UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
UniSource Energy Corporation
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(Name of Registrant as Specified In Its Charter)
N/A
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Shares of common stock, no par value per share, of UniSource Energy
Corporation
2) Aggregate number of securities to which transaction applies:
37,272,666 shares.
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The proposed maximum aggregate value of the transaction is
$941,134,817 (which is the product of 37,272,666 (the number of shares
of UniSource Energy Corporation common stock to be converted in the
merger) and $25.25 (the per share consideration)). The filing fee is
$119,242 (which is the product of the proposed maximum aggregate value
of the transaction and $126.70 per million pursuant to Fee Rate
Advisory No. 7 for Fiscal Year 2004).
4) Proposed maximum aggregate value of transaction:
$941,134,817
5) Total fee paid:
$119,242
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[LOGO OF UNISOURCE ENERGY APPEARS HERE]
One South Church Avenue
Tucson, Arizona 85701
, 2004
PROPOSED ACQUISITION -- YOUR VOTE IS IMPORTANT
James S. Pignatelli (520) 571-4000
Chairman of the Board
Dear Shareholders:
On November 21, 2003, we entered into an acquisition agreement with Saguaro
Acquisition Corp., which is a wholly owned indirect subsidiary of Saguaro
Utility Group L.P. The acquisition agreement provides that Saguaro Utility Group
L.P. will acquire us by merging Saguaro Acquisition Corp. with and into us. We
will survive the merger as a wholly owned indirect subsidiary of Saguaro Utility
Group L.P.
You are cordially invited to attend a special meeting of our shareholders
to consider and vote upon a proposal to approve the acquisition agreement so the
acquisition can occur. The special meeting will be held on , , 2004, at the
Sheraton Tucson Hotel and Suites, 5151 East Grant Road, Tucson, Arizona. The
special meeting will begin promptly at 10:00 a.m., local time. No admission
tickets will be required for attendance at the special meeting.
Upon completion of the acquisition, you will be entitled to receive $25.25
in cash, without interest, for each share of our common stock that you own. This
price represents a 30% premium over the closing price per share on the last
trading day prior to the public announcement of the acquisition. The receipt of
cash in exchange for your shares as part of the acquisition will constitute a
taxable transaction for you for U.S. federal income tax purposes.
The accompanying proxy statement contains important information about the
acquisition and other related matters. We urge you to carefully read the entire
proxy statement, including the acquisition agreement and fairness opinion of
Morgan Stanley & Co. Incorporated which are attached as Appendix A and Appendix
B, respectively, to the proxy statement.
Our board of directors believes the acquisition and the acquisition
agreement are advisable and fair to, and in the best interests of, our company
and our shareholders. Our board of directors recommends that you vote "for" the
proposal to approve the acquisition agreement so that the acquisition can occur.
The acquisition cannot be completed unless the acquisition agreement is
approved by a majority of our outstanding shares entitled to be cast. Whether or
not you plan to attend the special meeting, please take the time to vote, sign,
date and mail the enclosed proxy card as soon as possible. You may also vote by
telephone or the internet, as explained on the enclosed proxy card. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will be voted and counted in favor of the proposal. If you attend the
special meeting and wish to vote your shares in person, you may revoke your
proxy at any time. THE FAILURE OF ANY SHAREHOLDER TO VOTE WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE PROPOSAL.
Your interest and continued support of UniSource Energy Corporation are
much appreciated.
Sincerely,
UNISOURCE ENERGY CORPORATION
James S. Pignatelli
Chairman of the Board, President and
Chief Executive Officer
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE HOLDERS OF COMMON STOCK OF
UNISOURCE ENERGY CORPORATION
We will hold a special meeting of our shareholders on , , 2004, 10:00 a.m.,
local time, at the Sheraton Tucson Hotel and Suites, 5151 East Grant Road,
Tucson, Arizona.
The purpose of the meeting will be to consider and vote upon a proposal to
approve the Agreement and Plan of Merger between us and Saguaro Acquisition
Corp., which agreement provides that Saguaro Utility Group L.P., an Arizona
limited partnership, will acquire us by merging its wholly owned indirect
subsidiary, Saguaro Acquisition Corp., with and into us. Subject to the terms
and conditions of the acquisition agreement, at the effective time of the
acquisition, each outstanding share of our common stock will be converted into
the right to receive $25.25 in cash, without interest.
The proposal described above may be considered at the special meeting at
the time and date specified above or at any time and date to which the special
meeting may be properly adjourned or postponed.
Only shareholders of record at the close of business on , 2004 are entitled
to vote at the special meeting or any postponements or adjournments thereof.
Additional information about the acquisition and the Agreement and Plan of
Merger may be found in the accompanying proxy statement, which is first being
sent or given to our shareholders on or about , 2004. Your proxy is being
solicited by our board of directors.
Our board of directors believes the acquisition and the Agreement and Plan
of Merger are advisable and fair to, and in the best interests of, our company
and our shareholders. Our board of directors recommends that you vote "for" the
proposal to approve the Agreement and Plan of Merger so that the acquisition can
occur.
The acquisition cannot be completed unless the Agreement and Plan of Merger
is approved by a majority of our outstanding shares entitled to be cast. Whether
or not you plan to attend the special meeting, please take the time to vote,
sign, date and mail the enclosed proxy card as soon as possible. You may also
vote by telephone or the internet, as explained on the enclosed proxy card. If
you sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be voted and counted in favor of the proposal. If you attend the
special meeting and wish to vote your shares in person, you may revoke your
proxy at any time. THE FAILURE OF ANY SHAREHOLDER TO VOTE WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE PROPOSAL.
By Order of the Board of Directors,
Catherine A. Nichols
Corporate Secretary
Dated: , 2004
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD BY MAIL, OR TO VOTE BY TELEPHONE OR THE INTERNET, AS
EXPLAINED ON THE ENCLOSED PROXY CARD. IF THE MAIL OPTION IS SELECTED, USE THE
ENCLOSED ENVELOPE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED
STATES. RETURNING A SIGNED PROXY WILL NOT PROHIBIT YOU FROM ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON IF YOU SO DESIRE. PLEASE DO NOT SEND STOCK
CERTIFICATES WITH YOUR PROXY.
UNISOURCE ENERGY CORPORATION
One South Church Avenue
Tucson, Arizona 85701
SPECIAL SHAREHOLDERS' MEETING
PROXY STATEMENT
SPECIAL MEETING , 2004 Sheraton Tucson Hotel and Suites,
10:00 a.m., 5151 East Grant Road
local time Tucson, Arizona 85712
RECORD DATE The record date is , 2004. If you were a
shareholder of record at the close of business
on that date you may vote at the special
meeting. Each share is entitled to one vote.
At the close of business on the record date,
we had shares of our common stock outstanding.
AGENDA To consider and vote upon a proposal to
approve the Agreement and Plan of Merger
between us and Saguaro Acquisition Corp.
pursuant to which Saguaro Utility Group L.P.
will acquire us by merging its wholly owned
indirect subsidiary, Saguaro Acquisition
Corp., with and into us. In this proxy
statement we sometimes refer to Saguaro
Utility Group L.P. as Saguaro Utility and the
Agreement and Plan of Merger as the
acquisition agreement.
PROXIES A form of proxy card is enclosed. The shares
represented by an executed proxy card will be
We will follow your voted "for" or "against" the proposal in
voting instructions. accordance with the instructions in the proxy.
If no instructions are If no instructions are included in an
included we will executed proxy, the proxy will be voted in
vote "for" the proposal. favor of approval of the proposal. If you do
not vote, it will have the same effect as a
vote against the proposal. Our board of
directors or the proxy holders will use their
discretion on other matters that are incident
to the conduct of the special meeting.
PROXIES SOLICITED BY Our board of directors.
FIRST MAILING DATE We anticipate first mailing this proxy
statement and the form of proxy card
on , 2004.
VOTING PROCEDURES You can vote your shares by telephone, the
internet, mail or in person at the special
You can vote by telephone, meeting. Your proxy card contains instructions
the internet, mail or in for voting by telephone or the internet,
person. We encourage you which are the least expensive and fastest
to vote by telephone or methods of voting. To vote by mail, complete,
the internet. sign and date your proxy card, or your
broker's voting instruction card if your
shares are held by your broker, and return
it in the enclosed return envelope.
Under Arizona law, a majority of the shares
entitled to vote on any single matter which
may be brought before the special meeting will
constitute a quorum. Business may be conducted
once a quorum is represented.
Arizona law requires that the proposal be
approved by a majority of the shares entitled
to be cast. Any "abstentions" and broker
"non-votes" will have the same effect as
shares voted against the proposal.
REVOKING YOUR PROXY Any shareholder giving a proxy has
the right to revoke it by giving us notice in
You can revoke your proxy writing directed to the Corporate Secretary,
by following these UniSource Energy Corporation, One South Church
procedures. Avenue, Suite 1820, Tucson, Arizona
85701, or in person at the special meeting at
any time before the proxy is exercised.
PROXY SOLICITATION We will bear the entire cost of the
solicitation of proxies. Solicitations will
be made primarily by mail. Additional
solicitation of brokers, banks, nominees and
institutional investors may be made pursuant
to a special engagement of DF King & Co.,
Inc., at a cost of approximately $10,000 plus
reasonable out-of-pocket expenses.
Solicitations may also be made by telephone,
facsimile or personal interview to obtain
reasonable representation of shareholders at
the special meeting. Our employees may solicit
proxies for no additional compensation.
We will request brokers or other persons
holding stock in their names, or in the names
of their nominees, to forward proxy materials
to the beneficial owners of such stock or
request authority for the execution of the
proxies. We will reimburse those individuals
for reasonable expenses they incur in sending
these proxy materials.
ADDITIONAL QUESTIONS If you have more questions about the
acquisition or how to submit your proxy, or if
you need additional copies of this proxy
statement or the enclosed proxy card or voting
instructions, you should contact DF King &
Co., Inc. at 48 Wall Street, New York, New
York 10005, or by telephone at (800) 549-6746.
You may also obtain additional copies of this
proxy statement or proxy card from our
Corporate Secretary at our executive offices
at One South Church Avenue, Tucson, Arizona
85701, or by telephone at (520) 571- 4000.
PLEASE VOTE - YOUR VOTE IS IMPORTANT
2
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION....................................5
SUMMARY........................................................................8
The Parties.................................................................8
The Special Meeting.........................................................8
Share Ownership of Management...............................................9
The Acquisition.............................................................9
The Acquisition Agreement..................................................11
MARKET PRICES OF OUR COMMON STOCK.............................................14
THE PARTIES...................................................................15
UniSource Energy Corporation...............................................15
Saguaro Acquisition Corp...................................................15
THE ACQUISITION...............................................................16
General Description and Effect of the Acquisition..........................16
Background of the Acquisition..............................................16
Our Reasons for the Acquisition; Recommendation of
Our Board of Directors...................................................25
Opinion of Financial Advisor to Our Board of Directors.....................27
Effective Time of the Acquisition..........................................32
Regulatory Approvals.......................................................32
Financing for the Acquisition..............................................34
Interests of Certain Persons in the Acquisition............................34
Transactions with Management and Others....................................39
Material Federal Income Tax Consequences of the Acquisition................39
Accounting Treatment.......................................................41
Rights of Dissenting Shareholders..........................................41
Litigation Concerning the Acquisition......................................41
THE ACQUISITION AGREEMENT.....................................................42
General....................................................................42
Treatment of Shares........................................................42
Treatment of Stock Options.................................................43
Conduct of Our Business Pending the Acquisition............................43
Conduct of Business by Saguaro Acquisition Corp. Pending
the Acquisition..........................................................46
Cooperation, Notification..................................................46
Additional Agreements......................................................47
No Solicitation of Alternative Proposals...................................48
Conditions to Each Party's Obligation to Effect the Acquisition............49
Conditions to the Obligation of Saguaro Acquisition Corp. to
Effect the Acquisition...................................................50
Conditions to Our Obligation to Effect the Acquisition.....................51
Termination................................................................51
Termination Fees and Expenses..............................................52
Effect of Termination......................................................54
Amendment..................................................................54
Waiver.....................................................................54
SHARE OWNERSHIP OF MANAGEMENT.................................................55
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS..................................57
SUBMISSION OF SHAREHOLDER PROPOSALS...........................................58
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS....................................58
3
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Opinion of Morgan Stanley & Co. Incorporated
4
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION
Q. WHY AM I RECEIVING THIS PROXY STATEMENT?
A. As provided by the acquisition agreement, Saguaro Utility will acquire us
by merging its subsidiary, Saguaro Acquisition Corp., with and into us. We
will be the surviving corporation, but will become a wholly owned indirect
subsidiary of Saguaro Utility. In order for the acquisition to occur, we
must obtain shareholder approval of the acquisition agreement as required
by Arizona law. As discussed throughout this proxy statement, we will hold
a special meeting of our shareholders to obtain this approval. Your vote is
important regardless how many shares you own.
Q. WHAT WILL BE THE EFFECT OF THE ACQUISITION AND WHAT WILL I RECEIVE FOR MY
SHARES?
Upon completion of the acquisition, you will cease to own your shares, and
any ownership interest in our company, because your shares will be
converted into the right to receive $25.25 in cash, without interest, for
each share of our common stock owned at the time of the acquisition.
Saguaro Utility will become the indirect owner of all of our shares. We
will no longer be publicly held, and our common stock will cease to be
traded on the New York Stock Exchange and the Pacific Stock Exchange.
Q. WHY HAS UNISOURCE ENERGY DECIDED TO PROPOSE THIS ACQUISITION?
A. We entered into the acquisition agreement because our board of directors
believes, after careful consideration, that the acquisition and the
acquisition agreement are advisable and fair to, and in the best interests
of, our company and our shareholders since, among other reasons, the
acquisition consideration represents a significant premium over the
historical trading price of our common stock. The $25.25 cash acquisition
consideration represents a 30% premium over the closing price per share on
the last trading day prior to the public announcement of the acquisition.
Please read the more detailed description of our reasons for the
acquisition beginning on page 25.
Q. WHEN DO YOU EXPECT TO COMPLETE THE ACQUISITION?
A. The parties are working to complete all aspects of the acquisition as
quickly as possible. We cannot, however, predict the exact timing of the
completion of the acquisition because it is subject to governmental and
regulatory processes and other conditions. We currently anticipate that the
acquisition will be completed in the last half of 2004.
Q. WHO MUST APPROVE THE ACQUISITION?
A. In addition to the approval by our board of directors, which has already
been obtained, the acquisition agreement must be approved by the holders of
a majority of the outstanding shares of our common stock. Also, several
regulatory approvals must be obtained, most notably the approval of the
acquisition by the Arizona Corporation Commission, the Federal Energy
Regulatory Commission and the Securities and Exchange Commission. Please
read the more detailed description of the required regulatory approvals
beginning on page 32.
Q. BESIDES SHAREHOLDER APPROVAL AND REGULATORY APPROVALS, ARE THERE ANY OTHER
SIGNIFICANT CONDITIONS TO THE CLOSING OF THE ACQUISITION?
A. Yes. The acquisition agreement includes other significant conditions to the
closing of the acquisition, including, but not limited to the following:
o the absence of any material adverse effect on the business,
properties, assets, condition, prospects or results of operations of
UniSource Energy and its subsidiaries taken together as a whole;
5
o that no final order with respect to any regulatory approval necessary
to complete the acquisition either (i) has or could reasonably be
expected to have a material adverse effect on us or Saguaro Utility or
(ii) causes or could reasonably be expected to cause the rates of any
of our utility subsidiaries to be less favorable than the rates that
were in effect on the date of the acquisition agreement;
o that any restrictions on the ability of Tucson Electric Power Company,
our largest subsidiary, to pay dividends on all of its net income be
effectively eliminated; and
o that Saguaro Acquisition Corp. receives its financing for the
acquisition on terms and conditions that, in the reasonable judgment
of Saguaro Acquisition Corp., are comparable to, or more favorable to
Saguaro Acquisition Corp. in the aggregate than, the terms and
conditions contemplated by the acquisition agreement.
Please read the more detailed description of the conditions to the closing
of the acquisition beginning on page 49.
Q. WHAT WILL HAPPEN IF THE REQUIRED SHAREHOLDER APPROVAL IS NOT OBTAINED?
A. If the required shareholder approval is not obtained so that the
acquisition does not occur, our management and our board of directors will
continue to operate our company as before, and may consider other strategic
alternatives. We will, however, be required to pay Saguaro Acquisition
Corp. up to $10 million to reimburse it for its expenses incurred in
connection with the proposed acquisition. We may also be required to pay
Saguaro Acquisition Corp. an additional $15 million termination fee in
certain circumstances as described under "The Acquisition Agreement -
Termination Fees and Expenses."
Q. ARE THERE DISSENTERS' RIGHTS OF APPRAISAL IN CONNECTION WITH THE
ACQUISITION?
A. No. Under Arizona law, you do not have dissenters' rights of appraisal in
connection with the acquisition since our stock is registered on the New
York Stock Exchange and the Pacific Stock Exchange.
Q. HOW DOES UNISOURCE ENERGY'S BOARD OF DIRECTORS RECOMMEND THAT I VOTE?
A. Our board of directors recommends that you vote "for" the proposal to
approve the acquisition agreement.
Q. HOW DO I VOTE?
A. After you carefully read this proxy statement, you can vote by completing,
signing, dating and mailing the enclosed proxy card in the enclosed return
envelope. You can also vote by telephone or the internet, as explained on
the enclosed proxy card.
Q. WHAT HAPPENS IF I DO NOT VOTE?
A. We cannot consummate the acquisition unless shareholders representing a
majority of our outstanding shares approve the acquisition agreement. If
you do not vote, it will have the same effect as voting "against" the
proposal to approve the acquisition agreement. We, therefore, urge you to
vote.
Q. WHAT HAPPENS IF I DO NOT INSTRUCT A BROKER HANDLING MY SHARES ON HOW TO
VOTE?
A. If a broker holds your shares as nominee, he or she will not be able to
vote them without instructions from you. If you do not instruct your broker
on how to vote, your shares will have the effect of a vote "against" the
proposal to approve the acquisition agreement.
6
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED AND DATED PROXY CARD?
A. Yes. If you would like to revoke your proxy, you must deliver, at any time
before the vote has been taken at the special meeting, a written revocation
directed to the Corporate Secretary, UniSource Energy Corporation, One
South Church Avenue, Suite 1820, Tucson, Arizona 85701. Alternatively, you
may attend the special meeting in person and revoke your proxy orally by
notifying the Corporate Secretary before the vote takes place.
Q. WHEN AND WHERE IS THE SPECIAL MEETING?
A. The special meeting is scheduled for , , 2004, 10:00 a.m. local time, at
the Sheraton Tucson Hotel and Suites, 5151 East Grant Road, Tucson,
Arizona.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. If the acquisition agreement is approved and the acquisition completed,
the surviving corporation will send you written instructions for submitting
your stock certificates. You must follow those instructions and return your
stock certificates accordingly. You will receive your cash payment as soon
as reasonably practicable after the surviving corporation receives your
stock certificates along with any other documents reasonably requested to
be submitted in those instructions.
Q. WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A. The acquisition agreement allows us to continue to pay regular quarterly
cash dividends until the closing of the acquisition. Our board of directors
currently expects to continue to pay regular quarterly cash dividends on
our common stock until the closing of the acquisition, subject, however, to
our board of directors' evaluation of our financial condition, earnings,
cash flows and dividend policy. Thus, while our board of directors
anticipates that regular quarterly cash dividends will be declared and paid
until the closing of the acquisition, no assurance can be made that such
dividends will be declared and paid.
Q. WHAT ARE THE TAX CONSEQUENCES OF THE ACQUISITION TO SHAREHOLDERS?
A. In general, a shareholder will recognize gain or loss for federal income
tax purposes to the extent of the difference between the cash received and
the holder's tax basis in the shares of our common stock converted into the
right to receive cash.
Q. WHAT WILL HAPPEN WITH RESPECT TO UNISOURCE ENERGY'S OUTSTANDING STOCK
OPTIONS?
A. Immediately prior to the effective time of the acquisition, all of our
outstanding stock options will be deemed canceled. As a result, our stock
option holders will receive at or as soon as practicable after the
acquisition an amount in cash equal to the product of (i) the total number
of shares of our common stock underlying a holder's options, and (ii) the
excess of $25.25 over the exercise price per share of the shares of our
common stock underlying such options.
Q. WHOM SHOULD I CALL WITH QUESTIONS OR IF I WANT TO REQUEST AN ADDITIONAL
COPY OF THIS PROXY STATEMENT OR THE PROXY CARD?
A. You should call DF King & Co., Inc. at (800) 549-6746 with any questions
you may have about the acquisition or how to submit your proxy, or if you
need additional copies of this proxy statement or the enclosed proxy card
or voting instructions. If your broker holds your shares, you should also
call your broker for additional information.
7
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT. HOWEVER, THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE
ACQUISITION AND THE TERMS AND PROVISIONS OF THE ACQUISITION AGREEMENT, WE
ENCOURAGE YOU TO CAREFULLY READ THE ENTIRE PROXY STATEMENT AND ITS APPENDICES.
EACH ITEM IN THIS SUMMARY INCLUDES A PAGE REFERENCE DIRECTING YOU TO A MORE
COMPLETE DESCRIPTION OF THAT ITEM.
THE PARTIES (SEE PAGE 15)
On November 21, 2003, we entered into an acquisition agreement with Saguaro
Acquisition Corp. The acquisition agreement provides that Saguaro Utility will
acquire us by merging its wholly owned indirect subsidiary, Saguaro Acquisition
Corp., with and into us. We will survive the merger as a wholly owned indirect
subsidiary of Saguaro Utility.
UniSource Energy Corporation
----------------------------
UniSource Energy Corporation
One South Church Avenue
Tucson, Arizona 85701
(520) 571-4000
We are a holding company that owns substantially all of the outstanding
common stock of Tucson Electric Power Company, and all of the outstanding common
stock of UniSource Energy Services, Inc., Millennium Energy Holdings, Inc., and
UniSource Energy Development Company. In this proxy statement, we sometimes
refer to Tucson Electric Power as TEP, UniSource Energy Services as UES,
UniSource Energy Development Company as UED and Millennium Energy Holdings, Inc.
as Millennium.
TEP provides electric service to the community of Tucson, Arizona. UES
provides gas and electric service through its utility subsidiaries to 30
communities in northern and southern Arizona. Millennium invests in unregulated
businesses. UED engages in developing generating resources and other project
development activities.
Saguaro Acquisition Corp.
-------------------------
Saguaro Acquisition Corp.
4201 North 24th Street, Suite 100
Phoenix, Arizona 85016
Saguaro Acquisition Corp., a Delaware corporation, is a wholly owned
indirect subsidiary of Saguaro Utility, an Arizona limited partnership, whose
general partner is Sage Mountain, L.L.C. and whose limited partners include
investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P., J.P.
Morgan Partners, LLC and Wachovia Capital Partners. The sole manager of Sage
Mountain is Frederick B. Rentschler, former president and chief executive
officer of Armour-Dial, Beatrice Companies and Northwest Airlines.
THE SPECIAL MEETING (SEE COVER PAGE)
DATE, TIME AND PLACE.
The special meeting will be held on , , 2004, at the Sheraton Tucson Hotel
and Suites, 5151 East Grant Road, Tucson, Arizona, commencing at 10:00 a.m.,
local time.
8
PURPOSE.
At the special meeting, our shareholders will consider and vote upon a
proposal to approve the acquisition agreement.
RECORD DATE; SHARES ENTITLED TO VOTE.
Only holders of record at the close of business on , 2004, are entitled to
vote at the special meeting. On such date, there were shares of our common stock
outstanding, each of which is entitled to one vote on the matter to be voted
upon at the special meeting.
VOTE REQUIRED.
Under Arizona law, approval of the acquisition agreement requires the
affirmative vote of a majority of the outstanding shares of our common stock.
VOTING AND REVOCATION OF PROXIES.
You can vote by completing, signing, dating and mailing the enclosed proxy
card in the enclosed return envelope. You can also vote by telephone or the
internet, as explained on the enclosed proxy card. You can also vote in person
at the meeting, but we encourage you to submit your proxy now in any event.
If a broker holds your shares as nominee, he or she will not be able to
vote them without instructions from you. If you do not vote at all, mark your
proxy "abstain" or do not instruct your broker on how to vote, your shares will
have the same effect as voting "against" the proposal to approve the acquisition
agreement.
You can revoke your proxy at any time before the vote has been taken at the
special meeting. To revoke your proxy please follow the instructions included on
the cover page of this proxy statement.
SHARE OWNERSHIP OF MANAGEMENT (SEE PAGES 55 - 56)
At the close of business on January 5, 2004, our directors and executive
officers and their affiliates beneficially owned 1,528,522 shares of our common
stock, which represents 4.5% of the outstanding shares of our common stock.
THE ACQUISITION
GENERAL DESCRIPTION AND EFFECT OF THE ACQUISITION (SEE PAGE 16).
The acquisition agreement provides that Saguaro Utility will acquire us by
merging its wholly owned indirect subsidiary, Saguaro Acquisition Corp., with
and into us. We will be the surviving company, but will continue to conduct our
business as a wholly owned indirect subsidiary of Saguaro Utility. We will no
longer be a publicly held company. In connection with the acquisition, each
outstanding share of our common stock will be converted into the right to
receive $25.25 in cash, without interest.
RECOMMENDATION OF OUR BOARD OF DIRECTORS (SEE PAGES 25 - 26).
After careful consideration, our board of directors approved the
acquisition because our board of directors determined that the acquisition and
the acquisition agreement were fair to, and in the best interests of, our
company and our shareholders. Likewise, our board of directors recommends that
our shareholders vote "for" the proposal to approve the acquisition agreement.
See "The Acquisition - Background of the Acquisition" and "The Acquisition
- Our Reasons for the Acquisition; Recommendation of Our Board of Directors" in
this proxy statement beginning on page 16 and 25, respectively. You should
carefully consider all of the factors that our board of directors considered.
9
FAIRNESS OPINION (SEE PAGES 27 - 32).
In connection with the acquisition, Morgan Stanley & Co. Incorporated acted
as a financial advisor to our board of directors. On November 21, 2003, Morgan
Stanley delivered its written opinion to our board of directors to the effect
that, as of that date and subject to and based upon the assumptions and other
considerations set forth in its written opinion, the $25.25 in cash per share to
be received by our shareholders pursuant to the acquisition agreement was fair
from a financial point of view to those shareholders (other than Saguaro Utility
and its affiliates). The opinion does not constitute a recommendation as to how
any of our shareholders should vote with respect to the proposal to approve the
acquisition agreement or any other matter.
The full text of the written opinion of Morgan Stanley, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with its written opinion is attached hereto as Appendix B. We
recommend that our shareholders read the entire opinion carefully. We have
agreed to pay Morgan Stanley a transaction fee of up to $4 million in connection
with the acquisition.
FINANCING FOR THE ACQUISITION (SEE PAGE 34).
In connection with the acquisition, Saguaro Acquisition Corp. will pay
approximately $880 million in cash to our shareholders and holders of stock
options and other performance based awards awarded under our performance
incentive plans. The cash purchase price and other expenses related to the
acquisition are expected to be funded by a combination of equity contributions
by the partners of Saguaro Utility and borrowings and issuances of debt
securities by another wholly owned subsidiary of Saguaro Utility.
Saguaro Acquisition Corp. will not be required to complete the acquisition
unless it has received the debt financing as contemplated by the acquisition
agreement. As a result, even if we receive the required shareholder and
regulatory approvals to complete the acquisition, Saguaro Acquisition Corp.
might not be obligated to complete the acquisition if it does not receive this
financing.
REGULATORY APPROVALS (SEE PAGES 32 - 34).
Several regulatory approvals are required in order for the acquisition to
close. We must obtain regulatory approval from the Arizona Corporation
Commission. In addition, we and Saguaro Acquisition Corp. must (i) file certain
notification forms with the Antitrust Division of the Department of Justice and
the Federal Trade Commission and (ii) obtain the approval of the Federal Energy
Regulatory Commission under the Federal Power Act. Finally, Saguaro Acquisition
Corp. must obtain the approval of the Securities and Exchange Commission under
the Public Utility Holding Company Act of 1935.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION (SEE PAGES 34 - 38).
In considering our board of directors' recommendation to vote "for" the
proposal to approve the acquisition agreement, shareholders should be aware that
some of our directors and members of our management may have interests in the
acquisition that are different from, or in addition to, the interests of our
shareholders generally. In general, these interests include certain
indemnification rights, incentive compensation and severance payments due to the
acquisition and the vesting of stock options and other stock based incentive
awards upon the consummation of the acquisition. Although no agreement,
arrangement or understanding currently exists it is generally expected that our
existing management will remain after the acquisition is completed, which means
that members of our existing management may, prior to the closing of the
acquisition, enter into new agreements or arrangements with Saguaro Utility or
its affiliates regarding employment with, or the right to purchase or
participate in the equity of, the surviving corporation. Our board of directors
was aware of these interests and considered them, among other factors, in
approving the acquisition agreement.
10
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 39 - 41).
The acquisition will be a taxable transaction for you. For United States
federal income tax purposes, you will recognize gain or loss in the acquisition
in an amount equal to the difference between the cash you receive and your tax
basis in your shares. We urge you to consult your own tax advisor to understand
fully how the acquisition will affect you in light of your individual
circumstances.
DISSENTERS' RIGHTS OF APPRAISAL (SEE PAGE 41).
Under Arizona law, you are not entitled to dissenters' rights of appraisal
because our common stock is registered on the New York Stock Exchange and the
Pacific Stock Exchange.
THE ACQUISITION AGREEMENT
The acquisition agreement is the legal document that governs the
acquisition. The acquisition agreement is attached as Appendix A to this proxy
statement. We encourage you to carefully read the entire acquisition agreement.
ACQUISITION CONSIDERATION (SEE PAGE 42).
Upon completion of the acquisition, each of your shares of our common stock
will be converted into the right to receive $25.25 in cash, without interest.
CERTAIN COVENANTS (SEE PAGES 43 - 49).
In general, we and our subsidiaries must carry on business in the ordinary
course consistent with past practice and use all commercially reasonable efforts
to preserve substantially intact the present business organization and present
regulatory, business and employee relationships. In addition, the acquisition
agreement contains certain specific restrictions or limitations on the
activities of each of us and our subsidiaries, subject to the receipt of Saguaro
Acquisition Corp.'s prior written consent, which consent cannot be unreasonably
withheld and which consent must be given or withheld as soon as reasonably
practicable, including the issuance or repurchase of capital stock, the
amendment of charters and bylaws, acquisitions and dispositions of assets,
capital expenditures, incurrence of indebtedness, modification of employee
compensation and benefits, changes in accounting methods, discharging of
liabilities, and matters relating to our investment in Millennium.
In addition, we have agreed not to solicit or encourage any proposal from
any person to acquire us or our assets, but we may respond, in certain
circumstances, to unsolicited written bona fide proposals that we receive.
CONDITIONS TO THE ACQUISITION (SEE PAGES 49 - 51).
Completion of the acquisition depends upon the satisfaction, or waiver, of
a number of closing conditions. In addition to customary conditions relating to
compliance with the acquisition agreement, these conditions include the
following:
o the absence of any material adverse effect in the business, properties,
assets, condition, prospects or results of operations of UniSource
Energy and its subsidiaries taken together as a whole;
o the receipt of the required shareholder approval;
o the receipt of required regulatory approvals;
o that no final order with respect to any regulatory approval necessary
to effect the acquisition either (i) has or could reasonably be
11
expected to have a material adverse effect on us or Saguaro Utility or
(ii) causes or could reasonably be expected to cause the rates of any
of our utility subsidiaries to be less favorable than the rates that
were in effect on the date of the acquisition agreement;
o that restrictions on the ability of TEP to pay dividends of all of its
net income be effectively eliminated; and
o that Saguaro Acquisition Corp. receives its financing for the
acquisition on terms and conditions that, in the reasonable judgment of
Saguaro Acquisition Corp., are comparable to, or more favorable to
Saguaro Acquisition Corp. in the aggregate than, the terms and
conditions contemplated by the acquisition agreement.
MANNER AND BASIS OF CONVERTING SHARES (SEE PAGES 42 - 43).
At the effective time of the acquisition, each issued and outstanding share
of our common stock will automatically be converted into the right to receive
$25.25 in cash, without interest. This conversion will occur by virtue of the
merger of Saguaro Acquisition Corp. with and into us and without any action on
the part of any of our shareholders.
In order to receive the cash amount of $25.25 per share, shareholders must
surrender for exchange their certificates representing their shares. At or as
soon as reasonably practicable after the acquisition, Saguaro Utility will cause
the surviving corporation to deposit with a paying agent (i.e., a bank or trust
company) an amount of cash sufficient to pay for all of our common stock.
As soon as reasonably practicable after the effective time of the
acquisition, the surviving corporation will instruct the paying agent to mail to
each shareholder of record immediately prior to the effective time of the
acquisition (i) a form of letter of transmittal and (ii) instructions for
surrendering certificates in exchange for payment of the acquisition
consideration.
TERMINATION (SEE PAGES 51 - 52).
The acquisition agreement may be terminated by either us or Saguaro
Acquisition Corp. in certain circumstances as provided in the acquisition
agreement. The most notable circumstances in which the acquisition agreement may
be terminated by one or both parties, and the acquisition abandoned, are as
follows:
o if the acquisition is not completed on or before March 31, 2005, so
long as the failure to complete the acquisition is not the result of
the failure of the terminating party to comply with the terms of the
acquisition agreement;
o if either party materially breaches the acquisition agreement and fails
to cure such breach in accordance with the terms of the acquisition
agreement;
o if any state or federal law, regulation or order is adopted or issued,
and cannot be appealed, that has the effect of prohibiting the
acquisition, or if any such regulation or order does not satisfy the
applicable closing conditions or prevents the applicable closing
conditions from being capable of being satisfied;
o if the required shareholder approval is not obtained at the special
meeting;
o if Saguaro Acquisition Corp. cannot obtain its financing for the
acquisition in the manner and on the terms contemplated by the
acquisition agreement;
o if, prior to the shareholders meeting, we receive and accept a superior
proposal in accordance with the terms of the acquisition agreement; or
12
o if our board of directors (i) withdraws or changes its recommendation
to our shareholders to approve the acquisition agreement or (ii) fails
to confirm its recommendation in favor of the acquisition agreement (a)
in connection with an alternative proposal to acquire us or (b) upon
request from Saguaro Acquisition Corp. to do so.
TERMINATION FEES AND EXPENSES (SEE PAGES 52 - 53).
In certain circumstances, upon the termination of the acquisition
agreement, we would be required to pay Saguaro Acquisition Corp.'s expenses and
a termination fee in an aggregate amount of up to $25 million.
13
MARKET PRICES OF OUR COMMON STOCK
Our common stock is listed and traded on the New York Stock Exchange and
the Pacific Stock Exchange under the symbol "UNS." The following table provides
trading and dividend information for our common stock for the periods indicated.
The share prices set forth in this section represent our common stock price on
the consolidated tape for transactions on the New York Stock Exchange as
reported by Dow Jones.
HIGH LOW DIVIDEND
2001
First Quarter.......... $21.00 $15.13 $0.10
Second Quarter......... $25.99 $20.15 $0.10
Third Quarter.......... $24.05 $13.80 $0.10
Fourth Quarter......... $19.30 $13.80 $0.10
2002
First Quarter.......... $20.60 $16.74 $0.125
Second Quarter......... $20.75 $17.91 $0.125
Third Quarter.......... $18.89 $14.05 $0.125
Fourth Quarter......... $17.90 $13.69 $0.125
2003
First Quarter.......... $18.10 $16.00 $0.15
Second Quarter......... $19.27 $17.05 $0.15
Third Quarter.......... $19.80 $17.65 $0.15
Fourth Quarter......... $24.90 $19.01 $0.15
2004
First Quarter through
January 30............. $24.74 $24.56 N/A
On November 21, 2003, the last full trading day before the public
announcement of the execution of the acquisition agreement, the closing price
per share of our common stock for transactions on the New York Stock Exchange
was $19.40.
On , 2004 the most recent practicable date for which quotations
were available prior to the printing of this proxy statement, the closing price
per share of our common stock for transactions on the New York Stock Exchange
was $ .
14
THE PARTIES
UNISOURCE ENERGY CORPORATION
UniSource Energy Corporation
One South Church Avenue
Tucson, Arizona 85701
(520) 571-4000
We are an exempt holding company under the Public Utility Holding Company
Act of 1935. We have no significant operations of our own, but own substantially
all of the outstanding common stock of TEP, and all of the outstanding common
stock of UES, Millennium, and UED.
TEP, a regulated public utility, is our largest operating subsidiary and
represented approximately 86% of our assets as of September 30, 2003. TEP has
provided electric service to the community of Tucson, Arizona for over 100
years. UES, which we established recently as described below, provides gas and
electric service to 30 communities in northern and southern Arizona. Millennium
invests in unregulated businesses, including a developer of thin-film batteries
and a developer and manufacturer of thin-film photovoltaic cells. UED engages in
developing generating resources and other project development activities,
including facilitating the expansion of TEP's Springerville Generating Station.
On August 11, 2003, we completed the purchase of the Arizona gas and
electric system assets from Citizens Communications Company. This acquisition
added approximately 127,000 retail gas customers and 80,000 retail electric
customers in Arizona to our customer base. We formed two new operating companies
called UNS Gas, Inc. ("UNS Gas") and UNS Electric, Inc. ("UNS Electric") to
acquire these assets, as well as an intermediate holding company, UES, to hold
the common stock of UNS Gas and UNS Electric.
Each of TEP, UNS Electric and UNS Gas are regulated by the Arizona
Corporation Commission (the "ACC"), and TEP and UNS Electric are also regulated
by the Federal Energy Regulatory Commission (the "FERC").
We file reports, proxy statements and other information with the Securities
and Exchange Commission (the "SEC") that are available free of charge at the
SEC's website at http://www.sec.gov. You may also obtain information about us
from our internet site at http://www.unisourceenergy.com.
SAGUARO ACQUISITION CORP.
Saguaro Acquisition Corp.
4201 North 24th Street, Suite 100
Phoenix, Arizona 85016
Saguaro Acquisition Corp. was organized solely for the purpose of entering
into the acquisition agreement and consummating the transactions contemplated
thereby and has not carried on any activities to date other than activities
incident to its formation and in connection with the transactions contemplated
by the acquisition agreement. Saguaro Acquisition Corp. is a Delaware
corporation and a wholly owned indirect subsidiary of Saguaro Utility, an
Arizona limited partnership, whose general partner is Sage Mountain, L.L.C. and
whose limited partners include investment funds affiliated with Kohlberg Kravis
Roberts & Co., L.P. ("KKR"), J.P. Morgan Partners, LLC ("JPMP") and Wachovia
Capital Partners ("WCP"). Frederick B. Rentschler, former president and chief
executive officer of Armour-Dial, Beatrice Companies and Northwest Airlines, is
the managing member of Sage Mountain, L.L.C.
15
THE ACQUISITION
We are furnishing this proxy statement to each of our shareholders in
connection with the proposed acquisition of our company by Saguaro Utility. If
completed, the acquisition will be carried out as provided in the acquisition
agreement, a copy of which is attached as Appendix A to this proxy statement.
GENERAL DESCRIPTION AND EFFECT OF THE ACQUISITION
At the effective time of the acquisition, Saguaro Utility will acquire us
by merging its wholly owned indirect subsidiary, Saguaro Acquisition Corp., with
and into us. We will continue as the surviving corporation, but will be a wholly
owned indirect subsidiary of Saguaro Utility. Trading in our stock on the New
York Stock Exchange and the Pacific Stock Exchange will cease immediately as of
the effective time of the acquisition. After that time, the surviving
corporation will delist our shares from the New York Stock Exchange and the
Pacific Stock Exchange and deregister our shares under the Securities Exchange
Act of 1934. Each of our shareholders will thereafter receive $25.25 in cash,
without interest, for each share of our common stock owned at the effective time
of the acquisition. Each such shareholder, however, will no longer have an
opportunity to continue their ownership interest in us as an ongoing corporation
and therefore will not share in our future earnings and potential growth.
BACKGROUND OF THE ACQUISITION
Consistent with our board of directors' overall fiduciary duties to our
shareholders, our board of directors has been willing to consider potential
strategic transactions, including business combinations with other utilities or
energy companies, in addition to pursuing strategies that maximize our value as
an independent company. In that connection, we engaged New Harbor Incorporated
("New Harbor") in 1998 to advise us on an ongoing basis with respect to
strategic transactions. New Harbor is a financial advisory and investment
banking firm which specializes in advising companies in the utility industry.
New Harbor has worked closely with management to identify strategic
opportunities for us.
During the period from 1998 through 2002, our senior management engaged in
preliminary discussions with a number of third parties, including JPMP and KKR,
regarding strategic transactions, including potential business combinations.
However, none of these parties engaged in any discussions that progressed to the
point that it was determined that detailed involvement of our board of directors
was appropriate.
Beginning in July 2002, JPMP and another private equity firm (the "JPMP
Group") spoke with members of our management to explore the possibility of a
range of potential transactions, including financing transactions, investments
and a potential acquisition of our company. With respect to a potential
acquisition of our company, the JPMP Group's preliminary indication of interest
suggested an acquisition price of up to $20 per share. The JPMP Group also
requested permission to conduct a due diligence investigation of us.
In September 2002, our management advised our board of directors that we
had received a preliminary indication of interest from the JPMP Group to explore
a potential financing transaction with, private investment in, or an acquisition
of, our company and the request that they be permitted to conduct a
comprehensive due diligence investigation of our company.
At a meeting on September 16, 2002, our board of directors discussed the
preliminary indication of interest from the JPMP Group. At this time, we were
also in the process of negotiating a definitive agreement to acquire the Arizona
electric and gas utility assets of Citizens Communications Company ("Citizens").
In considering whether to pursue the preliminary indication of interest received
from the JPMP Group, our board of directors discussed other strategic
initiatives that we were exploring, including the transaction with Citizens. Our
board of directors also engaged in a preliminary discussion of the feasibility
of concurrently seeking and obtaining approval from the ACC of both the Citizens
transaction and any transaction with the JPMP Group. After instructing
management to advise the JPMP Group that the purchase price in any transaction
would have to be higher than the $20 per share price included in the preliminary
16
indication of interest, our board of directors authorized James S. Pignatelli,
our Chairman, President and Chief Executive Officer, to allow the JPMP Group's
due diligence investigation to proceed. On the date of this meeting, our common
stock closed at $19.22 on the New York Stock Exchange.
During the week of October 14, 2002, representatives of the JPMP Group met
with members of our senior management and received a presentation on our
business and financial condition at our offices in Tucson, Arizona. Also in
attendance at this meeting were representatives from WCP, a private equity firm
that had joined the JPMP Group.
At a meeting held on October 17, 2002, our board of directors continued its
discussion of the preliminary indication of interest from the JPMP Group. Prior
to commencing this discussion, Larry Bickle, a director of our company, advised
our board of directors of a potential conflict of interest he believed might
exist with respect to any transaction involving JPMP. Mr. Bickle is a Managing
Director of an investment fund in which a JPMP affiliate has a significant
investment and in which we have also invested. As a result of these
transactions, Mr. Bickle advised our board of directors that he would not vote
on any potential transaction involving JPMP. (See "Transactions with Management
and Others"). Our board of directors then received a general review from our
counsel, Thelen Reid & Priest LLP, on the directors' fiduciary responsibilities
in the context of a potential acquisition transaction in which we would cease to
be a public company. Following this presentation, Jay Beatty of New Harbor
presented an update on the state of the equity and debt markets in general and
on the utility industry and us in particular, offered comments on the current
market price of our common stock and generally addressed approaches that our
board of directors might take in valuing our common stock in connection with a
potential acquisition. Mr. Beatty noted that the market price of our common
stock had spiked in 2001. Mr. Beatty attributed this to a significant increase
in our earnings at such time due to substantial wholesale marketing activities
at a time of strong demand and high wholesale prices in the Western United
States. Following this spike in our earnings and stock price, average market
prices for energy declined sharply, returning to historical price levels and the
market price of our common stock had correspondingly declined. (See "Market
Prices of Our Common Stock"). After a request for an indication from our board
of directors of its preliminary interest in continuing discussions with the JPMP
Group, the directors, with Mr. Bickle abstaining, reached a consensus that we
should continue discussions with the JPMP Group, but also reached a consensus
that the pursuit of an acquisition transaction with the JPMP Group should not be
permitted to adversely affect our negotiations with Citizens, which were
anticipated to be completed in the near future.
On October 29, 2002, we executed a definitive agreement with Citizens to
acquire its Arizona electric and gas utility properties for approximately $230
million, subject to the terms and conditions contained in such agreement.
In late October 2002, we were advised that the other party working with
JPMP and WCP had determined that it did not wish to pursue an acquisition, but
that the private equity firm of KKR (JPMP, KKR, WCP, Sage Mountain, LLC and
their affiliates are collectively referred to as the "Investor Group") had
expressed interest in joining JPMP and WCP to pursue an acquisition transaction.
On November 2, 2002, representatives of the Investor Group and their advisors,
J.P. Morgan Securities, Inc. ("JPMSI"), met with members of our senior
management and received a presentation on our business and financial condition
and the pending Citizens acquisition.
In early November 2002, based on the direction provided by our board of
directors in their October 17, 2002 meeting, we determined to discontinue
further exploration of an acquisition transaction until closer to the time that
the Citizens acquisition was expected to close. Although representatives of the
Investor Group continued to speak with Mr. Pignatelli and other members of our
senior management from time to time, there were no significant developments with
respect to a possible transaction between us and the Investor Group until July
2003.
On July 14, 2003, Mr. Pignatelli and Kevin P. Larson, our Vice President,
Treasurer and Chief Financial Officer, met with representatives of the Investor
Group in New York City. At that meeting, the Investor Group's representatives
expressed a desire to renew their consideration of the possible acquisition of
our company for an unspecified price that would be in excess of $20 per share of
our common stock. On the date of this meeting, our common stock closed at $18.85
on the New York Stock Exchange.
17
On July 30, 2003, representatives of the Investor Group and JPMSI met with
members of our senior management and New Harbor at our executive offices in
Tucson, Arizona to receive a presentation about current developments in our
business, including the impact of the expected completion of the Citizens
acquisition and to discuss regulatory and other issues in connection with a
potential acquisition transaction.
At a meeting on August 4, 2003, our board of directors was advised that the
Investor Group had expressed renewed interest in acquiring us. At that meeting,
our board of directors concluded that the price to be received by shareholders
in any potential acquisition transaction was of primary concern, but also
generally discussed the potential impact of any acquisition transaction on
customers and communities served, employees and other constituencies and noted
that our directors would need to assess carefully the regulatory impact of an
acquisition.
On August 11, 2003, we completed the purchase of the Arizona gas and
electric system assets from Citizens.
On September 9, 2003, representatives of the Investor Group met with
Messrs. Pignatelli and Larson. At this meeting, the Investor Group's
representatives provided a general outline of their proposal. In particular, the
Investor Group expressed its interest in acquiring us for a purchase price of
$23 per share in cash. Under this proposal, our shareholders would have retained
ownership of Millennium because we would have distributed all of the shares of
Millennium to our shareholders (a "spin-off") concurrently with the closing of
the acquisition. On the date of this meeting, our common stock closed at $19.40
on the New York Stock Exchange.
Following the meeting of September 9th, Messrs. Pignatelli and Larson
arranged for a meeting of the Investor Group's representatives with John L.
Carter, a director of our company.
On September 16, 2003, representatives of the Investor Group met with
Messrs. Pignatelli, Larson and Carter and Mr. Beatty of New Harbor in New York
City. At this meeting, the Investor Group's representatives reiterated their
interest to acquire us and the general outline of their proposal. The Investor
Group's representatives stated that their due diligence investigation to date
had reinforced their desire to pursue a transaction. The Investor Group's
representatives stated that their belief was based upon the quality of our
management team, record of excellent customer service and commitment to the
communities we serve, positive relationships with regulatory authorities,
attractive, growing service territory and low-cost generation. The Investor
Group's representatives presented an overview of the Investor Group, their
transaction experience, their community involvement and the history of their due
diligence investigation and discussions up until that time. The Investor Group's
representatives also provided the general terms of their proposal, as described
above.
On September 30, 2003, our board of directors met to discuss, among other
things, the Investor Group's renewed proposal. At the beginning of the meeting,
Daniel Fessler advised our board of directors that he was submitting his
resignation from our board of directors because he would not be able to provide
sufficient time and attention to being a director at this time. Mr. Pignatelli
then reported to our board of directors regarding the meeting with the Investor
Group on September 16, 2003, at which the Investor Group had made the renewed
proposal to acquire us. Mr. Pignatelli also reported to our board of directors
that the Investor Group generally indicated that it expected to retain existing
management, but that no specific discussion had taken place regarding any
employment arrangements or equity investment by management in the entity to be
formed by the Investor Group to effectuate the proposed acquisition.
At this meeting, our board of directors received a general presentation
from Vincent Nitido, Jr., our Vice President, General Counsel and Chief
Administrative Officer, regarding our board of directors' responsibilities under
Arizona law. Mr. Nitido also generally addressed the standards applicable to
determining whether our management or directors had a conflict of interest with
respect to the transaction. Following Mr. Nitido's presentation, Thelen Reid &
Priest described certain enhanced rules that apply when an acquired company will
18
no longer be publicly traded as a result of a transaction with affiliates and
certain procedures that could be implemented by a board of directors when faced
with such a "going-private" transaction. Thelen Reid & Priest advised our board
of directors that they were not aware of any facts which would suggest that the
pending transaction would be subject to such rules or that such procedures would
be required. During this meeting, Mr. Bickle reminded our board of directors of
his potential conflict of interest with respect to any transaction including
JPMP and that he would not vote on matters relating to the potential
acquisition. (See "Transactions with Management and Others").
At the same meeting, Mr. Carter then reported to our board of directors
regarding the meeting held on September 16, 2003 with the Investor Group and
described the Investor Group's preliminary proposal. Mr. Nitido then reviewed
for our board of directors certain legal and structural considerations
associated with the proposal by the Investor Group to "spin-off" Millennium in
connection with the transaction.
Steven J. Glaser, Senior Vice President and Chief Operating Officer of TEP,
then generally discussed the regulatory standards applicable to the approval by
the ACC of a transaction of the nature proposed by the Investor Group. In
addition, the terms of TEP's existing rate settlement with the ACC were
reviewed. The rate settlement provides that TEP's retail rates may not be raised
during the term of the settlement, which expires in 2008. Although the rate
settlement contemplates market-based rates for power after that time, utility
regulators throughout the country, including the ACC, are reconsidering whether
rates related to generation should be market-based or determined on a more
traditional cost-of-service basis, which creates uncertainty with respect to
TEP's rates in respect of TEP's generation facilities after 2008. Mr. Larson and
Kent Grant, General Manager (Finance) of TEP, then reviewed our company's
financial position and prospects. In particular, they noted that forecasting
earnings after the expiration of TEP's rate settlement in 2008 is itself
uncertain due to the uncertainty concerning how retail rates will be set in
respect of TEP's generation facilities. The board of directors and management
then discussed, in light of the foregoing, the consequent risk related to our
future earnings and the market price of our common stock.
Mr. Beatty then made a presentation to our board of directors regarding
merger and acquisition activity in the utility industry generally, the Investor
Group, Millennium and the possible valuation of our company excluding
Millennium. Mr. Beatty noted that any attempt to value Millennium would be
complex and uncertain because Millennium had approximately 10 separate
businesses or investments in the technology, energy services and finance areas
and that many of these businesses were in the developmental stages. Although
comprising less than 6% of our consolidated assets, the unregulated businesses
of Millennium have contributed significant losses to date. Directors expressed
concerns regarding the potential viability of Millennium as a stand-alone entity
and whether a "spin-off" of Millennium was appropriate, or even feasible, at
this time. A discussion ensued with New Harbor as to whether Millennium was an
appropriate candidate for a "spin-off" and with counsel regarding issues
associated with a potential "spin-off" of Millennium.
At the conclusion of the discussion, the non-management members of our
board of directors met in executive session, and, with Messrs. Carter, Lawrence
Aldrich and Bickle abstaining from voting, our board of directors did not
approve continuation of discussions on the terms presented by the Investor
Group. Our board of directors expressed particular concern regarding a
"spin-off" of Millennium.
Following the meeting on September 30, 2003, Mr. Pignatelli advised the
Investor Group of the decision of our board of directors and described the
principal concerns of our board of directors. In response, the Investor Group
requested an opportunity to present a revised preliminary proposal directly to
our board of directors that addressed these concerns.
On October 13, 2003, our board of directors met to hear the Investor
Group's presentation. The Investor Group's representatives reviewed the reasons
for the Investor Group's interest in us and what the Investor Group believed to
be the benefits to our shareholders, including the premium of the proposed
purchase price over the then current market price of our common stock, the
opportunity for holders of large blocks of our common stock to obtain liquidity
for their shares, the Investor Group's access to the high-yield debt markets and
the Investor Group's belief that it could consummate a transaction quickly. They
also described the Investor Group's commitment to maintaining and improving our
relationships with our key constituencies, including management, employees,
19
customers, communities served and regulators. The Investor Group's
representatives told our board of directors that they believed that private
equity capital has become a more attractive source of capital for us. In
particular, the Investor Group's representatives discussed their perceptions
regarding potential significant changes in the capital markets that could
adversely impact our strategic situation as a publicly-traded utility holding
company, noting particularly that companies with comparatively small market
capitalization might not receive appropriate valuation in the public equity
markets or obtain access to well-priced capital. They also discussed the
possible adverse impact of diminished investor research analyst coverage on the
market prices of shares of smaller companies and other burdens connected with
remaining a listed public company. The Investor Group's representatives recalled
for our board of directors that the Investor Group had conducted a substantial
due diligence investigation of our company in the fall of 2002 and had renewed
its discussion regarding a possible transaction in July 2003. Among the
favorable factors that caused them to seek to renew discussions, they cited the
acquisition of the Citizens assets, the anticipated completion of the
Springerville Unit 3 project and improving conditions in the financial markets
which were expected to lower the cost of financing an acquisition.
The Investor Group's representatives then outlined two alternative
transaction structures. The first structure involved the acquisition of all of
our outstanding shares of common stock for a price of $24.50 to $25.00 per share
in cash. The second structure involved the purchase of all of our outstanding
shares of common stock for $23.00 per share in cash plus a note to be issued by
us ("Participating Notes") having a principal amount based upon a percentage of
a valuation of Millennium at the time when the Participating Notes became
payable, but with a payment at that time of at least $2.00 per share of our
common stock. The Investor Group's representatives provided a general
description of the terms of the Participating Notes, which contemplated that the
Participating Notes would not bear interest and would generally be payable in
five years, but could entitle holders to receive more than $2.00 per share,
depending upon the value of Millennium at the time the Participating Notes
became payable. If the value per share of Millennium after five years exceeded
$2.00, the holders of the Participating Notes would have been entitled to the
sum of $2.00 per Participating Note plus 60% of the excess of the per share
appraised value of Millennium over $2.00. We would have retained the remaining
value of Millennium. The Investor Group's representatives noted that the
specific terms and provisions of the Participating Notes would have to be
negotiated, if our board of directors determined to proceed with discussions,
and that the Participating Notes were proposed as an alternative to the
Millennium "spin-off."
After the Investor Group's representatives left the meeting, our board of
directors received a presentation from Mr. Nitido concerning its fiduciary
duties and responsibilities in connection with its consideration of the revised
proposal. Our board of directors also discussed the advisability of independent
legal counsel and financial advice in light of the proposed acquisition
transaction from the Investor Group. A representative of Fennemore Craig, P.C.
attended portions of the meeting to discuss certain issues under Arizona
corporate law regarding fiduciary duties, conflicts of interest, changes of
control and the implications of "going private" rules, and the advantages of
obtaining special counsel and financial advice to our board of directors when
considering the acquisition proposal from the Investor Group.
Mr. Beatty then made a presentation to our board of directors which
included a review of the principal points covered during his presentation to our
board of directors on September 30, 2003. Mr. Beatty advised our board of
directors that the general terms included in the revised proposal from the
Investor Group were sufficient from a financial point of view to merit our board
of directors authorizing continued discussion of the transaction. Mr. Beatty
also noted that our board of directors, at this early stage, did not need to
choose between the alternative transaction structures.
Our board of directors then discussed certain regulatory issues, including
what conditions the Investor Group might require with respect to regulatory
proceedings, and other potential transaction structures. Our board of directors
discussed the procedures to be followed in reviewing the potential transaction
with the Investor Group, including the advisability of forming a committee of
independent directors and the retention for the board of directors of separate
counsel and a financial advisor who had not been involved in the discussions
that led up to the potential transaction with the Investor Group.
Our board of directors, with Messrs. Pignatelli and Bickle abstaining,
unanimously authorized management to continue discussions with the Investor
20
Group and retained Fennemore Craig to act as special counsel to our board of
directors in connection with our board of directors' consideration of the
proposal. In addition, our board of directors determined to use Thelen Reid &
Priest to represent us in the capacity of transaction and securities counsel and
Roshka Heyman & DeWulf, PLC to represent us as Arizona regulatory counsel. Our
board of directors also determined to investigate and consider the engagement of
a financial advisor to our board of directors who had not previously advised us
on strategic transactions for the purpose of rendering financial advice and
issuing a fairness opinion in the event that the discussions resulted in a
definitive agreement.
At the conclusion of the meeting, our board of directors appointed a
committee (the "Strategic Transaction Advisory Committee" or "Committee") to
deliberate, analyze and negotiate the revised proposal and to ultimately make a
recommendation to our board of directors on whether or not to approve, and
recommend to the shareholders, an acquisition transaction with the Investor
Group. The Strategic Transaction Advisory Committee was composed of the
following directors: Mr. Carter (Chairman), and Harold Burlingame, Robert
Elliott, Kenneth Handy and Warren Jobe.
On October 17, 2003, Simpson Thacher & Bartlett LLP, transaction counsel to
the Investor Group, delivered to us and our counsel an initial draft of the
acquisition agreement and a summary of terms of the Participating Notes.
On October 20, 2003, our board of directors, acting by written consent,
provided that the Strategic Transaction Advisory Committee would not be subject
to any direction or control by our board of directors in its consideration of
any action concerning the Investor Group's proposal, although the Committee
would not have the power, without the affirmation of our board of directors, to
bind us to any part of the Investor Group's proposal. Our board of directors'
resolutions determined, based upon disclosures made by members of our board of
directors and upon the advice of counsel, that the previously appointed members
of the Committee were all "disinterested" and "qualified," as each term is
defined under Arizona law. Our board of directors' resolutions also authorized
the Committee to seek the assistance of legal, financial, tax and other
professional advisors and other advisors of their own selection which would
report only to the Committee and otherwise specifically defined the power and
authority of the Committee. On October 20, 2003, our board of directors, acting
by written consent, authorized the Committee to engage the services of Fennemore
Craig as special counsel to the Committee (in addition to acting as special
counsel to the board of directors) and concluded that it would be desirable to
engage a financial advisor which had not previously advised us on strategic
transactions to provide financial advice to the Committee and our board of
directors and, if requested, to provide an opinion regarding the fairness of the
consideration to be received by our shareholders from a financial point of view.
On October 21, 2003, representatives of the Investor Group, JPMSI and
Simpson Thacher & Bartlett met with our representatives, New Harbor and Thelen
Reid & Priest, in New York City to discuss general issues presented by the
initial draft of the acquisition agreement. On October 24, 2003, attorneys from
Simpson Thacher & Bartlett and Thelen Reid & Priest met separately to discuss
the draft acquisition agreement in detail and to discuss tax, corporate and
securities issues in connection with the proposed Participating Notes.
At meetings held on October 24 and October 29, 2003, the Strategic
Transaction Advisory Committee interviewed candidates for retention as a
financial advisor to the Committee and our board of directors in connection with
the potential transaction with the Investor Group. At the meeting held on
October 24, 2003, the Committee was advised by its counsel, Fennemore Craig, as
to the fiduciary duties and responsibilities of members of our board of
directors when considering an acquisition proposal, the provisions of Arizona
law regarding conflicting interests and changes of control and the issues
presented by the draft of the acquisition agreement received from the Investor
Group.
At its meeting on October 29, 2003, the Strategic Transaction Advisory
Committee also received an update from Mr. Pignatelli regarding certain of
Millennium's investments. The Committee, in consultation with its counsel and
representatives of New Harbor, also identified certain issues in connection with
the transaction, including price, the proposed Participating Notes, regulatory
conditions, financing of the transaction and the request by the Investor Group
21
for reimbursement of expenses if the acquisition failed to receive regulatory
approval. The Committee also discussed, in the event any arrangements or
understandings were to be entered into between management and the Investor
Group, the significance of such arrangements and understandings. The Committee
discussed under what circumstances the proposed transaction could be subject to
the enhanced disclosure rules applicable to "going-private" transactions.
On October 31, 2003, the Strategic Transaction Advisory Committee
unanimously voted to engage Morgan Stanley & Co. Incorporated ("Morgan Stanley")
to act as the financial advisor to the Committee and our board of directors in
connection with the transaction. The Committee also instructed Fennemore Craig
to review, consider and make recommendations regarding potential conflicting
interests, if any, of the members of our board of directors.
On October 31, 2003, our representatives and the Investor Group's
representatives and our and their counsel met to discuss the regulatory approval
process for a potential transaction.
On November 4, 2003, the Strategic Transaction Advisory Committee met with
representatives of Morgan Stanley and Fennemore Craig. The Committee emphasized
to Morgan Stanley that there had been no agreement or understanding to pursue an
acquisition transaction and that, for our board of directors to approve and
recommend a definitive agreement with the Investor Group, appropriate steps
should be taken to assure that the best price reasonably available for our
shareholders had been obtained, that management and employee interests had been
appropriately considered, that we would continue to benefit the communities we
serve and that our utility operations would continue to provide safe and
reliable service. Morgan Stanley's representatives discussed certain issues in
connection with the transaction, including the nature and identity of the entity
to be formed by the Investor Group to effectuate the acquisition, the status of
the Investor Group's financing arrangements and the Investor Group's position
that their costs and expenses should be reimbursed by us in the case of a
termination of the acquisition agreement as a consequence of a failure to
receive required regulatory approvals. The Strategic Transaction Advisory
Committee also discussed with Fennemore Craig and Morgan Stanley the
advisability of ascertaining whether parties other than the Investor Group might
have an interest in acquiring us and potential strategic parties that might be
interested and concluded that checking if any third parties were interested in
acquiring us was advisable. The Committee considered the need to maintain
confidentiality and instructed Morgan Stanley to proceed with contacting third
parties that may have been interested in acquiring us after obtaining
information from New Harbor as to the identity of any parties New Harbor may
have previously contacted.
The Strategic Transaction Advisory Committee also received an update from
Mr. Pignatelli regarding certain of Millennium's investments and Mr. Beatty
provided a summary of developments in the negotiations of the acquisition
agreement. The Committee also compared the proposed all-cash transaction with
the proposal that included the Participating Notes and a price of $1.50 to $2.00
per share less cash at closing than the all-cash transaction. The Committee
received from Fennemore Craig a review of the status of the acquisition
agreement and the various terms and conditions that were the subject of
negotiation.
On November 11, 2003, our board of directors received a presentation from
Fennemore Craig regarding the fiduciary duties and responsibilities of directors
under Arizona law and during a potential change of control transaction,
potential director conflicts of interest with respect to the proposed
acquisition and the benefits and desirability of having directors who did not
have a potential conflict of interest participate to the greatest extent
possible in the evaluation and negotiation of the transaction and the assessment
of alternatives. Fennemore Craig, after considering disclosures by members of
our board of directors, recommended to our board of directors that Messrs.
Pignatelli, Bickle and Aldrich and Ms. Elizabeth Bilby abstain from voting on
the proposed acquisition transaction with the Investor Group, but confirmed that
all of the members of the Strategic Transaction Advisory Committee were
"qualified" and "disinterested," as those terms are defined under Arizona law.
Following the presentation by Fennemore Craig, Mr. Pignatelli advised the
other members of our board of directors that while it is possible that specific
discussions may take place in the future, he had not engaged in any specific
discussions with the Investor Group regarding the terms of equity participation
of management in the acquisition transaction or regarding the terms of his
22
employment following the closing of the proposed acquisition. Mr. Pignatelli
expressed his belief that his existing ownership of our common stock and other
equity-based compensation was designed to align his interests with that of our
shareholders. He stated, however, that in order to avoid any perception of
conflict of interest with respect to the proposed acquisition, he would not
vote, in his capacity as a director, regarding the proposed acquisition. Mr.
Bickle confirmed that he would continue to abstain from voting as a director on
the matter for the reasons set forth above. Mr. Aldrich and Ms. Bilby each
expressed their beliefs, with respect to themselves, that their respective
transactions with us, which are described in "Transactions with Management and
Others", did not give rise to actual conflicts of interest that would preclude
their being "qualified" and "disinterested" in the consideration of the
acquisition transaction.
At the November 11, 2003 meeting, representatives of New Harbor described
the current progress of the negotiation of the acquisition agreement and the
financing structure contemplated by the Investor Group. New Harbor advised our
board of directors that, in its opinion, a "spin-off" of Millennium or the use
of the Participating Notes as consideration presented undue complications and
risk, without providing corresponding value to our shareholders, and advised
that an all-cash transaction would provide the most value to our shareholders.
In particular, New Harbor representatives noted that there was no assurance that
the Participating Notes would ever be worth more than $2.00 each, the minimum
payment under the Participating Notes in five years. New Harbor representatives
also expressed concern regarding the liquidity of the Participating Notes and
the related value implications. New Harbor also advised our board of directors
that, while it may be possible to negotiate a purchase price in excess of the
range of $24.50 to $25.00 per share currently proposed by the Investor Group, it
was unlikely that the Investor Group would increase its proposed purchase price
significantly. Representatives of Morgan Stanley were introduced to our board of
directors and Morgan Stanley reviewed with our board of directors the purpose
and scope of Morgan Stanley's engagement and reviewed the discussions that
Morgan Stanley had conducted with other parties regarding the acquisition of our
company for a price which would represent a significant premium over the current
market price of our common stock. Morgan Stanley reported that it had completed
contacting potential interested third parties and that none of the contacted
parties had expressed interest in acquiring us at a significant premium over the
current market price on our common stock.
At a meeting of the Strategic Transaction Advisory Committee held
immediately following the board of directors meeting on November 11, 2003,
Morgan Stanley further described its discussions with third parties regarding
possible interest in acquiring us at a significant premium over the current
market price of our common stock and also presented a general overview of
potential transactions with private equity investors such as the Investor Group.
In that regard, it was noted by members of the Committee that, in the past three
years, other private equity firms had explored the possible acquisition of our
company, but that discussions with those firms had all terminated without a
transaction. The Strategic Transaction Advisory Committee also discussed
Millennium and received a presentation from Fennemore Craig regarding the
current status of the negotiations of the acquisition agreement. In particular,
the Committee, in consultation with Fennemore Craig and Morgan Stanley,
discussed price, the financing condition, conditions to closing, the provisions
regarding the solicitation of other offers and the ability of each party to
terminate the agreement, and the termination provisions regarding the payment of
costs and expenses.
At the conclusion of these discussions, the Strategic Transaction Advisory
Committee determined to authorize the negotiations with the Investor Group to
continue for an all-cash transaction rather than a transaction involving a
"spin-off" of Millennium or the use of the Participating Notes, with the goal of
seeking further improvements regarding price and the other terms and conditions
prior to the meeting of our board of directors scheduled to be held on November
18, 2003.
Following this meeting, Mr. Carter, Fennemore Craig and Morgan Stanley met
with Thelen Reid & Priest and New Harbor to discuss the proposed acquisition
transaction and the acquisition agreement. On November 13, 2003, Thelen Reid &
Priest delivered detailed comments on the most recent draft of the acquisition
agreement to Simpson Thacher & Bartlett. The next day, Messrs. Larson and
Nitido, representatives of Morgan Stanley and New Harbor and Thelen Reid &
Priest met with the representatives of the Investor Group and Simpson Thacher &
Bartlett in New York City to engage in further negotiations. Negotiations
continued through November 16, 2003.
23
On November 18, 2003, the Strategic Transaction Advisory Committee met to
review the status of the negotiations with the Investor Group. At that meeting,
New Harbor presented a brief history of the discussions with the Investor Group
and presented a list of the parties with which New Harbor had engaged in
discussions regarding the acquisition of our company over the previous five
years. New Harbor also noted that none of these parties had expressed interest
in engaging in a transaction that would provide a significant premium to our
shareholders. Thelen Reid & Priest described the progress made in the
negotiations and listed the principal issues that remained unresolved in the
draft acquisition agreement. Morgan Stanley's representatives reviewed with the
Committee their preliminary valuation of our company as well as various
transaction issues. Mr. Glaser reported on the provisions of the acquisition
agreement relating to the regulatory approval process and discussed the
anticipated timing regarding ACC approval of the acquisition. Mr. Pignatelli
advised the Strategic Transaction Advisory Committee that he supported the
proposed acquisition. In stating the reasons for his recommendation, Mr.
Pignatelli noted in particular that the acquisition could provide us with a more
stable and secure future. The members of the Committee each indicated that they
were prepared to recommend the transaction and the acquisition agreement to our
board of directors for approval subject to reaching agreement on the price and
the other remaining unresolved issues under the acquisition agreement.
Following the meeting of the Strategic Transaction Advisory Committee, our
board of directors met to receive a report of the Committee regarding the
proposed transaction. Mr. Carter reported that, in light of the progress that
had been made, and subject to the attainment of agreement on the remaining
unresolved issues, the Committee was prepared to unanimously recommend that we
proceed with the proposed transaction with the Investor Group. Thelen Reid &
Priest presented an overview of the acquisition agreement, drafts of which had
previously been circulated to our board of directors, including the transaction
structure, the financing arrangements, the regulatory approvals required to
consummate the transaction, the terms under which our board of directors may
respond to bona fide written proposals from third parties and termination
provisions. Thelen Reid & Priest then summarized for our board of directors the
major points that remained unresolved in the acquisition agreement. Our board of
directors then discussed with Morgan Stanley various transaction and valuation
issues. New Harbor then made a presentation regarding the history of the
negotiations similar to that delivered earlier to the Committee. Our board of
directors then discussed the remaining unresolved issues and Mr. Glaser
responded to questions from directors regarding the ACC approval process.
Following the meeting of our board of directors, the Strategic Transaction
Advisory Committee reconvened to discuss the remaining open issues and to
develop a proposal to the Investor Group with respect to the remaining
unresolved issues and instructed Morgan Stanley to present the proposal to the
Investor Group. In particular, the Committee requested that Morgan Stanley seek
an increase in the purchase price to $25.25 from the range previously discussed
($24.50 to $25.00) and authorized Morgan Stanley to accept, contingent on the
price increase, the Investor Group's proposal that we reimburse their expenses
if the acquisition fails to receive the required Arizona regulatory approval.
On November 19, 2003, the Investor Group accepted our proposal. In
particular, the Investor Group agreed to a purchase price of $25.25 per share
and termination fees and expenses in an amount up to $25 million in the
aggregate on the terms stated in the acquisition agreement.
On November 21, 2003, the Strategic Transaction Advisory Committee met to
consider the proposed acquisition agreement and reviewed the conclusion of the
negotiations. Morgan Stanley delivered its opinion to the effect that, as of
that date, and subject to and based upon the considerations set forth in its
written opinion, the $25.25 in cash per share to be received by our shareholders
pursuant to the acquisition agreement was fair from a financial point of view to
those shareholders (other than Saguaro Utility and its affiliates). The
Committee then unanimously adopted resolutions recommending that our board of
directors approve the acquisition agreement.
Immediately following the meeting of the Strategic Transaction Advisory
Committee, our board of directors met to receive the recommendation of the
Committee and the fairness opinion of Morgan Stanley. Our board of directors,
with Messrs. Burlingame, Carter, Elliott, Handy and Jobe voting in favor of the
24
proposal, then adopted resolutions authorizing the execution of the acquisition
agreement and authorizing and recommending that our shareholders vote in favor
of the acquisition. The remaining four directors, Messrs. Pignatelli, Bickle and
Aldrich, and Ms. Bilby, after consultation with the Board's special counsel,
Fennemore Craig, abstained from voting on the acquisition in order to avoid any
appearance of a conflict of interest. These four directors, however, advised the
board that they agreed with the recommendation of the Strategic Transaction
Advisory Committee and that they would have voted to approve the acquisition.
The acquisition agreement was executed and delivered in the evening of
Friday, November 21, 2003 and the execution and delivery of the acquisition
agreement was publicly announced prior to the opening of business on Monday,
November 24, 2003.
OUR REASONS FOR THE ACQUISITION; RECOMMENDATION OF OUR BOARD OF DIRECTORS
In determining to approve the acquisition and to recommend that you vote to
approve the acquisition agreement, and in reaching its determination that the
acquisition and the acquisition agreement are fair to and in the best interests
of our company and our shareholders, our board of directors held discussions
with our executive officers and our financial and legal advisors. Our board of
directors reached its recommendation after careful consideration over time and
also considered the recommendation of the Strategic Transaction Advisory
Committee. Our board of directors and the Strategic Transaction Advisory
Committee considered numerous factors, including, without limitation, the
following:
o the review and analysis of our business, current and future financial
condition, current earnings and earnings prospects, as well as the
current and prospective regulatory environment;
o the relationship of the acquisition consideration to the historical
trading levels of our common stock including the fact that the cash
consideration of $25.25 per share of our common stock to be paid to
shareholders in the acquisition represents a premium of approximately
30% over the per share closing price on November 21, 2003, the last
trading day prior to the execution and delivery of the acquisition
agreement;
o the acquisition allows our shareholders to immediately realize a fair
value, in cash, for their investment and is preferable to the
shareholders continuing to hold shares of common stock indefinitely;
o the uncertainty over whether and when the businesses which Millennium
is developing will be successful;
o the fact that rates that may be charged by TEP may not be raised prior
to 2008 and that the regulatory environment following that time is
subject to uncertainty;
o the acquisition presents a means for holders of large blocks of shares
of our common stock to receive a premium price in cash for their
holdings without adversely affecting the market price for shares of our
common stock;
o the presentation of Morgan Stanley, including its opinion dated
November 21, 2003, to the Strategic Transaction Advisory Committee and
our board of directors, as to the fairness of the consideration to be
received by our shareholders from a financial point of view (see
"Opinion of Financial Advisor to our Board of Directors");
o the discussions with third parties conducted on our behalf by Morgan
Stanley (See "Background of the Acquisition") and a review of the
possible alternatives to the acquisition at this time, including
remaining a public company and the timing and likelihood of actually
achieving additional value from such alternatives;
o our board of directors' belief that the Investor Group is motivated to
operate our company and its businesses successfully, by meeting the
needs of our customers, employees and other constituencies;
25
o our board of directors' belief that that the Investor Group will
continue our strategy of providing safe and reliable service to our
utility customers and that the Investor Group's plans for us will
enable us to have adequate capital for utility operations and to meet
expansion requirements;
o our board of directors' belief that the Investor Group will be
sensitive to the needs of the communities we serve, and will cause us
to continue to be a good corporate citizen;
o our board of directors' belief that the Investor Group will cause us to
provide an attractive working environment for our employees;
o the commitment by the Investor Group to maintain our headquarters in
Tucson, Arizona;
o the terms of the acquisition agreement, including the right of our
board of directors, prior to the shareholders' approving the
acquisition, (a) to change its recommendation to our shareholders
regarding the acquisition in the exercise of its fiduciary duties and
(b) to terminate the acquisition agreement to accept a proposal
superior to that made by the Investor Group (see "The Acquisition
Agreement - No Solicitation of Alternative Proposals");
o the likelihood of consummation of the acquisition, including an
assessment of the risks associated with obtaining required approvals
from federal and state regulatory authorities; and
o the delivery by the Investor Group of letters setting forth the
commitments regarding the equity financing and commitments and other
arrangements regarding the debt financing necessary to enable the
Investor Group to consummate the acquisition, subject to usual
conditions for financing of this type (see "Financing for the
Acquisition").
In view of the wide variety of factors considered by the Strategic
Transaction Advisory Committee and our board of directors in connection with
their evaluation of the proposed acquisition, neither the Committee nor our
board of directors found it practicable to quantify or otherwise assign relative
weights to the foregoing factors. The Strategic Transaction Advisory Committee
and our board of directors viewed their respective positions and recommendations
as being based upon the totality of the information presented to and considered
by them. While the foregoing discussion of the information and factors
considered by the Committee and our board of directors is not intended to be
all-inclusive, it does constitute a summary of all of the material information
considered by the Committee and our board of directors in determining to
recommend approval of the acquisition.
The Strategic Transaction Advisory Committee and our board of directors
believe that each of the factors listed above supported their respective
conclusions that the acquisition is advisable and in the best interests of our
company and our shareholders.
The Strategic Transaction Advisory Committee unanimously determined that
the acquisition is fair to and in the best interests of the holders of our
common stock, and unanimously recommended that our board of directors approve
the acquisition agreement.
OUR BOARD OF DIRECTORS, WITH MESSRS. BURLINGAME, CARTER, ELLIOTT, HANDY AND
JOBE VOTING IN FAVOR OF THE PROPOSAL, RECOMMENDS THAT OUR SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE AGREEMENT AND PLAN OF MERGER BETWEEN SAGUARO ACQUISITION
CORP. AND US. The remaining four directors, Messrs. Pignatelli, Bickle and
Aldrich, and Ms. Bilby, after consultation with our board of directors' special
counsel, Fennemore Craig, abstained from voting on the acquisition in order to
avoid any appearance of a conflict of interest. These directors, however,
advised the board that they agreed with the recommendation of the Strategic
Transaction Advisory Committee and that they would have voted to recommend the
approval of the acquisition agreement.
26
OPINION OF FINANCIAL ADVISOR TO OUR BOARD OF DIRECTORS
Under an engagement letter dated as of November 3, 2003, we retained Morgan
Stanley to provide us with financial advisory services (including structuring,
planning and negotiating services) and a financial opinion letter in connection
with the acquisition. At the meeting of our board of directors, including the
members of the Strategic Transaction Advisory Committee, on November 21, 2003,
Morgan Stanley rendered its oral opinion to the board of directors, subsequently
confirmed in writing, to the effect that, as of November 21, 2003 and subject to
and based upon the assumptions and other considerations set forth in its written
opinion, the acquisition consideration to be received by our common stock
shareholders pursuant to the acquisition agreement was fair from a financial
point of view to our shareholders (other than Saguaro Utility and its
affiliates).
The full text of the written opinion of Morgan Stanley, dated November 21,
2003, is attached hereto as Appendix B. The opinion sets forth, among other
things, the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Morgan Stanley in rendering
its opinion. We recommend that you read the entire opinion carefully. Morgan
Stanley's opinion is addressed to our board of directors and to the members of
the Strategic Transaction Advisory Committee and addresses only the fairness,
from a financial point of view, of the consideration to be received by our
shareholders (other than Saguaro Utility and its affiliates) pursuant to the
acquisition agreement as of the date of the opinion. It does not address any
other aspects of the acquisition and does not constitute a recommendation to any
holder of our common stock as to how such shareholder should vote with respect
to the acquisition or any other matter. The summary of the opinion of Morgan
Stanley set forth in this document is qualified in its entirety by reference to
the full text of the opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things:
o reviewed certain publicly available financial statements and other
information about us;
o reviewed certain internal financial statements and other financial and
operating data concerning us, prepared by our management;
o reviewed certain financial forecasts prepared by our management;
o discussed our past and current operations and financial condition and
our prospects with our senior executives;
o reviewed our reported prices and trading activity for our common stock;
o compared our financial performance and the prices and trading activity
of our common stock with that of certain other publicly-traded
companies comparable to us and their securities;
o reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
o participated in discussions and/or negotiations among our
representatives, Saguaro Utility and certain other parties and their
financial and legal advisors;
o reviewed the debt letters and the equity commitment letter referred to
in the acquisition agreement;
o reviewed the acquisition agreement and certain related documents; and
o performed such other analyses and considered such other factors as
Morgan Stanley deemed appropriate.
27
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the financial projections, Morgan Stanley
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of our future financial performance.
In addition, Morgan Stanley has assumed that the acquisition will be consummated
in accordance with the terms set forth in the acquisition agreement. Morgan
Stanley has not made any independent valuation or appraisal of our assets or
liabilities, nor has it been furnished with any such appraisals. As is known by
us, Morgan Stanley is not a legal or regulatory expert and has relied upon the
assessments of other of our advisors with respect to such issues. Morgan
Stanley's opinion was necessarily based on economic, regulatory, market and
other conditions as in effect on, and the information made available to Morgan
Stanley as of November 21, 2003.
Morgan Stanley was not asked to consider, and Morgan Stanley's opinion does
not address, the relative merits of the acquisition as compared to any
alternative strategies or transactions that might exist for us or the effect of
such strategies or transactions, whether or not such strategies or transactions
may be available.
Morgan Stanley expressed no opinion or recommendation as to how our
shareholders should vote at the special meeting.
The following is a summary of the material financial analyses performed by
Morgan Stanley in connection with its oral opinion and the preparation of its
written opinion. Some of these summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses used by Morgan Stanley, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses.
COMPARATIVE STOCK PRICE PERFORMANCE.
Morgan Stanley reviewed the recent stock price performance of our common
stock and compared the performance with that of the following indices:
o Standard & Poor's 500 Index;
o Standard & Poor's 500 - Utilities Index; and
o An index of selected comparable companies to us, including Avista
Corporation, Cleco Corporation, Duquesne Light Holdings, Inc., Pinnacle
West Capital Corporation, PNM Resources, Inc. and Puget Energy, Inc.
The comparable companies were chosen on the basis of several criteria
including business mix, service territory characteristics, relative size, growth
prospects and capitalization. Morgan Stanley concluded that the characteristics
of these companies, taken as a group, are similar in many respects to our
characteristics.
The following table presents the change in value for these indices, as
compared to the change in the share price of our common stock over the periods
from November 20, 2000 to November 18, 2003 and May 19, 2003 to November 18,
2003:
----------------------------------------- -- ------------------------ -----------------------
Percentage Change for Percentage Change for
the Period 11/20/2000 the Period 05/19/2003
to 11/18/2003 to 11/18/2003
----------------------------------------- -- ------------------------ -----------------------
----------------------------------------- -- ------------------------ -----------------------
Standard & Poor's Electric Utility Index (47.6)% 2.8%
----------------------------------------- -- ------------------------ -----------------------
----------------------------------------- -- ------------------------ -----------------------
Standard & Poor's 500 Index (23.0)% 12.3%
----------------------------------------- -- ------------------------ -----------------------
----------------------------------------- -- ------------------------ -----------------------
Selected Comparable Companies (23.4)% 10.6%
----------------------------------------- -- ------------------------ -----------------------
----------------------------------------- -- ------------------------ -----------------------
UniSource Energy 30.2% 7.3%
----------------------------------------- -- ------------------------ -----------------------
28
COMPARABLE PUBLIC COMPANY ANALYSIS.
As part of its analysis, Morgan Stanley compared our financial information
with that of the same selected comparable companies as in the comparative stock
price performance analysis. The table below presents, as of November 18, 2003,
the representative range for each of the ratios of stock price to each of
forecasted fiscal 2003 and 2004 earnings per share, stock price to book value
per share as of September 30, 2003, stock price to the latest twelve-month
("LTM") earnings per share, and the aggregate value to LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA") multiple.
---------------------- -- -------------- ----------------- --------------- -------------- ------------------
Price to Price to Price to Book Price to LTM Aggregate Value
Forecasted Forecasted 2004 Value Earnings to LTM EBITDA
2003 Earnings Earnings
---------------------- -- -------------- ---------------- --------------- --------------- ------------------
---------------------- -- -------------- ---------------- --------------- --------------- ------------------
Comparable Companies 12.5-14.5 11.5-13.5 1.2-1.4 13.5-15.5 7.0-7.5
---------------------- -- -------------- ---------------- --------------- --------------- ------------------
---------------------- -- -------------- ---------------- --------------- --------------- ------------------
UniSource Energy 16.7 11.4 1.3 27.2 6.9
---------------------- -- -------------- ---------------- --------------- --------------- ------------------
No company utilized in the comparable public company analysis as a
comparison is identical to us. In evaluating the companies, Morgan Stanley made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond our control such as the impact of competition on our business and the
industry generally, industry growth and the absence of any material adverse
change in our financial condition and prospects or the industry or in the
financial markets in general. Mathematical analysis, such as determining an
average or a median, is not in itself a meaningful method of using comparable
public company data.
Morgan Stanley calculated the implied per share trading values for our
common stock based on the appropriate financial results and projections and the
range of multiples for the comparable companies. The resulting implied trading
values were: $14.53 - $16.78 based on stock price to forecasted 2003 earnings
per share, $19.31 - $22.47 based on stock price to forecasted 2004 earnings per
share, $17.78 - $20.55 based on stock price to book value per share as of
September 30, 2003, $9.67 - $11.10 based on stock price to LTM earnings per
share and $20.45 - $25.55 based on aggregate value to LTM EBITDA.
DISCOUNTED CASH FLOW ANALYSIS.
Given the different nature of businesses in which we participate, Morgan
Stanley performed a sum-of-the-parts discounted cash flow analysis. Morgan
Stanley's discounted cash flow analysis was based on subsidiary and consolidated
financial projections provided by our management for the period 2004 through
2012. Unlevered free cash flows were calculated as net income available to
common shareholders plus the aggregate of preferred stock dividends,
depreciation and amortization, deferred taxes, and other noncash expenses and
after-tax net interest expense less the sum of capital expenditures and
investment in noncash working capital for each operating subsidiary. Morgan
Stanley calculated the values of each subsidiary as of the end of the period for
which projections were provided by our management, also referred to as the
terminal value, by applying a range of net income multiples to the forecasted
net income as of the last year for which projections were provided by our
management, and the cash flow streams and terminal values were then discounted
to the date of the opinion using a range of discount rates representing an
estimated range of the weighted average cost of capital for each subsidiary. The
ranges of discount rates utilized for the valuation were 7.0%-8.0% for our
regulated utility subsidiaries and 20.0%-30.0% for our other non-regulated
subsidiary businesses. The range of net income multiples applied for this
analysis was 12.5x to 14.5x for our regulated utility subsidiaries, which is
based upon trading multiples of the comparable companies, and 15.0x to 20.0x for
our non-regulated subsidiary businesses which is based upon Morgan Stanley's
judgment of an appropriate trading range for a seasoned non-regulated power
technology company.
29
Based on this analysis, Morgan Stanley calculated per share trading values
for us ranging from $22.17 to $25.80.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS.
Using publicly available information, Morgan Stanley considered 6 announced
or completed precedent transactions in the regulated electric utility industry
comparable in certain respects to the acquisition. These precedent transactions
included:
o The AES Corporation's acquisition of IPALCO Enterprises Inc. (announced
July 2000);
o Powergen PLC's acquisition of LG&E Energy Corp. (announced February
2000);
o SW Acquisition L.P.'s acquisition of TNP Enterprises, Inc. (announced
May 1999);
o National Grid Transco PLC's acquisition of New England Electric System
(announced December 1998);
o The AES Corporation's acquisition of Cilcorp Inc. (announced November
1998);
o CalEnergy Company, Inc.'s acquisition of MidAmerican Energy Holdings
Company (announced August 1998).
Morgan Stanley compared publicly available financial and market statistics
of the precedent transactions. The table below presents the representative range
for each of the ratios of price paid in the precedent transactions to forecasted
earnings for the first and second fiscal years after the announcement of the
transactions, price paid to latest reported book value, price paid to the LTM
earnings, premium paid to the unaffected stock price, and the aggregate value
paid to LTM EBITDA multiple.
--------------- --- --------------- --------------- ------------ ------------ --------------- -----------------
Price Paid to Price Paid to Price Paid Price Paid Premium Aggregate Value
Forward FY1E Forward FY2E to Book Value to LTM to Unaffected to LTM EBITDA
Earnings Earnings Earnings Price
--------------- --- --------------- --------------- ------------- ------------ --------------- -----------------
--------------- --- --------------- --------------- ------------- ------------ --------------- -----------------
Precedent 15.5-17.5 14.5-16.5 1.8-2.3 16.5-18.5 25%-35% 7.0-8.0
Transactions
--------------- --- --------------- --------------- ------------- ------------ --------------- -----------------
Morgan Stanley calculated the per share transaction values for our common
stock based on the appropriate financial results and projections and the range
of multiples for the precedent transactions. The per share transaction values
calculated were: $17.86 - $20.02 based on price paid to the FY1E earnings,
$24.05 - $27.21 based on price paid to FY2E earnings, $22.78 - $28.79 based on
price paid to adjusted book value, $11.82 - $13.25 based on price paid to LTM
earnings, $24.00 - $25.92 based on premium paid to unaffected stock price, and
$20.45 - $30.66 based on aggregate value to LTM EBITDA.
No transaction utilized as a comparison in the analysis of selected
precedent transactions is identical to the acquisition, accordingly, an analysis
of the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in our financial and operating characteristics
and other factors that would affect the acquisition value of the companies to
which it is being compared. In evaluating the precedent transactions, Morgan
Stanley made judgments and assumptions with regard to conditions and other
matters, many of which are beyond our control, such as the impact of competition
on us and the industry generally, industry growth and the absence of any adverse
material change in our financial conditions and prospects or the industry or in
the financial markets in general. Mathematical analysis, such as determining the
mean or median, is not, in itself, a meaningful method of using precedent
transactions data.
30
In connection with the review of the acquisition by our board of directors
and the Strategic Transaction Advisory Committee, Morgan Stanley performed a
variety of financial and comparative analyses for purposes of rendering its
opinion. The preparation of a fairness opinion is a complex process and does not
lend itself to a partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute a specific weight to any single method of analysis or
factor it considered. Morgan Stanley believes that relying solely on a portion
of its analyses, without considering all of its analyses as a whole, would
create an incomplete view of the process underlying its analyses and opinion.
While Morgan Stanley did not rely solely on any single method of analysis or
factor, Morgan Stanley may have given various analyses and factors more or less
weight than other analyses and factors, and may have deemed various assumptions
more or less probable than other assumptions. None of these valuations, however,
should be taken to be Morgan Stanley's view of our actual value. In performing
its analyses, Morgan Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Many of
these assumptions are beyond our control. Any estimates contained in Morgan
Stanley's analyses are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than those suggested
by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its
analysis of the fairness of the consideration to be received pursuant to the
acquisition agreement from a financial point of view to holders in the aggregate
of shares of our common stock (other than Saguaro Utility and its affiliates)
and in connection with the delivery of its opinion to the board of directors and
the Strategic Transaction Advisory Committee. These analyses do not purport to
be appraisals or to reflect the prices at which shares of our common stock might
actually trade. We did not impose any limitations on the scope of the
information received or reviewed by Morgan Stanley in connection with its
delivery of the opinion.
The consideration to be received pursuant to the acquisition agreement was
determined through arm's length negotiations between us and Saguaro Acquisition
Corp. and was approved by our board of directors and the Strategic Transaction
Advisory Committee. Morgan Stanley provided advice to our board of directors and
the Strategic Transaction Advisory Committee during these negotiations. Morgan
Stanley did not, however, recommend any specific consideration amount to the
board of directors or the Strategic Transaction Advisory Committee or that any
specific consideration amount constituted the only appropriate amount.
In addition, Morgan Stanley's opinion and its presentation to our board of
directors and the Strategic Transaction Advisory Committee was one of many
factors taken into consideration by our board of directors and the Strategic
Transaction Advisory Committee in deciding to approve the acquisition.
Consequently, the analyses as described above should not be viewed as
determinative of the opinion of the board of directors or the Strategic
Transaction Advisory Committee with respect to the acquisition consideration or
of whether our board of directors or the Strategic Transaction Advisory
Committee would have been willing to agree to a different amount.
As discussed in the section entitled, "Background of the Acquisition,"
after considering and interviewing another investment banking firm, our board of
directors retained Morgan Stanley based upon Morgan Stanley's qualifications,
experience and expertise and the fact that Morgan Stanley had not previously
advised us on strategic transactions. Morgan Stanley is an internationally
recognized investment banking and advisory firm. Morgan Stanley, as part of its
investment banking and financial advisory business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. In the ordinary course of
business, Morgan Stanley or its affiliates may from time to time trade in our
securities or other indebtedness for its own account, the accounts of investment
funds and other clients under the management of Morgan Stanley and for the
account of customers and, accordingly, may hold long or short positions in these
securities or indebtedness.
Under the engagement letter, our board of directors agreed that we would
pay Morgan Stanley a fee up to $4 million for providing its financial advisory
31
services in connection with the acquisition, payable in installments. A portion
of the fee was a fixed amount attributable to Morgan Stanley's services with
respect to the preparation and delivery of its opinion. The final portion of the
fee is an amount based on the scope of work performed by Morgan Stanley not to
exceed a fixed amount. Under the engagement letter, we have agreed to reimburse
Morgan Stanley for its expenses incurred in performing its services. In
addition, we have agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain liabilities
and expenses, including certain liabilities under the federal securities laws,
related to or arising out of Morgan Stanley's engagement. In the past, Morgan
Stanley and its affiliates have provided financing services for us and have
received fees for the rendering of those services.
EFFECTIVE TIME OF THE ACQUISITION
The acquisition will become effective when we and Saguaro Acquisition Corp.
file the acquisition agreement and articles of merger with the ACC in accordance
with the Arizona Business Corporation Act and the acquisition agreement or a
certificate of merger with the Secretary of State of Delaware in accordance with
the Delaware General Corporation Law. The acquisition will not become effective
before the date of the special meeting. If the acquisition agreement is approved
at the special meeting, the effective time will occur as soon as practicable
after satisfaction or waiver of the remaining conditions to the acquisition
contained in the acquisition agreement, including the receipt of regulatory
approvals.
REGULATORY APPROVALS
Several regulatory approvals are required in order for the acquisition to
close. Although there can be no guarantee these approvals will be obtained on a
timely basis, or at all, we currently believe that the necessary approvals can
be obtained in sufficient time to allow the acquisition to be completed in the
second half of 2004. In the acquisition agreement, we and Saguaro Acquisition
Corp. have agreed to use all commercially reasonable efforts to obtain
regulatory approvals necessary or advisable to complete the acquisition. For
additional information regarding these regulatory approvals and their impact on
the parties' obligations to consummate the acquisition, see "The Acquisition -
Conditions to Each Party's Obligation to Effect the Acquisition."
ARIZONA CORPORATION COMMISSION.
The ACC must approve the acquisition under Arizona Administrative Code
R14-2-801 et seq. Under this rule, any public utility or affiliate intending to
reorganize a public utility holding company must notify the ACC of such intent,
and the ACC may reject the plan of reorganization if the ACC determines that the
reorganization would impair the financial status of the public utility,
otherwise prevent the public utility from attracting capital at fair and
reasonable terms, or would impair the ability of the public utility to provide
safe, reasonable and adequate service. Under these rules, "reorganize" is
defined to include the acquisition of a financial interest in an affiliate or
utility. Thus, since we are a holding company for TEP, UNS Gas and UNS Electric,
and Saguaro Utility is acquiring an interest in these public utilities, this
approval is required. We made the requisite filing with the ACC for approval of
the acquisition on December 29, 2003.
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935.
In connection with the acquisition, Saguaro Utility and its affiliates must
obtain SEC approval under Section 9(a)(2) of the Public Utility Holding Company
Act of 1935, as amended ("PUHCA"). Section 9(a)(2) requires SEC approval for any
person to acquire, directly or indirectly, 5% or more of the outstanding voting
securities of a public utility company if such person owns, directly or
indirectly, 5% or more of the outstanding voting securities of any other public
utility company or will, by virtue of such acquisition, own, directly or
indirectly, 5% or more of the voting securities of more than one public utility
company. Since Saguaro Utility will be indirectly acquiring in excess of 5% of
our three public utility subsidiaries, TEP, UNS Gas and UNS Electric, this
approval is required. Saguaro Utility expects to file an application with the
SEC seeking this approval prior to the special meeting.
32
Under the applicable standards of PUHCA, the SEC may not approve a proposed
acquisition if it finds that:
o the acquisition would tend towards detrimental interlocking relations
or a detrimental concentration of control of public utilities;
o the consideration to be paid in connection with the acquisition is not
reasonable;
o the acquisition would unduly complicate the capital structure or be
detrimental to the proper functioning of the utility's holding company
system; or
o the acquisition would violate applicable state law, or be detrimental
to the carrying out of the integration provisions of PUHCA.
In addition, the SEC must affirmatively find that a proposed acquisition
will serve the public interest by tending towards the economical and efficient
development of an integrated public utility system.
Saguaro Utility's obligations under the acquisition agreement are further
conditioned upon the following:
o the SEC granting Saguaro Utility and its affiliates an exemption under
Section 3(a)(1) from all provisions of PUHCA other than Section
9(a)(2); and
o Saguaro Utility and its limited partners receiving evidence
satisfactory to them in their reasonable judgment that none of their
limited partners nor any of their respective affiliates will become a
"holding company" or a "subsidiary company" or an "affiliate" of a
"holding company" within the meaning of that Act or under any similar
federal or Arizona law coming into effect after the date of the
acquisition agreement that imposes regulation material to Saguaro
Utility or any of its affiliates as a result of the transactions
contemplated by the acquisition agreement.
In this regard, Saguaro Utility expects to seek exemptive relief and a "no
action" letter from the SEC prior to the special meeting.
FEDERAL ENERGY REGULATORY COMMISSION.
Under Section 203 of the Federal Power Act, the FERC has jurisdiction when
a public utility sells or otherwise disposes of facilities, including
securities, that are subject to its jurisdiction. A disposition is deemed made
when there is a change of control of the public utility that owns the
facilities. Certain of TEP's and UNS Electric's transmission facilities and
services are subject to the FERC's jurisdiction. For this reason, the prior
approval of the FERC is required in order to complete the acquisition. We and
Saguaro Acquisition Corp. plan to file a joint application with the FERC prior
to the special meeting, requesting that the FERC approve the acquisition.
In reviewing an acquisition, the FERC generally evaluates the effect of a
proposed acquisition on competition and on rates and whether the proposed
acquisition will impair the effectiveness of regulation.
HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT.
The acquisition is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations thereunder,
which provide that certain acquisition transactions may not be completed until
specified information has been furnished to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and until certain waiting
periods have been terminated or have expired. This information has not yet been
furnished, but we expect that such information will be furnished to these
governmental agencies prior to the date of the special meeting. The expiration
or earlier termination of the Hart-Scott Act waiting period would not preclude
the Antitrust Division or the Federal Trade Commission from challenging the
acquisition on antitrust grounds. We and Saguaro Acquisition Corp. do not
believe that the acquisition will violate federal antitrust laws. If the
acquisition is not completed within 12 months after the expiration or earlier
33
termination of the initial Hart-Scott Act waiting period, the parties would be
required to submit new information to the Antitrust Division and the Federal
Trade Commission, and a new waiting period would have to expire or be earlier
terminated before the acquisition could be completed.
INJUNCTIONS.
The obligation of each party to complete the acquisition is subject to the
condition that there be no law, regulation or injunction in effect that would
prohibit the completion of the acquisition.
FINANCING FOR THE ACQUISITION
Upon consummation of the acquisition, Saguaro Utility will cause the
surviving corporation to pay approximately $880 million in cash to our
shareholders and holders of stock options and performance shares awarded under
our performance incentive plans. In addition, Saguaro Utility has informed us
that, in connection with the closing of the acquisition, it intends to cause the
surviving corporation (i) to repay a $95 million intercompany loan to us from
TEP and (ii) to contribute up to $168 million to TEP. We expect that TEP will
use a significant portion of these proceeds to retire some of its outstanding
debt. These transactions are expected to improve TEP's ratio of debt
capitalization to equity capitalization (as determined by the ACC) from
approximately 70/30 to 60/40 (excluding capital lease obligations).
It is expected that the proceeds for all of the above mentioned payments
will come from a combination of equity contributions by the partners of Saguaro
Utility and borrowings and issuances of debt securities by another affiliate of
Saguaro Acquisition Corp. It is expected that the partners of Saguaro Utility
will contribute approximately $557 million as common and/or preferred equity to
Saguaro Utility, which will contribute the net proceeds to Saguaro Acquisition
Corp. immediately prior to the acquisition. We also expect the remaining
proceeds necessary to finance this transaction will be obtained by Saguaro
Acquisition Corp.'s affiliate, at the closing of the acquisition, through a $360
million borrowing from a syndicate of lenders and an issuance of $300 million in
notes. In connection with the execution of the acquisition agreement, Saguaro
Acquisition Corp. and its affiliate obtained commitments from lenders for the
$360 million in borrowings. In addition, Saguaro Acquisition Corp. and its
affiliate obtained commitments for (i) a $50 million revolving credit facility
for general corporate purposes, (ii) a $40 million revolving credit facility for
UES, UNS Gas and UNS Electric and (iii) a $220 million loan to refinance TEP's
existing credit facility. Each of these commitments expires February 21, 2005,
and are subject to various closing conditions customary for bank commitment
letters in connection with an acquisition of this type. Saguaro Acquisition
Corp. and an affiliate also obtained a letter from a group of investment banks
that they were highly confident that they could arrange for the sale of up to
$300 million in notes of the affiliate through a private sale and/or a public
offering. The letter from the investment banks relating to the sale of the $300
million in notes is not a commitment or undertaking by such banks to underwrite,
place or purchase the notes or otherwise provide financing. Because the receipt
of the borrowings and issuance of the notes is a condition to the closing of the
acquisition, each condition to funding set forth in the commitment letters is
effectively a condition to Saguaro Acquisition Corp.'s obligation to effect the
acquisition. There are numerous conditions to these financings. Consequently,
there can be no assurance that these conditions will be satisfied or waived or
that such financings will be made available.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
In considering the recommendation of our board of directors, our
shareholders should be aware that members of our board of directors and
management will receive benefits from the acquisition that will be in addition
to or different from the benefits our shareholders receive generally. Our
directors knew about these additional interests and considered them when they
approved the acquisition.
INDEMNIFICATION AND INSURANCE.
In the acquisition agreement, Saguaro Acquisition Corp. agreed that the
surviving corporation would indemnify, after the effective time of the
34
acquisition, each of our directors and officers with respect to claims arising
from facts or events that occurred prior to the effective time of the
acquisition. These rights to indemnification will continue for at least six
years after the effective time of the acquisition.
In addition, the surviving corporation has agreed to obtain "tail"
insurance policies at the effective time of the acquisition that provide, for at
least six years after such time, insurance coverage with respect to directors'
and officers' liability for claims arising from facts or events that occurred
prior to such time. The amount and scope of the coverage will be at least as
favorable as the terms of our policies in effect as of the date of the
acquisition agreement.
EXISTING EMPLOYMENT ARRANGEMENTS.
Our subsidiary, TEP, has change in control agreements (each, a
"Change-in-Control Agreement") with all of its officers. Each Change-in-Control
Agreement is in effect until the later of: (i) five years after the date either
TEP or the officer gives written notice of termination of the Change-in-Control
Agreement, or (ii) if a change in control occurs during the term of the
Change-in-Control Agreement, five years after the change in control. For the
purpose of the Change-in-Control Agreements, a change in control includes the
acquisition of beneficial ownership of 30% of our common stock or approval by
our shareholders of certain, acquisitions, mergers or consolidations. Upon the
approval of the acquisition agreement at the special meeting, a change in
control will have occurred for purposes of the Change-in-Control Agreements
irrespective of whether or not the acquisition is completed. The
Change-in-Control Agreements provide that each officer shall be employed by TEP
or one of its subsidiaries or affiliates in a position comparable to his or her
current position, with compensation and benefits, which are at least equal to
their then current compensation and benefits, for a period of five years after a
change in control, subject to earlier termination due to the officer's
acceptance of a position with another company or termination by TEP for "cause,"
as that term is defined in the applicable Change-in-Control Agreement.
Following a change in control, in the event that the officer's employment
is terminated by TEP (other than a termination due to the officer's acceptance
of another position with TEP or for "cause"), or if the officer terminates
employment because of a reduction in position, responsibility, compensation or
for certain other stated reasons, the officer is entitled to severance benefits
in the form of:
o a lump sum payment equal to the present value of three times annual
salary and bonus compensation; plus
o the present value of the additional amount the officer would have
received under our retirement plan if the officer had continued to be
employed for the five-year period after a change in control occurs;
plus
o the present value of any employee awards under the 1994 Omnibus Stock
and Incentive Plan or any successor plan, which are outstanding at the
time of the officer's termination (whether vested or not), prorated
based on length of service.
Such officer would also be entitled to continue to participate in our
health, death and disability benefit plans for five years after the termination.
The Change-in-Control Agreements further require TEP to make a payment to the
officer to offset any excise taxes that may become payable under certain
conditions. Any payments made in respect of such excise taxes are not deductible
by us.
Assuming that the acquisition results in a change in control under the
terms of TEP's Change-in-Control Agreements that resulted in the immediate
termination of our top five highly paid executive officers, which are named
below under "Treatment of Stock Options," the total aggregate payment that would
be made to these executive officers under their Change-in-Control Agreements
would not be expected to exceed $17 million as of December 1, 2003.
35
NEW EMPLOYMENT ARRANGEMENTS.
As of the date of this proxy statement, no member of our management has
entered into any amendments or modifications to existing employment agreements
with us or our subsidiaries in anticipation of the acquisition. Nor has any
member of our management entered into any agreement, arrangement or
understanding with Saguaro Utility or its affiliates regarding employment with,
or the right to purchase or participate in the equity of, the surviving
corporation. Although no such agreement, arrangement or understanding currently
exists it is generally expected that our existing management will remain after
the acquisition is completed, which means that members of our existing
management may, prior to the closing of the acquisition, enter into new
arrangements with Saguaro Utility or its affiliates regarding employment with,
or the right to purchase or participate in the equity of, the surviving
corporation.
TREATMENT OF STOCK OPTIONS.
Our board of directors has over time granted options to our executive
officers and managers that allow those individuals to purchase our common stock
at specified prices. Members of our board of directors have also over time
received grants of options to purchase our common stock at specified prices.
Upon the approval of the acquisition agreement at the special meeting, a change
of control will have occurred for purposes of the outstanding stock options
under our stock and incentive plans, with the effect of making all outstanding
stock options immediately exercisable. In the acquisition agreement, Saguaro
Acquisition Corp. has agreed to pay, with respect to all outstanding options, an
amount in cash equal to the product of:
o the total number of shares of our common stock underlying a holder's
options, and
o the excess of $25.25 over the exercise price per share of the shares of
our common stock underlying such options.
As a result of this provision, as of January 5, 2004, the following
directors and executive officers will be entitled to receive, at the effective
time of the acquisition, the following cash payments, respectively, with respect
to the cancellation of their options (assuming that the options outstanding as
of January 5, 2004 are not exercised or canceled prior to the effective time):
36
Name and Title Amount
-------------- ------
James S. Pignatelli $6,601,211
Chairman, President & Chief Executive Officer
Lawrence J. Aldrich 63,748
Director
Larry W. Bickle 106,786
Director
Elizabeth T. Bilby 137,048
Director
Harold W. Burlingame 106,786
Director
John L. Carter 125,348
Director
Robert A. Elliott 8,862
Director
Kenneth Handy 46,116
Director
Warren Y. Jobe 46,116
Director
Steven J. Glaser 1,640,785
Senior Vice President and Chief Operating Officer,
Transmission & Distribution (TEP)
Dennis R. Nelson 1,659,625
Senior Vice President and Chief Operating Officer (UES)
Kevin P. Larson 935,158
Vice President, Chief Financial Officer & Treasurer
Michael J. DeConcini 1,170,338
Senior Vice President, Investments and Planning
All directors and executive officers as a group $ 17,457,007
TREATMENT OF OTHER COMPENSATION.
We maintain a deferred compensation plan that permits officers and
directors to defer a percentage of the compensation or fees that would otherwise
be payable to the individual for their services to us. A participant in this
plan may elect that his or her deferrals be credited in, among other things, the
form of a deemed investment in shares of our common stock. A trust has been
established that maintains a position in our common stock corresponding to the
plan participants' deemed investment in our common stock. Distributions are made
in stock or cash, at our discretion. Until the common stock is distributed,
directors and officers are not the beneficial owners of such shares. The table
below sets forth the allocable amount of shares to be credited to the named
directors and executive officers as of January 5, 2004.
Our board of directors has also, over time, granted our executive officers
and managers other equity-based compensation awards, including performance
shares, restricted stock units, stock units and dividend equivalent stock units,
under our stock and incentive plans. Performance shares are distributed as
shares of our common stock when and to the extent that performance goals during
a specified performance period have been met. The other units are payable in
cash in an amount determined by multiplying the market price of our common stock
at the time the amount is payable by the number of such units. Upon the approval
of the acquisition agreement at the special meeting, a change of control will
have occurred for purposes of these awards and the awards will be fully vested,
37
based upon, in the case of performance shares, the extent to which performance
goals during the performance period have been met up to the date of the change
of control, or at target, whichever is higher. Upon the change of control, all
performance shares will be distributed and cash payments will be made in respect
of the other units. The following table sets forth the amount of shares of our
common stock allocable to such awards as of January 5, 2004.
ALLOCABLE AMOUNT OF
ALLOCABLE AMOUNT OF SHARES UNDER OTHER
SHARES UNDER DEFERRED EQUITY-BASED
NAME COMPENSATION PLAN COMPENSATION AWARDS
---- --------------------- -------------------
James S. Pignatelli 28,619 126,423
Chairman, President & Chief Executive
Officer
Lawrence J. Aldrich -- 1,540
Director
Larry W. Bickle -- 405
Director
Elizabeth T. Bilby 2,811 1,540
Director
Harold W. Burlingame -- 1,540
Director
John L. Carter 9,868 405
Director
Robert A. Elliott -- 405
Director
Kenneth Handy 1,836 1,540
Director
Warren Y. Jobe -- 1,540
Director
Steven J. Glaser
Senior Vice President and Chief 2,082 35,700
Operating Officer, Transmission &
Distribution (TEP)
Dennis R. Nelson 32,283
Senior Vice President and Chief 2,163
Operating Officer (UES)
Kevin P. Larson
Vice President, Chief Financial Officer 733 6,736
& Treasurer
Michael J. DeConcini
Senior Vice President, Investments and 366 30,771
Planning
All directors and executive officers as 54,929 330,529
a group
In addition, certain of our executive officers and managers have been
awarded performance units, which are monetary awards based upon meeting
performance goals within specified performance periods. Although the amount of
performance units is not determined in relation to the price of our common
stock, the terms of such units also provide for their payment, upon the change
of control which will be deemed to occur at the time the shareholders approve
the acquisition agreement, based upon the same method of measuring performance
goals as described above for performance shares.
38
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Millennium was authorized by its board of directors in 2000 to invest $15
million, in aggregate, over a three- to five-year period in Haddington Energy
Partners II LP. Mr. Larry W. Bickle, a member of our board of directors, is a
Managing Director of Haddington Ventures LLC, the general partner of Haddington
Energy Partners II LP. As of December 31, 2003, Millennium had funded
approximately $8.5 million under this commitment, $2.4 million of which was
funded in 2003. A majority of the limited partner funds invested in Haddington
Energy Partners' various limited partnerships have been contributed by
investment funds affiliated with J.P. Morgan Partners, LLC. In addition, Mr.
Bickle has personal investments in investment funds affiliated with J.P. Morgan
Partners, LLC.
Millennium made a commitment of $5 million capital plus a share of expenses
to Tucson Ventures, LLC, a venture capital fund, in 2000. Tucson Ventures, LLC
merged with Valley Ventures III, LP, also a venture capital fund, in 2002. In
connection with the merger of the funds, Millennium's commitment was increased
to a total of $6 million, including expenses. Mr. Lawrence J. Aldrich, a member
of our board of directors, is a general partner of the company that manages, and
has invested in, Valley Ventures III, LP. As of December 31, 2003, Millennium
had funded approximately $1.2 million under this commitment.
Mr. Stephen Alexander, an immediate family member of Mrs. Elizabeth T.
Bilby, a member of our board of directors, is employed by Millennium. As
Director of Energy Investments, Mr. Alexander assists in overseeing Millennium's
investment portfolio. For his services in 2003, Mr. Alexander received
compensation of approximately $150,000 from Millennium.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
The following summary describes the material United States federal income
tax consequences of the acquisition applicable to our shareholders as of the
date hereof. Except where noted, it deals only with shares of our common stock
held as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"), and does not deal with special
situations, such as those of dealers or traders in securities or currencies,
banks, financial institutions, tax-exempt organizations, insurance companies,
real estate investment trusts, regulated investment companies, persons holding
our common stock as a part of a hedging or conversion transaction or a straddle,
persons who mark to market their securities, persons whose functional currency
is not the United States dollar or former United States citizens or long-term
residents who are subject to special rules on account of their loss of United
States citizenship or resident alien status. In addition, this discussion does
not address the tax consequences to persons who have purchased our common stock
through the exercise of employee stock options or other compensation
arrangements, or to persons who, prior or subsequent to the acquisition,
actually or constructively own shares of Saguaro Utility. It also does not
include any description of any alternative minimum tax consequences or the tax
laws of any state, local or foreign jurisdiction.
The discussion below is based upon the provisions of the Code, Treasury
Regulations promulgated thereunder, and administrative rulings and judicial
decisions as of the date hereof, all of which may be repealed, revoked or
modified at any time, with either forward-looking or retroactive effect, so as
to result in United States federal income tax consequences different from those
discussed below.
OUR SHAREHOLDERS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISORS AS TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION IN LIGHT OF
THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR
OTHER TAX LAWS.
As used herein, a "United States Holder" means a beneficial owner of shares
of our common stock that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate, the
income of which is subject to United States federal income taxation regardless
39
of its source, or a trust, (i) the administration of which is subject to the
primary supervision of a court within the United States and for which one or
more United States persons have the authority to control all substantial
decisions or (ii) that has a valid election in effect under applicable Treasury
Regulations to be treated as a United States person. As used herein, the term
"Non-United States Holder" means a beneficial owner of shares of our common
stock that is not a United States Holder.
UNITED STATES HOLDERS.
Upon the conversion of our common stock into the right to receive the
acquisition consideration, a United States Holder will recognize gain or loss
equal to the difference between (i) the amount realized upon the conversion and
(ii) the holder's adjusted tax basis in our common stock. The holder's adjusted
tax basis in our common stock will be, in general, its initial purchase price
for the common stock it is converting. If a holder acquired different blocks of
our common stock at different times a holder's gain or loss will be calculated
separately for each block of common stock converted. The gain or loss upon the
conversion of the common stock will be capital gain or loss and will be
long-term capital gain or loss if, at the time of conversion, the common stock
is treated as having been held for more than one year. Under current law, the
deductibility of capital losses is subject to limitations. Capital gain of a
non-corporate United States Holder is generally taxed at a maximum rate of 15%,
where the property is held for more than one year. For property held for one
year or less, capital gain of a non-corporate United States Holder is generally
taxed at rates applicable to ordinary income.
NON-UNITED STATES HOLDERS.
NON-UNITED STATES HOLDERS NOT ENGAGED IN A TRADE OR BUSINESS WITHIN THE
UNITED STATES.
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain recognized on the conversion of our
common stock unless (1) the gain is effectively connected with the holder's
trade or business in the United States (discussed below), (2) in the case of a
Non-United States Holder who is an individual and holds shares of our common
stock as a capital asset, the holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met or (3) we are or have been a "United States real property
holding corporation" for United States federal income tax purposes and a
Non-United States Holder holds (or held at any time during the shorter of the
five year period preceding the date of conversion or the holder's holding
period) more than 5% of our common stock.
NON-UNITED STATES HOLDERS ENGAGED IN A TRADE OR BUSINESS WITHIN THE
UNITED STATES.
Gain recognized by a Non-United States Holder from the conversion of our
common stock that is effectively connected with the conduct by the holder of a
trade or business in the United States is generally taxed at the graduated rates
that are applicable to United States persons. In the case of a Non-United States
Holder that is a corporation, effectively connected income may also be subject
to the United States federal branch profits tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING.
Payments of acquisition consideration to United States Holders in exchange
for our common stock are subject to information reporting unless the holder
establishes an exemption.
Payments of acquisition consideration to United States Holders in exchange
for our common stock may be subject to "backup withholding" tax if (i) the
holder fails to certify his or her correct social security number or other
taxpayer identification number to the payor responsible for backup withholding
(for example, the holder's securities broker) on IRS Form W-9 or a substantially
similar form signed under penalty of perjury, or (ii) the Internal Revenue
Service notifies the payor that the holder is subject to backup withholding due
to the holder's failure to properly report interest and dividends on his or her
tax return. The backup withholding rate for years 2004 and 2005 is 28%.
Backup withholding does not apply to payments made to exempt recipients,
such as corporations.
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Non-United States Holders will be subject to backup withholding and
information reporting with respect to payments of acquisition consideration
unless (i) the holder provides a properly completed and signed IRS Form W-8BEN
(or acceptable substitute) and the payor does not have actual knowledge or
reason to know that the form is incorrect, or (ii) the beneficial owner
otherwise establishes an exemption.
In addition, Non-United States Holders generally will not be subject to
information reporting or backup withholding with respect to payments of
acquisition consideration paid or collected by a foreign office of a custodian,
nominee or other foreign agent on behalf of the holder. If, however, the foreign
office acting for a Non-United States Holder is an office of a United States
person, a controlled foreign corporation or a foreign person that derives 50% or
more of its gross income for certain periods from the conduct of a United States
trade or business, or a foreign partnership with certain connections to the
United States, payments of acquisition consideration will be subject to
information reporting unless (i) the custodian, nominee, agent or broker has
documentary evidence that the beneficial owner is not a United States person and
certain other conditions are met or (ii) the beneficial owner otherwise
establishes an exemption. Payments that are subject to information reporting as
described in the preceding sentence will not be subject to backup withholding
unless the payor has actual knowledge or reason to know that the payee is a
United States person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules generally will be allowed as a credit or a refund
against the holder's United States federal income tax liability, if certain
required information is provided to the Internal Revenue Service.
ACCOUNTING TREATMENT
The acquisition will be accounted for as a purchase under generally
accepted accounting principles.
RIGHTS OF DISSENTING SHAREHOLDERS
Under Arizona law, you are not entitled to dissenters' rights of appraisal
since our common stock is registered on the New York Stock Exchange and the
Pacific Stock Exchange.
LITIGATION CONCERNING THE ACQUISITION
On November 24, 2003 two shareholder derivative lawsuits, McBride v.
Pignatelli, et al. and Zetooney v. Pignatelli, et al., were filed in the
Superior Court of the State of Arizona relating to the acquisition. In these two
lawsuits, which are virtually identical, the plaintiffs allege that our board of
directors, in its consideration and approval of the acquisition, breached its
fiduciary duty to our shareholders by (i) acting in its own interest rather than
in the interests of our shareholders, (ii) failing to properly evaluate our
company as an acquisition candidate, (iii) failing to act independently by
appointing independent advisors and appointing directors who had no conflicts of
interest to consider the acquisition, (iv) failing to address alleged conflicts
of interest appropriately, (v) failing to disclose material non-public
information regarding our company, and (vi) failing to submit the transaction to
shareholders for approval. The plaintiffs, who request that their suits be
permitted to proceed as class actions, seek damages and an order from the court
declaring that our board of directors has breached its fiduciary duties to our
shareholders, ordering that our board of directors take the steps specified in
the complaint to correct the alleged breaches of fiduciary duty and enjoining
the acquisition from proceeding. We believe that these lawsuits are without
merit and will vigorously defend them.
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THE ACQUISITION AGREEMENT
THE FOLLOWING DESCRIPTION IS A SUMMARY OF THE MATERIAL TERMS OF THE
ACQUISITION AGREEMENT. THE PROVISIONS OF THE ACQUISITION AGREEMENT ARE
COMPLICATED AND NOT EASILY SUMMARIZED. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION ABOUT THE ACQUISITION AGREEMENT THAT IS IMPORTANT TO YOU. THIS
SUMMARY IS QUALIFIED, IN ITS ENTIRETY, BY THE ACTUAL PROVISIONS OF THE
ACQUISITION AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT AS
APPENDIX A. WE URGE YOU TO CAREFULLY READ THE ACTUAL ACQUISITION AGREEMENT IN
ITS ENTIRETY.
GENERAL
The acquisition agreement provides that Saguaro Utility will acquire us,
subject to the terms and conditions set forth in the acquisition agreement, by
merging its wholly owned indirect subsidiary, Saguaro Acquisition Corp., with
and into us. We will survive the merger as a wholly owned indirect subsidiary of
Saguaro Utility.
The closing of the acquisition will take place on the fifth business day
after the satisfaction or waiver of the closing conditions to the acquisition,
unless another time is agreed to by the parties. As soon as practicable after
the satisfaction or waiver of the closing conditions to the acquisition, the
parties will cause the acquisition to become effective by filing (i) the
acquisition agreement and articles of merger with the ACC and (ii) the
acquisition agreement or a certificate of merger with the Secretary of State of
the State of Delaware. We currently expect that the closing of the acquisition
will take place in the second half of 2004.
TREATMENT OF SHARES
CONVERSION OF COMMON STOCK INTO ACQUISITION CONSIDERATION.
Each share of our common stock issued and outstanding immediately before
the acquisition (other than shares owned by us, Saguaro Utility and Saguaro
Acquisition Corp.) will automatically be canceled and will cease to exist and
will be converted into the right to receive $25.25 in cash, without interest.
After the acquisition is effective, you will no longer have any rights with
respect to the shares you hold or with respect to dividends, except for the
right to receive the acquisition consideration.
Each share of common stock held by us, Saguaro Utility and Saguaro
Acquisition Corp. at the time of the acquisition, will be canceled and no cash
or other consideration will be delivered in exchange for such shares.
NO FURTHER OWNERSHIP RIGHTS.
After the effective time of the acquisition, each of our outstanding stock
certificates will be deemed to only represent the right to receive the
acquisition consideration. The acquisition consideration paid upon surrender of
each certificate will be paid in full satisfaction of all rights pertaining to
the shares of our common stock represented by such certificate. At the effective
time of the acquisition, our share transfer books will be closed, and there will
be no further registration of transfers of outstanding shares of our common
stock on the share transfer books of the surviving corporation. If, after the
effective time of the acquisition, certificates are presented to the surviving
corporation or the paying agent for transfer or any other reason, they will be
canceled and exchanged for the acquisition consideration.
WITHHOLDING RIGHTS.
The surviving corporation or the paying agent will be entitled to deduct
and withhold any applicable taxes from the acquisition consideration.
PAYING AGENT.
Prior to the effective time of the acquisition, Saguaro Acquisition Corp.
will designate a paying agent reasonably acceptable to us to make payment of the
42
acquisition consideration to our shareholders as contemplated by the acquisition
agreement. Immediately following the acquisition or as soon as practicable
thereafter, the surviving corporation will deposit in trust with the paying
agent an amount of cash equal to the aggregate acquisition consideration.
EXCHANGE AND PAYMENT PROCEDURES.
As soon as reasonably practicable after the effective time of the
acquisition, the paying agent will mail to each record holder of a certificate
evidencing shares of our common stock (i) a form of letter of transmittal and
(ii) instructions for use in surrendering certificates in exchange for the
acquisition consideration. Upon surrender of a certificate for cancellation to
the paying agent, together with a duly completed and executed letter of
transmittal and such other documents as the paying agent may reasonably require,
the holder of the certificate will be entitled to receive the acquisition
consideration and the certificate(s) will be canceled. In the event of a
transfer of shares of our common stock that is not registered in our share
transfer books, the acquisition consideration may be paid to a person other than
the person in whose name the corresponding certificate is registered if the
certificate is properly endorsed or is otherwise in proper form for transfer. In
addition, the person requesting payment must either pay any applicable stock
transfer taxes or establish to the reasonable satisfaction of the surviving
corporation that such stock transfer taxes have been paid or are not applicable.
No interest will be paid or will accrue on the cash payable upon surrender of
the certificates.
You should not forward your stock certificates to the paying agent without
a letter of transmittal, and you should not return your stock certificates with
the enclosed proxy card.
NO LIABILITY.
None of Saguaro Acquisition Corp., the surviving corporation and the paying
agent will be liable to any person in respect of any cash delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
Any portion of the acquisition consideration deposited with the paying agent
that remains undistributed to the holders of certificates for six months after
the effective time of the acquisition, will be delivered to the surviving
corporation, upon demand. Any holders who do not surrender their certificates
within six months after the effective time of the acquisition will be treated as
general creditors of the surviving corporation with respect to their claim for
cash, if any, to which they may be entitled.
LOST CERTIFICATES.
If any certificate is lost, stolen, defaced or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate to be lost,
stolen, defaced or destroyed and, if required by the surviving corporation, the
posting by that person of a bond in a reasonable amount determined by the
surviving corporation, the paying agent will pay the acquisition consideration
in respect of the lost, stolen, defaced or destroyed certificate.
TREATMENT OF STOCK OPTIONS
Immediately prior to the effective time of the acquisition, each
outstanding option to acquire our common stock will be canceled, and, except as
otherwise agreed by Saguaro Acquisition Corp. and the applicable option holder,
each option holder will be entitled to receive at the effective time of the
acquisition or as soon as practicable thereafter from the surviving corporation
an amount in cash equal to the product of (i) the number of shares of our common
stock previously subject to each option and (ii) the excess of $25.25 over the
exercise price per share of our common stock previously subject to such option,
reduced by the amount of any applicable taxes. We agreed to take all actions
necessary prior to the effective time of the acquisition to terminate all stock
option plans.
CONDUCT OF OUR BUSINESS PENDING THE ACQUISITION
We have agreed that prior to the effective time of the acquisition, unless
otherwise contemplated by the acquisition agreement or required by applicable
43
law or unless Saguaro Acquisition Corp. gives its prior written consent (which
consent cannot be unreasonably withheld and must be given or withheld as soon as
reasonably practicable):
o we will conduct our business and the business of our subsidiaries in
the ordinary course of business, in a manner consistent with past
practice and in compliance with applicable laws; and
o we and our subsidiaries will each use commercially reasonable efforts
to preserve substantially intact our business organization, to keep
available the services of our employees, consultants, independent
contractors and directors, to preserve our assets and properties in
good repair and condition and to preserve our present relationships
with governmental authorities, customers, suppliers and other persons
with which we or any of our subsidiaries have business relations.
We have also agreed that prior to the effective time of the acquisition,
unless otherwise contemplated by the acquisition agreement or required by
applicable law or unless Saguaro Acquisition Corp. gives its prior written
consent (which consent cannot be unreasonably withheld and must be given or
withheld as soon as reasonably practicable), neither we nor any of our
subsidiaries will do any of the following:
o amend or otherwise change organizational documents;
o issue, deliver, sell, lease, sell and leaseback, transfer, pledge,
license, mortgage, encumber, dispose of or otherwise subject to any
lien (i) any of our or our subsidiaries' securities or (ii) any of our
or our subsidiaries' property or assets (whether tangible or
intangible), other than, in each case, as provided in the acquisition
agreement;
o declare, make, set aside or pay any dividends, other than (i)
inter-company dividends and dividends by TEP to its shareholders and
(ii) regular quarterly cash dividends with respect to our common stock,
not in excess of $0.15 per share in 2003, $0.16 per share in 2004 and
$0.17 per share in 2005;
o reclassify, combine, split, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any of our or our subsidiaries'
securities, except for purchases of outstanding shares of our common
stock pursuant to our Investment Plus Plan or any existing employee
benefit plan in a manner consistent with past practice;
o repurchase, repay or incur any indebtedness or issue any securities in
respect of indebtedness or assume, guarantee or endorse, or otherwise
become responsible for the obligations or indebtedness of any person,
other than certain permitted repayments and incurrences provided in the
acquisition agreement;
o enter into or materially amend, terminate, cancel or renew certain
specified types of contracts, including (i) material contracts, (ii)
agreements between us and our employees, (iii) agreements related to
indebtedness in excess of $100,000, (iv) agreements for the acquisition
or disposition of assets or capital stock in excess of $500,000, (v)
agreements containing dividend restrictions, (vi) agreements setting
rates (vii) certain agreements for the purchase or sale of electricity,
(viii) joint venture, limited liability company or partnership
agreements and (ix) agreements, outside the ordinary course of
business, involving expenditures, liabilities or revenues expected to
exceed $1,000,000;
o enter into any contracts with insiders;
o acquire any assets (other than in the ordinary course of business),
business, business organization or a division thereof, other than
acquisitions having an aggregate consideration of not more than
$500,000;
o authorize or make any capital expenditures, except (i) as required by
law, (ii) as we reasonably deem necessary to replace or repair property
44
following unanticipated loss or damage, (iii) capital contributions by
Millennium and its subsidiaries in the ordinary course of business in a
manner consistent with past practice and (iv) as contemplated by our
capital budget;
o take any action that could reasonably be expected to jeopardize the
qualification of the interest as tax-exempt on any tax-exempt bonds
that relate to our or our subsidiaries assets;
o engage in any activities that could reasonably be expected to cause us
or our subsidiaries not to be exempt from all provisions of PUHCA
(other than Section 9(a)(2) of that Act) pursuant to Section 3(a)(1) of
that Act;
o except as required by applicable law, the acquisition agreement or our
subsidiaries' existing employee benefit plans, (i) increase or
otherwise amend the compensation or fringe benefits of any of our or
our subsidiaries' employees, consultants, independent contractors or
directors (other than in the ordinary course of business in a manner
consistent with past practice, and in an aggregate amount not to exceed
$4 million), (ii) grant any retention, severance or termination pay not
required to be paid under our or our subsidiaries' existing employee
benefit plans to, or enter into or amend any employment, consulting or
severance contract with, any of our or our subsidiaries' present or
former employees, consultants, independent contractors or directors
(other than in the ordinary course of business in a manner consistent
with past practice), (iii) amend the terms of any outstanding options
to purchase any of our or our subsidiaries' equity, or (iv) enter into,
adopt, amend or terminate any employee benefit plan that would
materially increase our or our subsidiaries' obligations;
o fail to maintain books and records in accordance with generally
accepted accounting principles or change material tax, pension,
regulatory or financial accounting policies or procedures, unless
required by a change in legal or accounting requirements;
o (i) make, change or rescind any material tax election; (ii) fail to
duly and timely file all material tax returns and other documents
required to be filed with any governmental authority; (iii) extend the
statute of limitations with respect to any tax; or (iv) except in the
ordinary course of business, settle or compromise any material tax
liability;
o waive, release, assign, settle or compromise any pending or threatened
claim or proceeding which is material, which relates to the acquisition
or which is brought by any current, former or purported holder of any
of our or our subsidiaries' securities in such capacity;
o adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization
of us or our subsidiaries (other than the acquisition);
o pay, discharge or satisfy any material claims, liabilities or
obligations, other than the payment, discharge or satisfaction when due
or otherwise in the ordinary course of business in a manner consistent
with past practice of liabilities reflected or reserved against in our
balance sheet or incurred in the ordinary course of business in a
manner consistent with past practice after September 30, 2003;
o effectuate a plant closing or mass layoff;
o make any loans, advances, capital contributions to or investments in,
any other person other than to our wholly-owned subsidiaries (other
than Millennium or any of its subsidiaries) that were in existence on
the date of the acquisition agreement;
o other than in the ordinary course of business and in a manner
consistent with past practice or as required by applicable law, (i)
materially modify the risk management policies related to any
derivative financial instrument (other than modifications which are
more restrictive to us and our subsidiaries) and (ii) enter into any
derivative financial instrument other than as permitted by our trading
policies;
45
o fail to maintain in full force and effect adequate insurance policies
covering us and our subsidiaries;
o except as may be required by applicable law, take any action that could
result in any of our representations and warranties becoming untrue in
any material respect or any condition to the acquisition not being
satisfied;
o fail to take any action that could reasonably be expected to prevent or
materially impair or delay the consummation of the acquisition, other
than as provided in the acquisition agreement; or
o take, make any commitment to or enter into any contract to take any of
the foregoing actions.
CONDUCT OF BUSINESS BY SAGUARO ACQUISITION CORP. PENDING THE ACQUISITION
Saguaro Acquisition Corp. has agreed that, prior to the effective time of
the acquisition, it will not, without our prior written consent:
o incur any liabilities or obligations other than in connection with the
acquisition agreement; or
o engage in any business activity or enter into any contract other than
as contemplated by the acquisition agreement or relating to the
transactions contemplated thereby (including obtaining financing for
such transactions).
COOPERATION, NOTIFICATION
We have agreed to, and to cause our subsidiaries to, confer on a regular
and frequent basis with representatives of Saguaro Acquisition Corp. to discuss,
subject to applicable law, material operational and business matters, and to
give prompt notice to Saguaro Acquisition Corp. of any of the following matters:
o significant changes, developments, effects, conditions or occurrences
in our and our subsidiaries' businesses, properties, assets, condition,
prospects or results of operations;
o any state of facts, change, development, event, effect, occurrence or
condition that has had or could reasonably be expected to have a
material adverse effect on the business, properties, assets, condition,
prospects or results of operations of us and our subsidiaries taken as
a whole or that could prevent or materially impair or delay our ability
to perform our obligations under the acquisition agreement;
o any notice from or communications with any person alleging that his or
her consent is or may be required in connection with the acquisition;
o any notice from or communications with (i) any governmental authority
in connection with the acquisition or (ii) the SEC, ACC or any other
public utility commission of any state or the FERC on any other
material matter;
o copies of all filings made by us or any of our subsidiaries with (i)
any governmental authority in connection with the acquisition or (ii)
the SEC, ACC or any other public utility commission of any other state
or the FERC on any other material matter;
o any representation or warranty made by us in the acquisition agreement
becoming untrue or inaccurate in any material respect; or
o the failure by us to comply with any covenant or agreement contained in
the acquisition agreement.
46
In addition, we have agreed to, and to cause our subsidiaries to, discuss
with Saguaro Acquisition Corp. any changes or proposed changes in our and our
subsidiaries' regulated rates or charges or standards of service and to consult
with Saguaro Acquisition Corp. prior to making any filing or effecting any
contract with any governmental authority with respect to our and our
subsidiaries' regulated rates or charges, standards of service or accounting,
including providing Saguaro Acquisition Corp. an opportunity to review and
comment upon any such filing, and including all reasonable comments proposed by
Saguaro Acquisition Corp. We also have agreed that we and our subsidiaries will
not make any filing with the ACC or any other public utility commission of any
state or the FERC to change our rates or charges in any manner that could be
inconsistent with the closing conditions contained in the acquisition agreement.
For a description of these closing conditions, see "-Conditions to the
Obligation of Saguaro Acquisition Corp. to Effect the Acquisition."
ADDITIONAL AGREEMENTS
Until the effective time of the acquisition, we have agreed to, and to
cause our subsidiaries and our respective representatives to provide, subject to
applicable law, Saguaro Acquisition Corp., its representatives and potential
financing sources:
o reasonable access at all reasonable times to our and our subsidiaries'
officers, employees, agents, properties, offices, plants and other
facilities and to the books, personnel, contracts and records, and
o information concerning our and our subsidiaries' business, properties,
contracts, liabilities and personnel as reasonably requested.
The above information and any other non-public information will be held in
confidence as provided in the acquisition agreement.
We and Saguaro Acquisition Corp. have agreed to cooperate and use
commercially reasonable efforts to obtain the regulatory approvals necessary to
consummate the acquisition. Neither party, however, is obligated or permitted to
consent to any agreement or undertaking or to incur any liability or obligation
not contemplated by the acquisition agreement without the consent of the other
party. In addition, Saguaro Acquisition Corp. and its affiliates are not
required to pay or commit to pay any cash or other consideration, make any
commitment or incur any liability or other obligation in connection with
obtaining any required regulatory approval. Furthermore, we have agreed to
cooperate with Saguaro Acquisition Corp. to prepare and file all documents
necessary to complete the acquisition.
For the period ending on the last day of the calendar year in which the
acquisition occurs, Saguaro Acquisition Corp. has agreed to provide employee
benefit plans, programs and arrangements to our employees which are no less
favorable than those provided by us immediately prior to the acquisition.
Saguaro Acquisition Corp. has agreed to use commercially reasonable efforts
to arrange the debt financing for the acquisition on terms and conditions that
are, in Saguaro Acquisition Corp.'s reasonable judgment, comparable to, or more
favorable to, Saguaro Acquisition Corp. in the aggregate than the terms and
conditions contemplated by the acquisition agreement. If any portion of the debt
financing becomes unavailable in the manner or from the sources contemplated in
the acquisition agreement, Saguaro Acquisition Corp. shall use reasonable best
efforts to arrange any such portion from alternative sources on terms and
conditions that, in Saguaro Acquisition Corp.'s reasonable judgment, are
comparable to, or more favorable to, Saguaro Acquisition Corp. than, the terms
and conditions contemplated by the acquisition agreement.
In connection with the arrangement of the debt financing we have agreed to,
and to cause our subsidiaries to, provide all cooperation reasonably necessary.
The debt financing, however, may not require us to pay any commitment or other
fee or impose any other liability on us prior to the effective time of the
acquisition. In addition, we have agreed subject to certain limitations, at the
request of Saguaro Acquisition Corp., to call or cause our subsidiaries to call
for prepayment or redemption, or to prepay, redeem and/or renegotiate any of our
or our subsidiaries' existing indebtedness.
47
NO SOLICITATION OF ALTERNATIVE PROPOSALS
We have agreed that neither we nor any of our subsidiaries or
representatives will, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making or implementation of any
"alternative proposal." For purposes of the acquisition agreement, "alternative
proposal" means any:
o merger, reorganization, share exchange, tender offer, exchange offer,
consolidation, business combination, recapitalization, liquidation,
dissolution, joint venture or similar transaction involving us or our
subsidiaries; or
o purchase or sale of more than 10% of our and our subsidiaries' assets
taken as a whole or any our or our subsidiaries' securities.
We have further agreed that neither we nor any of our subsidiaries or
representatives will, directly or indirectly, have any discussion with or
provide any confidential information or data to any person relating to an
alternative proposal, or engage in any negotiations concerning an alternative
proposal, or otherwise facilitate any effort or attempt to make or implement an
alternative proposal or accept an alternative proposal.
Notwithstanding these agreements, prior to the special meeting, we or our
board of directors are permitted to engage in any discussions or negotiations
with, or provide any information or data to, any person in response to an
unsolicited bona fide written alternative proposal, if each of the following
conditions is satisfied:
o our board of directors concludes in good faith, after consultation with
its outside legal counsel, that the failure to take such action could
reasonably be expected to constitute a breach of its fiduciary duties
to our shareholders;
o our board of directors concludes in good faith, in consultation with
its financial advisors, that the alternative proposal constitutes or
could reasonably be expected to result in a "superior proposal," as
such term is defined below;
o our board of directors receives from the person making the alternative
proposal an executed confidentiality agreement on terms substantially
similar and no less favorable to us than those contained in the
confidentiality agreement related to the acquisition; and
o we and each of our subsidiaries have complied with our obligations
under the acquisition agreement relating to the solicitation of
alternative proposals.
For purposes of the acquisition agreement, the term "superior proposal"
means an alternative proposal that:
o is more favorable to our shareholders, from a financial point of view
taking into account all legal, financial, regulatory and other aspects
of the proposal, than the acquisition, including any proposed
alterations of the terms of the acquisition agreement made to us by
Saguaro Acquisition Corp. in response to the alternative proposal;
o our board of directors concludes is reasonably capable of being
completed; and
o results in a third party acquiring more than 50% of our common stock or
all or substantially all of our and our subsidiaries' assets.
We have agreed to promptly notify Saguaro Acquisition Corp. of the receipt
of any inquiries, offers or proposals by 5:00 p.m. New York City time on the
next business day after receipt thereof and to keep Saguaro Acquisition Corp.
48
reasonably informed of the status of any discussions or negotiations with
respect to any such inquiry, proposal or offer. We also have agreed not to
terminate, waive, amend or modify any standstill or confidentiality agreement to
which any of our subsidiaries or we are a party.
We have also agreed that our board of directors will not approve or
recommend an alternative proposal, or withdraw or modify its approval or
recommendation of the acquisition agreement with Saguaro Acquisition Corp.
Notwithstanding this provision, our board of directors may approve or recommend
an alternative proposal or withdraw or modify its recommendation in favor of the
acquisition agreement, upon four business days' notice to Saguaro Acquisition
Corp., if, prior to the shareholder's meeting, and in response to the receipt of
an unsolicited bona fide written alternative proposal:
o our board of directors has concluded in good faith that the alternative
proposal constitutes a superior proposal (after giving effect to any
modifications proposed by Saguaro Acquisition Corp.);
o our board of directors, after consultation with outside legal counsel,
has concluded in good faith that the failure to take such action could
reasonably be expected to constitute a breach of its fiduciary duties
to our shareholders under applicable law; and
o we have complied with our obligations under the acquisition agreement
not to solicit or encourage alternative proposals.
Under the foregoing circumstances, we would be permitted to terminate the
acquisition agreement and cancel the special meeting, subject to the
consequences described under "--Termination."
Even in the absence of an unsolicited bona fide written alternative
proposal, our board of directors, prior to date of the special meeting, may
withdraw or modify, or propose to withdraw or modify, its recommendation in
favor of the acquisition following four business days' notice to Saguaro
Acquisition Corp., but only if our board of directors concludes in good faith,
after consultation with outside legal counsel, that it is required to do so in
order to comply with its fiduciary duties to our shareholders under applicable
law. In this situation, we would not be permitted to terminate the acquisition
agreement and would be obligated to conduct the special meeting. Saguaro
Acquisition Corp., however, would have the right to terminate the acquisition
agreement under such circumstances, as described under "--Termination."
Prior to taking any action regarding the recommendation of the board of
directors either in response to an unsolicited bona fide written alternative
proposal or otherwise, our board of directors will be obligated to negotiate in
good faith with Saguaro Acquisition Corp. for a four business day period to
adjust the terms and conditions of the acquisition agreement so that either (i)
an alternative proposal ceases to be a superior proposal or (ii) the board of
directors otherwise ceases to conclude that a recommendation in favor of the
acquisition could constitute a breach of its fiduciary duties to our
shareholders under applicable law.
We have also agreed not to take any action to exempt any person from the
applicability of certain statutory and company-specific anti-takeover
provisions, including our shareholder rights agreement.
CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE ACQUISITION
Each party's obligation to complete the acquisition is subject to the
satisfaction or waiver of the following conditions:
o approval of the acquisition by our shareholders;
o the termination or expiration of any waiting period under the
Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended; and
o the absence of any order of a governmental authority or other legal
restraint preventing or making illegal the consummation of the
acquisition or any of the transactions contemplated by the acquisition
agreement.
49
CONDITIONS TO THE OBLIGATION OF SAGUARO ACQUISITION CORP. TO EFFECT THE
ACQUISITION
Saguaro Acquisition Corp.'s obligation to complete the acquisition is
subject to the satisfaction or waiver of the following conditions:
o the representations and warranties that we make are true and correct in
all material respects as of the date required to be so true and correct
(except failures to be true and correct that, in the aggregate, could
not reasonably be expected to have a material adverse effect on us or
the acquisition);
o we have performed in all material respects all of our obligations
required to be performed by us under the acquisition agreement at or
prior to the closing;
o the absence of any state of facts, change, development, event, effect,
condition or occurrence which could reasonably be expected to have a
material adverse effect. For purposes of the acquisition agreement a
material adverse effect with respect to our business means, subject to
certain exceptions, any state of facts, change, development, event,
effect, condition or occurrence that is materially adverse to (i) the
business, properties, assets, condition, prospects or results of
operations of us and our subsidiaries taken together as a whole or (ii)
that could reasonably be expected to prevent or materially impair or
delay our ability to perform our obligations under the acquisition
agreement;
o the regulatory approvals necessary to consummate the acquisition must
have been obtained and be final and such regulatory approvals must not
impose terms or conditions that:
o have, or could reasonably be expected to have, a material adverse
effect on us;
o have, or could reasonably be expected to have, a material adverse
effect on the business, properties, assets, condition, prospects or
results of operations of the surviving corporation, Saguaro
Acquisition Corp. or Saguaro Utility;
o have caused or could reasonably be expected to cause the rates of
TEP, UNS Electric or UNS Gas to be less favorable than the rates
applicable to these companies on the date of the acquisition
agreement;
o subject Saguaro Utility or any of its limited partners to any
regulation under PUHCA, or under any similar federal or Arizona law
coming into effect after the date of the acquisition agreement;
o require that any of the subsidiaries, assets, operations or
business of Saguaro Utility or any of its limited partners be
transferred, sold, spun off or distributed to shareholders, or
otherwise disposed of, liquidated or wound down; or
o require any of Saguaro Utility's limited partners to restructure
its capitalization or amend its organizational documents or require
Saguaro Utility to restructure its capitalization or amend any of
its organizational documents in any material respect, in each case
after the acquisition or in order to ensure that it will not become
subject to regulation under PUHCA, or under any similar federal or
Arizona law coming into effect after the date of the acquisition
agreement;
o Saguaro Utility and its limited partners receiving evidence
satisfactory to them in their reasonable judgment that none of their
limited partners nor any of their respective affiliates (within the
meaning of PUHCA) will become or will otherwise be deemed a "holding
company" or a "subsidiary company" or an "affiliate" of a "holding
company" within the meaning of that Act or under any similar federal or
Arizona law coming into effect after the date of the acquisition
agreement that imposes regulation material to Saguaro Utility or any of
its affiliates as a result of the acquisition or the transactions
contemplated by the acquisition agreement;
50
o except as was in existence on the date of the acquisition agreement, in
the reasonable judgment of Saguaro Acquisition Corp., there must be no
other law, order, approval or contract that impairs or restricts or
could reasonably be expected to impair or restrict the ability of TEP,
UNS Electric or UNS Gas to pay dividends or make distributions to their
shareholders of all of their net income;
o assuming the consummation of certain transactions contemplated to occur
in connection with the closing of the acquisition, as described in the
acquisition agreement, there must be no law, order, approval or
contract that, as applied to TEP and its subsidiaries, impairs or
restricts or could reasonably be expected to impair or restrict the
ability of these entities to pay dividends or make distributions of all
of their net income to their shareholders;
o Saguaro Acquisition Corp. must have received the proceeds of the debt
financing for the acquisition on terms and conditions that, in the
reasonable judgment of Saguaro Acquisition Corp., are comparable to, or
more favorable to, Saguaro Acquisition Corp. in the aggregate than the
terms and conditions contemplated by the acquisition agreement;
o Saguaro Acquisition Corp.'s affiliate must have received evidence that
we or our subsidiaries have called for the redemption of certain
indebtedness, as required by the acquisition agreement; and
o there must be no conditions requested of us, our subsidiaries, Saguaro
Acquisition Corp. or the surviving corporation by the Pension Benefit
Guaranty Corporation ("PBGC") in connection with any of our pension
plans that are or could reasonably be expected to be materially adverse
to the surviving corporation and no commencement of any action by the
PBGC to terminate any of our pension plans or to appoint a trustee of
any such plan.
CONDITIONS TO OUR OBLIGATION TO EFFECT THE ACQUISITION
Our obligation to effect the acquisition is subject to the satisfaction or
waiver of the following conditions:
o the representations and warranties of Saguaro Acquisition Corp. are
true and correct in all material respects as of the date required to be
so true and correct (except failures to be true and correct that, in
the aggregate, could not reasonably be expected to have a material
adverse effect on Saguaro Acquisition Corp.'s ability to perform its
obligations under the acquisition agreement);
o Saguaro Acquisition Corp. must have performed in all material respects
all of its obligations required to be performed by it under the
acquisition agreement at or prior to the closing; and
o the regulatory approvals necessary to consummate the acquisition must
have been obtained and be final and such regulatory approvals must not
impose terms or conditions that could reasonably be expected to prevent
the consummation of the transactions contemplated by the acquisition
agreement.
TERMINATION
The acquisition agreement may be terminated and the acquisition may be
abandoned at any time prior to the effective time of the acquisition, whether
before or after shareholder approval has been obtained, as follows:
o by the mutual written consent of the parties;
o by either party if:
o the closing has not been consummated on or before March 31, 2005,
except that this termination right will not be available to any
party whose failure to comply with the acquisition agreement has
resulted in the failure of the closing to have been consummated on
or before such date;
51
o there has been a material breach by the other party, which breach
has not been cured within 30 days receipt of notice thereof or
cannot be cured prior to closing, of any of the covenants or
agreements or any of the representations or warranties set forth in
the acquisition agreement, which breach, individually or together
with all other such breaches, would constitute, if occurring or
continuing on the date of the closing, the failure of any of the
applicable closing conditions set forth in the acquisition
agreement;
o any governmental authority has issued a final order or taken any
action permanently enjoining or otherwise prohibiting the
consummation of the acquisition or the transactions contemplated by
the acquisition agreement, unless the failure of this condition to
have been satisfied is due to the failure of the terminating party
to comply with the acquisition agreement; or
o a required regulatory approval is denied or a required regulatory
approval is obtained but contains provisions that would otherwise
result in the inability of the applicable regulatory closing
conditions to be satisfied or makes another applicable closing
condition incapable of being satisfied;
o by Saguaro Acquisition Corp. if:
o our shareholders do not approve the acquisition upon taking a vote
at the special meeting;
o our board of directors withdraws or modifies its recommendation to
our shareholders in favor of the acquisition and/or recommends a
superior proposal that caused it to change its recommendation in
favor of the acquisition;
o we breach certain of our obligations regarding the preparation of
this proxy statement, the convening of the special meeting or in
the solicitation of alternative proposals; or
o an alternative proposal that is publicly announced is commenced or
communicated to us and (i) we do not reject such proposal within
ten business days after the date of the receipt thereof or after
the date its existence first becomes publicly announced, if sooner,
(ii) our board of directors approves or recommends the alternative
proposal or (iii) we fail to confirm our recommendation in favor of
the acquisition within ten business days after being requested by
Saguaro Acquisition Corp. to do so; and
o by us if:
o our shareholders do not approve the acquisition upon taking a
vote at the special meeting, unless we have breached our
obligations relating to the preparation of this proxy statement,
the convening of the special meeting or the solicitation of
alternative proposals; or
o prior to the special meeting, our board of directors withdraws
or modifies its recommendation to our shareholders in favor of the
acquisition and has resolved to recommend and approve the superior
proposal that caused it to change its recommendation regarding the
acquisition, unless we breached our obligations relating to the
preparation of this proxy statement, the convening of the special
meeting or the solicitation of alternative proposals.
TERMINATION FEES AND EXPENSES
If the acquisition agreement is terminated:
o by either party due to the closing not being consummated on or before
March 31, 2005, and either (i) the ACC approval cannot be obtained or
(ii) the ACC approval is obtained but the order issued by the ACC does
52
not satisfy any of the conditions described in the fourth, sixth and
seventh bullet points under "--Conditions to the Obligation of Saguaro
Acquisition Corp. to Effect the Acquisition," then we must pay Saguaro
Acquisition Corp. termination expenses not to exceed $7 million;
o by either party due to the closing not being consummated on or before
March 31, 2005, and (i) at or prior to the termination date, an
alternative proposal is publicly announced, commenced or otherwise
communicated to us and (ii) within twelve months of the termination
date, we or any of our affiliates either becomes a party to any
definitive agreement, letter of intent or agreement in principle in
connection with any alternative proposal or consummates a transaction
that would constitute an alternative proposal, then we must pay Saguaro
Acquisition Corp. a termination fee in the amount of $15 million and
termination expenses not to exceed $10 million;
o by Saguaro Acquisition Corp. due to a material breach by us of any of
the covenants or agreements or any of the representations or warranties
contained in the acquisition agreement, then we must pay Saguaro
Acquisition Corp. termination expenses not to exceed $10 million, and,
further, if either (i) at or prior to the termination date, an
alternative proposal shall have been publicly announced or otherwise
communicated to us or (ii) within twelve months of the termination
date, we or any of our affiliates either becomes a party to any
definitive agreement, letter of intent or agreement in principle in
connection with any alternative proposal or consummates a transaction
that would constitute an alternative proposal, then we must also pay
Saguaro Acquisition Corp. a termination fee in the amount of $15
million;
o by either party due to (i) (a) the failure to obtain ACC approval or
(b) the ACC approval is obtained but the order issued by the ACC does
not satisfy any of the conditions described in the fourth, sixth and
seventh bullet points under "--Conditions to the Obligation of Saguaro
Acquisition Corp. to Effect the Acquisition" or (ii) the failure to
obtain the approval of our shareholders, then we must pay Saguaro
Acquisition Corp. termination expenses not to exceed $7 million in the
case of clauses (i)(a) and (i)(b) or $10 million in the case of clause
(ii) and, further, if (1) at or prior to the termination date, an
alternative proposal shall have been publicly announced or otherwise
communicated to us and (2) within twelve months of the termination
date, we or any of our affiliates either becomes a party to any
definitive agreement, letter of intent or agreement in principle in
connection with any alternative proposal or consummates a transaction
that would constitute an alternative proposal, then we must also pay
Saguaro Acquisition Corp. a termination fee in the amount of $18
million in the case of clauses (i)(a) and (i)(b) or $15 million in the
case of clause (ii);
o by Saguaro Acquisition Corp. due to the denial of a required regulatory
approval other than with respect to the ACC approval, and, further, if
(1) at or prior to the termination date, an alternative proposal shall
have been publicly announced or otherwise communicated to us and (2)
within twelve months of the termination date, we or any of our
affiliates either becomes a party to any definitive agreement, letter
of intent or agreement in principle in connection with any alternative
proposal or consummates a transaction that would constitute an
alternative proposal, then we must also pay Saguaro Acquisition Corp. a
termination fee in the amount of $15 million and termination expenses
not to exceed $10 million; or
o (i) by Saguaro Acquisition Corp. due to a change in our board of
directors' recommendation in favor of the acquisition or a breach by us
of certain of our obligations relating to the convening of the
shareholders' meeting or the solicitation of alternative proposals,
(ii) by us because our board of directors has approved a superior
proposal or (iii) by Saguaro Acquisition Corp. because (a) we have not
rejected an alternative proposal that was publicly announced or
otherwise communicated to us within ten business days after the date of
the receipt thereof or after the date of its existence first becomes
publicly announced, if sooner, (b) our board of directors approves or
recommends the alternative proposal or (c) we fail to confirm our
recommendation in favor of the acquisition within ten business days
after being requested by Saguaro Acquisition Corp. to do so, then, in
each case, we must pay Saguaro Acquisition Corp. a termination fee in
the amount of $15 million and termination expenses not to exceed $10
million.
53
EFFECT OF TERMINATION
If the acquisition agreement is terminated, it will become void and have no
effect, other than the provisions relating to confidentiality and termination
fees and expenses. Termination, however, will not relieve any party from
liability for its breach of the representations, warranties, covenants or
agreements set forth in the acquisition agreement. Following the termination of
the acquisition agreement no party shall be liable for damages in excess of $25
million, except in the case where a party willfully breached the acquisition
agreement.
AMENDMENT
Prior to the effective time of the acquisition, the agreement may be
amended by mutual agreement, in writing, of the parties. After the approval of
the acquisition agreement by our shareholders, no amendment may be made that
would reduce the amount or change the type of consideration into which each
share of our common stock will be converted upon consummation of the
acquisition.
WAIVER
Prior to the effective time of the acquisition, any party may, in writing,
(i) extend the time for the performance of any obligation or other act of any
other party, (ii) waive any inaccuracy in the representations and warranties
contained in the acquisition agreement or any document delivered pursuant
thereto and (iii) waive compliance with any agreement or condition contained in
the acquisition agreement.
54
SHARE OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of our shares as of January 5, 2004 by the following directors and
executive officers. The total number of our shares beneficially owned as of
January 5, 2004 by all directors and executive officers as a group is also
listed. Shares listed as beneficially owned include shares as to which the
directors and executive officers have or share the power to vote or the power to
dispose. In addition, shares listed as beneficially owned include shares subject
to options exercisable within 60 days (see "THE ACQUISITION - Interests of
Certain Persons in the Acquisition - Treatment of Stock Options," beginning on
page 36, for a description of the amounts payable in respect of unexercised
options at the effective time of the acquisition).
Name and
Title of Title of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership[1] Class
-------- ---------------- -------------------- ---------
Common James S. Pignatelli 508,509[2] 1.5%
Chairman, President & Chief
Executive Officer
Common Lawrence J. Aldrich 9,624[3] *
Director
Common Larry W. Bickle 15,564[4] *
Director
Common Elizabeth T. Bilby 13,625[5] *
Director
Common Harold W. Burlingame 12,225[4] *
Director
Common John L. Carter 22,371[6] *
Director
Common Robert A. Elliott 405 *
Director
Common Kenneth Handy 6,359[7] *
Director
Common Warren Y. Jobe 4,359[7] *
Director
Common Steven J. Glaser 154,319[8] *
Senior Vice President and Chief
Operating Officer, Transmission &
Distribution (TEP)
--------------------
* Represents less than 1% of our common stock.
1 Amounts include the following:
o Any shares held in the name of the spouse, minor children or other
relatives sharing the home of the director or officer. Except as
otherwise indicated below, the directors and officers have sole voting
and investment power over the shares shown. Voting power includes the
power to direct the voting of the shares held, and investment power
includes the power to direct the disposition of the shares held.
o Shares subject to options exercisable within 60 days, based on
information from E*Trade, our stock option plan administrator.
o Equivalent share amounts allocated to the individuals' 401(k) Plan
which, since June 1, 1998, has included a UniSource Energy Stock Fund
investment option.
2 Includes 492,705 shares subject to options exercisable within 60 days, and
14,404 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as
of January 5, 2004.
3 Includes 6,120 shares subject to options exercisable within 60 days.
4 Includes 9,320 shares subject to options exercisable within 60 days.
5 Includes 12,920 shares subject to options exercisable within 60 days.
6 Includes 11,720 shares subject to options exercisable within 60 days.
7 Includes 3,454 shares subject to options exerciable within 60 days.
55
Name and
Title of Title of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership[1] Class
-------- ---------------- -------------------- ---------
Common Dennis R. Nelson 159,841[9] *
Senior Vice president and Chief
Operating Officer (UES)
Common Kevin P. Larson 98,905[10] *
Vice President, Chief Financial
Officer & Treasurer
Common Michael J. DeConcini 84,711[11] *
Senior Vice President, Investments
and Planning
Common All directors and executive officers 1,530,009[12] 4.5%
as a group
--------------------
8 Includes 150,386 shares subject to options exercisable within 60 days, and
2,446 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of
January 5, 2004.
9 Includes 150,830 shares subject to options exercisable within 60 days, and
8,203 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of
January 5, 2004.
10 Includes 83,648 shares subject to options exercisable within 60 days, and
2,277 shares purchased under the 401(k) Plan UniSource Energy Stock Fund as of
January 5, 2004.
11 Includes 79,927 shares subject to options exercisable within 60 days,
and 4,784 purchased under the 401(k) Plan UniSource Energy Stock Fund as of
January 5, 2004.
12 Includes 1,421,168 shares subject to options exercisable within 60 days,
and 42,613 shares purchased under the 401(k) Plan UniSource Energy Stock Fund
as of January 5, 2004.
56
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of January 29, 2003, based on information reported in filings made by
the following persons with the SEC or information otherwise known to us, the
following persons were known or reasonably believed to be, as more fully
described below, the beneficial owners of more than 5% of our common stock:
Amount and
Title of Class Name and Address Nature of Percent of Class
-------------- of Beneficial Owner Beneficial Ownership ----------------
------------------- --------------------
Common T. Rowe Price Associates, Inc. 3,337,900[1] 9.9%
100 E. Pratt Street
Baltimore, MD 21202
Common White Mountains Insurance Group 2,018,100[2] 6.3%
80 South Main Street
Hanover, NH 03755
Common Gabelli Asset Management Inc. 2,091,500[3] 6.2%
One Corporate Center
Rye, NY 10580-1435
---------------------
1 In a statement (Schedule 13G/A ) filed with the SEC on February 5, 2003, T.
Rowe Price Associates, Inc. ("Price Associates") indicated it has sole
voting power over 1,180,500 shares and sole dispositive power over
3,337,900 shares of our common stock. Price Associates stated that these
securities are owned by various individual and institutional investors for
which Price Associates serves as investment advisor with power to direct
investments and/or sole power to vote the securities. For purposes of the
reporting requirements of the Securities and Exchange Act of 1934, as
amended, Price Associates is deemed to be the beneficial owner of such
securities; however, Price Associates expressly disclaimed that it is, in
fact, the beneficial owner of such securities. In a statement (Schedule
13F) filed with the SEC on September 30, 2003, Price Associates indicated
that it beneficially owns 3,256,305 shares, which represents 9.6% of the
class.
2 In a statement (Schedule 13G/A) filed with the SEC on February 5, 2003,
White Mountains Insurance Group ("WMIG") indicated that it has sole voting
and sole dispositive power over 2,018,100 shares of our common stock. WMIG
indicated that it indirectly controls, through various wholly-owned
subsidiaries and certain of its employee benefit plans, 2,018,100 shares.
WMIG stated that the shares are beneficially owned by OneBeacon Insurance
Company (200,000 shares), The Camden Fire Insurance Association (800,000
shares), Folksamerica Reinsurance Company (138,100 shares) and certain
employee benefit plans sponsored by Folksamerica Reinsurance Company
(100,000 shares) and OneBeacon Insurance Company (780,000 shares). WMIG
further stated that, through an investment advisory agreement, OneBeacon
Asset Management Company has sole voting power and dispositive power over
such shares. In a statement (Schedule 13F) filed with the SEC on September
30, 2003, WMIG indicated that it beneficially owns 1,883,100 shares, which
represents 5.6% of the class.
3 In a statement (Schedule 13D) filed with the SEC on December 29, 2003,
Gabelli Asset Management Inc. and its affiliates ("Gabelli") indicated that
they have sole voting power over 2,029,500 shares and sole dispositive
power over 2,091,500 shares of our common stock. Gabelli stated that the
shares are beneficially owned by Gabelli Funds, LLC (1,015,200 shares),
GAMCO Investors, Inc. (814,700 shares), Gabelli Securities, Inc. (249,600
shares), Gabelli Foundation, Inc. (10,000 shares) and MJG Associates, Inc.
(2,000 shares).
57
SUBMISSION OF SHAREHOLDER PROPOSALS
The deadline for submitting shareholder proposals for our 2004 annual
meeting of shareholders was December 11, 2003. Thus, the deadline has passed.
Our proxy statement for our 2004 annual meeting of shareholders will set forth
the date by which shareholder proposals must be submitted for inclusion in our
2005 proxy statement, assuming that the acquisition is not completed prior to
the 2005 annual meeting of shareholders.
Rule 14a-4 of the SEC's proxy rules allows us to use discretionary voting
authority to vote on a matter coming before an annual meeting of the
shareholders, which was not included in our proxy statement (if we do not have
notice of the matter at least 45 days before the date on which we first mailed
our proxy materials for the prior year's annual meeting of the shareholders). In
addition, we may also use discretionary voting authority if we receive timely
notice of such matter (as described in the preceding sentence) and if, in the
proxy statement, we describe the nature of such matter and how we intend to
exercise our discretion to vote on it. Accordingly, for our 2004 annual meeting
of shareholders, any such notice must be submitted to our Corporate Secretary on
or before February 24, 2004.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This proxy statement may contain forward-looking statements, particularly
regarding the proposed acquisition, as defined by the Private Securities
Litigation Reform Act of 1995. We are including the following cautionary
statements to make applicable and take advantage of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by or for us in this proxy statement. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements that are
not statements of historical facts. We caution that actual future results may
vary materially from those expected or implied. Some of the key factors that
could cause actual results to vary materially from those expressed or implied
include the receipt of required regulatory approvals, which are significant, and
the satisfaction of other conditions precedent to the consummation of the
acquisition, including the approval of the transaction by our shareholders, and
the availability of financing for the acquisition. There can be no assurance
that such conditions will be satisfied or that the acquisition will be
consummated. More information about the risks and uncertainties relating to
these forward-looking statements are found in our SEC filings, which are
available free of charge on the SEC's web site at http://www.sec.gov.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT
TO VOTE ON THE ACQUISITION AGREEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT FROM THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT. THIS PROXY STATEMENT IS DATED , 2004.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE. NEITHER THE MAILING OF THIS PROXY
STATEMENT TO SHAREHOLDERS NOR THE COMPLETION OF THE ACQUISITION WILL CREATE ANY
IMPLICATION TO THE CONTRARY.
58
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
UNISOURCE ENERGY CORPORATION
AND
SAGUARO ACQUISITION CORP.
dated as of November 21, 2003
TABLE OF CONTENTS
PAGE
----
ARTICLE I The Merger.........................................................A-1
Section 1.01. The Merger..........................................A-1
Section 1.02. Closing.............................................A-1
Section 1.03. Effective Time of the Merger........................A-1
Section 1.04. Articles of Incorporation; Bylaws...................A-2
Section 1.05. Directors and Officers..............................A-2
ARTICLE II Treatment of Shares...............................................A-2
Section 2.01. Effect of the Merger on Capital Stock...............A-2
Section 2.02. Exchange of Certificates............................A-3
ARTICLE III Representations and Warranties of the Company....................A-5
Section 3.01. Organization and Qualification......................A-5
Section 3.02. Capitalization; Subsidiaries........................A-6
Section 3.03. Authority Relative to this Agreement................A-7
Section 3.04. No Conflict; Required Filings and Consents..........A-8
Section 3.05. SEC Filings; Financial Statements...................A-9
Section 3.06. Absence of Certain Changes or Events...............A-10
Section 3.07. Absence of Litigation..............................A-10
Section 3.08. Tax Matters........................................A-11
Section 3.09. Employee Matters...................................A-13
Section 3.10. Environmental......................................A-16
Section 3.11. Compliance with Laws; Approvals from
Governmental Authorities.........................A-17
Section 3.12. Contracts..........................................A-18
Section 3.13. Regulation as a Utility............................A-19
Section 3.14. Affiliate Transactions.............................A-19
Section 3.15. Fairness Opinion...................................A-19
Section 3.16. Brokers and Transaction Expenses...................A-20
Section 3.17. Vote Required; Company Board Recommendation........A-20
Section 3.18. Intellectual Property..............................A-20
Section 3.19. Insurance..........................................A-21
Section 3.20. Derivative Products................................A-21
Section 3.21. Property...........................................A-22
ARTICLE IV Representations and Warranties of Newco..........................A-23
Section 4.01. Organization.......................................A-23
Section 4.02. Authority Relative to this Agreement...............A-23
Section 4.03. No Conflict; Required Filings and Consents.........A-23
Section 4.04. Brokers............................................A-24
Section 4.05. Financing..........................................A-24
Section 4.06. Ownership of Company Common Stock..................A-24
Section 4.07. Newco Status.......................................A-24
TABLE OF CONTENTS (CONT'D)
PAGE
----
ARTICLE V Conduct of Business Pending the Merger............................A-25
Section 5.01. Covenants of the Company...........................A-25
Section 5.02. Conduct of Business by Newco.......................A-30
Section 5.03. Cooperation, Notification..........................A-30
ARTICLE VI Additional Agreements............................................A-31
Section 6.01. Shareholders' Meeting; Preparation of the Proxy
Statement; SEC Filings..........................A-31
Section 6.02. Access to Information; Confidentiality.............A-33
Section 6.03. No Solicitation of Transactions....................A-34
Section 6.04. Employee Benefits Matters..........................A-36
Section 6.05. Directors' and Officers' Indemnification and
Insurance........................................A-36
Section 6.06. Regulatory Approvals and Other Matters.............A-37
Section 6.07. Public Announcements...............................A-39
Section 6.08. Financing..........................................A-39
Section 6.09. Resignations.......................................A-40
Section 6.10. Section 16 Matters.................................A-40
ARTICLE VII Conditions......................................................A-40
Section 7.01. Conditions to Each Party's Obligation to
Effect the Merger................................A-40
Section 7.02. Conditions to Obligation of Newco to Effect
the Merger.......................................A-41
Section 7.03. Conditions to Obligation of the Company to
Effect the Merger................................A-44
ARTICLE VIII Termination, Amendment and Waiver..............................A-45
Section 8.01. Termination........................................A-45
Section 8.02. Certain Fees and Expenses..........................A-46
Section 8.03. Effect of Termination..............................A-48
Section 8.04. Amendment..........................................A-48
Section 8.05. Waiver.............................................A-48
ARTICLE IX General Provisions...............................................A-49
Section 9.01. Non-Survival.......................................A-49
Section 9.02. Fees and Expenses..................................A-49
Section 9.03. Certain Definitions................................A-49
Section 9.04. Notices............................................A-50
Section 9.05. Interpretation.....................................A-51
Section 9.06. Severability.......................................A-51
Section 9.07. Entire Agreement...................................A-51
Section 9.08. No Implied Representations or Warranties...........A-51
Section 9.09. Assignment; Binding Effect; Benefit................A-51
Section 9.10. Schedules and Exhibits.............................A-52
Section 9.11. Counterparts; Effect...............................A-52
Section 9.12. Governing Law......................................A-52
Section 9.13. Waiver of Jury Trial...............................A-52
Section 9.14. Specific Performance...............................A-52
-A-ii-
INDEX OF DEFINED TERMS
SECTION
-------
ABCA........................................................................1.01
ACC.........................................................................1.03
ACC Approval.............................................................3.04(b)
Actions.....................................................................3.07
affiliate................................................................9.03(a)
Agreement...............................................................Recitals
Alternative Proposal.....................................................6.03(a)
Approvals................................................................3.04(b)
Articles and Certificate of Merger..........................................1.03
Arizona Articles of Merger..................................................1.03
Balance Sheet............................................................3.09(d)
business day.............................................................9.03(b)
Certificate..............................................................2.01(c)
Change in Board Recommendation...........................................6.03(d)
Closing.....................................................................1.02
Closing Date................................................................1.02
Code.....................................................................3.08(c)
Company.................................................................Recitals
Company Board............................................................3.01(b)
Company Board Recommendation.............................................3.17(b)
Company Common Stock.....................................................2.01(b)
Company Contracts........................................................3.12(b)
Company Employees........................................................3.09(a)
Company Plans............................................................3.09(a)
Company Reports..........................................................3.05(a)
Company Securities.......................................................3.02(a)
Confidentiality Agreement................................................6.02(b)
Contracts................................................................3.04(a)
control..................................................................9.03(c)
Credit Agreement.........................................................5.01(e)
Debt Financing..............................................................4.05
Debt Letters................................................................4.05
Delaware Certificate of Merger..............................................1.03
Delaware Secretary of State.................................................1.03
Derivative Product.......................................................3.20(d)
DGCL........................................................................1.01
Dividend Reinvestment Plan...............................................5.01(d)
Effective Time..............................................................1.03
Environmental Claim......................................................3.10(f)
Environmental Laws.......................................................3.10(f)
Environmental Permits....................................................3.10(b)
Equity Letter...............................................................4.05
ERISA....................................................................3.09(a)
ERISA Affiliate..........................................................3.09(d)
Exchange Act.............................................................3.04(b)
-A-iii-
INDEX OF DEFINED TERMS (CONT'D)
SECTION
-------
FERC.....................................................................3.04(b)
FERC Approval............................................................3.04(b)
Final Order..............................................................7.02(d)
Financing Letters...........................................................4.05
GAAP.....................................................................3.05(b)
Governmental Authority...................................................3.04(b)
Hazardous Materials......................................................3.10(f)
Holdings................................................................Recitals
HSR Act..................................................................3.04(b)
Indebtedness.............................................................3.02(c)
Insurance Cap............................................................6.05(b)
Insurance Policies..........................................................3.19
Intellectual Property....................................................3.18(a)
knowledge................................................................9.03(d)
Laws.....................................................................3.04(a)
Liens....................................................................3.02(b)
Limited Partners........................................................Recitals
Material Adverse Effect..................................................3.01(a)
MEG......................................................................5.01(e)
Merger..................................................................Recitals
Merger Consideration.....................................................2.01(c)
Millennium...............................................................5.01(b)
Morgan Stanley..............................................................3.15
Natural Gas Act..........................................................3.13(a)
Newco...................................................................Recitals
Newco Material Adverse Effect............................................7.02(d)
Notes Letter................................................................4.05
NYSE.....................................................................3.04(b)
Option...................................................................2.01(d)
Order.......................................................................3.07
Partnership.............................................................Recitals
Paying Agent.............................................................2.02(a)
PBGC.....................................................................3.09(d)
Pension Plan.............................................................3.09(d)
person...................................................................9.03(e)
Post-Closing Tax Period..................................................3.08(h)
Power Act................................................................3.04(b)
Pre-Closing Tax Period...................................................3.08(h)
Preferred Stock..........................................................3.02(a)
Proxy Statement..........................................................3.04(b)
PUHCA....................................................................3.05(e)
PUHCA Approval...........................................................4.03(b)
Release..................................................................3.10(f)
Representatives..........................................................6.01(e)
Required Approvals.......................................................3.04(b)
-A-iv-
INDEX OF DEFINED TERMS (CONT'D)
SECTION
-------
Rights Agreement.........................................................3.02(a)
SEC......................................................................3.04(b)
Securities Act...........................................................3.05(a)
Senior Financing Letter....................................................4.05
Shareholder Approval....................................................3.17(a)
Shareholders' Meeting...................................................6.01(a)
Stock Plans.............................................................2.01(d)
Subject Litigation......................................................6.05(c)
subsidiaries............................................................9.03(f)
Subsidiary Securities...................................................3.02(a)
Superior Proposal.......................................................6.03(a)
Surviving Corporation......................................................1.01
Tax Return..............................................................3.08(n)
Taxes...................................................................3.08(n)
TEP.....................................................................3.05(a)
TEP Entities............................................................7.02(d)
Termination Date...........................................................8.01
Termination Expenses....................................................8.02(b)
Termination Fee.........................................................8.02(b)
Trading Policies........................................................3.20(a)
UED.....................................................................5.01(b)
UES.....................................................................3.13(b)
UNS Electric............................................................3.13(a)
UNS Gas.................................................................3.13(a)
Utility Subsidiaries....................................................3.13(a)
-A-v-
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 21, 2003 (this
"AGREEMENT") between UniSource Energy Corporation, an Arizona corporation (the
"COMPANY"), and Saguaro Acquisition Corp., a Delaware corporation ("NEWCO").
WHEREAS, the respective Boards of Directors of the Company and Newco
have approved the merger of Newco with and into the Company (the "MERGER"), upon
the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, Newco is a wholly owned subsidiary of Saguaro Utility Group I
Corp., an Arizona corporation ("HOLDINGS"), which is a wholly owned subsidiary
of Saguaro Utility Group L.P., an Arizona limited partnership (the
"PARTNERSHIP"), whose general partner is Sage Mountain, L.L.C. and whose limited
partners (the "LIMITED PARTNERS") include investment funds affiliated with J.P.
Morgan Partners, LLC, Kohlberg Kravis Roberts & Co., L.P. and Wachovia Capital
Partners.
NOW THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.01. The Merger. Upon the terms and subject to the
conditions of this Agreement and in accordance with the Arizona Business
Corporation Act ("ABCA") and the Delaware General Corporation Law ("DGCL"), at
the Effective Time (as defined in Section 1.03), Newco shall be merged with and
into the Company. As a result of the Merger, the separate corporate existence of
Newco shall cease and the Company shall survive the Merger (sometimes
hereinafter referred to as the "SURVIVING CORPORATION").
Section 1.02. Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 8.01 and subject to the satisfaction or waiver of the
conditions set forth in Article VII, the closing of the Merger (the "CLOSING")
will take place at 10:00 a.m. on the fifth business day after satisfaction or
waiver of the conditions set forth in Article VII, excluding conditions that, by
their terms, cannot be satisfied until the Closing (the "CLOSING DATE"), at the
offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New
York 10017, unless another date, time or place is agreed to in writing by the
parties.
Section 1.03. Effective Time of the Merger. As soon as practicable
after the satisfaction or waiver of the conditions set forth in Article VII, the
parties shall cause the Merger to be consummated by filing (a) this Agreement
(or the plan of merger) and articles of merger (the "ARIZONA ARTICLES OF
MERGER") with the Arizona Corporation Commission (the "ACC") pursuant to the
ABCA and (b) this Agreement or a certificate of merger (the "DELAWARE
CERTIFICATE OF MERGER" and, together with the Arizona Articles of Merger, the
"ARTICLES AND CERTIFICATE OF MERGER") with the Secretary of State of the State
of Delaware (the "DELAWARE SECRETARY OF STATE") pursuant to the DGCL, each in
such form as required by and executed in accordance with the relevant provisions
of the ABCA or the DGCL, as applicable (the date and time of the filing of the
later of the Articles and Certificate of Merger with the ACC and the Delaware
Secretary of State, as applicable (or such later time as is specified in the
Articles and Certificate of Merger), being the "EFFECTIVE TIME").
Section 1.04. Articles of Incorporation; Bylaws. (a) At the
Effective Time and without any further action on the part of the Company and
Newco, the articles of incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the articles of incorporation of the
Surviving Corporation following the Merger, until thereafter amended or repealed
in accordance with their terms and as provided under the ABCA.
(b) At the Effective Time and without any further action on the part
of the Company and Newco, the bylaws of Newco shall be the bylaws of the
Surviving Corporation following the Merger, until thereafter amended or repealed
in accordance with their terms or the articles of incorporation of the Surviving
Corporation following the Merger and as provided under the ABCA.
Section 1.05. Directors and Officers. The directors of Newco
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation following the Merger, and the officers of the Company
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation following the Merger, in each case until their respective
successors are duly elected or appointed or until their earlier death,
resignation or removal in accordance with the articles of incorporation and
bylaws of the Surviving Corporation.
ARTICLE II
TREATMENT OF SHARES
Section 2.01. Effect of the Merger on Capital Stock. As of the
Effective Time, by virtue of the Merger and without any action on the part of
the Company, Newco or any holder of any shares of capital stock of the Company
or any shares of capital stock of Newco:
(a) Common Stock of Newco. Each share of common stock of Newco
issued and outstanding immediately prior to the Effective Time shall be
converted into one validly issued, fully paid and non-assessable share of common
stock, no par value per share, of the Surviving Corporation.
(b) Cancellation of Certain Company Common Stock. Each share of
common stock, no par value, of the Company (the "COMPANY COMMON STOCK") that is
owned by the Company and each share of Company Common Stock that is owned by the
Partnership, Newco or any subsidiary of Newco shall automatically be cancelled
and retired and shall cease to exist, and no cash or other consideration shall
be delivered or deliverable in exchange therefor. Each share of Company Common
Stock that is owned by any wholly owned subsidiary of the Company shall remain
outstanding.
-A-2-
(c) Conversion of Company Common Stock. Subject to the provisions
of this Section 2.01, each share of Company Common Stock, other than shares
canceled or that remain outstanding pursuant to Section 2.01(b), issued and
outstanding immediately prior to the Effective Time shall by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive $25.25 in cash (the "MERGER Consideration"), payable
without interest, to the holder of such share, upon surrender, in the manner
provided in Section 2.02, of a certificate formerly evidencing such share (a
"CERTIFICATE").
(d) Treatment of Stock Options and Other Employee Equity Rights.
(i) Immediately prior to the Effective Time, each outstanding option
to acquire Company Common Stock held by any Company Employee (as defined in
Section 3.09(a)) (an "OPTION") granted under the Company's 1994 Outside
Director Stock Option Plan, the Company's 1994 Omnibus Stock and Incentive
Plan (which includes the Company Stock Unit Award Program) or otherwise
(collectively, the "STOCK PLANS"), whether or not then exercisable, shall
be cancelled by the Company, and except as otherwise agreed by Newco and
the holder, the holder thereof shall be entitled to receive at the
Effective Time or as soon as practicable thereafter from the Surviving
Corporation following the Merger in consideration for such cancellation an
amount in cash equal to the product of (a) the number of shares of Company
Common Stock previously subject to each such Option and (b) the excess, if
any, of the Merger Consideration per share over the exercise price per
share of Company Common Stock previously subject to such Option, reduced by
the amount of any withholding or other Taxes (as defined in Section
3.08(n)) required by Law (as defined in Section 3.04(a)) to be withheld.
(ii) The Company shall use its reasonable best efforts to take all
such action as is necessary prior to the Effective Time to, effective as of
the Effective Time, terminate all Stock Plans so that on and after the
Effective Time no Company Employee shall have any Option to purchase shares
of Company Common Stock or any other equity interest in the Company under
any Stock Plan.
Section 2.02. Exchange of Certificates.
(a) Deposit with Paying Agent. Prior to the Effective Time, Newco
shall appoint a bank or trust company reasonably acceptable to the Company to
act as agent (the "PAYING AGENT") for the payment of the Merger Consideration
upon surrender of the Certificates in accordance with this Article II. At or as
soon as practicable after the Effective Time, the Surviving Corporation shall
deposit with the Paying Agent an amount of cash required for the payment of the
Merger Consideration upon surrender of Certificates in accordance with this
Article II. Such funds shall be invested by the Paying Agent as directed by the
Surviving Corporation, provided that such investments shall be in obligations of
or guaranteed by the United States of America or any agency or instrumentality
thereof, in commercial paper obligations rated A-1 or P-1 or better by Moody's
Investors Services, Inc. or Standard & Poor's Corporation, respectively, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $500,000,000. Any net profit resulting
from, or interest or income produced by, such investments will be payable to the
Surviving Corporation.
-A-3-
(b) Exchange and Payment Procedures. As soon as reasonably practicable
after the Effective Time, the Paying Agent shall mail to each holder of record
of a Certificate (i) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates held
by such person shall pass, only upon proper delivery of the Certificates to the
Paying Agent and shall be in customary form and have such other provisions as
the Surviving Corporation may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Paying
Agent or to such other agent or agents as may be appointed by the Surviving
Corporation, together with such letter of transmittal, duly completed and
validly executed, and such other documents as may reasonably be required by the
Paying Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor the amount of cash payable in respect of the shares formerly
represented by such Certificate pursuant to Section 2.01(c), and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Common Stock that is not registered in the share transfer
books of the Company, the proper amount of cash may be paid in exchange therefor
to a person other than the person in whose name the Certificate so surrendered
is registered if such Certificate shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such payment shall pay any
transfer or other Taxes required by reason of the payment to a person other than
the registered holder of such Certificate or establish to the reasonable
satisfaction of the Surviving Corporation that such Tax has been paid or is not
applicable. No interest shall be paid or shall accrue on the cash payable upon
surrender of any Certificate.
(c) No Further Ownership Rights in Company Common Stock. Until
surrendered as contemplated by Section 2.02(b), each Certificate shall be deemed
at any time after the Effective Time to represent only the right to receive upon
such surrender the Merger Consideration as contemplated by this Article II. The
Merger Consideration paid upon the surrender of a Certificate in accordance with
the terms of this Article II shall be deemed to have been paid at the Effective
Time in full satisfaction of all rights pertaining to the shares of Company
Common Stock formerly represented by such Certificate. At the close of business
on the date on which the Effective Time occurs, the share transfer books of the
Company shall be closed, and there shall be no further registration of transfers
on the share transfer books of the Surviving Corporation of the shares of
Company Common Stock that were outstanding immediately prior to the Effective
Time. If, after the close of business on the date on which the Effective Time
occurs, Certificates are presented to the Surviving Corporation or the Paying
Agent for transfer or any other reason, they shall be canceled and exchanged as
provided in this Article II.
(d) No Liability. None of Newco, the Surviving Corporation and the
Paying Agent shall be liable to any person in respect of any cash delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar Law. Any portion of the Merger Consideration deposited with the Paying
Agent pursuant to this Article II which remains undistributed to the holders of
the Certificates for six months after the Effective Time (or immediately prior
to such earlier date on which any cash in respect of such Certificate would
otherwise escheat to or become the property of any Governmental Authority (as
defined in Section 3.04(b)) shall be delivered to the Surviving Corporation,
-A-4-
upon demand. Any holders of Certificates who have not theretofore complied with
this Article II shall thereafter look only to the Surviving Corporation and only
as general creditors thereof for payment of their claim for cash, if any, to
which such holders may be entitled.
(e) Lost Certificates. If any Certificate shall have been lost,
stolen, defaced or destroyed, upon the making of an affidavit of that fact by
the person claiming such Certificate to be lost, stolen, defaced or destroyed
and, if required by the Surviving Corporation, the posting by such person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Paying Agent shall pay in respect of such lost, stolen, defaced
or destroyed Certificate the Merger Consideration.
(f) Withholding Rights. The Surviving Corporation or the Paying Agent
shall be entitled to deduct and withhold any applicable Taxes from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Company Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Newco that:
Section 3.01. Organization and Qualification. (a) Each of the
Company and each of its subsidiaries is duly organized, validly existing and in
good standing under the Laws of the jurisdiction of its organization and has the
requisite power and authority necessary to own, lease and operate its properties
and assets and to carry on its business as it is now being conducted. Each of
the Company and each of its subsidiaries is duly qualified or licensed to do
business, and is in good standing, in each jurisdiction where the character of
its properties and assets owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except where the
failure to be so duly qualified or licensed or in good standing, individually or
in the aggregate, does not have and could not reasonably be expected to have a
Material Adverse Effect. The term "MATERIAL ADVERSE EFFECT" means any state of
facts, change, development, event, effect, condition or occurrence that is
materially adverse to the business, properties, assets, condition (financial or
otherwise), prospects or results of operations of the Company (or the Surviving
Corporation) and its subsidiaries taken as a whole or that could reasonably be
expected to, directly or indirectly, prevent or materially impair or delay the
ability of the Company to perform its obligations hereunder, except to the
extent that such adverse effect arises from general economic, legal or
regulatory conditions affecting the electric or gas utility industry generally
that do not have a disproportionate effect on the Company; provided that the
fact that the Company shall fail to meet financial projections for periods
subsequent to the date of this Agreement shall not, in and of itself, constitute
a Material Adverse Effect, but this proviso shall in no way exclude from the
definition of Material Adverse Effect or from what constitutes a Material
Adverse Effect any state of facts, change, development, event, effect, condition
or occurrence that gave rise to, contributed to or caused such failure to meet
financial projections.
-A-5-
(b) The Company has furnished to Newco (in the case of the Company) or
made available to Newco (in the case of the Company's subsidiaries) a complete
and correct copy of the articles of incorporation and the bylaws (or similar
organizational documents) of the Company and each of its subsidiaries, in each
case as currently in effect. All such articles of incorporation and bylaws (and
similar organizational documents) are in full force and effect and no other
organizational documents are applicable to or binding upon the Company or its
subsidiaries. None of the Company and its subsidiaries is, or since January 1,
2000 has been, in violation of any of the provisions of its articles of
incorporation or bylaws (or similar organizational documents). To the knowledge
of the Company, no other party to any such document is, or since January 1, 2000
has been, in violation of any of its obligations under any such document nor has
the Company or any of its subsidiaries received any notice of any such
violation. The Company has made available to Newco complete and correct copies
of the minutes of all meetings or written consents of the shareholders, the
Board of Directors of the Company (the "COMPANY Board") and each committee
thereof and of the shareholders (or other equityholders), board of directors (or
similar body) and any committee thereof of each of its subsidiaries, in each
case, since January 1, 2000.
Section 3.02. Capitalization; Subsidiaries. (a) The authorized
capital stock of the Company consists of 75,000,000 shares of Company Common
Stock and 1,000,000 shares of Preferred Stock, without par value (the "PREFERRED
STOCK"). As of the date of this Agreement, (i) 33,680,721 shares of Company
Common Stock are issued and outstanding, all of which were duly authorized,
validly issued, fully paid and non-assessable and were issued free of preemptive
(or similar) rights, (ii) no shares of Company Common Stock are held in the
treasury of the Company, (iii) 3,091,945 shares of Company Common Stock are
issuable upon the exercise of outstanding Options or payment of other
outstanding equity or equity-based awards, including dividend equivalents,
granted under the Stock Plans and (iv) 953,578 shares of Company Common Stock
are reserved for issuance in connection with the Stock Plans (including shares
reserved in connection with the outstanding Options or payment of other
outstanding equity or equity-based awards, including dividend equivalents,
granted under the Stock Plans). As of the date of this Agreement, (i) no shares
of Preferred Stock are issued or outstanding and (ii) 10,000 shares of Preferred
Stock are reserved for issuance in connection with the rights issued pursuant to
the Rights Agreement dated as of March 5, 1999 between the Company and The Bank
of New York, as Rights Agent (the "RIGHTS AGREEMENT"). All shares of Company
Common Stock subject to issuance in connection with the exercise of outstanding
Options or payment of other outstanding equity or equity-based awards, including
dividend equivalents, granted under the Stock Plans, upon issuance on the terms
and conditions specified in the Stock Plans and instruments pursuant to which
they are issuable, will be duly authorized, validly issued, fully paid and
non-assessable and free of preemptive (or similar) rights. Except (i) as set
forth above or (ii) as a result of the exercise of the outstanding Options or
payment of other outstanding equity or equity-based awards granted under the
Stock Plans, including dividend equivalents, there are outstanding (a) no shares
of capital stock or other voting securities of the Company, (b) no securities of
the Company convertible into or exchangeable or exercisable for shares of
capital stock or voting securities of the Company, (c) no options, warrants or
other rights to acquire from the Company, and no obligation of the Company to
issue, any capital stock or voting securities or securities convertible into or
exchangeable or exercisable for capital stock or voting securities of the
Company and (d) no equity equivalents, interests in the ownership or earnings of
the Company or other similar rights (collectively, "COMPANY Securities"). There
are no outstanding obligations of the Company or any of its subsidiaries to
repurchase, redeem or otherwise acquire any Company Securities or any shares of
capital stock, voting securities, equity interests or securities convertible
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into or exchangeable or exercisable for shares of capital stock, voting
securities or equity interests of any of the subsidiaries of the Company or any
equity equivalents, interests in the ownership or earnings of any subsidiary of
the Company or other similar rights (collectively, "SUBSIDIARY SECURITIES"), or,
except as set forth in Schedule 3.02(a), to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
subsidiary or any other person. None of the Company or any of its subsidiaries
is a party to any shareholders' agreement, voting trust agreement or
registration rights agreement relating to Company Securities or Subsidiary
Securities or any other Contract (as defined in Section 3.04(a)) relating to
disposition, voting or dividends with respect to any Company Securities or
Subsidiary Securities. All dividends on the Company Common Stock that have been
declared or have accrued prior to the date of this Agreement have been paid in
full.
(b) Schedule 3.02(b) contains a complete and correct list of each
subsidiary of the Company and all other entities in which the Company owns,
directly or indirectly, any shares of capital stock or other equity interests.
Such list sets forth the jurisdiction of organization, the amount of all shares
of capital stock or other equity interests therein owned by the Company,
directly or indirectly, and, with respect to each subsidiary of the Company,
describes all of its outstanding Subsidiary Securities and lists the holders
thereof. Except as set forth in Schedule 3.02(b), each of the outstanding shares
of capital stock or other equity interests of each such subsidiary is duly
authorized, validly issued, fully paid and non-assessable and was issued free of
preemptive (or similar rights), and all such shares or other interests in any
such subsidiary or person that are owned by the Company or a subsidiary of the
Company are owned free and clear of all security interests, liens, claims,
pledges, Contracts, limitations in voting, dividend or transfer rights, charges
or other encumbrances of any nature whatsoever ("LIENS").
(c) Schedule 3.02(c) sets forth a complete and correct list, as of the
date of this Agreement, of each Contract pursuant to which any Indebtedness (as
defined in this Section 3.02(c)) of the Company or its subsidiaries is
outstanding or may be incurred in an amount in excess of $100,000, together with
the amount outstanding thereunder as of the date of this Agreement. No Contract
pursuant to which any Indebtedness of the Company or its subsidiaries is
outstanding or may be incurred provides for the right to vote (or is convertible
into, or exchangeable for, securities having the right to vote) on any matters
on which the shareholders of the Company or its subsidiaries may vote.
"INDEBTEDNESS" means (i) indebtedness for borrowed money, whether secured or
unsecured, (ii) obligations under conditional or installment sale or other title
retention Contracts relating to purchased property, (iii) capitalized lease
obligations and (iv) guarantees of any of the foregoing of another person. No
event has occurred which either entitles, or could entitle (with or without
notice or lapse of time or both) the holder of any Indebtedness described in
Schedule 3.02(c) to accelerate, or which does accelerate, the maturity of any
such Indebtedness.
Section 3.03. Authority Relative to this Agreement. The Company has
all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
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by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the transactions so
contemplated, except for the Shareholder Approval (as defined in Section
3.17(a)). This Agreement has been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and delivery hereof by
Newco, constitutes a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as may be
affected by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar Laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
Section 3.04. No Conflict; Required Filings and Consents. (a) The
execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby do not and will not: (i)
conflict with or violate the articles of incorporation or the bylaws (or similar
organizational documents) of the Company or any of its subsidiaries; (ii)
conflict with or violate any laws, statutes, rules, regulations, ordinances or
Orders (as defined in Section 3.07) (collectively, "LAWS") applicable to the
Company or any of its subsidiaries or by which its or any of their respective
properties are bound or affected (assuming that all consents, approvals and
authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b)
below have been obtained and all filings described in such clauses have been
made); or (iii) result in any breach or violation of, constitute a default,
require consent or result in the loss of a material benefit under, give rise to
a right to permit or require the purchase or sale of assets or securities under,
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a Lien on any of the properties or assets of
the Company or any of its subsidiaries (in each case, with or without notice or
lapse of time or both) pursuant to, any contract (written or oral), obligation,
plan, undertaking, arrangement, commitment, note, bond, mortgage, indenture,
agreement, lease, other instrument or Approval (as defined in Section 3.04(b))
(collectively, "CONTRACTS") to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or its or any of their
respective properties are bound or affected, except in the case of clauses (ii)
and (iii), for any such conflicts, violations, breaches, defaults or other
occurrences that, individually or in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby by the
Company do not and will not require any permit, license, authorization,
certification, tariff, consent, approval, concession or franchise (collectively,
"APPROVALS") from, action by, filing with or notification to, any Federal,
state, or local government or regulator or any court, arbitrator, administrative
agency or commission or other governmental, quasi-governmental, taxing or
regulatory (including a stock exchange or other self-regulatory body) authority,
official or agency (including a public utility commission, public services
commission or similar regulatory body), domestic, foreign or supranational (a
"GOVERNMENTAL AUTHORITY"), except for (i) (A) the filing with the Securities and
Exchange Commission (the "SEC") of a proxy statement relating to the
transactions contemplated hereby (the "PROXY STATEMENT" ) pursuant to the
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applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder (the "EXCHANGE ACT") and (B)
the filing of applications for de-listing of the Company Common Stock with the
New York Stock Exchange (the "NYSE") and the Pacific Stock Exchange, (ii)(A) the
filing of a premerger notification report by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), (B) the issuance by the Federal Energy Regulatory Commission (the "FERC")
of an order approving the sale or disposition of jurisdictional facilities of
the Company to occur as a result of the Merger under Section 203 of the Federal
Power Act, as amended, and the rules and regulations promulgated thereunder (the
"POWER ACT") (the "FERC APPROVAL") and (C) the issuance by the ACC of an order
approving the Merger under Arizona Administrative Code R14-2-801 et seq. (the
"ACC APPROVAL") (the actions referred to in this clause (ii), together with the
PUHCA Approval (as defined in Section 4.03(b)), collectively, the "REQUIRED
APPROVALS"; it being understood that references in this Agreement to "obtaining"
such Required Approvals shall mean making such filings; giving such notices;
obtaining such Approvals; and having such waiting periods expire as are
necessary to avoid a violation of any Laws), (iii) the filing and recordation of
the Articles and Certificate of Merger as required by the ABCA and the DGCL, as
applicable, and (iv) such Approvals, actions, filings or notifications the
failure of which to make or obtain, individually or in the aggregate, does not
have and could not reasonably be expected to have a Material Adverse Effect.
Section 3.05. SEC Filings; Financial Statements. (a) The Company
and, to the extent applicable, each of its then or current subsidiaries, has
timely filed all forms, reports, schedules, declarations, statements,
applications and other documents required to be filed with the SEC since January
1, 2000 (collectively, the "COMPANY REPORTS"), each of which, when filed,
complied in all material respects with the applicable requirements of the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "SECURITIES ACT") and the Exchange Act, each as in effect on the
date so filed. None of the Company Reports (including any financial statements
or schedules included or incorporated by reference therein), when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated or incorporated by reference therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. Other than Tucson Electric Power Company,
an Arizona corporation ("TEP"), none of the Company's subsidiaries is required
to file any forms, reports or documents with the SEC under the Exchange Act. The
Company has made available to Newco copies of all correspondence between the
SEC, on the one hand, and the Company and any of its subsidiaries, on the other
hand, since January 1, 2000.
(b) Each of the audited and unaudited financial statements (including
any related notes) included in the Company Reports, when filed, complied in all
material respects with all applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, has been
prepared in accordance with generally accepted accounting principles ("GAAP")
(except, in the case of unaudited quarterly statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes thereto) and, when filed, fairly
presented the consolidated financial position of the Company and its
subsidiaries at the respective date thereof and the consolidated results of its
and their operations and cash flows for the periods indicated (subject, in the
case of unaudited quarterly statements, to normal year-end audit adjustments,
which were not and are not expected to be material in amount). As of the date of
this Agreement, all of the Company's subsidiaries are consolidated for
accounting purposes.
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(c) Except as and to the extent disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 or in the
Company Reports filed and publicly available after the filing of such Form 10-K
and prior to the date of this Agreement, neither the Company nor any of its
subsidiaries has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise), except for liabilities or obligations
incurred in the ordinary course of business and in a manner consistent with past
practice since September 30, 2003 that, individually or in the aggregate, do not
have and could not reasonably be expected to have a Material Adverse Effect.
(d) The Company has made available to Newco a complete and correct
copy of any amendments or modifications which have not yet been filed with the
SEC to Contracts which previously had been filed by the Company with the SEC
pursuant to the Securities Act or the Exchange Act.
(e) Except as, individually or in the aggregate, does not have and
could not reasonably be expected to have a Material Adverse Effect, all filings,
including all written forms, statements, reports, Contracts and all documents,
exhibits, amendments and supplements relating thereto, including all rates,
tariffs, franchises, service agreements and related documents, required to be
made by the Company and its subsidiaries since January 1, 2000 under the Public
Utility Holding Company Act of 1935, as amended, and the rules and regulations
promulgated thereunder ("PUHCA" ), the Power Act and any state Law applicable to
public utilities (including Title 40, Public Utilities and Carriers, of the
Arizona Revised Statutes and the rules and regulations promulgated thereunder),
and under other regulations applicable to public utilities or public utility
holding companies in the United States, have been made in accordance with, and,
when filed, complied with, applicable Laws, including the requirements of the
relevant Governmental Authority.
Section 3.06. Absence of Certain Changes or Events. Since December
31, 2002, except as specifically contemplated by this Agreement or disclosed in
the Company Reports filed and publicly available prior to the date of this
Agreement, the Company and its subsidiaries have conducted their businesses only
in the ordinary course and in a manner consistent with past practice, and since
such date there has not been any state of facts, change, development, event,
effect, condition or occurrence that, individually or in the aggregate, has or
could reasonably be expected to have a Material Adverse Effect. Since September
30, 2003, except as (i) specifically contemplated by this Agreement, (ii)
disclosed in the Company Reports filed and publicly available prior to the date
of this Agreement or (iii) set forth in Schedule 3.06, there has not occurred
any action, event or failure to act that, if it had occurred after the date of
this Agreement, would have required the consent of Newco under Section 5.01.
Section 3.07. Absence of Litigation. Except as specifically
disclosed in the Company Reports filed and publicly available prior to the date
of this Agreement, there are no suits, claims, actions, proceedings, charges or
investigations ("ACTIONS") pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries or any assets,
properties or rights of the Company or any of its subsidiaries before any
Governmental Authority that individually or in the aggregate, has or could
reasonably be expected to have a Material Adverse Effect. As of the date of this
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Agreement, no officer or director of the Company is a defendant in any Action
commenced by shareholders of the Company with respect to the performance of his
or her duties as an officer and/or director of the Company. Except as set forth
in Schedule 3.07, there exist no Contracts with any of the directors and
officers of the Company or its subsidiaries that provide for indemnification by
the Company or its subsidiaries. Except as specifically disclosed in the Company
Reports filed and publicly available prior to the date of this Agreement,
neither the Company nor any of its subsidiaries nor any of their respective
properties or assets is or are subject to any order, writ, judgment, injunction,
decree, determination or award ("ORDER") of any Governmental Authority that,
individually or in the aggregate, has or could reasonably be expected to have a
Material Adverse Effect.
Section 3.08. Tax Matters. For purposes of this Section 3.08, any
reference to the Company or its subsidiaries shall include any corporation that
merged or was liquidated with and into the Company or any of its subsidiaries.
Except as set forth in Schedule 3.08 or except as, individually or in the
aggregate, does not have and could not reasonably be expected to have a Material
Adverse Effect:
(a) All Tax Returns (as defined in Section 3.08(n)) required to be
filed by or with respect to the Company and its subsidiaries have been timely
filed, and all such Tax Returns are complete and correct. The Company and its
subsidiaries have (i) timely paid all Taxes that are due, or that have been
asserted in writing by any Governmental Authority to be due, from or with
respect to it and (ii) provided adequate reserves in its financial statements
for any Taxes that have not been paid, whether or not shown as being due on any
Tax Returns.
(b) No claim for unpaid Taxes has become a Lien against the property
of the Company or any of its subsidiaries or is being asserted against the
Company or any of its subsidiaries.
(c) The statute of limitations with respect to the Tax Returns of the
Company and its subsidiaries and of each affiliated group (within the meaning of
the Internal Revenue Code of 1986, as amended (the "CODE")), of which the
Company and any of its subsidiaries are or have been a member for all periods
through the calendar years ending December 31, 1999 has expired. There are no
outstanding Contracts or waivers extending the statutory period of limitation
applicable to any claim for, or the period for the collection or assessment of,
income Taxes due from or with respect to the Company or any subsidiary of the
Company for any taxable period, and no power of attorney granted by or with
respect to the Company or any subsidiary of the Company relating to income Taxes
is currently in force.
(d) No audit or other Action by any Governmental Authority has
formally commenced and no notification has been given to the Company or any
subsidiary of the Company that such an audit or other Action is pending or
threatened with respect to any Taxes due from or with respect to the Company or
any subsidiary of the Company or any Tax Return filed by or with respect to the
Company or any subsidiary of the Company. No assessment of Tax has been proposed
in writing to the Company or any of its subsidiaries against the Company or any
subsidiary or any of their assets or properties.
(e) Neither the Company nor any of its subsidiaries is a party to,
bound by or has any obligation under, any Tax sharing, Tax indemnity or similar
Contract with a party that is not a member of the affiliated group of which the
Company is the common parent.
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(f) Set forth in Schedule 3.08 are the federal net operating loss
carryforwards of the Company and its subsidiaries as of January 1, 2003, the
expiration date of such carryforwards and any limitations to which they are
subject under section 382 of the Code or otherwise.
(g) Neither the Company nor any of its subsidiaries (i) is currently
or has ever been a member of an affiliated group (other than a group the common
parent of which is the Company or any of its subsidiaries) filing a consolidated
federal income Tax Return or (ii) has any liability for the Taxes of any person
(other than the affiliated group of which the Company is the common parent)
under Treasury Regulations Section 1.1502-6 (or any similar provision of state,
local or foreign Laws), or as a transferee or successor, by Contract or
otherwise.
(h) Neither the Company nor any of its subsidiaries is required to
include amounts in income, or exclude items of deduction, in a taxable period
beginning after the Closing Date (a "POST-CLOSING TAX PERIOD") as a result of
(i) a change in method of accounting, (ii) a closing agreement as described in
section 7121 of the Code (or corresponding or similar provision of state, local
or foreign Tax Laws), (iii) an installment sale or open transaction arising in a
taxable period ending on or before the Closing Date (a "PRE-CLOSING TAX
PERIOD"), (iv) a prepaid amount received, or paid, in a Pre-Closing Tax Period
or (v) deferred gains that could be recognized in a Post-Closing Tax Period.
(i) Each of the Company and each of its subsidiaries has withheld and
paid over all Taxes required to have been withheld and paid over, and complied
in all respects with all information reporting requirements, in connection with
amounts paid or owing to any Company Employee, creditor, independent contractor
or other third party.
(j) No property of the Company or any of its subsidiaries is property
that the Company or any of its subsidiaries or any party to this transaction is
or will be required to treat as being owned by another person pursuant to the
provisions of Code Section 168(f)(8) (as in effect prior to its amendment by the
Tax Reform Act of 1986) or is "tax exempt use property" within the meaning of
Code Section 168(h).
(k) Neither the Company nor any of its subsidiaries has been a party
to any distribution occurring during the last two years in which the parties to
such distribution treated the distribution as one to which Section 355 of the
Code is applicable.
(l) No action has been taken by the Company or any of its subsidiaries
that would reasonably be expected to jeopardize the qualification of the
interest as tax-exempt on any tax-exempt bonds that relate to the assets of the
Company or any of its subsidiaries.
(m) The Company and its subsidiaries have complied with the rules
described in section 168(i)(9) of the Code (and any other applicable provisions
of the Code or any Treasury Regulations promulgated thereunder) with respect to
any public utility property (as defined in section 168(i)(10) of the Code) for
which it has used the normalization method of accounting.
(n) As used herein, "TAXES" shall mean all taxes of any kind,
including those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, privilege, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, value added,
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property or windfall profits taxes, customs, duties or similar fees, assessments
or charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any Governmental Authority. As
used herein, "TAX RETURN" shall mean any return, declaration, report, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
Section 3.09. Employee Matters. (a) Schedule 3.09(a) contains a
complete and correct list of each "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including "multiemployer plans" (within the meaning of ERISA Section
3(37))), stock purchase, stock option, severance, employment, change-of-control,
fringe benefit, collective bargaining, bonus, incentive, deferred compensation
and all other employee benefit plans, Contracts, programs, policies or other
arrangements, whether or not subject to ERISA (including any funding mechanism
therefor now in effect or required in the future as a result of the transaction
contemplated by this Agreement or otherwise), under which any current or former
employee, consultant, independent contractor or director of the Company or any
of its subsidiaries (the "COMPANY EMPLOYEES") has, or could reasonably be
expected to have, any present or future right to benefits relating to service
with the Company or any of its subsidiaries or under which the Company or any
subsidiary of the Company has, or could reasonably be expected to have, any
present or future liability in respect of such benefits. All plans, Contracts,
programs, policies and arrangements required to be set forth in Schedule 3.09(a)
shall be collectively referred to as the "COMPANY PLANS". Neither the Company
nor any of its subsidiaries maintains any severance plans. Except as set forth
in Item 7 of Schedule 3.09(a), no Company Plan is a multiemployer plan within
the meaning of Section 4001(a)(3) of ERISA and none of the Company, its
subsidiaries and any ERISA Affiliate (as defined in Section 3.09(d)) has at any
time sponsored or contributed to, or has or had any liability or obligation in
respect of, any multiemployer plan.
(b) With respect to each Company Plan, the Company has delivered or
made available (or, with respect to certain Company Plans which are in the
aggregate immaterial to the Company and its subsidiaries taken as a whole, will
within ten business days following the date of this Agreement deliver or make
available) to Newco a complete and correct (or, to the extent no such copy
exists, an accurate description) thereof and, to the extent applicable, (i) any
related trust agreement, annuity contract or other funding instrument; (ii) the
most recent determination letter; (iii) any summary plan description and other
written communications (or description of any oral communication) by the Company
or any of its subsidiaries which modify in any significant respect the benefits
provided under the terms of any Company Plan in a manner not reflected in any of
the documents set forth in Schedule 3.09(a); and (iv) for the two most recent
years (A) the Form 5500 and attached schedules, (B) audited financial statements
and (C) actuarial valuation reports.
(c) With respect to all of the Company Plans, except as set forth in
the Company Reports filed and publicly available prior to the date of this
Agreement and except as, individually or in the aggregate, does not have and
could not reasonably be expected to have a Material Adverse Effect, all Company
Plans are in compliance in all respects with all applicable Laws, including the
Code, ERISA, and other applicable Laws (including in compliance with all filing
and reporting requirements).
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(d) Except as disclosed in the Company Reports filed and publicly
available prior to the date of this Agreement or as set forth in Schedule
3.09(d) (or, with respect to changes which are in the aggregate immaterial to
the Company and its subsidiaries taken as a whole, as will be provided within
fifteen business days of the date of this Agreement), the aggregate accrued
benefit obligations (whether vested or unvested) of participants in each Company
Plan that is subject to Title IV of ERISA (each, a "PENSION PLAN") (as of the
date of the most recent actuarial valuation prepared for such Pension Plan), on
a termination and projected benefit obligation basis (based on the actuarial
methods and assumptions indicated in the most recent applicable actuarial
valuation reports), do not exceed the fair market value of the assets of such
Pension Plan (as of the date of such valuation), and no material adverse change
has occurred with respect to the financial condition of such plan since such
last valuation. Except as disclosed in the Company Reports filed and publicly
available prior to the date of this Agreement or as set forth in Schedule
3.09(d) or as does not have and could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, (i) each Company
Plan that is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the Internal Revenue Service, and
the Company is not aware of any circumstances likely to result in revocation of
any such favorable determination letter, (ii) no Actions (other than routine
claims for benefits in the ordinary course) are pending or threatened, (iii) no
facts or circumstances exist that could give rise to any such Actions, (iv) no
written or oral communication has been received from the Pension Benefit
Guaranty Corporation (the "PBGC") in respect of any Company Plan subject to
Title IV of ERISA concerning the funded status of any such plan or any transfer
of assets and liabilities from any such plan in connection with the transactions
contemplated herein, (v) no administrative Action or audit of any Company Plan
by the Department of Labor, the PBGC, the Internal Revenue Service or other
Governmental Authorities are pending, threatened or in progress (including any
routine requests for information from the PBGC), (vi) the Company has no
obligations under any unfunded deferred compensation or supplemental retirement
plans that are not fully accrued for on the consolidated balance sheet of the
Company and its subsidiaries at September 30, 2003, including the notes thereto,
included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2003 (the "BALANCE SHEET") and (vii) neither the Company,
its subsidiaries nor any person that is treated as a single employer with the
Company or its subsidiaries under Section 414(b), (c), (m) or (o) of the Code
(an "ERISA AFFILIATE") has incurred or reasonably expects to incur any Tax,
fine, penalty, Lien or other liability to the PBGC, any Pension Plan or
otherwise under Title IV of ERISA (other than the payment of contributions or
premiums, none of which are overdue), the Code or any other applicable Laws.
(e) Except as specifically contemplated by this Agreement or as set
forth in Schedule 3.09(e), no Company Plan exists that, as a result of the
execution of this Agreement or the transactions contemplated by this Agreement
(whether alone or in connection with any subsequent event(s)), could result in
(i) the payment to any Company Employee of any money or other property, (ii) the
provision of any benefits or other rights of any individual or (iii) the
increase, acceleration or provision of any payments, benefits or other rights
provided to or for the benefit of any Company Employee (including the
acceleration of any funding obligations), whether or not any such payment,
right, benefit, increase, acceleration or provision could constitute a
"parachute payment" within the meaning of Section 280G of the Code.
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(f) Except as set forth in Schedule 3.09(f), there has been no
amendment to, written interpretation of or announcement (whether or not written)
by the Company or any of its subsidiaries relating to, or any change in employee
participation or coverage under, any Company Plan that would materially increase
the expense of maintaining such Company Plan above the level of the expense
incurred in respect thereof for the most recent fiscal year ended prior to the
date of this Agreement.
(g) No "reportable event" (as such term is defined in Section 4043 of
the Code) or "prohibited transaction" (as such term is defined in Section 406 of
ERISA and Section 4975 of the Code) that could reasonably be expected to result
in a material liability to the Company and its subsidiaries has occurred with
respect to any Company Plan. No "accumulated funding deficiency" (as such term
is defined in Section 302 of ERISA and Section 412 of the Code (whether or not
waived)) has occurred with respect to any Company Plan.
(h) Except with respect to any Company Plan identified in Schedule
3.09(a) and except to the extent accrued for in the Balance Sheet, neither the
Company nor any of its subsidiaries has incurred or reasonably expects to incur
any current or projected liability in respect of post-employment or
post-retirement health, medical or life insurance benefits for Company
Employees, except as required to avoid an excise Tax under Section 4980B of the
Code or as otherwise may be required pursuant to any other applicable Laws.
(i) Except as set forth in Schedule 3.09(i) or in the Company Reports
filed and publicly available prior to the date of this Agreement (or, with
respect to such Contracts which are in the aggregate immaterial to the Company
and its subsidiaries taken as a whole, as will be provided within ten business
days of the date of this Agreement), none of the Company and its subsidiaries is
a party to or otherwise bound by any Contract pursuant to which a labor
organization is certified under applicable labor Laws as a bargaining agent for
any Company Employee, nor is any such Contract presently being negotiated.
Except as set forth in Schedule 3.09(i) or in the Company Reports filed and
publicly available prior to the date of this Agreement or, except as,
individually or in the aggregate, does not have and could not reasonably be
expected to have a Material Adverse Effect, (1) there is not, and in the last
five years has not been, a representation question respecting any of the Company
Employees, (2) to the knowledge of the Company, there are no campaigns being
conducted to solicit cards from Company Employees to authorize representation by
a labor organization, (3) none of the Company and its subsidiaries is the
subject of any Action or Order by any Governmental Authority or, to the
knowledge of the Company, threatened with, any Action or Order, in each case
relating to Company Employees or employment practices or asserting that the
Company or any of its subsidiaries has committed an unfair labor practice or is
seeking to compel the Company or any of its subsidiaries to bargain with any
labor union or labor organization, (4) there is not pending or, to the knowledge
of the Company, threatened, nor has there been for the past five years, any
labor strike, dispute, walk-out, work stoppage, slow-down, lockout, arbitration
or grievance involving the Company or any of its subsidiaries, (5) none of the
Company and its subsidiaries or their respective representatives or employees
has committed any unfair labor practices and (6) the Company and its
subsidiaries are in compliance with all applicable Laws and collective
bargaining Contracts regarding employment and employment practices, terms and
conditions of employment, wages and hours and occupational safety and health.
-A-15-
Section 3.10. Environmental. Except as set forth in Schedule 3.10
or in the Company Reports filed and publicly available prior to the date of this
Agreement or except as, individually or in the aggregate, does not have and
could not reasonably be expected to have a Material Adverse Effect:
(a) The Company and each of its subsidiaries are in compliance with
all applicable Environmental Laws (as defined in Section 3.10(f)(ii)), and
neither the Company nor any of its subsidiaries has received any written
communication from any Governmental Authority that alleges that any of the
Company and its subsidiaries is not in compliance with applicable Environmental
Laws.
(b) The Company and each of its subsidiaries has obtained or has
applied for all environmental, health and safety Approvals (collectively, the
"ENVIRONMENTAL PERMITS") necessary for the construction of its facilities or the
conduct of its operations, and all such Environmental Permits are in good
standing or, where applicable, a renewal application has been timely filed and
is pending approval by any Governmental Authority, and the Company and its
subsidiaries are in compliance with all terms and conditions of the
Environmental Permits.
(c) There is no Environmental Claim (as defined in Section 3.10(f)(i))
(i) pending or, to the knowledge of the Company, threatened against the Company
or any of its subsidiaries or (ii) to the knowledge of the Company, pending or
threatened against any real or personal property or operations that the Company
or any of its subsidiaries owns, leases or uses, in whole or in part.
(d) To the knowledge of the Company, there has been no Release (as
defined in Section 3.10(f)(iv)) of any Hazardous Material (as defined in Section
3.10(f)(iii)) that has formed or could reasonably be expected to form the basis
of any Environmental Claim against the Company or any of its subsidiaries or
against any person (including any predecessor of the Company or any of its
subsidiaries) whose liability for such claim the Company or any of its
subsidiaries has or may have retained or assumed, either by operation of Law or
by Contract.
(e) To the knowledge of the Company, the Company has disclosed to
Newco all facts which the Company reasonably believes form the basis of (i) any
Environmental Claim against the Company or any of its subsidiaries or (ii) any
obligation of the Company or any of its subsidiaries currently required, or
known to be required in the future, to incur costs for pollution control
equipment or environmental remediation under, or otherwise to comply with,
applicable Environmental Laws.
(f) As used in this Agreement:
(i) "ENVIRONMENTAL CLAIM" means any and all Actions, demands,
demand letters, directives, Liens or notices of noncompliance or violation
by any person (including any Governmental Authority) alleging potential
liability (including potential responsibility for or liability for
enforcement costs, investigatory costs, cleanup costs, governmental
response costs, removal costs, remedial costs, natural-resources damages,
property damages, personal injuries, fines or penalties) arising out of,
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based on or resulting from (A) the presence, or Release or threatened
Release into the environment, of any Hazardous Materials at any location,
whether or not owned, operated, leased or managed by the Company or any of
their respective subsidiaries or joint ventures; (B) circumstances forming
the basis of any violation, or alleged violation, of any Environmental Law;
or (C) any and all Actions by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive
relief resulting from the presence or Release of any Hazardous Materials.
(ii) "ENVIRONMENTAL LAWS" means all Laws relating to pollution, the
environment (including ambient air, surface water, groundwater, land
surface or subsurface strata) or protection of human health as it relates
to the environment, including Laws relating to Releases or threatened
Releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
(iii) "HAZARDOUS MATERIALS" means (A) any petroleum (or any
derivative or byproduct thereof) or petroleum products, radioactive
materials, asbestos in any form that is or could become friable, urea
formaldehyde foam insulation, coal tar residue, any and all products or
by-products of gas manufacture, the presence of PCB's in reportable
concentrations in soil, groundwater, service-water or pipes and
transformers or other equipment that contain dielectric fluid containing
PCB's in regulated concentrations; (B) any chemicals, materials or
substances which are now defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants," "hazardous constituents" or words of
similar import, under any Environmental Law; and (C) any other chemical,
material, substance or waste regulated pursuant to, or the presence or
exposure to which may form the basis of liability under, any applicable
Environmental Law.
(iv) "RELEASE" means any release, spill, emission, leaking,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the indoor or outdoor environment (including the atmosphere, soil,
surface water, groundwater or property).
Section 3.11. Compliance with Laws; Approvals from Governmental
Authorities. Except as disclosed in the Company Reports filed and publicly
available prior to the date of this Agreement or except as, individually or in
the aggregate, does not have and could not reasonably be expected to have a
Material Adverse Effect, (a) the Company and each of its subsidiaries and their
relevant personnel and operations are, and since January 1, 2000, have been, in
compliance with all Laws applicable to them or by which any of their respective
properties are bound or affected, (b) no notice, Action or assertion has been
received by the Company or any of its subsidiaries or, to the knowledge of the
Company, has been filed, commenced or threatened against the Company or any of
its subsidiaries alleging any violation of any Law applicable to them or by
which their respective properties are bound or affected, (c) the Company and its
subsidiaries have all Approvals from any Governmental Authority necessary or
advisable to conduct their businesses as now being conducted and to own, lease
or operate their properties and assets, and there has occurred no violation of,
default (with or without notice or lapse of time or both) under, or event giving
to any person any right of termination, amendment or cancellation (with or
without notice or lapse of time or both) of any such Approval and (d) neither
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the Company nor any of its subsidiaries has received notice of any revocation or
modification of any Approval material to the Company and its subsidiaries taken
as a whole. Notwithstanding any provision of this Section 3.11 to the contrary,
the provisions of this Section 3.11 do not extend to matters covered by Section
3.08, Section 3.09 or Section 3.10.
Section 3.12. Contracts. (a) Schedule 3.12 contains a complete and
correct list of the following Contracts to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
its or any of their respective properties are bound or affected as of the date
of this Agreement:
(i) Contracts containing covenants restricting the payment of
dividends or limiting the freedom of the Company or any of its subsidiaries
or any of their respective affiliates to engage in any line of business or
compete with any person or operate at any location;
(ii) joint venture agreements, limited liability company
agreements, partnership agreements or similar agreements;
(iii) Contracts for the acquisition or disposition, directly or
indirectly (by merger or otherwise) of assets or capital stock or other
equity interests of another person for aggregate consideration in excess of
$500,000, other than Contracts for the procurement or sale of assets in the
ordinary course of business;
(iv) Contracts with the ACC or any other Governmental Authority
relating to the setting of rates of general applicability, the payment of
dividends or the incurrence of Indebtedness;
(v) Contracts for the purchase of electricity with a term of at
least one year and Contracts for the sale of electricity relating to
customers with load requirements that exceed 3 MW; and
(vi) Contracts outside the ordinary course of business involving
expenditures, liabilities or revenues reasonably expected to be in excess
of $1,000,000.
(b) Complete and correct copies of the written Contracts required to
be identified in Schedule 3.02(c), Schedule 3.09(a), Schedule 3.09(i), Schedule
3.12 and Schedule 3.14 (all such Contracts, collectively, the "COMPANY
CONTRACTS") (and complete and correct written summaries of any such oral
Contracts) have been delivered or made available to Newco.
(c) Neither the Company nor any of its subsidiaries is and, to the
knowledge of the Company, no other party is in default under, or in breach or
violation of, any Company Contract and, to the knowledge of the Company, no
event has occurred which would result in any breach or violation of, constitute
a default, require consent or result in the loss of a material benefit under,
give rise to a right to permit or require the purchase or sale of assets or
securities under, give rise to any right of termination, amendment, acceleration
or cancellation of, or result in the creation of a Lien on any of the properties
or assets of the Company or any of its subsidiaries (in each case, with or
without notice or lapse of time or both) pursuant to, any Company Contract,
except, for any such conflicts, violations, breaches, defaults or other
-A-18-
occurrences that, individually or in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect. Other than Contracts
that have terminated or expired in accordance with their terms, each Company
Contract is valid, binding and enforceable in accordance with its terms and is
in full force and effect.
Section 3.13. Regulation as a Utility. (a) Each of TEP and UNS
Electric, Inc. ("UNS ELECTRIC") is a "public utility company" (as such term is
defined under PUHCA) and is regulated as a "public utility" under the Power Act,
and each of TEP, UNS Electric and UNS Gas, Inc. ("UNS GAS" and, together with
TEP and UNS Electric, the "UTILITY SUBSIDIARIES") is regulated as a public
utility by the State of Arizona, but not by any other state. Other than as
described in the preceding sentence and in Section 3.13(b), none of the Company
or any "subsidiary company" or "affiliate" (such terms having the meaning
ascribed to such terms in PUHCA) of the Company is (i) (A) a "holding company"
or a "public-utility company" under PUHCA, (B) a "public utility" under the
Power Act, (C) a "natural gas company" under the Natural Gas Act, as amended,
and the rules and regulations promulgated thereunder (the "NATURAL GAS ACT") or
(D) a public utility or public service company (or similar designation) under
any other federal or state Law (including Title 40, Public Utilities and
Carriers, of the Arizona Revised Statutes) or (ii) otherwise franchised or
authorized to provide any utility services by any Governmental Authority or
certified as an exempt wholesale generator under PUHCA or as a "qualifying
facility" under the Public Utility Regulatory Policies Act of 1978, as amended,
and the rules and regulations promulgated thereunder.
(b) Each of the Company and UniSource Energy Services, Inc. ("UES ")
is a "holding company" within the meaning of PUHCA but is exempt from all
provisions of PUHCA (other than Section 9(a)(2) thereof) by an Order of the SEC
issued pursuant to Section 3(a)(1) of PUHCA.
(c) As of the date of this Agreement, none of the Utility Subsidiaries
or the Company or any of its other subsidiaries, all or part of whose rates or
services are regulated by a Governmental Authority, has rates which have been or
are being collected subject to refund, pending final resolution of any Action
pending before a Governmental Authority or on appeal to the courts.
Section 3.14. Affiliate Transactions. Except as set forth in
Schedule 3.14 or as disclosed in the Company's proxy statement relating to the
election of directors dated April 9, 2003, there are no Contracts or
transactions between the Company or any of its subsidiaries, on the one hand,
and any (i) officer or director of the Company or any of its subsidiaries, (ii)
record or beneficial owner of five percent or more of the voting securities of
the Company or (iii) affiliate of any such officer, director or record or
beneficial owner, on the other hand, except those of a type available to Company
Employees generally.
Section 3.15. Fairness Opinion. The Company has received the
written opinion of Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") to the
effect that, as of the date of this Agreement, the consideration to be received
in the Merger by the Company's shareholders is fair to such shareholders from a
financial point of view. An executed copy of such opinion has been delivered to
Newco.
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Section 3.16. Brokers and Transaction Expenses. (a) No broker,
finder or investment banker (other than Morgan Stanley and New Harbor
Incorporated) is entitled to any brokerage, finder's or other fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. The Company has heretofore
furnished to Newco a complete and correct copy of all Contracts between the
Company, on the one hand, and Morgan Stanley or New Harbor Incorporated, on the
other hand, pursuant to which either such firm would be entitled to any payment
relating to the transactions contemplated hereby.
(b) Set forth in Schedule 3.16 is the Company's reasonable estimate,
as of the date hereof, of the fees and expenses incurred or payable, or to be
incurred or payable, by the Company or any of its subsidiaries in connection
with this Agreement and the consummation of the transactions contemplated
hereby.
Section 3.17. Vote Required; Company Board Recommendation. (a) The
affirmative vote of the holders of a majority of the shares of Company Common
Stock entitled to be cast with respect to the Merger (the "SHAREHOLDER
APPROVAL") is the only vote of the holders of any class or series of the
securities necessary to approve this Agreement and the transactions contemplated
hereby.
(b) The Company Board has (i) adopted resolutions approving this
Agreement and the transactions contemplated hereby, including the Merger, (ii)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are advisable and fair to and in the best interests of the
shareholders of the Company, (iii) resolved to recommend approval of this
Agreement and the transactions contemplated hereby, including the Merger, to the
shareholders of the Company and (iv) directed that approval of this Agreement be
submitted to the Company's shareholders for the Shareholder Approval
(collectively, the "COMPANY BOARD RECOMMENDATION").
(c) The actions of the Company Board described in Section 3.17(b) are
sufficient to render inapplicable to this Agreement, the Merger and the other
transactions contemplated hereby the restrictions on "business combinations"
contained in Sections 2741 and 2742 of the ABCA and "control share acquisitions"
contained in Sections 2722 through 2725 of the ABCA (or any provisions similar
to the foregoing sections). No other state "business combination," "moratorium,"
"control share," "fair price," other anti-takeover or similar Law applies or
purports to apply to this Agreement, the Merger or any of the transactions
contemplated by this Agreement.
(d) The Company Board has taken sufficient action such that (i)
neither Newco nor any of its affiliates will become an "Acquiring Person" and
(ii) no "Shares Acquisition Date" or "Distribution Date" (as such terms are
defined in the Rights Agreement) will occur as a result of the approval,
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
Section 3.18. Intellectual Property. (a) Except as set forth in
Schedule 3.18(a) or except as, individually or in the aggregate, does not have
and could not reasonably be expected to have a Material Adverse Effect, (i) the
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Company and its subsidiaries own or have the right to use all Intellectual
Property used in their businesses as currently conducted; (ii) such Intellectual
Property is valid, unexpired, enforceable and has not been abandoned; (iii) each
Intellectual Property license to which the Company or any of its subsidiaries is
a party is valid and enforceable, and the Company and its subsidiaries are not
in breach or default thereunder; (iv) the Company and its subsidiaries are not
infringing or otherwise impairing the Intellectual Property of any third party,
and no third party is infringing or otherwise impairing their Intellectual
Property; (v) there is no pending or, to the knowledge of the Company,
threatened Action or Order relating to any Intellectual Property owned, leased
or used by the Company; and (vi) the Company and its subsidiaries have taken
reasonable steps to protect, maintain and safeguard their Intellectual Property.
For purposes hereof, "INTELLECTUAL PROPERTY" means all U.S. and foreign
intellectual property, including (i) inventions, discoveries, processes,
formulae, designs, methods, procedures, concepts, developments, technology, and
all related improvements and know-how; (ii) copyrights and copyrightable works,
including computer applications, programs, hardware, software, systems,
databases and related items; (iii) trademarks, service marks, trade names, brand
names, corporate names, logos and trade dress, the goodwill of any business
symbolized thereby, and all common-law rights relating thereto; and (iv) trade
secrets, data and other confidential information.
(b) Neither the Company nor any of its subsidiaries has licensed
Intellectual Property owned by them (or licensed to them by a third party) to
any person in a manner that, individually or in the aggregate, has or could
reasonably be expected to have a Material Adverse Effect.
Section 3.19. Insurance. All insurance policies to which any of the
Company and its subsidiaries is either an insured or a beneficiary (the
"INSURANCE POLICIES") are with reputable insurance carriers (other than existing
self-insurance), provide coverage for those risks incident to the business of
the Company and its subsidiaries and their respective properties and assets as
is customary for companies conducting the respective businesses conducted by the
Company and its subsidiaries during such time period, are in character and
amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except where
the failure to have such insurance or maintain insurance policies, individually
or in the aggregate, does not have and could not reasonably be expected to have
a Material Adverse Effect. Except as, individually or in the aggregate, does not
have and could not reasonably be expected to have a Material Adverse Effect, (i)
all premiums due and payable in respect of each Insurance Policy have been paid
and none of the Company and its subsidiaries has received notice from any
insurer or agent of any intent to cancel any such Insurance Policy, (ii) the
Insurance Policies are valid and enforceable policies and (iii) none of the
Company and its subsidiaries has received written notice from any insurance
company or Governmental Authority of any defects or inadequacies that would
adversely affect the insurability of, or cause any increase in the premiums for,
insurance covering any of the Company and its subsidiaries or any of their
respective properties or assets that have not been cured or repaired to the
satisfaction of the party issuing the notice.
Section 3.20. Derivative Products. (a) All Derivative Products
entered into for the account of the Company or any of its subsidiaries were
entered into in accordance with (i) established risk parameters, limits and
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guidelines and in compliance with the risk management policies approved by the
Company Board (the "TRADING POLICIES"), in each case both as in effect at the
time such Derivative Products were entered into and as in effect on the date of
this Agreement, to restrict the level of risk that the Company and its
subsidiaries are authorized to take with respect to Derivative Products and
monitor compliance with such risk parameters and (ii) applicable rules,
regulations and policies of any Governmental Authority.
(b) The Company has provided Newco with a complete and correct copy of
the Trading Policies, and the Trading Policies contain a complete and correct
description of the practice of the Company and its subsidiaries with respect to
Derivative Products, as of the date of this Agreement.
(c) At no time has the Company or any of its subsidiaries engaged in
any "round trip," "sale/buyback" or "wash" trading or any similar transaction.
(d) As used herein, "DERIVATIVE PRODUCT" means (i) any swap, cap,
floor, collar, futures contract, forward contract, option and any other
derivative financial instrument or Contract, based on any commodity, security,
instrument, asset, rate or index of any kind or nature whatsoever, whether
tangible or intangible, including electricity, natural gas, crude oil and other
commodities, emissions allowances, currencies, interest rates and indices and
(ii) forward contracts for physical delivery, physical output of assets, and
physical load obligations.
Section 3.21. Property. (a) Each of the Company and each of its
subsidiaries has good and marketable title to, or valid and enforceable right to
use under existing franchises, easements or licenses, or valid and enforceable
leasehold interests in, all of its properties, rights and assets except for
defects in title, easements, restrictive covenants and similar encumbrances
that, individually or in the aggregate, do not have and could not reasonably be
expected to have a Material Adverse Effect. All such properties, rights and
assets, other than properties, rights and assets in which the Company or any of
its subsidiaries has a leasehold interest, are free and clear of all Liens,
except for Liens specifically disclosed in the Company Reports filed and
publicly available prior to the date of this Agreement or Liens that,
individually or in the aggregate, do not have and could not reasonably be
expected to have a Material Adverse Effect. There is no condemnation,
expropriation, eminent domain or similar Action affecting any of such
properties, rights or assets pending or, to the knowledge of the Company,
threatened, that, individually or in the aggregate, has or could reasonably be
expected to have a Material Adverse Effect. All of the Company and its
subsidiaries' properties, rights and assets are in good operating condition and
repair, subject to continued repair and replacement in accordance with past
practice, and there are no structural defects in any of such properties, rights
and assets, except for any failure to be in such condition and repair or defects
that, individually or in the aggregate, does not have and could not reasonably
be expected to have a Material Adverse Effect.
(b) Each of the Company and its subsidiaries has complied with the
terms of all leases to which it is a party, and all such leases are in full
force and effect, except for such noncompliance or failures to be in full force
and effect that, individually or in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect. The Company and its
subsidiaries enjoy peaceful and undisturbed possession under all such leases,
except for failures to do so that, individually or in the aggregate, do not have
and could not reasonably be expected to have a Material Adverse Effect.
-A-22-
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF NEWCO
Newco represents and warrants to the Company as follows:
Section 4.01. Organization. Newco is duly organized, validly
existing and in good standing under the Laws of the State of Delaware and has
the requisite power and authority necessary to own, lease and operate its
properties and assets and to carry on its business as it is now being conducted.
Newco has furnished to the Company complete and correct copies of the articles
of incorporation and the bylaws (or similar organizational documents) of Newco,
Holdings and the Partnership, in each case as currently in effect. All such
articles of incorporation and bylaws (and similar organizational documents) are
in full force and effect and no other organizational documents are applicable to
or binding upon Newco, Holdings or the Partnership. None of Newco, Holdings and
the Partnership is in violation of any of the provisions of its articles of
incorporation and bylaws (or similar organizational documents).
Section 4.02. Authority Relative to this Agreement. Newco has all
necessary power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by Newco and
the consummation by Newco of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of Newco are necessary to authorize this Agreement or to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Newco and, assuming the due authorization,
execution and delivery hereof by the Company, constitutes a legal, valid and
binding obligation of Newco enforceable against it in accordance with its terms,
except as may be affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar Laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith and fair
dealing.
Section 4.03. No Conflict; Required Filings and Consents. (a) The
execution, delivery and performance of this Agreement by Newco and the
consummation of the transactions contemplated hereby do not and will not: (i)
conflict with or violate the articles of incorporation or the bylaws of Newco;
(ii) conflict with or violate any Laws applicable to Newco or by which it or its
properties are bound or affected (assuming that all consents, approvals and
authorizations contemplated by clause (i) of subsection (b) below have been
obtained and all filings described in such clauses have been made); or (iii)
result in any breach or violation of, constitute a default, require consent or
result in the loss of a material benefit under, give rise to a right to permit
or require the purchase or sale of assets or securities under, give rise to any
right of termination, amendment, acceleration or cancellation of, or result in
the creation of a Lien on any of the properties or assets of Newco (in each
case, with or without notice or lapse of time or both) pursuant to, any Contract
to which Newco is a party or by which Newco or its properties are bound or
affected, except, in the case of clauses (ii) and (iii), for any such conflicts,
violations, breaches, defaults or other occurrences that, individually or in the
aggregate, could not reasonably be expected to prevent the consummation of the
transactions contemplated hereby.
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(b) Assuming the Approvals referred to in clauses (i) and (ii) of
Section 3.04(b) are obtained, the execution, delivery and performance of this
Agreement by Newco and the consummation of the transactions contemplated hereby
by Newco do not and will not require any Approvals from, action by, filing with
or notification to, any Governmental Authority, except for (i) the filing of a
premerger notification report by the ultimate parent entity of Newco under the
HSR Act, (ii) the issuance by the SEC of an order approving the Merger under
Section 9(a)(2) of PUHCA and granting the Partnership and its "subsidiary
companies" (within the meaning of PUHCA) an exemption from all provisions of
PUHCA (other than Section 9(a)(2) thereof) pursuant to Section 3(a)(1) thereof
(collectively, the "PUHCA APPROVAL"), (iii) the filing and recordation of the
Articles and Certificate of Merger as required by the ABCA and the DGCL, as
applicable, and (iv) such Approvals, actions, filings or notifications the
failure of which to make or obtain, individually or in the aggregate, could not
reasonably be expected to prevent the consummation of the transactions
contemplated hereby.
Section 4.04. Brokers. The Company will not be responsible for any
brokerage, finder's or other fee or commission to any broker, finder or
investment banker in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Newco or its
affiliates.
Section 4.05. Financing. Newco has delivered to the Company a
complete and correct copy of (a) the letters attached as Exhibit A hereto from
(i) Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Lehman
Brothers Inc. (the "NOTES LETTER") and (ii) Credit Suisse First Boston, J.P.
Morgan Securities Inc., JPMorgan Chase Bank, Lehman Commercial Paper Inc. and
Lehman Brothers Inc. (the "SENIOR FINANCING LETTER" and, together with the Notes
Letter, the "DEBT LETTERS") with respect to debt financing (the "DEBT
FINANCING") for the transactions contemplated hereby and (b) the equity letter
attached as Exhibit B hereto (the "EQUITY LETTER" and, together with the Debt
Letters, the "FINANCING LETTERS").
Section 4.06. Ownership of Company Common Stock. Newco does not
beneficially own any Company Common Stock.
Section 4.07. Newco Status. Based upon PUHCA and the existing
interpretations thereof by the SEC staff, as of the date of this Agreement,
Newco has no reason to believe that, after giving effect to the consummation of
the transactions contemplated by this Agreement, including the consummation of
the Merger, any Limited Partner (or any "affiliate" (within the meaning of
PUHCA) of any Limited Partner) will become or otherwise will be deemed to be a
"holding company" or a "subsidiary company" or an "affiliate" of a "holding
company" (in each case, within the meaning of PUHCA). As of the date of this
Agreement and as of the date of the Shareholders' Meeting, Newco shall not have
entered into any contracts, agreements or other arrangements or understandings
with executive officers of the Company (other than those disclosed and
satisfactory to the Company Board) that in Newco's good faith judgment cause
Newco to be an "affiliate" (within the meaning of the Exchange Act) of the
Company.
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ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.01. Covenants of the Company. The Company agrees that,
during the period from the date of this Agreement to the Effective Time, unless
otherwise contemplated by this Agreement or required by applicable Law or unless
Newco gives its prior written consent, which consent shall not be unreasonably
withheld and which decision regarding consent shall be made as soon as
reasonably practicable, (1) the businesses of the Company and its subsidiaries
shall be conducted only in, and the Company and its subsidiaries shall not take
any action except in, the ordinary course of business, in a manner consistent
with past practice and in compliance with applicable Laws and (2) the Company
and its subsidiaries shall each use its commercially reasonable efforts to
preserve substantially intact its business organization, to keep available the
services of its present Company Employees, to preserve its assets and properties
in good repair and condition and to preserve its present relationships with
Governmental Authorities, customers, suppliers and other persons with which the
Company or any of its subsidiaries has business relations. By way of
amplification and not limitation, the Company agrees that neither the Company
nor any of its subsidiaries shall, during the period from the date of this
Agreement to the Effective Time, directly or indirectly do, or propose,
authorize or commit to do, any of the following, unless otherwise contemplated
by this Agreement or required by applicable Law or without the prior written
consent of Newco, which consent shall not be unreasonably withheld and which
decision regarding consent shall be made as soon as reasonably practicable:
(a) amend or otherwise change its articles of incorporation or bylaws
(or similar organizational documents);
(b) issue, deliver, sell, lease, sell and leaseback, pledge, license,
transfer, mortgage, encumber, dispose of or otherwise subject to any Lien (i)
any Company Securities or Subsidiary Securities (except for the issuance and
delivery of shares of Company Common Stock issuable in accordance with the terms
of the Options or other awards, including dividend equivalents, granted under
the Stock Plans, in each case outstanding as of the date of this Agreement, up
to 500,000 shares (or Options therefor) of Company Common Stock issuable under
Company Plans as in effect as of the date of this Agreement, to the extent
accounted for under any such plan and on terms determined consistent with past
practice), up to 200,000 shares of Global Solar Energy and up to 200,000 shares
of Infinite Power Solutions, Inc., in each case determined consistent with past
practice, or (ii) any property or assets, whether tangible or intangible, of the
Company or any of its subsidiaries, other than assets sold, leased, pledged,
licensed, transferred, disposed of or encumbered in the ordinary course of
business and in a manner consistent with past practice, other than (A) in the
case of both clauses (i) and (ii), pledges of Subsidiary Securities of UES,
Millennium Energy Holdings, Inc. ("MILLENNIUM") and UniSource Energy Development
Company ("UED") to secure Indebtedness permitted pursuant to Section
5.01(e)(i)(C) and (B) in the case of dispositions prohibited by clause (ii)
only, dispositions of property or assets (other than property and assets of
Global Solar Energy Inc. and its subsidiaries) in an aggregate amount not in
excess of $25,000,000.
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock or other equity interests, property or
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otherwise, with respect to any of its or its subsidiaries' capital stock other
than (A) dividends by a direct or indirect wholly owned subsidiary of the
Company to its parent and by TEP to its shareholders and (B) regular quarterly
cash dividends with respect to the Company Common Stock, not in excess of $0.15
per share in 2003, $0.16 per share in 2004 and $0.17 per share in 2005, in each
case with usual declaration, record and payment dates and in accordance with the
Company's past dividend policy;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of the Company Securities or
Subsidiary Securities, except for purchases of outstanding shares of
Company Common Stock pursuant to the Company's Investment Plus Plan (the
"DIVIDEND REINVESTMENT PLAN") or any existing Company Plan consistent with
past practice;
(e) (i) repurchase, repay or incur any Indebtedness or issue any
securities in respect of Indebtedness or assume, guarantee or endorse, or
otherwise as an accommodation become responsible for, the obligations or
Indebtedness of any person, other than:
(A) borrowings and repayments in the ordinary course of business
and in a manner consistent with past practice under the revolving
credit line under the Credit Agreement dated as of November 14, 2002
among TEP, the lenders party thereto, the issuing banks party
thereto, The Bank of New York and Union Bank of California, as
Co-Syndication Agents, Credit Suisse First Boston, as Documentation
Agent, and Toronto Dominion (Texas), Inc., as Administrative Agent
(as amended prior to the date of this Agreement, which amendments
have been furnished to Newco, the "CREDIT AGREEMENT") (in an
aggregate amount not to exceed $60,000,000 at any one time
outstanding),
(B) incurrences and repayments in connection with the mandatory
payment and tender provisions of TEP's variable-rate tax-exempt
bonds outstanding as of the date of this Agreement which are
supported by the letters of credit under the Credit Agreement and
the reimbursement obligations arising under the Credit Agreement
directly related to such letters of credit, provided that as a
result of the transactions contemplated by this clause (B), the
outstanding Indebtedness of TEP shall not increase,
(C) borrowings and repayments in the ordinary course of business
in an aggregate principal amount not to exceed $25,000,000 under a
revolving credit facility which may be entered into by UES or the
Company, provided that no such revolving credit facility shall be
entered into unless the Indebtedness thereunder is prepayable in
full at any time without any premium or penalty, other than
customary indemnities for LIBOR breakage costs that would result
from payment of principal on a date other than an interest payment
date,
(D) borrowings of the proceeds of amounts described in clause
(C) above in the ordinary course of business by UES and any Utility
Subsidiary from the Company or UES, as applicable, and repayments of
any such borrowings,
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(E) borrowings in the ordinary course of business by Millennium
Environmental Group, Inc. ("MEG") not to exceed $7,000,000 (which
may be guaranteed by the Company), provided that no such borrowing
or guarantee may be made unless (1) the first $5,000,000 of such
borrowing is used to refinance existing Indebtedness of MEG, (2)
contemporaneously with such borrowing or guarantee, MEG shall have
distributed to the Company (through a distribution to Millennium and
a distribution by Millennium to the Company) an amount in cash free
and clear of any Lien equal to the aggregate amount borrowed
pursuant to this clause (E) and (3) such guarantee shall be released
prior to the Closing or such guaranteed Indebtedness shall be repaid
prior to the Closing (and MEG shall be permitted to cash
collateralize such Indebtedness in an amount not to exceed
$3,000,000 to cause such release),
(F) repayments by MEG of the Indebtedness described in clause
(E) above, and
(G) borrowings and repayments in the ordinary course of business
consistent with past practice by Millennium and its subsidiaries
(other than MEG) pursuant to Company Contracts in effect on the date
of this Agreement and described in Item II under the heading
"Borrowed Money" in Schedule 3.02(c) and any refinancings of
borrowings under such Company Contracts, each on terms no less
favorable to Millennium and its subsidiaries and in an amount no
greater than the existing borrowing under such Company Contract on
the date of this Agreement;
(ii) except as permitted in Section 5.03(b), amend in any material
respect, terminate, cancel or renew any Company Contract or enter into any
Contract that would be a Company Contract if in effect on the date of this
Agreement (in each case, other than Company Contracts for the sale of
electricity relating to customers with load requirements of less than 15
MW);
(iii) enter into any transaction or Contract that would be required to
be set forth in Schedule 3.14 if in effect on the date of this Agreement;
(iv) acquire (including by merger, consolidation or acquisition of
stock or assets) any assets (other than in the ordinary course of
business), business or any corporation, partnership, limited liability
company, association or business organization or division thereof (other
than acquisitions having an aggregate consideration of not more than
$500,000); or
(v) authorize or make any capital expenditures, except:
(A) as may be required by Law,
(B) as reasonably deemed necessary by the Company to replace or
repair property following unanticipated loss or damage to such
property,
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(C) Millennium and its subsidiaries may make capital
expenditures in the ordinary course of business consistent with past
practice so long as none of the Company and its subsidiaries, except
as set forth in Schedule 5.01(o), makes any loans, advances or
capital contributions (including any "keep well" or other Contract
to maintain any financial statement condition of another person) to,
or investments in, Millennium or any of its subsidiaries to finance
such capital expenditures, and
(D) as contemplated by the capital budget of the Company
attached as Schedule 5.01(e), provided that (1) in 2004, the Company
and its subsidiaries (other than Millennium and its subsidiaries)
may make or authorize capital expenditures in excess of such capital
budget and in excess of the per project amounts budgeted therein so
long as such capital expenditures neither (x) cause or would be
reasonably likely to cause capital expenditures for 2004 to exceed
the aggregate 2004 capital budget by more than $17,000,000 in the
aggregate nor (y) exceed the budget specified for any individual
project contemplated by the 2004 capital budget by more than
$5,000,000 (or exceed $4,000,000 in total for any project not
contemplated by the 2004 capital budget) and (2) in 2005, the
Company and its subsidiaries (other than Millennium and its
subsidiaries) may make or authorize aggregate capital expenditures
in or for any fiscal quarter in an amount not to exceed $40,000,000;
(f) take any action that could reasonably be expected to jeopardize
the qualification of the interest as tax-exempt on any tax-exempt bonds that
relates to the assets of the Company or any of its subsidiaries;
(g) engage in any activities that could reasonably be expected to
cause the Company or any of its subsidiaries not to be exempt from all
provisions of PUHCA (other than Section 9(a)(2) thereof) pursuant to Section
3(a)(1) thereof;
(h) except to the extent required under applicable Law, this Agreement
or existing Company Plans as in effect on the date of this Agreement, (i)
increase or otherwise amend the compensation or fringe benefits of any Company
Employee, except for increases in salary or wages of current directors, officers
or employees of the Company or its subsidiaries in the ordinary course of
business and in a manner consistent with past practice, in an aggregate annual
amount not to exceed $4,000,000, (ii) grant any retention, severance or
termination pay not currently required to be paid under existing Company Plans
to, or enter into, or amend, any employment, consulting or severance Contract
with, any present or former Company Employee, other than in the ordinary course
of business in a manner consistent with past practice (provided that no such
grant, new Contract or amendment shall contain any provision relating to any
change-of-control protections), (iii) amend the terms of any outstanding Options
to purchase any equity of the Company or any subsidiary (including accelerating
the vesting or lapse of repurchase rights or obligations); or (iv) enter into,
adopt, amend or terminate any Company Plan in a manner which would, individually
or in the aggregate, materially increase the obligations of the Company or its
subsidiaries thereunder (except that no Company Plan that is a Stock Plan or
Contract may be so adopted, amended in any material respect or terminated);
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(i) fail to maintain its books and records in accordance with GAAP or,
except as may be required as a result of a change in Law or in GAAP, change
material Tax, pension, regulatory or financial accounting policies, procedures,
practices or principles used by it;
(j) make, change or rescind any material Tax election; fail to duly
and timely file all material Tax Returns and other documents required to be
filed with any Governmental Authority, subject to timely extensions permitted by
applicable Law; extend the statute of limitations with respect to any Tax; or,
except in the ordinary course of business, settle or compromise any material
federal, state, local or foreign Tax liability;
(k) waive, release, assign, settle or compromise any pending or
threatened Action which is material, which relates to the transactions
contemplated hereby or which is brought by any current, former or purported
holder of any securities of the Company or its subsidiaries in such capacity;
(l) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of the Company or any of its subsidiaries (other than the Merger);
(m) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction when due or
otherwise in the ordinary course of business and consistent with past practice
of liabilities reflected or reserved against in the Balance Sheet or incurred in
the ordinary course of business after September 30, 2003 and consistent with
past practice;
(n) effectuate a "plant closing" or "mass layoff," as those terms are
defined in the Worker Adjustment and Retraining Notification Act of 1988,
affecting in whole or in part any site of employment, facility, operating unit
or employee of the Company or any of its subsidiaries;
(o) other than as set forth in Schedule 5.01(o), make any loans,
advances or capital contributions (including any "keep well" or other Contract
to maintain any financial statement condition of another person) to, or
investments in, any other person, except for loans, advances and capital
contributions to subsidiaries (other than to Millennium or any of its
subsidiaries) that are wholly-owned by the Company and are in existence on the
date of this Agreement;
(p) other than in the ordinary course of business and in a manner
consistent with past practice or as required by applicable Law, (i) modify in
any material respect the Trading Policies or any similar policy, other than
modifications which are more restrictive to the Company and its subsidiaries, or
(ii) enter into any Contract or transaction related to any Derivative Product or
any similar transaction (other than as permitted by the Trading Policies);
(q) fail to maintain in full force and effect insurance policies
covering the Company and its subsidiaries and their respective properties,
assets and businesses in a form and amount consistent with prudent industry
practice;
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(r) except to the extent required by applicable Law, take any action
that could reasonably be expected to result in (i) any representation and
warranty of the Company set forth in this Agreement (A) that is qualified as to
materiality or Material Adverse Effect becoming untrue or (B) that is not so
qualified becoming untrue in any material respect or (ii) any condition to the
Merger set forth in Article VII not being satisfied;
(s) fail to take any action that could reasonably be expected to,
directly or indirectly prevent or materially impair or delay the consummation of
the transactions contemplated hereby (except to the extent specifically
permitted by Section 6.03 and Article VIII); or
(t) take, offer, propose to take or enter into or amend any Contract
to take, offer or propose any of the actions described in Sections 5.01(a)
through 5.01(s).
Section 5.02. Conduct of Business by Newco. Newco agrees that,
during the period from the date of this Agreement to the Effective Time, unless
the Company gives its prior written consent, Newco shall not (a) incur directly
or indirectly any liabilities or obligations other than those incurred in
connection with this Agreement or the transactions contemplated hereby
(including the Debt Financing) or (b) engage directly or indirectly in any
business activity of any kind or enter into any Contract with any person or
become subject to or bound by any Contract other than, in each case, as
contemplated by this Agreement or relating to the transactions contemplated
hereby (including the Debt Financing).
Section 5.03. Cooperation, Notification. (a) The Company shall, and
shall cause its subsidiaries to, confer on a regular and frequent basis with one
or more Representatives (as defined in Section 6.01(e)) of Newco to discuss,
subject to applicable Law, material operational and business matters. The
Company shall give prompt notice to Newco of (i) any significant changes,
developments, effects, conditions or occurrences in the business, properties,
assets, condition (financial or otherwise), prospects or results of operations
of the Company and its subsidiaries; (ii) any state of facts, change,
development, event, effect, condition or occurrence that, individually or in the
aggregate, has had or could reasonably be expected to have a Material Adverse
Effect; (iii) any notice or other communication from any person and the response
thereto of the Company or its subsidiaries or its or their Representatives
alleging that the consent of such person is or may be required in connection
with this Agreement or the transactions contemplated hereby; (iv) any notice or
other communication (A) from any Governmental Authority and the response thereto
of the Company or its subsidiaries or its or their Representatives in connection
with this Agreement or the transactions contemplated hereby and (B) from or to
the SEC, ACC or any other public utility commission of any state or FERC in
connection with any other material matter; (v) copies of all filings made by the
Company or any of its subsidiaries with any Governmental Authority in connection
with this Agreement and the transactions contemplated hereby and with the SEC,
ACC or any other public utility commission of any state or FERC in connection
with any other material matter; (vi) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality or Material
Adverse Effect becoming untrue or inaccurate in any respect; (vii) any such
representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect; or (viii) the failure by it to comply with
or satisfy in any material respect any covenant or agreement to be complied with
or satisfied by it under this Agreement; provided, however, that any
notification under this Section 5.03 shall not affect the representations,
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warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
(b) The Company shall, and shall cause its subsidiaries to, discuss
with Newco any changes or proposed changes in their regulated rates or charges
or standards of service from those in effect on the date hereof and consult with
Newco prior to making any filing or any amendment thereto (other than filing or
furnishing periodic reports under the Exchange Act), or effecting any Contract
with any Governmental Authority, whether written or oral, formal or informal,
with respect to their regulated rates or charges, standards of service or
accounting. The Company and its subsidiaries shall not make any filing to change
its rates or charges on file with the ACC or any other public utility commission
of any state or FERC in any manner that is or could reasonably be expected to be
inconsistent with any of the conditions or standards set forth in Section
7.02(d). Without limiting the generality of the foregoing, prior to any filing
with any Governmental Authority by the Company or any of its subsidiaries
related to the transactions contemplated hereby or otherwise related to
regulated rates which is either inconsistent with any of the conditions or
standards set forth in Section 7.02(d) or material to the Company and its
subsidiaries, taken as a whole, the Company (i) shall provide Newco an
opportunity to review and comment on such filing and (ii) shall include in such
filing all comments reasonably proposed by Newco.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01. Shareholders' Meeting; Preparation of the Proxy
Statement; SEC Filings. (a) The Company, acting through the Company Board, shall
promptly and duly call, give notice of, convene and hold as soon as reasonably
practicable a meeting of the holders of Company Common Stock for the purpose of
obtaining the Shareholder Approval (the "SHAREHOLDERS' MEETING"), and shall use
its reasonable best efforts to solicit and obtain the Shareholder Approval. The
Company shall be required to hold the Shareholders' Meeting and comply with its
other obligations under this Agreement regardless of whether the Company Board
has effected a Change in Board Recommendation (as defined in Section 6.03(d)) in
accordance with Section 6.03(d). The obligations set forth in the preceding
sentence shall not be applicable if this Agreement shall have been terminated in
accordance with Article VIII.
(b) As promptly as reasonably practicable following the date of this
Agreement, the Company shall prepare the Proxy Statement, the Company shall file
the Proxy Statement with the SEC and the Company shall respond as promptly as
reasonably practicable to any comments of the SEC with respect thereto and shall
cause the Proxy Statement to be mailed to the Company's shareholders as promptly
as reasonably practicable following the date of this Agreement. Except to the
extent expressly permitted by Section 6.03(d), the Proxy Statement shall include
the Company Board Recommendation. Each of Newco and the Company shall furnish
all information concerning itself as may be reasonably requested in connection
with the preparation, filing and distribution of the Proxy Statement.
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(c) The information supplied by Newco for inclusion in the Proxy
Statement shall not, at (i) the time the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the Company's shareholders and
(ii) the time of the Shareholders' Meeting, contain any untrue statement of a
material fact or fail to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If, at any time prior
to the date of the Shareholders' Meeting, any event or circumstance relating to
Newco, or its officers or directors, is discovered by Newco that should be set
forth in an amendment or a supplement to the Proxy Statement, Newco shall
promptly inform the Company (and the Company shall amend the Proxy Statement
accordingly). All documents that Newco is responsible for filing with the SEC in
connection with the transactions contemplated by this Agreement will comply in
all material respects with the requirements of applicable Law, including the
Exchange Act.
(d) The information supplied by the Company for inclusion in the Proxy
Statement shall not, at (i) the time the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the Company's shareholders and
(ii) the time of the Shareholders' Meeting, contain any untrue statement of a
material fact or fail to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If, at any time prior
to the date of the Shareholders' Meeting, any event or circumstance relating to
the Company or its subsidiaries, or their respective officers or directors, is
discovered by the Company that should be set forth in an amendment or a
supplement to the Proxy Statement, the Company shall promptly inform Newco (and
the Company shall amend the Proxy Statement accordingly). All documents that the
Company is responsible for filing with the SEC in connection with the
transactions contemplated by this Agreement will comply in all material respects
with the requirements of applicable Law, including the Exchange Act.
(e) The Company shall promptly notify Newco upon the receipt of any
comments from the SEC or its staff or any request from the SEC or its staff for
amendments or supplements to the Proxy Statement and shall provide Newco with
copies of all correspondence between the Company and its officers, directors,
employees, accountants, consultants, auditors, counsel, financial advisors and
other agents and representatives (collectively, "REPRESENTATIVES"), on the one
hand, and the SEC and its staff, on the other hand. Notwithstanding the
foregoing, prior to filing or mailing the Proxy Statement (or any amendment or
supplement thereto) or responding to any comments of the SEC with respect
thereto, the Company (i) shall provide Newco an opportunity to review and
comment on such document or response and (ii) shall include in such document or
response all comments reasonably proposed by Newco.
(f) Each of the Company Reports to be filed by the Company after the
date of this Agreement, when filed, will comply in all material respects with
the applicable requirements of the Securities Act and the Exchange Act, each as
in effect on the date so filed. None of the Company Reports (including any
financial statements or schedules included or incorporated by reference therein)
to be filed by the Company after the date of this Agreement, when filed, will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
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(g) Each of the audited and unaudited financial statements (including
any related notes) included in the Company Reports to be filed by the Company
after the date of this Agreement, when filed, will comply in all material
respects with all applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, will have been prepared
in accordance with GAAP (except, in the case of unaudited quarterly statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis throughout
the periods involved (except as may be indicated in the notes thereto) and will
fairly present the consolidated financial position of the Company and its
subsidiaries at the respective date thereof and the consolidated results of its
and their operations and cash flows for the periods indicated (subject, in the
case of unaudited quarterly statements, to normal year-end audit adjustments,
which were not and are not expected to be material in amount).
Section 6.02. Access to Information; Confidentiality. (a) From the
date of this Agreement to the Effective Time, the Company shall, and shall cause
its subsidiaries and its and their respective Representatives to, afford Newco
and its Representatives and potential financing sources for the transactions
contemplated by this Agreement reasonable access at all reasonable times to the
officers, employees, agents, properties, offices, plants and other facilities
and to the books, personnel, Contracts and records of the Company and its
subsidiaries, and shall furnish Newco and its Representatives and potential
financing sources with all such information concerning the business, properties,
Contracts, assets, liabilities, personnel and other aspects of the Company and
its subsidiaries as Newco and its Representatives and potential financing
sources may from time to time reasonably request, subject to requirements of
applicable Law. Newco, its Representatives and potential financing sources shall
have the right to conduct non-intrusive environmental and engineering
inspections of the real properties of the Company and its subsidiaries.
Notwithstanding the foregoing, Newco acknowledges that none of Newco or its
Representatives and potential financing sources shall be entitled to perform
invasive environmental investigations. No investigation pursuant to this Section
6.02 shall affect any representations or warranties of the parties herein or the
conditions to the obligations of the parties.
(b) Each of the Company and Newco will hold any nonpublic information,
including all information provided pursuant to Section 6.02(a), in confidence to
the extent required by, and in accordance with, the provisions of the letter
dated July 19, 2002 among the Company, J.P. Morgan Partners, LLC and the other
party thereto (the "CONFIDENTIALITY AGREEMENT"). Notwithstanding anything in
this Agreement or any other Contract to the contrary, each party to this
Agreement (and any Representative thereof) may disclose to any and all persons,
without limitation of any kind, the U.S. federal income tax treatment and tax
structure of the transactions contemplated by this Agreement and all materials
of any kind (including opinions or other tax analyses) that are provided to it
relating to such tax treatment and tax structure; provided, however, that
neither party (nor any Representative thereof) shall disclose (i) any
information that is not relevant to an understanding of the U.S. federal income
tax treatment of the transactions contemplated by this Agreement, including the
identity of any party to this Agreement (or any Representative thereof) or other
information that could lead any person to determine such identity or (ii) any
information to the extent such disclosure could result in a violation of any
federal or state securities laws.
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Section 6.03. No Solicitation of Transactions. (a) The Company
agrees that neither it nor any of its subsidiaries shall, and that it shall use
its reasonable efforts to cause its Representatives and each of the
Representatives of its subsidiaries not to, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate (including by way of furnishing
information) any inquiries or the making or implementation of any proposal or
offer (including any proposal from or offer to its shareholders) with respect to
(i) a merger, reorganization, share exchange, tender offer, exchange offer,
consolidation, business combination, recapitalization, liquidation, dissolution,
joint venture or similar transaction involving it or any of its subsidiaries or
(ii) any purchase or sale of more than 10% of the assets of the Company and its
subsidiaries, taken as a whole, or any Company Securities or Subsidiary
Securities (any such proposal or offer being hereinafter referred to as an
"ALTERNATIVE PROPOSAL"). The Company further agrees that neither it nor any of
its subsidiaries shall, and that it shall use its reasonable efforts to cause
its Representatives and each of the Representatives of its subsidiaries not to,
directly or indirectly, have any discussion with or provide any confidential
information or data to any person relating to an Alternative Proposal, or engage
in any negotiations concerning an Alternative Proposal, or otherwise facilitate
any effort or attempt to make or implement an Alternative Proposal or accept an
Alternative Proposal. Notwithstanding the foregoing, the Company (acting at the
direction of the Company Board) or the Company Board shall be permitted to,
prior to the Shareholders' Meeting, engage in any discussions or negotiations
with, or provide any information or data to, any person in response to an
unsolicited bona fide written Alternative Proposal by any such person, if and
only to the extent that, prior to engaging in such discussions or negotiations
or providing such information or data (i) the Company Board, after consultation
with its outside legal counsel, concludes in good faith that the failure to take
such action could reasonably be expected to constitute a breach by the Company
Board of its fiduciary duties to the shareholders of the Company under
applicable law, (ii) the Company Board concludes in good faith, in consultation
with its financial advisors, that such Alternative Proposal constitutes a
Superior Proposal (as defined in this Section 6.03(a)) or could reasonably be
expected to result in a Superior Proposal, (iii) the Company Board receives from
such person an executed confidentiality agreement on terms substantially similar
and no less favorable to the Company than those contained in the Confidentiality
Agreement and (iv) the Company and each of its subsidiaries has complied with
its obligations under this Section 6.03. A "SUPERIOR PROPOSAL" shall mean an
Alternative Proposal that constitutes a transaction that is more favorable to
the Company's shareholders (in their capacities as shareholders), from a
financial point of view and taking into account all legal, financial, regulatory
and other aspects of the proposal, than the transactions contemplated by this
Agreement (including any proposed alterations of the terms of this Agreement
submitted by Newco in response thereto) and which the Company Board concludes is
reasonably capable of being consummated; provided that to be a Superior
Proposal, an Alternative Proposal must result in a third party (or the
shareholders of such third party) acquiring, directly or indirectly, more than
50% of the Company Common Stock (or the surviving or ultimate parent entity in
such transaction) or all or substantially all of the assets of the Company and
its subsidiaries, taken as a whole).
(b) The Company shall notify Newco promptly (and in any event by 5:00
p.m. New York City time, on the next business day) of the receipt of any
inquiries, proposals or offers received by the Company or any of its
subsidiaries or any of their respective Representatives, indicating, in
connection with such notice, the name of such person and the material terms of
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any inquiries, proposals or offers. The Company shall keep Newco reasonably
informed of the status of any such discussions or negotiations and of any
modifications to such inquiries, proposals or offers (the Company agreeing that
it and its subsidiaries will not enter into any confidentiality agreement with
any person subsequent to the date of this Agreement which prohibits the Company
from providing such information to Newco). The Company agrees that neither it
nor any of its subsidiaries shall terminate, waive, amend or modify any
provision of any standstill or confidentiality agreement to which it or any of
its subsidiaries is a party and that it and its subsidiaries shall enforce the
provisions of any such agreement.
(c) Notwithstanding anything in this Section 6.03, (i) the Company
shall not be permitted to terminate this Agreement (except as otherwise
specifically permitted in Article VIII), (ii) prior to the termination of this
Agreement in accordance with Article VIII, none of the Company nor any of its
subsidiaries shall accept or enter into, or publicly propose to accept or enter
into, any letter of intent, agreement in principle, merger agreement or other
Contract relating to an Alternative Proposal (other than a confidentiality
agreement that complies with the provisions of this Section 6.03) and (iii) this
Section 6.03 shall not affect any other obligation of the Company under this
Agreement, including its obligations to convene and hold the Shareholders'
Meeting in accordance with Section 6.01(a). Effective as of the date of this
Agreement, the Company shall terminate, the Company shall cause its subsidiaries
to terminate, and the Company shall use its reasonable best efforts to cause its
Representatives and its subsidiaries' Representatives to terminate any existing
activities, discussions or negotiations with any third parties that may be
ongoing with respect to any Alternative Proposal, shall take the necessary steps
to inform its and its subsidiaries' Representatives of the obligations
undertaken in this Section 6.03 and shall request that all confidential
information previously furnished to any such third parties be returned promptly.
(d) The Company Board (or any committee thereof) shall not approve or
recommend an Alternative Proposal, or withdraw or modify its approval or
recommendation of this Agreement and the transactions contemplated hereby,
including the Merger (or publicly propose to do any of the foregoing), except as
explicitly provided in this Section 6.03(d). Prior to the time of the
Shareholders' Meeting, (i) in response to the receipt of an unsolicited bona
fide written Alternative Proposal, if the Company has complied with this Section
6.03 and the Company Board (A) concludes in good faith that such Alternative
Proposal constitutes a Superior Proposal (and continues to constitute a Superior
Proposal after taking into account any modifications proposed by Newco during
any four business day period referred to below) and (B) after consultation with
outside legal counsel, has concluded in good faith that the failure to take such
action could reasonably be expected to constitute a breach by the Company Board
of its fiduciary duties to the shareholders of the Company under applicable law,
then, on the fourth business day following Newco's receipt of written notice
from the Company of the Company Board's intention to do so, the Company Board
may approve and recommend such Superior Proposal and, in connection with such
Superior Proposal, withdraw or modify, or propose to withdraw or modify, the
Company Board Recommendation or (ii) in the absence of any Alternative Proposal,
if the Company Board, after consultation with outside legal counsel, has
concluded in good faith that it is required to do so in order to comply with its
fiduciary duties to the shareholders of the Company under applicable law, then,
on the fourth business day following Newco's receipt of written notice from the
Company of the Company Board's intention to do so, the Company Board may
withdraw or modify, or propose to withdraw or modify, the Company Board
Recommendation (either event described in the foregoing clauses (i) and (ii), a
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"CHANGE IN BOARD RECOMMENDATION"); provided, in each case, that during the
applicable four business day period, the Company shall be obligated to negotiate
in good faith with Newco (to the extent Newco desires to negotiate) to make such
adjustments in the terms and conditions of this Agreement so that (x) in the
case of clause (i), such Alternative Proposal would no longer be determined in
good faith by the Company Board to be a Superior Proposal or (y) in the case of
clause (ii), the Company Board ceases to conclude that the failure to effect a
Change in Board Recommendation could reasonably be expected to constitute a
breach by the Company Board of its fiduciary duties to the shareholders of the
Company under applicable law.
(e) The Company shall not take any action (i) to exempt any person
from the restrictions on "business combinations" contained in Sections 2741 and
2742 of the ABCA or "control share acquisitions" contained in Sections 2722
through 2725 of the ABCA (or any provisions similar to the foregoing sections)
or otherwise cause such restrictions not to apply or (ii) to exempt any person
or transaction from the applicability of any provision of the Rights Agreement
or to amend or terminate the Rights Agreement or to redeem the rights issued
thereunder.
(f) The Company and the Company Board may take and disclose to the
Company's shareholders a position in accordance with Rule 14e-2 under the
Exchange Act with respect to an Alternative Proposal; provided that the
foregoing will in no way (i) permit any action that would otherwise have been
prohibited under this Agreement, (ii) limit the obligation of the Company to
comply with its obligations under this Agreement or (iii) eliminate or modify
the effect that any action taken or disclosure made in accordance with such Rule
would have under this Agreement.
Section 6.04. Employee Benefits Matters. Except as contemplated
herein, the Company, for the period ending on the last day of the calendar year
in which the Effective Time occurs, shall provide employee benefit plans,
programs and arrangements which, in the aggregate, will provide benefits, as
applicable, to Company Employees which are no less favorable, in the aggregate,
than those provided pursuant to the plans, programs and arrangements of the
Company (other than those related to Company Securities) in effect immediately
prior to the Effective Time and set forth in Schedule 3.09(a); provided,
however, that nothing herein shall (x) prevent the amendment or termination of
any such plan, program or arrangement, (y) require that the Company (1) provide
or permit investment in the securities of the Company, (2) grant or award any
securities or securities-based compensation or benefit or (3) provide any
guaranteed bonus compensation, change of control protections or retention
awards, or (z) interfere with the Company's right or obligation to make such
changes as are necessary to conform with applicable Laws.
Section 6.05. Directors' and Officers' Indemnification and
Insurance. (a) The articles of incorporation and bylaws of the Surviving
Corporation shall contain the provisions regarding liability of directors and
indemnification of directors and officers that are set forth, as of the date of
this Agreement, in the articles of incorporation and the bylaws, respectively,
of the Company and shall provide indemnification with respect to claims arising
from facts or events that occurred prior to the Effective Time to the fullest
extent permitted by and in accordance with the ABCA from time to time, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would affect adversely the
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rights thereunder of individuals who at or at any time prior to the Effective
Time were Company Employees.
(b) The Surviving Corporation shall cause to be obtained at the
Effective Time "tail" insurance policies with a claims period of at least six
years from the Effective Time with respect to directors' and officers' liability
insurance in amount and scope at least as favorable as the Company's existing
policies for claims arising from facts or events that occurred prior to the
Effective Time; provided that if such "tail" insurance policies are not
available at a cost not greater than the amount set forth on Schedule 6.05(b)
(the "INSURANCE Cap"), the Surviving Corporation shall cause to be obtained as
much comparable insurance for as long a period (not to exceed six years from the
Effective Time) as is available for a cost not to exceed the Insurance Cap.
(c) In furtherance of and not in limitation of the preceding
paragraph, Newco agrees that the officers and directors of the Company that are
defendants in all Actions commenced by shareholders of the Company with respect
to (x) the performance of their duties as such officers and/or directors under
federal or state Law (including Actions under federal and state securities Laws)
and (y) the transactions contemplated by this Agreement, including any and all
such Actions commenced on or after the date of this Agreement (the "SUBJECT
LITIGATION") shall be entitled as a group to be represented, at the reasonable
expense of the Company or the Surviving Corporation, in the Subject Litigation
by one counsel (and Arizona counsel if appropriate and one local counsel in each
jurisdiction in which a case is pending) each of which such counsel shall be
selected by a plurality of such officer/director defendants (and reasonably
acceptable to the Surviving Corporation and, prior to the Effective Time,
Newco); provided that the Company shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld) and that a condition to the indemnification payments
provided in this Section 6.05 shall be that such officer/director defendant not
have settled any Subject Litigation without the consent of the Surviving
Corporation (such consent not to be unreasonably withheld) and, prior to the
Closing, Newco; and provided further that neither Newco, the Company nor the
Surviving Corporation shall have any obligation hereunder to any
officer/director defendant when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
non-appealable, that indemnification of such officer/director defendant in the
manner contemplated hereby is prohibited by applicable Law.
Section 6.06. Regulatory Approvals and Other Matters. (a) Each
party shall file or cause to be filed with the Federal Trade Commission and the
Department of Justice a premerger notification report under the HSR Act with
respect to the transactions contemplated hereby. The parties will use
commercially reasonable efforts to coordinate such filings and any responses
thereto, to make such filings in a timely manner and to respond promptly to any
requests for additional information made by either of such agencies.
(b) Each party shall cooperate and use commercially reasonable efforts
to prepare promptly and file all necessary documentation, to effect all
necessary applications, notices, petitions, filings and other documents, and to
use commercially reasonable efforts to obtain all necessary Approvals from any
Governmental Authority and all other persons necessary or advisable to
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consummate the transactions contemplated hereby, including the Required
Approvals; provided, however, that (i) no party shall be obligated or permitted
to consent to any action or to make or offer to make any commitment or
undertaking or incur any liability or obligation, other than those commitments
and undertakings set forth in Section 6.06(c), without the consent of the other
party, which consent shall not be unreasonably withheld (it being understood
that, without limiting the condition set forth in clause (B) of the first
sentence of Section 7.02(d)(i), consent may be withheld in a party's sole
discretion with respect to any matter that could increase in any material
respect the financial obligations of the Company or its subsidiaries) and (ii)
no party shall be obligated or permitted to consent to any action or to make or
offer to make any commitment or undertaking or incur any liability or obligation
that would be inconsistent with any of the conditions or standards set forth in
Section 7.02(d). Newco and the Company agree that they will consult with each
other with respect to the obtaining of all such necessary or advisable
Approvals; provided, however, that it is agreed that the Company shall have
primary responsibility for the preparation and filing of any applications with
the ACC for the ACC Approval and Newco shall have primary responsibility for the
preparation and filing of any applications with the FERC for the FERC Approval
and the SEC for the PUHCA Approval. Each of Newco and the Company shall have the
right to review and approve in advance drafts of all such necessary
applications, notices, petitions, filings and other documents made or prepared
in connection with the transactions contemplated by this Agreement, which
approval shall not be unreasonably withheld or delayed. Each party shall
promptly notify the other party of any failure or prospective failure to obtain
any such Approvals and shall provide copies of all Company Required Consents
obtained by it.
(c) In the application filed with the ACC for the ACC Approval, Newco
and the Company shall agree to the following undertakings:
(i) TEP's and the Surviving Corporation's management and corporate
headquarters shall remain in Tucson, Arizona.
(ii) The present TEP and Company management team has developed
constructive relationships with local, state and federal regulatory
agencies. The Surviving Corporation shall support its and TEP's management
team in continuing to build upon these relationships.
(iii) The local operations of TEP, UNS Gas and UNS Electric, including
employee and labor relations, shall be under the supervision of local
management.
(iv) TEP, UNS Gas and UNS Electric will not guarantee the obligations
of the Surviving Corporation.
(v) TEP's equity ratio to total capitalization should be improved to
40% by providing up to $168,000,000 in equity contributions and by causing
the $95,000,000 intercompany note of the Company to TEP to be repaid.
(vi) Existing TEP, UNS Gas and UNS Electric assets shall be managed,
including appropriate expansion of such asset base, to accommodate service
territory growth.
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(vii) The Company and its subsidiaries have undertaken to achieve a
high level of service to customers. The Surviving Corporation and its
subsidiaries shall continue to invest adequate capital to provide safe,
reliable and adequate service to the customers of TEP, UNS Gas and UNS
Electric.
(viii) An important part of the Company's business plan is for its
subsidiaries to be actively engaged in charitable and community programs.
The Surviving Corporation and its subsidiaries shall continue to support
and, where appropriate, enhance TEP's and the Company's (A) existing
charitable and community corporate "giving programs", (B) education,
environmental, economic and philanthropic partnerships and (C) consumer
partnerships.
(d) Notwithstanding anything in this Agreement to the contrary, in
connection with obtaining any Approval from any Governmental Authority or
any other person, none of Newco or any of its affiliates shall be required
to pay or commit to pay any cash or other consideration, to make any
commitment or to incur any liability or other obligation. No party to this
Agreement shall consent to any voluntary extension of any statutory
deadline or waiting period or to any voluntary delay of the consummation of
the transactions contemplated hereby at the behest of any Governmental
Authority without the consent and agreement of the other party to this
Agreement, which consent shall not be unreasonably withheld or delayed.
Section 6.07. Public Announcements. The initial press release
concerning the Merger shall be a joint press release and, thereafter, Newco and
the Company shall consult with each other before issuing any press release or
otherwise making any public statements with respect to this Agreement or any
transaction contemplated hereby and shall not issue any such press release or
make any such public statement prior to such consultation, except to the extent
required by applicable Law or the requirements of the NYSE or the Pacific Stock
Exchange, in which case the issuing party shall use its reasonable best efforts
to consult with the other party before issuing any such release or making any
such public statement.
Section 6.08. Financing. (a) Newco shall use commercially
reasonable efforts to arrange the Debt Financing on the terms and conditions
described in the Debt Letters (and, with respect to the Notes Letter, Schedule
7.02(e)(i)), including using commercially reasonable efforts (i) to negotiate
definitive agreements with respect thereto on the terms and conditions contained
therein and (ii) to satisfy all conditions applicable to Newco in such
definitive agreements that are within its control. In the event any portion of
the Debt Financing becomes unavailable in the manner or from the sources
contemplated in the Debt Letters, Newco shall use reasonable best efforts to
arrange any such portion from alternative sources on comparable or more
favorable terms in the aggregate to Newco (as determined in the reasonable
judgment of Newco). Newco shall give the Company prompt written notice of (i)
any material breach by any party of the Financing Letters (or any definitive
agreements entered into pursuant to the Financing Letters or any replacements
thereof), (ii) any termination of any Financing Letter or (iii) any exercise of
any "market out" or "material adverse change" conditions contained in any of the
Debt Letters (or replacements thereof).
(b) The Company agrees to provide, and shall cause its subsidiaries
and its and their respective Representatives to provide, all cooperation
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reasonably necessary in connection with the arrangement of the Debt Financing,
including (x) participation in meetings, drafting sessions, due diligence
sessions, management presentation sessions, road shows and sessions with rating
agencies, (y) preparation of business projections, financial statements,
offering memoranda, private placement memoranda, prospectuses and similar
documents and (z) execution and delivery of any commitment letters, underwriting
or placement agreements, pledge and security documents, other definitive
financing documents, or other requested certificates or documents, including a
certificate of the chief financial officer of the Company with respect to
solvency matters, comfort letters of accountants, consents of accountants for
use of their reports in any materials relating to the Debt Financing, legal
opinions as may be reasonably requested by Newco and a new tax sharing agreement
among Holdings, the Company and the subsidiaries of the Company, effective as of
the Effective Time; provided that the Debt Financing may not require the payment
of any commitment or other similar fee by the Company or impose any other
liability on the Company prior to the Effective Time. In addition, in connection
with the obtaining of the Debt Financing, the Company agrees, at the request of
Newco, to call or cause its subsidiaries to call for prepayment or redemption,
or to prepay, redeem and/or renegotiate, as the case may be, any of the then
existing Indebtedness of the Company or its subsidiaries; provided that (i) no
such prepayment or redemption shall actually be made until substantially
contemporaneous with or after, or, in the case of the call for prepayment,
immediately prior to or contemporaneous with, the Effective Time and (ii) no
such call for prepayment or redemption shall be required prior to the Effective
Time unless the terms of the Indebtedness permit the Company to condition such
call for prepayment or redemption on the occurrence of the Effective Time or to
withdraw such call for prepayment or redemption if the Effective Time shall not
have occurred on or prior to the applicable scheduled prepayment or redemption
date.
Section 6.09. Resignations. At the Closing, the Company shall
deliver to Newco evidence satisfactory to Newco of the resignation, effective at
the Effective Time, of those directors of the Company or its subsidiaries
designated by Newco prior to the Effective Time.
Section 6.10. Section 16 Matters. Prior to the Effective Time, the
Company shall take all such steps as may be required to cause to be exempt under
Rule 16b-3 promulgated under the Exchange Act any dispositions of Company Common
Stock (including derivative securities with respect to Company Common Stock)
that are treated as dispositions to the Company under such rule and result from
the transactions contemplated by Article I or Article II of this Agreement by
each individual who is subject to the reporting requirements of Section 16(a) of
the Exchange Act with respect to the Company.
ARTICLE VII
CONDITIONS
Section 7.01. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction or, if permitted by applicable Law, waiver on or
prior to the Closing Date of each of the following conditions:
(a) Shareholder Approval. The Shareholder Approval shall have been
obtained.
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(b) HSR Act. Any waiting period applicable under the HSR Act (and any
extension thereof) shall have been terminated or expired.
(c) No Order. No Order of any Governmental Authority or other legal
restraint or prohibition preventing the consummation of the Merger or any of the
other transactions contemplated hereby shall be in effect and no Law enacted,
entered, promulgated or enforced by any Governmental Authority which prohibits
or makes illegal consummation of the Merger or any of the other transactions
contemplated hereby.
Section 7.02. Conditions to Obligation of Newco to Effect the
Merger. The obligation of Newco to effect the Merger shall be further subject to
the satisfaction or, if permitted by applicable Law, waiver by Newco, on or
prior to the Closing Date, of each of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company (i) set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date (except that if such representations and
warranties speak as of an earlier date they shall be true and correct as of such
date); provided, however, that for purposes of this clause, such representations
and warranties shall be deemed to be true and correct unless the failure or
failures of all such representations and warranties to be so true and correct,
without giving effect to any qualification as to materiality or Material Adverse
Effect set forth in such representations or warranties, could, in the aggregate,
reasonably be expected to have a Material Adverse Effect and (ii) set forth in
this Agreement that are not qualified by materiality or Material Adverse Effect
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (except that if such representations and warranties speak as of an earlier
date they shall be true and correct in all material respects as of such date).
Newco shall have received a certificate signed on behalf of the Company by the
Chief Executive Officer and the Chief Financial Officer of the Company to the
foregoing effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date. Newco shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer and the Chief Financial Officer of the Company to the foregoing effect.
(c) No Material Adverse Effect. There shall not exist any state of
facts, change, development, event, effect, condition or occurrence that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect. Newco shall have received a certificate signed on
behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company to the foregoing effect.
(d) Regulatory Conditions.
(i) The Required Approvals shall have been obtained at or prior to the
Effective Time, such approvals shall have become Final Orders (as defined
in this Section 7.02(d)) and such Final Orders shall not impose terms or
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conditions that, individually or in the aggregate, (A) have had or could
reasonably be expected to have a Material Adverse Effect or a material
adverse effect upon the business, properties, assets, condition (financial
or otherwise), prospects or results of operations of Newco, the Surviving
Corporation, the Partnership or the respective businesses or assets thereof
(a "NEWCO MATERIAL ADVERSE EFFECT") or (B) have caused or could reasonably
be expected to cause the rates (including the Competition Transition
Charge) of any of the Utility Subsidiaries to be less favorable to the
Surviving Corporation or any Utility Subsidiary than the rates applicable
to such Utility Subsidiary on the date of this Agreement. For purposes of
this Agreement, in the event that any Final Order includes terms or
conditions that (1) subject either the Partnership or any Limited Partner
(or any "affiliate" (within the meaning of PUHCA) of any such person) to
any regulation under PUHCA, including any requirement to register as a
"holding company" under PUHCA, or (other than under the terms of the Energy
Policy Act of 2003 in the form passed by the United States House of
Representatives on November 18, 2003, to the extent such Act becomes law)
under any federal or Arizona Law relating to public utility holding
companies enacted, promulgated or otherwise coming into effect after the
date of this Agreement that imposes regulation material to the Partnership
or any of its affiliates, (2) require (whether on an absolute or contingent
basis) that, at any time, all or any of the subsidiaries, assets,
operations or business of either the Partnership or any Limited Partner (or
any "affiliate" (within the meaning of PUHCA) of any such person) be
transferred, sold, spun off or distributed (whether in whole or in part) to
shareholders, otherwise disposed of, liquidated or wound down, (3) require
(x) any Limited Partner (or any "affiliate" (within the meaning of PUHCA)
of any such person) to restructure its capitalization or amend any of its
articles of incorporation or bylaws (or similar organizational documents)
or (y) the Partnership (or any "affiliate" (within the meaning of PUHCA) of
any such person) to restructure its capitalization or amend any of its
articles of incorporation or bylaws (or similar organizational documents)
in any material respect, in each case in order to permit it to qualify for
an exemption from the requirement to register as a "holding company" under
PUHCA, or from any other regulation under PUHCA or (other than under the
terms of the Energy Policy Act of 2003 in the form passed by the United
States House of Representatives on November 18, 2003, to the extent such
Act becomes law) under any federal or Arizona Law relating to public
utility holding companies enacted, promulgated or otherwise coming into
effect after the date of this Agreement that imposes regulation material to
the Partnership or any of its affiliates, following the Merger or in order
to ensure that it will not become subject to any such regulation, then such
terms and conditions shall be deemed to constitute a Newco Material Adverse
Effect. A "FINAL ORDER" means an action by the relevant Governmental
Authority which has not been reversed, stayed, enjoined, set aside,
annulled or suspended, with respect to which any waiting period prescribed
by Law before the transactions contemplated hereby may be consummated has
expired, and as to which all conditions to the consummation of such
transactions prescribed by Law have been satisfied. Notwithstanding
anything to the contrary in this Agreement, in the event that PUHCA is
repealed, then on and after the date such repeal becomes effective, the
Required Approvals shall not include the PUCHA Approval for purposes of
this Section 7.02(d)(i); provided that the obligations of the parties to
comply with the provisions of Section 6.06(b) with respect to the PUHCA
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Approval shall in no way be diminished prior to the time any such repeal
becomes effective.
(ii) The Partnership and the Limited Partners shall have received
evidence satisfactory to them in their reasonable judgment (including a
"no-action" letter from the staff of the SEC) that none of the Limited
Partners nor any of their respective "affiliates" (within the meaning of
PUHCA) will become or otherwise be deemed to be a "holding company" or a
"subsidiary company" or an "affiliate" or a "holding company" within the
meaning of PUHCA, or (other than under the terms of the Energy Policy Act
of 2003 in the form passed by the United States House of Representatives on
November 18, 2003, to the extent such Act becomes law) under any federal or
Arizona Law relating to public utility holding companies enacted,
promulgated or otherwise coming into effect after the date of this
Agreement that imposes regulation material to the Partnership or any of its
affiliates following the Merger as a result of the transactions
contemplated hereby.
(iii) (A) Except as in existence on the date of this Agreement, in the
reasonable judgment of Newco, there shall be no Law, Order, Approval or
Contract that impairs or restricts, or could reasonably be expected to
impair or restrict, the ability of any Utility Subsidiary from paying
dividends or making distributions to its shareholders of all of such
Utility Subsidiary's net income and (B) assuming the consummation of the
transactions described in Section 6.06(c)(v) and the redemption in full by
TEP of its variable-rate tax-exempt bonds outstanding as of the date of
this Agreement which are supported by the Tranche B Letters of Credit under
the Credit Agreement, in the reasonable judgment of Newco, there shall be
no Law, Order, Approval or Contract (including any of the foregoing in
existence on the date of this Agreement) that, as applied to TEP and its
subsidiaries (the "TEP ENTITIES"), impairs or restricts, or could
reasonably be expected to impair or restrict, the ability of each TEP
Entity from paying dividends or making distributions of all of its net
income to its shareholders; provided that in no event shall more than
$168,000,000 in equity contributions be required to be provided to TEP or
Indebtedness in addition to or in excess of $95,000,000 under the
intercompany note of the Company to TEP be required to be repaid.
(e) Financing. Holdings shall have received the proceeds of the Debt
Financing on the terms and conditions set forth in the Debt Letters or upon
terms and conditions which are, in the reasonable judgment of Newco, comparable
or more favorable (to Newco) in the aggregate thereto, and to the extent that
any terms and conditions are not set forth in the Debt Letters, on terms and
conditions reasonably satisfactory to Newco. For purposes of this Section
7.02(e), (i) the terms and conditions of the Senior Financing Letter are deemed
to include any applicable terms set forth in the Fee Letter (as defined in the
Senior Financing Letter) relating to changes required for successful syndication
and (ii) the terms and conditions of the debt financing described in the Notes
Letter shall be deemed comparable or more favorable in the aggregate to the
terms and conditions set forth in the Notes Letter if such terms and conditions
are, in the reasonable judgment of Newco, comparable or more favorable (to
Newco) in the aggregate to the terms set forth on Schedule 7.02(e)(i) and to the
extent that any terms are not set forth on Schedule 7.02(e)(i), on terms and
conditions reasonably satisfactory to Newco. Newco shall have received evidence
that the Company and its subsidiaries shall have, prior to or contemporaneously
with the Closing, called for redemption the Indebtedness set forth on Schedule
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7.02(e)(ii) or such other Indebtedness as shall be mutually agreed upon by the
Company and Newco.
(f) PBGC. There shall be (i) no conditions requested of the Company or
its subsidiaries or of Newco or the Surviving Corporation by the PBGC in
connection with any Pension Plan that are or could reasonably be expected to be
materially adverse to the Surviving Corporation and (ii) no commencement of any
Action by the PBGC to terminate any Pension Plan or to appoint a trustee of such
plan (or a reasonable good faith determination by Newco that the commencement of
such Action is reasonably likely).
Section 7.03. Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be further
subject to the satisfaction or, if permitted by applicable Law, waiver by the
Company, on or prior to the Closing Date, of each of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of Newco (i) set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date (except that if such representations and warranties speak
as of an earlier date they shall be true and correct as of such date); provided,
however, that for purposes of this clause, such representations and warranties
shall be deemed to be true and correct unless the failure or failures of all
such representations and warranties to be so true and correct, without giving
effect to any qualification as to materiality or material adverse effect set
forth in such representations or warranties, would, in the aggregate, have a
material adverse effect on the ability of Newco to perform its obligations
hereunder and (ii) set forth in this Agreement that are not qualified by
materiality or material adverse effect shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date (except that if such representations and
warranties speak as of an earlier date they shall be true and correct in all
material respects as of such date). The Company shall have received a
certificate signed on behalf of Newco by its Chief Executive Officer or the
Chief Financial Officer of Newco to the foregoing effect.
(b) Performance of Obligations of Newco. Newco shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date. The Company shall have received a
certificate signed on behalf of Newco by its Chief Executive Officer or the
Chief Financial Officer to the foregoing effect.
(c) Required Approvals. The Required Approvals shall have been
obtained at or prior to the Effective Time, such approvals shall have become
Final Orders and such Final Orders shall not impose terms or conditions that,
individually or in the aggregate, could reasonably be expected to prevent the
consummation of the transactions contemplated hereby. Notwithstanding anything
to the contrary in this Agreement, in the event that PUHCA is repealed, then on
and after the date such repeal becomes effective, the Required Approvals shall
not include the PUCHA Approval for purposes of this Section 7.03(c); provided
that the obligations of the parties to comply with the provisions of Section
6.06(b) with respect to the PUHCA Approval shall in no way be diminished prior
to the time any such repeal becomes effective.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.01. Termination. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time,
notwithstanding any shareholder approval of this Agreement, as follows (the date
of any such termination, the "TERMINATION DATE"):
(a) by mutual written consent duly authorized by the Company Board and
by Newco;
(b) by the Company, on the one hand, or Newco, on the other hand, if
the Closing shall not have been consummated on or before March 31, 2005;
provided, that the right to terminate this Agreement under this Section 8.01(b)
shall not be available to any party whose failure to perform its obligations
under this Agreement has been the cause of, or resulted in, the failure of the
Closing to have been consummated on or before such date;
(c) by the Company, on the one hand, or Newco, on the other hand if
there shall have been a material breach of any of the covenants or agreements or
any of the representations or warranties set forth in this Agreement on the part
of any of Newco, in the case of a termination by the Company, or the Company, in
the case of a termination by Newco, which breach, individually or together with
all other such breaches, would constitute, if occurring or continuing on the
Closing Date, the failure of any of the conditions set forth in Section 7.02 or
Section 7.03, as the case may be, and which is not cured within 30 days
following written notice to the party committing such breach or by its nature or
timing cannot be cured prior to the Closing Date;
(d) by either Newco or the Company, if (i) a Final Order with respect
to any Required Approval shall have been obtained or any Governmental Authority
of competent jurisdiction denies or otherwise fails to grant a Required Approval
and such denial or other failure has become a Final Order, in each case as a
result of which the condition set forth in Section 7.02(d) (in the case of a
termination by Newco) or Section 7.03(c) (in the case of a termination by the
Company) shall become incapable of being satisfied, or (ii) any Governmental
Authority shall have issued a Final Order or taken any other action permanently
enjoining or otherwise prohibiting the consummation of the transactions
contemplated hereby, unless the failure of this condition to have been satisfied
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party set forth herein;
(e) by the Company (unless the Company is in breach of its obligations
under Section 6.01 or Section 6.03) or Newco, if the Shareholder Approval shall
not have been obtained by reason of the failure to obtain the Shareholder
Approval upon the taking of a vote on the Shareholder Approval at the
Shareholders' Meeting or any adjournment or postponement thereof;
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(f) by Newco, if (i) the Company Board shall have effected a Change in
Board Recommendation or (ii) the Company shall have breached its obligations
under Section 6.01 or under Section 6.03;
(g) by the Company, prior to the Shareholders' Meeting, if the Company
Board shall have effected a Change in Board Recommendation, the Company Board
has resolved to approve and recommend the Superior Proposal that caused it to
effect a Change in Board Recommendation and the Company has complied with its
obligations under Sections 6.01 and 6.03; or
(h) by Newco, if an Alternative Proposal that is publicly announced
shall have been commenced or communicated in writing to the Company and (i) the
Company shall not have rejected such proposal within ten business days after the
date of the receipt thereof by the Company or after the date of its existence
first becomes publicly announced, if sooner, (ii) the Company Board shall have
approved or recommended such Alternative Proposal (or resolved to do so) or
(iii) the Company shall have failed to confirm the Company Board Recommendation
within ten business days after being requested by Newco to do so.
Section 8.02. Certain Fees and Expenses. (a) If this Agreement
shall be terminated:
(i) by Newco or the Company pursuant to Section 8.01(b) and either (A)
the ACC Approval shall not have been obtained or (B) the ACC Approval shall
have been obtained but either (I) shall not satisfy the conditions set
forth in clause (i) of Section 7.02(d) or set forth in Section 7.03(c) or
(II) the conditions set forth in clause (iii) of Section 7.02(d) shall not
have been satisfied, then the Company will pay Newco an amount equal to the
Termination Expenses (as defined in Section 8.02(b));
(ii) by Newco or the Company pursuant to Section 8.01(b) and (1) at or
prior to the Termination Date, an Alternative Proposal shall have been
publicly announced, commenced or otherwise communicated or made known to
the Company (or any person shall have publicly announced, commenced or
otherwise communicated or made known an intention, whether or not
conditional, to make an Alternative Proposal) and (2) within twelve months
of the Termination Date, the Company or any of its affiliates either
becomes a party to any definitive agreement, letter of intent or agreement
in principle in respect of an Alternative Proposal or consummates a
transaction that would constitute an Alternative Proposal (which need not
be the same Alternative Proposal as the Alternative Proposal described in
clause (1)), then the Company will pay Newco an aggregate amount equal to
the Termination Fee (as defined in Section 8.02(b)) plus the Termination
Expenses;
(iii) by Newco pursuant to Section 8.01(c), then the Company will pay
Newco an amount equal to the Termination Expenses and, further, if either
(1) at or prior to the Termination Date, an Alternative Proposal shall have
been publicly announced, commenced or otherwise communicated or made known
to the Company (or any person shall have publicly announced, commenced or
otherwise communicated or made known an intention, whether or not
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conditional, to make an Alternative Proposal) or (2) within twelve months
of the Termination Date, the Company or any of its affiliates either
becomes a party to any definitive agreement, letter of intent or agreement
in principle in respect of an Alternative Proposal (which need not be the
same Alternative Proposal as the Alternative Proposal described in clause
(1)) or consummates a transaction that would constitute an Alternative
Proposal (which need not be the same Alternative Proposal as the
Alternative Proposal described in clause (1)), then, in either case, the
Company will also pay Newco an amount equal to the Termination Fee;
(iv) by the Company or Newco pursuant to (A) Section 8.01(d) and
either (I) the ACC Approval shall not have been obtained or (II) the ACC
Approval shall have been obtained but either (x) shall not satisfy the
conditions set forth in clause (i) of Section 7.02(d) or set forth in
Section 7.03(c) or (y) the conditions set forth in clause (iii) of Section
7.02(d) shall not have been satisfied or (B) Section 8.01(e), then the
Company will pay Newco an amount equal to the Termination Expenses and,
further, if (1) at or prior to the Termination Date, an Alternative
Proposal shall have been publicly announced, commenced or otherwise
communicated or made known to the Company (or any person shall have
publicly announced, commenced or otherwise communicated or made known an
intention, whether or not conditional, to make an Alternative Proposal) and
(2) within twelve months of the Termination Date, the Company or any of its
affiliates either becomes a party to any definitive agreement, letter of
intent or agreement in principle in respect of an Alternative Proposal
(which need not be the same Alternative Proposal as the Alternative
Proposal described in clause (1)) or consummates a transaction that would
constitute an Alternative Proposal (which need not be the same Alternative
Proposal as the Alternative Proposal described in clause (1)), then the
Company will also pay Newco an amount equal to the Termination Fee; or
(v) by Newco pursuant to Section 8.01(d) under circumstances where the
conditions set forth in clause (A) of Section 8.02(a)(iv) are not satisfied
and, further, if (1) at or prior to the Termination Date, an Alternative
Proposal shall have been publicly announced, commenced or otherwise
communicated or made known to the Company (or any person shall have
publicly announced, commenced or otherwise communicated or made known an
intention, whether or not conditional, to make an Alternative Proposal) and
(2) within twelve months of the Termination Date, the Company or any of its
affiliates either becomes a party to any definitive agreement, letter of
intent or agreement in principle in respect of an Alternative Proposal
(which need not be the same Alternative Proposal as the Alternative
Proposal described in clause (1)) or consummates a transaction that would
constitute an Alternative Proposal (which need not be the same Alternative
Proposal as the Alternative Proposal described in clause (1)), then the
Company will also pay Newco an aggregate amount equal to the Termination
Fee plus the Termination Expenses; or
(vi) pursuant to Section 8.01(f), Section 8.01(g) or Section 8.01(h),
then the Company will pay Newco an aggregate amount equal to the
Termination Fee plus the Termination Expenses.
(b) The Termination Fee and the Termination Expenses, as applicable,
shall be paid to Newco by the Company in immediately available funds (x)
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concurrently with and as a condition to the effectiveness of a termination of
this Agreement by the Company pursuant to Section 8.01(g) and (y) within five
business days after the date of the event giving rise to the obligation to make
such payment in all other circumstances. In no event shall the Company be
required to pay under this Section 8.02 an amount in excess of the Termination
Fee plus the Termination Expenses. As used in this Agreement, "TERMINATION FEE"
means an amount equal to $15,000,000 (except that, with respect to a termination
of this Agreement under the circumstances set forth in Section 8.02(a)(iv)(A),
the "Termination Fee" shall mean an amount equal to $18,000,000). As used in
this Agreement, "TERMINATION EXPENSES" means an amount, not to exceed
$10,000,000, equal to the documented out-of-pocket expenses of Newco, including
Newco's direct and indirect equity holders, incurred in connection with this
Agreement and the transactions contemplated hereby and the related financing
thereof (including all fees and expenses payable to financing sources or hedging
counterparties and the Representatives of Newco and/or its financing sources)
(except that, with respect to a termination of this Agreement under the
circumstances set forth in Section 8.02(a)(i) or Section 8.02(a)(iv)(A), the
"Termination Expenses" shall not exceed $7,000,000). For purposes of clauses
(ii), (iii), (iv) and (v) of Section 8.02(a) only, the term "Alternative
Proposal" shall have the meaning assigned to such term in Section 6.03(a),
except that the reference to "10%" in the definition thereof shall be deemed to
be a reference to "50%".
(c) In the event either party is required to file suit to seek all or
a portion of the Termination Fee and/or Termination Expenses, and it ultimately
succeeds, it shall be entitled to all expenses, including attorneys' fees and
expenses, which it has incurred in enforcing its rights hereunder.
Section 8.03. Effect of Termination. In the event of termination
of this Agreement by either the Company or Newco as provided in Section 8.01,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Newco or the Company, other than the
provisions of Section 6.02(b), Section 8.02, this Section 8.03 and Article IX.
Nothing contained in this Section 8.03 shall relieve any party from liability
for its breach of the representations, warranties, covenants or agreements set
forth in this Agreement; provided that following termination of this Agreement
by Newco or the Company as provided in Section 8.01, in the absence of a willful
breach no party shall be liable for damages in excess of $25,000,000 (including
any amounts paid pursuant to Section 8.02).
Section 8.04. Amendment. This Agreement may be amended by mutual
agreement of the parties at any time prior to the Effective Time; provided,
however, that, after the approval of this Agreement by the shareholders of the
Company, no amendment may be made that would reduce the amount or change the
type of consideration into which each share of the Company Common Stock shall be
converted upon consummation of the Merger. This Agreement may not be amended
except by an instrument in writing signed by the parties.
Section 8.05. Waiver. At any time prior to the Effective Time, any
party may (a) extend the time for the performance of any obligation or other act
of any other party, (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any agreement or condition contained herein. Any such
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extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby. The failure of any party to
this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of those rights.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01. Non-Survival. None of the representations,
warranties, covenants and other agreements in this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein that
by their terms apply or are to be performed in whole or in part after the
Effective Time.
Section 9.02. Fees and Expenses. Except as provided otherwise in
Section 8.02, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby and thereby shall be paid by the party
incurring such expenses.
Section 9.03. Certain Definitions. For purposes of this Agreement,
the term:
(a) "AFFILIATE" shall mean, unless otherwise indicated, any person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the person specified;
(b) "BUSINESS DAY" shall mean any day that the NYSE is normally open
for trading and that is not a day on which banks in the City of New York are
authorized or required to close for regular banking business;
(c) "CONTROL" (including the terms "controlling," "controlled by" and
"under common control with") shall mean the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by Contract or
otherwise;
(d) "KNOWLEDGE" means, with respect to any matter in question, that
the executive officers of Newco, on the one hand, or the executive officers of
the Company, on the other hand, have actual knowledge after reasonable inquiry;
(e) "PERSON" means any individual, corporation, company, partnership
(limited or general), limited liability company, joint venture, association,
trust, unincorporated organization or other business entity or "group" (as
defined in the Exchange Act); and
(f) "SUBSIDIARY" or "SUBSIDIARIES" mean, with respect to a party, any
person (other than an individual) of which at least fifty percent of the voting
securities or other equity interests having by their terms ordinary voting power
to elect a majority of the Board of Directors or others performing similar
functions with respect to such person is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries.
-A-49-
Section 9.04. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed duly given (a) on the date of
delivery if delivered personally, (b) on the first business day following the
date of dispatch if delivered by a nationally recognized next-day courier
service, (c) on the fifth business day following the date of mailing if
delivered by registered or certified mail, return receipt requested, postage
prepaid or (d) if sent by facsimile transmission, when transmitted and receipt
is confirmed. Each party shall act in good faith in confirming receipt of any
such facsimile transmissions. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
(a) If to the Company, to:
UniSource Energy Corporation
UniSource Energy Tower
One South Church Avenue
Tucson, Arizona 85701
Attention: Vincent Nitido, Jr.
Telecopy: (520) 884-3612
with a copy to:
Thelen Reid & Priest LLP
875 Third Avenue
New York, New York 10022-6225
Attention: Richard S. Green
John T. Hood
Telecopy: (212) 603-2001
(b) If to Newco, to:
Saguaro Acquisition Corp.
4201 North 24th Street, Suite 100
Phoenix, Arizona 85016
Attention: Frederick B. Rentschler
Telecopy: 602-285-5589
with a copy to:
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
Attention: David J. Sorkin
Brian M. Stadler
Telecopy: (212) 455-2502
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and:
Milbank Tweed Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, New York 10005
Attention: M. Douglas Dunn
John T. O'Connor
Telecopy: (212) 530-5219
Section 9.05. Interpretation. When a reference is made in this
Agreement to Sections, Schedules or Exhibits, such reference shall be to a
Section, Schedule or Exhibit of this Agreement, respectively, unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation". The words "hereof," "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. The
term "or" is not exclusive. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms. References
to a person are also to its permitted successors and assigns. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms.
Section 9.06. Severability. Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
Section 9.07. Entire Agreement. This Agreement (including the
attachments hereto and the documents and the instruments referred to herein)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof other than the Confidentiality Agreement.
Section 9.08. No Implied Representations or Warranties. Except for
the representations and warranties contained in this Agreement, neither the
Company nor Newco makes any representations or warranties, written or oral,
statutory, express or implied, concerning itself or any of its affiliates, or
its or its affiliates' respective businesses, assets or liabilities. Each party
acknowledges that it is sophisticated in commercial matters, including
transactions of the type contemplated by this Agreement, and that it has
received an adequate opportunity to conduct an investigation regarding the
transactions contemplated by this Agreement.
Section 9.09. Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
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assigned by any of the parties (whether by operation of Law or otherwise)
without the prior written consent of the other party. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement (except as provided in Section 6.05).
Section 9.10. Schedules and Exhibits. All Schedules and Exhibits
attached hereto and referred to herein are hereby incorporated herein and made a
part of this Agreement for all purposes as if fully set forth herein.
Information set forth on a Schedule shall not be deemed set forth on any other
Schedule, except to the extent that it would be reasonably apparent that a
reference on such Schedule also relates to a representation and warranty
qualified by another Schedule.
Section 9.11. Counterparts; Effect. This Agreement may be executed
in one or more counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same agreement.
Section 9.12. Governing Law. This Agreement shall be governed and
construed in accordance with the Laws of the State of Delaware, without regard
to any applicable conflicts of law provisions thereof that may require the
application of the Laws of another jurisdiction (except to the extent that
mandatory provisions of Arizona Law are applicable). The parties hereby
irrevocably submit to the exclusive jurisdiction of the courts of the State of
Delaware and the federal courts of the United States of America located in the
State of Delaware in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement,
and in respect of the transactions contemplated hereby, and hereby waive, and
agree not to assert, as a defense in any Action for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such Action may not be brought or is not maintainable in said courts or
that the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties irrevocably
agree that all claims with respect to such Action shall be heard and determined
in such a Delaware State or federal court. The parties hereby consent to and
grant any such court jurisdiction over the person of such parties and over the
subject matter of such dispute and agree that mailing of process or other papers
in connection with any such Action in the manner provided in this Section 9.12
or in such other manner as may be permitted by Law shall be valid and sufficient
service thereof.
Section 9.13. Waiver of Jury Trial. EACH PARTY HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 9.14. Specific Performance. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
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otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of
competent jurisdiction specified in Section 9.12, this being in addition to any
other remedy to which they are entitled at law or in equity.
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IN WITNESS WHEREOF, the Company and Newco have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
UNISOURCE ENERGY CORPORATION
By: /s/ James S. Pignatelli
-----------------------------------
Name: James S. Pignatelli
Title: President, Chairman and
Chief Executive Officer
SAGUARO ACQUISITION CORP.
By: /s/ Frederick B. Rentschler
-----------------------------------
Name: Frederick B. Rentschler
Title: President
APPENDIX B
[Letterhead of Morgan Stanley & Co. Incorporated]
November 21, 2003
Board of Directors and
Strategic Transaction Advisory Committee of the Board of Directors
UniSource Energy Corporation
One South Church Avenue, Suite 100
Tucson, AZ 85701
Members of the Board of Directors and the Strategic Transaction Advisory
Committee of the Board of Directors:
We understand that UniSource Energy Corporation, an Arizona corporation
("UniSource" or the "Company") and Saguaro Acquisition Corp. ("NewCo"), which is
an indirect wholly owned subsidiary of Saguaro Utility Group L.P., an Arizona
limited partnership, whose limited partners include investment funds affiliated
with J.P. Morgan Partners, LLC, Kohlberg Kravis Roberts & Co., L.P. and Wachovia
Capital Partners (the "Limited Partnership") propose to enter into an Agreement
and Plan of Merger, substantially in the form of the draft dated November 20,
2003 (the "Merger Agreement"), which provides, among other things, for the
merger (the "Merger") of NewCo with and into the Company. Pursuant to the
Merger, UniSource will become an indirect wholly owned subsidiary of the Limited
Partnership and each outstanding share of common stock, no par value (the
"Common Stock") of UniSource, other than shares canceled or that remain
outstanding pursuant to the terms of the Merger Agreement will be converted into
the right to receive $25.25 per share in cash. The terms and conditions of the
Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be received by
the holders of shares of Common Stock pursuant to the Merger Agreement is fair
from a financial point of view to such holders (other than the Limited
Partnership and its affiliates).
For purposes of the opinion set forth herein, we have:
a) reviewed certain publicly available financial statements and other
information of the Company;
b) reviewed certain internal financial statements and other financial and
operating data concerning the Company prepared by the management of
the Company;
c) reviewed certain financial projections prepared by the management of
the Company;
d) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
e) reviewed the reported prices and trading activity for the Common
Stock;
f) compared the financial performance of the Company and the prices and
trading activity of the Common Stock with that of certain other
comparable publicly-traded companies and their securities;
g) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
h) participated in discussions and or negotiations among representatives
of the Company, the Limited Partnership and certain other parties and
their financial and legal advisors;
i) reviewed the debt letters attached as Exhibit A to the Merger
Agreement from (i) Credit Suisse First Boston LLC, J.P. Morgan
Securities Inc., and Lehman Brothers Inc., dated November 21, 2003,
and (ii) Credit Suisse First Boston, J.P. Morgan Securities Inc.,
JPMorgan Chase Bank, Lehman Commercial Paper Inc., and Lehman Brothers
Inc., dated November 21, 2003, with respect to the debt financing and
the equity letter attached as Exhibit B to the Merger Agreement from
Saguaro Utility Group L.P., dated November 21, 2003;
j) reviewed the draft Merger Agreement, and certain related documents;
and,
k) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the 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. In
addition, we have assumed that the Merger will be consummated in accordance with
the terms set forth in the Merger Agreement. 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. As you know, we are not legal or
regulatory experts and have relied on the assessments of other advisors to the
Company with respect to such issues. Our opinion is necessarily based on
economic, regulatory, market and other conditions as in effect on, and the
information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors and the Strategic
Transaction Advisory Committee of the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Board of
Directors and the Strategic Transaction Advisory Committee of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the Merger with the Securities
and Exchange Commission. In addition, Morgan Stanley expresses no opinion or
recommendation as to how the shareholders of the Company should vote at the
shareholders' meetings held in connection with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date hereof
that the consideration to be received by the holders of shares of Common Stock
pursuant to the Merger Agreement is fair from a financial point of view to such
holders (other than the Limited Partnership and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Daniel B. More
----------------------------
Daniel B. More
Managing Director
FORM OF PROXY CARD
UNISOURCE ENERGY
TWO NEW WAYS TO VOTE
VOTE BY TELEPHONE OR INTERNET
24 HOURS A DAY - 7 DAYS A WEEK
SAVE YOUR COMPANY MONEY - IT'S FAST AND CONVENIENT
TELEPHONE
1-866-358-4695
o Use any touch-tone telephone.
o Have your proxy card ready.
o Enter your Control Number located in the box below.
o Follow the simple recorded instructions.
OR
INTERNET
https://www.proxyvotenow.com/uns
o Go to the website address listed above.
o Have your proxy card ready.
o Enter your Control Number located in the box below.
o Follow the simple instructions on the website.
OR
MAIL
o Mark, sign and date your proxy card.
o Detach your proxy card.
o Return your proxy card in the postage-paid envelope provided.
You can vote your shares by telephone, the
Internet, mail or in person at the Special
Meeting. Your telephone or Internet vote
authorizes the named proxies to vote your
shares in the same manner as if you marked,
signed and returned your proxy card. If you
have submitted your proxy by the Internet or
telephone there is no need to mail your proxy
card.
1-866-358-4695
CALL TOLL-FREE TO VOTE
CONTROL NUMBER FOR
TELEPHONE OR INTERNET VOTING
THE INTERNET AND TELEPHONE VOTING FACILITIES WILL BE AVAILABLE UNTIL 5:00 P.M.
E.S.T. ON , , 2004.
DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY THE INTERNET OR TELEPHONE.
(FORM OF PROXY CARD - FRONT)
[X]
Please sign, Date and Return the Proxy Votes MUST be indicated (X) in Black
Promptly Using the Enclosed Envelope or Blue Ink.
1. To approve the Agreement and Plan of Merger between Saguaro Acquisition
Corp. and UniSource Energy Corporation so that the acquisition can occur.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
To change your address
please mark this box. [ ]
To include any comments
please mark this box. [ ]
SCAN LINE
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
HEREON. When shares are held by joint tenants
in common or as community property, both
should sign. When signing as attorney,
executor, administrator, trustee, guardian or
custodian, please give full title as such. If
a corporation, please sign in corporate name
by President or other authorized officer. If
a partnership, please sign in partnership
name by authorized person. Receipt is hereby
acknowledged of Notice of Special Meeting and
Proxy Statement.
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Date Shareholder sign here
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Date Co-Owner sign here
A street map showing the location of the SHERATON TUCSON HOTEL & SUITES
Special Meeting is set forth in this area
LOCATION
5151 East Grant Road
Tucson, Arizona 85712
(between Swan and Craycroft)
520-323-6262 - Hotel Direct
800-325-3535 - Reservations
TRANSPORTATION
From Tucson International Airport
Shuttle Service
Arizona Stagecoach
Call 520-889-1000 pricing and
reservations
Automobile - Interstate 10 to
Grant Road exit
(FORM OF PROXY CARD - BACK)
UNISOURCE ENERGY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE SPECIAL MEETING TO BE HELD ON , , 2004.
P R O X Y
The undersigned hereby appoints James S. Pignatelli and Kevin P. Larson,
and each of them, with the power of substitution, to represent and to vote on
behalf of the undersigned all shares of Common Stock which the undersigned is
entitled to vote at the Special Meeting scheduled to be held at the Sheraton
Tucson Hotel and Suites, 5151 Grant Road, Tucson, Arizona, on ,
, 2004, and at any adjournments or postponements thereof, with all
powers the undersigned would possess if personally present and in their
discretion, upon such other matters as may properly come before the Special
Meeting, including, if submitted to a vote of the shareholders, a motion to
adjourn the Special Meeting to another time or place for the purpose of
soliciting additional proxies. This proxy, when executed, will be voted in the
manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED "FOR" PROPOSAL 1.
(Continued, and to be dated and signed on
reverse side.)
UNISOURCE ENERGY CORPORATION
C/O THE BANK OF NEW YORK
P. O. BOX. 11030
NEW YORK, N.Y. 10203-0030