<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1997
REGISTRATION NO. 333-26449
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLEGHENY POWER SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 4911 13-5531602
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
10435 DOWNSVILLE PIKE
HAGERSTOWN, MARYLAND 21740
(301) 790-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
THOMAS K. HENDERSON
ALLEGHENY POWER SYSTEM, INC.
10435 DOWNSVILLE PIKE
HAGERSTOWN, MARYLAND 21740
(301) 790-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
VICTOR A. ROQUE JOSEPH B. FRUMKIN DOUGLAS W. HAWES
DQE, INC. SULLIVAN & CROMWELL LEBOEUF, LAMB, GREENE &
500 CHERRINGTON PARKWAY 125 BROAD STREET MACRAE, L.L.P.
CORAOPOLIS, PENNSYLVANIA 15108 NEW YORK, NEW YORK 10004 125 WEST 55TH STREET
NEW YORK, NEW YORK 10019
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
ALLEGHENY POWER SYSTEM, INC.
10435 DOWNSVILLE PIKE
HAGERSTOWN, MARYLAND 21740
(301) 790-3400
June , 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"APS Special Meeting") of Allegheny Power System, Inc., a Maryland corporation
("APS"), to be held on August 7, 1997, at [a.m.] [p.m.], local time, at
.
At the APS Special Meeting, you will be asked to consider and vote on a
proposal to approve the issuance of shares of Common Stock, par value $1.25 per
share, of APS ("APS Common Stock") pursuant to the Agreement and Plan of Merger,
dated as of April 5, 1997 (the "Merger Agreement"), among DQE, Inc. ("DQE"), a
Pennsylvania corporation, APS and AYP Sub, Inc., which is to be formed as a
Pennsylvania corporation and a wholly owned subsidiary of APS ("Merger Sub"),
pursuant to which Merger Sub will be merged with and into DQE (the "Merger") and
DQE will become a wholly owned subsidiary of APS, and to approve the
transactions contemplated thereby. Upon the Merger becoming effective, each
share of Common Stock, no par value, of DQE will be converted into 1.12 shares
of APS Common Stock (the "Exchange Ratio"). In addition, at the APS Special
Meeting, you will be asked to consider and vote on a proposal to approve an
amendment to the Restated Charter of APS to change the name of APS to Allegheny
Energy, Inc. (the "Charter Amendment"). If the amendment is approved, we will
change the name of APS to Allegheny Energy whether or not the merger is
consummated.
The Board of Directors of APS has carefully reviewed and considered the
terms and conditions of the Merger. In addition, the Board of Directors of APS
has received the written opinion of its financial advisor, Merrill Lynch & Co.,
to the effect that as of April 4, 1997, the Exchange Ratio was fair from a
financial point of view to the holders of APS Common Stock.
THE BOARD OF DIRECTORS OF APS HAS DETERMINED THAT THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY ARE ADVISABLE FOR, FAIR TO, AND IN THE
BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE OF THE SHARES OF APS COMMON STOCK
CONTEMPLATED BY THE MERGER AGREEMENT. THE BOARD OF DIRECTORS OF APS ALSO
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO ADOPT THE
CHARTER AMENDMENT.
I urge you to review and consider carefully the accompanying Notice of
Special Meeting of Stockholders of APS and Joint Proxy Statement/Prospectus,
which contain information about APS and DQE and describe the Merger and certain
other matters.
The affirmative vote of a majority of the votes cast at the APS Special
Meeting is necessary for approval of the issuance of shares of APS Common Stock
pursuant to the Merger Agreement. The affirmative vote of a majority of the
total number of shares of APS Common Stock outstanding is necessary for approval
of the Charter Amendment.
IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE APS SPECIAL MEETING, YOU
ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE APS SPECIAL
MEETING. If you attend the APS Special Meeting and desire to revoke your proxy
in writing and vote in person, you may do so; in any event, a proxy may be
revoked in writing at any time before it is exercised. Your prompt cooperation
will be appreciated.
Sincerely,
[Signature]
ALAN J. NOIA
Chairman of the Board, President and
Chief Executive Officer
<PAGE> 3
ALLEGHENY POWER SYSTEM, INC.
10435 DOWNSVILLE PIKE
HAGERSTOWN, MARYLAND 21740
(301) 790-3400
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 7, 1997
------------------------
To the Stockholders of Allegheny Power System, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "APS
Special Meeting") of Allegheny Power System, Inc., a Maryland corporation
("APS"), has been called by the Executive Committee of the Board of Directors of
APS and will be held at at [a.m.] [p.m.], local time, on August
7, 1997, the purpose of which will be to consider and vote upon the following
matters described in the accompanying Joint Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve the issuance
of shares of Common Stock, par value $1.25 per share, of APS
("APS Common Stock") pursuant to the Agreement and Plan of
Merger, dated as of April 5, 1997 (the "Merger Agreement"),
among DQE, Inc., a Pennsylvania corporation ("DQE"), APS and
AYP Sub, Inc., which is to be formed as a Pennsylvania
corporation and a wholly owned subsidiary of APS ("Merger
Sub"), pursuant to which Merger Sub will be merged with and
into DQE and DQE will become a wholly owned subsidiary of
APS, and to approve the transactions contemplated thereby;
2. To consider and vote upon a proposal to approve an amendment
to the Restated Charter of APS to change the name of APS to
Allegheny Energy, Inc. (the "Charter Amendment"); and
3. To transact such other business as may properly come before
the APS Special Meeting or any adjournments or postponements
thereof.
Notwithstanding stockholder approval of proposal number 1, APS reserves the
right to terminate the Merger Agreement and abandon the merger of Merger Sub
with and into DQE (the "Merger") at any time prior to the consummation of the
Merger, subject to the terms and conditions of the Merger Agreement.
The Executive Committee of the Board of Directors of APS has fixed the
close of business on June 30, 1997, as the record date for the determination of
stockholders entitled to notice of, and to vote at, the APS Special Meeting, and
only stockholders of record at such time will be entitled to notice of, and to
vote at, the APS Special Meeting.
Approval of the issuance of shares of APS Common Stock pursuant to the
Merger Agreement requires the affirmative vote of a majority of the votes cast
at the APS Special Meeting. Approval of the Charter Amendment requires the
affirmative vote of a majority of the total number of shares of APS Common Stock
outstanding.
A form of Proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the APS
Special Meeting (including the Merger Agreement attached as Appendix A thereto)
accompany and form a part of this notice.
<PAGE> 4
Whether or not you plan to attend the APS Special Meeting, please promptly
complete, sign, date and return the enclosed proxy in the enclosed addressed,
postage-prepaid envelope. Prior to the voting of the proxy at the APS Special
Meeting, any person giving a proxy has the power to revoke it in writing or by
attending the APS Special Meeting and voting in person.
------------------------
THE BOARD OF DIRECTORS OF APS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
IN FAVOR OF THE ISSUANCE OF SHARES OF APS COMMON STOCK CONTEMPLATED BY THE
MERGER AGREEMENT AND IN FAVOR OF THE CHARTER AMENDMENT.
By Order of the Executive Committee of
the Board of Directors
[Signature]
EILEEN M. BECK
Secretary
Hagerstown, Maryland
June , 1997
The Proxy Solicitor For Allegheny Power System, Inc.:
[MACKENZIE PARTNERS LOGO]
156 Fifth Avenue
New York, NY 10010
<TABLE>
<C> <S>
Call Toll Free: 1-800-322-2885
Call Collect: 1-212-929-5500
</TABLE>
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND RETURN YOUR PROXY.
<PAGE> 5
DQE, INC.
500 CHERRINGTON PARKWAY
CORAOPOLIS, PENNSYLVANIA 15108-3184
(412) 262-4700
June , 1997
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders (the
"DQE Meeting") of DQE, Inc., a Pennsylvania corporation ("DQE"), to be held on
August 7, 1997, at 11:00 a.m., local time, at the Manchester Craftsmen's Guild
Auditorium, 1815 Metropolitan Street, Pittsburgh, Pennsylvania 15233.
At the DQE Meeting, you will be asked to consider and vote on a proposal to
approve a business combination (the "Merger") between DQE and a corporation to
be formed as a wholly owned subsidiary of Allegheny Power System, Inc. ("APS")
which will result in DQE becoming a wholly owned subsidiary of APS and each DQE
stockholder receiving 1.12 shares (the "Exchange Ratio") of APS common stock for
each share of DQE common stock ("DQE Common Stock"). Upon consummation of the
Merger, former stockholders of DQE will own approximately % of the outstanding
shares of APS, which will have changed its name to Allegheny Energy, Inc.
The Board of Directors of DQE has received the written opinion, dated April
5, 1997, of its financial advisor, Credit Suisse First Boston Corporation, to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Exchange Ratio was fair to the holders of DQE Common
Stock from a financial point of view.
YOUR BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF DQE AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR BOARD UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR ITS APPROVAL.
More detailed information concerning the Merger, together with financial
and other information concerning the businesses of DQE and APS, is included in
the enclosed Joint Proxy Statement/Prospectus. I urge you to review this
material carefully.
In addition, at the DQE meeting, you will be asked to elect four directors
to the Board of Directors of DQE to serve until the annual meeting of DQE's
stockholders in the year 2000 (the "Director Proposal"); to consider and vote
upon a proposal to approve the appointment by the Board of Directors of DQE of
Deloitte & Touche LLP as independent public accountants to audit the books of
DQE for the year ending December 31, 1997 (the "Accountant Proposal"); and to
consider and vote upon a proposal from a stockholder of DQE (the "Stockholder
Proposal"), if presented at the DQE meeting.
YOUR BOARD UNANIMOUSLY RECOMMENDS ADOPTION OF THE DIRECTOR PROPOSAL AND THE
ACCOUNTANT PROPOSAL AND UNANIMOUSLY RECOMMENDS VOTING AGAINST THE STOCKHOLDER
PROPOSAL.
The affirmative vote of a majority of the votes cast at the DQE Meeting is
necessary for approval of the Merger. The votes required with respect to the
other matters to be acted upon at the DQE Meeting are described in the attached
Joint Proxy Statement/Prospectus.
Promptly after the Merger is consummated you will be sent a letter of
transmittal with instructions for surrendering your certificates representing
shares of DQE Common Stock. PLEASE DO NOT SEND YOUR SHARE CERTIFICATES UNTIL YOU
RECEIVE THESE MATERIALS.
<PAGE> 6
IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE DQE MEETING, YOU ARE
URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE DQE MEETING. If you
attend the DQE Meeting and desire to revoke your Proxy in writing and vote in
person, you may do so; in any event, a Proxy may be revoked in a writing
delivered to the Corporate Secretary of DQE at any time before it is voted. Your
prompt response will be appreciated.
Sincerely,
[Signature]
DAVID D. MARSHALL
President and Chief Executive Officer
<PAGE> 7
DQE, INC.
500 CHERRINGTON PARKWAY
CORAOPOLIS, PENNSYLVANIA 15108-3184
(412) 262-4700
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 7, 1997
------------------------
To the Stockholders of DQE, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "DQE
Meeting") of DQE, a Pennsylvania corporation ("DQE"), has been called by the
Board of Directors of DQE (the "DQE Board") and will be held at the Manchester
Craftsmen's Guild Auditorium, 1815 Metropolitan Street, Pittsburgh, Pennsylvania
15233 at 11:00 a.m., local time, on August 7, 1997, to consider and vote upon
the following matters described in the accompanying Joint Proxy
Statement/Prospectus:
1. To consider and vote upon a proposal to adopt the Agreement
and Plan of Merger, dated as of April 5, 1997 (the "Merger
Agreement"), among DQE, Allegheny Power System, Inc., a Maryland
corporation ("APS"), and AYP Sub, Inc., which is to be formed as
a Pennsylvania corporation and a wholly owned subsidiary of APS
("Merger Sub"), pursuant to which Merger Sub will be merged with
and into DQE and DQE will become a wholly owned subsidiary of
APS, and to approve the transactions provided for in the Merger
Agreement;
2. To elect four directors to the DQE Board to serve until the
annual meeting of stockholders of DQE in the year 2000 or until
their respective successors have been chosen and qualified;
3. To consider and vote upon a proposal to approve the
appointment, by the DQE Board, of Deloitte & Touche LLP as
independent public accountants to audit the books of DQE for the
year ending December 31, 1997;
4. To consider and vote upon a proposal from a stockholder of
DQE, if presented at the DQE Meeting; and
5. To transact such other business as may properly come before
the DQE Meeting or any adjournments or postponements thereof.
The Board of Directors of DQE has fixed the close of business on June 16,
1997, as the record date for the determination of stockholders entitled to
notice of, and to vote at, the DQE Meeting, and only stockholders of record at
such time will be entitled to notice of, and to vote at, the DQE Meeting.
A form of Proxy and a Joint Proxy Statement/Prospectus containing more
detailed information with respect to the matters to be considered at the DQE
Meeting (including the Merger Agreement attached as Appendix A thereto)
accompany and form a part of this notice.
Whether or not you plan to attend the DQE Meeting, please promptly
complete, sign, date and return the enclosed Proxy in the enclosed addressed,
postage-prepaid envelope. If you attend the DQE Meeting and desire to revoke
your Proxy in writing and vote in person, you may do so; in any event, a Proxy
may be revoked in a writing delivered to the Corporate Secretary of DQE at any
time before it is voted.
By Order of the Board of Directors
[Signature]
DIANE S. EISMONT
Corporate Secretary
Coraopolis, Pennsylvania
June , 1997
<PAGE> 8
The Proxy Solicitor for DQE, Inc.:
Beacon Hill Partners, Inc.
90 Broad Street
New York, NY 10004
Call Toll Free: 1-800-253-3814
Call Collect: 1-212-843-8500
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND RETURN YOUR PROXY.
<PAGE> 9
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 18, 1997
JOINT PROXY STATEMENT
OF
ALLEGHENY POWER SYSTEM, INC.
AND
DQE, INC.
------------------------
PROSPECTUS
OF
ALLEGHENY POWER SYSTEM, INC.
------------------------
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Allegheny Power System, Inc., a Maryland corporation ("APS"), in connection with
the solicitation of proxies by the Board of Directors of APS from holders of
outstanding shares of common stock, par value $1.25 per share, of APS ("APS
Common Stock"), for use at the special meeting of stockholders of APS to be held
on August 7, 1997 and at any adjournments or postponements thereof (the "APS
Special Meeting"). This Joint Proxy Statement/Prospectus is also being furnished
to the stockholders of DQE, Inc., a Pennsylvania corporation ("DQE"), in
connection with the solicitation of proxies by the Board of Directors of DQE
(the "DQE Board") from holders of outstanding shares of common stock, no par
value, of DQE ("DQE Common Stock") for use at the annual meeting of stockholders
of DQE to be held on August 7, 1997 and at any adjournments or postponements
thereof (the "DQE Meeting," and, together with the APS Special Meeting, the
"Stockholders Meetings").
At the APS Special Meeting, the holders of APS Common Stock will be asked
to consider and vote upon proposals (i) to approve the issuance of shares of APS
Common Stock contemplated by the Agreement and Plan of Merger, dated as of April
5, 1997 (the "Merger Agreement"), among DQE, APS and AYP Sub, Inc., which is to
be formed as a Pennsylvania corporation and a wholly owned subsidiary of APS
("Merger Sub") and (ii) to approve an amendment to the Restated Charter of APS
to change the name of APS to Allegheny Energy, Inc. The Merger Agreement is
attached as Appendix A to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference.
At the DQE Meeting, the holders of DQE Common Stock will be asked (i) to
consider and vote upon a proposal to adopt the Merger Agreement and to approve
the transactions contemplated by the Merger Agreement, (ii) to elect four
directors to the DQE Board to serve until the annual meeting of stockholders of
DQE in the year 2000, (iii) to consider and vote upon a proposal to approve the
appointment of Deloitte & Touche LLP as independent accountants of DQE for the
year ending December 31, 1997, and (iv) to consider and vote upon a proposal
from a stockholder of DQE, if presented at the DQE Meeting. See "Other
Information for the DQE Meeting."
The Merger Agreement provides for the merger of Merger Sub with and into
DQE (the "Merger"). DQE will be the corporation surviving the Merger and will
become a wholly owned subsidiary of APS. Upon the Merger becoming effective,
each share of DQE Common Stock issued and outstanding immediately prior to such
time (other than shares of DQE Common Stock owned by APS, Merger Sub or any
other direct or indirect subsidiary of APS and shares of DQE Common Stock that
are owned by DQE or any direct or indirect subsidiary of DQE, in each case not
held on behalf of third parties, and which are not shares of DQE Common Stock
held by Duquesne Light Company, a subsidiary of DQE, to provide for redemption
of such subsidiary's preference shares pursuant to the terms of such
subsidiary's 401(k) plan or to provide benefits under another employee benefit
plan of such subsidiary (collectively, the "Excluded Shares")) will be converted
into the right to receive, and become exchangeable for, 1.12 shares of APS
Common Stock. See "The Merger -- Terms of the Merger."
APS has filed a Registration Statement on Form S-4 (including exhibits and
amendments thereto, the "Registration Statement") pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), covering the maximum number of
shares of APS Common Stock estimated to be issuable upon consummation of the
Merger. APS has registered 90,557,682 shares of APS Common Stock under the
Registration Statement. This Joint Proxy Statement/Prospectus constitutes the
respective Proxy Statements of APS and DQE relating to the solicitation of
proxies for use at their respective Stockholders Meetings and the Prospectus of
APS filed as part of the Registration Statement. The information contained in
this Joint Proxy Statement/Prospectus with respect to APS and its subsidiaries
has been supplied by APS, and the information with respect to DQE and its
subsidiaries has been supplied by DQE. This Joint Proxy Statement/Prospectus and
the proxy cards are first being provided to holders of shares of APS Common
Stock and DQE Common Stock on or about , 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is June , 1997
<PAGE> 10
AVAILABLE INFORMATION
Each of APS and DQE is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). The reports, proxy
statements and other information filed by APS and DQE with the SEC can be
inspected and copied at the SEC's public reference room located at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
public reference facilities in the SEC's regional offices located at: 7 World
Trade Center, 13th Floor, New York, New York 10048, and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates by writing to the Securities and
Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and can be accessed electronically on the SEC's Web site
at http://www.sec.gov. The shares of APS Common Stock are listed on the New York
Stock Exchange (the "NYSE"), the Chicago Stock Exchange (the "CSE"), the Pacific
Stock Exchange (the "PSE") and the Amsterdam Stock Exchange (the "AMSE"); and
the shares of DQE Common Stock are listed on the NYSE, the CSE and the
Philadelphia Stock Exchange (the "PHSE"). As such, the periodic reports, proxy
statements and other information filed by APS and DQE may be inspected at the
offices of those exchanges as follows: (i) the NYSE, at 20 Broad Street, New
York, New York 10005; (ii) the CSE, at One Financial Place, 444 LaSalle Street,
Chicago, Illinois 60605; (iii) with respect to APS, the PSE, at 301 Pine Street,
San Francisco, California 94101; (iv) with respect to APS, the AMSE, at
Bevrsplein 5, P.O. Box 19163, 1000 GD Amsterdam, The Netherlands; and (v) with
respect to DQE, the PHSE, at 1900 Market Street, Philadelphia, Pennsylvania
19103.
APS has filed a Registration Statement with the SEC under the Securities
Act with respect to the shares of APS Common Stock issuable upon consummation of
the Merger. This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. The
Registration Statement, including any amendments, schedules and exhibits
thereto, is available for inspection and copying as set forth above. Summaries
of the contracts or other documents referred to herein are summaries of the
material provisions thereof and are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO APS,
EXCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE UPON
REQUEST TO EILEEN BECK, SECRETARY, ALLEGHENY POWER SYSTEM, INC., 10435
DOWNSVILLE PIKE, HAGERSTOWN, MARYLAND 21740. TELEPHONE REQUESTS MAY BE DIRECTED
TO EILEEN BECK, SECRETARY, AT (301) 790-3400. DOCUMENTS RELATING TO DQE,
EXCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN, ARE AVAILABLE WITHOUT CHARGE UPON REQUEST TO
DIANE EISMONT, CORPORATE SECRETARY, DQE, INC., BOX 68, PITTSBURGH, PENNSYLVANIA
15230-0068. TELEPHONE REQUESTS MAY BE DIRECTED TO DIANE EISMONT, CORPORATE
SECRETARY, AT (412) 393-6080. IN ORDER TO ENSURE TIMELY DELIVERY OF ANY SUCH
DOCUMENT, ANY REQUEST SHOULD BE MADE BY , 1997.
The following documents filed with the SEC by APS (File No. 1-267) are
incorporated herein by reference: (a) APS' Annual Report on Form 10-K for the
year ended December 31, 1996 (the "1996 APS 10-K"); (b) APS' Current Report on
Form 8-K, dated April 5, 1997 and (c) APS' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.
The following documents filed with the SEC by DQE (File No. 1-10290) are
incorporated herein by reference: (a) DQE's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (the "1996 DQE 10-K"); (b) DQE's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997; (c) DQE's Current
Report on Form 8-K, dated April 9, 1997; and (d) the description of DQE Common
Stock contained in DQE's Registration Statement on Form 8-B/A-1, dated May 1,
1995.
ii
<PAGE> 11
All documents filed by either APS or DQE pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the applicable Stockholders Meeting and any adjournment or postponement
thereof shall be deemed to be incorporated herein by reference and to be a part
hereof from the date of such filing. Any statement contained herein or in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any other subsequently filed document which
also is, or is deemed to be, incorporated herein by reference modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part hereof, except as so modified or superseded.
No person is authorized to give any information or to make any
representations not contained in this Joint Proxy Statement/Prospectus or in the
documents incorporated herein by reference in connection with the solicitation
and the offering made hereby and, if given or made, such information or
representation should not be relied upon as having been authorized by APS or
DQE. This Joint Proxy Statement/Prospectus does not constitute an offer to sell,
or a solicitation of an offer to purchase, the securities offered by this Joint
Proxy Statement/Prospectus, or the solicitation of a proxy from any person, in
any jurisdiction in which it is unlawful to make such offer, solicitation of an
offer or proxy solicitation. Neither the delivery of this Joint Proxy
Statement/Prospectus nor any distribution of the securities made under this
Joint Proxy Statement/Prospectus hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of APS or DQE
since the date of this Joint Proxy Statement/Prospectus other than as set forth
in the documents incorporated herein by reference.
iii
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................................. ii
Incorporation of Certain Information by Reference..................................... ii
Summary............................................................................... 1
The Companies....................................................................... 1
The Stockholders Meetings........................................................... 2
The Merger.......................................................................... 3
The Merger Agreement................................................................ 6
Certain Regulatory Matters.......................................................... 9
Interests of Certain Persons in the Merger.......................................... 9
Accounting Treatment................................................................ 10
Resale of APS Common Stock.......................................................... 11
Dividends........................................................................... 11
Certain Federal Income Tax Consequences............................................. 11
Certain Related Agreements.......................................................... 11
Certain Effects of the Merger on the Rights of Holders of DQE Common Stock.......... 12
APS Charter Amendment............................................................... 12
Other Information for the DQE Meeting............................................... 12
Comparative Stock Prices............................................................ 13
Selected Unaudited Historical and Pro Forma Combined Financial Data................. 14
Notes to Selected Unaudited Historical and Pro Forma Combined Financial Data........ 16
The Stockholders Meetings............................................................. 17
General............................................................................. 17
Date, Place and Time................................................................ 17
Record Dates........................................................................ 18
Votes Required...................................................................... 18
Voting and Revocation of Proxies.................................................... 19
Solicitation of Proxies............................................................. 20
The Companies......................................................................... 20
Prior Contacts Between the Companies.................................................. 21
The Merger............................................................................ 21
General............................................................................. 21
Terms of the Merger................................................................. 22
Effective Time...................................................................... 22
Exchange of Certificates............................................................ 22
Appraisal Rights.................................................................... 24
Background of the Merger............................................................ 24
Reasons for the Merger; Recommendations of the Boards of Directors.................. 25
Synergies........................................................................... 27
Opinions of Financial Advisors...................................................... 27
Management and Operations Following the Merger...................................... 35
Cautionary Statement Concerning Forward-Looking Statements.......................... 35
The Merger Agreement.................................................................. 36
Representations and Warranties...................................................... 36
Conduct of Business Pending the Merger; Certain Covenants; Acquisition Proposals.... 37
Conditions.......................................................................... 40
Modification or Amendment; Waiver of Conditions; Extension.......................... 41
</TABLE>
iv
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Termination......................................................................... 42
Certain Termination Fees............................................................ 43
Expenses............................................................................ 44
Stock Options....................................................................... 44
Nuclear Matters..................................................................... 44
Certain Regulatory Provisions....................................................... 44
New York Stock Exchange Listing; De-Listing of DQE Common Stock..................... 45
Certain Regulatory Matters............................................................ 45
HSR Act............................................................................. 45
Federal Power Act................................................................... 45
PUHCA............................................................................... 45
Nuclear Regulatory Commission....................................................... 46
Pennsylvania Public Utility Commission.............................................. 46
Maryland Public Service Commission.................................................. 47
Other Regulatory Matters............................................................ 47
Power Supply Agreement.............................................................. 47
Effects of Certain Regulatory Trends................................................ 47
Interests of Certain Persons in the Merger............................................ 48
Directors and Officers.............................................................. 48
Severance Agreements................................................................ 49
DQE, Inc. Long-Term Incentive Plan.................................................. 49
Director and Officer Indemnification and Insurance.................................. 50
Accounting Treatment.................................................................. 50
Resale of APS Common Stock............................................................ 50
Dividends............................................................................. 51
Certain Federal Income Tax Consequences of the Merger................................. 51
General............................................................................. 51
Consequences to DQE Stockholders.................................................... 52
Fractional Shares................................................................... 52
Consequences to DQE, APS, Merger Sub and Holders of APS Common Stock................ 52
Certain Related Agreements............................................................ 53
Stock Option Agreement.............................................................. 53
Letter Agreement.................................................................... 55
Unaudited Pro Forma Combined Financial Information of APS and DQE..................... 56
Notes to Unaudited Pro Forma Combined Financial Information........................... 75
Description of APS Capital Stock...................................................... 76
APS Common Stock.................................................................... 76
Comparison of Certain Rights of the Holders of APS Common Stock and DQE Common
Stock............................................................................... 76
General............................................................................. 76
Size and Classification of the Board of Directors................................... 77
Election and Removal of Directors; Filling of Vacancies on the Board of Directors... 77
Duties of Directors................................................................. 78
Meetings of Stockholders............................................................ 79
Action by Written Consent........................................................... 80
Stockholder Proposals and Stockholder Nominations of Directors...................... 80
Amendment of Charter and Bylaws..................................................... 81
Required Vote for Authorization of Certain Actions.................................. 82
Appraisal and Dissenters' Rights.................................................... 83
</TABLE>
v
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
State Anti-Takeover Statutes........................................................ 84
Indemnification of Officers and Directors........................................... 87
Fair Price and Anti-Greenmail Provisions in the Charter Documents................... 88
Conflict-of-Interest Transactions................................................... 89
The APS Charter Amendment............................................................. 89
Other Information for the DQE Meeting................................................. 90
Election of Directors............................................................... 90
Nominees for Directors.............................................................. 90
Standing Directors.................................................................. 91
Directors' Fees and Plans........................................................... 92
The DQE Board and Its Committees.................................................... 93
Beneficial Ownership of Securities of DQE........................................... 93
Compensation Committee Report on Executive Compensation............................. 95
Section 16(a) Beneficial Ownership Reporting Compliance............................. 99
Compensation Committee Interlocks and Insider Participation......................... 99
Performance Graph................................................................... 99
Compensation........................................................................ 100
Retirement Plan..................................................................... 103
Employment and Change of Control.................................................... 103
Approval of Appointment of Independent Public Accountants........................... 104
Proposal of a DQE Stockholder....................................................... 105
Management's Statement in Opposition................................................ 106
Other Matters....................................................................... 107
Experts............................................................................... 107
Validity of Shares.................................................................... 107
Stockholder Proposals................................................................. 107
APPENDIX A: Agreement and Plan of Merger, dated as of April 5, 1997, among DQE, Inc.,
Allegheny Power System, Inc. and AYP Sub, Inc....................... A-1
APPENDIX B: Opinion of Merrill Lynch & Co., dated as of , 1997......... B-1
APPENDIX C: Opinion of Credit Suisse First Boston Corporation, dated as of ,
1997................................................................................ C-1
</TABLE>
vi
<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. It does not purport to be complete and
is qualified in its entirety by reference to the full text of this Joint Proxy
Statement/Prospectus, including the Appendices attached hereto and the documents
incorporated herein by reference. Stockholders are urged to read this Joint
Proxy Statement/Prospectus in its entirety. The information contained in this
Joint Proxy Statement/Prospectus with respect to Allegheny Power System, Inc.
("APS") and AYP Sub, Inc., which is to be formed as a Pennsylvania corporation
and a wholly owned subsidiary of APS ("Merger Sub"), has been supplied by APS,
and the information with respect to DQE, Inc. ("DQE," and sometimes hereinafter
referred to, with respect to the period following the Merger (as defined below),
as the "Surviving Corporation") has been supplied by DQE. Neither APS nor DQE is
responsible for inaccuracies, if any, in the information furnished by the other
party for use herein.
THE COMPANIES
APS
APS is a registered electric utility holding company which in 1996 had
operating revenues of approximately $2.3 billion. At December 31, 1996, APS had
total assets of approximately $6.6 billion. APS was incorporated in 1925 in
Maryland and owns, directly or indirectly, various regulated and unregulated
subsidiaries. APS' primary subsidiaries are engaged principally in the
generation, transmission, distribution and sale of electric energy. Its
subsidiaries' properties, which are interconnected and are operated as a single
integrated electric utility system, are located in Maryland, Ohio, Pennsylvania,
Virginia and West Virginia and provide energy to customers in portions of each
of those states. APS provides electric service to nearly 1.4 million customers
in an area of about 29,000 square miles.
The mailing address of APS' principal executive offices is 10435 Downsville
Pike, Hagerstown, Maryland 21740, and its telephone number is (301) 790-3400.
DQE
DQE is an energy services holding company incorporated in 1989 in
Pennsylvania which owns various regulated and unregulated subsidiaries. DQE's
subsidiaries include (i) an electric utility engaged in the production,
transmission, distribution and sale of electrical energy, (ii) a company that
makes strategic investments related to DQE's core energy business, (iii) a
company that offers energy solutions to customers in domestic and international
markets such as energy facility development, operation and maintenance and
independent power production, (iv) a company formed to explore strategic
business opportunities in the energy industry, and (v) a financial services
company that makes long-term investments and provides financing for DQE's
services and products. DQE's electric utility provides electric service to
customers in a service territory of about 800 square miles in southwestern
Pennsylvania, comprised of parts of Allegheny County (including the City of
Pittsburgh), and parts of Beaver County and Westmoreland County. This electric
utility provides service to about 580,000 customers in this service area and its
revenues account for the majority of DQE's revenue. In 1996, DQE had operating
revenues of approximately $1.2 billion. At December 31, 1996, DQE had total
assets of approximately $4.6 billion.
Duquesne Light Company, a subsidiary of DQE ("Duquesne Light"), owns
interests in three nuclear facilities. Duquesne Light owns a 13.74% interest in
Perry Power Station Unit 1 ("Perry Unit 1"), a 47.50% interest in Beaver Valley
Power Station Unit 1 ("Beaver Valley 1") and a 13.74% interest in Beaver Valley
Power Station Unit 2 ("Beaver Valley 2") (each, a "Nuclear Facility" and,
collectively, the "Nuclear Facilities").
Allegheny Development Corporation ("ADC") is a wholly owned subsidiary of
Duquesne Enterprises, Inc. which, in turn, is a wholly owned subsidiary of DQE.
ADC is an electric utility company engaged in the business of owning facilities
to provide complete energy services. Upon approval by the SEC, ADC will assign
to DH Energy, Inc. (a wholly owned subsidiary of DQE Energy Services, Inc.
("DES")) all of its rights and obligations under certain agreements, and DH
Energy, Inc. will become a public utility company pursuant to the PUHCA.
<PAGE> 16
In addition, DES will shortly be forming a new wholly owned subsidiary, MT
Energy, Inc. ("MT"). Upon SEC approval, MT will, among other things, enter into
an Operation and Maintenance Services Agreement with ADC, and become a public
utility company pursuant to the PUHCA.
The mailing address of DQE's principal executive offices is 500 Cherrington
Parkway, Coraopolis, Pennsylvania 15108, and its telephone number is (412)
262-4700.
Merger Sub
Merger Sub is to be formed as a wholly owned subsidiary of APS solely for
the purpose of effecting the merger of Merger Sub with and into DQE (the
"Merger"). The mailing address of Merger Sub's principal executive offices will
be 10435 Downsville Pike, Hagerstown, Maryland 21740, and its telephone number
will be (301) 790-3400.
THE STOCKHOLDERS MEETINGS
APS
The special meeting of stockholders of APS (the "APS Special Meeting") to
consider and vote upon (i) the approval of the issuance of the shares of Common
Stock, par value $1.25 per share, of APS ("APS Common Stock") as contemplated by
the Agreement and Plan of Merger, dated as of April 5, 1997 (the "Merger
Agreement"), among DQE, APS and Merger Sub, and (ii) the approval of an
amendment to the Restated Charter of APS ( the "APS Charter") to change the name
of APS to Allegheny Energy, Inc. (the "Charter Amendment") will be held on
August 7, 1997 at [a.m.][p.m.], local time, at . Only
holders of record of APS Common Stock at the close of business on June 30, 1997
(the "APS Record Date") will be entitled to vote at the APS Special Meeting. At
, 1997, there were shares of APS Common Stock outstanding
and entitled to vote. Each share of APS Common Stock is entitled to one vote.
The affirmative vote of a majority of the votes cast at the APS Special
Meeting is necessary for the approval of the issuance of the shares of APS
Common Stock pursuant to the Merger Agreement. The affirmative vote of a
majority of the total number of shares of APS Common Stock outstanding is
necessary for adoption of the Charter Amendment.
As of , 1997, directors and executive officers of APS and
their affiliates beneficially owned an aggregate of shares of APS
Common Stock (including shares which may be acquired within 60 days upon
exercise of stock options) or less than % of the shares of APS Common Stock
outstanding on such date. The directors and executive officers of APS have
indicated their intention to vote their shares of APS Common Stock in favor of
approval of the issuance of the shares of APS Common Stock as contemplated by
the Merger Agreement and in favor of approval of the Charter Amendment.
DQE
The annual meeting of stockholders of DQE (the "DQE Meeting") (i) to
consider and vote upon adoption of the Merger Agreement and approval of the
transactions contemplated thereby, (ii) to elect four directors to the Board of
Directors of DQE (the "DQE Board") to serve until the annual meeting of
stockholders of DQE in the year 2000, (iii) to consider and vote upon the
approval of the appointment by the DQE Board of Deloitte & Touche LLP ("Deloitte
& Touche") as independent public accountants to audit the books of DQE for the
year ending December 31, 1997 (the "Accountant Proposal") and (iv) to consider
and vote upon a proposal from a stockholder of DQE, if presented at the DQE
Meeting (the "Stockholder Proposal") will be held on August 7, 1997 at 11:00
a.m., local time, at the Manchester Craftsmen's Guild Auditorium, 1815
Metropolitan Street, Pittsburgh, Pennsylvania 15233. Only holders of record of
DQE Common Stock at the close of business on June 16, 1997 (the "DQE Record
Date") will be entitled to vote at the DQE Meeting. On , 1997,
there were shares of Common Stock, no par value, of DQE ("DQE Common
Stock") outstanding and entitled to vote. Each share of DQE Common Stock is
entitled to one vote. See "Other Information for the DQE Meeting."
2
<PAGE> 17
The affirmative vote of a majority of the votes cast at the DQE Meeting is
necessary for the adoption of the Merger Agreement and approval of the
transactions contemplated thereby. With respect to the election of directors of
DQE, the four persons receiving the highest number of votes will be elected as
directors of DQE. The affirmative vote of a majority of the votes cast at the
DQE Meeting is necessary for adoption of the Accountant Proposal and the
Stockholder Proposal.
Stockholders of DQE have cumulative voting rights with respect to the
election of directors of DQE.
Holders of preferred stock or other capital stock of Duquesne Light or any
of the other subsidiaries of DQE will not have voting rights with respect to any
of the matters to be acted upon at the DQE Meeting. The terms of such preferred
stock or other capital stock will not be affected by the Merger.
As of , 1997, directors and executive officers of DQE and
their affiliates beneficially owned an aggregate of shares of DQE
Common Stock (including shares which may be acquired within 60 days upon
exercise of stock options) or less than % of the shares of DQE Common Stock
outstanding on such date. See "Other Information for the DQE
Meeting -- Beneficial Ownership of Securities of DQE." The directors and
executive officers of DQE have indicated their intention to vote their shares of
DQE Common Stock in favor of adoption of the Merger Agreement and approval of
the transactions contemplated thereby. The directors and executive officers of
DQE have also indicated their intention to vote their shares of DQE Common Stock
in favor of the directors nominated by the DQE Board and in favor of the
Accountant Proposal and AGAINST the Stockholder Proposal.
For additional information relating to the Stockholders Meetings, see "The
Stockholders Meetings." For additional information concerning the DQE Meeting,
see "Other Information for the DQE Meeting."
THE MERGER
This section describes certain aspects of the Merger. The following
description does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Appendix A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. ALL HOLDERS
OF DQE COMMON STOCK AND HOLDERS OF APS COMMON STOCK ARE URGED TO READ THE MERGER
AGREEMENT IN ITS ENTIRETY.
General
The Merger Agreement provides for a business combination of APS and DQE in
which DQE will become a wholly owned subsidiary of APS and each issued and
outstanding share of DQE Common Stock will be converted into the right to
receive, and become exchangeable for, 1.12 shares of APS Common Stock (the
"Exchange Ratio"). Upon consummation of the Merger, holders of DQE Common Stock
immediately prior to the Merger will own approximately % of the outstanding
shares of APS Common Stock after the Merger (based on the number of shares of
APS Common Stock and DQE Common Stock outstanding as of , 1997).
Terms of the Merger
Subject to the satisfaction of the conditions set forth in the Merger
Agreement, Merger Sub will be merged with and into DQE and the holders of shares
of DQE Common Stock (other than shares of DQE Common Stock owned by APS, Merger
Sub or any other direct or indirect Subsidiary (as defined below) of APS and
shares of DQE Common Stock that are owned by DQE or any direct or indirect
Subsidiary of DQE, in each case not held on behalf of third parties, and which
are not shares of DQE Common Stock held by Duquesne Light, to provide for
redemption of Duquesne Light's preference shares pursuant to the terms of
Duquesne Light's 401(k) plan or to provide benefits under another employee
benefit plan of Duquesne Light (collectively, the "Excluded Shares")) will be
issued APS Common Stock in a transaction intended to qualify as a "pooling of
interests" for accounting purposes and as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
for federal income tax purposes. As used herein, the term "Subsidiary" means,
with respect to APS, DQE or Merger Sub, as the
3
<PAGE> 18
case may be, any entity whether incorporated or unincorporated, in which APS,
DQE or Merger Sub, as the case may be, owns, directly or indirectly, at least a
majority of the outstanding voting securities or other equity interests having
the power to elect a majority of directors, or otherwise direct the management
and policies, of such entity. Each outstanding share of APS Common Stock will
remain outstanding and be unaffected by the Merger.
No fractional shares of APS Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that each holder of DQE Common Stock who
would otherwise be entitled to receive a fractional share of APS Common Stock
will be entitled to receive, in lieu thereof, cash representing such holder's
proportionate interest in a share of APS Common Stock based on the closing price
of a share of APS Common Stock, as reported in The Wall Street Journal, New York
City edition, on the trading day immediately prior to the Effective Time (as
defined below).
At the Effective Time, all shares of DQE Common Stock credited to
participants' accounts under the Dividend Reinvestment and Stock Purchase Plan
of DQE (the "DQE DRSPP") will be converted into a number of shares of APS Common
Stock determined by multiplying the number of such shares of DQE Common Stock by
the Exchange Ratio. All such shares of APS Common Stock will be held in the
participants' accounts, with individual participant's accounts in the DQE DRSPP
being credited with fractional shares of APS Common Stock. See "The
Merger -- Terms of the Merger."
Effective Time
The Merger will become effective at the time when Articles of Merger
effecting the Merger (the "Pennsylvania Articles of Merger") have been duly
filed with the Department of State of the Commonwealth of Pennsylvania (the
"Effective Time") as provided in Section 1927 of the Pennsylvania Business
Corporation Law (the "PBCL"). See "The Merger -- Effective Time."
Exchange of Certificates
HOLDERS OF DQE COMMON STOCK SHOULD NOT SEND THEIR CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY RECEIVE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
HOLDERS OF APS COMMON STOCK WILL NOT EXCHANGE THEIR CERTIFICATES.
Promptly after the Effective Time, the Exchange Agent (as defined in the
Merger Agreement) will mail to each holder of DQE Common Stock (other than the
Excluded Shares) a letter of transmittal with instructions for exchanging
certificates representing shares of DQE Common Stock (each a "DQE Certificate")
in exchange for certificates representing shares of APS Common Stock (each an
"APS Certificate") and obtaining cash in lieu of any fractional share of APS
Common Stock. See "The Merger -- Terms of the Merger."
Appraisal Rights
Holders of APS Common Stock will not be entitled to any dissenters' or
appraisal rights under the Maryland General Corporation Law (the "MGCL") as a
result of the matters to be voted upon at the APS Special Meeting. Holders of
DQE Common Stock will not be entitled to any dissenters' or appraisal rights
under the PBCL as a result of any of the matters to be voted on at the DQE
Meeting.
Reasons for the Merger; Recommendations of the Boards of Directors -- APS
THE APS BOARD HAS DETERMINED UNANIMOUSLY THAT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY ARE ADVISABLE FOR, FAIR TO, AND IN THE BEST
INTERESTS OF, APS' STOCKHOLDERS. ACCORDINGLY, THE APS BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF APS VOTE FOR APPROVAL OF THE ISSUANCE OF THE SHARES OF APS COMMON STOCK AS
CONTEMPLATED BY THE MERGER AGREEMENT. The recommendation of the APS Board is
based on a number of strategic, operating and financial factors as described in
"The Merger -- Reasons for the Merger; Recommendations of the Boards of
Directors -- APS."
4
<PAGE> 19
Reasons for the Merger; Recommendations of the Boards of Directors -- DQE
THE DQE BOARD HAS DETERMINED UNANIMOUSLY THAT THE TERMS OF THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, STOCKHOLDERS OF DQE AND HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF DQE VOTE FOR ADOPTION OF THE
MERGER AGREEMENT. The recommendation of the DQE Board is based on a number of
strategic, operating and financial factors as described in "The
Merger -- Reasons for the Merger; Recommendations of the Boards of
Directors -- DQE." In considering the recommendation of the DQE Board, holders
of DQE Common Stock should be aware that certain members of DQE's management and
the DQE Board have other interests in the Merger in addition to the interests
which holders of DQE Common Stock have generally. The DQE Board was aware of
these other interests and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated thereby, including the
Merger. See "Interests of Certain Persons in the Merger" and "The
Merger -- Management and Operations Following the Merger."
Opinions of Financial Advisors
APS
Merrill Lynch & Co. ("Merrill Lynch") has delivered to the APS Board its
written opinion, dated as of the date of this Joint Proxy Statement/Prospectus,
to the effect that, as of such date, the Exchange Ratio was fair from a
financial point of view to the holders of APS Common Stock. See "The
Merger -- Opinions of Financial Advisors -- APS." A COPY OF THE OPINION OF
MERRILL LYNCH, DATED AS OF THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS,
WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE SCOPE OF THE REVIEW BY MERRILL LYNCH IN RENDERING ITS
OPINION, IS ATTACHED AS APPENDIX B TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
HOLDERS OF APS COMMON STOCK ARE URGED TO, AND SHOULD, READ MERRILL LYNCH'S
OPINION IN ITS ENTIRETY.
DQE
Credit Suisse First Boston Corporation ("CSFB") has acted as financial
advisor to DQE in connection with the Merger and has rendered to the DQE Board a
written opinion, dated the date of this Joint Proxy Statement/Prospectus, to the
effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Exchange Ratio was fair to the holders of DQE Common
Stock from a financial point of view. The opinion of CSFB is directed to the DQE
Board and relates only to the fairness of the Exchange Ratio from a financial
point of view, does not address any other aspect of the proposed Merger or any
related transaction and does not constitute a recommendation to any stockholder
as to how any stockholder should vote at the DQE Meeting. See "The
Merger -- Opinions of Financial Advisors -- DQE." A COPY OF THE OPINION OF CSFB,
DATED THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH DESCRIBES THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH SUCH OPINION, IS ATTACHED HERETO AS
APPENDIX C AND SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY.
Management and Operations Following the Merger
The Merger Agreement provides that, from and after the Effective Time, the
APS Board will be composed of 15 directors, of which six will be designated by
DQE and nine will be designated by APS prior to the Effective Time, in each case
to serve until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the APS Charter and the Bylaws of APS ("APS Bylaws"). As of the date
hereof, neither DQE nor APS has determined who it will designate to be directors
of APS following the Effective Time, but each of DQE and APS currently intends
to nominate persons from among the members of their respective boards of
directors at the Effective Time. In addition, the Merger Agreement provides
that, following the Effective Time, the chairmen of certain committees of the
APS Board will be selected from among the DQE designees and the chairmen of
other committees will be selected from among the APS designees. See "Interests
of Certain Persons in the Merger -- Directors and Officers."
5
<PAGE> 20
The Merger Agreement further provides that, from and after the Effective
Time, Alan J. Noia will be the Chairman and Chief Executive Officer of APS and
David D. Marshall will be the President and Chief Operating Officer of APS.
The Merger Agreement also provides that, from and after the Effective Time,
APS' corporate headquarters will remain in Maryland and substantial operations
of Subsidiaries of APS, including the Surviving Corporation, will remain in the
Pittsburgh, Pennsylvania area. See "The Merger -- Management and Operations
Following the Merger."
THE MERGER AGREEMENT
This section describes certain aspects of the Merger Agreement. The
following description does not purport to be complete and is qualified in its
entirety by reference to the Merger Agreement, which is attached as Appendix A
to this Joint Proxy Statement/Prospectus and is incorporated herein by
reference. ALL HOLDERS OF DQE COMMON STOCK AND APS COMMON STOCK ARE URGED TO
READ THE MERGER AGREEMENT IN ITS ENTIRETY.
Representations and Warranties
The Merger Agreement contains various representations and warranties of
DQE, APS and Merger Sub, certain of which are qualified by a material adverse
effect standard. See "The Merger Agreement -- Representations and Warranties."
Conduct of Business Pending the Merger
The Merger Agreement provides that during the period of time from the date
of the Merger Agreement until the Effective Time, unless approved in writing by
the other party or unless expressly contemplated by the Merger Agreement, the
Stock Option Agreement, dated as of April 5, 1997, between DQE and APS (the
"Stock Option Agreement"), the respective budgets of DQE and APS (which have
been submitted by DQE to APS and by APS to DQE), or as required by applicable
Law (as defined under "-- Modification or Amendment; Waiver of Conditions;
Extension"), each of DQE and APS will, among other things, conduct its and its
Subsidiaries' businesses in the ordinary and usual course, will not pay
dividends in excess of certain prescribed amounts and will not take any action
or omit to take any action that would prevent the Merger from qualifying for
"pooling of interests" accounting treatment or as a "reorganization" within the
meaning of Section 368(a) of the Code. See "The Merger Agreement -- Conduct of
Business Pending the Merger; Certain Covenants; Acquisition Proposals -- Interim
Operations" for a discussion of restrictions on APS, DQE and their respective
Subsidiaries with respect to the conduct of their businesses prior to the
Effective Time.
Acquisition Proposals
The Merger Agreement also provides that, except as contemplated by the
budgets submitted by DQE to APS and by APS to DQE and except as expressly
contemplated by the Merger Agreement, neither DQE nor APS nor any of their
respective Subsidiaries will, and DQE and APS will not authorize or permit their
officers, directors, employees, agents or other representatives retained by them
or any of their Subsidiaries, respectively, (i) to solicit, initiate or
encourage, or take any other action designed to facilitate, directly or
indirectly, any inquiries or the making of any proposal with respect to a
merger, reorganization, share exchange, consolidation or similar transaction
involving, or, other than in the ordinary course of business, any purchase of
all or any significant portion of assets or any equity securities of, DQE or
APS, as applicable, or of any of their respective Subsidiaries (any such
proposal or offer being referred to as an "Acquisition Proposal" and any such
transaction or purchase being referred to as an "Acquisition Transaction") or
(ii) to participate in any discussions or negotiations relating to any
Acquisition Proposal or Acquisition Transaction. In certain situations the terms
of the Merger Agreement will not prohibit either DQE or APS (A) from furnishing
information with respect to it and its Subsidiaries to any person pursuant to a
customary confidentiality agreement and (B) from participating in negotiations
regarding such Acquisition Proposal. See "The Merger
6
<PAGE> 21
Agreement -- Conduct of Business Pending the Merger; Certain Covenants;
Acquisition Proposals -- Acquisition Proposals."
In addition, the Merger Agreement provides that, except as expressly
permitted by the Merger Agreement, neither the APS Board nor the DQE Board, as
applicable, nor any committee thereof will (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to the other party to the
Merger Agreement, the approval or recommendation by such board of directors or
such committee of the Merger or the approval and adoption of the matters
relating to the Merger to be considered at the APS Special Meeting, in the case
of APS, and the DQE Meeting, in the case of DQE; (ii) approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal other than
the Merger; or (iii) cause or permit APS or DQE, as applicable, to enter into
any letter of intent, agreement in principle, acquisition agreement or other
similar agreement or understanding (each, an "Acquisition Agreement") related to
any Acquisition Proposal. Notwithstanding the foregoing provisions of the Merger
Agreement, in certain situations the proscribed actions may be taken. APS and
DQE have also each agreed in the Merger Agreement that in situations in which it
is permitted to enter into an Acquisition Agreement, it will not enter into a
binding Acquisition Agreement until at least the sixteenth business day after it
has provided the notice to APS or DQE, as applicable, required by the Merger
Agreement. The Merger Agreement also provides that if any party receives an
Acquisition Proposal it will immediately advise the other party orally and in
writing of such Acquisition Proposal, any request for information, the material
terms and conditions of such request or Acquisition Proposal and the identity of
the Person making such request or Acquisition Proposal. In addition, APS and DQE
have agreed that if either has received an Acquisition Proposal it will keep the
other party reasonably informed of the status and details of any such
Acquisition Proposal. See "The Merger Agreement -- Conduct of Business Pending
the Merger; Certain Covenants; Acquisition Proposals."
Conditions
The respective obligations of DQE, APS and Merger Sub to effect the Merger
are subject to the satisfaction or waiver at or prior to the Effective Time of a
number of conditions, including the following: (i) approval of the Merger
Agreement by holders of DQE Common Stock and by APS as the sole stockholder of
Merger Sub and the approval of the issuance of APS Common Stock as contemplated
by the Merger Agreement by holders of APS Common Stock; (ii) the authorization
for listing on the New York Stock Exchange (the "NYSE") upon official notice of
issuance of the shares of APS Common Stock to be issued in the Merger; (iii)
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, as amended, and the rules promulgated thereunder
(the "HSR Act"), and the receipt of all necessary Governmental Consents (as
defined under "The Merger Agreement -- Conditions") having been obtained on
terms not reasonably likely to have a Material Adverse Effect (as defined under
"The Merger Agreement -- Representations and Warranties") on either DQE or APS;
(iv) there being no statute, rule, regulation, judgment, decree, injunction or
other order in effect that restrains, enjoins or otherwise prohibits
consummation of the transactions contemplated by the Merger Agreement; (v) APS
and DQE having received from APS' independent accounting firm a letter to the
effect that the Merger will qualify for "pooling of interests" accounting
treatment; (vi) APS and DQE having obtained the consent or approval of each
person whose consent or approval is required to consummate the transactions
contemplated by the Merger Agreement and the Stock Option Agreement under any
contract to which APS or DQE or any of their Subsidiaries is a party; (vii) APS
and DQE having received the opinions of their respective counsels to the effect
that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that each
of APS, Merger Sub and DQE will be a party to that reorganization within the
meaning of Section 368(b) of the Code; (viii) APS having received an Affiliate
Letter (as defined under "Resale of APS Common Stock") from each person
identified as an affiliate of DQE pursuant to the Merger Agreement; (ix) the
absence of any change in the financial condition, properties, business or
results of operations of either APS or DQE that would be reasonably likely to
have a Material Adverse Effect on it; and (x) DQE and APS each having received
from their respective independent public accounting firms customary "comfort"
letters. See "The Merger Agreement -- Conditions."
7
<PAGE> 22
Modification or Amendment; Waiver of Conditions; Extension
The Merger Agreement provides that, subject to the provisions of applicable
law, ordinance, regulation, judgment, order, decree, arbitration, award, license
or permit of any Governmental Entity (each a "Law," and collectively, "Laws"),
the parties to the Merger Agreement may modify or amend the Merger Agreement by
written agreement executed and delivered by duly authorized officers of the
respective parties. The Merger Agreement also provides that the conditions to
each of the parties' obligations to consummate the Merger are for the sole
benefit of such party and at any time prior to the Effective Time, such party
may waive such conditions in whole or in part or extend the time for the
performance of any of the obligations or other acts of the other parties
thereto, to the extent permitted by applicable Law.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (a) by mutual written consent of DQE, APS
and Merger Sub, by action of the DQE Board and the APS Board, respectively, or
(b) by action of the DQE Board or the APS Board if (i) the Merger has not been
consummated by October 5, 1998, which may be extended for six months under
certain circumstances (the "Termination Date"); (ii) any Governmental Consents
(as defined under "The Merger Agreement -- Conditions") have been made or
obtained by Final Orders (as defined under "The Merger
Agreement -- Termination") which contain terms or conditions that would cause
any of the conditions relating to regulatory consents not to be satisfied; (iii)
any statute, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) that has been enacted, issued,
promulgated, enforced or entered by any court or Governmental Entity (as defined
under "The Merger Agreement -- Representations and Warranties") of competent
jurisdiction is in effect and restrains, enjoins or otherwise prohibits
consummation of the transactions contemplated by the Merger Agreement
(collectively, an "Order") provided, that it has become final and
non-appealable; (iv) the necessary vote of DQE's stockholders to effectuate the
Merger has not been obtained at the DQE Meeting, including any adjournments
thereof; or (v) the necessary vote of APS' stockholders to effectuate the Merger
has not been obtained at the APS Special Meeting, including any adjournments
thereof. The Merger Agreement provides that the right to terminate the Merger
Agreement pursuant to clause (i), (ii), (iv) or (v) above will not be available
to any party that has breached in any material respect its obligations under the
Merger Agreement in any manner that has contributed to the failure of the Merger
to be consummated. See "The Merger Agreement -- Termination."
Further, the Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time by action of the DQE Board or
the APS Board, as applicable: (a) subject to and in accordance with the
termination provisions of the Merger Agreement relating to Acquisition
Proposals; or (b) if (i) the APS Board or the DQE Board, as applicable, has
withdrawn or adversely modified its approval or recommendation of the Merger
Agreement or failed to reconfirm its recommendation of the Merger Agreement
after a written request by DQE or APS, as applicable, to do so, (ii) there has
been a material breach by APS or Merger Sub, on the one hand, or DQE, on the
other hand, of any representation, warranty, covenant or agreement contained in
the Merger Agreement that is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by DQE or APS, as applicable,
to the party committing such breach, or (iii) APS or DQE, as applicable, or any
of their affiliates, representatives or agents, takes any of the actions that
would be proscribed by certain provisions of the Merger Agreement which restrict
APS' or DQE's, as applicable, conduct with respect to Acquisition Proposals. See
"The Merger Agreement -- Conduct of Business Pending the Merger; Certain
Covenants; Acquisition Proposals -- Acquisition Proposals."
In the event of termination of the Merger Agreement and the abandonment of
the Merger, the Merger Agreement (other than certain provisions of the Merger
Agreement relating to expenses and confidentiality and other than as described
below under "The Merger Agreement -- Certain Termination Fees") will become void
and of no effect with no liability to any party thereto (or any of its
directors, officers, employees, agents, legal and financial advisors or other
representatives); provided, however, except as otherwise provided
8
<PAGE> 23
therein, no such termination will relieve any party thereto of any liability or
damages resulting from any breach of the Merger Agreement.
If the Merger is terminated under certain specified circumstances, certain
termination fees are payable by one party to the other. See "The Merger
Agreement -- Certain Termination Fees."
Stock Options
At the Effective Time, each outstanding option to purchase DQE Common Stock
(a "DQE Option") under DQE's Long-Term Incentive Savings Plan, DRSPP and 1996
Stock Plan for Non-Employee Directors and the Performance Incentive Program for
DQE and its Subsidiaries (the "DQE Stock Plans"), whether vested or unvested,
will be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such DQE Option, the same number of shares
of APS Common Stock as the holder of such DQE Option would have been entitled to
receive pursuant to the Merger had such holder exercised such option in full
immediately prior to the Effective Time, at a price per share of APS Common
Stock equal to (y) the aggregate exercise price for DQE Common Stock otherwise
purchasable pursuant to such DQE Option divided by (z) the number of full shares
of APS Common Stock deemed purchasable pursuant to such DQE Option. In addition,
pursuant to the Merger Agreement, APS has agreed to assume, effective as of the
Effective Time, each DQE Option in accordance with the terms of the DQE Stock
Plan under which it was issued and the stock option agreement by which it is
evidenced. See "The Merger Agreement -- Stock Options."
Nuclear Matters
The Merger Agreement provides that, at least quarterly prior to the
Effective Time, DQE, upon request by APS, will cause its President -- Generation
Group and its Chief Nuclear Officer to attend a meeting of the APS Board and
provide APS' directors with such oral and written information concerning the
Nuclear Facilities and DQE's nuclear generation program as such directors and/or
the Chief Financial Officer of APS may reasonably request. In addition, prior to
the Effective Time, APS is entitled to designate one person who will be a
director of APS or will be a person expert in nuclear matters to attend and
participate in each meeting of the Nuclear Review Committee of the DQE Board.
See "The Merger Agreement -- Nuclear Matters."
CERTAIN REGULATORY MATTERS
Under the HSR Act, certain transactions, including the Merger, may not be
consummated unless certain waiting period requirements have been satisfied. APS
and DQE will each file a Premerger Notification and Report Form (a "Notification
and Report Form") pursuant to the HSR Act with the Antitrust Division of the
Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). At any
time before or after the Effective Time, the FTC, the DOJ or others could take
action under the antitrust laws with respect to the Merger, including seeking to
enjoin the consummation of the Merger, to rescind the Merger or to require
divestiture of substantial assets of APS or DQE. There can be no assurance that
a challenge to the Merger on antitrust grounds will not be made or, if such a
challenge is made, that it would not be successful.
In addition, DQE and/or APS are or may be required to file notices with,
and to obtain the approval and consents of, the Securities and Exchange
Commission ("SEC") pursuant to the Public Utility Holding Company Act of 1935,
as amended ("PUHCA"), the Federal Energy Regulatory Commission ("FERC") pursuant
to the Federal Power Act of 1920, as amended (the "Power Act"), the Nuclear
Regulatory Commission ("NRC") pursuant to the Atomic Energy Act of 1954, as
amended ("AEA"), the Pennsylvania Public Utility Commission ("PAPUC") and the
Maryland Public Service Commission (the "MPSC"). See "The Merger
Agreement -- Certain Regulatory Matters."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the management of DQE and the DQE Board who have
interests in the Merger in addition to their interests as holders of DQE Common
Stock participated in the negotiation of the terms of the
9
<PAGE> 24
Merger Agreement. The DQE Board considered these interests in reaching its
conclusion that the Merger Agreement and the transactions contemplated thereby
are fair to and in the best interests of DQE and its stockholders, customers and
employees and the communities which it serves.
Directors and Officers
The Merger Agreement provides that the APS Board will, upon consummation of
the Merger, be composed of 15 directors, of which six will be designated by DQE
and nine will be designated by APS. Pursuant to the Merger Agreement, after the
Effective Time, Alan J. Noia will be Chairman and Chief Executive Officer of APS
and David D. Marshall will be President and Chief Operating Officer of APS.
Severance Agreements
DQE has entered into severance agreements with thirteen officers of DQE and
its affiliates, including seven executive officers of DQE. See "Interests of
Certain Persons in the Merger -- Severance Agreements."
DQE Long-Term Incentive Plan
Upon the adoption of the Merger Agreement by the holders of DQE Common
Stock, certain options to purchase shares of DQE Common Stock held by DQE
officers will vest pursuant to the terms of the DQE Stock Plan under which they
were granted. See "Interests of Certain Persons in the Merger -- DQE, Inc.
Long-Term Incentive Plan."
Director and Officer Indemnification and Insurance
Pursuant to the Merger Agreement, APS has agreed that from and after the
Effective Time it will indemnify and hold harmless each present and former
director and officer of DQE or any of its Subsidiaries (when acting in such
capacity) against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent that DQE or such
Subsidiary is permitted under the law of its jurisdiction of incorporation and
the Articles of Incorporation of DQE, effective January 5, 1989, as amended (the
"DQE Articles") and the Bylaws of DQE (the "DQE Bylaws") in effect on the date
of the Merger Agreement to indemnify such person. In addition, the Merger
Agreement provides that the Surviving Corporation will maintain DQE's existing
officers' and directors' liability insurance ("D&O Insurance") for a period of
six years after the Effective Time so long as the annual premium therefor is not
in excess of 200% of the last annual premium paid prior to the date of the
Merger Agreement (the "Current Premium"); provided, however, that if the
existing D&O Insurance expires, is terminated or canceled during such six-year
period, the Surviving Corporation will use its reasonable efforts to obtain as
much D&O Insurance as can be obtained for the remainder of such period for a
premium not in excess (on an annualized basis) of 200% of the Current Premium.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by each of APS
and DQE of a letter from its independent public accountants, Price Waterhouse
LLP and Deloitte & Touche, respectively, stating that the Merger, in their
respective opinions, will qualify as a "pooling of interests" for accounting
purposes. See "The Merger Agreement -- Conditions." Under this method of
accounting, APS will restate its consolidated financial statements at the
Effective Time to include the assets, liabilities, stockholders' equity and
results of operations of DQE. It is anticipated that, upon consummation of the
Merger, the fiscal year of the combined company will be the calendar year. See
"Accounting Treatment."
10
<PAGE> 25
RESALE OF APS COMMON STOCK
The shares of APS Common Stock issuable to stockholders of DQE in
connection with the Merger will be freely transferable by the holders thereof
except for those shares held by holders who may be deemed to be "affiliates" of
DQE. See "Resale of APS Common Stock."
DIVIDENDS
It is presently anticipated that, following the Effective Time, the current
$1.72 annual dividend per share of APS Common Stock will be maintained or
increased, subject to evaluation from time to time by the APS Board based on
APS' results of operations, financial condition, capital requirements, future
business prospects, regulatory environment and such other considerations as the
APS Board deems relevant. However, no assurance can be given that such dividend
will be maintained or increased.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. Assuming the
Merger so qualifies as a reorganization within the meaning of Section 368(a) of
the Code, in general, no gain or loss will be recognized by holders of DQE
Common Stock with respect thereto on the surrender of their DQE Common Stock in
exchange for APS Common Stock, except with respect to cash received in lieu of
fractional shares, and no gain or loss will be recognized by APS or DQE. Under
the Merger Agreement it is a condition precedent to the respective obligations
of APS and DQE to consummate the Merger that each of APS and DQE will have
received an opinion of its respective counsel, dated as of the Closing Date (as
defined in the Merger Agreement), to the effect that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code and that each
of DQE, APS and Merger Sub will be a party to the reorganization within the
meaning of Section 368(b) of the Code. For a further discussion of the federal
income tax consequences of the Merger, see "Certain Federal Income Tax
Consequences of the Merger."
CERTAIN RELATED AGREEMENTS
Stock Option Agreement
In connection with the Merger Agreement and the Merger, APS and DQE entered
into the Stock Option Agreement, pursuant to which DQE granted to APS an option
(the "Option") to purchase up to 15,379,007 shares of DQE Common Stock under
certain circumstances at an initial cash price per share of DQE Common Stock
equal to $27.850. The Stock Option Agreement provides that in no event will the
number of shares of DQE Common Stock for which the Option is exercisable exceed
19.9% of DQE Common Stock issued and outstanding at the time of exercise. See
"Certain Related Agreements -- Stock Option Agreement."
APS may exercise its Option, in whole or in part, if, but only if, a
Triggering Event (as defined under "Certain Related Agreements -- Stock Option
Agreement") has occurred prior to the occurrence of an Exercise Termination
Event (as defined under "Certain Related Agreements -- Stock Option Agreement");
provided that APS sends DQE a written notice of such exercise within 180 days
following the first such Triggering Event. See "Certain Related
Agreements -- Stock Option Agreement."
The Stock Option Agreement also provides that APS may require DQE to
repurchase the Option from APS in certain circumstances. See "Certain Related
Agreements -- Stock Option Agreement." The Stock Option Agreement further
provides that the Total Profit (as defined under "Certain Related Agreements --
Stock Option Agreement") of APS in such repurchase will not exceed $20,000,000.
See "Certain Related Agreements -- Stock Option Agreement."
Letter Agreement
APS and DQE have also entered into a Letter Agreement, dated April 5, 1997
(the "Letter Agreement"). The Letter Agreement provides that, in certain
circumstances upon a termination of the
11
<PAGE> 26
Merger Agreement, APS will pay a fee to DQE of up to $20,000,000, based upon the
difference between the market value of 19.9% of the outstanding shares of APS
Common Stock on the date of an applicable termination and the market value of
such shares on April 4, 1997. See "Certain Related Agreements -- Letter
Agreement."
CERTAIN EFFECTS OF THE MERGER ON THE RIGHTS OF HOLDERS OF DQE COMMON STOCK
Holders of DQE Common Stock who receive APS Common Stock pursuant to the
Merger will have certain rights as stockholders of APS that are different from
those rights they had as stockholders of DQE. For a comparison of certain
provisions of the APS Charter, the APS Bylaws and the MGCL with the DQE
Articles, the DQE Bylaws and the PBCL, see "Comparison of Certain Rights of the
Holders of APS Common Stock and DQE Common Stock."
APS CHARTER AMENDMENT
The APS Board has determined that the Charter Amendment is advisable for
APS whether or not the Merger is effectuated. Stockholders of APS should not be
affected in any way by this change of name. Further, stockholders of APS will
not be required to take any actions, following the APS Special Meeting, to
effect the Charter Amendment; stock certificates representing shares of APS
Common Stock will not need to be exchanged for new stock certificates. THE APS
BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF APS COMMON STOCK VOTE FOR THE
CHARTER AMENDMENT. See "The APS Charter Amendment."
OTHER INFORMATION FOR THE DQE MEETING
At the DQE Meeting, in addition to considering the Merger, the holders of
DQE Common Stock will elect four directors to the DQE Board and will vote upon
the Accountant Proposal and the Stockholder Proposal. See "Other Information for
the DQE Meeting."
12
<PAGE> 27
COMPARATIVE STOCK PRICES
APS Common Stock and DQE Common Stock are each listed on the NYSE, as well
as on certain other exchanges. APS is listed under the symbol "AYP" and DQE is
listed under the symbol "DQE". The following table sets forth, for the periods
indicated, the high and low sale prices per share of APS Common Stock and DQE
Common Stock as reported on the NYSE Composite Transactions Tape during the
periods listed.
<TABLE>
<CAPTION>
APS DQE
COMMON STOCK COMMON STOCK
------------------ ------------------
CALENDAR QUARTER HIGH LOW HIGH LOW
- ----------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
1995
- -----------------------------------------------------------
First Quarter............................................ $ 24 3/8 $ 21 1/2 $ 22 3/8 $ 19 5/8
Second Quarter........................................... 25 1/8 22 3/4 25 21 5/8
Third Quarter............................................ 26 22 7/8 26 5/8 23 1/2
Fourth Quarter........................................... 29 1/4 25 1/2 30 3/4 26 1/2
1996
- -----------------------------------------------------------
First Quarter............................................ 30 7/8 28 31 1/2 27 1/2
Second Quarter........................................... 31 1/16 28 1/2 28 7/8 25 3/4
Third Quarter............................................ 31 29 28 3/4 27
Fourth Quarter........................................... 31 1/8 28 7/8 30 3/8 27
1997
- -----------------------------------------------------------
First Quarter............................................ 31 5/8 29 1/8 29 7/8 27 3/4
Second Quarter (through June 17, 1997)................... 30 1/8 25 1/2 29 3/4 26 1/2
</TABLE>
On April 4, 1997, the last trading day before the public announcement of
the Merger Agreement, the closing prices of APS Common Stock and DQE Common
Stock as reported on the NYSE Composite Transactions Tape were $29.75 per share
and $27.125 per share, respectively. Based on the Exchange Ratio, the pro forma
equivalent per share value of DQE Common Stock on April 4, 1997, was $33.32 per
share. The pro forma equivalent per share value of DQE Common Stock on any date
equals the closing sale price of APS Common Stock on such date, as reported on
the NYSE Composite Transaction Tape, multiplied by the Exchange Ratio.
On June 17, 1997, the closing sale prices of APS Common Stock and DQE
Common Stock as reported on the NYSE Composite Transactions Tape were $26.625
per share and $27.875 per share ($29.82 on a pro forma equivalent per share
basis), respectively.
HOLDERS OF SHARES OF DQE COMMON STOCK AND APS COMMON STOCK ARE URGED TO
OBTAIN CURRENT QUOTATIONS FOR THE MARKET PRICES OF APS COMMON STOCK AND DQE
COMMON STOCK.
No assurance can be given as to the market prices of APS Common Stock or
DQE Common Stock at the Effective Time. The Exchange Ratio is fixed in the
Merger Agreement. As a result, the market value of APS Common Stock that holders
of DQE Common Stock will receive upon consummation of the Merger may vary
significantly from the market value of the shares of APS Common Stock that
holders of DQE Common Stock would receive if the Merger were consummated and
holders of DQE Common Stock received shares of APS Common Stock on the date of
this Joint Proxy Statement/Prospectus.
13
<PAGE> 28
SELECTED UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table presents selected historical financial data of APS and
DQE and selected unaudited pro forma combined financial data after giving effect
to the Merger as a "pooling of interests." APS' and DQE's selected historical
data for each of the five years in the period ended December 31, 1996 and the
three months ended March 31, 1997 have been derived from financial statements
filed with the SEC. The pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the financial
position or operating results that would have occurred or that will occur upon
consummation of the Merger. The pro forma combined financial data do not give
effect to any cost savings which may result from the integration of APS' and
DQE's operations. Additionally, the pro forma combined financial data do not
include any transaction costs relating to the Merger, nor do they consider any
reorganization costs that might occur as a result of the Merger. The following
selected financial data should be read in conjunction with the notes thereto and
with the related historical and pro forma combined financial statements and
notes thereto incorporated by reference or included herein. See "Available
Information," "Incorporation of Certain Information by Reference" and "Unaudited
Pro Forma Combined Financial Information of APS and DQE."
SELECTED HISTORICAL FINANCIAL DATA
APS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total Revenue................. $ 615 $2,328 $2,315 $2,185 $2,051 $1,963
Operating Expenses............ 491 1,937 1,893 1,802 1,676 1,607
------ ------ ------ ------ ------
Income from Operations (c).... 124 391 422 383 375 356
Income before Cumulative
Effect of Accounting
Change..................... 78 210 240 220 216 204
Cumulative Effect of
Accounting Change (a)...... -- -- -- 43 -- --
------ ------ ------ ------ ------
Net Income (c)................ $ 78 $ 210 $ 240 $ 263 $ 216 $ 204
Earnings Per Share before
Effect of Accounting
Change..................... $ 0.64 $ 1.73 $ 2.00 $ 1.86 $ 1.88 $ 1.83
Cumulative Effect of
Accounting Change (a)...... -- -- 0.37 -- --
------ ------ ------ ------ ------
Earnings Per Share after
Effect of Accounting
Change..................... $ 0.64 $ 1.73 $ 2.00 $ 2.23 $ 1.88 $ 1.83
Dividends Declared Per Share
of
APS Common Stock........... $ 0.43 $ 1.69 $ 1.65 $ 1.64 $ 1.63 $ 1.61
BALANCE SHEET DATA
Total Assets.................. $6,618 $6,619 $6,447 $6,362 $5,949 $5,039
Capitalization
Long-Term Debt............. $2,307 $2,397 $2,273 $2,179 $2,008 $1,952
Preferred/Preference
Stock.................... 170 170 170 325 276 278
Common Shareholders'
Equity................... 2,202 2,169 2,130 2,059 1,956 1,828
------ ------ ------ ------ ------
Total Capitalization..... $4,679 $4,736 $4,573 $4,563 $4,240 $4,058
Book Value Per Share of APS
Common Stock............... $18.04 $17.80 $17.65 $17.26 $16.62 $16.05
</TABLE>
14
<PAGE> 29
SELECTED HISTORICAL FINANCIAL DATA
DQE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total Revenue................. $ 301 $1,225 $1,220 $1,224 $1,183 $1,153
Operating Expenses............ 226 923 898 907 870 809
------ ------ ------ ------ ------ ------
Income from Operations........ 75 302 322 317 313 344
Income before Cumulative
Effect of Accounting
Changes.................... 45 179 171 157 141 142
Cumulative Effect of
Accounting Changes (a)..... -- -- -- -- 3 --
------ ------ ------ ------ ------ ------
Net Income.................... $ 45 $ 179 $ 171 $ 157 $ 144 $ 142
Earnings Per Share before
Effect of Accounting
Changes.................... $ 0.58 $ 2.32 $ 2.20 $ 1.98 $ 1.77 $ 1.78
Cumulative Effect of
Accounting Changes (a)..... $ -- $ -- $ -- $ -- $ 0.04 $ --
------ ------ ------ ------ ------ ------
Earnings Per Share after
Effect of Accounting
Changes.................... $ 0.58 $ 2.32 $ 2.20 $ 1.98 $ 1.81 $ 1.78
Dividends Declared Per Share
of DQE Common Stock........ $ 0.34 $ 1.30 $ 1.21 $ 1.13 $ 1.08 $ 1.03
BALANCE SHEET DATA
Total Assets.................. $4,623 $4,639 $4,459 $4,427 $4,550 $3,778
Capitalization
Long-Term Debt............. $1,402 $1,440 $1,401 $1,378 $1,417 $1,413
Preferred/Preference
Stock.................... 224 223 71 95 133 132
Common Shareholders'
Equity................... 1,409 1,392 1,329 1,277 1,231 1,171
------ ------ ------ ------ ------ ------
Total Capitalization..... $3,035 $3,055 $2,801 $2,750 $2,781 $2,716
Book Value Per Share of DQE
Common Stock............... $18.22 $18.01 $17.13 $16.27 $15.47 $14.75
</TABLE>
15
<PAGE> 30
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
APS AND DQE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------
1997 1996 1995 1994
------------ ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AND PERCENTAGES)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (B)
Total Revenue................................. $ 909 $ 3,546 $ 3,535 $ 3,398
Operating Expenses............................ 666 2,718 2,638 2,561
------- ------- -------
Income from Operations (c).................... 243 828 897 837
Net income(c)................................. 119 393 409 383
Earnings Per Share (d)........................ $ 0.57 $ 1.89 $ 1.98 $ 1.85
Dividends Per Share of Common Stock (d)....... $ 0.38 $ 1.47 $ 1.41 $ 1.37
Dividend Payout Ratio (f)..................... 75.4% 91.0% -- --
Equivalent DQE Pro Forma Per Share Data
Earnings Per Share (e)........................ $ 0.64 $ 2.12 $ 2.21 $ 2.07
Dividends Per Share of Common Stock (e)....... $ 0.43 $ 1.65 $ 1.58 $ 1.53
BALANCE SHEET DATA (B)
Total Assets.................................. $ 11,269 $11,290 $10,941 $10,819
Capitalization
Long-Term Debt............................. $ 3,709 $ 3,837 $ 3,674 $ 3,556
Preferred/Preference Stock................. 394 393 241 265
Common Shareholders' Equity................ 3,621 3,535 3,429 3,308
-------- ------- -------
Total Capitalization..................... $ 7,724 $ 7,765 $ 7,344 $ 7,129
Book Value Per Share of Common Stock (d)...... $ 17.37 $ 16.96 $ 16.52 $ 15.96
Equivalent DQE Pro Forma Per Share Data
Book Value Per Share of Common Stock (e)...... $ 19.45 $ 19.00 $ 18.50 $ 17.88
</TABLE>
NOTES TO SELECTED UNAUDITED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(a) The 1994 amount of $43 million ($.37 per share) represents the cumulative
effect of a change in APS' accounting to provide for the accrual of revenue
for services rendered but unbilled. The 1993 amount of $3 million ($.04 per
share) represents DQE's net cumulative effect for changes in accounting for
the adoption of "Statement of Financial Accounting Standards No. 109, Income
Taxes" ($8.0 million) and the cumulative effect of accounting for
maintenance costs by accruing over the periods between outages for
anticipated expenses of scheduled major fossil generating station outages
($5.4 million).
(b) The revenues, expenses, assets, liabilities and equity of APS and DQE have
been reclassified where appropriate to conform to the presentation expected
to be used by the combined company in the future. See "Unaudited Pro Forma
Combined Financial Information of APS and DQE."
(c) Income/earnings for the year ended December 31, 1996 and December 31, 1995
include pretax charges of $103.9 million and $23.4 million, respectively,
related to restructuring activities.
(d) Pro forma per common share amounts give effect to the conversion of each
share of DQE Common Stock outstanding into 1.12 shares of APS Common Stock.
See "The Merger Agreement" and "Unaudited Pro Forma Combined Financial
Information of APS and DQE."
(e) Represents the pro forma equivalent of one share of DQE Common Stock
calculated by multiplying the pro forma information by the Exchange Ratio.
(f) Calculated by dividing the current annual dividend rate of APS per share by
pro forma earnings per share. The $1.72 current dividend rate per share
represents the dividend rate APS expects to maintain or increase following
the Merger. However, no assurance can be given that such dividend rate will
be maintained or increased.
16
<PAGE> 31
THE STOCKHOLDERS MEETINGS
GENERAL
APS
This Joint Proxy Statement/Prospectus is being furnished to holders of APS
Common Stock in connection with the solicitation of proxies by the APS Board for
use at the APS Special Meeting, to be held on August 7, 1997, and any
adjournments or postponements thereof, to consider and vote upon (i) the
approval of the issuance of APS Common Stock contemplated by the Merger
Agreement and (ii) the approval of the Charter Amendment, and to transact such
other business as may properly come before the APS Special Meeting or any
adjournments or postponements thereof.
THE APS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE CHARTER
AMENDMENT AND UNANIMOUSLY RECOMMENDS THAT APS STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE ISSUANCE OF SHARES OF APS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT
AND VOTE FOR THE CHARTER AMENDMENT.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of APS
Common Stock is accompanied by a form of proxy for use at the APS Special
Meeting.
DQE
This Joint Proxy Statement/Prospectus is also being furnished to holders of
DQE Common Stock in connection with the solicitation of proxies by the DQE Board
for use at the DQE Meeting, to be held on August 7, 1997, and any adjournments
or postponements thereof, (i) to consider and vote upon the adoption of the
Merger Agreement and approval of the transactions contemplated thereby, (ii) to
elect four directors to the DQE Board to serve until the annual meeting of
stockholders of DQE in the year 2000, (iii) to consider and vote upon the
approval of the Accountant Proposal, (iv) to consider and vote upon the
Stockholder Proposal if presented at the DQE Meeting and (v) to transact such
other business as may properly come before the DQE Meeting or any adjournments
or postponements thereof. See "Other Information for the DQE Meeting."
THE DQE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS OF DQE VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT AND APPROVAL OF THE TRANSACTIONS CONTEMPLATED THEREBY. THE DQE BOARD
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF DQE VOTE FOR THE DIRECTORS NOMINATED
BY THE DQE BOARD FOR ELECTION TO THE DQE BOARD, VOTE FOR THE ACCOUNTANT PROPOSAL
AND VOTE AGAINST THE STOCKHOLDER PROPOSAL.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of DQE
Common Stock is accompanied by a form of proxy for use at the DQE Meeting.
This Joint Proxy Statement/Prospectus is also furnished to DQE stockholders
as a prospectus in connection with the issuance by APS of shares of APS Common
Stock contemplated by the Merger Agreement.
DATE, PLACE AND TIME
The APS Special Meeting will be held at on August 7,
1997 at [a.m.][p.m.], local time.
The DQE Meeting will be held at the Manchester Craftsmen's Guild
Auditorium, 1815 Metropolitan Street, Pittsburgh, Pennsylvania 15233 on August
7, 1997 at 11:00 a.m., local time.
17
<PAGE> 32
RECORD DATES
APS
The Executive Committee of the APS Board has fixed the close of business on
June 30, 1997 as the APS Record Date for the determination of the holders of APS
Common Stock entitled to receive notice of and to vote at the APS Special
Meeting and at any adjournments or postponements thereof.
DQE
The DQE Board has fixed the close of business on June 16, 1997 as the DQE
Record Date for the determination of the holders of DQE Common Stock entitled to
receive notice of and to vote at the DQE Meeting and at any adjournments or
postponements thereof.
VOTES REQUIRED
APS
As of , there were shares of APS Common Stock issued
and outstanding. Each share of APS Common Stock outstanding on the APS Record
Date is entitled to one vote upon each matter properly submitted at the APS
Special Meeting. The affirmative vote of a majority of the votes cast at the APS
Special Meeting is necessary for the approval of the issuance of the shares of
APS Common Stock contemplated by the Merger Agreement. The affirmative vote of a
majority of the total number of shares of APS Common Stock outstanding is
necessary for approval of the Charter Amendment.
Under the rules of the NYSE, in order to approve these proposals, the total
number of votes cast (whether for or against) with respect to such matter must
be in excess of 50% of the outstanding shares of APS Common Stock. Abstentions
will be counted as present for the purposes of determining whether a quorum is
present. Any abstention or broker non-vote will have the effect of reducing the
aggregate number of shares of APS Common Stock voting and the number of shares
of APS Common Stock required to approve the issuance of shares of APS Common
Stock contemplated by the Merger Agreement. With respect to the Charter
Amendment, any abstention or broker non-vote will have the same effect as a
negative vote. Under the rules of the NYSE, brokers who hold shares in street
name for customers will not have authority to vote either on the issuance of
shares of APS Common Stock contemplated by the Merger or on the Charter
Amendment, unless they receive specific instructions from beneficial owners.
As of , directors and executive officers of APS and their
affiliates beneficially owned an aggregate of shares of APS Common
Stock (including shares which may be acquired within 60 days upon exercise of
employee stock options), or less than % of the shares of APS Common Stock
outstanding on such date. The directors and executive officers of APS have
indicated their intention to vote their shares of APS Common Stock in favor of
approval of the issuance of the shares of APS Common Stock contemplated by the
Merger Agreement and in favor of approval of the Charter Amendment.
As of , 1997, the directors and executive officers of DQE owned
shares of APS Common Stock.
See "-- Interests of Certain Persons in the Merger."
DQE
As of , there were shares of DQE Common Stock
issued and outstanding. Other than with respect to the election of directors,
each share of DQE Common Stock outstanding on the DQE Record Date is entitled to
one vote upon each matter properly submitted at the DQE Meeting. The affirmative
vote of a majority of the votes cast at the DQE Meeting is necessary for the
adoption of the Merger Agreement and the approval of the transactions
contemplated thereby. With respect to the election of directors, the four
persons receiving the highest number of votes will be elected as directors. The
affirmative vote of a majority of the votes cast at the DQE Meeting is necessary
for the adoption of the Accountant Proposal and the Stockholder Proposal.
18
<PAGE> 33
Stockholders of DQE have cumulative voting rights with respect to the
election of directors of DQE. Cumulative voting entitles each stockholder of DQE
to as many votes as is equal to the number of whole shares of DQE Common Stock
held by such stockholder, multiplied by the number of directors to be elected.
Each stockholder may cast all of those votes for a single nominee or may
distribute them among two or more nominees.
Holders of preferred stock or capital stock of Duquesne Light or any of the
other subsidiaries of DQE will not have voting rights with respect to any of the
matters to be acted upon at the DQE Meeting. The terms of such preferred stock
or other capital stock will not be affected by the Merger.
The presence in person or by proxy at the DQE Meeting of the holders
entitled to vote a majority of the outstanding shares of DQE Common Stock is
necessary to constitute a quorum for the transaction of business. Abstentions
will be counted as present for the purposes of determining whether a quorum is
present. Any abstention or broker non-vote will have (i) the effect of reducing
the aggregate number of shares of DQE Common Stock required to adopt (a) the
Merger Agreement and approve the transactions required thereby, (b) the
Accountant Proposal and (c) the Stockholder Proposal, and (ii) no effect on the
election of directors of DQE. Under the rules of the NYSE, brokers who hold
shares in street name for customers will have no authority to vote on the Merger
or the Stockholder Proposal, unless they receive specific instructions from
beneficial owners. Such brokers, however, may vote in the election of directors
or on the Accountant Proposal without having received specific instructions from
beneficial owners.
As of , directors and executive officers of DQE and its
affiliates beneficially owned an aggregate of shares of DQE Common
Stock (including shares which may be acquired within 60 days upon exercise of
employee stock options) or less than % of the shares of DQE Common Stock
outstanding on such date. See "Other Information for the DQE
Meeting -- Beneficial Ownership of Securities of DQE." The directors and
executive officers of DQE have indicated their intention to vote their shares of
DQE Common Stock in favor of adoption of the Merger Agreement and approval of
the transactions contemplated thereby. The directors and executive officers of
DQE have also indicated their intention to vote their shares of DQE Common Stock
in favor of the directors nominated by the DQE Board and the Accountant Proposal
and against the Stockholder Proposal. See "Other Information for the DQE
Meeting -- Election of Directors," "-- Approval of Appointment of Independent
Public Accountants" and "-- Proposal of a DQE Stockholder."
As of April 15, 1997, directors and executive officers of APS owned no
shares of DQE Common Stock. See "Interests of Certain Persons in the Merger."
VOTING AND REVOCATION OF PROXIES
Shares of APS Common Stock and DQE Common Stock represented by a proxy
properly signed and received at or prior to the appropriate Stockholders
Meeting, unless subsequently revoked, will be voted in accordance with the
instructions thereon. IF A PROXY IS SIGNED AND RETURNED WITHOUT INDICATING ANY
VOTING INSTRUCTIONS, SHARES OF APS COMMON STOCK REPRESENTED BY THE PROXY WILL BE
VOTED FOR THE PROPOSAL TO APPROVE THE ISSUANCE OF SHARES OF APS COMMON STOCK
CONTEMPLATED BY THE MERGER AGREEMENT AND WILL BE VOTED FOR THE PROPOSAL TO ADOPT
THE CHARTER AMENDMENT, AND SHARES OF DQE COMMON STOCK REPRESENTED BY A PROXY
PROPERLY SIGNED AND RECEIVED WILL BE VOTED FOR THE PROPOSAL TO ADOPT THE MERGER
AGREEMENT AND TO APPROVE THE TRANSACTIONS CONTEMPLATED THEREBY, FOR THE ELECTION
AS A DIRECTOR OF DQE OF EACH OF THE PERSONS NOMINATED FOR DIRECTOR OF DQE BY THE
DQE BOARD, FOR THE ACCOUNTANT PROPOSAL AND AGAINST THE STOCKHOLDER PROPOSAL.
Votes for election of directors will be cumulated selectively (at the discretion
of the holders of such stockholder's proxy) among those nominees for director
for whom the stockholder has not withheld authority to vote. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before the proxy is voted by filing a duly executed revocation with the
Secretary of APS, for stockholders of APS, or with the Corporate Secretary of
DQE, for stockholders of DQE, prior to or at the appropriate Stockholders
Meeting or, in the case of stockholders of APS, by the execution of a subsequent
proxy in favor of another person. All written notices of revocation and other
communications with respect to revocation of APS proxies should be addressed as
follows: Allegheny Power System, Inc., 10435 Downsville
19
<PAGE> 34
Pike, Hagerstown, Maryland 21740, Attention: Secretary. All written notices of
revocation and other communications with respect to revocation of DQE proxies
should be addressed as follows: DQE, Inc., 411 Seventh Avenue, 15th Floor,
Pittsburgh, Pennsylvania 15219, Attention: Secretary.
Holders of DQE Common Stock will be entitled to present matters for
consideration at the DQE Meeting. Holders of APS Common Stock would be entitled
to present matters for consideration at the APS Special Meeting, if additional
proposals are permitted at the APS Special Meeting and, in such a situation, the
stockholder complies with the applicable provisions of the APS Bylaws. See
"Comparison of Certain Rights of the Holders of APS Common Stock and DQE Common
Stock -- Meetings of Stockholders -- APS," and "-- Stockholder Proposals and
Stockholder Nominations of Directors -- APS."
The APS Board and the DQE Board are not currently aware of any business to
be acted upon at their respective Stockholders Meetings other than as described
herein. If, however, other matters are properly brought before either
Stockholders Meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment. Such adjournment may be for the purpose of soliciting
additional proxies. Shares represented by proxies voting against the issuance of
shares of APS Common Stock contemplated by the Merger Agreement, in the case of
APS, and against the adoption of the Merger Agreement and the approval of the
transactions contemplated thereby, in the case of DQE, will be voted against a
proposal to adjourn the respective Stockholder Meeting for the purpose of
soliciting additional proxies. Neither APS nor DQE currently intends to seek an
adjournment of its respective Stockholder Meeting.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
APS and DQE, none of whom will be specifically compensated for such services,
may solicit proxies from the stockholders of APS and DQE, respectively,
personally or by telephone, telecopy, telegram or other forms of communication.
Brokerage houses, nominees, fiduciaries and other custodians will be requested
to forward soliciting materials to beneficial owners and will be reimbursed for
their reasonable expenses incurred in sending proxy materials to beneficial
owners.
In addition, APS and DQE have retained MacKenzie Partners, Inc. and Beacon
Hill Partners, Inc., respectively, to assist in the solicitation of proxies from
their respective stockholders. The fees to be paid to such firms for such
services by each of APS and DQE are not expected to exceed $15,000 and $10,000,
respectively, plus, in each case, reasonable out-of-pocket costs and expenses.
APS and DQE each will bear its own expenses in connection with the solicitation
of proxies for its Stockholders Meeting, except that each will pay one-half of
all printing and filing costs and expenses incurred in connection with the
Registration Statement and this Joint Proxy Statement/Prospectus.
DQE STOCKHOLDERS SHOULD NOT SEND DQE COMMON STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
THE COMPANIES
APS
APS is a registered electric utility holding company which in 1996 had
operating revenues of approximately $2.3 billion. At December 31, 1996, APS had
total assets of approximately $6.6 billion. APS was incorporated in 1925 in
Maryland and owns, directly or indirectly, various regulated and unregulated
subsidiaries. APS' primary subsidiaries are engaged principally in the
generation, transmission, distribution and sale of electric energy. Its
subsidiaries' properties, which are interconnected and operated as a single
integrated electric utility system, are located in Maryland, Ohio, Pennsylvania,
Virginia and West Virginia and provide energy to customers in portions of each
of those states. APS provides electric service to nearly 1.4 million customers
in an area of about 29,000 square miles.
20
<PAGE> 35
DQE
DQE is an energy services holding company incorporated in 1989 in
Pennsylvania which owns various regulated and unregulated subsidiaries. DQE's
subsidiaries include (i) an electric utility engaged in the production,
transmission, distribution and sale of electrical energy, (ii) a company that
makes strategic investments related to DQE's core energy business, (iii) a
company that offers energy solutions to customers in domestic and international
markets such as energy facility development, operation and maintenance and
independent power production, (iv) a company formed to explore strategic
business opportunities in the energy industry, and (v) a financial services
company that makes long-term investments and provides financing for DQE's
services and products. DQE's electric utility provides electric service to
customers in a service territory of about 800 square miles in southwestern
Pennsylvania, comprised of parts of Allegheny County (including the City of
Pittsburgh) and parts of Beaver County and Westmoreland County. This electric
utility provides service to about 580,000 customers in this service area, and
its revenues account for the majority of DQE's revenue.
Duquesne Light owns a 13.74% interest in Perry Unit 1, a 47.50% interest in
Beaver Valley 1 and a 13.74% interest in Beaver Valley 2.
ADC is a wholly owned subsidiary of Duquesne Enterprises, Inc., which, in
turn, is a wholly owned subsidiary of DQE. ADC is an electric utility company
engaged in the business of owning facilities to provide complete energy
services. Upon approval by the SEC, ADC will assign to DH Energy, Inc. all of
its rights and obligations under certain agreements, and DH Energy, Inc. will
become a public utility company pursuant to the PUHCA.
In addition, DES will shortly be forming MT. Upon SEC approval, MT will,
among other things, enter into an Operation and Maintenance Services Agreement
with ADC, and become a public utility company pursuant to the PUHCA.
Merger Sub
Merger Sub is to be formed by APS as a wholly owned subsidiary of APS
solely for the purpose of effecting the Merger.
PRIOR CONTACTS BETWEEN THE COMPANIES
In October 1996, AYP Energy, Inc., an indirect wholly owned Subsidiary of
APS, purchased Duquesne Light's 50% interest in Unit No. 1 of the Fort Martin
Power Station for a price of approximately $170 million pursuant to an agreement
entered into in November 1995. In addition, APS and DQE are parties to several
power exchange and regulatory agreements.
THE MERGER
This section describes certain aspects of the Merger. The following
description does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Appendix A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. All holders
of DQE Common Stock and holders of APS Common Stock are urged to read the Merger
Agreement in its entirety. For a further description of the Merger Agreement,
see "The Merger Agreement."
GENERAL
The Merger Agreement provides for a business combination between APS and
DQE in which, subject to the satisfaction of the conditions therein, the Merger
will be effected, DQE will become a wholly owned Subsidiary of APS, and the
holders of DQE Common Stock, other than the Excluded Shares, will be issued APS
Common Stock in a transaction intended to qualify as a "pooling of interests"
for accounting purposes and as a "reorganization" within the meaning of Section
368(a) of the Code for federal income tax purposes. In the Merger, each
outstanding share of DQE Common Stock (other than the Excluded Shares) will be
21
<PAGE> 36
converted into the right to receive, and become exchangeable for, 1.12 shares of
APS Common Stock. Each outstanding share of APS Common Stock will remain
outstanding and be unaffected by the Merger. As a result of the Merger, holders
of DQE Common Stock immediately prior to the Merger will own approximately
% of the outstanding APS Common Stock after the Merger (based on the
number of shares of APS Common Stock and DQE Common Stock outstanding as of
, 1997).
TERMS OF THE MERGER
At the Effective Time, APS, Merger Sub and DQE will consummate the Merger
in which Merger Sub will be merged with and into DQE, and the separate corporate
existence of Merger Sub will thereupon cease. DQE, as the Surviving Corporation,
will be a wholly owned subsidiary of APS and will continue to be governed by the
laws of the Commonwealth of Pennsylvania. The Merger Agreement provides that the
articles of incorporation of DQE in effect immediately prior to the Effective
Time will remain the articles of incorporation of the Surviving Corporation. The
Merger Agreement provides that the bylaws of Merger Sub in effect at the
Effective Time shall be the bylaws of the Surviving Corporation following the
Merger.
At the Effective Time, each issued and outstanding share of DQE Common
Stock (other than the Excluded Shares) will be converted into the right to
receive, and become exchangeable for, 1.12 shares of APS Common Stock, and the
right, if any, to receive cash in lieu of any fractional share into which such
shares of DQE Common Stock have been converted (as described below) and any
distribution or dividend with a record date after the Effective Time, in each
case without interest. By virtue of the Merger, the Excluded Shares shall cease
to be outstanding and shall be canceled and retired without payment of any
consideration.
If at any time during the period between the date of the Merger Agreement
and the Effective Time there is a change in the number of shares of APS Common
Stock or securities convertible or exchangeable into or exercisable for shares
of APS Common Stock issued and outstanding as a result of a reclassification,
stock split, stock dividend or distribution, or other similar transaction, the
Exchange Ratio will be equitably adjusted.
No fractional shares of APS Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that each holder of DQE Common Stock who
would otherwise have been entitled to receive a fractional share of APS Common
Stock will be entitled to receive, in lieu thereof, cash representing such
holder's proportionate interest in a share of APS Common Stock, based on the
closing price of such shares as reported in The Wall Street Journal, New York
City edition, on the trading day immediately prior to the Effective Time.
The DQE DRSPP provides that dividends on DQE Common Stock of plan
participants will be used to purchase shares of DQE Common Stock at market value
and also permits participants to invest in additional shares of DQE Common Stock
through optional cash payments. The DQE DRSPP credits whole shares and
fractional shares of DQE Common Stock to participants' accounts. At the
Effective Time, all shares of DQE Common Stock credited to participants'
accounts under the DQE DRSPP will be converted into a number of shares of APS
Common Stock determined by multiplying the number of such shares of DQE Common
Stock by the Exchange Ratio. All such shares of APS Common Stock will be held in
the participants' accounts, with individual participants' accounts in the DQE
DRSPP being credited with fractional shares of APS Common Stock.
EFFECTIVE TIME
The Merger will become effective at the time when the Pennsylvania Articles
of Merger have been duly filed with the Department of State of the Commonwealth
of Pennsylvania as provided in Section 1927 of the PBCL.
EXCHANGE OF CERTIFICATES
Pursuant to the Merger Agreement, promptly after the Effective Time, the
Surviving Corporation will cause the Exchange Agent to mail to each holder of
DQE Common Stock (other than holders of the
22
<PAGE> 37
Excluded Shares) (i) a letter of transmittal specifying that delivery will be
effected, and risk of loss and title to the DQE Certificates will pass, only
upon delivery of the DQE Certificates (or affidavits of loss in lieu thereof) to
the Exchange Agent, such letter of transmittal to be in such form and to have
such other provisions as APS and DQE may reasonably agree, and (ii) instructions
for use in effecting the surrender of the DQE Certificates in exchange for (A)
APS Certificates and (B) any unpaid dividends and other distributions and cash
in lieu of fractional shares. Upon surrender of a DQE Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, the holder of such DQE Certificate will be entitled to receive in
exchange therefor (x) an APS Certificate representing the number of whole shares
of APS Common Stock that such holder is entitled to receive pursuant to the
Merger Agreement, (y) a check in the amount (after giving effect to any required
tax withholdings) of (A) any cash in lieu of fractional shares plus (B) any
unpaid non-stock dividends and any other dividends or other distributions that
such holder has the right to receive pursuant to the Merger Agreement, and the
DQE Certificate so surrendered will forthwith be canceled. No interest will be
paid or will have accrued on any amount payable upon due surrender of the DQE
Certificates. DQE Certificates surrendered by "affiliates" of DQE, as determined
pursuant to the Merger Agreement, will be exchanged in accordance with the above
procedure after APS receives from the "affiliate" a written agreement not to
transfer the shares of APS Common Stock received in the exchange, except as
permitted in the written agreement.
In the event of a transfer of ownership of DQE Common Stock that is not
registered in the transfer records of DQE, an APS Certificate representing the
proper number of shares of APS Common Stock, together with a check for any cash
to be paid upon due surrender of the DQE Certificate and any other dividends or
distributions in respect thereof, may be issued and/or paid to such a transferee
if the DQE Certificate formerly representing such shares of DQE Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. If any APS Certificate is to be issued in a name
other than that in which the DQE Certificate surrendered in exchange therefor is
registered, it will be a condition of such exchange that the person or entity
requesting such exchange pay any transfer or other taxes required by reason of
the issuance of APS Certificates in a name other than that of the registered
holder of the DQE Certificate surrendered, or establish to the satisfaction of
APS or the Exchange Agent that such tax has been paid or is not applicable.
All APS Common Stock issued in connection with the Merger will be deemed
issued and outstanding as of the Effective Time and whenever a dividend or other
distribution is declared by APS in respect of the APS Common Stock, the record
date for which is at or after the Effective Time, that declaration will include
dividends or other distributions in respect of all shares issuable pursuant to
this Agreement. No dividends or other distributions in respect of the APS Common
Stock will be paid to any holder of any unsurrendered DQE Certificate until such
DQE Certificate is surrendered for exchange in accordance with the provisions of
the Merger Agreement. Subject to applicable Laws, following surrender of any
such Certificate, there will be issued and/or paid to the holder of the APS
Certificates issued in exchange therefor, without interest, (A) at the time of
such surrender, the dividends or other distributions with a record date after
the Effective Time theretofore payable with respect to such whole shares of APS
Common Stock and not paid and (B) at the appropriate payment date, the dividends
or other distributions payable with respect to such whole shares of APS Common
Stock with a record date after the Effective Time but with a payment date
subsequent to surrender.
In addition, pursuant to the Merger Agreement, holders of unsurrendered DQE
Certificates will be entitled to vote after the Effective Time at any meeting of
APS stockholders the number of whole shares of APS Common Stock represented by
such DQE Certificates, regardless of whether such holders have exchanged their
DQE Certificates.
After the Effective Time, there will be no transfers on the stock transfer
books of DQE of shares of DQE Common Stock that were outstanding immediately
prior to the Effective Time.
In the event any DQE Certificate is lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such DQE Certificate
to be lost, stolen or destroyed and, if required by APS, the
23
<PAGE> 38
posting by such person of a bond in customary amount as indemnity against any
claim that may be made against it with respect to such DQE Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed DQE
Certificate the shares of APS Common Stock and any cash payable and any unpaid
dividends or other distributions in respect of APS Common Stock pursuant to the
Merger Agreement upon due surrender of and delivery pursuant to the Merger
Agreement in respect of the DQE Common Stock to which such Certificate relates.
HOLDERS OF DQE COMMON STOCK SHOULD NOT SEND THEIR CERTIFICATES TO THE
EXCHANGE AGENT UNTIL TRANSMITTAL MATERIALS ARE RECEIVED FROM THE EXCHANGE AGENT.
HOLDERS OF APS COMMON STOCK WILL NOT EXCHANGE THEIR CERTIFICATES.
APPRAISAL RIGHTS
Holders of APS Common Stock will not be entitled to any dissenters' or
appraisal rights under the MGCL as a result of the matters to be voted upon at
the APS Special Meeting. Holders of DQE Common Stock also will not be entitled
to any dissenters' or appraisal rights under the PBCL as a result of the matters
to be voted upon at the DQE Meeting.
BACKGROUND OF THE MERGER
The electric utility industry throughout the United States is in the early
stages of dramatic changes that are intended to bring competition to what has
been, since the electric industry's inception, a collection of regional
monopolies. These changes have been brought about in part through the adoption
of the Energy Policy Act of 1992 and through orders 888 and 889 of the FERC. In
addition, in Pennsylvania, where DQE has all of its electric utility business
and APS has a substantial portion of its electric utility business, the trend to
bring about competition led to the enactment in late 1996 of the Electricity
Generation Customer Choice and Competition Act, 66 Pa. Cons. Stat. sec. 2801 et
seq. (the "Pennsylvania Restructuring Legislation"), which provides, among other
things, for a phase in of competition for retail electric customers in
Pennsylvania and an opportunity for recovery of certain capital costs ("stranded
costs") incurred by utilities in a regulated environment that are not likely to
be recoverable through prices charged in a competitive environment. In light of
these developments, both the APS Board and the DQE Board have been engaged in
reviews of steps they might take to best position their respective companies to
take advantage of the changes occurring in the electric utility industry.
In late 1996, the chief executive officers of APS and DQE met on several
occasions and had several phone conversations to discuss a possible combination
between APS and DQE. As a result of these contacts, APS and DQE agreed in
December of 1996 to commence a process of due diligence and to determine if a
mutually desirable transaction could be agreed upon. These early contacts
concluded with understandings that APS was open to the idea of negotiating an
exchange ratio that would give holders of DQE Common Stock a premium to its
market trading price, that the board of directors of the combined company could
include representation from the DQE Board approximately equivalent to the
percentage ownership of DQE stockholders in the combined company after the
Merger and that APS saw a good fit for DQE management in APS after the Merger.
An initial meeting of APS and DQE managements and their respective legal
and financial advisors was held in late December 1996, at which time important
areas of due diligence were identified and a subsequent mutual due diligence
presentation was scheduled. After this December meeting, APS and DQE began the
organization of due diligence information regarding their respective companies
for review by the other. In mid-January 1997, the senior managements of APS and
DQE met and each gave a business overview presentation to the other party and
its legal and financial advisors and responded to questions. Thereafter,
representatives of APS and DQE performed financial, operating and legal due
diligence investigations on the other party and throughout January through April
1997, negotiated the legal and financial terms of the Merger. In addition, APS
retained legal counsel experienced in nuclear-related matters, a firm of
consulting nuclear engineers and a retired nuclear utility executive to assist
APS in its due diligence investigation of the Nuclear Facilities.
24
<PAGE> 39
The negotiations of the terms of the Merger Agreement focused most
intensely upon the number of shares of APS Common Stock into which each share of
DQE Common Stock would be converted in the Merger, the status of events
concerning the Nuclear Facilities, whether contractual language relating to an
adverse regulatory or operating event at the Nuclear Facilities that does not
give rise to a material adverse effect on DQE should give APS a right not to
consummate the Merger or result in a reduction in the Exchange Ratio, the
circumstances under which the terms of regulatory approvals could give APS, or
APS and DQE, a right not to consummate the Merger, the circumstances under which
termination fees would be payable and the amount of those fees, and the
circumstances under which either party could negotiate with a third party
regarding an alternative merger proposal or terminate the Merger Agreement to
accept such a proposal. During the week of March 31, 1997, an understanding with
respect to potentially mutually agreeable positions on the principal issues was
reached, and thereafter documentation was finalized, due diligence was completed
and the APS Board and the DQE Board each approved the Merger and related matters
at respective meetings held late in the day on April 4, 1997, following
presentations from their respective senior managements and their legal and
financial advisors (including descriptions of the Merger Agreement by their
respective legal advisors) and after having received the fairness opinions of
their respective financial advisors.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
APS
The APS Board has unanimously determined that the terms of the Merger
Agreement and the transactions contemplated thereby are advisable for, fair to,
and in the best interests of, APS and its stockholders. In reaching this
determination, the APS Board concluded that the Merger offered an opportunity to
increase the long-term value of stockholders' investment in APS over what that
value would have been had APS not agreed to the Merger, and that such
opportunity more than offsets the risks inherent in the Merger. In reaching this
conclusion, the APS Board considered that:
(i) the Merger would better position APS to take advantage of
changes in the electric utility industry by expanding its service
territory and number of customers served by combining its existing
service territories with DQE's contiguous service territories;
(ii) APS management has historically been better than its peer
companies at managing electric generation, transmission and
distribution and its belief that the Merger would permit the combined
management to utilize this expertise over greater amounts of
generation and distribution;
(iii) based upon reports from its outside advisors and APS
management and publicly available materials regarding DQE, DQE
management has historically been better than its peer companies in
developing unregulated businesses and the APS Board's belief that the
Merger would permit the combined management to utilize this expertise
as a part of a bigger, financially stronger enterprise;
(iv) the terms of the recently enacted Pennsylvania restructuring
legislation and the significant mitigation efforts already undertaken
by DQE would permit DQE to recover such stranded costs associated with
DQE's investment in the Nuclear Facilities as determined to be just
and reasonable by the PAPUC; and
(v) the synergies estimated by the managements of APS and DQE
appear to be achievable.
In reaching the determination that the terms of the Merger were advisable
for, fair to and in the best interests of APS and its stockholders, the APS
Board also considered a number of additional factors, including its knowledge of
APS' business and discussions with APS' management concerning the results of
APS' management's due diligence investigation of DQE, the economic and
regulatory environment, strategic, operational and financial opportunities and
risks associated with the Merger and the terms of the Merger Agreement, the
historical, current and 30-day average market prices of DQE Common Stock and the
opinion of APS' financial advisor, Merrill Lynch, to the effect that, as of the
date of such opinion, the Exchange Ratio was fair from a financial point of view
to the holders of APS Common Stock. The APS Board also considered certain risks
and potential disadvantages associated with the Merger, including the
acquisition of interests in the Nuclear Facilities and the fact that APS has
historically avoided ownership of nuclear power plants, the
25
<PAGE> 40
possibility that APS would be unable to retain, after the Merger, the senior
management of DQE responsible for DQE's unregulated businesses, the risk that
the projected synergies will not be realized in the amounts expected or that
they will be offset by unanticipated increases in expenses or revenue losses,
the management distractions necessarily associated with a business combination
of the magnitude of the Merger and the potential disruption to the businesses of
APS and DQE, along with the risk that the transaction might not be completed as
a result of a failure to satisfy the conditions to the Merger Agreement.
The foregoing discussion of the information and factors which were given
weight by the APS Board is not intended to be exhaustive but is believed to
include all material factors considered by the APS Board. The APS Board did not
assign specific weights to the foregoing factors and individual directors may
have given different weights to different factors. After considering all such
factors, the APS Board unanimously determined that the terms of the Merger
Agreement and the transactions contemplated thereby are advisable for, fair to,
and in the best interests of, APS and its stockholders and unanimously
recommends to its stockholders that they approve the issuance of shares of APS
Common Stock pursuant to the Merger Agreement.
THE APS BOARD UNANIMOUSLY RECOMMENDS THAT APS STOCKHOLDERS VOTE FOR
APPROVAL OF THE ISSUANCE OF SHARES OF APS COMMON STOCK PURSUANT TO THE MERGER
AGREEMENT.
DQE
The DQE Board has unanimously approved the Merger Agreement and the
transactions contemplated thereby, having determined that the terms of the
Merger Agreement and the transactions contemplated thereby are fair to, and in
the best interests of, its stockholders. In reaching this determination, the DQE
Board concluded that the Merger was likely to increase the value of its
stockholders' investment in DQE over what DQE could probably achieve on its own.
In reaching this conclusion, the DQE Board considered that:
(i) the Merger will allow the combined company to meet the
challenges of the increasingly competitive environment in the utility
industry more effectively than DQE could on its own because it will
have the critical mass necessary to compete in a deregulated utility
environment, including an expanded customer base from which to grow
unregulated activities, a stronger financial and operational position
and less nuclear exposure;
(ii) the estimated synergies from the Merger should improve DQE's
financial performance due to savings from the elimination of duplicate
activities and by creating improved operating efficiencies and lower
capital costs;
(iii) the Merger will permit stockholders of DQE to benefit from
the combined company's flexibility and leverage in financing its
operations and its enhanced ability to take advantage of future
strategic opportunities and to reduce its exposure to changes in
economic conditions in any segment of its business;
(iv) the combined service territories of DQE and APS will be more
geographically diverse than the service territory of DQE alone,
reducing DQE's exposure to changes in economic, competitive or
climatic conditions, as well as providing a larger regional platform
from which to expand DQE's customer base;
(v) APS' winter-peaking, low-cost, efficient operations, and
suburban and rural customer base, will complement DQE's summer-peaking
operations and urban customer base;
(vi) DQE's current customers will receive a wider range of
energy-related products and services; and
(vii) DQE's mix of regulated and unregulated energy products and
services provides a strategic fit with APS' core businesses.
26
<PAGE> 41
In reaching the determination that the terms of the Merger were fair to,
and in the best interests of, stockholders of DQE, the DQE Board also considered
a number of additional factors, including its knowledge of DQE's business and
discussions with DQE's management concerning the results of DQE's due diligence
investigation of APS, the economic and regulatory environment, strategic,
operational and financial opportunities open to DQE, the terms of the Merger
Agreement, the historical and current market prices of DQE Common Stock and APS
Common Stock and the opinion of DQE's financial advisor, CSFB, to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair to the holders of DQE Common
Stock from a financial point of view. The DQE Board also considered certain
risks and potential disadvantages associated with the Merger, including the risk
that the estimated synergies will not be realized in the amounts expected or
that they will be offset by unanticipated increases in expenses or revenue
losses, the management distractions necessarily associated with a business
combination of the magnitude of the Merger and the potential disruption to the
businesses of APS and DQE, along with the risk that the transaction might not be
completed as a result of a failure to satisfy the conditions to the Merger
Agreement, and the fact that certain members of DQE's management and the DQE
Board had other interests in the Merger in addition to the interests which
holders of DQE Common Stock have generally.
The foregoing discussion of the information and factors which were given
weight by the DQE Board is not intended to be exhaustive but is believed to
include all material factors considered by the DQE Board. The DQE Board did not
assign specific weights to the foregoing factors and individual Directors may
have given different weights to different factors. After considering all such
factors, the DQE Board unanimously approved the Merger Agreement and unanimously
recommends to its stockholders that they approve the adoption of the Merger
Agreement and the transactions contemplated thereby.
THE DQE BOARD UNANIMOUSLY RECOMMENDS THAT DQE STOCKHOLDERS VOTE FOR
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE TRANSACTIONS CONTEMPLATED
THEREBY.
SYNERGIES
APS and DQE have jointly studied the estimated synergies arising out of a
combination of their companies. The companies estimated that the Merger could
result in savings of approximately $1 billion over the 10-year period from 1998
to 2008, taking into account the costs estimated to be necessary to achieve such
synergies. The savings are expected to come from elimination of duplicate
activities (including labor and corporate and administrative programs), improved
operating efficiencies and lower capital costs. The labor reductions would be
achieved from a combination of reduced hiring, attrition and targeted voluntary
reduction programs.
Holders of APS Common Stock or DQE Common Stock should note that the
analyses employed in developing these savings estimates were based upon various
assumptions that involve judgments with respect to economic conditions,
inflation rates, regulatory treatment, weather conditions, financial market
conditions, interest rates and other factors which are each difficult to predict
and beyond the control of DQE and APS. Accordingly, although the APS Board and
DQE Board believe that reasonable assumptions were used to develop these
estimates of synergies, there can be no assurance that these estimates will
approximate the future experience of the combined company or the extent to which
it can realize these synergies. See "The Merger -- Cautionary Statement
Concerning Forward-Looking Statements."
OPINIONS OF FINANCIAL ADVISORS
APS
On April 4, 1997, Merrill Lynch delivered its oral opinion to the APS
Board, which was subsequently confirmed in a written opinion dated as of that
date and as of the date of this Joint Proxy Statement/Prospectus (the "Merrill
Lynch Opinion"), to the effect that, as of such dates, and based upon the
assumptions made, matters considered and limits of review set forth in such
opinion, the Exchange Ratio was fair to holders of APS Common Stock from a
financial point of view.
A COPY OF THE MERRILL LYNCH OPINION, DATED AS OF THE DATE OF THIS JOINT
PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY MERRILL
LYNCH, IS ATTACHED AS ANNEX B TO THIS JOINT PROXY STATEMENT/PROSPECTUS. HOLDERS
OF APS COMMON
27
<PAGE> 42
STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. THE MERRILL
LYNCH OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW TO THE HOLDERS OF APS COMMON STOCK AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY APS STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE APS SPECIAL MEETING. THE SUMMARY OF THE MERRILL LYNCH OPINION
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other
things: (1) reviewed APS' Annual Reports, Form 10-Ks and related financial
information for the three-fiscal-year period ended December 31, 1996 and certain
other filings made with the SEC, including proxy statements, Form 8-Ks and
registration statements, during the last three years; (2) reviewed DQE's Annual
Reports, Form 10-Ks and related financial information for the three-fiscal-year
period ended December 31, 1996 and certain other filings made with the SEC,
including proxy statements, Form 8-Ks and registration statements, during the
last three years; (3) reviewed certain information, including financial
forecasts, relating to the business, earnings, cash flow, assets and prospects
of APS and DQE furnished to Merrill Lynch by APS and DQE; (4) conducted
discussions with members of senior management of APS and DQE concerning their
respective businesses, regulatory environments, prospects and strategic
objectives; (5) reviewed the market prices and valuation multiples for APS
Common Stock and DQE Common Stock and compared them with those of certain
publicly traded companies which Merrill Lynch deemed to be reasonably similar to
APS and DQE, respectively; (6) compared the results of operations of APS and DQE
with those of certain companies which Merrill Lynch deemed to be reasonably
similar to APS and DQE, respectively; (7) compared the proposed financial terms
of the transaction contemplated by the Merger Agreement with the financial terms
of certain other transactions which Merrill Lynch deemed to be relevant; (8)
considered the pro forma effect of the Merger on APS' capitalization ratios and
earnings, dividends and book value per share; (9) reviewed the Merger Agreement;
(10) reviewed this Joint Proxy Statement/Prospectus (with respect to the Merrill
Lynch Opinion, dated as of the date hereof); and (11) reviewed such other
financial studies and analyses and performed such other investigations and took
into account such other matters as Merrill Lynch deemed necessary, including its
assessment of general economic, market, monetary and other conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the
accuracy and the completeness of all information supplied or otherwise made
available to it by APS and DQE, and Merrill Lynch did not independently verify
such information or undertake an independent evaluation or appraisal of the
assets or liabilities of APS or DQE. In addition, Merrill Lynch did not conduct
any physical inspection of the properties or facilities of APS or DQE. With
respect to the financial forecasts and the estimated synergies furnished by APS
and DQE, Merrill Lynch assumed that they were reasonably prepared and reflected
the best currently available estimates and judgments of APS' or DQE's management
as to the expected future financial performances of APS or DQE, as the case may
be, and as to the expected future projected outcomes of various legal,
regulatory and other contingencies. Merrill Lynch assumed that the Merger will
be accounted for as a pooling of interests and will be free of federal tax to
APS, DQE and the holders of shares of APS Common Stock and the holders of shares
of DQE Common Stock. The Merrill Lynch Opinion is necessarily based upon general
economic, market, monetary and other conditions as they existed and could be
evaluated, and the information made available to Merrill Lynch, as of the date
of such opinion. The Merrill Lynch Opinion was prepared solely for the
information and use of the APS Board.
In connection with the preparation of the Merrill Lynch Opinion, Merrill
Lynch expressed no opinion as to what the value of APS Common Stock actually
will be when issued upon consummation of the Merger or what the value of APS
Common Stock or DQE Common Stock will be at any time after the date of the
Merrill Lynch Opinion. No limitations were imposed by APS on Merrill Lynch with
respect to the investigations made or procedures followed by Merrill Lynch in
rendering its opinion.
The following is a summary of certain of the financial and comparative
analyses performed by Merrill Lynch in arriving at the Merrill Lynch Opinion
dated as of April 4, 1997.
Historical Market Value Analysis. Merrill Lynch reviewed the performance
of the daily closing prices per share of DQE Common Stock and APS Common Stock
in relation to each other for the period from February 1, 1994 to April 4, 1997.
Merrill Lynch also reviewed the historical ratios of such daily closing prices
per share of DQE Common Stock to those of APS Common Stock (the "Historical
Trading Ratios") for the
28
<PAGE> 43
period from February 1, 1994 to April 4, 1997, and the mean of such Historical
Trading Ratios for the one-year, two-year and three-year periods ended on April
4, 1997, and compared such Historical Trading Ratios to the Exchange Ratio. This
analysis showed that, during the three-year period ended on April 4, 1997, the
Historical Trading Ratio ranged from 1.079 to 0.861, and the mean of the
Historical Trading Ratios for the one-year, two-year and three-year periods
ended on April 4, 1997 were 0.937, 0.973 and 0.959, respectively.
Comparable Publicly Traded Company Analysis. Using publicly available
information, Merrill Lynch compared certain financial and operating information
and ratios (described below) for DQE with the corresponding financial and
operating information and ratios for separate groups of publicly traded
companies that Merrill Lynch deemed to be reasonably comparable to DQE. The
companies included in the DQE analyses were: Baltimore Gas & Electric Company,
Boston Edison Company, DTE Energy Company, Florida Progress Corporation, GPU,
Inc., Illinova, New England Electric System and PP&L Resources, Inc.
(collectively, the "DQE Comparables").
In deriving an estimated valuation range for DQE, Merrill Lynch compared:
(i) current trading price to estimated 1997 earnings per share for the DQE
Comparables, which estimates were obtained from Institutional Brokers Estimate
System ("IBES") and ranged from 8.3x to 11.6x, with a mean of 10.0x, compared to
a multiple of 11.4x for DQE Common Stock based upon estimates from IBES; (ii)
current trading price to estimated 1998 earnings per share for the DQE
Comparables, which estimates were obtained from IBES and ranged from 7.9x to
11.3x, with a mean of 10.0x, compared to a multiple of 11.0x for DQE Common
Stock based upon estimates from IBES; (iii) current trading price to book value
for the DQE Comparables, which ranged from 1.01x to 1.53x, with a mean of 1.26x,
compared to a multiple of 1.53x for DQE Common Stock; (iv) firm value to 1996
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the DQE Comparables, which ranged from 5.2x to 7.3x, with a mean of 6.0x,
compared to a multiple of 6.6x for DQE Common Stock; (v) firm value to 1996
earnings before interest and taxes ("EBIT") for the DQE Comparables, which
ranged from 7.1x to 11.2x, with a mean of 9.2x, compared to a multiple of 11.4x
for DQE Common Stock; (vi) the dividend yield ratio for the DQE Comparables,
which ranged from 5.7% to 8.4%, with a mean of 6.8%, compared to the dividend
yield ratio of 4.9% for DQE Common Stock; and (vii) the forward payout ratio for
the DQE Comparables, which ranged from 46.8% to 80.7%, with a mean of 68.5%,
compared to the dividend yield ratio of 56.4% for DQE Common Stock.
Based upon the estimated valuation ranges for DQE in such analyses and the
APS current trading price as of April 1, 1997, Merrill Lynch calculated an
implied exchange ratio of a share of DQE Common Stock to a share of APS Common
Stock ranging from 0.82x to 1.00x, compared to the Exchange Ratio of 1.12.
No public company utilized as a comparison in the analyses described above
is identical to DQE. Accordingly, an analysis of publicly traded comparable
companies is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
value of the comparable companies or company to which they are being compared.
Comparable Transactions Analysis. Using publicly available information,
Merrill Lynch reviewed eighteen transactions announced between May 1995 and
December 1996, involving selected electric utility companies, eleven
transactions of which were mergers of electric utility companies (the "Electric
Merger Transactions") and seven transactions of which were so-called
"convergence" transactions or mergers of utilities providing different types of
power (the "Convergence Transactions"). The Electric Merger Transactions and the
date each transaction was announced were as follows: Northern States Power
Company/Wisconsin Energy Corporation (May 1995), CIPSCO Incorporated/Union
Electric Company (August 1995), Southwestern Public Service Company/Public
Service Company of Colorado (August 1995), Potomac Electric Power
Company/Baltimore Gas and Electric Company (September 1995), UtiliCorp United
Inc./Kansas City Power & Light Company (May 1996), Kansas City Power & Light
Company/Western Resources, Inc. (June 1996), Atlantic Energy, Inc./Delmarva
Power & Light Company (August 1996), IES Industries Inc./WPL Holdings, Inc.
(August 1996), IES Industries Inc./Mid-American Energy Company (August 1996),
Interstate Power/WPL Holdings, Inc. (August 1996) and Centerior Energy
Corporation/Ohio Edison Company (September 1996). The Convergence Transactions
and the date each transaction was announced were as follows: Washington Energy
Company Inc./Puget Sound Power &
29
<PAGE> 44
Light Company (October 1995), ENSERCH Corporation/Texas Utilities Company (April
1996), Portland General Corporation/Enron Corp. (July 1996), NorAm Energy
Corp./Houston Industries Incorporated (August 1996), Pacific Enterprises/Enova
Corporation (October 1996), PanEnergy Corp./Duke Power Company (November 1996)
and Long Island Lighting Company/The Brooklyn Union Gas Company (December 1996).
Merrill Lynch reviewed the transaction price in certain of the above
transactions as a multiple of (i) last-twelve-months pre-announcement net income
of the acquired company, which ranged from approximately 12.0x to 15.0x, (ii)
pre-announcement book value of the acquired company, which ranged from
approximately 1.55x to 1.90x, (iii) last-twelve-months pre-announcement EBIT of
the acquired company, which ranged from approximately 9.0x to 11.0x, and (iv)
last-twelve-months pre-announcement EBITDA of the acquired company, which ranged
from approximately 6.0x to 7.0x; and estimated transaction prices for DQE on the
basis of such multiples.
Based upon the transaction prices estimated for DQE in such analyses using
transaction price as a multiple of adjusted last-twelve-months pre-announcement
net income and the APS current trading price as of April 1, 1997, Merrill Lynch
calculated an implied exchange ratio of a share of DQE Common Stock to a share
of APS Common Stock ranging from 1.01 to 1.27, compared to the Exchange Ratio of
1.12.
None of the business combinations utilized as a comparison in the analyses
described above is identical to the Merger. Accordingly, an analysis of
comparable business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable companies or company to which they
are being compared.
Discounted Cash Flow Analysis. Merrill Lynch derived estimated valuation
ranges for APS and DQE by performing discounted cash flow ("DCF") analyses.
In the case of APS, the DCF was calculated assuming discount rates ranging
from 7.5% to 11.5%, and was comprised of the sum of the present value of (i) the
projected unlevered free cash flows for years 1997 to 2006 estimated by APS and
(ii) the 2006 terminal value based upon a range of multiples from 6.5x to 7.0x
of projected 2006 EBITDA. In the case of DQE, the DCF was calculated assuming
discount rates ranging from 7.5% to 11.5%, and was comprised of the sum of the
present value of (i) the projected unlevered free cash flows for years 1997 to
2006 estimated by DQE and (ii) the 2006 terminal value based upon a range of
multiples from 6.25x to 6.75x of projected 2006 EBITDA.
Based upon the estimated valuation range of DQE set forth above and the APS
current trading price as of April 1, 1997, Merrill Lynch calculated an implied
exchange ratio of a share of DQE Common Stock to a share of APS Common Stock
ranging from 0.91 to 1.22, compared to the Exchange Ratio of 1.12.
Contribution Analysis. Merrill Lynch calculated the contribution of each
of APS and DQE to the pro forma combined company with respect to (i) earnings
per share, (ii) common equity per share, (iii) dividends per share, (iv) book
value per share, (v) EBITDA and (vi) EBIT, in each case for the historical
fiscal years 1994 through 1996, and for the projected fiscal years 1997 through
2001 using the projections of the respective companies' managements.
Based upon the estimated implied ratios in such analyses calculated with
respect to EBITDA, Merrill Lynch calculated implied exchange ratios of a share
of DQE Common Stock to a share of APS Common Stock ranging from 1.17 to 1.51,
compared to the Exchange Ratio of 1.12.
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch. Arriving at a fairness opinion is a
complex process not necessarily susceptible to partial analysis or summary
description. Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all such factors and analyses, could create a
misleading view of the processes underlying its opinion. Merrill Lynch did not
assign relative weights to any of its analyses in preparing its opinion. The
matters considered by Merrill Lynch in its analyses are based on numerous
macroeconomic, operating and financial assumptions with respect to industry
30
<PAGE> 45
performance, general business and economic conditions and other matters, many of
which are beyond APS' or DQE's control and involve the application of complex
methodologies and educated judgment. Any estimates incorporated in the analyses
performed by Merrill Lynch are not necessarily indicative of actual past or
future results or values, which may be significantly more or less favorable than
such estimates. Estimated values do not purport to be appraisals and do not
necessarily reflect the prices at which businesses or companies may be sold in
the future, and such estimates are inherently subject to uncertainty.
Merrill Lynch is an internationally recognized investment banking firm and
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, corporate and other purposes. Merrill
Lynch was selected to act as financial advisor to the APS Board because of its
substantial expertise in transactions similar to the Merger and its reputation
in investment banking and mergers and acquisitions.
In connection with APS' engagement of Merrill Lynch, APS and Merrill Lynch
have entered into a letter agreement (the "Merrill Lynch Engagement Letter"),
(1) pursuant to which Merrill Lynch was paid a fee of $250,000 on the date of
such letter agreement and (2) which provides that if, during the period Merrill
Lynch is retained by APS or within 18 months thereafter, (a) a Merger
Transaction (as defined in the Merrill Lynch Engagement Letter) is consummated
or (b) APS or its affiliate enters into an agreement with DQE which subsequently
results in a Merger Transaction, an additional fee of $8,650,000 will be
payable. Any fee previously paid to Merrill Lynch in accordance with clause (1)
of this paragraph will be deducted from the fee to which Merrill Lynch is
entitled in accordance with clause (2). Pursuant to the Merrill Lynch Engagement
Letter, if APS receives any bust-up fee, break-up fee, termination fee, expense
reimbursement or any similar type of payment from DQE in connection with a
proposed Merger Transaction, then APS has agreed to pay Merrill Lynch 10% of
such payment received (excluding any payment to APS related to the reimbursement
of actual out-of-pocket expenses incurred by APS, provided, however, that
Merrill Lynch's fee pursuant to this sentence will not be considered as an
out-of-pocket expense for purposes of this sentence), up to a maximum of
$6,250,000. In addition, pursuant to the Merrill Lynch Engagement Letter, APS
has agreed to pay certain other expenses of, and has granted certain rights of
indemnification to, Merrill Lynch.
In the ordinary course of Merrill Lynch's business, Merrill Lynch may
actively trade the securities of APS or DQE for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
DQE
CSFB has acted as financial advisor to DQE in connection with the Merger.
CSFB was selected by DQE based on CSFB's experience, expertise and familiarity
with DQE and its business. CSFB is an internationally recognized investment
banking firm and is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
In connection with CSFB's engagement, DQE requested that CSFB evaluate the
fairness of the Exchange Ratio from a financial point of view. On April 4, 1997
CSFB rendered to the DQE Board an oral opinion, to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair to the holders of DQE Common Stock from a financial
point of view. CSFB has confirmed its opinion dated April 4, 1997 by delivery of
a written opinion dated the date of this Joint Proxy Statement/Prospectus. In
connection with its opinion dated the date of this Joint Proxy
Statement/Prospectus, CSFB updated certain of the analyses performed in
connection with its opinion delivered on April 4, 1997 and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith.
THE FULL TEXT OF CSFB'S WRITTEN OPINION TO THE DQE BOARD, DATED THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF DQE ARE URGED TO, AND SHOULD,
READ THE OPINION OF CSFB CAREFULLY AND IN ITS ENTIRETY. CSFB'S OPINION IS
DIRECTED TO THE DQE BOARD AND RELATES ONLY TO THE
31
<PAGE> 46
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE DQE MEETING. THE SUMMARY OF THE OPINION OF CSFB SET FORTH IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, CSFB reviewed the Merger Agreement, this Joint
Proxy Statement/Prospectus and certain publicly available business and financial
information relating to DQE and APS. CSFB also reviewed certain other
information relating to DQE and APS, including financial forecasts provided to
CSFB by DQE and APS, and met with the managements of DQE and APS to discuss the
businesses and prospects of DQE and APS. CSFB also considered certain financial
and stock market data of DQE and APS and compared those data with similar data
for other publicly held companies in businesses similar to those of DQE and APS,
and considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions recently effected. CSFB also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB (including the information contained in this Joint Proxy
Statement/Prospectus) and relied on such information being complete and accurate
in all material respects. With respect to the financial forecasts, CSFB assumed
that such forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of DQE and APS as
to the future financial performance of DQE and APS. CSFB also assumed, with the
consent of the DQE Board and based upon the views of the management of, and
regulatory counsel for, DQE, that, in the course of obtaining the necessary
regulatory and third-party consents for the Merger, no restriction will be
imposed that will have a material adverse effect on the contemplated benefits of
the Merger. CSFB was not requested to conduct, and did not conduct, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of DQE or APS, nor was CSFB furnished with any such evaluations or
appraisals. CSFB's opinion was necessarily based upon information available to
CSFB, and financial, economic, market and other conditions as they existed and
could be evaluated, on the date of its opinion. CSFB did not express any opinion
as to the actual value of the APS Common Stock when issued pursuant to the
Merger or the prices at which the APS Common Stock will trade subsequent to the
Merger. In connection with its engagement, CSFB was not requested to, and did
not, solicit third-party indications of interest in acquiring all or any part of
DQE. Although CSFB evaluated the Exchange Ratio from a financial point of view,
CSFB was not requested to, and did not, recommend the specific consideration
payable in the Merger, which consideration was determined through negotiation
between DQE and APS. No other limitations were imposed by DQE on CSFB with
respect to the investigations made or procedures followed by CSFB in rendering
its opinion.
In preparing its opinion to the DQE Board, CSFB performed a variety of
financial and comparative analyses, including those described below. The summary
of CSFB's analyses set forth below does not purport to be a complete description
of the analyses underlying CSFB's opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. In arriving at its opinion, CSFB
made qualitative judgments as to the significance and relevance of each analysis
and factor considered by it. Accordingly, CSFB believes that its analyses must
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying such analyses and its opinion. In
its analyses, CSFB made numerous assumptions with respect to DQE, APS, industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of DQE and
APS. No company, transaction or business used in such analyses as a comparison
is identical to DQE, APS or the Merger, nor is an evaluation of the results of
such analyses entirely mathematical; rather, such analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be
32
<PAGE> 47
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. CSFB's opinion and financial
analyses were only one of many factors considered by the DQE Board in its
evaluation of the proposed Merger and should not be viewed as determinative of
the views of the DQE Board or management with respect to the Exchange Ratio or
the Merger.
The following is a summary of the material financial analyses performed by
CSFB in connection with its opinion dated April 5, 1997:
Discounted Cash Flow Analysis. CSFB estimated the present value of the
future streams of after-tax free cash flows that could be produced through
fiscal 2006 by each of DQE's business segments (i.e., Duquesne Light; Montauk;
and Duquesne Enterprises, DQE Energy Partners and DQE Energy Services (the
"Other Unregulated Businesses")), based upon internal estimates of DQE
management, as adjusted after consultation with DQE management. Ranges of
estimated terminal values, when applied, were calculated using either terminal
multiples of operating cash flow ("OCF") or perpetuity growth rates. The free
cash flow streams and estimated terminal values were then discounted to present
value using various discount rates depending upon the business segment analyzed.
For Duquesne Light (excluding Duquesne Light's generation equipment investment),
terminal OCF multiples of 6.5x to 7.0x and discount rates ranging from 7.75% to
8.25% were utilized. For Duquesne Light's generation equipment investment,
discount rates ranging from 13.0% to 13.5% were utilized over the investment's
remaining fixed life. For Montauk, perpetuity growth rates of (3.5%) to (3.0%)
and discount rates ranging from 12.0% to 12.5% were utilized. CSFB also analyzed
Montauk's current investment portfolio (assuming no additional investments),
utilizing discount rates of 10.0% to 14.0%. The Other Unregulated Businesses
were valued business by business, utilizing perpetuity growth rates of (0.5%) to
7.0% and discount rates ranging from 9.25% to 23.0%, depending upon the
particular business. The Other Unregulated Businesses also were analyzed taking
into account only current businesses and those planned by the end of fiscal
1997. This analysis indicated an enterprise reference range of approximately
$2.9 billion to $3.2 billion for Duquesne Light and an overall enterprise
reference range for DQE of approximately $3.5 billion to $3.9 billion.
CSFB also performed a discounted cash flow analysis of APS' electric
utilities businesses (consisting of West Penn Power Company ("West Penn"), The
Potomac Edison Company ("Potomac Edison") and Monongahela Power Company
("Monongahela")) (collectively, the "APS Electric Utility Businesses"),
Allegheny Generating Company and AYP Capital, Inc. based upon internal estimates
of APS management, as adjusted after consultation with DQE management. Ranges of
estimated terminal values were calculated by applying multiples of terminal year
2006 OCF of 6.5x to 7.0x to the APS Electric Utility Businesses, 8.0x to 8.5x to
Allegheny Generating Company and 10.0x to 11.0x to AYP Capital. The after-tax
free cash flow streams and estimated terminal values were then discounted to
present value using discount rates ranging from 7.75% to 8.25%. This analysis
indicated an enterprise reference range for APS of approximately $6.1 billion to
$6.6 billion.
Selected Companies Analysis. CSFB compared certain financial and operating
information of Duquesne Light to corresponding data of the following selected
publicly traded companies in the electric utility industry: APS; Cinergy
Corporation; DTE Energy Company; GPU, Inc.; New England Electric System; Ohio
Edison Company; PECO Energy Company; and PP&L Resources, Inc. (the "Duquesne
Comparables"). CSFB compared adjusted market values (equity market value plus
net debt and other corporate adjustments) as a multiple of, among other things,
estimated calendar 1997 OCF and operating income, and compared equity market
values as a multiple of net income and book value. Estimates for the Duquesne
Comparables were based on estimates of selected investment banking firms, and
estimates for Duquesne Light were based on internal estimates of DQE management,
as adjusted after consultation with DQE management. All multiples were based on
closing stock prices on April 1, 1997. Applying a range of selected multiples
for the Duquesne Comparables of estimated calendar 1997 OCF, operating income,
net income and book value of 5.7x to 6.7x, 9.5x to 10.0x, 11.0x to 12.0x and
1.3x to 1.5x, respectively, to corresponding financial data of Duquesne Light
resulted in an enterprise reference range for Duquesne Light of approximately
$2.8 billion to $3.1 billion. CSFB did not derive an enterprise reference range
for Montauk, the Other Unregulated Businesses or
33
<PAGE> 48
Duquesne Light's generation equipment investment based on this analysis since
there were no publicly traded companies directly comparable to Montauk, the
Other Unregulated Businesses or such investment.
CSFB also compared certain financial and operating information of the APS
Electric Utility Businesses and Allegheny Generating Company to corresponding
data of the following selected publicly traded companies in the electric utility
industry: American Electric Power Company, Inc.; Carolina Power & Light Company;
Dominion Resources Inc.; NIPSCO Industries Inc.; OGE Energy Corp.; and PP&L
Resources, Inc. (the "APS Comparables"). CSFB compared adjusted market values as
a multiple of, among other things, estimated calendar 1997 OCF and operating
income, and compared equity market values as a multiple of net income and book
value. Estimates for the APS Comparables were based on estimates of selected
investment banking firms and estimates for APS were based on internal estimates
of APS management, as adjusted after consultation with DQE management. All
multiples were based on closing stock prices on April 1, 1997. Applying a range
of selected multiples for the APS Comparables of estimated calendar 1997 OCF,
operating income, net income and book value of 6.2x to 6.7x, 9.0x to 10.0x,
12.0x to 13.0x and 1.5x to 1.8x, respectively, to corresponding financial data
of the APS Electric Utility Businesses and 7.5x to 8.5x, 9.5x to 10.5x, 12.0x to
13.0x and 1.5x to 1.8x, respectively, to corresponding financial data of
Allegheny Generating Company, resulted in an overall enterprise reference range
for the APS Electric Utility Businesses and Allegheny Generating Company of
approximately $6.0 billion to $6.5 billion. CSFB did not derive an enterprise
reference range for AYP Capital based on this analysis since there were no
publicly traded companies directly comparable to AYP Capital.
Selected Transactions Analysis. Using publicly available information, CSFB
analyzed the purchase prices and implied transaction multiples paid or proposed
to be paid in the following selected transactions in the electric utility
industry (acquiror/target): Western Resources, Inc./Kansas City Power & Light
Company; The Brooklyn Union Gas Company/Long Island Lighting Company; Ohio
Edison Company/Centerior Energy Corporation; Delmarva Power & Light
Company/Atlantic Energy Inc.; MidAmerican Energy Company/IES Industries Inc.;
Enron Corporation/Portland General Corporation; Kansas City Power & Light
Company/UtiliCorp United Inc.; WPL Holdings, Inc./IES Industries Inc. and
Interstate Power; Public Service Company of Colorado/Southwestern Public Service
Company; Union Electric Company/CIPSCO Incorporated; PECO Energy Company/PP&L
Resources, Inc.; and Wisconsin Energy Corporation/Northern States Power Company
(the "Selected Transactions"). CSFB compared adjusted purchase prices as a
multiple of latest 12 months OCF and operating income, and compared purchase
prices as a multiple of net income and book value. All multiples were based on
historical financial information available at the time of announcement of the
transaction. Applying a range of selected multiples for the Selected
Transactions of the latest 12 months OCF, operating income, net income and book
value of 6.5x to 7.5x, 10.5x to 11.5x, 14.5x to 15.5x and 1.7x to 1.9x,
respectively, to corresponding financial data of Duquesne Light resulted in an
enterprise reference range for Duquesne Light (excluding Duquesne Light's
generation equipment investment) of approximately $3.3 billion to $3.6 billion.
CSFB did not derive an enterprise reference range for Montauk, the Other
Unregulated Businesses or Duquesne Light's generation equipment investment based
on this analysis since there were no transactions which involved companies
directly comparable to Montauk, the Other Unregulated Businesses or such
investment.
Aggregate Reference Ranges. On the basis of the valuation methodologies
employed in the analyses described above, CSFB derived an aggregate enterprise
and per share equity reference range for DQE of approximately $3.7 billion to
$4.1 billion, or approximately $30.32 to $35.04 per fully diluted common share,
and an aggregate enterprise and per share equity reference range for APS of
approximately $6.0 billion to $6.6 billion, or approximately $27.32 to $31.91
per fully diluted common share.
Relative Contribution Analysis. CSFB analyzed the relative contributions
of DQE and APS to the estimated revenues, OCF, operating income, net income,
book value and total assets of the pro forma combined company for fiscal 1997.
This analysis indicated that, in fiscal 1997, DQE would contribute approximately
33%, 37%, 26%, 40%, 39% and 41% of the revenues, OCF, operating income, net
income, book value and total assets, respectively, of the pro forma combined
company, and APS would contribute approximately 67%, 63%, 74%, 60%, 61% and 59%
of the revenues, OCF, operating income, net income, book value and total assets,
respectively, of the pro forma combined company. Based on the Exchange Ratio,
34
<PAGE> 49
current holders of DQE and APS would own approximately 42% and 58%,
respectively, of the combined company upon consummation of the Merger.
Pro Forma Merger Analysis. CSFB analyzed the potential pro forma effect of
the Merger on the EPS of APS during fiscal years 1997 through 1999. This
analysis indicated that the Merger could be dilutive to APS' EPS in fiscal years
1997 and 1998 and accretive to APS' EPS in fiscal year 1999. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Pursuant to the terms of CSFB's engagement, DQE has agreed to pay CSFB for
its services in connection with the Merger an aggregate financial advisory fee
of $8.65 million. DQE also has agreed to reimburse CSFB for reasonable
out-of-pocket expenses incurred by CSFB in performing its services, including
the fees and expenses of legal counsel and any other advisor retained by CSFB,
and to indemnify CSFB and certain related persons and entities against certain
liabilities, including liabilities under the federal securities laws, arising
out of CSFB's engagement. CSFB has in the past provided financial services to
DQE unrelated to the proposed Merger, for which services CSFB has received
compensation.
In the ordinary course of its business, CSFB and its affiliates may
actively trade the debt and equity securities of both DQE and APS for their own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
The Merger Agreement provides that, from and after the Effective Time, the
APS Board will be composed of 15 directors and that, immediately prior to the
Effective Time, DQE will designate six of such directors, and APS will designate
nine of such directors, and that all such designated directors will be the
directors of APS from and after the Effective Time until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the APS Charter and the APS Bylaws.
Although as of the date hereof, neither DQE nor APS has determined who it will
designate to be directors of APS following the Effective Time, each of DQE and
APS currently intends to nominate persons from among the members of its board of
directors at the Effective Time. In addition, the Merger Agreement provides that
following the Effective Time four of the six directors of APS designated by DQE
pursuant to the Merger Agreement will be the chairmen of the following
committees of the APS Board: Nuclear Review; New Business; Finance; and Employee
and Community Relations, and that four of the nine directors of APS designated
by APS pursuant to the Merger Agreement will be the chairmen of the following
committees of the APS Board: Audit; Management Review; Nominating; and Benefits.
The Merger Agreement further provides that, from and after the Effective
Time, Alan J. Noia will be the Chairman and Chief Executive Officer of APS and
David D. Marshall will be the President and Chief Operating Officer of APS.
The Merger Agreement also provides that, from and after the Effective Time,
APS' corporate headquarters will remain in Maryland and substantial operations
of APS Subsidiaries, including the Surviving Corporation, will remain in the
Pittsburgh, Pennsylvania area.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Joint Proxy Statement/Prospectus contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements relate to
anticipated financial performance, management's plans and objectives for future
operations, business prospects, market conditions and other matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of that safe
harbor, APS and DQE note that a variety of factors could cause the actual
results of the combined company to differ materially from the anticipated
results expressed in such forward-looking statements. The following discussion
is intended to identify certain factors that could cause future outcomes to
differ materially from those set forth in the forward-looking statements
contained in this Joint Proxy Statement/Prospectus.
Forward-looking statements include the information concerning possible or
assumed future results of operations of APS and DQE set forth under "-- Opinions
of Financial Advisors," "-- Reasons for the
35
<PAGE> 50
Merger; Recommendations of the Boards of Directors," and "-- Synergies." Readers
are cautioned that such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of APS and DQE to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may affect APS', DQE's or the combined
company's operations, markets, products, services and prices. Such factors
include, among others, the following: general economic and business conditions;
industry capacity; changes in technology; changes in political, social and
economic conditions; regulatory matters; integration of the operations of APS
and DQE; regulatory conditions to the combination; the loss of any significant
customers; changes in business strategy or development plans; the speed and
degree to which competition enters the electric utility industry; state and
federal legislative and regulatory initiatives that increase competition, affect
cost and investment recovery and have an impact on rate structures; industrial,
commercial and residential growth in the service territories of APS and DQE; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; and growth in opportunities for
Subsidiaries of APS and DQE.
THE MERGER AGREEMENT
This section describes certain aspects of the Merger Agreement. This
section is not a complete description of the Merger Agreement and is qualified
in its entirety by reference to the Merger Agreement, which is attached as
Appendix A to this Joint Proxy Statement/Prospectus and is incorporated herein
by reference. ALL HOLDERS OF DQE COMMON STOCK AND APS COMMON STOCK ARE URGED TO
READ THE MERGER AGREEMENT IN ITS ENTIRETY.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
DQE, APS and Merger Sub, certain of which are qualified by a Material Adverse
Effect (as defined below) standard. Pursuant to the Merger Agreement, DQE
represents and warrants to APS and APS represents and warrants to DQE regarding,
among others, the following matters: (i) the corporate existence and
capitalization of it and its respective Subsidiaries; (ii) corporate power and
authority to execute, deliver and perform its obligations under the Merger
Agreement and the Stock Option Agreement and to consummate the Merger; (iii) the
execution, delivery and performance of the Merger Agreement and the Stock Option
Agreement, and the consummation of the Merger and the other transactions
contemplated by the Merger Agreement and the Stock Option Agreement, will not
violate any law, rule, regulation, any governmental or non-governmental permit
or license or the organizational documents of it or of its Subsidiaries and the
making or provision of all required filings and notices with or to any
governmental or regulatory authority, agency, commission, body or other
governmental entity ("Governmental Entity"); (iv) consents, registrations,
approvals, permits or authorizations required by any Governmental Entity,
including filings with applicable utility commissions, the SEC, the FERC and the
NRC; (v) its financial statements; (vi) the conduct of its and its Subsidiaries'
businesses since December 31, 1996; (vii) pending or threatened civil, criminal
or administrative actions, suits, claims, hearings, investigations or
proceedings and obligations and liabilities of it or any of its Affiliates (as
that term is defined under Rule 145 of the Securities Act, and for the purposes
of applicable interpretations regarding the "pooling-of-interests" method of
accounting); (viii) its bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
compensation, medical, health or other plan, agreement, policy or arrangement
that covers employees, directors, former employees or former directors of APS,
DQE or their respective Subsidiaries ("Compensation and Benefit Plans"); (ix)
compliance with all Laws; (x) with respect to DQE, the inapplicability of any
"fair price," "moratorium," "control share acquisition" or other similar
anti-takeover statute or regulation, including Section 2541 et seq. of the PBCL
(each, a "Takeover Statute"); (xi) environmental matters; (xii) the absence of
any action that would prevent APS from accounting for the Merger as a "pooling
of interests" or prevent the Merger and the other transactions contemplated by
the Merger Agreement from qualifying as a "reorganization" within the meaning of
Section 368(a) of the Code; (xiii) tax matters; (xiv) labor matters; (xv) the
adequacy and maintenance of insurance coverage for all insurable risks; (xvi)
intellectual property rights and infringements
36
<PAGE> 51
on intellectual property rights; (xvii) its and its "subsidiary companies" and
"affiliates" (as such terms are defined in the PUHCA) status as a regulated
utility: with respect to DQE, that it is an exempt holding company under Section
3(a)(1) of the PUHCA and, with respect to APS, that it is a registered holding
company under the PUHCA; and (xviii) with respect to DQE, that its Nuclear
Facilities have conducted their operations in compliance with all applicable
laws and that insurance coverages consistent with industry practice are
maintained.
"Material Adverse Effect" is defined in the Merger Agreement to mean, with
respect to any person, a material adverse effect on the financial condition,
properties, operations, business or results of operations of such person and its
Subsidiaries taken as a whole; provided, however, that any such effect resulting
from any change in law, rule, or regulation promulgated by (i) the United States
Congress, (ii) the SEC with respect to the PUHCA, (iii) the Pennsylvania State
Legislature or the PAPUC or (iv) the FERC, or any interpretation of any such
law, rule or regulation, or the application of the Pennsylvania Restructuring
Legislation, that affects both DQE and its Subsidiaries, taken as a whole, and
APS and its Subsidiaries, taken as a whole, is considered only when determining
if a Material Adverse Effect has occurred to the extent that such effect on one
such party exceeds such effect on the other party.
CONDUCT OF BUSINESS PENDING THE MERGER; CERTAIN COVENANTS; ACQUISITION PROPOSALS
Interim Operations
The Merger Agreement provides that during the period of time from the date
of the Merger Agreement until the Effective Time, unless approved in writing by
the other party or unless expressly contemplated by the Merger Agreement, the
Stock Option Agreement, the respective budgets of DQE and APS (which have been
submitted to the other party), or as required by applicable Law: (i) each of DQE
and APS will conduct its and its Subsidiaries' businesses in the ordinary and
usual course and, to the extent consistent therewith, each of DQE and APS will
use its and its respective Subsidiaries' best efforts to preserve its business
organization and maintain its existing relations and goodwill with customers,
suppliers, creditors, regulators, lessors, employees and business associates;
(ii) each of DQE and APS will not (A) issue, sell, pledge, dispose of or
encumber any capital stock owned by it in any of its respective Subsidiaries;
(B) amend its articles of incorporation, charter or bylaws; (C) split, combine
or reclassify its outstanding shares of capital stock; (D) declare, set aside or
pay any dividend payable in cash, stock or property in respect of any capital
stock other than dividends from its direct or indirect wholly owned
Subsidiaries, other than (x) in the case of DQE, regular quarterly cash
dividends not in excess of $0.34 per share of DQE Common Stock (which amount
may, at the election of DQE, be increased by not more than 6.5% per year
beginning in the 1997 fiscal year of DQE) and regular quarterly cash dividends
on the preferred and preference stock of its Subsidiaries and (y) in the case of
APS, regular quarterly cash dividends not in excess of $0.43 per share of APS
Common Stock (which amount may, at the election of APS, be increased by not more
than 6.5% per year beginning in the 1997 fiscal year of APS) and regular
quarterly cash dividends on the preferred shares of Subsidiaries of APS; or (E)
repurchase, redeem or otherwise acquire (except for (x) mandatory sinking fund
obligations existing on the date of the Merger Agreement and (y) redemptions,
purchases, acquisitions or issuances required by the respective terms of any DQE
Stock Plans, in the case of DQE, or APS Stock Plans, in the case of APS, or any
dividend reinvestment plans in effect on the date of the Merger Agreement in the
ordinary course of the operation of such plans) or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of its capital stock
or any securities convertible into or exchangeable or exercisable for any shares
of its capital stock; (iii) each of DQE and APS will not and will not permit any
of its Subsidiaries to (A) issue, sell, pledge, dispose of or encumber any
shares of, or securities convertible into or exchangeable or exercisable for, or
options, warrants, calls, commitments or rights of any kind to acquire, any
shares of its capital stock of any class or any other property or assets (other
than (x) in the case of DQE, shares of DQE Common Stock issuable pursuant to
options outstanding on the date of the Merger Agreement under the DQE Stock
Plans or upon conversion of the Preferred Stock of DQE (the "Preferred Shares")
and additional options or rights to acquire shares of DQE Common Stock required
by the terms of any DQE Stock Plan as in effect on the date of the Merger
Agreement in the ordinary course of the operation of such DQE Stock Plan, (y) in
the case of APS, shares of APS Common Stock issuable pursuant to options
outstanding under the APS Stock Plans and
37
<PAGE> 52
additional options or rights to acquire shares of APS Common Stock required by
the terms of any APS Stock Plan as in effect on the date of the Merger Agreement
in the ordinary course of the operation of such APS Stock Plan, and (z)
issuances of securities in connection with grants or awards of stock-based
compensation made in accordance with the terms of the Merger Agreement); (B)
other than in the ordinary and usual course of business, and except for
long-term indebtedness incurred in connection with the refinancing of existing
indebtedness either at its maturity or at a lower cost of funds, transfer,
lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any
other property or assets (including capital stock of any of its Subsidiaries) or
incur or modify any material indebtedness or other liability; (C) make any
commitments for, make or authorize any capital expenditures other than (x)
capital expenditures not in excess of $25,000,000 in the aggregate incurred in
connection with the repair or replacement of facilities destroyed or damaged due
to casualty or accident (whether or not covered by insurance), (y) as required
by Law, or (z) in amounts less than $5,000,000 individually and $15,000,000 in
the aggregate; or (D) make any acquisition of, or investment in, assets or stock
of any other person or entity in excess of $15,000,000 in the aggregate; (iv)
neither DQE nor APS or any of their respective Subsidiaries will terminate,
establish, adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under, amend or otherwise modify any Compensation
and Benefit Plans or increase the salary, wage, bonus or other compensation of
any directors, officers or employees except (A) for grants or awards to its or
its respective Subsidiaries' directors, officers and employees under existing
Compensation and Benefit Plans in such amounts and on such terms as are
consistent with past practice, (B) in the normal and usual course of business
(which shall include normal periodic performance reviews and related
compensation and benefit increases, annual reestablishment of Compensation and
Benefit Plans and the provision of individual Compensation and Benefit Plans
consistent with past practice for newly hired or appointed officers and
employees and the adoption of Compensation and Benefit Plans for employees of
new Subsidiaries in amounts and on terms consistent with past practice) or (C)
for actions necessary to satisfy existing contractual obligations under
Compensation and Benefit Plans existing as of the date of the Merger Agreement;
(v) each of DQE and APS will consult with the other prior to settling or
compromising, or permitting any of their respective Subsidiaries to settle or
compromise, any material claim or litigation, and neither DQE nor APS or any of
their respective Subsidiaries will, except in the ordinary and usual course of
business, modify, amend or terminate any of its material contracts or waive,
release or assign any material rights or claims; (vi) neither DQE nor APS or any
of their respective Subsidiaries will make any tax election or permit any
insurance policy naming it as a beneficiary or loss-payable payee to be canceled
or terminated except in the ordinary and usual course of business; and (vii)
neither DQE nor APS or any of their respective Subsidiaries will take any action
or omit to take any action that would prevent the Merger from qualifying for
"pooling of interests" accounting treatment or as a "reorganization" within the
meaning of Section 368(a) of the Code or that would cause any of their
respective representations and warranties in the Merger Agreement to become
untrue in any material respect.
Acquisition Proposals
The Merger Agreement provides that, except as contemplated by the budgets
submitted by DQE to APS and by APS to DQE and except as expressly contemplated
by the Merger Agreement, neither DQE nor APS or any of their respective
Subsidiaries will, and DQE and APS will not authorize or permit their officers,
directors, employees, agents or other representatives retained by them or any of
their Subsidiaries, respectively, to (i) solicit, initiate or encourage, or take
any other action designed to facilitate, directly or indirectly, any inquiries
or the making of any Acquisition Proposal or (ii) participate in any discussions
or negotiations relating to any Acquisition Proposal or Acquisition Transaction.
The Merger Agreement does not prohibit either DQE or APS, at any time prior to
the obtaining of the necessary vote of the DQE stockholders to effectuate the
Merger, in the case of DQE, or the necessary vote of APS stockholders to
effectuate the Merger, in the case of APS, from (i) furnishing information with
respect to it and its Subsidiaries to any person pursuant to a customary
confidentiality agreement (as determined by the party receiving such Acquisition
Proposal after consultation with its outside counsel) and (ii) participating in
negotiations regarding such Acquisition Proposal, if the DQE Board or the APS
Board, as applicable, determines in good faith, based on the advice of outside
counsel, that it is necessary to do so to avoid a breach of its duties under
state corporate Law applicable to the conduct of directors of DQE or APS, as
applicable, in response to an
38
<PAGE> 53
Acquisition Proposal which was not solicited by it or which did not otherwise
result from a breach of these provisions of the Merger Agreement, subject to
such party's compliance with the provisions of the Merger Agreement which relate
to disclosure of Acquisition Proposals, which are discussed in the third
succeeding paragraph below.
In addition, the Merger Agreement provides that, except as expressly
permitted by the Merger Agreement, neither the DQE Board nor the APS Board, as
applicable, or any committee thereof, will (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to the other party to the
Merger Agreement, the approval or recommendation by such board of directors or
such committee of the Merger or the adoption and approval of the matters
relating to the Merger to be considered at the DQE Meeting, in the case of DQE,
and the APS Special Meeting, in the case of APS, (ii) approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal other than
the Merger, or (iii) cause or permit DQE or APS, as applicable, to enter into
any Acquisition Agreement, related to any Acquisition Proposal. Notwithstanding
the provisions of the Merger Agreement described in the previous sentence, in
the event that prior to the obtaining of the necessary vote of the stockholders
of DQE to effectuate the Merger, in the case of DQE, or the necessary vote of
the stockholders of APS to effectuate the Merger, in the case of APS, there
exists a Superior Proposal (as defined below) and the DQE Board or the APS
Board, as applicable, determines that there is not a substantial probability
that the necessary vote of the stockholders of DQE to effectuate the Merger or
the necessary vote of the stockholders of APS to effectuate the Merger, as
applicable, will be obtained due to the existence of such Superior Proposal, the
DQE Board or the APS Board, as applicable, may, subject to the terms of the
Merger Agreement described in this and the following sentences, withdraw or
modify its approval or recommendation of the Merger or the approval of the
matters to be considered at the DQE Meeting, in the case of DQE, and the APS
Special Meeting, in the case of APS, and the DQE Board or the APS Board, as
applicable, may (subject to the terms of the Merger Agreement described in this
and the following sentences) approve or recommend such Superior Proposal or
terminate the Merger Agreement, but only if (a) the party seeking to terminate
is not in material breach of any of the terms of the Merger Agreement, (b) the
board of directors of the party seeking to terminate authorizes DQE or APS, as
applicable, to enter into a binding written Acquisition Agreement concerning an
Acquisition Transaction that constitutes a Superior Proposal and the party
seeking to terminate notifies the other party in writing that it intends to
enter into such an Acquisition Agreement, attaching such Acquisition Agreement
to such notice and specifying any material terms and conditions not included in
the Acquisition Agreement and further identifying the party making the Superior
Proposal, (c) the other party does not make, within fifteen business days of
receipt of written notification from the party seeking to terminate of such
party's intention to enter into a binding Acquisition Agreement for a Superior
Proposal, an offer that the board of directors of such party believes, in good
faith after consultation with its financial advisors, is at least as favorable,
from a financial point of view, to its stockholders as the Superior Proposal,
and (d) the party seeking to terminate prior to such termination pays to the
other party in immediately available funds any fees required to be paid pursuant
to the provisions of the Merger Agreement. Each of DQE and APS has agreed in the
Merger Agreement (A) that it will not enter into a binding Acquisition Agreement
until at least the sixteenth business day after it has provided the notice to
DQE or APS, as applicable, required by the Merger Agreement and (B) to notify
APS or DQE, as applicable, promptly, if its intention to enter into the written
Acquisition Agreement referred to in its notification changes at any time after
giving such notification.
A "Superior Proposal" is defined in the Merger Agreement to mean, in
respect of DQE or APS, as applicable, any proposal made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the equity securities of DQE or APS, as the case
may be, entitled to vote generally in the election of directors or all or
substantially all the assets of DQE or APS, as the case may be, and otherwise on
terms which the board of directors of such party determines in its good faith
judgment (x) (based on the written opinion of a financial advisor of nationally
recognized reputation (which opinion will be provided to the other party)) to be
more favorable from a financial point of view to its stockholders after
consideration of the Merger and the transactions contemplated by the Merger
Agreement and for which financing, to the extent required, is then committed,
(y) to be more favorable to such party after consideration of the Merger and the
transactions contemplated by the Merger Agreement after taking into account any
additional constituencies (including stockholders) and pertinent factors
permitted under the laws of the
39
<PAGE> 54
Commonwealth of Pennsylvania or the laws of the State of Maryland, as
applicable, and (z) to constitute a transaction that is reasonably likely to be
consummated on the terms set forth, taking into account all legal, financial,
regulatory and other aspects of the proposal.
The Merger Agreement also provides that if any party receives an
Acquisition Proposal it will immediately advise the other party orally and in
writing of such Acquisition Proposal, any request for information, the material
terms and conditions of such request or Acquisition Proposal and the identity of
the Person making such request or Acquisition Proposal. In addition, DQE and APS
have agreed that if either has received an Acquisition Proposal it will keep the
other party reasonably informed of the status and details of any such
Acquisition Proposal.
The Merger Agreement further provides that nothing contained in the Merger
Agreement will prohibit a party from taking and disclosing to its stockholders a
position contemplated by Rule 14e-2(a) under the Exchange Act with respect to an
Acquisition Proposal by means of a tender or exchange offer.
CONDITIONS
The respective obligations of DQE, APS and Merger Sub to effect the Merger
are subject to the satisfaction or waiver at or prior to the Effective Time of
each of the following conditions: (i) the Merger Agreement having been duly
approved by holders of shares of DQE Common Stock and by APS as the sole
stockholder of Merger Sub and the issuance of APS Common Stock pursuant to the
Merger having been duly approved by the holders of APS Common Stock; (ii) the
shares of APS Common Stock issuable to holders of DQE Common Stock pursuant to
the Merger Agreement having been authorized for listing on the NYSE upon
official notice of issuance; (iii) the waiting period applicable to the
consummation of the Merger under the HSR Act having expired or been terminated
and, other than the filing of the Pennsylvania Articles of Merger, all filings
required to be made prior to the Effective Time by DQE or APS or any of their
respective Subsidiaries with, and all consents, approvals and authorizations
required to be obtained prior to the Effective Time by DQE or APS, or any of
their respective Subsidiaries, from any Governmental Entity (collectively,
"Governmental Consents") in connection with the execution and delivery of the
Merger Agreement and the consummation of the transactions contemplated by the
Merger Agreement having been made or obtained (as the case may be) and having
become Final Orders (as defined under "-- Termination"), and such Final Orders
not, individually or in the aggregate, containing terms that would have, or be
reasonably likely to have, a Material Adverse Effect on DQE or a Material
Adverse Effect on APS (excluding, after the Effective Time, DQE and its
Subsidiaries); (iv) no court or Governmental Entity of competent jurisdiction
having enacted, issued, promulgated, enforced or entered any Order, and no
Governmental Entity having instituted any proceeding seeking any such Order; (v)
the Registration Statement, of which this Joint Proxy Statement/ Prospectus is a
part, having become effective under the Securities Act and no stop order
suspending such effectiveness having been issued and no proceedings for that
purpose having been initiated or been threatened by the SEC; (vi) APS having
received all state securities and "blue sky" permits and other authorizations
necessary to consummate the transactions contemplated by the Merger Agreement;
and (vii) APS and DQE having received from APS' independent accounting firm a
letter to the effect that the Merger will qualify for "pooling of interests"
accounting treatment.
In addition, the obligations of APS and Merger Sub to effect the Merger are
also subject to the satisfaction or waiver by APS, prior to the Effective Time,
of the following conditions: (i) the representations and warranties of DQE set
forth in the Merger Agreement being true and correct in all material respects as
of the date of the Merger Agreement and as of the Closing Date, including the
representation by DQE relating to the absence of any change in the financial
condition, properties, business or results of operations of DQE that would be
reasonably likely to have a Material Adverse Effect on DQE and its Subsidiaries
(except to the extent any such representation or warranty expressly speaks as of
an earlier date), and APS having received a certificate signed on behalf of DQE
by an executive officer of DQE to such effect; (ii) DQE having performed in all
material respects all obligations required to be performed by it under the
Merger Agreement at or prior to the Closing Date, and APS having received a
certificate signed on behalf of DQE by an executive officer of DQE to such
effect; (iii) DQE having obtained the consent or approval of each person whose
consent or approval is required to consummate the transactions contemplated by
the Merger Agreement and the Stock Option Agreement under any contract to which
DQE or any of its Subsidiaries is a party, except those for which the failure to
obtain
40
<PAGE> 55
such consent or approval, individually or in the aggregate, is not reasonably
likely to have a Material Adverse Effect on DQE or is not reasonably likely to
materially adversely affect the ability of DQE to consummate the transactions
contemplated by the Merger Agreement; (iv) APS having received the opinion of
Sullivan & Cromwell to the effect that the Merger will be treated for Federal
income tax purposes as a "reorganization" within the meaning of Section 368(a)
of the Code, and that each of APS, Merger Sub and DQE will be a party to that
reorganization within the meaning of Section 368(b) of the Code; (v) APS having
received a letter from each of DQE's Affiliates, making certain representations
and assurances in connection with the resale of APS Common Stock received
pursuant to the Merger Agreement and the transactions contemplated thereby (each
an "Affiliates Letter") from each person identified as an affiliate of DQE in
accordance with the provisions of the Merger Agreement; (vi) APS having received
from its independent public accounting firm and DQE's independent public
accounting firm customary "comfort" letters.
Further, the obligation of DQE to effect the Merger is also subject to the
satisfaction or waiver by DQE, prior to the Effective Time, of the following
conditions: (i) the representations and warranties of APS and Merger Sub set
forth in the Merger Agreement being true and correct as of the date of the
Merger Agreement and as of the Closing Date, including the representation by APS
relating to the absence of any change in the financial condition, properties,
business or results of operations of APS that would be reasonably likely to have
a Material Adverse Effect on APS and its Subsidiaries (except to the extent any
such representation and warranty expressly speaks as of an earlier date), and
DQE having received a certificate signed on behalf of APS by an executive
officer of APS and Merger Sub to such effect; (ii) each of APS and Merger Sub
having performed in all material respects all obligations required to be
performed by it under the Merger Agreement at or prior to the Closing Date, and
DQE having received a certificate signed on behalf of APS and Merger Sub by an
executive officer of APS to such effect; (iii) APS having obtained the consent
or approval of each person whose consent or approval will be required in order
to consummate the transactions contemplated by the Merger Agreement and the
Stock Option Agreement under any contract to which APS or any of its
Subsidiaries is a party, except those for which failure to obtain such consents
and approvals, individually or in the aggregate, is not reasonably likely to
have a Material Adverse Effect on APS or is not reasonably likely to materially
adversely affect the ability of APS to consummate the transactions contemplated
by the Merger Agreement; (iv) DQE having received the opinion of LeBoeuf, Lamb,
Greene & MacRae, L.L.P. to the effect that the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that each of APS, Merger Sub and DQE will be a party to
that reorganization within the meaning of Section 368(b) of the Code; and (v)
DQE having received from its independent public accounting firm and APS'
independent accounting firm customary "comfort" letters.
Each of the foregoing conditions to the Merger, including the receipt of
opinions with respect to the federal income tax consequences of the Merger, may
be waived solely at the discretion of the party waiving such condition. In the
event that any such waiver occurs after the respective stockholders have
approved the issuance of APS Common Stock, in the case of APS, or the Merger
Agreement, in the case of DQE, at their respective Stockholder Meetings, APS or
DQE, as the case may be, may seek to re-solicit the approval of its respective
stockholders. If either party waives the condition relating to the receipt of an
opinion with respect to the federal income tax consequences of the Merger it
will recirculate a revised version of this Joint Proxy Statement/Prospectus to
disclose the waiver of this condition, to disclose material risks to its
stockholders as a result of the waiver of this condition, if any, and to
disclose any related material disclosures. In addition, each party would
re-solicit the approval of its respective stockholders in the event that it
waived the condition relating to the receipt of an opinion with respect to the
federal income tax consequences of the Merger and the tax consequences of the
Merger are, at such time, materially different from the tax consequences
described under "Certain Federal Income Tax Consequences of the Merger."
MODIFICATION OR AMENDMENT; WAIVER OF CONDITIONS; EXTENSION
The Merger Agreement provides that, subject to the provisions of applicable
Law, the parties to the Merger Agreement may modify or amend the Merger
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties. The Merger Agreement also provides that the
conditions to each of the parties' obligations to consummate the Merger are for
the sole benefit of such party and at any time prior to the Effective Time such
party may waive such conditions in whole or in part or extend
41
<PAGE> 56
the time for the performance of any of the obligations or other acts of the
other parties thereto to the extent permitted by applicable Law.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (a) by mutual written consent of DQE, APS
and Merger Sub by action of the DQE Board and the APS Board or (b) by action of
the DQE Board or the APS Board if (i) the Merger has not been consummated by the
Termination Date (provided that the Termination Date will automatically be
extended for six months if, on the Termination Date: (A) any of the conditions
relating to regulatory consents has not been satisfied or waived, (B) each of
the other conditions to the consummation of the Merger has been satisfied or
waived or can readily be satisfied, and (C) any Governmental Consent that has
not yet been obtained is being pursued diligently and in good faith), (ii) any
Governmental Consents will have been made or obtained by action by the relevant
Governmental Entity that 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 by the Merger Agreement may be
consummated has expired, and as to which all conditions to the consummation of
such transactions prescribed by law, regulation or order have been satisfied
("Final Orders") which contain terms or conditions that would cause any of the
conditions relating to regulatory consents not to be satisfied, (iii) any Order
permanently restraining, enjoining or otherwise prohibiting the Merger has
become final and non-appealable, (iv) the necessary vote of DQE's stockholders
to effectuate the Merger has not been obtained at the DQE Meeting, including any
adjournments thereof, or (v) the necessary vote of APS' stockholders to
effectuate the Merger has not been obtained at the APS Special Meeting,
including any adjournments thereof. The Merger Agreement provides that the right
to terminate the Merger Agreement pursuant to clause (i), (ii), (iv) or (v)
above will not be available to any party that has breached in any material
respect its obligations under the Merger Agreement in any manner that has
contributed to the failure of the Merger to be consummated.
Further, the Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time by action of the DQE Board:
(a) subject to and in accordance with the termination provisions of the Merger
Agreement relating to Acquisition Proposals (see "The Merger Agreement --
Conduct of Business Pending the Merger; Certain Covenants; Acquisition
Proposals -- Acquisition Proposals"); or (b) if (i) the APS Board has withdrawn
or adversely modified its approval or recommendation of the Merger Agreement or
failed to reconfirm its recommendation of the Merger Agreement after a written
request by DQE to do so, (ii) there has been a material breach by APS or Merger
Sub of any representation, warranty, covenant or agreement contained in the
Merger Agreement that is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by DQE to the party committing such
breach, or (iii) APS or any of its affiliates, representatives or agents takes
any of the actions that would be proscribed by certain provisions of the Merger
Agreement which restrict APS' conduct with respect to Acquisition Proposals (see
"The Merger Agreement -- Conduct of Business Pending the Merger; Certain
Covenants; Acquisition Proposals -- Acquisition Proposals").
In addition, the Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time by action of the APS Board:
(a) subject to and in accordance with the termination provisions of the Merger
Agreement relating to Acquisition Proposals (see "The Merger Agreement --
Conduct of Business Pending the Merger; Certain Covenants; Acquisition
Proposals -- Acquisition Proposals"); or (b) if (i) the DQE Board has withdrawn
or adversely modified its approval or recommendation of the Merger Agreement or
failed to reconfirm its recommendation of the Merger Agreement after a written
request by APS to do so, (ii) there has been a material breach by DQE of any
representation, warranty, covenant or agreement contained in the Merger
Agreement that is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by APS to the party committing such
breach, or (iii) DQE or any of its affiliates, representatives or agents takes
any of the actions that would be proscribed by certain provisions of the Merger
Agreement which restrict DQE's conduct with respect to Acquisition Proposals
(see "The Merger Agreement -- Conduct of Business Pending the Merger; Certain
Covenants; Acquisition Proposals -- Acquisition Proposals").
42
<PAGE> 57
In the event of termination of the Merger Agreement and the abandonment of
the Merger, the Merger Agreement (other than certain provisions of the Merger
Agreement relating to expenses and confidentiality and other than as described
below under "The Merger Agreement -- Certain Termination Fees") will become void
and of no effect with no liability of any party thereto (or any of its
directors, officers, employees, agents, legal and financial advisors or other
representatives); provided, however, except as otherwise provided in the Merger
Agreement, no such termination will relieve any party thereto of any liability
or damages resulting from any breach of the Merger Agreement.
CERTAIN TERMINATION FEES
The Merger Agreement provides that in the event that it is terminated (a)
by DQE pursuant to the provisions of the Merger Agreement permitting DQE to
terminate the Merger Agreement under certain circumstances when a Superior
Proposal exists, (b) by APS following (i) the DQE Board having withdrawn or
adversely modified its approval or recommendation of the Merger Agreement or
failing to reconfirm its recommendation of the Merger Agreement after a written
request by APS to do so, or (ii) DQE or any of its affiliates, representatives
or agents having taken any of the actions that would be proscribed by certain
provisions of the Merger Agreement which restrict DQE's conduct with respect to
Acquisition Proposals, or (c) by DQE or APS pursuant to the provisions of the
Merger Agreement permitting them to terminate if the necessary vote of the
stockholders of DQE to effectuate the Merger has not been obtained at the DQE
Meeting, then DQE will promptly pay APS in addition to any amount, not to exceed
$20,000,000, paid and/or payable by DQE to APS pursuant to the Stock Option
Agreement, a termination fee (the "DQE Initial Termination Fee") equal to the
sum of (x) the charges and expenses incurred by APS or Merger Sub in connection
with the Merger Agreement and the Stock Option Agreement and the transactions
contemplated by the Merger Agreement and the Stock Option Agreement up to a
maximum amount of $10,000,000 and (y) an amount equal to $50,000,000 less the
sum of (I) the amount paid pursuant to clause (x) above and (II) the amount not
to exceed $20,000,000 paid and/or payable by DQE to APS pursuant to the Stock
Option Agreement. The Merger Agreement provides that in no event will the amount
payable pursuant to the previous sentence exceed $50,000,000. In addition, if
the Merger Agreement is terminated (A) at a time when the DQE Initial
Termination Fee is payable to APS or (B) at a time when the approval of DQE
stockholders has not been obtained at the DQE Meeting and at any time within two
years after such termination DQE consummates a Material Acquisition Transaction
(as defined below) with any person other than APS or a Subsidiary of APS, then
DQE will pay APS an additional termination fee (the "Further Termination Fee")
of $50,000,000. For a discussion of the terms of the Stock Option Agreement, see
"Certain Related Agreements -- Stock Option Agreement."
A "Material Acquisition Transaction" is defined in the Merger Agreement to
mean, with respect to APS or DQE, any Acquisition Transaction or series of
related Acquisition Transactions involving a merger or consolidation of such
party or forty percent or more of its voting power, equity interests or assets
(in each case directly or indirectly).
The Merger Agreement also provides that in the event that it is terminated
(a) by APS pursuant to the provisions of the Merger Agreement permitting APS to
terminate the Merger Agreement under certain circumstances when a Superior
Proposal exists, (b) by DQE following (i) the APS Board having withdrawn or
adversely modified its approval or recommendation of the Merger Agreement or
failing to reconfirm its recommendation of the Merger Agreement after a written
request by DQE to do so, or (ii) APS, or any of its affiliates, representatives
or agents having taken any of the actions that would be proscribed by certain
provisions of the Merger Agreement, which restrict APS' conduct with respect to
Acquisition Proposals, or (c) by DQE or APS pursuant to the provisions of the
Merger Agreement permitting them to terminate if the necessary vote of the
stockholders of APS has not been obtained at the APS Special Meeting, then APS
will promptly pay DQE in addition to any amount, not to exceed $20,000,000, paid
and/or payable by APS to DQE pursuant to the Letter Agreement, a termination fee
(the "APS Initial Termination Fee") equal to the sum of (x) the charges and
expenses incurred by DQE in connection with the Merger Agreement and the Stock
Option Agreement and the transactions contemplated by the Merger Agreement and
the Stock Option Agreement up to a maximum amount of $10,000,000 and (y) an
amount equal to $50,000,000 less the sum of (I) the amount paid pursuant to
clause (x) and (II) the amount, not to exceed $20,000,000, paid and/or
43
<PAGE> 58
payable by APS to DQE pursuant to the Letter Agreement. The Merger Agreement
provides that in no event will the amount payable pursuant to the previous
sentence exceed $50,000,000. In addition, if the Merger Agreement is terminated
(A) at a time when the APS Initial Termination Fee is payable to DQE or (B) at a
time when the approval of APS' stockholders has not been obtained at the APS
Special Meeting and at any time within two years after such termination APS
consummates a Material Acquisition Transaction with any person other than DQE or
a Subsidiary of DQE, then APS will pay DQE the Further Termination Fee. For a
discussion of the terms of the Letter Agreement, see "Certain Related
Agreements -- Letter Agreement."
EXPENSES
The Merger Agreement provides that except as provided therein with respect
to certain expenses described below and except as provided with respect to
expenses in the event of termination of the Merger Agreement, the Surviving
Corporation will pay all charges and expenses, including those of the Exchange
Agent, in connection with the exchange of shares, and APS has agreed to
reimburse the Surviving Corporation for such charges and expenses. The Merger
Agreement also provides that, whether or not the Merger is consummated, all
costs and expenses incurred in connection with the Merger Agreement and the
Stock Option Agreement and the Merger and the other transactions contemplated by
the Merger Agreement and the Stock Option Agreement will be paid by the party
incurring such expense, except that expenses incurred in connection with the
filing fee for the filings under the HSR Act, the Registration Statement of
which this Joint Proxy Statement/Prospectus forms a part and printing and
mailing this Joint Proxy Statement/Prospectus and such other expenses as the
parties may agree will be shared equally by APS and DQE.
STOCK OPTIONS
Pursuant to the Merger Agreement, at the Effective Time each outstanding
DQE Option under the DQE Stock Plans, whether vested or unvested, will be deemed
to constitute an option to acquire, on the same terms and conditions as were
applicable under such DQE Option, the same number of shares of APS Common Stock
as the holder of such DQE Option would have been entitled to receive pursuant to
the Merger had such holder exercised such option in full immediately prior to
the Effective Time (rounded down to the nearest whole number), at a price per
share of APS Common Stock (rounded up to the nearest whole cent) equal to (y)
the aggregate exercise price for the shares of DQE Common Stock otherwise
purchasable pursuant to such DQE Option divided by (z) the number of full shares
of APS Common Stock deemed purchasable pursuant to such DQE Option. In addition,
pursuant to the Merger Agreement, APS has agreed to assume, effective as of the
Effective Time, each DQE Option in accordance with the terms of the DQE Stock
Plan under which it was issued and the stock option agreement by which it is
evidenced.
NUCLEAR MATTERS
The Merger Agreement provides that, at least quarterly prior to the
Effective Time, DQE, upon request by APS, will cause its President -- Generation
Group and its Chief Nuclear Officer to attend a meeting of the APS Board and
provide APS' directors with such oral and written information concerning the
Nuclear Facilities and DQE's nuclear generation program as such directors and/or
the Chief Financial Officer of APS may reasonably request, including, but not
limited to, information relating to safety matters, regulatory matters,
refueling plans, outages, planned and pending capital expenditures and DQE's
relations with co-owners of the Nuclear Facilities. In addition, prior to the
Effective Time, APS will be entitled to designate one person who will be a
director of APS or will be a person expert in nuclear matters reasonably
acceptable to DQE, to attend and participate in each meeting of the Nuclear
Review Committee of the DQE Board.
CERTAIN REGULATORY PROVISIONS
Pursuant to the Merger Agreement, DQE and APS each have agreed to, and to
cause their respective subsidiaries to, discuss with each other any changes in
its or its respective subsidiaries' regulated rates or charges (other than
pass-through fuel rates or charges), standards of service or accounting from
those in effect on the date of the Merger Agreement, and to consult with the
other prior to making any filing (or any amendment thereto), or effecting any
agreement, commitment, arrangement or consent, whether written or oral, formal
or informal, with respect thereto, other than in connection with rate filings
pending as of the date of the Merger Agreement.
44
<PAGE> 59
In addition, pursuant to the Merger Agreement, DQE and APS have agreed that
neither DQE nor APS will, nor will DQE or APS permit any of their respective
subsidiaries to, take any action that would impair the ability of APS to obtain
the approvals under the PUHCA for the transactions contemplated by the Merger
Agreement.
Further, pursuant to the Merger Agreement, DQE and APS have agreed that
they will cause their respective Pennsylvania utility subsidiaries to file in a
timely manner with the PAPUC a restructuring plan to implement direct access to
a competitive market for electric generation pursuant to the Pennsylvania
Restructuring Legislation.
NEW YORK STOCK EXCHANGE LISTING; DE-LISTING OF DQE COMMON STOCK
APS will file a listing application with the NYSE covering the shares of
APS Common Stock to be issued in connection with the Merger. The obligations of
APS and DQE to consummate the Merger are subject to the condition that the
shares of APS Common Stock to be issued to the holders of DQE Common Stock in
connection with the Merger be approved for listing on the NYSE, subject only to
official notice of issuance. DQE Common Stock will be delisted from the NYSE,
the CSE and the PHSE and deregistered under the Exchange Act as soon as
practicable following the Effective Time.
CERTAIN REGULATORY MATTERS
HSR ACT
Under the HSR Act and the rules promulgated thereunder, certain
transactions, including the Merger, may not be consummated unless certain
waiting period requirements have been satisfied. APS and DQE each will file a
Notification and Report Form pursuant to the HSR Act with the DOJ and the FTC.
At any time before or after the Effective Time, the FTC, the DOJ or others could
take action under the antitrust laws with respect to the Merger, including
seeking to enjoin the consummation of the Merger, to rescind the Merger or to
require divestiture of substantial assets of APS or DQE. There can be no
assurance that a challenge to the Merger on antitrust grounds will not be made
or, if such a challenge is made, that it would not be successful.
FEDERAL POWER ACT
Section 203 of the Power Act provides that no public utility shall sell or
otherwise dispose of the whole of its facilities subject to the jurisdiction of
the FERC or directly or indirectly merge or consolidate its facilities with
those of any other person or purchase, acquire or take any security of any other
public utility without first having obtained an order authorizing it from the
FERC. The approval of the FERC is required to consummate the Merger. Under
Section 203 of the Power Act, the FERC will approve a merger if it finds the
merger to be "consistent with the public interest." The FERC may grant its order
on such terms and conditions as it finds necessary or appropriate to secure the
maintenance of adequate service and coordination in the public facilities
subject to its jurisdiction. In December 1996, the FERC issued a policy
statement which updated and clarified its procedures, criteria and policies
concerning public utility mergers for the purpose of providing greater certainty
and expedition in its analysis of mergers. The FERC announced that it would
generally take into account three factors in analyzing proposed mergers: the
effect on competition, the effect on rates and the effect on regulation. DQE and
APS will file a joint application before the FERC seeking approval of the
Merger.
PUHCA
APS is registered as a holding company under the PUHCA. Pursuant to Section
3(a)(1) of the PUHCA, DQE is a holding company exempt from all of the provisions
of the PUHCA except for Section 9(a)(2) thereof. APS is required to obtain SEC
approval under Section 9(a)(1) of the PUHCA in connection with the Merger. DQE
is not required to obtain SEC approval. An application for approval of the
Merger will be filed by APS.
45
<PAGE> 60
Under the applicable standards of the PUHCA, the SEC is directed to approve
the Merger unless it finds that (i) the Merger would tend towards interlocking
relations or a concentration of control which is detrimental to the public
interest or the interest of investors or consumers, (ii) the consideration to be
paid in connection with the Merger is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of the utility assets
underlying the securities to be acquired, (iii) the Merger would unduly
complicate the capital structure of APS' holding company system or would be
detrimental to the proper functioning of APS' holding company system or (iv) the
Merger would be unlawful pursuant to an appropriate state law. To approve the
Merger, the SEC must also find that the Merger would tend towards the economical
and efficient development of an integrated public utility system and would
otherwise conform to the PUHCA's integration and corporate simplification
standards.
Following the Merger, APS will continue to be a registered holding company
under the PUHCA and therefore, following the Merger, stockholders of DQE will
own stock in a regulated holding company pursuant to the PUHCA. The PUHCA
imposes restrictions on the operations of registered holding company systems.
Among these are requirements that certain securities issuances, as well as
acquisitions of securities, sales and acquisitions of utility assets and
acquisitions of interests in any other business, be approved by the SEC. The
PUHCA also limits the ability of registered holding companies to engage in
non-utility ventures and regulates holding company system service companies and
the rendering of services by holding company affiliates to the system's
utilities. The SEC has authority under the PUHCA to preclude the payment of
dividends by APS and the payment of dividends by DQE to APS under certain
circumstances. DQE and APS recognize that the divestiture of certain of the
existing nonutility operations of DQE is a possibility, but APS will request in
its PUHCA application that it be allowed to retain the nonutility operations of
DQE, or, in the alternative, that the question of divestiture be deferred. If
divestiture is ultimately required, the SEC historically has allowed companies
sufficient time to accomplish divestiture in a manner that protects stockholder
value. Following the Merger, DQE will no longer be exempt as a public utility
holding company under the PUHCA.
In June 1995, the staff of the SEC published a report which recommended
changes to the PUHCA, including a recommendation to Congress to repeal the
entire act. Bills were introduced in the last Congress to repeal the PUHCA, but
did not pass. Similar bills have been introduced in the 105th Congress. However,
neither APS nor DQE can predict what changes, if any, will be made to the PUHCA
as a result of these activities.
NUCLEAR REGULATORY COMMISSION
Duquesne Light owns a 13.74% interest in Perry Unit 1, a 47.50% interest in
Beaver Valley 1 and a 13.74% interest in Beaver Valley 2. Pursuant to agreements
with the co-owners, a subsidiary of Duquesne Light operates Beaver Valley 1 and
Beaver Valley 2. Duquesne Light holds NRC licenses with respect to its ownership
interests in and operating responsibilities for these nuclear units. The AEA
currently provides that licenses may not be transferred or in any manner
disposed of, either voluntarily or involuntarily, directly or indirectly, unless
the NRC finds that such transfer or disposition is in accordance with the AEA
and consents in writing. Pursuant to the AEA, Duquesne Light will seek approval
from the NRC to the full extent required to reflect that, after the Merger,
Duquesne Light, although continuing to own the identical pre-Merger shares of
the Nuclear Facilities, will become an indirect operating subsidiary of APS.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
DQE is a Pennsylvania corporation and is the parent corporation of Duquesne
Light, a Pennsylvania public utility providing electric service to the public in
Pennsylvania. APS' subsidiaries own significant generating units in
Pennsylvania. APS' subsidiary West Penn is a Pennsylvania public utility
providing electric service to the public in Pennsylvania. Pursuant to the laws
of Pennsylvania, approval of the PAPUC is required for any public utility to be
acquired by or to be transferred to any person or corporation, including a
transfer by way of merger. The PAPUC will approve transfers if the PAPUC finds
or determines that such transfer is necessary or proper for the service,
accommodation, convenience or safety of the public. In addition, under the
Pennsylvania Restructuring Legislation, the PAPUC may investigate the effect of
mergers on the
46
<PAGE> 61
proper functions of a competitive retail electricity market. Duquesne Light and
West Penn Power Company will file appropriate applications seeking any required
or necessary approval of the PAPUC.
In connection with the Pennsylvania Restructuring Legislation, APS and DQE
will each file restructuring plans with the PAPUC. Each such plan will set forth
proposals for the transition to customer choice and recovery of stranded costs.
MARYLAND PUBLIC SERVICE COMMISSION
APS is a Maryland corporation. The MPSC is granted general authority to
supervise and regulate public utility operations in the State of Maryland. The
issuance of APS Common Stock may require the approval of the MPSC. The MPSC will
authorize an issuance of stock if the issuance is reasonably required for the
acquisition of property by the issuing company. If appropriate or necessary, APS
will file an application for approval of the MPSC.
OTHER REGULATORY MATTERS
In addition to Pennsylvania and Maryland, APS has public utilities
subsidiary operations in Ohio, West Virginia and Virginia. Certain of these
states may contend that they have jurisdiction over the Merger and that their
consent to the Merger is required. Amendment of certain affiliate agreements
which may occur in connection with the Merger will require the approval of the
State Corporation Commission of Virginia and the Public Service Commission of
West Virginia. Other than with respect to the amendment of these affiliate
agreements, APS does not believe that any of these states has jurisdiction with
respect to the Merger.
POWER SUPPLY AGREEMENT
APS' subsidiaries currently intend to either amend the Power Supply
Agreement, dated January 1, 1968, among Monongahela, Potomac Edison and West
Penn, as amended, or eliminate such agreement and in lieu thereof may (a)
organize a new subsidiary or subsidiaries of APS, (b) cause APS' utility
subsidiaries to transfer or lease certain of their respective generation or
transmission assets and liabilities to such subsidiary or Subsidiaries and (c)
cause such new subsidiary or Subsidiaries to sell APS' utility subsidiaries'
generation and generation services and/or transmission and transmission services
as appropriate or as required. These transactions may require regulatory
approvals. Any required approvals will be sought by APS and its subsidiaries as
soon as practicable following the decision to engage in any of these
transactions.
EFFECTS OF CERTAIN REGULATORY TRENDS
SFAS No. 71
In accordance with SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," the regulated entities, financial statements reflect
assets and liabilities issued on current cost-based ratemaking regulation. Once
the transition to full retail competition is completed in Pennsylvania, APS'
wholly-owned subsidiary operating in Pennsylvania, West Penn, and Duquesne Light
may not meet the criteria for applying SFAS No. 71 to their respective
generation operations and assets. In that event, any remaining generation
related regulatory assets and liabilities, if any, would be written off, and any
generation related long-lived fixed and intangible assets would need to be
evaluated for impairment under the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The result could be an extraordinary noncash charge to operations that
could be material to the financial position and results of operations of APS or
DQE, as the case may be. Because of the provisions in the Pennsylvania
Restructuring Legislation related to stranded cost recovery, APS and DQE do not
believe any significant write-offs or charges should be required.
Stranded Cost Recovery
Stranded costs can generally be described as mandated costs (such as
regulatory assets and obligations under PURPA contracts) and costs of generation
that could be recovered in a regulated environment but cannot be recovered in a
competitive environment because they are in excess of market. The Pennsylvania
Restructuring Legislation permits recovery of both types from customers through
a competitive transition
47
<PAGE> 62
charge ("CTC"), subject to PAPUC approval, with the provision that utilities
have an obligation to mitigate stranded costs to the extent practicable. Over
the CTC recovery period, which can be up to nine years, all Pennsylvania
utilities are permitted a CTC charge to recover costs in excess of market.
Generally, because West Penn has a lower per unit cost of operation, its CTC
charge for costs in excess of market may be less than other utilities. Duquesne
Light by comparison has certain higher cost per unit operations which would
provide it with a higher charge for costs in excess of market. West Penn and
Duquesne Light will each file its restructuring plan on August 1, 1997 in which
it will address this issue.
Emerging Issues Task Force
Members of the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "Task Force") have discussed issues related to the impact
of changes in the regulatory environment for electric utilities. These changes
have resulted from initiatives which are intended to ultimately change the
pricing of the generation of electricity (but not of its transmission or
distribution) to competitive pricing. Although the arrangements vary from state
to state, the regulators are expected to provide (or are providing, such as in
the Pennsylvania Restructuring Legislation) for a transition period for the
generation of electricity from a fully regulated to a competitive environment.
During these transition periods, mechanisms are being provided for a utility to
recover certain assets and other costs associated with its generation operations
prior to (and, in some cases, subsequent to) the change, while at the same time
the price of electricity generated after the change will be based on market
rates. During this transition period and thereafter, for the foreseeable future,
the transmission and distribution portions of a utility's operations are
expected to continue to be cost of service based rate regulated.
The Task Force is considering how to identify the regulatory assets
attributable to that portion of a business which under SFAS 101 would require
write-off, assuming SFAS 71 is no longer applicable to the generation portion of
a utility's operations. The Task Force is also considering a threshold question
of whether application of SFAS 71 to the generation facilities of a utility is
appropriate during the transition period, or whether SFAS 101 requires that
regulatory accounting principles no longer be applied.
There can be no assurances as to how the Task Force will resolve these
issues. As disclosed above under "-- SFAS No. 71," a determination that SFAS No.
71 is inapplicable would have significant adverse consequences to West Penn and
Duquesne Light.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the management of DQE and the DQE Board who have
interests in the Merger that are in addition to their interests as holders of
DQE Common Stock have participated in the negotiation of the terms of the Merger
Agreement and the transactions contemplated thereby.
DIRECTORS AND OFFICERS
The Merger Agreement provides that from and after the Effective Time, the
APS Board will be composed of 15 directors and that immediately prior to the
Effective Time, DQE will designate six of such directors, and APS will designate
nine of such directors, and that all such designated directors will be the
directors of APS from and after the Effective Time until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the APS Charter and the APS Bylaws.
Although as of the date hereof, neither DQE nor APS has determined who it will
designate to be directors of APS following the Effective Time, each of DQE and
APS currently intends to nominate persons from among the members of its
respective boards of directors at the Effective Time. In addition, the Merger
Agreement provides that four of the six directors of APS designated by DQE
pursuant to the Merger Agreement will be the chairmen of the following
committees of the APS Board: Nuclear Review; New Business; Finance; and Employee
and Community Relations, and that four of the nine directors of APS designated
by APS pursuant to the Merger Agreement will be the chairmen of the following
committees of the APS Board: Audit; Management Review; Nominating; and Benefits.
48
<PAGE> 63
SEVERANCE AGREEMENTS
DQE and its affiliates have entered into severance agreements (the "DQE
Severance Agreements") with David D. Marshall, Victor A. Roque and Gary L.
Schwass, and with 10 other officers of DQE or its affiliates, providing benefits
upon a Change in Control (as defined below). The DQE Severance Agreements
provide for payments and certain other benefits to the officer if the officer's
employment is terminated by the officer after a Constructive Discharge (as
defined below), or is terminated by DQE for any reason other than death,
disability or cause at any time during the period that begins on the date of a
Change of Control and ends 36 months after the closing of the transactions
giving rise to such Change in Control. The payment will be a lump sum amount
equal to (i) three times the officer's current annual base pay and target bonus
opportunity at the time of the termination, (ii) an amount intended to
compensate the officer for the loss of long-term incentive benefits, and (iii)
the amount of forfeitures, if any, and expected contributions for the 36 months
following the termination under DQE's 401(k) Plan. In addition, the officer will
receive a lump sum payment equal to the actuarial value of the excess of (x) the
benefits payable to the officer under the Retirement Plan of DQE and the
Supplemental Executive Retirement Plan of DQE (the "Retirement Plans"), assuming
three additional years of participation by the officer in the Retirement Plans,
over (y) the actual benefit payable to the officer under the Retirement Plans.
Medical, disability and life insurance benefits also will continue for the same
36-month period. The officer also is entitled to such payments and benefits if
the employee voluntarily terminates his or her employment in the thirteenth
month following the closing of the transaction giving rise to the Change in
Control, provided that the 36 month payment and benefit period would be reduced
to 24 months and payments and benefits would be reduced, if necessary, to avoid
the excise tax under Section 4999 of the Code.
The officer will also be entitled to a tax gross-up payment if (i) it is
determined that any payment (and the value of any benefits) received or to be
received under his or her DQE Severance Agreement would be subject to the excise
tax imposed by Section 4999 of the Code and (ii) the payments (and the value of
any benefits) to be received in excess of 300% of the base amount (as that term
is defined in Section 280G of the Code) exceeds 10% of the total payments and
benefits due pursuant to the DQE Severance Agreements. Otherwise, the payments
and benefits received or to be received pursuant to the DQE Severance Agreements
will be reduced to an amount which will not be subject to such excise tax.
"Change in Control" is defined in the DQE Severance Agreements as, among
other things, the public announcement of a transaction approved by the DQE Board
involving a merger of DQE other than a merger in which the outstanding voting
securities of DQE immediately prior to the merger continue to represent at least
80% of the outstanding voting securities of DQE or the surviving entity
immediately after the merger. The Merger constitutes such a merger and therefore
the public announcement of the DQE Board's approval of the Merger constituted a
Change in Control for purposes of the DQE Severance Agreements, unless and until
the Merger is abandoned. "Constructive Discharge" is defined in the DQE
Severance Agreements as, among other things, (i) a requirement that the officer
be based at any office or location more than 50 miles from Pittsburgh,
Pennsylvania, other than an office or location within 35 miles of DQE's or
Duquesne Light's principal executive offices; (ii) the reduction of the
officer's compensation or benefits, unless part of a reduction for all executive
officers of DQE, Duquesne Light or any parent thereof; (iii) the material
failure of DQE to comply with the terms of the officer's DQE Severance
Agreement; or (iv) prior to the closing of the transaction giving rise to the
Change in Control, a material decrease in the employee's positions, titles,
authority or duties.
If the employment of all officers with DQE Severance Agreements had been
terminated as of the date of this Joint Proxy Statement/Prospectus, the
aggregate cost to DQE under the DQE Severance Agreements would not exceed
$20,000,000.
DQE, INC. LONG-TERM INCENTIVE PLAN
The DQE, Inc. Long-Term Incentive Plan (the "Incentive Plan") provides
long-term incentive compensation in the form of stock options (with or without
stock appreciation rights and dividend equivalents). Several officers of DQE
have been awarded options pursuant to the Incentive Plan, some of
49
<PAGE> 64
which are not currently exercisable and/or subject to forfeiture. Under the
terms of the Incentive Plan, upon the occurrence of certain events, including
the adoption of the Merger Agreement by the holders of DQE Common Stock, all
stock options and stock appreciation rights become immediately exercisable. In
addition, an option holder whose employment is terminated within one year of
such stockholder approval, for any reason other than disability, retirement or
death, has a period of three months following such termination to exercise such
option (but in no event later than the original expiration date of such option).
If all such stock options and stock appreciation rights become immediately
exercisable after the DQE Meeting, the aggregate benefit to the holders of all
such stock options and stock appreciation rights based on current values would
not exceed $500,000.
DIRECTOR AND OFFICER INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, APS has agreed that, from and after the
Effective Time, it will indemnify and hold harmless each present and former
director and officer of DQE or any of its Subsidiaries (when acting in such
capacity), against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent that DQE or such
Subsidiary is permitted to indemnify such person under the law of its
jurisdiction of incorporation and the DQE Articles and DQE Bylaws in effect on
the date of the Merger Agreement. In addition, the Merger Agreement provides
that the Surviving Corporation will maintain DQE's existing D&O Insurance for a
period of six years after the Effective Time so long as the annual premium
therefor is not in excess of 200% of the Current Premium; provided, however,
that if the existing D&O Insurance expires or is terminated or canceled during
such six-year period, the Surviving Corporation will use its reasonable efforts
to obtain as much D&O Insurance as can be obtained for the remainder of such
period for a premium not in excess (on an annualized basis) of 200% of the
Current Premium.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the receipt by each of APS
and DQE of a letter from APS' independent public accountant stating that the
Merger, in its opinion, will qualify as a "pooling of interests" for accounting
purposes, it being understood that APS' independent accounting firm may rely on
a letter from DQE's independent accounting firm with respect to the eligibility
of DQE and its subsidiaries for such accounting treatment. See "The Merger
Agreement -- Conditions" and "Unaudited Pro Forma Combined Financial Information
of APS and DQE."
APS and DQE believe that the Merger will qualify as a "pooling of
interests" for accounting and financial reporting purposes, and have been so
advised by Price Waterhouse LLP and Deloitte & Touche, their respective
independent public accountants, based on information through the date hereof.
Under this method of accounting, APS will restate at the Effective Time its
consolidated financial statements to include the assets, liabilities,
stockholders' equity and results of operations of DQE. It is anticipated that
upon consummation of the Merger, the fiscal year of the combined company will be
the calendar year.
RESALE OF APS COMMON STOCK
The shares of APS Common Stock issuable to stockholders of DQE in
connection with the Merger have been registered under the Securities Act. Such
shares may be traded freely and without restriction by those stockholders not
deemed to be "affiliates" of APS or DQE as that term is defined in the rules
under the Securities Act. "Affiliates" are generally defined as persons who
control, are controlled by or are under common control with DQE at the time of
the DQE Meeting. Shares of APS Common Stock received by those stockholders of
DQE who are deemed to be "affiliates" of DQE may be resold without registration
as provided for by Rule 144 or 145, or as otherwise permitted, under the
Securities Act. This Joint Proxy
50
<PAGE> 65
Statement/Prospectus does not cover any resales of APS Common Stock received by
affiliates of DQE, or by certain of their family members or related interests.
Pursuant to the Merger Agreement, each of DQE and APS have agreed to
deliver to the other a letter identifying all persons whom such party believes
to be, as of the date of their respective Stockholders Meetings, "affiliates" of
such party for purposes of Rule 145 under the Securities Act. Each of DQE and
APS has agreed to use its best efforts to cause each person who is identified as
an "affiliate" in the letter referred to above to deliver to APS prior to the
date of their respective Stockholders Meetings an Affiliate Letter providing
that each such person will agree not to sell, pledge, transfer or otherwise
dispose of the shares of APS Common Stock to be received by such person in the
Merger except in compliance with the applicable provisions of the Securities Act
and, if the Merger qualifies for "pooling of interests" accounting treatment,
until such time as financial results covering at least 30 days of combined
operations of APS and DQE shall have been published.
DIVIDENDS
It is presently anticipated that, following the Effective Time, the current
$1.72 annual dividend per share of APS Common Stock will be maintained or
increased, subject to evaluation from time to time by the APS Board based on
APS' results of operations, financial condition, capital requirements, future
business prospects, regulatory environment and such other considerations as the
APS Board deems relevant. However, no assurance can be given that such dividend
will be maintained or increased.
DQE's current annual dividend is equal to $1.36 per share of DQE Common
Stock. It has been DQE's practice to limit its dividend payout such that
dividends do not exceed 60% of earnings. Pursuant to the Merger Agreement, DQE
has agreed to coordinate with APS the declaration, setting of record dates and
payment dates of dividends on DQE Common Stock so that holders of DQE Common
Stock do not receive dividends on both DQE Common Stock and APS Common Stock
received in the Merger in respect of any calendar quarter, or fail to receive a
dividend on either DQE Common Stock or APS Common Stock received in the Merger
with respect to any calendar quarter.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary discusses the material federal income tax
consequences of the Merger. The summary is based upon the Code, applicable
Treasury Regulations thereunder and administrative rulings and judicial
authority as of the date hereof. All of the foregoing are subject to change,
possibly with retroactive effect, and any such change could affect the
continuing validity of the discussion. The discussion assumes that holders of
shares of DQE Common Stock hold such shares as a capital asset. Further, the
discussion does not address the tax consequences that may be relevant to a
particular stockholder subject to special treatment under certain federal income
tax laws, such as dealers in securities, banks, insurance companies, tax-exempt
organizations, non-United States persons, stockholders who acquired shares of
DQE Common Stock through the exercise of options or otherwise as compensation or
through a tax-qualified retirement plan, and holders of options and performance
share units granted under DQE's benefit plans. This discussion does not address
any consequences arising under the laws of any state, locality or foreign
jurisdiction, nor does it address the effect of the Merger on DQE or APS in
respect of any asset as to which unrealized gain is required to be recognized
for U.S. federal income tax purposes at the end of each taxable year under a
mark-to-market system.
Neither DQE nor APS has requested a ruling from the Internal Revenue
Service ("IRS") with regard to any of the federal income tax consequences of the
Merger, and the opinions of counsel as to such federal income tax consequences
referred to below will not be binding on the IRS.
GENERAL
As of the date hereof, it is intended that the Merger will constitute a
"reorganization" pursuant to Section 368(a) of the Code and that for federal
income tax purposes no gain or loss will be recognized by APS, DQE or Merger
Sub. The respective obligations of the parties to consummate the Merger are
conditioned on (i) the
51
<PAGE> 66
receipt by APS of an opinion of Sullivan & Cromwell dated the Closing Date
confirming that the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code and that each of APS, DQE and Merger Sub will be a
party to the reorganization within the meaning of Section 368(b) of the Code,
and (ii) the receipt by DQE of an opinion of LeBoeuf, Lamb, Greene & MacRae,
L.L.P. dated the Closing Date confirming that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code and that each of
APS, DQE and Merger Sub will be a party to the reorganization within the meaning
of Section 368(b) of the Code. These conditions may be waived at the sole
discretion of the party waiving the condition. Such opinions will be based upon,
among other things, (i) representations of DQE, APS and certain stockholders of
DQE customarily given in transactions of this type and (ii) the assumption that
the Merger will be consummated in accordance with the terms of the Merger
Agreement. DQE and APS expect to receive such opinions prior to closing, but
have not yet received such opinions. If either party waives the condition
relating to the receipt of an opinion with respect to the federal income tax
consequences of the Merger it will re-circulate a revised version of this Joint
Proxy Statement/Prospectus to disclose the waiver of this condition, to disclose
material risks to its stockholders as a result of the waiver of this condition,
if any, and to disclose any related material disclosures. In addition, each
party would re-solicit the approval of its respective stockholders in the event
that it waived the condition relating to the receipt of an opinion with respect
to the federal income tax consequences of the Merger and the tax consequences of
the Merger are, at such time, materially different from the tax consequences of
the Merger described below.
The discussion below summarizes the material federal income tax
consequences of the Merger, assuming that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. Set forth as
Exhibits 8-a and 8-b to the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part are the opinions with respect to the federal
income tax consequences of the Merger of Sullivan & Cromwell and LeBoeuf, Lamb,
Greene & MacRae, L.L.P., respectively.
CONSEQUENCES TO DQE STOCKHOLDERS
Under the reorganization provisions of the Code, no gain or loss will be
recognized by holders of DQE Common Stock with respect thereto as a result of
the surrender of their shares of DQE Common Stock in exchange for shares of APS
Common Stock pursuant to the Merger (except as discussed below with respect to
cash received in lieu of fractional shares). The aggregate tax basis of the
shares of APS Common Stock received in the Merger (including any fractional
shares of APS Common Stock deemed received) will be the same as the aggregate
tax basis of the shares of DQE Common Stock surrendered in exchange therefor in
the Merger. The holding period of the shares of APS Common Stock received
(including the holding period of fractional shares of APS Common Stock deemed
received) will include the holding period of shares of DQE Common Stock
surrendered in exchange therefor.
FRACTIONAL SHARES
If a holder of shares of DQE Common Stock receives cash in lieu of a
fractional share interest in APS Common Stock in the Merger, such fractional
share interest will be treated as having been distributed to the holder, and
such cash amount will be treated as received in redemption of the fractional
share interest. Under Section 302 of the Code, if such redemption is "not
essentially equivalent to a dividend" after giving effect to the constructive
ownership rules of the Code, the holder will generally recognize capital gain or
loss equal to the cash amount received for the fractional share of APS Common
Stock reduced by the portion of the holder's tax basis in shares of DQE Common
Stock surrendered that is allocable to the fractional share interest in APS
Common Stock. Under these rules, a minority stockholder of DQE should recognize
capital gain or loss on the receipt of cash in lieu of a fractional share
interest in APS Common Stock. The capital gain or loss will be long term capital
gain or loss if the holder's holding period in the fractional share interest is
more than one year.
CONSEQUENCES TO DQE, APS, MERGER SUB AND HOLDERS OF APS COMMON STOCK
None of DQE, APS or Merger Sub or the holders of APS Common Stock will
recognize gain or loss as a result of the Merger.
52
<PAGE> 67
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, DQE
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER APPLICABLE TAX
LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
CERTAIN RELATED AGREEMENTS
STOCK OPTION AGREEMENT
In connection with the Merger Agreement and the Merger, APS and DQE entered
into the Stock Option Agreement, pursuant to which DQE granted to APS the Option
entitling APS to purchase up to 15,379,007 shares of DQE Common Stock (the
"Option Shares") under the circumstances described below at an initial cash
price per share of DQE Common Stock equal to $27.850 (such price as adjusted as
provided in the Stock Option Agreement, the "Option Price"). The Stock Option
Agreement provides that in no event will the number of shares of DQE Common
Stock for which the Option is exercisable exceed 19.9% of DQE Common Stock
issued and outstanding at the time of exercise.
APS may exercise its Option, in whole or in part, if, but only if, a
Triggering Event (as defined below) will have occurred prior to the occurrence
of an Exercise Termination Event (as defined below); provided that APS sends DQE
a written notice of such exercise within 180 days following the first such
Triggering Event.
As defined in the Stock Option Agreement, a "Triggering Event" means the
occurrence of any event which could cause the Merger Agreement to be terminable:
(x) by DQE subject to and in accordance with the termination provisions of the
Merger Agreement relating to Acquisition Proposals (See "The Merger
Agreement -- Conduct of Business Pending the Merger; Certain Covenants;
Acquisition Proposals -- Acquisition Proposals"); (y) by APS if the DQE Board
has withdrawn or adversely modified its approval or recommendation of the Merger
Agreement or failed to reconfirm its recommendation of the Merger Agreement
after a written request by APS to do so or if DQE or any of its affiliates,
representatives or agents takes any of the actions that would be proscribed by
certain provisions of the Merger Agreement which restrict DQE's conduct with
respect to Acquisition Proposals (See "The Merger Agreement -- Conduct of
Business Pending the Merger; Certain Covenants; Acquisition
Proposals -- Acquisition Proposals"); or (z) by APS or DQE if the necessary vote
of DQE's stockholders to effectuate the Merger has not been obtained at the DQE
Meeting, including any adjournments thereof.
As defined in the Stock Option Agreement, an "Exercise Termination Event"
means (i) the Effective Time; (ii) the termination of the Merger Agreement in
accordance with the provisions thereof if such termination precedes the
occurrence of a Triggering Event; or (iii) the first anniversary of the date of
termination of the Merger Agreement if such termination follows, or occurs at
the same time as, the occurrence of a Triggering Event, or, if on such
anniversary date the Option cannot be exercised by reason of any applicable
judgment, decree, order, law or regulation, 30 business days after such
impediment to exercise is removed or becomes final and not subject to appeal,
but in no event under clause (iii) later than April 5, 1999.
The Stock Option Agreement provides that in the event that any additional
shares of DQE Common Stock are issued or otherwise become outstanding after the
date of the Stock Option Agreement, the aggregate number of shares of DQE Common
Stock purchasable upon exercise of the Option (inclusive of shares, if any,
previously purchased upon exercise of the Option) will automatically be
increased so that, after such issuance, it equals 19.9%. Any such increase shall
not affect the Option Price. Further, in the event of any change in the
outstanding shares of DQE Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares or the like, the type and number of shares of DQE Common Stock
purchasable pursuant to the Option will be appropriately adjusted. Whenever the
number of shares of DQE Common Stock purchasable upon exercise of the Option is
adjusted
53
<PAGE> 68
as described in the preceding sentence, the Option Price will be adjusted by
multiplying the Option Price by a fraction, the numerator of which is equal to
the number of shares of DQE Common Stock purchasable prior to the adjustment and
the denominator of which is equal to the number of shares of DQE Common Stock
purchasable after the adjustment.
The Stock Option Agreement also provides that APS may require that DQE
repurchase the Option from APS. The Stock Option Agreement provides that upon
the occurrence of a Triggering Event that occurs prior to an Exercise
Termination Event, (i) at the request of APS, delivered in writing within 180
days of such occurrence (or such later period as provided in the Stock Option
Agreement under certain circumstances in connection with the obtaining of
regulatory approvals or avoidance of liability under Section 16(b) of the
Exchange Act) DQE will repurchase the Option from APS, as a whole or in part, at
a price (the "Option Repurchase Price") equal to the number of shares of DQE
Common Stock then purchasable upon exercise of the Option multiplied by the
amount by which the market/offer price (as defined below) exceeds the Option
Price and (ii) at the request of APS, delivered in writing within 180 days of
such occurrence (or such later period as provided in the Stock Option Agreement
under certain circumstances in connection with the obtaining of regulatory
approvals or avoidance of liability under Section 16(b) of the Exchange Act),
DQE will repurchase such number of Option Shares from APS as APS shall designate
at a price (the "Option Share Repurchase Price") equal to the number of shares
designated multiplied by the market/offer price. The term "market/offer price"
is defined in the Stock Option Agreement to mean the highest of (x) the price
per share of DQE Common Stock at which a tender or exchange offer for DQE Common
Stock has been made, (y) the price per share of DQE Common Stock to be paid by
any third party pursuant to an agreement with DQE and (z) the average closing
price for shares of DQE Common Stock on the 10 consecutive trading days on the
NYSE immediately preceding the delivery of the written notice stating that APS
elects to require DQE to repurchase the Option and/or any Option Shares in
accordance with the Stock Option Agreement (each such notice, a "Repurchase
Notice"). In the event that a tender or exchange offer is made for DQE Common
Stock or an agreement is entered into for a merger or consolidation involving
consideration other than cash, the value of the securities or other property
issuable or deliverable in exchange for DQE Common Stock will be determined by a
nationally recognized investment banking firm selected by DQE.
In the event that APS requests the repurchase of the Option in part, DQE
will deliver with the Option Repurchase Price a new Stock Option Agreement
evidencing APS' right to purchase that number of shares of DQE Common Stock
purchasable pursuant to the Option at the time of delivery of the Repurchase
Notice minus the number of shares of DQE Common Stock represented by that
portion of the Option then being repurchased.
The Stock Option Agreement provides that the Total Profit of APS will not
exceed $20,000,000 and, if it otherwise would exceed such amount, APS, at its
sole election, will either (a) reduce the number of shares of DQE Common Stock
subject to the Option, (b) deliver to DQE for cancellation Option Shares
previously purchased by APS, (c) pay cash to DQE, or (d) any combination
thereof, so that APS' actually realized Total Profit does not exceed $20,000,000
after taking into account the foregoing actions.
As defined in the Stock Option Agreement, the term "Total Profit" means the
aggregate amount (before taxes) of the following: (i) (x) the amount received by
APS pursuant to DQE's repurchase of the Option (or any portion thereof) or any
Option Shares pursuant to the Stock Option Agreement, less, in the case of any
repurchase of Option Shares, (y) APS' purchase price for such Option Shares, as
the case may be, (ii) (x) the net cash amounts received by APS pursuant to the
sale of Option Shares (or any other securities into which such Option Shares are
converted or exchanged) to any unaffiliated party, less (y) APS' purchase price
of such Option Shares, and (iii) any Notional Total Profit (as defined below).
The term "Notional Total Profit" with respect to any number of shares as to
which APS may propose to exercise the Option shall be the Total Profit
determined as of the date of such proposal assuming that the Option was
exercised on such date for such number of shares and assuming that such shares,
together with all other Option Shares held by APS and its affiliates as of such
date, were sold for cash at the closing market price for the Common Stock as of
the close of business on the preceding trading day (less customary brokerage
commissions).
54
<PAGE> 69
LETTER AGREEMENT
APS and DQE have also entered into the Letter Agreement in connection with
the Merger Agreement. The Letter Agreement provides that in the event that the
Merger Agreement is terminated (x) by APS pursuant to provisions of the Merger
Agreement permitting APS to terminate the Merger Agreement under certain
circumstances when a Superior Proposal exists, or (y) by DQE following (i) the
APS Board having withdrawn or adversely modified its approval or recommendation
of the Merger Agreement or failing to reconfirm its recommendation of the Merger
Agreement after a written request by DQE to do so, or (ii) APS or any of its
affiliates or representatives or agents having taken any of the actions that
would be proscribed by certain provisions of the Merger Agreement which restrict
APS' conduct with respect to Acquisition Proposals, or (z) by DQE or APS
pursuant to the provisions of the Merger Agreement permitting them to terminate
the Merger Agreement if the necessary vote of the stockholders of APS to
effectuate the Merger has not been obtained at the APS Special Meeting, then APS
will pay to DQE the amount, if any, by which (1) 0.199 multiplied by the number
of shares of APS Common Stock outstanding at the close of business on the
business day immediately prior to such termination (such date, the
"Determination Date") multiplied by the average daily closing price of APS
Common Stock on the NYSE on the ten NYSE trading days ending on the
Determination Date, as reported in the New York City edition of The Wall Street
Journal, exceeds (2) $719,870,422; provided that the amount payable pursuant to
the Letter Agreement will not exceed $20,000,000.
55
<PAGE> 70
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OF APS AND DQE
The following unaudited pro forma financial information combines the
historical consolidated balance sheets and statements of income of APS and DQE,
including their respective subsidiaries, after giving effect to the Merger. The
unaudited pro forma combined balance sheet at March 31, 1997, set forth below,
gives effect to the Merger as if it had occurred at March 31, 1997. The
unaudited pro forma combined statements of income for the three months ended
March 31, 1997, and each of the 3 years ended December 31, 1996, 1995 and 1994
give effect to the Merger as if it had occurred at January 1, 1996, 1995 and
1994, respectively, and the unaudited pro forma combined statement of income for
the three months ended March 31, 1997, gives effect to the Merger as if it had
occurred on January 1, 1997. These statements are prepared on the basis of
accounting for the Merger as a pooling of interests and are based on the
assumptions set forth in the notes thereto.
The following pro forma financial information has been prepared from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes thereto of APS and DQE, incorporated by reference
herein. The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Merger been
consummated on the dates, or at the beginning of the periods for which the
Merger is being given effect, nor is it necessarily indicative of future
financial position or operating results. See "Available Information" and
"Incorporation of Certain Information by Reference."
56
<PAGE> 71
APS AND DQE
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (E),(F)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE TOTAL
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS BALANCE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments...... $ 24,804 $ 386,857 $ -- $ 411,661
Receivables:
Electric customer accounts
receivable, net..................... 290,237 77,786 38,426(a) 406,449
Other receivables..................... 14,692 50,999 -- 65,691
---------- ---------- ------- ----------
Total Receivables -- Net......... 304,929 128,785 38,426 472,140
Materials and supplies (at average cost):
Coal/Fuel............................. 73,289 19,114 -- 92,403
Operating and construction............ 83,744 51,778 -- 135,522
---------- ---------- ------- ----------
Total Materials and Supplies..... 157,033 70,892 -- 227,925
Prepaid taxes............................ 68,119 468 -- 68,587
Deferred income taxes.................... 52,129 -- -- 52,129
Other current assets..................... 14,840 6,630 -- 21,470
---------- ---------- ------- ----------
Total Current Assets............. $ 621,854 $ 593,632 $38,426 $ 1,253,912
LONG-TERM INVESTMENTS:
Benefit plans' investments............... $ 65,670 $ 1,332 -- $ 67,002
Affordable housing....................... -- 155,662 -- 155,662
Leveraged leases......................... -- 193,654 -- 193,654
Other leases............................. -- 87,119 -- 87,119
Gas reserves............................. -- 77,855 -- 77,855
Other investments........................ 19,525 61,209 -- 80,734
---------- ---------- ------- ----------
Total Long-Term Investments...... $ 85,195 $ 576,831 -- $ 662,026
PROPERTY, PLANT AND EQUIPMENT:
At original cost property, plant and
equipment............................. $ 8,243,825 $ 4,799,655 -- $13,043,480
Less: Accumulated depreciation and
amortization.......................... (2,976,531) (2,018,710) -- (4,995,241)
---------- ---------- ------- ----------
Total Property, Plant and
Equipment -- Net............... $ 5,267,294 $ 2,780,945 -- $ 8,048,239
OTHER NON-CURRENT ASSETS:
Regulatory assets........................ $ 551,674 $ 541,359 $(9,228)(b) $ 1,083,805
Unamortized loss on reacquired debt...... 52,440 83,867 -- 136,307
Other.................................... 39,128 45,948 -- 85,076
---------- ---------- ------- ----------
Total Other Non-Current Assets... $ 643,242 $ 671,174 $(9,228) $ 1,305,188
---------- ---------- ------- ----------
Total Assets................... $ 6,617,585 $ 4,622,582 $29,198 $11,269,365
========== ========== ======= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
57
<PAGE> 72
APS AND DQE
UNAUDITED PRO FORMA COMBINED BALANCE SHEET(E),(F)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE TOTAL
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS BALANCE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Current maturities and sinking fund
requirements........................ $ 95,400 $ 107,146 -- $ 202,546
Short-term debt........................ 133,746 930 -- 134,676
Accounts payable....................... 123,745 73,919 -- 197,664
Accrued liabilities.................... -- 27,689 13,213(b) 40,902
Dividends declared..................... -- 28,709 -- 28,709
Taxes accrued:
Federal and state income tax........ 46,182 (7,102) -- 39,080
Other............................... 41,909 694 -- 42,603
Interest accrued....................... 43,441 26,550 -- 69,991
Deferred power costs................... 23,937 1,903 -- 25,840
Restructuring liability................ 39,296 -- -- 39,296
Other.................................. 69,674 949 -- 70,623
--------- --------- ------- ----------
Total Current Liabilities...... $ 617,330 $ 261,387 $ 13,213 $ 891,930
NON-CURRENT LIABILITIES:
Deferred income taxes -- net........... $ 1,013,995 $ 768,258 $ (9,313)(b) $ 1,788,887
15,947(c)
Deferred investment tax credits........ 139,468 104,096 243,564
Capital lease obligations.............. 3,781 24,150 -- 27,931
Regulatory liabilities................. 92,093 -- -- 92,093
Deferred income........................ -- 180,835 -- 180,835
Other.................................. 71,395 248,687 -- 320,082
--------- --------- ------- ----------
Total Non-Current
Liabilities.................. $ 1,320,732 $ 1,326,026 $ 6,634 $ 2,653,392
COMMITMENTS AND CONTINGENCIES............ -- -- -- --
CAPITALIZATION:
LONG-TERM DEBT AND QUIDS................. $ 2,307,107 $ 1,402,286 -- $ 3,709,393
PREFERRED AND PREFERENCE STOCK OF
SUBSIDIARIES:
Preferred and Preference Stock......... 170,086 242,605 -- 412,691
Deferred ESOP benefit.................. -- (18,931) -- (18,931)
--------- --------- ------- ----------
Total Preferred and Preference
Stock of Subsidiaries........ 170,086 223,674 -- 393,760
COMMON STOCKHOLDERS' EQUITY:
Common stock........................... $ 152,639 $ -- $ -- $ 152,639
Other paid-in capital.................. 1,035,825 987,413 -- 2,023,238
Retained earnings...................... 1,013,866 796,429 (13,128)(b) 1,819,646
22,479(c)
Treasury stock (at cost)............... -- (374,633) -- (374,633)
--------- --------- ------- ----------
Total Common Stockholders'
Equity......................... $ 2,202,330 $ 1,409,209 $ 9,351 $ 3,620,890
--------- --------- ------- ----------
Total Capitalization.............. $ 4,679,523 $ 3,035,169 $ 9,351 $ 7,724,043
--------- --------- ------- ----------
Total Liabilities and
Capitalization............... $ 6,617,585 $ 4,622,582 $ 29,198 $11,269,365
========= ========= ======= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
58
<PAGE> 73
APS AND DQE
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT(E),(F)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS TOTAL
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential............................. $ 257,913 $ 104,322 $(7,092) $ 355,143
Commercial.............................. 123,886 114,523 -- 238,409
Industrial.............................. 182,270 47,597 -- 229,867
Wholesale and other..................... 19,940 202 -- 20,142
Bulk power transactions, net............ 18,683 8,731 -- 27,414
---------- ---------- ------ ----------
Total Sales of Electricity...... 602,692 275,375 (7,092) 870,975
Other................................... 12,288 25,556 -- 37,844
---------- ---------- ------ ----------
Total Operating Revenues........ 614,980 300,931 (7,092) 908,819
OPERATING EXPENSES
Fuel and purchased power................ $ 191,048 $ 51,654 $ -- $ 242,702
Other operating......................... 72,825 80,603 -- 153,428
Maintenance............................. 61,480 17,749 (686)(b) 78,543
Deferred power costs, net............... (2,083) (124) -- (2,207)
Depreciation and amortization........... 68,782 55,174 -- 123,956
Taxes other than income................. 48,656 20,558 -- 69,214
---------- ---------- ------ ----------
Total Operating Expenses........ 440,708 225,614 (686) 665,636
OPERATING INCOME.......................... $ 174,272 $ 75,317 $(6,406) $ 243,183
Other income, net....................... 1,802 20,001 -- 21,803
Interest and other charges.............. 48,549 28,680 -- 77,229
---------- ---------- ------ ----------
Income before income taxes.............. 127,525 66,638 (6,406) 187,757
Income taxes............................ 49,934 21,541 (2,943)(a) 68,817
285(b)
---------- ---------- ------ ----------
Net Income...................... $ 77,591 $ 45,097 $(3,748) $ 118,940
========== ========== ====== ==========
Average Number of Shares of Common Stock
Outstanding (Thousands of Shares)....... 121,843 77,287 9,274 208,404
EARNINGS
Earnings per share of common stock........ $ 0.64 $ 0.58 $ 0.57
DIVIDENDS
Dividends declared per share of common
stock................................... $ 0.43 $ 0.34 $ 0.38(h)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
59
<PAGE> 74
APS AND DQE
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT(E),(F)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS TOTAL
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential............................. $ 932,235 $ 404,183 $ 3,905(a) $1,340,323
Commercial.............................. 492,726 486,666 -- 979,392
Industrial.............................. 752,905 189,527 -- 942,432
Wholesale and other..................... 74,260 857 -- 75,117
Bulk power transactions, net............ 74,790 58,046 -- 132,836
---------- ---------- ------ ----------
Total Sales of Electricity...... 2,326,916 1,139,279 3,905 3,470,100
Other................................... 2,068 73,994 -- 76,062
---------- ---------- ------ ----------
Total Operating Revenues........ $ 2,328,984 $ 1,213,273 $ 3,905 $3,546,162
OPERATING EXPENSES
Fuel and purchased power................ $ 698,902 $ 236,678 -- $ 935,580
Other operating......................... 299,817 291,829 -- 591,646
Maintenance............................. 243,314 78,386 $(4,566)(b) 318,657
1,523(c)
Deferred power costs, net............... 15,621 (4,528) -- 11,093
Restructuring charges and asset
write-off............................ 103,865 -- -- 103,865
Depreciation and amortization........... 263,246 222,928 -- 486,174
Taxes other than income................. 185,373 85,974 -- 271,347
---------- ---------- ------ ----------
Total Operating Expenses........ $ 1,810,138 $ 911,267 $(3,043) $2,718,362
OPERATING INCOME.......................... $ 518,846 $ 302,006 $ 6,948 $ 827,800
Other income, net....................... 9,882 74,790 -- 84,672
Interest and other charges.............. 188,334 110,270 -- 298,604
---------- ---------- ------ ----------
Income before income taxes.............. 340,394 266,526 6,948 613,868
Income taxes............................ 130,347 87,388 1,621(a) 220,645
1,895(b)
(606)(c)
---------- ---------- ------ ----------
Net Income...................... $ 210,047 $ 179,138 $ 4,038 $ 393,223
========== ========== ====== ==========
Average Number of Shares of Common Stock
Outstanding (Thousands of Shares)....... 121,141 77,349 9,282 207,772
EARNINGS
Earnings per share of common stock........ $ 1.73 $ 2.32 $ 1.89
DIVIDENDS
Dividends declared per share of common
stock................................... $ 1.69 $ 1.30 $ 1.47(h)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
60
<PAGE> 75
APS AND DQE
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT(E),(F)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS TOTAL
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential............................... $ 926,966 $ 415,946 $ 419(a) $1,343,331
Commercial................................ 493,696 493,780 -- 987,476
Industrial................................ 770,251 192,274 -- 962,525
Wholesale and other....................... 66,147 855 -- 67,002
Bulk power transactions, net.............. 58,151 51,117 -- 109,268
---------- ---------- ------ ----------
Total Sales of Electricity........ 2,315,211 1,153,972 419 3,469,602
Other..................................... -- 65,157 -- 65,157
---------- ---------- ------ ----------
Total Operating Revenues.......... $ 2,315,211 $ 1,219,129 $ 419 $3,534,759
OPERATING EXPENSES
Fuel and purchased power.................. $ 686,636 227,122 -- 913,758
Other operating........................... 290,501 290,724 -- 581,225
Maintenance............................... 249,477 81,516 (6,595)(b) 333,603
9,205(c)
Deferred power costs, net................. 47,796 6,086 -- 53,882
Restructuring charges and asset
write-off.............................. 23,440 -- -- 23,440
Depreciation and amortization............. 256,316 202,558 -- 458,874
Taxes other than income................... 184,729 88,658 -- 273,387
---------- ---------- ------ ----------
Total Operating Expenses.......... $ 1,738,895 $ 896,664 $ 2,610 $2,638,169
OPERATING INCOME............................ 576,316 322,465 (2,191) 896,590
Other income, net......................... 13,370 52,314 -- 65,684
Interest and other charges................ 193,118 107,555 -- 300,673
---------- ---------- ------ ----------
Income before income taxes................ 396,568 267,224 (2,191) 661,601
Income taxes.............................. 156,876 96,661 174(a) 252,784
2,737(b)
(3,664)(c)
---------- ---------- ------ ----------
Net Income........................ $ 239,692 $ 170,563 $(1,438) $ 408,817
========== ========== ====== ==========
Average Number of Shares of Common Stock
Outstanding (Thousands of Shares)......... 119,864 77,674 9,321 206,859
EARNINGS
Earnings per share of common stock.......... $ 2.00 $ 2.20 $ 1.98
DIVIDENDS
Dividends declared per share of common
stock..................................... $ 1.65 $ 1.21 $ 1.41(h)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
61
<PAGE> 76
APS AND DQE
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT(E),(F)
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS DQE
RECLASSIFIED RECLASSIFIED PRO FORMA ADJUSTED
BALANCE(D) BALANCE(D) ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential........................... $ 863,725 $ 397,976 $ 842(a) $1,262,543
Commercial............................ 459,303 484,198 -- 943,501
Industrial............................ 728,009 193,098 -- 921,107
Wholesale and other................... 65,795 845 -- 66,640
Bulk power transactions, net.......... 67,797 57,732 -- 125,529
---------- ---------- ------ ----------
Total Sales of Electricity.... 2,184,629 1,133,849 842 3,319,320
Other................................. -- 78,695 -- 78,695
---------- ---------- ------ ----------
Total Operating Revenues...... $2,184,629 $1,212,544 $ 842 $3,398,015
OPERATING EXPENSES
Fuel and purchased power.............. $ 721,066 $ 243,572 -- $ 964,638
Other operating....................... 285,007 329,664 -- 614,671
Maintenance........................... 241,913 79,488 985(b) 311,308
(11,078)(c)
Deferred power costs, net............. 11,805 (11,290) -- 515
Restructuring charges and asset
write-off.......................... 9,178 -- 9,178
Depreciation and amortization......... 223,883 165,912 -- 389,795
Taxes other than income............... 183,060 88,331 -- 271,391
---------- ---------- ------ ----------
Total Operating Expenses...... $1,675,912 $ 895,677 $ (10,093) $2,561,496
OPERATING INCOME........................ $ 508,717 $ 316,867 $ 10,935 $ 836,519
Other income, net..................... 43,142 42,924 -- 86,066
Interest and other charges............ 176,528 110,002 -- 286,530
---------- ---------- ------ ----------
Income before income taxes and
cumulative effect of accounting
change............................. 375,331 249,789 10,935 636,055
Income taxes.......................... 155,580 92,973 349(a) 252,902
(409)(b)
4,409(c)
---------- ---------- ------ ----------
Income before cumulative effect of
accounting change.................. 219,751 156,816 6,586 383,153
Cumulative effect of accounting
change, net........................ 43,446 -- (43,446)(g) --
---------- ---------- ------ ----------
Net Income.................... $ 263,197 $ 156,816 $ (36,860) $ 383,153
========== ========== ====== ==========
Average Number of shares of common stock
outstanding (Thousands of Shares)..... 118,272 79,046 9,486 206,804
EARNINGS
Earnings per share of common stock
before cumulative effect of
accounting change.................. $1.86 $1.98 $1.85
Cumulative effect of accounting
change............................. $0.37 -- --
Earnings per share of common stock
after cumulative effect of
accounting change.................. $2.23 $1.98 $1.85
DIVIDENDS
Dividends declared per share of common
stock.............................. $1.64 $1.13 $1.37(h)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
62
<PAGE> 77
APS
RECLASSIFYING BALANCE SHEET (d)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
HISTORICAL RECLASSIFICATIONS BALANCE
----------- ----------------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments............. $ 24,804 $ -- $ 24,804
Receivables:
Electric customer accounts receivable, net... 290,237 -- 290,237
Other receivables............................ 14,692 -- 14,692
----------- -------- -----------
Total Receivables -- Net................ 304,929 -- 304,929
Materials and supplies (at average cost):
Coal/Fuel.................................... 73,289 -- 73,289
Operating and construction................... 83,744 -- 83,744
----------- -------- -----------
Total Materials and Supplies............ 157,033 -- 157,033
Prepaid taxes................................... 68,119 -- 68,119
Deferred income taxes........................... 52,129 -- 52,129
Other current assets............................ 14,840 -- 14,840
----------- -------- -----------
Total Current Assets.................... $ 621,854 -- $ 621,854
LONG-TERM INVESTMENTS:
Subsidiaries consolidated -- excess of cost over
book equity at acquisition................... $ 15,077 $ (15,077) $ --
Benefit plans' investments...................... 65,670 -- 65,670
Other........................................... 4,448 15,077 19,525
----------- -------- -----------
Total Long-Term Investments............. $ 85,195 -- $ 85,195
PROPERTY, PLANT AND EQUIPMENT:
At original cost property, plant and
equipment.................................... $ 8,243,825 -- $ 8,243,825
Less: Accumulated depreciation and
amortization................................. (2,976,531) -- (2,976,531)
----------- -------- -----------
Total Property, Plant and
Equipment -- Net...................... $ 5,267,294 -- $ 5,267,294
OTHER NON-CURRENT ASSETS:
Regulatory assets............................... $ 551,674 -- $ 551,674
Unamortized loss on reacquired debt............. 52,440 -- 52,440
Other........................................... 39,128 -- 39,128
----------- -------- -----------
Total Other Non-Current Assets.......... $ 643,242 -- $ 643,242
----------- -------- -----------
Total Assets.......................... $ 6,617,585 -- $ 6,617,585
----------- -------- -----------
</TABLE>
63
<PAGE> 78
APS
RECLASSIFYING BALANCE SHEET (d)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Current maturities and sinking fund
requirements................................... $ -- $ 95,400 $ 95,400
Short-term debt................................... 133,746 -- 133,746
Long-term debt due within one year................ 95,400 (95,400) --
Accounts payable.................................. 123,745 -- 123,745
Taxes accrued:
Federal and state income tax................... 46,182 -- 46,182
Other.......................................... 41,909 -- 41,909
Interest accrued.................................. 43,441 -- 43,441
Deferred power costs.............................. 23,937 -- 23,937
Restructuring liability........................... 39,296 -- 39,296
Other............................................. 69,674 -- 69,674
--------- ------- ---------
Total Current Liabilities................. $ 617,330 $ -- $ 617,330
NON-CURRENT LIABILITIES:
Deferred income taxes -- net...................... $ 1,013,995 $ -- $ 1,013,995
Deferred investment tax credit.................... -- 139,468 139,468
Capital lease obligations......................... -- 3,781 3,781
Unamortized investment credit..................... 139,468 (139,468) --
Regulatory liabilities............................ 92,093 -- 92,093
Other............................................. 75,176 (3,781) 71,395
--------- ------- ---------
Total Non-Current Liabilities............. $ 1,320,732 $ -- $ 1,320,732
COMMITMENTS AND CONTINGENCIES....................... -- -- --
CAPITALIZATION:
LONG-TERM DEBT AND QUIDS............................ $ 2,307,107 -- $ 2,307,107
PREFERRED STOCK..................................... 170,086 -- 170,086
COMMON STOCKHOLDERS' EQUITY:
Common stock...................................... 152,639 -- 152,639
Other paid-in capital............................. 1,035,825 -- 1,035,825
Retained earnings................................. 1,013,866 -- 1,013,866
--------- ------- ---------
Total Common Stockholders' Equity......... $ 2,202,330 -- $ 2,202,330
--------- ------- ---------
Total Capitalization...................... $ 4,679,523 -- $ 4,679,523
--------- ------- ---------
Total Liabilities and Capitalization.... $ 6,617,585 $ -- $ 6,617,585
========= ======= =========
</TABLE>
64
<PAGE> 79
APS
RECLASSIFYING INCOME STATEMENT (d)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential......................................... $257,913 $ -- $257,913
Commercial.......................................... 123,886 -- 123,886
Industrial.......................................... 182,270 -- 182,270
Wholesale and other................................. 20,235 (295) 19,940
Bulk power transactions, net........................ 30,676 (11,993) 18,683
--------- -------- ---------
Total Sales of Electricity.................. 614,980 (12,288) 602,692
Other............................................... -- 12,288 12,288
--------- -------- ---------
Total Operating Revenues.................... $614,980 $ -- $614,980
OPERATING EXPENSES
Fuel................................................ $140,465 $(140,465) $ --
Purchased power..................................... 50,583 (50,583) --
Fuel and purchased power............................ 140,465 191,048
50,583
Other operating..................................... 72,825 -- 72,825
Maintenance......................................... 61,480 -- 61,480
Deferred power costs, net........................... (2,083) -- (2,083)
Depreciation and amortization....................... 68,782 -- 68,782
Taxes other than income............................. 48,656 -- 48,656
Federal and state income taxes...................... 50,178 (50,178) --
--------- -------- ---------
Total Operating Expenses.................... $490,886 $ (50,178) $440,708
OPERATING INCOME...................................... $124,094 $ 50,178 $174,272
Other income, net................................... 896 906 1,802
Allowance for other than borrowed funds used during
construction..................................... 1,150 (1,150) --
--------- -------- ---------
Total Other Income and Deductions........... 2,046 (244) 1,802
--------- -------- ---------
Interest and other charges.......................... -- 48,549 48,549
Interest on long term debt.......................... 43,380 (43,380) --
Other interest...................................... 3,833 (3,833) --
Allowance for borrowed funds used during
construction..................................... (965) 965 --
Dividends on preferred stock of subsidiaries........ 2,301 (2,301) --
--------- -------- ---------
Total Interest Charges and Preferred
Dividends................................. 48,549 -- 48,549
--------- -------- ---------
Income before income taxes.......................... 77,591 49,934 127,525
Income taxes........................................ -- 49,934 49,934
--------- -------- ---------
Net Income.................................. $ 77,591 $ -- $ 77,591
========= ======== =========
</TABLE>
65
<PAGE> 80
APS
RECLASSIFYING INCOME STATEMENT (D)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential....................................... $ 932,235 -- $ 932,235
Commercial........................................ 492,726 -- 492,726
Industrial........................................ 752,905 -- 752,905
Wholesale and other............................... 74,260 -- 74,260
Bulk power transactions, net...................... 75,523 $ (733) 74,790
--------- -------- ---------
Total Sales of Electricity................ 2,327,649 (733) 2,326,916
Other............................................. -- 2,068 2,068
--------- -------- ---------
Total Operating Revenues.................. $ 2,327,649 $ 1,335 $ 2,328,984
OPERATING EXPENSES
Fuel.............................................. $ 513,210 $ (513,210) $ --
Purchased power................................... 184,357 (184,357) --
Fuel and purchased power.......................... -- 513,210 698,902
184,357
1,335
Other operating................................... 299,817 -- 299,817
Maintenance....................................... 243,314 -- 243,314
Deferred power costs, net......................... 15,621 -- 15,621
Restructuring charges and asset write-off......... 103,865 -- 103,865
Depreciation and amortization..................... 263,246 -- 263,246
Taxes other than income........................... 185,373 -- 185,373
Federal and state income taxes.................... 127,992 (127,992) --
--------- -------- ---------
Total Operating Expenses.................. $ 1,936,795 $ (126,657) $ 1,810,138
OPERATING INCOME.................................... $ 390,854 $ 127,992 $ 518,846
Allowance for other than borrowed funds used
during construction............................ 3,157 (3,157) --
Other income, net................................. 4,370 5,512 9,882
--------- -------- ---------
Total Other Income and Deductions......... 7,527 2,355 9,882
--------- -------- ---------
Interest and other charges........................ -- 188,334 188,334
Interest on long term debt........................ 166,387 (166,387) --
Other interest.................................... 15,398 (15,398) --
Allowance for borrowed funds used during
construction................................... (2,731) 2,731 --
Dividends on preferred stock of subsidiaries...... 9,280 (9,280) --
--------- -------- ---------
Total Interest Charges and Preferred
Dividends............................... 188,334 -- 188,334
--------- -------- ---------
Income before income taxes........................ 210,047 130,347 340,394
Income taxes...................................... -- 130,347 130,347
--------- -------- ---------
Net Income................................ $ 210,047 $ -- $ 210,047
========= ======== =========
</TABLE>
66
<PAGE> 81
APS
RECLASSIFYING INCOME STATEMENT (D)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
---------- ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential....................................... $ 926,966 -- $ 926,966
Commercial........................................ 493,696 -- 493,696
Industrial........................................ 770,251 -- 770,251
Wholesale and other............................... 66,147 -- 66,147
Bulk power transactions, net...................... 58,151 -- 58,151
---------- --------- ----------
Total Sales of Electricity................ 2,315,211 -- 2,315,211
Other............................................. -- -- --
---------- --------- ----------
Total Operating Revenues.................. $2,315,211 -- $ 2,315,211
OPERATING EXPENSES
Fuel.............................................. $ 508,533 (508,533) $ --
Purchased power................................... 178,103 (178,103) --
Fuel and purchased power.......................... -- 508,533 686,636
178,103
Other operating................................... 290,501 -- 290,501
Maintenance....................................... 249,477 -- 249,477
Deferred power costs, net......................... 47,796 -- 47,796
Restructuring charges and asset write-off......... 23,440 -- 23,440
Depreciation and amortization..................... 256,316 -- 256,316
Taxes other than income........................... 184,729 -- 184,729
Federal and state income taxes.................... 154,203 $(154,203) --
---------- --------- ----------
Total Operating Expenses.................. $1,893,098 $(154,203) $ 1,738,895
OPERATING INCOME.................................... $ 422,113 $ 154,203 $ 576,316
Allowance for other than borrowed funds used
during construction............................ 4,473 (4,473) --
Other income, net................................. 6,224 7,146 13,370
---------- --------- ----------
Total Other Income and Deductions......... 10,697 2,673 13,370
---------- --------- ----------
Interest and other charges........................ -- 193,118 193,118
Interest on long term debt........................ 167,199 (167,199) --
Other interest.................................... 14,417 (14,417) --
Allowance for borrowed funds used during
construction................................... (3,713) 3,713 --
Dividends on preferred stock of subsidiaries...... 15,215 (15,215) --
---------- --------- ----------
Total Interest Charges and Preferred
Dividends............................... 193,118 -- 193,118
---------- --------- ----------
Income before income taxes........................ 239,692 156,876 396,568
Income taxes...................................... -- 156,876 156,876
---------- --------- ----------
Net Income................................ $ 239,692 $ -- $ 239,692
========== ========= ==========
</TABLE>
67
<PAGE> 82
APS
RECLASSIFYING INCOME STATEMENT (d)
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
APS RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential....................................... $ 863,725 -- $ 863,725
Commercial........................................ 459,303 -- 459,303
Industrial........................................ 728,009 -- 728,009
Wholesale and other............................... 65,795 -- 65,795
Bulk power transactions, net...................... 67,797 -- 67,797
---------- -------- ----------
Total Sales of Electricity................ 2,184,629 -- 2,184,629
Other............................................. -- -- --
---------- -------- ----------
Total Operating Revenues.................. $ 2,184,629 -- $ 2,184,629
OPERATING EXPENSES
Fuel.............................................. $ 547,241 (547,241) $ --
Purchased power................................... 173,825 (173,825) --
Fuel and purchased power.......................... -- 547,241 721,066
173,825
Other operating................................... 285,007 -- 285,007
Maintenance....................................... 241,913 -- 241,913
Deferred power costs, net......................... 11,805 -- 11,805
Restructuring charges and asset write-off......... 9,178 -- 9,178
Depreciation and amortization..................... 223,883 -- 223,883
Taxes other than income........................... 183,060 -- 183,060
Federal and state income taxes.................... 125,913 $(125,913) --
---------- -------- ----------
Total Operating Expenses.................. $ 1,801,825 $(125,913) $ 1,675,912
OPERATING INCOME.................................... $ 382,804 $ 125,913 $ 508,717
Allowance for other than borrowed funds used
during construction............................ 11,966 (11,966) --
Other income, net................................. 1,509 41,633 43,142
---------- -------- ----------
Total Other Income and Deductions......... 13,475 29,667 43,142
---------- -------- ----------
Interest and other charges........................ -- 176,528 176,528
Interest on long term debt........................ 153,668 (153,668) --
Other interest.................................... 10,394 (10,394) --
Allowance for borrowed funds used during
construction................................... (7,630) 7,630 --
Dividends on preferred stock of subsidiaries...... 20,096 (20,096) --
---------- -------- ----------
Total Interest Charges and Preferred
Dividends............................... 176,528 -- 176,528
---------- -------- ----------
Income before income taxes and cumulative effect
of accounting change........................... 219,751 155,580 375,331
Income taxes...................................... -- 155,580 155,580
---------- -------- ----------
Income before cumulative effect of accounting
change......................................... 219,751 -- 219,751
Cumulative effect of accounting change, net....... 43,446 -- 43,446
---------- -------- ----------
Net Income................................ $ 263,197 $ -- $ 263,197
========== ======== ==========
</TABLE>
68
<PAGE> 83
DQE
RECLASSIFYING BALANCE SHEET (D)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
----------- ----------------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments............. $ 386,857 -- $ 386,857
Receivables:
Electric customer accounts receivable, net... 97,655 (19,869) 77,786
Other utility receivables.................... 16,534 (16,534) --
Other receivables............................ 34,465 16,534 50,999
Less: Allowance for uncollectible accounts... (19,869) 19,869 --
----------- ----------- -----------
Total Receivables -- Net................ 128,785 -- 128,785
Materials and supplies (at average cost):
Coal/Fuel.................................... 19,114 -- 19,114
Operating and construction................... 51,778 -- 51,778
----------- ----------- -----------
Total Materials and Supplies............ 70,892 -- 70,892
Prepaid taxes................................... -- 468 468
Other current assets............................ 8,430 (1,800) 6,630
----------- ----------- -----------
Total Current Assets.................... $ 594,964 $ (1,332) $ 593,632
LONG-TERM INVESTMENTS:
Benefit plans' investments...................... $ -- $ 1,332 $ 1,332
Affordable housing.............................. 155,662 -- 155,662
Leveraged leases................................ 193,654 -- 193,654
Other leases.................................... 87,119 -- 87,119
Gas reserves.................................... 77,855 -- 77,855
Other investments............................... 61,209 -- 61,209
----------- ----------- -----------
Total Long-Term Investments............. $ 575,499 $ 1,332 $ 576,831
PROPERTY, PLANT AND EQUIPMENT:
At original cost Property, plant and
equipment.................................... $ -- $ 4,799,655 $ 4,799,655
Electric plant in service....................... 4,285,761 (4,285,761) --
Construction work in progress................... 44,340 (44,340) --
Property held under capital leases.............. 100,036 (100,036) --
Property held for future use.................... 190,824 (190,824) --
Other........................................... 178,694 (178,694) --
----------- ----------- -----------
Gross property, plant and equipment............. $ 4,799,655 $ -- $ 4,799,655
Less: Accumulated depreciation and
amortization................................. (2,018,710) -- (2,018,710)
----------- ----------- -----------
Total Property, Plant and
Equipment -- Net...................... $ 2,780,945 $ -- $ 2,780,945
OTHER NON-CURRENT ASSETS:
Regulatory assets............................... $ 625,226 $ (83,867) $ 541,359
Unamortized loss reacquired debt................ -- 83,867 83,867
Other........................................... 45,948 -- 45,948
----------- ----------- -----------
Total Other Non-Current Assets.......... $ 671,174 $ -- $ 671,174
----------- ----------- -----------
Total Assets.......................... $ 4,622,582 $ -- $ 4,622,582
=========== =========== ===========
</TABLE>
69
<PAGE> 84
DQE
RECLASSIFYING BALANCE SHEET (D)
AT MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
---------- ----------------- ------------
<S> <C> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Notes payable..................................... $ 930 $ (930) $ --
Current maturities and sinking fund
requirements................................... 107,146 -- 107,146
Short term debt................................... -- 930 930
Accounts payable.................................. 80,626 (6,707) 73,919
Accrued liabilities............................... 41,124 (13,435) 27,689
Dividends declared................................ 28,709 -- 28,709
Taxes accrued:
Federal and state income tax................... -- (7,102) (7,102)
Other.......................................... -- 694 694
Interest accrued.................................. -- 26,550 26,550
Deferred power costs.............................. -- 1,903 1,903
Other............................................. 2,852 (1,903) 949
--------- -------- ---------
Total Current Liabilities................. $ 261,387 $ -- $ 261,387
NON-CURRENT LIABILITIES:
Deferred income taxes -- net...................... $ 768,258 $ -- $ 768,258
Deferred investment tax credits................... 104,096 -- 104,096
Capital lease obligations......................... 24,150 -- 24,150
Deferred income................................... 180,835 -- 180,835
Other............................................. 248,687 -- 248,687
--------- -------- ---------
Total Non-Current Liabilities............. $1,326,026 $ -- $ 1,326,026
COMMITMENTS AND CONTINGENCIES....................... -- -- --
CAPITALIZATION:
LONG-TERM DEBT AND QUIDS............................ $1,402,286 $ -- $ 1,402,286
PREFERRED AND PREFERENCE STOCK OF SUBSIDIARIES:
Preferred and preference stock.................... -- 242,605 242,605
Non-redeemable preferred stock.................... 213,608 (213,608) --
Non-redeemable preference stock................... 28,997 (28,997) --
--------- -------- ---------
Total preferred and preference stock before
deferred employee stock ownership plan (ESOP)
benefit........................................ 242,605 -- 242,605
Deferred ESOP benefit............................. (18,931) -- (18,931)
--------- -------- ---------
Total Preferred and Preference Stock of
Subsidiaries............................ $ 223,674 $ -- $ 223,674
COMMON STOCKHOLDERS' EQUITY:
Common stock...................................... $ 987,413 $(987,413) $ --
Other paid-in capital............................. -- 987,413 987,413
Retained earnings................................. 796,429 -- 796,429
Treasury stock (at cost) (32,318,774 shares)...... (374,633) -- (374,633)
--------- -------- ---------
Total Common Stockholders' Equity......... $1,409,209 $ -- $ 1,409,209
--------- -------- ---------
Total Capitalization...................... $3,035,169 $ -- $ 3,035,169
--------- -------- ---------
Total Liabilities and Capitalization.... $4,622,582 $ -- $ 4,622,582
========= ======== =========
</TABLE>
70
<PAGE> 85
DQE
RECLASSIFYING INCOME STATEMENT(D)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential....................................... $ 104,356 $ (34) $ 104,322
Commercial........................................ 114,781 (258) 114,523
Industrial........................................ 47,631 (34) 47,597
Provision for doubtful accounts (2,750) 2,750 --
Wholesale and other............................... -- 202 202
Bulk power transactions, net...................... -- 8,731 8,731
---------- ------- ----------
Customer Revenues......................... 264,018 11,357 275,375
Electricity sales to other utilities.............. 8,731 (8,731) --
---------- ------- ----------
Total sales of electricity................ 272,749 2,626 275,375
Other............................................. 29,335 (3,779) 25,556
---------- ------- ----------
Total Operating Revenues.................. $ 302,084 $ (1,153) $ 300,931
OPERATING EXPENSES
Fuel and purchased power.......................... $ 51,654 $ -- $ 51,654
Other operating................................... 81,632 (1,029) 80,603
Maintenance....................................... 17,749 -- 17,749
Deferred power costs, net......................... -- (124) (124)
Depreciation and amortization..................... 55,174 -- 55,174
Taxes other than income........................... 20,558 -- 20,558
---------- ------- ----------
Total Operating Expenses.................. $ 226,767 $ (1,153) $ 225,614
OPERATING INCOME.................................... $ 75,317 $ -- $ 75,317
Other income, net................................. 20,001 -- 20,001
Interest and other charges........................ 28,680 -- 28,680
---------- ------- ----------
Income before income taxes........................ 66,638 -- 66,638
Income taxes...................................... 21,541 -- 21,541
---------- ------- ----------
Net Income................................ $ 45,097 $ -- $ 45,097
========== ======= ==========
</TABLE>
71
<PAGE> 86
DQE
RECLASSIFYING INCOME STATEMENT(D)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential....................................... $ 405,392 $ (1,209) $ 404,183
Commercial........................................ 489,646 (2,980) 486,666
Industrial........................................ 190,723 (1,196) 189,527
Provision for doubtful accounts................... (10,582) 10,582 --
Wholesale and other............................... -- 857 857
Bulk power transactions, net...................... -- 58,046 58,046
---------- ------- ----------
Customer Revenues......................... 1,075,179 64,100 1,139,279
Electricity sales to other utilities.............. 58,292 (58,292) --
---------- ------- ----------
Total sales of electricity................ 1,133,471 5,808 1,139,279
Other............................................. 91,724 (17,730) 73,994
---------- ------- ----------
Total Operating Revenues.................. $ 1,225,195 $ (11,922) $ 1,213,273
OPERATING EXPENSES
Fuel and purchased power.......................... $ 236,924 $ (246) $ 236,678
Other operating................................... 298,977 (7,148) 291,829
Maintenance....................................... 78,386 -- 78,386
Deferred power costs, net......................... -- (4,528) (4,528)
Depreciation and amortization..................... 222,928 -- 222,928
Taxes other than income........................... 85,974 -- 85,974
---------- ------- ----------
Total Operating Expenses.................. $ 923,189 $ (11,922) $ 911,267
OPERATING INCOME.................................... $ 302,006 $ -- $ 302,006
Other income, net................................. 74,790 -- 74,790
Interest and other charges........................ 110,270 -- 110,270
---------- ------- ----------
Income before income taxes........................ 266,526 -- 266,526
Income taxes...................................... 87,388 -- 87,388
---------- ------- ----------
Net Income................................ $ 179,138 $ -- $ 179,138
========== ======= ==========
</TABLE>
72
<PAGE> 87
DQE
RECLASSIFYING INCOME STATEMENT (D)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential......................................... $ 414,291 $ 1,655 $ 415,946
Commercial.......................................... 491,789 1,991 493,780
Industrial.......................................... 190,689 1,585 192,274
Provision for doubtful accounts..................... (13,430) 13,430 --
Wholesale and other................................. -- 855 855
Bulk power transactions, net........................ -- 51,117 51,117
---------- -------- ----------
Customer Revenues........................... 1,083,339 70,633 1,153,972
Electricity sales to other utilities................ 55,963 (55,963) --
---------- -------- ----------
Total Sales of Electricity.................. 1,139,302 14,670 1,153,972
Other............................................... 80,860 (15,703) 65,157
---------- -------- ----------
Total Operating Revenues.................... $ 1,220,162 $ (1,033) $ 1,219,129
OPERATING EXPENSES
Fuel and purchased power............................ $ 231,968 $ (4,846) $ 227,122
Other operating..................................... 292,997 (2,273) 290,724
Maintenance......................................... 81,516 -- 81,516
Deferred power costs, net........................... -- 6,086 6,086
Depreciation and amortization....................... 202,558 -- 202,558
Taxes other than income............................. 88,658 -- 88,658
---------- -------- ----------
Total Operating Expenses.................... $ 897,697 $ (1,033) $ 896,664
OPERATING INCOME...................................... $ 322,465 $ -- $ 322,465
Other income, net................................... 52,314 -- 52,314
Interest and other charges.......................... 107,555 -- 107,555
---------- -------- ----------
Income before income taxes.......................... 267,224 -- 267,224
Income taxes........................................ 96,661 -- 96,661
---------- -------- ----------
Net Income.................................. $ 170,563 $ -- $ 170,563
========== ======== ==========
</TABLE>
73
<PAGE> 88
DQE
RECLASSIFYING INCOME STATEMENT (D)
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF $)
<TABLE>
<CAPTION>
DQE RECLASSIFIED
(HISTORICAL) RECLASSIFICATIONS BALANCE
------------ ----------------- ------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Electricity:
Residential........................................... $ 401,246 $ (3,270) $ 397,976
Commercial............................................ 490,309 (6,111) 484,198
Industrial............................................ 195,852 (2,754) 193,098
Provision for doubtful accounts....................... (11,890) 11,890 --
Wholesale and other................................... -- 845 845
Bulk power transactions, net.......................... -- 57,732 57,732
---------- ---------- ----------
Customer Revenues............................. 1,075,517 58,332 1,133,849
Electricity sales to other utilities.................. 58,295 (58,295) --
---------- ---------- ----------
Total Sales of Electricity.................... 1,133,812 37 1,133,849
Other................................................. 90,098 (11,403) 78,695
---------- ---------- ----------
Total Operating Revenues...................... $ 1,223,910 $ (11,366) $ 1,212,544
OPERATING EXPENSES
Fuel and purchased power.............................. $ 244,135 $ (563) $ 243,572
Other operating....................................... 329,177 487 329,664
Maintenance........................................... 79,488 -- 79,488
Deferred power costs, net............................. -- (11,290) (11,290)
Depreciation and amortization......................... 165,912 -- 165,912
Taxes other than income............................... 88,331 -- 88,331
---------- ---------- ----------
Total Operating Expenses...................... $ 907,043 $ (11,366) $ 895,677
OPERATING INCOME........................................ $ 316,867 $ -- $ 316,867
Other income, net..................................... 42,924 -- 42,924
Interest and other charges............................ 110,002 -- 110,002
---------- ---------- ----------
Income before income taxes............................ 249,789 -- 249,789
Income taxes.......................................... 92,973...... -- 92,973
---------- ---------- ----------
Net Income.................................... $ 156,816 $ -- $ 156,816
========== ========== ==========
</TABLE>
74
<PAGE> 89
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(a) Represents the effect of recording unbilled revenue by DQE. APS changed its
method of accounting for unbilled revenue in 1994.
(b) Represents the effect of accruing for nuclear refueling outages by DQE
during the periods leading up to the outage. DQE, historically, would defer
the costs incurred and amortize them during the period(s) between outages.
(c) Represents the effect of accruing for major turbine-generator inspection
outages by APS during the periods leading up to the outage. APS,
historically, has recorded such cost as incurred. APS believes accruing for
such outages during the periods leading up to the outage is preferable to
recording such cost as incurred and is consistent with DQE's method of
accounting for such costs. The effect of the adjustment for the three months
ended March 31, 1997, was not material and, accordingly, no pro forma
adjustments were made to eliminate such transactions.
(d) The revenues, expenses, assets, liabilities and equity of APS and DQE have
been reclassified where appropriate to conform to the presentation expected
to be used by the combined company in the future.
(e) Intercompany transactions between APS and DQE during the periods presented
were not material and, accordingly, no pro forma adjustments were made to
eliminate such transactions.
(f) The allocation between APS and DQE and their customers of the estimated cost
savings resulting from the Merger, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Transaction
costs are estimated to be approximately $ million (including fees for
financial advisors, attorneys, accountants, consultants, filings and
printing). None of these estimated cost savings, the costs to achieve such
savings or transaction costs have been reflected in the pro forma financial
statements.
(g) Represents the reversal of the cumulative effect of adopting unbilled
revenues by APS in 1994. All periods presented include the impact of
unbilled revenues.
(h) APS expects, but cannot assure, that the dividend rate of $1.72 per share
will be maintained or increased following the Merger. See "Dividends."
75
<PAGE> 90
DESCRIPTION OF APS CAPITAL STOCK
The following description of certain terms of the stock of APS does not
purport to be complete and is qualified in its entirety by reference to the APS
Charter incorporated herein by reference.
The authorized stock of APS currently consists of 260,000,000 authorized
shares of APS Common Stock. As of , 1997, there were outstanding
shares of APS Common Stock.
APS COMMON STOCK
Except in connection with elections to the APS Board, the holders of APS
Common Stock are entitled to one vote per share for each share held of record on
matters voted on by stockholders and are entitled to participate equally in
dividends when and as such dividends may be authorized by the APS Board out of
assets legally available therefor. The APS Charter provides for cumulative
voting in the election of directors, whereby each stockholder entitled to vote
for the election of directors is entitled to the number of votes equal to the
number of shares of such stock held by him multiplied by the number of directors
to be elected, and such votes may be cast for a single director or may be
distributed among any two or more of the directors standing for election. As a
Maryland corporation, APS is subject to statutory limitations on the
authorization and payment of dividends. In the event of a liquidation,
dissolution or winding up of APS, holders of APS Common Stock have the right to
a ratable portion of assets remaining after satisfaction in full of the prior
rights of creditors, including holders of APS' indebtedness, all liabilities and
the aggregate liquidation preferences of any outstanding shares of APS Preferred
Stock. The holders of APS Common Stock have no conversion or redemption rights.
If the APS Board authorizes the issuances of new or additional shares of APS
Common Stock, or any security convertible into APS Common Stock, for money and
other than by a public offering of all such shares, or through underwriters or
investment bankers who shall have agreed promptly to make a public offering of
such shares, such new shares must first be offered pro rata to the then
outstanding shares of APS Common Stock upon terms no less favorable to the
purchaser than those offered to persons other than the holders of APS Common
Stock. The period of time during which such pre-emptive rights may be exercised
may be limited by the APS Board, but in no event for a period of time less than
10 days after the mailing of the notice announcing the availability of such
rights. All outstanding shares of APS Common Stock are, and the shares of APS
Common Stock to be issued in the Merger will be, validly issued, fully paid and
non-assessable. As of , there were holders of record of
APS Common Stock.
Transfer Agent
The transfer agent and registrar for APS Common Stock is ChaseMellon
Shareholder Services, L.L.C.
COMPARISON OF CERTAIN RIGHTS OF THE HOLDERS
OF APS COMMON STOCK AND DQE COMMON STOCK
GENERAL
As a result of the Merger, holders of DQE Common Stock will become holders
of APS Common Stock and the rights of all such former holders of DQE Common
Stock will thereafter be governed by the APS Charter, the APS Bylaws and the
MGCL. The rights of the holders of DQE Common Stock are presently governed by
the DQE Articles, the DQE Bylaws and the PBCL. The following summary, which does
not purport to be a complete statement of the material differences in the rights
of the stockholders of DQE and APS, sets forth certain differences between the
MGCL and the PBCL, between the APS Charter and the DQE Articles and between the
APS Bylaws and the DQE Bylaws. This summary is qualified in its entirety by
reference to the full text of each of such documents, the MGCL and the PBCL. For
information as to how such documents may be obtained, see "Available
Information."
76
<PAGE> 91
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
APS
Except where a corporation has no outstanding stock or has fewer than three
stockholders, Section 2-402 of the MGCL provides that every corporation shall
have at least three directors, the precise number of directors to be specified
in the corporation's charter until such number is changed by the corporation's
bylaws. The APS Charter provides that the number of directors of APS may be
changed from time to time in the manner provided by the APS Bylaws. The APS
Bylaws provide that the number of directors of APS may be changed from time to
time by the APS Board, but in no event will the APS Board be composed of more
than 15 members or less than three members. As of the date of this Joint Proxy
Statement/Prospectus, APS has ten directors. At the Effective Time, the APS
Board will be composed of 15 members.
All of the directors of APS serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
DQE
The DQE Articles provide that the number of directors of DQE will be
determined from time to time by the DQE Board by a resolution adopted by a
majority vote of the Disinterested Directors (as defined below under
"-- Election and Removal of Directors; Filling of Vacancies on the Board of
Directors -- DQE").
The DQE Articles also provide that the DQE Board is divided into three
classes, with each director serving for a term of three years. Each year, the
term of one class of the DQE Board expires. As of the date of this Joint Proxy
Statement/Prospectus, DQE has nine directors, of whom four had been elected for
terms expiring in 1997, three had been elected for terms expiring in 1998, and
two had been elected for terms expiring in 1999.
ELECTION AND REMOVAL OF DIRECTORS; FILLING OF VACANCIES ON THE BOARD OF
DIRECTORS
APS
The APS Charter provides for cumulative voting in the election of
directors, whereby each stockholder entitled to vote in the election of
directors is entitled to the number of votes equal to the number of shares of
such stock held by him multiplied by the number of directors to be elected, and
such votes may be cast for a single director or may be distributed among any two
or more of the directors standing for election.
Pursuant to Section 2-406 of the MGCL, subject to certain restrictions,
stockholders may remove directors either with or without cause by the
affirmative vote of a majority of all the votes entitled to be cast in the
election of directors. However, if a corporation has cumulative voting for the
election of directors, and less than the entire board of directors is removed, a
director may not be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire board of directors. Pursuant to Section 2-407 of the MGCL,
stockholders of a corporation may elect a successor to fill a vacancy on a board
resulting from the removal of a director. As provided in the APS Bylaws,
vacancies, except for vacancies caused by an increase in the number of
directors, may be filled by a majority of the remaining directors, whether or
not sufficient to constitute a quorum; vacancies resulting from an increase in
the number of directors may be filled by a majority of the APS Board. Under the
MGCL, a director elected by a board of directors serves until the next annual
meeting of stockholders and until a successor is elected and qualifies.
DQE
Section 1758(c) of the PBCL provides for cumulative voting in the election
of directors.
Section 1726 of the PBCL provides that, unless otherwise provided in a
bylaw adopted by a corporation's stockholders, any director or all of the
directors of a corporation may be removed from office without cause by the vote
of the stockholders entitled to elect directors, unless the board of directors
is classified and such classification was effected by a bylaw adopted by the
stockholders. The PBCL provides that, unless a
77
<PAGE> 92
corporation's articles provide otherwise, if the board of directors is so
classified -- as is the DQE Board -- any director or all of the directors may be
removed from office only for cause by a vote of the stockholders entitled to
vote thereon. Stockholders may also remove the entire board of directors by the
unanimous consent or vote of stockholders entitled to vote in such matter.
Pursuant to the DQE Articles, so long as removal without cause is permitted
under the PBCL, any director, any class of directors, or the entire DQE Board
may be removed from office without cause only if stockholders entitled to cast
at least 80% of the votes which all stockholders would be entitled to cast at an
annual election of directors vote in favor of such removal. The DQE Articles
also provide that, if the power to remove without cause is not mandated by
statute, directors may be removed from office only for cause and only if such
removal is approved by the affirmative vote of at least a majority of the voting
power of the outstanding shares of capital stock of DQE entitled to vote
generally in an annual election of the directors of DQE ("DQE Voting Stock")
which are not beneficially owned by any person or entity (other than DQE or a
subsidiary (as defined in the DQE Articles) or an employee benefit plan of DQE
or a subsidiary) that is the beneficial owner, directly or indirectly, of 10% of
the voting power of the outstanding DQE Voting Stock (a "DQE Interested
Stockholder").
Pursuant to Section 1726 of the PBCL, unless otherwise provided in a bylaw
adopted by the stockholders, a board of directors may remove any director who
has been convicted of an offense punishable by imprisonment for a term of more
than one year or been judicially declared of unsound mind, or for any other
proper cause enumerated in a corporation's bylaws. The DQE Bylaws do not state
any such cause. Section 1726 further allows any stockholder or director to
petition a court to remove one or more directors for reasons of fraudulent or
dishonest acts, for gross abuse of authority or discretion with respect to the
corporation or for any other proper cause.
Under Section 1725 of the PBCL, except as otherwise provided in a
corporation's bylaws, vacancies on a corporation's board of directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority of the remaining directors, although less than a quorum, or by a
sole remaining director, and any such person so selected will be a director and
serve for the balance of the unexpired term, unless the corporation's bylaws
provide otherwise.
The DQE Bylaws provide that vacancies in the DQE Board will be filled in
the manner provided in the DQE Articles, which state that a vacancy may be
filled only by a majority vote of the Disinterested Directors then in office,
even if less than a quorum, and provide that all such directors elected to fill
vacancies shall hold office for the remainder of the term for the class of
directors to which they have been elected.
A "Disinterested Director" is defined in the DQE Articles to mean a
director of DQE who is not a DQE Interested Stockholder or an affiliate,
associate or representative of a DQE Interested Stockholder and either (i) was a
director of DQE immediately prior to the time the DQE Interested Stockholder
attained such status or (ii) is a successor to a Disinterested Director and is
recommended or elected to succeed a Disinterested Director by a majority of the
Disinterested Directors.
DUTIES OF DIRECTORS
APS
Section 2-405.1 of the MGCL requires a director of a Maryland corporation
to perform his duties in good faith, in a manner he reasonably believes to be in
the best interests of the corporation, and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. A
director in performing his duties is entitled to rely on any information,
opinion, report or statement prepared or presented by: (i) an officer or
employee of the corporation whom the director reasonably believes to be
competent in the matter presented, (ii) a lawyer, public accountant, or other
person, as to matters the director reasonably believes to be within that
person's professional competence, or (iii) a committee of the corporation's
board on which the director does not serve as to a matter within its designated
authority, if the director reasonably believes the committee to merit
confidence.
78
<PAGE> 93
DQE
In discharging their fiduciary duties, the directors of a corporation
individually, committees of the board, and the board of directors as a whole
may, pursuant to Section 1715 of the PBCL, in considering the best interests of
the corporation, consider to the extent they deem appropriate: (i) the effects
of any action on the corporation's shareholders, employees, suppliers,
customers, creditors and the communities in which the corporation is located,
(ii) the short-term and the long-term interests of the corporation and the
possibility that such interests may be best served by the independence of the
corporation, (iii) the resources, intent and conduct (past, stated and
potential) of any person seeking to acquire control of the corporation, and (iv)
all other pertinent factors. Section 1715 further relieves the board of
directors from any duty to regard any interest (including any corporate
interest) as dominating or controlling, and explicitly states that the board of
directors need not render inapplicable or make a determination under the
provisions of the PBCL relating to (i) control acquisitions, (ii) business
combinations, (iii) control share acquisitions, or (iv) disgorgement following
attempts to acquire control of the corporation. With respect to an acquisition
or potential or proposed acquisition for control of a corporation, Section 1715
explicitly states that actions by directors are subject to the same standard of
conduct for directors that is applicable to all other conduct, and also
establishes a presumption that actions with respect to an acquisition, or a
potential or proposed acquisition of control, to which a majority of
disinterested directors shall have assented, satisfy the directors' standards of
care under the PBCL unless it is proved by clear and convincing evidence that
the "disinterested directors" (as defined in the PBCL) did not assent to such
action in good faith after reasonable investigation.
MEETINGS OF STOCKHOLDERS
APS
Pursuant to the APS Bylaws, special meetings of the stockholders may be
called for any purpose by the Chairman of the APS Board, the President, the APS
Board or the Executive Committee of the APS Board, and must be called by APS'
Secretary, President or any director at the written request of stockholders
holding a majority of the issued and outstanding stock of APS entitled to vote
at the meeting. Any request by the stockholders must state the purpose or
purposes of the meeting. On June 5, 1997, the APS Bylaws were amended to provide
that unless the APS Board or the Executive Committee of the APS Board determine
otherwise, the business of any special meeting will be limited to the purpose or
purposes for which such special meeting is called, and no other proposals or
matters will be considered. The APS Charter and the APS Bylaws both provide that
a quorum consists of the presence, in person or by proxy, of a majority of the
issued and outstanding shares entitled to vote at the meeting, except as
otherwise provided by law or the APS Bylaws. The APS Charter provides that,
notwithstanding any other provision of law requiring action to be taken or
authorized by the affirmative vote of the holders of a majority or other
designated proportion of the shares of APS, action taken by APS will be valid if
taken or authorized by the affirmative vote of the holders of a majority of the
total number of shares outstanding and entitled to vote thereon.
DQE
Section 1755 of the PBCL allows special meetings of shareholders to be
called at any time by the board of directors, by shareholders entitled to cast
at least 20% of the votes that all shareholders are entitled to cast at such
special meeting (unless the corporation's articles of incorporation provide
otherwise) or by such officers or other persons as may be authorized by the
corporation's bylaws. The DQE Bylaws provide that special meetings of the
stockholders may be called at any time by the Chairman of the DQE Board, the
President or by the DQE Board, and (to the extent permitted by the PBCL) shall
be called at the written request of stockholders owning at least 20% of the
shares of DQE capital stock entitled to be voted at the meeting (which request
shall state the purpose of the proposed meeting). Other than as provided in
Section 1755 of the PBCL, under Section 2521 of the PBCL, the stockholders, with
the exception of an "interested stockholder" (as that term is defined in Section
2553 of the PBCL with respect to meetings the purpose of which is to approve
certain business combinations), of a Registered Corporation (defined in the PBCL
generally as a domestic corporation that has a class or series of shares
entitled to vote generally in the
79
<PAGE> 94
election of directors of the corporation registered under the Exchange Act) do
not have the right to call a special meeting.
Section 1756 of the PBCL provides that, unless otherwise stated in a bylaw
adopted by the stockholders, a quorum consists of the presence of stockholders
entitled to cast at least a majority of the votes that all stockholders are
entitled to cast on a particular matter. However, pursuant to Section 2523 of
the PBCL, the board of directors of a Registered Corporation may adopt or change
a bylaw related to a quorum. The DQE Bylaws provide that the presence, either in
person or by proxy, of a majority of outstanding shares of capital stock
entitled to vote constitutes a quorum.
ACTION BY WRITTEN CONSENT
APS
Under Section 2-505 of the MGCL, stockholders may take any action required
or permitted to be taken at a meeting without a meeting only by unanimous
written consent signed by each stockholder entitled to vote on such matter and a
written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote at it. The APS Charter provides
that a change in the terms of any of the outstanding APS Common Stock may be
made upon the consent in writing, or by vote at a meeting of stockholders called
for that purpose, of the holders of a majority of the outstanding APS Common
Stock.
DQE
Under Section 2524 of the PBCL, the stockholders of a Registered
Corporation may act without a meeting by less than unanimous written consent if
such action is permitted by such corporation's articles of incorporation. The
DQE Articles provide that any action that could be taken at a meeting of
stockholders may be taken without a meeting by the written consent of
stockholders who would have been entitled to cast the minimum number of votes
that would be necessary to authorize the action at a meeting at which all
stockholders entitled to vote thereon were present and voting.
STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS OF DIRECTORS
APS
The APS Bylaws provide that stockholder proposals and nominations for
election of directors may be made at any annual or special meeting of
stockholders only if advance notice of the proposal has been timely given in
accordance with the APS Bylaws, and such proposals or nominations are otherwise
proper for consideration under applicable Law, the APS Charter and the APS
Bylaws. The APS Bylaws provide that a stockholder must deliver notice of any
proposal or the name of any person to be nominated for election as a director of
APS to APS' Corporate Secretary at APS' principal executive office not less than
60 nor more than 90 days prior to the date of the meeting. In the event that the
date of the meeting is first publicly announced or disclosed less than 70 days
prior to the date of the meeting, such notice must be given not more than ten
days after the date of the announcement or disclosure. Public notice will be
deemed to have been given more than 70 days in advance of the annual meeting of
APS if APS has previously disclosed, in the APS Bylaws or otherwise, that the
annual meeting in each year is to be held on a determinable date, unless and
until the APS Board determines to hold the meeting on a different date. With
respect to a proposal, the stockholder must deliver with the notice of the
proposal the text of the proposal to be presented, a brief written statement of
the reasons why such stockholder favors the proposal and must set forth such
stockholder's name and address, the number and class of all shares of each class
of stock of APS beneficially owned by such stockholder and any material interest
of such stockholder in the proposal (other than as a stockholder). With respect
to a nomination of a person for the APS Board, the stockholder must deliver with
the notice a written statement setting forth the name of the person to be
nominated, the number and class of all shares of each class of stock of APS
beneficially owned by such person, the information regarding such person
required by certain sections of Regulation S-K adopted by the SEC (or the
corresponding provisions of any regulation subsequently adopted by the SEC
applicable to APS), such person's signed consent to serve as a director of APS
if elected, and such stockholder's name and address and the number and class of
all shares of each class of stock of APS
80
<PAGE> 95
beneficially owned by such stockholder. The Chairman of the meeting will have
the right to determine whether such notice has been duly given and, if it has
not, may direct that proposals and nominees not be considered. For information
with respect to presenting matters at special meetings, see "-- Meetings of
Stockholders -- APS."
DQE
Pursuant to the DQE Articles, any stockholder of record entitled to vote in
an election of directors may nominate a candidate for election as a director of
DQE upon written notice of the nomination to the DQE's Corporate Secretary not
later than 120 days in advance of the meeting at which the election will be
held, such notice setting forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the stockholder is a holder of record of stock of DQE
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC, had the nominee been nominated by the
DQE Board; and (e) the consent of each nominee to serve as a director of DQE if
so elected.
AMENDMENT OF CHARTER AND BYLAWS
APS
Under Section 2-604 of the MGCL, an amendment of a corporate charter
requires a resolution by the board of directors setting forth the proposed
amendment and declaring it advisable, and approval by the stockholders of the
corporation by the affirmative vote of two-thirds of all votes entitled to vote
on the matter; unless the charter provides otherwise. The APS Charter provides
that any action by the stockholders of APS requires approval by the holders of a
majority of the outstanding shares of APS. See "-- Meetings of
Stockholders -- APS."
Section 2-109 of the MGCL provides that the power to adopt, alter and
repeal a corporation's bylaws shall be vested in the stockholders, except to the
extent that a corporation's charter or bylaws confer this power on the
corporation's board of directors. The APS Charter provides that a majority of
the APS Board has the power to make, alter and repeal the APS Bylaws, except
that the power to alter the APS Bylaws to divide the board into separate classes
having different tenures is reserved to APS' stockholders.
DQE
Under Section 1912 of the PBCL, amendments to a corporation's articles of
incorporation may be proposed for adoption either by a resolution of the board
of directors setting forth the proposal or, unless otherwise provided by the
corporation's articles of incorporation, by petition of the stockholders
entitled to cast at least 10% of the votes that all stockholders are entitled to
cast on the proposal. The right of the stockholders to propose an amendment to a
corporation's articles of incorporation does not apply to a Registered
Corporation. In either case, any proposal to amend the articles of incorporation
must be approved by the affirmative vote of a majority of the votes cast by all
stockholders entitled to vote on such proposal, unless the articles of
incorporation or the PBCL requires approval by a greater proportion of votes.
Further, if a proposed amendment would authorize a board of directors to
determine the relative rights as between series of preferred or special classes
of stock, adversely alter the preferences, limitations or special rights (other
than preemptive rights or the right to vote cumulatively) of the shares of a
class or series, authorize a new class or series of shares with a preference as
to dividends or assets senior to an existing class of shares, or increase the
number of authorized shares of any class or series having a preference as to
dividends or assets which is senior to another class or series of shares, then
the holders of the outstanding shares of the class or series shall have the
right to vote as a class in respect of the amendment, the bylaws or articles of
incorporation of the corporation
81
<PAGE> 96
notwithstanding, and the amendment must be approved by a majority of votes cast
in each such class vote. Under Section 1914 of the PBCL, stockholder approval is
not required for certain specified amendments to the articles of incorporation
that do not adversely affect the rights of stockholders.
The DQE Articles provide that, in addition to any other affirmative vote
required by applicable law, the DQE Articles or otherwise, any amendment,
alteration, change or repeal of Articles 7 and 8 of the DQE Articles (which
provide for (i) supermajority stockholder approval of certain business
combinations, and (ii) the definitions of terms used in the DQE Articles),
requires (A) the approval of at least 80% of the voting power of all then
outstanding shares of DQE Voting Stock, voting together as a single class, and
(B) the holders of at least a majority of the voting power of the then
outstanding shares of DQE Voting Stock, which are not beneficially owned by any
DQE Interested Stockholder, voting together as a single class. However, the
supermajority requirement to amend Articles 7 and 8 does not apply if a majority
of the Disinterested Directors recommends the proposed action and the
Disinterested Directors at the time of the recommendation constitute at least a
majority of the full DQE Board, exclusive of any directors elected by the
holders of any class of stock having preferences over the DQE Common Stock as to
dividends or assets.
The DQE Articles also provide that the DQE Board, by vote including a
majority of the DQE Disinterested Directors, may adopt, repeal and amend the DQE
Bylaws, except with respect to such matters as are reserved by statute to the
stockholders. Stockholders of DQE may repeal, amend and adopt the DQE Bylaws
only if, in addition to any other affirmative vote required by law, the DQE
Articles or otherwise, such action is approved by the affirmative vote of (i)
the holders of at least 80% of the voting power of all then outstanding shares
of DQE Voting Stock, voting together as a single class, and (ii) the holders of
at least a majority of the voting power of the then outstanding shares of DQE
Voting Stock which are not beneficially owned by any Interested Stockholder,
voting together as a single class. However, the supermajority requirement does
not apply if a majority of the Disinterested Directors recommends the proposed
action and the Disinterested Directors at the time of the recommendation
constitute at least a majority of the full DQE Board, exclusive of any directors
elected by the holders of any class of stock having a preference over DQE Common
Stock as to dividends or assets. The DQE Bylaws provide that, except as provided
by the DQE Articles or by statute, the power to amend the DQE Bylaws is
exclusively vested in the DQE Board.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
APS
Under Section 3-105 of the MGCL, in order for a corporation to merge,
consolidate, transfer all or substantially all of its assets or engage in a
share exchange, the corporation's board of directors must adopt a resolution
declaring that the proposed transaction is advisable on substantially the terms
and conditions set forth or referred to in such resolution and direct that the
proposed transaction be submitted for stockholder consideration at either an
annual or a special meeting of stockholders. To be approved, the proposed
transaction must receive the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter, unless the charter provides otherwise. In
certain cases (e.g. merger of a 90%-owned subsidiary into its parent), no vote
of the stockholders is required. The APS Charter requires that a merger,
consolidation, transfer of assets and share exchange be approved by the holders
of a majority of the total number of shares outstanding and entitled to vote
thereon of APS. See "-- Meetings of Stockholders -- APS." No approval of the
Merger by the stockholders of APS is required pursuant to the APS Charter or the
MGCL. However, approval of the issuance of APS Common Stock in the Merger is
required pursuant to the rules and regulations of the NYSE.
DQE
Under Section 1924 of the PBCL, for a plan of merger to be adopted, a
corporation's board of directors must adopt a resolution approving such plan of
merger and must direct that the plan of merger be submitted to a vote of the
stockholders entitled to vote thereon at a regular or special meeting of the
stockholders. The plan of merger must be approved by a majority of the votes
cast by all stockholders entitled to vote thereon and, if any class or series of
shares is entitled to vote thereon as a class, by a majority of the votes cast
in each class vote. Unless otherwise required by a corporation's bylaws, a plan
of merger does not require stockholder
82
<PAGE> 97
approval if: (i)(A) the surviving or new corporation is a domestic corporation
whose articles of incorporation are identical to the articles of incorporation
of such constituent corporation, provided that, the articles of incorporation
need not be identical to the extent that stockholder approval would not be
required to amend the corporation's articles of incorporation generally; (B)
each share of such constituent corporation outstanding immediately prior to the
merger or consolidation will continue as, or be converted into (except as
otherwise agreed to by the holder thereof), an identical share of the surviving
or new corporation; and (C) such plan provides that the stockholders of such
constituent corporation will hold in the aggregate shares of the surviving or
new corporation having a majority of the votes entitled to be cast generally in
an election of directors; (ii) prior to the adoption of such plan, another
corporation that is a party to such plan owns 80% or more of the outstanding
shares of each class of such constituent corporation so long as, in the case of
a Registered Corporation, the adoption is consistent with the provisions of the
PBCL relating to business combinations with interested stockholders, or (iii) no
shares of the constituent corporation have been issued prior to the adoption of
the plan of merger by the board of directors pursuant to Section 1922 of the
PBCL (relating to a plan of merger). In certain circumstances, to approve a
"business combination" (as defined in the DQE Articles), the DQE Articles
require the affirmative vote of (i) the holders of at least 80% of the DQE
Voting Stock and (ii) a majority of the voting power of DQE Voting Stock not
beneficially owned by a DQE Interested Stockholder, voting together as a single
class. See "-- Fair Price and Anti-Greenmail Provisions in the Charter
Documents -- DQE."
APPRAISAL AND DISSENTERS' RIGHTS
APS
Under Section 3-202 of the MGCL, a stockholder of a Maryland corporation
has, subject to certain limitations, the right to demand and receive the fair
value of such stockholder's stock from the corporation if: (i) the corporation
consolidates or merges with another corporation; (ii) the stockholder's stock is
acquired in a share exchange; (iii) the corporation transfers all or
substantially all of its assets in a manner that requires corporate action under
Section 3-105 of the MGCL (relating to mergers, consolidations, transfers of
assets and share exchanges); (iv) unless permitted to do so by its charter
(which the APS Charter does), the corporation amends its charter so as to alter
the contract rights, as expressly set forth in the charter, of outstanding stock
and substantially adversely affects the stockholder's rights; or (v) the
transaction involves a business combination between the corporation and an
Interested Stockholder (defined generally in the MGCL as any person that is the
beneficial owner, directly or indirectly, of ten percent or more of the voting
power of the outstanding voting stock of the corporation). Unless the
transaction involves a business combination between the corporation and an
interested stockholder, the right to receive fair value does not exist (A) if
the stockholder's stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or (B) if the
stock is that of a successor in a merger, unless, among other things, (x) the
merger alters the contract rights of the stock as expressly set forth in the
corporation's charter, without such charter reserving the right to do so, or (y)
the stock is to be changed or converted into something other than either the
stock in the successor or cash, scrip, or other rights or interests arising out
of provisions for the treatment of fractional shares of stock in the successor.
DQE
Section 1571 of the PBCL provides that stockholders of a corporation have
appraisal rights with respect to specified corporate actions, including: (i) a
plan of merger, consolidation, division, share exchange or conversion; (ii)
certain amendments to its articles of incorporation in which disparate treatment
is accorded to the holders of shares of the same class or series; and (iii) a
sale or transfer of all or substantially all of such corporation's assets.
However, in no event are appraisal rights afforded to the holders of shares that
are either listed on a national securities exchange or held of record by more
than 2,000 stockholders unless (A) shares converted by a plan are not converted
solely into shares of the acquiring, surviving, new or other corporation and
cash in lieu of fractional shares; (B) the shares are a preferred or special
class of stock, unless the articles of incorporation of such corporation, the
plan, or the terms of the transaction entitle all holders of the shares of
83
<PAGE> 98
such class to vote thereon and require for the adoption thereof the affirmative
vote of a majority of the votes cast by all stockholders of such class; or (C)
if such shares constitute a group of a class or series which are to receive
special treatment in the corporate action under consideration, the holders of
such group are not entitled to vote as a special class in respect of such
corporate action.
STATE ANTI-TAKEOVER STATUTES
APS
Under Sections 3-601 to 3-603, inclusive, of the MGCL, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person (other than the
corporation or a subsidiary of the corporation) who beneficially owns 10 percent
or more of the voting power of the corporation's shares or an affiliate or
associate of the corporation who, at any time within the two-year period prior
to the date in question, was the beneficial owner of ten percent or more of the
voting power of the then-outstanding voting stock of the corporation (an "MGCL
Interested Stockholder") or an affiliate of such an MGCL Interested Stockholder
are prohibited for five years after the most recent date on which the MGCL
Interested Stockholder becomes an MGCL Interested Stockholder. Thereafter, any
such business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation, voting together as a single voting group, and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the MGCL Interested Stockholder who will (or whose
affiliate will) be a party to the business combination or by an affiliate or
associate of the MGCL Interested Stockholder, voting together as a single voting
group, unless, among other conditions, the corporation's common stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
MGCL Interested Stockholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the MGCL Interested
Stockholder becomes an MGCL Interested Stockholder.
Under Sections 3-701 et seq. of the MGCL, "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. "Control Shares"
are voting shares of stock which, if aggregated with all other such shares of
stock previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by virtue
of a revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are
84
<PAGE> 99
approved at a stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation, provided, however, that the charter or bylaw
provision was adopted before the acquisition of the shares.
Neither the APS Charter nor the APS Bylaws contains a provision exempting
from the control share acquisition statute any acquisitions by any person of
shares of stock of APS. There can be no assurance that such a provision will not
be added at any time in the future.
DQE
Chapter 25 of the PBCL contains several anti-takeover provisions that apply
to Registered Corporations.
Section 2538 of the PBCL provides that if (i) a stockholder of a Registered
Corporation (together with others acting jointly or in concert therewith and
affiliates thereof) is to be a party to a merger or consolidation, a share
exchange or certain sales of assets involving such corporation or a subsidiary
thereof; (ii) a stockholder is involved in a transaction in which such
stockholder will receive a disproportionate amount of the securities resulting
from a division of such corporation; (iii) a stockholder, other than certain
dissenting stockholders, is to be treated differently from others holding shares
of the same class in a voluntary dissolution or winding up of such corporation;
or (iv) in a reclassification, a stockholder's percentage of voting or economic
share interest is materially increased relative to substantially all other
stockholders, then the transaction being proposed must be approved by the
affirmative vote of stockholders representing at least a majority of the votes
that all stockholders are entitled to cast with respect to such transaction,
excluding all such shares which the stockholder who is interested in the
transaction is entitled to cast. The approvals required by Section 2538 are in
addition to any other approvals required by Subpart B of Part II of the PBCL,
the corporation's articles of incorporation or bylaws or otherwise. Such special
voting requirement does not apply to a transaction (A) that has been approved by
a majority of such corporation's board of directors, excluding directors who are
officers or directors of, or have a material equity interest in, the interested
stockholder or who were nominated for election as a director by the interested
stockholder and first elected as a director within 24 months of the vote on the
proposed transaction; (B) in which the consideration to be received by the
stockholders for shares of any class of which shares are owned by the interested
stockholder is not less than the highest amount paid by the interested
stockholder in acquiring shares of the same class; or (C) that has been approved
by the directors of the corporation and involves an 80% or more stockholder.
Sections 2545 and 2546 of the PBCL provide that, subject to certain limited
exceptions, in the event of the acquisition by any person or group of persons
acting together that has voting power over voting shares of a Registered
Corporation that entitle the holders thereof to at least 20% of the voting power
of the voting shares of such corporation (a "controlling person or group" for
purposes of Sections 2545 and 2546 of the PBCL): (i) such controlling person or
group must give prompt notice to all stockholders of record of such corporation
that such acquisition has occurred; and (ii) any stockholder may make written
demand on such controlling person or group for payment of the fair value, to be
determined in the manner prescribed by the PBCL (the minimum of which must be
the highest price paid per share by the controlling person during the prior 90
days), of the voting shares held by such stockholder, and upon receipt of any
such demand, such controlling person or group must pay such fair value to such
stockholder in accordance with the procedures set forth in the PBCL, which
include proceedings that would require such stockholder to present such
stockholder's shares to a court for a determination of the fair value thereof.
Section 2555 of the PBCL applies to transactions between a Registered
Corporation and a 20% stockholder thereof (an "interested stockholder" for
purposes of Section 2555 of the PBCL), notwithstanding that Section 2538 of the
PBCL is also applicable. Section 2555 prohibits a Registered Corporation from
engaging in a business combination with an interested stockholder unless: (i)
such business combination or
85
<PAGE> 100
the acquisition of shares causing such interested stockholder to become such was
approved by the board of directors of such corporation prior to the interested
stockholder's share acquisition, or where the purchase of shares made by the
interested shareholder had been approved by the board of directors of such
corporation prior to the interested shareholder's share acquisition date; (ii)
such business combination is approved by the affirmative vote of the holders of
shares representing at least a majority of the votes entitled to be cast in an
election of directors, excluding voting shares beneficially owned by such
interested stockholder or its affiliates or associates, and the meeting at which
such business combination is approved is held at least three months after the
time the interested stockholder became the beneficial owner of at least 80% of
the shares entitled to vote in an election of directors and the consideration to
be offered to stockholders in connection with such business combination meets
specified fair price standards; (iii) such business combination is unanimously
approved by the holders of all outstanding common shares of such corporation;
(iv) such business combination is approved by the affirmative vote of the
holders of shares entitling such holders to cast a majority of the votes that
all stockholders would be entitled to cast in an election of directors of the
corporation, excluding any voting shares beneficially owned by the interested
stockholder or any affiliate or associate of the interested stockholder, at a
meeting called for such a purpose no earlier than five years after the date of
the interested shareholder's share acquisition; or (v) such business combination
is approved at a stockholder's meeting called for such a purpose no earlier than
five years after the date of the interested stockholder's share acquisition and
that satisfies specified fair price standards.
Section 2564 of the PBCL provides that PBCL Control Shares (as defined
below) of a corporation will have their voting rights taken away. Such voting
rights may only be restored by the affirmative vote of (i) the holders of a
majority of the disinterested shares (as defined in the PBCL) and (ii) a
majority of the voting power of the outstanding voting shares of such
corporation. In addition, under certain circumstances, a Registered Corporation
is permitted to redeem PBCL Control Shares. "PBCL Control Shares" are defined as
the number of voting shares which, upon acquisition by any person or group,
results in a "PBCL Control-Share Acquisition," which is defined as an
acquisition of such number of voting shares as, when added to the voting shares
already held by such acquiring person or group, would entitle such person or
group to exercise voting power for the first time within any of the following
three ranges: (i) at least 20% but less than 33 1/3%; (ii) at least 33 1/3% but
less than 50%; or (iii) 50% or more. PBCL Control Shares also include voting
shares acquired within 180 days of the occurrence of a PBCL Control-Share
Acquisition or acquired with the intention of making a PBCL Control-Share
Acquisition. Under a provision of the DQE Bylaws, DQE has opted out of the
provisions of Section 2564 of the PBCL.
Section 2575 of the PBCL provides that any profit realized by a
"controlling person or group" (as defined above) from the disposition of any
equity security of a Registered Corporation is recoverable by such corporation
if (i) such profit is realized by such controlling person within 18 months after
the controlling person became such and (ii) the equity security so disposed of
was acquired by such controlling person within 24 months prior to or 18 months
after such controlling person became such. Subject to certain exceptions,
"controlling person or group" includes any person or group who (i) acquired,
offered to acquire or, directly or indirectly, publicly disclosed or caused to
be publicly disclosed its intention to acquire, power to vote at least 20% of
the voting shares of such corporation or (ii) publicly disclosed or caused to be
publicly disclosed that it may seek to acquire control of such corporation
through any means. Under a provision of the DQE Bylaws, DQE has opted out of the
provisions of Section 2575 of the PBCL.
Pursuant to Section 1713 of the PBCL, except in the case of obligations
imposed by criminal statutes and a director's liability to pay federal, state
and local taxes, if a corporation's bylaws so provide, its directors may not be
held personally liable for monetary damages for any action taken, unless the
director's actions constitute self-dealing, willful misconduct or recklessness
or the director has failed to perform the duties of his office under the PBCL.
Both the DQE Articles and the DQE Bylaws provide that, to the maximum extent
provided by Pennsylvania law, no director of DQE will be personally liable for
monetary damages for any act or omission taken as a director.
86
<PAGE> 101
INDEMNIFICATION OF OFFICERS AND DIRECTORS
APS
Section 2-418 of the MGCL requires a corporation (unless its charter
provides otherwise, which the APS Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by a reason of his service in that
capacity. Section 2-418 permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses (including attorney's fees) actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right of the corporation or in which the director was
found to have received an improper personal benefit, unless a court so orders
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation as authorized by the MGCL and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met.
The APS Bylaws provide that APS will indemnify any person who was or is a
party or is threatened with being made a party to any action, suit, or
proceeding, including appeals (other than an action, suit or proceeding by or in
the right of APS), by reason of being a director, officer or employee of APS or
serving at the request of APS in a similar capacity for another entity, against
expenses (including attorneys' fees), judgments, decrees, fines, penalties and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such proceeding if the person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that the conduct was unlawful. The APS Bylaws
further provide that APS will indemnify any person who, by reason of being a
director, officer or employee of APS or serving at the request of APS in a
similar capacity for another corporation, is or was a party or is threatened
with being made a party to any action, suit or proceeding, including appeals, by
or in the right of APS to procure a judgment in its favor, against all expenses
actually and reasonably incurred (including attorneys' fees) in connection with
the defense or settlement of such action, suit or proceeding. APS will also
indemnify such person for any amounts paid in settlement of such action, suit or
proceeding, up to the amount that would have reasonably been expended in such
person's defense, if such action had been prosecuted to conclusion. However,
indemnification in the case of an action brought by or in the right of APS will
be made only if the person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of APS and no such
indemnified party shall have been finally adjudged to be liable for negligence
or misconduct in the performance of his duty to APS, except that a court may
order indemnification despite an adjudication of liability if it deems such
indemnification proper in view of all the circumstances. Other provisions of the
APS Charter provide for indemnification as permitted by the MGCL.
Consistent with Section 2-405.2 of the MGCL and Section 5-349 of Courts and
Judicial Proceedings Article, the APS Charter provides that directors and
officers are not liable to APS or its stockholders for monetary damages for
breach of their fiduciary duties, provided that director and officer liability
is not eliminated (i) to the extent that it is proved that the person actually
received an improper benefit or profit in money, property or services, to the
extent of the improper money, property or services actually received, or (ii) to
the extent that a judgment or final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding.
87
<PAGE> 102
DQE
Sections 1741 and 1742 of the PBCL permit a corporation, unless otherwise
restricted by its bylaws, to indemnify a person who was or is a party or is
threatened to be made a party to (i) any action or proceeding, whether civil,
criminal, administrative or investigative, not on behalf of such corporation,
against expenses (including attorneys' fees), judgments, penalties, fines and
settlement amounts incurred by reason of such person's being or having been a
representative of such corporation or having served at the request of the
corporation as a representative of another entity, if such person acted in good
faith and reasonably believed that his actions were in or not opposed to the
best interests of such corporation and, with respect to any criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful, or (ii) any
action by or in the right of the corporation to procure a judgment in its favor
against expenses (including attorneys' fees) incurred by reason of such person's
being or having been a representative of such corporation or having served at
the request of the corporation as a representative of another entity, if such
person acted in good faith and reasonably believed that his actions were in or
not opposed to the best interests of such corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful. To the extent that a representative of a corporation has been
successful on the merits or otherwise in the defense of a third party or
derivative action, indemnification for expenses incurred (including attorneys'
fees) is mandatory. Section 1746 of the PBCL provides that its provisions on
indemnification will not be deemed exclusive of any other rights to which a
person may be entitled under any bylaw, agreement or otherwise, provided that
indemnification shall not be made in the case of willful misconduct or
recklessness. Section 1745 of the PBCL provides that a corporation may pay
expenses in advance, provided that the person undertakes to repay the amount if
it is ultimately determined that he is not entitled to be indemnified by the
corporation.
The DQE Bylaws provide that directors and officers will be entitled to
indemnification for any reasonable expense (including attorneys fees) or
liability paid or incurred in connection with any actual or threatened claim,
action, suit or proceeding, civil, criminal, administrative, investigative or
otherwise, whether by or in the right of DQE or otherwise, by reason of such
person serving in such capacity or, at the request of DQE, in a similar capacity
with another entity, and such indemnification includes the right to have
expenses paid in advance, in compliance with applicable law. The right to
receive indemnification does not apply in suits by directors or officers against
DQE, other than suits to obtain indemnification.
Pursuant to Section 1713 of the PBCL, except in the case of obligations
imposed by criminal statutes and a director's liability to pay federal, state
and local taxes, if a corporation's bylaws so provide, its directors may not be
held personally liable for monetary damages for any action taken, unless the
director's actions constitute self-dealing, willful misconduct or recklessness
or the director has failed to perform the duties of such director's office under
the PBCL. Both the DQE Articles and the DQE Bylaws provide that, to the maximum
extent provided by Pennsylvania law, no director of DQE will be personally
liable for monetary damages for any act taken or omission made as a director.
FAIR PRICE AND ANTI-GREENMAIL PROVISIONS IN THE CHARTER DOCUMENTS
APS
Neither the APS Charter nor the APS Bylaws contain any "Anti-Greenmail" or
"Fair Price" provisions, which would, respectively, prevent APS from
repurchasing shares of APS from a potential acquiror of APS, and paying a
premium for those shares, in order to prevent an acquisition of APS by such
potential acquiror, and require that transactions with specified stockholders
meet certain price criteria.
DQE
Neither the DQE Articles nor the DQE Bylaws contain any "Anti-Greenmail"
provision.
The DQE Articles provide, among other things, that (i) business
combinations with; (ii) issuance of securities of DQE to; (iii) adoption of a
plan for the liquidation or winding up of the DQE affairs proposed by or on
behalf of; or (iv) any transaction, recapitalization or stock reclassification
having the result of increasing the amount of outstanding shares of DQE owned
by, a DQE Interested Stockholder or an affiliate or associate
88
<PAGE> 103
of a DQE Interested Stockholder, requires the approval of 80% of DQE Voting
Stock, voting together as a single class, and the approval of a majority of the
shares of DQE Voting Stock, other than those beneficially owned by DQE
Interested Stockholders, voting as a class. However, if (i) the transaction is
approved by a majority of Disinterested Directors, or (ii) the per-share
consideration received by holders of common stock satisfies the fair price
criteria specified in the DQE Articles, the approval described above is not
required, and such transaction will require only such affirmative vote, if any,
as may be required by law, by any other provision of the DQE Articles or by any
agreement with any national securities exchange.
CONFLICT-OF-INTEREST TRANSACTIONS
APS
Under Section 2-419 of the MGCL, a contract or transaction between (i) a
corporation and any of its directors, or (ii) a corporation and any other entity
in which any of its directors has a material financial interest, is not void or
voidable solely because of a common directorship or interest, the presence of
the director at the meeting of the board or a committee of the board that
authorizes the contract or transaction or the counting of the vote of the
director for the authorization, if (x) the fact of the common directorship or
interest is known or disclosed and either (A) a majority of the disinterested
directors on the board or committee approve the contract or transaction, or (B)
the majority of the shares entitled to vote, other than those owned of record or
beneficially owned by the interested director, approve the contract or
transaction, or (y) the contract or transaction is fair and reasonable to the
corporation.
The APS Charter provides that, in the absence of fraud, the fact that a
director has an interest in a transaction or contract with APS or an interest in
any entity that engages in a transaction or enters into a contract with APS,
will not affect or invalidate the contract if authorized, ratified or approved
by the APS Board or the stockholders of APS. The APS Charter further provides
that a director will not be liable to account to APS for any profit made on any
such contract or transaction if the contract or transaction has received the
authorization, approval or ratification of the APS Board or the stockholders of
APS.
DQE
Under Section 1728 of the PBCL, unless the bylaws of the corporation
provide otherwise, transactions between a corporation and one or more of its
directors or officers or between a corporation and any other entity in which one
or more directors or officers has a financial interest are not void or voidable,
solely due to the existence of such relationship, the presence at or
participation in the meeting of the board of directors that authorizes that
transaction or the counting of such persons' votes, if: (i) the material facts
are disclosed as to the relationship or interest or are known to the board of
directors and a majority of the disinterested directors approves the
transaction; (ii) the material facts are disclosed as to the relationship or
interest and the transaction is specifically approved in good faith by a vote of
the stockholders; or (iii) the contract is fair to the corporation at the time
authorized.
THE APS CHARTER AMENDMENT
The APS Board has determined that the Charter Amendment is advisable for
APS whether or not the Merger is effectuated. The APS Board believes that the
name "Allegheny Energy, Inc." more accurately describes the focus of the
combined company and the path that APS will take whether or not the Merger is
consummated. The APS Board believes that Allegheny Energy, Inc. is a more
accurate description of a company that intends to provide its customers with a
wide array of energy products and services. Stockholders of APS should not be
affected in any way by this change of name. Assuming the Charter Amendment is
approved at the APS Special Meeting, stockholders of APS will not be required to
take any further action to effect the Charter Amendment; stock certificates
representing shares of APS Common Stock will not need to be exchanged for new
stock certificates. THE APS BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF APS
COMMON STOCK VOTE FOR THE CHARTER AMENDMENT.
89
<PAGE> 104
OTHER INFORMATION FOR THE DQE MEETING
There were shares of DQE Common Stock outstanding and entitled to
vote at the close of business on , the DQE Record Date. Each
stockholder is entitled to one vote for each whole share held on all matters to
be voted upon at the DQE Meeting and, in addition, has cumulative voting rights
with respect to the election of directors.
Confidentiality: It is the policy of DQE that proxies, ballots, and voting
tabulations that identify individual stockholders are kept confidential, except
in a contested proxy solicitation or as may be necessary to meet applicable
legal requirements. Proxies, ballots, and other voting documents are available
for examination only by the judges of election and those associated with
processing proxy cards and tabulating the vote, who must agree to comply with
this policy of confidentiality.
Wesley W. von Schack resigned as Chairman, President, and Chief Executive
Officer of DQE in August of 1996. In February of 1997, the DQE Board elected
David D. Marshall, President and Chief Executive Officer. Mr. Marshall had been
serving as interim President and Chief Executive Officer since August of 1996.
In August of 1996, the DQE Board also elected Robert P. Bozzone and William H.
Knoell to serve as Lead Directors. The Lead Directors alternately chair DQE
Board meetings and perform other functions of a Chairman not delegated to the
President and Chief Executive Officer of DQE.
DQE appreciates the outstanding leadership, wisdom, and dedication that Mr.
von Schack provided during his twelve years of distinguished service to DQE and
his significant contributions to the community.
DQE has a mandatory retirement age of 70 with an exception to allow
directors who reach the age of 70 while serving as directors to complete their
terms. In 1996 the DQE Bylaws were amended to provide for the position of "Lead
Director" and to provide that directors serving as Lead Directors are not
subject to the mandatory retirement age of 70. As a result, William H. Knoell
will be eligible to be a nominee for reelection at this Annual Meeting and has
been unanimously nominated by the DQE Board. Lead Directors chair meetings of
the DQE Board or stockholders (under certain circumstances) and advise the
Company on matters of DQE Board and corporate governance.
ELECTION OF DIRECTORS
Four directors are to be elected by the stockholders of DQE at the DQE
Meeting. Unless the Merger is consummated, they will continue to serve until the
Annual Meeting of DQE in the year 2000 and thereafter until their successors are
chosen and qualified. It is intended that proxies solicited on behalf of the DQE
Board will be voted for the nominees named below. If, because of events not
presently known or anticipated, any nominee is unable to serve or for good cause
will not serve, the proxies voted for the election of that director may be voted
(in the discretion of the holders of the proxies) for other nominees not named
below. Unless otherwise indicated, the business positions have been held for the
past five years.
NOMINEES FOR DIRECTORS
Terms Expiring in the Year 2000:
DANIEL BERG, Age 68, Director of DQE since 1989. Institute Professor and
Acting Director, Services Research and Education Center, of Rensselaer
Polytechnic Institute. A director of Duquesne Light, Hy-Tech Machine, Inc.
(manufacturer of specialty parts and equipment), and Joachim Machinery Company,
Inc. (distributor of machine tools), and Chairman of the Academic Advisory Board
of the National Academy of Engineering.
ROBERT P. BOZZONE, Age 63, Director of DQE since 1990. Elected to be a Lead
Director in August of 1996. Vice Chairman of Allegheny Teledyne, Inc. (specialty
metals production) since its formation through the merger of Allegheny Ludlum
Corporation and Teledyne, Inc. in August 1996. Formerly Vice Chairman from
1994-1996 and President and Chief Executive Officer from 1990-1994 of Allegheny
Ludlum. Also a director of Duquesne Light and Allegheny Teledyne, Inc., a
trustee of Rensselaer Polytechnic Institute, a life member of ASM International
(engineering technical society), and a board member of the Greater Pittsburgh
90
<PAGE> 105
Council -- Boy Scouts of America, The Salvation Army, and Catholic Charities.
Also former Chairman of the Pittsburgh Branch of the Federal Reserve Bank of
Cleveland.
WILLIAM H. KNOELL, Age 72, Director of DQE since 1989. Elected to be a Lead
Director in August of 1996. Retired Chairman of the Board and Chief Executive
Officer of Cyclops Industries, Inc. (basic and specialty steels and fabricated
steel products, industrial and commercial construction). Also a director of
Duquesne Light, Cabot Oil & Gas Corporation and St. Clair Memorial Hospital and
a life trustee of Carnegie Mellon University.
THOMAS J. MURRIN, Age 68, Director of DQE since 1991. Dean of the A. J.
Palumbo School of Business Administration of Duquesne University since 1991.
Prior to that, Deputy Secretary of the U.S. Department of Commerce and President
of the Energy and Advanced Technology Group of Westinghouse Electric
Corporation. Also a director of Duquesne Light and Motorola, Inc. (manufacturer
of electronic equipment and components) and a member of the Executive Committee
of the U.S. Council on Competitiveness and Chairman of the District Export
Council.
THE DQE BOARD UNANIMOUSLY RECOMMENDS THAT DQE STOCKHOLDERS APPROVE THE
ELECTION OF THE NOMINEES FOR DIRECTOR.
STANDING DIRECTORS
The other members of the DQE Board currently serving terms expiring as
noted are as follows:
Terms Expiring in 1998:
DOREEN E. BOYCE, Age 63, Director of DQE since 1989. President of the Buhl
Foundation (charitable institution for educational and public purposes). Also a
director of Duquesne Light, Microbac Laboratories, Inc., Orbeco Analytical
Systems, Inc. and Dollar Bank, Federal Savings Bank and a trustee of Franklin &
Marshall College.
DAVID D. MARSHALL, Age 45, Director of DQE since 1995. President and Chief
Executive Officer of DQE and Duquesne Light since August of 1996. Previously
Executive Vice President of DQE and President and Chief Operating Officer of
Duquesne Light since 1995. Vice President of DQE from 1989 to 1995, and
Executive Vice President of Duquesne Light from 1992 to 1995. Also a director of
Duquesne Light, United Way of Allegheny County, and Southwestern Pennsylvania
Industrial Resource Center (economic development), and Trustee, Vice President,
and Secretary of Penn's Southwest Association (economic development).
ROBERT MEHRABIAN, Age 55, Director of DQE since 1991. President Emeritus
and Professor of Material Science and Engineering at Carnegie Mellon University.
Distinguished Visiting Professor at the University of California, Santa Barbara.
Also a director of Duquesne Light, Allegheny Teledyne, Inc., PPG Industries
Inc., Mellon Bank Corporation, Mellon Bank, N.A., and BEI Electronics, Inc.
(develops systems and sensors for satellites, aircraft, medical devices and
automobiles), an ex-officio trustee of Carnegie Mellon University and a member
of the Alcoa Science & Technology Council.
Terms Expiring in 1999:
SIGO FALK, Age 62, Director of DQE since 1989. Management of personal
investments. Chairman of The Maurice Falk Medical Fund and Leon Falk Family
Trust and a director of Duquesne Light. Also Chair of the Chatham College Board
of Trustees and a board member of the Historical Society of Western Pennsylvania
and the Allegheny Land Trust.
ERIC W. SPRINGER, Age 68, Director of DQE since 1989. Partner of Horty,
Springer & Mattern, P.C. (attorneys-at-law). Also a director of Duquesne Light,
a trustee of the Maurice Falk Medical Fund, a Trustee Emeritus of Presbyterian
University Hospital and the University of Pittsburgh Medical Center, and Past
President of the Allegheny County Bar Association.
91
<PAGE> 106
DIRECTORS' FEES AND PLANS
Directors of DQE who are not employees are compensated for their DQE Board
service by a combination of DQE Common Stock and cash. They receive an annual
retainer of $15,000 in cash for service to DQE and its affiliates, payable in
twelve monthly installments, and 250 shares of DQE Common Stock, payable in
April of each year. Each director also receives a fee of $1,000 for each DQE
Board and committee meeting attended. For service as Lead Directors in 1996,
Messrs. Bozzone and Knoell each received 263 shares of DQE Common Stock and
$5,021 in cash. Dr. Berg received a fee of $1,000 per meeting for three meetings
he attended as a director of Chester Engineers, Inc., which at the time was an
affiliate of DQE. Directors who are employees of DQE or any of its affiliates do
not receive fees for their services as directors.
In February of 1996, the DQE Board authorized a study of outside director
pension programs. After a full review, the Duquesne Light Board voted to
terminate the Duquesne Light Outside Directors' Retirement Plan (the "Directors'
Retirement Plan") for individuals who become non-employee directors after August
27, 1996 and to freeze the plan for current non-employee directors of DQE as of
December 1, 1996. Directors of DQE and Duquesne Light who retired prior to
August 27, 1996 will continue to receive their monthly benefits under the
Directors' Retirement Plan which are equal to the monthly retainer in effect at
the time of retirement from the DQE Board for a period equal to the total months
of service on the DQE Board and the board of directors of Duquesne Light but no
longer than 120 months. As a result of the termination of the Directors'
Retirement Plan, new non-employee directors will not be entitled to benefits
under that plan, and current non-employee directors of DQE and Duquesne Light
will accrue no additional retirement benefits for services after December 1,
1996. In full satisfaction of their accrued benefits under the Directors'
Retirement Plan, current directors of DQE received, as of December 31, 1996,
shares of DQE Common Stock and cash equal in value to the actuarial value of
such accrued benefits. Such actuarial value was determined assuming a 5% per
annum increase in the annual retainer, future annual increases in the value of
DQE Common Stock of 6.5%, a dividend yield of 4.5%, and an after-tax discount
rate of 4.5% per annum. In the case of current directors with less than ten
years' service, all or a portion of the shares received are subject to a vesting
schedule. The vesting schedule is the same as the vesting schedule to which
benefits under the Directors' Retirement Plan were subject, i.e., 50% vesting
after five years of service plus an additional 10% vesting in years six through
ten.
In order to increase directors' stock-based compensation and thus
strengthen the link between directors' compensation and stockholder interests,
the DQE Board adopted a new stock plan under which new non-employee directors of
DQE will each receive up to 4,150 shares of restricted DQE Common Stock that
will vest at the rate of 50% after five years of service as a director plus an
additional 10% per year in years six through ten. Unvested shares are forfeited
if the recipient ceases to be a director.
Each director of Duquesne Light under the age of 72 who is not an employee
may elect under a directors' deferred compensation plan to defer receipt of a
percentage of his or her director's remuneration until after termination of
service as a director. Deferred compensation may be received in one to ten
annual installments commencing, with certain exceptions, on the 15th day of
January of the year designated by the director. Interest accrues quarterly on
all deferred compensation at a rate equal to a specified bank's prime lending
rate. Dr. Berg and Mr. Mehrabian elected to participate in the plan for 1996.
As part of its overall program to promote charitable giving, DQE and
Duquesne Light have a Charitable Giving Program for all directors funded by life
insurance policies on the directors owned by Duquesne Light. Directors of DQE
are paired, and upon the death of the second of the two directors, DQE will
donate up to five hundred thousand dollars each to one or more qualifying
charitable organizations recommended by each of the two directors and reviewed
and approved by the Employment and Community Relations Committee of the DQE
Board. A director of DQE must have service of 60 months or more on the DQE Board
in order to qualify for the full donation amount, with service of less than 60
months qualifying for an incremental donation. The program does not result in
any material cost to DQE.
DQE provides Business Travel Insurance to its non-employee directors as
part of its Business Travel Insurance Plan for Management Employees. In the
event of accidental death or dismemberment, benefits of up to $400,000 per
individual are provided. The program does not result in any material cost to
DQE.
92
<PAGE> 107
THE DQE BOARD AND ITS COMMITTEES
There were twelve regular meetings and four special meetings of the DQE
Board during 1996. Attendance by the directors at DQE Board meetings and
committee meetings in 1996 averaged 98.9%. No director failed to attend at least
75% of the DQE Board meetings and committee meetings of the DQE Board.
The DQE Board has standing committees which meet periodically, including
the Audit, Compensation, and Nominating Committees of the DQE Board which are
described below and a Finance Committee.
Actions taken by any committee of the DQE Board are reported to the full
DQE Board.
Audit Committee
The Audit Committee of the DQE Board is composed of four directors who are
not employees of DQE. Members are Drs. Berg and Mehrabian and Messrs. Bozzone
and Springer. The principal responsibilities of the Audit Committee of the DQE
Board include recommending the independent public accountants and reviewing the
DQE financial statements and the related report of the independent public
accountants; the results of the annual audit performed by the accountants; the
DQE system of internal accounting control; and the adequacy of the internal
audit function. The Audit Committee of the DQE Board met four times during 1996.
Compensation Committee
The Compensation Committee of the DQE Board, composed of three non-employee
directors, makes recommendations to the DQE Board regarding compensation and
benefits provided to executive officers and members of the DQE Board and the
establishment or amendment of various employee benefit plans. The members of the
Compensation Committee in 1996 were Dr. Boyce and Messrs. Bozzone and Falk. The
Compensation Committee of the DQE Board met three times during 1996.
Nominating Committee
The Nominating Committee of the DQE Board recommends to the DQE Board DQE
candidates for election and reelection to, or to fill vacancies on, the DQE
Board. The Nominating Committee of the DQE Board considers nominees recommended
to it in writing by stockholders and sent to the Corporate Secretary of DQE.
Members of the Nominating Committee of the DQE Board are Messrs. Falk, Knoell,
and Springer. The Nominating Committee of the DQE Board met once during 1996.
BENEFICIAL OWNERSHIP OF SECURITIES OF DQE
The following table shows all equity securities of DQE beneficially owned,
directly or indirectly, as of February 21, 1997, by each director and by each
current executive officer named in the Summary Compensation Table:
<TABLE>
<CAPTION>
SHARES OF DQE COMMON
TOTAL SHARES OF STOCK/ PERCENT OF
DQE COMMON STOCK NATURE OF OWNERSHIP(1) CLASS
---------------- -------------------------- ----------
<S> <C> <C> <C> <C>
Daniel Berg......................... 6,689 5,039 VP, IP *
1,650 Joint, SVP
SIP
Doreen E. Boyce..................... 5,744 5,744 VP, IP *
Robert P. Bozzone................... 18,695(2) 8,620 VP, IP
7,000 VP, IP *
3,075 VP
Sigo Falk........................... 7,645(3) 6,145 VP, IP *
1,500 SVP, SIP
William H. Knoell................... 7,287(4) 6,252 VP, IP *
1,035 SVP, SIP
</TABLE>
93
<PAGE> 108
<TABLE>
<CAPTION>
SHARES OF DQE COMMON
TOTAL SHARES OF STOCK/ PERCENT OF
DQE COMMON STOCK NATURE OF OWNERSHIP(1) CLASS
---------------- -------------------------- ----------
<S> <C> <C> <C> <C>
David D. Marshall................... 99,948(5)(6) 5,200 VP *
65 VP, IP
16,894 Joint, SVP
SIP
Robert Mehrabian.................... 6,890(7) 2,008 VP, IP *
3,382 VP
1,500 SVP, SIP
Thomas J. Murrin.................... 5,829(8) 1,893 VP, IP *
3,186 VP
750 Joint, SVP
SIP
Eric W. Springer.................... 7,728(9) 6,837 VP, IP *
Gary L. Schwass..................... 91,357(5) 20,141 VP, IP *
Victor A. Roque..................... 34,556(5)(6) 200 VP *
407 VP, IP
1,637 Joint, SVP,
SIP
James D. Mitchell................... 30,121(5)(6) 200 VP *
754 VP, IP
3,996 Joint, SVP,
SIP
Wesley W. von Schack................ 473,497(10) 22,816 VP, IP *
Directors, Nominees and Executive
Officers as a Group (16
persons).......................... 798,391 *
</TABLE>
- ---------------
* None of the individuals named in the table above owned beneficially more
than 1% of the outstanding shares of DQE Common Stock. The directors and
executive officers of DQE as a group beneficially owned 1.18% of the
outstanding shares of DQE Common Stock as of February 21, 1997.
(1) The term "Joint" means owned jointly with the person's spouse. The initials
"VP" and "IP" mean sole voting power and sole investment power,
respectively, and the initials "SVP" and "SIP" mean shared voting power and
shared investment power, respectively.
(2) 7,000 of these shares are held by a foundation established for charitable
purposes, for which Mr. Bozzone is the trustee but not an income
beneficiary. 3,075 shares were granted under the DQE 1996 Stock Plan for
Non-Employee Directors to vest over four years.
(3) 1,500 of these shares are held by a trust in which Mr. Falk is an income
beneficiary but not a trustee.
(4) 1,035 of these shares are held by a trust in which Mr. Knoell is a trustee
and the income beneficiary.
(5) The amounts shown as owned by Messrs. Marshall, Schwass, Roque, Mitchell
and von Schack include shares of DQE Common Stock which they have the right
to acquire within 60 days of , 1997 through the exercise of
stock options granted under the Long-Term Incentive Plan in the following
amounts: 77,789; 71,216; 32,312; 25,171; and 449,608, respectively, and all
executive officers as a group: 669,196 shares.
(6) The amounts shown as being owned by Messrs. Marshall, Roque and Mitchell
include 200 shares of restricted stock that each was awarded as part of
consideration for the signing of Noncompetition and Confidentiality
Agreements and are subject to forfeiture for a period of one year from the
date of such agreement, and 5,000 shares of restricted stock granted to Mr.
Marshall which are subject to performance vesting for a three-year period.
(7) 1,500 of these shares are held in an IRA for which Mellon Bank, N.A. is the
trustee; Dr. Mehrabian is the beneficiary. 3,382 shares were granted under
the DQE 1996 Stock Plan for Non-Employee Directors to vest over five years.
94
<PAGE> 109
(8) 3,186 shares were granted under the DQE 1996 Stock Plan for Non-Employee
Directors to vest over three years.
(9) 891 of these shares are held by Mr. Springer's wife. Mr. Springer disclaims
beneficial ownership of such shares.
(10) 166 of these shares are held in an IRA for which The Dreyfus Corporation is
the trustee, and Mr. von Schack is the beneficiary. 1,099 of these shares
are held in an IRA by Mr. von Schack's wife. Mr. von Schack disclaims
beneficial ownership of these shares.
Messrs. Marshall, Schwass, Roque and Mitchell also beneficially own 605,
607, 151 and 288 shares, respectively, of the Preference Stock, Plan Series A,
of Duquesne Light. The preference shares are held by the Duquesne Light Employee
Stock Option Plan trustee for Duquesne Light's 401(k) Plan on behalf of the
Executive Officers of DQE, who have voting but not investment power. The
preference shares are redeemable for DQE Common Stock or cash on retirement,
termination of employment, death, or disability. Shares outstanding as of
February 21, 1997 for the Preference Stock, Plan Series A, of Duquesne Light,
are 820,221. Mr. Roque is not vested in these preference shares.
The directors and executive officers of DQE do not own any shares of
Preferred Stock of Duquesne Light.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
All components of compensation for senior management are approved by the
Compensation Committee of the DQE Board and ratified by the DQE Board based on
the recommendations of the Compensation Committee of the DQE Board, which is
composed entirely of non-employee directors of DQE.
On December 20, 1995, the Internal Revenue Service issued final regulations
under Code Section 162(m) limiting the deductibility of executive compensation
for officers of public companies. DQE believes that all compensation paid by DQE
and its Subsidiaries in 1996 was fully tax deductible. It is the present
intention of the Compensation Committee of the DQE Board to seek to ensure that
all compensation that is otherwise tax deductible will continue to be tax
deductible. The amendments to the Incentive Plan, which were approved by the
stockholders in 1996, were designed to allow the Compensation Committee of the
DQE Board, in its discretion, to grant stock options that comply with the final
regulations. However, the Compensation Committee of the DQE Board reserves the
right to take whatever action with respect to senior management compensation
that it deems appropriate and in the best interest of DQE and its stockholders.
The primary objective of the Compensation Committee of the DQE Board is to
ensure that the DQE senior management compensation programs and strategies are
designed and administered to attract, retain, and motivate persons required to
achieve the DQE overall mission of creating and enhancing value for its
stockholders, customers, and employees, as well as for the community in which it
operates.
Throughout the development and administration of the DQE strategic
compensation plans, the Compensation Committee of the DQE Board has adhered to a
results-based approach by linking a significant percentage of total compensation
to performance. The Compensation Committee of the DQE Board has purposely placed
an emphasis on the at-risk elements of compensation for the DQE Chief Executive
Officer and other senior officers. The DQE awards under these incentive programs
are tied to corporate and individual performance. The accomplishment of goals
and objectives is at the center of the Compensation Committee of the DQE Board's
decision to make awards under these incentive programs and strengthens the
relationship between stockholder interests and ultimate total compensation. The
Compensation Committee of the DQE Board exercises a degree of discretion in
administering these incentive plans which the Compensation Committee of the DQE
Board believes encourages continual focus on building long-term stockholder
value.
An independent outside consultant with industry expertise has determined
that a greater percentage of the DQE senior management's total compensation is
variable and placed at risk, when benchmarked against a comparative industry
panel of energy service companies of similar operating revenue size. All stock
options are performance-based and are granted under the Incentive Plan, which
was approved by the stockholders of DQE.
Annually, the Compensation Committee of the DQE Board reviews and
determines base salary levels, annual incentive compensation, and long-term
performance-based stock option vesting, based on competitive
95
<PAGE> 110
pay levels, individual performance and potential, and changes in duties and
responsibilities. Base salaries are competitively benchmarked with the averages
of comparative utility and general industry panels of companies of similar
revenue and operating characteristics, reflecting the diversification of DQE's
business operations. Some of the utility companies in the utility industry panel
are also included in the Standard & Poor's Electric Companies Index used in the
performance graph. See " -- Performance Graph." DQE entered into employment
agreements with Messrs. Schwass and Marshall and Ms. Green pursuant to which the
minimum annual base salary is specified. See "Interests of Certain Persons in
the Merger" and "-- Employment and Change of Control."
In addition to the industry panel comparison, the Compensation Committee of
the DQE Board considered results in the areas of customer service levels,
cost-effective management, and operational performance (including, for example,
generating plant performance and system reliability) in determining whether a
base salary increase, as well as annual or long-term awards, were granted in
1996. Messrs. Marshall, Schwass, and von Schack received increases in base
salary in 1996.
If a predetermined corporate financial performance threshold is met, there
is an opportunity to earn annual cash and stock option performance awards by
meeting short-term operating and financial goals. The threshold recommended by
the Compensation Committee of the DQE Board and approved by the DQE Board for
1996 related to DQE Board earnings per share. DQE met this goal in 1996. At the
beginning of each year, individual objectives also are established for each
officer and approved by the Compensation Committee of the DQE Board. The DQE
Chief Executive Officer's performance is evaluated for annual and long-term
awards on the basis of the overall performance of DQE, the performance of the
other members of his management team and, as discussed in more detail below, his
leadership in developing and implementing operating and strategic plans to
further the DQE long-term corporate objectives. The Compensation Committee of
the DQE Board reviews individual results and the corporate performance with the
full DQE Board. The DQE Board, upon the recommendation of the Compensation
Committee of DQE, approves the amount of annual performance awards granted to
each officer based on the achievement of corporate and individual objectives.
Specific individual annual objectives considered by the Compensation
Committee of the DQE Board in determining the annual performance compensation
awards support one or more of five major corporate objectives of DQE, including
maximizing long-term stockholder value; providing quality service and superior
customer satisfaction; managing assets cost effectively; maintaining excellent
operational performance; and providing leadership in the community.
In the aggregate, annual incentives ranged from fifteen to thirty-five
percent of base salary in 1996. The actual percentage of annual cash incentive
awards varies, depending upon the degree to which performance objectives are
met. See "Summary Compensation Table" for the annual cash incentive compensation
awards earned. As former Chief Executive Officer of DQE, Mr. von Schack received
a pro-rated annual cash award for his performance.
The number of performance stock options awarded annually from the prior
year's annual grants is determined by use of a cash incentive performance
multiplier. The size of the multiplier is based on the amount of increase in
earnings per share of DQE Common Stock. The Compensation Committee of the DQE
Board awarded annual performance options for 1996 in the amount of 33,861 to Mr.
Marshall; 28,985 to Mr. Schwass; 17,391 to Mr. Roque; 12,919 to Mr. Mitchell;
and 15,503 to Ms. Green. Additional options were not earned because not all of
the established annual performance objectives were achieved (see footnote 4 to
the "Summary Compensation Table"). Fifty percent of the annual stock options
awarded in 1996 vested upon award, and there is a one-year wait before the
officer is able to exercise the remaining fifty percent. In recognition of his
performance over the past twelve years and his overall contributions to DQE,
65,590 annual performance options were awarded to Mr. von Schack to vest upon
award.
Performance-based stock options awarded in 1996 pursuant to the Incentive
Plan were granted under the provisions of a three-year plan approved and
recommended by the Compensation Committee of the DQE Board and approved by the
DQE Board. Three-year strategies were developed by each individual, and annual
milestones designed to enhance the general well-being of DQE were established by
the Chief Executive Officer of DQE and approved by the Compensation Committee of
the DQE Board. The long-term strategies
96
<PAGE> 111
were designed to support the long-term corporate objectives of maximizing
stockholder value; providing quality service and superior customer satisfaction;
managing assets cost effectively; maintaining excellent operational performance;
and providing leadership in the community. Through a performance-based award
schedule, there is an opportunity to earn a percentage of the three-year grant
annually. The award opportunity is up to thirty percent in the first year, up to
sixty percent in the second year, and up to one hundred percent in the third
year. In recognition of his performance over the past twelve years and his
contributions to DQE, all of the options previously granted to Mr. von Schack
were awarded.
Under the leadership of Mr. Marshall, DQE's management team continued to
achieve excellent results with respect to DQE's long-term corporate objectives.
In 1996, DQE continued to demonstrate a solid track record of financial and
operational performance. Earnings per share increased over 5%. In November, an
increase of eight cents (6.25%) in the annual dividend was declared beginning in
January 1997. As shown under "-- Performance Graph," DQE's common stock has had
a total return which exceeded the S&P Electric Companies over the same period. A
full report on DQE's financial performance can be found in its 1996 Annual
Report to Stockholders. These results are consistent with the objective to
achieve measurable and meaningful increases in the value of DQE's stockholders'
investment.
Customers continue to rate the quality of service provided by Duquesne
Light's representatives higher than the national utility average, according to
independent surveys. Duquesne Light's customers also experience service
restoration among the top U.S. utilities. Duquesne Light's current reliability
performance provides service that is available approximately 99.9% of the time.
Duquesne Light was one of the first electric utilities in the United States to
offer comprehensive service guarantees. Since service guarantees were
inaugurated in early 1995, Duquesne Light's error rate has been only 0.007% out
of more than 37 million guaranteed performance transactions with customers.
Customers have seen the average price of electricity drop 13.4% since
August of 1991 as a result of rate reductions in 1993 and 1994 while inflation
raised the price of other goods and services by 18%. In 1996, the PAPUC approved
a Duquesne Light proposal which included a commitment that rates would not
increase through the year 2000. With inflation expected to increase 13.6%
through the year 2000, the average cost of other products and services will have
increased 50% relative to the price of electricity by the end of the decade.
Duquesne Light continues to be widely recognized as an environmental
leader. Some examples of recent environmental accomplishments include
successfully meeting all of the objectives and goals of Duquesne Light's
Environmental Strategic Plan; complying throughout 1996 with all federal, state,
and local environmental laws and regulations; developing a comprehensive
compliance plan through the year 2000 for effective control of SO(2) and NOx;
installing reasonably available control technology for NOx emissions on all
operated coal-fired generating units; and implementing a DQE-wide pollution
prevention program to plan, document, and verify DQE's continuing efforts to
effectively control pollution. Duquesne Light is an environmentally clean
utility and innovative and forward-thinking in environmental matters.
In terms of awards and recognition, three of Duquesne Light's environmental
projects were selected for national recognition by the National Awards Council
for Environmental Sustainability, a coalition of 60 environmental, community,
government, and business organizations, by inclusion in Renew America's 1996
Environmental Success Index. The 1996 Index includes Duquesne Light's
environmental awareness and educational programs for youth; the Brunot Island
Wildlife Habitat Enhancement Project; and Duquesne Light's innovative disposal
of fly ash in abandoned mines. Duquesne Light was also awarded the 1996
Governor's Award for Environmental Excellence for "Outstanding Achievement in
Technology Innovation" related to Duquesne Light's research and development of
cost-effective low NOx burner technology. This patented technology, developed
for the Elrama Power Station, is readily transferable to numerous other coal-
fired boilers around the country. Duquesne Light's marketing activities also
received national recognition during 1996, including, for the fourth consecutive
year, the National Association of Town Watch's National Electric Utility Award
for outstanding participation in the National Night Out and the Edison Electric
Institute Marketing Achievement Award for managing an electric vehicle
transportation project utilizing an electric shuttle bus at the Pittsburgh
International Airport. In addition, Duquesne Light received the 1996 Edison
Electric Institute Minority Business Development Corporation of the Year Award.
97
<PAGE> 112
Duquesne Light's lunchtime seminar program, "Work and Family Issues,"
earned it membership in the first class of the U.S. Department of Labor's
"Working Women Count!" Honor Roll. The honor roll singles out policies and
programs that respond to improving pay and benefits; building a family-friendly
work place; and valuing women's work through training and advancement.
Robert P. Bozzone, Chairman
Doreen E. Boyce
Sigo Falk
98
<PAGE> 113
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires directors and executive officers
of DQE, and any persons who beneficially own more than ten percent of DQE Common
Stock, to file with the SEC initial reports of ownership and reports of changes
in ownership of DQE Common Stock. Such persons are required by SEC regulations
to furnish DQE with copies of all Section 16(a) forms they file.
To DQE's knowledge, during the year ended December 31, 1996, based solely
on review of the copies of such reports furnished to DQE and written
representations that no other reports were required, all such Section 16(a)
filing requirements were met except that a grant of restricted stock that was
unissued was inadvertently excluded from the initial Form 3 Report of Jack E.
Saxer, Jr., Vice President. The Form 3 was later amended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the DQE Board are Dr. Boyce
and Messrs. Bozzone and Falk. No member of the Compensation Committee of the DQE
Board was at any time during 1996 or at any other time an officer or employee of
the DQE Board.
No executive officer of DQE served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the DQE Board or the Compensation Committee of the DQE
Board.
PERFORMANCE GRAPH
The following graph represents a performance comparison of cumulative total
return on DQE Common Stock as compared to the S&P Electric Companies and the S&P
500 Index for the period of five fiscal years commencing December 31, 1991 and
ending on December 31, 1996.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
DQE, S&P ELECTRICS AND S&P 500 INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DQE S&P ELECTRICS S&P 500 INDEX
<S> <C> <C> <C>
1991 100 100 100
1992 111 106 108
1993 124 118 119
1994 113 104 120
1995 184 136 165
1996 182 136 203
</TABLE>
- ---------------
Assumes $100 invested on December 31, 1991.
* Total return assumes reinvestment of dividends.
99
<PAGE> 114
COMPENSATION
The following Summary Compensation Table sets forth certain information as
to cash and noncash compensation earned and either paid to, or accrued for the
benefit of, the current President and Chief Executive Officer of DQE, the four
other highest-paid executive officers of DQE, and the former Chairman of the
Board, President and Chief Executive Officer of DQE, who resigned effective
August 9, 1996, for services rendered in all capacities to DQE and its
Subsidiaries during the years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
AWARDS
---------------------------
PAYOUTS
(F) (G) -------
ANNUAL COMPENSATION (E) OTHER SECURITIES (I)
---------------------------- OTHER RESTRICTED UNDERLYING (H) ALL
(A) (C) (D) ANNUAL STOCK PERFORMANCE LTIP OTHER
NAME AND PRINCIPAL (B) SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) (5) ($)(2)(7)
- ----------------------- ---- ------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
D. D. Marshall......... 1996 289,486 101,367 68,284 141,250(5) 56,645 0 7,375
President and Chief 5,725(6)
Executive Officer 1995 233,333 86,750 27,918 0 63,555 0 4,291
(Effective 8/9/96) 1994 191,667 48,450 7,814 0 52,813 0 4,504
G. L. Schwass.......... 1996 250,000 87,500 124,191 0 68,964 0 4,458
Exec. Vice Pres. 1995 216,667 78,750 60,638 0 61,539 0 4,448
and Chief Financial 1994 191,667 57,000 21,299 0 52,813 0 4,430
Officer
D. L. Green............ 1996 195,000 46,800 13,860 5,650(6) 54,768 0 7,622
Senior Vice 1995 184,000 51,900 44,268 0 28,954 0 4,460
President(9) 1994 166,333 49,500 16,319 0 35,469 0 4,482
V. A. Roque............ 1996 175,000 52,500 0 5,540(6) 17,391 0 7,388
Vice President and 1995 175,000 52,500 215,097 0 31,731 0 4,490
General Counsel
J. D. Mitchell......... 1996 130,000 39,000 0 5,650(6) 17,883 0 6,002
Vice President 1995 130,000 39,000 0 0 25,500 0 2,508
1994 128,847 25,391 0 0 10,000 0 1,923
W. W. von Schack....... 1996 276,975 120,428 572,603 0 91,459 0 1,828(8)
Former Chairman, 1995 440,000 194,700 174,853 0 166,385 0 4,448
President and CEO 1994 440,000 163,240 173,682 0 155,000 0 4,490
(1/1/96 -- 8/9/96)
</TABLE>
- ---------------
(1) The amount of any bonus compensation is determined annually based upon the
prior year's performance and either paid or deferred (via an eligible
participant's prior election) in the following year. The amounts shown for
each year are the awards earned in those years but established and paid or
deferred in the subsequent years. Mr. von Schack's bonus was prorated for
his months of service before his resignation.
(2) Amounts of Other Annual Compensation are connected to the funding of
non-qualified pension benefit accruals for Messrs. Marshall, Schwass, and
von Schack and Ms. Green (recently deceased). Amounts of Other Annual
Compensation for Mr. Roque represent reimbursement for moving expenses,
including sale of residence and income taxes. Amounts of All Other
Compensation shown are DQE matching contributions during 1994, 1995, and
1996 under the Duquesne Light 401(k) Retirement Savings Plan for Management
Employees and compensatory tax payments on restricted stock.
(3) The awards listed are the only restricted stock holdings of the named
officers.
(4) Includes total number of stock options granted during the fiscal year, with
or without tandem SARs and stock-for-stock (reload) options on option
exercises, as applicable, whether vested or not. See table "Option/SAR
Grants in Last Fiscal Year." The stock options are subject to vesting
(exercisability) based on DQE and individual performance and achievement of
specified goals and objectives. Of the amount of 1994 stock options granted,
Messrs. Marshall and von Schack have lost 2,673 and 3,988 stock options,
respectively. Of the amount of 1995 stock options granted, Messrs. Marshall
and von Schack have lost 347 and 1,524 stock options, respectively. Of the
amount of 1996 stock options granted, Ms. Green lost 3,876 stock options.
(5) Vesting of this award is based on the achievement of performance goals for a
three-year period. Dividends will be accrued and paid after the end of the
three-year period on the shares earned.
(6) Represents the value of 200 shares of DQE Common Stock awarded as part of
the consideration for the signing of a Non-Competition and Confidentiality
Agreement. Dividends are paid quarterly.
(7) In 1996, premiums in the amount of $95,980 were paid by DQE for split-dollar
life insurance for Mr. von Schack. This amount was refunded to DQE in full
in 1996 in connection with his resignation.
100
<PAGE> 115
(8) Includes a payment of $401 to cover one month's health care premium pursuant
to Mr. von Schack's resignation.
(9) Deceased April 1997.
Supplemental Tables
The following tables provide information with respect to options to
purchase DQE Common Stock and tandem stock appreciation rights in 1996 under the
Incentive Plan.
Option grants are structured to align compensation with the creation of
value for common stockholders. For example, should DQE stock rise 50% in value
over the ten-year option term (from $29.00 per share to $43.50 per share),
stockholder value would increase an estimated $1,120,458,775, while the value of
the grants to the individuals listed below would increase an estimated
three-tenths of one percent ($3,460,403) of the total gain realized by all
stockholders.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(C)
(B) % OF TOTAL
NUMBER OF OPTIONS/SARS (D) (F)
SECURITIES GRANTED TO EXERCISE GRANT
UNDERLYING EMPLOYEES OR BASE (E) DATE
(A) OPTIONS/SARS IN FISCAL PRICE EXPIRATION PRESENT
NAME GRANTED(#) YEAR ($/SH)(3) DATE VALUE($)(4)
- ------------------------------ ------------ ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
D. D. Marshall................ 28,986(1) 6.7% 30.1875 02/26/06 127,538*
13,139(2) 3.0% 26.4375 02/18/02 37,709*
619(2) 0.1% 30.0000 02/18/02 2,037*
13,901(2) 3.2% 30.0000 08/29/04 49,210*
G. L. Schwass................. 28,986(1) 6.7% 30.1875 02/26/06 127,538*
18,229(2) 4.2% 27.5625 07/22/01 54,140*
748(2) 0.2% 27.5625 08/29/04 2,438*
21,001(2) 4.8% 29.7500 08/29/04 70,143*
D. L. Green(6)................ 19,379(1) 4.5% 30.1875 02/26/06 85,268*
15,133(2) 3.5% 30.3125 07/31/98 41,313*
1,535(2) 0.4% 28.8125 07/31/98 3,653*
18,721(2) 4.3% 28.8125 07/22/01 54,104*
V. A. Roque................... 17,391(1) 4.0% 30.1875 02/26/06 76,520*
J. D. Mitchell................ 12,919(1) 3.0% 30.1875 02/26/06 56,844*
751(2) 0.2% 30.8750 08/29/04 2,839*
1,435(2) 0.3% 27.0625 08/29/04 4,563*
2,778(2) 0.6% 29.9375 08/29/04 9,751*
W. W. von Schack.............. 20,297(2) 4.7% 30.7500 08/08/97 47,292*
5,572(2) 1.3% 30.7500 08/08/97 12,983*
65,590(1)(5) 15.1% 30.1875 08/08/97 150,201*
</TABLE>
- ---------------
* The actual value, if any, an executive may realize will depend on the
difference between the actual stock price and the exercise price on the date
the option is exercised. There is no assurance that the value ultimately
realized by an executive, if any, will be at or near the value estimated.
(1) These grants represent performance stock options with tandem stock
appreciation rights and stock-for-stock (reload) options. If the performance
conditions are met and the granted option is awarded, 50% of the award vests
immediately, and the remaining 50% vests one year later.
(2) These grants represent stock-for-stock (reload) options received upon
exercise of stock options by the applicable officer electing to use
previously owned DQE stock to exercise the options and/or pay withholding
taxes under the terms of the Incentive Plan. These options include tandem
stock appreciation rights, dividend equivalent accounts, and stock-for-stock
options.
101
<PAGE> 116
(3) The exercise price of the options is the fair market value of DQE Common
Stock on the date such options were granted. The exercise price may be
payable in cash or previously owned shares of DQE Common Stock held for at
least six months.
(4) The grant date present value shown in column (f) gives the theoretical value
of the options listed in column (b) on the grant dates using the
Black-Scholes option pricing model, modified to account for the payment of
dividends. The theoretical value of the option was calculated assuming an
option life equal to the time period between the grant date and expiration
date (i.e., from 1.45 to 10.00 years); a periodic risk-free rate of return
equal to the yield of the U.S. Treasury note having a similar maturity date
as the option expiration date, as reported by Bloomberg Financial Markets on
the grant date (i.e., from 4.86% to 6.65%); the most recent initial
quarterly dividend as of the option grant date (i.e., from $0.32 to $0.34),
with an expected growth rate of 5.5% per year as estimated by "Value Line
Ratings and Reports", dated December 13, 1996; and an expected stock price
volatility as reported by Bloomberg Financial Markets over the same length
of time as the option life as of the month of the grant (i.e., from 12.96%
to 17.94%). No adjustments to the grant date present values have been made
with respect to exercise restrictions, forfeiture, or early exercise.
(5) Vested upon award.
(6) Deceased April 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(D)
NUMBER OF SECURITIES (E)
(B) UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SECURITIES OPTIONS/SARS AT OPTIONS/SARS AT
UNDERLYING (C) FISCAL YEAR-END(#)(6) YEAR-END ($)(6)(7)
(A) OPTIONS/SARS VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISED(#) ($)(5) UNEXERCISABLE UNEXERCISABLE
- --------------------- -------------------- -------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
D. D. Marshall....... 38,012(1) 271,938 40,839/84,525 190,809/328,803
31,177(2) 271,720
18,511(3) 159,715
23,422(4) 302,532
G. L. Schwass........ 108,089(1) 950,779 38,549/89,161 103,558/315,273
45,884(2) 441,865
D. L. Green(8)....... 20,897(1) 151,937 73,921/65,612 511,022/194,314
43,989(2) 690,645
V. A. Roque.......... 12,115(1) 83,542 11,500/38,507 103,500/157,349
2,000(4) 15,625
J. D. Mitchell....... 5,975(2) 53,419 9,711/33,697 67,996/133,998
9,000(3) 62,062
5,000(4) 48,229
W. W. von Schack..... 233,709(1) 2,105,058 549,608/0 3,974,516/0
34,369(2) 656,493
</TABLE>
- ---------------
(1) Stock appreciation rights exercised for stock and cash.
(2) Stock options exercised for stock by tendering shares of previously-owned
DQE Common Stock.
(3) Stock appreciation rights exercised for cash.
(4) Stock options exercised for stock by tendering cash.
(5) Represents the difference between the exercise price of the options or SARs
and the fair market value of DQE Common Stock on the NYSE on the date of
exercise.
(6) The numbers set forth include options/SARs previously granted (including
those granted in 1996) but not yet earned. The number to be earned will be
based on individual performance and could range from zero to the following
numbers for the named officers, respectively: 49,986 ($181,998); 49,986
102
<PAGE> 117
($181,998); 33,379 ($102,686); 26,391 ($68,499); 21,919 ($67,999); and 0
($0). These options may be earned by the officer over future periods from
one to three years as established with each option grant.
(7) Represents the difference between the exercise price of the options or SARs
and the fair market value of DQE Common Stock on the NYSE on December 31,
1996.
(8) Deceased April 1997.
RETIREMENT PLAN
DQE and its Subsidiaries maintain tax-qualified and non-qualified defined
benefit pension plans and arrangements that cover the named executive officers,
among others. The following table illustrates the estimated annual straightlife
annuity benefits payable at the normal retirement age of 65 to management
employees in the specified earnings classifications and years of service shown:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
HIGHEST
CONSECUTIVE
FIVE-YEAR
AVERAGE
COMPENSATION 5 10 15 20 25 30 35
------------ -------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000 $ 10,000 $ 20,000 $ 31,000 $ 41,000 $ 51,000 $ 59,000 $ 65,000
$150,000 $ 12,000 $ 25,000 $ 37,000 $ 50,000 $ 62,000 $ 72,000 $ 79,000
$175,000 $ 15,000 $ 29,000 $ 44,000 $ 59,000 $ 74,000 $ 85,000 $ 93,000
$200,000 $ 17,000 $ 34,000 $ 51,000 $ 68,000 $ 85,000 $ 98,000 $ 108,000
$300,000 $ 26,000 $ 52,000 $ 78,000 $ 104,000 $ 130,000 $ 149,000 $ 165,000
$400,000 $ 35,000 $ 70,000 $ 105,000 $ 140,000 $ 175,000 $ 201,000 $ 221,000
$500,000 $ 44,000 $ 88,000 $ 132,000 $ 176,000 $ 220,000 $ 252,000 $ 277,000
$600,000 $ 53,000 $ 106,000 $ 159,000 $ 212,000 $ 265,000 $ 304,000 $ 334,000
$700,000 $ 62,000 $ 124,000 $ 186,000 $ 248,000 $ 310,000 $ 356,000 $ 391,000
$800,000 $ 71,000 $ 142,000 $ 213,000 $ 284,000 $ 355,000 $ 407,000 $ 447,000
$900,000 $ 80,000 $ 160,000 $ 240,000 $ 320,000 $ 400,000 $ 459,000 $ 504,000
$950,000 $ 85,000 $ 169,000 $ 253,000 $ 338,000 $ 422,000 $ 485,000 $ 532,000
</TABLE>
Compensation utilized for pension formula purposes includes salary and
bonus reported in columns (c) and (d) of the Summary Compensation Table and
stock option compensation prior to March 1, 1994. An employee who has at least
five years of service has a vested interest in the retirement plan. Benefits are
received by an employee upon retirement, which may be as early as age 55.
Benefits are reduced by reason of retirement if commenced prior to age 60 or
upon election of certain options under which benefits are payable to survivors
upon the death of the employee. Pension amounts set forth in the above table
reflect the integration with social security of the tax-qualified retirement
plans. Retirement benefits are also subject to offset by other retirement plans
under certain conditions.
The credited years of service for Messrs. Marshall and Schwass, and Ms.
Green (recently deceased), are 19, 22 and 17, respectively. The current
five-year covered compensation and current years of credited service of Messrs.
Roque, Mitchell, and von Schack, respectively, are $199,231 and 4; $138,241 and
16; and $853,396 and 32.
EMPLOYMENT AND CHANGE OF CONTROL
DQE has three-year employment agreements with Messrs. Marshall and Schwass.
Each agreement is subject to automatic one-year renewals unless prior written
notice of termination is given by the officer or DQE.
103
<PAGE> 118
The agreements provide, among other things, that each serve in his present
position at an annual base salary of at least $190,000 for each of Messrs.
Marshall and Schwass, subject to periodic review, and for the participation of
each in executive compensation and other employee benefit plans of the
companies.
If any of the officers is discharged other than for cause or resigns for
good reason, then, in addition to any amounts earned but not paid as of the date
of termination, he would receive in a cash lump sum the balance of his base
salary for the remaining term of the agreement, a bonus amount with respect to
the remaining term of the agreement calculated at a rate equivalent to his prior
year's bonus and the actuarial equivalent of the additional pension he would
have accrued had his service for pension purposes continued until the expiration
of the agreement. In addition, the officer would be entitled to immediate
vesting (or the redemption in cash) of all of his stock-based awards. Pursuant
to the Severance Agreements with Messrs. Marshall and Schwass, these three-year
employment agreements have been terminated subject to reinstatement if the
Merger is abandoned.
During 1996, the DQE Board authorized and DQE entered into non-competition
and confidentiality agreements with Messrs. Marshall, Roque and Mitchell. The
agreements provide that these individuals will not disclose confidential
information about DQE or its affiliates; compete directly or indirectly with DQE
or any of its affiliates in a specified geographic area; solicit the business of
certain customers and suppliers of DQE; or induce any employee of DQE or its
affiliates to leave his current employment, each for specified periods of time
following the termination of his or her employment with DQE. Consideration for
these agreements was 200 shares of DQE Common Stock subject to a one-year
transfer restriction plus sufficient cash to pay federal, state, and local taxes
on the shares and an increase in the severance benefits payable to the executive
to one and one-half times the severance benefits, if any, to which the
individual is otherwise entitled with a minimum of six months and a maximum of
one year of severance pay. If, however, an executive is a party to an employment
agreement which provides greater severance benefits than are provided under the
non-competition and confidentiality agreements, the employment agreement shall
control.
In connection with the August 1996 resignation of Mr. von Schack as
Chairman, President, and Chief Executive Officer of DQE, DQE, Duquesne Light,
and Mr. von Schack entered into a letter agreement pursuant to which Mr. von
Schack was paid a prorated bonus in the amount of $120,428 and his coverage
under the medical benefits program was continued for a period of one month. All
of the stock options granted to and currently held by Mr. von Schack were fully
awarded, vested, and made exercisable. Mr. von Schack agreed, among other
things, not to disclose confidential information about DQE and its affiliates;
compete directly or indirectly with DQE or any of its affiliates in a specified
geographic area; solicit the business of customers and suppliers of DQE; or
induce any employee of DQE or its affiliates to leave his or her current
employment, each for specified periods of time. Mr. von Schack also released DQE
from liability for claims arising from and during his employment and his
Employment Agreement with DQE was terminated. All of Mr. von Schack's retirement
benefits were fully vested and nonforfeitable and will be distributed in accord
with the terms of the retirement plans.
Options and alternative stock appreciation rights granted under the DQE,
Inc. Long-Term Incentive Plan become immediately and fully exercisable upon
occurrence of certain change-in-control events. See "Interests of Certain
Persons in the Merger."
APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Action is to be taken at the DQE Meeting to approve the appointment, by the
DQE Board, of independent certified public accountants to audit the books of DQE
and its Subsidiaries for the year ending December 31, 1997. The DQE Board
recommends the approval of the appointment of Deloitte & Touche as independent
certified public accountants for 1997.
Deloitte & Touche provided a variety of professional services for DQE and
its Subsidiaries during 1996. Included were the audit of the annual financial
statements of DQE; reviews of quarterly financial statements; services related
to filings with the SEC and the FERC; audits of certain employee benefit plans;
and consultations on matters related to accounting and financial reporting.
Non-audit services also were provided during 1996, including advice and
technical assistance relating to corporate tax matters.
104
<PAGE> 119
Representatives of Deloitte & Touche will be present at the DQE Meeting and
have the opportunity to make a statement if they desire and will also be
available to respond to appropriate questions from stockholders in attendance.
DQE is submitting the appointment of independent public accountants for
approval by the stockholders, although approval is not required. If approval is
not obtained, the DQE Board will reconsider its appointment of Deloitte &
Touche.
THE DQE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
APPROVE THE APPOINTMENT OF DELOITTE & TOUCHE AS INDEPENDENT ACCOUNTANTS.
PROPOSAL OF A DQE STOCKHOLDER
Annual Election of All Directors
Approval of the Stockholder Proposal requires the affirmative vote of a
majority of the votes cast by all stockholders entitled to vote. If a
stockholder abstains from voting certain shares or a broker indicates on a proxy
that it does not have discretionary authority to vote certain shares, those
shares will not be considered as votes cast with respect to this proposal and
will not have the same legal effect as a vote "Against" the proposal.
Approval of the Stockholder Proposal would be advisory only and would not
effect a change in the length of terms of the directors. Actual replacement of
the three-year terms with a one-year term would require an amendment to the DQE
Articles. If the proposal receives the affirmative vote of over 50% of the votes
cast by all stockholders entitled to vote in 1997, the DQE Board will consider
an amendment to the Articles to be submitted to stockholders for approval at the
1998 Annual Meeting. Under the DQE Articles, if the DQE Board agreed with the
amendment, it would require the affirmative vote of over 50% of the votes cast
by all stockholders entitled to vote. If the DQE Board did not agree with the
amendment, it would require the affirmative vote of the holders of at least 80%
of the then-outstanding shares for approval.
An individual stockholder has informed DQE that he intends to present the
following proposal at the DQE Meeting. The name and address of the proponent and
the number of shares he holds will be furnished by DQE to any person, orally or
in writing as requested, promptly upon the receipt of any oral or written
request to Stockholder Relations, DQE, P. O. Box 68, Pittsburgh, PA 15230-0068
(telephone number: 412-393-6167).
"Resolved that stockholders Board action to eliminate (after current
director terms expire) three year director terms and set one year as the term
for each director.
"Reasons:
(1) Corporate experience has shown that staggered three year terms are
almost a totally ineffective defense against takeovers.
(2) DQE's director vacancies (recently 3) are abnormally low in relation
to other NYSE-listed firms.
(3) Recently several corporations (locally and nationally) have adopted
(or readopted) single-year terms.
(4) Institutional investors, financial and union pension fund
administrators, many analysts, and specialist in corporate
governance now prefer single year terms.
(5) Opposition to annual election now generally gives a perception of
non-responsive management.
(6) DQE's stockholder and public images would improve if management
ceased opposing one-year terms.
"Discussion:
105
<PAGE> 120
"Sources within the College Equities Retirement Fund have advised the
proposer is the least effective of any anti-takeover provisions adopted during
the '80s and '90s. The respected UAW (United Auto Workers) investment strategist
has publicly reiterated that staggered terms are useless as anti-takeover
defense. Classical opponents of staggered boards agree. And managements under
investor pressure for poor performance (Westinghouse, etc.) have not opposed a
switch to single-year terms. Institutional investors and pension fund managers
have increasingly used the stockholder resolution mechanism to promote
single-year terms. Examples -- UAW at Tenneco (1996) CREF, CALPERS (California
Public Employees Retirement System) with several corporations, and the vote
totals in favor have steadily increased from the mid-20% range to the mid-40%
level recently. (In the Ichan motivated turmoil just prior to the split of U.S.
Steel into USX-Marathon and USX-U.S. Steel, a single-term resolution received
51% of the vote recorded on a very low number of total shares voted because of
an excessively delayed proxy statement). In previous votes at DQE, the last
(1993) was slightly over 30.9%.
"At the time of submission of this proposal (November, 1996), the proponent
does not know what management's action may be. There are three choices open:
(a) recommendation against
(b) no recommendation
(c) recommendation of support
"About 1970, a supporting recommendation actually occurred at ATT. Mr. John
De Butts, then chairman, asked his staff to try and find one stockholder
resolution that was meritorious and that management could support. One was
found, and the vote in favor was a landslide. De Butts' action spiked the
"Always-Agin-It" unless it was management's origination.
"Please vote your shares by marking the "FOR" box on DQE's ballot card or
on the instruction form to your broker or pension plan. Remember, failure to
mark a box is a vote "against" if management exercises its established right to
count blank boxes as it wishes. Otherwise, still vote -- good management is
promoted by a large share turnout.
"Thank you."
MANAGEMENT'S STATEMENT IN OPPOSITION
THE DQE BOARD OF RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THE ADOPTION OF
THE STOCKHOLDER'S PROPOSAL.
The main advantage of a staggered board is time -- time to negotiate prior
to a hostile takeover.
The DQE Board believes that stockholders are not the victims, but are, in
fact, the main beneficiaries of the use of a staggered board since a corporate
raider could not takeover DQE immediately. Keeping a staggered board forces a
raider to negotiate with DQE, which means all stockholders of DQE should have an
opportunity to receive the best stock price in a takeover. Use of a staggered
board also provides the DQE Board with time to negotiate the effect of a
business combination on the DQE employees, customers, region, and other affected
constituencies. Even in light of the Merger Agreement, the staggered board
remains necessary. The consummation of the Merger is not guaranteed, and the
initiation of a hostile bid could deprive stockholders of the value of the
Merger by creating undue confusion if the DQE Board is replaced.
A staggered board also protects stockholder value since it provides
director continuity and stability by ensuring that at least some experienced
directors are on the DQE Board and preventing the sharp changes in policies,
strategies, and operations which could occur in a hostile takeover.
See the chart under "-- Performance Graph" for a comparison of DQE's
five-year cumulative total return. DQE has continued to outperform the industry
as represented by the S&P Electrics Index and has achieved a very respectable
performance as measured against the outstanding performance of the S&P 500
Index.
106
<PAGE> 121
Because of their value, staggered boards are still in common use in
utilities and other companies in Pennsylvania and other states.
A staggered board has worked well for DQE over the years. It was first
approved by Duquesne Light stockholders in 1987, ten years ago. It was
originally passed by DQE stockholders in 1989 and was reaffirmed in 1992 and
1993 when this same stockholder proposal was defeated on two separate occasions.
The DQE Board has considered the merits of the stockholder proposal and, on
balance, believes stockholders are better served by keeping a staggered board.
The DQE Board asks for your support to keep this protection for your stock
value in place.
OTHER MATTERS
Any person who is a holder or beneficial holder of DQE Common Stock on the
Record Date will receive, free upon request, a copy of DQE's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "DQE 10-K") as filed with
the SEC. Requests must be made in writing to the Corporate Secretary of DQE, Box
68, Pittsburgh, PA 15230-0068.
Note that the Audited Financial Statements and the Notes to the Audited
Financial Statements from the DQE 10-K are embodied in DQE's 1996 Annual Report
to Shareholders, which was previously mailed to all holders of DQE Common Stock.
EXPERTS
The consolidated financial statements of APS at December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Joint Proxy Statement/Prospectus and the
financial statement schedules incorporated by reference in the Registration
Statement have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent public accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements and schedules of DQE as of December
31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994,
incorporated by reference in this Joint Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors. Such financial
statements are incorporated herein by reference in reliance upon such reports
given upon their authority as experts in accounting and auditing.
VALIDITY OF SHARES
The validity of the APS Common Stock to be issued pursuant to the Merger
will be passed upon for APS by Sullivan & Cromwell.
STOCKHOLDER PROPOSALS
The date by which stockholder proposals must be received by APS for
inclusion in the proxy materials relating to the 1998 annual meeting of
stockholders of APS is December 5, 1997. The date by which stockholder proposals
must be received by DQE for inclusion in the proxy materials relating to the
1998 annual meeting of stockholders of DQE, which is currently expected to be
held on April 28, 1998, is November 17, 1997.
107
<PAGE> 122
APPENDIX A
MERGER AGREEMENT
A-1
<PAGE> 123
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
DQE, INC.,
ALLEGHENY POWER SYSTEM, INC.
AND
AYP SUB, INC.
DATED AS OF APRIL 5, 1997
<PAGE> 124
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
RECITALS.......................................................................... A-1
ARTICLE I The Merger; Closing; Effective Time................................ A-1
1.1. Merger Sub; The Merger............................................. A-1
1.2. Closing............................................................ A-2
1.3. Effective Time..................................................... A-2
ARTICLE II Certificate of Incorporation and By-Laws of the Surviving A-2
Corporation........................................................
2.1. The Certificate of Incorporation................................... A-2
2.2. The Bylaws......................................................... A-2
ARTICLE III Officers and Directors of the Surviving Corporation................ A-2
3.1. Directors.......................................................... A-2
3.2. Officers........................................................... A-2
ARTICLE IV Effect of the Merger on Capital Stock; Exchange of Certificates.... A-2
4.1. Effect on Capital Stock............................................ A-2
(a) Merger Consideration........................................... A-2
(b) Cancellation of Shares......................................... A-3
(c) Merger Sub..................................................... A-3
4.2. Exchange of Certificates for Shares................................ A-3
(a) Exchange Agent................................................. A-3
(b) Exchange Procedures............................................ A-3
(c) Distributions with Respect to Unexchanged Shares; Voting....... A-4
(d) Transfers...................................................... A-4
(e) Fractional Shares.............................................. A-4
(f) Termination of Exchange Fund................................... A-4
(g) Lost, Stolen or Destroyed Certificates......................... A-4
(h) Affiliates..................................................... A-5
4.3. Dissenters' Rights................................................. A-5
4.4. Adjustments to Prevent Dilution.................................... A-5
ARTICLE V Representations and Warranties..................................... A-5
5.1. Representations and Warranties of the Company and Parent........... A-5
(a) Organization, Good Standing and Qualification.................. A-5
(b) Capital Structure.............................................. A-6
(c) Corporate Authority; Approval and Fairness..................... A-7
(d) Governmental Filings; No Violations............................ A-8
(e) Reports; Financial Statements.................................. A-8
(f) Absence of Certain Changes..................................... A-9
(g) Litigation and Liabilities..................................... A-9
(h) Employee Benefits.............................................. A-9
(i) Compliance with Laws; Permits.................................. A-11
(j) Takeover Statutes.............................................. A-11
(k) Environmental Matters.......................................... A-11
(l) Accounting and Tax Matters..................................... A-12
(m) Taxes.......................................................... A-12
(n) Labor Matters.................................................. A-13
</TABLE>
A-i
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(o) Insurance...................................................... A-13
(p) Intellectual Property.......................................... A-13
(q) Brokers and Finders............................................ A-15
(r) Regulation as a Utility........................................ A-15
(s) Operations of Nuclear Power Plants............................. A-15
(t) Affiliates of the Company...................................... A-16
(u) Ownership of Other Party's Common Stock........................ A-16
ARTICLE VI Covenants.......................................................... A-16
6.1. Interim Operations................................................. A-16
6.2. Acquisition Proposals.............................................. A-18
6.3. Information Supplied............................................... A-19
6.4. Stockholders Meetings.............................................. A-19
6.5. Filings; Other Actions; Notification............................... A-20
6.6. Taxation and Accounting............................................ A-21
6.7. Access............................................................. A-21
6.8. Affiliates......................................................... A-21
6.9. Stock Exchange Listing and De-listing.............................. A-22
6.10. Publicity.......................................................... A-22
6.11. Benefits........................................................... A-22
(a) Stock Options.................................................. A-22
(b) Directors of Parent............................................ A-23
(c) Officers of Parent............................................. A-23
(d) Parent Board Committees........................................ A-23
(e) Corporate Headquarters......................................... A-23
6.12. Expenses........................................................... A-23
6.13. Indemnification; Directors' and Officers' Insurance................ A-24
6.14. Other Actions by the Company and Parent............................ A-24
(a) Takeover Statute............................................... A-24
(b) Dividends...................................................... A-25
6.15. Parent Vote........................................................ A-25
6.16. Rate Matters....................................................... A-25
6.17. PUHCA.............................................................. A-25
6.18. Pennsylvania Restructuring Legislation............................. A-25
6.19. Nuclear Matters.................................................... A-25
ARTICLE VII Conditions......................................................... A-26
7.1. Conditions to Each Party's Obligation to Effect the Merger......... A-26
(a) Stockholder Approval........................................... A-26
(b) NYSE Listing................................................... A-26
(c) Regulatory Consents............................................ A-26
(d) Litigation..................................................... A-26
(e) S-4............................................................ A-26
(f) Blue Sky Approvals............................................. A-26
(g) Pooling Letter................................................. A-26
7.2. Conditions to Obligations of Parent and Merger Sub................. A-26
(a) Representations and Warranties................................. A-26
(b) Performance of Obligations of the Company...................... A-27
(c) Consents....................................................... A-27
(d) Tax Opinion.................................................... A-27
</TABLE>
A-ii
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(e) Affiliates Letters............................................. A-27
(f) Comfort Letters................................................ A-27
7.3. Conditions to Obligation of the Company............................ A-27
(a) Representations and Warranties................................. A-27
(b) Performance of Obligations of Parent and Merger Sub............ A-27
(c) Consents....................................................... A-27
(d) Tax Opinion.................................................... A-28
(e) Comfort Letters................................................ A-28
ARTICLE VIII Termination........................................................ A-28
8.1. Termination by Mutual Consent...................................... A-28
8.2. Termination by Either Parent or the Company........................ A-28
8.3. Termination by the Company......................................... A-28
8.4. Termination by Parent.............................................. A-29
8.5. Effect of Termination and Abandonment.............................. A-29
ARTICLE IX Miscellaneous and General.......................................... A-30
9.1. Survival........................................................... A-30
9.2. Modification or Amendment.......................................... A-30
9.3. Waiver of Conditions; Extension.................................... A-30
9.4. Counterparts....................................................... A-31
9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL...................... A-31
9.6. Notices............................................................ A-32
9.7. Entire Agreement................................................... A-32
9.8. No Third Party Beneficiaries....................................... A-32
9.9. Obligations of Parent and of the Company........................... A-33
9.10. Severability....................................................... A-33
9.11. Interpretation..................................................... A-33
9.12. Assignment......................................................... A-33
</TABLE>
A-iii
<PAGE> 127
SCHEDULE OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------------------------------ ----
<S> <C>
Acquisition Agreement............................................................... A-18
Acquisition Proposal................................................................ A-18
Acquisition Transaction............................................................. A-18
AEA................................................................................. A-8
Affiliates Letter................................................................... A-21
Agreement........................................................................... A-1
Audit Date.......................................................................... A-8
Bankruptcy and Equity Exception..................................................... A-7
Budgets............................................................................. A-9
Bylaws.............................................................................. A-2
Certificate......................................................................... A-3
Charter............................................................................. A-2
Closing............................................................................. A-2
Closing Date........................................................................ A-2
Code................................................................................ A-1
Company............................................................................. A-1
Company Budget...................................................................... A-9
Company Disclosure Letter........................................................... A-5
Company Option...................................................................... A-6
Company Requisite Vote.............................................................. A-7
Compensation and Benefit Plans...................................................... A-9
Confidentiality Agreement........................................................... A-32
Constituent Corporations............................................................ A-1
Contracts........................................................................... A-8
Conversion Ratio.................................................................... A-3
Costs............................................................................... A-24
Current Premium..................................................................... A-24
D&O Insurance....................................................................... A-24
Disclosure Letter................................................................... A-5
Effective Time...................................................................... A-2
Environmental Law................................................................... A-12
ERISA............................................................................... A-10
ERISA Affiliate..................................................................... A-11
ERISA Affiliate Plan................................................................ A-11
Exchange Act........................................................................ A-8
Exchange Agent...................................................................... A-3
Exchange Fund....................................................................... A-3
Excluded Shares..................................................................... A-2
FERC................................................................................ A-6
Final Order......................................................................... A-26
GAAP................................................................................ A-9
Governmental Consents............................................................... A-26
Governmental Entity................................................................. A-8
Hazardous Material.................................................................. A-12
HSR Act............................................................................. A-8
Indemnified Parties................................................................. A-24
Intellectual Property Rights........................................................ A-15
IRS................................................................................. A-10
Law/Laws............................................................................ A-11
Material Acquisition Transaction.................................................... A-29
</TABLE>
A-iv
<PAGE> 128
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ------------------------------------------------------------------------------------ ----
<S> <C>
Material Adverse Effect............................................................. A-5
Merger.............................................................................. A-1
Merger Consideration................................................................ A-3
Merger Sub.......................................................................... A-1
Nuclear Facility/Nuclear Facilities................................................. A-15
Nuclear Review Committee............................................................ A-25
NYSE................................................................................ A-22
Order............................................................................... A-26
Parent.............................................................................. A-1
Parent Budget....................................................................... A-9
Parent Common Stock................................................................. A-3
Parent Companies.................................................................... A-2
Parent Disclosure Letter............................................................ A-5
Parent Requisite Vote............................................................... A-7
Parent Stock Plans.................................................................. A-6
Parent Stockholders Meeting......................................................... A-19
Parent Voting Debt.................................................................. A-7
PBCL................................................................................ A-1
Pennsylvania Articles of Merger..................................................... A-2
Pennsylvania Restructuring Legislation.............................................. A-25
Pension Plan........................................................................ A-11
Permits............................................................................. A-11
Person.............................................................................. A-4
Pooling Affiliates Letter........................................................... A-22
Power Act........................................................................... A-8
Preferred Shares.................................................................... A-6
Prospectus/Proxy Statement.......................................................... A-19
PUHCA............................................................................... A-6
Reports............................................................................. A-8
Representatives..................................................................... A-21
S-4 Registration Statement.......................................................... A-19
SEC................................................................................. A-6
Securities Act...................................................................... A-8
Shares.............................................................................. A-2
Stock Option Agreement.............................................................. A-1
Stock Plans......................................................................... A-6
Stockholders Meeting................................................................ A-19
Subsidiary.......................................................................... A-5
Superior Proposal................................................................... A-19
Surviving Corporation............................................................... A-1
Takeover Statute.................................................................... A-11
Tax/Taxes/Taxable................................................................... A-14
Tax Return.......................................................................... A-14
Termination Date.................................................................... A-28
Third-Party Intellectual Property Rights............................................ A-15
Voting Debt......................................................................... A-6
</TABLE>
A-v
<PAGE> 129
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated
as of April 5, 1997, among DQE, Inc., a Pennsylvania corporation (the
"Company"), Allegheny Power System, Inc., a Maryland corporation ("Parent"), and
AYP Sub, Inc., a Pennsylvania corporation to be organized as a wholly owned
subsidiary of Parent ("Merger Sub," the Company and Merger Sub sometimes being
hereinafter collectively referred to as the "Constituent Corporations.")
RECITALS
WHEREAS, Parent and the Company have determined to engage in a strategic
business combination;
WHEREAS, in furtherance thereof, the respective boards of directors of each
of Parent and the Company have approved this Agreement, which contemplates the
merger of Merger Sub with and into the Company (the "Merger") whereby the
Company will become a wholly owned subsidiary of Parent, and have approved the
Merger upon the terms and subject to the conditions set forth in this Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
WHEREAS, for financial accounting purposes, it is intended that the Merger
shall be accounted for as a "pooling-of-interests;"
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, as a condition and inducement to Parent's willingness to enter into
this Agreement, the Company is entering into a stock option agreement with
Parent (the "Stock Option Agreement"), pursuant to which the Company has granted
to Parent an option to purchase Shares (as defined in Section 4.1(a)) under the
terms and conditions set forth in the Stock Option Agreement; and
WHEREAS, the Company and Parent desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1. Merger Sub; The Merger. (a) As promptly as practicable following the
execution of this Agreement and receipt of any required regulatory approvals,
Parent shall cause Merger Sub to be incorporated under the laws of the
Commonwealth of Pennsylvania. The Articles of Incorporation and Bylaws of Merger
Sub shall be in a customary form. The authorized capital stock of Merger Sub
shall consist of 1,000 shares of common stock, $0.01 par value per share, all of
which shall be issued to Parent at a price of $1.00 per share following the
receipt of any required regulatory approvals. As promptly as practicable
following the issuance of such shares, Parent shall cause Merger Sub to
authorize, execute and deliver this Agreement and to assume its obligations as a
party hereto.
(b) Upon the terms and subject to the conditions set forth in this
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
be merged with and into the Company and the separate corporate existence of
Merger Sub shall thereupon cease. The Company shall be the surviving corporation
in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"), and the separate corporate existence of the Company with all its
rights, privileges, immunities, powers and franchises shall continue unaffected
by the Merger, except as set forth in Article III. The Merger shall have the
effects specified in the Pennsylvania Business Corporation Law, as amended
("PBCL").
A-1
<PAGE> 130
1.2. Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York
at 9:00 A.M. on the fifth business day after the day on which the last to be
fulfilled or waived of the conditions set forth in Article VII (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the fulfillment or waiver of those conditions) shall be satisfied or waived
in accordance with this Agreement or (ii) at such other place and time and/or on
such other date as the Company and Parent may agree in writing (the "Closing
Date").
1.3. Effective Time. As soon as practicable following the Closing, the
Company and Parent will cause an Articles of Merger (the "Pennsylvania Articles
of Merger") to be executed and filed with the Department of State of the
Commonwealth of Pennsylvania as provided in Section 1927 of the PBCL. The Merger
shall become effective at the time when the Pennsylvania Articles of Merger has
been duly filed with the Department of State of the Commonwealth of Pennsylvania
(the "Effective Time").
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
OF THE SURVIVING CORPORATION
2.1. The Certificate of Incorporation. 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 (the "Charter"), until
duly amended as provided therein or by applicable law, except that Article V of
the Charter shall be amended to read in its entirety as follows: "The aggregate
number of shares that the Corporation shall have the authority to issue is 1,000
shares of Common Stock, par value $0.01 per share".
2.2. The Bylaws. The by-laws of Merger Sub in effect at the Effective
Time shall be the by-laws of the Surviving Corporation (the "Bylaws"), until
thereafter amended as provided therein or by applicable law.
ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1. Directors. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the Charter
and Bylaws.
3.2. Officers. The officers of the Company at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the Charter
and Bylaws.
ARTICLE IV
EFFECT OF THE MERGER ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
4.1. Effect on Capital Stock. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any capital stock of
the Company:
(a) Merger Consideration. Each share of the Common Stock, without par
value, of the Company (the "Shares") issued and outstanding immediately
prior to the Effective Time (other than Shares owned by Parent, Merger Sub
or any other direct or indirect subsidiary of Parent (collectively, the
"Parent Companies") and Shares that are owned by the Company or any direct
or indirect Subsidiary of the Company, in each case not held on behalf of
third parties, and which are not Shares held by the Company's utility
Subsidiary to provide for redemption of such Subsidiary's preference shares
pursuant to the terms of such Subsidiary's 401(k) plan or to provide
benefits under another employee benefit plan of such Subsidiary
(collectively, "Excluded Shares")) shall, subject to Section 4.2(e) of this
Agreement,
A-2
<PAGE> 131
be converted into, and become exchangeable for 1.12 (the "Conversion
Ratio") shares of Common Stock, par value $1.25 per share, of Parent
("Parent Common Stock"), except as such merger consideration may be
adjusted pursuant to Section 4.4 (as so adjusted, the "Merger
Consideration"). At the Effective Time, all Shares shall no longer be
outstanding and shall be cancelled and retired and shall cease to exist,
and each certificate (a "Certificate") formerly representing any of such
Shares (other than Excluded Shares) shall thereafter represent only the
right to receive the Merger Consideration and the right, if any, to receive
pursuant to Section 4.2(e) cash in lieu of fractional shares into which
such Shares have been converted pursuant to this Section 4.1(a) and any
distribution or dividend pursuant to Section 4.2(c).
(b) Cancellation of Shares. Each Excluded Share shall, by virtue of
the Merger and without any action on the part of the holder thereof, cease
to be outstanding, shall be cancelled and retired without payment of any
consideration therefor and shall cease to exist.
(c) Merger Sub. At the Effective Time, each share of Common Stock,
par value $0.01 per share, of Merger Sub issued and outstanding immediately
prior to the Effective Time shall be converted into one share of common
stock of the Surviving Corporation.
4.2. Exchange of Certificates for Shares.
(a) Exchange Agent. As of the Effective Time, Parent shall deposit,
or shall cause to be deposited, with an exchange agent selected by Parent
with the consent of the Company (the "Exchange Agent"), which consent shall
not be unreasonably withheld, for the benefit of the holders of Shares,
certificates representing the shares of Parent Common Stock and, after the
Effective Time, if applicable, any cash, dividends or other distributions
with respect to the Parent Common Stock to be issued or paid pursuant to
the last sentence of Section 4.1(a) in exchange for outstanding Shares upon
due surrender of the Certificates (or affidavits of loss in lieu thereof)
pursuant to the provisions of this Article IV (such certificates for shares
of Parent Common Stock, together with the amount of any dividends or other
distributions payable with respect thereto, being hereinafter referred to
as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause the Exchange Agent to mail to each holder
of record of Shares (other than holders of Excluded Shares) (i) a letter of
transmittal specifying that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon delivery of the
Certificates (or affidavits of loss in lieu thereof) to the Exchange Agent,
such letter of transmittal to be in such form and have such other
provisions as Parent and the Company may reasonably agree, and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for (A) certificates representing shares of Parent Common Stock
and (B) any unpaid dividends and other distributions and cash in lieu of
fractional shares. Subject to Section 4.2(h), upon surrender of a
Certificate for cancellation to the Exchange Agent together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing
that number of whole shares of Parent Common Stock that such holder is
entitled to receive pursuant to this Article IV, (y) a check in the amount
(after giving effect to any required tax withholdings) of (A) any cash in
lieu of fractional shares plus (B) any unpaid non-stock dividends and any
other dividends or other distributions that such holder has the right to
receive pursuant to the provisions of this Article IV, and the Certificate
so surrendered shall forthwith be cancelled. No interest will be paid or
accrued on any amount payable upon due surrender of the Certificates. In
the event of a transfer of ownership of Shares that is not registered in
the transfer records of the Company, a certificate representing the proper
number of shares of Parent Common Stock, together with a check for any cash
to be paid upon due surrender of the Certificate and any other dividends or
distributions in respect thereof, may be issued and/or paid to such a
transferee if the Certificate formerly representing such Shares is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Person (as defined below) requesting
such exchange shall pay any transfer or other taxes required by
A-3
<PAGE> 132
reason of the issuance of certificates of shares of Parent Common Stock in
a name other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of Parent or the
Exchange Agent that such tax has been paid or is not applicable.
For the purposes of this Agreement, the term "Person" shall mean any
individual, corporation (including not-for-profit), general or limited
partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined in Section
5.1(d)) or other entity of any kind or nature.
(c) Distributions with Respect to Unexchanged Shares; Voting. (i) All
shares of Parent Common Stock to be issued pursuant to the Merger shall be
deemed issued and outstanding as of the Effective Time and whenever a
dividend or other distribution is declared by Parent in respect of the
Parent Common Stock, the record date for which is at or after the Effective
Time, that declaration shall include dividends or other distributions in
respect of all shares issuable pursuant to this Agreement. No dividends or
other distributions in respect of the Parent Common Stock shall be paid to
any holder of any unsurrendered Certificate until such Certificate is
surrendered for exchange in accordance with this Article IV. Subject to the
effect of applicable laws, following surrender of any such Certificate,
there shall be issued and/or paid to the holder of the certificates
representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (A) at the time of such surrender, the
dividends or other distributions with a record date after the Effective
Time theretofore payable with respect to such whole shares of Parent Common
Stock and not paid and (B) at the appropriate payment date, the dividends
or other distributions payable with respect to such whole shares of Parent
Common Stock with a record date after the Effective Time but with a payment
date subsequent to surrender.
(ii) Holders of unsurrendered Certificates shall be entitled to vote
after the Effective Time at any meeting of Parent stockholders the number
of whole shares of Parent Common Stock represented by such Certificates,
regardless of whether such holders have exchanged their Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers
on the stock transfer books of the Company of the Shares that were
outstanding immediately prior to the Effective Time.
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional shares of Parent Common Stock will be issued
and any holder of Shares entitled to receive a fractional share of
Parent Common Stock but for this Section 4.2(e) shall be entitled to
receive a cash payment in lieu thereof, which payment shall represent
such holder's proportionate interest in a share of Parent Common Stock
based on the closing price of a share of the Parent Common Stock, as
reported in The Wall Street Journal, New York City edition, on the
trading day immediately prior to the Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Common
Stock) that remains unclaimed by the stockholders of the Company for 180
days after the Effective Time shall be paid to Parent. Any stockholders of
the Company who have not theretofore complied with this Article IV shall
thereafter look only to Parent for payment of their shares of Parent Common
Stock and any cash, dividends and other distributions in respect of the
Parent Common Stock payable and/or issuable pursuant to Section 4.1 and
Section 4.2(c) upon due surrender of their Certificates (or affidavits of
loss in lieu thereof), in each case, without any interest thereon.
Notwithstanding the foregoing, none of Parent, the Surviving Corporation,
the Exchange Agent or any other Person shall be liable to any former holder
of Shares for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(g) Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the Person claiming such Certificate to be
lost, stolen or destroyed and, if required by Parent, the posting by such
Person of a bond in customary amount as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the
shares of Parent Common Stock and any cash payable and any unpaid dividends
or other distributions in respect of Parent
A-4
<PAGE> 133
Common Stock pursuant to Section 4.2(c) upon due surrender of and
deliverable pursuant to this Agreement in respect of the Shares to which
such Certificate relates.
(h) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "affiliate" (as determined
pursuant to Section 6.8) of the Company shall not be exchanged until Parent
has received a written agreement from such Person as provided in Section
6.8 hereof.
4.3. Dissenters' Rights. In accordance with Section 1571 of the PBCL, no
appraisal rights shall be available to holders of Shares in connection with the
Merger.
4.4. Adjustments to Prevent Dilution. In the event that Parent changes
the number of Shares or shares of Parent Common Stock or securities convertible
or exchangeable into or exercisable for Shares or shares of Parent Common Stock
issued and outstanding prior to the Effective Time as a result of a
reclassification, stock split (including a reverse split), stock dividend or
distribution, recapitalization, merger, subdivision, issuer tender or exchange
offer, or other similar transaction, the Merger Consideration shall be equitably
adjusted.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of the Company and Parent. Except as
set forth in the corresponding sections or subsections of the disclosure letter,
dated the date hereof, delivered by the Company to Parent or by Parent to the
Company (each a "Disclosure Letter", and the "Company Disclosure Letter" and the
"Parent Disclosure Letter", respectively), as the case may be, the Company
(except for subparagraphs (b)(ii), (b)(iii), (c)(ii), (c)(iii), (q)(ii),
(r)(iii) and (u)(ii) below and references in subparagraphs (a) and (h)(i) below
to documents made available by Parent to the Company) hereby represents and
warrants to Parent, and Parent (except for subparagraphs (b)(i), (c)(i), (j),
(q)(i), (r)(ii), (s), (t) and (u)(i) below and references in subparagraphs (a)
and (h)(i) below to documents made available by the Company to Parent and the
reference in subparagraph (h)(i) below to items to be included in the Company
Disclosure Letter), hereby represents and warrants to the Company, that:
(a) Organization, Good Standing and Qualification. Each of it and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of organization and
has all requisite corporate or similar power and authority to own and
operate its properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction where the ownership or operation
of its properties or conduct of its business requires such qualification,
except where the failure to be so qualified or in good standing, when taken
together with all other such failures, is not reasonably likely to have a
Material Adverse Effect (as defined below) on it. It has made available to
Parent, in the case of the Company, and to the Company, in the case of
Parent, a complete and correct copy of its and its Subsidiaries'
certificates or articles of incorporation, as the case may be, and by-laws,
each as amended to date. Such certificates or articles of incorporation, as
the case may be, and by-laws as so made available are in full force and
effect. Section 5.1(a) of the Disclosure Letters contains a correct and
complete list of each jurisdiction where the Company, in the case of the
Company Disclosure Letter, and Parent, in the case of the Parent Disclosure
Letter, and in each case, each of its Subsidiaries is organized and
qualified to do business.
As used in this Agreement, the term (i) "Subsidiary" means, with
respect to the Company, Parent or Merger Sub, as the case may be, any
entity whether incorporated or unincorporated, in which the Company, Parent
or Merger Sub, as the case may be, owns, directly or indirectly, at least a
majority of the outstanding voting securities or other equity interests
having the power to elect a majority of the directors, or otherwise direct
the management and policies, of such entity and (ii) "Material Adverse
Effect" means, with respect to any Person, a material adverse effect on the
financial condition, properties, operations, business or results of
operations of such Person and its Subsidiaries taken as a whole; provided,
however, that any such effect resulting from any change in law, rule, or
regulation promulgated
A-5
<PAGE> 134
by (i) the United States Congress, (ii) the Securities and Exchange
Commission (the "SEC") with respect to the Public Utility Holding Company
Act of 1935, as amended (the "PUHCA"), (iii) the Pennsylvania State
Legislature or the Pennsylvania Public Utilities Commission or (iv) the
Federal Energy Regulatory Commission (the "FERC"), or any interpretation of
any such law, rule or regulation, or the application of the Pennsylvania
Restructuring Legislation (as defined in Section 6.18), which affects both
the Company and its Subsidiaries, taken as a whole, and Parent and its
Subsidiaries, taken as a whole, shall only be considered when determining
if a Material Adverse Effect has occurred to the extent that such effect on
one such party exceeds such effect on the other party.
(b) Capital Structure. (i) The authorized capital stock of the
Company consists of 187,500,000 Shares, of which 79,318,011 Shares were
outstanding as of the close of business on April 3, 1997, and 4,000,000
shares of Preferred Stock, without par value, of which no shares were
outstanding as of the close of business on April 3, 1997 (the "Preferred
Shares"). All of the outstanding Shares have been duly authorized and
validly issued and are fully paid and nonassessable. The Company has no
Shares or Preferred Shares reserved for issuance, except that, as of April
3, 1997, there were 1,584,285 Shares reserved for issuance pursuant to the
Company's Long-Term Incentive Savings Plan, the Dividend Reinvestment and
Stock Purchase Plan, the 1996 Stock Plan for Non-Employee Directors and the
Performance Incentive Program for the Company and its Subsidiaries (the
"Stock Plans"). The Company Disclosure Letter contains a correct and
complete list of each outstanding option to purchase Shares under the Stock
Plans (each a "Company Option"), including the holder, date of grant,
exercise price and number of Shares subject thereto.
Each of the outstanding shares of capital stock or other securities of
each of the Company's Subsidiaries is duly authorized, validly issued and
is fully paid and nonassessable and owned by a direct or indirect wholly
owned subsidiary of the Company, free and clear of any lien, pledge,
security interest, claim or other encumbrance. Except as set forth above,
there are no preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments which obligate the Company
or any of its Subsidiaries to issue or sell any shares of capital stock or
other securities of the Company or any of its Subsidiaries or any
securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire from the
Company or any of its Subsidiaries, any securities of the Company or any of
its Subsidiaries, and no securities or obligations evidencing such rights
are authorized, issued or outstanding. The Company does not have
outstanding any bonds, debentures, notes or other obligations the holders
of which have the right to vote (or are convertible into or exercisable for
securities having the right to vote) with the stockholders of the Company
on any matter ("Voting Debt").
(ii) The authorized stock of Parent consists of 260,000,000 shares of
Parent Common Stock, of which 122,111,567 shares were outstanding as of the
close of business on April 3, 1997. All of the outstanding shares of Parent
Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. Parent has no Parent Common Stock reserved for
issuance, except that, as of April 3, 1997, there were 1,692,310 shares of
Parent Common Stock reserved for issuance pursuant to the Allegheny Power
Employee Stock Ownership and Savings Plan and the Allegheny Power System
Performance Share Plan (the "Parent Stock Plans"). Each of the outstanding
shares of capital stock of each of Parent's Subsidiaries is duly authorized
and validly issued and is fully paid and nonassessable and owned by a
direct or indirect wholly owned subsidiary of Parent, free and clear of any
lien, pledge, security interest, claim or other encumbrance. Except as set
forth above, there are no preemptive or other outstanding rights, options,
warrants, conversion rights, stock appreciation rights, redemption rights,
repurchase rights, agreements, arrangements or commitments which obligate
Parent or any of its Subsidiaries to issue or to sell any shares of capital
stock or other securities of Parent or any of its Subsidiaries or any
securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire from Parent
or any of its Subsidiaries, any securities of Parent or any of its
Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. Parent does not have outstanding any
bonds, debentures, notes or other obligations
A-6
<PAGE> 135
the holders of which have the right to vote (or are convertible into or
exercisable for securities having the right to vote) with the stockholders
of Parent on any matter ("Parent Voting Debt").
(iii) The authorized capital stock of Merger Sub shall consist of
1,000 shares of Common Stock, par value $0.01 per share, all of which shall
be validly issued and outstanding at the Effective Time. At the Effective
Time, all of the issued and outstanding capital stock of Merger Sub will be
owned by Parent and there shall be (i) no other voting securities of Merger
Sub, (ii) no securities of Merger Sub convertible into or exchangeable for
shares of capital stock or voting securities of Merger Sub and (iii) no
options or other rights to acquire from Merger Sub, and no obligations of
Merger Sub to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Merger Sub. At the Effective Time, Merger Sub shall not have conducted any
business, and shall have no, assets, liabilities or obligations of any
nature, other than those incident to its formation and pursuant to this
Agreement and the Merger and the other transactions contemplated by this
Agreement.
(c) Corporate Authority; Approval and Fairness. (i) The Company has
all requisite corporate power and authority and has taken all corporate
action necessary in order to execute, deliver and perform its obligations
under this Agreement and the Stock Option Agreement and to consummate,
subject only to approval of this Agreement by the holders of a majority of
the votes cast by Shares entitled to a vote on approval of this Agreement
(the "Company Requisite Vote"), the Merger. This Agreement and the Stock
Option Agreement have been duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof and thereof
by the other signatories hereto and thereto, constitute valid and binding
agreements of the Company enforceable against the Company in accordance
with their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles
(the "Bankruptcy and Equity Exception"). The board of directors of the
Company (A) has approved this Agreement and the Stock Option Agreement and
the Merger and the other transactions contemplated hereby and thereby and
(B) has received the opinion of its financial advisor Credit Suisse First
Boston Corporation to the effect that, as of the date of this Agreement,
the Conversion Ratio is fair to the holders of Shares from a financial
point of view.
(ii) Parent has all requisite corporate power and authority and each
has taken all corporate action necessary in order to execute, deliver and
perform its obligations under this Agreement and to consummate, subject
only to any stockholder approval necessary to permit the issuance of Parent
Common Stock required to be issued pursuant to Article IV (the "Parent
Requisite Vote"), the Merger. This Agreement has been duly executed and
delivered by Parent and, assuming the due authorization, execution and
delivery hereof by the Company, constitutes a valid and binding agreement
of Parent, enforceable against Parent in accordance with its terms, subject
to the Bankruptcy and Equity Exception. At the Effective Time, Merger Sub
shall have all requisite corporate authority and shall have taken all
corporate action necessary in order to execute, deliver and perform its
obligations under this Agreement and to consummate the Merger. At the
Effective Time, this Agreement shall have been duly executed and delivered
by Merger Sub and, assuming the due authorization, execution and delivery
hereof by the Company, shall constitute a valid and binding agreement of
Merger Sub, enforceable against Merger Sub in accordance with its terms,
subject to the Bankruptcy and Equity Exception. The Parent Common Stock,
when issued, will be validly issued, fully paid and nonassessable, and no
stockholder of Parent will have any preemptive right of subscription or
purchase in respect thereof. The Board of Directors of Parent (A) has
approved this Agreement, the Merger and the transactions contemplated
hereby and (B) has received the opinion of its financial advisors Merrill
Lynch & Co. to the effect that the consideration to be paid by Parent to
the holders of the Shares in the Merger is fair to Parent from a financial
point of view.
(iii) Parent has all requisite corporate power and authority and has
taken all corporate action necessary in order to execute, deliver and
perform its obligations under the Stock Option Agreement. The Stock Option
Agreement has been duly executed and delivered by Parent, and, assuming the
due authorization, execution and delivery thereof by the Company,
constitutes a valid and binding agreement of Parent, enforceable against
Parent in accordance with its terms, subject to the Bankruptcy and Equity
Exception.
A-7
<PAGE> 136
(d) Governmental Filings; No Violations. (i) Other than the filings,
notices and/or approvals (A) pursuant to Section 1.3, (B) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and the Securities Act of 1933, as amended (the "Securities Act"), (C) to
comply with state securities or "blue-sky" laws, (D) of the SEC pursuant to
the PUHCA, the FERC pursuant to the Federal Power Act, as amended (the
"Power Act") and the NRC pursuant to the Atomic Energy Act, as amended (the
"AEA"), (E) of federal or state regulatory bodies pursuant to Environmental
Laws (as defined in Section 5.1(k)), and (F) of the state public utility
commissions or similar state regulatory bodies identified in the respective
Disclosure Letter pursuant to applicable state laws regulating the electric
utility business, no notices, reports or other filings are required to be
made by it with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by it from, any governmental or
regulatory authority, agency, commission, body or other governmental entity
("Governmental Entity"), in connection with the execution and delivery of
this Agreement and the Stock Option Agreement by it and the consummation by
it of the Merger and the other transactions contemplated hereby and
thereby, except those that the failure to make or obtain are not,
individually or in the aggregate, reasonably likely to have a Material
Adverse Effect on it or prevent, materially delay or materially impair the
ability of it to consummate the transactions contemplated by this Agreement
and the Stock Option Agreement.
(ii) The execution, delivery and performance of this Agreement and the
Stock Option Agreement by it does not, and the consummation by it of the
Merger and the other transactions contemplated hereby and thereby will not,
constitute or result in (A) a breach or violation of, or a default under,
its certificate or articles of incorporation or by-laws or the comparable
governing instruments of any of its Subsidiaries, (B) subject to the
receipt of all required waivers and consents as described in Section
5.1(d)(i) or the last sentence of this subsection, a breach or violation
of, or a default under, the acceleration of any obligations or the creation
of a lien, pledge, security interest or other encumbrance on the assets of
it or any of its Subsidiaries (with or without notice, lapse of time or
both) pursuant to any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation ("Contracts") binding upon it or
any of its Subsidiaries or any Law (as defined in Section 5.1(i)) or
governmental or non-governmental permit or license to which it or any of
its Subsidiaries is subject or (C) any change in the rights or obligations
of any party under any of the Contracts, except, in the case of clause (B)
or (C) above, for any breach, violation, default, acceleration, creation or
change that, individually or in the aggregate, is not reasonably likely to
have a Material Adverse Effect on it or prevent, materially delay or
materially impair its ability to consummate the transactions contemplated
by this Agreement and the Stock Option Agreement. The Company Disclosure
Letter, with respect to the Company, and the Parent Disclosure Letter, with
respect to the Parent, contains a correct and complete list of Contracts of
the Company, in the case of the Company Disclosure Letter, and of Parent,
in the case of the Parent Disclosure Letter, and its respective
Subsidiaries pursuant to which consents or waivers are or may be required
prior to consummation of the transactions contemplated by this Agreement
and the Stock Option Agreement (whether or not subject to the exception set
forth with respect to clauses (B) and (C) above).
(e) Reports; Financial Statements. The filings required to be made by
it and its Subsidiaries since December 31, 1993 under the PUHCA, the Power
Act, the AEA and state law, and under regulations applicable to public
utilities, have been made with the relevant Governmental Entities, and each
of it and its Subsidiaries has complied in all material respects with such
laws and regulations, except for such failures as are not reasonably likely
to have a Material Adverse Effect on it. It has delivered to the other
party each registration statement, report, proxy statement or information
statement prepared by it or its Subsidiaries and filed with the SEC since
December 31, 1996 (the "Audit Date"), including its Annual Report on Form
10-K for the year ended December 31, 1996 in the form (including exhibits,
annexes and any amendments thereto) filed with the SEC (collectively,
including any such registration statement, report, proxy statement or
information statement filed subsequent to the date hereof, the "Reports").
As of their respective dates, the Reports did not, and any Reports filed
with the SEC subsequent to the date hereof will not, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. Each
of the consolidated balance sheets included in or
A-8
<PAGE> 137
incorporated by reference into the Reports (including the related notes and
schedules) fairly presents, or will fairly present, the consolidated
financial position of it and its Subsidiaries as of its date and each of
the consolidated statements of income and of changes in financial position
included in or incorporated by reference into the Reports (including any
related notes and schedules) fairly presents, or will fairly present, the
results of operations, retained earnings and changes in financial position,
as the case may be, of it and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal
year-end audit adjustments that will not be material in amount or effect),
in each case in accordance with generally accepted accounting principles
("GAAP") consistently applied during the periods involved, except as may be
noted therein.
(f) Absence of Certain Changes. Except as disclosed in the Reports
filed prior to the date hereof, or as expressly contemplated by this
Agreement or as expressly contemplated by the DQE, Inc. 1997 Five Year
Plan, a copy of which has been provided to, and accepted by, Parent (the
"Company Budget") or the Allegheny Power Final Operating, Cash and Capital
Budget for Year 1997 and Forecast Years 1998 through 2001, a copy of which
has been provided to, and accepted by, the Company (the "Parent Budget"
and, collectively with the Company Budget, the "Budgets"), since the Audit
Date it and its Subsidiaries have conducted their respective businesses
only in, and have not engaged in any material transaction other than
according to, the ordinary and usual course of such businesses and there
has not been (i) any change in the financial condition, properties,
business or results of operations of it and its Subsidiaries or any
development or combination of developments affecting it of which its
management has knowledge that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on it; (ii) any
material damage, destruction or other casualty loss with respect to any
material asset or property owned, leased or otherwise used by it or any of
its Subsidiaries, whether or not covered by insurance; (iii) any
declaration, setting aside or payment of any dividend or other distribution
in respect of its capital stock, except for dividends or other
distributions on its capital stock publicly announced prior to the date
hereof and except as expressly provided for herein; or (iv) any change by
it in accounting principles or material accounting practices or methods.
Since the Audit Date, except as provided for herein or as disclosed in the
Reports filed prior to the date hereof, there has not been any increase in
the compensation payable or that could become payable by it or any of its
Subsidiaries to officers or key employees or any amendment of any of the
Compensation and Benefit Plans (as defined in Section 5.1(h)) other than
increases or amendments in the ordinary course.
(g) Litigation and Liabilities. Except as disclosed in the Reports
filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or
proceedings pending or, to the knowledge of its executive officers,
threatened against it or any of its Affiliates or (ii) obligations or
liabilities, whether or not accrued, contingent or otherwise and whether or
not required to be disclosed, including those relating to matters involving
any Environmental Law (as defined in Section 5.1(k)) or any other facts or
circumstances of which its executive officers have knowledge that could
result in any claims against, or obligations or liabilities of, it or any
of its Affiliates, that, individually or in the aggregate, are reasonably
likely to have a Material Adverse Effect on it or prevent or materially
burden or materially impair the ability of it to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
(h) Employee Benefits.
(i) With the exception of documents as to which Parent is bound by
a confidentiality agreement (which pertain to arrangements which are
not, individually or in the aggregate, material), a copy of each bonus,
deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase,
restricted stock, stock option, employment, termination, severance,
compensation, medical, health or other plan, agreement, policy or
arrangement that covers employees, directors, former employees or former
directors of Parent, the Company or their respective Subsidiaries (its
"Compensation and Benefit Plans") and any trust agreement or insurance
contract forming a part of such Compensation and Benefit Plans has been
made available to the other party prior to the date hereof and each such
Compensation and Benefit Plan is listed in Section 5.1(h) of the
applicable Disclosure Letter. Any "change of control" or similar
provisions in
A-9
<PAGE> 138
the Compensation and Benefit Plans are specifically identified in
Section 5.1(h) of the applicable Disclosure Letter.
(ii) All Compensation and Benefit Plans are in substantial
compliance with all applicable law, including the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Each
Compensation and Benefit Plan that is an "employee pension benefit
plan", within the meaning of Section 3(2) of ERISA (a "Pension Plan")
and that is intended to be qualified under Section 401(a) of the Code
has received a favorable determination letter from the Internal Revenue
Service (the "IRS") for "TRA" (as defined in Rev. Proc. 93-39), or the
remedial amendment period for such Pension Plan has not yet expired, and
it is not aware of any circumstances likely to result in revocation of
any such favorable determination letter. There is no pending or, to the
knowledge of its executive officers, threatened material litigation
relating to the Compensation and Benefit Plans. Neither it nor any of
its Subsidiaries has engaged in a transaction with respect to any
Compensation and Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would be reasonably expected
to subject it or any of its Subsidiaries to a material tax or penalty
imposed by either Section 4975 of the Code or Section 502(i) of ERISA.
(iii) As of the date hereof, no liability under Subtitle C or D of
Title IV of ERISA has been or is expected to be incurred by it or any of
its Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by it or any of its
Subsidiaries, or the single-employer plan (an "ERISA Affiliate Plan") of
any entity which is treated as a single employer with it or any of its
Subsidiaries under Section 414 of the Code (an "ERISA Affiliate"). It
and its Subsidiaries have not incurred and do not expect to incur any
withdrawal liability with respect to any "multiemployer plan", within
the meaning of Section 4001(a)(3) of ERISA, under Subtitle E of Title IV
of ERISA (including withdrawal liability as a result of actions of ERISA
Affiliates). No notice of a "reportable event", within the meaning of
Section 4043 of ERISA, for which the 30-day reporting requirement has
not been waived, has been required to be filed for any Pension Plan or
ERISA Affiliate Plan within the 12-month period ending on the date
hereof or will be required to be filed in connection with the
transaction contemplated by this Agreement and the Stock Option
Agreement.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan as of the date hereof have been timely
made. Neither any Pension Plan nor any ERISA Affiliate Plan has an
"accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA. Neither it
nor its Subsidiaries has provided, or is required to provide, security
to any Pension Plan or to any ERISA Affiliate Plan pursuant to Section
401(a)(29) of the Code.
(v) Under each Pension Plan which is a single-employer plan and
ERISA Affiliate Plan, as of the last day of the most recent plan year
ended prior to the date hereof for which an actuarial valuation has been
completed, the actuarially determined present value of all "benefit
liabilities", within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in the
Pension Plan's or ERISA Affiliate Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such
Pension Plan or ERISA Affiliate Plan, and there has been no material
change in the financial condition of such Pension Plan since the last
day of such most recent plan year. The potential withdrawal liability of
it and its Subsidiaries and ERISA Affiliates under each multiemployer
plan to which each such entity contributes or had an obligation to
contribute, determined as if a "complete withdrawal" (within the meaning
of Section 4203 of ERISA) has occurred as of the date hereof, would not
reasonably be expected to have a Material Adverse Effect on it.
(vi) Neither it nor its Subsidiaries have any obligations for
retiree health and life benefits under any Compensation and Benefit
Plan. It or its Subsidiaries may amend or terminate any such plan under
the terms of such plan at any time without incurring any material
liability thereunder.
A-10
<PAGE> 139
(vii) The consummation of the Merger and the other transactions
contemplated by this Agreement or the Stock Option Agreement would not,
directly or indirectly (including as a result of any Compensation and
Benefit Plans providing for severance as a result of termination of
employment within a specified time period following a change in control
of the Company) (x) entitle any employees of it or its Subsidiaries to
severance pay, (y) accelerate the time of payment or vesting or trigger
any payment of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Compensation or Benefit Plans or (z) result in any breach or violation
of, or a default under, any of the Compensation and
Benefit Plans.
(viii) All Compensation and Benefit Plans covering current or
former non-U.S. employees or former employees of it and its Subsidiaries
comply in all material respects with applicable local law. It and its
Subsidiaries have no material unfunded liabilities, as determined under
local funding requirements, with respect to any Pension Plan that covers
such non-U.S. employees.
(i) Compliance with Laws; Permits. Except as set forth in the Reports
filed prior to the date hereof, the businesses of each of it and its
Subsidiaries have not been, and are not being, conducted in violation of
any law, ordinance, regulation, judgment, order, decree, arbitration award,
license or permit of any Governmental Entity (each a "Law" and
collectively, "Laws"), except for violations or possible violations that,
individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on it or prevent or materially burden or materially
impair its ability to consummate the transactions contemplated by this
Agreement and the Stock Option Agreement. Except as set forth in the
Reports filed prior to the date hereof, no investigation or review by any
Governmental Entity with respect to it or any of its Subsidiaries is
pending or, to the knowledge of its executive officers, threatened, nor has
any Governmental Entity indicated an intention to conduct the same, except
for those the outcome of which are not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect on it or prevent or
materially burden or materially impair the ability of it to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
To the knowledge of its executive officers, no material change is required
in its or any of its Subsidiaries' processes, properties or procedures in
connection with any such Laws, and it has not received any notice or
communication of any material noncompliance with any such Laws that has not
been cured as of the date hereof. Each of it and its Subsidiaries has all
permits, licenses, trademarks, service marks, franchises, variances,
exemptions, orders and other governmental authorizations, consents and
approvals (collectively, "Permits") necessary to conduct its business as
presently conducted except those the absence of which are not, individually
or in the aggregate, reasonably likely to have a Material Adverse Effect on
it or prevent or materially burden or materially impair its ability to
consummate the Merger and the other transactions contemplated by this
Agreement and the Stock Option Agreement.
(j) Takeover Statutes. The Board of Directors of the Company has
taken or will take all appropriate and necessary action such that each of
PBCL sec. 2551 et seq. and Article VII of the Company's charter will not
have any effect on the Merger or the transactions contemplated by this
Agreement or the Stock Option Agreement. No other "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover
statute or regulation, including, without limitation, PBCL sec. 2541 et
seq. (each, a "Takeover Statute") or any applicable anti-takeover provision
in the Company's articles of incorporation and by-laws is, or at the
Effective Time will be, applicable to the Company, the Shares, the Merger
or the other transactions contemplated by this Agreement or the Stock
Option Agreement.
(k) Environmental Matters. Except as disclosed in the Reports filed
prior to the date hereof, and except for such matters that, individually or
in the aggregate, are not reasonably likely to have a Material Adverse
Effect on it: (i) it and its Subsidiaries have complied with all applicable
Environmental Laws; (ii) the properties currently owned or operated by it
(including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Material; (iii) the
properties formerly owned or operated by it or any of its Subsidiaries were
not contaminated with any Hazardous Material during the period of ownership
or operation by it or any of its Subsidiaries; (iv) neither it nor its
A-11
<PAGE> 140
Subsidiaries are subject to liability for any Hazardous Material disposal
or contamination on any third party property; (v) neither it nor any
Subsidiary has been associated with any release or threat of release of any
Hazardous Material; (vi) neither it nor any Subsidiary has received any
notice, demand, letter, claim or request for information alleging that it
or any of its Subsidiaries may be in violation of or liable under any
Environmental Law; (vii) neither it nor any of its Subsidiaries is subject
to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with
any third party relating to liability under any Environmental Law or
relating to any Hazardous Material; and (viii) there are no circumstances
or conditions involving it or any of its Subsidiaries that could reasonably
be expected to result in any claims, liability, investigations, costs or
restrictions on the ownership, use, or transfer of any property of it
pursuant to any Environmental Law.
As used herein, the term "Environmental Law" shall mean any local,
state or federal statute, rule, regulation, order, consent decree,
agreement with any Governmental Entity, common law standard of conduct,
directive or ordinance pertaining to: (A) the protection of health, safety
or the indoor or outdoor environment; (B) the use, development and control
of land; (C) the conservation, management or use of natural resources and
wildlife; (D) the protection or use of surface water and ground water; (E)
the management, manufacture, possession, presence, use, generation,
transportation, treatment, storage, disposal, release, threatened release,
abatement, removal, remediation, or handling of, or exposure to, any
Hazardous Material or waste (including, without limitation, ash, coal
residues and radioactive wastes and contaminated materials); or (F)
pollution (including any release or threat of release to air, land, surface
water and ground water); and includes without limitation, the following
federal statutes (and their implementing regulations and the analogous
state statutes and regulations): the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C. sec. 9601 et seq.;
the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended by the Hazardous and Solid Waste
Amendments of 1984, 42 U.S.C. sec. 6901 et seq.; the Federal Water
Pollution Control Act of 1972, as amended by the Clean Water Act of 1977,
as amended, 33 U.S.C. sec. 1251 et seq.; the Toxic Substances Control Act
of 1976, as amended, 15 U.S.C. sec. 2601 et seq.; the Emergency Planning
and Community Right-to-Know Act of 1986, 42 U.S.C. sec. 11001 et seq.; the
Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990,
42 U.S.C. sec. 7401 et seq.; the Occupational Safety and Health Act of
1970, as amended, 29 U.S.C. sec. 651 et seq.; the Rivers and Harbors Act of
1899, as amended, 33 U.S.C. sec. 401 et seq.; the Endangered Species Act of
1973, as amended, 16 U.S.C. sec. 1531 et seq.; the Atomic Energy Act, as
amended, 42 U.S.C. sec. 2014 et seq.; the Occupational Safety and Health
Act of 1970, as amended, 29 U.S.C. sec. 651 et seq.; and the Safe Drinking
Water Act of 1974, as amended, 42 U.S.C. sec. 300(f) et seq.
As used herein, the term "Hazardous Material" shall mean any
substance, chemical, compound, product, solid, gas, liquid, waste,
by-product, pollutant, contaminant, or material which is hazardous or
toxic, and includes without limitation, asbestos or any substance
containing asbestos, polychlorinated biphenyls, radioactive materials,
petroleum (including crude oil or any fraction thereof), and any hazardous
or toxic waste, material, or substance regulated under any Environmental
Law.
(l) Accounting and Tax Matters. As of the date hereof, neither it nor
any of its Affiliates has taken or agreed to take any action, nor do its
executive officers have any knowledge of any fact or circumstance, that
would prevent Parent from accounting for the business combination to be
effected by the Merger as a "pooling-of-interests" or prevent the Merger
and the other transactions contemplated by this Agreement from qualifying
as a "reorganization" within the meaning of Section 368(a) of the Code.
(m) Taxes. Except for such matters that, individually or in the
aggregate, will not have a Material Adverse Effect on it: (i) it and each
of its Subsidiaries (as appropriate) (x) have prepared in good faith and
duly and timely filed (taking into account any applicable extensions) all
Tax Returns (as defined below) that they were required to file (whether
separately or on a combined or consolidated basis) and all such Tax Returns
are complete and accurate in all material respects; (y) have timely paid in
full all Taxes (as defined below) they were or are required to pay and duly
and timely withheld and paid over to the appropriate recipient all Taxes
that they were or are obligated to withhold from amounts paid or
A-12
<PAGE> 141
owing to any employee, creditor or third party; and (z) have not waived or
agreed to waive any statute of limitations with respect to Taxes or agreed
to any extension of time with respect to the assessment or collection of
any Tax (unless such waiver or extension is not currently effective); (ii)
no audits, examinations, investigations, assessments or proposed
assessments of deficiencies, refund claims or other proceedings relating to
the Taxes of it or any of its Subsidiaries are pending or, to the knowledge
of any of its executive officers, threatened; (iii) there are not, to the
knowledge of its executive officers, unresolved actual claims concerning
its or any of its Subsidiaries' Tax liability; (iv) all Taxes due with
respect to completed and settled examinations or concluded litigation
relating to it or any of its Subsidiaries have been timely paid in full;
(v) it has made available to the other party true, correct and complete
copies of all United States federal income Tax Returns (including all
consolidated Tax Returns) filed by it or any of its Subsidiaries with
respect to the taxable periods ending on or after December 31, 1992,
together with true, correct and complete copies of any audit or other
examination reports and any notices or proposed notices of deficiency
relating to such Tax Returns; (vi) neither it nor any of its Subsidiaries
has any liability with respect to accrued but unpaid Taxes (whether or not
assessed or shown as due on any Tax Return) in excess of the reserves
therefor reflected in the financial statements included in the most
recently filed Reports (as adjusted for any time elapsed since the date of
such Reports in accordance with the past customary practice of it and its
Subsidiaries); (vii) no liens or other security interests have been imposed
on any of its assets or any assets of any of its Subsidiaries in connection
with any failure (or alleged failure) to pay any Tax; (viii) neither it nor
any of its Subsidiaries is a party to any Tax allocation or sharing
agreement, is or has been a member of an affiliated group filing a
consolidated or combined Tax Return (other than a group of which it or one
of its Subsidiaries is or was the common parent) or otherwise has any
liability for Taxes other than its Taxes or Taxes of one of its
Subsidiaries; (ix) neither it nor any of its Subsidiaries has filed a
consent under Section 341(f) of the Code; or has made or is a party to any
agreement under which it is or may become obligated to make any payments
that will be nondeductible under Section 280G of the Code (assuming it
cannot be established that any such payments are "reasonable compensation"
within the meaning of Section 280G(B)(4) of the Code); (x) it and each of
its Subsidiaries has complied (and until the Effective Time will comply) in
all material respects with the provisions of the Code relating to the
payment and withholding of Taxes, including without limitation the
withholding and reporting requirements under Sections 1441 through 1464,
3401 through 3406, and 6041 and 6049 of the Code, as well as similar
provisions under any other laws; (xi) the statute of limitations for the
assessment of all Taxes has expired for all applicable Tax Returns of it
and each of its Subsidiaries for taxable years ending on or before the date
three years before the date of this Agreement; (xii) no power of attorney
currently in force has been granted by it or any of its Subsidiaries
concerning any Tax matter; (xiii) no property of it or any of its
Subsidiaries is property that it or any such Subsidiary or any party to
this transaction is or will be required to treat as being owned by another
person pursuant to the provisions of Section 168(f)(8) of the Code (as in
effect prior to its amendment by the Tax Reform Act of 1986) or is
tax-exempt use property within the meaning of Section 168 of the Code;
(xiv) neither it nor any of its Subsidiaries is required to include in
income any adjustment pursuant to Section 481(a) of the Code by reason of a
voluntary change in accounting method initiated by it or any of its
Subsidiaries, and to the best of the knowledge of its executive officers,
the IRS has not proposed any such adjustment or change in accounting
method; (xv) it and its Subsidiaries have or had substantial authority
(within the meaning of Section 6661 of the Code for Tax Returns filed on or
before December 31, 1990, and within the meaning of Section 6662 of the
Code for Tax Returns filed after December 31, 1990) for all transactions
that could give rise to an understatement of federal income tax (within the
meaning of Section 6661 of the Code, for Tax Returns filed on or before
December 31, 1990, and within the meaning of Section 6662 of the Code, for
Tax Returns filed after December 31, 1990); (xvi) as of December 31, 1995,
it and its Subsidiaries had net operating loss carryovers available to
offset future income as disclosed in the relevant Disclosure Letter; (xvii)
such Disclosure Letter discloses the amount of and year of expiration of
each company's net operating loss carryovers; (xviii) it and each of its
Subsidiaries had tax credit carryovers available to offset future tax
liability as disclosed in the relevant Disclosure Letter; (xix) such
Disclosure Letter discloses the amount and year of expiration of each
company's tax credit carryovers; (xx) no election under Section 338 of the
Code (or any predecessor provision) has been made by or with respect to it
or any of its Subsidiaries or any of their respective assets
A-13
<PAGE> 142
or properties; (xxi) no indebtedness of it or any of its Subsidiaries is
"corporate acquisition indebtedness" within the meaning of Section 279(b)
of the Code; and (xxii) neither it nor any of its Subsidiaries has engaged
in any intercompany transactions within the meaning of Treasury Regulations
sec. 1.1502-13 for which any income or gain will remain unrecognized as of
the close of the last taxable year prior to the Effective Time.
As used in this Agreement, (i) the term "Tax" (including, with
correlative meaning, the terms "Taxes" and "Taxable") includes all federal,
state, local and foreign income, profits, franchise, gross receipts,
environmental, customs duty, capital stock, severances, stamp, payroll,
sales, employment, unemployment, disability, use, property, withholding,
excise, production, value added, occupancy and other taxes, duties or
assessments of any nature whatsoever, together with all interest, penalties
and additions imposed with respect to such amounts and any interest in
respect of such penalties and additions, and (ii) the term "Tax Return"
includes all returns and reports (including elections, declarations,
disclosures, schedules, estimates and information returns) required to be
supplied to a Tax authority relating to Taxes.
(n) Labor Matters. Neither it nor any of its Subsidiaries is a party
to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization,
nor, as of the date hereof, is it or any of its Subsidiaries the subject of
any material proceeding asserting that it or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain
with any labor union or labor organization nor is there pending or, to the
knowledge of its executive officers, threatened, nor has there been for the
past five years, any labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving it or any of its Subsidiaries. It has
previously made available to the other party correct and complete copies of
all labor and collective bargaining agreements to which it or any of its
Subsidiaries is party or by which any of them are otherwise bound.
(o) Insurance. All material fire and casualty, general liability,
business interruption, product liability, and sprinkler and water damage
insurance policies maintained by it or any of its Subsidiaries are with
reputable insurance carriers, provide full and adequate coverage for all
insurable risks incident to the business of it and its Subsidiaries and
their respective properties and assets, and 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 for any such
failures to maintain insurance policies that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect on
it. Neither it nor any of its Subsidiaries has received any notice of
cancellation or termination with respect to any material insurance policy
thereof. All material insurance policies of it and its Subsidiaries are
valid and enforceable policies.
(p) Intellectual Property.
(i) It and/or each of its Subsidiaries owns, or is licensed or
otherwise possesses sufficient legally enforceable rights to use, all
patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, technology, know-how, computer software programs
or applications, and tangible or intangible proprietary information or
materials that are currently used (or, with respect to trademarks,
tradenames and service marks, have been used within the last five years)
in its and its Subsidiaries' business, except for any such failures to
own, be licensed or possess that, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect on it.
(ii) Except as disclosed in the Reports filed prior to the date
hereof or as is not reasonably likely to have a Material Adverse Effect
on it:
(A) It is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations
hereunder, in violation of any licenses, sublicenses and other
agreements as to which it is a party and pursuant to which it is
authorized to use any third-party patents, trademarks, service marks,
copyrights, trade names, technology, know-how, proprietary
A-14
<PAGE> 143
information and computer software programs and applications
("Third-Party Intellectual Property Rights");
(B) no claims with respect to the patents, registered and
material unregistered trademarks and service marks, registered
copyrights, trade names and any applications therefor, technology,
know-how, proprietary information and computer software programs and
applications owned or used by it or any its Subsidiaries (the
"Intellectual Property Rights"), any trade secret material to it or
its Subsidiaries, or Third Party Intellectual Property Rights to the
extent arising out of any use, reproduction or distribution of such
Third Party Intellectual Property Rights by or through it or any of
its Subsidiaries, are currently pending or, to the knowledge of its
executive officers, are threatened by any Person;
(C) it does not know of any valid grounds for any bona fide
claims (i) to the effect that the manufacture, sale, licensing or use
of any product or service as now used, sold or licensed or proposed
for use, sale or license by it or any of its Subsidiaries infringes
on any copyright, patent, trademark, service mark, or trade secret;
(ii) against the use or license for use by it or any of its
Subsidiaries, of any trademarks, trade names, trade secrets,
copyrights, patents, technology, know-how, proprietary information or
computer software programs and applications used in the business of
it or any of its Subsidiaries as currently conducted or as proposed
to be conducted; (iii) challenging the ownership, validity or
effectiveness of any of its Intellectual Property Rights or other
trade secret material to it; or (iv) challenging the license or
legally enforceable right to the use of the Third Party Intellectual
Rights by it or any of its Subsidiaries;
(D) to the knowledge of its executive officers, none of the
Intellectual Property Rights has been legally declared invalid and
all patents, registered trademarks and service marks, and copyrights
held by it are valid, enforceable and subsisting; and
(E) to the knowledge of its executive officers, there is no
material unauthorized use, infringement or misappropriation of any of
its Intellectual Property Rights by any third party, including any
employee or former employee of it or any of its Subsidiaries, and no
third party has applied to register any intellectual property which
may infringe upon its Intellectual Property Rights.
(q) Brokers and Finders. Neither it nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in
connection with the Merger or the other transactions contemplated in this
Agreement or the Stock Option Agreement except that (i) the Company has
retained Credit Suisse First Boston Corporation as its financial advisor,
the arrangements with which have been disclosed in writing to Parent prior
to the date hereof and (ii) Parent has employed Merrill Lynch & Co. as its
financial advisory, the arrangements with which have been disclosed in
writing to the Company prior to the date hereof.
(r) Regulation as a Utility.
(i) Neither it nor any "subsidiary company" or "affiliate" of it
(such terms having the meaning ascribed to such terms in the PUHCA) is
subject to regulation as a public utility or public service company (or
similar designation) by any state in the United States or any foreign
country. Section 5.1(r) of its Disclosure Letter sets forth each
"affiliate" and each "subsidiary company" of it which may be deemed to
be a "public utility company" or a "holding company" within the meaning
of the PUHCA.
(ii) The Company is an exempt holding company under Section 3(a)(1)
of the PUHCA.
(iii) Parent is a registered holding company under the PUHCA.
(s) Operations of Nuclear Power Plants. The operations of Beaver
Valley Power Station Unit 1, Beaver Valley Power Station Unit 2, and Perry
Nuclear Power Plant Unit 1 (each, a "Nuclear Facility" and, collectively,
the "Nuclear Facilities") owned by Duquesne Light Company (together with
The Cleveland Electric Illuminating Company, Ohio Edison Company,
Pennsylvania Power Company and
A-15
<PAGE> 144
The Toledo Edison Company) are and have at all times been conducted in
compliance with applicable health, safety, regulatory and other legal
requirements, except for such failures to comply as are not, individually
or in the aggregate, reasonably likely to have a Material Adverse Effect on
the Company. To the knowledge of the Company, the Nuclear Facilities each
maintain (i) emergency plans designed to respond to an unplanned release
therefrom of radioactive materials into the environment and (ii) insurance
coverages consistent with industry practice, all of which coverages are
listed in Section 5.1(s) of the Company Disclosure Letter. To the knowledge
of the Company, plans for the decommissioning of each of the Nuclear
Facilities and for the short-term storage of spent nuclear fuel conform
with the requirements of applicable law, and such plans have at all times
been funded consistently with reasonable projections for such plans.
(t) Affiliates of the Company. Section 5.1(t) of the Company
Disclosure Letter sets forth the name and every line of business conducted
by each "affiliate" of the Company as that term is defined in Section
2(a)(11) of the PUHCA.
(u) Ownership of Other Party's Common Stock. (i) The Company does not
"beneficially own" (as such term is defined in Rule 13d-3 under the
Exchange Act) any shares of Parent Common Stock.
(ii) Parent does not "beneficially own" (as such term is defined in
Rule 13d-3 under the Exchange Act) any Shares.
ARTICLE VI
COVENANTS
6.1. Interim Operations. The Company and Parent each covenants and agrees
as to itself and its Subsidiaries that, after the date hereof and until the
Effective Time (unless Parent or the Company, as the case may be, shall
otherwise approve in writing and except as otherwise expressly contemplated by
this Agreement, the respective Disclosure Letter, the Stock Option Agreement,
the Company Budget or the Parent Budget, or as required by applicable Law):
(a) the business of it and its Subsidiaries shall be conducted in the
ordinary and usual course and, to the extent consistent therewith, it and
each of its Subsidiaries shall use its best efforts to preserve its
business organization intact and maintain its existing relations and
goodwill with customers, suppliers, creditors, regulators, lessors,
employees and business associates;
(b) it shall not (i) issue, sell, pledge, dispose of or encumber any
capital stock owned by it in any of its Subsidiaries; (ii) amend its
articles of incorporation, charter or by-laws; (iii) split, combine or
reclassify its outstanding shares of capital stock; (iv) declare, set aside
or pay any dividend payable in cash, stock or property in respect of any
capital stock other than dividends from its direct or indirect wholly owned
Subsidiaries and other than (A) in the case of the Company, regular
quarterly cash dividends not in excess of $0.34 per Share (which amount
may, at the election of the Company, be increased by not more than 6.5% per
year, beginning in the 1997 fiscal year of the Company) and regular
quarterly cash dividends on the preferred and preference stock of its
Subsidiaries and (B) in the case of Parent, regular quarterly cash
dividends not in excess of $0.43 per share of Parent Common Stock (which
amount may, at the election of Parent, be increased by not more than 6.5%
per year, beginning in the 1997 fiscal year of Parent) and regular
quarterly cash dividends on the preferred shares of subsidiaries of Parent;
or (v) repurchase, redeem or otherwise acquire (except for (A) mandatory
sinking fund obligations existing on the date hereof and (B) redemptions,
purchases, acquisitions or issuances required by the respective terms of
any Stock Plans, in the case of the Company, or Parent Stock Plans, in the
case of Parent, or any dividend reinvestment plans as in effect on the date
hereof in the ordinary course of the operation of such plans) or permit any
of its Subsidiaries to purchase or otherwise acquire, any shares of its
capital stock or any securities convertible into or exchangeable or
exercisable for any shares of its capital stock;
A-16
<PAGE> 145
(c) neither it nor any of its Subsidiaries shall (i) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible
into or exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of its capital
stock of any class or any other property or assets (other than (x) in the
case of the Company, Shares issuable pursuant to options outstanding on the
date hereof under the Stock Plans or upon conversion of the Preferred
Shares and additional options or rights to acquire Shares required by the
terms of any Stock Plan as in effect on the date hereof in the ordinary
course of the operation of such Stock Plan, (y) in the case of the Parent,
shares of Parent Common Stock issuable pursuant to options outstanding
under the Parent Stock Plans and additional options or rights to acquire
Parent Shares required by the terms of any Parent Stock Plan as in effect
on the date hereof in the ordinary course of the operation of such Parent
Stock Plan, and (z) issuances of securities in connection with grants or
awards of stock-based compensation made in accordance with Section 6.1(d)
hereof); (ii) other than in the ordinary and usual course of business, and
except for long-term indebtedness incurred in connection with the
refinancing of existing indebtedness either at its maturity or at a lower
cost of funds, transfer, lease, license, guarantee, sell, mortgage, pledge,
dispose of or encumber any other property or assets (including capital
stock of any of its Subsidiaries) or incur or modify any material
indebtedness or other liability; (iii) make any commitments for, make or
authorize any capital expenditures other than (x) capital expenditures not
in excess of $25,000,000 in the aggregate incurred in connection with the
repair or replacement of facilities destroyed or damaged due to casualty or
accident (whether or not covered by insurance), (y) as required by Law, or
(z) in amounts less than $5,000,000 individually and $15,000,000 in the
aggregate; provided, however, that if either party proposes to make any
capital expenditure which requires the written consent of the other party
pursuant to this Section 6.1, such other party shall not unreasonably
withhold such consent; or (iv) make any acquisition of, or investment in,
assets or stock of any other Person or entity in excess of $15,000,000 in
the aggregate;
(d) neither it nor any of its Subsidiaries shall terminate, establish,
adopt, enter into, make any new grants or awards of stock-based
compensation or other benefits under, amend or otherwise modify any
Compensation and Benefit Plans or increase the salary, wage, bonus or other
compensation of any directors, officers or employees except (i) for grants
or awards to directors, officers and employees of it or its Subsidiaries
under existing Compensation and Benefit Plans in such amounts and on such
terms as are consistent with past practice, (ii) in the normal and usual
course of business (which shall include normal periodic performance reviews
and related compensation and benefit increases, annual reestablishment of
Compensation and Benefit Plans and the provision of individual Compensation
and Benefit Plans consistent with past practice for newly hired or
appointed officers and employees and the adoption of Compensation and
Benefit Plans for employees of new Subsidiaries in amounts and on terms
consistent with past practice) or (iii) for actions necessary to satisfy
existing contractual obligations under Compensation and Benefit Plans
existing as of the date hereof;
(e) each of the Company and Parent shall consult with the other prior
to settling or compromising, or permitting any of its Subsidiaries to
settle or compromise, any material claim or litigation, and neither it nor
any of its Subsidiaries shall, except in the ordinary and usual course of
business, modify, amend or terminate any of its material Contracts or
waive, release or assign any material rights or claims;
(f) neither it nor any of its Subsidiaries shall make any Tax election
or permit any insurance policy naming it as a beneficiary or loss-payable
payee to be cancelled or terminated except in the ordinary and usual course
of business;
(g) neither it nor any of its Subsidiaries shall take any action or
omit to take any action that would prevent the Merger from qualifying for
"pooling of interests" accounting treatment or as a "reorganization" within
the meaning of Section 368(a) of the Code or that would cause any of its
representations and warranties herein to become untrue in any material
respect; and
(h) neither it nor any of its Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
A-17
<PAGE> 146
6.2. Acquisition Proposals. (a) Except as contemplated by the Company
Budget or the Parent Budget and except as expressly contemplated by this
Agreement, neither the Company nor Parent shall, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor, attorney, accountant,
agent or other representative retained by it or any of its Subsidiaries to,
directly or indirectly through another person, (i) solicit, initiate or
encourage (including by way of furnishing information), or take any other action
designed to facilitate, directly or indirectly, any inquiries or the making of
any proposal with respect to a merger, reorganization, share exchange,
consolidation or similar transaction involving, or, other than in the ordinary
course of business, any purchase of all or any significant portion of assets or
any equity securities, of the Company or Parent, as applicable, or any of its
Subsidiaries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal" and any such transaction or purchase being hereinafter
referred to as an "Acquisition Transaction") or (ii) participate in any
discussions or negotiations relating to any Acquisition Proposal or Acquisition
Transaction; provided, however, that if, at any time prior to the obtaining of
the Parent Requisite Vote, in the case of Parent, or the Company Requisite Vote,
in the case of the Company, the board of directors of the Company or Parent, as
applicable, determines in good faith, based on the advice of outside counsel,
that it is necessary to do so to avoid a breach of its duties under state
corporate Law applicable to the conduct of directors, the Company or Parent, as
applicable, may, in response to an Acquisition Proposal which was not solicited
by it or which did not otherwise result from a breach of this Section 6.2(a),
and subject to such party's compliance with Section 6.2(c), (A) furnish
information with respect to it and its Subsidiaries to any person pursuant to a
customary confidentiality agreement (as determined by the party receiving such
Acquisition Proposal after consultation with its outside counsel), the benefits
of the terms of which, if more favorable to the other party to such
confidentiality agreement than those in place with the other party hereto, shall
be extended to the other party hereto, and (B) participate in negotiations
regarding such Acquisition Proposal.
(b) Except as expressly permitted by this Section 6.2, neither the board of
directors of the Company or Parent, as applicable, nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to the other party hereto, the approval or recommendation by such
board of directors or such committee of the Merger or the adoption and approval
of the matters to be considered at the Stockholders Meeting (as defined in
Section 6.4), in the case of the Company, and the Parent Stockholders Meeting
(as defined in Section 6.4), in the case of Parent, (ii) approve or recommend,
or propose publicly to approve or recommend, any Acquisition Proposal other than
the Merger, or (iii) cause or permit the Company or Parent, as applicable, to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement or understanding (each, an "Acquisition Agreement")
related to any Acquisition Proposal. Notwithstanding the foregoing, in the event
that prior to the obtaining of the Company Requisite Vote, in the case of the
Company, or the Parent Requisite Vote, in the case of Parent, there exists a
Superior Proposal (as defined below) and the board of directors of the Company
or Parent, as applicable, determines that there is not a substantial probability
that the Company Requisite Vote or the Parent Requisite Vote, as applicable,
will be obtained due to the existence of such Superior Proposal, the board of
directors of the Company or Parent, as applicable, may, subject to this and the
following sentences, withdraw or modify its approval or recommendation of the
Merger or the approval of the matters to be considered at the Stockholders
Meeting, in the case of the Company, and the Parent Stockholders Meeting, in the
case of Parent, the board of directors of the Company or Parent, as applicable,
may (subject to this and the following sentences of this Section 6.2(b)) approve
or recommend such Superior Proposal or terminate this Agreement (and, subject to
Article VIII hereof, concurrently with such termination, if it so chooses, cause
the Company or Parent, as applicable, to enter into an Acquisition Agreement
with respect to such Superior Proposal), but only if (i) the party seeking to
terminate is not in material breach of any of the terms of this Agreement, (ii)
the board of directors of the party seeking to terminate authorizes the Company
or Parent, as applicable, to enter into a binding written Acquisition Agreement
concerning an Acquisition Transaction that constitutes a Superior Proposal and
the party seeking to terminate notifies the other party in writing that it
intends to enter into such an Acquisition Agreement, attaching such Acquisition
Agreement to such notice and specifying any material terms and conditions not
included in the Acquisition Agreement and further identifying the party making
the Superior Proposal, (iii) the other party does not make, within fifteen
business days of receipt of written
A-18
<PAGE> 147
notification from the party seeking to terminate of such party's intention to
enter into a binding Acquisition Agreement for a Superior Proposal, an offer
that the board of directors of such party believes, in good faith after
consultation with its financial advisors, is at least as favorable, from a
financial point of view, to its stockholders as the Superior Proposal, and (iv)
the party seeking to terminate prior to such termination pays to the other party
in immediately available funds any fees required to be paid pursuant to Section
8.5. The Company and Parent each agrees (i) that it will not enter into a
binding Acquisition Agreement referred to in clause (ii) above until at least
the sixteenth business day after it has provided the notice to Parent or the
Company, as applicable, required thereby and (ii) to notify Parent or the
Company, promptly, if its intention to enter into the written Acquisition
Agreement referred to in its notification shall change at any time after giving
such notification. For purposes of this Agreement, a "Superior Proposal" means
in respect of the Company or Parent, as applicable, any proposal made by a third
party to acquire, directly or indirectly, for consideration consisting of cash
and/or securities, more than 50% of the equity securities of the Company or
Parent, as the case may be, entitled to vote generally in the election of
directors or all or substantially all the assets of the Company or Parent, as
the case may be, and otherwise on terms which the board of directors of such
party determines in its good faith judgment (x) (based on the written opinion of
a financial advisor of nationally recognized reputation (which opinion shall be
provided to the other party hereto)) to be more favorable from a financial point
of view to its stockholders after consideration of the Merger and the
transactions contemplated hereby and for which financing, to the extent
required, is then committed, (y) to be more favorable to such party after
consideration of the Merger and the transactions contemplated hereby after
taking into account any additional constituencies (including stockholders) and
other pertinent factors permitted under the laws of the Commonwealth of
Pennsylvania or the laws of the State of Maryland, as applicable, and (z) to
constitute a transaction that is reasonably likely to be consummated on the
terms set forth, taking into account all legal, financial, regulatory and other
aspects of the proposal.
(c) In addition to the obligations of the parties set forth in paragraphs
(a) and (b) of this Section 6.2, any party that has received an Acquisition
Proposal shall immediately advise the other party hereto orally and in writing
of such Acquisition Proposal, any request for information, the material terms
and conditions of such request or Acquisition Proposal and the identity of the
Person making such request or Acquisition Proposal. Any party that has received
an Acquisition Proposal will keep the other party hereto reasonably informed of
the status and details (including amendments or proposed amendments) of any such
Acquisition Proposal.
(d) Nothing contained herein shall prohibit a party from taking and
disclosing to its stockholders a position contemplated by Rule 14e-2(a) under
the Exchange Act with respect to an Acquisition Proposal by means of a tender or
exchange offer.
6.3. Information Supplied. The Company and Parent each agrees, as to
itself and its Subsidiaries, that none of the information supplied or to be
supplied by it or its Subsidiaries for inclusion or incorporation by reference
in (i) the Registration Statement on Form S-4 to be filed with the SEC by Parent
in connection with the issuance of shares of Parent Common Stock in the Merger
(including the joint proxy statement and prospectus (the "Prospectus/Proxy
Statement") constituting a part thereof) (the "S-4 Registration Statement")
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and (ii) the Prospectus/Proxy Statement and any amendment
or supplement thereto will, at the date of mailing to stockholders and at the
times of the Stockholders Meeting and the Parent Stockholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
6.4. Stockholders Meetings. The Company will take, in accordance with
applicable law and its articles of incorporation and by-laws, all action
necessary to convene a meeting of holders of Shares (the "Stockholders Meeting")
as promptly as practicable after the S-4 Registration Statement is declared
effective to consider and vote upon the approval of this Agreement. Parent will
take, in accordance with applicable law and its charter and by-laws, all action
necessary to convene a meeting of holders of Parent Common Stock (the "Parent
Stockholders Meeting") as promptly as practicable after the S-4 Registration
Statement is
A-19
<PAGE> 148
declared effective to consider and vote upon the approval of the issuance of
Parent Common Stock in the Merger. Subject to obligations under applicable Law,
each of the Company's and Parent's board of directors shall recommend such
approval and shall take all lawful action to solicit such approval.
Notwithstanding the foregoing, Parent may delay the Parent Stockholders Meeting
and the Company may delay the Stockholders Meeting by action of its respective
Board of Directors after written notice of such delay to the other party if such
Board of Directors shall determine that a Person has made a Superior Proposal
and there is not a reasonable probability that the Company Requisite Vote, in
the case of the Company, or the Parent Requisite Vote, in the case of Parent,
will be obtained without such delay; provided, that such Stockholders Meeting or
Parent Stockholders Meeting, as the case may be, shall be held at the earliest
time at which there is a reasonable probability of obtaining the Company
Requisite Vote or Parent Requisite Vote, as the case may be. If a party
determines to delay its stockholders meeting pursuant to the prior sentence the
other party may (but need not) delay its stockholders meeting.
6.5. Filings; Other Actions; Notification. (a) The Company and Parent
shall promptly prepare and file with the SEC the Prospectus/Proxy Statement, and
Parent shall prepare and file with the SEC the S-4 Registration Statement as
promptly as practicable. The Company and Parent each shall use its reasonable
efforts to have the S-4 Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing, and, unless the
Parent Stockholders Meeting or Stockholders Meeting has been delayed pursuant to
Section 6.4, promptly thereafter mail the Prospectus/Proxy Statement to the
respective stockholders of each of the Company and Parent. If the mailing is
delayed it shall be completed as promptly as is practicable after the parties
have determined to hold their respective stockholders meetings. Parent shall
also use its best efforts to obtain prior to the effective date of the S-4
Registration Statement all necessary state securities law or "blue sky" permits
and approvals required in connection with the Merger and to consummate the other
transactions contemplated by this Agreement and the Stock Option Agreement.
(b) The Company and Parent each shall use its best reasonable efforts to
cause to be delivered to the other party and its directors a letter of its
independent auditors, dated (i) the date on which the S-4 Registration Statement
shall become effective and (ii) the Closing Date, and addressed to the other
party and its directors, in form and substance customary for "comfort" letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement.
(c) The Company and Parent shall cooperate with each other and use (and
shall cause their respective Subsidiaries to use) all commercially reasonable
efforts (i) to take or cause to be taken all actions, and do or cause to be done
all things, necessary, proper or advisable under this Agreement, the Stock
Option Agreement and applicable Laws to consummate and make effective the Merger
and the other transactions contemplated by this Agreement and the Stock Option
Agreement as soon as practicable (including using their respective best efforts
to prepare and file as promptly as practicable all documentation to effect all
necessary applications, notices, petitions, filings and other documents) and
(ii) to obtain as promptly as practicable all permits, consents, approvals and
authorizations (including, without limitation, the expiration or earlier
termination of any applicable waiting period under the HSR Act) necessary or
advisable to be obtained from any third party and/or any Governmental Entity in
order to consummate the Merger or any of the other transactions contemplated by
this Agreement and the Stock Option Agreement. Subject to applicable Laws
relating to the exchange of information, Parent shall have the right to review
and approve in advance all characterizations of the information relating to
Parent and its Subsidiaries, and the Company shall have the right to review and
approve in advance all characterizations of the information relating to the
Company and its Subsidiaries, and each will consult with the other to the extent
practicable with respect to all such information, in each case that appears in
any filing made with, or written materials submitted to, any third party and/or
any Governmental Entity in connection with the Merger and the other transactions
contemplated by this Agreement and the Stock Option Agreement. In exercising the
foregoing right, each of the Company and Parent shall act reasonably and as
promptly as practicable.
(d) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Prospectus/Proxy Statement, the S-4
Registration Statement or any other statement, filing, notice or application
made by or on behalf of Parent, the
A-20
<PAGE> 149
Company or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Merger and the transactions
contemplated by this Agreement and the Stock Option Agreement.
(e) The Company and Parent each shall keep the other apprised of the status
of matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of notice or other
communications received by Parent or the Company, as the case may be, or any of
its Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger and the other transactions contemplated by this Agreement
and the Stock Option Agreement. The Company and Parent each shall give prompt
notice to the other of any change that is reasonably likely to result in a
Material Adverse Effect on it.
6.6. Taxation and Accounting. Subject to Section 6.2, neither Parent nor
the Company shall take or cause to be taken any action, whether before or after
the Effective Time, that would disqualify the Merger as a "pooling of interests"
for accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Code.
6.7. Access. Upon reasonable notice, and except as may otherwise be
required by applicable Law, the Company and Parent each shall (and shall cause
its Subsidiaries to) afford the other's officers, employees, counsel,
accountants and other authorized representatives ("Representatives") access,
during normal business hours throughout the period prior to the Effective Time,
to its properties, books, contracts and records and, during such period, each
shall (and shall cause its Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as may reasonably
be requested, provided that no investigation pursuant to this Section shall
affect or be deemed to modify any representation or warranty made by the
Company, Parent or Merger Sub, and provided, further, that the foregoing shall
not require the Company or Parent to permit any inspection, or to disclose any
information, that in the reasonable judgment of the Company or Parent, as the
case may be, would result in the disclosure of any trade secrets of third
parties or violate any of its obligations with respect to confidentiality to
third parties if the Company or Parent, as the case may be, shall have used
reasonable efforts to obtain the consent of such third party to such inspection
or disclosure. All requests for information made pursuant to this Section shall
be directed to an executive officer of the Company or Parent, as the case may
be, or such Person as may be designated by it. All such information shall be
governed by the terms of the Confidentiality Agreement, including without
limitation all such information disclosed in the Disclosure Letters, and the
Company and Parent, and each of their respective Subsidiaries, shall use their
respective best reasonable efforts to maintain the confidentiality of all such
information disclosed in the Disclosure Letters.
6.8. Affiliates. (a) Parent shall deliver to the Company a list of names
and addresses of those Persons who are, in the opinion of the Parent, as of the
time of the Stockholders Meeting, "affiliates" of the Company within the meaning
of Rule 145 under the Securities Act and for the purposes of applicable
interpretations regarding the pooling-of-interests method of accounting. The
Company shall provide to Parent such information and documents as Parent shall
reasonably request for purposes of preparing such list. There shall be added to
such list the names and addresses of any other Person subsequently identified as
a Person who may be deemed to be such an affiliate of the Company; provided,
however, that no such Person identified by Parent shall be added to the list of
affiliates of the Company if Parent shall receive from the Company, on or before
the date of the Stockholders Meeting, an opinion of counsel reasonably
satisfactory to Parent to the effect that such Person is not an affiliate. The
Company shall exercise its best efforts to deliver or cause to be delivered to
Parent, prior to the date of the Stockholders Meeting, from each affiliate of
the Company identified in the foregoing list (as the same may be supplemented as
aforesaid), a letter dated as of the Closing Date substantially in the form
attached as Exhibit A-1 (the "Affiliates Letter"). Parent shall not be required
to maintain the effectiveness of the S-4 Registration Statement or any other
registration statement under the Securities Act for the purposes of resale of
Parent Common Stock by such affiliates received in the Merger and the
certificates representing Parent Common Stock received by such affiliates shall
bear a customary legend regarding applicable Securities Act restrictions and the
provisions of this Section.
A-21
<PAGE> 150
(b) Prior to the date of the Stockholders Meeting, Parent shall deliver to
the Company a list of names and addresses of those Persons who were, in the
opinion of the Parent, at the time of the Stockholders Meeting, "affiliates" of
Parent for the purposes of applicable interpretations regarding the "pooling-of-
interests" method of accounting. Parent shall provide to the Company such
information and documents as the Company shall reasonably request for purposes
of reviewing such list. There shall be added to such list the names and
addresses of any other Person the Company reasonably identifies (by written
notice to Parent within ten business days after the Company's receipt of such
list) as being a Person who may be deemed to be such an affiliate of Parent;
provided, however, that no such Person identified by the Company shall be added
to the list of affiliates of Parent if the Company shall receive from Parent, on
or before the date of the Stockholders Meeting, an opinion of counsel reasonably
satisfactory to the Company to the effect that such Person is not an affiliate.
Parent shall exercise its best efforts to deliver or cause to be delivered to
the Company, prior to the date of the Stockholders Meeting, from each of such
affiliates of Parent identified in the foregoing list (as the same may be
supplemented as aforesaid), a letter dated as of the Closing Date substantially
in the form attached as Exhibit A-2 (the "Pooling Affiliates Letter").
(c) If the Merger would otherwise qualify for "pooling-of-interests"
accounting treatment, shares of Parent Common Stock issued to affiliates of the
Company in exchange for Shares shall not be transferable until such time as
financial results covering at least 30 days of combined operations of Parent and
the Company have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies, regardless of whether each
such affiliate has provided the written agreement referred to in this Section
6.8, except to the extent permitted by, and in accordance with, SEC Accounting
Series Release 135 and SEC Staff Accounting Bulletins 65 and 76. Any shares held
by any such affiliate shall not be transferable, regardless of whether such
affiliate has provided the applicable written agreement referred to in this
Section 6.8, if such transfer, either individually or in the aggregate with
other transfers by affiliates, would preclude Parent's ability to account for
the business combination to be effected by the Merger as a "pooling of
interests". The Company shall not register the transfer of any Certificate,
unless such transfer is made in compliance with the foregoing.
6.9. Stock Exchange Listing and De-listing. Parent shall use its best
efforts to cause the shares of Parent Common Stock to be issued in the Merger to
be approved for listing on the New York Stock Exchange, Inc. (the "NYSE")
subject to official notice of issuance, prior to the Closing Date. The Company
shall use its best efforts to cause the Shares to be (i) de-listed from the
NYSE, the Philadelphia Stock Exchange and the Chicago Stock Exchange and (ii)
de-registered under the Exchange Act as soon as practicable following the
Effective Time.
6.10. Publicity. The initial press release concerning this Agreement and
the transactions contemplated by this Agreement shall be a joint press release
and thereafter the Company and Parent shall consult with each other prior to
issuing any press releases or otherwise making public announcements with respect
to the Merger and the other transactions contemplated by this Agreement and the
Stock Option Agreement and prior to making any filings with any third party
and/or any Governmental Entity (including any national securities exchange with
respect thereto, except as may be required by law or by obligations pursuant to
any listing agreement with or rules of any national securities exchange).
6.11. Benefits.
(a) Stock Options.
(i) At the Effective Time, each Company Option, whether vested or
unvested, shall be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such Company Option,
the same number of shares of Parent Common Stock as the holder of such
Company Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior
to the Effective Time (rounded down to the nearest whole number), at a
price per share (rounded up to the nearest whole cent) equal to (y) the
aggregate exercise price for the Shares otherwise purchasable pursuant
to such Company Option divided by (z) the number of full shares of
Parent Common Stock deemed purchasable pursuant to such Company Option
in accordance with the foregoing; provided, however, that in the case of
any
A-22
<PAGE> 151
Company Option to which Section 422 of the Code applies, the option
price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in
accordance with the foregoing, subject to such adjustments as are
necessary in order to satisfy the requirements of Section 424(a) of the
Code. At or prior to the Effective Time, the Company shall make all
necessary arrangements with respect to the Stock Plans to permit the
assumption of the unexercised Company Options by Parent pursuant to this
Section.
(ii) Effective at the Effective Time, Parent shall assume each
Company Option in accordance with the terms of the Stock Plan under
which it was issued and the stock option agreement by which it is
evidenced. At or prior to the Effective Time, Parent shall take all
corporate action necessary to reserve for issuance a sufficient number
of shares of Parent Common Stock for delivery upon exercise of Company
Options assumed by it in accordance with this Section and, to the extent
required under applicable SEC rules, take all corporate actions
necessary or appropriate to obtain shareholder approval at a
stockholders' meeting selected by Parent with respect to such Stock Plan
to the extent such approval is required to enable such Stock Plan to
comply with Rule 16b-3 under the Exchange Act. As soon as practicable
after the Effective Time, Parent shall file a registration statement on
Form S-3 or Form S-8, as the case may be (or any successor form), or on
another appropriate form (or shall cause such Company Option to be
deemed an option issued pursuant to a Parent Stock Plan for which shares
of Parent Common Stock have previously been registered pursuant to an
appropriate registration form), with respect to the Parent Common Stock
subject to such Company Options, and shall use its best efforts to
maintain the effectiveness of such registration statements (and maintain
the current status of the prospectus or prospectuses contained therein)
for so long as such Company Options remain outstanding.
(b) Directors of Parent. From and after the Effective Time, the board
of directors of Parent shall consist of 15 directors. Immediately prior to
the Effective Time, the Company shall designate six of such directors, and
Parent shall designate nine of such directors, and such designated
directors shall be the directors of Parent from and after the Effective
Time until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in
accordance with Parent's charter and bylaws.
(c) Officers of Parent. From and after the Effective Time, the
Chairman and Chief Executive Officer of Parent shall be Alan J. Noia and
the President and Chief Operating Officer of Parent shall be David D.
Marshall. If either such officer is unable or unwilling to serve in such
office immediately after the Effective Time, his successor shall be elected
as soon as practicable after the Effective Time by the directors of Parent
designated pursuant to Section 6.11(b). From and after the Effective Time,
the individuals appointed by such designated directors shall be the other
officers of Parent, and all such officers of Parent shall serve from and
after the Effective Time until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or
removal in accordance with Parent's charter and by-laws.
(d) Parent Board Committees. From and after the Effective Time, four
of the six directors of Parent designated by the Company pursuant to
Section 6.11(b) shall be the chairman of the following committees of the
board of directors of Parent: Nuclear Review; New Business; Finance; and
Employee and Community Relations. From and after the Effective Time, four
of the nine directors of Parent designated by Parent pursuant to Section
6.11(b) shall be the chairman of the following committees of the board of
directors of Parent: Audit; Management Review; Nominating; and Benefits.
(e) Corporate Headquarters. From and after the Effective Time,
Parent's corporate headquarters shall remain in Maryland and substantial
operations of Parent's Subsidiaries, including the Surviving Corporation,
shall remain in the Pittsburgh, Pennsylvania area.
6.12. Expenses. Except as provided in this Section 6.12, the Surviving
Corporation shall pay all charges and expenses, including those of the Exchange
Agent, in connection with the transactions contemplated in Article IV, and
Parent shall reimburse the Surviving Corporation for such charges and expenses.
Except as otherwise provided in Section 8.5(b), whether or not the Merger is
consummated, all costs and
A-23
<PAGE> 152
expenses incurred in connection with this Agreement and the Stock Option
Agreement and the Merger and the other transactions contemplated by this
Agreement and the Stock Option Agreement shall be paid by the party incurring
such expense, except that expenses incurred in connection with the filing fee
for the filings under the HSR Act, the S-4 Registration Statement and printing
and mailing the Prospectus/Proxy Statement, the S-4 Registration Statement, and
such other expenses as may be set forth in Section 6.12 of the Parent Disclosure
Letter shall be shared equally by Parent and the Company.
6.13. Indemnification; Directors' and Officers' Insurance. (a) From and
after the Effective Time, Parent agrees that it will indemnify and hold harmless
each present and former director and officer of the Company or any of its
Subsidiaries (when acting in such capacity), determined as of the Effective Time
(the "Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that the Company or such Subsidiary is permitted
under the law of its jurisdiction of incorporation and its articles of
incorporation and bylaws in effect on the date hereof to indemnify such Person
(and Parent shall also advance expenses as incurred to the fullest extent
permitted under applicable Law, provided that the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification).
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 6.13, upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Parent thereof. In the event
of any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) Parent or the Surviving Corporation
shall have the right to assume the defense thereof and Parent shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, (ii) the Indemnified Parties will cooperate
in the defense of any such matter and (iii) Parent shall not be liable for any
settlement effected without its prior written consent; provided, however, that
Parent shall not have any obligation hereunder to any Indemnified Party if and
when a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by applicable
Law.
(c) The Surviving Corporation shall maintain the Company's existing
officers' and directors' liability insurance ("D&O Insurance") for a period of
six years after the Effective Time so long as the annual premium therefor is not
in excess of 200% of the last annual premium paid prior to the date hereof (the
"Current Premium"); provided, however, that if the existing D&O Insurance
expires, is terminated or cancelled during such six-year period, the Surviving
Corporation will use reasonable efforts to obtain as much D&O Insurance as can
be obtained for the remainder of such period for a premium not in excess (on an
annualized basis) of 200% of the Current Premium.
(d) If the Surviving Corporation or any of its successors or assigns (i)
shall consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity of such consolidation
or merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then and in each such
case, proper provisions shall be made so that the successors and assigns of the
Surviving Corporation shall assume all of the obligations set forth in this
Section 6.13.
(e) The provisions of this Section 6.13 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
6.14. Other Actions by the Company and Parent.
(a) Takeover Statute. If any Takeover Statute is or may become
applicable to the Merger or the other transactions contemplated by this
Agreement or the Stock Option Agreement, each of Parent and the Company and
its board of directors shall grant such approvals and take such actions as
are necessary so that such transactions may be consummated as promptly as
practicable on the terms contemplated by
A-24
<PAGE> 153
this Agreement or by the Stock Option Agreement, as the case may be, and
otherwise act to eliminate or minimize the effects of such Takeover Statute
on such transactions.
(b) Dividends. The Company shall coordinate with Parent the
declaration, setting of record dates and payment dates of dividends on
Shares so that holders of Shares do not receive dividends on both Shares
and Parent Common Stock received in the Merger in respect of any calendar
quarter or fail to receive a dividend on either Shares or Parent Common
Stock received in the Merger in respect of any calendar quarter.
6.15. Parent Vote. Parent shall vote (or consent with respect to) or
cause to be voted (or a consent to be given with respect to) any Shares and any
shares of common stock of Merger Sub beneficially owned by it or any of its
Affiliates or with respect to which it or any of its Affiliates has the power
(by agreement, proxy or otherwise) to cause to be voted (or to provide a
consent), in favor of the adoption and approval of this Agreement at any meeting
of stockholders of the Company or Merger Sub, respectively, at which this
Agreement and the Stock Option Agreement shall be submitted for adoption and
approval and at all adjournments or postponements thereof (or, if applicable, by
any action of stockholders of either the Company or Merger Sub by consent in
lieu of a meeting).
6.16. Rate Matters. Other than currently pending rate filings, each of
the Company and Parent shall, and shall cause its Subsidiaries to, discuss with
each other any changes in its or its Subsidiaries regulated rates or charges
(other than pass-through fuel rates or charges), standards of service or
accounting from those in effect on the date hereof and consult with the other
prior to making any filing (or any amendment thereto), or effecting any
agreement, commitment arrangement or consent, whether written or oral, formal or
informal, with respect thereto.
6.17. PUHCA. Neither the Company nor Parent shall, nor shall the Company
or Parent permit any of its Subsidiaries to, take any action that would impair
the ability of Parent to obtain the approvals under the PUHCA for the
transactions contemplated by this Agreement.
6.18. Pennsylvania Restructuring Legislation. The Company and Parent each
agrees that it will cause its Pennsylvania utility Subsidiary to file in a
timely manner with the Pennsylvania Public Utility Commission a restructuring
plan to implement direct access to a competitive market for electric generation
pursuant to the Electricity Generation Customer Choice and Competition Act, 66
Pa. Comm. Stat. sec. 2801 et seq. (the "Pennsylvania Restructuring
Legislation").
6.19. Nuclear Matters. (a) At least quarterly prior to the Effective
Time, the Company shall, upon request by Parent, cause its
President -- Generation Group and its Chief Nuclear Officer to attend a meeting
of the Board of Directors of Parent and provide Parent's directors with such
oral and written information concerning the Nuclear Facilities and the Company's
nuclear generation program as such directors and/or the chief financial officer
of Parent may reasonably request, including but not limited to information
relating to safety matters, regulatory matters, refueling plans, outages,
planned and pending capital expenditures and the Company's relations with
co-owners of the Nuclear Facilities.
(b) Prior to the Effective Time, Parent shall be entitled to designate one
person who shall be a director of Parent or shall be a person expert in nuclear
matters reasonably acceptable to the Company, to attend and participate (without
having any voting rights) in each meeting of the Nuclear Review Committee of the
Board of Directors of the Company (the "Nuclear Review Committee"), and such
Parent designee shall be given the same notice of meetings and other information
as is given each member of the Nuclear Review Committee.
A-25
<PAGE> 154
ARTICLE VII
CONDITIONS
7.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been duly
approved by holders of Shares constituting the Company Requisite Vote and
by the sole stockholder of Merger Sub in accordance with applicable law and
the certificate and by-laws of each such corporation, and the issuance of
Parent Common Stock pursuant to the Merger shall have been duly approved by
the holders of Parent Common Stock constituting the Parent Requisite Vote.
(b) NYSE Listing. The shares of Parent Common Stock issuable to
holders of Shares pursuant to this Agreement shall have been authorized for
listing on the NYSE upon official notice of issuance.
(c) Regulatory Consents. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated and, other than the filing provided for in Section 1.3, all
filings required to be made prior to the Effective Time by the Company or
Parent or any of their respective Subsidiaries with, and all consents,
approvals and authorizations required to be obtained prior to the Effective
Time by the Company or Parent or any of their respective Subsidiaries from,
any Governmental Entity (collectively, "Governmental Consents") in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby shall have been made
or obtained (as the case may be) and become Final Orders (as hereinafter
defined), and such Final Orders shall not, individually or in the
aggregate, contain terms or conditions that would have, or be reasonably
likely to have, a Material Adverse Effect on the Company or a Material
Adverse Effect on Parent (excluding, after the Effective Time, the Company
and its Subsidiaries). The term "Final Order" shall mean action by the
relevant Governmental Entity that 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, regulation or order have been
satisfied.
(d) Litigation. No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the transactions
contemplated by this Agreement (collectively, an "Order"), and no
Governmental Entity shall have instituted any proceeding seeking any such
Order.
(e) S-4. The S-4 Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of
the S-4 Registration Statement shall have been issued and no proceedings
for that purpose shall have been initiated or be threatened by the SEC.
(f) Blue Sky Approvals. Parent shall have received all state
securities and "blue sky" permits and other authorizations necessary to
consummate the transactions contemplated hereby.
(g) Pooling Letter. Parent and the Company shall have received from
Parent's independent accounting firm a letter, dated as of the Closing
Date, to the effect that the Merger will qualify for "pooling of interests"
accounting treatment, it being understood Parent's independent accounting
firm may rely upon a letter of the Company's independent accounting firm
with respect to the eligibility of the Company and its Subsidiaries for
such accounting treatment.
7.2. Conditions to Obligations of Parent and Merger Sub. The obligations
of Parent and Merger Sub to effect the Merger are also subject to the
satisfaction or waiver by Parent prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as
A-26
<PAGE> 155
of the Closing Date as though made on and as of the Closing Date (except to
the extent any such representation or warranty expressly speaks as of an
earlier date), and Parent shall have received a certificate signed on
behalf of the Company by an executive officer of the Company to such
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, and Parent
shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to such effect.
(c) Consents. The Company shall have obtained the consent or approval
of each Person whose consent or approval shall be required in order to
consummate the transactions contemplated by this Agreement and the Stock
Option Agreement under any Contract to which the Company or any of its
Subsidiaries is a party, except those for which the failure to obtain such
consent or approval, individually or in the aggregate, is not reasonably
likely to have a Material Adverse Effect on the Company or is not
reasonably likely to materially adversely affect the ability of the Company
to consummate the transactions contemplated by this Agreement.
(d) Tax Opinion. Parent shall have received the opinion of Sullivan &
Cromwell, counsel to Parent, dated the Closing Date, to the effect that the
Merger will be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that each of Parent,
Merger Sub and the Company will be a party to that reorganization within
the meaning of Section 368(b) of the Code. Such opinion may be based on, in
addition to the review of such matters of law and fact as Sullivan &
Cromwell considers appropriate, (i) representations made at the request of
Sullivan & Cromwell by Parent, the Company, stockholders of Parent or the
Company, or any combination of such persons, (ii) certificates provided at
the request of Sullivan & Cromwell by officers of Parent or the Company and
other appropriate persons and (iii) assumptions set forth in the opinion
with the consent of Parent, which consent shall not be unreasonably
withheld.
(e) Affiliates Letters. Parent shall have received an Affiliates
Letter from each Person identified as an affiliate of the Company pursuant
to Section 6.8.
(f) Comfort Letters. Parent shall have received, in form and
substance reasonably satisfactory to Parent, from its independent public
accounting firm and the Company's independent public accounting firm the
"comfort" letters described in Section 6.5(b).
7.3. Conditions to Obligation of the Company. The obligation of the
Company to effect the Merger is also subject to the satisfaction or waiver by
the Company prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub 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 to the extent any
such representation and warranty expressly speaks as of an earlier date),
and the Company shall have received a certificate signed on behalf of
Parent by an executive officer of Parent and Merger Sub to such effect.
(b) Performance of Obligations of Parent and Merger Sub. Each of
Parent and Merger Sub 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, and the Company shall have received a certificate
signed on behalf of Parent and Merger Sub by an executive officer of Parent
to such effect.
(c) Consents. Parent shall have obtained the consent or approval of
each Person whose consent or approval shall be required in order to
consummate the transactions contemplated by this Agreement and the Stock
Option Agreement under any Contract to which Parent or any of its
Subsidiaries is a party, except those for which failure to obtain such
consents and approvals, individually or in the aggregate, is not reasonably
likely to have a Material Adverse Effect on Parent or is not reasonably
likely to materially adversely affect the ability of Parent to consummate
the transactions contemplated by this Agreement.
A-27
<PAGE> 156
(d) Tax Opinion. The Company shall have received the opinion of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Company, dated the
Closing Date, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that each of Parent, Merger Sub and the Company
will be a party to that reorganization within the meaning of Section 368(b)
of the Code. Such opinion may be based on, in addition to the review of
such matters of law and fact as such counsel considers appropriate, (i)
representations made at the request of such counsel by Parent, the Company,
Merger Sub, stockholders of Parent or the Company, or any combination of
such persons, (ii) certificates provided at the request of such counsel by
officers of Parent, the Company and Merger Sub, or any combination of such
officers and (iii) assumptions set forth in the opinion with the consent of
the Company, which consent shall not be unreasonably withheld.
(e) Comfort Letters. The Company shall have received from its
independent public accounting firm and Parent's independent public
accounting firm the "comfort" letters described in Section 6.5(b).
ARTICLE VIII
TERMINATION
8.1. Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of the Company and Parent referred
to in Section 7.1(a), by mutual written consent of the Company, Parent and
Merger Sub, by action of their respective boards of directors.
8.2. Termination by Either Parent or the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the board of directors of either Parent or the Company if (a)
the Merger shall not have been consummated by October 5, 1998, whether such date
is before or after the date of approval by the stockholders of the Company or
Parent (the "Termination Date"); provided that the Termination Date shall
automatically be extended for six months if, on October 5, 1998: (i) any of the
conditions set forth in Section 7.1(c) has not been satisfied or waived, (ii)
each of the other conditions to the consummation of the Merger set forth in
Article VII has been satisfied or waived or can readily be satisfied, and (iii)
any Governmental Consent that has not yet been obtained is being pursued
diligently and in good faith, (b) any Governmental Consents shall have been made
or obtained by Final Orders which contain terms or conditions that would cause
the condition set forth in Section 7.1(c) not to be satisfied, (c) any Order
permanently restraining, enjoining or otherwise prohibiting the Merger shall
have become final and non-appealable, whether before or after the approval by
the stockholders of the Company or Parent, (d) the Company Requisite Vote shall
not have been obtained at the duly held Stockholders Meeting, including any
adjournments thereof, or (e) the Parent Requisite Vote shall not have been
obtained at the duly held Parent Stockholders Meeting, including any
adjournments thereof; provided that the right to terminate this Agreement
pursuant to clause (a), (b), (d) or (e) above shall not be available to any
party that has breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure of the Merger to be consummated.
8.3. Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval by stockholders of the Company referred to in Section
7.1(a), by action of the board of directors of the Company:
(a) subject to and in accordance with the provisions of Section 6.2; or
(b) if (i) the Board of Directors of Parent shall have withdrawn or
adversely modified its approval or recommendation of this Agreement or
failed to reconfirm its recommendation of this Agreement within five
business days after a written request by the Company to do so, (ii) there
has been a material breach by Parent or Merger Sub of any representation,
warranty, covenant or agreement contained in this Agreement that is not
curable or, if curable, is not cured within 30 days after written notice of
such breach is given by the Company to the party committing such breach, or
(iii) Parent or any of the other Persons described in Section 6.2(a) as
affiliates, representatives or agents of Parent shall take any of the
A-28
<PAGE> 157
actions that would be proscribed by Section 6.2 but for the exceptions
therein allowing certain actions to be taken pursuant to the proviso in
Section 6.2(a) or in the second sentence of Section 6.2(b).
8.4. Termination by Parent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval by the stockholders of Parent referred to in Section 7.1(a), by
action of the board of directors of Parent:
(a) subject to and in accordance with the provisions of Section 6.2;
or
(b) if (i) the Board of Directors of the Company shall have withdrawn
or adversely modified its approval or recommendation of this Agreement or
failed to reconfirm its recommendation of this Agreement within five
business days after a written request by Parent to do so, (ii) there has
been a material breach by the Company of any representation, warranty,
covenant or agreement contained in this Agreement that is not curable or,
if curable, is not cured within 30 days after written notice of such breach
is given by Parent to the party committing such breach, or (iii) if the
Company or any of the other Persons described in Section 6.2(a) as
affiliates, representatives or agents of the Company shall take any of the
actions that would be proscribed by Section 6.2 but for the exceptions
therein allowing certain actions to be taken pursuant to the proviso in
Section 6.2(a) or in the second sentence of Section 6.2(b).
8.5. Effect of Termination and Abandonment. (a) In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, this Agreement (other than as set forth in Section 9.1) shall
become void and of no effect with no liability of any party hereto (or any of
its directors, officers, employees, agents, legal and financial advisors or
other representatives); provided, however, except as otherwise provided herein,
no such termination shall relieve any party hereto of any liability or damages
resulting from any breach of this Agreement.
(b) In the event that this Agreement is terminated (x) by the Company
pursuant to Section 8.3(a) (or 6.2), or (y) by Parent pursuant to Section
8.4(b)(i) or (iii), or (z) by the Company or Parent pursuant to Section 8.2(d),
then the Company: (1) shall promptly, but in no event later than two days after
the date of such termination (except in the case of a termination pursuant to
Section 8.3(a) which requires payment prior to termination), pay Parent, in
addition to any amount, not to exceed $20,000,000, paid and/or payable by the
Company to Parent pursuant to the Stock Option Agreement, a termination fee
equal to the sum of (I) the charges and expenses repaid to Parent or Merger Sub
pursuant to clause (2) of this Section 8.5(b) and (II) an amount equal to
$50,000,000 less the sum of (x) the amounts paid pursuant to clause (I) of this
Section 8.5(b)(1), and (y) the amount, not to exceed $20,000,000, paid and/or
payable by the Company to Parent pursuant to the Stock Option Agreement; and (2)
shall promptly, but in no event later than two days after being notified of such
by Parent, pay all of the charges and expenses, including those of the Exchange
Agent, incurred by Parent or Merger Sub in connection with this Agreement and
the Stock Option Agreement and the transactions contemplated by this Agreement
and the Stock Option Agreement up to a maximum amount of $10,000,000, in each
case payable by wire transfer of same day funds. In no event shall the Company
be required to pay more than $50,000,000 pursuant to the preceding sentence. In
addition, if this Agreement is terminated (x) at a time when a termination fee
is payable pursuant to the terms of the preceding sentence or (y) at a time when
the approval of the Company's stockholders required by Section 7.1(a) shall not
have been obtained at a meeting duly convened therefor or at any adjournment or
postponement thereof and at any time within two years after such termination the
Company shall consummate a Material Acquisition Transaction (as defined below)
with any Person other than Parent or a Subsidiary of Parent, then the Company
shall simultaneously with the consummation of such Material Acquisition
Transaction pay Parent an additional termination fee of $50,000,000 payable by
wire transfer of same day funds. A "Material Acquisition Transaction" shall
mean, with respect to Parent or the Company, any Acquisition Transaction or
series of related Acquisition Transactions involving a merger or consolidation
of such party or involving forty percent or more of its voting power, equity
interests or assets (in each case directly or indirectly). The Company
acknowledges that the agreements contained in this Section 8.5(b) are an
integral part of the transactions contemplated by this Agreement and that,
without these agreements, Parent and Merger Sub would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the amount due
pursuant to this Section 8.5(b) and, in order to obtain such payment, Parent or
Merger Sub commences a suit which results in
A-29
<PAGE> 158
a judgment against the Company for any of the fees set forth in this Section
8.5(b), the Company shall pay to Parent or Merger Sub its costs and expenses
(including attorneys' fees) in connection with such suit, together with interest
on the amount of such payment at the prime rate of Citibank, N.A. in effect on
the date such payment was required to be made.
(c) In the event that this Agreement is terminated (x) by Parent pursuant
to Section 8.4(a)(or 6.2) or (y) by the Company pursuant to Section 8.3(b)(i) or
(iii), or (z) by the Company or Parent pursuant to Section 8.2(e), then Parent:
(1) shall promptly, but in no event later than two days after the date of such
termination (except in the case of a termination pursuant to Section 8.4(a)
which requires payment prior to termination), pay the Company, in addition to
any amount, not to exceed $20,000,000, paid and/or payable by Parent to the
Company pursuant to the letter agreement, dated the date hereof, between Parent
and the Company, a termination fee equal to the sum of (I) the charges and
expenses repaid to the Company pursuant to clause (2) of this Section 8.5(c) and
(II) an amount equal to $50,000,000 less the sum of (x) the amounts paid
pursuant to clause (I) of this Section 8.5(c)(1), and (y) the amount, not to
exceed $20,000,000, paid and/or payable by Parent to the Company pursuant to the
letter agreement, dated the date hereof, between Parent and the Company; and (2)
shall promptly, but in no event later than two days after being notified of such
by the Company, pay all of the charges and expenses incurred by the Company in
connection with this Agreement and the Stock Option Agreement and the
transactions contemplated by this Agreement and the Stock Option Agreement up to
a maximum amount of $10,000,000, in each case payable by wire transfer of same
day funds. In no event shall Parent be required to pay more than $50,000,000
pursuant to the preceding sentence. In addition, if this Agreement is terminated
(x) at a time when a termination fee is payable pursuant to the terms of the
preceding sentence or (y) at a time when the approval of Parent's stockholders
required by Section 7.1(a) shall not have been obtained at a meeting duly
convened therefor or at any adjournment or postponement thereof and at any time
within two years after such termination Parent shall consummate a Material
Acquisition Transaction with any Person other than the Company or a Subsidiary
of the Company, then Parent shall simultaneously with the consummation of such
Material Acquisition Transaction pay the Company an additional termination fee,
payable by wire transfer of same day funds, of $50,000,000. Parent acknowledges
that the agreements contained in this Section 8.5(c) are an integral part of the
transactions contemplated by this Agreement and that, without these agreements,
the Company would not enter into this Agreement; accordingly, if Parent fails to
promptly pay the amount due pursuant to this Section 8.5(c) and, in order to
obtain such payment, the Company commences a suit which results in a judgment
against Parent for any of the fees set forth in this Section 8.5(c), Parent
shall pay to the Company its costs and expenses (including attorneys' fees) in
connection with such suit, together with interest on the amount of such payment
at the prime rate of Citibank, N.A. in effect on the date such payment was
required to be made.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Survival. This Article IX and the agreements of the Company, Parent
and Merger Sub contained in Sections 6.6 (Taxation and Accounting), 6.11
(Benefits), 6.12 (Expenses) and 6.13 (Indemnification; Directors' and Officers'
Insurance) shall survive the consummation of the Merger. This Article IX, the
representations contained in Section 5.1(c), the agreements of the Company,
Parent and Merger Sub contained in Section 6.12 (Expenses), Section 8.5 (Effect
of Termination and Abandonment) and the Confidentiality Agreement shall survive
the termination of this Agreement. All other representations, warranties,
agreements and covenants in this Agreement shall not survive the consummation of
the Merger or the termination of this Agreement.
9.2. Modification or Amendment. Subject to the provisions of applicable
Law, the parties hereto may modify or amend this Agreement, by written agreement
executed and delivered by duly authorized officers of the respective parties.
9.3. Waiver of Conditions; Extension. The conditions to each of the
parties' obligations to consummate the Merger are for the sole benefit of such
party and at any time prior to the Effective Time such party
A-30
<PAGE> 159
may waive such conditions in whole or in part or extend the time for the
performance of any of the obligations or other acts of the other parties hereto
to the extent permitted by applicable Law.
9.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement. This
Agreement shall become a binding obligation of Merger Sub upon Merger Sub's
execution of this Agreement in accordance with Section 1.1(a).
9.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN, AND IN ALL RESPECTS SHALL BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF, THE COMMONWEALTH OF
PENNSYLVANIA WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the courts of the
Commonwealth of Pennsylvania and the Federal courts of the United States of
America located in the Commonwealth of Pennsylvania solely in respect of the
interpretation and enforcement of the provisions of this Agreement and the Stock
Option Agreement and of the documents referred to in this Agreement and the
Stock Option Agreement, and in respect of the transactions contemplated hereby
and thereby, and hereby waive, and agree not to assert, as a defense in any
action, suit or proceeding for the interpretation or enforcement hereof or of
any such document, that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said courts or that the
venue thereof may not be appropriate or that this Agreement and the Stock Option
Agreement or any such document may not be enforced in or by such courts, and the
parties hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a Commonwealth of Pennsylvania
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 or proceeding in the manner provided in Section 9.6, or in such
other manner as may be permitted by Law, shall be valid and sufficient service
thereof. No provision of this Agreement shall be construed to require any party
to violate or contravene any applicable Law.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT OR THE STOCK OPTION AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE STOCK OPTION AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR THE STOCK OPTION AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT OR THE STOCK OPTION AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
A-31
<PAGE> 160
9.6. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent or Merger Sub
Allegheny Power System, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740-1766
Attention: Thomas K. Henderson
telecopier: (301) 665-9006
(with a copy to Joseph B. Frumkin
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
telecopier: (212) 558-3588)
if to the Company
DQE, Inc.
411 Seventh Avenue
Pittsburgh, Pennsylvania 15230-1930
Attention: Victor A. Roque
telecopier: (412) 393-6266
(with copies to Douglas W. Hawes
and Steven H. Davis
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
telecopier: (212) 424-8500)
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. Entire Agreement. This Agreement (including any exhibits hereto),
the Company Disclosure Letter, the Parent Disclosure Letter, the Stock Option
Agreement and the Confidentiality Agreement, dated November 18, 1996, between
Parent and the Company (the "Confidentiality Agreement") constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties both written and oral, among the parties with
respect to the subject matter hereof. References herein to this Agreement shall
for all purposes be deemed to include references to the Company Disclosure
Letter and Parent Disclosure Letter. EACH PARTY HERETO AGREES THAT, EXCEPT FOR
THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER PARENT
AND MERGER SUB NOR THE COMPANY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES,
AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF
OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL AND LEGAL
ADVISORS OR OTHER REPRESENTATIVES WITH RESPECT TO THE EXECUTION AND DELIVERY OF
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, NOTWITHSTANDING THE
DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY
DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE
FOREGOING.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.13
(Indemnification; Directors' and Officers' Insurance), this Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
A-32
<PAGE> 161
9.9. Obligations of Parent and of the Company. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause such Subsidiary
to take such action. Whenever this Agreement requires a Subsidiary of the
Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such Subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such Subsidiary to take such action.
9.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11. Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.12. Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Parent may designate, by written
notice to the Company, another wholly-owned direct or indirect subsidiary to be
a Constituent Corporation in lieu of Merger Sub, in the event of which all
references herein to Merger Sub shall be deemed references to such other
subsidiary, except that all representations and warranties made herein with
respect to Merger Sub as of the date of this Agreement shall be deemed
representations and warranties made with respect to such other subsidiary as of
the date of such designation.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the Company and Parent as of the date hereof.
DQE, INC.
By: /s/ DAVID D. MARSHALL
------------------------------------
David D. Marshall
President and Chief Executive
Officer
ALLEGHENY POWER SYSTEM, INC.
By: /s/ ALAN J. NOIA
------------------------------------
Alan J. Noia
President and Chief Executive
Officer
Accepted and Agreed as of:
--------------------------------------,
199__
AYP SUB, INC.
By:
------------------------------------
Name:
Title:
A-33
<PAGE> 162
APPENDIX B
OPINION OF MERRILL LYNCH & CO.
[TO COME]
B-1
<PAGE> 163
APPENDIX C
OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION
[TO COME]
C-1
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 2-418 of the MGCL, a corporation may indemnify a director who
is a party to a proceeding by reason of such status for judgments, penalties,
fines, settlements and reasonable expenses incurred in connection with the
proceeding, unless (i) the act or omission of the director was material and the
matter giving rise to the proceeding was an act or omission of the director
committed in bad faith or was the result of active and deliberate dishonesty;
(ii) the director actually received an improper personal benefit in money,
property or services; or (iii) in a criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful. No such
indemnification may be made if the proceeding was by or in the right of the
corporation and the director is adjudged liable to the corporation. Further,
under the MGCL, unless the charter provides otherwise, (i) indemnification of
expenses is mandatory if a director is successful in the defense of any
proceeding; and (ii) a court of competent jurisdiction may order indemnification
despite the director having failed to meet the standards otherwise applicable
under the statute for permissive indemnification, if it deems such
indemnification proper under the circumstances.
A corporation may not provide indemnification whether or not involving an
action in the director's official capacity, if the director is adjudged to be
liable on the basis that personal benefit was improperly received.
Further, a corporation may not indemnify a director except after a specific
proceeding, and after a determination that indemnification is permissible, such
determination being made either (i) by the board of directors, by a majority of
a quorum consisting of directors not a party to the proceeding, or if such is
impossible, then by a majority vote of a committee established by the board to
act on the matter; (ii) by a special legal counsel selected, by the board by a
majority of a quorum consisting of directors not a party to the proceeding, or a
committee established in accordance with certain requirements; or (iii) by the
stockholders. Officers, employees and agents of the company may be indemnified
to the same extent as a director, in the same manner, and subject to the same
limitations.
The APS Bylaws provide that APS will indemnify any person who was or is a
party or is threatened with being made a party to any action, suit, or
proceeding, including appeals (other than an action, suit or proceeding by or in
the right of APS), by reason of being a director, officer or employee of APS or
serving at the request of APS in a similar capacity for another entity, against
expenses (including attorneys' fees), judgments, decrees, fines, penalties and
amounts paid in settlement, actually and reasonably incurred in connection with
such proceeding if the person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe that the conduct was unlawful. The APS Bylaws further provide that APS
will indemnify any person who, by reason of being a director, officer or
employee of APS or serving at the request of APS in a similar capacity for
another corporation, was or is a party or is threatened with being made a party
to any action, suit or proceeding, including appeals, by or in the right of APS
to procure a judgment in its favor, against expenses actually and reasonably
incurred in connection with the defense or settlement of such action, suit or
proceeding. APS will also indemnify such person for any amounts paid in
settlement of such action, suit or proceeding up to the amount that would
reasonably have been expended in such person's defense if such action would have
been prosecuted to conclusion. However, indemnification in the case of an action
brought by or in the right of APS will be made only if the person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of APS and no such indemnified party shall have been finally adjudged
to be liable for negligence or misconduct in the performance of his duty to APS,
except that a court may order indemnification despite an adjudication of
liability if it deems such indemnification proper in view of all the
circumstances. Other provisions of the APS Charter provide for indemnification
as permitted by the MGCL.
Consistent with Section 2-405.2 of the MGCL and Section 5-349 of Courts and
Judicial Proceedings Article, the APS Charter provides that directors and
officers are not liable to APS or its stockholders for monetary damages for
breach of fiduciary duties, provided that director and officer liability is not
eliminated (i) to the extent that it is proved that the person actually received
an improper benefit or profit in money,
II-1
<PAGE> 165
property or services, to the extent of the improper money, property or services
actually received, or (ii) to the extent that a judgment or final adjudication
adverse to the person is entered in a proceeding based on a finding in the
proceeding that the person's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
2-a Agreement and Plan of Merger, dated as of April 5, 1997, among DQE, APS and Merger
Sub (incorporated by reference to Exhibit 2(a) to APS' Current Report on Form 8-K
(File No. 1-267), dated April 9, 1997).
3 Bylaws of APS, as amended.**
5 Opinion of Sullivan & Cromwell regarding validity of securities being registered.*
8-a Opinion of Sullivan & Cromwell regarding certain federal income tax matters.*
8-b Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding certain federal income
tax matters.*
10-a Stock Option Agreement, dated as of April 5, 1997, between APS and DQE
(incorporated by reference to Exhibit 2(b) to APS' Current Report on Form 8-K
(File No. 1-267), dated April 9, 1997).
10-b Letter Agreement, dated as of April 5, 1997, between APS and DQE (incorporated by
reference to Exhibit 2(c) to APS' Current Report on Form 8-K (File No. 1-267),
dated April 9, 1997).
23-a Consent of Price Waterhouse LLP.**
23-b Consent of Deloitte & Touche LLP.**
23-c Consent of Sullivan & Cromwell (included in the opinion filed as Exhibit 5 to this
Registration Statement and incorporated herein by reference).*
23-d Consent of Sullivan & Cromwell (included in the opinion filed as Exhibit 8-a to
this Registration Statement and incorporated herein by reference).*
23-e Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in the opinion filed
as Exhibit 8-b to this Registration Statement and incorporated herein by
reference).*
24 Power of Attorney.***
99-a Form of Proxy of APS.**
99-b Form of Proxy of DQE.**
99-c Consent of Merrill Lynch & Co.***
99-d Consent of Credit Suisse First Boston Corporation.***
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,
(ii) To reflect in the prospectus any facts or events arising after
the Effective Time of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20 percent change in the
II-2
<PAGE> 166
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) The undersigned Registrant hereby undertakes that, for the purpose
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) The undersigned Registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities
which remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
Registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the Effective Time of the registration statement through the date
of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the county of Washington, state of Maryland, on
the 18th day of June, 1997.
ALLEGHENY POWER SYSTEM, INC.
By: /s/ THOMAS K. HENDERSON
--------------------------------------
Thomas K. Henderson
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<S> <C>
Principal Executive Officer: /s/ ALAN J. NOIA
-----------------------------------------------
Alan J. Noia
President, Chief Executive Officer and Director
Principal Financial Officer: /s/ MICHAEL P. MORRELL
-----------------------------------------------
Michael P. Morrell
Senior Vice President, Finance
Principal Accounting Officer: /s/ KENNETH M. JONES
-----------------------------------------------
Kenneth M. Jones
Vice President and Controller
DIRECTORS:
Eleanor Baum* By: /s/ THOMAS K. HENDERSON
William L. Bennett* -----------------------------------------------
Wendell F. Holland* Thomas K. Henderson,
Phillip E. Lint* as Attorney-in-fact for the Directors
Frank A. Metz, Jr.* June 18, 1997
Alan J. Noia*
Steven H. Rice*
Gunnar E. Sarsten*
Peter L. Shea*
</TABLE>
- ---------------
* By power of attorney.
II-4
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------- ------------
<S> <C> <C>
2-a Agreement and Plan of Merger, dated as of April 5, 1997, among DQE,
APS and Merger Sub (incorporated by reference to Exhibit 2(a) to
APS' Current Report on Form 8-K (File No. 1-267), dated April 9,
1997)...............................................................
3 Bylaws of APS, as amended**.........................................
5 Opinion of Sullivan & Cromwell regarding validity of securities
being registered.*..................................................
8-a Opinion of Sullivan & Cromwell regarding certain federal income tax
matters.*...........................................................
8-b Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. regarding certain
federal income tax matters.*........................................
10-a Stock Option Agreement, dated as of April 5, 1997, between APS and
DQE (incorporated by reference to Exhibit 2(b) to APS' Current
Report on Form 8-K (File No. 1-267), dated April 9, 1997)...........
10-b Letter Agreement, dated as of April 5, 1997, between APS and DQE
(incorporated by reference to Exhibit 2(c) to APS' Current Report on
Form 8-K (File No. 1-267), dated April 9, 1997).....................
23-a Consent of Price Waterhouse LLP**...................................
23-b Consent of Deloitte & Touche LLP**..................................
23-c Consent of Sullivan & Cromwell (included in the opinion filed as
Exhibit 5 to this Registration Statement and incorporated herein by
reference).*........................................................
23-d Consent of Sullivan & Cromwell (included in the opinion filed as
Exhibit 8-a to this Registration Statement and incorporated herein
by reference).*.....................................................
23-e Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in the
opinion filed as Exhibit 8-b to this Registration Statement and
incorporated herein by reference).*.................................
24 Power of Attorney***................................................
99-a Form of Proxy of APS**..............................................
99-b Form of Proxy of DQE**..............................................
99-c Consent of Merrill Lynch & Co.***...................................
99-d Consent of Credit Suisse First Boston Corporation***................
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
<PAGE> 1
EXHIBIT 3
BYLAWS OF APS, AS AMENDED
<PAGE> 2
By-Laws
OF
ALLEGHENY POWER SYSTEM, INC.
As Amended to June 5, 1997
<PAGE> 3
BY-LAWS
OF
ALLEGHENY POWER SYSTEM, INC.
ARTICLE I.
STOCKHOLDERS' MEETINGS.
SECTION 1. Place of Meetings.
Every meeting of the stockholders shall be held in New York, N. Y., or at
such other place within the United States as shall be determined by the Board of
Directors and specified in the notice thereof.
SECTION 2. Annual Meetings.
An annual meeting of the stockholders of this Corporation shall be held on
the second Thursday in May in each year (or if that be a legal holiday, then on
the next succeeding business day) for the purpose of electing Directors for the
ensuing year and for the transaction of such other business as may properly be
brought before the meeting.
SECTION 3. Special Meetings.
Special meetings of the stockholders for any purpose or purposes, unless
otherwise prescribed by statute, may be called by the Chairman of the Board, the
President, the Board of Directors or the Executive Committee, and shall be
called by the President or Secretary or any Director upon the request in writing
of stockholders holding a majority in amount of the entire capital stock issued
and outstanding entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. Unless the Board of Directors or the
Executive Committee determines otherwise, the business of any special meeting
shall be limited to the purposes for which such special meeting is called and
no other proposals or matters shall be considered.
SECTION 4. Notice of Meetings of Stockholders.
Written or printed notice of every meeting of stockholders, stating the
time and place thereof (and the business proposed to be transacted at any
special meeting), shall be served personally upon, left at the residence or
usual place of business of or mailed, postage prepaid, to each stockholder,
entitled to vote, of record on the record date fixed by the Board of Directors
therefor, at such address as appears upon the books of the Corporation, at least
ten days before such meeting. No business shall be transacted at any special
meeting except that specially named in the notice of such meeting.
Notice of the time, place and/or purpose of any meeting of stockholders
may be dispensed with if every stockholder entitled to vote, shall attend either
in person or by proxy, or if every absent stockholder entitled to vote shall in
writing, filed with the records of the meeting, either before or after the
holding thereof, waive such notice.
No stockholder shall be entitled to notice of any meeting of stockholders
unless entitled to vote thereat.
<PAGE> 4
SECTION 5. Quorum at Stockholders' Meetings.
The presence in person or by proxy of the holders of record of a majority
of the shares of the capital stock of the Corporation issued and outstanding,
entitled to vote, shall constitute a quorum at all meetings of the stockholders
except as otherwise provided by law or these By-Laws. If, however, such majority
shall not be present or represented at any meeting of the stockholders, the
holders of a majority of the stock present in person or by proxy shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of voting stock shall be
present. At such adjourned meeting at which the requisite amount of voting stock
shall be represented, any business may be transacted which might have been
transacted at the meeting as originally notified.
SECTION 6. Voting and Inspectors.
At all meetings of stockholders every stockholder shall be entitled to
vote all shares of voting stock standing in his name on the books of the
Corporation on the date for the determination of stockholders entitled to vote
at such meeting, either in person or by proxy appointed by instrument in writing
subscribed by such stockholder or his duly authorized attorney and bearing date
not more than three months prior to said meeting, unless said instrument shall
on its face provide for a longer period for which it is to remain in force.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided by law,
in the Charter or in these By-Laws.
At any election of Directors, upon the request of the holders of ten
percent. (10%) of the stock entitled to vote at such election, the Chairman of
the meeting shall appoint two Inspectors of Election, who shall first subscribe
an oath or affirmation to execute faithfully the duties of Inspectors at such
election with strict impartiality and according to the best of their ability,
and shall make a certificate of the result of the vote taken; no candidate for
the office of Director shall be appointed such Inspector.
A vote by ballot shall be taken upon any election or matter, upon the
request of the holders of ten per cent. (10%) of the stock entitled to vote on
such election or matter.
SECTION 7. Conduct of Stockholders Meetings.
The meetings of the stockholders shall be presided over by the Chairman of
the Board, or if he is not present by the President, or if he is not present by
a Vice-President, or if neither the Chairman of the Board nor the President nor
a Vice-President is present, by a Chairman to be elected at the meeting. The
Secretary of the Corporation, if present, shall act as Secretary of such
meetings; if neither the Secretary nor any Assistant Secretary is present then
the meeting shall elect its Secretary.
The order of business at each such meeting shall be as determined by the
Chairman of the meeting. The Chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time alloted to questions or
comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof and the opening
<PAGE> 5
and closing of the voting polls.
SECTION 8. Advance Notice of Stockholder Proposals and Nominations.
At any annual or special meeting of stockholders, proposals made by
stockholders and nominations for election as directors made by stockholders
shall be considered only if advance notice thereof has been timely given as
provided herein and such proposals or nominations are otherwise proper for
consideration under applicable law and the Charter and these By-Laws. Notice of
any proposal to be presented by any stockholder or of the name of any person to
be nominated by any stockholder for election as a director of the Corporation at
any meeting of stockholders shall be delivered to the Secretary of the
Corporation at its principal executive office not less than 60 nor more than 90
days prior to the date of the meeting; provided, however, that if the date of
the meeting is first publicly announced or disclosed (in a public filing or
otherwise) less than 70 days prior to the date of the meeting, such advance
notice shall be given not more than ten days after such date is first so
announced or disclosed. Public notice shall be deemed to have been given more
than 70 days in advance of the annual meeting if the Corporation shall have
previously disclosed, in these By-Laws or otherwise, that the annual meeting in
each year is to be held on a determinable date, unless and until the Board of
Directors determines to hold the meeting on a different date. Any stockholder
who gives notice of any such proposal shall deliver therewith the text of the
proposal to be presented and a brief written statement of the reasons why such
stockholder favors the proposal and setting forth such stockholder's name and
address, the number and class of all shares of each class of stock of the
Corporation beneficially owned by such stockholder and any material interest of
such stockholder in the proposal (other than as a stockholder). Any stockholder
desiring to nominate any person for election as a director of the Corporation
shall deliver with such notice a statement in writing setting forth the name of
the person to be nominated, the number and class of all shares of each class of
stock of the Corporation beneficially owned by such person, the information
regarding such person required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation subsequently adopted by the
Securities and Exchange Commission applicable to the Corporation), such person's
signed consent to serve as a director of the Corporation if elected, such
stockholder's name and address and the number and class of all shares of each
class of stock of the Corporation beneficially owned by such stockholder. As
used herein, shares "beneficially owned" shall mean all shares as to which such
person, together with such person's affiliates and associates (as defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended), may be deemed
to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, as amended, as well as all shares as to which such person,
together with such person's affiliates and associates, has the right to become
the beneficial owner pursuant to any agreement or understanding, or upon the
exercise of warrants, options or rights to convert or exchange (whether such
rights are exercisable immediately or only after the passage of time or the
occurrence of conditions). The Chairman of the meeting, in addition to making
any other determinations that may be appropriate to the conduct of the meeting,
shall determine whether such notice has been duly given and shall direct that
proposals and nominees not be considered if such notice has not been given.
<PAGE> 6
ARTICLE II.
BOARD OF DIRECTORS.
SECTION 1. Number and Tenure of Office.
The business and property of the Corporation shall be managed by a Board
of Directors. The number of Directors of the Corporation shall be not more than
fifteen, but the number of directors may from time to time be increased or
decreased as provided in Section 2 of this Article II. Directors need not be
stockholders. Directors shall hold office until the next annual meeting of
stockholders and until their successors are duly chosen and qualified.
SECTION 2. Increase and Decrease in Number of Directors.
The Board of Directors by the affirmative vote of a majority of the entire
Board may from time to time increase the number of Directors to any number not
exceeding fifteen and may from time to time decrease the number of Directors to
any number not less than three.
SECTION 3. Vacancies.
Except as otherwise provided by law, any vacancy occurring in the Board of
Directors for any cause other than by reason of an increase in the number of
Directors may be filled by a majority of the Directors remaining in office,
whether or not they constitute a quorum. Any vacancy occurring by reason of an
increase in the number of Directors may be filled by a majority of the entire
Board of Directors.
SECTION 4. Place of Meetings.
Every meeting of the Board of Directors shall be held in New York, N.Y.,
or at such other place in or out of the State of Maryland as the Board may from
time to time determine or shall be specified in the notice thereof.
SECTION 5. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such time and
on such notice as the Directors may from time to time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the adjournment of the annual meeting of the stockholders for
the election of Directors.
SECTION 6. Special Meetings.
Special meetings of the Board of Directors may be held at any time upon
call of the Chairman of the Board, the President, the Executive Committee, or of
a majority of the Directors, by oral or telegraphic or written notice duly
served on or sent or mailed to each Director not less than two days before such
meeting. Meetings of the Board of Directors may be held at any time without
notice, if all the Directors are present or if those not present waive notice of
the meeting in writing, filed with the records of the meeting before or after
the holding thereof.
<PAGE> 7
SECTION 7. Action by Written Consent, Telephonic or Other Similar Communications
Equipment.
Any action required or permitted to be taken at a meeting of the Board may
be taken without a meeting if the action is taken by the whole Board and is
evidenced by one or more written consents describing the action taken, signed by
all Directors on the Board, and filed with the minutes or corporate records of
Board proceedings. Members of the Board may participate in a regular or special
meeting of the Board by means of conference telephone or similar communications
equipment by which all persons participating can simultaneously hear each other.
Participation in a meeting by these communications means constitutes presence in
person at the meeting.
SECTION 8. Quorum.
One-third of the whole number of Directors, but in no case less than two
Directors, shall constitute a quorum for the transaction of business. If, at any
meeting of the Board there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time until a quorum shall
have been obtained.
SECTION 9. Executive Committee and Other Committees.
The Board, by resolution adopted by a majority of the whole Board, may
elect from its members an Executive Committee and one or more other committees,
each consisting of two or more Directors. The President and the Chairman of the
Board shall be a member and the Chairman, respectively, of the Executive
Committee. Unless otherwise expressly provided by law or by the Charter or by
resolution of the Board, the Executive Committee shall have all the powers of
the Board (except the power to appoint or remove a member of the Executive
Committee or other committee; to fill vacancies on the Board or its committees;
to remove an officer appointed by the Board; to adopt, amend or repeal these
By-Laws or the Company's Charter; to declare dividends or distributions on
stock; to issue stock; to approve any merger or share exchange not requiring
stockholder approval or to recommend to stockholders any action requiring
stockholders' approval) when the Board is not in session, and each other
committee shall have such powers as the Board shall confer. In the absence of
any member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint a member of the Board to
act in the place of such absent member. Each such committee may fix its own
rules of procedure, and may meet when and as provided by such rules or by
resolution of the Board of Directors; but in every case the presence of a
majority shall be necessary to constitute a quorum. Insofar as the rights of
third parties shall not be affected thereby, all action by any committee shall
be subject to revision and alteration by the Board. Any action required or
permitted to be taken at a meeting of the members of the Executive or any other
committee may be taken without a meeting if the action is taken by the whole
committee and is evidenced by one or more written consents describing the action
taken, signed by all members of the committee, and filed with the minutes or
corporate records of committee proceedings. Members of any committee may
participate in a regular or special meeting of such committee by means of
conference telephone or similar communications equipment by which all persons
participating can simultaneously hear each other. Participation in a meeting by
these communications means constitutes presence in person at the meeting. The
majority of the whole Board of Directors shall have the power at any time to
change the members of the Executive Committee, except the Chairman thereof, and
to change, at any time, the members of the other committees, to fill vacancies
in any committee by election from the Directors, and to discharge any of the
other committees.
<PAGE> 8
SECTION 10. Remuneration.
In addition to reimbursement of his reasonable expenses incurred in
attending meetings or otherwise in connection with his attention to the affairs
of the Company, each Director as such, and as a member of the Executive
Committee or of any other committee of the Board, shall be entitled to receive
such remuneration as may be fixed from time to time by the Board of Directors,
in the form either of payment at the rate of a fixed sum per month or of fees
for attendance at meetings of the Board and committees thereof.
ARTICLE III.
OFFICERS.
SECTION 1. Executive Officers.
The Executive Officers of the Corporation shall be elected by the Board of
Directors as soon as may be after the annual meeting of the stockholders, and
shall be a Chairman of the Board (who shall be a Director), a President (who
shall be a Director), one or more Vice-Presidents, a Secretary, one or more
Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. The
Board of Directors may also appoint such other officers, agents and employees as
to the Board may seem proper. Any two offices, except those of President and
Vice-President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged or
verified by any two or more officers.
SECTION 2. Term of Office.
The term of office of all officers shall be one year and until their
respective successors are elected, subject, however, to the provision for
removal contained in the Charter.
SECTION 3. Powers and Duties.
The officers of the Corporation shall have such powers and duties as
generally pertain to their offices, respectively, as well as such powers and
duties as from time to time shall be conferred by the Board of Directors or the
Executive Committee.
SECTION 4. Checks, Notes, Etc.
All checks and drafts on the Corporation's bank accounts and all bills of
exchange and promissory notes, and all acceptances, obligations and other
instruments for the payment of money, shall be signed by such officer or
officers, agent or agents, as shall be thereunto authorized from time to time by
the Board of Directors or the Executive Committee.
<PAGE> 9
ARTICLE IV.
CAPITAL STOCK.
SECTION 1. Certificate of Shares.
Certificates representing shares in the capital stock of the Corporation
shall be in such form as the Board of Directors may from time to time prescribe
and shall be signed by the President or a Vice-President and by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with its seal. A certificate shall be deemed to be so
signed and sealed whether the signatures be manual or facsimile signatures and
whether the seal be a facsimile seal or any other form of seal.
SECTION 2. Transfer of Shares.
Shares in the capital stock of the Corporation shall be transferred on the
books of the Corporation by the holder thereof in person or by his duly
authorized attorney, upon surrender and cancellation of certificates for the
same number of shares, duly endorsed or accompanied by proper instruments of
assignment and transfer, with such proof of the authenticity of the signature as
the Corporation or its agents may reasonably require.
SECTION 3. Record Dates.
The Directors may fix, in advance, a date as the recorded date for the
purpose of determining stockholders entitled to notice of, or to vote at, any
meeting of stockholders, or stockholders entitled to receive payment of any
dividend or the allotment of any rights, or in order to make a determination of
stockholders for any other proper purpose. Such date in any case shall not be
more than forty days, and in case of a meeting of stockholders, not less than
ten days, prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken.
SECTION 4. Seal.
The Board of Directors shall provide a suitable corporate seal, in such
form and bearing such inscriptions as they may determine.
SECTION 5. Stock Ledgers.
Original or duplicate stock ledgers, containing the names and addresses of
the stockholders of the Corporation and the number of shares of each class held
by them respectively, shall be kept at an office or agency of the Corporation in
such city or town as may be designated in an additional or supplementary by-law
adopted by the Board of Directors. If no other place is so designated, such
original or duplicate stock ledgers shall be kept at an office or agency of the
Corporation in New York, N.Y.
<PAGE> 10
ARTICLE V.
FISCAL YEAR.
The fiscal year of the Corporation shall begin on the first day of January
and end on the thirty-first day of December following.
ARTICLE VI.
INDEMNIFICATION.
SECTION 1.
The Corporation shall indemnify any person who was or is a party or is
threatened with being made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, including all appeals (other than an action, suit or proceeding
by or in the right of the Corporation) by reason of the fact that he is or was a
director, officer or employee of the Corporation, or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, decrees, fines, penalties and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith or in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal action, suit or proceeding, that he
had reasonable cause to believe that his conduct was unlawful.
SECTION 2.
The Corporation shall indemnify any person who was or is a party or is
threatened with being made a party to any threatened, pending or completed
action, suit or proceeding, including all appeals, by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer or employee of the Corporation, or is or was serving
at the request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action, suit or proceeding.
The Corporation shall also indemnify any such person against amounts paid in
settlement of such action, suit or proceeding up to the amount that would
reasonably have been expended in his defense (determined in the manner provided
for in Section 4) if such action, suit or proceeding had been prosecuted to a
conclusion. However, indemnification under this Section shall be made only if
the person to be indemnified acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation and no
such indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been finally adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation
unless, and only to the extent that, the court or body in or before which such
action, suit or proceeding was finally determined, or any court of competent
jurisdiction, shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses or other amounts
paid as such court or body shall deem proper.
<PAGE> 11
SECTION 3.
Without limiting the right of any director, officer or employee of the
Corporation to indemnification under any other Section hereof, if such person
has been substantially and finally successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 1 and 2 or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
SECTION 4.
Any indemnification under Sections 1 and 2 (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer or employee is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Sections 1 and 2. Such determination shall be made (1) by
the Board of Directors by a majority vote of a quorum consisting of directors
who are or were not parties to or threatened with such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or even if obtainable, if
a majority of a quorum of disinterested directors so directs, by independent
legal counsel (compensated by the Corporation) in a written opinion, or (3) if
there be no disinterested directors, or if a majority of the disinterested
directors, whether or not a quorum, so directs, by the holders of a majority of
the shares entitled to vote in the election of directors without reference to
default or contingency which would permit the holders of one or more classes of
shares to vote for the election of one or more directors.
SECTION 5.
Expenses of each person indemnified hereunder incurred in defending a
civil, criminal, administrative or investigative action, suit, or proceeding
(including all appeals) or threat thereof, may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors, whether a disinterested quorum exits or
not, upon receipt of an undertaking by or on behalf of the director, officer or
employee to repay such expenses unless it shall ultimately be determined that he
is entitled to be indemnified by the Corporation.
SECTION 6.
The indemnification provided by this Article shall not be deemed exclusive
of or in any way to limit any other rights to which any person indemnified may
be or may become entitled as a matter of law, by the articles, regulations,
agreements, insurance, vote of shareholders or otherwise, with respect to action
in his official capacity and with respect to action in another capacity while
holding such office and shall continue as to a person who has ceased to be a
director, officer, or employee and shall inure to the benefit of the heirs,
executors, administrators and other legal representatives of such person.
SECTION 7.
Sections 1 through 6 of this Article shall also apply to such other agents
of the Corporation as are designated for such purpose at any time by the Board
<PAGE> 12
of Directors.
SECTION 8.
If any part of this Article shall be found, in any action, suit or
proceeding, to be invalid or ineffective, the validity and the effect of the
remaining parts shall not be affected.
SECTION 9.
The provisions of this Article shall be applicable to claims, actions,
suits or proceedings made or commenced after the adoption hereof, whether
arising from acts or omissions to act occurring before or after the adoption
hereof.
ARTICLE VII.
AMENDMENTS.
The power to make, alter and repeal the By-Laws of the Corporation is
vested in the Board of Directors and may be exercised by a majority of the whole
Board; except that the power to alter the By-Laws to divide the Board into
classes having different tenures of office is reserved in the Charter to the
stockholders.
ARTICLE VIII.
MISCELLANEOUS.
The Corporation shall not, as a common or contract carrier, engage in the
transportation of passengers or property by railroad or motor vehicle; but this
restriction shall not limit the exercise by the Corporation of its other powers
as contained in this Charter. The provisions of this Article VIII shall not be
altered, amended or repealed except by the stockholders.
<PAGE> 1
EXHIBIT 23-a
CONSENT OF PRICE WATERHOUSE LLP
<PAGE> 2
EXHIBIT 23-a
CONSENT OF PRICE WATERHOUSE LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 2 to the Registration Statement on Form
S-4 of Allegheny Power System, Inc. (the Company) of our report dated February
5, 1997, appearing on page 46 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
Price Waterhouse LLP
Pittsburgh, Pennsylvania
June 18, 1997
<PAGE> 1
EXHIBIT 23-B
CONSENT OF DELOITTE & TOUCHE LLP
<PAGE> 2
EXHIBIT 23-b
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-26449 of Allegheny Power System, Inc. on Form S-4 of our report dated
January 28, 1997, appearing in the Annual Report on Form 10-K of DQE, Inc. for
the year ended December 31, 1996 and to the reference to us under the heading
"Experts" in the Joint Proxy Statement/Prospectus, which is part of this
Registration Statement.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 18, 1997
<PAGE> 1
EXHIBIT 99-a
FORM OF PROXY OF APS
<PAGE> 2
EXHIBIT 99-a
[ALLEGHENY LOGO]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
ALLEGHENY POWER SYSTEM, INC.
10435 DOWNSVILLE PIKE
HAGERSTOWN, MARYLAND 21740
The undersigned hereby (1) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Allegheny Power System, Inc., a Maryland corporation
("APS"), to be held at at [a.m.] [p.m.], local time on August
7, 1997 (the "Meeting"), and at any adjournments or postponements thereof, and
the Joint Proxy Statement/Prospectus furnished in connection therewith, and (2)
appoints Alan J. Noia, Thomas K. Henderson and Eileen M. Beck and each of them,
as his or her proxies (with full power of substitution) for and in the name,
place, and stead of the undersigned, to vote upon and act with respect to all of
the shares of Common Stock, par value $1.25 per share, of APS (the "APS Common
Stock") standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the Meeting and at any adjournments
or postponements thereof.
The undersigned directs that this proxy be voted as follows:
(1) To consider and vote upon a proposal to issue shares of APS Common
Stock pursuant to the Agreement and Plan of Merger, dated as of April
5, 1997 (the "Merger Agreement"), among DQE, Inc., a Pennsylvania
corporation ("DQE"), APS and AYP Sub, Inc., which is to be formed as a
Pennsylvania corporation and a wholly owned subsidiary of APS ("Merger
Sub"), pursuant to which Merger Sub will be merged (the "Merger") with
and into DQE and DQE will become a wholly owned subsidiary of APS, and
to approve the transactions contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) To consider and vote upon a proposal to adopt an amendment to the
Restated Charter of APS to change the name of APS to Allegheny Energy,
Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) In the discretion of the proxies named above, on such other business as
may properly come before the Meeting or any adjournments or
postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED AND DELIVERED, WILL BE VOTED AS
SPECIFIED ABOVE. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH
OF THE PROPOSALS. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN
THIS CARD.
<PAGE> 3
[Allegheny Logo]
10435 Downsville Pike
Hagerstown, Maryland 21740
Notwithstanding stockholder approval of proposal number 1, APS reserves the
right to terminate the Merger Agreement and abandon the Merger at any time prior
to the consummation of the Merger, subject to the terms and conditions of the
Merger Agreement.
Holders of APS Common Stock will not be entitled to appraisal rights in
connection with the Merger or the other matters to be voted on at the Meeting.
The undersigned hereby revokes any proxy heretofore given to vote or act with
respect to the APS Common Stock and hereby ratifies and confirms all that the
proxies named above, their substitutes, or any of them may lawfully do by virtue
hereof.
PLEASE PROMPTLY MARK, SIGN, DATE, AND RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED.
Date:
-----------------------------------, 1997
-----------------------------------------
Signature of Stockholder
-----------------------------------------
Signature of Stockholder (if jointly
held)
PLEASE DATE THIS PROXY AND SIGN YOUR NAME
EXACTLY AS IT APPEARS HEREON. WHERE THERE
IS MORE THAN ONE OWNER, EACH SHOULD SIGN.
WHEN SIGNING AS AN ATTORNEY,
ADMINISTRATOR, EXECUTOR, GUARDIAN, OR
TRUSTEE, PLEASE ADD YOUR TITLE AS SUCH.
IF EXECUTED BY A CORPORATION, THE PROXY
SHOULD BE SIGNED BY A DULY AUTHORIZED
OFFICER AND STATE THE FULL NAME OF THE
CORPORATION.
<PAGE> 1
EXHIBIT 99-B
FORM OF PROXY OF DQE
<PAGE> 2
EXHIBIT 99-b
[DQE LOGO]
ANNUAL MEETING OF STOCKHOLDERS AUGUST 7, 1997
DQE's Annual Meeting of Stockholders will be held on August 7, 1997 at the
Manchester Craftsmen's Guild Auditorium, 1815 Metropolitan Street, Pittsburgh,
Pennsylvania 15233 at 11:00 a.m.
The lower portion of this form is your PROXY CARD. EACH PROPOSAL IS FULLY
EXPLAINED IN THE "NOTICE OF 1997 ANNUAL MEETING AND PROXY STATEMENT." To vote
your proxy, please MARK, SIGN and DATE the proxy card. Then please DETACH and
RETURN the completed proxy card promptly in the enclosed envelope.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3
AND A VOTE "AGAINST" PROPOSAL 4.
If you will attend the Annual Meeting, please complete the form found at the end
of the proxy statement and return it with your proxy card. An admittance ticket
will be sent to you. As in past years, A TICKET WILL BE NEEDED FOR ADMITTANCE TO
THE MEETING.
DETACH HERE
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
DIRECTORS RECOMMEND A VOTE "FOR" PROPOSALS 1, 2 AND 3
1. ADOPT AGREEMENT AND PLAN OF MERGER AMONG DQE, ALLEGHENY
POWER SYSTEM, INC. ("APS") AND AYP SUB, INC., WHICH IS TO
BE FORMED AS A WHOLLY OWNED SUBSIDIARY OF APS, AND [DQE LOGO]
RELATED TRANSACTIONS. BOX 68
PITTSBURGH, PA 15230-0068
[ ] FOR [ ] AGAINST [ ] ABSTAIN PROXY H
2. ELECTION OF DIRECTORS: (TO WITHHOLD AUTHORITY TO VOTE FOR
ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE
NOMINEE'S NAME LISTED BELOW.)
[ ] FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY
(EXCEPT THOSE CROSSED OUT) (ALL NOMINEES)
DANIEL BERG WILLIAM H. KNOELL
ROBERT P. BOZZONE THOMAS J. MURRIN
3. APPROVAL OF AUDITORS: DELOITTE & TOUCHE LLP
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS RECOMMEND A VOTE "AGAINST" PROPOSAL 4
4. PROPOSAL OF A STOCKHOLDER:
ANNUAL ELECTION OF DIRECTORS
---------------------------------- ----------------------------------
[ ] FOR [ ] AGAINST [ ] ABSTAIN SIGNATURE SIGNATURE
----------------------- STOCKHOLDER(S) SIGNATURE(S) SHOULD CORRESPOND
DATE TO THE NAME(S) APPEARING ON THIS PROXY. PLEASE
GIVE FULL TITLE IF SIGNING IN A REPRESENTATIVE
CAPACITY.
</TABLE>
<PAGE> 3
O DETACH HERE O
VOTE THIS PROXY CARD TODAY!
--------------------------------------------------------------------
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS.
<PAGE> 4
[LOGO]
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS AUGUST 7, 1997
David D. Marshall, Victor A. Roque, and Diane S. Eismont, or any of them,
are hereby appointed Proxy or Proxies, with full power of substitution, to vote
the shares of the stockholder(s) named on the reverse side hereof at the Annual
Meeting of Stockholders of DQE to be held on August 7, 1997 and at any
adjournments or postponements thereof as directed on the reverse side hereof and
in his, her or their discretion to act upon any other matters that may properly
come before the meeting or any adjournments or postponements thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS and, when
properly executed and delivered, will be voted as you specify. If not specified,
this proxy will be voted FOR Proposals 1, 2 and 3 and AGAINST Proposal 4. A vote
FOR Proposal 2 includes discretionary authority to cumulate votes selectively
among the nominees as to whom authority to vote has not been withheld and to
vote for a substitute nominee if any nominee is unable to serve or for good
cause will not serve.
Notwithstanding stockholder approval of Proposal 1, DQE reserves the right
to terminate the Merger Agreement and abandon the Merger at any time prior to
the consummation of the Merger, subject to the terms and conditions of the
Merger Agreement.
Holders of DQE Common Stock will not be entitled to dissenters' rights in
connection with the Merger or the other matters to be voted on at the Meeting.
The signer hereby revokes any proxy previously given to vote or act with
respect to the DQE Common Stock and hereby ratifies and confirms all that the
proxies named above, their substitutes, or any of them may lawfully do by virtue
hereof.
PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN THE
COMPLETED PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
