<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1998
REGISTRATION NO. 333-50109
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN ELECTRIC POWER COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEW YORK 4911 13-4922640
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
(614) 223-1000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
E. LINN DRAPER, JR.
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
AMERICAN ELECTRIC POWER COMPANY, INC.
RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
(614) 223-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JAMES M. COTTER, ESQ. E.R. BROOKS WILLIAM E. JOOR III, ESQ.
SIMPSON THACHER & BARTLETT CHAIRMAN AND CHIEF EXECUTIVE VINSON & ELKINS L.L.P.
425 LEXINGTON AVENUE OFFICER 1001 FANNIN
NEW YORK, NY 10017-3954 CENTRAL AND SOUTH WEST HOUSTON, TEXAS 77002-6726
(212) 455-2000 CORPORATION (713) 758-2222
1616 WOODALL RODGERS FREEWAY
DALLAS, TEXAS 75202-1234
(214) 777-1000
</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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC.
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
---------------------
[LOGO]
APRIL , 1998
------------------------
Dear Shareholder:
We invite you to attend our annual meeting which will be held at The Ohio
State University's Fawcett Center, 2400 Olentangy River Road, Columbus, Ohio at
9:30 a.m., local time, on May 27, 1998.
At the annual meeting, we will ask you to approve:
- an increase in the number of authorized shares of AEP common stock from
300,000,000 to 600,000,000; and
- our using these shares to complete the transaction with Central and South
West Corporation, as described in the merger agreement we have with them.
We can complete the transaction with Central and South West only if you
approve these two actions. As a result of the transaction, Central and South
West Corporation stockholders will receive 0.60 of a share of AEP common stock
in exchange for each of their shares of Central and South West common stock.
Following the merger, the current stockholders of Central and South West
Corporation will hold approximately 40.1% of the issued and outstanding AEP
common stock.
The Board of Directors of AEP has determined that the merger is fair and in
your best interests. The Board has unanimously approved the merger agreement and
the transactions contemplated by the merger agreement.
At the meeting, we will also ask you to elect directors and ratify the
appointment of Deloitte & Touche LLP as independent auditors for 1998.
The merger is described in the accompanying Joint Proxy
Statement/Prospectus. Additional information concerning the related transactions
accompanies this letter. Please read these materials carefully.
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR CERTAIN MATTERS YOU SHOULD
CONSIDER.
During the course of the meeting there will be the usual time for discussion
of the items on the agenda and for questions regarding AEP's affairs. Directors
and officers will be available to talk individually with shareholders before and
after the meeting.
Your participation in the annual meeting, in person or by proxy, is
important. Please mark, date, sign and return the enclosed proxy as soon as
possible, whether or not you plan to attend the meeting or, if you prefer you
may vote your shares by telephone or internet by following the instructions on
the proxy card. If you have any questions regarding the proposed transaction,
please call Morrow & Co., Inc., our proxy solicitation agent, toll free at (800)
566-9061.
Thank you and I look forward to seeing you at the meeting.
Sincerely,
[LOGO]
E. Linn Draper, Jr.
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR
THE COMPANY COMMON STOCK TO BE ISSUED IN THE MERGER, AND THEY HAVE NOT
DETERMINED WHETHER THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED
THE FAIRNESS OR MERITS OF THE MERGER. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated April , 1998 and is first
being mailed to shareholders on or about April , 1998.
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC.
1 RIVERSIDE PLAZA
COLUMBUS, OHIO 43215
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL , 1998
Dear Shareholder:
THE ANNUAL MEETING of shareholders of AMERICAN ELECTRIC POWER COMPANY, INC.,
a New York corporation (the "Company" or "AEP"), will be held at The Ohio State
University's Fawcett Center, 2400 Olentangy River Road, Columbus, Ohio at 9:30
a.m., local time, on May 27, 1998 for the following purposes:
1. To vote upon the issuance by AEP of shares of its Common Stock, par
value $6.50 per share ("AEP Common Stock"), to the stockholders of
Central and South West Corporation ("CSW") pursuant to the Agreement and
Plan of Merger dated as of December 21, 1997, which appears as Annex I to
the accompanying Joint Proxy Statement/Prospectus, providing for the
merger of Augusta Acquisition Corporation, a wholly-owned subsidiary of
the Company, with and into CSW;
2. To approve the amendment of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of AEP Common
Stock from 300,000,000 shares to 600,000,000 shares;
3. To elect 11 directors of the Company, to hold office until the next
annual meeting of the Company's shareholders and until their successors
are duly elected;
4. To approve the firm of Deloitte & Touche LLP as independent auditors for
1998; and
5. To consider and act on such other matters as may properly come before
the meeting.
The Board of Directors has fixed the close of business on April 8, 1998, as
the record date for the determination of shareholders entitled to notice of and
to vote at the meeting.
The Company's audited financial statements and management's discussion and
analysis of results of operations and financial condition were mailed to you the
last week of March, 1998. A copy of such information will be provided by
first-class mail without charge to any shareholder, including any beneficial
owner, upon oral or written request. Requests should be directed to Investor
Relations, at the Company's address set forth above or by phoning (800)
237-2667. You will receive the Company's summary annual report under separate
cover.
If you plan to attend the meeting and are a shareholder of record, please
mark the "Annual Meeting" box on your proxy card. An admission ticket is
included with the proxy card for each shareholder of record. However, if your
shares are not registered in your own name, please advise the shareholder of
record (your bank, broker, etc.) that you wish to attend. That firm must provide
you with evidence of your ownership which will enable you to gain admittance to
the meeting.
YOUR VOTE IS VERY IMPORTANT. PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE, WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING. THIS YEAR, RECORD HOLDERS OF AEP COMMON STOCK CAN
ALSO VOTE THEIR SHARES BY USING A TOLL-FREE TELEPHONE NUMBER OR THE INTERNET.
INSTRUCTIONS FOR USING THESE CONVENIENT NEW SERVICES ARE SET FORTH ON THE
ENCLOSED PROXY CARD.
YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DECIDE TO ATTEND THE
MEETING.
If you are planning to attend the meeting, please indicate this when you
vote.
By Action of the Board of Directors,
G.P. Maloney
SECRETARY
Columbus, Ohio
April , 1998
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
1616 WOODALL RODGERS FREEWAY
DALLAS, TEXAS 75202-1234
---------------------
APRIL , 1998
------------------------
To Our Stockholders:
We invite you to attend our annual meeting which will be held at 10:30 a.m.,
local time, on Thursday, May 28, 1998 at the Dallas Museum of Art, 1717 North
Harwood Street, Dallas, Texas.
At the annual meeting, we will ask you to vote on a proposal to approve the
merger of a subsidiary of American Electric Power Company, Inc. into Central and
South West Corporation. As a result of the merger, you will receive 0.60 of a
share of AEP common stock for each share of CSW common stock owned by you.
Following the Merger, the current stockholders of CSW will hold approximately
40.1% of the issued and outstanding AEP Common Stock.
We can complete the merger only if certain conditions are satisfied,
including obtaining your approval and satisfying certain regulatory
requirements.
THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS INCLUDES A SUMMARY OF THE
TERMS OF THE MERGER AND CERTAIN OTHER INFORMATION RELATING TO THE MERGER. PLEASE
READ THIS MATERIAL CAREFULLY.
SEE "RISK FACTORS" BEGINNING ON PAGE 20 FOR CERTAIN MATTERS YOU SHOULD
CONSIDER.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR, AND IN YOUR BEST INTERESTS AND
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
At the meeting, we will also ask you to elect directors and ratify the
appointment of the firm of Arthur Andersen LLP as independent auditors for 1998.
The formal notice of the annual meeting is attached, and a form of proxy is
enclosed for your use. Whether or not you expect to attend the meeting, it is
very important that your shares be represented, and it would therefore be
helpful if you would return your signed and dated proxies promptly. If you have
any questions regarding the proposed transaction, please call investor services
at CSW at (888) 279-1100 (toll free).
I look forward to seeing you at the meeting.
Sincerely,
E.R. BROOKS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR
THE AEP COMMON STOCK TO BE ISSUED IN THE MERGER, AND THEY HAVE NOT DETERMINED
WHETHER THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THE
FAIRNESS OR MERITS OF THE MERGER. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated April , 1998 and is first
being mailed to shareholders on or about April , 1998.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
1616 WOODALL RODGERS FREEWAY
DALLAS, TEXAS 75202-1234
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Central and
South West Corporation, a Delaware corporation ("CSW"), will be held at the
Dallas Museum of Art, 1717 North Harwood Street, Dallas, Texas on Thursday, May
28, 1998 at 10:30 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger dated as of December 21, 1997 (the "Merger
Agreement"), attached as Annex I to the accompanying Joint Proxy
Statement/Prospectus, providing for the merger (the "Merger") of Augusta
Acquisition Corporation, a wholly-owned subsidiary of American Electric
Power Company, Inc. ("AEP"), with and into CSW and the other transactions
contemplated thereby;
2. To elect three directors who will constitute Class II of the Board of
Directors and two directors who will be included in Class III of the
Board of Directors;
3. To approve the appointment of Arthur Andersen LLP as independent
auditors for 1998; and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Approval and adoption of the Merger Agreement and the transactions
contemplated thereby requires the affirmative vote of a majority of the
outstanding shares of CSW's Common Stock entitled to vote thereon.
Stockholders of CSW are not entitled to appraisal rights in connection with
the Merger.
THE ENCLOSED PROXY CARD WILL ENABLE YOU TO VOTE YOUR SHARES ON THE MATTERS
TO BE CONSIDERED AT THE ANNUAL MEETING. ALL YOU NEED TO DO IS MARK THE PROXY
CARD TO INDICATE YOUR VOTE, DATE AND SIGN THE PROXY CARD, AND THEN RETURN IT
PROMPTLY IN THE SELF-ADDRESSED STAMPED ENVELOPE PROVIDED. THE GIVING OF THE
PROXY WILL NOT AFFECT YOUR RIGHT TO ATTEND THE MEETING, NOR, IF YOU CHOOSE TO
REVOKE THE PROXY, YOUR RIGHT TO VOTE IN PERSON.
The Board of Directors has fixed the close of business on April 8, 1998 as
the record date for determination of stockholders entitled to notice of and to
vote at the annual meeting.
By Order of the Board of Directors
KENNETH C. RANEY, JR.
SECRETARY
April , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY................................................................. 4
The Companies............................................................................................ 4
The Meetings............................................................................................. 4
Voting................................................................................................... 5
The Record Dates for Voting at the Meetings.............................................................. 5
Security Ownership of Management......................................................................... 6
What You Will Receive in the Merger...................................................................... 6
Recommendations of the Boards of Directors............................................................... 6
Background of the Merger................................................................................. 6
Opinions of Financial Advisors........................................................................... 7
Interests of Certain Persons in the Merger............................................................... 7
Conditions to the Merger................................................................................. 8
Regulatory Approvals..................................................................................... 8
Termination of the Merger Agreement...................................................................... 8
Termination Fees and Expenses............................................................................ 9
No Appraisal Rights...................................................................................... 10
U.S. Federal Income Tax Consequences..................................................................... 10
Comparison of Shareholder Rights......................................................................... 11
Forward-Looking Statements May Prove Inaccurate.......................................................... 11
Directors of AEP Following the Merger.................................................................... 11
COMPARATIVE PER SHARE DATA................................................................................. 12
COMPARATIVE MARKET PRICE INFORMATION....................................................................... 13
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 15
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL DATA................................ 17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................. 19
RISK FACTORS............................................................................................... 20
THE AEP MEETING............................................................................................ 22
Matters to be Considered................................................................................. 22
Record Date; Voting Rights; Required Vote; Confidential Voting........................................... 23
Voting of Proxies........................................................................................ 24
Revocability of Proxies.................................................................................. 25
Solicitation of Proxies.................................................................................. 25
THE CSW MEETING............................................................................................ 26
Matters To Be Considered................................................................................. 26
Record Date; Voting Rights; Required Vote................................................................ 26
Voting of Proxies........................................................................................ 27
Revocability of Proxies.................................................................................. 27
Appraisal Rights......................................................................................... 27
Solicitation of Proxies.................................................................................. 28
THE COMPANIES.............................................................................................. 29
American Electric Power Company, Inc..................................................................... 29
Central and South West Corporation....................................................................... 29
THE MERGER................................................................................................. 31
General.................................................................................................. 31
Background of the Merger................................................................................. 31
Reasons for the Merger................................................................................... 42
Recommendations of the Boards of Directors............................................................... 44
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Opinion of Financial Advisor to AEP...................................................................... 47
Opinion of Financial Advisor to CSW...................................................................... 54
Merger Consideration..................................................................................... 57
Effective Time of the Merger............................................................................. 58
Conversion of Shares; Procedures for Exchange of Certificates............................................ 58
Fractional Shares........................................................................................ 59
Certain U.S. Federal Income Tax Consequences............................................................. 59
Anticipated Accounting Treatment......................................................................... 60
Interests of Certain Persons in the Merger............................................................... 61
Stock Exchange Listing................................................................................... 63
Restrictions on Resales by Affiliates.................................................................... 63
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS................................................ 64
DESCRIPTION OF CAPITAL STOCK OF AEP........................................................................ 77
Dividend Rights.......................................................................................... 77
Voting Rights............................................................................................ 77
Liquidation Rights....................................................................................... 77
Preemptive Rights........................................................................................ 77
Transfer Agents and Registrars........................................................................... 77
COMPARISON OF RIGHTS OF HOLDERS OF CSW SHARES AND AEP SHARES............................................... 77
General.................................................................................................. 77
Shareholder Rights Plans................................................................................. 77
Voting Rights............................................................................................ 78
Fair Price Provisions.................................................................................... 79
Amendments to Certificate of Incorporation............................................................... 80
Special Meetings......................................................................................... 80
Shareholders' Action Without a Meeting................................................................... 81
Preemptive Rights........................................................................................ 81
Dividends................................................................................................ 81
Stock Repurchases........................................................................................ 82
Issuance of Rights or Options to Purchase Shares to Directors, Officers and Employees.................... 82
Loans to Directors....................................................................................... 82
Classification of the Boards of Directors................................................................ 82
Duties of Directors...................................................................................... 83
Limitations on Directors' Liability...................................................................... 83
Indemnification of Directors and Officers................................................................ 83
Removal of Directors..................................................................................... 85
Newly Created Directorships and Vacancies................................................................ 85
Dissenters' Rights of Appraisal.......................................................................... 85
Business Combination Statutes............................................................................ 86
"Anti-Greenmail"......................................................................................... 87
Stock Exchange Listings.................................................................................. 87
THE MERGER AGREEMENT....................................................................................... 88
The Merger............................................................................................... 88
Representations and Warranties........................................................................... 88
Certain Covenants; Conduct of Business Prior to the Merger............................................... 88
Acquisition Proposals.................................................................................... 92
Certain Post-Merger Matters.............................................................................. 93
Board of Directors and Officers of Surviving Corporation................................................. 93
Stock Based Compensation and Employee Benefit Plans...................................................... 93
Conditions to the Consummation of the Merger............................................................. 95
Termination.............................................................................................. 96
Expenses and Fees........................................................................................ 97
Amendment and Waiver..................................................................................... 98
</TABLE>
ii
<PAGE>
<TABLE>
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PAGE
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<S> <C>
Indemnification.......................................................................................... 99
REGULATORY APPROVALS....................................................................................... 100
Antitrust Considerations................................................................................. 100
1935 Act................................................................................................. 100
Atomic Energy Act........................................................................................ 101
Federal Power Act........................................................................................ 101
Communications Act....................................................................................... 101
Arkansas Commission...................................................................................... 101
Louisiana Commission..................................................................................... 101
Oklahoma Commission...................................................................................... 102
Texas Commission......................................................................................... 102
Affiliate Contracts...................................................................................... 102
Other Regulatory Matters................................................................................. 102
CERTAIN LITIGATION......................................................................................... 104
THE AEP MEETING--ADDITIONAL MATTERS........................................................................ 104
Election of Directors.................................................................................... 104
Approval of Auditors..................................................................................... 109
Executive Compensation................................................................................... 110
Share Ownership of Directors and Executive Officers...................................................... 117
THE CSW MEETING--ADDITIONAL MATTERS........................................................................ 119
Election of Directors.................................................................................... 119
Security Ownership of Management......................................................................... 121
Section 16(a) Beneficial Ownership Reporting Compliance.................................................. 124
Compensation Committee Interlocks and Insider Participation.............................................. 124
Approval of Appointment of Independent Public Accountants................................................ 125
Transaction of Other Business............................................................................ 125
Executive Compensation................................................................................... 126
EXPERTS.................................................................................................... 136
LEGAL OPINIONS............................................................................................. 136
FUTURE SHAREHOLDER PROPOSALS............................................................................... 136
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 137
LIST OF DEFINED TERMS...................................................................................... 139
</TABLE>
<TABLE>
<S> <C>
Annex I Agreement and Plan of Merger
Annex II Opinion of Salomon Smith Barney
Annex III Opinion of Morgan Stanley & Co. Incorporated
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
<TABLE>
<S> <C>
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: AEP and CSW believe that combining the two companies will create a company better able
to produce and deliver low-cost power. In addition we believe the combination will
create added value for customers, employees and shareholders through operating
efficiencies and synergies.
This merger means that you will have a stake in what AEP and CSW believe will be the
nation's preeminent diversified electric utility company, serving more than 4.6 million
customers in 11 states and approximately 4 million customers outside the United States.
The service area of the combined companies in the United States will link the Midwest
and Southwest and reach virtually from Canada to Mexico. To review the reasons for the
merger in greater detail, see page 42.
Q: WHAT WILL CSW STOCKHOLDERS RECEIVE FOR THEIR CSW SHARES?
A: CSW stockholders will receive 0.60 of a share of AEP common stock in exchange for each
of their shares of CSW common stock. This exchange ratio will not change, even if the
market price of the AEP common stock or the CSW common stock increases or decreases
between now and the date that the merger is completed. Therefore, the value of the
shares of AEP common stock received in the merger by a CSW stockholder may be less or
more than the market value of his or her shares of CSW common stock before the merger.
Following the merger, the current CSW stockholders will hold approximately 40.1% of the
issued and outstanding AEP common stock.
AEP will not issue fractional shares in the merger. As a result, if you are a CSW
stockholder, the total number of AEP common shares that you will receive in the merger
will be rounded down to the nearest whole number, and you will receive a cash payment
for the value of the remaining fraction of an AEP common share that you would otherwise
receive.
Q: WILL AEP SHAREHOLDERS RECEIVE ANY SHARES AS A RESULT OF THE MERGER?
A: No. AEP shareholders will continue to hold the same number of AEP shares they currently
own.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as possible, so
that your shares can be voted at the May 27, 1998 AEP shareholder meeting (if you are an
AEP shareholder) or at the May 28, 1998 CSW stockholder meeting (if you are a CSW
stockholder). AEP shareholders may also vote by telephone or internet by following the
instructions on the proxy card.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR
ME?
A: Your broker will vote your shares only if you provide instructions on how to vote. You
should contact your broker and ask what directions your broker will need from you. Your
broker will not be able to vote your shares without instructions from you.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the applicable
shareholder meeting. You can do this in one of three ways. First, you can send a written
notice stating that you would like to revoke your proxy. Second, you can complete and
submit a new proxy card. Third, you can attend the appropriate meeting and vote in
person. Your attendance alone will not, however, revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions received from your
broker to change those instructions.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Q: SHOULD CSW STOCKHOLDERS OR AEP SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. If you are a CSW stockholder, after the merger is completed you will receive written
instructions for exchanging your CSW common shares for AEP common shares (and your cash
payment in lieu of any fractional AEP common share). If you are an AEP shareholder, you
should retain your certificates, as you will continue to hold the AEP shares you
currently own.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: AEP and CSW each plan to continue to pay dividends on their common stock until the
closing of the merger at approximately the same times and rates per share as were paid
by each company during the last year. However, both the AEP Board and the CSW Board will
continue to evaluate their respective financial condition and earnings. AEP does not
anticipate making any changes to its dividend policy following the merger; however, the
AEP Board will continue to evaluate the financial condition and earnings of AEP and its
dividend policy.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO SHAREHOLDERS?
A: The exchange of shares of CSW common stock for shares of AEP common stock in the merger
will be tax-free to CSW stockholders for federal income tax purposes. Holders of CSW
common stock will, however, have to pay taxes on any cash received for fractional
shares.
The merger will not have any effect on AEP shareholders for federal income tax purposes.
Q: WHAT WILL CSW STOCKHOLDERS' TAX BASIS BE IN THE AEP COMMON STOCK THEY RECEIVE IN THE
MERGER?
A: Your tax basis in the shares of AEP common stock will equal your current tax basis in
your CSW common stock reduced by the amount of basis allocable to fractional shares.
Q: WHAT REGULATORY APPROVALS ARE NEEDED?
A: Before we can complete the merger, we must, among other things:
-await the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; and
-receive approvals from federal regulatory agencies, including:
-the Securities and Exchange Commission;
-the Nuclear Regulatory Commission; and
-the Federal Energy Commission.
-receive approvals from state regulatory agencies, including regulators in:
-Arkansas;
-Louisiana;
-Oklahoma; and
-Texas.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger in the first half of 1999. We are working toward
completing the merger as quickly as possible. The timing and likelihood of obtaining the
regulatory approvals described above is uncertain.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you are an AEP shareholder and you have more questions about the merger, you should
contact:
</TABLE>
American Electric Power Company, Inc.
Shareholder Relations Department
1 Riverside Plaza
Columbus, Ohio 43215
Telephone: (800) 237-2667
Fax: (614) 223-2807
or
Morrow & Co, Inc., the
proxy solicitor, who may be called toll-free at (800) 566-9061
<TABLE>
<S> <C>
If you are a CSW stockholder and you have more questions about the merger, you should
contact:
</TABLE>
Central and South West Corporation
Investor Services Department
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
Telephone: (888) 279-1100 (toll free)
Fax: (214) 777-2829
3
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS
REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" (PAGE 137). THE MERGER
AGREEMENT IS ATTACHED AS ANNEX I TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE
MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
THE COMPANIES (PAGE 29)
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza
Columbus, Ohio 43215-2373
(614) 223-1000
AEP is one of the nation's largest public utility holding companies,
providing energy to 2.9 million customers. Through its domestic electric utility
subsidiaries, AEP primarily generates, transmits, distributes or sells electric
energy in portions of the states of Ohio, Indiana, Kentucky, Michigan,
Tennessee, Virginia and West Virginia. Substantially all of the operating
revenues of AEP and its subsidiaries are derived from selling electricity to
customers. AEP also has holdings in the United Kingdom and China. Wholly owned
subsidiaries provide power engineering, consulting, telecommunications and
management services around the world.
CENTRAL AND SOUTH WEST CORPORATION
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
CSW is a global, diversified public utility holding company based in Dallas.
CSW owns four domestic electric utility subsidiaries serving 1.7 million
customers in portions of the states of Texas, Oklahoma, Louisiana and Arkansas
and a regional electricity company in the United Kingdom. CSW owns other
international energy operations and non-utility subsidiaries involved in
energy-related investments, telecommunications, energy efficiency services (such
as engineering design, equipment procurement and performance monitoring) and
financial transactions.
THE MEETINGS (PAGES 22 AND 26)
TIME, PLACE AND DATE OF MEETINGS. The annual meeting of shareholders of AEP
will be held at The Ohio State University's Fawcett Center, 2400 Olentangy River
Road, Columbus, Ohio, at 9:30 a.m., local time, on Wednesday, May 27, 1998.
The annual meeting of stockholders of CSW will be held at 10:30 a.m., local
time, on Thursday, May 28, 1998, at the Dallas Museum of Art, 1717 North Harwood
Street, Dallas, Texas.
MATTERS TO BE CONSIDERED AT THE MEETINGS. AEP MEETING. At the AEP meeting,
we will ask the AEP shareholders (1) to approve an increase in the number of
authorized shares of AEP Common Stock from 300,000,000 to 600,000,000, (2) to
approve the use of AEP shares to complete the transaction with CSW, (3) to elect
directors for AEP and (4) to approve independent auditors for AEP.
CSW MEETING. At the CSW meeting, holders of shares of common stock of CSW
will be asked to (1) approve the merger agreement providing for the merger, (2)
elect directors for CSW and (3) approve independent auditors for CSW.
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VOTES REQUIRED. AEP. The issuance of AEP shares to holders of CSW shares in
the merger requires the affirmative vote of a majority of the votes cast on the
proposal, provided that the total votes cast on the proposal represent a
majority of the outstanding AEP shares. The Charter Amendment requires the
affirmative vote of a majority of the total outstanding AEP shares. AEP
directors will be elected by a plurality of the votes cast at the AEP meeting.
Approval of the independent auditors of AEP requires the affirmative vote of a
majority of the AEP shares present or represented by proxy at the AEP meeting.
CSW. Approval of the merger agreement requires the affirmative vote of a
majority of the total outstanding CSW shares. CSW directors will be elected by a
plurality of the votes cast at the CSW meeting. This means that the persons (up
to the number of Board seats to be filled) who receive more votes than those
cast for other candidates win the election. Approval of the independent auditors
of CSW requires the favorable vote of a majority of the CSW shares present or
represented by proxy at the CSW meeting.
VOTING (PAGES 23 AND 26)
AEP. AEP shareholders will have one vote at the AEP meeting for each AEP
share held of record on April 8, 1998:
- to approve the issuance of AEP shares to holders of CSW shares in the
merger;
- to approve the amendment to the AEP certificate of incorporation; and
- to approve Deloitte & Touche LLP as independent auditors for AEP for 1998.
Voting is, however, cumulative for the election of AEP directors. This means
you have the right to cast a total number of votes equal to the number of shares
you hold multiplied by the number of directors to be elected. You may cast all
your votes for one candidate, or you may distribute these votes among the
candidates.
EXAMPLE: If you held 10 AEP shares on April 8, 1998 you will have a total
of 110 votes that you may cast all for one candidate or distribute among the 11
candidates as you wish.
CSW. CSW stockholders will have one vote at the CSW meeting for each CSW
share held of record on April 8, 1998:
- to approve the merger agreement;
- to approve Arthur Andersen LLP as independent auditors for CSW for 1998;
and
- to elect directors.
THE RECORD DATES FOR VOTING AT THE MEETINGS (PAGES 23 AND 26)
AEP.
The close of business on April 8, 1998 was the record date for determining
which holders of AEP capital stock are entitled to vote at the AEP meeting. At
the record date, there were 190,378,571 AEP shares entitled to vote at the AEP
meeting.
CSW.
The close of business on April 8, 1998 was the record date for determining
which holders of CSW capital stock are entitled to vote at the CSW meeting. At
the record date, there were 212,281,477 CSW shares entitled to vote at the CSW
meeting.
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SECURITY OWNERSHIP OF MANAGEMENT (PAGES 117 AND 121)
As of January 1, 1998, directors and executive officers of AEP and their
affiliates beneficially owned an aggregate of approximately 146,369 shares (less
than 1%) of the outstanding AEP shares. As of December 31, 1997, directors and
executive officers of CSW and their affiliates beneficially owned an aggregate
of approximately 486,165 shares (less than 1%) of the outstanding CSW shares.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 31)
AEP SHAREHOLDERS:
After the merger, each AEP share will remain outstanding and will represent
one share of the combined companies, which will continue under the name
"American Electric Power Company, Inc."
CSW STOCKHOLDERS:
Each CSW share will be converted into the right to receive 0.60 of an AEP
share from AEP and CSW will become a wholly-owned subsidiary of AEP.
Assuming that there are 190,378,571 AEP shares and 212,281,477 CSW shares
outstanding immediately before the closing of the merger, the number of AEP
shares to be issued to the holders of CSW shares in the merger would be
127,368,886, which would represent 40.1% of the outstanding AEP shares
immediately after the closing of the merger.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (PAGE 44)
AEP. AEP'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT, THE
ISSUANCE OF AEP SHARES TO HOLDERS OF CSW SHARES IN THE MERGER AND THE AMENDMENT
TO THE AEP CERTIFICATE OF INCORPORATION. THE AEP BOARD OF DIRECTORS RECOMMENDS
THAT AEP SHAREHOLDERS VOTE FOR THE SHARE ISSUANCE AND THE CHARTER AMENDMENT.
CSW. CSW'S BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, CSW AND ITS STOCKHOLDERS AND RECOMMENDS THAT CSW STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT.
BACKGROUND OF THE MERGER
The chief executive officers of AEP and CSW had informal discussions on
several occasions from January 1997 to March 1997 regarding a merger of the
companies. With CSW's stock price depressed in late April 1997 as a result, in
the opinion of CSW management, of adverse action by the Texas Public Utility
Commission, CSW management terminated discussions with AEP.
From May through September 1997, CSW management continued to explore a
variety of strategic alternatives. As part of this analysis, CSW management, in
consultation with its advisors, developed a list of screening criteria for use
in analyzing potential merger partners. CSW also considered other strategic
alternatives which could be pursued without a business combination. At a meeting
of the CSW Board of Directors on September 27, 1997, management recommended to
the CSW Board of Directors that CSW seek a merger with a partner that could
enhance CSW's ability to implement its long-term vision. The CSW Board of
Directors unanimously authorized CSW management to pursue its search for an
appropriate merger partner while continuing to evaluate CSW's stand-alone
options.
In September 1997, the chief executive officers of AEP and CSW resumed their
discussions regarding a stock-for-stock merger. During the ensuing months, CSW's
management also held preliminary discussions, and exchanged non-public
information, with three other electric utilities regarding a possible business
combination and continued to evaluate other stand-alone alternatives. CSW
management met with the CSW Board of Directors and a committee of the CSW Board
of Directors on many
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occasions during October-December 1997 to update the directors and receive
direction on the course of their discussions.
On November 24, 1997, CSW management and CSW's advisers met with a committee
of the CSW Board to discuss the progress of the strategic alternative evaluation
process. The committee authorized CSW management to send to four strategic
merger candidates a letter requesting each to advise CSW as to whether, and on
what terms, it was interested in pursuing a strategic combination with CSW. On
December 11, 1997, CSW received affirmative responses to the request letters
from AEP and two of the three other companies.
On December 12, 1997, CSW management and advisers met with a committee of
the CSW Board of Directors to discuss the responses and the status of the
strategic merger candidate evaluation process. After analyzing the responses and
CSW's other stand-alone alternatives, the committee determined that AEP appeared
to be the best strategic merger partner for CSW and that a merger with AEP on
the right terms would be more likely to restore and enhance long-term
stockholder value than any of the other merger or stand-alone strategic
alternatives.
Following negotiations between Dr. Draper and Mr. Brooks, CSW and AEP agreed
to proceed with merger negotiations on the basis of a proposed exchange ratio of
0.60 of an AEP share for each CSW share. The Boards of Directors of both
companies approved the merger agreement in meetings on December 21, 1997, and
the merger agreement was signed that afternoon.
OPINIONS OF FINANCIAL ADVISORS (PAGES 47 AND 54)
AEP. In deciding to approve the merger, one of the factors that AEP's Board
of Directors considered was the opinion of its financial advisor, Salomon
Brothers Inc, now doing business as Salomon Smith Barney, that, as of December
21, 1997 and based upon and subject to the considerations set forth in such
opinion, the consideration to be paid by AEP in connection with the merger was
fair to AEP from a financial point of view. AEP URGES ITS SHAREHOLDERS TO READ
THE ENTIRE SALOMON SMITH BARNEY OPINION ATTACHED AS ANNEX II TO THIS JOINT PROXY
STATEMENT/PROSPECTUS CAREFULLY.
CSW. Similarly, in deciding to approve the merger, one of the factors that
the CSW Board of Directors considered was the opinion (which opinion has been
reissued as of the date of this Joint Proxy Statement/Prospectus) of its
financial advisor, Morgan Stanley & Co. Incorporated, that as of December 21,
1997, and the date of this Joint Proxy Statement/Prospectus, the exchange ratio
was fair from a financial point of view, to the holders of CSW Shares. CSW URGES
ITS STOCKHOLDERS TO READ THE ENTIRE MORGAN STANLEY OPINION ATTACHED AS ANNEX III
TO THIS JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 61)
In considering the CSW Board of Directors' recommendation that CSW
stockholders vote in favor of the merger, CSW shareholders should be aware that
a number of CSW's officers and directors have severance agreements, retention
incentives or benefit plans that give them interests in the merger that are
different from, or in addition to, other CSW shareholders. The total amount that
may be payable to CSW's officers and directors in connection with the merger due
to severance and retention arrangements is approximately $48.4 million, plus any
additional payments that may be necessary to cover excise tax liabilities in
connection with such payments. In order to encourage key executives to stay, and
for other business reasons, CSW and AEP are currently evaluating certain
modifications to the severance agreements and retention incentives which are not
expected to result in an increase in such payments.
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CONDITIONS TO THE MERGER (PAGE 95)
AEP and CSW will not complete the merger unless a number of conditions are
satisfied or, if permitted, waived by them. These include:
- AEP shareholders must approve the issuance of AEP shares in the merger and
the amendment to the AEP certificate of incorporation (which condition may
not be waived);
- CSW stockholders must approve and adopt the merger agreement (which
condition may not be waived);
- each party's representations and warranties contained in the merger
agreement must continue to be accurate;
- each party must perform its obligations under the merger agreement;
- there cannot be any injunction that prohibits the merger (which condition
may not be waived);
- the relevant governmental authorities must approve the merger without the
imposition of conditions that could reasonably be expected to have a
material adverse effect on the combined company;
- there cannot be any law or order imposed by a governmental authority that
requires the divestiture of a substantial portion of the generating assets
of CSW or AEP;
- AEP and CSW must receive legal opinions as to the tax free nature of the
merger;
- AEP and CSW must receive opinions dated as of the date of this Joint Proxy
Statement/ Prospectus of Salomon Smith Barney and Morgan Stanley
confirming their original fairness opinions (which opinions have been
received);
- AEP and CSW must receive letters from AEP's and CSW's independent
accountants stating that the merger will qualify for pooling of interests
accounting treatment;
- the New York Stock Exchange must authorize listing of the AEP shares to be
issued in the merger; and
- the registration statement on Form S-4 registering the AEP shares to be
issued in the merger must be declared effective (which registration
statement has been declared effective).
REGULATORY APPROVALS (PAGE 100)
We must receive the approvals of federal and state regulatory agencies
before we can complete the merger. At the federal level, these approvals include
approval of the Securities and Exchange Commission, the Nuclear Regulatory
Commission and the Federal Energy Regulatory Commission. We must also complete
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. At the state level, we must receive approvals from regulators
in Arkansas, Louisiana, Oklahoma and Texas. We also require the approval or
non-opposition of certain state regulatory commissions.
TERMINATION OF THE MERGER AGREEMENT (PAGE 96)
AEP and CSW mutually can agree to terminate the merger agreement at any
time, whether before or after the receipt of stockholder approval, without
completing the merger. Either one of them can terminate the merger agreement if:
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- the merger is not completed by December 31, 1999, although this deadline
will be extended to June 30, 2000 if the completion of the merger is
delayed only because certain governmental approvals have not been
received;
- the shareholders of AEP do not approve the issuance of AEP shares in the
merger and the amendment of the AEP certificate of incorporation or the
stockholders of CSW do not approve and adopt the merger agreement;
- a governmental authority, such as a court, permanently prohibits the
merger;
- the board of directors of the other company
- withdraws or modifies in any adverse manner its approval or
recommendation of the merger,
- fails to reaffirm its approval or recommendation of the merger if the
terminating company requests it,
- approves or recommends any acquisition of such other company by a third
party (other than pursuant to the merger agreement), or
- approves or recommends a sale of a material portion of such other
company's capital stock or assets to a third party (other than pursuant
to the merger agreement);
- the board of directors of the other company determines, under certain
circumstances, that the board's fiduciary obligations require acceptance
of an offer from a third party to enter into an alternative acquisition
transaction;
- if a third party acquires greater than 50% of the voting power of the
other company or if the individuals who make up the current board of
directors of the other party (or nominees whom they have approved) of the
other company no longer constitute a majority of the board; or
- the other company breaches or fails to comply with any of its material
representations, warranties or obligations under the merger agreement,
unless such breach or failure to comply can be cured and the other company
continues to use reasonable efforts to remedy such breach or failure to
comply.
TERMINATION FEES AND EXPENSES (PAGE 97)
Either AEP or CSW will be required to pay the other a fee of $225 million
plus expenses of up to a total of $20 million if:
- the merger is not completed by December 31, 1999, although this deadline
will be extended to June 30, 2000 if the completion of the merger is
delayed only because certain governmental approvals have not been
received, and:
- at that time, there is an offer from a third party to enter into another
transaction with it, and,
- within 18 months after the termination, it enters into an agreement with
the third party for an acquisition;
- it terminates the merger agreement to accept a superior proposal from a
third party:
- after its board of directors determines in good faith that its fiduciary
obligations under applicable law require them to accept the superior
proposal, and,
- within 18 months of the termination, it enters into an agreement with
the third party for an acquisition;
- it fails to obtain the shareholders approval for the merger, and,
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- at that time, there is an offer from a third party to enter into an
acquisition with it and,
- within 18 months of the termination, it enters into an agreement with
the third party for an acquisition;
- its board of directors withdraws its approval of the merger, and
- at that time, there is an offer from a third party to enter into an
acquisition with it and,
- within 18 months of the termination, it enters into an agreement with
the third party for an acquisition;
- the merger agreement is terminated by the other party due to a breach by
it and,
- at the time of termination, there is an offer from a third party to
enter into another transaction with it and,
- within 18 months of the termination, it enters into an agreement with
the third party for an acquisition; or
- a third party acquires greater than 50% of its voting power or the
individuals who make up its current board of directors no longer
constitute a majority of the board.
Either AEP or CSW will be required to pay the other a fee of $20 million if:
- it terminates the merger agreement to accept a superior proposal from a
third party after its board of directors determines in good faith that its
fiduciary obligations under applicable law require the board to accept the
superior proposal;
- the merger agreement is terminated by reason of its material breach or
failure to comply with any of its representations, warranties or
obligations under the merger agreement;
- its board of directors withdraws its approval of the merger or its
favorable recommendation of the merger; or
- the merger agreement is terminated by the other party because a third
party acquires greater than 50% of its voting power or if the individuals
who make up its current board of directors no longer constitute a majority
of the board.
In no event will the fees and expenses payable by either party as described
above exceed $245 million.
NO APPRAISAL RIGHTS (PAGE 85)
Neither CSW stockholders nor AEP shareholders are entitled to dissenters'
appraisal rights in connection with the merger.
U.S. FEDERAL INCOME TAX CONSEQUENCES (PAGE 59)
The merger is structured so that none of AEP, its merger subsidiary, CSW,
CSW stockholders or AEP shareholders will recognize any gain or loss for federal
income tax purposes in connection with the merger (except for taxes payable
because of cash received instead of fractional AEP Shares by CSW stockholders).
The merger is conditioned on receipt of legal opinions that this is the case.
AEP has received from its counsel, Simpson Thacher & Bartlett, an opinion to
the effect that the merger will be treated for United States federal income tax
purposes as a reorganization as defined in the Internal Revenue Code, that AEP,
its merger subsidiary and CSW each will be a party to the reorganization as
defined in the Internal Revenue Code and that AEP, its merger subsidiary and CSW
will not recognize any gain or loss as a result of the merger. CSW has received
from its tax counsel,
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Christy & Viener, an opinion to the effect that the merger will be treated for
United States federal income tax purposes as a reorganization as defined in the
Internal Revenue Code, that AEP, its merger subsidiary and CSW each will be a
party to the reorganization as defined in the Internal Revenue Code, and that
stockholders of CSW will not recognize any gain or loss upon the receipt of AEP
shares for their CSW shares, other than with respect to cash received in lieu of
fractional shares.
UNDER THE TERMS OF THE MERGER AGREEMENT AEP AND/OR CSW MAY WAIVE THE
REQUIREMENT THAT SUCH PARTIES RECEIVE THE BRING-DOWN OPINIONS OF TAX COUNSEL
DESCRIBED ABOVE AT CLOSING. IF THE RECEIPT OF SUCH TAX OPINIONS AT CLOSING IS
WAIVED BY EITHER PARTY, AEP AND CSW WILL RECIRCULATE THIS JOINT PROXY
STATEMENT/PROSPECTUS TO DISCLOSE ANY SUCH WAIVER AND ALL RELATED MATERIAL
DISCLOSURE, INCLUDING RISKS TO INVESTORS, AND RESOLICIT THE VOTES OF THE
RESPECTIVE STOCKHOLDERS OF AEP AND CSW.
TAX MATTERS CAN BE COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN TAX
ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
COMPARISON OF SHAREHOLDER RIGHTS (PAGE 77)
In the merger, if you are a CSW stockholder, you will receive AEP shares and
become an AEP shareholder. There are numerous differences between the rights of
a stockholder in CSW, a Delaware corporation, and the rights of a shareholder in
AEP, a New York corporation, including classification of directors, cumulative
voting for directors, the ability of stockholders to take action without a
meeting and preemptive rights of stockholders in connection with the issuance of
shares. If you are an AEP shareholder, there will be no change in your rights as
an AEP shareholder after the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 19)
AEP and CSW have made forward-looking statements in this document that are
subject to certain risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future results of operations of
AEP, CSW and the combined company as well as statements preceded by, followed by
or that include the words "believes," "expects," "anticipates," "intends," or
similar expressions. You should understand that certain important factors, in
addition to those discussed elsewhere in this document and in the documents that
are incorporated herein by reference, could affect the future results of the
combined companies and could cause those results to differ materially from those
expressed in our forward-looking statements.
DIRECTORS OF AEP FOLLOWING THE MERGER (PAGE 62)
In the merger agreement, AEP and CSW have agreed that the Board of Directors
of AEP immediately following the merger will consist of 15 members and will be
reconstituted to include all then current board members of AEP, Mr. E.R. Brooks
(the current Chairman of CSW) and four additional outside directors of CSW to be
nominated by AEP.
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of AEP and
CSW and combined per share data on an unaudited pro forma basis after giving
effect to the Merger as if it had occurred on January 1, 1995 on a
pooling-of-interests basis assuming that 0.60 of an AEP share was issued in
exchange for each CSW share outstanding. This data should be read in conjunction
with the selected historical audited and unaudited financial data and the
historical audited and unaudited financial statements of AEP and CSW and the
notes thereto that are incorporated herein by reference. The pro forma combined
per share information of AEP and CSW is derived from the unaudited pro forma
combined condensed financial statements and notes thereto included elsewhere in
this Joint Proxy Statement/Prospectus. The pro forma comparative per share data
does not purport to represent what the financial position or results of
operations of AEP would actually have been had the transactions identified above
occurred at the beginning of the relevant periods or to project AEP's financial
position or results of operations for any future date or period. The data set
forth below should be read in conjunction with the pro forma financial
statements and the separate historical financial statements and notes thereto of
AEP and CSW, included elsewhere in, or incorporated by reference into, this
Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
CSW PRO FORMA
HISTORICAL PRO FORMA EQUIVALENT
AEP HISTORICAL PER COMBINED PER COMBINED PER
PER SHARE SHARE AEP SHARE CSW SHARE
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE:
Year ended December 31, 1997................... $ 24.62 $ 16.76 $ 25.79 $ 15.47
CASH DIVIDENDS DECLARED PER SHARE:
Year ended December 31, 1995................... $ 2.40 $ 1.72 $ 2.58(a) $ 1.55(a)
Year ended December 31, 1996................... 2.40 1.74 2.59(a) 1.55(a)
Year ended December 31, 1997................... 2.40 1.74 2.60(a) 1.56(a)
INCOME PER SHARE FROM CONTINUING OPERATIONS
(BASIC AND DILUTED):
Year ended December 31, 1995................... $ 2.85 $ 1.97 $ 3.02 $ 1.81
Year ended December 31, 1996................... 3.14 1.43 2.84 1.70
Year ended December 31, 1997................... 3.28 1.55 3.00 1.80
DIVIDEND PAYOUT RATIO:
Year ended December 31, 1997................... 88.7%(b) 241.7%(b) 123.9%(b) 123.9%(b)
</TABLE>
- ------------------------
(a) The pro forma combined dividends per share were based on the sum of the
historical dividends declared by AEP and CSW divided by the pro forma
average number of AEP shares outstanding. The pro forma average number of
AEP shares was calculated by multiplying the average number of outstanding
CSW shares during the year by the exchange ratio and adding the result to
the average number of outstanding AEP shares during the year. The pro forma
combined dividends per share are not necessarily indicative of the level of
dividends after the consummation of the merger. The current annual dividend
rate per AEP share is $2.40. AEP does not currently anticipate making any
changes to its dividend. However, the AEP Board of Directors will continue
to evaluate the financial condition and earnings of AEP and the continuing
appropriateness of the dividend. If the pro forma combined dividends per
share were based on AEP's current annual dividend rate of $2.40 per share,
the pro forma combined dividends per AEP share would be $2.40 for each of
the years ended December 31, 1995, 1996 and 1997 and the pro forma
equivalent combined dividend per CSW share would be $1.44 for each of the
years ended December 31, 1995, 1996 and 1997.
(b) The dividend payout ratio before an extraordinary loss from UK windfall tax
was 73.1% for AEP and 112.3% for CSW and 86.6% for pro forma combined per
AEP share and pro forma equivalent combined per CSW share.
See "Notes to Selected Historical and Unaudited Pro Forma Combined Condensed
Financial Data" on page 18.
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COMPARATIVE MARKET PRICE INFORMATION
AEP. The AEP shares are listed for trading on the New York Stock Exchange,
Inc. ("NYSE") under the symbol "AEP." The following table sets forth, for the
fiscal quarters indicated, the dividends paid and the high and low sales prices
of AEP shares as reported on the NYSE Composite Transactions, in each case based
on published financial sources.
<TABLE>
<CAPTION>
AEP
--------------------------------
HIGH LOW DIVIDENDS
------- ------- -----------
<S> <C> <C> <C>
1996
First Quarter............................................................................ 44 3/4 40 1/8 0.60
Second Quarter........................................................................... 42 3/4 38 5/8 0.60
Third Quarter............................................................................ 43 1/8 40 0.60
Fourth Quarter........................................................................... 42 1/2 39 1/2 0.60
1997
First Quarter............................................................................ 43 3/16 40 0.60
Second Quarter........................................................................... 42 1/2 39 1/8 0.60
Third Quarter............................................................................ 46 5/8 41 1/2 0.60
Fourth Quarter........................................................................... 52 45 1/4 0.60
1998
First Quarter............................................................................ 55 11/16 47 13/16 0.60
Second Quarter (through April 13, 1998).................................................. 50 3/4 48 5/8 N.A.
</TABLE>
CSW. The CSW shares are listed for trading on the NYSE and the Chicago
Stock Exchange under the symbol "CSR." The following table sets forth, for the
fiscal quarters indicated, the dividends paid and the high and low sales prices
of CSW shares as reported on the NYSE Composite Transactions, in each case based
on published financial sources.
<TABLE>
<CAPTION>
CSW
--------------------------------
HIGH LOW DIVIDENDS
------- ------- -----------
<S> <C> <C> <C>
1996
First Quarter............................................................................ 28 1/2 26 3/8 0.435
Second Quarter........................................................................... 28 7/8 26 1/2 0.435
Third Quarter............................................................................ 28 1/2 25 3/4 0.435
Fourth Quarter........................................................................... 28 25 1/2 0.435
1997
First Quarter............................................................................ 26 20 3/4 0.435
Second Quarter........................................................................... 22 1/4 18 0.435
Third Quarter............................................................................ 22 9/16 19 1/2 0.435
Fourth Quarter........................................................................... 27 1/2 20 0.435
1998
First Quarter............................................................................ 27 7/8 26 1/4 0.435
Second Quarter (through April 13, 1998).................................................. 27 1/4 26 9/16 N.A.
</TABLE>
EQUIVALENT PER SHARE DATA. The information presented in the table below
represents closing sale prices reported on the NYSE Composite Transactions for
both AEP shares and CSW shares, on December 19, 1997, the last trading day
immediately preceding the public announcement of the proposed merger, and on
April , 1998, the last practicable day for which closing sale prices were
available at the time of the mailing of this Joint Proxy Statement/Prospectus,
as well as the "equivalent per share price" of CSW shares on such dates. AEP and
CSW shareholders should obtain current market quotations for the AEP shares and
the CSW shares. The "equivalent per share price" of CSW shares represents the
closing
13
<PAGE>
sale price per share reported on the NYSE Composite Transactions for AEP shares
at such specified date, multiplied by the exchange ratio of 0.60.
<TABLE>
<CAPTION>
AEP CSW CSW
SHARE SHARE EQUIVALENT
PRICE PRICE PER SHARE PRICE
----------- ----------- ---------------
<S> <C> <C> <C>
December 19, 1997................................................................ $ 52 $ 26 $ 31.20
April , 1998................................................................... $ $ $
</TABLE>
Following the consummation of the merger, CSW shares will cease to be traded
on the NYSE and the Chicago Stock Exchange.
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
AEP and CSW are providing the following financial information to aid you in
your analysis of the financial aspects of the merger. This information is only a
summary and you should read it in conjunction with the historical financial
statements of AEP and CSW and the related notes contained in the annual reports
and other information that AEP and CSW have previously filed with the SEC. See
"Where You Can Find More Information" on page 137.
SELECTED HISTORICAL FINANCIAL DATA OF AEP
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENTS DATA
Operating Revenues................................................ $ 5,269 $ 5,505 $ 5,670 $ 5,849 $ 6,161
Operating Expenses................................................ 4,340 4,573 4,705 4,841 5,177
--------- --------- --------- --------- ---------
Operating Income.................................................. 929 932 965 1,008 984
Income Before Extraordinary Item.................................. 354 500 530 587 620
Extraordinary Loss--U.K. Windfall Tax............................. -- -- -- -- (109)
Net Income........................................................ 354 500 530 587 511
Earnings per Common Share:
Before Extraordinary Item....................................... $ 1.92 $ 2.71 $ 2.85 $ 3.14 $ 3.28
Extraordinary Loss.............................................. -- -- -- -- (0.58)
--------- --------- --------- --------- ---------
Net Income...................................................... $ 1.92 $ 2.71 $ 2.85 $ 3.14 $ 2.70
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends Declared per Common Share............................... $ 2.40 $ 2.40 $ 2.40 $ 2.40 $ 2.40
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA
Total Assets...................................................... $ 15,359 $ 15,736 $ 15,900 $ 15,883 $ 16,615
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capitalization:
Long-term Debt (a).............................................. $ 4,995 $ 4,980 $ 5,057 $ 4,884 $ 5,424
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption........................... 268 233 148 90 47
Subject to Mandatory Redemption (a)........................... 501 590 523 510 128
Common Shareholders' Equity..................................... 4,151 4,229 4,340 4,545 4,677
--------- --------- --------- --------- ---------
Total Capitalization.............................................. $ 9,915 $ 10,032 $ 10,068 $ 10,029 $ 10,276
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Obligations Under Capital Leases (a).............................. $ 284 $ 400 $ 405 $ 414 $ 538
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Book Value per Common Share....................................... $ 22.50 $ 22.83 $ 23.25 $ 24.15 $ 24.62
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Including portion due within one year.
See "Notes to Selected Historical and Unaudited Pro Forma
Combined Condensed Financial Data".
15
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CSW
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENTS DATA
Operating Revenues.................................................. $ 3,084 $ 3,105 $ 3,143 $ 5,155 $ 5,268
Operating Expenses.................................................. 2,641 2,550 2,522 4,360 4,533
--------- --------- --------- --------- ---------
Operating Income.................................................... 443 555 621 795 735
Income From Continuing Operations................................... 249 369 377 297 329
Discontinued Operations............................................. 13 25 25 132 --
Income Before Extraordinary Item.................................... 262 394 402 429 329
Extraordinary Loss--U.K. Windfall Tax............................... -- -- -- -- (176)
Cumulative Effect of Change in Accounting Principles................ 46 -- -- -- --
Net Income for Common Stock......................................... 308 394 402 429 153
Earnings per Common Share (basic and diluted):
Continuing Operations............................................. $ 1.32 $ 1.95 $ 1.97 $ 1.43 $ 1.55
Discontinued Operations........................................... 0.07 0.13 0.13 0.64 --
Extraordinary Loss................................................ -- -- -- -- (0.83)
Cumulative Effect of Change in Accounting Principles.............. 0.24 -- -- -- --
--------- --------- --------- --------- ---------
Net Income........................................................ $ 1.63 $ 2.08 $ 2.10 $ 2.07 $ 0.72
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends Declared per Common Share................................. $ 1.62 $ 1.70 $ 1.72 $ 1.74 $ 1.74
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA
Total Assets...................................................... $ 10,604 $ 11,066 $ 13,869 $ 13,332 $ 13,451
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capitalization:
Long-term Debt (a)(b)........................................... $ 2,769 $ 2,946 $ 3,943 $ 4,227 $ 3,937
Certain Subsidiary-obligated, Mandatorily Redeemable, Preferred
Securities of Subsidiary Trusts............................... -- -- -- -- 335
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption........................... 292 292 292 292 176
Subject to Mandatory Redemption (a)........................... 64 36 35 34 27
Common Stockholders' Equity..................................... 2,930 3,052 3,178 3,802 3,556
--------- --------- --------- --------- ---------
Total Capitalization.............................................. $ 6,055 $ 6,326 $ 7,448 $ 8,355 $ 8,031
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Book Value per Common Share....................................... $ 15.55 $ 16.01 $ 16.48 $ 17.98 $ 16.76
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(a) Including portion due within one year.
(b) Including capital lease obligations.
See "Notes to Selected Historical and Unaudited Pro Forma
Combined Condensed Financial Data".
16
<PAGE>
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma combined condensed financial data
combines the historical consolidated balance sheets and statements of income of
AEP and CSW, including their respective subsidiaries, after giving effect to the
merger, assuming the merger had been effective for all periods presented. This
information should be read in conjunction with the historical financial
statements. These statements were 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 hereto. 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 as of which, or at the beginning of the periods
for which, the merger is being given effect, nor is it necessarily indicative of
future operating results or financial position. See "Unaudited Pro Forma
Combined Condensed Financial Statements."
<TABLE>
<CAPTION>
(IN MILLIONS--EXCEPT
PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
INCOME STATEMENTS DATA
Operating Revenues.................................................................. $ 8,761 $ 10,945 $ 11,352
Operating Expenses.................................................................. 7,211 9,196 9,671
--------- --------- ---------
Operating Income.................................................................... 1,550 1,749 1,681
Income From Continuing Operations................................................... 907 884 949
Discontinued Operations............................................................. 25 132 --
Income Before Extraordinary Item.................................................... 932 1,016 949
Extraordinary Loss--U.K. Windfall Tax............................................... -- -- (285)
Net Income.......................................................................... 932 1,016 664
Earnings per Common Share (basic and diluted):
Continuing Operations............................................................. $ 3.02 $ 2.84 $ 3.00
Discontinued Operations........................................................... 0.08 0.42 --
Extraordinary Loss................................................................ -- -- (0.90)
--------- --------- ---------
Net Income........................................................................ $ 3.10 $ 3.26 $ 2.10
--------- --------- ---------
--------- --------- ---------
Dividends Declared per Common Share................................................. $ 2.58 $ 2.59 $ 2.60
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEETS DATA
Total Assets........................................................................ $ 29,769 $ 29,215 $ 30,066
--------- --------- ---------
--------- --------- ---------
Capitalization:
Long-term Debt (a)(b)............................................................. $ 9,405 $ 9,525 $ 9,899
Certain Subsidiary--obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts............................................................... -- -- 335
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption............................................. 440 382 223
Subject to Mandatory Redemption (a)............................................. 558 544 155
Common Shareholders' Equity....................................................... 7,518 8,347 8,183
--------- --------- ---------
Total Capitalization................................................................ $ 17,921 $ 18,798 $ 18,795
--------- --------- ---------
--------- --------- ---------
Book Value per Common Share......................................................... N.A. N.A. $ 25.79
---------
---------
</TABLE>
- ------------------------
(a) Including portion due within one year.
(b) Including capital lease obligations.
N.A. = Not Applicable.
See "Notes to Selected Historical and Unaudited Pro Forma
Combined Condensed Financial Data."
17
<PAGE>
NOTES TO SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
1. Pro forma common share amounts give effect to the conversion of each
outstanding CSW share into 0.60 of an AEP share as provided in the merger
agreement.
2. Certain revenues, expenses, assets and liabilities of CSW have been
reclassified to conform with AEP's presentation. The effects of accounting
policy differences are immaterial and have not been adjusted in the selected
unaudited pro forma combined condensed financial data.
3. In November 1995, CSW announced its intention to commence a tender offer for
SEEBOARD plc, a regional electricity company in the United Kingdom. By April
1996 CSW acquired control of 100% of SEEBOARD plc for an aggregate adjusted
purchase price of approximately $2.1 billion. The acquisition was accounted
for as a purchase and SEEBOARD plc is included in CSW financial information
on a consolidated basis beginning in December 1995.
4. In June 1996, CSW sold Transok, an intrastate natural gas gathering,
transmission, marketing and processing company for approximately $890
million. Transok's results of operations are shown as discontinued
operations in all applicable statements of income through 1996.
5. AEP and New Century Energies, Inc. acquired a regional electricity company
in the United Kingdom, Yorkshire Electricity Group plc, through an
equally-owned joint venture in April 1997. Total consideration paid by the
joint venture was approximately $2.4 billion which was financed by a
combination of equity and non-recourse debt. AEP uses the equity method of
accounting for its investment in Yorkshire Electricity Group plc which is
included in other property and investments. The earnings from the investment
in Yorkshire Electricity Group plc excluding extraordinary items (see Note
6) are included in nonoperating income.
6. In July 1997 the British government enacted a law that imposed on certain
privatized businesses a one-time windfall tax on a revised privatization
value which originally had been computed in 1990. The windfall tax is
actually an adjustment of the original privatization price by the U.K.
government. The pro forma windfall tax liability attributable to AEP's
interest in Yorkshire Electricity Group plc and CSW's interest in SEEBOARD
plc of $285 million is reported as an extraordinary loss.
7. The data assumes the business combination was accounted for as a pooling of
interests and was completed prior to the periods presented. Pro forma
equivalent and pro forma per share amounts give effect to the conversion of
each outstanding CSW share into 0.60 of an AEP share. The pro forma combined
dividends per share were based on the sum of the historical dividends
declared by AEP and CSW divided by the pro forma average number of AEP
shares outstanding. The pro forma average number of AEP shares was
calculated by multiplying the average number of outstanding CSW shares
during the year by the exchange ratio and adding the result to the average
number of outstanding AEP shares during the year. The pro forma combined
dividends per share are not necessarily indicative of the level of dividends
after the consummation of the merger. The current annual dividend rate per
AEP share is $2.40. AEP does not currently anticipate making any changes to
its dividend. However, the AEP Board of Directors will continue to evaluate
the financial condition and earnings of AEP and the continuing
appropriateness of the dividend. If the pro forma combined dividends per
share were based on AEP's current annual dividend rate of $2.40 per share,
the pro forma combined dividends per AEP share would be $2.40 for each of
the years ended December 31, 1995, 1996 and 1997 and the pro forma
equivalent combined dividend per CSW share would be $1.44 for each of the
years ended December 31, 1995, 1996 and 1997.
18
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995:
(i) Certain statements, including possible or assumed future results of
operations of AEP and CSW contained in "The Merger--Background of the
Merger," "The Merger--Reasons for the Merger", "The Merger--Recommendations
of the Board of Directors," "The Merger--Opinion of Financial Advisor to
AEP" and "The Merger--Opinion of Financial Advisor to CSW," including any
forecasts, projections and descriptions of anticipated cost savings or other
synergies referred to therein, and certain statements incorporated by
reference from documents filed with the Securities and Exchange Commission
(the "SEC") by AEP and CSW including any statements contained herein or
therein regarding the development or possible or assumed future results of
operations of AEP's and CSW's businesses, the markets for AEP's and CSW's
services and products, anticipated capital expenditures, regulatory
developments, competition or the effects of the merger of a wholly-owned
subsidiary of AEP ("Sub") with and into CSW (the "Merger"),
(ii) any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends" or similar expressions, and
(iii) other statements contained or incorporated by reference herein
regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. AEP and CSW stockholders are cautioned not to place
undue reliance on such statements, which speak only as of the date thereof.
Among the factors that could cause actual results to differ materially are:
electric load and customer growth; abnormal weather conditions; available
sources and cost of fuel and generating capacity; the speed and degree to which
competition enters the power generation, wholesale and retail sectors of the
electric utility industry; state and federal regulatory and/or legislative
initiatives that increase competition, threaten cost and investment recovery and
impact rate structures; the ability of the combined company to successfully
reduce its cost structure; conditions imposed by regulators in connection with
the regulatory approval process related to the Merger; the degree to which the
combined company is able to retain and develop additional nonregulated business
ventures and the results of such ventures; the economic climate and growth in
the service territories of AEP and CSW following the Merger; economies generated
by the Merger; inflationary trends and interest rates; and other risks detailed
from time to time in the reports filed with the SEC by AEP and CSW.
The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by AEP or CSW or persons acting on its or their
behalf. Except for their ongoing obligations to disclose material information as
required by the federal securities laws, neither AEP nor CSW undertakes any
obligation to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
19
<PAGE>
RISK FACTORS
SHAREHOLDERS OF AEP AND STOCKHOLDERS OF CSW SHOULD CONSIDER CAREFULLY ALL
THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING
THE FOLLOWING FACTORS:
RISKS RELATED TO THE MERGER
UNCERTAINTIES IN INTEGRATING THE COMPANIES AND ACHIEVING COST SAVINGS
CSW and AEP have entered into the Agreement and Plan of Merger dated as of
December 21, 1997 (the "Merger Agreement") with the expectation that the Merger
will result in certain benefits, including, without limitation, cost savings,
operating efficiencies, revenue enhancements and other synergies. See "The
Merger -- Reasons for the Merger", "-- Recommendations of the Boards of
Directors." Achieving the benefits of the Merger will depend in part upon the
integration of the businesses of AEP and CSW in an efficient manner, and there
can be no assurance that this will occur. The consolidation of operations will
require substantial attention from management. Any diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on the revenues, levels of expenses
and operating results of the combined company. There can be no assurance that
the combined company will realize any of the anticipated benefits of the Merger.
For a discussion of other factors and assumptions related to the synergy
estimates, see "The Merger -- Reasons for the Merger", "-- Recommendations of
the Boards of Directors."
NECESSITY OF RECEIVING GOVERNMENTAL APPROVALS PRIOR TO THE MERGER
The consummation of the Merger is conditioned upon receipt of approvals of
the SEC under the Public Utility Holding Company Act of 1935, as amended (the
"1935 Act"), the Nuclear Regulatory Commission (the "NRC") under the Atomic
Energy Act of 1954, as amended (the "Atomic Energy Act"), the Federal Energy
Regulatory Commission (the "FERC") under the Federal Power Act, as amended (the
"Federal Power Act"), the Federal Communications Commission (the "FCC") under
the Communications Act of 1934, as amended (the "Communication Act"), and
approvals of the Arkansas Public Service Commission (the "Arkansas Commission"),
the Louisiana Public Service Commission (the "Louisiana Commission") and the
Oklahoma Corporation Commission (the "Oklahoma Commission"), a determination by
the Public Utility Commission of Texas (the "Texas Commission") that the Merger
is consistent with the public interest under applicable state laws, and the
expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). In addition, the approval or non-opposition of certain state regulatory
commissions and the SEC is also required with respect to various inter-affiliate
agreements to be entered into or amended in connection with the Merger. In
addition, regulatory commissions of states where AEP's and CSW's utility
subsidiaries operate as well as other parties have the ability to intervene in
federal and state regulatory proceedings.
There can be no assurance as to the timing of the required regulatory
approvals, the ability to obtain such approvals or that such approvals will
contain satisfactory terms and conditions. It is a condition to the consummation
of the Merger that final orders from various federal and state commissions
described above have been obtained and do not impose terms, conditions, or
qualifications that, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the combined company. There can be
no assurance that any such approvals will be obtained, or if obtained, will not
contain terms, conditions or qualifications that cause such approvals to fail to
satisfy such condition to the consummation of the Merger or that such orders
will not be appealed by intervenors to the appropriate courts. See "Regulatory
Approvals."
SUBSTANTIAL DILUTION OF VOTING INTEREST OF AEP SHAREHOLDERS
Based on the capitalization of AEP and CSW as of April 8, 1998 and that, in
the merger, CSW stockholders will receive .60 (the "Exchange Ratio") of a share
of common stock, par value $6.50 per share
20
<PAGE>
of AEP ("AEP Shares"), holders of AEP Shares immediately before the Merger will
own securities representing approximately 59.9% of the voting power of AEP
Shares immediately following consummation of Merger, without regard to shares
issuable upon the exercise of options, rights or warrants. This will constitute
substantial dilution of the voting interest in AEP of the AEP shareholders.
THE EFFECT OF STOCK PRICE FLUCTUATIONS ON THE CONSIDERATION TO BE RECEIVED
BY THE HOLDERS OF CSW SHARES IN THE MERGER
The relative prices of shares of common stock, par value $3.50 per share of
CSW (the "CSW Shares") and AEP Shares at the effective time of the Merger may
vary significantly from the prices as of the date of execution of the Merger
Agreement, the date hereof or the date of the shareholder meetings. These
variances may be due to changes in the businesses, operations, results and
prospects of AEP or CSW, market assessments of the likelihood that the Merger
will be consummated and the timing thereof, the effect of any conditions or
restrictions imposed on or proposed with respect to the combined company by
regulatory agencies in connection with or following consummation of the Merger,
general market and economic conditions, and other factors. For example, between
April 9, 1997 and April 9, 1998, the closing sales price of the AEP Share has
ranged from a high of $52 to a low of $39 5/8; the closing sales price of the
CSW Shares during the same period has ranged from a high of $27 13/16 to a low
of $18 1/4. In addition, the stock market generally has experienced significant
price and volume fluctuations. These market fluctuations could have a material
adverse effect on the market or liquidity of the AEP Shares. The Exchange Ratio
fixes the consideration to be received by the stockholders of CSW at .60 of an
AEP Share for each CSW Share, without any minimum or maximum value per share
restrictions. There can be no assurance as to the market price of the AEP Shares
as of the effective time of the Merger (the "Effective Time"), and therefore
there is no assurance as to the value of the consideration to be received by the
CSW stockholders in the Merger.
REDUCTION OF DIVIDENDS TO BE RECEIVED BY CSW STOCKHOLDERS
Based on the AEP current dividend of $2.40 per share and the Exchange Ratio,
CSW's stockholders would receive $1.44 per share in dividends upon consummation
of the Merger, which represents a reduction in the CSW stockholders' dividend
payout ratio. On April 17, 1997, CSW announced its regular quarterly dividend on
the CSW Shares of $0.435 per share, which represents an implied annual dividend
rate of $1.74 per CSW Share and a dividend payout ratio of 91% of earnings per
common share. The current CSW dividend payout ratio is significantly higher than
the AEP dividend payment ratio. The historical dividend payout ratio per CSW
Share for the year ended December 31, 1997 was 241.7%, compared to 88.7% per AEP
Share. AEP does not anticipate making any changes to its dividend policy
following the Merger; however, the AEP Board will continue to evaluate the
financial condition and earnings of AEP and the appropriateness of its dividend
policy. See "COMPARATIVE PER SHARE DATA".
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF AEP AND CSW
COMPETITIVE AND REGULATORY CONDITIONS
The Merger will combine two companies that share a common regulatory and
competitive environment as well as a number of factors currently affecting
certain electric utilities, including relatively high levels of debt and
competition from municipal and other alternative providers of electric service.
The electric utility industry has been undergoing dramatic structural change for
several years, becoming increasingly competitive. This evolution is due to,
among other things, the Energy Policy Act of 1992 and the issuance by FERC in
1996 of certain orders which have further opened the transmission systems of
electric utilities to use by third parties. As a result of the Merger, these
factors may affect the combined company to a greater degree than would be the
case for either AEP or CSW on a stand-alone basis.
21
<PAGE>
ENVIRONMENTAL RISK FACTORS
AEP's and CSW's electric utility subsidiaries are subject to regulation by
federal, state and local authorities with regard to air and water-quality
control and other environmental matters. It is expected that costs related to
environmental requirements (including any changes in environmental statutes and
regulations) will eventually be reflected in the rates of such subsidiaries.
However, there can be no assurance that all environmental costs will be
recovered. Certain proposed changes to federal air-quality control regulations
and requirements could have adverse effects on AEP's and CSW's electric utility
subsidiaries and on the post-Merger combined company. For example, the United
States Environmental Protection Agency (the "USEPA") has recently revised
ambient air quality standards for ozone and particulate matter. While those
standards do not mandate emission levels for facilities such as electric
generating plants, they may result in more areas being designated as
non-attainment areas for those two pollutants, and states may be required to
develop strategies to reduce such pollutants, including lowering emission levels
for electric generating plants. With respect to ozone, the USEPA promulgated a
new 8-hour standard of 80 parts per billion ozone in ambient air. The USEPA also
issued state implementation plan deficiency notices to various states (including
each of the states in which AEP's electric utility subsidiaries operate) calling
for implementation of plans to reduce NOx emissions consistent with the new
8-hour ozone standard, based mainly on a proposed reduction of power plant NOx
emissions to 0.15 lb./ mmBtu (approximately 85% below 1990 levels). With respect
to particulate matter emissions, the USEPA promulgated a new standard for fine
particulate matter less than 2.5 microns in size. In addition, the USEPA intends
to engage in studies, which may lead to regulation of mercury emissions by
electric utilities in the future. Although the costs of meeting revised USEPA
ambient air standards for ozone and particulate matter, along with other future
environmental laws and regulations, cannot be precisely predicted at this time,
such costs could be significant to AEP, and to lesser degree, CSW, as well as to
the combined company.
THE AEP MEETING
This Joint Proxy Statement/Prospectus is first being mailed to shareholders
of AEP on or about April , 1998 in connection with the solicitation of proxies
by the AEP Board of Directors for use at the annual meeting of shareholders of
AEP (the "AEP Meeting") to be held at The Ohio State University's Fawcett
Center, 2400 Olentangy River Road, Columbus, Ohio on May 27, 1998, at 9:30 a.m.,
local time, and at any adjournment or postponement thereof.
MATTERS TO BE CONSIDERED
At the AEP Meeting, holders of AEP Shares will consider and vote upon
proposals to (i) approve the issuance of AEP Shares in the Merger (the "Share
Issuance"); (ii) approve an amendment to the Restated Certificate of
Incorporation of AEP (the "AEP Charter") to increase the number of authorized
AEP Shares from 300,000,000 to 600,000,000 (the "Charter Amendment"); (iii)
elect 11 directors to the AEP Board of Directors (the "AEP Board"); (iv) ratify
the appointment of Deloitte & Touche LLP as AEP's independent auditors for 1998
and (v) transact such other business as may properly come before the AEP Meeting
or any adjournment(s) or postponement thereof.
THE BOARD OF DIRECTORS OF AEP HAS BY THE UNANIMOUS VOTE OF THE DIRECTORS
PRESENT APPROVED THE MERGER AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS
CONTEMPLATED THEREBY, AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE SHARE ISSUANCE,
FOR THE CHARTER AMENDMENT, FOR THE PROPOSED SLATE OF AEP DIRECTORS AND FOR THE
RATIFICATION OF AEP'S INDEPENDENT AUDITORS.
Approval by the holders of AEP Shares of the Share Issuance is required by
the NYSE because the number of AEP Shares to be issued in the Merger is expected
to exceed 20% of the AEP Shares outstanding immediately prior to the Share
Issuance.
22
<PAGE>
The Charter Amendment increasing the number of authorized AEP Shares from
300,000,000 to 600,000,000 will enable AEP to have a sufficient number of shares
for the Share Issuance. If the Merger is consummated, AEP estimates that up to
130,000,000 AEP Shares would be required for issuance in connection with the
Merger (including the AEP Shares issuable upon exercise of CSW stock options
outstanding at the Effective Time).
While AEP has no present intention of issuing any of the shares sought to be
authorized that are not required to be issued in connection with the Merger, AEP
believes that the availability of additional authorized shares would provide it
with the ability to respond to future business needs and opportunities. The
additional authorized shares would be available for issuance by AEP from time to
time after the Effective Time without further action or authorization by
shareholders (except as required by law or by a national securities exchange) in
connection with possible investment opportunities, acquisitions of assets and
other companies or for other corporate purposes as determined by the AEP Board.
Such other corporate purposes might include raising additional capital funds
through offerings of AEP Shares or of equity or debt securities convertible into
or exchangeable for AEP Shares and the issuance of AEP Shares in connection with
the employee benefit plans and executive compensation plans of AEP and its
subsidiaries. If such additional authorized shares are issued to other than
existing holders of AEP Shares, the percentage interest of such holders in AEP
would be reduced. Although the existence or issuance of authorized but unissued
shares of AEP capital stock could, under certain circumstances, have an anti-
takeover effect, AEP has no present intention to issue such shares for
anti-takeover purposes.
The Share Issuance will not be effected unless the Merger is consummated.
The Charter Amendment will be effected, if approved by AEP shareholders,
regardless of whether the Merger is consummated. Approval of both the Share
Issuance and the Charter Amendment by the holders of AEP Shares are conditions
to the consummation of the Merger.
At the AEP Meeting, holders of AEP Shares will also be asked to vote upon
proposals for the election of the directors to the AEP Board, ratification of
the appointment of Deloitte & Touche LLP as AEP's independent auditors for 1998
and such other business as may properly come before the AEP Meeting.
RECORD DATE; VOTING RIGHTS; REQUIRED VOTE; CONFIDENTIAL VOTING
The holders of a majority in interest of the outstanding AEP Shares entitled
to vote must be present in person or by proxy at the AEP Meeting in order for a
quorum to be present. Only holders of record of AEP Shares at the close of
business on April 8, 1998 (the "AEP Record Date"), will be entitled to receive
notice of and to vote at the AEP Meeting. On the AEP Record Date, AEP had issued
and outstanding 190,378,571 AEP Shares. As of the AEP Record Date, the AEP
Shares were held by approximately 142,049 shareholders of record. Each AEP Share
entitled to vote at the AEP Meeting entitles its holder to one vote, except with
respect to the election of directors, for which voting is cumulative.
Abstentions and broker non-votes (i.e shares held by brokers or nominees which
are represented at a meeting but with respect to which the broker or nominee is
not empowered to vote on a particular matter) will be counted as shares present
for purposes of determining the presence or absence of a quorum at the AEP
Meeting.
Approval of the Charter Amendment requires the affirmative vote of a
majority of the outstanding AEP Shares. In determining whether this proposal has
received the requisite number of affirmative votes, abstentions and shares which
brokers do not have the authority to vote in the absence of timely instructions
from the beneficial owners ("broker non-votes") will not be counted as votes
cast and will have the same effect as a vote against the proposal. Abstentions
may be specified with respect to approval of the Charter Amendment by properly
marking the "ABSTAIN" box on the proxy for such proposal.
Approval of the Share Issuance requires the affirmative vote of a majority
of the votes cast on the proposal, provided that the total votes cast on the
proposal represent a majority of the outstanding AEP Shares entitled to vote
thereon. Abstentions may be specified with respect to approval of the Share
Issuance by properly marking the "ABSTAIN" box on the proxy for such proposal.
For purposes of the
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NYSE requirements, in determining (i) the total number of votes cast on such
proposal and (ii) whether such proposal has been approved by a majority of the
votes cast, abstentions will be counted and have the same effect as votes cast
against the Share Issuance while broker non-votes will not be counted as votes
cast.
In the election of directors, voting is cumulative. This means each AEP
shareholder has the right to cast as many votes in the aggregate as equals the
number of votes to which that shareholder is entitled (one vote for each AEP
Share held) multiplied by eleven, the number of directors to be elected. Each
AEP shareholder may cast the whole number of votes so computed for one
candidate, or may distribute votes among the candidates, as the shareholder
chooses. The proxies designated by the Board of Directors will not cumulate the
votes of shares they represent. Directors will be elected by a plurality of
votes cast by the holders of AEP Shares entitled to vote at the AEP Meeting.
"Plurality" means that the individuals who receive the largest number of votes
cast are elected as directors up to the maximum number of directors to be chosen
at the meeting. An abstention may be specified with respect to voting for
directors, by properly marking the "WITHHOLD" box on the proxy. Votes withheld
with respect to one or more of the nominees and broker non-votes will not be
counted as votes cast for such individuals and, accordingly, will have no effect
on the outcome of the vote.
Ratification of the appointment of AEP's independent auditors requires the
affirmative vote of a majority of the shares present in person or by proxy at
the AEP Meeting and entitled to be voted. An abstention may be specified with
respect to voting on such proposal, by properly marking the "ABSTAIN" box on the
proxy for such proposal. In determining whether this proposal has received the
requisite number of affirmative votes, abstentions and broker non-votes will not
be counted as votes cast and, accordingly, will have no effect on the outcome of
the vote.
This year, record holders of AEP Shares can also vote their shares by using
a toll-free telephone number or the internet. Instructions for using these
convenient new services are set forth on the enclosed proxy card.
CONFIDENTIAL VOTING. It is the policy of AEP that shareholders be provided
privacy in voting. All proxy (voting instruction) cards and ballots, which
identify shareholders, are held confidential, except as may be necessary to meet
any applicable legal requirements. Proxy cards are returned in envelopes
addressed to an independent third-party tabulator, who receives, inspects, and
tabulates the proxies. Voted proxies and ballots are not seen by nor reported to
AEP except (i) in aggregate number or to determine if (rather than how) a
shareholder has voted, (ii) in cases where shareholders write comments on their
proxy cards, or (iii) in a contested proxy solicitation.
As of January 1, 1998, directors and executive officers of AEP and their
affiliates were beneficial owners of an aggregate of 146,369 (less than 1%) of
the outstanding AEP Shares.
VOTING OF PROXIES
AEP Shares represented by all properly executed proxies received in time for
the AEP Meeting will be voted at such meetings in the manner specified by the
holders thereof. If no voting direction is indicated on the proxy card, the
shares will be considered votes FOR the Charter Amendment, FOR the Share
Issuance, FOR the election of the nominees for director (without cumulation) and
FOR the appointment of Deloitte & Touche LLP as independent auditors for AEP for
1998. Proxy cards that are not signed or that are not returned are treated as
not voted for any purpose. Proxies relating to "street name" shares that are
voted by brokers will be counted as shares present for purposes of determining
the presence of a quorum on all matters, but will not be treated as shares
having voted at the AEP Meeting as to any proposal as to which authority to vote
is withheld by the broker or with respect to which such broker or nominee is not
empowered to vote.
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It is not expected that any matter other than those referred to herein will
be brought before the AEP Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgment with respect to such matters, unless authority to do so is withheld in
the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed AEP form of proxy does not preclude a
shareholder from voting in person. An AEP shareholder may revoke a proxy at any
time prior to its exercise by filing with the Secretary of AEP a duly executed
revocation or proxy bearing a later date or by voting in person at the meeting.
Attendance at the AEP Meeting will not of itself constitute a revocation of a
proxy.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, AEP and CSW each will bear the cost of its
solicitation of proxies, except that AEP and CSW will share equally the cost of
printing and mailing this Joint Proxy Statement/ Prospectus. In addition to
solicitation by mail, the directors, officers and employees of AEP and its
subsidiaries may solicit proxies from shareholders of AEP by telephone or
telegram or in person. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses in connection therewith. Arrangements will also be made
with brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of shares held of
record by such persons and AEP will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in connection therewith.
Morrow & Co., Inc. will assist in the solicitation of proxies by AEP for a
fee of $50,000, plus reasonable out-of-pocket expenses.
HOLDERS OF AEP SHARES SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IF THE MERGER IS CONSUMMATED, HOLDERS OF AEP SHARES WILL NOT EXCHANGE
SUCH SHARES OR RECEIVE ADDITIONAL AEP SHARES.
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THE CSW MEETING
This Joint Proxy Statement/Prospectus is first being mailed to stockholders
of CSW on or about April , 1998 in connection with the solicitation of proxies
by the CSW Board of Directors (the "CSW Board") for use at the annual meeting of
stockholders of CSW (the "CSW Meeting") to be held at the Dallas Museum of Art,
1717 North Harwood Street, Dallas, Texas, on May 28, 1998, at 10:30 a.m., local
time, and at any adjournment or postponement thereof.
MATTERS TO BE CONSIDERED
At the CSW Meeting, holders of CSW Shares, will consider and vote upon a
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby, including the merger of a wholly-owned subsidiary of AEP
with and into CSW as a result of which each outstanding CSW Share will be
converted into the right to receive 0.60 of an AEP Share and CSW will become a
wholly-owned subsidiary of AEP. CSW'S BOARD OF DIRECTORS HAS DETERMINED THAT THE
TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR
TO, AND IN THE BEST INTERESTS OF, CSW AND ITS STOCKHOLDERS AND RECOMMENDS THAT
CSW STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
At the CSW Meeting, holders of CSW Shares will also be asked to (i) elect
three members of the CSW Board of Directors to hold office as Class II directors
until the CSW annual meeting in 2001, (ii) elect two members of the CSW Board of
Directors to hold office as Class III directors until the CSW annual meeting in
1999 and (iii) ratify the appointment of Arthur Andersen, LLP as CSW's
independent auditors for 1998. THE CSW BOARD OF DIRECTORS HAS NOMINATED E.R.
BROOKS, ROBERT W. LAWLESS AND JAMES L. POWELL FOR ELECTION AS CLASS II DIRECTORS
AND WILLIAM R. HOWELL AND RICHARD L. SANDOR FOR ELECTION AS CLASS III DIRECTORS.
THE CSW BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CSW STOCKHOLDERS VOTE FOR
THE ELECTION OF SUCH PERSONS TO THE CSW BOARD OF DIRECTORS AND THE RATIFICATION
OF ARTHUR ANDERSEN LLP AS CSW'S INDEPENDENT AUDITORS.
THE BOARD OF DIRECTORS OF CSW HAS APPROVED THE MERGER AGREEMENT, THE MERGER
AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS A VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, FOR THE PROPOSED SLATE OF
DIRECTORS AND FOR THE RATIFICATION OF CSW'S INDEPENDENT AUDITORS.
RECORD DATE; VOTING RIGHTS; REQUIRED VOTE
The holders of a majority of the outstanding CSW Shares entitled to vote
must be present in person or by proxy at the CSW Meeting in order for a quorum
to be present. Only holders of record of CSW Shares at the close of business on
April 8, 1998 (the "CSW Record Date"), will be entitled to receive notice of and
to vote at the CSW Meeting. On the CSW Record Date, CSW had issued and
outstanding 212,281,477 CSW Shares. As of the CSW Record Date, the CSW Shares
were held by approximately 64,369 stockholders of record. Each CSW Share
entitled to vote at the CSW Meeting entitles its holder to one vote. Abstentions
and broker non-votes (i.e. shares held by brokers or nominees which are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote on a particular matter) will be counted as shares present for
purposes of determining the presence or absence of a quorum at the CSW Meeting.
The affirmative vote of a majority of the outstanding CSW Shares entitled to
vote thereon is required for approval and adoption of the Merger Agreement.
Abstentions may be specified with respect to approval and adoption of the Merger
by properly marking the "ABSTAIN" box on the proxy for such proposal.
Abstentions and broker non-votes will have the effect of a vote against the
approval and adoption of the Merger Agreement.
Directors will be elected by a plurality of votes cast by the holders of CSW
Shares entitled to vote at the CSW Meeting. "Plurality" means that the
individuals who receive the largest number of votes cast are elected as
directors up to the maximum number of directors to be chosen at the meeting.
Abstentions from
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voting for directors, by properly marking the "WITHHOLD" box on the proxy, as
well as broker non-votes will be tabulated as votes withheld in the election of
directors and will have no influence on the voting results.
Ratification of the appointment of CSW's independent auditors or any other
issue (other than election of directors and approval and adoption of the Merger)
to be voted upon at the CSW Meeting requires the affirmative vote of a majority
of the shares present in person or by proxy at the CSW Meeting and entitled to
be voted. Abstentions will be counted as shares present and entitled to vote and
therefore will have the same effect as a negative vote on whether ratification
has been approved. Broker non-votes will have no influence on such voting
results.
As of December 31, 1997, directors and executive officers of CSW and their
affiliates were beneficial owners of an aggregate of 486,165 shares (less than
1%) of the outstanding CSW Shares.
VOTING OF PROXIES
CSW Shares represented by all properly executed proxies received in time for
the CSW Meeting will be voted at such meeting in the manner specified by the
holders thereof. If no voting direction is indicated on the proxy card, the
shares will be considered votes FOR the approval and adoption of the Merger
Agreement, FOR the election of the nominees for director and FOR the appointment
of Arthur Andersen LLP as independent auditors for CSW for 1998. Proxies
relating to "street name" shares that are voted by brokers will be counted as
shares present for purposes of determining the presence of a quorum on all
matters, but will not be treated as shares having voted at the CSW Meeting as to
any proposal as to which authority to vote is withheld or with respect to which
a broker or nominee is not empowered to vote.
It is not expected that any matter other than those referred to herein will
be brought before the CSW Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgment with respect to such matters, unless authority to do so is withheld in
the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed CSW form of proxy does not preclude a
stockholder from voting in person. A CSW stockholder may revoke a proxy at any
time prior to its exercise by filing with the Secretary of CSW a duly executed
revocation of proxy or a proxy bearing a later date or by voting in person at
the meeting. Attendance at the CSW Meeting will not of itself constitute a
revocation of a proxy.
APPRAISAL RIGHTS
No holders of CSW Shares will be entitled to appraisal rights under Delaware
law if the Merger is approved. Under certain circumstances, the Delaware General
Corporation Law (the "DGCL") entitles a shareholder to exercise its appraisal
rights upon a merger or consolidation of the corporation effected pursuant to
the DGCL if the holder complies with the requirements of Section 262 thereof.
Appraisal rights are available under Section 262 of the DGCL if holders of
shares in a constituent company to a merger, which shares are listed on a
national securities exchange (as the CSW Shares are), are required by the terms
of the merger to accept consideration other than shares of stock of the
surviving corporation, shares of stock of any corporation listed on a national
securities exchange, designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 shareholders, or cash in lieu of
fractional shares. As holders of CSW Shares will receive only AEP Shares, which
are listed on the NYSE, and cash in lieu of fractional shares under the terms of
the Merger Agreement, they are not entitled to appraisal rights under the DGCL.
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SOLICITATION OF PROXIES
Subject to the Merger Agreement, AEP and CSW each will bear the cost of its
solicitation of proxies, except that AEP and CSW will share equally the cost of
printing and mailing this Joint Proxy Statement/ Prospectus. In addition to
solicitation by mail, the directors, officers and employees of CSW and its
subsidiaries may solicit proxies from stockholders of CSW by telephone or
telegram or in person. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses in connection therewith. Arrangements will also be made
with brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of shares held of
record by such persons, and CSW will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in connection therewith.
Innisfree M&A Incorporated will assist in the solicitation of proxies by CSW
for a fee of $50,000, plus reasonable out-of-pocket expenses.
HOLDERS OF CSW SHARES SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IF THE MERGER IS CONSUMMATED, CSW STOCKHOLDERS WILL BE FURNISHED
INSTRUCTIONS FOR EXCHANGING THEIR CSW STOCK CERTIFICATES FOR AEP STOCK
CERTIFICATES AT THAT TIME.
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THE COMPANIES
AMERICAN ELECTRIC POWER COMPANY, INC.
American Electric Power Company, Inc., a New York business corporation and
the issuer of the AEP Shares covered by this Joint Proxy Statement/Prospectus,
has its principal executive offices at 1 Riverside Plaza, Columbus, Ohio
43215-2373. Its telephone number is (614) 223-1000.
AEP was incorporated under the laws of the State of New York in 1906 and
reorganized in 1925. It is a public utility holding company which owns all of
the outstanding shares of common stock of seven domestic electric utility
operating subsidiaries: Appalachian Power Company, Columbus Southern Power
Company, Indiana Michigan Power Company, Kentucky Power Company, Kingsport Power
Company, Ohio Power Company and Wheeling Power Company. Substantially all of the
operating revenues of AEP and its subsidiaries are derived from the furnishing
of electric service. In addition, in recent years AEP has been pursuing various
unregulated business opportunities in the U.S. and worldwide.
The service area of AEP's electric utility subsidiaries covers portions of
the states of Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West
Virginia. The generating and transmission facilities of AEP's subsidiaries are
physically interconnected, and their operations are coordinated, as a single
integrated electric utility system. Transmission networks are interconnected
with extensive distribution facilities in the territories served. The electric
utility subsidiaries of AEP have traditionally provided electric service,
consisting of generation, transmission and distribution, on an integrated basis
to their retail customers. As a result of the changing nature of the electric
business, effective January 1, 1996, AEP's subsidiaries realigned into four
functional business units: Power Generation; Nuclear Generation; Energy
Delivery; and Corporate Development. In addition, the electric utility
subsidiaries began to do business as "American Electric Power." The legal and
financial structure of AEP and its subsidiaries, however, did not change.
In 1997, AEP and New Century Energies, Inc. jointly acquired Yorkshire
Electricity Group plc ("Yorkshire Electricity"), through a holding company owned
equally by each of AEP Resources, Inc. and New Century Energies, Inc. Yorkshire
Electricity is an English independent regional electricity company, principally
engaged in the distribution and supply of electricity to 2.1 million customers.
In addition, a subsidiary of AEP Resources International, Limited has a 70%
interest in Nanyang General Light Electric Co. Ltd., a joint venture in China
organized to develop and build two 125 megawatt coal-fired generating units.
CENTRAL AND SOUTH WEST CORPORATION
CSW, a Delaware corporation, has its principal executive offices at 1616
Woodall Rodgers Freeway, Dallas, Texas 75202-1234. Its telephone number is (214)
777-1000.
CSW is a Dallas-based public utility holding company registered under the
1935 Act. CSW owns all of the common stock of Central Power and Light Company
("CPL"), Public Service Company of Oklahoma ("PSO"), Southwestern Electric Power
Company ("SWEPCO"), and West Texas Utilities Company ("WTU"), collectively, the
"CSW U.S. Electric Operating Companies." CSW also owns all of the common stock
of CSW Services, Inc., CSW Credit, Inc., CSW Energy, Inc., CSW International,
Inc., CSW Communications, Inc., EnerShop Inc. and CSW Energy Services, Inc. and
indirectly owns all of the outstanding share capital of SEEBOARD plc
("SEEBOARD"), a regional electric company in the United Kingdom. In addition,
CSW owns 80% of the outstanding shares of common stock of CSW Leasing, Inc.
CSW U.S. ELECTRIC OPERATING COMPANIES
The CSW U.S. Electric Operating Companies are public utility companies
engaged in generating, purchasing, transmitting, distributing and selling
electricity. The CSW U.S. Electric Operating Companies serve approximately 1.7
million customers in one of the largest combined service territories in the U.S.
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covering approximately 152,000 square miles in portions of Texas, Oklahoma,
Louisiana and Arkansas. The customer base of these companies includes a mix of
residential, commercial and diversified industrial customers. CPL and WTU
operate in portions of south and central west Texas, respectively. PSO operates
in portions of eastern and southwestern Oklahoma, and SWEPCO operates in
portions of northeastern Texas, northwestern Louisiana and western Arkansas.
CSW Services, Inc. performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW system, primarily for the U.S.
Electric Operating Companies. During 1996, CSW functionally reorganized its
domestic utility operations into three organizational units, power generation,
energy delivery and energy services, which are centrally managed from CSW
Services, Inc. The functional unbundling of CSW's vertically integrated
structure is expected to provide a more competitive organizational structure.
Certain employees were reassigned from the U.S. Electric Operating Companies to
CSW Services, Inc. to provide these centrally managed services.
SEEBOARD
SEEBOARD is one of the 12 regional electricity companies in the United
Kingdom. SEEBOARD's principal regulated businesses are the distribution and
supply of electricity. In addition to its distribution and supply businesses,
SEEBOARD is also engaged in other activities, including gas supply, electricity
generation, electrical contracting and retailing.
SEEBOARD's service area covers approximately 3,000 square miles in Southeast
England, extending from the outlying areas of London to the English Channel. The
area has a population of approximately 4.6 million people with significant
portions of the area, such as south London, having a high population density.
OTHER CSW BUSINESS OPERATIONS
CSW Energy, Inc. develops, owns and operates independent power and
cogeneration facilities within the United States. CSW International, Inc.
engages in international activities, including developing, acquiring, financing
and owning exempt wholesale generators and foreign utility companies, either
alone or with local or other partners.
CSW Communications, Inc. develops and operates telecommunications services
primarily consisting of utility automation services and local telephone exchange
services. EnerShop Inc. provides energy services to commercial, industrial,
institutional and governmental customers.
CSW Credit, Inc. purchases, without recourse, accounts receivable from the
CSW U.S. Electric Operating Companies and accounts receivable from certain
non-affiliated parties, subject to limitations imposed under the 1935 Act. CSW
Leasing, Inc. has investments in leveraged leases.
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THE MERGER
GENERAL
AEP, Sub and CSW have entered into the Merger Agreement which provides that,
subject to the satisfaction or waiver of the conditions set forth therein (see
"Conditions to the Consummation of the Merger"), Sub will be merged with and
into CSW, CSW will be the surviving corporation in the Merger (the "Surviving
Corporation") and each CSW Share will be converted into the right to receive
0.60 of an AEP Share together with cash in lieu of fractional AEP Shares.
Contemporaneously with the closing under the Merger Agreement, a Certificate of
Merger will be filed with the Secretary of State of the State of Delaware, and
the Merger will become effective at the time of such filing unless otherwise
provided in the Certificate of Merger.
THE DESCRIPTION OF THE MERGER AGREEMENT CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT, A COPY OF WHICH IS INCLUDED AS ANNEX I TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN BY THIS
REFERENCE.
BACKGROUND OF THE MERGER
GENERAL. AEP and CSW share a common vision of the future and are seeking to
merge in furtherance of their shared strategy to become the nation's preeminent
diversified electric utility. AEP and CSW share the view that the electric
utility industry is in an era of accelerating change that will have a
significant impact on the future competitive position of electric utility
companies and their ability to maintain and increase earnings. Recently, the
electric utility industry has begun a transformation that is being driven by
technological advances, consumer pressures and federal and state legislative and
regulatory initiatives aimed at introducing greater competition in the wholesale
and retail energy markets. AEP and CSW each believe that efficient, low cost
suppliers of energy with a diverse customer base will be best prepared to
compete successfully in the rapidly changing electric energy marketplace.
Historically, competition in the wholesale and retail electric power markets
was limited. In the wholesale market, this was due primarily to difficulties in
obtaining transmission service over utility systems located between potential
buyers and sellers and barriers to entry, including the threat of regulation
under the 1935 Act. Pursuant to the Energy Policy Act of 1992 (the "Energy
Act"), however, Congress authorized the FERC to exempt certain wholesale power
sellers from regulation under the 1935 Act and, in 1996, the FERC issued Orders
888 and 889 under the Energy Act requiring utilities to provide
non-discriminatory, open access transmission service upon request. These
regulatory developments have resulted in an active competitive wholesale market
for electricity. Although the retail market for electricity currently is
considerably less competitive than the wholesale market, most states in which
the utility subsidiaries of AEP and CSW provide retail service, have adopted or
are actively considering legislative or regulatory action that has as its
primary objective permitting retail customers to select their electricity
supplier and obligating utilities to provide transmission and distribution
service to competitors. As a result of these ongoing regulatory activities, the
managements of AEP and CSW believe that there will soon be greatly increased
competition in the retail sector of the business.
Both AEP and CSW believe that these changes are leading to a fundamental
transformation of the electric utility business. They further believe that
electric utility companies face increased business risks and opportunities and,
unless they adapt quickly to the changing environment, will be limited in their
ability to improve earnings. Many electric utilities are pursuing consolidation
to reduce these risks and create new opportunities for earnings growth.
Utilities confronting intensified competition have sought and, AEP and CSW
believe, will continue to seek opportunities to create efficiencies and control
costs through consolidation. AEP and CSW believe that strategic assets, such as
a utility's transmission network and low cost generation assets, will be key
factors in structuring the successful utility of the future and that
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customers in a competitive market will be particularly sensitive to an electric
utility's efficiency and ability to respond to their needs.
For the past several years, AEP and CSW have separately been monitoring the
changes occurring in the electric utility industry and focusing their strategic
planning activities on adapting to an evolving competitive environment. These
ongoing changes in the electric utility industry and strategic planning
activities of AEP and CSW have led each of them to believe that a strategic
merger of the two companies would be the best way to achieve their compatible
long-term strategic goals.
PARTICIPANTS. Set forth below are the principal participants (and their
offices and titles then held) in the discussions and negotiations that resulted
in the Merger Agreement. At certain of the meetings described below under
"Discussions" other employees or financial and legal advisers of AEP or CSW
participated; however, the core members of the management and transaction teams
involved in the discussions and negotiations are listed below.
AEP Management
E. Linn Draper, Jr.--Chairman of the Board, President and Chief Executive
Officer
Donald M. Clements, Jr.--Executive Vice President, Corporate Development
Henry W. Fayne--Senior Vice President, Corporate Planning, Budgeting
Thomas S. Jobes--Managing Director, Corporate Development
Jeffrey D. Cross--Vice President & General Counsel, Corporate Development
CSW Management
E. R. Brooks--Chairman & Chief Executive Officer
Thomas V. Shockley III--President and Chief Operating Officer
Glenn Files--Executive Vice President
Ferd. C. Meyer, Jr.--Senior Vice President and General Counsel
Glenn D. Rosilier--Senior Vice President and Chief Financial Officer
Thomas M. Hagan--Senior Vice President, External Affairs
Venita McCellon-Allen--Senior Vice President, Corporate Development and
Assistant Corporate Secretary
Michael D. Smith--President, Southwestern Electric Power Company
Stephen J. McDonnell--Vice President, Mergers and Acquisitions
DISCUSSIONS. As indicated above, for the past several years, the management
of CSW has been cognizant of the changing industry environment and engaged in a
strategic planning process that was primarily focused on managing the
corporation so that it would be poised to benefit from these changes.
In January 1997, senior management of CSW and AEP, including Mr. Brooks and
Dr. Draper, began to discuss informally, as an adjunct to other discussions
relating to potential international business opportunities, a potential merger
of equals between AEP and CSW (implying a stock for stock exchange at current
market prices without premium). On February 17, 1997, Dr. Draper and Mr.
Clements met with Mr. Brooks and Mr. Shockley in Dallas to continue the
discussions as to whether a merger of equals between AEP and CSW would be
feasible. Following this meeting, Mr. Jobes and Mr. McDonnell were directed to
explore the feasibility of a merger between the companies from a financial and
regulatory point of view. To that end, in March 1997, AEP and CSW engaged joint
advisers to consider regulatory issues. AEP and CSW also engaged a third party
consultant to assist the senior managements of the two companies in an analysis
of the cost savings and other synergies that might result therefrom. The joint
advisers were asked to begin to study the feasibility of the potential merger.
During March and April, AEP and CSW personnel met independently with the joint
advisers to provide information; and Mr. Jobes and Mr. McDonnell spoke by
telephone on several occasions to discuss the work of the joint advisers.
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In March 1997, actions by the Texas Commission, including public comments in
early March by one of the Commissioners and an order in late March by the
Commission reducing rates of Central Power & Light Company, the largest utility
of CSW, in a rate proceeding initiated in 1995 by CP&L, signaled the Texas
electric utility industry that, in the absence of legislative action, the Texas
Commission would not favor a full return on stranded investment during the
transition to retail competition among Texas electric utilities. Legislation
designed to deregulate the Texas electric utility industry, with the concomitant
result of retail competition, was proposed in May 1997 but, despite the support
of the Texas investor owned utilities, was not passed by the Texas legislature
prior to the end of the legislative session in May 1997. In the opinion of CSW
management, the indications of the Commission, combined with the uncertainty of
such legislation passing, caused a substantial decline in the market price of
CSW Shares during March 1997. On March 3, 1997, prior to the Commission actions
mentioned above, the closing market price of the CSW Shares on the New York
Stock Exchange was $24.00; in contrast, by April 17, 1997, the market price of
the CSW Shares had declined to a closing sale price on that date of $18.25.
On April 17, 1997, CSW announced its regular quarterly dividend on the CSW
Shares of $0.435 per share (an implied annual rate of $1.74 per CSW Share). At
this level, the dividend payout ratio was 91% of earnings per common share. In
announcing the dividend, CSW cautioned its stockholders that the CSW Board was
continuing to monitor factors that could affect its dividend, that the recent
rate order in the CP&L rate case, if ultimately upheld, would significantly
affect CP&L's earnings and that the outcome of that case was one of many factors
to be considered by the CSW Board as it reviews CSW's dividend policy.
Mr. Brooks notified Dr. Draper in late April that the decline in the market
price of the CSW Shares rendered a merger of equals between AEP and CSW
impracticable and as a result, CSW terminated the exploratory discussions with
AEP regarding such a merger. They agreed, notwithstanding the termination of
discussions, that AEP and CSW should receive the preliminary results of the work
of the joint advisers. On April 25, 1997, teams led by Mr. Clements and Mr.
Shockley met with the joint advisers in Columbus, Ohio to discuss the
preliminary results of their work. Following consultation with the advisers of
AEP and CSW, the representatives of the two companies were led to believe that a
business combination of the two companies was feasible from a regulatory point
of view.
The decline in the price of CSW Shares provided additional motivation to CSW
management to explore its strategic alternatives, not only to position CSW to
compete effectively in a changed industry environment, but also to restore
shareholder value. As a consequence, CSW management accelerated its examination
of its strategic alternatives.
In late April 1997, the chief executive officer of a large electric utility
company ("Company A") requested Mr. Brooks to resume preliminary conversations
about a possible business combination held earlier in the year. During May 1997,
representatives of CSW met several times with management representatives of
Company A to discuss the feasibility of a combination of the companies. These
discussions also contemplated a merger of equals because the common stock of
Company A was similarly depressed and therefore the market capitalization of the
two companies were comparable. Pursuant to the provisions of a confidentiality
agreement between the companies executed in May 1997, the two companies began
the process of exchanging information necessary to determine the feasibility of
a combination but did not engage in any discussions regarding the terms of any
such combination. These discussions were, from CSW's point of view, tentative
because CSW's management and Board of Directors had not at this time determined
that a business combination was the preferred strategic alternative.
During May and June 1997, CSW management intensified its studies of certain
other electric utility companies that had been identified as potential
candidates for a strategic merger or business combination involving a stock for
stock exchange. Another strategic alternative that was examined by management
during this period was the feasibility of a divestiture of the transmission and
distribution assets of CSW in order to concentrate on the domestic generation
and power marketing businesses and the international electric power business
(the "Asset Divestiture Plan"). In late July 1997, CSW engaged the Dallas office
of
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McKinsey & Co. ("McKinsey") to assist management in its evaluation of the Asset
Divestiture Plan. At a meeting of the CSW Board of Directors on July 17, 1997,
CSW management, together with Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), outlined for the directors potential strategic alternatives available
to CSW to meet the changing industry environment and to restore and enhance
long-term shareholder value, including possible business combinations and
strategic alliances with other companies, the Asset Divestiture Plan and other
options that could be pursued on a stand along basis. No specific companies,
other than AEP and Company A, were identified at this meeting as being possible
business combination candidates.
During late July and August 1997, CSW management, with the assistance of its
advisers, including McKinsey and Morgan Stanley, continued to evaluate the Asset
Divestiture Plan and the process of screening potential business combination
candidates.
As indicated above, CSW management believes that strategic assets, such as a
utility's transmission network and low cost generation, will be key factors in
structuring the successful utility of the future and that premiums will be
placed on efficiency and the ability to respond to the needs of customers. CSW
management further believes that efficient, low cost suppliers of energy with a
diverse customer base will be best prepared to compete successfully in the
rapidly changing electric energy marketplace. Accordingly, the screening
criteria for potential business combination candidates required that any
candidate be of sufficient size to permit the efficient production of low cost
energy and that the candidate have a management strategy focused on reducing or
diversifying exposure to regulatory risks, reducing exposure to stranded
investment, establishing a significant electric power trading capability,
building a national retail and wholesale presence and pursuing growth in
selected international investments. In addition, the screening criteria required
that a business combination with any candidate be feasible from a regulatory
point of view. During this period, CSW management concluded that a stock for
stock business combination with a candidate meeting the screening criteria that
involved a premium over the market price of the CSW Shares was preferable to a
merger of equals with a company whose common stock was similarly depressed.
In August and early September 1997, Mr. Brooks held three meetings with the
chief executive officer of Company A and during those meetings discussed CSW's
progress in evaluating its strategic alternatives. McKinsey began to assist CSW
in its process of screening potential strategic business combination candidates.
During early September 1997, Mr. Brooks, based on a careful examination of the
aforementioned strategic alternatives and intensive study of potential business
combination candidates and information developed by CSW management from that
process, met with Dr. Draper to determine AEP's interest in renewing discussions
regarding a potential business combination and with the chief executive officers
of two other large electric utility companies ("Company B" and "Company C") to
determine their interest, if any, in exploring a possible business combination
with CSW. All expressed strong interest in engaging in preliminary discussions
with CSW.
The Board of Directors of CSW met again on September 10, 1997 and discussed
the progress of CSW management in its ongoing evaluation of potential strategic
alternatives. Subsequently, CSW representatives met with representatives of two
other large electric utility companies. Neither of those companies was then in a
position to enter into discussions regarding a possible business combination.
At a meeting of the Board of Directors on September 27, 1997, CSW management
and McKinsey discussed with the CSW Board their views on the changing conditions
in the electric utility industry generally and, more specifically, in Texas and
the impact of such changing conditions on CSW and its business and prospects.
They also discussed the challenges facing and opportunities available to CSW
under each of the several strategic alternatives that had been under study and
previously discussed by CSW's management with the CSW Board, including a
possible business combination and strategic alternatives that could be pursued
by CSW on a stand-alone basis, and how each of these strategic alternatives
might affect CSW and long-term stockholder value. CSW management and the CSW
Board discussed extensively the impact of the electric utility industry
restructuring, the best means to enhance
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CSW's capabilities in fuel contracting, power sales, trading and asset
acquisitions and CSW's ability to build a national retail presence. At this
point, CSW management advised the directors that management, after extensive
study, had determined not to recommend the Asset Divestiture Plan and explained
the reasons for this determination, which included risks associated with
potential adverse federal income tax consequences, CSW's ability to sell its
transmission and distribution assets for a fair price given regulatory
uncertainty in Texas, its ability successfully to apply the proceeds of any such
sale to the acquisition of additional generation capacity and the barriers to
entry and already significant competition in the electric power trading market.
Morgan Stanley then presented a financial analysis of CSW's strategic
alternatives, including a business combination analysis and an analysis of the
stand-alone alternatives. In conclusion, Mr. Brooks informed the CSW Board of
CSW management's belief that CSW's strategic vision should include reducing or
diversifying exposure to regulatory risks, reducing its exposure to stranded
investment, establishing a significant electric power trading capability,
building a national retail and wholesale presence and pursuing focused growth in
international investments, and that implementation of this strategy would be the
best way to restore and enhance long-term stockholder value. CSW management then
recommended to the CSW Board that CSW seek a strategic combination with a
partner that could enhance CSW's ability to implement its strategic vision. CSW
management further recommended that any strategic combination candidate should
have a comparable strategic vision with that of CSW in order to maximize the
likelihood that the combination would bring the most long-term value to CSW's
stockholders. In the view of CSW management, such a merger candidate should own
generation capacity that would be competitive in a deregulated environment, have
a national presence with a solid reputation in the electric utility industry and
not increase CSW's exposure to stranded costs. Mr. Brooks also informed the CSW
Board that he had been in contact with the chief executive officers of certain
potential strategic combination candidates that, in the view of CSW management,
met these criteria and that several of them were interested in discussing a
merger. At the conclusion of CSW management's presentation, the CSW
Board unanimously authorized CSW management to pursue discussions with companies
that had been identified to the CSW Board as having the potential to contribute
to the realization of CSW's long-term strategy while continuing to evaluate
CSW's stand-alone options.
While CSW management had earlier conveyed to AEP, Company B and Company C
the notion that CSW would not entertain any business combination proposal that
did not, in addition to meeting the screening criteria, include a significant
premium to the CSW Shares market price, in late September 1997 Mr. Brooks
conveyed the same notion to the chief executive officer of Company A. The latter
responded by advising Mr. Brooks that Company A was not in a position to
consider such a premium, and the discussions with Company A were, accordingly,
suspended.
In early October 1997, Mr. Brooks met with the chief executive officer of a
smaller electric utility company at the request of the latter. During the
meeting, the latter expressed strong interest in pursuing a business combination
transaction between CSW and his company. Mr. Brooks informed the chief executive
officer that, in the views of CSW management, the combination was not an
appropriate strategic fit and that his company did not meet CSW's screening
criteria.
On October 8 and 15, 1997, CSW management conferred by telephone with the
CSW Board regarding the progress made by CSW management in its discussions with
potential business combination candidates. During these calls, CSW management
identified for the CSW Board several candidates that had indicated an interest
in pursuing exploratory discussions with CSW about a strategic merger.
Messrs. Brooks, Shockley and Rosilier met with Dr. Draper on October 9, 1997
in Columbus, Ohio. This discussion concerned the parties' interest in a
potential strategic combination and the need to expand their exploratory
discussions to include a larger group of employees and advisers.
In mid-October 1997, the Chief Executive Officer of Company A called Mr.
Brooks to ask if Company A could resume talks with CSW concerning a potential
merger with a significant premium to the CSW Shares market price, if a large
component of the consideration to CSW stockholders would be cash. Mr.
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Brooks informed him that such a proposal would not be responsive to CSW's
interest in a potential stock-for-stock transaction if CSW chose not to remain
independent, but that CSW would give due consideration to any such proposal from
Company A and evaluate it in light of CSW's other strategic alternatives.
During October 1997, CSW executed confidentiality agreements with AEP,
Company B and Company C and commenced the exchange of nonpublic information.
During this period, McKinsey completed its review of the electric utility
industry and confirmed management's list of potential business combination
candidates. Mr. Brooks also approached the chief executive officer of one other
electric utility company on CSW's list of candidates regarding his company's
interest in a potential business combination. That chief executive officer
indicated interest but determined not to engage in business combination
discussions because of perceived regulatory concerns.
On October 23, 1997, CSW management, consultants and financial and legal
advisers met with the CSW Board in the corporate offices of CSW to discuss
further the strategic alternatives available to CSW, including a possible
strategic merger and strategic alternatives that could be pursued by CSW on a
stand-alone basis. CSW management, consultants and advisers discussed with the
CSW Board the rationale behind CSW management's recommendation that a strategic
combination be considered and reviewed the overall progress of CSW management's
efforts to identify the best strategic merger partner, as measured against the
criteria previously outlined by Mr. Brooks to the CSW Board. CSW management and
McKinsey compared and contrasted the option of remaining independent with a
strategic combination, discussing in particular the need to build skills for a
deregulated market and the desirability of having sufficient size and a large,
diverse customer base to support and expand those skills. CSW management and
McKinsey also discussed with the CSW Board the process of identifying the best
strategic combination partner, the status of the process at that time and each
of the candidates then being evaluated by CSW management. As regards each
potential business combination candidate, CSW management reported specifically
with respect to its then developed views regarding the likelihood of regulatory
approval of such a business combination. Morgan Stanley reviewed for the CSW
Board the earnings analysis for CSW on a stand-alone basis presented at the
September 27 meeting, discussed the financial condition of several strategic
merger candidates and presented an accretion/dilution analysis with respect to a
strategic merger with each. CSW management also discussed with the CSW Board the
contacts made with potential candidates. At the conclusion of the meeting, the
CSW Board authorized management to continue the screening process and ratified
the execution of confidentiality agreements with selected candidates.
On October 29, 1997, in a telephone conference, the initial transaction
teams of AEP and CSW organized a mutual evaluation process. Mr. Jobes and Mr.
McDonnell initiated the telephone conference which resulted in the decision to
renew their efforts to identify and quantify the potential cost savings and
synergies resulting from such a business combination with the assistance of a
third party consultant.
On October 30, 1997, Mr. Brooks and other senior executives of AEP and CSW
met at a hotel in Columbus, Ohio to make initial presentations about the
business, operations, financial condition and prospects of their respective
companies.
On October 31, 1997, Mr. Brooks and other executives met with executives of
Company B in Dallas to explore the possibility of a strategic business
combination and the issues raised thereby, and Mr. Brooks and other executives
met with executives of Company A in Dallas for the same purpose.
On November 4, 1997, Mr. Shockley and other executives met with executives
of Company C in Dallas to discuss the possibility of a strategic business
combination and related issues.
On November 5, 1997, CSW management met with the CSW Board by telephone
conference to update the CSW Board on the process of identifying the best
strategic partner. Mr. Brooks reviewed for the CSW Board the status of the
discussions with AEP and the other potential strategic merger candidates. On
November 6 and 7, 1997, members of the transaction teams of CSW and AEP held
meetings at the offices of Salomon Brothers Inc., now doing businesss as Salomon
Smith Barney ("Salomon Smith
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Barney") in Chicago, Illinois to discuss regulatory and financial matters
relating to a potential merger. The regulatory discussions included
presentations by legal advisers to AEP and CSW with respect to the regulatory
filing and approval processes that would be required in order to consummate a
merger. Presentations were made with respect to the required filings with and
findings or approvals by the FERC, SEC, NRC, U.S. Justice Department and Federal
Trade Commission and each of the states in which AEP and CSW operate. The
discussions also concerned the potential regulatory issues that might arise, and
the potential regulatory filings that might be necessary, in connection with the
Merger as a result of the two companies' respective operations in the United
Kingdom. The discussion of financial matters consisted primarily of explanations
of the financial information previously exchanged by AEP and Salomon Smith
Barney with CSW and Morgan Stanley.
By letter dated November 6, 1997, the chief executive officer of Company A
advised Mr. Brooks that, while previous discussions had involved the possibility
of a merger of equals, Company A was now willing to discuss a stock and cash
transaction involving a 15 to 20 percent premium to the CSW Shares market price
on such date. On November 11, 1997, the chief operating officer of Company A
forwarded to Mr. Brooks a copy of a report (the "Company A McKinsey Report")
rendered by another office of McKinsey & Company that compared a business
combination of CSW with AEP, Company A and Company C and concluded that the
combination with Company A was the most favorable, based on large part on
Company A's assessment of the likelihood of regulatory approval of each such
transaction.
During the first two weeks of November, CSW established transaction teams
consisting of officers of CSW and representatives of its financial and legal
advisers to meet with their counterparts at AEP and Companies A, B and C to
exchange information and to evaluate further the desirability and feasibility of
a strategic business combination with each. Each of these companies was informed
by CSW that it was engaged in a process of evaluating its strategic alternatives
and that it was engaged in discussions with other unidentified companies. During
this period, the CSW transaction teams met with their counterparts at each of
the four strategic business combination candidates numerous times for the
purpose of exchanging information and evaluating the issues relating to a
potential business combination.
On November 13 and 14, 1997, CSW management and CSW's advisers met with the
CSW Board in Austin, Texas to discuss further the strategic alternatives
available to CSW, including a possible strategic merger as well as various
stand-alone alternatives. CSW management reported to the CSW Board the receipt
of the Company A McKinsey Report and that CSW management had sought and received
assurance from McKinsey that no information regarding CSW was shared by the
Dallas office with personnel in the other office of McKinsey & Company. CSW
management and CSW's consultants and advisers discussed with the CSW Board the
rationale behind CSW management's recommendation that a strategic merger be
considered and reviewed the overall progress of CSW management's efforts to
identify the optimal strategic merger partner as measured against the criteria
previously discussed with the CSW Board. CSW management discussed with the CSW
Board the status of the discussions with AEP and the other potential strategic
merger candidates and the regulatory filing and approval process that would be
required in connection with a strategic combination and how that process would
differ as applied to a merger with each candidate. CSW management and Morgan
Stanley also discussed with the CSW Board the business, operations, financial
condition and prospects of the candidates and their relative strengths and
weaknesses, especially the compatibility of each candidate's strategic plan with
CSW's plan and the extent to which they satisfied the criteria previously
outlined to the CSW Board.
At this meeting, the CSW Board authorized the formation of the Corporate
Strategy Review Committee (the "CSW Committee") to facilitate greater
involvement and direction by the CSW Board in the evaluation process. The CSW
Committee consisted of Messrs. Donald M. Carlton, Joe H. Foy, William R. Howell,
Robert W. Lawless and James L. Powell. Mr. Foy, was appointed Chairman of the
CSW Committee. The CSW Board directed the CSW Committee (i) to keep fully
informed, on behalf of the CSW Board, regarding the progress of evaluation of
the strategic alternatives available to CSW, including the possibility of a
strategic combination or of remaining independent, (ii) to participate in the
direction of
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such process, (iii) to evaluate any proposals received by CSW pursuant to such
process or otherwise, (iv) to determine which, if any, proposal is in the best
long-term interests of CSW and its stockholders, (v) to ensure that it is kept
informed of, and to direct, the negotiation of the terms and conditions of any
combination contemplated by any proposal and (vi) to recommend to the CSW Board
any such combination that the CSW Committee shall determine to be in the best
long-term interests of CSW and its stockholders.
From November 15 through November 24, 1997, CSW management and advisers
continued their discussions with all the potential strategic merger candidates.
On November 20 and 21, members of the transaction teams of CSW and AEP met at
the offices of Salomon Smith Barney in Chicago, Illinois to continue exploratory
due diligence and to discuss regulatory issues. At these meetings the two teams
answered due diligence questions and continued their earlier discussions of the
regulatory approval process.
On November 24, 1997, CSW management and CSW's advisers met with the CSW
Committee in the corporate offices of CSW to inform the CSW Committee on the
progress of the strategic alternative evaluation process. The CSW Committee
received a thorough briefing on the ongoing discussions that were continuing
with AEP and the other potential strategic merger candidates. To bring closure
to the evaluation process, the CSW Committee authorized CSW management to send
to each of the four strategic merger candidates a letter (the "Request Letters")
requesting each of the candidates to advise CSW formally as to whether it was
interested in pursuing a strategic combination with CSW. In the Request Letters,
CSW asked each recipient to advise CSW as to the principal terms and conditions
under which it was prepared to discuss such a business combination. The Request
Letters also advised the recipients regarding the minimum essential parameters
of a business combination proposal required by CSW in order to receive full
consideration by CSW, including the parameter that any combination should be
structured as a tax free, stock-for-stock transaction.
From November 25 through December 11, 1997, CSW management and advisors
continued exploratory discussions with each of the strategic merger candidates.
On December 2, 1997, members of the transaction teams of AEP and CSW met in
Washington, D.C. to review certain regulatory and other issues.
On December 5, 1997, the CSW Committee met by telephone conference. CSW
management and advisers briefed the CSW Committee on the ongoing discussions
with the potential strategic merger candidates held since November 24, 1997. CSW
management reviewed with the CSW Committee the process that resulted in the
discussions with AEP and the other candidates, and discussed its views of the
financial and operational strengths of each potential strategic merger candidate
and the perceived business prospects of each combination. During these
discussions, CSW management emphasized the factors discussed at previous CSW
Board and CSW Committee meetings in presenting an analysis of each of the
potential strategic merger candidates. Morgan Stanley also informed the CSW
Committee of its discussions with the financial advisers to each of the
candidates (other than Company C which had not engaged a financial adviser).
On December 5, 1997, the CSW Board met with CSW management and CSW's
financial advisers to receive an update on the status of CSW's efforts to
identify a potential strategic combination partner. The CSW Committee reported
to the CSW Board on the CSW Committee's meetings held November 14, 1997,
November 24, 1997 and December 5, 1997. The report contained a review of the
deliberations of the CSW Committee during these meetings, including a briefing
with respect to the Request Letters, the rationale therefor and the content
thereof. During this meeting, Mr. Brooks outlined and discussed all of the
issues being considered by the CSW Committee, CSW management and CSW's financial
advisers with respect to each of the candidates. CSW management also updated the
CSW Board with respect to the status of discussions with AEP and Company A,
Company B and Company C. Morgan Stanley also informed the Board about
conversations it had with the financial advisers to each of AEP and Company A
and Company B.
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On December 6, 1997, the AEP Board met with AEP management and AEP's legal
and financial advisors to consider submitting a preliminary indication of
interest with respect to a possible business combination with CSW in response to
the Request Letter. At the meeting, AEP management and the financial and legal
advisors of AEP advised the AEP Board as to the status of the due diligence
review of CSW's business, operations and financial condition conducted to date
and feasibility of consummating the proposed business combination.
On December 11, 1997, CSW received affirmative responses to the Request
Letters from AEP, Company A and Company B. Company C declined to respond citing
anticipated regulatory and accounting concerns. AEP's response indicated that,
based on the information it had received to date and subject to satisfactory
completion of due diligence, AEP would be interested in continuing discussions
with CSW that could lead to a merger pursuant to which each CSW Share would be
exchanged for .58 of one AEP Share (an implied value of $28.60 per CSW Share
based on the closing sale price of the AEP Shares on December 10, 1997). The
response from Company A indicated that company would be interested in discussing
a business combination in which 60% of the CSW Common Stock would be converted
into cash at $29 per share and the balance would be converted into common stock
of a new entity having a market value of $29 per share of CSW Common Stock based
on a trading period prior to closing. The response from Company B indicated that
it would, based on and subject to further analysis of several significant
assumptions relating to forecasted financial results and other matters, be
interested in discussing a business combination in which the CSW Common Stock
would be converted into common stock of Company B having a market value of $26
to $28 per share of CSW Common Stock.
CSW management deemed the proposal from Company A to be nonresponsive to the
Request Letter primarily because the large cash component of the merger
consideration was inconsistent with the objective of the CSW management and CSW
Board that the CSW shareholders be afforded the opportunity to participate in
the company resulting from any strategic merger pursued by CSW, and CSW
management so advised the Committee at its meeting on December 12, 1997.
After receipt of the response from Company B, Mr. Brooks called the chief
executive officer of Company B to advise him that the implied value of his
proposal would need to be higher than $28 per CSW Share in order to be
considered seriously by CSW. The response of the latter was that he could only
improve his offer if substantial risks were removed from the transaction, some
of which were beyond the control of CSW.
On December 12, 1997, CSW management and advisers met with the CSW Committee
at the corporate offices of CSW to discuss affirmative responses and the status
of the strategic merger candidate evaluation process. CSW management and legal
advisers discussed with the CSW Committee the content of each of the responses
received and compared each of them to the terms and conditions requested by CSW
in the Request Letters. Each response was also discussed in the context of the
discussions being conducted with that strategic merger candidate and the
evaluations of the candidates presented at prior CSW Board and CSW Committee
meetings. CSW management also reviewed for the CSW Committee the strengths and
weaknesses of each responding candidate and how compatible each of their
business plans was with CSW's strategic vision. Morgan Stanley reviewed with the
CSW Committee the key financial terms of each proposal and noted the valuation
of AEP's proposal based on the respective stock prices as of December 11, 1997
was higher than the other two proposals. The CSW Committee then discussed the
stand-alone options available to CSW and compared those to the potential
strategic mergers under consideration. After further discussion, the CSW
Committee determined that AEP appeared to be the best strategic merger partner
for CSW and that a merger with AEP on the right terms would be more likely to
restore and enhance long-term stockholder value than any of the other merger or
stand-alone strategic alternatives. The CSW Committee then requested CSW
management to seek a more favorable exchange ratio. The CSW Committee authorized
CSW management to proceed to negotiation of a definitive business combination
agreement with AEP if CSW management was successful in improving the exchange
ratio.
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On December 12, 1997, in accordance with instructions from the CSW
Committee, Mr. Brooks called Dr. Draper to inform him that CSW management was
prepared to recommend that CSW enter into negotiations with AEP in an effort to
reach agreement on a merger if AEP would increase the suggested exchange ratio.
Following negotiations between Dr. Draper and Mr. Brooks regarding various
exchange ratios throughout the day, Dr. Draper agreed to increase the proposed
exchange ratio to .60 of one AEP Share for each CSW Share (an implied value of
$29.74 per CSW Share based on the closing sale price of AEP Shares on December
12, 1997). Later in the day, Mr. Brooks informed Dr. Draper that CSW management
was authorized by the CSW Committee to proceed with merger negotiations on that
basis.
From December 13 through December 17, 1997, both CSW and AEP accelerated
their due diligence efforts, with both companies' teams working primarily in
data rooms established at the offices of CSW's legal counsel in Dallas, Texas.
On December 16, 1997, CSW delivered a draft merger agreement to AEP. Numerous
small group meetings were held to discuss the regulatory approval process,
environmental matters, nuclear operations and other matters, with the results of
such meetings reported to AEP and CSW managements.
On December 17, 18 and 19, 1997, the CSW Committee met by telephone
conference with CSW management and advisers and the committee's counsel to
discuss the status of the negotiations with AEP. CSW management discussed with
the CSW Committee the due diligence efforts being conducted by both companies
and the progress of the merger negotiations.
On December 17, 1997, the AEP Board met with AEP management and AEP's legal
and financial advisors to review the status of the negotiations with CSW. AEP
management advised the AEP Board with respect to the due diligence efforts being
conducted by both companies and the progress of the Merger negotiations.
Representatives of Salomon Smith Barney made a presentation to the AEP Board
with respect to certain analyses preformed by Salomon Smith Barney in evaluating
the consideration proposed to be paid by AEP in connection with the Merger.
From December 18 through December 20, 1997, negotiating teams from AEP and
CSW met at the offices of AEP's legal counsel in New York, New York to negotiate
the terms of the Merger Agreement.
On December 20, 1997, the CSW Committee met at the corporate offices of CSW
in Dallas, Texas. At this meeting, CSW management updated the CSW Committee on
the progress of the negotiations with AEP and discussed with the CSW Committee a
number of other issues. CSW management presented a report to the CSW Committee
regarding the strategic fit of a merger with AEP as compared with other possible
merger candidates or stand-alone options available to CSW and how the various
alternatives would affect stockholder value. Legal counsel discussed with the
CSW Committee the substantive issues involved in obtaining FERC approval of a
merger with AEP and compared those issues and their likely resolution with the
issues raised by a combination with the other responding candidates. Legal
counsel also discussed the regulatory environment in several of the states in
which AEP operates. Mr. Hagan discussed regulatory issues in the States of
Arkansas, Louisiana, Oklahoma and Texas as they relate to a merger with AEP and
the other potential strategic merger candidates. Mr. Meyer reviewed for the CSW
Committee the 1935 Act requirements that would apply to a merger with AEP and
the other potential strategic merger candidates and also reviewed the
feasibility of the proposed merger under the various applicable regulatory
requirements. Mr. Files discussed with the CSW Committee certain environmental
issues associated with a merger with AEP. Mr. Files reviewed for the CSW
Committee the environmental due diligence undertaken by CSW and its
environmental advisers, in particular with respect to AEP's coal mining
operations and its coal-fired generation plants. Mr. Files discussed the impact
of possible legislation on AEP's operations and the likely costs associated
therewith. Mr. Smith reported to the CSW Committee on the expected cost savings
and other synergies that would result from a merger with AEP and how these cost
savings and other efficiencies might be realized and reflected in the combined
company's future operations. Mr. Rosilier discussed the accounting and tax
treatment of a merger with AEP. Morgan Stanley presented a detailed financial
analysis of the proposed merger, including valuations for each of CSW and
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AEP on a stand-alone and combined basis utilizing certain stated assumptions
regarding cost efficiencies and enhanced revenues. Morgan Stanley's report
included historical and comparative price earnings ratios, historical market
prices and the relationships of such prices to general market performance.
Morgan Stanley also informed the CSW Committee that Morgan Stanley would issue
an opinion to the CSW Board that the exchange ratio in the Merger was fair to
CSW's common stockholders from a financial point of view. See "The
Merger--Opinion of Financial Adviser to CSW". Mr. Shockley reviewed significant
issues in the Merger agreement. He reported on the proposed methods of resolving
operational issues between the companies pending consummation of the Merger. He
also outlined the terms and conditions of various material adverse events which
could result in either party terminating the Merger Agreement. CSW's outside
counsel reviewed the substantive provisions of the Merger Agreement, including
the termination and termination fee provisions. At the conclusion of the
meeting, the CSW Committee voted unanimously to recommend to the CSW Board that
it authorize CSW to enter into the Merger on the terms and conditions outlined
and discussed thoroughly during the presentations to the CSW Committee.
On December 21, 1997, at a special meeting of the CSW Board held in the
corporate offices of CSW, Mr. Foy presented the CSW Committee's report and
recommendation to the CSW Board and Mr. Foy and Mr. Brooks reviewed for the CSW
Board those issues discussed at the December 20, 1997 CSW Committee meeting.
CSW's outside counsel reviewed with the CSW Board the terms of the final forms
of the Merger Agreement and other transaction documents. Counsel also reviewed
the approval process to be commenced upon execution of the Merger Agreement,
including the process of seeking approval of AEP and CSW stockholders and the
various regulatory agencies whose approval would be required. Mr. Meyer
discussed with the CSW Board various provisions of the 1935 Act and their
applicability to the proposed Merger and to the operations of the combined
entity after the effective time of the proposed Merger. He also reviewed with
the CSW Board the feasibility of the proposed merger under the various
applicable regulatory requirements. Morgan Stanley delivered its oral opinion to
the CSW Board to the effect that, as of such date and based upon and subject to
various considerations, the proposed exchange ratio of .60 of one of the AEP
Shares for each CSW Share was fair, from a financial point of view, to the
holders of CSW Shares. The CSW Board then reviewed the presentations they had
received at this and previous CSW Board meetings concerning CSW's strategic
alternatives and how best to restore and enhance long-term stockholder value,
discussing and considering, among other things: current industry, economic and
market conditions; the effects of the changing regulatory environment and
increased competition on CSW's earning potential as a stand-alone company; the
results of due diligence on AEP and its operations and business prospects; the
impact of current and anticipated environmental legislation on the combined
company; expected cost savings and synergies resulting from the Merger that will
enhance opportunities for earnings growth and create value for stockholders;
diversification and, hence, reduction of regulatory risks that would result from
the Merger; creation of a larger service territory with a more diversified
customer base, thereby reducing the adverse impact of regional economic
downturns; increased flexibility and leverage in financing; creation of a larger
low-cost generating system allowing for a reduction in reserve margins and
deferring the need to add generating capacity; enhanced ability to make
off-systems sales; the tax and accounting treatment of the Merger; the
regulatory feasibility of the Merger; and increased opportunities in wholesale
and retail energy marketing. Upon conclusion, the CSW Board unanimously approved
an amendment of the Stockholder Rights Plan to exempt the Merger from the
application thereof and, by a vote of twelve in favor and one against, approved
the Merger Agreement and the transactions contemplated thereby. Mr. Glenn Biggs
was the sole director to vote against approval of the Merger Agreement and the
transactions contemplated thereby based on his expressed beliefs that the Merger
Agreement should contain a collar limiting the effect of any potential decline
in the market price of the AEP Shares prior to consummation of the Merger and
that, despite legal advice to the contrary, the Merger might not be feasible
under the 1935 Act. See "THE CSW MEETING--ADDITIONAL MATTERS--Election of
Directors" and "--Meetings and Compensation of the CSW Board."
On December 21, 1997, the AEP Board met to consider the proposed Merger.
Representatives of AEP's senior management, AEP's legal advisors and its
financial advisors made presentations and
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reviewed the matters set forth under "Reasons for the Merger." The terms of the
proposed Merger and the provisions contained in the draft of the Merger
Agreement were reviewed with the AEP Board. Salomon Smith Barney rendered its
oral opinion, confirmed by a subsequent written opinion dated December 21, 1997,
that, as of such date, and based upon and subject to the considerations set
forth therein, the consideration to be paid by AEP in connection with the Merger
was fair to AEP from a financial point of view. After discussion and
consideration, the AEP Board approved the Merger, the Merger Agreement and all
of the related transactions with the unanimous vote of all directors present
(Ms. Kathryn D. Sullivan being absent from the meeting).
Following the meetings of the AEP Board and the CSW Board, the Merger
Agreement was executed.
REASONS FOR THE MERGER
AEP and CSW share a common vision of the strategic path necessary to succeed
in the increasingly competitive utility and energy services marketplace. The
electric utility industry has been undergoing dramatic structural change for
several years. This evolution has been marked by the Energy Policy Act of 1992
and the issuance by the FERC in 1996 of Orders 888 and 889 which further opened
the transmission systems of electric utilities to use by third parties. To
compete more effectively in the dynamic and increasingly competitive global
energy and related services market, AEP and CSW believe that companies must be
able to market and deliver a wide variety of energy services across various
energy forms at competitive prices. Both AEP and CSW foresee a convergence of
energy-related services, electric utility services and potentially other utility
services such as telecommunications.
AEP and CSW believe that the Merger will position the combined companies to
be the nation's preeminent diversified electric utility company, and that the
Merger offers significant opportunities to create additional value for
shareholders, customers and employees of AEP and CSW. The benefits of the Merger
include the following:
- INCREASED SCALE--The combined company will be a substantially larger
enterprise than either AEP or CSW on a stand-alone basis. As competition
intensifies within the industry, AEP and CSW believe scale will be one
contributor to overall business success. Scale has importance in many
areas, including utility operations, product development, advertising and
corporate services. The Merger is expected to improve the profitability of
the combined company by roughly doubling the customer base and providing
synergies in all of these areas.
- COST SAVINGS--Through the elimination of duplication in corporate and
administrative programs, greater efficiencies in operations and business
processes, improved purchasing power, and the combination of two
workforces, the companies expect to capture Merger-related savings of
approximately $2 billion, net of transaction and transition costs, over
the next ten years, based on preliminary estimates by the managements of
AEP and CSW. These estimated cost savings would be attributable to the
Merger and would not include other types of savings that might be achieved
without a business combination of AEP and CSW. The estimated cost savings
reflect the creation of cost reduction or cost avoidance opportunities
through the ability to consolidate separate, stand-alone operations into a
single entity.
- COMPETITIVE PRICES AND SERVICES--Sales to industrial, large commercial and
wholesale customers are at greatest near-term risk as a result of
increased competition in the electric utility industry. It is expected
that the Merger will create a company better able to meet the demands of
such customers for reliable, low-cost power in the face of increased
competition among suppliers and will create operating efficiencies that
will allow the combined companies to be able to produce and deliver low-
cost power to customers.
- FINANCIAL STRENGTH--By significantly increasing the market capitalization
of the combined company compared with the individual companies, it is
expected that the Merger will result in a combined company with a stronger
financial base, improved position in the credit markets and less exposure
to regional economic downturns.
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- GREATER DIVERSIFICATION--The combination of the two companies will
immediately increase the companies' ability to serve a larger and more
diverse base of customers. The combined service territories of AEP and CSW
will be more diverse than their individual service territories, reducing
exposure to adverse changes in any sector's economic and competitive
conditions. After the Merger, the combined company plans to expand
relationships with existing customers and to develop relationships with
new customers in its service area, using its combined distribution
channels to market a portfolio of innovative energy-related products
throughout the region at competitive prices. In addition to geographic
diversity, the Merger will result in a combined company which has greater
diversity in fuel and generation, which its expected to reduce dependence
upon any one sector of the energy industry and reduce exposure to
fluctuations in certain commodity prices.
Subject to the qualifications expressed below, AEP and CSW believe that the
Merger will generate substantial cost savings to the combined company following
the Effective Time, which would not be available absent the Merger. As mentioned
above, preliminary estimates by the management of AEP and CSW indicate that the
Merger could result in potential net non-fuel cost savings (that is, after
taking into account the costs incurred to achieve such savings) of approximately
$2.0 billion during the ten-year period following the Merger. Potentially
significant cost savings include personnel reductions and reduced corporate and
administrative programs. Assuming a March 31, 1999 closing, AEP and CSW estimate
available synergies and cost savings resulting from the Merger, net of costs
necessary to achieve these reductions, of approximately $17 million (9 months),
$102 million, $135 million, $162 million, $181 million, $243 million, $255
million, $259 million, $267 million, $275 million and $69 million (3 months) in
the first ten years following the Merger, respectively, for a total of
approximately $2 billion. The synergies and the cost savings in the first five
years are expected to be lower than the later years due to the costs incurred to
achieve certain synergies and cost savings. The categories and estimated amounts
of non-production cost synergies and cost savings over the ten year period are
anticipated to be as follows: labor savings of approximately $996 million,
corporate and administrative savings of approximately $1,044 million, and
purchasing economy savings of approximately $367 million. Achievement of these
savings will require incurring an estimated cost of $248 million and does not
include estimated savings from pre-merger initiatives of approximately $193
million. The companies are required to obtain state regulatory approvals of the
Merger in the states of Texas, Oklahoma, Louisiana and Arkansas as well as from
the FERC, the NRC, the FCC and the SEC. In addition, the companies must await
the expiration or termination of the applicable waiting period under the HSR
Act. As part of the filings, the companies plan to propose regulatory plans
which suggest an equitable sharing of the net savings from the Merger which will
be requested to be amortized over a multi-year period. Although specific
estimates of the net savings to the shareholders cannot be determined until all
regulatory proceedings have been completed, it is expected that approximately
half of the net savings would be realized by the shareholders. In addition, it
is anticipated that there will be reduced fuel costs.
The analyses employed by the managements of AEP and CSW in order to develop
estimates of potential savings as a result of the Merger were necessarily based
upon various assumptions. The estimated merger cost savings are assumed to be
available coincident with closing at or about March 31, 1999 and to extend over
a ten-year period concluding March 31, 2009. The material assumptions include
savings that are provided in nominal dollars based on escalation rates of
approximately 3% for all non-labor areas and 4% for salaries and wages. These
escalation rates are also adjusted for other areas where price changes differ
from general escalation rates. No assumptions are made with respect to
individual company cost reductions; rather, reductions are assumed to occur
across both companies using blended cost rates. Reductions in staffing levels
are assumed to occur across both companies and reflect the areas where overlap
or duplication are expected. Cost reductions in other non-labor areas reflect
either duplication in expenditures, for example information technology, or
economies of scale in purchasing services, such as insurance. These avoided
duplicate expenditures reflect specific projects, where identifiable, or assumed
project cost levels based on the plans of the individual companies. Economies of
scale are predicated upon perceived opportunities to reduce unit costs based on
observed prices paid and the results of expected
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negotiations. Accordingly, while AEP and CSW believe that such assumptions are
reasonable for purposes of the development of estimates of potential savings,
there can be no assurance that such assumptions will approximate actual
experience or that such savings will be realized. See "Summary of the Joint
Proxy Statement/Prospectus--Cautionary Statement Concerning Forward-Looking
Statements." The nature of the allocation of the estimated cost savings
resulting from the Merger will depend in part upon the results of regulatory
proceedings in the various jurisdictions in which AEP and CSW operate their
utility businesses. See "Regulatory Approvals."
In the past, such regulatory commissions have occasionally required a
particular allocation of estimated merger-related cost savings as a condition of
approval of a merger. If a commission requires that some part of merger-related
cost savings be allocated to customers, those savings will necessarily be
unavailable to the stockholders of the combined company. However, the Merger
Agreement provides that consummation of the Merger is dependent on regulatory
approvals that do not impose terms, conditions, or qualifications that,
individually, or in the aggregate, could resonably be expected to have a
Material Adverse Effect on the combined company.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
AEP. THE AEP BOARD HAS BY THE UNANIMOUS VOTE OF THE DIRECTORS PRESENT AT
THE MEETING APPROVED THE MERGER AGREEMENT AND DETERMINED TO RECOMMEND THE
CHARTER AMENDMENT AND THE SHARE ISSUANCE. THE AEP BOARD RECOMMENDS THAT THE
HOLDERS OF AEP COMMON STOCK VOTE FOR APPROVAL OF THE CHARTER AMENDMENT AND THE
SHARE ISSUANCE.
The determination of the AEP Board to approve the Merger and the
transactions contemplated thereby was based upon consideration of a number of
factors. The following list includes the material factors considered by the AEP
Board in its evaluation of the Merger and the transactions contemplated thereby:
(i) AEP's and CSW's respective businesses, operations, assets, management,
geographic locations and prospects; (ii) current industry, economic, market and
regulatory conditions and trends which encourage consolidation to create new
business strategies and earnings growth; (iii) potential opportunities for
enhanced value for customers arising out of the operating efficiencies of the
combined company due to the combined company's stronger competitive position;
(iv) AEP's and CSW's strategic fit and compatible corporate cultures and visions
of the future of the energy business; (v) the financial resources of the
combined company; (vi) the ability to consummate the Merger, including, in
particular, the ability to obtain required regulatory approvals on a timely
basis without the imposition of conditions that could reasonably be expected to
have a material adverse effect on the combined company; (vii) the anticipated
positive effects of the Merger on long-term value for shareholders through their
ownership of stock in a stronger, more diversified company; (viii) the
geographically attractive service territory of CSW expanding the breadth and
diversity of markets for the combined company to service; (ix) the
diversification of AEP's and CSW's fuel and environmental risks; (x) the terms
of the Merger Agreement, which provide for reciprocal representations and
warranties, conditions to closing and rights to termination (as discussed under
"The Merger Agreement"); (xi) the recent incidence of Merger transactions
involving electric utility companies in surrounding markets, which is part of a
wider trend in the utility industry towards consolidation and strategic
partnerships in order to create larger, stronger companies made to face an
increasingly competitive environment; (xii) the impact of regulation under
various state and federal laws, in particular the federal and state legislative
and regulatory initiatives aimed at introducing greater competition in the
wholesale and retail energy markets, and the feasibility of obtaining regulatory
approvals required as conditions to the consummation of the merger; and (xiii)
the opinion of Salomon Smith Barney that, as of December 21, 1997 and based upon
and subject to the considerations set forth therein, the consideration to be
paid by AEP in the Merger was fair to AEP from a financial point of view, which
opinion was confirmed as of the date of this Joint Proxy Statement/Prospectus.
In view of the variety of factors considered in connection with its evaluation
of the Merger, the AEP Board of Directors did not
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find it practicable to and did not quantify or otherwise assign relative weights
to the specific factors considered in reaching its determination. In making its
determination, the AEP Board of Directors also considered the risks and
likelihood of achieving the results discussed above.
CSW. CSW'S BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, CSW AND ITS STOCKHOLDERS AND RECOMMENDS THAT CSW STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT.
In considering the recommendation of the CSW Board with respect to the
Merger Agreement, stockholders should be aware that certain members of the CSW
Board will become directors and/or employees of AEP following consummation of
the Merger and/or may become entitled to severance benefits as a result of the
Merger. Therefore, such directors have interests in the Merger that are
different than, or in addition to, the interests of stockholders of CSW
generally. The CSW Board was aware of these interests and considered them, among
other matters, in approving the Merger Agreement. See "--Interest of Certain
Persons in the Merger."
The Board of Directors of CSW believes that the terms of the Merger
Agreement are fair to, and that the Merger is in the best interests of, CSW and
its stockholders. Accordingly, the Board of Directors of CSW has approved the
Merger upon the terms and conditions contained in the Merger Agreement and
recommends approval and adoption thereof by the stockholders of CSW.
In engaging in the process of screening and evaluating potential strategic
merger candidates and in reaching its determination to approve and recommend the
Merger Agreement, the CSW Board was motivated in its desire to position CSW to
meet the challenges of the changing electric utility industry environment
discussed under "--Background of the Merger" and thereby to assist the holders
of CSW Shares to realize the benefits of the opportunities, and to avoid the
risks, presented by such changing environment. In addition, the CSW Board was
motivated to restore stockholder value lost as a result of the events in March
and April 1997 as described under "--Background of the Merger."
In its deliberations with respect to the Merger and the Merger Agreement,
the CSW Board consulted with CSW management and the financial and legal advisers
to CSW. The factors considered by the CSW Board include those enumerated below.
While all of these factors were considered by the CSW Board, the CSW Board did
not make determinations with respect to each such factor. RATHER, THE CSW BOARD
MADE ITS JUDGMENT WITH RESPECT TO THE MERGER AND THE MERGER AGREEMENT BASED ON
THE TOTAL MIX OF INFORMATION AVAILABLE TO IT, AND THE JUDGMENTS OF INDIVIDUAL
DIRECTORS MAY HAVE BEEN INFLUENCED TO A GREATER OR LESSER DEGREE BY THEIR
INDIVIDUAL VIEWS WITH RESPECT TO DIFFERENT FACTORS.
The factors considered by the CSW Board in evaluating the Merger and the
Merger Agreement included the following:
(i) its knowledge of the business, operations, assets, properties,
operating results and financial condition of CSW;
(ii) CSW's strategic alternatives, including the prospects of
positioning CSW for the future and restoring and enhancing long-term
shareholder value by remaining an independent company or by effecting a
strategic business combination with another party;
(iii) information concerning CSW's prospects as an independent company,
including financial projections for the year ended December 31, 1999;
(iv) information concerning the financial position, results of
operations, businesses, competitive position and prospects of a business
combination with each of AEP, Company A and Company B, including the amount
of stranded investment of each;
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(v) the philosophies of the managements of each of AEP, Company A and
Company B, especially as they relate to the means of meeting the challenges
of industry change, and the compatibility of those with that of CSW
management;
(vi) the prospects of regulatory approval, at each level of regulation,
of a combination with each of AEP, Company A and Company B;
(vii) the opportunities for cost savings as a result of a business
combination with each of AEP, Company A and Company B (which, in the case of
AEP, were estimated by the managements of AEP and CSW to be approximately
$2.0 billion to be realized over the ten years following the consummation of
the Merger);
(viii) the extensive information developed during the period of the
screening process discussed
under "--Background of the Merger" with respect to AEP, Company A and
Company B, as well as the extensive and inclusive nature of the screening
process itself;
(ix) the comparative market capitalization, debt-to-equity ratio and
financial strength of each of CSW as an independent company and a
combination of CSW with each of AEP, Company A and Company B;
(x) the effects of the changing regulatory environment and increased
competition in the electric power industry as described under "--Background
of the Merger";
(xi) the positive effects of the Merger on CSW's customers through a
positioning of CSW to achieve the most reliable and low-cost power
production and delivery;
(xii) the recent trend in the utility industry toward consolidation and
strategic partnerships that create larger, stronger companies made to face
an increasingly competitive environment;
(xiii) specifically, with respect to a business combination with AEP:
(a) the Exchange Ratio and recent trading prices for CSW Shares and
AEP Shares;
(b) the opportunity for the stockholders of CSW to receive a premium
over the market price for their CSW Shares immediately prior to
announcement of the Merger Agreement (the Exchange Ratio implied a
premium of $5.20, or 20%, over the closing market price per CSW Share on
December 19, 1997 based on the closing market price ($52.00) for AEP
Shares on the same day);
(c) the anticipated positive effects of the Merger on CSW
stockholders through their ownership of stock in a combined company that
will likely have greater stability and strength due to its geographically
expanded service territory having a more diversified customer base,
thereby reducing the adverse impact of regional economic downturns and
reducing regulatory risks, its increased economies of scale, its expected
cost savings and synergies expected to result from the consolidation of
CSW's and AEP's stand-alone operations, its larger low-cost generating
system allowing for a reduction in reserve margins and deferring the need
to add generating capacity, its enhanced ability to make off-systems
sales, its increased opportunities in wholesale and retail energy
marketing, and its expected increased flexibility and leverage in
financing activities;
(d) the terms of the Merger Agreement, which provide for reciprocal
representations and warranties, conditions to closing and rights to
termination, balanced rights and obligations and protection for employees
of CSW (as discussed under "The Merger Agreement");
(e) the tax and accounting treatment of the Merger; and
(f) the numerous presentations made by Morgan Stanley to the CSW
Board during the screening process, including information regarding CSW
as an independent entity and CSW in combination with AEP, Company A and
Company B (as well as others) and the oral opinion of
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Morgan Stanley rendered to the CSW Board on December 21, 1997 that, as of
such date, the Exchange Ratio was fair, from a financial point of view,
to the holders of the CSW Shares. See "--Opinion of Financial Adviser to
CSW".
During its deliberations regarding the Merger and the Merger Agreement (and,
indeed, during the screening process), the CSW Board also analyzed certain risks
associated with the Merger. First, it was drawn to the CSW Board's attention
that a business combination with AEP would likely involve a reduction in the
dividend enjoyed by holders of CSW Shares. Based on the AEP current dividend
rate of $2.40 per share and the Exchange Ratio, CSW's stockholders would receive
$1.44 per share in dividend upon consummation of the Merger. Second, the CSW
Board was advised with respect to the environmental risks faced by AEP.
Specifically, these entail the risk of more restrictive clean air legislation
and consequent capital expenditure requirements to meet clean air standards at
AEP's coal fired plants. Third, the CSW Board was thoroughly advised regarding
the risks of obtaining regulatory approval for the Merger at all levels of
regulation. After reviewing these matters thoroughly, including the relatively
high CSW dividend payout ratio in comparison with the industry average, the
extensive due diligence investigation by CSW representatives of the AEP
environmental risks and the legal advice received by CSW with respect to
regulatory approvals, the CSW Board determined that the benefits of the Merger
outweighed any risks entailed in these matters.
The CSW Board believes that the Merger will provide strategic and
operational opportunities that would be unavailable to CSW as an independent
company and will enable CSW and its stockholders to participate in a
significantly larger and more diverse company. Through the pooling of common
stock equity, management, human resources and technical expertise and
coordination in the use of the facilities of CSW and AEP, the CSW Board believes
the combined company will be better able to meet the competitive environment for
the delivery of energy and services than would CSW as a stand-alone enterprise.
The CSW Board believes that the combined entity will be better able, in the long
term, to achieve benefits of increased financial stability and strength,
improved and unified management, efficiencies of operations, better use of
facilities for the benefit of customers and reduced or deferred requirements for
future additional generating capacity than would CSW as an independent company
or a combination of CSW with Company A or Company B.
IN VIEW OF THE WIDE VARIETY OF FACTORS CONSIDERED BY IT IN CONNECTION WITH
ITS EVALUATION OF THE MERGER AND THE MERGER AGREEMENT, THE CSW BOARD DID NOT
FIND IT PRACTICABLE TO QUANTIFY OR OTHERWISE TO ATTEMPT TO ASSIGN RELATIVE
WEIGHTS TO THE SPECIFIC FACTORS CONSIDERED IN REACHING ITS DETERMINATION AND DID
NOT DO SO. RATHER, THE CSW BOARD MADE ITS JUDGMENT WITH RESPECT TO THE MERGER
AND THE MERGER AGREEMENT BASED ON THE TOTAL MIX OF INFORMATION AVAILABLE TO IT,
AND THE JUDGMENTS OF INDIVIDUAL DIRECTORS MAY HAVE BEEN INFLUENCED TO A GREATER
OR LESSER DEGREE BY THEIR INDIVIDUAL VIEWS WITH RESPECT TO DIFFERENT FACTORS. In
making its determination, the CSW Board of Directors also considered the risks
and likelihood of achieving the results discussed above.
OPINION OF FINANCIAL ADVISOR TO AEP
AEP retained Salomon Smith Barney, pursuant to a letter agreement dated
September 3, 1997 (the "Salomon Engagement Letter") to act as financial advisor
to AEP in connection with a potential merger with CSW. Pursuant to the Salomon
Engagement Letter, Salomon Smith Barney rendered an opinion to the AEP Board on
December 21, 1997 to the effect that, based upon and subject to the
considerations set forth in such opinion, as of such date, the consideration to
be paid by AEP in the Merger was fair to AEP from a financial point of view.
Salomon Smith Barney has confirmed its opinion dated December 21, 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, Salomon Smith Barney updated certain of the
analyses performed in connection with its opinion delivered on December 21, 1997
and reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
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The full text of Salomon Smith Barney's opinion dated the date of this Joint
Proxy Statement/ Prospectus (the "Salomon Smith Barney Opinion"), which sets
forth the assumptions made, general procedures followed, matters considered and
limits on the review undertaken, is included as Annex II to this Joint Proxy
Statement/Prospectus. The summary of Salomon Smith Barney's opinion set forth
below is qualified in its entirety by reference to the full text of such
opinion. No limitations were imposed by AEP or AEP's Board of Directors with
respect to the investigations made or procedures followed by Salomon Smith
Barney in rendering its opinions. SHAREHOLDERS ARE URGED TO READ THE SALOMON
SMITH BARNEY OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Salomon Smith Barney reviewed and
analyzed, among other things, the following: (1) the Merger Agreement; (2)
certain publicly available information concerning AEP, including the Annual
Reports on Form 10-K of AEP for each of the years in the four year period ended
December 31, 1997 and the Quarterly Reports on Form 10-Q of AEP for the quarters
ended March 31, June 30, and September 30, 1997; (3) certain other internal
information, primarily financial in nature, including projections, concerning
the business and operations of AEP furnished to Salomon Smith Barney by AEP for
purposes of its analysis; (4) certain publicly available information concerning
the trading of, and the trading market for, the AEP Shares; (5) certain publicly
available information concerning CSW, including the Annual Reports on Form 10-K
of CSW for each of the years in the four year period ended December 31, 1997 and
the Quarterly Reports on Form 10-Q of CSW for the quarters ended March 31, June
30, and September 30, 1997; (6) certain other internal information, primarily
financial in nature, including projections, concerning the business and
operations of CSW furnished to Salomon Smith Barney by CSW for purposes of its
analysis; (7) certain publicly available information concerning the trading of,
and the trading market for, the CSW Shares; (8) certain internal information
concerning the prospects of the combined operations of AEP and CSW furnished to
Salomon Smith Barney by AEP for purposes of its analysis; (9) certain publicly
available information with respect to certain other companies that Salomon Smith
Barney believed to be comparable to CSW or AEP, and the trading markets for
certain of such other companies' securities; and (10) certain publicly available
information concerning the nature and terms of certain other transactions that
Salomon Smith Barney considered relevant to its inquiry. Salomon Smith Barney
also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that it deemed
relevant. Salomon Smith Barney also met with certain officers and employees of
AEP and CSW to discuss the foregoing as well as other matters Salomon Smith
Barney believed relevant to its inquiry.
In its review and analysis and in arriving at its opinion, Salomon Smith
Barney assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. Salomon Smith Barney did not conduct a physical
inspection of any of the properties or facilities of AEP or CSW, nor did it make
or obtain or assume any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties or facilities. With respect
to projections, Salomon Smith Barney assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of AEP and CSW as to the future financial
performance of AEP and CSW, respectively. Salomon Smith Barney expressed no view
with respect to such projections or the assumptions on which they were based.
Salomon Smith Barney further assumed that the conditions precedent to the Merger
contained in the Merger Agreement will be satisfied and that the Merger will be
consummated in accordance with the terms of the Merger Agreement.
In conducting its analysis and arriving at its opinion, Salomon Smith Barney
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (1) the historical and
current financial position and results of operations of CSW and AEP; (2) the
business prospects of CSW and AEP; (3) the historical and current market for the
AEP Shares, the CSW Shares and the equity securities of certain other companies
that Salomon Smith Barney believed to be comparable to AEP or CSW; and (4) the
nature and terms of certain other acquisition transactions that
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Salomon Smith Barney believed to be relevant. Salomon Smith Barney also took
into account its assessment of general economic, market and financial conditions
as well as its experience in connection with similar transactions and securities
valuation generally. Salomon Smith Barney's opinion necessarily was based on
conditions as they existed and could be evaluated on the date thereof and
Salomon Smith Barney assumed no responsibility to update or revise its opinion
based upon circumstances or events occurring after such date. Salomon Smith
Barney's opinion does not constitute an opinion or imply any conclusions as to
the likely trading range for the AEP Shares following consummation of the
Merger. Salomon Smith Barney's opinion was for the benefit of AEP's Board of
Directors and management in their consideration of the Merger and was, in any
event, limited to the fairness, from a financial point of view, of the
consideration to be paid by AEP in the Merger and did not address AEP's
underlying business decision to effect the Merger or constitute a recommendation
of the Merger to AEP or a recommendation to any holder of AEP Shares or CSW
Shares as to how such holder should vote with respect to the Merger.
In connection with rendering its opinion on December 21, 1997, Salomon Smith
Barney made a presentation to the AEP Board on December 17, 1997, with respect
to certain analyses performed by Salomon Smith Barney in evaluating the
consideration to be paid by AEP in connection with the Merger. The following is
a summary of such Salomon Smith Barney presentation. The following quantitative
information, to the extent it is based on market data, is based on market data
as it existed at December 15, 1997 and is not necessarily indicative of current
market conditions.
DISCOUNTED CASH FLOW ANALYSES--CSW. Salomon Smith Barney performed a
discounted cash flow ("DCF") analysis, based on financial projections provided
by CSW and adjusted by the management of AEP, to establish a range of equity
value per share for the CSW Shares. The DCF was calculated for CSW assuming
discount rates ranging from 7.75% to 8.50% and was comprised of the sum of the
present value of (i) the projected unlevered free cash flows for fiscal years
1997 to 2006 and (ii) the fiscal year 2006 terminal value based upon a range of
multiples from 13.5x to 14.5x projected net income for fiscal year 2006. From
this analysis, Salomon Smith Barney derived a range of the implied equity value
per CSW Share of approximately $25.00 to $29.00. Salomon Smith Barney also
calculated the present value, net after-tax, of the approximately $2.0 billion
in pre-tax synergies (estimated in an analysis prepared by management of AEP and
CSW with the assistance of a third-party consultant to be achieved over the next
approximately 10 years). Salomon Smith Barney derived a present value of those
synergies of approximately $5.00 per CSW share. Based on the foregoing, Salomon
Smith Barney derived a reference range for the implied value per CSW share,
including synergies, of approximately $30.00 to $34.00.
COMPARABLE COMPANY ANALYSIS--CSW. Salomon Smith Barney reviewed certain
publicly available financial, operating and stock market information for CSW,
and five other publicly-traded utility companies (Dominion Resources, Inc., GPU,
Inc., Houston Industries Incorporated, PP&L Resources, Inc. and Texas Utilities
Company (the "CSW Comparable Companies")). Salomon Smith Barney considered the
CSW Comparable Companies to be reasonably similar to CSW insofar as they
participate in business segments similar to the CSW's business segments, but
none of these companies has the same management, makeup, size and combination of
businesses as CSW. Accordingly, the analysis described below is not purely
mathematical. Rather it involves complex considerations and judgments concerning
differences in historical and projected financial and operating characteristics
of CSW and the CSW Comparable Companies and other factors that could affect
public trading value.
For CSW and each of the CSW Comparable Companies, Salomon Smith Barney
compared the ratio of market equity value as of December 15, 1997 to (1) latest
twelve months ("LTM") net income (13.3x for CSW compared with a range of 11.0x
to 17.2x for the CSW Comparable Companies); (2) 1997 estimated net income (16.2x
for CSW compared with a range of 10.9x to 13.6x for the CSW Comparable
Companies); (3) 1998 estimated net income (13.3x for CSW compared with a range
of 10.9x to 13.0x for the CSW Comparable Companies); (4) book value (1.54x for
CSW compared with a range of 1.35x to 1.52x for the CSW Comparable Companies);
(5) LTM after-tax cash flow (5.8x for CSW compared with a range of 4.6x to 6.0x
for the CSW Comparable Companies); (6) 1997 estimated after-tax cash flow (5.6x
for CSW
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compared with a range of 4.6x to 5.7x for the CSW Comparable Companies); and (7)
1998 estimated after-tax cash flow (6.5x for CSW compared with a range of 4.6x
to 5.7x for the CSW Comparable Companies). Salomon Smith Barney also compared
the ratio of firm value (calculated as the offer value plus total debt,
preferred equity and minority interests less cash) as of December 15, 1997 to
(1) LTM earnings before interest, taxes, depreciation and amortization
("EBITDA") (7.9x for CSW compared with a range of 6.0x to 8.5x for the CSW
Comparable Companies); (2) 1997 estimated EBITDA (7.5x for CSW compared with a
range of 5.6x to 7.3x for the CSW Comparable Companies); and (3) 1998 estimated
EBITDA (6.9x for CSW compared with a range of 5.6x to 7.2x for the CSW
Comparable Companies). Using the multiples described above, Salomon Smith Barney
derived reference ranges for the implied value of the CSW Shares (1) on a
stand-alone basis ($21.00 to $25.00 per share); (2) including approximately
$5.00 per share for the present value of the net after-tax synergies expected to
result from the Merger ($26.00 to $30.00 per share); and (3) including a 30%
control premium, but no synergies ($27.50 to $32.50 per share).
ANALYSIS OF SELECTED UTILITY COMPANY MERGERS AND ACQUISITIONS. Salomon
Smith Barney also analyzed certain publicly available financial, operating and
stock market information for seven selected merger or acquisition transactions
in the utility industry announced since August 1996 (the "Precedent Utility
Transactions"). The Precedent Utility Transactions reviewed were LG&E Energy
Corp./KU Energy Corporation, Enron Corp./Portland General Corp., Allegheny Power
System, Inc./DQE Inc., Western Resources Inc./Kansas City Power & Light Co.,
Brooklyn Union Gas Co./Long Island Lighting Co., WPL Holdings, Inc./IES
Industries, Inc., and WPL Holdings, Inc./Interstate Power Co. Salomon Smith
Barney considered the Precedent Utility Transactions to be reasonably similar to
the Merger, but none of these precedents is identical to the Merger. For each
transaction reviewed, Salomon Smith Barney established, among other things, the
premium to market price one month prior to the public announcement of the
transaction and the multiples of (1) offer price to trailing twelve months
earnings per share (ranging from 13.0x to 17.5x); (2) offer price to forward
earnings per share (ranging from 14.0x to 18.0x); (3) offer price to forward
plus one year earnings per share (ranging from 14.0x to 17.5x); (4) offer price
to book value (ranging from 1.5x to 2.1x); (5) firm value to LTM EBITDA (ranging
from 6.8x to 8.5x); and (6) firm value to LTM earnings before interest and taxes
("EBIT")(ranging from 10.0x to 13.0x). The premium of offer price to market
price in the Precedent Utility Transactions (excluding WPL Holdings,
Inc./Interstate Power Co., based on Salomon Smith Barney's judgment that the
process that led to that transaction was not sufficiently comparable to the
process resulting in the Merger) ranged from 17.0% to 36.0% with a median of
30.0% and a mean of 29.0%. From this analysis, Salomon Smith Barney derived a
reference range for the implied equity value per CSW Share of $27 to $35.
An analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of CSW and other factors that would affect the acquisition value
of the companies to which it is being compared. Mathematical analysis (such as
determining the mean or median) is not, in itself, a meaningful method of using
precedent transactions data.
DISCOUNTED CASH FLOW ANALYSIS--AEP. Salomon Smith Barney performed a DCF
analysis, based on financial projections provided by management of AEP, to
establish a range of equity value per share for the AEP Shares. The DCF was
calculated for AEP assuming discount rates ranging from 7.75% to 8.50% and was
comprised of the sum of the present value of (i) the projected unlevered free
cash flows for fiscal years 1997 to 2006 and (ii) the fiscal year 2006 terminal
value based upon a range of multiples from 13.5x to 14.5x projected net income
for fiscal year 2006. From this analysis, Salomon Smith Barney derived a
reference range of the implied equity value per AEP Share of approximately
$42.00 to $49.00.
COMPARABLE COMPANY ANALYSIS--AEP. Salomon Smith Barney reviewed certain
publicly available financial, operating and stock market information for AEP,
and six other publicly-traded utility companies (Allegheny Power System, Inc.,
CINergy Corp., Dominion Resources, Inc., New Century Energies, Inc., Northern
States Power Co., and The Southern Company (the "AEP Comparable Companies")).
Salomon
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Smith Barney considered the AEP Comparable Companies to be reasonably similar to
AEP insofar as they participate in business segments similar to AEP's business
segments, but none of these companies has the same management, makeup, size and
combination of businesses as AEP. Accordingly, the analysis described below is
not purely mathematical. Rather it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of AEP and the AEP Comparable Companies and other factors that
could affect public trading value.
For AEP and each of the AEP Comparable Companies, Salomon Smith Barney
compared the ratio of market equity value as of December 15, 1997 to (1) to LTM
net income (15.2x for AEP compared with a range of 13.6x to 17.7x for the AEP
Comparable Companies); (2) 1997 estimated net income (15.1x for AEP compared
with a range of 13.1x to 15.9x for the AEP Comparable Companies); (3) 1998
estimated net income (15.1x for AEP compared with a range of 12.6x to 14.6x for
the AEP Comparable Companies); (4) book value (2.06x for AEP compared with a
range of 1.49x to 2.36x for the AEP Comparable Companies); (5) LTM after-tax
cash flow (8.1x for AEP compared with a range of 5.1x to 8.1x for the AEP
Comparable Companies); (6) 1997 estimated after-tax cash flow (7.8x for AEP
compared with a range of 5.1 x to 8.2x for the AEP Comparable Companies); and
(7) 1998 estimated after-tax cash flow (7.8x for AEP compared with a range of
5.0x to 7.7x for the AEP Comparable Companies). Salomon Smith Barney also
compared the ratio of firm value as of December 15, 1997 to (1) LTM EBITDA (8.0x
for AEP compared with a range of 7.5x to 9.1x for the AEP Comparable Companies);
(2) 1997 estimated EBITDA (8.0x for AEP compared with a range of 6.7x to 9.5x
for the AEP Comparable Companies); and (3) 1998 estimated EBITDA (7.8x for AEP
compared with a range of 6.6x to 9.1x for the AEP Comparable Companies). Using
the multiples described above, Salomon Smith Barney derived a reference range
for the implied value of the AEP Shares of $44.00 to $52.00.
HISTORICAL TRADING RATIOS ANALYSIS. Salomon Smith Barney also reviewed the
daily closing prices of the CSW Shares and the AEP Shares during the period from
December 15, 1992 through December 15, 1997 and the implied historical trading
ratios determined by dividing the price per CSW Share by the price per AEP Share
(the "Historical Trading Ratio") over such period. Salomon Smith Barney
calculated that during that period the Historical Trading Ratio ranged from a
high of 0.91 to a low of 0.44 with an average of 0.70. Over the one-month period
preceding December 15, 1997, the Historical Trading Ratio ranged from a high of
0.52 to a low of 0.45 with an average of 0.49. Over the six-month period
preceding December 15, 1997, the Historical Trading Ratio ranged from a high of
0.52 to a low of 0.44 with an average of 0.47. Over the one-year period
preceding December 15, 1997, the Historical Trading Ratio ranged from a high of
0.65 to a low of 0.44 with an average of 0.52. Over the three-year period
preceding December 15, 1997, the Historical Trading Ratio ranged from a high of
0.79 to a low of 0.44 with an average of 0.63. The ratio on December 15, 1997
was 0.52.
CONTRIBUTION ANALYSIS. Salomon Smith Barney reviewed the relative
contributions of each of AEP and CSW to estimated net income of the combined
companies for each of the years from 1997 through 2006, to LTM book value of the
combined companies, to 1999 estimated book value for the combined companies and
to market equity value of the combined companies as of December 15, 1997. This
analysis showed that CSW is expected to contribute a percentage of the combined
company's net income ranging from approximately 34% to approximately 40% in
fiscal 1997 to 2003 before leveling off at approximately 39% in the years 2004
to 2006. This analysis also showed that CSW's contribution to LTM book value and
1999 estimated book value were approximately 44% and 42%, respectively, and that
its contribution to market equity value at December 15, 1997 was approximately
37%. CSW stockholders would own approximately 40% of the outstanding shares of
the combined companies based upon the Exchange Ratio.
PRO FORMA ANALYSIS OF THE MERGER. Salomon Smith Barney analyzed the pro
forma impact of the Merger on an earnings per share ("EPS") basis to AEP's
shareholders and on an EPS and dividends per share ("DPS") basis to CSW's
stockholders for the fiscal years ended December 31, 2000 through 2006. The
analysis was performed utilizing stand-alone earnings estimated for the years
2000 through 2006 for
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AEP and CSW based on financial projections prepared by AEP management taking
into account the synergies expected to be derived from the Merger as estimated
by AEP but excluding one-time costs. Based upon such analysis, the Merger would
be somewhat dilutive to AEP shareholders for the years 2000-2002 and somewhat
accretive for the remaining years of the forecast. Salomon Smith Barney noted
that the transaction would generally produce EPS accretion of 10% or more each
year for CSW stockholders, but would result in a lower dividend per original CSW
Share of more than 10% through 2003, the reduction continuing to decline
thereafter.
The foregoing summary does not purport to be a complete description of the
analyses performed by Salomon Smith Barney or of its presentations to AEP's
Board of Directors. Such summary does constitute a complete summary, in all
material respects, of the material financial analyses furnished by Salomon Smith
Barney to the AEP Board on December 17, 1997. The preparation of financial
analyses and fairness opinions is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. Salomon Smith Barney made no attempt to assign specific weights to
particular analyses or factors considered, but rather made qualitative judgments
as to the significance and relevance of the analyses and factors considered.
Accordingly, Salomon Smith Barney believes that its analyses (and the summary
set forth above) must be considered as a whole, and that selecting portions of
such analyses and of the factors considered by Salomon Smith Barney, without
considering all of such analyses and factors, could create a misleading or
incomplete view of the processes underlying the analyses conducted by Salomon
Smith Barney and its opinion. With regard to the comparable public company
analysis and the comparable transaction analysis summarized above, Salomon Smith
Barney selected comparable public companies on the basis of various factors,
including the size of the public company and similarity of the line of business;
however, no public company or transaction utilized as a comparison is identical
to CSW or AEP, any business segment of CSW or AEP or the Merger. As a result,
the comparable public company analysis and the comparable transaction analysis
are not purely mathematical, but also take into account differences in financial
and operating characteristics of the Comparable Companies and other factors that
could affect the transaction or public trading value of the Comparable Companies
and transactions to which CSW and AEP, the business segments of CSW and AEP and
the Merger are being compared. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to CSW, AEP, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of CSW and AEP, including (in addition to those
specifically mentioned in the Salomon Smith Barney opinion) that there would be
no material changes in AEP's or CSW's assets, financial condition, results of
operations or prospects and that U.S. economic conditions, the financial markets
and the mergers and acquisitions market, generally, would continue as currently
existing with no material changes. Any estimates contained in Salomon Smith
Barney's analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
than those suggested by such analyses. Estimates of values of companies do not
purport to be appraisals or necessarily to reflect the prices at which companies
may actually be sold. Because such estimates are inherently subject to
uncertainty, none of CSW, AEP, CSW's Board of Directors, AEP's Board of
Directors, Salomon Smith Barney or any other person assumes responsibility if
future results or actual values differ materially from the estimates. Salomon
Smith Barney's analyses were prepared solely as part of Salomon Smith Barney's
analysis of the fairness of the consideration to be paid by AEP in the Merger
and were provided to AEP's Board of Directors in that connection. The opinion of
Salomon Smith Barney was one of the factors taken into consideration by AEP's
Board of Directors in making its determination to approve the Merger Agreement
and the Merger.
Salomon Smith Barney is an internationally recognized investment banking
firm engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. AEP selected Salomon Smith
Barney to act as its financial advisor on the basis of Salomon Smith Barney's
international reputation and Salomon Smith Barney's familiarity with AEP.
Salomon Smith
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Barney or its affiliates had previously rendered investment banking and
financial advisory services to AEP and CSW, for which such entity received
customary compensation. In addition, in the ordinary course of its business,
Salomon Smith Barney may trade the debt and equity securities of both CSW and
AEP for its own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
Pursuant to the Salomon Engagement Letter, AEP will pay Salomon Smith Barney
the following fees: (a) a quarterly retainer of $100,000 for each quarter that
Salomon Smith Barney is actively providing financial advisory and investment
banking services to AEP (pursuant to which $2.0 million has been paid as of the
date of this Joint Proxy Statement/Prospectus); plus (b) an additional fee of
$2.5 million, which became payable upon execution of the Merger Agreement (which
has been paid); plus (c) an additional fee of $2.5 million, which will become
payable upon approval of the Merger Agreement by the stockholders of CSW and
approval of the Share Issuance and the Charter Amendment by the shareholders of
AEP; plus (d) an additional fee of $12.5 million (less any amounts paid pursuant
to (a), (b) and (c) above) upon closing of the Merger. AEP has also agreed to
reimburse Salomon Smith Barney for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of its counsel) and to indemnify Salomon Smith Barney
against certain liabilities and expenses relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
As noted under the captions "THE MERGER--Recommendations of the Boards of
Directors; Reasons for the Merger" and "--Recommendations of the Boards of
Directors," the fairness opinion of Salomon Smith Barney was one of several
factors considered by AEP's Board of Directors in determining to approve the
Merger Agreement and the Merger. The amount of consideration payable in the
Merger was determined by arms'-length negotiations between AEP and CSW, in
consultation with their respective financial advisors and other representatives,
and was not established by such financial advisors.
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OPINION OF FINANCIAL ADVISOR TO CSW
Morgan Stanley was retained by CSW to act as its financial advisor in
connection with the Merger. Morgan Stanley is an internationally recognized
investment banking firm and was selected by CSW based on Morgan Stanley's
experience and expertise. On December 21, 1997, Morgan Stanley rendered to CSW's
Board of Directors an oral opinion, which was subsequently confirmed in writing,
to the effect that, as of such date and based on and subject to certain matters
stated therein, the Exchange Ratio provided for under the Merger Agreement was
fair from a financial point of view to the holders of CSW Shares.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION, DATED THE DATE OF THIS
JOINT PROXY STATEMENT/ PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE AND
MATTERS CONSIDERED AND THE LIMITS OF THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX
III TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF CSW SHARES ARE URGED TO, AND SHOULD, READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S OPINION ADDRESSES THE FAIRNESS
OF THE EXCHANGE RATIO PROVIDED FOR UNDER THE MERGER AGREEMENT FROM A FINANCIAL
POINT OF VIEW TO THE HOLDERS OF CSW SHARES. IT DOES NOT ADDRESS ANY OTHER ASPECT
OF THE MERGER NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF CSW
SHARES AS TO HOW TO VOTE AT THE CSW MEETING. THE SUMMARY OF THE OPINION OF
MORGAN STANLEY SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
For purposes of the opinion set forth herein, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of CSW and AEP; (ii) reviewed certain internal financial statements
and other financial and operating data concerning CSW and AEP prepared by their
respective managements; (iii) analyzed certain financial projections prepared by
the managements of CSW and AEP, respectively; (iv) discussed the past and
current operations and financial condition and the prospects of CSW and AEP with
senior executives of CSW and AEP, respectively; (v) reviewed the reported prices
and trading activity for CSW Shares and AEP Shares; (vi) discussed certain
regulatory issues relating to the proposed Merger with senior executives of CSW
and AEP; (vii) compared the financial performance of CSW and AEP and the prices
and trading activity of CSW Shares and AEP Shares with that of certain other
comparable publicly-traded companies and their securities; (viii) reviewed the
financial terms, to the extent publicly available, of certain comparable merger
and acquisition transactions; (ix) reviewed the pro forma impact of the Merger
on AEP's earnings per share, cash flow, consolidated capitalization and
financial ratios; (x) participated in discussions and negotiations among
representatives of CSW and AEP and their financial and legal advisors; (xi)
reviewed the Merger Agreement and certain related documents; (xii) reviewed and
discussed with CSW and AEP an analysis prepared by CSW and AEP with the
assistance of a third-party consultant regarding estimates of the amount and
timing of synergies and cost savings estimated to be derived from the Merger;
and (xiii) performed such other analyses as Morgan Stanley has deemed
appropriate.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by Morgan Stanley for the
purposes of its opinion. With respect to the financial projections and the
estimates of the amount and timing of synergies and cost savings estimated to be
derived from the Merger, Morgan Stanley assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of CSW and AEP. Morgan Stanley did
not make any independent valuation or appraisal of the assets or liabilities of
CSW, nor was Morgan Stanley furnished with any such appraisals. In addition,
Morgan Stanley assumed that the Merger will be consummated in accordance with
the terms set forth in the Merger Agreement, including, among other things, that
the Merger will be accounted for as a "pooling of interests" business
combination in accordance with U.S. generally accepted accounting principles and
the Merger will be treated as a tax-free reorganization and/or exchange, each
pursuant to the Internal Revenue Code of 1986 (the "Code"). Morgan Stanley's
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to Morgan Stanley as of, the date
of its opinion.
The following is a brief summary of the material analyses performed by
Morgan Stanley in connection with Morgan Stanley's presentation and opinion to
the CSW Board on December 21, 1997:
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COMPARABLE PUBLIC COMPANY ANALYSIS. As part of its analysis, Morgan Stanley
compared certain financial information of CSW with that of a group of publicly
traded electric utility companies, including Dominion Resources, Inc., Entergy
Corporation, PP&L Resources, Inc., and Texas Utilities Company (collectively,
the "CSW Comparable Companies"), and also compared certain financial information
of AEP with that of a group of publicly traded electric utility companies,
including CINergy Corp., FPL Group, Inc., LG&E Energy Corporation, Northern
States Power Company and PacifiCorp (collectively, the "AEP Comparable
Companies"). Such financial information included the ratio of price to LTM ended
September 30, 1997, forecasted 1998 and forecasted 1999 earnings multiples,
price to book value multiple, price to LTM cash flow from operations multiple
and dividend yield. Such analyses indicated that as of December 19, 1997 and
based on a compilation of earnings projections by securities research analysts
as of December 19, 1997, CSW and AEP traded at 13.0 and 16.6 times historical
LTM earnings, respectively; 13.7 and 15.2 times forecasted earnings for the
calendar year 1998, respectively; 13.3 and 14.7 times forecasted earnings for
the calendar year 1999, respectively; 1.5 and 2.1 times book value as of the
quarter ended September 30, 1997, respectively; 6.2 and 8.0 times historical LTM
cash flow from operations, respectively; and dividend yields of 6.7% and 4.6%,
respectively. Morgan Stanley noted that, based on a compilation of earnings
projections by securities research analysts as of December 19, 1997, the CSW
Comparable Companies and the AEP Comparable Companies traded in a range of 12.4
to 17.8 and 14.7 to 23.1 times historical LTM earnings, respectively; 10.8 to
12.9 times and 14.2 and 15.7 times 1998 forecasted earnings, respectively; 10.5
to 12.6 and 13.6 and 15.0 times 1999 forecasted earnings, respectively; 1.0 to
1.5 and 1.8 and 2.4 times book value as of the quarter ended September 30, 1997,
respectively; and had dividend yields of 5.4% to 7.4% and 3.3% to 4.9%,
respectively.
No company utilized in the comparable public company analysis is identical
to CSW or AEP. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of CSW and AEP and other factors that
could affect the public trading value of the companies to which they are being
compared. In evaluating the CSW Comparable Companies and the AEP Comparable
Companies, Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of CSW or AEP, such as the
impact of competition on CSW or AEP and the industry generally, industry growth
and the absence of any adverse material change in the financial conditions and
prospects of CSW or AEP or the industry or in the financial markets in general.
Mathematical analysis (such as determining the mean or median) is not, in
itself, a meaningful method of using comparable company data.
TRADING RATIO ANALYSIS. Morgan Stanley also reviewed the ratio of the
trading prices of CSW Shares to AEP Shares over the intervals of three months,
six months, one year, two years and three years prior to the announcement of the
Merger. Such ratios were in the range of 0.47 to 0.63. Based on the closing
price of CSW Shares and AEP Shares on December 19, 1997 (the last trading day
prior to December 21, 1997) of $26.00 and $52.00, respectively, the ratio was
0.50.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Stanley performed a discounted cash
flow analysis of CSW and AEP based on certain financial projections provided by
the respective managements for each company for the period 1997 through 2006 and
1997 through 2007, respectively. Unlevered free cash flow of each company was
calculated as net income available to common stockholders plus the aggregate of
preferred stock dividends, depreciation and amortization, deferred taxes, and
other noncash expenses and after-tax net interest expense less the sum of
capital expenditures and investment in noncash working capital. Morgan Stanley
calculated terminal values by applying a range of perpetual growth rates to the
unlevered free cash flow in fiscal 2006 and 2007, respectively, and the
cash-flow streams and terminal values were then discounted to the present using
a range of discount rates representing an estimated range of the weighted
average cost of capital for CSW and AEP. Based on this analysis, Morgan Stanley
calculated per share values for CSW ranging from $18.95 to $24.82 and for AEP
ranging from $46.64 to $55.71.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS. Using publicly available
information, Morgan Stanley considered announced or completed transactions in
the electric utility industry, which were deemed to be
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comparable to the Merger including KU Energy Corporation and LG&E Energy
Corporation, DQE, Inc. and Allegheny Power System, Inc., Kansas City Power &
Light Company and Western Resources, Inc., Potomac Electric Power Company and
Baltimore Gas & Electric Company and CIPSCO Incorporated and Union Electric
Company (collectively, the "Electric Utility Transactions"). Morgan Stanley
compared certain financial and market statistics of the Electric Utility
Transactions to the Merger. The premium to unaffected market price (i.e., the
unaffected market price one day prior to the announcement of the Transaction)
ranged from 21% to 34%, the price to book value multiple ranged from 1.7 to 2.4
times, the LTM price to earnings multiple ranged from 15.4 to 19.8 times and the
LTM operating cash flow multiple ranged from 7.5 to 8.4 times. Based on this
analysis, Morgan Stanley calculated per share values for CSW ranging from $28.34
to $32.82.
No transaction utilized as a comparison in the analysis of selected
precedent transactions is identical to the Merger in both timing and size.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of CSW and other factors that would affect the
acquisition value of the companies to which it is being compared. In evaluating
the precedent transactions, Morgan Stanley made judgments and assumptions with
regard to industry performance, global business, economic, market and financial
conditions and other matters, many of which are beyond the control of CSW, such
as the impact of competition on CSW and the industry generally, industry growth
and the absence of any adverse material change in the financial conditions and
prospects of CSW or the industry or the financial markets in general.
Mathematical analysis (such as determining the mean or median) is not, in
itself, a meaningful method of using precedent transactions data.
CONTRIBUTION ANALYSIS. Morgan Stanley reviewed the pro forma effect of the
Merger and computed the contribution attributable to CSW and AEP to the combined
company's pro forma projected financial results for 1997. Such financial results
included: sales; operating income; EBITDA; earnings; cash flow from operations;
and book value. The computation showed, among other things, that CSW would
contribute to the combined company's approximately 46% of sales, 40% of
operating income, 43% of EBITDA, 28% of earnings, 39% of cash flow from
operations, and 43% of book value. Morgan Stanley calculated that the Exchange
Ratio would result in pro forma ownership of the combined company for holders of
CSW common stock equal to approximately 40%.
PRO FORMA ANALYSIS OF THE MERGER. Morgan Stanley reviewed the pro forma
impact of the Merger on AEP's EPS for the fiscal years ended 1998 through 2001.
The analysis was performed assuming completion of the Merger at the beginning of
this period, utilizing stand-alone earnings estimated for the fiscal years ended
1998 through 2001 for CSW and AEP based on certain financial projections
prepared by the respective managements of each company taking into account the
synergies and cost savings expected to be derived from the Merger as estimated
by CSW and AEP. Based on such analysis, the Merger would average less than 1.0%
dilution to AEP's stockholders for the period 1998 through 2001 on an EPS basis.
In connection with its opinion dated the date of this Joint Proxy
Statement/Prospectus, Morgan Stanley confirmed the appropriateness of its
reliance on the analyses performed in connection with its opinion delivered on
December 21, 1997 by performing procedures to update certain of such analyses
and by reviewing the assumptions on which such analyses were based and the
factors considered in connection therewith. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to a partial
analysis or summary description. Morgan Stanley considered the results of all of
its analysis as a whole and did not attribute any particular weight to an
analysis or factor considered by it. Morgan Stanley believes that selecting
portions of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Morgan
Stanley may have given various analyses more or less weight than other analyses,
and may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of CSW and AEP.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the
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control of CSW and AEP, including (in addition to those specifically mentioned
in the Morgan Stanley opinion) that there would be no material changes in AEP's
or CSW's assets, financial condition, results of operations or prospectus and
that U.S. economic conditions, the financial markets and the mergers and
acquisitions market, generally, would continue as currently existing with no
material changes. The analyses performed by Morgan Stanley are not necessarily
indicative of actual value, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as part of
Morgan Stanley's analysis of the fairness of the Exchange Ratio, pursuant to the
Merger Agreement, from a financial point of view to the holders of CSW Shares
and were provided to the CSW Board in connection with the delivery of Morgan
Stanley's written opinion dated December 21, 1997. The analyses do not purport
to be appraisals or to reflect the prices at which CSW might actually be sold.
In addition, as described above, Morgan Stanley's opinion and presentation to
the CSW Board were one of many factors taken into consideration by the CSW Board
in making its determination to approve the Merger. Consequently, the Morgan
Stanley analyses described above should not be viewed as determinative of the
opinion of the CSW Board or the view of the management of CSW with respect to
the value of CSW or of whether the CSW Board would have been willing to agree to
a different exchange ratio. The Exchange Ratio pursuant to the Merger Agreement
was determined through negotiations between CSW and AEP and approved by the CSW
Board and the AEP Board.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuation for estate, corporate and other purposes. In the ordinary course of
its business, Morgan Stanley and its affiliates may actively trade the debt and
equity securities of CSW and AEP for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. In the past, Morgan Stanley has provided financial advisory and
financing services to CSW and AEP, and their affiliates, for which services
Morgan Stanley has received customary fees.
Morgan Stanley has been retained by CSW to act as financial advisor to CSW
with respect to the Merger. Pursuant to a letter agreement dated December 19,
1997 between CSW and Morgan Stanley, Morgan Stanley is entitled to (i) an
advisory fee for its time and efforts expended in connection with the
engagement, which is estimated to be between $1,500,000 and $2,000,000 and which
is payable in the event the transaction is not consummated and (ii) a
transaction fee equal to approximately $18,250,000, which is payable as follows:
one-third upon the execution of the definitive transaction agreement, one-third
upon approval of the transaction by CSW's shareholders and one-third upon
closing of the transaction. Any amounts paid or payable to Morgan Stanley as
advisory or announcement fees will be credited against the transaction fee. CSW
has also agreed to reimburse Morgan Stanley for its expenses, including expenses
of its counsel, and to indemnify Morgan Stanley and its affiliates against
certain liabilities and expenses, including liabilities under federal securities
laws.
MERGER CONSIDERATION
Pursuant to the Merger Agreement, subject to certain provisions as described
herein with respect to shares owned by CSW, AEP or any subsidiary of CSW or AEP,
and with respect to fractional shares, each issued and outstanding CSW Share
will be converted into the right to receive from AEP 0.60 of an AEP Share.
Fractional AEP Shares will not be issued in the Merger. Holders of CSW
Shares otherwise entitled to a fractional AEP Share will be paid cash in lieu of
such fractional share determined and paid as described in "Fractional Shares"
below.
The Exchange Ratio was determined by and through negotiations between AEP
and CSW, each of which was advised with respect to such negotiations by its
respective financial advisor. Based on the number of CSW Shares and the number
of CSW stock options outstanding on the CSW Record Date, a maximum of
130,000,000 AEP Shares may be issued in respect of CSW Shares in the Merger and
700,000 shares would be reserved for issuance upon exercise of CSW options
assumed by AEP pursuant to the Merger Agreement.
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Any CSW Shares owned by CSW or any of its subsidiaries or by AEP, Sub or any
other subsidiary of AEP will automatically be cancelled at the Effective Time
and will cease to exist. The securities of CSW's subsidiaries will remain
outstanding after consummation of the Merger.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing and acceptance of the
Certificate of Merger with the Secretary of State of the State of Delaware or
such later date as is specified in such Certificate. The filing of the
Certificate of Merger will occur as soon as practicable following the
satisfaction or, if permissible, waiver of the conditions set forth in the
Merger Agreement. See "THE MERGER AGREEMENT -- Conditions to the Consummation of
the Merger".
The Merger Agreement provides that, subject to certain limitations, the
Merger Agreement may be terminated by one or all parties at any time prior to
the filing of the Certificate of Merger with the Delaware Secretary of State if,
among other reasons, the Merger has not been consummated on or before December
31, 1999 (or June 30, 2000 if this deadline is extended pursuant to the terms of
the Merger Agreement) notwithstanding approval of the Merger Agreement by the
stockholders of CSW or the approval of the Charter Amendment or the Share
Issuance by the shareholders of AEP. See "THE MERGER AGREEMENT -- Termination".
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of CSW Shares into the right to receive AEP Shares will occur
at the Effective Time of the Merger.
As soon as reasonably practicable after the Effective Time, a third party
exchange agent selected by AEP and reasonably satisfactory to CSW (the "Exchange
Agent") will send a transmittal form (the "Letter of Transmittal") to each
record holder of CSW Shares. The Letter of Transmittal will contain instructions
with respect to the surrender of certificates which prior thereto represented
CSW Shares in exchange for certificates representing the AEP Shares or the
amount of cash in lieu of a fractional interest in an AEP Share for which the
shares represented by the certificates so surrendered are exchangeable pursuant
to the Merger Agreement.
CSW STOCKHOLDERS SHOULD NOT FORWARD CSW STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented CSW
Shares shall, upon surrender to the Exchange Agent of such certificate or
certificates and acceptance thereof by the Exchange Agent, be entitled to a
certificate or certificates representing the number of whole AEP Shares,
calculated based on the Exchange Ratio and rounded down to the nearest whole
number, and the amount of cash, if any, into which the aggregate number of CSW
Shares previously represented by such certificate or certificates surrendered
shall have been converted. The Exchange Agent shall accept such certificates
upon compliance with such reasonable terms and conditions as the Exchange Agent
may impose to effect an orderly exchange thereof in accordance with normal
exchange practices. After the Effective Time, there will be no further transfer
on the records of CSW or its transfer agent of certificates representing CSW
Shares and if such certificates are presented for transfer, they shall be
cancelled against delivery of certificates for AEP Shares (and cash, if any, in
lieu of fractional AEP Shares) pursuant to the Merger Agreement. Until
surrendered in accordance with the Merger Agreement, each certificate for CSW
Shares will be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the consideration contemplated by the
Merger Agreement. No interest will be paid or will accrue on any cash payable in
lieu of any fractional AEP Shares.
No dividends or other distributions declared or made after the Effective
Time with respect to AEP Shares with a record date after the Effective Time will
be paid to the holder of any unsurrendered certificate for CSW Shares with
respect to the CSW Shares formerly represented thereby, and no cash payment in
lieu of fractional shares shall be paid to any such holder, until the surrender
of such certificate in accordance with the Merger Agreement. Following surrender
of any such certificate, there shall be paid
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without interest to the holder of such certificate (i) a certificate or
certificates representing whole AEP Shares issued in exchange therefor (ii) the
amount of any cash payable with respect to any fraction of an AEP Share to which
such holder is entitled pursuant to the Merger Agreement (iii) the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole AEP Shares and (iv) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole AEP Shares.
FRACTIONAL SHARES
No certificates or scrip representing fractional AEP Shares will be issued
upon surrender for exchange of certificates formerly representing CSW Shares,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a shareholder of AEP. In lieu of any such fractional shares,
each holder of CSW Shares upon surrender of a certificate for exchange pursuant
to the Merger Agreement will be paid an amount in cash (without interest),
determined as follows: pursuant to instructions from AEP, the Exchange Agent
will determine the number of fractional shares allocable to all holders of CSW
Shares pursuant to the Merger Agreement, will aggregate all such fractional
shares into whole AEP Shares, will sell such whole AEP Shares in the open market
at then prevailing prices on behalf of the holders who would otherwise be
entitled thereto and will distribute to each holder, at the time of surrender of
such holder's CSW Share certificates, such holder's ratable share of such
proceeds, after withholding United States federal income taxes and any
applicable transfer taxes. All brokers' fees and commissions and fees of the
Exchange Agent incurred in connection with such sale will be paid by AEP. For
this purpose, shares of any holder represented by two or more certificates may
be aggregated, and in no event will any holder be paid any amount in respect of
more than one AEP Share.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Christy & Viener, tax counsel to CSW, the following
discussion accurately describes the material United States federal income tax
consequences of the Merger to the holders of CSW Shares and is based upon
current provisions of the Code, existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
In addition, this discussion summarizes the tax opinions being delivered to CSW
and AEP by Christy & Viener and Simpson Thacher & Bartlett, respectively, which
have been filed as exhibits to this Joint Proxy Statement/Prospectus. This
discussion does not address all of the Merger's United States federal income tax
consequences that may be relevant to particular holders, including holders that
are subject to special tax rules such as dealers in securities, foreign persons,
mutual funds, insurance companies, tax-exempt entities and holders who do not
hold their shares as capital assets. Holders of CSW Shares are advised and
expected to consult their own tax advisors regarding the United States federal
income tax consequences of the Merger in light of their personal circumstances
and the consequences under state, local and foreign tax laws.
AEP has received from its counsel, Simpson Thacher & Bartlett, an opinion to
the effect that the Merger will be treated for United States federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
that AEP, Sub and CSW each will be a party to the reorganization within the
meaning of Section 368(b) of the Code and that AEP, Sub and CSW will not
recognize any gain or loss as a result of the Merger. CSW has received from its
tax counsel, Christy & Viener, an opinion to the effect that the Merger will be
treated for United States federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code, that AEP, Sub and CSW each will be a
party to the reorganization within the meaning of Section 368(b) of the Code,
and that stockholders of CSW will not recognize any gain or loss upon the
receipt of AEP Shares for their CSW Shares, other than with respect to cash
received in lieu of fractional shares. Such opinions are subject to certain
assumptions and based on certain representations of AEP, Sub and CSW.
Stockholders of CSW should be aware that such opinions are not binding on the
Internal Revenue Service (the "IRS"), and no assurance can be given that the IRS
will not adopt a contrary position or that a contrary IRS position would not be
sustained by a court.
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Since, in the opinion of counsel for AEP and CSW, the Merger will qualify as
a reorganization under Section 368(a) of the Code, the following United States
federal income tax consequences will result:
(a) no gain or loss will be recognized by AEP, Sub or CSW in connection with
the Merger;
(b) no gain or loss will be recognized by a holder of CSW Shares upon the
exchange of all such holder's shares of CSW Shares solely for AEP Shares in the
Merger;
(c) the aggregate basis of the AEP Shares received by a CSW stockholder in
the Merger (including any fractional share deemed received) will be the same as
the aggregate basis of the CSW Shares surrendered in exchange therefor;
(d) the holding period of the AEP Shares received by a CSW stockholder in
the Merger (including any fractional share deemed received) will include the
holding period of the CSW Shares surrendered in exchange therefor; provided that
such CSW Shares are held as capital assets at the Effective Time; and
(e) a stockholder of CSW who receives cash in lieu of a fractional share
will recognize gain or loss equal to the difference, if any, between such
stockholder's basis in the fractional share (as described in paragraph (c)
above) and the amount of cash received. Such gain or loss will be eligible for
long-term capital gain or loss treatment if the CSW Shares are held by such
stockholder as a capital asset at the Effective Time, and the holding period for
a fractional share (as described in paragraph (d) above) is more than one year
at the Effective Time. If the holding period for a fractional share is more than
18 months at the Effective Time, a maximum tax rate of 20% will apply to any
such capital gain if recognized by a CSW stockholder who is an individual.
UNDER THE TERMS OF THE MERGER AGREEMENT AEP AND/OR CSW MAY WAIVE THE
REQUIREMENT THAT SUCH PARTIES RECEIVE THE BRING-DOWN OPINIONS OF TAX COUNSEL
DESCRIBED ABOVE AT CLOSING. IF THE RECEIPT OF SUCH TAX OPINIONS AT CLOSING IS
WAIVED BY EITHER PARTY, AEP AND CSW WILL RECIRCULATE THIS JOINT PROXY
STATEMENT/PROSPECTUS TO DISCLOSE ANY SUCH WAIVER AND ALL RELATED MATERIAL
DISCLOSURE, INCLUDING RISKS TO INVESTORS, AND RESOLICIT THE VOTES OF THE
RESPECTIVE STOCKHOLDERS OF AEP AND CSW.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for using the "pooling of interests"
method of accounting for business combinations pursuant to Opinion No. 16 of the
Accounting Principles Board. The pooling of interests method of accounting
assumes that the combining companies have been merged from inception, and the
historical financial statements for periods prior to consummation of the Merger
are restated as though the companies had been combined from inception. See the
"Unaudited Pro Forma Combined Condensed Financial Statements."
The receipt on the closing date by AEP of a letter from Deloitte & Touche
LLP and by CSW of a letter from Arthur Andersen LLP, their respective
independent accountants, stating that the transaction will qualify as a pooling
is a condition to the consummation of the Merger. In addition, the Merger
Agreement provides that each person who may be deemed an affiliate of CSW or AEP
will enter into an agreement with AEP not to sell or otherwise transfer any CSW
Shares or AEP Shares, as the case may be, within 30 days prior to the Effective
Time or any AEP Shares thereafter prior to the publication of financial results
that include at least 30 days of post-Merger combined operations of AEP and CSW.
Forms of such agreements ("Affiliate's Agreements") are attached as Annexes B
and C to the Merger Agreement, a copy of which is itself attached to this Joint
Proxy Statement/Prospectus as Annex I. In accordance with the provisions of the
Merger Agreement, AEP and CSW will each use commercially reasonable efforts to
obtain, not later than 10 days prior to the date of the respective shareholders'
meetings, executed Affiliate's Agreements from all persons known to the
managements of AEP or CSW to be affiliates of either corporation.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the CSW Board's recommendation that you vote in favor of the
Merger, CSW stockholders should be aware that the officers of CSW, including
some officers who are also directors, and nonemployee directors of CSW have
certain interests in the Merger that are different from, or in addition to, the
interests of stockholders of CSW generally.
OWNERSHIP OF CSW SHARES; STOCK OPTIONS
As of December 31, 1997, directors and executive officers of CSW
beneficially owned an aggregate of 486,165 CSW Shares. As of December 31, 1997,
directors and executive officers of CSW held options to purchase an aggregate of
561,191 CSW Shares, of which options to purchase 239,258 CSW Shares were
exercisable. See "The Merger Agreement--Stock Based Compensation and Employee
Benefit Plans;" and "Compensation Information of Directors and Executive
Officers of CSW."
CSW LONG-TERM INCENTIVE PLAN AND CHANGE IN CONTROL AGREEMENTS.
CSW's Amended and Restated 1992 Long-Term Incentive Plan (the "CSW Incentive
Plan") provides for awards of stock options, stock appreciation rights,
restricted stock, phantom stock, and performance unit awards to employees
selected by the CSW compensation committee. See "THE CSW MEETING-- ADDITIONAL
MATTERS--Executive Compensation." As of December 31, 1997, the executive
officers of CSW had received awards of restricted stock, stock options and
performance units, as described elsewhere in this Joint Proxy
Statement/Prospectus. Upon a Change in Control (as defined in the CSW Incentive
Plan), the awards previously granted to those employees will become fully
exercisable, fully vested, or fully earned. A Change in Control, includes, among
other things, a merger, acquisition or consolidation following which the
stockholders of CSW own less than 75% of the surviving entity. Consummation of
the Merger will constitute a Change in Control under the CSW Incentive Plan.
Pursuant to CSW Board of Directors approval in October 1996, CSW also has
Change in Control Agreements (the "Change in Control Agreements") with 16 key
employees, including those individuals named in the CSW Summary Compensation
Table. See "The CSW Meeting--Additional Matters--Cash and Other Forms of
Compensation." The purpose of the Change in Control Agreements is to assure the
objective judgment and to retain the loyalty of these key employees in the event
of a Change in Control (as defined) of CSW. A Change in Control includes, among
other things, any person gaining ownership or control of 25% or more of the
outstanding shares of CSW's voting stock or the closing of any merger,
acquisition or consolidation following which the former shareholders of CSW own
less than 75% of the surviving entity. The Merger will constitute such a Change
in Control.
The Change in Control Agreements entitle such employees, in certain
circumstances, including but not limited to, a termination by CSW within three
years after a Change in Control (prior to the expiration of the Change in
Control Agreements), to receive (i) a lump sum payment equal to two to four
times of their base salary plus target bonus, (ii) enhanced non-qualified
retirement benefits, (iii) continued health and other welfare benefits for up to
three years and (iv) various other non-qualified benefits. Such employees are
also eligible for an additional payment, if required, to make them whole for any
excise tax imposed by Section 4999 of the Code.
The total amount that may be payable to CSW's officers and directors in
connection with the Merger pursuant to the Change in Control Agreements is
approximately $48.4 million (including, $10.4 million payable under the CSW
Incentive Plan), plus any additional payments that may be necessary to cover
excise tax liabilities (including any gross-up) under Section 4999 of the Code
in connection with such payments. In order to encourage retention of key
executives, and for other business reasons, CSW and AEP are currently evaluating
certain modifications to the Change in Control Agreements which are not expected
to result in an increase in such payments.
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CSW DIRECTORS COMPENSATION PLAN.
CSW's Directors Compensation Plan (the "CSW Directors Plan") provides cash
compensation, phantom stock, deferred compensation and certain other benefits to
directors of CSW who are not employees of CSW ("CSW Nonemployee Directors"). The
CSW Directors Plan provides that in the event of a Corporate Change (as defined
in the CSW Directors Plan), each previously granted phantom stock unit will be
converted into one CSW Share. These CSW Shares will be distributed in a lump sum
to the CSW Nonemployee Directors. A Corporate Change means the occurrence of (i)
a merger or consolidation where CSW is not the surviving corporation (or
survives only as subsidiary of an entity other than a previously wholly-owned
subsidiary of CSW), (ii) the sale, lease or exchange or agreement to sell, lease
or exchange by CSW of 85% or more of its assets to any person or entity (other
than a wholly-owned subsidiary of CSW), or (iii) the dissolution or liquidation
of CSW. Consummation of the Merger will constitute a Corporate Change under the
CSW Directors Plan. As of December 31, 1997, CSW had granted 5,400 phantom stock
units to CSW Nonemployee Directors. In the absence of a Corporate Change,
phantom stock units granted under the CSW Directors Plan vest at such time as a
director ceases to be a member of the CSW Board and are then converted into CSW
Shares on a one-for-one basis.
CSW SEVERANCE PLAN.
CSW's Severance Benefit Plan (the "CSW Severance Plan") provides severance
benefits to certain full time employees who are terminated following a
restructuring or reorganization (other than those employees covered by Change in
Control Agreements). Upon consummation of the Merger, full time employees whose
positions are eliminated will receive, among other things, a cash payment based
on years of service and certain company paid welfare benefits. Upon consummation
of the Merger if all executives are severed, CSW expects to make payments of up
to approximately $2.5 million to executive officers under the CSW Severance
Plan.
CSW RETENTION PLAN
CSW has entered into retention agreements with a number of executives and
managers ("agreement holders") whom it believes are critical to consummating the
Merger and are likely to have attractive employment opportunities outside of
CSW. There are two types of agreements; one provides for payment of a cash bonus
effective on the successful completion of the Merger and the other provides for
payment of a cash bonus January 31, 2000. These agreements provide for the
payment of a cash bonus within ten days of the successful completion of the
Merger, provided in both cases that the agreement holder is still an employee of
CSW at the Effective Time, or if the agreement holder has been terminated by the
company due to Merger-related staffing decisions. Agreement holders are also
entitled to an additional payment, if necessary to make him or her whole for any
excise tax, together with interest or penalties, imposed by Section 4999 of the
Code on such payments made by CSW. The total cost of these agreements at the
time of this Joint Proxy Statement/Prospectus is currently estimated at between
$7.5 and $10.0 million, not including any gross-up, if necessary, for excise
taxes.
BOARD OF DIRECTORS
Pursuant to the Merger Agreement, AEP has agreed to increase the size of the
AEP Board of Directors at the Effective Time to 15 directors and take other
actions in order to reconstitute the Board to include all then current board
members of AEP, Mr. Brooks and four additional outside directors of CSW to be
nominated by AEP. The four additional outside directors have not been selected
to date.
DIRECTOR AND OFFICER INDEMNIFICATION AND INSURANCE
For a period of six years after the Effective Time, AEP has agreed to
maintain in effect the current policies of directors' and officers' liability
insurance maintained by CSW (or similarly advantageous
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policies) with respect to claims arising from facts or events which occurred
before the Effective Time. AEP will not, however, be obligated to make any
annual premium payments for such insurance to the extent such premiums exceed
200% of the greater of the current amount of premiums paid by CSW as of the date
of the Merger Agreement or annual premiums for the year in which the Closing
occurs paid by CSW.
Until six years from the Effective Time, the certificate of incorporation
and bylaws of CSW shall not be amended to reduce or limit the rights of
indemnity afforded to the present and former directors and officers of CSW.
After the Merger, AEP will at all times exercise the powers granted to it to
indemnify the present and former directors, officers, employees and agents of
CSW against claims made against them arising from their service in such
capacities prior to the Effective Time.
STOCK EXCHANGE LISTING
It is a condition to the parties' obligations under the Merger Agreement
that the AEP Shares issuable pursuant to the Merger Agreement be approved for
listing on the NYSE, subject to official notice of issuance.
RESTRICTIONS ON RESALES BY AFFILIATES
The AEP Shares to be received by CSW stockholders in connection with the
Merger have been registered under the Securities Act of 1933, and the rules and
regulations promulgated thereunder (the "Securities Act") and, except as set
forth in this paragraph, may be traded without restriction. The AEP Stock to be
issued in connection with the Merger and received by persons who are deemed to
be "affiliates" (as that term is defined in Rule 144 under the Securities Act)
of CSW prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 under the Securities Act (or, in case any
such person should become an affiliate of AEP, Rule 144 under the Securities
Act) or as otherwise permitted under the Securities Act. Under guidelines
published by the SEC, the sale or other disposition of AEP Shares or CSW Shares
by an affiliate of either AEP or CSW, as the case may be, within 30 days prior
to the Effective Time, or the sale or other disposition of AEP Shares
thereafter, prior to the publication of financial results that include at least
30 days of post-Merger combined operations of AEP and CSW (the "Pooling Period")
could preclude pooling of interests accounting treatment of the Merger.
Accordingly, the Merger Agreement provides that CSW and AEP will use all
reasonable efforts to cause each of its affiliates to execute an Affiliate's
Agreement to the effect that such persons will not sell, transfer or otherwise
dispose of any CSW Shares or AEP Shares, as the case may be, during the Pooling
Period (subject to certain exceptions for transactions that would not have an
adverse impact on the availability of pooling of interest accounting treatment)
and, with respect to affiliates of CSW, that such persons will not sell,
transfer or otherwise dispose of AEP Shares at any time in violation of the
Securities Act or the rules and regulations promulgated thereunder, including
Rule 145. As indicated under "-- Anticipated Accounting Treatment," AEP and CSW
will each use commercially reasonable efforts to obtain, not later than 10 days
prior to the date of the respective shareholders' meetings, executed Affiliate's
Agreements from all persons known to the managements of AEP or CSW to be
affiliates of such corporations, respectively.
63
<PAGE>
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
reflect the historical condensed balance sheets and condensed statements of
income of AEP and CSW, including their respective subsidiaries, after giving
effect to the Merger as a pooling of interests. The unaudited pro forma combined
condensed balance sheet gives effect to the Merger as though it occurred on the
balance sheet date, December 31, 1997.
The unaudited pro forma combined condensed statements of income for the
years ended December 31, 1997, 1996 and 1995 give effect to the Merger as if it
occurred on January 1, 1995. The statements are based on accounting for the
business combination as a pooling of interests and are based on the assumptions
in the notes to unaudited pro forma combined condensed financial statements.
Certain CSW historical income statement and balance sheet items were
reclassified to conform with the presentation expected to be used by AEP after
the Merger is completed.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of the results of operations that might have occurred had
the Merger actually taken place on January 1, 1995 or the actual financial
position that might have resulted had the Merger been consummated on December
31, 1997 or of the future results of operations or financial position of AEP.
The unaudited pro forma combined condensed financial statements have been
prepared from, and should be read in conjunction with the historical financial
statements and related notes thereto of AEP and CSW, incorporated by reference
herein. See "WHERE YOU CAN FIND MORE INFORMATION."
64
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW
AEP (AS PRO FORMA PRO FORMA
(AS REPORTED) RECLASSIFIED) ADJUSTMENTS COMBINED
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................ $ 6,161 $ 3,321 $ 9,482
United Kingdom....................................... -- 1,870 1,870
------ ------ -----------
TOTAL OPERATING REVENUES........................... 6,161 5,191 11,352
------ ------ -----------
OPERATING EXPENSES:
Fuel................................................. 1,627 1,177 2,804
Purchased Power...................................... 416 89 505
United Kingdom Cost of Sales......................... -- 1,291 1,291
Other Operation...................................... 1,228 948 2,176
Maintenance.......................................... 483 152 635
Depreciation and Amortization........................ 591 491 1,082
Taxes Other Than Federal Income Taxes................ 491 240 731
Federal Income Taxes................................. 341 106 447
------ ------ -----------
TOTAL OPERATING EXPENSES........................... 5,177 4,494 9,671
------ ------ -----------
OPERATING INCOME....................................... 984 697 1,681
NONOPERATING INCOME.................................... 60 70 130
------ ------ -----------
INCOME BEFORE INTEREST CHARGES AND PREFERRED
DIVIDENDS............................................ 1,044 767 1,811
INTEREST CHARGES....................................... 406 436 842
PREFERRED STOCK DIVIDEND REQUIREMENTS OF
SUBSIDIARIES......................................... 18 12 30
GAIN ON REACQUIRED PREFERRED STOCK OF SUBSIDIARIES..... -- 10 10
------ ------ -----------
INCOME BEFORE EXTRAORDINARY ITEM....................... 620 329 949
EXTRAORDINARY LOSS--U.K. WINDFALL TAX.................. (109) (176) (285)
------ ------ -----------
NET INCOME............................................. $ 511 $ 153 $ 664
------ ------ -----------
------ ------ -----------
Average Number of Shares Outstanding................... 189.0 212.1 (84.8) 316.3
------ ------ -----------
------ ------ -----------
EARNINGS PER SHARE (basic and diluted):
Before Extraordinary Item............................ $ 3.28 $ 1.55 $ 3.00
Extraordinary Loss................................... (0.58) (0.83) (0.90)
------ ------ -----------
EARNINGS PER SHARE................................... $ 2.70 $ 0.72 $ 2.10
------ ------ -----------
------ ------ -----------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
65
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW
AEP (AS PRO FORMA PRO FORMA
(AS REPORTED) RECLASSIFIED) ADJUSTMENTS COMBINED
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................ $ 5,849 $ 3,248 $ 9,097
United Kingdom....................................... -- 1,848 1,848
------ ------ -----------
TOTAL OPERATING REVENUES........................... 5,849 5,096 10,945
------ ------ -----------
OPERATING EXPENSES:
Fuel................................................. 1,601 1,151 2,752
Purchased Power...................................... 86 77 163
United Kingdom Cost of Sales......................... -- 1,331 1,331
Other Operation...................................... 1,210 780 1,990
Maintenance.......................................... 503 150 653
Depreciation and Amortization........................ 601 459 1,060
Taxes Other Than Federal Income Taxes................ 498 255 753
Federal Income Taxes................................. 342 152 494
------ ------ -----------
TOTAL OPERATING EXPENSES............................... 4,841 4,355 9,196
------ ------ -----------
OPERATING INCOME....................................... 1,008 741 1,749
NONOPERATING INCOME (LOSS)............................. 2 (7) (5)
------ ------ -----------
INCOME BEFORE INTEREST CHARGES AND PREFERRED
DIVIDENDS............................................ 1,010 734 1,744
INTEREST CHARGES....................................... 381 419 800
PREFERRED STOCK DIVIDEND REQUIREMENTS OF
SUBSIDIARIES......................................... 42 18 60
------ ------ -----------
INCOME FROM CONTINUING OPERATIONS...................... 587 297 884
DISCONTINUED OPERATIONS................................ -- 132 132
------ ------ -----------
NET INCOME............................................. $ 587 $ 429 $ 1,016
------ ------ -----------
------ ------ -----------
Average Number of Shares Outstanding................... 187.3 207.5 (83.0) 311.8
------ ------ -----------
------ ------ -----------
EARNINGS PER SHARE (basic and diluted):
Continuing Operations................................ $ 3.14 $ 1.43 $ 2.84
Discontinued Operations.............................. -- 0.64 0.42
------ ------ -----------
EARNINGS PER SHARE................................... $ 3.14 $ 2.07 $ 3.26
------ ------ -----------
------ ------ -----------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
66
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW
AEP (AS PRO FORMA PRO FORMA
(AS REPORTED) RECLASSIFIED) ADJUSTMENTS COMBINED
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................ $ 5,670 $ 2,883 $ 8,553
United Kingdom....................................... -- 208 208
------ ------ -----------
TOTAL OPERATING REVENUES............................... 5,670 3,091 8,761
------ ------ -----------
OPERATING EXPENSES:
Fuel................................................. 1,537 1,004 2,541
Purchased Power...................................... 88 41 129
United Kingdom Cost of Sales......................... -- 158 158
Other Operation...................................... 1,184 551 1,735
Maintenance.......................................... 542 155 697
Depreciation and Amortization........................ 593 352 945
Taxes Other Than Federal Income Taxes................ 489 178 667
Federal Income Taxes................................. 272 67 339
------ ------ -----------
TOTAL OPERATING EXPENSES............................... 4,705 2,506 7,211
------ ------ -----------
OPERATING INCOME....................................... 965 585 1,550
NONOPERATING INCOME.................................... 20 135 155
------ ------ -----------
INCOME BEFORE INTEREST CHARGES AND PREFERRED
DIVIDENDS............................................ 985 720 1,705
INTEREST CHARGES....................................... 400 324 724
PREFERRED STOCK DIVIDEND REQUIREMENTS OF
SUBSIDIARIES......................................... 55 19 74
------ ------ -----------
INCOME FROM CONTINUING OPERATIONS...................... 530 377 907
DISCONTINUED OPERATIONS................................ -- 25 25
------ ------ -----------
NET INCOME............................................. $ 530 $ 402 $ 932
------ ------ -----------
------ ------ -----------
Average Number of Shares Outstanding................... 185.8 191.7 (76.7) 300.8
------ ------ -----------
------ ------ -----------
EARNINGS PER SHARE (basic and diluted):
Continuing Operations................................ $ 2.85 $ 1.97 $ 3.02
Discontinued Operations.............................. -- 0.13 0.08
------ ------ -----------
EARNINGS PER SHARE................................... $ 2.85 $ 2.10 $ 3.10
------ ------ -----------
------ ------ -----------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
67
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
UNAUDITED RECLASSIFYING CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW CSW
CSW (RECLASSIFYING (AS
(AS REPORTED) ENTRIES) RECLASSIFIED)
------------- --------------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................... $ 3,321 $ 3,321
United Kingdom.......................................... 1,870 1,870
Other Diversified....................................... 77 $ (77)(A) --
------ ----- ------
TOTAL OPERATING REVENUES.................................. 5,268 (77) 5,191
------ ----- ------
OPERATING EXPENSES:
U.S. Electric Fuel...................................... 1,177 1,177
U.S. Electric Purchased Power........................... 89 89
United Kingdom Cost of Sales............................ 1,291 1,291
Other Operation......................................... 981 (33)(A) 948
Maintenance............................................. 152 152
Depreciation and Amortization........................... 497 (6)(A) 491
Taxes Other Than Federal Income Taxes................... 195 45(B) 240
Federal Income Taxes.................................... 151 (45)(A,B) 106
------ ----- ------
TOTAL OPERATING EXPENSES.................................. 4,533 (39) 4,494
------ ----- ------
OPERATING INCOME.......................................... 735 (38) 697
NONOPERATING INCOME....................................... 32 38(A) 70
------ ----- ------
INCOME BEFORE INTEREST CHARGES............................ 767 -- 767
------ ----- ------
INTEREST CHARGES:
Interest on Long-term Debt.............................. 333 333
Distributions on Trust Preferred Securities............. 17 17
Interest on Short-term Debt and Other................... 86 86
------ ------
TOTAL INTEREST CHARGES.................................... 436 436
PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES..... 12 12
GAIN ON REACQUIRED PREFERRED STOCK OF SUBSIDIARIES........ (10) (10)
------ ------
INCOME BEFORE EXTRAORDINARY ITEM.......................... 329 329
EXTRAORDINARY LOSS--U.K. WINDFALL TAX..................... (176) (176)
------ ----- ------
NET INCOME FOR COMMON STOCK............................... $ 153 $ -- $ 153
------ ----- ------
------ ----- ------
Average Number of Shares Outstanding...................... 212.1 212.1
------ ------
------ ------
EARNINGS PER SHARE (basic and diluted):
Before Extraordinary Item............................... $ 1.55 $ 1.55
Extraordinary Loss...................................... (0.83) (0.83)
------ ------
EARNINGS PER SHARE...................................... $ 0.72 $ 0.72
------ ------
------ ------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
68
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
UNAUDITED RECLASSIFYING CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW CSW
CSW (RECLASSIFYING (AS
(AS REPORTED) ENTRIES) RECLASSIFIED)
------------- --------------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................... $ 3,248 $ 3,248
United Kingdom.......................................... 1,848 1,848
Other Diversified....................................... 59 $ (59)(A) --
------ ----- ------
TOTAL OPERATING REVENUES.................................. 5,155 (59) 5,096
------ ----- ------
OPERATING EXPENSES:
U.S. Electric Fuel...................................... 1,151 1,151
U.S. Electric Purchased Power........................... 77 77
United Kingdom Cost of Sales............................ 1,331 1,331
Other Operation......................................... 785 (5)(A) 780
Maintenance............................................. 150 150
Depreciation and Amortization........................... 464 (5)(A) 459
Taxes Other Than Federal Income Taxes................... 178 77 (A,B 255
Federal Income Taxes.................................... 224 (72)(A,B) 152
------ ----- ------
TOTAL OPERATING EXPENSES.................................. 4,360 (5) 4,355
------ ----- ------
OPERATING INCOME.......................................... 795 (54) 741
NONOPERATING INCOME (LOSS)................................ (61) 54(A) (7)
------ ----- ------
INCOME BEFORE INTEREST CHARGES............................ 734 -- 734
------ ----- ------
INTEREST CHARGES:
Interest on Long-term Debt.............................. 325 325
Interest on Short-term Debt and Other................... 94 94
------ ------
TOTAL INTEREST CHARGES.................................... 419 419
PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES..... 18 18
------ ------
INCOME FROM CONTINUING OPERATIONS......................... 297 297
DISCONTINUED OPERATIONS................................... 132 132
------ ----- ------
NET INCOME FOR COMMON STOCK............................... $ 429 $ -- $ 429
------ ----- ------
------ ----- ------
Average Number of Shares Outstanding...................... 207.5 207.5
------ ------
------ ------
EARNINGS PER SHARE (basic and diluted):
Continuing Operations................................... $ 1.43 $ 1.43
Discontinued Operations................................. 0.64 0.64
------ ------
EARNINGS PER SHARE...................................... $ 2.07 $ 2.07
------ ------
------ ------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
69
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
UNAUDITED RECLASSIFYING CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CSW CSW
CSW (RECLASSIFYING (AS
(AS REPORTED) ENTRIES) RECLASSIFIED)
------------- --------------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
U.S. Electric........................................... $ 2,883 $ 2,883
United Kingdom.......................................... 208 208
Other Diversified....................................... 52 $ (52)(A) --
------ ----- ------
TOTAL OPERATING REVENUES.................................. 3,143 (52) 3,091
------ ----- ------
OPERATING EXPENSES:
U.S. Electric Fuel...................................... 1,004 1,004
U.S. Electric Purchased Power........................... 41 41
United Kingdom Cost of Sales............................ 158 158
Other Operation......................................... 557 (6)(A) 551
Maintenance............................................. 155 155
Depreciation and Amortization........................... 353 (1)(A) 352
Taxes Other Than Federal Income Taxes................... 162 16 (A,B 178
Federal Income Taxes.................................... 92 (25)(A,B) 67
------ ----- ------
TOTAL OPERATING EXPENSES.................................. 2,522 (16) 2,506
------ ----- ------
OPERATING INCOME.......................................... 621 (36) 585
NONOPERATING INCOME....................................... 99 36(A) 135
------ ----- ------
INCOME BEFORE INTEREST CHARGES............................ 720 -- 720
------ ----- ------
INTEREST CHARGES:
Interest on Long-term Debt.............................. 223 223
Interest on Short-term Debt and Other................... 101 101
------ ------
TOTAL INTEREST CHARGES.................................... 324 324
PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES..... 19 19
------ ------
INCOME FROM CONTINUING OPERATIONS......................... 377 377
DISCONTINUED OPERATIONS................................... 25 25
------ ----- ------
NET INCOME FOR COMMON STOCK............................... $ 402 $ -- $ 402
------ ----- ------
------ ----- ------
Average Number of Shares Outstanding...................... 191.7 191.7
------ ------
------ ------
EARNINGS PER SHARE (basic and diluted):
Continuing Operations................................... $ 1.97 $ 1.97
Discontinued Operations................................. 0.13 0.13
------ ------
EARNINGS PER SHARE...................................... $ 2.10 $ 2.10
------ ------
------ ------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
70
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
CSW
AEP (AS PRO FORMA PRO FORMA
(AS REPORTED) RECLASSIFIED) ADJUSTMENTS COMBINED
------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
ELECTRIC UTILITY PLANT:
Production........................................... $ 9,493 $ 5,824 $ 15,317
Transmission......................................... 3,502 1,558 5,060
Distribution......................................... 4,654 4,453 9,107
General (including mining assets and nuclear fuel)... 1,605 1,577 3,182
Construction Work in Progress........................ 343 184 527
------------- ------- -----------
Total Electric Utility Plant..................... 19,597 13,596 33,193
Accumulated Depreciation and Amortization............ 7,964 5,217 13,181
------------- ------- -----------
NET ELECTRIC UTILITY PLANT....................... 11,633 8,379 20,012
------------- ------- -----------
OTHER PROPERTY AND INVESTMENTS......................... 1,359 800 2,159
------------- ------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents............................ 91 75 166
Accounts Receivable (net)............................ 668 840 1,508
Fuel................................................. 225 65 290
Materials and Supplies............................... 264 172 436
Accrued Utility Revenues............................. 189 76 265
Prepayments and Other................................ 81 78 159
------------- ------- -----------
TOTAL CURRENT ASSETS............................. 1,518 1,306 2,824
------------- ------- -----------
REGULATORY ASSETS...................................... 1,817 1,440 3,257
------------- ------- -----------
GOODWILL............................................... -- 1,428 1,428
------------- ------- -----------
DEFERRED CHARGES....................................... 288 98 386
------------- ------- -----------
TOTAL............................................ $ 16,615 $ 13,451 $ 30,066
------------- ------- -----------
------------- ------- -----------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
71
<PAGE>
AMERICAN ELECTRIC POWER COMPANY, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
CSW
AEP (AS PRO FORMA PRO FORMA
(AS REPORTED) RECLASSIFIED) ADJUSTMENTS COMBINED
------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stock......................................... $ 1,293 $ 743 $ 85 $ 2,121
Paid-in Capital...................................... 1,779 1,039 (85) 2,733
Retained Earnings.................................... 1,605 1,774 (50) 3,329
------------- ------- ------------ -----------
Total Common Shareholders' Equity................ 4,677 3,556 (50) 8,183
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption................ 47 176 223
Subject to Mandatory Redemption.................... 128 26 154
Certain Subsidiary-obligated, Mandatorily Redeemable,
Preferred Securities of Subsidiary Trusts.......... -- 335 335
Long-term Debt....................................... 5,129 3,898 9,027
------------- ------- ------------ -----------
TOTAL CAPITALIZATION............................. 9,981 7,991 (50) 17,922
------------- ------- ------------ -----------
OTHER NONCURRENT LIABILITIES........................... 1,246 27 1,273
------------- ------- -----------
CURRENT LIABILITIES:
Preferred Stock and Long-term Debt Due Within One
Year............................................... 295 32 327
Short-term Debt...................................... 555 1,413 1,968
Accounts Payable..................................... 353 558 911
Taxes Accrued........................................ 381 171 552
Interest Accrued..................................... 76 87 163
Obligations Under Capital Leases..................... 101 2 103
Other................................................ 323 236 50 609
------------- ------- ------------ -----------
TOTAL CURRENT LIABILITIES........................ 2,084 2,499 50 4,633
------------- ------- ------------ -----------
DEFERRED INCOME TAXES.................................. 2,561 2,432 4,993
------------- ------- -----------
DEFERRED INVESTMENT TAX CREDITS........................ 376 278 654
------------- ------- -----------
DEFERRED GAIN ON SALE AND LEASEBACK--ROCKPORT PLANT
UNIT 2............................................... 231 -- 231
------------- ------- -----------
DEFERRED CREDITS....................................... 136 224 360
------------- ------- -----------
TOTAL.................................................. $ 16,615 $ 13,451 $ 30,066
------------- ------- -----------
------------- ------- -----------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
72
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
UNAUDITED RECLASSIFYING CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
CSW CSW
CSW (RECLASSIFYING (AS
(AS REPORTED) ENTRIES) RECLASSIFIED)
------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
FIXED ASSETS:
Electric
Production................................................. $ 5,824 $ 5,824
Transmission............................................... 1,558 1,558
Distribution............................................... 4,453 4,453
General.................................................... 1,381 $ 196(C) 1,577
Construction Work in Progress.............................. 184 184
Nuclear Fuel............................................... 196 (196)(C) --
------------- ------ -------
Total Electric......................................... 13,596 -- 13,596
Other Diversified.......................................... 250 (250)(D) --
------------- ------ -------
Total Fixed Assets..................................... 13,846 (250) 13,596
Accumulated Depreciation and Amortization.................... 5,218 (1)(D) 5,217
------------- ------ -------
NET FIXED ASSETS......................................... 8,628 (249) 8,379
------------- ------ -------
OTHER PROPERTY AND INVESTMENTS............................... -- 800 ( E,F 800
------------- ------ -------
CURRENT ASSETS:
Cash and Cash Equivalents.................................. 75 75
Accounts Receivable........................................ 916 (76)(G) 840
Fuel....................................................... 65 65
Materials and Supplies..................................... 172 172
Accrued Utility Revenues................................... -- 76(G) 76
Under-Recovered Fuel Costs................................. 84 (84)(H) --
Prepayments and Other...................................... 78 78
------------- ------ -------
TOTAL CURRENT ASSETS..................................... 1,390 (84) 1,306
------------- ------ -------
DEFERRED CHARGES AND OTHER ASSETS:
Deferred Plant Costs....................................... 503 (503)(H) --
Mirror CWIP Asset.......................................... 285 (285)(H) --
Other Non-Utility Investments.............................. 448 (448)(E) --
Securities Available for Sale.............................. 103 (103)(F) --
Income Tax Related Regulatory Assets, Net.................. 329 (329)(H) --
Goodwill................................................... 1,428 1,428
Regulatory Assets.......................................... -- 1,440(H) 1,440
Other Deferred Charges..................................... 337 (239)(H) 98
------------- ------ -------
TOTAL DEFERRED CHARGES AND OTHER ASSETS.................. 3,433 (467) 2,966
------------- ------ -------
TOTAL.................................................. $ 13,451 $ -- $ 13,451
------------- ------ -------
------------- ------ -------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
73
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
UNAUDITED RECLASSIFYING CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
CSW CSW
CSW (RECLASSIFYING (AS
(AS REPORTED) ENTRIES) RECLASSIFIED)
------------- ------------- ---------------
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stock.................................................... $ 743 $ 743
Paid-in Capital................................................. 1,039 1,039
Retained Earnings............................................... 1,746 $ 28(I) 1,774
Foreign Currency Translation Adjustment and Other............... 28 (28)(I) --
------------- ------ -------
Total Common Shareholders' Equity........................... 3,556 -- 3,556
Cumulative Preferred Stocks of Subsidiaries:
Not Subject to Mandatory Redemption........................... 176 176
Subject to Mandatory Redemption............................... 26 26
Certain Subsidiary-obligated, Mandatorily Redeemable,
Preferred Securities of Subsidiary Trusts..................... 335 335
Long-term Debt.................................................. 3,898 3,898
------------- ------ -------
TOTAL CAPITALIZATION........................................ 7,991 -- 7,991
------------- ------ -------
OTHER NONCURRENT LIABILITIES...................................... -- 27 (J,K 27
------------- ------ -------
CURRENT LIABILITIES:
Preferred Stock and Long-term Debt
Due Within One Year........................................... 32 32
Short-term Debt................................................. 721 692(L) 1,413
Short-term Debt--CSW Credit, Inc................................ 636 (636)(L) --
Loan Notes...................................................... 56 (56)(L) --
Accounts Payable................................................ 558 558
Taxes Accrued................................................... 171 171
Interest Accrued................................................ 87 87
Obligations Under Capital Leases................................ -- 2(J) 2
Other........................................................... 238 (2)(J) 236
------------- ------ -------
TOTAL CURRENT LIABILITIES................................... 2,499 -- 2,499
------------- ------ -------
DEFERRED INCOME TAXES............................................. 2,432 2,432
------------- -------
DEFERRED INVESTMENT TAX CREDITS................................... 278 278
------------- -------
DEFERRED CREDITS.................................................. 251 (27)( ,K) 224
------------- ------ -------
TOTAL............................................................. $ 13,451 $ -- $ 13,451
------------- ------ -------
------------- ------ -------
</TABLE>
See "Notes to Unaudited Pro Forma Combined Condensed Financial Statements".
74
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. There were no material intercompany transactions between AEP, including its
subsidiaries, and CSW, including its subsidiaries, during the periods
presented.
2. The unaudited pro forma combined condensed financial statements reflect the
conversion of each outstanding CSW Share into 0.60 of an AEP Share, as
provided in the Merger Agreement. The unaudited pro forma combined condensed
financial statements are presented as if the companies were combined during
all periods included therein. The combined authorized shares reflect the
number of shares which would be authorized assuming the Share Issuance
proposed herein had been approved on December 31, 1997.
3. The principal accounting policies for both companies' regulated operations
are to follow the methods used by their respective regulatory commissions in
establishing rates. The consummation of the Merger is not expected to result
in any changes in the way regulators treat allowable costs for rate-making
purposes. The effects of accounting policy differences are immaterial and
have not been adjusted in the pro forma combined condensed financial
statements.
4. The pro forma average number of outstanding AEP Shares was calculated by
multiplying the average number of outstanding CSW Shares during the year by
the exchange ratio of 0.60 of an AEP Share and adding the result to the
average number of outstanding AEP Shares during the year.
5. The pro forma adjustment to common stock and paid-in capital represents the
effects of recording the Merger of AEP and CSW as of the consummation date
using the pooling of interests method of accounting whereby the common stock
and paid-in capital amounts are adjusted to reflect the difference in par
value ($6.50 per AEP Share compared with $3.50 per CSW Share) and the
exchange ratio of 0.60 of an AEP Share for each CSW Share.
6. In connection with the Merger, the companies expect to incur charges
estimated at approximately $50 million for transaction costs. Such costs
include investment banking (financial advisors), legal, accounting, filing,
printing and other related fees and costs to consummate the Merger. The
combined company intends to seek recovery of the transaction costs through
the regulatory process. The pro forma combined condensed financial
statements do not reflect any of the costs savings estimated to result from
the merger or any cost to achieve the merger. As noted in the "Reasons for
the Merger" section, a sharing of the cost savings, net of the costs to
achieve the Merger, is expected to be the outcome of the various regulatory
proceedings. See "Reasons for the Merger" for further discussion regarding
estimated synergies and cost savings (page 42).
7. The CSW unaudited reclassifying condensed financial statements reflect the
reclassifying entries necessary to adjust CSW's condensed balance sheet and
condensed statement of income presentation to be consistent with the
presentation expected to be used by AEP after the Merger is completed. The
following describes such reclassifying entries:
STATEMENTS OF INCOME RECLASSIFYING ENTRIES
(A) To reclassify other diversified income and expenses to nonoperating
income.
(B) To reclassify state and United Kingdom income taxes.
BALANCE SHEETS RECLASSIFYING ENTRIES
(C) To reclassify nuclear fuel.
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(D) To reclassify non-utility plant and related accumulated depreciation.
(E) To reclassify other non-utility investments.
(F) To reclassify securities available for sale.
(G) To reclassify accrued utility revenues.
(H) To reclassify regulatory assets.
(I) To reclassify foreign currency translation and other.
(J) To reclassify obligations under capital leases.
(K) To reclassify operating reserves.
(L) To reclassify short-term debt.
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DESCRIPTION OF CAPITAL STOCK OF AEP
The following statements are brief summaries of certain provisions relating
to AEP's capital stock and are qualified in their entirety by reference to the
provisions of the AEP Charter and AEP's By-Laws (the "AEP Bylaws"), which are
incorporated by reference as an exhibit to the registration statement on Form
S-4 filed with the SEC by AEP (the "Registration Statement") of which this Joint
Proxy Statement/ Prospectus is a part.
AEP's authorized capitalization presently consists of 300,000,000 AEP
Shares, of which 189,989,989 shares were issued and outstanding as of December
19, 1997.
DIVIDEND RIGHTS
Dividends may be declared and paid on the AEP Shares out of legally
available surplus.
VOTING RIGHTS
The holders of AEP Shares have exclusive voting rights of one vote for each
share held. The holders of AEP Shares are entitled to cumulative voting in the
election of directors.
LIQUIDATION RIGHTS
In the event of any liquidation of AEP, the holders of AEP Shares are
entitled to share ratably in the remaining assets of AEP available for
distribution.
PREEMPTIVE RIGHTS
The holders of AEP Shares, upon the issuance for money or other
consideration of any stock or any securities convertible into any stock, shall
not have any preemptive right unless the AEP Board of Directors determine to
issue and sell AEP Shares solely for money and other than by (i) a public
offering, (ii) an offering to or through underwriters or dealers who agree to
make a public offering, or (iii) any other offering which is authorized or
approved by the affirmative vote of the outstanding AEP Shares.
TRANSFER AGENTS AND REGISTRARS
The transfer agent and registrar for the AEP Shares is First Chicago Trust
Company of New York.
COMPARISON OF RIGHTS OF HOLDERS OF
CSW SHARES AND AEP SHARES
GENERAL
As a result of the Merger, holders of CSW Shares will become shareholders of
AEP, and the rights of such former CSW stockholders will thereafter be governed
by the AEP Charter and the AEP Bylaws and the laws of the State of New York. The
rights of the holders of CSW Shares are currently governed by the Second
Restated Certificate of Incorporation of CSW (the "CSW Charter") and the Bylaws
of CSW, as amended (the "CSW Bylaws") and the laws of the State of Delaware. The
following summary sets forth the material differences between the AEP Charter
and the CSW Charter, the AEP Bylaws and the CSW Bylaws, and New York and
Delaware law. This summary is qualified in its entirety by reference to the full
text of each of such documents and the applicable state statutes. For
information as to how such documents may be obtained, see "WHERE YOU CAN FIND
MORE INFORMATION".
SHAREHOLDER RIGHTS PLANS
AEP has no shareholder rights plan.
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CSW has a stockholder rights plan (the "CSW Rights Agreement") which
provides that after a person or group acquires or announces a tender or exchange
offer to acquire 15% or more of the outstanding CSW Shares, the holder of a CSW
Share (other than the Acquiring Person) is entitled to purchase, at the exercise
price, additional CSW Shares having a current market value of two times the
exercise price (a "CSW Right"). In addition, if CSW is acquired in a merger or
other business combination, each CSW Right will entitle the holder to purchase,
at the exercise price, common stock of the acquiror having a current market
value of two times the exercise price.
The Merger Agreement provides that CSW shall take, and CSW has taken,
actions (including amending the CSW Rights Agreement) so that the execution,
delivery and performance of the Merger Agreement and the consummation of the
Merger and other transactions contemplated thereby, will not result in the grant
of any CSW Right or enable or require that any outstanding CSW Rights be
exercised, distributed or triggered.
VOTING RIGHTS
GENERALLY
Each holder of CSW Shares is entitled to one vote for each share held by
such holder upon each matter voted upon. In the election of directors, the
principle of cumulative voting does not apply. Votes may, in all cases, be cast
by proxy, but no stockholder can designate more than three persons as proxies.
The affirmative vote of a majority of the CSW Shares represented at a meeting
shall be the act of the stockholders, unless a greater number is required by
law.
Every holder of record of AEP Shares has one vote for each share held for
the election of directors and upon all other matters; provided, however, that at
all elections of directors, cumulative voting shall apply.
ELECTION OF DIRECTORS
The CSW Charter provides that directors shall be divided into three classes
as nearly equal in size as is practicable. The directors shall hold office for
three years. The CSW Charter provides that the number of directors should be not
less than nine nor more than fifteen, as may be fixed from time to time by the
resolutions adopted by a majority of the entire CSW Board of Directors. The
number of directors at CSW is currently fixed at 12. The CSW Bylaws provide
that, except with respect to persons who were serving as directors on October
12, 1987, and who were 60 years old or over at such time, the CSW Board of
Directors shall not elect nor propose for election (a) any non-employee who is
70 years old or will be 70 years old on or before the date of the election, or
(b) any employee of CSW or any of its subsidiaries (other than any past or
present Chief Executive Officer of CSW) whose service as such employee has
terminated or will in normal course terminate on or before the date of election.
In addition, the CSW Bylaws provide that the term of any director who is an
employee of CSW or any of its subsidiaries, (other than a Chief Executive
Officer who retires) shall expire concurrently with the termination of service
of that director as an employee.
The AEP Bylaws provide that the number of directors shall be not less than
nine nor more than seventeen. Each director will hold office until the next
annual meeting. The number of directors shall be the number fixed by resolution
of the AEP Board of Directors. The number of directors of AEP is currently fixed
at 13. Upon consummation of the Merger, the number of directors of AEP will be
fixed at 15.
APPROVAL OF CERTAIN TRANSACTIONS
The DGCL generally requires the affirmative vote of a majority of the
outstanding stock entitled to vote thereon for the approval of any merger or
consolidation. Unless required by the certificate of
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incorporation, no stockholder approval is required for certain mergers in which
(i) there is no amendment to the certificate of incorporation of a corporation,
(ii) each share of stock of such corporation is to be an identical outstanding
or treasury share of the surviving corporation after the effective date of the
merger and (iii) either no stock or shares, securities or obligations
convertible into such stock, will be issued or delivered in connection with the
merger or the unissued shares or treasury shares of stock to be issued or
delivered in connection with the merger plus those initially issuable upon any
conversion of any other shares, securities or obligations to be issued or
delivered under such plan are less than 20% of the shares of common stock of
such corporation outstanding immediately prior to the effective date of the
merger.
The New York Business Corporation Law (the "NYBCL") requires for
corporations in existence on February 23, 1998 the certificate of incorporation
of which does not expressly provide for approval of a Merger or consolidation by
a majority vote of the outstanding shares entitled to vote thereon, the
affirmative vote of two-thirds of all outstanding shares entitled to vote
thereon to effect a merger, a consolidation, a share exchange or the sale, lease
or disposition of all or substantially all of a corporation's assets.
Notwithstanding any provision in the certificate of incorporation, the holders
of shares of a class or series are entitled to vote as a class if such shares
will remain outstanding after the merger or will be converted into the right to
receive shares of stock of the surviving or consolidated corporation or another
corporation and the certificate or articles of incorporation of the surviving or
consolidated corporation or of such other corporation immediately after the
effectiveness of the merger or consolidation would contain any provision which
is not contained in the certificate of incorporation of the corporation and
which, if contained in an amendment to the certificate of incorporation, would
entitle the holders of shares of such class or such one or more series to vote
and to vote as a separate class thereon. The NYBCL does not contain a provision
for mergers (other than those between a corporation and its 90% or more owned
subsidiary) without the approval of shareholders similar to that in the DGCL.
Since the Merger is to be effected between Sub and CSW, both Delaware
corporations, (and AEP is not a constituent corporation in the Merger) the
approval procedure described in the preceding paragraph does not apply to AEP
with respect to the Merger.
FAIR PRICE PROVISIONS
The CSW Charter contains a "fair price" provision that applies to certain
business combination transactions involving (i) any person that beneficially
owns 5% or more of the voting power of all of the outstanding stock of CSW or
(ii) any affiliate (as defined in the CSW Charter) or associate (as defined in
the CSW Charter) of CSW that during the previous two year period was the
beneficial owner of 5% or more of the voting power of all of the outstanding
stock of CSW (a "CSW Interested Stockholder"). The "fair price" provision
requires (i) the affirmative vote of the holders of at least 80% of the
outstanding voting stock of CSW and (ii) the affirmative vote of a majority of
the outstanding voting stock of CSW held by persons other than the CSW
Interested Stockholder to approve certain transactions between CSW and the CSW
Interested Stockholder. These transactions include any merger or consolidation
of CSW or its subsidiaries, any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of the assets of CSW having a fair market value in
excess of $25 million, any adoption of a plan or proposal of termination,
liquidation or dissolution of CSW, any reclassification of securities or
recapitalizations of CSW, certain issuances or transfers of CSW securities, and
certain other transactions involving the CSW Interested Stockholder. The voting
requirement does not apply to certain transactions, including those that are
approved by CSW's Continuing Directors (as defined in the CSW Charter) or that
meet certain "fair price" criteria contained in the CSW Charter. THE CSW BOARD
APPROVED THE MERGER AT ITS DECEMBER 21, 1997 MEETING, THUS THE ABOVE DESCRIBED
VOTING REQUIREMENT DOES NOT APPLY TO THE VOTE TO APPROVE AND ADOPT THE MERGER.
The AEP Charter contains a "fair price" provision that applies to certain
business combinations or transactions involving (i) any person that beneficially
owns more than 5% of the combined voting power of the then outstanding voting
stock of AEP, (ii) any affiliate (as defined in the AEP Charter) of AEP that
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within the five-year period immediately prior to the date in question,
beneficially owned more than 5% of the combined voting power of the outstanding
voting stock of AEP (each of the shareholders described in clauses (i) and (ii)
being referred to as "AEP Interested Stockholders"), or (iii) an assignee of or
one who otherwise succeeded to any shares of voting stock which were during the
prior five-year period beneficially owned by an AEP Interested Stockholder,
provided that the transaction to which such assignment occurred was not a public
offering. The "fair price" provision requires the affirmative vote of (i) at
least 75% of the combined voting power of the then issued and outstanding voting
stock of AEP, and (ii) a majority of the combined voting power of the then
issued and outstanding voting stock beneficially owned by persons other than
such AEP Interested Stockholder to approve certain transactions between AEP and
the AEP Interested Stockholder. These transactions include any merger or
consolidation of AEP or any subsidiary with the AEP Interested Stockholder or
any other corporation which is or would be an affiliate of an AEP Interested
Stockholder, any sale, lease, license, exchange, mortgage, pledge, transfer or
other disposition of the assets of AEP having a fair market value of more than
$100 million to or with any AEP Interested Stockholder, the issuance or transfer
by AEP or any subsidiary of any securities of AEP or a subsidiary having a fair
market value of more than $100 million to any AEP Interested Stockholder or any
affiliate, the adoption of any plan for the liquidation or dissolution of AEP
proposed by or on behalf of the AEP Interested Stockholder or any affiliate, or
any reclassification of securities, recapitalization or reorganization of AEP,
or any merger or consolidation of AEP with any of its subsidiaries, or any self
tender offer for or repurchase which has the effect of increasing the
proportionate share of outstanding shares owned by any AEP Interested
Stockholder or any affiliate. The voting requirement does not apply to certain
transactions, including those that are approved by a majority of AEP's
Disinterested Directors (as defined in the AEP Charter) or that meet certain
"fair price" criteria contained in the AEP Charter.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Under both Delaware and New York law, amendments to a certificate of
incorporation may be authorized by the vote of the holders of a majority of all
outstanding shares entitled to vote thereon. Both states also provide for
approval by vote of the holders of a majority of outstanding shares of a
particular class of stock in certain circumstances.
SPECIAL MEETINGS
Under both Delaware and New York law, special meetings of stockholders may
be called by the board of directors and by such other person or persons
authorized to do so by the corporation's certificate of incorporation or bylaws.
In addition, Delaware law provides that, if an annual meeting is not held or an
action by written consent to elect directors in lieu of an annual meeting is not
taken within 30 days of the date designated for such a meeting, or is not held
for a period of 13 months after the latest to occur of the organization of the
corporation, its last annual meeting or the last action by written consent to
elect directors in lieu of an annual meeting, the Delaware Court of Chancery may
summarily order a meeting to be held upon the application of any stockholder or
director. Under New York law, if there is a failure to elect a sufficient number
of directors to conduct the business of the corporation for a period of one
month after the date fixed by or under the bylaws for the annual meeting of
stockholders or for a period of 13 months after the last annual meeting, the
board of directors may call a special meeting for the election of directors. If
the board fails to do so within 2 weeks, holders of 10% of the votes of the
shares entitled to vote in an election of directors may demand the call of a
special meeting for an election of directors.
The CSW Bylaws provide that special meetings of the stockholders of CSW may
be called by the Chairman, by the CSW Board of Directors, by a majority of the
CSW Directors individually or by holders of not less than one-third of the total
outstanding shares of stock. Such special meeting shall be held at such place,
date and hour as may be fixed by the person or persons calling the meeting.
Special meetings of the shareholders of AEP may be called by the AEP Board of
Directors or the AEP Executive Committee,
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or of stockholders holding one-fourth of the capital stock, at such time and at
such place as may be stated in the call and notice.
SHAREHOLDERS' ACTION WITHOUT A MEETING
The DGCL provides that unless otherwise provided in the certificate of
incorporation, stockholders may take any action without a meeting by written
consent signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of any action by less than unanimous consent
must be given to stockholders who did not consent to such action and who, if the
action had taken place at a meeting, would have been entitled to notice.
The NYBCL provides that shareholders may take any action without a meeting
by written consent only if such consent is signed by the holders of all
outstanding shares entitled to vote thereon or, if the certificate of
incorporation so permits, the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the corporate action without a meeting by less than
unanimous consent shall be given to those stockholders who have not consented in
writing.
Neither the AEP Charter nor the CSW Charter contains any provision altering
these provisions of the statutes.
PREEMPTIVE RIGHTS
For corporations incorporated after July 3, 1967, Delaware law does not
provide for preemptive rights to the holders of capital stock unless the
certificate of incorporation provides for such rights. The CSW Charter provides
that any shares of common stock may be issued without first being offered to
stockholders.
The NYBCL provides, for corporations incorporated before February 23, 1998,
subject to certain exceptions, preemptive rights to shareholders upon an
issuance of securities which would adversely affect certain specified interests
of such shareholders, provided that the certificate of incorporation may provide
otherwise. The AEP Charter provides that subject to certain exceptions, upon any
issuance for money or other consideration of any stock, no holder of stock of
any kind shall have any preemptive rights. Under the exceptions to the AEP
Charter, preemptive rights are available where AEP issues or sells any shares
solely for money and other than by a public offering, an offering to or through
underwriters or dealers who agree to make a public offering or any offering
which is authorized by the shareholders.
DIVIDENDS
Subject to any restrictions in a corporation's certificate of incorporation
(which restrictions the CSW Charter does not include), the DGCL generally
provides that the directors of a corporation may declare and pay dividends only
out of surplus (defined as the excess if any, of the net assets over capital)
or, when no surplus exists, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. Dividends may not be paid
out of net profits if the capital of the corporation is less than the aggregate
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets.
Under the NYBCL, a corporation may declare and pay dividends on its
outstanding shares except when currently the corporation is insolvent or would
thereby be made insolvent, or when the declaration, payment or distribution
would be contrary to any restrictions contained in the certificate of
incorporation (which restrictions the AEP Charter does not include). In general,
dividends may be declared or paid out of surplus only.
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STOCK REPURCHASES
The DGCL permits a corporation to repurchase or redeem its shares, except
that a corporation may not do so when the capital of the corporation is impaired
or when such purchase or redemption would cause any impairment of the capital of
the corporation. A purchase or redemption out of capital of shares which are
entitled upon any distribution of the corporation's assets, whether by dividend
or liquidation, to a preference over another class or series of its stock, or,
if no shares entitled to such preference are outstanding, any of its own shares,
is permitted if such shares will be retired upon their acquisition and the
capital of the corporation reduced in accordance with Delaware law.
Under the NYBCL, notwithstanding any authority contained in the certificate
of incorporation, the shares of a corporation may not be purchased, redeemed,
converted or exchanged, if the corporation is then insolvent or would thereby be
made insolvent. Shares may be purchased or redeemed only out of surplus.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
The DGCL permits any corporation, subject to any provisions in its
certificate of incorporation, to create rights or options entitling the holders
thereof to purchase from the corporation any shares of its capital stock of any
class or classes. The terms shall be stated in the certificate of incorporation
or in a resolution adopted by the board of directors. The DGCL provides that, in
the absence of actual fraud in the transaction, the judgment of the directors as
to the consideration for the issuance of such rights or options and the
sufficiency thereof shall be conclusive. This provision has been interpreted by
Delaware case law not to apply to interested director transactions or to
issuances that constitute waste. The NYBCL requires that the issuance to
officers, directors or employees of rights or options to purchase shares must be
authorized by a majority of votes cast at a meeting of shareholders, or
authorized by and consistent with a plan adopted by such vote of shareholders.
In the absence of preemptive rights, such authorization is not required in New
York for the issuance of rights or options in substitution for or upon the
assumption of rights or options of a corporation with which the issuing
corporation is merging or consolidating.
LOANS TO DIRECTORS
The DGCL permits any corporation to lend money to, or guarantee an
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is a
director of the corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation.
Under the NYBCL, a corporation may not lend money to or guarantee the
obligations of a director of the corporation unless either the particular loan
or guarantee is approved by the shareholders, or the certificate of
incorporation expressly permits such transactions. The AEP Charter does not
contain any such provision.
CLASSIFICATION OF THE BOARDS OF DIRECTORS
Both the DGCL and the NYBCL provide that a corporation's board of directors
may be divided into various classes with staggered terms of offices. Neither the
AEP Charter nor the AEP Bylaws provide for a classified board. Both the CSW
Charter and the CSW Bylaws provide for three classes of directors, as nearly
equal in size as practicable. Under the DGCL, unless otherwise provided in a
corporation's certificate of incorporation, directors of a corporation with a
classified board may only be removed by stockholders of the corporation for
cause. CSW's Charter does not override the DGCL provision regarding removal of
classified directors.
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DUTIES OF DIRECTORS
The NYBCL specifically permits a board of directors to consider
constituencies other than the holders of a corporation's capital stock and to
consider both the long-term and short-term interests of the corporation and such
constituencies when taking any action, including action taken in connection with
a change or potential change in the control of the corporation. The NYBCL
permits directors to consider the effect that a corporation's actions may have
in the short-term and the long-term upon (i) potential growth, development,
productivity and profitability of the corporation; (ii) current employees; (iii)
retired employees and other beneficiaries receiving or entitled to receive
retirement, welfare or similar benefits from the corporation; (iv) the
corporation's customers and creditors; and (v) the ability of the corporation to
provide continuously goods, services, employment opportunities and employment
benefits and make other contributions to the communities in which it does
business. The DGCL contains no similar provision; however, Delaware case law has
established that, in connection with a potential change of control of a
corporation, its directors may consider, among various other proper factors, the
impact of both the bid and the potential acquisition on constituencies other
than stockholders, but only to the extent that they are rationally related to
the benefits from the change of control that would accrue to the stockholders.
LIMITATIONS ON DIRECTORS' LIABILITY
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for damages for breach of the director's
fiduciary duties. This limitation is unavailable for (i) breaches of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involved intentional misconduct or knowing violation of the law (iii) unlawful
payment of dividends, or unlawful stock purchases; or (iv) any transaction from
which the director derived an improper personal benefit. The CSW Charter
includes such a provision to the full extent permitted by law.
The NYBCL permits a corporation to limit or eliminate a director's personal
liability to the corporation or the holders of its capital stock for breach of
duty. This limitation is generally unavailable for acts or omissions by a
director which were (i) in bad faith, (ii) involved intentional misconduct or a
knowing violation of law or (iii) involved a financial profit or other advantage
to which such director was not legally entitled. The NYBCL also prohibits
limitations on director liability for acts or omissions which resulted in a
violation of a statute prohibiting certain dividend declarations, certain share
repurchases or redemptions, certain payments to shareholders after dissolution
and particular types of loans.
The AEP Charter provides for limitations on directors' liability to the
fullest extent permitted by the NYBCL.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL also provides that a corporation may advance
expenses of defense (upon receipt of an undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL further provides that indemnification may not
be made for any claim, issue or matter as to which a person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation, except only to the extent a court determines that
the person is entitled to indemnity for such expenses that such court deems
proper.
The CSW Bylaws provide that each person who is or was or had agreed to
become a director or officer, or each such person who is or was serving or had
agreed to serve at the request of the CSW Board
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of Directors or an officer as an employee or agent or as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
such person), shall be indemnified (including, without limitation, the
advancement of expenses and payment of all loss, liability and expenses) to the
full extent permitted by the law as presently in effect or as may hereafter be
amended (but in the case of any such amendment, only to the extent that such
amendment permits broader indemnification rights than said laws permitted prior
to such amendment); provided, however, that no person shall be indemnified for
amounts paid in settlement unless the terms and conditions of such settlement
have been consented to by CSW and provided further, that no indemnification for
employees or agents (other than directors and officers) will be made without the
express authorization of the CSW Board of Directors.
Under the NYBCL, a corporation may indemnify any person made, or threatened
to be made, a party to an action or proceeding (other than one by or in the
right of the corporation to procure a judgment in its favor), whether civil or
criminal, including an action by or in the right of any other corporation of any
type or kind, domestic or foreign, or any partnership, joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by any
reason of the fact that he, his testator or intestate, was a director or officer
of the corporation, or served such other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees actually and necessarily incurred as a result of such
action or proceeding, or any appeal therein, if such director or officer acted,
in good faith, for a purpose which he reasonably believed to be in, or, in the
case of service for any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise, not opposed to, the best
interests of the corporation and, in criminal actions or proceedings, in
addition, had no reasonable cause to believe that his conduct was unlawful.
The NYBCL further provides that no indemnification of directors in
shareholder derivative suits may be made in respect of (i) a threatened action,
or a pending action which is settled or otherwise disposed of, or (ii) any
claim, issue or matter as to which the director or officer has been adjudged to
be liable to the corporation, unless and only to the extent that the court in
which the action was brought or, if no action is brought, any court of competent
jurisdiction, determines upon application that, in view of the circumstances of
the case, the director or officer is fairly and reasonably entitled to indemnity
for such portion of the settlement amount and expenses as the court deems
proper. The statutory provisions for indemnification and advancement of expenses
are not exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled independently of the applicable
statutory provision.
The AEP Bylaws provide that to the fullest extent permitted by law, AEP
shall indemnify any person made, or threatened to be made, a party to any action
or proceeding (formal or informal), whether civil, criminal, administrative or
investigative and whether by or in the right of AEP or otherwise, by reason of
the fact that such person, such person's testator or intestate, is or was a
director, officer or employee of AEP, or of any subsidiary or affiliate of AEP,
or served any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise in any capacity at the request of AEP, against
all loss and expense including, without limiting the generality of the
foregoing, judgments, fines (including excise taxes), amounts paid in settlement
and attorneys' fees and disbursements actually and necessarily incurred as a
result of such action or proceeding, or any appeal therefrom, and all legal fees
and expenses incurred in successfully asserting a claim for indemnification
pursuant to such provision of the AEP Bylaws; provided, however, that no
indemnification may be made to or on behalf of any director, officer or employee
if a judgment or other final adjudication adverse to the director, officer or
employee establishes that such person's acts were committed in bad faith or were
the result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that such person personally gained in fact a financial
profit or other advantage to which such person was not legally entitled.
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The AEP Bylaws further provide that in any case in which a director, officer
or employee (or a representative of the estate of such director, officer or
employee) requests indemnification, upon such person's request the AEP Board of
Directors shall meet within sixty days thereof to determine whether such person
is eligible for indemnification in accordance with the standard set forth above.
Such a person claiming indemnification shall be entitled to indemnification upon
a determination that no judgment or other final adjudication adverse to such
person has established that such person's acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that such person personally gained in fact a
financial profit or other advantage to which such person was not legally
entitled.
REMOVAL OF DIRECTORS
Under the DGCL, directors may be removed, with or without cause, by the vote
of a majority of the outstanding shares of all classes of stock entitled to vote
present at a meeting of stockholders. The DGCL imposes additional restrictions
on the removal of directors for corporations with cumulative voting or directors
elected by the holders of a specific class or series of shares. Unless the
certificate of incorporation otherwise provides, in the case of a corporation
with a classified board, stockholders may effect such removal only for cause.
The CSW Charter provides that a director may be removed only for cause and only
by the affirmative vote of the holders of eighty percent of the CSW Shares.
The NYBCL provides that any or all of the directors of a corporation may be
removed for cause by a vote of the shareholders and that the certificate of
incorporation or bylaws may provide for removal without cause by vote of the
shareholders. Under the statute, subject to certain exceptions, directors may
also be removed without cause by action of the board if such is provided for in
the certificate of incorporation or the bylaws. The AEP Charter and the AEP
Bylaws contain no provision for removal of directors without cause by the
shareholders or the board. The NYBCL also imposes additional restrictions on the
removal of directors of corporations with cumulative voting or directors elected
by the holders of a specific class or series of shares. For corporations having
cumulative voting, no director may be removed when the votes cast against his or
her removal would be sufficient to elect him or her if voted cumulatively at an
election at which the same total number of votes were cast and the entire board,
or the entire class of directors of which he or she is a member, were then being
elected.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Delaware law provides that, unless otherwise provided in the certificate of
incorporation or bylaws, vacancies, including those due to removal without
cause, and newly created directorships may be filled by majority vote of the
directors then in office, even if the number of directors then in office is less
than a quorum. If, at the time of filling any vacancy or newly created
directorship, the directors then in office constitute less than a majority of
the whole board, the Court of Chancery has the authority, upon application of
stockholders holding at least 10% of the shares outstanding at the time and
entitled to vote, to order an election to be held to fill any such vacancies or
new directorships, or to replace the directors chosen by the directors then in
office.
New York law provides that newly created directorships and vacancies
occurring for any reason other than removal without cause (which the AEP Charter
does not currently permit), may be filled by vote of the board of directors. If
the number of directors then in office is less than a quorum, any newly created
directorships and vacancies may be filled by vote of a majority of the directors
then in office. Under the AEP Bylaws, vacancies in the board may be filled by
the board at any meeting.
DISSENTERS' RIGHTS OF APPRAISAL
In certain circumstances, Section 262 of the DGCL entitles a stockholder to
exercise its appraisal rights upon a merger or consolidation of the corporation
effected pursuant to the DGCL if the holder
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complies with the requirements of Section 262 thereof. Appraisal rights are
available under Section 262 of the DGCL if holders of shares in a constituent
company which shares are listed on a national securities exchange are required
by the terms of the merger to accept consideration other than shares of stock of
the surviving corporation, shares of stock of any corporation listed on a
national securities exchange, designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders or cash in lieu
of fractional shares.
Stockholders of CSW are not entitled to appraisal rights under the DGCL in
connection with the Merger because AEP Shares are listed on the NYSE and holders
of CSW Shares are not required upon consummation of the Merger to exchange such
shares for any consideration other than AEP Shares or cash in lieu of fractional
shares.
The NYBCL grants dissenters' rights to shareholders (i.e., the right to cash
payment of the fair value of one's shares determined by judicial appraisal) in
the case of a merger or consolidation, a sale, lease, exchange or other
disposition of all or substantially all of the corporation's assets, any share
exchange in which the corporation is participating as a subject corporation (but
only those shareholders whose shares have been acquired), and (in the case of a
shareholder whose shares are adversely affected thereby) certain amendments to
the certificate of incorporation, as the case may be. The NYBCL provides that
dissenters' rights are not available to a shareholder in a merger or
consolidation that receives shares that are listed on a national securities
exchange or designated as a national market system security. The NYBCL, in
determining the "fair value" for payment of shares, mandates that the court
consider the nature of the transaction and its effect on the corporation and its
shareholders, and the concepts and methods of valuation then customary in the
relevant financial and securities markets.
AEP shareholders are not entitled to appraisal rights under the NYBCL in
connection with the Merger, because they are retaining their AEP Shares and the
Charter Amendment does not cause the AEP shareholders to be adversely affected.
BUSINESS COMBINATION STATUTES
In 1988, Delaware enacted a statute designed to provide Delaware
corporations with limited protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), in
general, provides that a person or entity that owns 15% or more of the
outstanding voting stock of a Delaware corporation (an "Interested Stockholder")
may not consummate a merger or other business combination transaction with such
corporation at any time during the three-year period following the date such
person or entity became an Interested Stockholder, unless an exemption described
below is applicable. The term "business combination" is defined broadly to cover
a wide range of corporate transactions including mergers, sales of assets,
issuances of stock, transactions with subsidiaries and the receipt of
disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the time a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder, (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he or she became an Interested Stockholder, with the number of shares
outstanding calculated without regard to those shares owned by the corporation's
directors who are also officers or by certain employee stock plans, and (iii)
any business combination with an Interested Stockholder that is approved by the
board of directors and by a two-thirds vote of the outstanding voting stock not
owned by the Interested Stockholder. The CSW Charter does not contain an
election, as permitted by Delaware law, to be exempt from the requirements of
Section 203.
Under Section 912 of the NYBCL ("Section 912"), a corporation is generally
prohibited from engaging in certain business combinations (as defined by the
statute to include certain mergers and
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consolidations, dispositions of assets and issuances of securities, as well as
certain other transactions) with an interested stockholder (as defined by the
statute generally to include holders of 20% or more of the outstanding stock of
the corporation) for a period of five years following the date that such
stockholder became an interested stockholder, unless certain exemptions,
including the business combination or the purchase of stock by means of which
the interested shareholder became such is approved by the corporation's board of
directors in advance of such stock purchase, or unless the interested
shareholder was the beneficial owner of 5% or more of the corporation's
outstanding voting stock on October 30, 1985, and remains so until becoming an
interested shareholder.
Neither Section 203 nor Section 912 are applicable to the Merger and the
transactions contemplated by the Merger Agreement.
"ANTI-GREENMAIL"
The NYBCL provides that no domestic corporation may purchase or agree to
purchase more than 10% of its stock from a shareholder who has held the shares
for less than two years at any price which is higher than the market price
unless such transaction is approved by both the corporation's board of directors
and a majority of the votes of all outstanding shares entitled to vote thereon
at a meeting of shareholders unless the certificate of incorporation requires a
greater percentage or the corporation offers to purchase shares from all the
holders on the same terms. The DGCL contains no similar provision.
STOCK EXCHANGE LISTINGS
CSW Shares are listed on the NYSE and Chicago Stock Exchange. AEP Shares are
listed on the NYSE.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, which appears as Annex I to this Joint Proxy Statement/Prospectus and
is incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Merger Agreement.
THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the holders of CSW Shares and the approval of certain
related matters by the holders of AEP Shares and the satisfaction or waiver of
the other conditions to the Merger, Sub will be merged with and into CSW, and
CSW will continue as the Surviving Corporation and CSW will be a wholly-owned
subsidiary of AEP.
If the conditions to the Merger are satisfied or waived, the parties will
file with the Secretary of State of the State of Delaware a duly executed
certificate of merger, and the Merger will become effective upon the filing and
acceptance thereof or at such date thereafter as is provided in the certificate
of merger.
CSW Shares outstanding at the Effective Time will be converted into AEP
Shares, as described under "THE MERGER -- Merger Consideration". With regard to
the treatment of fractional share interests, see "THE MERGER -- Fractional
Shares".
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of each
of CSW and AEP relating to, among other things, (i) its organization and similar
corporate matters; (ii) its capitalization; (iii) the authorization, execution,
delivery, performance and enforceability of the Merger Agreement; (iv) the
specification of the permits and orders required from governmental authorities
for the execution, delivery and performance of the Merger Agreement; (v) the
absence of conflicts, violations and defaults under any law, regulations or
order, its charter and bylaws and certain other agreements and documents with
respect to its execution, delivery and performance of the Merger Agreement; (vi)
the documents and reports filed by it with the SEC and other governmental
authorities and the accuracy of the information, including the financial
statements, contained therein; (vii) the absence of certain changes and events;
(viii) the material permits and orders from governmental authorities required to
conduct its business, including its nuclear facilities; (ix) its litigation and
compliance with laws; (x) its ownership of common stock of the other party; (xi)
employee benefit plans, (xii) its taxes, (xiii) certain environmental matters,
(xiv) its affiliates; (xvii) the opinion of its financial advisor; (xviii) its
brokers or investment bankers involved in the transactions; and (xix) the vote
required of its stockholders to consummate the Merger. The representations and
warranties of CSW and AEP also extend in many respects to their respective
subsidiaries and, in the case of AEP, Sub joins in the representations and
warranties of AEP. The representations and warranties expire at the Effective
Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
BUSINESS MAINTENANCE. Each of CSW and AEP has agreed that, prior to the
Effective Time, unless expressly contemplated by the Merger Agreement or
otherwise consented to in writing by the other, it will and will cause its
subsidiaries (i) to operate its business in the usual and ordinary course
consistent with past or then current industry practices; (ii) to use all
commercially reasonable efforts to preserve substantially intact its business
organization, to maintain its rights and franchises, to retain the services of
its respective key employees and to maintain its relationships with its
respective customers and suppliers; (iii) to maintain and keep its properties
and assets in as good repair and condition as at present, ordinary wear and tear
excepted, and to maintain supplies and inventories in quantities consistent with
its customary business practice; and (iv) to use all commercially reasonable
efforts to keep in full force and effect insurance and bonds comparable in
amount and scope of coverage to that currently maintained; (v) to use
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all commercially reasonable efforts to maintain in effect all existing orders
and permits relating to its operations and timely to apply for any additional
orders and permits that are or will be required for its current or currently
planned operations; and (vi) to consult with each other on a frequent and
reasonable basis in order to ensure compliance with the covenants in the Merger
Agreement and otherwise as necessary to consummate the Merger (subject to
retention of discretion and control by each over its own affairs). The foregoing
covenants exclude any matters that, individually or in the aggregate, could not
reasonably be expected to have a change or effect that is material and adverse
to the business, condition (financial or otherwise) or results of operations or
prospects of such party and its subsidiaries taken as a whole (a "Material
Adverse Effect").
NEGATIVE COVENANTS. CSW has agreed that, prior to the Effective Time,
subject to certain exceptions and unless expressly contemplated by the Merger
Agreement or otherwise consented to in writing by AEP, it will not do, and will
not permit any of its subsidiaries to do, any of the following:
- except to the extent required by existing agreements and subject to
certain other limited exceptions, (a) increase the compensation payable to
or to become payable to any director or executive officer; (b) grant any
severance or termination pay; (c) amend or otherwise modify the terms of
any outstanding options, warrants or rights, the effect of which would be
to make such terms more favorable to the holders thereof; (d) take any
action to accelerate the vesting of any outstanding stock options; (e)
amend or take any other actions to increase the amount or accelerate the
payment or vesting of any benefit under any benefit plan; or (f)
contribute, transfer or otherwise provide any cash, securities or other
property to any grantee, trust, escrow or other arrangement that has the
effect of providing assets for benefits payable pursuant to any
termination or severance agreement;
- subject to certain limited exceptions, (a) enter into any employment or
severance agreement with any director, officer or employee or (b)
establish, adopt or enter into any new benefit plan;
- declare or pay any dividend on, or make any other distribution in respect
of, outstanding shares of capital stock of CSW or certain of its
subsidiaries, except for dividends declared and paid on the CSW Shares at
approximately the same times and at a rate per share not to exceed the
rate per share as declared and paid during the year ended December 31,
1997, intercompany dividends and distributions and dividends paid with
respect to outstanding preferred stock of CSW subsidiaries;
- redeem, purchase or acquire, or offer to purchase or acquire, any
outstanding equity securities of CSW or certain of its subsidiaries,
except (a) as required by the terms of any outstanding equity securities,
(b) in connection with the refunding or refinancing of preferred equity
securities at a lower cost of funds, (c) in connection with open market
purchases of CSW Shares to fund up to $10 million in any fiscal year of
acquisitions not prohibited by the Merger Agreement, (d) as required to
administer existing employee benefit, direct stock purchase and dividend
reinvestment plans and (e) pursuant to certain other limited exceptions;
- split, combine or reclassify any of the CSW Shares or effect any
recapitalization of CSW;
- offer, sell, issue or grant, or authorize the offering, sale, issuance or
grant, of any Equity Securities, except issuances of CSW Shares issuable
upon exercise of outstanding stock options and preferred stock of any CSW
subsidiary to finance investments or capital contributions not prohibited
by the Merger Agreement or to refinance existing preferred stock or
indebtedness obligations of such subsidiary and subject to certain other
limited exceptions;
- grant any lien with respect to any shares of capital stock of, or other
equity interest in, any significant subsidiary of CSW owned by CSW or a
subsidiary of CSW;
- acquire or agree to acquire any business or other entity, or otherwise
acquire or agree to acquire any assets of any other person, except
acquisitions of assets and businesses related to the core
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domestic and U.K. regulated businesses in which CSW is currently engaged
(the "Core Business") if the fair market value of the consideration paid
therefor does not exceed 105% of the amount currently budgeted for such
acquisitions and except for certain specified permitted transactions;
- except for certain specified permitted transactions and the disposition of
assets other than generation assets and inventories in the ordinary course
of business and certain legal requirements, sell or otherwise dispose of,
or grant any lien with respect to, any of its material assets;
- adopt any amendments to its charter or bylaws that could reasonably be
expected to have a Material Adverse Effect on the ability of CSW to
perform its obligations under the Merger Agreement;
- change any of its significant accounting policies or take certain actions
with respect to taxes;
- except in connection with certain specified permitted transactions or as
required by law, incur any material obligation for borrowed money or
purchase money indebtedness, other than drawings under existing or renewed
credit lines, debt securities issued by subsidiaries to finance
investments and capital expenditures permitted by the Merger Agreement and
indebtedness incurred in the ordinary course of business;
- unless required by the terms thereof, release any third party from its
obligations under any existing standstill provisions under a
confidentiality or other agreement;
- except in connection with certain specified permitted transactions or as
required by law, enter into any material contracts with any person (other
than customers and vendors in the ordinary course of business) that
provides for an exclusive arrangement or is substantially more restrictive
or substantially less advantageous than existing material contracts of
CSW;
- except in connection with certain specified permitted transactions or as
required by law, make capital and non-fuel operational and maintenance
expenditures relating to the Core Business in excess of 105% of the amount
currently budgeted for such expenditures;
- except pursuant to existing legal obligations, make, or commit to make,
any investments in, or loans or capital contributions to, or guarantee any
obligations of, any joint venture in excess of 105% of the amount
currently budgeted therefor by CSW; or
- agree in writing or otherwise to do any of the foregoing.
AEP has agreed that, prior to the Effective Time, subject to certain
exceptions and unless expressly contemplated by the Merger Agreement or
otherwise consented to in writing by CSW, it will not do, and will not permit
any of its subsidiaries to do, any of the following:
- except to the extent required by existing agreements and subject to
certain other limited exceptions, (a) increase the compensation payable to
or to become payable to any director or executive officer; (b) grant any
severance or termination pay; (c) amend or otherwise modify the terms of
any outstanding options, warrants or rights, the effect of which would be
to make such terms more favorable to the holders thereof; or (d) amend or
take any other actions to increase the amount or accelerate the payment or
vesting of any benefit under any benefit plan;
- subject to certain limited exceptions, (a) enter into any employment or
severance agreement with any director, officer or employee or (b)
establish, adopt or enter into any new benefit plan;
- declare or pay any dividend on, or make any other distribution in respect
of, outstanding shares of capital stock of AEP or certain of its
subsidiaries, except for dividends declared and paid on the AEP Shares at
approximately the same times and at a rate per share not less than the
rate per share as were declared and paid during the year ended December
31, 1997, intercompany dividends and distributions and dividends paid with
respect to outstanding preferred stock of AEP subsidiaries;
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- redeem, purchase or acquire, or offer to purchase or acquire, any
outstanding equity securities of AEP or certain of its subsidiaries,
except (a) as required by the terms of any outstanding equity securities,
(b) in connection with the refunding or refinancing of preferred equity
securities at a lower cost of funds, (c) in connection with open market
purchases of AEP Shares to fund up to $10 million in any fiscal year of
acquisitions not prohibited by the Merger Agreement, (d) as required to
administer existing employee benefit, direct stock purchase and dividend
reinvestment plans and (e) pursuant to certain other limited exceptions;
- split, combine or reclassify any of the AEP Shares or effect any
recapitalization of AEP;
- offer, sell, issue or grant, or authorize the offering, sale, issuance or
grant, of any equity securities, except issuances of AEP Shares not in
excess of 10% of the amount currently outstanding, AEP Shares issuable
upon exercise of outstanding stock options and preferred stock of any AEP
subsidiary to finance investments or capital contributions not prohibited
by the Merger Agreement or to refinance existing preferred stock or
indebtedness obligations of such subsidiary and subject to certain other
limited exceptions;
- grant any lien with respect to any shares of capital stock of, or other
equity interest in, any significant subsidiary of AEP owned by AEP or a
subsidiary of AEP;
- acquire or agree to acquire any business or other entity, or otherwise
acquire or agree to acquire any assets of any other person, except
acquisitions of assets and businesses related to the energy sector if the
fair market value of the consideration paid therefor does not exceed $2.5
billion in the aggregate (reduced by the amount expended for capital
expenditures (other than relating to the core domestic and U.K. regulated
businesses in which AEP is currently engaged (the "AEP Core Business"))
and with respect to certain joint ventures as permitted by the Merger
Agreement);
- except for the disposition of assets other than generation assets and
inventories in the ordinary course of business, divestitures of non-AEP
Core Business and, except as required by law, sell or otherwise dispose
of, or grant any lien with respect to, any of its material assets;
- adopt any amendments to its charter or bylaws that could reasonably be
expected to have a Material Adverse Effect on the ability of AEP to
perform its obligations under the Merger Agreement;
- change any of its significant accounting policies or take certain actions
with respect to taxes;
- except as required by law, incur any material obligation for borrowed
money or purchase money indebtedness, other than drawings under existing
or renewed credit lines, debt securities issued by subsidiaries to finance
investments and capital expenditures permitted by the Merger Agreement,
indebtedness not in excess of $2.0 billion in the aggregate (in addition
to the aggregate amount currently budgeted by AEP for indebtedness) and
indebtedness incurred in the ordinary course of business;
- unless required by the terms thereof, release any third party from its
obligations under any existing standstill provisions under a
confidentiality or other agreement;
- except as required by law, enter into any material contracts with any
person (other than customers and vendors in the ordinary course of
business) that provides for an exclusive arrangement or is substantially
more restrictive or substantially less advantageous than existing material
contracts of AEP;
- except in connection with AEP Core Business or as required by law, make
capital expenditures relating to the Core Business in excess of $2.5
billion less the amounts expended in connection with acquisitions and
joint ventures as permitted by the Merger Agreement;
- except pursuant to existing legal obligations, make, or commit to make,
any investments in, or loans or capital contributions to, or guarantee any
obligations of, any joint venture in excess of $2.5 billion
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(reduced by the amounts expended for capital expenditures (other than with
respect to the AEP Core Business)) and acquisitions as permitted by the
Merger Agreement; or
- agree in writing or otherwise to do any of the foregoing.
ACCESS TO BUSINESS OF OTHER PARTY. During the pendency of the Merger
Agreements, AEP and CSW each has agreed to afford, and to cause its subsidiaries
to afford, to the other party and its representatives reasonable access at
reasonable times to the officers, employees, agents, properties, offices and
other facilities of such party and its subsidiaries and to such party's and such
party's subsidiaries' books and records. Each of them also has agreed to
furnish, and to cause its subsidiaries to furnish, to the other party and its
representatives such information concerning the business, properties, contracts,
records and personnel of such party and its subsidiaries as may be reasonably
requested. If the Merger Agreement is terminated in accordance with its terms, a
party that has received information pursuant to the Merger Agreement is obliged
to return or destroy such information within ten days after a request therefor
by the other party. All information furnished by either party pursuant to the
Merger Agreement is subject to a confidentiality agreement executed and
delivered by AEP and CSW prior to negotiation of the Merger Agreement.
ACQUISITION PROPOSALS
In the Merger Agreement, AEP and CSW each have agreed that neither it nor
any of its subsidiaries nor any of the officers and directors of it or its
subsidiaries will, and have agreed to use its best efforts to cause its and its
subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its subsidiaries) not
to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate
(including by way of furnishing information) any inquiries or the making of any
Acquisition Proposal (defined below), or to directly or indirectly have any
discussion with or provide any confidential information or data to any person
relating to an Acquisition Proposal, or engage in any negotiations concerning an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal or accept an Acquisition Proposal. AEP and CSW
have agreed in the Merger Agreement that nothing contained in the Merger
Agreement will prevent either AEP or CSW or their respective Boards of Directors
from (A) complying with Rule 14e-2(a) promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), with regard to an Acquisition Proposal; (B) in
response to an unsolicited BONA FIDE written Acquisition Proposal by any Person,
recommending such an unsolicited bona fide written Acquisition Proposal to its
stockholders, or withdrawing or modifying in any adverse manner its approval or
recommendation of the Merger Agreement; or (C) engaging in any discussions or
negotiations with, or providing any information to, any person in response to an
unsolicited bona fide written Acquisition Proposal by any such person, if and
only to the extent that, in any such case as is referred to in clause (B) or (C)
of this sentence, (i) the AEP shareholders' approval of the Share Issuance and
the Charter Amendment or the CSW stockholders' approval of the Merger, as the
case may be, shall not have been obtained, (ii) the Board of Directors of AEP or
CSW, as the case may be, concludes in good faith that such Acquisition Proposal
(x) in the case of clause (B) of this sentence would, if consummated, constitute
a Superior Proposal (defined below) or (y) in the case of clause (C) above could
reasonably be expected to constitute a Superior Proposal, (iii) the Board of
Directors of AEP or CSW, as the case may be, determines in good faith upon the
basis of written advice of outside legal counsel that such action is necessary
to act in a manner consistent with its fiduciary duties under applicable law,
(iv) prior to providing any information or data to any person in connection with
an Acquisition Proposal by any such person, such Board of Directors receives
from such person an executed confidentiality agreement containing customary
terms and provisions and (v) prior to providing any information or data to any
person or entering into discussions or negotiations with any person, such Board
of Directors notifies the other party immediately of such inquiries, proposals
or offers received by, any such information requested from, or any such
discussions or negotiations sought to be initiated or continued with, any of its
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representatives indicating, in connection with such notice, the name of such
person and the material terms and conditions of any proposals or offers.
As used in this Joint Proxy Statement/Prospectus, the term "Acquisition
Proposal" includes, with respect to AEP or CSW, the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving, or any purchase or sale of all or any significant portion
of the assets or 10% or more of the equity securities of, such party or any of
its subsidiaries that, in any such case, could reasonably be expected to
interfere with the completion of the Merger or the other transactions
contemplated by the Merger Agreement. As used in this Joint Proxy
Statement/Prospectus, the term "Superior Proposal" includes, with respect to AEP
or CSW, a BONA FIDE written Acquisition Proposal which the Board of Directors of
AEP or the CSW, as the case may be, concludes in good faith (after consultation
with its financial advisors and legal counsel), taking into account all legal,
financial, regulatory and other aspects of the proposal and the person making
the proposal, (i) would, if consummated, result in a transaction more favorable
to the shareholders of AEP or CSW, as the case may be, from a strategic and
financial point of view, than the transactions contemplated by the Merger
Agreement and (ii) is reasonably capable of being completed (PROVIDED that for
purposes of this definition, the reference to "10%" in the definition of
"Acquisition Proposal" shall be deemed to be a reference to "50%" and
"Acquisition Proposal" shall only be deemed to refer to a transaction involving
AEP or CSW, as the case may be, or with respect to assets (including the shares
of any subsidiary of AEP or CSW) of AEP or CSW, as the case may be, and its
subsidiaries, taken as a whole, and not any of its subsidiaries alone).
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Sub will cease to exist as a corporation,
and CSW, as the Surviving Corporation, will succeed to all of the assets, rights
and obligations of Sub.
Pursuant to the Merger Agreement, the charter and the bylaws of CSW, as in
effect immediately prior to the Effective Time, will be the charter and bylaws
of the Surviving Corporation until amended as provided therein and pursuant to
the DGCL.
BOARD OF DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
In the Merger Agreement, AEP and CSW have agreed that the Board of Directors
of AEP following the Merger will consist of 15 members and will be reconstituted
to include all then current board members of AEP, Mr. E.R. Brooks (the Chairman
of CSW) and four additional outside directors of CSW to be nominated by AEP.
STOCK BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
STOCK OPTIONS. The Merger Agreement provides that at the Effective Time,
automatically and without any action on the part of the holder thereof, each CSW
stock option will be assumed by AEP and will become an option to purchase AEP
Shares. The number of shares of AEP Shares subject thereto will be obtained by
multiplying the number of CSW Shares previously subject thereto (without regard
to any vesting schedule) by the Exchange Ratio, and the exercise price per share
of AEP Shares will be obtained by dividing the exercise price per share of CSW
Shares stated therein by the Exchange Ratio. Otherwise, the terms and conditions
of such CSW options will remain the same.
Based on the CSW stock options outstanding at the CSW Record Date and
assuming none of such CSW stock options are exercised prior to the Effective
Time, AEP will be required at the Effective Time to reserve an aggregate of
700,000 shares of AEP Shares for issuance upon exercise of CSW stock options
assumed by AEP pursuant to the Merger.
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The assumption by AEP of the CSW stock options pursuant to the Merger
Agreement will not affect the vesting schedule of any such Shares. The CSW
Incentive Plan provides that upon a Change of Control, as defined therein,
including the closing of a Merger following which the stockholders of CSW own
less than 75% of the surviving entity, outstanding stock options will be fully
exercisable as of the date of the Change of Control. For information as to the
holdings of CSW stock options by directors and executive officers of CSW, see
"THE MERGER--Interests of Certain Persons in the Merger--Ownership of CSW
Shares; Stock Options." In addition, the Change in Control Agreements also
provide for the acceleration of CSW Shares granted to parties to such Change in
Control Agreements. For information regarding the effect of the Change in
Control Agreements on options held by those executive officers of CSW who are
parties to the Change in Control Agreements, see "THE MERGER--Interests of
Certain Persons in the Merger--CSW Long-Term Incentive Plan and Change in
Control Agreements."
OTHER STOCK-BASED COMPENSATION. Certain types of stock-based compensation
other than stock options are outstanding under the CSW Incentive Plan, LTIP and
the CSW Director's Plan. AEP has agreed to assume the LTIP and the CSW
Director's Plan with respect to any stock-based compensation payable in the form
of CSW Shares as a result of the Merger ("Other Compensation") and to substitute
AEP Shares under such assumed Other Compensation (the "Assumed Other
Compensation"). The number of shares of AEP Shares issuable with respect to
assumed Other Compensation will be the number of whole AEP Shares which the
holder of the Other Compensation would have received upon consummation of the
Merger if the Other Compensation had been paid in full immediately prior to the
Merger.
SEPARATE COMPANY PLANS. AEP will continue the CSW employee benefit plans
from the Effective Time through July 1, 2002, without adverse change except that
(a) any CSW Share investment fund maintained under any plan will be replaced by
an AEP Share investment fund or traditional investment fund as determined by
AEP, (b) premiums under the CSW medical, dental, life, accidental death and
dismemberment and disability insurance plans may be increased (other than with
respect to participants who had retired from CSW or its subsidiaries prior to
1993 or their survivors), and (c) changes required by law may be made. AEP has
agreed that after July 1, 2002, it will provide employees of CSW and its
subsidiaries with employee benefits that are in the aggregate as least as
favorable as the employee benefits provided to similarly situated employees of
AEP and its subsidiaries and, if any AEP employee benefit plan is provided to
employees of CSW and its subsidiaries, the AEP employee benefit plan will
recognize such employees' service with CSW and its subsidiaries for all
purposes, including the accrual of benefits and the eligibility to receive
benefits. AEP has also agreed that no earlier than July 1, 2002, AEP will merge
the Central and South West Corporation Cash Balance Retirement Plan (the "CSW
Cash Balance Plan") with a defined benefit pension plan of AEP or its
subsidiaries, and that the retirement benefit for employees of CSW and its
subsidiaries who become participants in the merged plan will be determined under
the AEP pension plan formula for all years of service, but such benefit will not
be less than such employees' benefit accrued under the CSW Cash Balance Plan
immediately prior to the plan Merger, plus the benefit determined under the AEP
pension plan formula for years of service beginning after the plan Merger. AEP
has agreed that if the employees of CSW and its subsidiaries become participants
in a health plan of AEP or its subsidiaries, AEP will waive all pre-existing
condition limitations with respect to such employees and, if such participation
is effective other than on the first day of a calendar year, such employees will
receive credit for any co-payments and deductibles incurred by such employees in
the same calendar year under the CSW medical plan.
RETIREE AND DISABILITY BENEFITS. From and after July 1, 2002, AEP will
provide access to retiree medical and life insurance coverage to any employee or
director of CSW and its subsidiaries who retires or becomes disabled prior to
July 1, 2002, and who was eligible for retiree medical and life insurance
coverage under the CSW plans in effect on the date of such employee or
director's retirement or termination. AEP will also continue the retiree medical
and life insurance coverage for employees or directors who retired or became
disabled prior to 1993 without adverse change to such employees or directors.
Further, AEP will provide medical coverage without adverse change to employees
who become disabled before July 1, 2002,
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as long as such employees satisfy the requirements of the Central and South West
Corporation System Employees' Disability Income Plan on the date of such
employees' retirement or termination.
CERTAIN NONQUALIFIED ARRANGEMENTS. AEP will maintain the Central and South
West System Special Executive Retirement Plan (the "SERP") and the Central and
South West Corporation Executive Deferred Compensation Plan (the "DCP") from and
after the Effective Time until July 1, 2002, without adverse change to any
employee until all benefits are paid out in accordance with the plans, but no
deferrals will be permitted under the DCP after the Effective Time. If the SERP
or the Central and South West Corporation Executive Deferred Savings Plan (the
"DSP") is terminated or otherwise discontinued after July 1, 2002, AEP will make
available to the class of employees of CSW and its subsidiaries that was
eligible to participate in the SERP and the DSP any nonqualified deferred
compensation plans that AEP maintains to supplement the AEP qualified employee
benefit plans and the employees' service with CSW and its subsidiaries will be
recognized for all purposes under such plans. Further, AEP's supplemental plans
will assume the obligation of the SERP or DSP to pay the accrued benefits
thereunder at the time of any termination or discontinuance of the SERP or DSP.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of AEP and CSW to consummate the Merger are
subject to the satisfaction of the following conditions, any or all of which may
be waived in writing by CSW and AEP, in whole or in part, to the extent
permitted by applicable law; (i) the Registration Statement shall have been
declared effective by the SEC under the Securities Act, no stop order suspending
the effectiveness of the Registration Statement shall have been issued by the
SEC and no proceedings for that purpose shall have been initiated by the SEC;
(ii) the Merger Agreement shall have been approved and adopted by the requisite
vote of the shareholders of CSW and the Share Issuance and the Charter Amendment
shall have been approved and adopted by the stockholders of AEP; (iii) no court
or governmental authority shall have enacted, issued, promulgated, enforced or
entered any law, regulation or order (whether temporary, preliminary or
permanent) that is in effect and that has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger; (iv) all judgments,
orders or decrees of any court or governmental authority ("Orders") necessary
for the consummation of the Merger shall have been obtained and shall have
become Final Orders (as defined below) and no Final Orders shall impose terms or
conditions or qualifications that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on the combined
companies; (v) AEP and CSW shall each have been advised in writing on the
closing date by its independent public accountants that the Merger will qualify
as a pooling of interests transaction in accordance with generally accepted
accounting principles and the applicable SEC regulations; (vi) the AEP Shares to
be issued pursuant to the Merger shall have been listed, subject to official
notice of issuance, on the NYSE; and (vii) there shall not have occurred and
remain in effect a Divestiture Event (as defined below) with respect to AEP or
CSW. For the purposes of this Joint Proxy Statement/Prospectus, a "Final Order"
is defined as an Order that has not been reversed, stayed, enjoined, set aside,
annulled or suspended, with respect to which any waiting period prescribed by
law before the Merger may be consummated has expired (but without the
requirement for expiration of any applicable rehearing or appeal period) and as
to which all conditions to the consummation of the Merger prescribed by law,
regulation or order have been satisfied, and "Divestiture Event" is defined as
the adoption of a law or the issuance by a governmental authority of any
regulation or order that requires the divestiture of a substantial portion of
the generating assets of CSW or AEP.
The obligation of AEP to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by AEP, in whole or in part, to the
extent permitted by applicable law; (i) each of the representations and
warranties of CSW contained in the Merger Agreement shall be true and correct in
all material respects as of the date of the Merger Agreement and as of the
closing as though made again as of the closing (except for representations and
warranties that expressly speak only as of a specific date or time other than
the date of the Merger
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Agreement or the closing date which need only be true and correct as of such
date); and (ii) CSW shall have performed or complied in all material respects
with all agreements and covenants required by the Merger Agreement to be
performed or complied with by it on or prior to the closing date. For purposes
of clause (i), no representation or warranty of CSW shall be deemed to be untrue
as a result of the occurrence of a Divestiture Event or any change or effect
arising out of any foreign, federal or state legislative or regulatory action
with respect to (a) the regulation or deregulation of the electric utility
industry or (b) health or environment, including the conservation or protection
of the environment.
The obligation of CSW to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions, any
or all of which may be waived in writing by CSW, in whole or in part, to the
extent permitted by applicable law: (i) each of the representations and
warranties of AEP and Sub contained in the Merger Agreement shall be true and
correct in all material respects as of the date of the Merger Agreement and as
of the closing as though made again as of the closing (except for
representations and warranties that expressly speak only as of a specific date
or time other than the date of the Merger Agreement or the closing date which
need only be true and correct as of such date); and (ii) AEP and Sub shall have
performed or complied in all material respects with all agreements and covenants
required by the Merger Agreement to be performed or complied with by them on or
prior to the closing date. For purposes of clause (i), no representation or
warranty of AEP shall be deemed to be untrue as a result of the occurrence of a
Divestiture Event or any change or effect arising out of any foreign, federal or
state legislative or regulatory action with respect to (a) the regulation or
deregulation of the electric utility industry or (b) health or environment,
including the conversation or protection of the environment.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the required vote of the shareholders of AEP or
CSW: (a) by mutual written consent of AEP and CSW; (b) by AEP or CSW (such
party, the "Terminating Party"), upon two business days' prior written notice to
the other (the "Breaching Party"), upon a breach of any representation,
warranty, covenant or agreement on the part of the Breaching Party made in the
Merger Agreement or if any representation or warranty of the Breaching Party
shall have become untrue, in either case such that the Terminating Party's
conditions to effecting the Merger would not be satisfied, subject to a cure
period under certain circumstances; (c) by either CSW or AEP, upon two business
days' prior written notice to the other, if there shall occur any Divestiture
Event except that no such termination shall be permitted so long as the
Divestiture Event is capable of being vacated, lifted or reversed prior to the
Termination Date (as defined below) through the exercise of commercially
reasonable efforts; (d) by either AEP or CSW, upon two business days' prior
written notice to the other, if there shall be any law or regulation issued or
adopted or any order which is final and non-appealable preventing the
consummation of the Merger, subject to a limited exception; (e) by either AEP or
CSW, by written notice to the other, if the Merger shall not have been
consummated before December 31, 1999 (the "Termination Date"); PROVIDED,
HOWEVER, that the Merger Agreement may be extended by written notice to a date
not later than June 30, 2000 if the Merger shall not have been consummated as a
result of CSW, AEP or Sub's having failed by December 31, 1999 to satisfy the
condition of obtaining the required regulatory approvals or the condition
requiring the absence of a Divestiture Event described above in clauses (iii)
and (iv), respectively, under "Conditions to the Consummation of the Merger" and
provided that the right to terminate the Merger Agreement under the provision
described in this clause (e) will not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such date;
(f) by either AEP or CSW, upon two business days' prior written notice, if the
Merger Agreement shall fail to receive the requisite vote for approval and
adoption by the stockholders of CSW or the Share Issuance and Charter Amendment
shall fail to receive the requisite vote for approval and adoption by the
stockholders of AEP; (g) by AEP or CSW, at any time prior to, in the case of AEP
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receipt of shareholders' approval of the Share Issuance and the Charter
Amendment, and in the case of CSW, receipt of CSW stockholders' approval of the
Merger Agreement, upon two business days' prior written notice to the other, if
the Board of Directors of AEP or CSW, as the case may be, shall approve a
Superior Proposal; provided, however, that (1) such party shall have complied
with the covenant regarding Acquisition Proposals described above under "The
Merger Agreement--Acquisition Proposals", (2) the Board of Directors of AEP or
CSW, as the case may be, shall have concluded in good faith, after giving effect
to all concessions which may be offered in negotiations entered into pursuant to
clause (4) below, on the basis of the advice of its financial advisors and
outside counsel, that such proposal is a Superior Proposal, (3) the Board of
Directors of AEP or CSW, as the case may be, shall have concluded in good faith,
after receipt of written advice of outside counsel, that notwithstanding all
concessions which may be offered by the other party in negotiations entered into
pursuant to clause (4) below, such action is necessary for the Board of
Directors to act consistent with its fiduciary duties; and (4) prior to any such
termination, AEP or CSW, as the case may be, will, and will cause its respective
financial and legal advisors to, negotiate with the other to make such
adjustments in the terms and conditions of the Merger Agreement as would enable
AEP or CSW, as the case may be, to proceed with the transactions contemplated
therein on such adjusted terms; (h) by AEP or CSW, upon two business days' prior
written notice to the other, if the Board of Directors of the other party or any
committee thereof (1) shall withdraw or modify in any manner adverse to the
Terminating Party its approval or recommendation of, in the case of the Board of
Directors of CSW, the Merger Agreement and in the case of the Board of Directors
of AEP, the Charter Amendment and the Share Issuance, (2) shall fail to reaffirm
such approval or recommendation upon the Terminating Party's request, (3) shall
approve or recommend any Superior Proposal or (4) shall resolve to take any of
the actions specified in clause (1), (2) or (3); and (i) by either AEP or CSW,
by written notice to the other, if (1) a third party acquires securities
representing greater than 50% of the voting power of the outstanding voting
securities of the other party or (2) individuals who as of the date hereof
constitute the board of directors of such other party (together with any new
directors whose election by such board of directors or whose nomination for
election by the stockholders of such party was approved by a vote of a majority
of the directors of such party then still in office who were either directors as
of the date of the Merger Agreement or whose election or nomination for election
was approved prior to the Merger Agreement) cease for any reason to constitute a
majority of the Board of Directors of such other party then in office.
Subject to limited exceptions, including the survival of the parties'
agreements to pay certain fees and reimburse expenses to the other under certain
circumstances, as discussed below, in the event of the termination of the Merger
Agreement, the Merger Agreement shall become void, there shall be no liability
on the part of AEP, Sub or CSW (or any of their respective officers and
directors) to the other, and all rights and obligations of the parties thereto
shall cease, except that no party will be relieved from its obligations with
respect to any breach of the Merger Agreement.
EXPENSES AND FEES
All expenses incurred by AEP, Sub and CSW will be borne by the party
incurring such expenses; PROVIDED, HOWEVER, that the allocable share of AEP and
Sub, as a group, and CSW for all expenses related to printing, mailing and
filing this Joint Proxy Statement/Prospectus and all SEC and other regulatory
filing fees incurred in connection with the Registration Statement or this Joint
Proxy Statement/Prospectus shall be borne one-half each; and PROVIDED, FURTHER,
that AEP may, at its option, pay any expenses of CSW that are solely and
directly related to the Merger.
If the Merger Agreement is terminated pursuant to the provision described
above in clause (g) under "Termination" ("Clause (g)"), pursuant to the
provision described above in clause (b) under "Termination" ("Clause (b)"),
pursuant to the provision described above in clause (h) under "Termination"
("Clause (h)") or pursuant to the provision described above in clause (i) under
"Termination" ("Clause (i)"), then the breaching party or party whose Board of
Directors has exercised its fiduciary out as
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described under Clause (g) or changed its recommendation or the party whose
stock has been acquired or whose Board of Directors has changed, as the case may
be, shall promptly (but not later than five business days after notice of the
amount due is received) pay to the other party, as liquidated damages and
expense reimbursement, an amount equal to $20 million (the "Termination Fee").
If (i) the Merger Agreement is terminated pursuant to (A) the provision
described above in clause (e) under "Termination", (B) Clause (g), (C) the
provision described above in clause (f) under "Termination", (D) Clause (h) or
(E) Clause (b); and (ii) at the time of such termination (or in the case of
clause (i)(C) of this sentence, prior to the meeting of such party's
shareholders) there shall have been an Acquisition Proposal involving CSW or AEP
(as the case may be, the "Target Party") or any of its affiliates which, at the
time of such termination (or such meeting, as the case may be), shall not have
been (x) rejected by the Target Party and its Board of Directors and (y)
withdrawn by the third party; and (iii) within eighteen months of any such
termination described in clause (i) above, the Target Party or any of its
affiliates becomes a subsidiary of such offeror or a subsidiary of an affiliate
of such offeror or accepts a written offer or enters into a written agreement to
consummate or consummates an Acquisition Proposal with such offeror or an
affiliate thereof, then such Target Party (jointly and severally with its
affiliates), upon the signing of a definitive agreement relating to such
Acquisition Proposal, or, if no such agreement is signed, then at the closing
(and as a condition to the closing) of such Target Party's becoming such a
subsidiary or of such Acquisition Proposal, shall pay CSW or AEP, as the case
may be, a termination fee equal to $225 million (the "Topping Fee") plus
Expenses (as defined below) of such party not in excess of $20 million
("Out-of-Pocket Expenses"). If the Merger Agreement is terminated by CSW or AEP
pursuant to Clause (i), then CSW or AEP, as the case may be, shall pay
immediately the terminating party the Topping Fee plus Out-of-Pocket Expenses.
As used in this Joint Proxy Statement/Prospectus, the term "Expenses"
includes all reasonable out-of-pocket expenses (including all fees and expenses
of counsel, accountants, investment bankers, experts and consultants to a party
hereto and its affiliates) incurred by a party or on its behalf in connection
with or related to the authorization, preparation, negotiation, execution and
performance of the Merger Agreement, the preparation, printing, filing and
mailing of the Registration Statement, this Joint Proxy Statement/Prospectus,
the solicitation of stockholder approvals and all other matters related to the
consummation of the transactions contemplated by the Merger Agreement.
If termination fees are payable pursuant to the termination provisions
contained in the Merger Agreement, the aggregate amount payable to either AEP or
CSW and each of their respective affiliates will not exceed $245 million
(including Expenses).
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time, PROVIDED, HOWEVER, that after approval of the Merger by the
stockholders of CSW, no amendment may be made that would alter or change the
type of consideration into which each share of CSW Shares will be converted
pursuant to the Merger Agreement upon consummation of the Merger, alter or
change any term of the certificate of incorporation of CSW to be affected by the
Merger or alter or change any of the terms and conditions that would adversely
affect the holders of any class or series of CSW securities. Any such amendment
to the Merger Agreement must be set forth in a writing signed by AEP, Sub, and
CSW. At any time prior to the Effective Time, any party to the Merger Agreement
may (i) extend the time for the performance of any of the obligations or other
acts of the other party thereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained therein or in any
document delivered pursuant thereto and (iii), to the extent permitted by law,
waive compliance by the other party with any of the agreements or conditions
contained therein. Any such extension or waiver shall be valid only if set forth
in a writing signed by the party or parties to be bound by such extension or
waiver.
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INDEMNIFICATION
The Merger Agreement provides that, for a period of six years after the
Effective Time, (i) the certificate of incorporation and bylaws of the Surviving
Corporation (which will contain indemnification provisions substantially
equivalent to the current provisions in the CSW Charter and Bylaws) as in effect
immediately following the Effective Time shall not be amended to reduce or limit
the rights of indemnity afforded to the present and former directors and
officers of CSW thereunder or as to the ability of the Surviving Corporation to
indemnify such persons or to hinder, delay or make more difficult the exercise
of such rights of indemnity or the ability to indemnify with respect to any
claims made against such persons arising from their service in such capacities;
and (ii) AEP shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by CSW (or substitute
policies under certain circumstances) with respect to claims arising from facts
or events that occurred before the Effective Time; PROVIDED, HOWEVER, that in no
event shall AEP or the Surviving Corporation be required to expend more than
200% of the current annual premiums paid by CSW for such insurance.
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REGULATORY APPROVALS
Set forth below is a summary of the material regulatory requirements
affecting the Merger. Additional consents from or notifications to governmental
agencies may be necessary or appropriate in connection with the Merger.
Under the Merger Agreement, AEP and CSW have agreed to use all commercially
reasonable efforts to obtain any permits, orders and other governmental
authorizations necessary, proper or advisable to consummate and make effective
the transactions contemplated by the Merger Agreement. While AEP, CSW and their
subsidiaries believe that they will receive the requisite regulatory approvals
of the Merger, including favorable ratemaking treatment, there can be no
assurance as to the timing of such approvals, the ability to obtain such
approvals or that such approvals will contain satisfactory terms and conditions.
It is a condition to the consummation of the Merger that final orders from the
various federal and state commissions described above necessary for the
consummation of the Merger and other transactions contemplated by the Merger
Agreement have been obtained and do not impose terms, conditions or
qualifications that, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the combined company. There can be
no assurance that any such approvals will be obtained or, if obtained, will not
contain terms, conditions or qualifications that cause such approvals to fail to
satisfy such condition to the consummation of the Merger or that such orders
will not be appealed by intervenors to the appropriate courts.
ANTITRUST CONSIDERATIONS
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Merger) may not be consummated until certain
information has been submitted to the Antitrust Division of the Department of
Justice ("Antitrust Division") and the Federal Trade Commission (the "FTC") and
the specified HSR Act waiting period requirements have been satisfied. AEP and
CSW will provide their respective premerger notifications pursuant to the HSR
Act. The expiration or earlier termination of the HSR Act waiting period would
not preclude the Antitrust Division or the FTC from challenging the Merger on
antitrust grounds. Neither AEP nor CSW believes that the Merger will violate
federal antitrust laws. If the Merger is not consummated within 12 months after
the expiration or earlier termination of the initial HSR Act waiting period, AEP
and CSW must submit new information to the Antitrust Division and the FTC, and a
new HSR Act waiting period must expire or be earlier terminated before the
Merger may be consummated.
1935 ACT
In connection with the Merger, AEP and CSW are required to obtain SEC
approval under various sections of the 1935 Act (including Sections 6(a) and
9(a), which govern certain issuances of securities and certain acquisitions of
securities, utility assets or an interest in any other business by any company
in a registered holding company system). AEP and CSW will file a joint
application to the SEC seeking the necessary approvals under the 1935 Act.
Under the standards applicable to transactions subject to approval pursuant
to Section 9(a) of the 1935 Act, the SEC is directed to approve the Merger
unless it finds that (i) the Merger would tend towards detrimental interlocking
relations or a detrimental concentration of control, (ii) the consideration to
be paid in connection with the Merger is not reasonable, (iii) the Merger would
unduly complicate the capital structure of the applicant's holding company
system or would be detrimental to the proper functioning of the applicant's
holding company system, or (iv) the Merger would violate applicable state law.
To approve the proposed Merger, the SEC also must find that the Merger would
tend towards the development of an integrated public utility system and would
otherwise conform to the 1935 Act's integration and corporate simplification
standards.
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ATOMIC ENERGY ACT
CSW, through its wholly-owned subsidiary CPL, owns a 25.2% interest in the
South Texas Project, a two-unit nuclear electric generating station. The South
Texas Project is operated by the STP Nuclear Operating Company ("STP
Operating"), a Texas non-profit corporation, which is jointly-owned by CPL and
the other owners of the South Texas Project. CPL holds NRC licenses with respect
to its ownership interests in the South Texas Project and STP Operating. Section
184 of the Atomic Energy Act provides that no license may be transferred,
assigned or in any manner disposed of, directly or indirectly, through transfer
of control of any license to any person, unless the NRC finds that the transfer
is in accordance with the provisions of the Atomic Energy Act and gives its
consent in writing. CPL will seek approval from the NRC for transfer of control
of its NRC licenses as a result of the merger of its parent, CSW, with a
subsidiary of AEP. After the Merger, CPL, as an operating utility subsidiary of
AEP, will continue to own the identical pre-Merger interests in the South Texas
Project and STP Operating.
FEDERAL POWER ACT
Section 203 of the Federal Power Act provides that no public utility may
sell or otherwise dispose of its jurisdictional facilities, directly or
indirectly merge or consolidate its facilities with those of any other person,
or acquire any security of any other public utility, without first having
obtained authorization from the FERC. AEP and CSW will file a joint application
with the FERC seeking approval of the Merger. Under Section 203 of the Federal
Power Act, the FERC will approve a merger if it finds the merger to be
"consistent with the public interest."
Under the FERC's 1996 Utility Merger Policy Statement, if one or more state
commissions with regulatory jurisdiction over a Merger applicant's retail rates
lacks the authority to approve a merger, and raises concerns at the FERC
regarding the effect of the proposed merger on state regulation, the FERC may
hold a hearing to address the issue. AEP has advised that it does not believe
that formal approval of the Merger is required by the state commissions with
jurisdiction over its utility subsidiaries, i.e., the Indiana, Kentucky, Ohio,
Michigan, Tennessee, Virginia and West Virginia commissions.
COMMUNICATIONS ACT
CSW, itself or through one or more subsidiaries, holds various radio
licenses subject to the jurisdiction of the FCC under Title III of the
Communications Act. Under Section 310 of the Communications Act, no station
license may be assigned or transferred, directly or indirectly, except upon
application to and approval by the FCC. AEP and CSW intend to file applications
with the FCC seeking approval for the transfer of control of these licenses as a
result of the Merger.
ARKANSAS COMMISSION
CSW's wholly-owned subsidiary, SWEPCO, is subject to the jurisdiction of the
Arkansas Commission. Pursuant to Section 23-3-306(b) of the Arkansas Statutes,
Arkansas Commission approval is required before any person may merge with or
otherwise acquire control of a domestic public utility. AEP, CSW and SWEPCO will
seek Arkansas Commission approval of the Merger.
The Arkansas Commission must approve a merger application unless it finds
that one or more of five adverse circumstances would result from the
transaction. The circumstances include an adverse effect on the public utility's
existing obligations or the quality of service, a reduction in competition for
the provision of utility services within the state, and an adverse effect on the
financial condition of the public utility.
LOUISIANA COMMISSION
CSW's wholly-owned subsidiary, SWEPCO, is subject to the jurisdiction of the
Louisiana Commission. Pursuant to Louisiana Statutes Section 45:1164, the
Louisiana Commission is granted general
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supervisory authority over public utilities operating in the state and, under
this authority, the Louisiana Commission has held that its approval or
non-opposition is required prior to the sale, lease, merger, consolidation,
stock transfer, or any other change of control or ownership of a public utility
subject to its jurisdiction. AEP, CSW and SWEPCO will seek Louisiana Commission
approval of, or non-opposition to, the Merger.
The Louisiana Commission reviews merger applications pursuant to an 18
factor test that generally relates to the impact of the transaction on
competition, the financial condition of the utility, quality of service, public
health and safety, employment, and other similar "public interest" matters.
OKLAHOMA COMMISSION
CSW's wholly-owned subsidiary, PSO, is subject to the jurisdiction of the
Okalahoma Commission. The Oklahoma statutes concerning mergers and acquisitions
of public utilities are substantially identical to the sections of the Arkansas
Statutes discussed above. Thus, Oklahoma Commission approval is required before
any person may merge with or otherwise acquire control of an Oklahoma public
utility; and the Oklahoma Commission is required to approve such merger or
acquisition of control unless it finds that the transaction will result in one
or more of a list of adverse circumstances, which are substantially identical to
the adverse circumstances listed above with respect to Arkansas. AEP, CSW and
PSO will seek the approval of the Oklahoma Commission consistent with these
requirements.
TEXAS COMMISSION
Three of CSW's wholly-owned subsidiaries, CPL, SWEPCO and WTU, are subject
to the jurisdiction of the Texas Commission. Pursuant to Section 14.101 of the
Texas Utilities Code, each transaction involving the sale of at least 50 percent
of the stock of a public utility must be reported to the Texas Commission within
a reasonable time. AEP, CSW, CPL, SWEPCO and WTU will report the Merger to the
Texas Commission for its review.
In reviewing a transaction involving the sale of at least 50 percent of the
stock of a Texas utility, the Texas Commission is required to determine whether
the action is consistent with the public interest, taking into consideration
factors such as the reasonable value of the property, facilities, or securities
to be acquired, disposed of, merged, transferred, or consolidated, and whether
the transaction will adversely affect the health or safety of customers or
employees, result in the transfer of jobs of Texas citizens to workers domiciled
outside of Texas, or result in the decline of service. If the Texas Commission
determines that a transaction is not in the public interest, it may take the
effect of the transaction into consideration in ratemaking proceedings and
disallow the effect of such transaction if such transaction will unreasonably
affect rates or service.
AFFILIATE CONTRACTS
In connection with the Merger, AEP, CSW and their subsidiaries will need to
enter into or amend agreements related to the provision by affiliates of the
combined companies of various services, including management, supervisory,
construction, engineering, accounting, legal, financial or similar services. The
approval or non-opposition of certain state regulatory commissions and the SEC
is required with respect to the creation or amendment of certain inter-affiliate
agreements. AEP, CSW and their subsidiaries will file such agreements with the
appropriate state regulatory commissions and the SEC.
OTHER REGULATORY MATTERS
CSW and its subsidiaries have obtained from various regulatory authorities
certain franchises, permits and licenses which may need to be renewed, replaced
or transferred as a result of the Merger, and approvals, consents or
notifications may be required in connection with such renewals, replacements or
transfers.
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AEP's operating utility companies are subject to the jurisdiction of utility
regulatory commissions in the states of Indiana, Kentucky, Michigan, Ohio,
Tennessee, Virginia and West Virginia. On January 16, 1998, the Public Utilities
Commission of Ohio opened a docket regarding the Merger and the Kentucky Public
Service Commission (the "Kentucky Commission"), by letter, requested that AEP
file an application for the Kentucky Commission's approval of the Merger. On
March 13, 1998, after having received a response from AEP, the Executive
Director of the Kentucky Commission sent a letter to AEP indicating, based on
its analysis of the information provided to date, that the Merger would require
prior Kentucky Commission approval, but stating that if AEP is aware of any
controlling case law to the contrary, the issue would be revisited. AEP believes
that the approval of the utility regulatory commissions in these states is not
required to consummate the Merger.
Regulatory commissions of states where AEP's and CSW's utility subsidiaries
operate may intervene in the federal regulatory proceedings. In addition, such
regulatory commissions regulate the rates charged to utility customers within
their jurisdictions. In approving rates, each state may take into account
savings resulting from, and other effects of, the Merger.
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CERTAIN LITIGATION
Two lawsuits have been filed in Delaware state court seeking to enjoin the
Merger. CSW and each of its directors have been named as defendants in both
cases. The first suit, ROBERT LEWIS V. WILLIAM R. HOWELL, ET AL., alleges that
the CSW Rights Plan, approved by the CSW Board on September 27, 1997 and which
became effective on December 19, 1997, constitutes a "poison pill" precluding
acquisition offers and resulting in a heightened fiduciary duty on the part of
the CSW Board to pursue an auction-type sale process to obtain the best value
for CSW stockholders. The second suit, ROBERT LEWIS AND MAX GRILL V. GLEN BIGGS,
ET AL., alleges that the Merger is unfair to CSW stockholders in that it does
not recognize the underlying intrinsic value of CSW's assets and its future
profitability. This second suit also seeks an auction-type sale process. CSW
believes that both suits are without merit and intends to defend them
vigorously.
THE AEP MEETING--ADDITIONAL MATTERS
ELECTION OF DIRECTORS
Eleven directors are to be elected at the AEP Meeting to hold office until
the next annual meeting and until their successors have been elected. The
By-Laws of AEP provide that the number of directors of AEP shall be such number,
not less than 9 nor more than 17, as shall be determined from time to time by
resolution of AEP's Board of Directors.
On December 17, 1997, AEP's Board of Directors adopted a resolution
increasing the number of directors constituting the entire Board from 12 to 13,
and elected Dr. Kathryn D. Sullivan to fill the vacancy thus created. In
addition, on January 28, 1998, AEP's Board of Directors adopted a resolution
reducing the number of directors from 13 to 11, effective on the date of the AEP
Meeting. Messrs. DeMaria and Maloney, each currently a director, will be
retiring from the Board and not standing for reelection.
The 11 nominees named on pages 105-107 were selected by AEP's Board of
Directors on the recommendation of the Committee on Directors of the Board. The
proxies named on the proxy card or their substitutes will vote for the Board's
nominees, unless instructed otherwise. Shareholders may withhold authority to
vote for any or all of such nominees on the proxy card. Except for Dr. Sullivan,
who is standing for election for the first time, all of the Board's nominees
were elected by the shareholders at the 1997 annual meeting. It is not expected
that any of the nominees will be unable to stand for election or be unable to
serve if elected. In the event that a vacancy in the slate of nominees should
occur before the meeting, the proxies may be voted for another person nominated
by AEP's Board of Directors or the number of directors may be reduced
accordingly.
The following brief biographies of the nominees include their principal
occupations, ages on the date of this Joint Proxy Statement/Prospectus, accounts
of their business experience and the names of certain companies of which they
are directors. Data with respect to the number of AEP Shares and stock-based
units beneficially owned by each of them appears on page 117.
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NOMINEES FOR DIRECTOR
<TABLE>
<C> <S> <C>
[photo] JOHN P. DESBARRES Received an associate degree in electrical
INVESTOR/CONSULTANT, engineering from Worcester Junior College in 1960
RANCHO PALOS VERDES, CALIFORNIA and completed the Harvard Business School Program
Age 58 for Management Development in 1975 and the
Director since April 1997 Massachusetts Institute of Technology Sloan School
Senior Executive Program in 1984. Joined Sun
Company (petroleum and natural gas) in 1963,
holding various positions until 1979, when he was
elected president of Sun Pipe Line Company
(1979-1988) (crude oil products). Chairman,
president and chief executive officer of Sante Fe
Pacific Pipelines, Inc. (1988-1991) (petroleum
products pipeline). President and chief executive
officer (1991-1995) and chairman (1992-1995) of
Transco Energy Company (natural gas). A director of
Texas Eastern Products Pipeline Company, which is
the general partner of TEPPCO Partners, L.P.
- ---------------------------------------------------------------------------------------------------------------
[photo] E. LINN DRAPER, JR. Received his B.A. and B.S. (chemical engineering)
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE degrees from Rice University in 1964 and 1965,
OFFICER OF AEP AND AEP SERVICE respectively, and Ph.D. (nuclear engineering) in
CORPORATION; CHAIRMAN AND CHIEF 1970 from Cornell University. Joined Gulf States
EXECUTIVE OFFICER OF ALL OTHER MAJOR Utilities Company, an unaffiliated electric
COMPANY SUBSIDIARIES utility, in 1979. Chairman of the board, president
Age 56 and chief executive officer of Gulf States
Director since 1992 (1987-1992). Elected president of AEP and president
and chief operating officer of AEP Service
Corporation in March 1992 and chairman of the board
and chief executive officer of AEP and all of its
major subsidiaries in April 1993. A director of BCP
Management, Inc., which is the general partner of
Borden Chemicals and Plastics L.P., and CellNet
Data Systems, Inc.
- ---------------------------------------------------------------------------------------------------------------
[photo] ROBERT M. DUNCAN Received his B.S. and J.D. from The Ohio State
DIRECTOR AND TRUSTEE, University in 1948 and 1952, respectively. After
COLUMBUS, OHIO two years in the private practice of law, held a
Age 70 series of governmental legal positions culminating
Director since 1985 in service as a judge for the U.S. District Court
for the Southern District of Ohio, a position held
from 1974 to 1985. Private practice of law
(1985-1991). Vice president and general counsel,
The Ohio State University (1992-1994). A trustee of
Nationwide Investing Foundation, Nationwide
Investing Foundation II, Nationwide Separate
Account Trust and Financial Horizons Investment
Trust.
- ---------------------------------------------------------------------------------------------------------------
[photo] ROBERT W. FRI Holds a B.A. from Rice University and an M.B.A.
DIRECTOR, NATIONAL from Harvard Business School. Associated with
MUSEUM OF NATURAL HISTORY McKinsey & Company, Inc., management consulting
(SMITHSONIAN INSTITUTION), firm, from 1963 to 1971 and again from 1973 to
WASHINGTON, D.C. 1975, being elected a principal in the firm in
Age 62 1968. From 1971 to 1973, served as first Deputy
Director since 1995 Administrator of the Environmental Protection
Agency, becoming Acting Administrator in 1973. Was
first Deputy and then Acting Administrator of the
Energy Research and Development Administration from
1975 to 1977. From 1978 to 1986 was President of
Energy Transition Corporation. President and
director of Resources for the Future (non-profit
research organization) from 1986 to 1995 and became
senior fellow emeritus in 1996. Assumed his present
position with the National Museum of Natural
History in 1996. A director of Hagler Bailly, Inc.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<C> <S> <C>
[photo] LESTER A. HUDSON, JR. Received a B.A. from Furman University in 1961, an
CHAIRMAN, H&E ASSOCIATES, M.B.A. from the University of South Carolina in
GREENVILLE, SOUTH CAROLINA 1965 and Ph.D. (industrial management) from Clemson
Age 58 University in 1997. Joined Dan River Inc. (textile
Director since 1987 fabric manufacturer) in 1970 and was elected
president and chief operating officer in 1981 and
chief executive officer in 1987. Resigned from Dan
River in 1990. Joined WundaWeve Carpets, Inc.
(carpet manufacturer) as chairman, president and
chief executive officer in 1990. Chairman of
WundaWeve in 1991. Vice chairman of WundaWeve
(1993-1995). Chairman, H&E Associates (investment
firm) in 1995. A director of American National
Bankshares Inc. and Greenville Hospital System
Foundation. Business Strategy Instructor, Clemson
University.
- ---------------------------------------------------------------------------------------------------------------
[photo] LEONARD J. KUJAWA Received his B.B.A. in 1954 and M.B.A. in 1955 from
INTERNATIONAL the University of Michigan. Joined Arthur Andersen
ENERGY CONSULTANT, LLP (accounting and consulting firm) in 1957 and
ATLANTA, GEORGIA became a partner in 1968, specializing in the
Age 65 electric and telecommunications industries.
Director since February 1997 Worldwide Director Energy and Telecommunications
(1985-1995). Retired in 1995. International energy
consultant to his former firm and other global
companies. A director of Schweitzer-Mauduit
International, Inc.
- ---------------------------------------------------------------------------------------------------------------
[photo] ANGUS E. PEYTON Graduated from Princeton University in 1949 and
PARTNER, BROWN & PEYTON, received his LL.B. from the University of Virginia
ATTORNEYS, CHARLESTON, in 1952. Served as an assistant attorney general of
WEST VIRGINIA West Virginia (1956-1957), as chairman of the West
Age 71 Virginia Industrial Development Authority, and as
Director since 1978 West Virginia Commerce Commissioner (1965-1969).
Formed his present law firm in 1969. A director of
One Valley Bancorp of West Virginia, Inc.
- ---------------------------------------------------------------------------------------------------------------
[photo] DONALD G. SMITH Joined Roanoke Electric Steel Corporation (steel
CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF manufacturer) in 1957. Held various positions with
EXECUTIVE OFFICER AND TREASURER OF Roanoke Electric Steel before being named president
ROANOKE ELECTRIC STEEL CORPORATION, and treasurer in 1985, chief executive officer in
ROANOKE, VIRGINIA 1986 and chairman of the board in 1989.
Age 62
Director since 1994
- ---------------------------------------------------------------------------------------------------------------
[photo] LINDA GILLESPIE STUNTZ Holds an A.B. from Wittenberg University (1976) and
PARTNER, STUNTZ & DAVIS, P.C., J.D. from Harvard Law School (1979). Private
ATTORNEYS, WASHINGTON, D.C. practice of law (1979-1981). U.S. House of
Age 43 Representatives, Committee on Energy and Commerce:
Director since 1993 Associate Minority Counsel, Subcommittee on Fossil
and Synthetic Fuels (1981-1986) and Minority
Counsel and Staff Director (1986-1987). Private
practice of law (1987-1989). U.S. Department of
Energy (1989-1993): Acting Deputy Secretary
(January 1992-July 1992) and Deputy Secretary (July
1992-January 1993). Returned to the private
practice of law in March 1993. A director of
Schlumberger Limited. Member, Advisory Council,
Electric Power Research Institute.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<C> <S> <C>
[photo] KATHRYN D. SULLIVAN Received her B.S. from the University of California
PRESIDENT AND CHIEF and Ph.D. from Dalhousie University. NASA space
EXECUTIVE OFFICER, shuttle astronaut (1978-1993). Chief Scientist at
COSI COLUMBUS, the National Oceanic and Atmospheric Administration
COLUMBUS, OHIO (1993-1996). Became president and chief executive
Age 46 officer of COSI Columbus (science museum) in 1996.
Director since December 1997 U.S. Naval Reserve Officer.
- ---------------------------------------------------------------------------------------------------------------
[photo] MORRIS TANENBAUM Graduated from The Johns Hopkins University in 1949
VICE PRESIDENT, NATIONAL ACADEMY with a B.A. in chemistry and received a Ph.D. in
OF ENGINEERING, physical chemistry in 1952 from Princeton
SHORT HILLS, NEW JERSEY University. Joined Bell Telephone Laboratories in
Age 69 1952 and held various positions with AT&T
Director since 1989 companies. Became vice chairman of the board of
AT&T in 1986 and chief financial officer in 1988.
Retired in 1991. A director of Cabot Corporation. A
trustee of Massachusetts Institute of Technology,
associate trustee of Battelle Memorial Institute,
trustee emeritus of The Johns Hopkins University
and honorary trustee of The Brookings Institution.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Dr. Draper and Messrs. Peter J. DeMaria and G.P. Maloney are directors of
Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan
Power Company, Kentucky Power Company and Ohio Power Company (all of which are
subsidiaries of AEP with one or more classes of publicly held preferred stock or
debt securities) and other subsidiaries of AEP. Dr. Draper and Messrs. DeMaria
and Maloney are also directors of AEP Generating Company, a subsidiary of AEP.
FUNCTIONS OF AEP'S BOARD OF DIRECTORS AND COMMITTEES
Under New York law, AEP is managed under the direction of AEP's Board of
Directors. The Board establishes broad corporate policies and authorizes various
types of transactions, but it is not involved in day-to-day operational details.
During 1997, the Board held eight regular and two special meetings. The Board
has six standing committees, the functions of which are described in the
following paragraphs.
The AUDIT COMMITTEE consists of Messrs. DesBarres, Duncan, Fri, Hudson and
Peyton. The Audit Committee oversees, and reports to the Board concerning, the
general policies and practices of AEP and its subsidiaries with respect to
accounting, financial reporting, and internal auditing and financial controls.
It also maintains a direct exchange of information between the Board and AEP's
independent accountants and reviews possible conflict of interest situations
involving directors. During 1997 the Audit Committee held four meetings.
The COMMITTEE ON DIRECTORS consists of Messrs. Duncan, Fri, Hudson and
Kujawa and Ms. Stuntz. The Committee on Directors is responsible for: (i)
recommending the size of the Board within the boundaries imposed by the By-Laws;
(ii) recommending selection criteria for nominees for election or appointment to
the Board; (iii) conducting independent searches for qualified nominees and
screening the qualifications of candidates recommended by others; and (iv)
recommending to the Board for its consideration one or more nominees for
appointment to fill vacancies on the Board as they occur and the slate of
nominees for election at the annual meeting. During 1997 the Committee on
Directors held two meetings.
The Committee on Directors will consider shareholder recommendations of
candidates to be nominated as directors of AEP. All such recommendations must be
in writing and addressed to the Secretary of AEP. By accepting a shareholder
recommendation for consideration, the Committee on Directors does not undertake
to adopt or take any other action concerning the recommendation, or to give the
proponent its reasons for not doing so.
The CORPORATE PUBLIC POLICY COMMITTEE consists of Messrs. DesBarres, Duncan,
Fri, Hudson, Kujawa, Peyton and Smith, Ms. Stuntz and Drs. Sullivan and
Tanenbaum. The Corporate Public Policy Committee is responsible for examining
AEP's policies on major public issues affecting the AEP System, as well as
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established System policies which affect the relationship of AEP and its
subsidiaries to their service areas and the general public; for reporting
periodically and on request to the Board and providing recommendations to the
Board on such policy matters; and for counseling the management of the AEP
System on any such policy matters presented to the Committee for consideration
and study. During 1997 the Corporate Public Policy Committee held two meetings.
The EXECUTIVE COMMITTEE consists of Drs. Draper and Tanenbaum and Mr.
Peyton. It is empowered to exercise all the authority of AEP's Board of
Directors, subject to certain limitations prescribed in the By-Laws, during the
intervals between meetings of the Board. Meetings of the Executive Committee are
convened only in extraordinary circumstances. The Executive Committee did not
meet during 1997.
The FINANCE COMMITTEE consists of Messrs. Kujawa, Peyton and Smith, Ms.
Stuntz and Dr. Tanenbaum. The Finance Committee monitors and reports to the
Board with respect to the capital requirements and financing plans and programs
of AEP and its subsidiaries including, among other things, reviewing and making
such recommendations as it considers appropriate concerning the short and long-
term financing plans and programs of AEP and its subsidiaries and the
implementation of the same. During 1997 the Finance Committee held four
meetings.
The HUMAN RESOURCES COMMITTEE consists of Messrs. DesBarres, Hudson and
Smith and Dr. Tanenbaum. The Human Resources Committee is responsible for: (i)
reviewing the salaries and other compensation and benefits provided to members
of the Board who are officers of AEP or employees of any of its subsidiaries,
and recommending to the Board for approval the amount of salary, compensation
and benefits to be paid to such persons each year; (ii) reviewing management
proposals concerning salaries, compensation and benefits to be paid to senior
officers of AEP Service Corporation; (iii) reviewing and making recommendations
to the Board with respect to the compensation of directors; (iv) evaluating
AEP's hiring, development, promotional and succession planning practices for
those management positions described in (ii) above; and (v) periodic review of
AEP's overall affirmative action performance. During 1997 the Human Resources
Committee held four meetings.
During 1997, except for Dr. Sullivan, no incumbent director attended fewer
than 75% of the aggregate of the total number of meetings of AEP's Board of
Directors and the total number of meetings held by all Committees on which he or
she served. Dr. Sullivan missed one of two Board meetings after she was elected
a director, an unscheduled special meeting.
DIRECTORS COMPENSATION AND STOCK OWNERSHIP GUIDELINES
ANNUAL RETAINERS AND MEETING FEES. Directors who are officers of AEP or
employees of any of its subsidiaries do not receive any compensation, other than
their regular salaries and the accident insurance coverage described below, for
attending meetings of AEP's Board of Directors of AEP. The other members of the
Board receive an annual retainer of $23,000 for their services, an additional
annual retainer of $3,000 for each Committee that they chair, a fee of $1,000
for each meeting of the Board and of any Committee that they attend (except a
meeting of the Executive Committee held on the same day as a Board meeting), and
a fee of $1,000 per day for any inspection trip or conference (except a trip or
conference on the same day as a Board or Committee meeting).
DEFERRED COMPENSATION AND STOCK PLAN. The Deferred Compensation and Stock
Plan for Non-Employee Directors permits non-employee directors to choose to
receive up to 100 percent of their annual Board retainer in AEP Shares and/or
units that are equivalent in value to AEP Shares ("Stock Units"), deferring
receipt by the non-employee director until termination of service or for a
period that results in payment commencing not later than five years thereafter.
AEP Shares are distributed and/or Stock Units are credited to directors, as the
case may be, when the retainer is payable, and are based on the closing price of
the AEP Shares on the payment date. Amounts equivalent to cash dividends on the
Stock Units accrue as additional Stock Units. Payment of Stock Units to a
director from deferrals of the retainer and dividend credits is made in cash or
AEP Shares, or a combination of both, as elected by the director.
STOCK UNIT ACCUMULATION PLAN. The Stock Unit Accumulation Plan for
Non-Employee Directors awards 300 Stock Units to each non-employee director as
of the first day of the month in which the non-employee director becomes a
member of the Board, and annually thereafter, up to a maximum of 3,000 Stock
Units for each non-employee director. Amounts equivalent to cash dividends on
the Stock Units
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accrue as additional Stock Units. Stock Units credited to a non-employee
director's account as a result of the annual awards and dividend credits are
forfeitable on a pro rata basis for each full month that service as a director
is less than 60 months. Stock Units are paid to the director in cash upon
termination of service unless the director has elected to defer payment for a
period that results in payment commencing not later than five years thereafter.
INSURANCE. AEP maintains a group 24-hour accident insurance policy to
provide a $1,000,000 accidental death benefit for each director (three-year
premium was $15,750). The current policy will expire on September 1, 2000, and
AEP expects to renew the coverage. In addition, AEP pays each director
(excluding officers of AEP or employees of any of its subsidiaries) an amount to
provide for the federal and state income taxes incurred in connection with the
maintenance of this coverage (approximately $350 annually).
STOCK OWNERSHIP GUIDELINES. AEP's Board of Directors considers stock
ownership in AEP by management to be of great importance. Such ownership
enhances management's commitment to the future of AEP and further aligns
management's interests with those of AEP's shareholders. In keeping with this
philosophy, the Board has adopted minimum stock ownership guidelines for
non-employee directors. The target for each non-employee director is 2,000
shares of AEP Shares and/or Stock Units, with such ownership to be acquired by
December 31, 2000 for directors in office on January 1, 1997, and by the end of
the fifth year of service for directors joining the Board after this time. For
further information as to the guidelines for AEP's executive officers, see the
"Board Human Resources Committee Report on Executive Compensation" below under
the caption "Stock Ownership Guidelines."
OTHER MATTERS
The directors and officers of AEP and its subsidiaries are insured, subject
to certain exclusions, against losses resulting from any claim or claims made
against them while acting in their capacities as directors and officers. The
American Electric Power System companies are also insured, subject to certain
exclusions and deductibles, to the extent that they have indemnified their
directors and officers for any such losses. Such insurance is provided by
Associated Electric & Gas Insurance Services, CNA, Energy Insurance Mutual, The
Federal Insurance Company and Great American Insurance Company, effective
January 1, 1998 through December 31, 1998, and pays up to an aggregate amount of
$150,000,000 on any one claim and in any one policy year. The total annual
premium for the five policies is $1,274,413.
Fiduciary liability insurance provides coverage for American Electric Power
System companies, their directors and officers, and any employee deemed to be a
fiduciary or trustee, for breach of fiduciary responsibility, obligation, or
duties as imposed under the Employee Retirement Income Security Act of 1974, as
amended. This coverage, provided by The Federal Insurance Company, Zurich
Insurance Company and Executive Risk Indemnity, Inc., was renewed, effective
July 1, 1997 through June 30, 2000, for a premium of $402,658. It provides
$100,000,000 of aggregate coverage with a $500,000 deductible for each loss.
APPROVAL OF AUDITORS
On the recommendation of the Audit Committee, AEP's Board of Directors has
appointed the accounting firm of Deloitte & Touche LLP as independent auditors
of AEP for the year 1998, subject to approval by the shareholders at the annual
meeting. Deloitte & Touche LLP is considered to be the firm best qualified to
perform this important function because of its ability and the familiarity of
its personnel with AEP's affairs. It and predecessor firms have been AEP's
auditors since 1911. Approval of this proposal requires the affirmative vote of
holders of a majority of the shares present in person or by proxy at the
meeting. The AEP Board of Directors has endorsed this appointment and it is
recommending approval of this proposal by the AEP shareholders.
Fees billed by Deloitte & Touche LLP for auditing and other professional
services rendered to the Company and its subsidiaries during 1997 were
$2,914,000.
Representatives of Deloitte & Touche LLP will be present at the meeting and
will have an opportunity to make a statement if they desire to do so. They also
will be available to answer appropriate questions.
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EXECUTIVE COMPENSATION
The following table shows for 1997, 1996 and 1995 the compensation earned by
the chief executive officer and the four other most highly compensated executive
officers (as defined by regulations of the SEC) of AEP at December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
-------------------- PAYOUTS ALL OTHER
SALARY BONUS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) PAYOUTS($)(1) ($)(2)
- ------------------------------------------------- --------- --------- --------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
E. Linn Draper, Jr. -- Chairman of the board, 1997 1996 720,000 327,744 951,132 675,903 31,620 31,990
president and chief executive officer of AEP 1995 720,000 281,664 334,851 30,790
and the Service Corporation; chairman and chief 685,000 236,325
executive officer of other subsidiaries
Peter J. DeMaria -- Controller and director of 1997 1996 385,000 153,345 391,793 290,825 21,570 21,190
AEP; vice chairman of the board of the Service 1995 360,000 140,832 143,829 20,050
Corporation; vice president, controller and 330,000 113,850
director of other subsidiaries
G. P. Maloney -- Vice president, secretary and 1997 1996 385,000 153,345 391,793 286,288 21,570 21,190
director of AEP; vice chairman of the board of 1995 360,000 140,832 141,582 20,060
the Service Corporation; vice president and 330,000 113,850
director of other subsidiaries
William J. Lhota -- Executive vice president and 1997 1996 355,000 141,396 364,436 263,114 20,570 19,690
director of the Service Corporation; president, 1995 320,000 125,184 132,592 19,140
chief operating officer and director of other 300,000 103,500
subsidiaries
James J. Markowsky -- Executive vice president -- 1997 1996 325,000 129,447 338,382 254,535 18,020 19,480
power generation and director of the Service 1995 303,000 118,534 126,599 17,515
Corporation; vice president and director of 285,000 98,325
other subsidiaries
</TABLE>
- ------------------------
(1) Amounts in the "Bonus" column reflect payments under the Senior Officer
Annual Incentive Compensation Plan (and predecessor Management Incentive
Compensation Plan) for performance measured for each of the years ended
December 31, 1995, 1996 and 1997. Payments are made in March of the
subsequent year. Amounts for 1997 are estimates but should not change
significantly.
Amounts in the "Long-Term Compensation" column reflect performance share unit
targets earned under the Performance Share Incentive Plan (which became
effective January 1, 1994) for the two-, three- and three-year performance
periods ending December 31, 1995, 1996 and 1997, respectively. The two-year
performance period was a transition performance period.
See below under "Long-Term Incentive Plans -- Awards in 1997" and pages 114
and 115 for additional information.
(2) For 1997, includes (i) employer matching contributions under the AEP System
Employees Savings Plan: Dr. Draper, $3,400; Mr. DeMaria, $3,306; Mr.
Maloney, $4,800; Mr. Lhota, $4,800; and Dr. Markowsky, $3,250; (ii) employer
matching contributions under the AEP System Supplemental Savings Plan, a
non-qualified plan designed to supplement the AEP Savings Plan: Dr. Draper,
$18,200; Mr. DeMaria, $8,244; Mr. Maloney, $6,750; Mr. Lhota, $5,850; and
Dr. Markowsky, $6,500;
110
<PAGE>
and (iii) subsidiary companies director fees: Dr. Draper and Messrs. DeMaria
and Maloney, $10,020; Mr. Lhota, $9,920; and Dr. Markowsky, $8,270.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1997
Each of the awards set forth below establishes performance share unit
targets, which represent units equivalent to shares of AEP Shares, pursuant to
AEP's Performance Share Incentive Plan. Since it is not possible to predict
future dividends and the price of AEP Shares, credits of performance share units
in amounts equal to the dividends that would have been paid if the performance
share unit targets were established in the form of AEP Shares are not included
in the table.
The ability to earn performance share unit targets is tied to achieving
specified levels of total shareholder return ("TSR") relative to the S&P
Electric Utility Index. Notwithstanding AEP's TSR ranking, no performance share
unit targets are earned unless AEP shareholders realize a positive TSR over the
relevant three-year performance period. The Human Resources Committee may, at
its discretion, reduce the number of performance share unit targets otherwise
earned. In accordance with the performance goals established for the periods set
forth below, the threshold, target and maximum awards are equal to 25%, 100% and
200%, respectively, of the performance share unit targets. No payment will be
made for performance below the threshold.
Payments of earned awards are deferred in the form of restricted stock units
(equivalent to shares of AEP Shares) until the officer has met the equivalent
stock ownership target discussed in the Human Resources Committee Report. Once
officers meet and maintain their respective targets, they may elect either to
continue to defer or to receive further earned awards in cash and/or AEP Shares.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS OF
PERFORMANCE PERFORMANCE SHARE UNITS UNDER
PERIOD NON-STOCK PRICE-BASED PLAN
NUMBER OF UNTIL -----------------------------------
PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM
NAME SHARE UNITS OR PAYOUT (#) (#) (#)
- ------------------------------------------------------ ------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
E. L. Draper, Jr...................................... 7,111 1997-1999 1,778 7,111 14,222
P. J. DeMaria......................................... 3,327 1997-1999 832 3,327 6,654
G. P. Maloney......................................... 3,327 1997-1999 832 3,327 6,654
W. J. Lhota........................................... 3,068 1997-1999 767 3,068 6,136
J. J. Markowsky....................................... 2,809 1997-1999 702 2,809 5,618
</TABLE>
RETIREMENT BENEFITS
The American Electric Power System Retirement Plan provides pensions for all
employees of AEP System companies (except for employees covered by certain
collective bargaining agreements), including the executive officers of AEP. The
Retirement Plan is a noncontributory defined benefit plan.
The following table shows the approximate annual annuities under the
Retirement Plan that would be payable to employees in certain higher salary
classifications, assuming retirement at age 65 after various periods of service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF ACCREDITED SERVICE
----------------------------------------------------------------------------------
HIGHEST ANNUAL EARNINGS 15 20 25 30 35 40 45
- -------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 400,000............................. $ 93,660 $ 124,880 $ 156,100 $ 187,320 $ 218,500 $ 245,140 $ 271,740
500,000............................. 117,660 156,880 196,100 235,320 274,540 307,790 341,040
600,000............................. 141,660 188,880 236,100 283,320 330,540 370,440 410,340
700,000............................. 165,660 220,880 276,100 331,320 386,540 433,090 479,640
900,000............................. 213,660 284,880 356,100 427,320 498,540 558,390 618,240
1,100,000............................ 261,660 348,880 436,100 523,320 610,540 683,390 756,840
1,300,000............................ 309,660 412,880 516,100 619,320 722,540 808,990 895,440
</TABLE>
111
<PAGE>
The amounts shown in the table are the straight life annuities payable under
the Retirement Plan without reduction for the joint and survivor annuity.
Retirement benefits listed in the table are not subject to any deduction for
Social Security or other offset amounts. The retirement annuity is reduced 3%
per year in the case of retirement between ages 60 and 62 and further reduced 6%
per year in the case of retirement between ages 55 and 60. If an employee
retires after age 62, there is no reduction in the retirement annuity.
AEP maintains a supplemental retirement plan which provides for the payment
of benefits that are not payable under the Retirement Plan due primarily to
limitations imposed by Federal tax law on benefits paid by qualified plans. The
table includes supplemental retirement benefits.
Compensation upon which retirement benefits are based, for the executive
officers named in the Summary Compensation Table above, consists of the average
of the 36 consecutive months of the officer's highest aggregate salary and
Senior Officer Annual Incentive Compensation Plan (and predecessor Management
Incentive Compensation Plan) awards, shown in the "Salary" and "Bonus" columns,
respectively, of the Summary Compensation Table, out of the officer's most
recent 10 years of service. As of December 31, 1997, the number of full years of
service applicable for retirement benefit calculation purposes for such officers
were as follows: Dr. Draper, five years; Mr. DeMaria, 38 years; Mr. Maloney, 42
years; Mr. Lhota, 33 years; and Dr. Markowsky, 26 years.
Dr. Draper has a contract with AEP and AEP Service Corporation which
provides him with a supplemental retirement annuity that credits him with 24
years of service in addition to his years of service credited under the
Retirement Plan less his actual pension entitlement under the Retirement Plan
and any pension entitlement from the Gulf States Utilities Company Trusteed
Retirement Plan, a plan sponsored by his prior employer.
Fourteen AEP System employees (including Messrs. DeMaria, Maloney and Lhota
and Dr. Markowsky) whose pensions may be adversely affected by amendments to the
Retirement Plan made as a result of the Tax Reform Act of 1986 are eligible for
certain supplemental retirement benefits. Such payments, if any, will be equal
to any reduction occurring because of such amendments. Assuming retirement in
1998 of the executive officers named in the Summary Compensation Table, only
Messrs. DeMaria and Maloney would be affected and their annual supplemental
benefit would be $491 and $3,847, respectively.
AEP made available a voluntary deferred-compensation program in 1982 and
1986, which permitted certain members of AEP System management to defer receipt
of a portion of their salaries. Under this program, a participant was able to
defer up to 10% or 15% annually (depending on the terms of the program offered),
over a four-year period, of his or her salary, and receive supplemental
retirement or survivor benefit payments over a 15-year period. The amount of
supplemental retirement payments received is dependent upon the amount deferred,
age at the time the deferral election was made, and number of years until the
participant retires. The following table sets forth, for the executive officers
named in the Summary Compensation Table, the amounts of annual deferrals and,
assuming payments commencing at age 65, annual supplemental retirement payments
under the 1982 and 1986 programs.
<TABLE>
<CAPTION>
1982 PROGRAM 1986 PROGRAM
----------------------- -----------------------
ANNUAL ANNUAL
AMOUNT OF AMOUNT OF
ANNUAL SUPPLEMENTAL ANNUAL SUPPLEMENTAL
AMOUNT RETIREMENT AMOUNT RETIREMENT
DEFERRED PAYMENT DEFERRED PAYMENT
(4-YEAR (15-YEAR (4-YEAR (15-YEAR
NAME PERIOD) PERIOD) PERIOD) PERIOD)
- -------------------------------------------------------------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
P. J. DeMaria................................................. $ 10,000 $ 52,000 $ 13,000 $ 53,300
G. P. Maloney................................................. 15,000 67,500 16,000 56,400
</TABLE>
112
<PAGE>
BOARD HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of AEP's Board of Directors regularly reviews
executive compensation policies and practices and evaluates the performance of
management in the context of AEP's performance. None of the members of the
Committee is or has been an officer or employee of any AEP System company or
receives remuneration from any AEP System company in any capacity other than as
a director. See page .
The Human Resources Committee recognizes that the executive officers are
charged with managing a $16 billion multi-state electric utility with
international investments during challenging times and with addressing many
difficult and complex issues.
AEP's executive compensation program is designed to maximize shareholder
value, to support the implementation of AEP's business strategy and to improve
both corporate and personal performance. The Committee's compensation policies
supporting this program are:
- Pay for performance, motivating both short- and long-term performance.
Compensation for short-and long-term performance focuses on meeting
specified corporate performance goals and the long-term interests of
shareholders, respectively.
- Require a significant amount of compensation for senior executives to be
"at risk," variable incentive compensation versus fixed or base pay with
much of this risk similar to the risk experienced by other AEP
shareholders.
- Enhance AEP's ability to attract, retain, reward, motivate and encourage
the development of exceptionally knowledgeable, highly qualified and
experienced executives through compensation opportunities.
- Target compensation levels at rates that are reflective of current market
practices to maintain a stable, successful management team.
In carrying out its responsibilities, the Committee utilizes independent
compensation consultants to obtain information and recommendations relating to
changing industry compensation practices and programs.
The Committee also considers management's responses to the impact of
increased competition and other significant changes in the rapidly evolving
electric utility industry. It is the Committee's opinion that, in this
ever-changing environment, Dr. Draper and the senior management team continue to
develop and implement strategies effectively to position AEP for the future.
This includes AEP's development of unregulated business activities and proposals
and actions taken in connection with the industry's transition to competition.
Four specific significant initiatives in 1997 were the acquisition of 50% of
Yorkshire Electricity, a proposed joint venture with Conoco, developing a
national energy trading organization and the Merger Agreement with CSW. The
success of these efforts and their benefits to AEP cannot be precisely measured
in advance, but the Committee believes they are vital to AEP's long-term
success.
STOCK OWNERSHIP GUIDELINES. AEP's Board of Directors, upon the Committee's
recommendation, underscored the importance of aligning executive and shareholder
interests by adopting in December 1994 stock ownership guidelines for senior
management participants in the Performance Share Incentive Plan. The Committee
and senior management believe that linking a significant portion of an
executive's current and potential future net worth to AEP's success, as
reflected in the stock price and dividends paid, gives the executive a stake
similar to that of AEP's owners and further encourages long-term management for
the benefit of those owners.
Under the guidelines, the target ownership of AEP Shares is directly related
to the officer's corporate position with the greatest ownership target for the
chief executive officer. The target for the CEO is 45,000 shares, which was
equivalent to approximately three times his then annual base salary. The targets
for the other four officers named in the Summary Compensation Table are 15,000
shares each, equivalent to approximately 1.5 times their then annual base
salary. Each officer is expected to achieve the ownership target within a period
of five years commencing on January 1, 1995. AEP Shares equivalents earned
113
<PAGE>
through the Management Incentive Compensation Plan, Senior Officer Annual
Incentive Compensation Plan and Performance Share Incentive Plan, described
below, are included in determining compliance with the ownership targets. As of
January 1, 1998, Dr. Draper and the other four officers named in the Summary
Compensation Table exceeded their respective ownership requirements (see the
table on page 117 for actual ownership amounts).
COMPONENTS OF EXECUTIVE COMPENSATION
BASE SALARY. When reviewing salaries, the Committee considers pay practices
used by other electric utilities and industry in general. In addition, the
Committee considers the respective positions held by the executive officers,
their levels of responsibility, performance and experience, and the relationship
of their salaries to the salaries of other AEP managers and employees.
For compensation comparison purposes, the Human Resources Committee uses the
electric utility companies in the S&P Electric Utility Index, which is the peer
group used in the Comparison of Five Year Cumulative Total Return graph in this
proxy statement. In recognition of AEP's relatively large size and operational
complexity, executive officer salary levels are targeted to the second highest
quartile (between the 50th and 75th percentiles) of the range of compensation
paid by the other electric utilities in this compensation peer group. Base
salary levels in 1997 for the CEO and next four most highly compensated
executive officers of AEP named in the Summary Compensation Table were within
this second highest quartile. In establishing salary levels against that range,
the Human Resources Committee considers the competitiveness of AEP's entire
compensation package.
Salaries are adjusted, as appropriate, and reviewed annually to reflect
individual and corporate performance and consistency with compensation changes
within AEP and the compensation peer group of other electric utilities.
The Committee meets without the presence of Dr. Draper, chairman, president
and chief executive officer, to evaluate his performance and compensation and
reports on that evaluation to the outside directors of the Board. After full
discussion, these directors then act on the Committee's recommendation.
ANNUAL INCENTIVE. A variable, performance-based portion of the executive
officers' total compensation is paid through the Senior Officer Annual Incentive
Compensation Plan ("SOIP"), effective January 1, 1997, which is included in the
"Bonus" column in the Summary Compensation Table. The SOIP is the successor to
the Management Incentive Compensation Plan ("MICP") for senior officers and is
similar in operation and philosophy to the MICP.
The SOIP is intended to motivate and reward senior officers to achieve
superior management performance in serving customer needs and creating
shareholder value. Each participant is assigned an annual target award expressed
as a percentage of annual salary. For 1997, the target awards for Dr. Draper and
the other executive officers named in the compensation table were 40% and 35%,
respectively. Actual awards can vary from 0-150% of the target award based on
performance.
SOIP awards are based entirely on preestablished AEP corporate performance
criteria specified in the SOIP. For 1997, these four criteria included (i) total
investor return, which reflects stock price and dividends paid, measured
relative to the performance of utilities in the S&P Electric Utility Index, (ii)
return on stockholder equity, measured relative to the performance of utilities
in the S&P Electric Utility Index and on absolute performance, (iii) the extent
to which the average price of power sold to retail customers was lower as
compared with other utilities in the states which AEP serves and, (iv) effective
with the 1997 plan year, "safety performance". For 1997, the performance merited
an award of 113.8%. This percentage is an estimate but should not change
significantly.
To more closely align the financial interests of the executive officers with
AEP's shareholders, SOIP participants may elect to defer their awards, with the
deferrals treated as if invested in AEP Shares, although no stock is actually
purchased. Dividend equivalents are credited during the deferral period.
LONG-TERM INCENTIVE. The Performance Share Incentive Plan (the "Plan")
provides longer-term, performance-driven, equity incentive award opportunities
directly related to shareholder value.
114
<PAGE>
The Plan annually establishes performance share unit targets which are
earned based on AEP's subsequent three-year total shareholder returns measured
relative to the S&P peer utilities. In 1997, the Committee established targets
for Dr. Draper and the other executive officers named in the Summary
Compensation Table equivalent to 40% and 35%, respectively, of their then base
salaries. The target number of performance share units has been determined after
an evaluation of long-term incentive opportunities provided by the S&P peer
companies, again targeting the second highest quartile of competitive practice.
However, the awards which will ultimately be paid to participants under the Plan
for a performance period are not determinable in advance and can range from
0-200% of the target.
The Plan ended a three-year performance period at year end 1997. AEP's total
shareholder return for 1995-1997 ranked fourth relative to the S&P peer
utilities and, as a result, 185% of the performance share unit targets
originally established (and dividend credits) were earned. The associated awards
are listed in the Summary Compensation Table.
Similar to the SOIP awards which are deferred, payments of earned awards
under the Plan are also deferred in the form of restricted stock units
(equivalent to shares of AEP Shares). Such Plan deferrals continue until
termination of employment or, if so elected by the recipient, with payments
commencing not later than five years thereafter. Once the officers meet and
maintain their respective equivalent stock ownership targets discussed above,
they may then elect either to continue to defer or to receive further earned
Plan awards in cash and/or AEP Shares. Dividend equivalents are credited as
though reinvested in additional restricted stock units. The Plan is further
described on page 111.
TAX POLICY
The Committee has considered the impact of Section 162(m) of the Code, which
provides a limit on the deductibility of compensation for certain executive
officers in excess of $1,000,000 per year. It is the Committee's policy,
consistent with sound executive compensation principles and the needs of AEP, to
qualify all compensation for deductibility where practicable.
Award payments under the Performance Share Incentive Plan have been
structured to be exempt from the deduction limit because they are made pursuant
to a shareholder-approved performance-driven plan. Award payments under the SOIP
currently are not eligible for the performance-based exemption under the Code.
However, since Dr. Draper has deferred his SOIP award to dates past his
retirement from AEP, the Committee has not deemed it necessary at this time to
qualify compensation paid pursuant to the SOIP for deductibility under Section
162(m). The Committee may decide to do so in the future.
No named officer in the Summary Compensation Table had taxable compensation
for 1997 in excess of the deduction limit. The Committee intends to continue to
evaluate the impact of this Code provision.
HUMAN RESOURCES
COMMITTEE MEMBERS
Morris Tanenbaum, Chairman
John P. DesBarres
Lester A. Hudson, Jr.
Donald G. Smith
115
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
<S> <C> <C>
AEP, S&P 500 Index & S&P Electric Utility Index**
Dollars
S&P Electric Utility
Index S&P 500 Index
0 100 100
1993 112.55 110.08
1994 97.9 111.53
1995 128.22 153.45
1996 128.18 188.68
1997 162.27 251.26
Assumes $100 Invested on January 1, 1993 in AEP Common Stock, S&P 500 Index and
S&P Electric Utility Index
*Total Return Assumes Reinvestment of Dividends
**Fiscal Year Ending December 31
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
<S> <C>
AEP, S&P 500 Index & S&P Electric Utility Index**
Dollars
American Electric Power
0 100
1993 119.74
1994 114.23
1995 150.75
1996 162.03
1997 215.04
Assumes $100 Invested on January 1, 1993 in AEP Common Stock, S&P 500 Index and
S&P Electric Utility Index
*Total Return Assumes Reinvestment of Dividends
**Fiscal Year Ending December 31
</TABLE>
The total return performance shown on the graph above is not necessarily
indicative of future performance.
116
<PAGE>
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of AEP Shares and
stock-based units as of January 1, 1998 for all directors as of the date of this
Joint Proxy Statement/Prospectus, all nominees to AEP's Board of Directors, each
of the persons named in the Summary Compensation Table and all directors and
executive officers as a group. Unless otherwise noted, each person had sole
voting and investment power over the number of AEP Shares and stock-based units
of AEP set forth across from his or her name. Fractions of shares and units have
been rounded to the nearest whole number.
<TABLE>
<CAPTION>
STOCK
NAME AEP SHARES UNITS(A) TOTAL
- ------------------------------------------------------------------ ----------- --------- ---------
<S> <C> <C> <C>
P. J. DeMaria..................................................... 7,754( (e) 15,932 23,686
J. P. DesBarres................................................... 5,000(d) 312 5,312
E. L. Draper, Jr.................................................. 7,373( (d) 62,857 70,230
R. M. Duncan...................................................... 2,121 3,169 5,290
R. W. Fri......................................................... 1,000 937 1,937
L. A. Hudson, Jr.................................................. 1,853(e) 3,169 5,022
L. J. Kujawa...................................................... 300 697 997
W. J. Lhota....................................................... 15,056( (d) 14,827 29,883
G. P. Maloney..................................................... 5,803( (d) 12,715 18,518
J. J. Markowsky................................................... 5,126( (e) 12,417 17,543
A. E. Peyton...................................................... 4,819(f) 3,549 8,368
D. G. Smith....................................................... 2,000 1,258 3,258
L. G. Stuntz...................................................... 1,500(d) 1,774 3,274
K. D. Sullivan.................................................... -- 304 304
M. Tanenbaum...................................................... 1,433 2,839 4,272
All directors and executive officers as a group (15 persons)...... 146,369( (g) 136,756 283,125
</TABLE>
- ------------------------
(a) This column includes amounts deferred in stock units and held under the
Stock Unit Accumulation Plan for Non-Employee Directors, Deferred
Compensation and Stock Plan for Non-Employee Directors, Management Incentive
Compensation Plan, Senior Officer Annual Incentive Compensation Plan and
Performance Share Incentive Plan. Certain of these stock units are subject
to forfeiture based on service as a director or length of employment.
(b) Includes the following numbers of share equivalents held in the AEP
Employees Savings Plan over which such persons have sole voting power, but
the investment/disposition power is subject to the terms of the Savings
Plan: Mr. DeMaria, 3,187; Dr. Draper, 2,716; Mr. Lhota, 12,876; Mr. Maloney,
3,436; Dr. Markowsky, 5,074; and all executive officers, 27,289.
(c) Does not include, for Messrs. DeMaria, Lhota and Maloney, 85,231 shares in
the American Electric Power System Educational Trust Fund over which Messrs.
DeMaria, Lhota and Maloney share voting and investment power as trustees
(they disclaim beneficial ownership). The amount of shares shown for all
directors and executive officers as a group includes these shares.
(d) Includes the following numbers of shares held in joint tenancy with a family
member: Mr. DeMaria, 462; Mr. DesBarres, 5,000; Dr. Draper, 2,200; Mr.
Lhota, 2,180; Mr. Maloney, 2,367; and Ms. Stuntz, 300.
(e) Includes the following numbers of shares held by family members over which
beneficial ownership is disclaimed: Mr. DeMaria, 3,192; Mr. Hudson, 750; and
Dr. Markowsky, 19.
(f) Includes 1,500 shares over which Mr. Peyton shares voting and investment
power which are held by trusts of which he is a trustee, but he disclaims
beneficial ownership of 1,000 of such shares.
(g) Represents less than 1% of the total number of shares outstanding.
117
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and Section 17(a) of the 1935 Act require
AEP's officers and directors to file initial reports of ownership and reports of
changes in ownership of AEP Shares and other securities of AEP and its
subsidiaries with the SEC and NYSE. Officers and directors are required by SEC
regulations to furnish AEP copies of all reports they file. Based solely on
AEP's review of the copies of such reports received and written representations
from certain reporting persons, AEP notes that during 1997 Angus E. Peyton, a
director, did not timely report the acquisition of 354 AEP Shares occurring in
April 1997. He reported it in February 1998.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the only persons or groups known to AEP as of December
31, 1997, with beneficial ownership of 5 percent or more of AEP's Shares.
<TABLE>
<CAPTION>
AEP SHARES
-------------------------
AMOUNT OF
NAME, ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS OWNERSHIP CLASS
------------ -----------
<S> <C> <C>
Sanford C. Bernstein & Co., Inc...................................................... 17,535,763(a) 9.3 %
767 Fifth Avenue
New York, NY 10153
FMR Corp............................................................................. 9,773,663(b) 5.15%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ------------------------
(a) Based on the Schedule 13G filed with the SEC, Sanford C. Bernstein & Co.,
Inc. reported that it has sole voting power for 10,291,617 shares, shared
voting power for 1,807,665 shares, and sole dispositive power for 17,535,763
shares.
(b) The Schedule 13G filed by FMR Corp. included Edward C. Johnson 3d, Chairman
of FMR Corp., and Abigail P. Johnson, a director of FMR Corp., as reporting
persons. According to the Schedule 13G, FMR Corp. reported that it has sole
voting power for 719,263 shares and sole dispositive power for 9,773,663
shares.
118
<PAGE>
THE CSW MEETING--ADDITIONAL MATTERS
ELECTION OF DIRECTORS
At the CSW Meeting, three directors will be elected to Class II of the CSW
Board for three-year terms expiring at the 2001 annual meeting or at such time
as their respective successors are duly elected and qualified, and two directors
will be elected to Class III of the CSW Board to fill the remaining one year of
the Class III term expiring at the 1999 annual meeting or at such time as their
respective successors are duly elected and qualified. Directors will be elected
by a plurality of the votes cast at the CSW Meeting.
The CSW Board currently consists of 11 members divided into three classes
with staggered terms of office. Class I, Class II and Class III directors' terms
will expire at CSW's annual meetings in 2000, 1998 and 1999, respectively. The
three nominees for election as Class II directors at the CSW Meeting, Messrs.
Brooks, Lawless and Powell, currently serve as Class II directors of the CSW
Board. The fourth Class II director, Mr. Glenn Biggs was not nominated for
reelection to the CSW Board at the CSW Meeting. Accordingly, the size of the CSW
Board will be reduced to 10 after the CSW Meeting. During 1997, Mr. William R.
Howell and Dr. Richard L. Sandor were elected to Class III of the CSW Board. In
accordance with the CSW Charter, these two directors must stand for election at
this annual meeting even though the terms of the Class III directors generally
do not expire until the annual meeting in 1999.
Mr. J.C. Templeton retired from the CSW Board in April 1997. Mr. Lloyd D.
Ward resigned from the CSW Board on January 1, 1998, Mr. Glenn Files resigned
from the CSW Board on January 21, 1998. Each of these three directors were Class
III directors prior to their resignation.
THE CSW BOARD HAS NOMINATED AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE ELECTION OF E. R. BROOKS, ROBERT W. LAWLESS AND JAMES L. POWELL, AS
CLASS II DIRECTORS, AND WILLIAM R. HOWELL AND RICHARD L. SANDOR, AS CLASS III
DIRECTORS.
Each nominee is presently a director of CSW and has served continuously
since the year indicated opposite his/her name below. Each of the nominees has
consented to being named as a nominee and to serve as a director of CSW if
elected. 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 directors may be voted (at the discretion of the holders of the
proxies) for a substitute nominee not named herein.
THE FOLLOWING INFORMATION IS GIVEN WITH RESPECT TO THE NOMINEES FOR ELECTION AS
DIRECTORS:
E. R. BROOKS, 60 CLASS II, DIRECTOR SINCE 1988
Mr. Brooks has served as Chairman and Chief Executive Officer of CSW since
February 1991. He served as CSW's President from February 1991 to July 1997. He
is also a member of the Board of Directors of each of CSW's subsidiaries, as
well as a Director of Hubbell, Inc. Mr. Brooks is a Trustee of Baylor Health
Care Center, Dallas, Texas, and Hardin Simmons University, Abilene, Texas.
ROBERT W. LAWLESS, 61 CLASS II, DIRECTOR SINCE 1991
Dr. Lawless served as the President and Chief Executive Officer of Texas Tech
University and Texas Tech University Health Sciences Center in Lubbock, Texas
from July 1989 through April 1996. He has served as the president of the
University of Tulsa since May 1996. He is a member of the Board of Directors of
three Salomon Brothers Mutual Funds.
119
<PAGE>
JAMES L. POWELL, 68 CLASS II, DIRECTOR SINCE 1987
Mr. Powell has been involved in ranching and investments in Ft. McKavett, Texas
since prior to 1992. He is a Director of Southwest Bancorp of Sanderson, Texas,
a Director and member of the Executive Committee of National Finance Credit
Corporation and an Advisory Director of First National Bank, Mertzon, Texas.
WILLIAM R. HOWELL, 62 CLASS III, DIRECTOR SINCE 1997
Mr. Howell served as Chairman of the Board of J.C. Penney Company from 1983 to
January 1997 and also as its Chief Executive Officer from 1983 to January 1995.
He is currently Chairman Emeritus of J.C. Penney Company. He has been Chairman
of the Board of Trustees of Southern Methodist University since 1996 and serves
on the Chairman's Advisory Council of the National Minority Suppliers
Development Council. He is a member of the Board of Directors of Exxon
Corporation, Warner-Lambert Company, Bankers Trust, Halliburton Company and The
Williams Companies, Inc.
RICHARD L. SANDOR, 56 CLASS III, DIRECTOR SINCE 1997
Dr. Sandor has served as Chairman and Chief Executive Officer of Centre
Financial Products Limited since March 1993 and also as Chairman of the Board of
Hedge Financial Products, Inc. since May 1997. He is a Board of Director of
Center for Sustainable Development in the Americas and is on the board of
governors of The School of the Art Institute of Chicago.
THE FOLLOWING INFORMATION IS GIVEN FOR CONTINUING DIRECTORS:
MOLLY SHI BOREN, 54 CLASS I, DIRECTOR SINCE 1991
Ms. Boren, of Norman, Oklahoma, has been an attorney since prior to 1992 and is
a former Special District Judge in Pontotoc County, Oklahoma. She formerly
served as a Director of Liberty Bank Corporation and of Pet Incorporated.
DONALD M. CARLTON, 60 CLASS I, DIRECTOR SINCE 1994
Mr. Carlton served as the President and Chairman of Radian Corporation, an
engineering and technology firm, from 1969 through December 1995. In January
1996 he was named President and Chief Executive Officer of Radian International
LLC. He is a member of the Board of Directors of Concert Investment Series Funds
and National Instruments.
T. J. ELLIS, 55 CLASS I, DIRECTOR SINCE 1996
Mr. Ellis is Chairman and Chief Executive Officer of SEEBOARD and has served in
such capacity since January 1996. Previously he served as the Chief Executive
Officer of SEEBOARD for more than the past five years. He currently serves as a
director of CSW UK Finance Company, CSW Investments, Sussex Chamber of Commerce
Training and Enterprise and The Brighton West Pier Trust.
THOMAS V. SHOCKLEY, III, 52 CLASS I, DIRECTOR SINCE 1991
Mr. Shockley was elected President and Chief Operating Officer of CSW in July
1997. He joined CSW as Senior Vice President in January 1990, and became an
Executive Vice President in September of that same year. In addition, he served
as Chief Executive Officer of CSW's subsidiary, Central and South West Services,
Inc., from October 1992 to December 1993. Mr. Shockley continues to serve as a
Director of each of CSW's non-electric subsidiaries.
JOE H. FOY, 71 CLASS III, DIRECTOR SINCE 1974
Mr. Foy served as a partner of the law firm of Bracewell & Patterson,
Houston, Texas until his retirement in 1993. He is currently a member of the
Board of Directors of Enron Corporation.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table shows securities beneficially owned as of December 31,
1997 by each director and nominee, certain executive officers and all directors
and executive officers as a group. Share amounts shown in this table include
options exercisable within 60 days after December 31, 1997, restricted stock,
CSW Shares credited to thrift plus accounts and all other CSW Shares
beneficially owned by the listed persons.
<TABLE>
<CAPTION>
NAME CSW SHARES(1)(2)
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Glenn Biggs.................................................................................... 19,211
Molly Shi Boren................................................................................ 3,119
E.R. Brooks.................................................................................... 131,529
Donald M. Carlton.............................................................................. 8,230
T. J. Ellis.................................................................................... 7,694
Glenn Files.................................................................................... 42,269
Joe H. Foy..................................................................................... 10,717
T.M. Hagan..................................................................................... 13,625
William R. Howell.............................................................................. 1,000
Robert W. Lawless.............................................................................. 3,074
Venita McCellon-Allen.......................................................................... 6,528
Ferd. C. Meyer, Jr............................................................................. 46,480
James L. Powell................................................................................ 4,211
Glenn D. Rosilier.............................................................................. 68,071
Richard L. Sandor.............................................................................. --
Thomas V. Shockley, III........................................................................ 68,329
Lloyd D. Ward.................................................................................. 2,157
All of the above and other officers as a group (CSW directors and officers).................... 486,165
</TABLE>
- ------------------------
(1) Shares for Ms. McCellon-Allen, Messrs. Brooks, Files, Hagan, Meyer,
Rosilier, Shockley, and CSW directors and officers include 1,125, 12,225,
4,500, 1,125, 5,700, 5,700, 7,275, and 42,150 shares of restricted stock,
respectively. These individuals currently have voting power, but not
investment power, with respect to these shares. The above shares also
include 1,934, 65,175, 23,653, 8,484, 32,889, 32,889, 42,231, and 239,258
CSW Shares underlying immediately exercisable options held by Ms.
McCellon-Allen, Messrs. Brooks, Files, Hagan, Meyer, Rosilier, Shockley, and
CSW directors and officers, respectively.
(2) All of the share amounts represent less than one percent of the outstanding
CSW Shares.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the only persons or groups known to CSW as of December
31, 1997, with beneficial ownership of 5 percent or more of CSW's Shares.
<TABLE>
<CAPTION>
CSW SHARES
------------------------------
<S> <C> <C>
AMOUNT OF
NAME, ADDRESS OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS OWNERSHIP CLASS
- ------------------------------------------------------------------------------------- --------------- -------------
Mellon Bank Corporation and subsidiaries............................................. 12,196,127(1) 6%
One Mellon Bank Center
Pittsburgh, PA 15258
</TABLE>
- ------------------------
(1) Mellon Bank Corporation and its subsidiaries, including Mellon Bank, N.A.,
which acts as trustee of an employee benefit plan of CSW, reported that they
exercise sole voting power as to 11,022,435 shares and shared voting power
as to 11,022,435 shares.
OTHER INFORMATION REGARDING THE CSW BOARD
Nominees for directorships are recommended by the Nominating Committee of
the CSW Board and are nominated by the CSW Board on the basis of their
qualifications, including training, experience, integrity and independence of
mind, to render service to CSW. CSW's Bylaws generally provide that CSW shall
not elect or propose for election as a director any non-employee who will have
attained the age of 70 (72 for persons who served as directors and were at least
60 years of age on October 12, 1987) at the date of such election or proposed
election. Federal law restricts the extent to which CSW may have interlocking
directorates with other companies.
The number of directors constituting the entire CSW Board may not be less
than nine nor more than fifteen, as may be fixed from time to time by resolution
adopted by a majority of the entire CSW Board. The size of the CSW Board is
currently fixed at 12. No decrease in the number of directors on the CSW Board
may shorten the term of any incumbent director. The majority of the CSW Board
may adopt a resolution to increase the number of directors to not more than
fifteen and may elect a new director or directors to fill any such newly created
directorship. Similarly, vacancies occurring on the CSW Board for any reason may
be filled by majority vote of the remaining directors. Any such CSW
Board-elected director will hold office until CSW's next annual meeting of
stockholders and the election and qualification of a successor.
Under the CSW Charter, any director may be removed from office by the
stockholders of CSW only for cause and only by the affirmative vote of the
holders of at least 80 percent of the voting power of the outstanding CSW
Shares.
MEETINGS AND COMPENSATION OF THE CSW BOARD
The CSW Board held 6 regular meetings and 8 special meetings during 1997.
Directors who are not also officers and employees of CSW receive annual cash
directors' fees of $12,000 for serving on the CSW Board and a fee of $1,250 per
day plus expenses for each meeting of the CSW Board or committee attended. In
addition, under the CSW Directors' Plan each non-employee director receives an
annual award of 600 phantom stock shares on the fourth Wednesday of January
during their term of office. Such phantom stock shares vest at such time as a
director ceases to be a member of the CSW Board and are then converted into CSW
Shares on a one-for-one basis. The CSW Board has standing Policy, Audit,
Executive Compensation, Nominating and Corporate Strategy Review Committees.
Chairmen of the Audit, Corporate Strategy Review, Executive Compensation, and
Nominating Committees receive annual fees of $6,000, $6,000, $3,500 and $3,500,
respectively, to be paid in cash in addition to regular directors'
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and meeting fees. Committee chairmen and committee members who are also officers
and employees of CSW receive no annual director's, chairman's or meeting fees.
CSW maintains a memorial gift program for all of its current directors,
directors who have retired since 1992 and certain executive officers. There are
14 current directors and executive officers and 13 retired directors and
officers eligible for the memorial gift program. Under this program, CSW will
make donations in a director's or executive officer's name to up to three
charitable organizations in an aggregate of $500,000, payable by CSW upon such
person's death. CSW maintains corporate-owned life insurance policies to fund
the program. The annual premiums paid by CSW are based on pooled risks and
averaged $15,803 per participant for 1997, $16,402 per participant for 1996, and
$16,367 per participant for 1995.
Non-employee directors are provided the opportunity to enroll in a medical
and dental program offered by CSW. This program is identical to the employee
plan and directors who elect coverage pay the same premium as active employee
participants in the plan. If a non-employee director terminates his service on
the board with ten or more years of service and is over seventy years of age,
that director is eligible to receive retiree medical and dental benefits
coverage from CSW.
Non-employee directors are provided the opportunity to participate in the
Central and South West Deferred Compensation Plan for Directors. The plan allows
participants to defer up to $20,000 of board and committee fees. Participants
receive a ten-year annuity, based on the amount deferred, beginning at the
participants normal retirement date from the Board.
During 1997, CSW retained Mr. Glenn Biggs, a current member of the CSW
Board, under an agreement to pursue special business development activities in
Mexico on behalf of CSW. For the year ended December 31, 1997, CSW paid Mr.
Biggs $120,000 pursuant to this agreement. Effective March 18, 1998, Mr. Biggs
resigned his position as a director of CSW. Mr. Biggs had not previously been
nominated for reelection to the CSW Board. In connection with his resignation,
Mr. Biggs' consulting arrangement was terminated. CSW and Mr. Biggs entered into
an agreement pursuant to which Mr. Biggs was paid, a lump sum for, among other
things, his benefit under certain compensation plans and to pay his director and
CSW Board committee fees through May 1998 and his consulting fees through March
1998. Pursuant to that agreement, Mr. Biggs and his spouse are also entitled to
continued medical and dental coverage under the CSW Medical Plan for Outside
Directors and CSW has agreed to maintain the memorial gift program for Mr.
Biggs.
All current directors attended more than 75 percent of the total number of
meetings held by the Board and each committee on which such directors served in
1997, except for Mr. Ward who attended 57 percent of the total meetings.
CSW BOARD COMMITTEES
POLICY COMMITTEE. The Policy Committee, currently consisting of Messrs.
Brooks (Chairman), Foy, Lawless and Powell, held 9 meetings in 1997. The Policy
Committee reviews and makes recommendations to the CSW Board concerning major
policy issues, considers the composition, structure and functions of the CSW
Board and its committees and reviews existing corporate policies and recommends
changes when appropriate. The Policy Committee has authority to act as and on
behalf of the CSW Board when the full CSW Board is not in session.
AUDIT COMMITTEE. The Audit Committee, currently consisting of Ms. Boren and
Messrs. Carlton, Lawless (Chairman), Powell and Sandor, held 4 meetings in 1997.
The Audit Committee recommends to the CSW Board the independent public
accountants to be selected; discusses with the internal auditors and independent
public accountants the overall scope, plans and results of their audits, and
their evaluations of internal controls and the overall quality of CSW's
accounting and financial reporting practices; facilitates any private
communication with the committee desired by the internal auditors or independent
public accountants; discusses with management, internal auditors and the
independent public accountants CSW's
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accounting and financial reporting principles and policies; monitors the program
to ensure compliance with CSW's business ethics policy; and may direct and
supervise an investigation into any significant matter brought to its attention
within the scope of its duties.
EXECUTIVE COMPENSATION COMMITTEE. The Executive Compensation Committee,
currently consisting of Ms. Boren and Messrs. Foy (Chairman), Howell, Lawless,
and Sandor, held 6 meetings in 1997. The Executive Compensation Committee
determines the executive compensation philosophy of CSW, reviews benefit
programs and management succession programs, sets the salaries for the executive
officers of CSW and reviews and recommends salaries for the chief executive
officers of CSW's principal subsidiaries.
NOMINATING COMMITTEE. The Nominating Committee, currently consisting of
Messrs. Carlton, Foy, Howell and Powell (Chairman), held 5 meetings in 1997. The
Nominating Committee reviews candidates for election to the CSW Board and
recommends qualified candidates to fill existing vacancies or newly created
directorships. The Nominating Committee welcomes stockholder suggestions for CSW
Board nominations. Such suggestions should be directed to Mr. Brooks, Chairman,
President and Chief Executive Officer, who will forward them to the Nominating
Committee.
CORPORATE STRATEGY REVIEW COMMITTEE. The Corporate Strategy Review
Committee currently consisting of Messrs. Carlton, Foy (Chairman), Howell,
Lawless and Powell, held 8 meetings in 1997. The primary purposes of the
Corporate Strategy Review Committee, which is comprised exclusively of
nonemployee directors, are to assist and advise the CSW Board in evaluating
various strategic alternatives available to CSW. Specifically, the duties of the
Corporate Strategy Review Committee include overseeing the integrity of the
evaluation process and keeping the CSW Board informed on a timely basis, as well
as recommending to the CSW Board a course of action which the Committee
determines is in the best interests of CSW and its stockholders. The committee
is also responsible for directing the negotiation by management of specific
terms and conditions relating to strategic transactions including the Merger.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and Section 17(a) of the 1935 Act require
CSW's officers and directors, and persons who beneficially own more than ten
percent of CSW's Shares to file reports of ownership and changes in ownership
with the SEC and NYSE. Officers, directors and greater-than-ten-percent
stockholders are required by SEC regulation to furnish CSW copies of all Section
16(a) reports they file. Based solely on CSW's review of the copies of such
forms received and written representations from certain reporting persons, CSW
believes that during 1997 all such filing requirements applicable to its
officers, directors and greater-than-ten-percent stockholders were met with the
exception of Stephen J. McDonnell (who due to a reorganization went out of
office as Treasurer effective May 1996 and was not elected Vice President,
Mergers and Acquisitions until April 1997) who did not file a Form 5 for the
year ending December 31, 1996, reporting his year end ownership in the CSW
Retirement Savings Plan and CSW Dividend Reinvestment Plan. Following this
inadvertent delinquency, Mr. McDonnell filed the proper Form 5 with the SEC.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Executive Compensation Committee of the CSW Board served as
an officer or employee of CSW or any of its subsidiaries during or prior to
1997. No executive officer of CSW serves or has served on the Executive
Compensation Committee during or prior to 1997. No executive officer of CSW
serves or has served as a director of another company, one of whose executive
officers serves as a member of the Executive Compensation Committee or as a
director of CSW, during or prior to 1997.
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APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the CSW Board, which is composed entirely of
non-employee directors, has selected Arthur Andersen LLP as the independent
public accountants to audit the consolidated financial statements of CSW and its
consolidated subsidiaries for the year ending December 31, 1998. The CSW Board
has endorsed this appointment and it is being presented to the CSW stockholders
for approval.
Arthur Andersen LLP has audited the consolidated financial statements of CSW
and its subsidiaries for many years. CSW has been advised by Arthur Andersen LLP
that neither it nor any member or employee thereof has any direct financial
interest or any material indirect financial interest in CSW or any of its
subsidiaries in any capacity.
During the year ended December 31, 1997, Arthur Andersen LLP provided both
audit and non-audit services to CSW and its subsidiaries. These audit services
included: (1) regular examination of the consolidated financial statements of
CSW, including work relating to quarterly reviews, SEC filings and consultation
on accounting and financial reporting matters; (2) audit of the financial
statements of certain subsidiary companies to meet statutory or regulatory
requirements; and (3) examination of the financial statements of various
employee benefit plans of CSW and its subsidiaries. Nonaudit services provided
by Arthur Andersen LLP included income tax consulting, employee benefit advisory
services, economic consulting and other financial consulting services.
The financial statements of SEEBOARD for calendar year 1997 and prior years
have been audited by KPMG Peat Marwick, which firm is expected to be engaged to
audit such financial statements for the year ending December 31, 1998. Andersen
Consulting, which is an affiliate of Arthur Andersen LLP, provides information
technology services to SEEBOARD.
All significant audit and nonaudit services provided by Arthur Andersen LLP
and Andersen Consulting are approved by the Audit Committee which gives due
consideration to the potential effect of nonaudit services on auditor
independence.
One or more representatives of Arthur Andersen LLP will be present at the
CSW Meeting, will have an opportunity to make a statement if he or she desires
to do so and will be available to respond to appropriate questions.
Ratification of the appointment of Arthur Andersen LLP to audit the
consolidated financial statements of CSW for the year ending December 31, 1998
requires the affirmative vote of a majority of the votes cast by the holders of
CSW Shares present in person or by proxy at the CSW Meeting. An abstention from
voting will have the same effect as votes cast against such proposal. An
abstention will be included in computing the number of shares present for
purposes of determining the presence of a quorum at the CSW Meeting. If the
resolution does not pass, the selection of independent public accountants will
be reconsidered by the Audit Committee and the CSW Board.
THE CSW BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE APPOINTMENT
OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS OF CSW FOR FISCAL YEAR
1998. PROXIES RECEIVED BY THE CSW BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
TRANSACTION OF OTHER BUSINESS
At the date hereof, the management of CSW knows of no other business to come
before the CSW Meeting. If any other business is properly presented at the CSW
Meeting, the proxies will be voted in respect thereof in the discretion of the
person or persons voting them.
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EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION COMMITTEE REPORT
CSW's executive compensation program has as its foundation the following
objectives:
- Maintaining a total compensation program consisting of base salary,
performance incentives and benefits designed to support the corporate goal
of providing superior value to CSW stockholders and customers;
- Providing comprehensive programs which serve to facilitate the
recruitment, retention and motivation of qualified executives; and
- Rewarding key executives for achieving financial, operating and individual
objectives that produce a corresponding and direct return to CSW's
stockholders in both the long-term and the short-term.
The Executive Compensation Committee which consists of six independent
outside directors, has designed CSW's executive compensation programs around a
strong pay-for-performance philosophy. The Executive Compensation Committee
strives to maintain competitive levels of total compensation as compared to
peers in the utility industry.
Each year, the Executive Compensation Committee conducts a comprehensive
review of CSW's executive compensation programs. The Executive Compensation
Committee is assisted in these efforts by an independent consultant and by CSW's
internal staff, who provide the Executive Compensation Committee with relevant
information and recommendations regarding the compensation policies, programs
and specific compensation practices. This review is designated to ensure that
the programs are in place to enable CSW to achieve its strategic and operating
objectives and provide superior value to its stockholders and customers, and to
document CSW's relative competitive position.
The Executive Compensation Committee reviews a comparison of CSW's
compensation programs with those offered by comparable companies within the
utility industry. For each component of compensation, as well as total
compensation, the Executive Compensation Committee seeks to ensure that CSW's
level of compensation for CSW's expected level of performance approximates the
average or mean for executive officers in similar positions at comparable
companies. In most years, this means that the level of total compensation for
expected performance will be near the average for comparable companies.
Performance above or below expected levels is reflected in a corresponding
increase or reduction in the incentive portion of the compensation program.
The amounts of each of the primary components of executive
compensation--salary, annual incentive plan awards and long-term incentive plan
awards--will fluctuate according to individual, business unit, and/or corporate
performance. Corporate performance for these purposes is measured against a peer
group of selected companies in the utility industry (the "Utility Peer Group").
The Utility Peer Group consists of the companies listed in the S&P Electric
Utility index as well as large regional competitors. The Executive Compensation
Committee believes that using the S&P Electric Utility index provides an
objective measure to compare performance benchmarks appropriate for compensation
purposes.
CSW's executive compensation program includes several components serving
long and short-term objectives. CSW provides its senior executive officers with
benefits under the SERP and all executive officers with certain executives
perquisites (as noted elsewhere in this Joint Proxy Statement/Prospectus.) In
addition, CSW maintains for each of its executive officers a package of benefits
under its pension and welfare benefit plans that are generally provided to all
employees, including group health, life, disability and accident insurance
plans, tax-advantaged reimbursement accounts, a defined benefit pension plan and
the 401(k) savings plan.
The following describes the relationship of compensation to performance for
the principal components of executive officer compensation:
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BASE SALARY: Each executive officer's corporate position is matched to a
comparable position within the utility Industry and is valued at the 50th
percentile market level. In some cases, these positions are common in both the
utility industry as well as general industry. In these cases, comparisons are
made to both markets. Once these market values are determined, the position is
then evaluated based on the position's overall contribution to corporate goals.
This internal weighting is combined with the value the market places on the
associated job responsibilities and a salary is assigned to that position. Each
year the assigned values are reviewed against market conditions, including
compensation practices in the Utility Peer Group, inflation, and supply and
demand in the labor markets. If these conditions change significantly there may
be an adjustment to base salary. Finally, the results of the executive officers'
performance over the past year becomes part of the basis of the Executive
Compensation Committee's decision to approve, at its discretion, base salaries
of executive officers. After a review of the data and other factors influencing
corporate results, the salaries of the Chairman and his direct reports were not
adjusted during 1997.
INCENTIVE PROGRAMS--GENERAL: The executive incentive programs are designed
to strike an appropriate balance between short-term accomplishments and CSW's
need to effectively plan for and perform over the long-term.
INCENTIVE PROGRAMS--ANNUAL INCENTIVE PLAN: The Central and South West
Corporation Annual Incentive Plan (the "AIP") is a short-term bonus plan
rewarding annual performance. AIP awards are determined under a formula that
directly ties the amount of the award with levels of achievement for specific
individual, business unit and corporate performance. The amount of an executive
officer's AIP award equals the sum of the corporate and business unit results
times their individuals rating times their target award. In addition, the
executive's award calculation is weighted 80 percent on corporate results and 20
percent on business unit results. The award can vary from 0 to a maximum of 150
percent of target.
The corporate performance is currently determined by two equally weighted
measures--earnings per share and cash flow. Threshold, target and exceptional
levels of performance are set by the Executive Compensation Committee in the
first quarter of each year. The Executive Compensation Committee considers both
historic performance and budgeted or expected levels of performance in setting
these targets.
Performance for a given business unit represents the weighted average of
performance indices that measure the achievement of specific financial and/or
operational goals that are set and weighted at the beginning of the year for
that business unit.
The individual performance represents the average of results achieved on
several individual goals and a subjective evaluation of overall job performance.
Although individual performance goals do not repeat corporate performance
measures, these goals are constructed to support departmental, work team or
business unit performance which links to corporate performance goals or
initiative. If an individual fails to achieve a minimum threshold performance
level on individual performance goals, that individual does not earn an AIP
award for that year.
Target awards for executive officers have been fixed at 50 percent of salary
for the chief executive officer, 45 percent of salary for senior vice
presidents, and business unit presidents and 35 percent of salary for other
officers. The corresponding maximum AIP award that can be earned by the
executive based on position is 1.5 times the target award. These targets are
established by a review of competitive practice among the Utility Peer Group.
Performance under the AIP is measured or reviewed by each executive
officer's superior officer, or in the case of the chief executive officer by the
Executive Compensation Committee, with the assistance of internal staff. The
results are reviewed and are subject to approval by the Executive Compensation
Committee. Under the terms of the AIP, the Executive Compensation Committee in
the exercise of its discretion, may vary corporate or company performance
measures in the form of payment for AIP awards
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from year-to-year prior to establishing the awards, including payment in cash or
restricted stock, as determined by the Executive Compensation Committee.
In 1997, AIP awards were determined based on the corporate performance
index, the business unit company performance index and the individual
performance index. As permitted by the AIP, the Executive Compensation Committee
granted a limited number of awards to recognize key individuals who provided
vision and strategic leadership.
INCENTIVE PROGRAMS--LONG-TERM INCENTIVE PLAN: Amounts realized by CSW's
executive officers under awards made pursuant to the CSW Incentive Plan depend
entirely upon corporate performance. The Executive Compensation Committee
selects the form and amount of CSW Incentive Plan awards based upon its
evaluation of which vehicles are best positioned to serve as effective
incentives for long-term performance.
Since 1992, the Executive Compensation Committee has established CSW
Incentive Plan awards in the form of performance shares. These awards provide
incentives both for exceptional corporate performance and retention. Each year,
the Compensation Committee has set a target award of a specified dollar amount
for each awardee based on a percentage of salary. The dollar amount
corresponding to the target award is divided by the per share market price of
CSW's common stock on the date the award is established to derive the number of
shares of such stock that will be issued if target performance is achieved by
CSW.
The payout of such an CSW Incentive Plan award is based upon a comparison of
CSW's total stockholder return over a three-year period, or "cycle," against
total stockholder returns of utilities in the Utility Peer Group over the same
three-year period. Total stockholder return is calculated by dividing (i) the
sum of (A) the cumulative amount of dividends per share for the three-year
period, assuming full dividend reinvestment, and (B) the change in share price
over the three-year period, by (ii) the share price at the beginning of the
three-year period. If CSW's total stockholder return for a cycle falls in one of
the top three quartiles of similarly calculated total stockholder returns
achieved at companies in the Utility Peer Group, CSW will make a payout to
participants for the three-year cycle then ending. First, second and third
quartile performance will result in payouts of 150 percent, 100 percent and 50
percent of target, respectively. Performance in the fourth quartile yields no
payout under the CSW Incentive Plan.
Each year since the inception of the CSW Incentive Plan, a new three-year
performance cycle has been established. In January 1997, the Executive
Compensation Committee evaluated the 1994-1996 cycle performance under the CSW
Incentive Plan and because results were below the threshold for a payout, no
awards were granted. In January 1998, the Committee reviewed total stockholder
return results for the period covering 1995-1997, and because performance was in
the third quartile, granted restricted stock awards at 50 percent of target.
CSW from time to time has also granted stock options and restricted stock
under the CSW Incentive Plan. Stock options and restricted stock are granted at
the discretion of the Executive Compensation Committee. Stock options, once
vested, allow grantees to buy specified numbers of shares of CSW common stock at
a specified stock price, which to date has been the market price on the date of
grant. In determining grants to date, the Executive Compensation Committee has
considered both the number and value of options granted by companies in the
Utility Peer Group with respect to both the number and value of options awarded
by CSW, and the relative amounts of other long-term incentive awards at CSW and
such peers. The executive officers' realization of any value on the options
depends upon stock appreciation. In May 1997, a stock option grant was approved
at the market price of $20.75 per share to provide the opportunity for more
equity ownership and to provide immediate focus to our executives on CSW
strategic initiatives. No executive officer owns in excess of one percent of
CSW's common stock. Further, the amounts of CSW Incentive Plan awards are
measured against similar practices of other companies in the Utility Peer Group.
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TAX CONSIDERATIONS: Section 162(m) of the Code generally limits CSW's
federal income tax deduction for compensation paid in any taxable year to any
one of the five highest paid executive officers named in CSW's proxy statement
to $1 million. The limit does not apply to specified types of payments,
including, most significantly, payments that are not includible in the
employee's gross income, payments made to or from a tax-qualified plan, and
compensation that meets the Code's definition of performance-based compensation.
Under the Code, the amount of a performance-based incentive award must be based
entirely on an objective formula, without any subjective consideration of
individual performance, to be considered performance-based.
The Executive Compensation Committee has carefully considered the impact of
this law. At this time, the Executive Compensation Committee believes it is in
CSW's and stockholder's best interests to retain the subjective determination of
individual performance under the AIP. Consequently, payments under the AIP, if
any, to the named executive officers may be subject to the limitation imposed by
section 162(m) of the Code. In 1997, stockholders approved a restatement and
requalification of the CSW Incentive Plan for purposes of satisfying Section
162(m).
RATIONALE FOR CEO COMPENSATION
In 1997, Mr. Brooks' compensation was determined as described above for all
of CSW's executive officers.
Mr. Brooks' annual salary is currently $700,000. The Executive Compensation
Committee reviewed Mr. Brooks' salary as a part of its overall annual review of
executive compensation. His salary is based on market information for similar
positions as well as salaries of chief executive officers at comparable regional
utilities (not limited to the Utility Peer Group).
Mr. Brooks' target AIP award for 1997 was 50 percent of his salary. As
permitted by the AIP, for 1997, the Executive Compensation Committee approved an
award in the amount of $450,000 to recognize Mr. Brooks' significant vision and
strategic leadership.
After a review of the results of the 1995-1997 cycle of the CSW Incentive
Plan, the Executive Compensation Committee approved an award in the amount of
8,157 shares of restricted stock recognizing total shareholder return
performance in the third quartile, or fifty percent of target, which vest fifty
percent in January 1999 and fifty percent in January 2000.
In 1997 the Executive Compensation Committee established Mr. Brooks' target
award for the CSW Incentive Plan for the 1997-1999 cycle of $490,000 to be paid
in shares of restricted stock in 1999 if performance measures are met. Mr
Brooks' target amount was derived by reference to the number and value of grants
to chief executive officers at comparable companies.
EXECUTIVE COMPENSATION COMMITTEE
Joe H. Foy, Chairman
Molly Shi Boren
William R. Howell
Robert W. Lawless
Richard L. Sandor
Lloyd D. Ward
129
<PAGE>
CASH AND OTHER FORMS OF COMPENSATION. The following table sets forth the
aggregate cash and other compensation for services rendered for the fiscal years
of 1997, 1996, and 1995 paid or awarded by CSW to its chief executive officer
and each of the four most highly compensated executive officers ( the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AWARDS
OTHER -------------------------- PAYOUTS
ANNUAL RESTRICTED SECURITIES -----------------
COMPEN- STOCK UNDERLYING CSW INCENTIVE
NAME AND SALARY BONUS SATION AWARD(S) OPTIONS/ PLAN PAYOUTS
PRINCIPAL POSITION YEAR ($) ($)(1) ($) ($)(1)(2) SARS(#) ($)
- -------------------------------- --------- --------- --------- ----------- ----------- ------------- -----------------
E.R. Brooks..................... 1997 699,999 375,200 14,723 -- 65,000 --
Chairman and Chief Executive 1996 657,692 374,354 22,267 417,688 -- --
Officer 1995 628,847 162,739 25,149 -- -- --
T.V. Shockley, III.............. 1997 490,000 215,662 4,325 -- 41,000 --
President and Chief Operating 1996 435,212 242,565 10,746 248,563 -- --
Officer 1995 406,870 105,448 8,441 -- -- --
Glenn Files..................... 1997 374,999 143,099 8,534 -- 31,000 --
Senior Vice President, 1996 331,135 44,860 66,415 153,750 -- --
Electric Operations 1995 266,223 85,048 19,144 -- -- --
Ferd. C. Meyer, Jr.............. 1997 345,051 157,157 3,950 -- 29,000 --
Executive Vice President and 1996 345,051 209,898 8,910 194,750 -- --
General Counsel 1995 336,547 86,444 12,354 -- -- --
Glenn D. Rosilier............... 1997 334,751 161,055 3,594 -- 28,000 --
Executive Vice President and 1996 334,751 209,898 10,331 194,750 -- --
Chief Financial Officer 1995 326,500 86,444 6,706 -- -- --
<CAPTION>
<S> <C>
ALL OTHER
COMPEN-
NAME AND SATION
PRINCIPAL POSITION ($)(3)
- -------------------------------- -----------
E.R. Brooks..................... 23,757
Chairman and Chief Executive 23,992
Officer 23,956
T.V. Shockley, III.............. 23,757
President and Chief Operating 21,742
Officer 21,706
Glenn Files..................... 23,757
Senior Vice President, 23,992
Electric Operations 23,117
Ferd. C. Meyer, Jr.............. 21,307
Executive Vice President and 21,742
General Counsel 21,706
Glenn D. Rosilier............... 23,757
Executive Vice President and 23,992
Chief Financial Officer 23,019
</TABLE>
- ------------------------
(1) Amounts in these columns are paid or awarded in a calendar year for
performance in a preceding year.
(2) Grants of restricted stock are administered by the Executive Compensation
Committee of the CSW Board of Directors, which has the authority to
determine the individuals to whom and the terms upon which restricted stock
grants, including the number of underlying shares, shall be made. The awards
reflected in this column all have four-year vesting periods with 25% vesting
on the first, second, third and fourth anniversary dates of the award. Upon
vesting, CSW Shares are re-issued without restrictions. The individual
receives dividends and may vote shares of restricted stock, even before they
are vested. The amount reported in the table represents the market value of
the shares at the date of grant. As of December 31, 1997, the aggregate
restricted stock holdings of each of the Named Executive Officers were:
<TABLE>
<CAPTION>
RESTRICTED STOCK HELD MARKET VALUE AT
AT DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------- -----------------
<S> <C> <C>
E. R. Brooks......................................................... 12,225 $ 330,839
T. V. Shockley....................................................... 7,275 $ 196,880
Glenn Files.......................................................... 4,500 $ 121,781
Ferd. C. Meyer, Jr................................................... 5,700 $ 154,256
Glenn Rosilier....................................................... 5,700 $ 154,256
</TABLE>
130
<PAGE>
(3) Amounts shown in this column consist of (i) the annual employer matching
payments to CSW's Retirement Savings Plan, (ii) premiums paid per
participant for personal liability insurance and (iii) average amounts of
premiums paid per participant in those years under CSW's memorial gift
program. See "--Meetings and Compensation of the CSW Board of Directors" for
a description of CSW's memorial gift program.
OPTION/SAR GRANTS. Shown below is information on grants of stock options
made in 1997 pursuant to the CSW Incentive Plan to the Named Executive Officers.
No stock appreciation rights were granted in 1997.
CSW OPTION/SAR GRANTS IN 1997(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF CSW
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERMS(3)
----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF CSW % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#)(2) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- --------------------------------------- ----------------- ----------------- ----------- ----------- --------- ----------
E. R. Brooks........................... 65,000 9.4 20.750 5/23/2007 849,713 2,144,513
T. V. Shockley, III.................... 41,000 6.0 20.750 5/23/2007 535,973 1,352,693
Glenn Files............................ 31,000 4.5 20.750 5/23/2007 405,248 1,022,768
Ferd. C. Meyer, Jr..................... 29,000 4.2 20.750 5/23/2007 379,103 956,753
Glenn D. Rosilier...................... 28,000 4.1 20.750 5/23/2007 366,030 923,790
</TABLE>
- ------------------------
(1) The stock option plans are administered by the Executive Compensation
Committee of the CSW Board of Directors, which has the authority to
determine the individuals to whom and the terms upon which option and SAR
grants shall be made.
(2) All options were granted on May 23, 1997, and are first exercisable 12
months after the grant date, with one-third of the shares becoming
exercisable at that time and with an additional one third of the aggregate
becoming exercisable on each of the next two anniversary dates.
(3) The annual rates of appreciation of 5% and 10% are specifically required by
SEC disclosure rules and in no way guarantee that such annual rates of
appreciation will be achieved by CSW nor should this be construed in any way
to constitute any representation by CSW that such growth will be achieved.
131
<PAGE>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE. Shown below is information
regarding option/SAR exercises during 1997 and unexercised options/SARs at
December 31, 1997 for the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-MONEY
VALUE OPTIONS/SARS AT YEAR-END OPTIONS/SARS AT YEAR-END
SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ---------------------------------- ------------------- ----------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
E. R. Brooks...................... -- -- 65,175/65,000 9,007/410,313
T. V. Shockley, III............... -- -- 42,231/41,000 5,837/258,813
Glenn Files....................... -- -- 23,653/31,000 5,593/195,688
Ferd. C. Meyer, Jr................ -- -- 32,889/29,000 4,547/183,063
Glenn D. Rosilier................. -- -- 32,889/28,000 4,547/176,750
</TABLE>
- ------------------------
(1) Calculated based upon the difference between the closing price of CSW's
Shares on the NYSE on December 31, 1997 ($27.0625 per share) and the
exercise price per share of the outstanding unexercisable and exercisable
options ($20.750, $24.813 and $29.625, as applicable).
LONG-TERM INCENTIVE PLAN AWARDS IN 1997. The following table shows
information concerning awards made to the Named Executive Officers during 1997
under the CSW Incentive Plan:
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE BASED PLANS
NUMBER OF OTHER PERIOD -------------------------------------
SHARES, UNITS OR UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS OR PAYOUT ($) ($) ($)
- -------------------------------------------- ------------------- ---------------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
E. R. Brooks................................ -- 2 years -- 490,000 735,000
T. V. Shockley, III......................... -- 2 years -- 294,000 441,000
Glenn Files................................. -- 2 years -- 225,000 337,500
Ferd. C. Meyer, Jr.......................... -- 2 years -- 207,030 310,545
Glenn D. Rosilier........................... -- 2 years -- 200,850 301,275
</TABLE>
Payouts of the awards are contingent upon CSW's achieving a specified level
of total stockholder return, relative to the S&P Electric Index, for a
three-year period, or cycle, and exceeding a certain defined minimum threshold.
If the Named Executive Officer's employment is terminated during the performance
period for any reason other than death, total and permanent disability or
retirement, then the award is canceled. The CSW Incentive Plan contains a
provision accelerating awards upon a change in control of CSW. Except as
provided in the next sentence, if a change in control of CSW occurs, all options
become fully exercisable and all restrictions, terms and conditions applicable
to all restricted stock are deemed lapsed and satisfied and all performance
units are deemed to have been fully earned, as of the date of the change in
control. Awards which have been outstanding for less than six months prior to
the date the change in control occurs are not subject to acceleration upon the
occurrence of a change in control. The CSW Incentive Plan also contains
provisions designed to prevent circumvention of the above acceleration
provisions through coerced termination of an employee prior to a change in
control. See "Executive Compensation Committee Report" for a more thorough
discussion of the terms of the CSW Incentive Plan.
RETIREMENT PLAN. CSW maintains the tax-qualified CSW Cash Balance Plan for
eligible employees. In addition, CSW maintains the SERP, a non-qualified ERISA
excess plan, that primarily provides benefits that cannot be payable under the
CSW Cash Balance Plan because of maximum limitations imposed on such plans by
the Code.
132
<PAGE>
Through June 30, 1997, the CSW Cash Balance Plan was structured as a
traditional, defined benefit final average pay plan. Effective July 1, 1997, the
present value of accrued benefits under the Retirement Plan was converted to a
cash balance.
Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which credits are allocated annually based on a
percentage of the participant's pay. As of July 1, 1997, the definition of pay
for the CSW Cash Balance Plan was expanded to include not only base pay but also
bonuses, overtime, and commissions. The applicable percentage is determined by
the age and years of vesting service the participant has with CSW and its
affiliates as of December 31 of each year (or as of the participant's
termination date, if earlier). The following table shows the applicable
percentage used to determine credits at the age and years of service indicated:
<TABLE>
<CAPTION>
SUM OF AGE
PLUS
YEARS OF
SERVICE APPLICABLE PERCENTAGE
- -------------- ---------------------
<S> <C>
less than 30 3.0%
30-39 3.5%
40-49 4.5%
50-59 5.5%
60-69 7.0%
70 or more 8.5%
</TABLE>
As of December 31, 1997, the sum of age plus years of service of the Named
Executive Officers for the cash balance formula are as follows: Mr. Brooks, 96;
Mr. Shockley, 73; Mr. Files, 76; Mr. Meyer, 74; and Mr. Rosilier, 71.
All balances in the accounts of participants earn a fixed rate of interest
which is also credited annually. The interest rate for a particular year is the
average rate of return of the 30-year Treasury Rate for November of the prior
year. For 1997, the interest rate was 6.48%. For 1998, the interest rate is
6.11%. Interest continues to be credited as long as the participant's balance
remains in the plan.
At retirement or other termination of employment, an amount equal to the
vested balance (including qualified and SERP benefit) then credited to the
account is payable to the participant in the form of an immediate or deferred
lump-sum or annuity. Benefits (both from the CSW Cash Balance Plan and the SERP)
under the cash balance formula are not subject to reduction for Social Security
benefits or other offset amounts. The estimated annual benefit payable to each
of the Named Executive Officers as a single life annuity at age 65 under the CSW
Cash Balance Plan and the SERP is; Mr. Brooks, $464,599; Mr. Shockley, $230,384;
Mr. Meyer, $144,432; Mr. Rosilier, $250,142; Mr. Files, $272,378. These
projections are based on the following assumptions: (1) participant remains
employed until age 65; (2) salary used is base pay paid for calendar year 1997
assuming no future increases plus bonus at 1997 target level; (3) interest
credit at 6.11% for 1998 and future years; (4) the conversion of the lump-sum
cash balance to a single life annuity at normal retirement age, based on an
interest rate of 6.11% and the 1983 Group Annuity Mortality Table, which sets
forth generally accepted life expectancies.
In addition, certain employees who were 50 or over and had completed at
least 10 years of service as of July 1, 1997, also continue to earn a benefit
using the prior pension formula. At commencement of benefits, the following
Named Executive Officers have a choice of their accrued benefit using the cash
balance formula or their accrued benefit using the prior pension formula: Mr.
Brooks, Mr. Shockley, and Mr. Meyer. Once the participant selects either the
earned benefit under the cash balance formula or the earned benefit under the
prior pension formula, the other earned benefit is no longer available.
The table below shows the estimated combined benefits payable from both the
prior pension formula and the SERP based on retirement age of 65, the average
compensation shown, the years of credited
133
<PAGE>
service shown, continued existence of the prior pension formula without
substantial change and payment in the form of a single life annuity.
<TABLE>
<CAPTION>
ANNUAL BENEFITS AFTER
SPECIFIED YEARS OF CREDITED SERVICE
-----------------------------------------------
AVERAGE COMPENSATION 15 20 25 30 OR MORE
- -------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$ 250,000 $ 62,625 $ 83,333 $ 104,167 $ 125,000
$ 350,000 $ 87,675 $ 116,667 $ 145,833 $ 175,000
$ 450,000 $ 112,725 $ 150,000 $ 187,500 $ 225,000
$ 550,000 $ 137,775 $ 183,333 $ 229,167 $ 275,000
$ 650,000 $ 162,825 $ 216,667 $ 270,833 $ 325,000
$ 750,000 $ 187,875 $ 250,000 $ 312,500 $ 375,000
$ 850,000 $ 212,500 $ 283,333 $ 357,000 $ 425,000
</TABLE>
Benefits payable under the prior pension formula are based upon the
participant's years of credited service, age at retirement, and covered
compensation earned by the participant. The annual normal retirement benefit
payable under the prior pension formula and the SERP are based on 1.67 percent
of "Average Compensation" times the number of years of credited service (reduced
by no more than 50 percent of a participant's age 62 or later Social Security
benefit). "Average compensation" is covered compensation for the prior pension
formula and equals the average annual compensation, reported as salary in the
Summary Compensation Table, during the 36 consecutive months of highest pay
during the 120 months prior to retirement.
Respective years of credited service and ages, as of December 31, 1997, for
the three Named Executive Officers who continue to earn a benefit under the
prior pension formula are: Mr. Brooks, 30 and 60; Mr. Shockley, 14 and 52; and
Mr. Meyer, 16 and 58.
In addition, Mr. Shockley and Mr. Meyer have arrangements with CSW under
which they will receive a total of 30 years of credited service using the prior
pension formula (paid through the SERP) if they remain employed by CSW through
age 60. In 1992, Mr. Meyer completed five consecutive years of employment which
entitled him to receive five additional years of credited service (through the
SERP) as included in his years of service for the cash balance formula and the
prior pension formula as set forth above.
134
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
<S> <C> <C> <C>
of Central and South West Corporation, the S&P 500
Index
and the S&P Electric Cos. Index
CSR S&P Electric S&P 500
1992 100 100 100
1993 109 113 110
1994 88 98 112
1995 115 128 153
1996 113 128 189
1997 127 162 251
</TABLE>
The total return performance shown on the graph above is not necessarily
indicative of future performance.
135
<PAGE>
EXPERTS
The financial statements and related financial statement schedule
incorporated in this Joint Proxy Statement/Prospectus by reference from AEP's
Annual Report on Form 10-K have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated herein
by reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and schedules of CSW, incorporated by
reference in this Joint Proxy Statement/Prospectus from CSW's Annual Report on
Form 10-K have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and is
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
AEP Meeting and representatives of Arthur Andersen LLP are expected to be
present at the CSW Meeting, where they will have the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.
LEGAL OPINIONS
The legality of the AEP Shares being offered hereby is being passed upon for
AEP by Simpson Thacher & Bartlett, Counsel for AEP.
Simpson Thacher & Bartlett, counsel for AEP, and Christy & Viener, counsel
for CSW, have delivered opinions concerning certain federal income tax
consequences of the Merger. See "THE MERGER-- Certain U.S. Federal Income Tax
Consequences".
FUTURE SHAREHOLDER PROPOSALS
Any AEP shareholder proposals for the 1999 Annual Meeting of AEP
Shareholders must be received by AEP, at 1 Riverside Plaza, Columbus, Ohio
43215, no later than November 10, 1998 for inclusion in the proxy statement and
form of proxy for such meeting.
Any CSW stockholder proposals for the 1999 Annual Meeting of CSW
Stockholders must be received by CSW, at 1616 Woodall Rogers Freeway, Dallas,
Texas 75202, no later than November 1, 1998 for inclusion in the proxy statement
and form of proxy for such meeting.
136
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
AEP and CSW each file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that the companies file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. AEP's and CSW's public filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and
other information concerning AEP and CSW also may be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005. Information regarding AEP
and CSW, respectively, is also available to the public at the web sites
maintained by AEP at "http://www.aep.com." and by CSW at "http://www.csw.com."
AEP has filed the Registration Statement to register with the SEC the AEP
Shares to be issued to CSW stockholders in the Merger. This Joint Proxy
Statement/Prospectus is a part of the Registration Statement and constitutes a
prospectus of AEP, as well as a proxy statement of AEP for the AEP Meeting and a
proxy statement of CSW for the CSW Meeting.
As allowed by SEC rules, this Joint Proxy Statement/ Prospectus does not
contain all the information that shareholders can find in the Registration
Statement or the exhibits to the Registration Statement.
The SEC allows AEP and CSW to "incorporate by reference" information into
this Joint Proxy Statement/Prospectus, which means that the companies can
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Joint Proxy Statement/Prospectus, except for any information
superseded by information contained directly in the Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus incorporates by
reference the documents set forth below that AEP and CSW have previously filed
with the SEC. These documents contain important information about the companies
and their financial condition.
<TABLE>
<CAPTION>
AEP SEC FILINGS (FILE NO. 1-3525) PERIOD
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Annual Report on Form 10-K.............................. Year ended December 31, 1997
Quarterly Reports on Form 10-Q.......................... As filed
Current Reports on Form 8-K............................. December 21, 1997 and as filed
</TABLE>
<TABLE>
<CAPTION>
CSW SEC FILINGS (FILE NO. 1-1443) PERIOD
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Annual Report on Form 10-K.............................. Year ended December 31, 1997
Quarterly Reports on Form 10-Q.......................... As filed
Current Reports on Form 8-K............................. December 22, 1997 and as filed
</TABLE>
AEP and CSW hereby incorporate by reference additional documents that AEP or
CSW may file with the SEC between the date of this Joint Proxy
Statement/Prospectus and the dates of the special meetings. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements.
AEP has supplied all information contained or incorporated by reference in
this Joint Proxy Statement/ Prospectus relating to AEP or Sub, and CSW has
supplied all such information relating to CSW.
If you are a shareholder, you may have received some of the documents
incorporated by reference. You may also obtain any of such documents through
your applicable company or the SEC or the SEC's
137
<PAGE>
Internet web site described above. Documents incorporated by reference are
available from your applicable company without charge, excluding all exhibits
unless specifically incorporated by reference an exhibit in this Joint Proxy
Statement/Prospectus. Shareholders may obtain documents incorporated by
reference in this Joint Proxy Statement/Prospectus by requesting them in writing
or by telephone from the appropriate company at the following addresses:
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza
Columbus, Ohio 43215
Attention: Shareholder Relations
Tel: 1-800-237-2667
CENTRAL AND SOUTH WEST CORPORATION
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
Attention: Secretary
Tel: (214) 777-1000
If you would like to request documents, please do so by May 20, 1998 to
receive them before the meetings. If you request any incorporated documents, the
appropriate company will mail them to you by first-class mail, or other equally
prompt means, within one business day of receipt of your request.
SEC rules require that an annual report of AEP, with respect to AEP
shareholders, and of CSW, with respect to CSW stockholders, precede or accompany
proxy material. More than one annual report need not be sent to the same
address, if the recipient agrees. If more than one annual report is being sent
to your address, at your request, mailing of the duplicate copy to the account
you select will be discontinued. You may so indicate in the space provided on
your proxy card. Eliminating these duplicate mailings will not affect receipt of
future proxy statements and proxy cards.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE YOUR SHARES AT THE
MEETINGS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DATED APRIL , 1998. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THE JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS
JOINT PROXY STATEMENT/PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF AEP SHARES
IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
138
<PAGE>
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
LOCATION
OF DEFINED
TERMS TERM
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Acquisition Proposal................................................................................. Page 93
AEP.................................................................................................. +Page
AEP Board............................................................................................ Page 22
AEP Bylaws........................................................................................... Page 77
AEP Charter.......................................................................................... Page 22
AEP Comparable Companies............................................................................. Page 50
AEP Core Business.................................................................................... Page 91
AEP Interested Stockholders.......................................................................... Page 80
AEP Meeting.......................................................................................... Page 22
AEP Record Date...................................................................................... Page 23
AEP Shares........................................................................................... Page 21
Affiliate's Agreements............................................................................... Page 60
agreement holders.................................................................................... Page 62
AIP.................................................................................................. Page 127
Antitrust Division................................................................................... Page 100
Arkansas Commission.................................................................................. Page 20
Asset Divestiture Plan............................................................................... Page 33
Assumed Other Compensation........................................................................... Page 94
Atomic Energy Act.................................................................................... Page 20
Average Compensation................................................................................. Page 134
Breaching Party...................................................................................... Page 96
broker non-votes..................................................................................... Page 23
Change in Control Agreements......................................................................... Page 61
Charter Amendment.................................................................................... Page 22
Clause (b)........................................................................................... Page 97
Clause (g)........................................................................................... Page 97
Clause (h)........................................................................................... Page 97
Clause (i)........................................................................................... Page 97
Code................................................................................................. Page 54
Communications Act................................................................................... Page 20
Company A............................................................................................ Page 33
Company A McKinsey Report............................................................................ Page 37
Company B............................................................................................ Page 34
Company C............................................................................................ Page 34
Core Business........................................................................................ Page 90
CPL.................................................................................................. Page 29
CSW.................................................................................................. +Page
CSW Board............................................................................................ Page 26
CSW Bylaws........................................................................................... Page 77
CSW Cash Balance Plan................................................................................ Page 94
CSW Charter.......................................................................................... Page 77
CSW Committee........................................................................................ Page 37
CSW Comparable Companies............................................................................. Page 49
CSW Directors Plan................................................................................... Page 62
CSW Incentive Plan................................................................................... Page 61
CSW Interested Stockholder........................................................................... Page 79
CSW Meeting.......................................................................................... Page 26
CSW Nonemployee Directors............................................................................ Page 62
CSW Record Date...................................................................................... Page 26
CSW Right............................................................................................ Page 78
CSW Rights Agreement................................................................................. Page 78
</TABLE>
139
<PAGE>
<TABLE>
<CAPTION>
LOCATION
OF DEFINED
TERMS TERM
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
CSW Severance Plan................................................................................... Page 62
CSW Shares........................................................................................... Page 21
DCF.................................................................................................. Page 49
DCP.................................................................................................. Page 95
DGCL................................................................................................. Page 27
Divesture Event...................................................................................... Page 95
DPS.................................................................................................. Page 52
DSP.................................................................................................. Page 95
EBIT................................................................................................. Page 50
EBITDA............................................................................................... Page 50
Effective Time....................................................................................... Page 21
Electric Utilities Transactions...................................................................... Page 56
Energy Act........................................................................................... Page 31
EPS.................................................................................................. Page 51
Exchange Act......................................................................................... Page 97
Exchange Agent....................................................................................... Page 58
Exchange Ratio....................................................................................... Page 20
Expenses............................................................................................. Page 98
FCC.................................................................................................. Page 20
Federal Power Act.................................................................................... Page 20
FERC................................................................................................. Page 20
Final Order.......................................................................................... Page 95
FTC.................................................................................................. Page 100
Historical Trading Ratio............................................................................. Page 51
HSR Act.............................................................................................. Page 20
Interested Stockholder............................................................................... Page 86
IRS.................................................................................................. Page 59
Kentucky Commission.................................................................................. Page 103
Letter of Transmittal................................................................................ Page 58
Louisiana Commission................................................................................. Page 20
LTM.................................................................................................. Page 49
Material Adverse Effect.............................................................................. Page 89
McKinsey............................................................................................. Page 34
Merger............................................................................................... Page 19
Merger Agreement..................................................................................... Page 20
MICP................................................................................................. Page 114
Named Executive Officers............................................................................. Page 129
Morgan Stanley....................................................................................... Page 34
NRC.................................................................................................. Page 20
NYBCL................................................................................................ Page 79
NYSE................................................................................................. Page 13
Oklahoma Commission.................................................................................. Page 20
Orders............................................................................................... Page 95
Other Compensation................................................................................... Page 94
Out-of-Pocket Expenses............................................................................... Page 98
Plan................................................................................................. Page 114
Plurality............................................................................................ Page 24
Pooling Period....................................................................................... Page 63
Precedent Utility Transactions....................................................................... Page 50
PSO.................................................................................................. Page 29
Registration Statement............................................................................... Page 77
Request Letter....................................................................................... Page 38
Salomon Engagement Letter............................................................................ Page 47
</TABLE>
140
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<TABLE>
<CAPTION>
LOCATION
OF DEFINED
TERMS TERM
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Salomon Smith Barney................................................................................. Page 36
Salomon Smith Barney Opinion......................................................................... Page 48
SEC.................................................................................................. Page 19
Section 203.......................................................................................... Page 86
Section 912.......................................................................................... Page 86
Securities Act....................................................................................... Page 63
SEEBOARD............................................................................................. Page 29
SERP................................................................................................. Page 95
Share Issuance....................................................................................... Page 22
SOIP................................................................................................. Page 114
Stock Units.......................................................................................... Page 108
STP Operating........................................................................................ Page 101
Superior Proposal.................................................................................... Page 93
Sub.................................................................................................. Page 19
Surviving Corporation................................................................................ Page 31
SWEPCO............................................................................................... Page 29
Target Party......................................................................................... Page 98
Terminating Party.................................................................................... Page 96
Termination Date..................................................................................... Page 96
Termination Fee...................................................................................... Page 98
Texas Commission..................................................................................... Page 20
Topping Fee.......................................................................................... Page 98
TSR.................................................................................................. Page 111
USEPA................................................................................................ Page 22
Utility Peer Group................................................................................... Page 126
WTU.................................................................................................. Page 29
Yorkshire Electricity................................................................................ Page 29
1935 Act............................................................................................. Page 20
</TABLE>
+ These terms are defined in the "Notice of Annual Meetings of Shareholders"
page (beginning of document)
141
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
AMERICAN ELECTRIC POWER COMPANY, INC.,
AUGUSTA ACQUISITION CORPORATION
AND
CENTRAL AND SOUTH WEST CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I
DEFINITIONS................................................................................................ 2
SECTION 1.1 Definitions.................................................................................... 2
SECTION 1.2 Rules of Construction.......................................................................... 2
ARTICLE II
TERMS OF MERGER............................................................................................ 2
SECTION 2.1 Statutory Merger............................................................................... 2
SECTION 2.2 Effective Time................................................................................. 2
SECTION 2.3 Effect of the Merger........................................................................... 2
SECTION 2.4 Certificate of Incorporation; Bylaws........................................................... 2
SECTION 2.5 Directors and Officers......................................................................... 3
ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES......................................................... 3
SECTION 3.1 Merger Consideration; Conversion and Cancellation of Securities................................ 3
SECTION 3.2 Exchange of Certificates....................................................................... 4
SECTION 3.3 Closing........................................................................................ 6
SECTION 3.4 Stock Transfer Books........................................................................... 6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................. 6
SECTION 4.1 Organization and Qualification; Subsidiaries................................................... 6
SECTION 4.2 Certificate of Incorporation and Bylaws........................................................ 7
SECTION 4.3 Capitalization................................................................................. 7
SECTION 4.4 Authorization of Agreement..................................................................... 8
SECTION 4.5 Regulation and Approvals....................................................................... 8
SECTION 4.6 No Violation................................................................................... 9
SECTION 4.7 Reports........................................................................................ 9
SECTION 4.8 No Material Adverse Effect; Conduct............................................................ 10
SECTION 4.9 Permits; Compliance............................................................................ 11
SECTION 4.10 Litigation; Compliance with Laws.............................................................. 12
SECTION 4.11 Ownership of AEP Common Stock................................................................. 12
SECTION 4.12 Employee Benefit Plans........................................................................ 12
SECTION 4.13 Taxes......................................................................................... 15
SECTION 4.14 Environmental Matters......................................................................... 16
SECTION 4.15 Insurance..................................................................................... 16
SECTION 4.16 Pooling; Tax Matters.......................................................................... 16
SECTION 4.17 Affiliates.................................................................................... 16
SECTION 4.18 Opinion of Financial Advisor.................................................................. 17
SECTION 4.19 Brokers....................................................................................... 17
SECTION 4.20 Vote Required................................................................................. 17
</TABLE>
i
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<TABLE>
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<S> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE AEP COMPANIES........................................................ 17
SECTION 5.1 Organization and Qualification; Subsidiaries................................................... 17
SECTION 5.2 Certificate of Incorporation and Bylaws........................................................ 18
SECTION 5.3 Capitalization................................................................................. 18
SECTION 5.4 Authorization of Agreement..................................................................... 19
SECTION 5.5 Regulation and Approvals....................................................................... 19
SECTION 5.6 No Violation................................................................................... 20
SECTION 5.7 Reports........................................................................................ 20
SECTION 5.8 No Material Adverse Effect; Conduct............................................................ 21
SECTION 5.9 Permits; Compliance............................................................................ 21
SECTION 5.10 Litigation; Compliance with Laws.............................................................. 22
SECTION 5.11 Ownership of Company Common Stock............................................................. 23
SECTION 5.12 Employee Benefit Plans........................................................................ 23
SECTION 5.13 Taxes......................................................................................... 25
SECTION 5.14 Environmental Matters......................................................................... 26
SECTION 5.15 Insurance..................................................................................... 26
SECTION 5.16 Pooling; Tax Matters.......................................................................... 27
SECTION 5.17 Affiliates.................................................................................... 27
SECTION 5.18 Opinion of Financial Advisor.................................................................. 27
SECTION 5.19 Brokers....................................................................................... 27
SECTION 5.20 Vote Required................................................................................. 27
SECTION 5.21 No Business Activities........................................................................ 27
ARTICLE VI
COVENANTS.................................................................................................. 28
SECTION 6.1 Affirmative Covenants.......................................................................... 28
SECTION 6.2 Negative Covenants............................................................................. 28
SECTION 6.3 Access and Information......................................................................... 36
ARTICLE VII
ADDITIONAL AGREEMENTS...................................................................................... 36
SECTION 7.1 Meeting of AEP Stockholders.................................................................... 36
SECTION 7.2 Meeting of Company Stockholders................................................................ 36
SECTION 7.3 Registration Statement; Joint Proxy Statement/Prospectus....................................... 36
SECTION 7.4 Appropriate Action; Consents; Filings.......................................................... 38
SECTION 7.5 Affiliates; Pooling; Tax Treatment............................................................. 39
SECTION 7.6 Public Announcements........................................................................... 40
SECTION 7.7 NYSE Listing................................................................................... 40
SECTION 7.8 Company Rights Agreement....................................................................... 40
SECTION 7.9 Comfort Letters................................................................................ 40
SECTION 7.10 Stock Options; Employee Benefit Plans......................................................... 40
SECTION 7.11 Indemnification of Directors and Officers..................................................... 43
SECTION 7.12 Newco......................................................................................... 45
SECTION 7.13 Event Notices................................................................................. 45
SECTION 7.14 Board of Directors............................................................................ 45
SECTION 7.15 Headquarters.................................................................................. 45
SECTION 7.16 Rate Matters.................................................................................. 45
SECTION 7.17 Coordination of Dividends..................................................................... 46
SECTION 7.18 Transition Management......................................................................... 46
SECTION 7.19 Acquisition Proposals......................................................................... 46
SECTION 7.20 Workforce Matters............................................................................. 47
</TABLE>
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<S> <C>
ARTICLE VIII
CLOSING CONDITIONS......................................................................................... 48
SECTION 8.1 Conditions to Obligations of Each Party........................................................ 48
SECTION 8.2 Additional Conditions to Obligations of the AEP Companies...................................... 49
SECTION 8.3 Additional Conditions to Obligations of the Company............................................ 50
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER.......................................................................... 51
SECTION 9.1 Termination.................................................................................... 51
SECTION 9.2 Effect of Termination.......................................................................... 54
SECTION 9.3 Amendment...................................................................................... 54
SECTION 9.4 Waiver......................................................................................... 54
SECTION 9.5 Fees, Expenses and Other Payments.............................................................. 54
SECTION 9.6 Certain Damages, Payments and Expenses......................................................... 54
ARTICLE X
GENERAL PROVISIONS......................................................................................... 56
SECTION 10.1 Effectiveness of Representations, Warranties and Agreements................................... 56
SECTION 10.2 Notices....................................................................................... 56
SECTION 10.3 Headings...................................................................................... 57
SECTION 10.4 Severability.................................................................................. 57
SECTION 10.5 Entire Agreement.............................................................................. 57
SECTION 10.6 Assignment.................................................................................... 58
SECTION 10.7 Parties in Interest........................................................................... 58
SECTION 10.8 Failure or Indulgence Not Waiver; Remedies Cumulative......................................... 58
SECTION 10.9 Governing Law................................................................................. 58
SECTION 10.10 Counterparts................................................................................. 58
</TABLE>
ANNEXES
<TABLE>
<S> <C>
Annex A Schedule of Defined Terms
Annex B Affiliate's Agreement (Company Affiliates)
Annex C Affiliate's Agreement (AEP Affiliates)
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 21, 1997, is by and
among American Electric Power Company, Inc., a New York corporation ("AEP"),
Augusta Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of AEP ("Newco"), and Central and South West Corporation, a Delaware
corporation (the "Company"). AEP and Newco are sometimes collectively referred
to herein as the "AEP Companies."
RECITALS:
The Board of Directors of the Company has determined that the business
combination to be effected by means of the Merger is consistent with and in
furtherance of the long-term business strategy of the Company and is fair to,
and in the best interests of, the Company and its stockholders and has approved
and adopted this Agreement and recommended approval and adoption of this
Agreement by the stockholders of the Company.
The Board of Directors of AEP has determined that the business combination
to be effected by means of the Merger is consistent with and in furtherance of
the long-term business strategy of AEP and is fair to, and in the best interests
of, AEP and its stockholders and has approved this Agreement, the Charter
Amendment and the Share Issuance and recommended approval and adoption of the
Charter Amendment and the Share Issuance by the stockholders of AEP.
The Board of Directors of Newco has determined that the business combination
to be effected by means of the Merger is in the best interests of Newco and its
stockholder and has approved and adopted this Agreement and recommended approval
and adoption of this Agreement by AEP.
To give effect to the transactions contemplated hereby, upon the terms and
subject to the conditions of this Agreement and in accordance with the Delaware
Law, Newco will merge with and into the Company.
For Federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization under the provisions of Section 368(a) of the Code.
The Merger is intended to be treated as a "pooling of interests" for
accounting purposes.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. Certain capitalized and other terms used in this
Agreement are defined in Annex A hereto and are used herein with the meanings
ascribed to them therein.
SECTION 1.2 RULES OF CONSTRUCTION. Unless the context otherwise requires, as
used in this Agreement: (a) a term has the meaning ascribed to it; (b) an
accounting term not otherwise defined has the meaning ascribed to it in
accordance with GAAP; (c) "or" is not exclusive; (d) "including" shall mean
"including, without limitation;" (e) words in the singular include the plural;
(f) words in the plural include the singular; (g) words applicable to one gender
shall be construed to apply to each gender; (h) the terms "hereof," "herein,"
"hereby," "hereto" and derivative or similar words refer to this entire
Agreement; and (i) the terms "Article" or "SECTION" shall refer to the specified
Article or SECTION of this Agreement.
ARTICLE II
TERMS OF MERGER
SECTION 2.1 STATUTORY MERGER. Subject to the terms and conditions and in
reliance upon the representations, warranties, covenants and agreements
contained herein, Newco shall merge (the "Merger") with and into the Company at
the Effective Time. The terms and conditions of the Merger and the mode of
carrying the same into effect shall be as set forth in this Agreement. As a
result of the Merger, the separate corporate existence of Newco shall cease and
the Company shall continue as the Surviving Corporation.
SECTION 2.2 EFFECTIVE TIME. As soon as practicable after the satisfaction
or, if permissible, waiver of the conditions set forth in Article VIII, the
parties hereto shall cause the Merger to be consummated by filing a Certificate
of Merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware, in such form as required by, and executed in accordance with the
relevant provisions of, the Delaware Law.
SECTION 2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, except as otherwise provided herein, all the property, rights,
privileges, powers and franchises of Newco and the Company shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Newco and the
Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 2.4 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective Time, the
certificate of incorporation and the bylaws of the Company, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation and the bylaws of the Surviving Corporation.
SECTION 2.5 DIRECTORS AND OFFICERS. The directors of Newco immediately prior
to the Effective Time shall be the directors of the Surviving Corporation, each
to hold office in accordance with the certificate of incorporation and bylaws of
the Surviving Corporation, and the officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, in each
case until their respective successors are duly elected or appointed and
qualified.
ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 3.1 MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF SECURITIES.
On the date on which the Effective Time occurs, by virtue of the Merger and
without any action on the part of the AEP Companies, the Company or any
securityholder thereof:
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(a) Subject to the other provisions of this Article III, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time (exclusive of any shares to be cancelled pursuant to SECTION
3.1(c)) shall be converted into that number of shares of AEP Common Stock
equal to the Common Stock Exchange Ratio. If between the date of this
Agreement and the Effective Time the outstanding shares of Company Common
Stock or AEP Common Stock shall have been changed into a different number of
shares or a different class, by reason of any dividend, subdivision,
reclassification, recapitalization, split, combination, exchange of shares
or other transaction, the Common Stock Exchange Ratio shall be
correspondingly adjusted to reflect such dividend, subdivision,
reclassification, recapitalization, split, combination, exchange of shares
or other transaction.
(b) All shares of Company Common Stock shall, upon conversion into
shares of AEP Common Stock at the Effective Time, cease to be outstanding
and shall automatically be cancelled and retired, and each certificate
previously evidencing shares of Company Common Stock outstanding immediately
prior to the Effective Time (exclusive of any shares to be cancelled
pursuant to SECTION 3.1(c)) shall thereafter be deemed, for all purposes
other than the payment of dividends or distributions, to represent that
number of shares of AEP Common Stock into which such shares of Company
Common Stock were converted pursuant to SECTION 3.1(a) and, if applicable,
the right to receive cash pursuant to SECTION 3.2(e). The holders of
certificates previously evidencing Company Common Stock shall cease to have
any rights with respect to such Company Common Stock except as otherwise
provided herein or by law.
(c) Notwithstanding any provision of this Agreement to the contrary,
each share of Company Common Stock held in the treasury of the Company and
each share of Company Common Stock, if any, owned by AEP or any direct or
indirect wholly owned subsidiary of AEP or of the Company immediately prior
to the Effective Time shall be cancelled and extinguished without conversion
thereof.
(d) Each share of common stock, par value $.01 per share, of Newco
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock, par value $3.50 per share, of the
Surviving Corporation.
SECTION 3.2 EXCHANGE OF CERTIFICATES. (a) EXCHANGE FUND. On or prior to the
day of the Effective Time, AEP shall deposit, or cause to be deposited, with the
Exchange Agent, for the benefit of the holders of Company Common Stock, for
exchange in accordance with this Article III, through the Exchange Agent,
certificates evidencing a number of shares of AEP Common Stock into which the
number of shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time was converted pursuant to SECTION 3.1(a). The
Exchange Agent shall, pursuant to irrevocable instructions from AEP, deliver AEP
Common Stock, together with any cash to be paid in lieu of fractional interests
in shares of AEP Common Stock pursuant to SECTION 3.2(e) and any dividends or
distributions related thereto, in exchange for certificates theretofore
evidencing Company Common Stock surrendered to the Exchange Agent pursuant to
SECTION 3.2(c). Except as contemplated by SECTION 3.2(f), the Exchange Fund
shall not be used for any other purpose.
(b) LETTER OF TRANSMITTAL. Promptly after the Effective Time, AEP will cause
the Exchange Agent to send to each record holder of Company Common Stock
immediately prior to the Effective Time a letter of transmittal and other
appropriate materials for use in surrendering to the Exchange Agent certificates
that prior to the Effective Time evidenced shares of Company Common Stock.
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Exchange
Agent shall distribute to each former holder of Company Common Stock, upon
surrender to the Exchange Agent for cancellation of one or more certificates
that theretofore evidenced shares of Company Common Stock, certificates
evidencing the appropriate number of shares of AEP Common Stock into which such
shares of Company Common Stock were converted pursuant to the Merger, together
with any cash to be paid in lieu of
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<PAGE>
fractional interests in shares of AEP Common Stock pursuant to SECTION 3.2(e)
and any dividends or distributions related thereto. If shares of AEP Common
Stock are to be issued to a Person other than the Person in whose name the
surrendered certificate or certificates are registered, it shall be a condition
of issuance of AEP Common Stock that the surrendered certificate or certificates
shall be properly endorsed, with signatures guaranteed, or otherwise in proper
form for transfer and that the Person requesting such payment shall pay any
transfer or other taxes required by reason of the issuance of AEP Common Stock
to a Person other than the registered holder of the surrendered certificate or
certificates or such Person shall establish to the satisfaction of AEP that such
tax has been paid or is not applicable. Notwithstanding the foregoing, neither
the Exchange Agent nor any party hereto shall be liable to any former holder of
Company Common Stock for any AEP Common Stock, cash in lieu of fractional
interests or dividends or distributions thereon delivered to a public official
pursuant to any applicable escheat Law.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES OF COMPANY COMMON
STOCK. No dividends or other distributions declared or made with respect to AEP
Common Stock with a record date after the Effective Time shall be paid to the
holder of any certificate that theretofore evidenced shares of Company Common
Stock until the holder of such certificate shall surrender such certificate.
Subject to the effect of any applicable escheat Laws, following surrender of any
such certificate, there shall be paid (i) to the holder of the certificates
evidencing whole shares of AEP Common Stock issued in exchange therefor, without
interest, (A) promptly, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such whole
shares of AEP Common Stock, and (B) at the appropriate payment date, the amount
of dividends or other distributions, with a record date after the Effective Time
but prior to surrender and a payment date occurring after surrender, payable
with respect to such whole shares of AEP Common Stock and (ii) to the holder of
any certificate that theretofore evidenced shares of Company Common Stock,
without interest, promptly the amount of any cash payable with respect to a
fractional interest in a share of AEP Common Stock to which such holder is
entitled pursuant to SECTION 3.2(e).
(e) NO FRACTIONAL SHARES. Notwithstanding anything herein to the contrary,
no certificates or scrip evidencing fractional interests in shares of AEP Common
Stock shall be issued in connection with the Merger, and any such fractional
interests to which a holder of record of Company Common Stock at the Effective
Time would otherwise be entitled will not entitle such holder to vote or to any
rights of a stockholder of AEP. In lieu of any such fractional shares, each
holder of record of Company Common Stock at the Effective Time who but for the
provisions of this SECTION 3.2(e) would be entitled to receive a fractional
interest of a share of AEP Common Stock pursuant to the Merger shall be paid
cash, without any interest thereon, as hereinafter provided. AEP shall instruct
the Exchange Agent to determine the number of whole shares and fractional shares
of AEP Common Stock allocable to each holder of record of Company Common Stock
at the Effective Time, to aggregate all such fractional shares into whole
shares, to sell the whole shares obtained thereby in the open market at then
prevailing prices on behalf of holders who otherwise would be entitled to
receive fractional share interests and to distribute to each such holder such
holder's ratable share of the total proceeds of such sale, after making
appropriate deductions of the amount, if any, required for Federal income tax
withholding purposes and after deducting any applicable transfer taxes. All
brokers' fees and commissions and fees of the Exchange Agent incurred in
connection with such sales shall be paid by AEP.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains unclaimed by the former holders of Company Common Stock for twelve
months after the Effective Time shall be delivered to AEP, upon demand, and any
former holders of Company Common Stock who have not theretofore complied with
this Article III shall thereafter look only to AEP for AEP Common Stock, any
cash to be paid in lieu of fractional interests in shares of AEP Common Stock
and any dividends or other distributions to which they are entitled.
(g) WITHHOLDING OF TAX. AEP shall be entitled to deduct and withhold from
the consideration otherwise payable pursuant to this Agreement to any former
holder of Company Common Stock such
I-4
<PAGE>
amounts as AEP (or any affiliate thereof) is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax Law. To the extent that amounts are so withheld by
AEP, such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the former holder of Company Common Stock in respect of
which such deduction and withholding was made by AEP.
(h) LOST CERTIFICATES. If any certificate evidencing shares of Company
Common Stock 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 AEP, the posting by such Person of a
bond, in such reasonable amount as AEP may direct, as indemnity against claims
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 a
certificate evidencing that number of shares of AEP Common Stock into which the
shares of Company Common Stock evidenced by such lost, stolen or destroyed
certificate were converted pursuant to SECTION 3.1(a), any cash in lieu of
fractional interests in shares of AEP Common Stock to which the holder thereof
may be entitled pursuant to SECTION 3.2(e) and any dividends or other
distributions to which the holder thereof may be entitled pursuant to SECTION
3.2(d).
SECTION 3.3 CLOSING. The Closing shall take place at such time and place as
the parties shall mutually agree on the second Business Day immediately
following the date on which the last of the conditions set forth in Article VIII
(other than conditions that by their nature are required to be performed on the
Closing Date) is fulfilled or, if permissible, waived, or at such other place,
time and date as the parties hereto may agree. At the conclusion of the Closing
on the Closing Date, the parties hereto shall cause the Certificate of Merger
relating to the Merger to be filed with the Secretary of State of the State of
Delaware.
SECTION 3.4 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer
books of the Company shall be closed and there shall be no further registration
of transfers of shares of Company Common Stock thereafter on the records of the
Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the AEP Companies that:
SECTION 4.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company and
each Subsidiary of the Company are legal entities duly organized, validly
existing and in good standing under the Laws of their respective jurisdictions
of incorporation or organization, have all requisite power and authority to own,
lease and operate their respective properties and to carry on their respective
businesses as they are now being conducted and are duly qualified and in good
standing to do business in each jurisdiction in which the nature of the business
conducted by them or the ownership or leasing of their respective properties
makes such qualification necessary, other than any matters, including the
failure to be so duly qualified and in good standing, that could not reasonably
be expected to have a Material Adverse Effect on the Company. SECTION 4.1 of the
Company's Disclosure Letter sets forth, as of the date of this Agreement, a true
and complete list of all the Company's directly or indirectly owned
Subsidiaries, together with (A) the jurisdiction of incorporation or formation
of each Subsidiary and the percentage of each Subsidiary's outstanding capital
stock or other equity interests owned by the Company or another Subsidiary of
the Company, and (B) an indication of whether each such Subsidiary is a
Significant Subsidiary. Except as set forth in SECTION 4.1 of the Company's
Disclosure Letter, neither the Company nor any of its Subsidiaries owns an
equity interest in any other partnership or joint venture arrangement or other
business entity that is Material to the Company.
SECTION 4.2 CERTIFICATE OF INCORPORATION AND BYLAWS. The Company has
heretofore marked for identification and furnished to AEP complete and correct
copies of the certificate of incorporation and the
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bylaws or the equivalent organizational documents, in each case as amended or
restated to the date hereof, of the Company and each of its Significant
Subsidiaries. Neither the Company nor any of its Significant Subsidiaries is in
violation of any of the provisions of its certificate of incorporation or bylaws
(or equivalent organizational documents).
SECTION 4.3 CAPITALIZATION. (a) COMPANY COMMON STOCK. The authorized capital
stock of the Company consists of 350,000,000 shares of Company Common Stock of
which as of November 7, 1997: (A) 212,235,320 shares were issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, the
Company's certificate of incorporation or bylaws or any agreement to which the
Company is a party or is bound and (B) 10,410,363 shares were reserved for
future issuance in the amounts and for the purposes set forth in SECTION 4.3(a)
of the Company's Disclosure Letter. Except as set forth in SECTION 4.3(a) of the
Company's Disclosure Letter, between November 7, 1997 and the date of this
Agreement, no shares of Company Common Stock have been issued by the Company and
the Company has not granted any options for, or other rights to purchase, shares
of Company Common Stock.
(b) RESERVED SHARES. Except for shares to which reference is made in SECTION
4.3(a), no shares of Company Common Stock are reserved for issuance, and, except
for the Company's Rights Agreement and stock options shares with respect to
which are reserved for issuance as set forth in SECTION 4.3(a) of the Company's
Disclosure Letter, there are no contracts, agreements, commitments or
arrangements obligating the Company to (i) offer, sell, issue or grant any
Equity Securities of the Company, (ii) redeem, purchase or acquire, or offer to
purchase or acquire, any outstanding Equity Securities of the Company or (iii)
grant any Lien on any shares of capital stock of the Company.
(c) SUBSIDIARY STOCK. The authorized, issued and outstanding capital stock
of, or other equity interests in, each of the Company's Significant Subsidiaries
are set forth in SECTION 4.3(c) of the Company's Disclosure Letter. Except as
set forth in SECTION 4.3(c) of the Company's Disclosure Letter, (i) all the
issued and outstanding common stock of each of the Company's Significant
Subsidiaries is owned, directly or indirectly, by the Company; (ii) all the
issued and outstanding shares of each class of capital stock of, or other equity
interests in, each of the Significant Subsidiaries of the Company have been duly
authorized and are validly issued, and, with respect to capital stock, are fully
paid and nonassessable, and were not issued in violation of any preemptive or
similar rights of any past or present equity holder of such Significant
Subsidiary; (iii) all such issued and outstanding shares, or other equity
interests, that are indicated as owned by the Company or one of its Subsidiaries
in SECTION 4.3(c) of the Company's Disclosure Letter are owned (A) beneficially
as set forth therein and (B) free and clear of all Liens; (iv) no shares of
capital stock of, or other equity interests in, any Significant Subsidiary of
the Company are reserved for issuance; and (v) there are no contracts,
agreements, commitments or arrangements obligating the Company or any of its
Subsidiaries (A) to offer, sell, issue, grant, pledge, dispose of or encumber
any Equity Securities of any of the Significant Subsidiaries of the Company, (B)
to redeem, purchase or acquire, or offer to purchase or acquire, any outstanding
Equity Securities of any of the Significant Subsidiaries of the Company or (C)
to grant any Lien on any outstanding shares of capital stock of, or other equity
interest in, any of the Significant Subsidiaries of the Company.
(d) ADVERSE CLAIMS. Except for the Company's Rights Agreement and stock
options shares with respect to which are reserved for issuance as set forth in
SECTION 4.3(a) of the Company's Disclosure Letter, there are no voting trusts,
proxies or other agreements, commitments or understandings of any character to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound with respect to the voting of any shares of
capital stock of the Company or any of its Significant Subsidiaries, with
respect to the registration of the offering, sale or delivery of any shares of
capital stock of the Company or any of its Significant Subsidiaries under the
Securities Act or otherwise relating to any shares of capital stock of the
Company or any of its Significant Subsidiaries.
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SECTION 4.4 AUTHORIZATION OF AGREEMENT. The Company has all requisite
corporate power and authority to execute and deliver this Agreement and each
instrument required hereby to be executed and delivered by it at the Closing
and, subject to obtaining the Required Company Vote, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby.
The execution and delivery by the Company of this Agreement and each instrument
required hereby to be executed and delivered by it at the Closing and the
performance of its obligations hereunder and thereunder have been duly and
validly authorized by all requisite corporate action on the part of the Company
(other than, with respect to the Merger, the Required Company Vote). This
Agreement has been duly executed and delivered by the Company and (assuming due
authorization, execution and delivery hereof by the other parties hereto)
constitutes a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as the same may be
limited by legal principles of general applicability governing the application
and availability of equitable remedies.
SECTION 4.5 REGULATION AND APPROVALS. (a) UTILITY REGULATION. The Company is
a public utility holding company registered under, and subject to the provisions
of, the Holding Company Act, and the Company is the parent, owning all the
outstanding common stock, of four Domestic Public Utility Companies: (i) CP&L,
which provides regulated retail electric service in the State of Texas; (ii)
PSO, which provides regulated retail electric service in the State of Oklahoma;
(iii) SWEPCO, which provides regulated retail electric service in the States of
Texas, Louisiana and Arkansas; and (iv) WTU, which provides regulated retail
electric service in the State of Texas. In addition, the Company indirectly owns
all of the outstanding stock of Seeboard, a regulated regional electricity
company in England and Wales. Seeboard is a Foreign Utility Company. Except as
aforesaid and as set forth in SECTION 4.5(a) of the Company's Disclosure Letter,
neither the Company nor any of its Subsidiaries is subject to rate regulation as
a public utility or public service company (or similar designation) by any state
in the United States or any municipality or other political subdivision of any
state, by the United States or any Governmental Authority of the United States
or by any foreign country.
(b) APPROVALS. Except for the applicable requirements set forth in SECTION
4.5(b) of the Company's Disclosure Letter, no declaration, filing or
registration with, no waiting period imposed by and no Permit or Order of, any
Governmental Authority is required under any Law, Regulation or Order applicable
to the Company or any of its Subsidiaries to permit the Company to execute,
deliver or perform this Agreement or any instrument required hereby to be
executed and delivered by it at the Closing, the failure to obtain which could
reasonably be expected to have a Material Adverse Effect on the Company.
SECTION 4.6 NO VIOLATION. Assuming receipt of all Permits and Orders
indicated as required in SECTION 4.5(b) and receipt of the Required Company
Vote, neither the execution and delivery by the Company of this Agreement or any
instrument required hereby to be executed and delivered by it at the Closing nor
the performance by the Company of its obligations hereunder or thereunder will
(a) violate or breach the terms of or cause a default under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination, cancellation or acceleration of any obligation under, or result
in the creation of any lien, security interest, charge or encumbrance upon, any
of the properties or assets of the Company or any of its Subsidiaries under (i)
any Law, Regulation, Permit or Order applicable to the Company or any of its
Subsidiaries, (ii) the certificate of incorporation or bylaws or similar
organizational documents of the Company or any of its Subsidiaries or (iii)
except as set forth in SECTION 4.6 of the Company's Disclosure Letter, any note,
bond, mortgage, indenture, deed of trust, license, franchise, concession, lease,
contract or agreement to which the Company or any of its Subsidiaries is a party
or by which it or any of its properties or assets is bound, or (c) with the
passage of time, the giving of notice or the taking of any action by a third
Person, have any of the effects set forth in clause (a) of this SECTION, except
in any such case for any matters described in clauses (i) and (iii) of this
SECTION that could not reasonably be expected to have a material adverse effect
upon the ability of the Company to perform its obligations under this Agreement
or a Material Adverse Effect on the Company. Prior to the execution of this
Agreement, the Board of Directors of the Company has taken all necessary action
to
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cause this Agreement and the transactions contemplated hereby to be exempt from
the provisions of SECTION 203 of the Delaware Law and to ensure that the
execution, delivery and performance of this Agreement by the parties hereto will
not cause any rights to be distributed or to become exercisable under the
Company's Rights Agreement.
SECTION 4.7 REPORTS. (a) REPORTS. Since January 1, 1993, the Company and its
Subsidiaries have filed or caused to be filed (i) all SEC Reports of the Company
or any of its Subsidiaries required to be filed with the Commission and (ii) all
other Reports of the Company or any of its Subsidiaries required to be filed
with any Governmental Authorities, including the FERC, the Commission (under the
Holding Company Act), the NRC and State Regulatory Commissions, except where the
failure to file any such Reports of the Company or any of its Subsidiaries could
not reasonably be expected to have a Material Adverse Effect on the Company. The
Company has made available to AEP a true and complete copy of each such SEC
Report. The Reports of the Company and its Subsidiaries, including all those
filed after the date of this Agreement and prior to the Effective Time, (i) were
or will be prepared in all material respects in accordance with the requirements
of applicable Law and (ii), in the case of the SEC Reports of the Company and
its Subsidiaries, did not at the time they were filed, or will not at the time
they are filed, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) FINANCIAL STATEMENTS. The Company's Consolidated Financial Statements
and any condensed financial statements of the Company (including any related
notes thereto) contained in any SEC Reports of the Company or any of its
Subsidiaries filed with the Commission after the date of this Agreement (i) have
been or will have been prepared in accordance with the published Regulations of
the Commission and in accordance with GAAP (except (A) to the extent required by
changes in GAAP, (B) with respect to unaudited financial statements as permitted
by Form 10-Q and (C), with respect to SEC Reports of the Company or any of its
Subsidiaries filed prior to the date of this Agreement, as may be indicated in
the notes thereto) and (ii) fairly present the consolidated financial position
of the Company and its Subsidiaries as of the respective dates thereof and the
consolidated results of their operations and cash flows for the periods
indicated (including, in the case of any unaudited interim financial statements,
reasonable estimates of normal and recurring year-end adjustments).
(c) NO OMISSIONS. Except for matters disclosed in SECTION 4.7(c) of the
Company's Disclosure Letter, or matters disclosed in the Company's SEC Reports
filed with the Commission prior to the date hereof, there exist no liabilities
or obligations of the Company and its Subsidiaries, whether accrued, absolute,
contingent or threatened, that would be required to be reflected, reserved for
or disclosed under GAAP in condensed financial statements of the Company as of
and for the period ended on the dates on which this representation and warranty
is made or deemed to be made, other than (i) liabilities or obligations that are
adequately reflected, reserved for or disclosed in the Company's Consolidated
Financial Statements, (ii) liabilities or obligations incurred in the ordinary
course of business of the Company consistent with past practice since September
30, 1997, (iii) liabilities or obligations the incurrence of which would not
have been prohibited by SECTIONs 6.1 or 6.2(a) had such sections been in effect
since September 30, 1997 and (iv) other liabilities and obligations that could
not reasonably be expected to have a Material Adverse Effect on the Company.
SECTION 4.8 NO MATERIAL ADVERSE EFFECT; CONDUCT. (a) MATERIAL ADVERSE
CHANGES. Except as set forth in SECTION 4.8(a) of the Company's Disclosure
Letter, since September 30, 1997, no event (other than any event that is of
general application to the electric utility industry in the United States or the
United Kingdom) has occurred that, individually or together with other similar
events, has had, and, to the Knowledge of the Company, no fact or condition
(other than any fact or condition that is of general application to the electric
utility industry in the United States or the United Kingdom) exists that could
reasonably be expected to have, a Material Adverse Effect on the Company.
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(b) PROSCRIBED CONDUCT. Except as set forth in SECTION 4.8(b) of the
Company's Disclosure Letter, during the period from September 30, 1997 to the
date of this Agreement, neither the Company nor any of its Subsidiaries has
failed to conduct its business in the ordinary course consistent with past
practice, other than any conduct that would not have been prohibited by SECTION
6.1 or SECTION 6.2(a) had such sections been in effect since September 30, 1997.
SECTION 4.9 PERMITS; COMPLIANCE. (a) GENERAL. The Company and its
Subsidiaries have obtained all Orders and Permits that are necessary to carry on
their businesses as currently conducted, except for any such Orders or Permits
that the failure to possess, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on the Company. Except
as set forth in SECTION 4.14 of the Company's Disclosure Letter, all such Orders
and Permits are in full force and effect, have not been violated in any respect
that could reasonably be expected to have a Material Adverse Effect on the
Company and no suspension, revocation or cancellation thereof has occurred or,
to the Knowledge of the Company, been threatened and there is no action,
proceeding or investigation pending or, to the Knowledge of the Company,
threatened regarding suspension, revocation or cancellation of any of such
Permits or Orders, except where the suspension, revocation or cancellation of
such Permits or Orders could not reasonably be expected to have a Material
Adverse Effect on the Company.
(b) SOUTH TEXAS NUCLEAR FACILITY. CP&L is a co-owner of the South Texas
Nuclear Facility, owning an undivided 25.2% interest therein. The operations of
the South Texas Nuclear Facility are subject to the control of the STP Nuclear
Operating Company (the "Operating Company"), in which the Company owns a like
equity interest. Except as set forth in SECTION 4.9(b) of the Company's
Disclosure Letter, to the Knowledge of the Company, the operations of the South
Texas Nuclear Facility have at all times been conducted in compliance with
applicable health, safety, regulatory and other legal requirements, except where
the failure to be so in compliance in the aggregate could not reasonably be
expected to have a Material Adverse Effect on the Company. Except as set forth
in SECTION 4.9(b) of the Company's Disclosure Letter, to the Knowledge of the
Company the operations of the South Texas Nuclear Facility are not the subject
of any outstanding notices of violation or requests for information from the NRC
or any other agency with jurisdiction over such facility. To the Knowledge of
the Company, the Operating Company maintains, and is in compliance with, an
emergency plan designed to protect the health and safety of the public in the
event of an unplanned release of radioactive materials from the South Texas
Nuclear Facility, and the NRC has determined that such plan is in compliance
with its requirements. To the Knowledge of the Company, liability insurance to
the full extent required by Law for operating nuclear facilities remains in full
force and effect with respect to the South Texas Nuclear Facility, and the
amount of such insurance has been approved by the NRC. To the Knowledge of the
Company, plans for the decommissioning of the South Texas Nuclear Facility, and
for the storage of spent nuclear fuel, conform with the requirements of
applicable Law, and the owners of such facility, including the Company, have
funded such plans to the extent required by Law.
SECTION 4.10 LITIGATION; COMPLIANCE WITH LAWS. There are no actions, suits,
investigations or proceedings (including any proceedings in arbitration) pending
or, to the Knowledge of the Company, threatened against the Company or any of
its Subsidiaries, at law or in equity, in any Court or before or by any
Governmental Authority, except actions, suits or proceedings that (a) are fully
and accurately disclosed in the Company's SEC Reports filed with the Commission
prior to the date hereof, (b) are set forth in SECTION 4.10 or SECTION 4.14 of
the Company's Disclosure Letter or (c), individually or, with respect to
multiple actions, suits or proceedings that allege similar theories of recovery
based on similar facts, in the aggregate, could not reasonably be expected to
have a Material Adverse Effect on the Company. Except as set forth in SECTION
4.10 of the Company's Disclosure Letter, there are no Material claims pending
or, to the Knowledge of the Company, threatened by any Persons against the
Company or any of its Subsidiaries for indemnification pursuant to any statute,
organizational document, contract or otherwise with respect to any action, suit,
investigation or proceeding pending in any Court or before or by any
Governmental Authority. Except as set forth in SECTION 4.10 or SECTION 4.14 of
the Company's
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Disclosure Letter, the Company and its Subsidiaries are in substantial
compliance with all applicable Laws and Regulations and are not in default with
respect to any Order applicable to the Company or any of its Subsidiaries,
except such events of noncompliance or defaults that, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect on
the Company.
SECTION 4.11 OWNERSHIP OF AEP COMMON STOCK. Neither the Company nor any of
its Affiliates "beneficially own" (as such term is defined for purposes of
SECTION 13(d) of the Exchange Act) any shares of AEP Common Stock (in whole or
in part).
SECTION 4.12 EMPLOYEE BENEFIT PLANS. (a) LISTING. Each Company Benefit Plan
is listed in SECTION 4.12(a) of the Company's Disclosure Letter, including, with
respect to Terminated Company Benefit Plans, the date of termination. True and
correct copies of each of the following have been made available to AEP with
respect to each Current Company Benefit Plan: (i) the three most recent annual
reports (Form 5500) filed with the IRS, (ii) the plan document, (iii) the trust
agreement, if any, (iv) the most recent summary plan description if required by
ERISA, (v) the three most recent actuarial reports or valuations relating to
each Current Company Benefit Plan subject to Title IV of ERISA and (vi) the most
recent determination letter, if any, issued by the IRS with respect to any
Current Company Benefit Plan intended to be qualified under SECTION 401 of the
Code.
(b) MATERIAL ADVERSE CHANGES. With respect to each Company Benefit Plan, no
event has occurred and, to the Knowledge of the Company, there exists no
condition or set of circumstances in connection with which the Company or any of
its Subsidiaries could be subject to any liability under the terms of such
Company Benefit Plan, ERISA, the Code or any other applicable Law, other than
any condition or set of circumstances that could not reasonably be expected to
have a Material Adverse Effect on the Company.
(c) QUALIFIED STATUS OF CURRENT PLANS. Except as set forth in SECTION
4.12(c) of the Company's Disclosure Letter, each Current Company Benefit Plan
intended to be qualified under SECTION 401 of the Code (i) satisfies in form the
requirements of such SECTION, (ii) has received a favorable determination letter
from the IRS regarding such qualified status, (iii) has not, since receipt of
the most recent favorable determination letter, been amended, and, (iv) to the
Knowledge of the Company, has not been operated in a way that would adversely
affect its qualified status.
(d) NO TERMINATIONS OF CURRENT PLANS. There has been no termination or
partial termination of any Current Company Benefit Plan within the meaning of
SECTION 411(d)(3) of the Code.
(e) TERMINATED PLANS. Any Terminated Company Benefit Plan intended to have
been qualified under SECTION 401 of the Code received a favorable determination
letter from the IRS with respect to its termination.
(f) CLAIMS. There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the Knowledge of the Company, threatened
against, or with respect to, any Company Benefit Plan or its assets that could
reasonably be expected to have a Material Adverse Effect on the Company and, to
the Knowledge of the Company, no facts or circumstances exist that could give
rise to any such actions, suits or claims.
(g) PENDING MATTERS. To the Knowledge of the Company, there is no matter
pending (other than routine qualification determination filings) with respect to
any Company Benefit Plan before the IRS, the Department of Labor, the PBGC or
other Governmental Authority.
(h) TIMELY CONTRIBUTIONS. Except as set forth in SECTION 4.12(h) of the
Company's Disclosure Letter, all contributions required to be made to Company
Benefit Plans pursuant to their terms and the provisions of ERISA, the Code or
any other applicable Law have been timely made.
(i) CURRENT PLANS SUBJECT TO TITLE IV OF ERISA. As to each Current Company
Benefit Plan subject to Title IV of ERISA, (i) there has been no event or
condition that presents a significant risk of plan termination, (ii) no
accumulated funding deficiency, whether or not waived, within the meaning of
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SECTION 302 of ERISA or SECTION 412 of the Code has been incurred, (iii) no
reportable event within the meaning of SECTION 4043 of ERISA (for which the
disclosure requirements of Regulation section 4043.1 et seq. promulgated by the
PBGC have not been waived) has occurred within six years prior to the date of
this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been
given under SECTION 4041 of ERISA, (v) no proceeding has been instituted under
SECTION 4042 of ERISA to terminate such Benefit Plan, (vi) no liability to the
PBGC has been incurred (other than with respect to required premium payments)
and (vii) the assets of such Benefit Plan equal or exceed the actuarial present
value of the benefit liabilities, within the meaning of SECTION 4041 of ERISA,
under such Benefit Plan, based upon reasonable actuarial assumptions and the
asset valuation principles established by the PBGC.
(j) EXCESS PARACHUTE PAYMENTS. Except as set forth in SECTION 4.12(j) of the
Company's Disclosure Letter and except for any Retention Agreement not
prohibited by SECTION 6.2(a), in connection with the consummation of the
transactions contemplated by this Agreement, no payments of money or other
property, acceleration of benefits or provision of other rights have been or
will be made under any Current Company Benefit Plan that could reasonably be
expected to be nondeductible under SECTION 280G of the Code, whether or not some
other subsequent action or event would be required to cause such payment,
acceleration or provision to be triggered.
(k) NO REQUIRED INCREASE IN CONTRIBUTIONS. Except as set forth in SECTION
4.12(k) of the Company's Disclosure Letter, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
(i) require the Company or any of its Subsidiaries to make a larger contribution
to, or pay greater benefits or provide other rights under, any Current Company
Benefit Plan than it otherwise would, whether or not some other subsequent
action or event would be required to cause such payment or provision to be
triggered or (ii) create or give rise to any additional vested rights or service
credits under any Current Company Benefit Plan whether or not some other
subsequent action or event would be required to cause such creation or
acceleration to be triggered.
(l) INTENTIONALLY OMITTED.
(m) RETIREE BENEFITS. Except as set forth in SECTION 4.12(m) of the
Company's Disclosure Letter, no Current Company Benefit Plan (other than a
Company Benefit Plan maintained outside the United States that is either fully
insured or fully funded through a retirement plan) provides retiree medical or
retiree life insurance benefits to any Person and neither the Company nor any of
its Subsidiaries is contractually or otherwise obligated (whether or not in
writing) to provide any Person with life insurance or medical benefits upon
retirement or termination of employment, other than as required by the
provisions of SECTIONs 601 through 608 of ERISA and SECTION 4980B of the Code.
(n) MULTIEMPLOYER PLANS. Except as set forth in SECTION 5.1 of AEP's
Disclosure Letter, neither the Company nor any member of its Controlled Group
contributes or has an obligation to contribute, and has not within six years
prior to the date of this Agreement contributed, had an obligation to
contribute, or had any other liability to a multiemployer plan within the
meaning of SECTION 3(37) of ERISA.
(o) COLLECTIVE BARGAINING CONTRACTS. Except as set forth in SECTION 4.12(o)
of the Company's Disclosure Schedule, (i) no collective bargaining agreement is
being negotiated by the Company or any of its Subsidiaries, (ii) there is no
pending or, to the Knowledge of the Company, threatened labor dispute, strike or
work stoppage against the Company or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect on the Company, (iii)
to the Knowledge of the Company, neither the Company or any of its Subsidiaries
nor any representative or employee of the Company or any of its Subsidiaries has
in the United States committed any Material unfair labor practices in connection
with the operation of the business of the Company and its Subsidiaries, and (iv)
there is no pending or, to the Knowledge of the Company, threatened charge or
complaint against the Company or any of its Subsidiaries by the National Labor
Relations Board or any comparable agency of any state of the United States.
(p) FUNDING OF CERTAIN BENEFITS. Except as set forth in SECTION 4.12(p) of
the Company's Disclosure Letter, the Company has not contributed, transferred or
otherwise provided any cash, securities or other property to any grantee, trust,
escrow or other arrangement that has the effect of providing or setting aside
assets for benefits payable pursuant to any termination, severance or other
change in control agreement.
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SECTION 4.13 TAXES. (a) TAX RETURNS AND TAXES. Except for such matters as
could not reasonably be expected to have a Material Adverse Effect on the
Company, (i) all Tax Returns that are required to be filed by or with respect to
the Company or any of its Subsidiaries on or before the Effective Time have been
or will be timely filed, (ii) all Taxes that are due and payable by the Company
or any of its Subsidiaries on or before the Effective Time have been or will be
timely paid in full or adequate reserves have been established for the payment
of such Taxes, (iii) all withholding Tax requirements imposed on or with respect
to the Company or any of its Subsidiaries and that are required to be satisfied
at or before the Effective Time have been or will be satisfied in full in all
respects and (iv) no penalty, interest or other charge is or will become due
with respect to the late filing of any such Tax Return or late payment of any
Tax by the Company or any of its Subsidiaries.
(b) AUDITS. Except as set forth in SECTION 4.13(b) of the Company's
Disclosure Letter, all Material Tax Returns required to be filed by the Company
or any of its Subsidiaries have been audited (and such audit has become final)
by the applicable Governmental Authority or the applicable statute of
limitations has expired for the period covered by such Tax Returns.
(c) EXTENSIONS OF TIME. Except as set forth in SECTION 4.13(c) of the
Company's Disclosure Letter, there is not in force any extension of time with
respect to the due date for the filing of any Material Tax Return required to be
filed by the Company or any of its Subsidiaries or any waiver or agreement for
any extension of time for the assessment or payment of any Tax due with respect
to the period covered by any Tax Return filed, or required to be filed, by the
Company or any of its Subsidiaries.
(d) CLAIMS. No Material issues have been raised by any Taxing authority in
connection with the audit or examination of any Tax Return filed, or required to
be filed, by the Company or any of its Subsidiaries, and there is no claim
against the Company or any of its Subsidiaries for any Taxes, and no assessment,
deficiency or adjustment has been asserted or proposed with respect to any Tax
Return, that, in either case, could reasonably be expected to have a Material
Adverse Effect on the Company.
(e) AFFILIATED GROUP. Except as set forth in SECTION 4.13(e) of the
Company's Disclosure Letter, none of the Company and its Subsidiaries, during
the last ten years, has been a member of an affiliated group filing a
consolidated Federal income Tax Return other than an affiliated group of which
the Company is the common parent.
SECTION 4.14 ENVIRONMENTAL MATTERS. Except for matters disclosed in SECTION
4.14 of the Company's Disclosure Letter, or matters disclosed in the Company's
SEC Reports filed with the Commission prior to the date hereof, and except for
matters that, individually or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect on the Company, (a) the properties, operations
and activities of the Company and its Subsidiaries are in compliance with all
applicable Environmental Laws; (b) the Company and its Subsidiaries and the
properties and operations of the Company and its Subsidiaries are not subject to
any existing, pending or, to the Knowledge of the Company, threatened action,
suit, investigation, inquiry or proceeding by or before any Court or
Governmental Authority under any Environmental Law; (c) all Permits, if any,
required to be obtained or filed by the Company or any of its Subsidiaries under
any Environmental Law in connection with the business of the Company and its
Subsidiaries have been obtained or filed and are valid and currently in full
force and effect; (d) to the Knowledge of the Company, there has been no release
of any hazardous substance, pollutant or contaminant into the environment by the
Company or its Subsidiaries or in connection with their properties or
operations; (e) to the Knowledge of the Company, there has been no exposure of
any Person or property to any hazardous substance, pollutant or contaminant in
connection with the properties, operations and activities of the Company and its
Subsidiaries; and (f) the Company and its Subsidiaries have made available to
AEP all internal and external environmental audits and studies and all
correspondence on substantial environmental matters (in each case relevant to
the Company or any of its Subsidiaries) in the possession of the Company or its
Subsidiaries.
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SECTION 4.15 INSURANCE. The Company and its Subsidiaries own and are, and
have been continuously since January 1, 1993, beneficiaries under all such
insurance policies underwritten by reputable insurers that, as to risks insured,
coverages and related limits and deductibles, are customary in the industries in
which the Company and its Subsidiaries operate. Except as disclosed in SECTION
4.15 of the Company's Disclosure Letter, neither the Company nor any of it
Subsidiaries has received any notice of cancellation or termination of any
Material insurance policy as to which it is a named beneficiary. All Material
insurance policies of the Company and its Subsidiaries are valid and enforceable
against the underwriters thereof in accordance with their terms, except as the
same may be limited by legal principles of general applicability governing the
application and availability of equitable remedies.
SECTION 4.16 POOLING; TAX MATTERS. Neither the Company nor, to the Knowledge
of the Company, any of its Affiliates has taken or agreed to take any action
that would prevent the Merger from being treated as a "pooling of interests" in
accordance with generally accepted accounting principles and the Regulations of
the Commission or from constituting a reorganization within the meaning of
section 368(a) of the Code.
SECTION 4.17 AFFILIATES. SECTION 4.17 of the Company's Disclosure Letter
contains a true and complete list of all Persons who, to the Knowledge of the
Company, may be deemed to be "affiliates" of the Company as such term is used in
Rule 145 under the Securities Act, including all directors and executive
officers of the Company.
SECTION 4.18 OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Morgan Stanley & Co. Incorporated on the date of this Agreement to
the effect that the consideration to be received by the holders of Company
Common Stock in the Merger is fair, from a financial point of view, to such
holders.
SECTION 4.19 BROKERS. Except as set forth in SECTION 4.19 of the Company's
Disclosure Letter, no broker, finder or investment banker (other than Morgan
Stanley & Co. Incorporated) is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. Prior to the date
of this Agreement, the Company has made available to AEP complete and correct
copies of all agreements between the Company and Morgan Stanley & Co.
Incorporated pursuant to which such firm will be entitled to any payment
relating to the transactions contemplated by this Agreement.
SECTION 4.20 VOTE REQUIRED. The approval by the holders of a majority of the
votes entitled to be cast by holders of the Company Common Stock, with each
share of Company Common Stock being entitled to one vote per share, is the only
vote of the holders of any class or series of capital stock of the Company or
any of its Subsidiaries required to approve the Merger, this Agreement or the
transactions contemplated hereby (the "Required Company Vote").
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE AEP COMPANIES
The AEP Companies hereby represent and warrant to the Company that:
SECTION 5.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. AEP and each
Subsidiary of AEP are legal entities duly organized, validly existing and in
good standing under the Laws of their respective jurisdictions of incorporation
or organization, have all requisite power and authority to own, lease and
operate their respective properties and to carry on their respective businesses
as they are now being conducted and are duly qualified and in good standing to
do business in each jurisdiction in which the nature of the business conducted
by them or the ownership or leasing of their respective properties makes such
qualification necessary, other than any matters, including the failure to be so
duly qualified and in good standing, that could not reasonably be expected to
have a Material Adverse Effect on AEP. SECTION 5.1 of AEP's Disclosure Letter
sets forth, as of the date of this Agreement, a true and complete list of all of
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the directly or indirectly owned Subsidiaries of AEP, together with (A) the
jurisdiction of incorporation of each Subsidiary and the percentage of each
Subsidiary's outstanding voting securities owned by AEP or another Subsidiary of
AEP, and (B) an indication of whether each such Subsidiary is a Significant
Subsidiary. Except as set forth in SECTION 5.1 of AEP's Disclosure Letter,
neither AEP nor any of its Subsidiaries owns an equity interest in any other
partnership or joint venture arrangement or other business entity that is
Material to AEP.
SECTION 5.2 CERTIFICATE OF INCORPORATION AND BYLAWS. AEP has heretofore
marked for identification and furnished to the Company complete and correct
copies of the certificate of incorporation and the bylaws or the equivalent
organizational documents, in each case as amended or restated to the date
hereof, of AEP, Newco and each of AEP's Significant Subsidiaries. Neither AEP,
Newco, nor any of AEP's Significant Subsidiaries is in violation of any of the
provisions of its certificate of incorporation or bylaws (or equivalent
organizational documents).
SECTION 5.3 CAPITALIZATION. (a) AEP COMMON STOCK. The authorized capital
stock of AEP consists of 300,000,000 shares of AEP Common Stock of which as of
the date hereof: (A) 189,989,989 shares were issued and outstanding, all of
which are duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, AEP's certificate of
incorporation or bylaws or any agreement to which AEP is a party or is bound and
(B) 51,581,493 shares were reserved for future issuance in the amounts and for
the purposes set forth in SECTION 5.3(a) of AEP's Disclosure Letter.
(b) RESERVED SHARES. Except for shares to which reference is made in SECTION
5.3(a), no shares of AEP Common Stock are reserved for issuance, and there are
no contracts, agreements, commitments or arrangements obligating AEP to (i)
offer, sell, issue or grant any Equity Securities of AEP, (ii) to redeem,
purchase or acquire, or offer to purchase or acquire, any outstanding Equity
Securities of AEP or (iii) grant any Lien on any shares of capital stock of AEP.
(c) SUBSIDIARY STOCK. The authorized, issued and outstanding capital stock
of, or other equity interests in, each of AEP's Significant Subsidiaries and
Newco are set forth in SECTION 5.3(c) of AEP's Disclosure Letter. Except as set
forth in SECTION 5.3(c) of AEP's Disclosure Letter, (i) all the issued and
outstanding common stock of each of AEP's Significant Subsidiaries and Newco is
owned, directly or indirectly, by AEP; (ii) all the issued and outstanding
shares of each class of capital stock of, or other equity interests in, each of
the Significant Subsidiaries of AEP and Newco have been duly authorized and are
validly issued, and, with respect to capital stock, are fully paid and
nonassessable, and were not issued in violation of any preemptive or similar
rights of any past or present equity holder of such Significant Subsidiary;
(iii) all such issued and outstanding shares, or other equity interests, that
are indicated as owned by AEP, Newco or one of its Subsidiaries in SECTION
5.3(c) of AEP's Disclosure Letter are owned (A) beneficially as set forth
therein and (B) free and clear of all Liens; (iv) no shares of capital stock of,
or other equity interests in, any Significant Subsidiary of AEP or Newco are
reserved for issuance; and (v) there are no contracts, agreements, commitments
or arrangements obligating AEP or any of its Significant Subsidiaries or Newco
(A) to offer, sell, issue, grant, pledge, dispose of or encumber any Equity
Securities of any of the Significant Subsidiaries of AEP or Newco or (B) to
redeem, purchase or acquire, or offer to purchase or acquire, any outstanding
Equity Securities of any of the Significant Subsidiaries of AEP or Newco or (C)
to grant any Lien on any outstanding shares of capital stock of, or other equity
interest in, any of the Significant Subsidiaries of AEP or Newco.
(d) ADVERSE CLAIMS. There are no voting trusts, proxies or other agreements,
commitments or understandings of any character to which AEP or any of its
Subsidiaries is a party or by which AEP or any of its Subsidiaries is bound with
respect to the voting of any shares of capital stock of AEP, any of its
Significant Subsidiaries or Newco, with respect to the registration of the
offering, sale or delivery of any shares of capital stock of AEP or any of its
Significant Subsidiaries or Newco under the Securities Act or otherwise relating
to any shares of capital stock of AEP, any of its Significant Subsidiaries or
Newco.
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SECTION 5.4 AUTHORIZATION OF AGREEMENT. Each of AEP and Newco has all
requisite corporate power and authority to execute and deliver this Agreement
and each instrument required hereby to be executed and delivered by it at the
Closing and, subject to obtaining the Required AEP Vote, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby. The execution and delivery by each of AEP and Newco of this
Agreement and each instrument required hereby to be executed and delivered by it
at the Closing and the performance of their respective obligations hereunder and
thereunder have been duly and validly authorized by all requisite corporate
action on the part of AEP and Newco (other than the Required AEP Vote). This
Agreement has been duly executed and delivered by AEP and Newco and (assuming
due authorization, execution and delivery hereof by the Company) constitutes a
legal, valid and binding obligation of each of AEP and Newco, enforceable
against each of them in accordance with its terms, except as the same may be
limited by legal principles of general applicability governing the application
and availability of equitable remedies.
SECTION 5.5 REGULATION AND APPROVALS. (a) UTILITY REGULATION. AEP is a
public utility holding company registered under, and subject to the provisions
of, the Holding Company Act, and AEP is the parent, owning all the outstanding
common stock, of seven Domestic Public Utility Companies: (i) APCo, which
provides regulated retail electricity service in the States of Virginia and West
Virginia and which is also regulated in the State of Tennessee; (ii) CSPCo,
which provides regulated retail electricity service in the State of Ohio; (iii)
I&M, which provides regulated retail electricity service in the States of
Indiana and Michigan; (iv) KEPCo, which provides regulated retail electricity
service in the State of Kentucky; (v) KPC, which provides regulated retail
electricity service in the State of Tennessee; (vi) OPCo, which provides
regulated retail electricity service in the State of Ohio and which is also
regulated in the State of West Virginia and (vii) WPC, which provides regulated
retail electricity service in the State of West Virginia. In addition, AEP
indirectly owns 50% of Yorkshire Electricity Group plc, a regulated regional
electricity company in the United Kingdom ("Yorkshire"). Yorkshire is a Foreign
Utility Company. Except for regulation of the aforesaid companies by FERC under
the Federal Power Act, by the Commission under the Holding Company Act and by
said states and as set forth in SECTION 5.5(a) of AEP's Disclosure Letter,
neither AEP nor any of its Subsidiaries is subject to regulation as a public
utility or a public service company (or similar designation) by any state in the
United States or any municipality or other political subdivision of any state,
by the United States or by any Governmental Authority of the United States or by
any foreign country.
(b) APPROVALS. Except for the applicable requirements set forth in SECTION
5.5(b) of AEP's Disclosure Letter, no declaration, filing or registration with,
no waiting period imposed by and no Permit or Order of, any Governmental
Authority is required under any Law, Regulation or Order applicable to AEP or
any of its Subsidiaries to permit AEP or Newco to execute, deliver or perform
this Agreement or any instrument required hereby to be executed and delivered by
either of them at the Closing, the failure to obtain which could reasonably be
expected to have a Material Adverse Effect on AEP.
SECTION 5.6 NO VIOLATION. Assuming receipt of all Permits and Orders
indicated as required in SECTION 5.5(b) and receipt of the Required AEP Vote,
neither the execution and delivery by AEP or Newco of this Agreement or any
instrument required hereby to be executed and delivered by either of them at the
Closing nor the performance by AEP or Newco of their respective obligations
hereunder or thereunder will (a) violate or breach the terms of or cause a
default under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination, cancellation or acceleration
of any obligation under, or result in the creation of any lien, security
interest, charge or encumbrance upon, any of the properties or assets of AEP or
any of its Subsidiaries under (i) any Law, Regulation, Permit or Order
applicable to AEP or any of its Subsidiaries, (ii) the certificate of
incorporation or bylaws or similar organizational documents of AEP or any of its
Subsidiaries or (iii) any note, bond, mortgage, indenture, deed of trust,
license, franchise, concession, lease, contract or agreement to which AEP or any
of its Subsidiaries is a party or by which it or any of its properties or assets
is bound, or (b) with the passage of time, the giving of notice or the taking of
any action by a third Person, have any of the effects set forth in
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clause (a) of this SECTION, except in any such case for any matters described in
clauses (i) and (iii) of this SECTION that could not reasonably be expected to
have a material adverse effect upon the ability of AEP or Newco to perform their
respective obligations under this Agreement or a Material Adverse Effect on AEP.
Prior to the execution of this Agreement, the Board of Directors of AEP has
taken all necessary action to cause this Agreement and the transactions
contemplated hereby to be exempt from the provisions of SECTION 912 of the New
York Law.
SECTION 5.7 REPORTS. (a) REPORTS. Since January 1, 1993, AEP and its
Subsidiaries have filed or caused to be filed (i) all SEC Reports of AEP or any
of its Subsidiaries required to be filed with the Commission and (ii) all other
Reports of AEP or any of its Subsidiaries required to be filed with any other
Governmental Authorities, including the FERC, the Commission (under the Holding
Company Act), the NRC and State Regulatory Commissions, except where the failure
to file any such Reports of AEP or any of its Subsidiaries could not reasonably
be expected to have a Material Adverse Effect on AEP. AEP has made available to
the Company a true and complete copy of each such SEC Report. The Reports of AEP
and its Subsidiaries, including all those filed after the date of this Agreement
and prior to the Effective Time, (i) were or will be prepared in all material
respects in accordance with the requirements of applicable Law and (ii), in the
case of the SEC Reports of AEP and its Subsidiaries, did not at the time they
were filed, or will not at the time they are filed, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(b) FINANCIAL STATEMENTS. The AEP Consolidated Financial Statements and any
consolidated financial statements of AEP (including any related notes thereto)
contained in any SEC Reports of AEP or any of its Subsidiaries filed with the
Commission after the date of this Agreement (i) have been or will have been
prepared in accordance with the published Regulations of the Commission and in
accordance with GAAP (except (A) to the extent required by changes in GAAP, (B)
with respect to unaudited financial statements as permitted by Form 10-Q and
(C), with respect to SEC Reports of AEP filed prior to the date of this
Agreement, as may be indicated in the notes thereto) and (ii) fairly present the
consolidated financial position of AEP and its Subsidiaries as of the respective
dates thereof and the consolidated results of their operations and cash flows
for the periods indicated (including, in the case of any unaudited interim
financial statements, reasonable estimates of normal and recurring year-end
adjustments).
(c) NO OMISSIONS. Except for matters disclosed in SECTION 5.7(c) of AEP's
Disclosure Letter, or matters disclosed in AEP's SEC Reports filed with the
Commission prior to the date hereof, there exist no liabilities or obligations
of AEP and its Subsidiaries, whether accrued, absolute, contingent or
threatened, that would be required to be reflected, reserved for or disclosed
under GAAP in consolidated financial statements of AEP as of and for the period
ended on the dates on which this representation and warranty is made or deemed
to be made, other than (i) liabilities or obligations that are adequately
reflected, reserved for or disclosed in AEP's Consolidated Financial Statements,
(ii) liabilities or obligations incurred in the ordinary course of business of
AEP consistent with past practice since September 30, 1997, (iii) liabilities or
obligations the incurrence of which would not have been prohibited by SECTION
6.1 or 6.2(b) had such sections been in effect since September 30, 1997 and (iv)
other liabilities and obligations that could not reasonably be expected to have
a Material Adverse Effect on AEP.
SECTION 5.8 NO MATERIAL ADVERSE EFFECT; CONDUCT. (a) MATERIAL ADVERSE
CHANGES. Except as set forth in SECTION 5.8(a) of AEP's Disclosure Letter, since
September 30, 1997, no event (other than any event that is of general
application to the electric utility industry in the United States or the United
Kingdom) has occurred that, individually or together with other similar events,
has had, and to the Knowledge of AEP, no fact or condition (other than any fact
or condition that is of general application to the electric utility industry in
the United States or the United Kingdom) exists that could reasonably be
expected to have, a Material Adverse Effect on AEP.
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(b) PROSCRIBED CONDUCT. Except as set forth in SECTION 5.8(b) of AEP's
Disclosure Letter, during the period from September 30, 1997 to the date of this
Agreement, neither AEP nor any of its Subsidiaries has failed to conduct its
business in the ordinary course consistent with past practice, other than any
conduct that would not have been prohibited by SECTION 6.1 or SECTION 6.2(b) had
such sections been in effect since September 30, 1997.
SECTION 5.9 PERMITS; COMPLIANCE. (a) GENERAL. To the Knowledge of AEP, AEP
and its Subsidiaries have obtained all Orders and Permits that are necessary to
carry on their businesses as currently conducted, except for any such Orders or
Permits that the failure to possess, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on AEP. All such Orders
and Permits are in full force and effect, have not been violated in any respect
that could reasonably be expected to have a Material Adverse Effect on AEP and
no suspension, revocation or cancellation thereof has occurred or, to the
Knowledge of AEP, been threatened and there is no action, proceeding or
investigation pending or, to the Knowledge of AEP, threatened regarding
suspension, revocation or cancellation of any of such Permits or Orders, except
where the suspension, revocation or cancellation of such Permits or Orders could
not reasonably be expected to have a Material Adverse Effect on AEP.
(b) COOK NUCLEAR PLANT. A Subsidiary of AEP is the owner of the Cook Nuclear
Plant. Except as set forth in SECTION 5.9(b) of AEP's Disclosure Letter, to the
Knowledge of AEP, the operations of the Cook Nuclear Plant have at all times
been conducted in compliance with applicable health, safety, regulatory and
other legal requirements, except where the failure to be so in compliance in the
aggregate could not reasonably be expected to have a Material Adverse Effect on
AEP. Except as set forth in SECTION 5.9(b) of AEP's Disclosure Letter, to the
Knowledge of AEP, the operations of the Cook Nuclear Plant are not the subject
of any outstanding notices of violation or requests for information from the NRC
or any other agency with jurisdiction over such facility. To the Knowledge of
AEP, AEP maintains, and is in compliance with, an emergency plan designed to
protect the health and safety of the public in the event of an unplanned release
of radioactive materials from the Cook Nuclear Plant, and the NRC has determined
that such plan is in compliance with its requirements. To the Knowledge of AEP,
liability insurance to the full extent required by law for operating nuclear
facilities remains in full force and effect with respect to the Cook Nuclear
Plant, and the amount of such insurance has been approved by the NRC. To the
Knowledge of AEP, plans for the decommissioning of the Cook Nuclear Plant, and
for the storage of spent nuclear fuel, conform with the requirements of
applicable law, and the owner of such facility has funded such plans to the
extent required by Law.
SECTION 5.10 LITIGATION; COMPLIANCE WITH LAWS. There are no actions, suits,
investigations or proceedings (including any proceedings in arbitration) pending
or, to the Knowledge of AEP, threatened against AEP or any of its Subsidiaries,
at law or in equity, in any Court or before or by any Governmental Authority,
except actions, suits or proceedings that (a) are fully and accurately disclosed
in AEP's SEC Reports filed with the Commission prior to the date hereof, (b) are
set forth in SECTION 5.10 or SECTION 5.14 of AEP's Disclosure Letter or (c)
individually or, with respect to multiple actions, suits or proceedings that
allege similar theories of recovery based on similar facts, in the aggregate,
could not reasonably be expected to have a Material Adverse Effect on AEP.
Except as set forth in SECTION 5.10 of AEP's Disclosure Letter, there are no
Material claims pending or, to the Knowledge of AEP, threatened by any Persons
against AEP or any of its Subsidiaries for indemnification pursuant to any
statute, organizational document, contract or otherwise with respect to any
action, suit, investigation or proceeding pending in any Court or before or by
any Governmental Authority. Except as set forth in SECTION 5.10 of AEP's
Disclosure Letter, AEP and its Subsidiaries are in substantial compliance with
all applicable Laws and Regulations and are not in default with respect to any
Order applicable to AEP or any of its Subsidiaries, except such events of
noncompliance or defaults that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on AEP.
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SECTION 5.11 OWNERSHIP OF COMPANY COMMON STOCK. Neither AEP nor any of its
Affiliates "beneficially own" (as such term is defined for purposes of SECTION
13(d) of the Exchange Act) any shares of Company Common Stock.
SECTION 5.12 EMPLOYEE BENEFIT PLANS. (a) LISTING. Each AEP Benefit Plan is
listed in SECTION 5.12(a) of AEP's Disclosure Letter, including, with respect to
Terminated AEP Benefit Plans, the date of termination. True and correct copies
of each of the following have been made available to the Company with respect to
each Current AEP Benefit Plan: (i) the three most recent annual reports (Form
5500) filed with the IRS, (ii) the plan document, (iii) the trust agreement, if
any, (iv) the most recent summary plan description if required by ERISA, (v) the
three most recent actuarial reports or valuations relating to each Current AEP
Benefit Plan subject to Title IV of ERISA and (vi) the most recent determination
letter, if any, issued by the IRS with respect to any Current AEP Benefit Plan
intended to be qualified under SECTION 401 of the Code.
(b) MATERIAL ADVERSE CHANGES. With respect to each AEP Benefit Plan, no
event has occurred and, to the Knowledge of AEP, there exists no condition or
set of circumstances in connection with which AEP or any of its Subsidiaries
could be subject to any liability under the terms of such AEP Benefit Plan,
ERISA, the Code or any other applicable Law, other than any condition or set of
circumstances that could not reasonably be expected to have a Material Adverse
Effect on AEP.
(c) QUALIFIED STATUS OF CURRENT PLANS. Except as set forth in SECTION
5.12(c) of AEP's Disclosure Letter, each Current AEP Benefit Plan intended to be
qualified under SECTION 401 of the Code (i) satisfies in form the requirements
of such SECTION, (ii) has received a favorable determination letter from the IRS
regarding such qualified status, (iii) has not, since receipt of the most recent
favorable determination letter, been amended, and, (iv) to the Knowledge of AEP,
has not been operated in a way that would adversely affect its qualified status.
(d) NO TERMINATION OF CURRENT PLANS. Except as set forth in SECTION 5.12(d)
of AEP's Disclosure Letter, there has been no termination or partial termination
of any Current AEP Benefit Plan within the meaning of SECTION 411(d)(3) of the
Code.
(e) TERMINATED PLANS. Any Terminated AEP Benefit Plan intended to have been
qualified under SECTION 401 of the Code received a favorable determination
letter from the IRS with respect to its termination.
(f) CLAIMS. There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the Knowledge of AEP, threatened against, or
with respect to, any AEP Benefit Plan or its assets that could reasonably be
expected to have a Material Adverse Effect on AEP and, to the Knowledge of AEP,
no facts or circumstances exist that could give rise to any such actions, suits
or claims.
(g) PENDING MATTERS. To the Knowledge of AEP, there is no matter pending
(other than routine qualification determination filings) with respect to any AEP
Benefit Plan before the IRS, the Department of Labor, the PBGC or other
Government Authority.
(h) TIMELY CONTRIBUTIONS. All contributions required to be made to AEP
Benefit Plans pursuant to their terms and the provisions of ERISA, the Code or
any applicable Law have been timely made.
(i) CURRENT PLANS SUBJECT TO TITLE IV OF ERISA. As to each Current AEP
Benefit Plan subject to Title IV of ERISA, (i) there has been no event or
condition that presents a significant risk of plan termination, (ii) no
accumulated funding deficiency, whether or not waived, within the meaning of
SECTION 302 of ERISA or SECTION 412 of the Code has been incurred, (iii) no
reportable event within the meaning of SECTION 4043 of ERISA (for which the
disclosure requirements of Regulation section 4043.1 et seq. promulgated by the
PBGC have not been waived) has occurred within six years prior to the date of
this Agreement, (iv) no notice of intent to terminate such Benefit Plan has been
given under SECTION 4041 of ERISA, (v) no proceeding has been instituted under
SECTION 4042 of ERISA to terminate such
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Benefit Plan, (vi) no liability to the PBGC has been incurred (other than with
respect to required premium payments) and (vii) the assets of such Benefit Plan
equal or exceed the actuarial present value of the benefit liabilities, within
the meaning of SECTION 4041 of ERISA, under such Benefit Plan, based upon
reasonable actuarial assumptions and the asset valuation principles established
by the PBGC.
(j) EXCESS PARACHUTE PAYMENTS. Except as set forth in SECTION 5.12(j) of
AEP's Disclosure Letter, in connection with the consummation of the transactions
contemplated by this Agreement, no payments of money or other property,
acceleration of benefit or provision of other rights have been or will be made
under any Current AEP Benefit Plan that could be reasonably be expected to be
nondeductible under SECTION 280G of the Code, whether or not some other
subsequent action or event would be required to cause such payment, acceleration
or provision to be triggered.
(k) NO REQUIRED INCREASE IN CONTRIBUTIONS. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not (i) require AEP or any of its Subsidiaries to make a larger contribution to,
or pay greater benefits or provide other rights under, any Current AEP Benefit
Plan than it otherwise would, whether or not some other subsequent action or
event would be required to cause such payment or provision to be triggered or
(ii) create or give rise to any additional vested rights or service credits
under any Current AEP Benefit Plan, whether or not some other subsequent action
or event would be required to cause such creation or acceleration to be
triggered.
(l) INTENTIONALLY OMITTED.
(m) RETIREE BENEFITS. Except as set forth in SECTION 5.12(m) of AEP's
Disclosure Letter, no Current AEP Benefit Plan (other than an AEP Benefit Plan
maintained outside the United States that is either fully insured or fully
funded through a retirement plan) provides retiree medical or retiree life
insurance benefits to any Person and neither AEP nor any of its Subsidiaries is
contractually or otherwise obligated (whether or not in writing) to provide any
Person with life insurance or medical benefits upon retirement or termination of
employment, other than as required by the provisions of SECTIONs 601 through 608
of ERISA and SECTION 4980B of the Code.
(n) MULTIEMPLOYER PLANS. Except as set forth in SECTION 5.12(n) of AEP's
Disclosure Letter, neither AEP nor any member of its Controlled Group
contributes or has an obligation to contribute, and has not within six years
prior to the date of this Agreement contributed, had an obligation to
contribute, or had any other liability to a multiemployer plan within the
meaning of SECTION 3(37) of ERISA. Neither AEP nor any member of its Controlled
Group participate in any multiemployer plan with withdrawal liability on the
date hereof which could reasonably be expected to have a Material Adverse Effect
on AEP.
(o) COLLECTIVE BARGAINING CONTRACTS. Except as set forth in SECTION 5.12(o)
of AEP's Disclosure Schedule, (i) no collective bargaining agreement is being
negotiated by AEP or any of its Subsidiaries, (ii) there is no pending or, to
the Knowledge of AEP, threatened labor dispute, strike or work stoppage against
AEP or any of its Subsidiaries that could reasonably be expected to have a
Material Adverse Effect on AEP, (iii) to the Knowledge of AEP, neither AEP or
any of its Subsidiaries nor any representative or employee of AEP or any of its
Subsidiaries has in the United States committed any Material unfair labor
practices in connection with the operation of the business of AEP and its
Subsidiaries, and (i) there is no pending or, to the Knowledge of AEP,
threatened charge or complaint against AEP or any of its Subsidiaries by the
National Labor Relations Board or any comparable agency of any state of the
United States.
SECTION 5.13 TAXES. (a) TAX RETURNS AND TAXES. Except for such matters as
could not reasonably be expected to have a Material Adverse Effect on AEP, (i)
all Tax Returns that are required to be filed by or with respect to AEP or any
of its Subsidiaries on or before the Effective Time have been or will be timely
filed, (ii) all Taxes that are due and payable by AEP or any of its Subsidiaries
on or before the Effective Time have been or will be timely paid in full or
adequate reserves have been established for the payment of such Taxes, (iii) all
withholding Tax requirements imposed on or with respect to AEP or any of its
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Subsidiaries and that are required to be satisfied at or before the Effective
Time have been or will be satisfied in full in all respects and (iv) no penalty,
interest or other charge is or will become due with respect to the late filing
of any such Tax Return or late payment of any Tax by AEP or any of its
Subsidiaries.
(b) AUDITS. Except as set forth in SECTION 5.13(b) of AEP's Disclosure
Letter, all Material Tax Returns required to be filed by AEP or any of its
Subsidiaries have been audited (and such audit has become final) by the
applicable Governmental Authority or the applicable statute of limitations has
expired for the period covered by such Tax Returns.
(c) EXTENSION OF TIME. Except as set forth in SECTION 5.13(c) of AEP's
Disclosure Letter, there is not in force any extension of time with respect to
the due date for the filing of any Material Tax Return required to be filed by
AEP or any of its Subsidiaries or any waiver or agreement for any extension of
time for the assessment or payment of any Tax due with respect to the period
covered by any Tax Return filed, or required to be filed, by AEP or any of its
Subsidiaries.
(d) CLAIMS. No Material issues have been raised by any Taxing authority in
connection with the audit or examination of any Tax Return filed, or required to
be filed, by AEP or any of its Subsidiaries, and there is no claim against AEP
or any of its Subsidiaries for any Taxes, and no assessment, deficiency or
adjustment has been asserted or proposed with respect to any Tax Return, that,
in either case, could reasonably be expected to have a Material Adverse Effect
on AEP.
(e) AFFILIATED GROUP. Except as set forth in SECTION 5.13(e) of AEP's
Disclosure Letter, none of AEP and its Subsidiaries, during the last ten years,
has been a member of an affiliated group filing a consolidated Federal income
Tax Return other than an affiliated group of which AEP is the common parent.
SECTION 5.14 ENVIRONMENTAL MATTERS. Except for matters disclosed in SECTION
5.14 of AEP's Disclosure Letter, or matters disclosed in AEP's SEC Reports filed
with the Commission prior to the date hereof, and except for matters that,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on AEP, (a) the properties, operations and activities of
AEP and its Subsidiaries are in compliance with all applicable Environmental
Laws; (b) AEP and its Subsidiaries and the properties and operations of AEP and
its Subsidiaries are not subject to any existing, pending or, to the Knowledge
of AEP, threatened action, suit, investigation, inquiry or proceeding by or
before any Court or Governmental Authority under any Environmental Law; (c) all
Permits, if any, required to be obtained or filed by AEP or any of its
Subsidiaries under any Environmental Law in connection with the business of AEP
and its Subsidiaries have been obtained or filed and are valid and currently in
full force and effect; (d) to the Knowledge of AEP, there has been no release of
any hazardous substance, pollutant or contaminant into the environment by AEP or
its Subsidiaries or in connection with their properties or operations; (e) to
the Knowledge of AEP, there has been no exposure of any Person or property to
any hazardous substance, pollutant or contaminant in connection with the
properties, operations and activities of AEP and its Subsidiaries; and (f) AEP
and its Subsidiaries have made available to the Company all internal and
external environmental audits and studies and all correspondence on substantial
environmental matters (in each case relevant to AEP or any of its Subsidiaries)
in the possession of AEP or its Subsidiaries.
SECTION 5.15 INSURANCE. AEP and its Subsidiaries own and are, and have been
continuously since January 1, 1993, beneficiaries under all such insurance
policies underwritten by reputable insurers that, as to risks insured, coverages
and related limits and deductibles, are customary in the industries in which AEP
and its Subsidiaries operate. Except as disclosed in SECTION 5.15 of AEP's
Disclosure Letter, neither AEP nor any of it Subsidiaries has received any
notice of cancellation or termination of any Material insurance policy as to
which it is a named beneficiary. All Material insurance policies of AEP and its
Subsidiaries are valid and enforceable against the underwriters thereof in
accordance with their terms,
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except as the same may be limited by legal principles of general applicability
governing the application and availability of equitable remedies.
SECTION 5.16 POOLING; TAX MATTERS. Neither AEP nor, to the Knowledge of AEP,
any of its Affiliates has taken or agreed to take any action that would prevent
the Merger from being treated as a "pooling of interests" in accordance with
generally accepted accounting principles and the Regulations of the Commission
or from constituting a reorganization within the meaning of section 368(a) of
the Code.
SECTION 5.17 AFFILIATES. SECTION 5.17 of AEP's Disclosure Letter contains a
true and complete list of all Persons who, to the Knowledge of AEP, may be
deemed to be "affiliates" of AEP as such term is used under Rule 145 under the
Securities Act, including all directors and executive officers of AEP.
SECTION 5.18 OPINION OF FINANCIAL ADVISOR. AEP has received the opinion of
Salomon Smith Barney on the date of this Agreement to the effect that the
consideration to be paid by AEP in the Merger is fair, from a financial point of
view, to AEP.
SECTION 5.19 BROKERS. Except as set forth in SECTION 5.19 of AEP's
Disclosure Letter, no broker, finder or investment banker (other than Salomon
Smith Barney) is entitled to any brokerage, finder's or other fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of AEP. Prior to the date of this Agreement,
AEP has made available to the Company complete and correct copies of all
agreements between AEP and Salomon Smith Barney pursuant to which such firm will
be entitled to any payment relating to the transactions contemplated by this
Agreement.
SECTION 5.20 VOTE REQUIRED. The affirmative vote of holders of a majority of
the outstanding shares of AEP Common Stock is the only vote of holders of any
class or series of capital stock of AEP necessary to approve the amendment to
the restated certificate of incorporation of AEP in order to increase the number
of authorized shares of AEP Common Stock to be issued in the Merger (the
"Charter Amendment"); and the affirmative vote of holders of shares of AEP
Common Stock representing a majority of the total votes cast at a meeting of the
holders of outstanding shares of AEP Common Stock is the only vote of the
holders of any class or series of AEP capital stock necessary under the rules of
the NYSE to approve the issuance of shares of AEP Common Stock to be issued in
the Merger (the "Share Issuance"). Such votes of the holders of shares of AEP
Common Stock necessary to approve the Charter Amendment and the Share Issuance
are hereinafter collectively referred to as the "Required AEP Vote" and are the
only votes of the holders of any class or series of capital stock of AEP or its
Subsidiaries required to approve the Merger, this Agreement or the transactions
contemplated hereby, except for the vote of AEP as the sole stockholder of
Newco. AEP, in its capacity as sole stockholder of Newco, has approved this
Agreement and the transactions contemplated hereby.
SECTION 5.21 NO BUSINESS ACTIVITIES. Newco was organized solely for the
purpose of the transactions contemplated hereby and has not conducted any
activities other than in connection with the organization of Newco, the
negotiation and execution of this Agreement and the consummation of the
transaction contemplated hereby. Newco has no Subsidiaries.
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ARTICLE VI
COVENANTS
SECTION 6.1 AFFIRMATIVE COVENANTS. Each of the Company and AEP hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by the
other, it will and will cause its Subsidiaries to:
(a) operate its business in the ordinary course consistent with past or
then current industry practices;
(b) use all commercially reasonable efforts to preserve substantially
intact its business organization and goodwill, maintain its rights and
franchises, retain the services of its respective key employees and maintain
its goodwill and relationships with its respective customers and suppliers;
(c) maintain and keep its properties and assets in as good repair and
condition as at present, ordinary wear and tear excepted, and maintain
supplies and inventories in quantities consistent with its customary
business practice;
(d) use all commercially reasonable efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of coverage to
that currently maintained;
(e) use all commercially reasonable efforts to maintain in effect all
existing Orders and Permits pursuant to which such party or its Subsidiaries
operate, and timely to apply for and obtain any additional Orders and
Permits that are or will be required for the current or currently planned
operations of such party or its Subsidiaries; and
(f) consult and confer with one another on a frequent and reasonable
basis in order to ensure compliance with the covenants contained in this
Agreement and otherwise as necessary to consummate and make effective the
transactions contemplated by this Agreement, provided, that, except as
otherwise expressly set forth herein, AEP and the Company shall each retain
discretion and control over its affairs;
except for any matters that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on the Company or AEP,
as the case may be, provided, that, no action by the Company or its Subsidiaries
or AEP or its Subsidiaries, as the case may be, with respect to matters
specifically addressed by any provision of Section 6.2 shall be deemed a breach
of this Section 6.1 unless such action would constitute a breach of one or more
of such provisions of Section 6.2.
SECTION 6.2 NEGATIVE COVENANTS. (a) COMPANY COVENANTS. The Company
covenants and agrees that, except as expressly otherwise contemplated by this
Agreement or Section 6.2(a) of the Company's Disclosure Letter or otherwise
consented to in writing by AEP, which consent shall not be unreasonably
withheld, from the date of this Agreement until the Closing, it will not do, and
will not permit any of its Subsidiaries to do, any of the following:
(i) (A) increase the compensation payable to or to become payable to any
director or executive officer; (B) grant any severance or termination pay;
(C) amend or otherwise modify the terms of any outstanding options, warrants
or rights, the effect of which shall be to make such terms more favorable to
the holders thereof; (D) take any action to accelerate the vesting of any
outstanding Company stock options; (E) amend or take any other actions to
increase the amount or accelerate the payment or vesting of any benefit
under any Benefit Plan (including the acceleration of vesting, waiving of
performance criteria or the adjustment of awards or any other actions
permitted upon a change in control of such party or upon a filing under
Section 13(d) or 14(d) of the Exchange Act with respect to such party), or
(F) contribute, transfer or otherwise provide any cash, securities or other
property to any grantee, trust, escrow or other arrangement that has the
effect of providing or setting aside assets for benefits payable pursuant to
any termination, severance, or other change in control agreement;
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except (i) pursuant to any contract, agreement or other legal obligation of
the Company or any of its Subsidiaries existing at the date of this
Agreement, (ii) increases in salary payable or to become payable upon
promotion to an office having greater operational responsibilities, (iii),
in the case of severance or termination payments, pursuant to the severance
policy of the Company or its Subsidiaries existing at the date of this
Agreement, (iv) in the case of options, warrants, rights or Benefit Plans,
amendments required by ERISA or other applicable law and (v) except with
respect to the management employees of the Company who are parties to Change
of Control Agreements with the Company on the date hereof, any such
increase, grant, amendment, modification or action in the ordinary course of
business consistent with past practice;
(ii) (A) enter into any employment or severance agreement with, any
director, officer or employee, either individually or as part of a class of
similarly situated persons or (B) establish, adopt or enter into any new
Benefit Plan; except employment and severance agreements entered into for
the benefit of any newly employed or promoted officers or employees, in
which case, the terms of such agreements shall be reasonably consistent with
those existing at the date of such employment and except for Company Benefit
Plans relating to health and life insurance benefits established, adopted or
entered into in the ordinary course of business consistent with past
practice;
(iii) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock of the Company or any
Significant Subsidiary, except (A) dividends declared and paid by the
Company with respect to the outstanding Company Common Stock at
approximately the same times and at a rate per share of Company Common Stock
not to exceed the rate per share of Company Common Stock as were declared
and paid during the year ending December 31, 1997 and (B) dividends and
distributions by a wholly owned Subsidiary of the Company to the Company or
another wholly owned Subsidiary of the Company and (C) dividends and
distributions declared and paid with respect to outstanding shares of
preferred stock or similar obligations of the Company's Subsidiaries;
(iv) (A) redeem, purchase or acquire any outstanding Equity Securities
of the Company or any of its Significant Subsidiaries other than
redemptions, repurchases and other acquisitions of Equity Securities in the
ordinary course of business consistent with past practice and that will not
cause a failure of the condition contained in Section 8.1(e) to be
satisfied, including purchases, redemptions and other acquisitions (1) in
connection with the administration of employee benefit, direct stock
purchase and dividend reinvestment plans as in effect on the date hereof in
the ordinary course of the operation of such plans, (2) required by the
respective terms of any Equity Security, (3) in connection with the
refunding of preferred Equity Securities or through the issuance of
additional preferred Equity Securities or indebtedness, as the case may be,
at a lower cost of funds (calculating such cost on an aggregate after-tax
basis) or through the issuance of indebtedness not prohibited by Section
6.2(a)(xi), (4) of Company Common Stock in the open market to fund up to
$10,000,000 in any fiscal year of any acquisitions not prohibited by Section
6.2(a)(vii), (5) in intercompany transactions and (6) by the Company or any
of its wholly-owned Subsidiaries directly from any wholly-owned Subsidiary
of the Company in exchange for capital contributions or loans to such
Subsidiary); or (B) split, combine or reclassify the Company Common Stock or
effect any recapitalization of the Company;
(v) offer, sell, issue or grant, or authorize the offering, sale,
issuance or grant, of any Equity Securities of the Company or any of its
Significant Subsidiaries; except issuances of (A) Company Common Stock (1)
upon the exercise of Company stock options outstanding at the date of this
Agreement in accordance with the terms thereof, (2) upon the expiration of
any restrictions upon issuance of any grant existing at the date of this
Agreement of restricted stock or stock bonus pursuant to the terms of any
Benefit Plans of the Company or any of its Subsidiaries or (3) periodically
pursuant to the terms of any Benefit Plans of the Company or any of its
Subsidiaries; and (B) preferred stock or similar securities of any
Subsidiary for the purpose of financing investments or
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capital expenditures not prohibited under this Agreement or refinancing
existing indebtedness or preferred stock or similar obligations of such
Subsidiary;
(vi) grant any Lien (other than Permitted Encumbrances) with respect to
any shares of capital stock of, or other equity interests in, any
Significant Subsidiary of the Company owned beneficially by the Company or
any other Subsidiary of the Company;
(vii) acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or in any other manner acquiring,
any business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets of any
other Person; except (A) the purchase of assets from suppliers or vendors in
the ordinary course of business and consistent with past or then standard
industry practice, (B) acquisitions of equity interests, assets (excluding
the acquisition of assets permitted in clause (A) above) and businesses
related to the core domestic and U.K. regulated businesses in which the
Company and its Subsidiaries are currently engaged (the "Company Core
Businesses") the fair market value of the total consideration (including the
value of indebtedness (other than non-recourse indebtedness) or other
liability acquired or assumed) for which does not exceed 105% of the amount
budgeted by the Company for such acquisitions as set forth in Section
6.2(a)(vii) of the Company's Disclosure Letter and (C) in connection with a
Company Permitted Transaction;
(viii) except in connection with Company Permitted Transactions or as
required by Law, sell, lease, exchange or otherwise dispose of, or grant any
Lien (other than a Permitted Encumbrance) with respect to, any of the assets
of the Company or any of its Subsidiaries that are Material to the Company,
except dispositions of assets other than generation assets and inventories
in the ordinary course of business and consistent with past practice;
(ix) adopt any amendments to its charter or bylaws or other
organizational documents that could reasonably be expected to have a
material adverse effect on the ability of the Company to perform its
obligations under this Agreement;
(x) (A) change any of its methods of accounting in effect at September
30, 1997, except as may comply with GAAP, (B) make or rescind any election
relating to Taxes that are Material to the Company (other than any election
that must be made periodically and that is made consistent with past
practice) or (C) change any of its methods of reporting income or deductions
for Federal income tax purposes from those employed in the preparation of
the Federal income tax returns for the taxable year ending December 31,
1996, except, in the case of each of clauses (A), (B) and (C), as may be
required by Law and, in the case of clause (C), for matters that could not
reasonably be expected to have a Material Adverse Effect on the Company;
(xi) except in connection with a Company Permitted Transaction or as
required by Law, incur any obligations for borrowed money or purchase money
indebtedness that are Material to the Company, whether or not evidenced by a
note, bond, debenture or similar instrument, except (A) drawings under
credit lines existing at the date of this Agreement or renewals or
replacements thereof, (B) obligations evidenced by debt securities issued by
a Subsidiary of the Company for the purpose of financing investments or
capital expenditures permitted under this Agreement or refinancing existing
indebtedness or preferred stock obligations of such Subsidiary and (C)
indebtedness incurred in the ordinary course of business consistent with
past or then standard industry practice;
(xii) unless required by the terms thereof, release any third Person from
its obligations under any existing standstill agreement or similar agreement
whether included in a confidentiality agreement or otherwise;
(xiii) except in connection with a Company Permitted Transaction or as
required by Law, enter into any Material Contract with any third Person
(other than customers and vendors in the ordinary
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course of business) that provides for an exclusive arrangement with that
third Person or is substantially more restrictive on the Company or any of
its Subsidiaries or substantially less advantageous to the Company or any of
its Subsidiaries than Material Contracts existing on the date hereof;
(xiv) except in connection with a Company Permitted Transaction or as
required by Law, make capital and non-fuel operational and maintenance
expenditures relating to the Company Core Businesses in excess of 105% of
the amount budgeted by the Company for capital and non-fuel operational and
maintenance expenditures as set forth in Section 6.2(a)(vii) of the
Company's Disclosure Letter;
(xv) except pursuant to any contract, agreement or other legal obligation
of the Company or any of its Subsidiaries existing at the date of this
Agreement, make, or commit to make, any investments in, or loans or capital
contributions to, or to undertake any guarantees or other obligations with
respect to, any joint venture (whether organized as a corporation,
partnership or other legal entity) in excess of 105% of the amount budgeted
by the Company for such investments relating to the Company Core Businesses
as set forth in Section 6.2(a)(vii) of the Company's Disclosure Letter or in
connection with a Company Permitted Transaction; or
(xvi) agree in writing or otherwise to do any of the foregoing.
(b) AEP COVENANTS. AEP covenants and agrees that, except as expressly
contemplated by this Agreement or Section 6.2(b) of AEP's Disclosure Letter or
otherwise consented to in writing by the Company, which consent shall not be
unreasonably withheld, from the date of this Agreement until the Effective Time,
it will not do, and will not permit any of its Subsidiaries to do, any of the
following:
(i) (A) increase the compensation payable to or to become payable to any
director or executive officer; (B) grant any severance or termination pay;
(C) amend or otherwise modify the terms of any outstanding options, warrants
or rights, the effect of which shall be to make such terms more favorable to
the holders thereof; (D) amend or take any other actions to increase the
amount or accelerate the payment or vesting of any benefit under any Benefit
Plan (including the acceleration of vesting, waiving of performance criteria
or the adjustment of awards or any other actions permitted upon a change in
control of such party or upon a filing under Section 13(d) or 14(d) of the
Exchange Act with respect to such party); except (i) pursuant to any
contract, agreement or other legal obligation of AEP or any of its
Subsidiaries existing at the date of this Agreement, (ii) increases in
salary payable or to become payable upon promotion to an office having
greater operational responsibilities, (iii), in the case of severance or
termination payments, pursuant to the severance policy of AEP or its
Subsidiaries existing at the date of this Agreement, (iv) in the case of
options, warrants, rights or Benefit Plans, amendments required by ERISA or
other applicable law and (v) any (including incentive) increase, grant,
amendment, modification or action in the ordinary course of business
consistent with past practice;
(ii) (A) enter into any employment or severance agreement with, any
director, officer or employee, either individually or as part of a class of
similarly situated persons or (B) establish, adopt or enter into any new
Benefit Plan; except (1) employment and severance agreements entered into
for the benefit of any newly employed or promoted officers or employees, in
which case, the terms of such agreements shall be reasonably consistent with
those existing at the date of such employment, (2) that AEP may modify or
enter into severance arrangements with management employees, which
arrangements provide a level of severance benefits to such management
employees generally comparable to the level of severance benefits which are,
on the date of this Agreement, provided to similarly situated employees of
the Company and (3) for AEP Benefit Plans relating to health and life
insurance benefits established, adopted or entered into in the ordinary
course of business consistent with past practice;
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(iii) declare or pay any dividend on, or to make any other distribution
in respect of, outstanding shares of capital stock of AEP or any Significant
Subsidiary (other than Yorkshire), except (A) dividends declared and paid by
AEP with respect to the outstanding AEP Common Stock at approximately the
same times and rates and at a rate per share of AEP Common Stock not less
than the rate per share of AEP Common Stock as were declared and paid during
the year ended December 31, 1997 and (B) dividends and distributions by a
wholly owned Subsidiary of AEP to AEP or another wholly owned Subsidiary of
AEP and (C) dividends and distributions declared and paid with respect to
outstanding shares of preferred stock or similar obligations of AEP's
Subsidiaries.
(iv) (A) redeem, purchase or acquire, or offer to purchase or acquire,
any outstanding Equity Securities of AEP or any of its Significant
Subsidiaries other than redemptions, repurchases and other acquisitions of
Equity Securities in the ordinary course of business consistent with past
practice which will not cause a failure of the condition contained in
Section 8.1(e) to be satisfied, including purchases, redemptions and other
acquisitions (1) in connection with the administration of employee benefit;
direct stock purchase and dividend reinvestment plans as in effect on the
date hereof in the ordinary course of the operation of such plans, (2)
required by the respective terms of any Equity Security, (3) in connection
with the refunding of preferred Equity Securities or through the issuance of
additional preferred Equity Securities or indebtedness, as the case may be,
at a lower cost of funds (calculating such cost on an aggregate after-tax
basis) or through the issuance of indebtedness not prohibited by Section
6.2(b)(xi), (4) of AEP Common Stock in the open-market to fund up to
$10,000,000 in any fiscal year of any acquisitions not prohibited by Section
6.2(b)(vii), (5) in intercompany transactions and (6) by AEP or any of its
wholly-owned Subsidiaries directly from any wholly-owned Subsidiary of AEP
in exchange for capital contributions or loans to such Subsidiary; or (B)
split, combine or reclassify AEP Common Stock or effect any recapitalization
of AEP;
(v) offer, sell, issue or grant, or authorize the offering, sale,
issuance or grant, of any Equity Securities of AEP or any of its Significant
Subsidiaries; except issuances of (A) AEP Common Stock (1) upon the
expiration of any restrictions upon issuance of any grant existing at the
date of this Agreement of restricted stock or stock bonus pursuant to the
terms of any Benefit Plans of AEP or any of its Subsidiaries or (2)
periodically pursuant to the terms of any Benefit Plans of AEP or any of its
Subsidiaries; (B) preferred stock or similar securities of any Subsidiary
for the purpose of financing investments or capital expenditures not
prohibited under this Agreement or refinancing existing indebtedness or
preferred stock or similar obligations of such Subsidiary and (C) issuances
of a number of shares of AEP Common Stock not in excess of 10% of the number
of shares represented to be outstanding in Section 5.3 hereof;
(vi) grant any Lien (other than Permitted Encumbrances) with respect to
any shares of capital stock of, or other equity interests in, any
Significant Subsidiary of AEP owned beneficially by AEP or any other
Subsidiary of AEP;
(vii) acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or in any other manner acquiring,
any business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets of any
other Person; except (A) the purchase of assets from suppliers or vendors in
the ordinary course of business and consistent with past or then standard
industry practice and (B) acquisitions of equity interests, assets
(excluding the acquisition of assets permitted in clause (A) above) and
businesses related to the energy sector the fair market value of the total
consideration (including the value of indebtedness (other than non-recourse
indebtedness) or other liability acquired or assumed) for which does not
exceed $2.5 billion in the aggregate (which amount shall be reduced by the
amount permitted and expended for (x) capital expenditures (other than
relating to the core domestic and United Kingdom regulated utility business
in which AEP and its Subsidiaries are currently engaged (the "AEP Core
Businesses")) pursuant to Section 6.2(b)(xiv) and (y) joint ventures
pursuant to Section 6.2(b)(xv);
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(viii) sell, lease, exchange or otherwise dispose of, or grant any Lien
(other than a Permitted Encumbrance) with respect to, any of the assets of
AEP or any of its Subsidiaries that are Material to AEP, except (A)
dispositions of assets other than generation assets and inventories in the
ordinary course of business and consistent with past practice, (B)
divestitures of non-AEP Core Businesses and (C) except as required by Law;
(ix) adopt any amendments to its charter or bylaws or other
organizational documents that could reasonably be expected to have a
material adverse effect on the ability of AEP to perform its obligations
under this Agreement;
(x) (A) change any of its methods of accounting in effect at September
30, 1997, except as may be required to comply with GAAP, (B) make or rescind
any election relating to Taxes that are Material to AEP (other than any
election that must be made periodically and that is made consistent with
past practice) or (C) change any of its methods of reporting income or
deductions for Federal income tax purposes from those employed in the
preparation of the Federal income tax returns for the taxable year ending
December 31, 1996, except, in the case of each of clauses (A), (B) and (C),
as may be required by Law and, in the case of clause (C), for matters that
could not reasonably be expected to have a Material Adverse Effect on AEP;
(xi) except as required by Law, incur any obligations for borrowed money
or purchase money indebtedness that are Material to AEP, whether or not
evidenced by a note, bond, debenture or similar instrument, except (A)
drawings under credit lines existing at the date of this Agreement or
renewals or replacements thereof, (B) obligations evidenced by debt
securities issued by a Subsidiary of AEP for the purpose of financing
investments or capital expenditures permitted under this Agreement or
refinancing existing indebtedness or preferred stock obligations of such
Subsidiary, (C) purchase money indebtedness as to which Liens may be granted
as permitted by Section 6.2(b)(vi), (D) indebtedness incurred in the
ordinary course of business consistent with past practice and (E)
indebtedness not in excess of $2.0 billion in the aggregate (in addition to
the aggregate amount budgeted for indebtedness by AEP as set forth in
Section 6.2(b)(xi) of AEP's Disclosure Letter);
(xii) unless required by the terms thereof, release any third Person from
its obligations under any existing standstill agreement or similar agreement
whether included in a confidentiality agreement or otherwise;
(xiii) except as otherwise required by Law, enter into any Material
Contract with any third Person (other than customers and vendors in the
ordinary course of business) that provides for an exclusive arrangement with
that third Person or is substantially more restrictive on AEP or any of its
Subsidiaries or substantially less advantageous to AEP or any of its
Subsidiaries than Material Contracts existing on the date hereof;
(xiv) other than with respect to the AEP Core Businesses or except as
required by Law, make capital expenditures in excess of $2.5 billion less
the amounts permitted and expended in connection with acquisitions and joint
ventures pursuant to Section 6.2(b)(vii) and Section 6.2(b)(xv);
(xv) except pursuant to any contract, agreement or other legal obligation
of AEP or its Subsidiaries existing at the date of this Agreement, make or
commit to make, any investments in, or loans or capital contributions to, or
to undertake any guarantees or other obligations with respect to, any joint
venture in excess of $2.5 billion (which amount shall be reduced by any
amounts permitted and expended for capital expenditures (other than with
respect to the AEP Core Businesses)) and acquisitions as set forth in
Section 6.2(b)(xiv) and 6.2(b)(vii); or
(xvi) agree in writing or otherwise to do any of the foregoing.
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SECTION 6.3 ACCESS AND INFORMATION. AEP and the Company shall each, and
shall each cause its Subsidiaries to, (i) afford to the other party and its
officers, directors, employees, accountants, consultants, legal counsel, agents
and other representatives (collectively, the "Representatives" of such party)
reasonable access at reasonable times upon reasonable prior notice to the
officers, employees, agents, properties, offices and other facilities of such
party and its Subsidiaries and to their books and records and (ii) furnish
promptly to the other party and its Representatives such information concerning
the business, properties, contracts, records and personnel of the furnishing
party and its Subsidiaries (including financial, operating and other data and
information) as may be reasonably requested, from time to time, by or on behalf
of the other party. All documents furnished pursuant to this Section 6.3 shall
be subject to the Confidentiality Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 MEETING OF AEP STOCKHOLDERS. AEP shall, promptly after the
date of this Agreement, take all actions necessary in accordance with Law, the
rules of the NYSE and its certificate of incorporation and bylaws to convene a
special meeting of AEP's stockholders for the purpose of obtaining the Required
AEP Vote (together with any adjournments thereof, the "AEP Stockholders'
Meeting"), and AEP shall consult with the Company in connection therewith.
Subject to Section 7.19, AEP shall take all commercially reasonable action to
solicit from stockholders of AEP proxies in favor of the Share Issuance and the
Charter Amendment and to secure the Required AEP Vote and the Board of Directors
of AEP shall recommend approval of the Share Issuance and the Charter Amendment
by the stockholders of AEP.
SECTION 7.2 MEETING OF COMPANY STOCKHOLDERS. The Company shall, promptly
after the date of this Agreement, take all actions necessary in accordance with
Law, the rules of the NYSE and its certificate of incorporation and bylaws to
convene a special meeting of the Company's stockholders to consider approval and
adoption of this Agreement and the Merger (together with any adjournments
thereof, the "Company Stockholders' Meeting"), and the Company shall consult
with AEP in connection therewith. Subject to Section 7.19, the Company shall
take all commercially reasonable action to solicit from stockholders of the
Company proxies in favor of the approval and adoption of this Agreement and the
Merger and to secure the Required Company Vote and the Board of Directors of the
Company shall recommend approval of the transactions contemplated by this
Agreement by the stockholders of the Company.
SECTION 7.3 REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS. (a)
JOINT PROXY STATEMENT/PROSPECTUS. As promptly as practicable after the execution
of this Agreement, the parties shall prepare and file with the Commission the
registration statement on form S-4 to be filed with the Commission in connection
with the issuance of shares of AEP common stock in the Merger (the "Registration
Statement") and the joint proxy statement relating to the meetings of AEP's and
the Company's stockholders to be held in connection with the Merger (together
with any amendments thereof or supplements thereto effected prior to the
effective date of the Registration Statement, the "Joint Proxy
Statement/Prospectus"). The Joint Proxy Statement/Prospectus shall comply as to
form in all material respects with the applicable provisions of the Securities
Act and the Exchange Act and the Regulations thereunder. Each of the AEP
Companies and the Company shall furnish all information concerning it and the
holders of its capital stock as the other may reasonably request in connection
with the preparation and filing of the Joint Proxy Statement/Prospectus. Each of
the AEP Companies and the Company will use all commercially reasonable efforts
to have or cause the Registration Statement to become effective as promptly as
practicable, and shall take any action required to be taken under any applicable
Federal or state securities Laws in connection with the issuance of shares of
AEP Common Stock in the Merger (other than qualifying to do business in any
jurisdiction in which they are currently not so qualified). As promptly as
practicable after the Registration Statement shall have become effective, (x)
AEP shall mail the Joint Proxy Statement/Prospectus to its stockholders entitled
to notice of and to vote at the AEP
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Stockholders' Meeting and (y) the Company shall mail the Joint Proxy
Statement/Prospectus to its stockholders entitled to notice of and to vote at
the Company Stockholders' Meeting.
(b) COMPANY INFORMATION. The information supplied by the Company for
inclusion or incorporation by reference in the Registration Statement shall not,
at the time the Registration Statement is declared effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information supplied by the Company for inclusion or
incorporation by reference in the Joint Proxy Statement/Prospectus shall not, at
the date of the mailing of the Joint Proxy Statement/Prospectus (or any
supplement thereto) and at the time of the AEP Stockholders' Meeting or of the
Company Stockholders' Meeting or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to the
Company or any of its Subsidiaries, or its or their respective officers or
directors, should be discovered by the Company that should be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement/Prospectus, the Company shall promptly inform AEP. All documents that
the Company is responsible for filing with the Commission in connection with the
transactions contemplated herein shall comply as to form in all material
respects with the applicable requirements of the Securities Act and the
Regulations thereunder and the Exchange Act and the Regulations thereunder.
(c) THE AEP COMPANIES INFORMATION. The information supplied by the AEP
Companies for inclusion or incorporation by reference in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by AEP for inclusion
or incorporation by reference in the Joint Proxy Statement/Prospectus shall not,
at the date of the mailing of the Joint Proxy Statement/Prospectus (or any
supplement thereto), at the time of the AEP Stockholders' Meeting or the Company
Stockholders' Meeting or at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event or circumstance relating to AEP or any of its
Subsidiaries, or to their respective officers or directors, should be discovered
by AEP that should be set forth in an amendment to the Registration Statement or
a supplement to the Joint Proxy Statement/Prospectus, AEP shall promptly inform
the Company. All documents that the AEP Companies are responsible for filing
with the Commission in connection with the transactions contemplated hereby
shall comply as to form in all material respects with the applicable
requirements of the Securities Act and the Regulations thereunder and the
Exchange Act and the Regulations thereunder.
SECTION 7.4 APPROPRIATE ACTION; CONSENTS; FILINGS. (a) APPLICATIONS. Each
of the Company and AEP shall consult with one another, coordinate with respect
to, and use all commercially reasonable efforts (i) subject to Section 7.19, to
take, or to cause to be taken, all appropriate action, and to do, or to cause to
be done, all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, (ii) to obtain from any Governmental Authorities any Permits or
Orders required to be obtained by AEP or the Company or any of their
Subsidiaries in connection with the authorization, execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, including the Merger, (iii) to make all necessary filings,
and thereafter make any other required submissions, with respect to this
Agreement and the Merger required under (A) the Securities Act and the Exchange
Act, and any other applicable Federal or state securities Laws, (B) the Holding
Company Act, (C) the Federal Power Act, (D) the Atomic Energy Act, (E) the
applicable State Regulatory Acts, (F) the HSR Act and (G) any other applicable
Law; provided that AEP and the Company shall cooperate with each other in
connection with
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the making of all such filings, including providing copies of all such documents
to the nonfiling party and its advisors prior to filings and, if requested,
shall accept all reasonable additions, deletions or changes suggested in
connection therewith, and provided further that, except as otherwise expressly
provided herein, each party shall retain discretion and control over its
affairs. The Company and AEP shall furnish all information required for any
application or other filing to be made pursuant to any applicable Law or any
applicable Regulations of any Governmental Authority in connection with the
transactions contemplated by this Agreement.
(b) REGULATORY PLANS. The Company and AEP have jointly retained Vinson &
Elkins L.L.P. and Simpson Thacher & Bartlett to assist the parties in developing
and implementing a collaborative regulatory plan in connection with the
transactions contemplated hereby.
(c) COOPERATION. AEP and the Company agree to cooperate and use all
commercially reasonable efforts to resist or resolve any action including
legislative, administrative or judicial action and to have vacated or overturned
any Order of any Court or Governmental Authority that is in effect and that
prevents or prohibits the consummation of the Merger or any other transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that in no event shall either
party take, or be required to take, any action that could reasonably be expected
to have a Material Adverse Effect on AEP, the Company or the Combined Companies.
Both parties shall consult on a reasonable and frequent basis regarding matters
relating to the operations of AEP and the Company prior to Closing, provided,
that, except as otherwise expressly set forth herein, AEP and the Company shall
each retain discretion over their own affairs.
(d) THIRD PARTY CONSENTS. (i) Each of the Company and AEP shall give (or
shall cause their respective Subsidiaries to give) any notices to third Persons,
and use, and cause their respective Subsidiaries to use, all commercially
reasonable efforts to obtain any consents from third Persons (A) necessary,
proper or advisable to consummate the transactions contemplated by this
Agreement, (B) otherwise required under any contracts, licenses, leases or other
agreements in connection with the consummation of the transactions contemplated
hereby or (C) required to prevent a Material Adverse Effect on the Company or
AEP from occurring prior to the Effective Time or a Material Adverse Effect on
the Combined Companies from occurring after the Effective Time (the "Third Party
Consents").
(ii) If any party shall fail to obtain any consent from a third Person
described in subsection (d)(i) above, such party shall use all commercially
reasonable efforts, and shall take any such actions reasonably requested by the
other parties, to limit the adverse effect upon the Company and AEP, their
respective Subsidiaries, and their respective businesses resulting, or which
could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
SECTION 7.5 AFFILIATES; POOLING; TAX TREATMENT. (a) AFFILIATES. Each of
the Company and AEP shall use all commercially reasonable efforts to cause
Persons (other than Subsidiaries) who are, or who become "affiliates," as such
term is used in Rule 145 under the Securities Act, of the Company or AEP, as the
case may be, after the date of this Agreement but prior to the date of the
Company Stockholders' Meeting or the AEP Stockholders' Meeting, as the case may
be, to execute and deliver a letter agreement substantially in the form of Annex
B or Annex C hereto, as the case may be, not later than 10 days prior to the
date of such meeting.
(b) EFFECTIVE REGISTRATION STATEMENT. AEP shall not be required to
maintain the effectiveness of the Registration Statement for the purpose of
resale by stockholders of the Company who may be Affiliates of the Company
pursuant to Rule 145 under the Securities Act.
(c) POOLING. Each party hereto shall use all commercially reasonable
efforts to cause the Merger to be treated for financial accounting purposes as a
Pooling Transaction, and shall not take, and shall use all commercially
reasonable efforts to prevent any Affiliate of such party from taking, any
actions which could prevent the Merger from being treated for financial
accounting purposes as a Pooling Transaction.
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(d) TAX REORGANIZATION. Each party hereto shall use all commercially
reasonable efforts to cause the Merger to qualify, and shall not take, and shall
use all commercially reasonable efforts to prevent any Affiliate of such party
from taking, any actions which could prevent the Merger from qualifying as a
reorganization under the provisions of Section 368(a) of the Code.
SECTION 7.6 PUBLIC ANNOUNCEMENTS. AEP and the Company shall consult with
each other before issuing any press release or otherwise making any public
statements with respect to the Merger or this Agreement and shall not issue any
such press release or make any such public statement prior to such consultation.
SECTION 7.7 NYSE LISTING. AEP shall use all commercially reasonable
efforts to cause the shares of AEP Common Stock to be issued in the Merger to be
approved for listing (subject to official notice of issuance) on the NYSE prior
to the Effective Time.
SECTION 7.8 COMPANY RIGHTS AGREEMENT. The Company shall take all action
(including, if necessary, amending such Rights Agreement) so that the execution,
delivery and performance of this Agreement and the consummation of the Merger
and the other transactions contemplated hereby do not and will not result in the
grant of any rights to any Person under the Company Rights Agreement or enable
or require any outstanding rights to be exercised, distributed or triggered.
SECTION 7.9 COMFORT LETTERS. (a) AEP LETTER. AEP shall use all
commercially reasonable efforts to cause Deloitte & Touche L.L.P. to deliver a
letter dated as of the date of mailing of the Joint Proxy Statement/Prospectus,
and addressed to AEP and the Company, in form and substance reasonably
satisfactory to the Company and customary in scope and substance for agreed upon
procedures letters delivered by independent public accounts in connection with
registration statements and proxy statements similar to the Joint Proxy
Statement/Prospectus.
(b) COMPANY LETTER. The Company shall use all commercially reasonable
efforts to cause Arthur Andersen LLP to deliver a letter dated as of the date of
mailing of the Joint Proxy Statement/Prospectus, and addressed to the Company
and AEP, in form and substance reasonably satisfactory to AEP and customary in
scope and substance for agreed upon procedures letters delivered by independent
public accountants in connection with registration statements and proxy
statements similar to the Joint Proxy Statement/Prospectus.
SECTION 7.10 STOCK OPTIONS; EMPLOYEE BENEFIT PLANS. (a) STOCK-BASED
COMPENSATION.
(i) STOCK OPTIONS. AEP agrees to assume, effective as of the Effective
Time, each option to purchase shares of Company Common Stock granted under
the Company's 1992 Long-term Incentive Plan or Directors' Compensation Plan
(an "Outstanding Option") (whether or not vested) which remains as of such
time unexercised in whole or in part and to substitute AEP Common Stock as
purchasable under such assumed option ("Assumed Option"), with such
assumption and substitution to be effected as follows:
(A) The Assumed Option shall not give the optionee additional
benefits which he did not have under the Outstanding Option before such
assumption;
(B) The number of shares of AEP Common Stock purchasable under any
Assumed Option shall be equal to the number of whole shares of AEP Common
Stock that the holder of the Outstanding Option being assumed would have
received upon consummation of the Merger had such Outstanding Option been
exercised in full prior to the Merger;
(C) The per share option price of the Assumed Option shall be equal
to the per share option price of the Outstanding Option divided by the
Common Stock Exchange Ratio; and
(D) The Assumed Option shall provide the optionee with the same
benefit rights which he had under the Outstanding Option before such
assumption.
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Notwithstanding the foregoing, in the case of any Outstanding Option to
which section 421 of the Code applies by reason of the qualification under
section 422 of the Code, the exercise price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise
of such option shall comply with section 424(a) of the Code. As soon as
practicable after the Effective Time, AEP shall deliver to the holders of
the Outstanding Options appropriate agreements evidencing its assumption of
such options.
(ii) OTHER STOCK-BASED COMPENSATION. Effective as of the Effective Time,
AEP agrees to assume the Company's 1992 Long-Term Incentive Plan and
Director's Compensation Plan with respect to any stock-based compensation
(other than the Outstanding Options) payable in the form of Company Common
Stock as a result of the Merger ("Other Compensation"), and to substitute
shares of AEP Common Stock with respect to such assumed Other Compensation.
The number of shares of AEP Common Stock issuable with respect to such Other
Compensation shall be equal to the number of whole shares of AEP Common
Stock that the holder of Other Compensation being assumed would have
received upon consummation of the Merger had such Other Compensation been
paid in full prior to the Merger.
On or prior to the Effective Time, the Company shall take or cause to be taken
all such actions, reasonably satisfactory to AEP, as may be necessary or
desirable in order to authorize the transactions contemplated by subsections (i)
and (ii) above. Further, AEP shall take all corporate actions necessary to
reserve for issuance a sufficient number of shares of AEP Common Stock for
delivery upon exercise of the Company Outstanding Options or issuance of the
Company Other Compensation assumed by AEP pursuant to subsections (i) and (ii)
above. Prior to the Effective Time, AEP shall file one or more registration
statements on Form S-8 (or any successor or other appropriate forms) with
respect to the shares of AEP Common Stock issuable in respect to the Assumed
Options or Other Compensation and AEP Common Stock issuable in respect of the
Assumed Options or Other Compensation and AEP shall use its commercially
reasonable efforts to cause such registration statement to become effective
promptly after the Effective Time and to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus or
prospectuses contained herein) for so long as any Assumed Options remain
outstanding and to comply with applicable state securities and blue sky laws. So
long as any holder of an Assumed Options shall be subject to the reporting
requirements under Section 16(a) of the Exchange Act, AEP shall have the
Company's 1992 Long-Term Incentive Plan and Directors' Compensation Plan to be
administered in a manner that complies with Rule 16b-3 promulgated under the
Exchange Act.
(b) SEPARATE COMPANY PLANS. From and after the Effective Time through July
1, 2002, AEP will continue or cause to be continued, without adverse change to
any employee or former employee of the Company or any of its Subsidiaries, the
Company Benefit Plans listed in Section 7.10(b) of the Company's Disclosure
Letter, except that (i) any Company Common Stock investment fund offered under a
Company Benefit Plan will be replaced by an AEP Common Stock investment fund or
a traditional investment fund as determined by AEP (ii) premiums charged to
participants may be increased under medical, dental, life, accidental death and
dismemberment, and disability insurance plans (except that premiums charged to
participants who retired from the Company or any of its Subsidiaries prior to
1993 (or survivors of such participants) may not be increased), and (iii)
changes required by law, including changes required to maintain the qualified
status of any Company Benefit Plan intended to be qualified under Section 401(a)
of the Code, may be made. After July 1, 2002, AEP will provide the employees of
the Company and its Subsidiaries with benefits that in the aggregate are at
least as favorable as the benefits provided to similarly situated employees of
AEP and its Subsidiaries. If, after July 1, 2002, an AEP Benefit Plan is made
available to employees of the Company or any of its Subsidiaries, all periods of
service with the Company and its Subsidiaries will be credited to such employees
for all purposes of the AEP Benefit Plan, including the accrual of benefits and
eligibility to receive benefits for which a specified period of service is
required under the AEP Benefit Plan. No earlier than July 1, 2002, the Company's
Cash Balance Retirement Plan shall be merged into a defined benefit pension plan
maintained by AEP or one of its
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Subsidiaries. The retirement benefit for employees of the Company or its
Subsidiaries who become participants in such merged plan will be determined
under the AEP pension plan formula for all years of service (including years of
service with the Company and its Subsidiaries) but such retirement benefit will
not be less than the benefit accrued under the Company's Cash Balance Retirement
Plan determined immediately prior to such plan merger plus the benefit
determined under the AEP pension plan formula for years of service beginning on
the date of such plan merger. If employees of the Company or any of its
Subsidiaries become participants in a health plan maintained by AEP or any of
its Subsidiaries, all preexisting condition limitations under the AEP health
plan for such employees will be waived. In addition, if such AEP health plan
participation becomes effective as of any date other than the first day of a
calendar year, such employees will receive credit under the AEP health plan for
any co-payments and deductibles incurred by such employees in the same calendar
year under the Company's Medical Plan.
(c) RETIREE AND DISABILITY BENEFITS. From and after July 1, 2002, AEP will
provide access to retiree medical and life insurance coverage for any employee
or director of the Company or any of its Subsidiaries who retires or becomes
disabled prior to July 1, 2002 and who was eligible for such coverage under
plans of the Company and its Subsidiaries in effect on the date of such
individual's retirement. Further, for any such employees or directors who
retired or became disabled prior to 1993, such coverage shall be continued
without adverse change to such retired or disables employees or directors. In
addition, with respect to any such employee who becomes disabled before July 1,
2002, so long as such employee continues to satisfy the eligibility requirements
for disability benefits under the Company's Disability Income Plan in effect on
such date AEP will offer such disabled employee medical coverage without charge
to such disabled employee.
(d) CERTAIN NONQUALIFIED ARRANGEMENTS. From and after the Effective Time
through July 1, 2002, AEP will maintain the Company's Supplemental Executive
Retirement Plan and Executive Deferred Compensation Plan without adverse change
to any employee participating in the Plan until all benefits have been paid in
accordance with the terms of the Plan; provided, however, that no deferrals
shall be permitted under such plan after the Effective Time. If the Company's
Supplemental Executive Retirement Plan or Executive Deferred Savings Plan is
terminated or otherwise discontinued after July 1, 2002, AEP will make available
to the class of employees of the Company and its Subsidiaries who were eligible
to participate in the Company's Supplemental Executive Retirement Plan or
Executive Deferred Savings Plan any nonqualified deferred compensation plan or
plans it maintains to supplement benefits in the AEP Benefit Plans that are
qualified plans. In addition, employees of the Company and its Subsidiaries will
be given credit for service with the Company and its Subsidiaries for all
purposes of such supplemental plans, and the supplemental plans will assume the
obligation of the Supplemental Executive Retirement Plan or the Executive
Deferred Savings Plan, as applicable, to pay the benefits that have accrued
under the Supplemental Executive Retirement Plan or the Executive Deferred
Savings Plan at the time of such termination or discontinuance.
(e) MEMORIAL GIFTS PROGRAM. The Company will take all action necessary to
terminate the Memorial Gifts Program as of the Effective Time; provided,
however, that all then-existing commitments under such Program will not be
adversely affected by such termination and will be honored in accordance with
their terms.
(f) AGREEMENT BY AEP. AEP agrees to honor without modification or contest,
and agrees to cause the Surviving Corporation to honor without modification or
contest, and to make required payments when due under all Change of Control
Agreements and all Retention Agreements, including any modifications to such
Change of Control Agreements or Retention Agreements permitted by Section
6.2(a).
(g) The provisions of Sections 7.10(d) and (f) are intended to be for the
benefit of, and shall be enforceable by, each Person entitled to benefits or
payments thereunder and the heirs and representatives of such Person.
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SECTION 7.11 INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Until six
years from the Effective Time, the certificate of incorporation and bylaws of
the Company as the corporation surviving the Merger (in this Section 7.11 called
the "Surviving Corporation") as in effect immediately after the Effective Time
shall not be amended to reduce or limit the rights of indemnity afforded to the
present and former directors and officers of the Company thereunder or as to the
ability of the Company to indemnify such persons or to hinder, delay or make
more difficult the exercise of such rights of indemnity or the ability to
indemnify. The Surviving Corporation will at all times exercise the powers
granted to it by its certificate of incorporation, its bylaws and applicable law
to indemnify to the fullest extent possible the present and former directors,
officers, employees and agents of the Company against claims made against them
arising from their service in such capacities prior to the Effective Time.
(b) If any claim or claims shall, subsequent to the Effective Time and
within six years thereafter, be made against any present or former director,
officer, employee or agent of the Company based on or arising out of the
services of such Person prior to the Effective Time in the capacity of such
Person as a director, officer, employee or agent of the Company, the provisions
of subsection (a) of this Section respecting the certificate of incorporation
and bylaws of the Surviving Corporation shall continue in effect until the final
disposition of all such claims.
(c) AEP hereby agrees after the Effective Time to guarantee the payment of
the Surviving Corporation's indemnification obligations described in Section
7.11(a) up to an amount determined as of the Effective Time equal to (i) the
fair market value of any assets of the Surviving Corporation or any of its
Subsidiaries distributed to AEP or any of its Subsidiaries (other than the
Surviving Corporation and its Subsidiaries), minus (ii) any liabilities of the
Surviving Corporation or any of its Subsidiaries assumed by AEP or any of its
Subsidiaries (other than the Surviving Corporation and its Subsidiaries), minus
(iii) the fair market value of any assets of AEP or any of its Subsidiaries
(other than the Surviving Corporation and its Subsidiaries) contributed to the
Surviving Corporation or any of its Subsidiaries and (iv) plus any liabilities
of AEP or any of its Subsidiaries (other than the Surviving Corporation and its
Subsidiaries) assumed by the Surviving Corporation or any of its Subsidiaries.
(d) Notwithstanding subsection (a), (b) or (c) of this Section 7.11, AEP and
the Surviving Corporation shall be released from the obligations imposed by such
subsection if AEP shall assume the obligations of the Surviving Corporation
thereunder by operation of Law or otherwise. Notwithstanding anything to the
contrary in this Section 7.11, neither AEP nor the Surviving Corporation shall
be liable for any settlement effected without its written consent, which shall
not be unreasonably withheld.
(e) AEP shall cause to be maintained in effect until six years from the
Effective Time the current policies of directors' and officers' liability
insurance maintained by the Company (or substitute policies providing at least
the same coverage and limits and containing terms and conditions that are not
materially less advantageous) with respect to claims arising from facts or
events which occurred before the Effective Time; PROVIDED, HOWEVER, that in no
event shall AEP or the Surviving Corporation be required to expend more than 200
percent of the greater of (i) current annual premiums and (ii) annual premiums
for the year in which the Closing occurs paid by the Company for such insurance;
PROVIDED, FURTHER, that, if AEP or the Surviving Corporation is unable to obtain
insurance for any period for 200 percent of the greater of such annual premiums,
then the obligation of AEP and the Surviving Corporation pursuant hereto shall
be to obtain the best coverage reasonably available under the circumstances
subject to the foregoing limitations on premiums.
(f) The provisions of this Section 7.11 are intended to be for the benefit
of, and shall be enforceable by, each Person entitled to indemnification
hereunder and the heirs and representatives of such Person.
(g) AEP shall not permit the Surviving Corporation to merge or consolidate
with any other Person unless the Surviving Corporation shall ensure that the
surviving or resulting entity assumes the obligations imposed by subsections
(a), (b), (c) and (e) of this Section.
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SECTION 7.12 NEWCO. Prior to the Effective Time, Newco shall not conduct
any business or make any investments other than as specifically contemplated by
this Agreement and will not have any assets (other than the minimum amount of
cash required to be paid to Newco for the valid issuance of its stock to AEP).
SECTION 7.13 EVENT NOTICES. From and after the date of this Agreement
until the Effective Time, each party hereto shall promptly notify the other
party hereto of (i) the occurrence or nonoccurrence of any event the occurrence
or nonoccurrence of which would be likely to cause any condition to the
obligations of such party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied and (ii) the failure of such
party to comply with any covenant or agreement to be complied with by it
pursuant to this Agreement which would be likely to result in any condition to
the obligations of such party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied. No delivery of any notice
pursuant to this Section 7.13 shall cure any breach of any representation or
warranty or any failure to comply with any covenant or agreement of such party
contained in this Agreement or otherwise limit or affect the remedies available
hereunder to the party receiving such notice.
SECTION 7.14 BOARD OF DIRECTORS. At the Effective Time, the Board of
Directors of AEP shall be expanded to fifteen members and reconstituted to
include all then current board members of AEP, the Chairman of the Company on
the date hereof, and four additional outside directors of the Company to be
nominated by AEP.
SECTION 7.15 HEADQUARTERS. At and after the Effective Time, the principal
corporate office of the Combined Companies shall be located in Columbus, Ohio;
and the Combined Companies shall maintain a significant presence in the states
currently served by the Company.
SECTION 7.16 RATE MATTERS. Each of the Company and AEP shall, and shall
cause its Significant Subsidiaries to, discuss with the other any changes in its
or its Significant Subsidiaries' rates or charges (other than automatic cost
pass-through rate adjustment clauses), 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 with governmental regulators, whether written or oral,
formal or informal, with respect thereto (provided that except as otherwise
expressly provided herein each party shall retain discretion and control over
its affairs), and except as set forth in Section 7.16 of the Company's
Disclosure Letter, no party will make any filing to change its rates or charges,
standards of service or accounting that could reasonably be expected to have a
Material Adverse Effect on the Combined Companies.
SECTION 7.17 COORDINATION OF DIVIDENDS. Each of the Company and AEP shall
coordinate with the other regarding the declaration and payment of any dividends
in respect of the Company Common Stock and AEP Common Stock and the record dates
and the payment dates relating thereto, it being the intention of the Company
and AEP that holders of the Company Common Stock shall not receive two
dividends, or fail to receive one dividend, for any single calendar quarter with
respect to their shares of Company Common Stock and/or any shares of AEP Common
Stock that any such holder receives in exchange therefor pursuant to the Merger.
SECTION 7.18 TRANSITION MANAGEMENT. As soon as practicable after the date
hereof, the parties shall create a special transition management task force (the
"Task Force"). The Task Force shall examine various alternatives regarding the
manner in which to best organize and manage the business of the Combined
Companies after the Effective Time, subject to applicable Law.
SECTION 7.19 ACQUISITION PROPOSALS. Each of AEP and the Company agrees
that neither it nor any of its Subsidiaries nor any of the officers and
directors of it or its Subsidiaries shall, and that it shall direct and use its
best efforts to cause its and its Subsidiaries' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to,
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directly or indirectly, initiate, solicit, encourage or otherwise facilitate
(including by way of furnishing information) any inquiries or the making of any
proposal or offer with respect to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving, or any purchase or sale of all or any
significant portion of the assets or 10% or more of the equity securities of, it
or any of its Subsidiaries that, in any such case, could reasonably be expected
to interfere with the completion of the Merger or the other transactions
contemplated by this Agreement (any such proposal or offer being hereinafter
referred to as an "ACQUISITION PROPOSAL"). Each of AEP and the Company further
agrees that neither it nor any of its Subsidiaries nor any of the officers and
directors of it or its Subsidiaries shall, and that it shall direct and use its
best efforts to cause its and its Subsidiaries' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, directly or indirectly, have
any discussion with or provide any confidential information or data to any
Person relating to an Acquisition Proposal, or engage in any negotiations
concerning an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal or accept an Acquisition
Proposal. Notwithstanding the foregoing, the Board of Directors of AEP or the
Company shall be permitted to (A) to the extent applicable, comply with Rule
14e-2(a) promulgated under the Exchange Act with regard to an Acquisition
Proposal, (B) in response to an unsolicited bona fide written Acquisition
Proposal by any Person, recommend such an unsolicited bona fide written
Acquisition Proposal to its stockholders, or withdraw or modify in any adverse
manner its approval or recommendation of this Agreement or (C) engage in any
discussions or negotiations with, or provide any information to, any Person in
response to an unsolicited bona fide written Acquisition Proposal by any such
Person, if and only to the extent that, in any such case as is referred to in
clause (B) or (C), (i) the Required AEP Vote or the Required Company Vote, as
the case may be, shall not have been obtained, (ii) the Board of Directors of
AEP or the Company, as the case may be, concludes in good faith that such
Acquisition Proposal (x) in the case of clause (B) above would, if consummated,
constitute a Superior Proposal or (y) in the case of clause (C) above could
reasonably be expected to constitute a Superior Proposal, (iii) the Board of
Directors of AEP or the Company, as the case may be, determines in good faith
upon the basis of written advice of outside legal counsel that such action is
necessary for such Board of Directors to act in a manner consistent with its
fiduciary duties under applicable law, (iv) prior to providing any information
or data to any Person in connection with an Acquisition Proposal by any such
Person, the AEP Board of Directors or the Company Board of Directors, as the
case may be, receives from such Person an executed confidentiality agreement
containing customary terms and provisions and (v) prior to providing any
information or data to any Person or entering into discussions or negotiations
with any Person, the Board of Directors of AEP or the Board of Directors of the
Company, as the case may be, notifies the other party immediately of such
inquiries, proposals or offers received by, any such information requested from,
or any such discussions or negotiations sought to be initiated or continued
with, any of its representatives indicating, in connection with such notice, the
name of such Person and the material terms and conditions of any proposals or
offers. AEP and the Company agree that they will keep the other party informed,
on a current basis, of the status and terms of any such proposals or offers and
the status of any such discussions or negotiations. Each of AEP and the Company
agrees that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Acquisition Proposal. Each of AEP and the Company agrees
that it will take the necessary steps to promptly inform the individuals or
entities referred to in the first sentence of this Section 7.19 of the
obligations undertaken in this Section 7.19. Nothing in this Section 7.19 shall
(x) permit either AEP or the Company to terminate this Agreement (except as
specifically provided in Article IX hereof) or (y) affect any other obligation
of AEP or the Company under this Agreement.
SECTION 7.20 WORKFORCE MATTERS. Subject to applicable collective
bargaining agreements, for a period of 2 years following the Effective Time, any
reductions in workforce in respect of employees of the Combined Company and
their Subsidiaries shall be made on a fair and equitable basis, in light of the
circumstances and the objectives to be achieved, giving consideration to
previous work history, job
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experience, and qualifications, without regard to whether employment prior to
the Effective Time was with the Company or its Subsidiaries or AEP or its
Subsidiaries, and any employees whose employment is terminated or jobs are
eliminated by AEP or any of its Subsidiaries during such period shall be
entitled to participate on a fair and equitable basis in the job opportunity and
employment placement programs offered by the Combined Companies or any of their
prospective Subsidiaries. Any workforce reductions carried out following the
Effective Time by the Combined Companies and their Subsidiaries shall be done in
accordance with all applicable collective bargaining agreements, and all laws
and regulations governing the employment relationship and termination thereof
including, without limitation, the Worker Adjustment and Retraining Notification
Act and regulations promulgated thereunder, and any comparable state or local
law. As provided generally in Section 10.7, nothing in this Section is intended
to confer upon any Person (other than the parties hereto), including any current
or future employee of AEP or the Company or any subsidiary of either of them,
any right, benefit or remedy of any nature whatsoever.
ARTICLE VIII
CLOSING CONDITIONS
SECTION 8.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The respective
obligations of each party to effect the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of the following conditions, any or all of which may be waived by
a party with respect to its obligations, in whole or in part, to the extent
permitted by applicable Law:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the Commission under the
Securities Act; and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and not
withdrawn and no proceedings brought by the Commission for that purpose
shall be pending.
(b) STOCKHOLDER APPROVAL. (i) The Company shall have obtained the
Required Company Vote in connection with the adoption of this Agreement by
the stockholders of the Company and (ii) AEP shall have obtained the
Required AEP Vote in connection with the approval of the Share Issuance and
the Charter Amendment by the stockholders of AEP.
(c) NO PROHIBITING LAW, REGULATION OR ORDER. No Court or Governmental
Authority shall have enacted, issued, promulgated, enforced or entered any
Law, Regulation or Order (whether temporary, preliminary or permanent) that
is in effect and that has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(d) REQUIRED ORDERS. All Orders necessary for the consummation of the
Merger and the other transactions contemplated hereby shall have been
obtained at or prior to the Effective Time and such Orders shall have become
Final Orders and no Final Orders shall impose terms or conditions or
qualifications that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect on the Combined Companies.
(e) POOLING OF INTERESTS. Each of AEP and the Company shall have
received a letter of its independent public accountants, dated the Closing
Date, in form and substance reasonably satisfactory, in each case, to AEP
and the Company, stating that the transactions effected pursuant to this
Agreement will qualify as a pooling of interests transaction under GAAP and
applicable Commission Regulations.
(f) NYSE LISTING. The shares of AEP Common Stock to be issued pursuant
to the Merger shall have been listed, subject to official notice of
issuance, on the NYSE.
(g) DIVESTITURE EVENT. There shall not have occurred and remain in
effect a Divestiture Event with respect to either AEP or the Company.
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SECTION 8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE AEP COMPANIES. The
obligations of the AEP Companies to effect the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of the following conditions, any or all of which may be waived by
the AEP Companies, in whole or in part, to the extent permitted by applicable
Law:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company contained in this Agreement that is qualified as
to materiality shall be true and correct in all respects and each of those
that is not so qualified as to materiality shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing as
though made again at and as of the Closing (except for representations and
warranties that expressly speak only as of a specific date or time other
than the date hereof or the Closing Date which need only be true and correct
as of such date), provided, that no representation or warranty of the
Company shall be deemed to be untrue or incorrect as a result of the
occurrence of a Divestiture Event or any change or effect arising out of or
resulting from any foreign, federal or state legislative or regulatory
action with respect to (i) the regulation or deregulation of the electric
utility industry in such jurisdiction, or (ii) health or the environment,
including the conservation or protection of the environment. The AEP
Companies shall have received a certificate of the Chief Executive Officer
and the Chief Financial Officer of the Company, dated the Closing Date, to
such effect.
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied with, in all material respects, all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Closing. The AEP Companies shall have received a certificate of
the Chief Executive Officer and the Chief Financial Officer of the Company,
dated the Closing Date, to such effect.
(c) TAX OPINION. AEP shall have received the opinion dated the Closing
Date of Simpson Thacher & Bartlett to the effect that (i) the Merger will
constitute a reorganization under section 368(a) of the Code, (ii) the
Company, AEP and Newco will each be a party to that reorganization, and
(iii) no gain or loss will be recognized by the Company, AEP or Newco by
reason of the Merger. In rendering their opinion, such counsel may require
and rely upon representations, including those contained in certificates of
officers of the Company, Newco and AEP.
(d) INVESTMENT BANKER'S OPINION. AEP shall have received, on or prior to
the date of mailing of the Joint Proxy Statement/Prospectus to the holders
of AEP Common Stock, a written opinion from Salomon Smith Barney, dated the
date of such mailing, confirming the opinion to which reference is made in
Section 5.18.
(e) COMPANY REQUIRED CONSENTS. The Company Required Consents shall have
been obtained.
SECTION 8.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of the following conditions, any or all of which may be waived by
the Company, in whole or in part, to the extent permitted by applicable Law:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the AEP Companies contained in this Agreement that is
qualified as to materiality shall be true and correct in all respects and
each of those that is not so qualified as to materiality shall be true and
correct in all material respects as of the date of this Agreement and as of
the Closing as though made again at and as of the Closing (except for
representations and warranties that expressly speak only as of a specific
date or time other than the date hereof or the Closing Date which need only
be true and correct as of such date), provided, that no representation or
warranty of AEP shall be deemed to be untrue or incorrect as a result of the
occurrence of a Divestiture Event or any change or effect arising out of or
resulting from any foreign, federal or sate legislative or regulatory action
with respect to (i) the regulation or deregulation of the electric utility
industry in such jurisdiction, or (ii) health or the
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environment, including the conservation or protection of the environment.
The Company shall have received a certificate of the Chief Executive Officer
and the Chief Financial Officer of AEP, dated the Closing Date to such
effect.
(b) AGREEMENTS AND COVENANTS. The AEP Companies shall have performed or
complied with, in all material respects, all agreements and covenants
required by this Agreement to be performed or complied with by them at or
prior to the Closing. The Company shall have received a certificate of the
Chief Executive Officer and the Chief Financial Officer of AEP, dated the
Closing Date, to such effect.
(c) TAX OPINION. The Company shall have received the opinion dated the
Closing Date of Christy & Viener to the effect that (i) the Merger will
constitute a reorganization under section 368(a) of the Code, (ii) AEP, the
Company and Newco will each be a party to that reorganization and (iii) no
gain or loss will be recognized by the stockholders of the Company upon the
receipt of shares of AEP Common Stock in exchange for shares of Company
Common Stock pursuant to the Merger except with respect to any cash received
in lieu of fractional interests in shares of AEP Common Stock or cash
received pursuant to statutory dissenters rights. In rendering their
opinion, such counsel may require and rely upon representations, including
those contained in certificates of officers of the Company, Newco and AEP.
(d) INVESTMENT BANKER'S OPINION. The Company shall have received, on or
prior to the date of mailing of the Joint Proxy Statement/Prospectus to the
holders of Company Common Stock, a written opinion from Morgan Stanley & Co.
Incorporated, dated the date of such mailing, confirming the opinion to
which reference is made in Section 4.18.
(e) AEP REQUIRED CONSENTS. The AEP Required Consents shall have been
obtained.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after receipt of the AEP Required
Vote or before or after receipt of the Company Required Vote:
(a) MUTUAL CONSENT. By mutual written consent of AEP and the Company;
(b) TERMINATING COMPANY BREACH. By AEP, upon two Business Days' prior
written notice to the Company, upon a breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company shall have
become untrue, in either case such that the conditions set forth in Section
8.2(a) or Section 8.2(b) would not be satisfied (a "Terminating Company
Breach"); PROVIDED THAT, if such Terminating Company Breach is curable by
the Company through the exercise of commercially reasonable efforts, for so
long as the Company continues to exercise such commercially reasonable
efforts AEP may not terminate this Agreement under this Section 9.1(b);
(c) TERMINATING AEP BREACH. By the Company, upon two Business Days'
prior written notice to AEP, upon breach of any representation, warranty,
covenant or agreement on the part of the AEP Companies (or either of them)
set forth in this Agreement, or if any representation or warranty of the AEP
Companies (or either of them) shall have become untrue, in either case such
that the conditions set forth in Section 8.3(a) or Section 8.3(b) would not
be satisfied (a "Terminating AEP Breach"); PROVIDED THAT, if such
Terminating AEP Breach is curable by the AEP Companies through the exercise
of their commercially reasonable efforts, for so long as the AEP Companies
continue to exercise such commercially reasonable efforts the Company may
not terminate this Agreement under this Section 9.1(c);
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(d) DIVESTITURE EVENT. By either AEP or the Company, upon two Business
Days' prior written notice to the other, if there shall be any Divestiture
Event; provided that, if such Divestiture Event is capable of being vacated,
lifted or reversed on or before the Termination Date (as extended pursuant
to Section 9.1(f) hereof) through the exercise of commercially reasonable
efforts and for so long as the party whose assets are subject to the
Divestiture Event continues to exercise such commercially reasonable
efforts, such party seeking to terminate may not terminate this Agreement
under this Section 9.1(d).
(e) LAW, REGULATION OR ORDER. By either AEP or the Company, upon two
Business Days' prior written notice to the other, if there shall be any Law
or Regulation issued or adopted or any Order which is final and
nonappealable preventing the consummation of the Merger, unless the party
relying on such Law, Regulation or Order as a basis for termination under
this Section 9.1(e) has not complied with its obligations under Section 7.4;
(f) TERMINATION DATE. By either AEP or the Company, by written notice to
the other, if the Merger shall not have been consummated before December 31,
1999 ("Termination Date"); PROVIDED, HOWEVER, that this Agreement may be
extended by written notice of either AEP or the Company to a date not later
than June 30, 2000, if the Merger shall not have been consummated as a
result of the Company or the AEP Companies having failed by December 31,
1999 to satisfy the conditions set forth in Section 8.1(c) or Section 8.1(d)
but all other conditions to the Closing shall be fulfilled; provided
further, that, the right to terminate the Agreement under this Section
9.1(f) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date.
(g) STOCKHOLDER VOTE. By either AEP or the Company, upon two Business
Days' prior written notice to the other, if the transactions contemplated by
this Agreement shall fail to receive the Required AEP Vote at the AEP
Stockholders' Meeting or if this Agreement shall fail to receive the
Required Company Vote at the Company Stockholders' Meeting;
(h) AEP FIDUCIARY OUT. By AEP, at any time prior to receipt of the
Required AEP Vote, upon two Business Days' prior written notice to the
Company, if, the Board of Directors of AEP shall approve a Superior
Proposal; provided, however, that (i) AEP shall have complied with Section
7.19, (ii) the Board of Directors of AEP shall have concluded in good faith,
after giving effect to all concessions which may be offered by the Company
pursuant to clause (iv) below, on the basis of the advice of its financial
advisors and outside counsel, that such proposal is a Superior Proposal,
(iii) the Board of Directors of AEP shall have concluded in good faith,
after receipt of written advice of outside counsel, that notwithstanding all
concessions which may be offered by the Company in negotiations entered into
pursuant to clause (iv) below, such action is necessary for the AEP Board of
Directors to act in a manner consistent with its fiduciary duties under
applicable law; and (iv) prior to any such termination, AEP shall, and shall
cause its respective financial and legal advisors to, negotiate with the
Company to make such adjustments in the terms and conditions of this
Agreement as would enable AEP to proceed with the transactions contemplated
herein on such adjusted terms;
(i) COMPANY FIDUCIARY OUT. By the Company, at any time prior to receipt
of the Required Company Vote, upon two Business Days' prior written notice
to AEP, if, the Board of Directors of the Company shall approve a Superior
Proposal; provided, however, that (i) the Company shall have complied with
Section 7.19, (ii) the Board of Directors of the Company shall have
concluded in good faith, after giving effect to all concessions which may be
offered by AEP pursuant to clause (iv) below, on the basis of the advice of
its financial advisors and outside counsel, that such proposal is a Superior
Proposal, (iii) the Board of Directors of the Company shall have concluded
in good faith, after receipt of the written advice of outside counsel, that
notwithstanding all concessions which may be offered by AEP in negotiations
entered into pursuant to clause (iv) below, such action is necessary for the
Company Board of Directors to act in a manner consistent with its fiduciary
duties under applicable
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law; and (iv) prior to any such termination, the Company shall, and shall
cause its respective financial and legal advisors to, negotiate with AEP to
make such adjustments in the terms and conditions of this Agreement as would
enable the Company to proceed with the transactions contemplated herein on
such adjusted terms;
(j) AEP CHANGE OF RECOMMENDATION. By the Company, upon two Business
Days' prior written notice to AEP, if the Board of Directors of AEP or any
committee thereof (A) shall withdraw or modify in any manner adverse to the
Company its approval or recommendation of the Charter Amendment, the Share
Issuance, this Agreement or the Merger, (B) shall fail to reaffirm such
approval or recommendation upon the Company's request, (C) shall approve or
recommend any Superior Proposal or (D) shall resolve to take any of the
actions specified in clause (A), (B) or (C);
(k) COMPANY CHANGE OF RECOMMENDATION. By AEP, upon two Business Days'
prior written notice to the Company, if the Board of Directors of the
Company or any committee thereof (A) shall withdraw or modify in any manner
adverse to AEP its approval or recommendation of this Agreement or the
Merger, (B) shall fail to reaffirm such approval or recommendation upon
AEP's request, (C) shall approve or recommend any Superior Proposal or (D)
shall resolve to take any of the actions specified in clause (A), (B) or
(C); or
(l) THIRD PARTY ACQUISITION. By either AEP or the Company, by written
notice to the other party, if (A) a third party acquires securities
representing greater than 50% of the voting power of the outstanding voting
securities of such other party or (B) individuals who as of the date hereof
constitute the board of directors of such other party (together with any new
directors whose election by such board of directors or whose nomination for
election by the stockholders of such party was approved by a vote of a
majority of the directors of such party then still in office who are either
directors as of the date hereof or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority of
the board of directors of such party then in office.
The right of any party hereto to terminate this Agreement pursuant to this
Section 9.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any Person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 9.2 EFFECT OF TERMINATION. Except as provided in Section 9.6 and
Section 10.1 of this Agreement, in the event of the termination of this
Agreement pursuant to Section 9.1, this Agreement shall forthwith become void,
there shall be no liability on the part of the AEP Companies or the Company or
any of their respective officers or directors to the other and all rights and
obligations of any party hereto shall cease, except that nothing herein shall
relieve any party from liability for any breach of this Agreement.
SECTION 9.3 AMENDMENT. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; PROVIDED, HOWEVER, that, after receipt of
either the AEP Required Vote or the Company Required Vote, no amendment may be
made which would reduce the amount or change the type of consideration into
which each share of Company Common Stock shall be converted upon consummation of
the Merger. This Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
SECTION 9.4 WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or, to the extent legally permissible, conditions
contained herein. Any such extension or waiver shall be valid only
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if set forth in an instrument in writing signed by the party or parties to be
bound thereby. For purposes of this Section 9.4, the AEP Companies shall be
deemed to be one party.
SECTION 9.5 FEES, EXPENSES AND OTHER PAYMENTS. Subject to Section 9.6, all
Expenses incurred by the parties hereto shall be borne solely and entirely by
the party which has incurred such Expenses; PROVIDED, HOWEVER, that the share of
all Expenses related to printing, filing and mailing the Registration Statement
and the Joint Proxy Statement/Prospectus and all Commission and other regulatory
filing fees incurred in connection with the Registration Statement and the Joint
Proxy Statement/Prospectus allocable to the Company and to the AEP Companies as
a group shall be 50% each; AND PROVIDED FURTHER that AEP may, at its option and
subject to Section 7.5(d), pay any Expenses of the Company.
SECTION 9.6 CERTAIN DAMAGES, PAYMENTS AND EXPENSES. (a) DAMAGES PAYABLE
UPON TERMINATION FOR BREACH OR WITHDRAWAL OF APPROVAL. If this Agreement is
terminated pursuant to Section 9.1(h) or (i) (fiduciary out), Section 9.1(b) or
(c) (breach), Section 9.1(j) or (k) (change of recommendation) or Section 9.1
(l) (acquisition of voting power or change of board), then the breaching party
or party whose board has exercised its fiduciary out or changed its
recommendation or whose voting stock has been acquired or whose board has
changed, as the case may be, shall promptly (but not later than five Business
Days after receipt of notice that the amount is due from the other party) pay to
the other party, as liquidated damages and expense reimbursement, an amount in
cash equal to $20 million (the "Termination Fee").
(b) OTHER TERMINATION PAYMENTS. If (i) this Agreement is terminated
pursuant to (A) Section 9.1(f) (expiration date), (B) Section 9.1(h) or (i)
(fiduciary out), (C) Section 9.1(g) (failure to obtain shareholder
approval), (D) Section 9.1(j) or (k) (change of recommendation) or (E)
pursuant to Section 9.1(b) or (c) (breach); and (ii) at the time of such
termination (or in the case of clause (i)(C) above, prior to the meeting of
such party's shareholders) there shall have been an Acquisition Proposal
involving the Company or AEP (as the case may be, the "Target Party") or any
of its Affiliates which, at the time of such termination (or such meeting,
as the case may be), shall not have been (x) rejected by the Target Party
and its Board of Directors and (y) withdrawn by the third party; and (iii)
within eighteen months of any such termination described in clause (i)
above, the Target Party or any of its Affiliates becomes a Subsidiary of
such offeror or a Subsidiary of an Affiliate of such offeror or accepts a
written offer or enters into a written agreement to consummate or
consummates an Acquisition Proposal with such offeror or an Affiliate
thereof, then such Target Party (jointly and severally with its Affiliates),
upon the signing of a definitive agreement relating to such Acquisition
Proposal, or, if no such agreement is signed, then at the closing (and as a
condition to the closing) of such Target Party becoming such a subsidiary or
of such Acquisition Proposal, shall pay the Company or AEP, as the case may
be, a termination fee equal to $225 million (the "Topping Fee") plus
Expenses of such party not in excess of $20 million ("Out-of-Pocket
Expenses"). If this Agreement is terminated by the Company or AEP pursuant
to Section 9.1(l) (third party acquisition of voting power or change of
board), then the Company or AEP, as the case may be, shall pay immediately
the terminating party the Topping Fee plus Out-of-Pocket Expenses.
(c) EXPENSES. The Parties agree that the agreements contained in this
Section 9.6 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to the other any fee due hereunder, the defaulting
party shall pay the costs and expenses (including legal fees and expenses)
in connection with any action, including the filing of any lawsuit or other
legal action, taken to collect payment, together with interest on the amount
of any unpaid fee at the publicly announced prime rate of Citibank, N.A.
from the date such fee was required to be paid.
(d) LIMITATION OF FEES. Notwithstanding anything herein to the contrary,
the aggregate amount payable to AEP and its Affiliates pursuant to Section
9.6(a) and Section 9.6(b) shall not exceed $245 million and the aggregate
amount payable to the Company and its Affiliates pursuant to Section 9.6(a)
and Section 9.6(b) shall not exceed $245 million.
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(e) EXCLUSIVE REMEDY. Subject to the following sentence, the payments
required by Sections 9.6(a) and Section 9.6(b) shall constitute liquidated
damages in full and complete satisfaction of, and shall be the sole and
exclusive remedy for any loss, liability, damage or claim arising out of or
in connection with the transactions contemplated by this Agreement,
including any termination of this Agreement pursuant to Section 9.1.
Notwithstanding the foregoing sentence, in the event of payment of the
Termination Fee pursuant to Section 9.6(a), if (i) this Agreement is
terminated by a party as a result of a willful breach of representation,
warranty, covenant or agreement by the other party, and (ii) the Topping Fee
is not paid, the nonbreaching party may pursue any remedies available to it
at law or in equity and shall, in addition to the Termination Fee, be
entitled to recover such additional amounts as such nonbreaching party may
be entitled to receive at law or in equity.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. (a) EFFECT OF INVESTIGATION. Except as set forth in Section 10.1(b)
of this Agreement, the representations, warranties, covenants and agreements of
each party hereto shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any other party hereto, any Person
controlling any such party or any of their officers, directors, representatives
or agents whether prior to or after the execution of this Agreement.
(b) TERMINATION. The representations and warranties in this Agreement
shall terminate at the Effective Time and the representations, warranties,
covenants and agreements shall terminate upon the termination of this
Agreement pursuant to Article IX, except that the covenants and agreements
set forth in the last sentence of Section 6.3, Sections 9.2, 9.5 and 9.6 and
Article X hereof shall survive termination of this Agreement.
SECTION 10.2 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses ( or at such other address for a party as shall be specified by like
changes of address) or sent by electronic transmission to the telecopier number
specified below:
(a) AEP. If to any of the AEP Companies, to:
American Electric Power Service Corporation
1 Riverside Plaza
Columbus, Ohio 43215
Attention: Donald M. Clements, Jr., Executive Vice President
Telecopier No.: 614-223-1552
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: James M. Cotter
Telecopier No.: (212) 455-2502
(b) COMPANY. If to the Company, to:
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, Texas 75266-0164
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Attention: Thomas V. Shockley, III, President
Telecopier No.: (214) 777-1528
with a copy to:
Vinson & Elkins L.L.P.
1001 Fannin
Houston, Texas 77002-6760
Attention: William E. Joor III
Telecopier No.: (713) 758-2346
SECTION 10.3 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.4 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 10.5 ENTIRE AGREEMENT. This Agreement (together with the Annexes,
the Company's Disclosure Letter and AEP's Disclosure Letter) constitutes the
entire agreement of the parties, and supersedes all prior agreements and
undertakings, both written and oral, among the parties, with respect to the
subject matter hereof, other than the Confidentiality Agreement which shall
remain in full force and effect with respect to the subject matter thereof.
SECTION 10.6 ASSIGNMENT. This Agreement shall not be assigned by operation
of Law or otherwise.
SECTION 10.7 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except for the
beneficiaries of the indemnities and covenants contained in Sections 7.11,
7.10(d) and 7.10(f) herein, nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
SECTION 10.8 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty, covenant or
agreement herein, nor shall any single or partial exercise of any such right
preclude other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive to,
and not exclusive of, any rights or remedies otherwise available.
SECTION 10.9 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware, regardless of
the Laws that might otherwise govern under applicable principles of conflicts of
law; PROVIDED, HOWEVER, that any matter involving the internal corporate affairs
of any party hereto shall be governed by the provisions of the state of its
incorporation.
SECTION 10.10 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
<TABLE>
<S> <C> <C>
By /s/ E. LINN DRAPER, JR.
-----------------------------------------
E. Linn Draper, Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AUGUSTA ACQUISITION CORPORATION
By: /s/ DONALD M. CLEMENTS, JR.
-----------------------------------------
Donald M. Clements, Jr.
PRESIDENT
CENTRAL AND SOUTH WEST CORPORATION
By: /s/ E.R. BROOKS
-----------------------------------------
E.R. Brooks
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
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ANNEX A
SCHEDULE OF DEFINED TERMS
The following terms when used in the Agreement shall have the meanings set
forth below unless the context shall otherwise require:
"Acquisition Proposal" shall have the meaning ascribed to such term in
Section 7.19.
"Affiliate" shall, with respect to any Person, mean any other Person that
controls, is controlled by or is under common control with the former.
"Agreement" shall mean the Agreement and Plan of Merger made and entered
into as of December 21, 1997 among AEP, Newco and the Company, including any
amendments thereto and each Annex (including this Annex A) and including AEP's
Disclosure Letter and the Company's Disclosure Letter.
"APCo" shall mean Appalachian Power Company, a Virginia corporation.
"Atomic Energy Act" shall mean shall mean the Atomic Energy Act of 1954, as
amended, and the Regulations promulgated thereunder.
"AEP" shall mean American Electric Power Company, Inc., a New York
corporation, and its successors from time to time.
"AEP Benefit Plans" shall mean Benefit Plans with respect to AEP and its
Subsidiaries.
"AEP Common Stock" shall mean the voting common stock, par value $6.50 per
share, of AEP.
"AEP Companies" shall have the meaning ascribed to such term in the first
paragraph of the Agreement.
"AEP Required Consents" shall mean any Third Party Consents relating to AEP
the failure of which to obtain could reasonably be expected to have a Material
Adverse Effect on the Combined Companies.
"AEP Stockholders' Meeting" shall have the meaning ascribed to such term in
Section 7.1.
"AEP's Audited Consolidated Financial Statements" shall mean the condensed
balance sheets of AEP and its Subsidiaries as of December 31, 1996, 1995 and
1994 and the related condensed statements of operations and cash flows for each
of the three fiscal years in the three-year period ended December 31, 1996,
together with the notes thereto, all as audited by Deloitte & Touche L.L.P.,
independent accountants, under their report with respect thereto dated February
25, 1997 and included in AEP's Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Commission.
"AEP's Consolidated Financial Statements" shall mean AEP's Audited
Consolidated Financial Statements and AEP's Unaudited Consolidated Financial
Statements.
"AEP's Disclosure Letter" shall mean a letter of even date herewith
delivered by AEP to the Company concurrently with the execution of the
Agreement, which, among other things, shall identify exceptions to AEP's
representations, warranties and covenants contained in this Agreement by
specific section and subsection references.
"AEP's Unaudited Consolidated Financial Statements" shall mean the unaudited
condensed balance sheet of AEP and its Subsidiaries as of September 30, 1997 and
the related condensed statements of operations and cash flows for the
three-month periods and nine-month periods ended September 30, 1996 and
September 30, 1997, together with the notes thereto, included in AEP's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 filed with the
Commission.
"Benefit Plans" shall mean, with respect to a specified Person, any employee
pension benefit plan (whether or not insured), as defined in Section 3(2) of
ERISA, any employee welfare benefit plan (whether
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or not insured) as defined in Section 3(1) of ERISA, any plans that would be
employee pension benefit plans or employee welfare benefit plans if they were
subject to ERISA, such as foreign plans and plans for directors, any stock
bonus, stock ownership, stock option, stock purchase, stock appreciation rights,
phantom stock, severance, employment, change-in-control, deferred compensation
and any bonus or incentive compensation plan, agreement, program or policy
(whether qualified or nonqualified, written oral), sponsored, maintained or
contributed to by the specified Person or any of its Subsidiaries for the
benefit of any of the present or former directors, officers, employees, agents,
consultants or other similar representatives providing services to or for the
specified Person or any of its Subsidiaries in connection with such services or
any such plans which have been so sponsored, maintained, or contributed to
within six years prior to the date of the Agreement; PROVIDED, HOWEVER, that
such term shall not include (a) routine employment policies and procedures
developed and applied in the ordinary course of business and consistent with
past practice, including wage, vacation, holiday and sick or other leave
policies, (b) workers compensation insurance and (c) directors and officers
liability insurance.
"Business Day" means any day other than a day on which banks in the State of
Texas or the State of New York are authorized or obligated to be closed.
"Certificate of Merger" shall have the meaning ascribed to such term in
Section 2.2.
"Charter Amendment" shall have the meaning ascribed to such term in Section
5.20.
"Change of Control Agreements" shall mean the change in control or severance
agreements identified as such in Section 4.12(j) of the Company's Disclosure
Letter.
"Closing" shall mean a meeting, which shall be held in accordance with
Section 3.3, of all Persons interested in the transactions contemplated by the
Agreement at which all documents deemed necessary by the parties to the
Agreement to evidence the fulfillment or waiver of all conditions precedent to
the consummation of the transactions contemplated by the Agreement are executed
and delivered.
"Closing Date" shall mean the date of the Closing as determined pursuant to
Section 3.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Combined Companies" shall mean, before the Merger, the AEP Companies
(together with all of their Subsidiaries) and the Company (together with all of
its Subsidiaries) considered as a single business enterprise as if the Merger
had been consummated immediately prior to the time of consideration, and after
the Merger shall mean AEP (together with its Subsidiaries).
"Commission" shall mean the Securities and Exchange Commission, a
Governmental Authority of the United States Government, and its successors from
time to time.
"Common Stock Exchange Ratio" shall mean 0.60, as adjusted pursuant to the
second sentence of Section 3.1(a) of the Agreement.
"Company" shall mean Central and South West Corporation, a Delaware
corporation, and its successors from time to time.
"Company Benefit Plans" shall mean Benefit Plans with respect to the Company
and its Subsidiaries.
"Company Common Stock" shall mean the common stock, par value $3.50 per
share, of the Company.
"Company Permitted Transactions" shall mean (i) those transactions described
in Section 6.1 of the Company's Disclosure Letter and (ii) individual
transactions not otherwise permitted by Section 6.2(a) the total investment
(including debt and equity and other liability acquired or assumed) with respect
to which does not exceed $50 million per annum or $150 million per annum when
aggregated with all other such transactions, provided that no transactions
entered into in reliance on this clause (ii) shall involve a total
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investment (including debt and equity and other liability acquired or assumed)
in excess of $75 million per annum in any one country.
"Company Required Consents" shall mean any Third Party Consents relating to
the Company the failure of which to obtain could reasonably be expected to have
a Material Adverse Effect on the Combined Companies.
"Company Stockholders' Meeting" shall have the meaning ascribed to such term
in Section 7.2.
"Company's Audited Consolidated Financial Statements" shall mean the
condensed balance sheets of the Company and its Subsidiaries as of December 31,
1996, 1995 and 1994 and the related condensed and combined statements of
operations and cash flows for each of the three fiscal years in the three-year
period ended December 31, 1996, together with the notes thereto, all as audited
by Arthur Andersen LLP, independent accountants, under their report with respect
thereto dated February 28, 1997 and included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 filed with the Commission.
"Company's Consolidated Financial Statements" shall mean the Company's
Audited Consolidated Financial Statements and the Company's Unaudited
Consolidated Financial Statements.
"Company's Disclosure Letter" shall mean a letter of even date herewith
delivered by the Company to the AEP Companies concurrently with the execution of
the Agreement, which, among other things, shall identify exceptions to the
Company's representations, warranties and covenants contained in this Agreement
by specific section and subsection references.
"Company's Rights Agreement" shall mean that certain Rights Agreement
entered into or to be entered into between the Company and a rights agent,
substantially in the form previously filed with the Commission except for any
amendments or modifications thereto contemplated in the Agreement.
"Company's Unaudited Consolidated Financial Statements" shall mean the
unaudited condensed balance sheet of the Company and its Subsidiaries as of
September 30, 1997 and the related condensed statements of operations and cash
flows for the three-month periods and nine-month periods ended September 30,
1996 and September 30, 1997, together with the notes thereto, included in the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
filed with the Commission.
"Confidentiality Agreement" shall mean that certain confidentiality
agreement between AEP and the Company dated October 17, 1997, as amended.
"Control" (including the terms "controlled," "controlled by" and "under
common control with") shall mean the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of stock or as
trustee or executor, by contract or credit arrangement or otherwise.
"Controlled Group" shall mean any organization which is a member of a
controlled group of organizations within the meaning of Code sections 414(b),
(c), (m) or (o).
"Cook Nuclear Plant" shall mean the Donald C. Cook nuclear plant located in
Bridgman, Michigan.
"Court" shall mean any court or arbitration tribunal of the United States,
any foreign country or any domestic or foreign state, and any political
subdivision thereof, and shall include the European Court of Justice.
"CP&L" shall mean Central Power and Light Company, a Texas corporation and a
Subsidiary of the Company.
"CSPCo" shall mean Columbus Southern Power Company, an Ohio corporation.
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"Current AEP Benefit Plans" shall mean Benefit Plans that are sponsored,
maintained, or contributed to by AEP or any of its Subsidiaries as of the date
of the Agreement.
"Current Company Benefit Plans" shall mean Benefit Plans that are sponsored,
maintained, or contributed to by the Company or any of its Subsidiaries as of
the date of the Agreement.
"Delaware Law" shall mean the General Corporation Law of the State of
Delaware.
"Divestiture Event" shall mean any Law, Regulation or Order adopted or
issued by a Governmental Authority that requires the divestiture of a
substantial portion of the generating assets of the Company and its
Subsidiaries, taken as a whole, or AEP and its Subsidiaries, taken as a whole.
"Domestic Public Utility Company" shall mean a company that provides
electric energy directly to retail customers under rates, terms and conditions
determined by a State Regulatory Commission; provided that no company shall be a
Domestic Public Utility Company solely by reason of engaging in power marketing
or brokering or the wholesale sale of electric energy.
"Effective Time" shall mean the date and time of the completion of the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with Section 2.2.
"Environmental Law or Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations, or orders of any Governmental Authority
pertaining to health or the environment currently in effect and applicable to a
specified Person and its Subsidiaries, including the Clean Air Act, as amended,
the Comprehensive Environmental, Response, Compensation, and Liability Act of
1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as
amended, the Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe
Drinking Water Act, as amended, the Toxic Substances Control Act, as amended,
the Hazardous & Solid Waste Amendments Act of 1984, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, the Oil Pollution Act of 1990, as amended
("OPA"), any state or local Laws implementing the foregoing Federal Laws, and
all other environmental conservation or protection Laws. For purposes of the
Agreement, the terms "hazardous substance" and "release" have the meanings
specified in CERCLA; PROVIDED, HOWEVER, that to the extent the Laws of the state
or locality in which the property is located establish a meaning for "hazardous
substance" or "release" that is broader than that specified in either CERCLA or
RCRA, such broader meaning shall apply, and the term "hazardous substance" shall
include all dehydration and treating wastes, waste (or spilled) oil, and waste
(or spilled) petroleum products, and (to the extent in excess of background
levels) radioactive material, even if such are specifically exempt from
classification as hazardous substances pursuant to CERCLA or RCRA or the
analogous statutes of any jurisdiction applicable to the specified Person or its
Subsidiaries or any of their respective properties or assets.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the Regulations promulgated thereunder.
"Equity Securities" shall mean, with respect to a specified Person, any
shares of capital stock of, or other equity interests in, or any securities that
are convertible into or exchangeable for any shares of capital stock of, or
other equity interests in, or any outstanding options, warrants or rights of any
kind to acquire any shares of capital stock of, or other equity interests in,
such Person.
"Exchange Act" shall mean the Securities Exchange Act of 1934 and the
Regulations promulgated thereunder.
"Exchange Agent" shall mean a bank or trust company having a net worth in
excess of $100 million designated and appointed to act in the capacities
required thereof under Section 3.2.
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"Exchange Fund" shall mean the fund of AEP Common Stock and cash in lieu of
fractional interests and dividends and distributions, if any, with respect to
such shares of AEP Common Stock established at the Exchange Agent pursuant to
Section 3.2.
"Expenses" shall mean all reasonable out-of-pocket expenses (including all
fees and expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto and its affiliates) incurred by a party or on its
behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of the Agreement, the preparation,
printing, filing and mailing of the Registration Statement, Joint Proxy
Statement/Prospectus, the solicitation of stockholder approvals and all other
matters related to the consummation of the transactions contemplated hereby.
"Federal Power Act" shall mean the Federal Power Act, as amended, and the
Regulations promulgated thereunder.
"FERC" shall mean the Federal Energy Regulatory Commission, a Governmental
Authority of the United States Government, and its successors from time to time.
"Final Order" shall mean an Order 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 (but without the requirement for expiration of any
applicable rehearing or appeal period), and as to which all conditions to the
consummation of such transactions prescribed by Law, Regulation or Order have
been satisfied.
"Foreign Utility Company" shall mean a foreign utility company as defined in
section 33(a)(3) of the Holding Company Act.
"GAAP" shall mean accounting principles generally accepted in the United
States consistently applied by a specified Person.
"Governmental Authority" shall mean any governmental or regulatory agency or
authority (other than a Court but including a stock exchange or other
self-regulatory body) of or within the United States, any foreign country, or
any domestic or foreign state, and any political subdivision thereof, and shall
include any multinational authority having governmental or quasi-governmental
powers.
"Holding Company Act" shall mean the Public Utility Holding Company Act of
1935, as amended, and the Regulations promulgated thereunder.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the Regulations promulgated thereunder.
"I&M" shall mean Indiana Michigan Power Company, an Indiana corporation.
"IRS" shall mean the Internal Revenue Service, a Governmental Authority of
the United States Government, and its successors from time to time.
"Joint Proxy Statement/Prospectus" shall have the meaning ascribed to such
term in Section 7.3(a).
"KEPCo" shall mean Kentucky Power Company, a Kentucky corporation.
"Knowledge" shall mean, with respect to either the Company or AEP, the
actual knowledge of any executive officer of such party after reasonable
inquiry.
"KPC" shall mean Kingsport Power Company, a Virginia corporation.
"Law" shall mean all laws, statutes, ordinances, rules and regulations of
the United States, any foreign country, or any domestic or foreign state, and
any political subdivision or agency thereof, including all decisions of Courts
having the effect of law in each such jurisdiction.
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"Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any agreement to give any of the foregoing),
any conditional sale or other title retention agreement, any lease in the nature
thereof or the filing of or agreement to give any financing statement under the
Uniform Commercial Code of any jurisdiction.
"Material" shall mean material to the business, condition (financial or
otherwise) or results of operations or prospects of a specified Person and its
subsidiaries, if any, taken as a whole; PROVIDED, HOWEVER, that, as used in this
definition the word "material" shall have the meaning accorded thereto in
Section 11 of the Securities Act.
"Material Contract" shall mean each contract, lease, indenture, agreement,
arrangement or understanding to which a specified Person or any of its
Subsidiaries is a party or to which any of the assets or operations of such
specified Person or any of its Subsidiaries is subject that is of a type that
would be required to be included as an exhibit to a registration statement on
Form S-1 pursuant to Paragraph (2), (4) or (10) of Item 601(b) of Regulation S-K
under the Securities Act if such a registration statement were to be filed by
such Person under the Securities Act on the date of determination.
"Material Adverse Effect" shall mean any change or effect that is material
and adverse to the business, condition (financial or otherwise) or results of
operations or prospects of a specified Person and its subsidiaries, if any,
taken as a whole; PROVIDED, HOWEVER, that, as used in this definition the word
"material" shall have the meaning accorded thereto in Section 11 of the
Securities Act.
"Merger" shall have the meaning ascribed to such term in Section 2.1 of the
Agreement.
"Newco" shall mean Augusta Acquisition Corporation, a Delaware corporation
and a wholly-owned Subsidiary of AEP formed for the sole purpose of affecting
the Merger.
"New York Law" shall mean the New York Business Corporation Law.
"NRC" shall mean the Nuclear Regulatory Commission, a Governmental Authority
of the United States Government, and its successors from time to time.
"NYSE" shall mean the New York Stock Exchange, Inc.
"OPCo" shall mean Ohio Power Company, an Ohio corporation.
"Operating Company" shall have the meaning ascribed to such term in Section
4.9(b).
"Order" shall mean any judgment, order or decree of any Court or
Governmental Authority, Federal, foreign, state or local. Any reference in the
Agreement to the "receipt" or "obtaining" of any Order shall mean making such
declarations, filings or registrations; giving such notices; obtaining such
consents or approvals; and having such waiting periods expire as are necessary
to avoid a violation of Law.
"Out-of-Pocket Expenses" shall have the meaning ascribed to such term in
Section 9.6(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Permit" shall mean any and all permits, licenses, authorizations, orders,
consents, certificates, registrations or other approvals granted by any
Governmental Authority. Any reference in the Agreement to the "receipt" or
"obtaining" of any Permit shall mean making such declarations, filings or
registrations; giving such notices; obtaining such consents or approvals; and
having such waiting periods expire as are necessary to avoid a violation of Law.
"Permitted Encumbrances" shall mean the following:
(1) liens for taxes, assessments and other governmental charges not
delinquent or which are currently being contested in good faith by
appropriate proceedings; PROVIDED that, in the latter case, the specified
Person or one of its Subsidiaries shall have set aside on its books adequate
reserves with respect thereto;
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(2) mechanics' and materialmen's liens not filed of record and similar
charges not delinquent or which are filed of record but are being contested
in good faith by appropriate proceedings; PROVIDED that, in the latter case,
the specified Person or one of its Subsidiaries shall have set aside on its
books adequate reserves with respect thereto;
(3) liens in respect of judgments or awards with respect to which the
specified Person or one of its Subsidiaries shall in good faith currently be
prosecuting an appeal or other proceeding for review and with respect to
which such Person or such Subsidiary shall have secured a stay of execution
pending such appeal or such proceeding for review; PROVIDED that such Person
or such Subsidiary shall have set aside on its books adequate reserves with
respect thereto;
(4) easements, leases, reservations or other rights of others in, or
minor defects and irregularities in title to, property or assets of a
specified Person or any of its Subsidiaries; PROVIDED that such easements,
leases, reservations, rights, defects or irregularities do not materially
impair the use of such property or assets for the purposes for which they
are held; and
(5) any lien or privilege vested in any lessor, licensor or permittor
for rent or other obligations of a specified Person or any of its
Subsidiaries thereunder so long as the payment of such rent or the
performance of such obligations is not delinquent.
"Person" shall mean an individual, partnership, limited liability company,
corporation, joint stock company, trust, estate, joint venture, association or
unincorporated organization, or any other form of business or professional
entity, but shall not include a Governmental Authority.
"Pooling Transaction" shall mean a business combination that qualifies for
financial accounting purposes, as a pooling of interests pursuant to Accounting
Principles Board Opinion 16 and the interpretations thereof and the Staff
Accounting Bulletins of the Commission and the interpretations thereof.
"PSO" shall mean Public Service Company of Oklahoma, an Oklahoma
corporation.
"Registration Statement" shall have the meaning ascribed to such term in
Section 7.3(a).
"Regulation" shall mean any rule or regulation of any Governmental Authority
having the effect of Law.
"Representatives" shall have the meaning ascribed to such term in Section
6.3.
"Reports" shall mean, with respect to a specified Person, all reports,
registrations, filings and other documents and instruments required to be filed
by the specified Person or any of its Subsidiaries with any Governmental
Authority (other than the Commission).
"Required AEP Vote" shall have the meaning ascribed to such term in Section
5.20.
"Required Company Vote" shall have the meaning ascribed to such term in
Section 4.20.
"Retention Agreements" shall mean the retention agreements described in
Section 6.2(a) of the Company's Disclosure Letter.
"SEC Reports" shall mean (1) all Annual Reports on Form 10-K, (2) all
Quarterly Reports on Form 10-Q, (3) all proxy statements relating to meetings of
stockholders (whether annual or special), (4) all Current Reports on Form 8-K
and (5) all other reports, schedules, registration statements or other documents
required to be filed during a specified period by a Person with the Commission
pursuant to the Securities Act or the Exchange Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
Regulations promulgated thereunder.
"Seeboard" shall mean SEEBOARD plc, a company incorporated in England and a
Subsidiary of the Company.
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"Share Issuance" shall have the meaning ascribed to such term in Section
5.20.
"Significant Subsidiary" shall mean any subsidiary of the Company or AEP, as
the case may be, that would constitute a Significant Subsidiary of such party
within the meaning of Rule 1-02 of Regulation S-X of the Commission.
"South Texas Nuclear Facility" shall mean the South Texas nuclear project
located in Bay City, Texas.
"State Regulatory Commissions" shall mean: the Public Utility Commission of
the State of Texas; the Public Service Commission of the State of Arkansas; the
Corporation Commission of the State of Oklahoma; the Public Service Commission
of the State of Louisiana; the Indiana Utility Regulatory Commission; the
Kentucky Public Service Commission; the Michigan Public Service Commission; the
Ohio Public Utility Commission; the Tennessee Regulatory Commission; the
Virginia State Corporation Commission; and the West Virginia Public Service
Commission.
"State Regulatory Acts" shall mean the utility Laws regulating Domestic
Public Utility Companies in the States of Arkansas, Oklahoma, Texas, Louisiana,
Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia; in
each case, as amended, and the Regulations promulgated thereunder.
A "Subsidiary" of a specified Person shall be any corporation, partnership,
limited liability company, joint venture or other legal entity of which the
specified Person (either alone or through or together with any other subsidiary)
owns, directly or indirectly, over 50% of the stock or other equity or
partnership interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity.
"Superior Proposal" a BONA FIDE written Acquisition Proposal which the Board
of Directors of AEP or the Board of Directors of the Company, as the case may
be, concludes in good faith (after consultation with its financial advisors and
legal counsel), taking into account all legal, financial, regulatory and other
aspects of the proposal and the Person making the proposal, (i) would, if
consummated, result in a transaction that is more favorable to such party's
stockholders, from a strategic and financial point of view, than the
transactions contemplated by this Agreement and (ii) is reasonably capable of
being completed (PROVIDED that for purposes of this definition the term
Acquisition Proposal shall have the meaning assigned to such term in Section
7.19 except that the reference to "10%" in the definition of "Acquisition
Proposal" shall be deemed to be a reference to "50%" and "Acquisition Proposal"
shall only be deemed to refer to a transaction involving AEP or the Company, as
the case may be, or with respect to assets (including the shares of any
Subsidiary of AEP or the Company) of AEP or the Company, as the case may be, and
its Subsidiaries, taken as a whole, and not any of its Subsidiaries alone).
"Surviving Corporation" shall mean the Company as the corporation surviving
the Merger.
"SWEPCO" shall mean Southwestern Electric Power Company, a Delaware
corporation and a Subsidiary of the Company.
"Target Party" shall have the meaning ascribed to such term in Section
9.6(b).
"Task Force" shall have the meaning ascribed to such term in Section 7.18.
"Tax Returns" shall mean all returns, reports or other documents (including
information returns) required to be filed by or under any Law with any
Governmental Authority with respect to Taxes.
"Taxes" shall mean all taxes, charges, imposts, tariffs, fees, levies or
other similar assessments or liabilities, including income taxes, ad valorem
taxes, excise taxes, withholding taxes, stamp taxes or other taxes of or with
respect to gross receipts, premiums, real property, personal property, windfall
profits, sales, use, transfers, licensing, employment, payroll and franchises
imposed by or under any Law; and such terms shall include any interest, fines,
penalties, assessments or additions to tax resulting from, attributable to or
incurred in connection with any such tax or any contest or dispute thereof.
I-A-8
<PAGE>
"Terminated AEP Benefit Plans" shall mean Benefit Plans that were sponsored,
maintained, or contributed to by AEP or any of its Subsidiaries within six years
prior to the date of this Agreement but which have been terminated prior to the
date of the Agreement.
"Terminated Company Benefit Plans" shall mean Benefit Plans that were
sponsored, maintained, or contributed to by the Company or any of its
Subsidiaries within six years prior to the date of this Agreement but which have
been terminated prior to the date of the Agreement.
"Terminating AEP Breach" shall have the meaning ascribed to such term in
subsection 9.1(c) of the Agreement.
"Terminating Company Breach" shall have the meaning ascribed to such term in
subsection 9.1(b) of the Agreement.
"Termination Date" shall have the meaning ascribed to such term in Section
9.1(f).
"Termination Fee" shall have the meaning ascribed to such term in Section
9.6(a).
"Third Party Consents" shall have the meaning ascribed to such term in
Section 7.4(d)(i).
"Topping Fee" shall have the meaning ascribed to such term in Section
9.6(b).
"WPC" shall mean Wheeling Power Company, a West Virginia corporation.
"WTU" shall mean West Texas Utilities Company, a Texas corporation and a
Subsidiary of the Company.
I-A-9
<PAGE>
ANNEX B
[Central and South West Corporation Affiliates]
AFFILIATE'S AGREEMENT
American Electric Power Company, Inc.
1 Riverside Plaza
Columbus, Ohio 43215-2373
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75266-0164
Ladies and Gentlemen:
The undersigned has been advised that, as of the date hereof, the
undersigned may be deemed to be an "affiliate" of Central and South West
Corporation, a Delaware corporation (the "Company"), as that term is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the terms and subject to the conditions of that certain
Agreement and Plan of Merger by and among American Electric Power Company, Inc.,
a New York corporation ("AEP"), Augusta Acquisition Corporation, a newly formed
Delaware corporation and a wholly owned Subsidiary of AEP ("Newco"), and the
Company dated as of December 21, 1997 (the "Merger Agreement"), providing for,
among other things, the merger of Newco with and into the Company (the
"Merger"), the undersigned will be entitled to receive shares of common stock,
par value $6.50 per share ("AEP Common Stock"), of AEP in exchange for shares of
common stock, par value $3.50 per share ("Company Common Stock"), of the Company
owned by me at the effective time of the Merger (the "Effective Time") as
determined pursuant to the Merger Agreement.
The undersigned understands that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the staff of the SEC has issued certain
guidelines that should be followed to ensure the application of pooling of
interests accounting to the transaction.
In consideration of the agreements contained herein, AEP's and the Company's
reliance on this letter in connection with the consummation of the Merger and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned hereby represents, warrants and agrees
that the undersigned has not made and will not make any sale, transfer or other
disposition of (i) Company Common Stock or AEP Common Stock within the 30 day
period prior to the date of the consummation of the Merger or (ii) AEP Common
Stock received by the undersigned pursuant to the Merger or otherwise owned by
the undersigned until after such time as financial statements of AEP that
include at least 30 days of combined operations of the Company and AEP after the
Merger shall have been publicly reported, unless the undersigned shall have
delivered to AEP, prior to any such sale, transfer or other disposition, a
written opinion from Deloitte & Touche L.L.P., independent public accountants
for AEP, or a written no-action letter from the accounting staff of the SEC, in
either case in form and substance reasonably satisfactory to AEP, to the effect
that such sale, transfer or other disposition will not cause the Merger not to
be treated as a "pooling of interests" for financial accounting purposes in
accordance with generally accepted accounting principles and the rules,
regulations and interpretations of the SEC and (iii) AEP Common Stock received
by the undersigned pursuant to the Merger in violation of the Securities Act or
the Rules and Regulations. The undersigned has been advised that the offering,
sale and delivery of the shares of AEP Common Stock pursuant to the Merger will
have been registered with
I-B-1
<PAGE>
the SEC under the Securities Act on a Registration Statement on Form S-4. The
undersigned has also been advised, however, that since the undersigned may be
deemed to be an affiliate of the Company at the time the Merger is submitted for
a vote of the stockholders of the Company, AEP Common Stock received by the
undersigned pursuant to the Merger can be sold by the undersigned only (i)
pursuant to an effective registration statement under the Securities Act of 1933
(the "Securities Act"), (ii) in conformity with the volume and other limitations
of Rule 145 promulgated by the SEC under the Securities Act, or (iii) in
reliance upon an exemption from registration that is available under the
Securities Act.
The undersigned also understands that instructions will be given to the
transfer agent for AEP Common Stock with respect to AEP Common Stock to be
received by the undersigned pursuant to the Merger and that there will be placed
on the certificates representing such shares of AEP Common Stock, or any
substitutions therefor, a legend stating in substance as follows:
"These shares were issued in a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. These shares may only be
transferred in accordance with the terms of such Rule and an Affiliate's
Agreement between the original holder of such shares and AEP, a copy of
which agreement is on file at the principal offices of AEP."
It is understood and agreed that the legend set forth above shall be removed
upon surrender of certificates bearing such legend by delivery of substitute
certificates without such legend if the undersigned shall have delivered to AEP
an opinion of counsel, in form and substance reasonably satisfactory to AEP, to
the effect that (i) the sale or disposition of the shares represented by the
surrendered certificates may be effected without registration of the offering,
sale and delivery of such shares under the Securities Act and (ii) the shares to
be so transferred may be publicly offered, sold and delivered by the transferee
thereof without compliance with the registration provisions of the Securities
Act.
By its execution hereof, AEP agrees that it will, as long as the undersigned
owns any AEP Common Stock to be received by the undersigned pursuant to the
Merger, take all reasonable efforts to make timely filings with the SEC of all
reports required to be filed by it pursuant to the Securities Exchange Act of
1934, as amended, and will promptly furnish upon written request of the
undersigned a written statement confirming that such reports have been so timely
filed.
I-B-2
<PAGE>
If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.
Very truly yours,
By:
-----------------------------------------
Name:
Title:
Date:
Address:
ACCEPTED this day
of , 1998
AMERICAN ELECTRIC POWER COMPANY, INC.
By:
-----------------------------------------
Name:
Title:
CENTRAL AND SOUTH WEST CORPORATION
By:
-----------------------------------------
Name:
Title:
I-B-3
<PAGE>
ANNEX C
[AEP Affiliates]
AFFILIATE'S AGREEMENT
American Electric Power Company, Inc.
1 Riverside Plaza
Columbus, Ohio 43215-2373
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75266-0164
Ladies and Gentlemen:
The undersigned has been advised that, as of the date hereof, the
undersigned may be deemed to be an "affiliate" of American Electric Power
Company, Inc., a New York corporation ("AEP"), as that term is defined in the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act").
The undertakings contained in this Affiliate's Agreement are being given by
the undersigned in connection with that certain Agreement and Plan of Merger by
and among AEP, Augusta Acquisition Corporation, a newly formed Delaware
corporation and a wholly owned Subsidiary of AEP ("Newco"), and Cypress, a
Delaware corporation (the "Company") dated as of December 21, 1997 (the "Merger
Agreement"), providing for, among other things, the merger of Newco with and
into the Company (the "Merger").
The undersigned understands that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the staff of the SEC has issued certain
guidelines that should be followed to ensure the application of pooling of
interests accounting to the transaction.
In consideration of the agreements contained herein, AEP's and the Company's
reliance on this letter in connection with the consummation of the Merger and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned hereby represents, warrants and agrees
that the undersigned has not made and will not make any sale, transfer or other
disposition of (i) AEP Common Stock or Company Common Stock within the thirty
day period prior to the date of the consummation of the Merger or (ii) AEP
Common Stock owned by the undersigned until such time as financial statements
that include at least 30 days of combined operations of the Company and AEP
after the Merger shall have been publicly reported, unless the undersigned shall
have delivered to AEP prior to any such sale, transfer or other disposition, a
written opinion from Deloitte & Touche L.L.P., independent public accountants
for AEP, or a written no-action letter from the accounting staff of the SEC, in
either case in form and substance reasonably satisfactory to AEP, to the effect
that such sale, transfer or other disposition will not cause the Merger not to
be treated as a "pooling of interests" for financial accounting purposes in
accordance with generally accepted accounting principles and the rules,
regulations and interpretations of the SEC.
I-C-1
<PAGE>
If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.
Very truly yours,
By:
-----------------------------------------
Name:
Title:
Date:
Address:
ACCEPTED this day
of , 1998
CENTRAL AND SOUTH WEST CORPORATION
By:
-----------------------------------------
Name:
Title:
AMERICAN ELECTRIC POWER COMPANY, INC.
By:
-----------------------------------------
Name:
Title:
I-C-2
<PAGE>
[LETTERHEAD OF SALOMON SMITH BARNEY]
ANNEX II
April 16, 1998
Board of Directors
American Electric Power Company, Inc.
1 Riverside Plaza
Columbus, OH 43215-2373
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to American Electric Power Company, Inc. (the
"Company") of the consideration to be paid by the Company in connection with the
proposed merger (the "Proposed Merger") of Augusta Acquisition Corporation
("Mergeco"), a wholly owned subsidiary of the Company, with Central and South
West Corporation (the "Subject Company"), pursuant to the Agreement and Plan of
Merger (the "Agreement"), dated as of December 21, 1997, by and among the
Company, Mergeco and the Subject Company.
As more specifically set forth in the Agreement, and subject to the terms
and conditions thereof, Mergeco will merge with and into the Subject Company,
and each issued and outstanding share of common stock, par value $3.50 per
share, of the Subject Company ("Subject Company Common Stock") (other than
shares held in treasury of the Subject Company) will be converted in the
Proposed Merger into the right to receive 0.60 of a share of common stock, par
value $6.50 per share, of the Company ("Company Common Stock"), subject to
adjustment.
As you are aware, Salomon Smith Barney has acted as financial advisor to the
Company in connection with the Proposed Merger and will receive a fee for our
services, a substantial portion of which is contingent upon consummation of the
Proposed Merger. Additionally, Salomon Smith Barney or its affiliates have
previously rendered certain investment banking and financial advisory services
to the Company and the Subject Company, for which we have received customary
compensation. In addition, in the ordinary course of business, we may actively
trade the debt and equity securities of the Company and the Subject Company for
our own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
In connection with rendering our opinion we have reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) certain publicly
available information concerning the Company, including the Annual Reports on
Form 10-K of the Company for each of the years in the four year period ended
December 31, 1997 and the Quarterly Reports on Form 10-Q of the Company for the
quarters ended March 31, June 30 and September 30, 1997, respectively; (iii)
certain other internal information, primarily financial in nature, including
projections, concerning the business and operations of the Company furnished to
us by the Company for purposes of our analysis; (iv) certain publicly available
information concerning the trading of, and the trading market for, the Company
Common Stock; (v) certain publicly available information concerning the Subject
Company, including the Annual Reports on Form 10-K of the Subject Company for
each of the years in the four year period ended December 31, 1997 and the
Quarterly Reports on Form 10-Q of the Subject Company for the quarters ended
March 31, June 30 and September 30, 1997, respectively; (vi) certain other
internal information, primarily financial in nature, including projections,
concerning the business and operations of the Subject Company furnished to us by
the Subject Company and the Company for purposes of our analysis; (vii) certain
publicly available information concerning the trading of, and the trading market
for, the Subject Company Common Stock; (viii) certain internal information
concerning the prospects of the combined operations of the Company and the
Subject Company furnished to us by the Company for purposes of our analysis;
(ix) certain publicly available information with respect to certain other
companies that we believe to be comparable to the Subject Company or the Company
and the trading markets for certain of such other companies' securities; and (x)
II-1
<PAGE>
certain publicly available information concerning the nature and terms of
certain other transactions that we consider relevant to our inquiry. We have
also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that we deemed
relevant. We have also met with certain officers and employees of the Subject
Company and Company, to discuss the foregoing, as well as other matters we
believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties or facilities of the Subject Company or the Company, nor have we made
or obtained or assumed any responsibility for making or obtaining any
independent evaluations or appraisals of any of such properties or facilities.
With respect to projections, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of the Subject Company and the Company as to the
future financial performance of the Subject Company and the Company and we
express no view with respect to such projections or the assumptions on which
they were based. We have also assumed that the conditions precedent to the
Proposed Merger in the Agreement will be satisfied and the Proposed Merger will
be consummated in accordance with the terms of the Agreement.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of the
Subject Company and the Company; (ii) the business prospects of the Subject
Company and the Company; (iii) the historical and current market for the Company
Common Stock, the Subject Company Common Stock and for the equity securities of
certain other companies that we believe to be comparable to the Subject Company
or the Company; and (iv) the nature and terms of certain other acquisition
transactions that we believe to be relevant. We have also taken into account our
assessment of general economic, market and financial conditions as well as our
experience in connection with similar transactions and securities valuation
generally. Our opinion necessarily is based upon conditions as they exist and
can be evaluated on the date hereof and we assume no responsibility to update or
revise our opinion based upon circumstances or events occurring after the date
hereof. Our opinion as expressed below does not constitute an opinion or imply
any conclusion as to the likely trading range for the Company Common Stock
following consummation of the Proposed Merger. Our opinion is, in any event,
limited to the fairness, from a financial point of view, of the consideration to
be paid by the Company in the Proposed Merger and does not address the Company's
underlying business decision to effect the Proposed Merger or constitute a
recommendation of the Proposed Merger to the Company or a recommendation to any
holder of Company Common Stock as to how such holder should vote with respect to
the Proposed Merger.
This opinion is intended for the benefit and use of the Company (including
its management and directors) in considering the transaction to which it relates
and may not be used by the Company for any other purpose or reproduced,
disseminated, quoted or referred to by the Company at any time, in any manner or
for any purpose, without the prior written consent of Salomon Smith Barney,
except that this opinion may be reproduced in full in, and references to the
opinion and to Salomon Smith Barney and its relationship with the Company (in
each case in such form as Salomon Smith Barney shall approve) may be included
in, the proxy statement the Company distributes to holders of Company Common
Stock in connection with the Proposed Merger and in the registration statement
on Form S-4 filed by the Company of which such proxy statement forms a part.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that the consideration to be paid by the Company in the Proposed Merger
is fair, from a financial point of view, to the Company.
Very truly yours,
/s/ Salomon Smith Barney
SALOMON SMITH BARNEY
II-2
<PAGE>
ANNEX III
[Letterhead of Morgan Stanley]
April 16, 1998
Board of Directors
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, TX 75266-0164
Members of the Board:
We understand that Central and South West Corporation ("CSW" or the
"Company"), American Electric Power Company, Inc. ("AEP") and Newco, a wholly
owned subsidiary of AEP, ("Newco"), have entered into an Agreement and Plan of
Merger dated as of December 21, 1997 (the "Merger Agreement"), which provides,
among other things, for the merger (the "Merger") of Newco with and into CSW.
Pursuant to the Merger, CSW will become a wholly owned subsidiary of AEP and
each outstanding share of common stock, par value $3.50 per share (the "Company
Common Stock") of CSW, other than shares held in treasury or held by AEP or any
affiliate of AEP or as to which dissenters' rights have been perfected, will be
converted into the right to receive 0.60 shares (the "Exchange Ratio") of common
stock par value $6.50 per share of AEP (the "AEP Common Stock"). The terms and
conditions of the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to holders of shares
of the Company Common Stock.
For purposes of the opinion set forth herein, we have;
(i) reviewed certain publicly available financial statements and other
information of the Company and AEP;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company and AEP prepared by their
respective managements;
(iii) analyzed certain financial projections prepared by the managements
of the Company and AEP, respectively;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company and AEP with senior executives of the
Company and AEP, respectively;
(v) reviewed the reported prices and trading activity for the Company
Common Stock and AEP Common Stock;
(vi) discussed certain regulatory issues relating to the proposed Merger
with senior executives of the Company and AEP;
(vii) compared the financial performance of the Company an AEP and the
prices and trading activity of the Company Common Stock and AEP Common Stock
with that of certain other comparable publicly-traded companies and their
securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the pro forma impact of the Merger on AEP's earnings per
share, cash flow, consolidated capitalization and financial ratios;
(x) participated in discussions and negotiations among representatives
of the Company and AEP and their financial and legal advisors;
III-1
<PAGE>
(xi) reviewed the Merger Agreement and certain related documents;
(xii) reviewed and discussed with the Company and AEP an analysis
prepared by the Company and AEP with the assistance of a third party
consultant regarding estimates of the amount and timing of synergies and
cost savings estimated to be derived from the Merger; and
(xiii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections and the estimates of the
amount and timing of synergies and cost savings estimated to be derived from the
Merger, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and AEP. We have not made any independent
valuation or appraisal of the assets or liabilities of the Company, nor have we
been furnished with any such appraisals. In addition, we have assumed that the
Merger will be consummated in accordance with the terms set forth in the Merger
Agreement, including, among other things, that the Merger will be accounted for
as a "pooling of interests" business combination in accordance with U.S.
Generally Accepted Accounting Principals and the Merger will be treated as a
tax-free reorganization and/ or exchange, each pursuant to the Internal Revenue
Code of 1986. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for the Company and AEP and their
affiliates, and have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Merger and the transactions related thereto. In addition, we
express no recommendation as to how the shareholders of the Company should vote
at the shareholders' meeting held in connection with this Merger.
Based on the foregoing, we are of the opinion on the date hereof that the
Exchange Ratio, pursuant to the Merger Agreement is fair from a financial point
of view to holders of shares of the Company Common Stock.
<TABLE>
<S> <C> <C>
Very truly yours
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Jeffrey R. Holzschuh
-----------------------------------------
Jeffrey R. Holzschuh
Managing Director
</TABLE>
III-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the New York Business Corporation Law (the "NYBCL") a corporation may
indemnify any person made, or threatened to be made, a party to an action or
proceeding (other than one by or in the right of the corporation to procure a
judgment in its favor), whether civil or criminal, including an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any director or officer of the corporation served in any
capacity at the request of the corporation, by any reason of the fact that he,
his testator or intestate, was a director or officer of the corporation, or
served such other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise in any capacity, against judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys' fees
actually and necessarily incurred as a result of such action or proceeding, or
any appeal therein, if such director or officer acted, in good faith, for a
purpose which he reasonably believed to be in, or, in the case of service for
any other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise, not opposed to, the best interests of the corporation
and, in criminal actions or proceedings, in addition, had no reasonable cause to
believe that his conduct was unlawful.
The NYBCL further provides that no indemnification of directors in
shareholder derivative suits may be made in respect of (i) a threatened action,
or a pending action which is settled or otherwise disposed of, or (ii) any
claim, issue or matter as to which the director or officer has been adjudged to
be liable to the corporation, unless and only to the extent that the court in
which the action was brought or, if no action is brought, any court of competent
jurisdiction, determines upon application that, in view of the circumstances of
the case, the director or officer is fairly and reasonably entitled to indemnity
for such portion of the settlement amount and expenses as the court deems
proper. The statutory provisions for indemnification and advancement of expenses
are not exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled independently of the applicable
statutory provision.
The AEP By-Laws provide that to the fullest extent permitted by law, AEP
shall indemnify any person made, or threatened to be made, a party to any action
or proceeding (formal or informal), whether civil, criminal, administrative or
investigative and whether by or in the right of AEP or otherwise, by reason of
the fact that such person, such person's testator or intestate, is or was a
director, officer or employee of AEP, or of any subsidiary or affiliate of AEP,
or served any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise in any capacity at the request of AEP, against
all loss and expense including, without limiting the generality of the
foregoing, judgments, fines (including excise taxes), amounts paid in settlement
and attorneys' fees and disbursements actually and necessarily incurred as a
result of such action or proceeding, or any appeal therefrom, and all legal fees
and expenses incurred in successfully asserting a claim for indemnification
pursuant to such provision of the AEP By-Laws; provided, however, that no
indemnification may be made to or on behalf of any director, officer or employee
if a judgment or other final adjudication adverse to the director, officer or
employee establishes that such person's acts were committed in bad faith or were
the result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that such person personally gained in fact a financial
profit or other advantage to which such person was not legally entitled.
The AEP By-Laws further provide that in any case in which a director,
officer or employee (or a representative of the estate of such director, officer
or employee) requests indemnification, upon such person's request the AEP Board
of Directors shall meet within sixty days thereof to determine whether such
person is eligible for indemnification in accordance with the standard set forth
above. Such a person claiming indemnification shall be entitled to
indemnification upon a determination that no judgment or other final
adjudication adverse to such person has established that such person's acts were
committed in
II-1
<PAGE>
bad faith or were the result of active and deliberate dishonesty and were
material to the cause of action so adjudicated, or that such person personally
gained in fact a financial profit or other advantage to which such person was
not legally entitled.
ITEM 21(A). EXHIBITS
See Exhibit Index.
ITEM 21(B). FINANCIAL STATEMENT SCHEDULES
All financial statement schedules of AEP and CSW which are required to be
included herein are included in the Annual Report of AEP on Form 10-K for the
fiscal year ended December 31, 1997 or the Annual Report on Form 10-K of CSW for
the fiscal year ended December 31, 1997, respectively, which are incorporated
herein by reference.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers and 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 date 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
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective registration statement;
(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;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That for the 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to
II-2
<PAGE>
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(5) 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.
(6) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (5) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and
is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(7) 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 Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants 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 registrants will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(8) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(9) 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on April 16, 1998.
AMERICAN ELECTRIC POWER COMPANY, INC.
By: /s/ G.P. MALONEY
-----------------------------------------
Name: G.P. Maloney
Title: Vice President, Secretary and
Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Controller and Director April 16, 1998
P. J. Demaria
*
- ------------------------------ Director April 16, 1998
John P. Desbarres
Chairman of the Board,
* President, Chief
- ------------------------------ Executive Officer and April 16, 1998
E. Linn Draper, Jr. Director (Principal
Executive Officer)
*
- ------------------------------ Director April 16, 1998
Robert M. Duncan
*
- ------------------------------ Director April 16, 1998
Robert W. Fri
*
- ------------------------------ Director April 16, 1998
Lester A. Hudson, Jr.
*
- ------------------------------ Director April 16, 1998
Leonard J. Kujawa
/s/ G. P. MALONEY Vice President, Secretary
- ------------------------------ and Director (Principal April 16, 1998
G. P. Maloney Financial Officer)
*
- ------------------------------ Director April 16, 1998
Angus E. Peyton
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director April 16, 1998
Donald G. Smith
*
- ------------------------------ Director April 16, 1998
Morris Tanenbaum
</TABLE>
*By: /s/ G. P. MALONEY
-------------------------
G. P. Maloney,
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk(*), are filed
herewith. The exhibits not so designated have heretofore been filed with the
Commission and, pursuant to 17 C.F.R. Section229.10(d) and Section240.12b-32,
are incorporated herein by reference to the documents indicated in brackets
following the descriptions of such exhibits.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- -------------------------------------------------------------------------------------------------
<C> <S>
AEP
2.1 --Agreement and Plan of Merger by and among AEP, Augusta Acquisition Corporation and Central and
South West Corporation, dated as of December 21, 1997 [attached as Annex I to the Joint Proxy
Statement/Prospectus contained in this Registration Statement].
3(a) --Copy of Restated Certificate of Incorporation of AEP, dated October 29, 1997 [Quarterly Report
on Form 10-Q of AEP for the quarter ended September 30, 1997, Exhibit 3(a)].
3(b) --Copy of By-Laws of AEP, as amended through January 28, 1998 [Annual Report on Form 10-K of AEP
for the fiscal year ended December 31, 1997, File No. 1-3525, Exhibit 3(b)].
5.1 --Validity Opinion Simpson Thacher & Bartlett*
8.1 --Tax Opinion of Simpson Thacher & Bartlett*
8.2 --Tax Opinion of Christy & Viener*
10(a) --Interconnection Agreement, dated July 6, 1951, among APCo, CSPCo, KEPCo, OPCo and I&M and with
the Service Corporation, as amended [Registration Statement No. 2-52910, Exhibit 5(a);
Registration Statement No. 2-61009, Exhibit 5(b); and Annual Report on Form 10-K of AEP for the
fiscal year ended December 31, 1990, File No. 1-325, Exhibit 10(a)(3)].
10(b) --Copy of Transmission Agreement, dated April 1, 1984, among APCo, CSPCo, I&M, KEPCo, OPCo and
with the Service Corporation as agent, as amended [Annual Report on Form 10-K of AEP for the
fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(b); and Annual Report on Form
10-K of AEP for the fiscal year ended December 31, 1988, File No. 1-325, Exhibit 10(b)(2)].
10(c) --Copy of Lease Agreements, dated as of December 1, 1989, between AEGCo or I&M and Wilmington
Trust Company, as amended [Registration Statement No. 33-32752, Exhibits 28(c)(1)(C),
28(c)(2)(C), 28(c)(3)(C), 28(c)(4)(C), 28(c)(5)(C),and 28(c)(6)(C); Registration Statement No.
33-32753, Exhibit 28(a)(1)(C), 28(a)(2)(C), 28(a)(3)(C), 28(a)(4)(C), 28(a)(5)(C) and
28(a)(6)(C); and Annual Report on Form 10-K of AEGCo for the fiscal year ended December 31,
1993, File No. 0-18135, Exhibit 10(c)(1)(B), 10(c)(2)(B), 10(c)(3)(B), 10(c)(4)(B), 10(c)(5)(B)
and 10(c)(6)(B); Annual Report on Form 10-K of I&M for the fiscal year ended December 31, 1993,
File No. 1-3570, Exhibits 10(e)(1)(B), 10(e)(2)(B), 10(e)(3)(B), 10(e)(4)(B), 10(e)(5)(B) and
10(e)(6)(B)].
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- -------------------------------------------------------------------------------------------------
<C> <S>
10(d) --Lease Agreement dated January 20, 1995 between OPCo and JMG Funding, Limited Partnership, and
amendment thereto (confidential treatment requested) [Annual Report on Form 10-K of OPCo for
the fiscal year ended December 31, 1994, File No. 1-6543, Exhibit 10(1)(2)].
10(e) --Modification No. 1 to the AEP System Interim Allowance Agreement, dated July 28, 1994, among
APCo, CSPCo, I&M, KEPCo, OPCo and the Service Corporation [Annual Report on Form 10-K of AEP
for the fiscal year ended December 31, 1996, File No. 1-3525, Exhibit 10(l)].
10(f)(1) --AEP Deferred Compensation Agreement for certain executive officers [Annual Report on Form 10-K
of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(e)].
10(f)(2) --Amendment to AEP Deferred Compensation Agreement for certain executive officers [Annual Report
on Form 10-K of AEP for the fiscal year ended December 31, 1986, File No. 1-3525, Exhibit
10(d)(2)].
10(g) --AEP Accident Coverage Insurance Plan for directors [Annual Report on Form 10-K of AEP for the
fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(g)].
10(h)(1) --AEP Deferred Compensation and Stock Plan for Non-Employee Directors [Annual Report on Form 10-K
of AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(f)(1)].
10(h)(2) --AEP Stock Unit Accumulation Plan for Non-Employee Directors [Annual Report on Form 10-K of AEP
for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(f)(2)].
10(i)(1)(A) --AEP Excess Benefit Plan, as amended through August 25, 1997 [Quarterly Report on Form 10-Q of
AEP for the quarter ended September 30, 1997, File No. 1-3525, Exhibit 10].
10(i)(1)(B) --Guaranty by AEP of the Service Corporation Excess Benefits Plan [Annual Report on Form 10-K of
AEP for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(h)(1)(B)].
10(i)(2) --AEP System Supplemental Savings Plan, as amended through November 15, 1995 (Non-Qualified)
[Annual Report on Form 10-K of AEP for the fiscal year ended December 31, 1985, File No.
1-3525, Exhibit 10(g)(2)].
10(i)(3) --Service Corporation Umbrella TrustTM for Executives [Annual Report on Form 10-K of AEP for the
fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(g)(3)].
10(j) --Employment Agreement between E. Linn Draper, Jr. and AEP and the Service Corporation [Annual
Report on Form 10-K of AEGCo for the fiscal year ended December 31, 1985, File No. 1-18135,
Exhibit 10(g)(3)].
10(k)(1) --AEP System Senior Officer Annual Incentive Compensation Plan [Annual Report on Form 10-K of AEP
for the fiscal year ended December 31, 1985, File No. 1-3525, Exhibit 10(i)(1)].
10(k)(2) --American Electric Power System Performance Share Incentive Plan, as Amended and Restated
through February 26, 1997 [Annual Report on Form 10-K of AEP for the fiscal year ended December
31, 1985, File No. 1-3525, Exhibit 10(i)(2)].
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- -------------------------------------------------------------------------------------------------
<C> <S>
10(l) --Split-Dollar Insurance Program [Annual Report on Form 10-K of AEP for the fiscal year ended
December 31, 1997, File No. 1-3525, Exhibit 10(l)].
23.1 --Consent of Deloitte & Touche LLP.*
23.2 --Consent of Arthur Andersen LLP.*
23.3 --Consent of Simpson Thacher & Bartlett [included in Exhibits 5.1 and 8.1].
23.4 --Consent of Christy & Viener [included in Exhibit 8.2].
23.5 --Consent of Salomon Smith Barney [included in Annex II to the Joint Proxy Statement/ Prospectus
contained in this Registration Statement].
23.6 --Consent of Morgan Stanley & Co. Incorporated [included in Annex II to the Joint Proxy
Statement/Prospectus contained in this Registration Statement].
23.7 --Consent of KPMG Audit Plc*
24 --Power of Attorney [included in signature page to the original Registration Statement].
99.1 --Form of AEP Proxy Card.*
99.2 --Form of CSW Proxy Card.*
99.3 --Consent of E.R. Brooks.*
99.4 --Internet Voting and Telephone Voting Script*
</TABLE>
II-8
<PAGE>
Exhibit 5.1
[LETTERHEAD OF SIMPSON THACHER AND BARTLETT]
April 14, 1998
American Electric Power Company, Inc.
1 Riverside Plaza
Columbus, Ohio 43215
Ladies and Gentlemen:
We have acted as counsel to American Electric Power Company,
Inc., a New York corporation (the "Company"), in connection with the Agreement
and Plan of Merger dated as of December 21, 1997 (the "Merger Agreement") by and
among the Company, Central and South West Corporation, a Delaware corporation
("CSW"), and Augusta Acquisition Corporation, a wholly-owned subsidiary of the
Company and a Delaware corporation ("Sub"). This opinion letter is furnished to
you in connection with a registration statement on Form S-4 (the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended, for the registration of
133,587,409 shares of common stock, $6.50 par value per share (the "Shares"), of
the Company. The Shares are to be issued pursuant to the Merger Agreement which
provides for Sub to merge with and into CSW (the "Merger") and for CSW to
survive the Merger as a wholly-owned subsidiary of the
<PAGE>
American Electric Power
Company, Inc. -2- April 14, 1998
Company. Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Merger Agreement.
We have examined, and have relied as to matters of fact upon, an
executed copy of the Merger Agreement, the Registration Statement, and originals
or copies, certified or otherwise identified to our satisfaction, of such
corporate records, agreements, documents and other instruments and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that the Shares being issued by
the Company have been duly authorized and, when issued in accordance with the
Merger Agreement including, without limitation, following the approval by the
stockholders of the Company of the Charter Amendment and completion of the
Merger, will be legally issued, fully paid and nonassessable.
<PAGE>
American Electric Power
Company, Inc. -3- April 14, 1998
This opinion letter is rendered to you in connection with the above
described transaction. We hereby consent to the filing of this opinion letter
as an exhibit to the Registration Statement, and to the use of our name therein
and in the related joint proxy statement/prospectus under the caption "Legal
Matters."
We are members of the Bar of the State of New York, and we do not
express any opinion herein concerning any law other than the law of the State of
New York and the federal law of the United States.
Very truly yours,
/s/ Simpson Thacher & Bartlett
----------------------------------
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit 8.1
April 14, 1998
American Electric Power Company, Inc.
1 Riverside Plaza
Columbus, Ohio 43215
Re: Merger of Augusta Acquisition Corporation
With and into Central and South West Corporation
------------------------------------------------
Ladies and Gentlemen:
You have requested our opinion, as counsel to American Electric Power
Company, Inc., a New York corporation ("AEP"), as to certain United States
federal income tax consequences of the merger (the "Merger") of Augusta
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
AEP ("Acquisition Sub"), with and into Central and South West Corporation, a
Delaware corporation (the "Company"), pursuant to the terms and provisions of
the Agreement and Plan of Merger, dated as of December 21, 1997, by and among
AEP, Acquisition Sub and the Company (the "Merger Agreement"). All capitalized
terms used but not defined herein shall have the meaning ascribed to such terms
in the Merger Agreement.
In delivering this opinion letter, we have examined and relied upon
the accuracy and completeness of the facts, information, covenants and
representations contained in originals or copies, certified or otherwise
identified to our satisfaction, of the Merger Agreement, the Joint Proxy
Statement/Prospectus and such other documents as we have deemed necessary or
appropriate to form the basis for the opinions expressed herein. In addition,
as to certain facts material to our opinions, we have relied upon the accuracy
of written representations made by an authorized officer of each of AEP and the
<PAGE>
2 April 14, 1998
Company in letters dated the date hereof and addressed to us, copies of which
are attached hereto as Exhibits A and B, respectively. Our opinions are
conditioned upon, among other things, the accuracy and completeness, as of the
Effective Time, of the facts, information, covenants and representations
referred to above.
In our examination of such materials, we have assumed the genuineness
of all signatures, the legal capacity of all natural persons, the authenticity
of all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic copies
and the authenticity of the originals of such documents. In rendering our
opinions, we also have assumed that the Merger and the transactions related to
the Merger or contemplated by the Merger Agreement will be consummated (i) in
accordance with the terms of the Merger Agreement and that none of the terms and
conditions contained therein has been or will be waived or modified in any
respect and (ii) as described in the Joint Proxy Statement/Prospectus. Any
change in the facts set forth or assumed herein could affect our conclusions.
Based upon and subject to the foregoing, we are of the opinion that
the material United States federal income tax consequences of the Merger to AEP,
Acquisition Sub and the Company are as follows: (i) the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code; (ii) AEP,
Acquisition Sub and the Company will each be a party to such reorganization
within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will
be recognized by AEP, Acquisition Sub and the Company as a result of the Merger.
<PAGE>
3 April 14, 1998
Our opinions are based upon the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Regulations promulgated thereunder and other
relevant judicial and administrative rulings or pronouncements, all as in effect
on the date hereof. Consequently, future changes in the law may cause the tax
consequences of the Merger to be materially different than those described
above.
We are members of the Bar of the State of New York, and we do not
express any opinions herein concerning any law other than the federal law of the
United States. In addition, except for the opinions set forth herein, we do not
express any other opinions in connection with the Merger or the transactions
contemplated by the Merger Agreement or described in the Joint Proxy
Statement/Prospectus.
This opinion letter (and the opinions expressed herein) is being
delivered to you in connection with the filing of the Joint Proxy
Statement/Prospectus and may not be relied upon by you or used, circulated,
quoted or otherwise referred to for any other purpose without our prior written
consent. We hereby consent to the filing this opinion letter as Exhibit 8.1 to
the Joint Proxy Statement/Prospectus and to the use of our name in the Joint
Proxy Statement/Prospectus under the caption "The Merger-Certain U.S. Federal
Income Tax Consequences".
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit A
[American Electric Power Company, Inc. Letterhead]
April 14, 1998
Re: The Merger of Augusta Acquisition Corporation
With and into Central and South West Corporation
------------------------------------------------
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion regarding the material
United States federal income tax consequences of the merger (the "Merger") of
Augusta Acquisition Corporation ("Newco") with and into Central and South West
Corporation (the "Company") pursuant to the Agreement and Plan of Merger, dated
as of December 21, 1997, by and among American Electric Power Company, Inc.
("AEP"), Newco and the Company (the "Merger Agreement"). We understand that you
will be relying on such facts and representations in delivering this opinion.
Unless otherwise defined herein, capitalized terms shall have the meanings
ascribed to them in the Merger Agreement.
The undersigned, a duly authorized officer of AEP, hereby represents
and warrants, after due inquiry and investigation of such matters, that, as of
the Effective Time:
1. The Merger will be effected in accordance with the Merger Agreement.
2. The fair market value of the AEP Common Stock received by each
stockholder of the Company in the Merger will be approximately equal to the fair
market value of the Company Common Stock surrendered by such stockholder in the
Merger.
3. To the knowledge of the management of AEP, the stockholders of the
Company do not plan or intend to sell, exchange, or otherwise dispose of a
number of shares of the AEP Common Stock to be received by them in the Merger
that would reduce the ownership of AEP Common Stock by such stockholders to a
number of shares having a value, as of the Effective Time, of less than fifty
percent (50%) of the value of all the formerly outstanding shares of Company
Common Stock as of the same time. For purposes of this representation, shares
of Company Common Stock exchanged for cash or other property or exchanged for
cash in lieu of fractional share interests of AEP Common Stock will be treated
as outstanding Company Common Stock on the date of the Merger. Moreover, shares
of Company Common Stock and shares of AEP Common Stock held by stockholders of
the Company and otherwise sold, redeemed or disposed of prior or subsequent to
and as part of
<PAGE>
Simpson Thacher & Bartlett -2- April 14, 1998
the overall plan of Merger will be considered in making this representation. In
addition, and not in limitation of the foregoing, AEP has considered in making
this representation any shares of Company Common Stock that have been sold,
redeemed or otherwise disposed of by stockholders who own or owned five percent
(5%) or more of the Company Common Stock after the announcement of the Merger
and prior to the Effective Time to the extent the management of AEP has
knowledge on the date hereof of any such sales, redemptions or dispositions.
Except as set forth on Exhibit 1 to this letter, to the knowledge of the
management of AEP, there are no stockholders who own five percent (5%) of the
Company Common Stock on the date hereof.
4. Following the Merger, the Company will hold at least 90% of the fair
market value of the net assets and at least 70% of the fair market value of the
gross assets held by the Company and Newco, as the case may be, immediately
prior to the Merger. For purposes of this representation, amounts paid by the
Company or Newco to shareholders of the Company who receive cash or other
property, amounts used by the Company and Newco to pay expenses incurred in
connection with the Merger and all redemptions and distributions (except for
regular, normal dividends) made by the Company will be considered assets held by
the Company or Newco, as the case may be, immediately prior to the Merger.
5. Neither AEP nor any corporation affiliated with AEP will (i) be under
any obligation or will have entered into any agreement or understanding to
redeem or repurchase any of the AEP Common Stock issued to stockholders of the
Company in the Merger or to make any extraordinary distributions in respect of
such AEP Common Stock or (ii) have any plan or intention to reacquire any of the
AEP Common Stock issued in the Merger.
6. AEP has no plan or intention to (i) liquidate the Company, (ii) merge
the Company with or into another corporation, (iii) sell or otherwise dispose of
the stock of the Company, except for transfers of such stock to corporations
controlled by AEP, or (iv) cause the Company to sell or otherwise dispose of any
of its assets, or any assets that it acquired from Newco, except for
dispositions in the ordinary course of its business or transfers of assets to a
corporation controlled by the Company.
7. Following the Merger, the Company will continue its historic business
or use a significant portion of its historic business assets in a business.
8. Prior to the Merger, AEP will own all of the outstanding stock of
Newco.
9. Newco is being formed solely to effect the Merger and it will not
conduct any business or other activities prior to the Merger. Newco will have
no liabilities that will be assumed by the Company and it will not transfer any
assets to the Company in the Merger that are subject to any liabilities.
<PAGE>
Simpson Thacher & Bartlett -3- April 14, 1998
10. Pursuant to the Merger, at least 80% of the Company Common Stock will
be exchanged solely for AEP Common Stock. For purposes of this representation,
shares of Company Common Stock exchanged for cash or other property originating
with AEP will be treated as outstanding Company Common Stock on the Effective
Date.
11. At the Effective Time, the Company will not have any warrants,
options, convertible securities or any other type of right pursuant to which any
person could acquire any stock of the Company.
12. AEP does not own, nor has it owned during the past five years, any
stock of the Company.
13. The Company has no plan or intention to issue any additional shares of
stock that would cause AEP to own less than (i) 80% of the total combined voting
power of all classes of Company stock entitled to vote or (ii) 80% of any other
class of stock of the Company.
14. AEP, Newco and the Company and the stockholders of the Company will
pay their respective expenses, if any, incurred in connection with the Merger.
15. There will be no intercorporate indebtedness existing between AEP or
its subsidiaries and the Company or its subsidiaries that was issued, acquired
or will be settled at a discount.
16. Neither AEP nor Newco will (i) elect, or have in effect an
election, to be treated as a "regulated investment company" or as a "real
estate investment trust" or file any tax return consistent with such
treatment, or (ii) be a corporation 50% or more of the fair market value of
whose total assets are stock or securities and 80% or more of the fair market
value of whose total assets are assets held for investment. In making the
determinations described in (ii) above, (x) the stock and securities of any
subsidiary of AEP or Newco shall be disregarded and AEP or Newco, as the case
may be, shall be deemed to own its ratable share of such subsidiary's assets
and (y) a corporation shall be considered to be a subsidiary of AEP or Newco,
as the case may be, if AEP and/or Newco owns 50% or more of the combined
voting power of all classes of the stock of such subsidiary that are entitled
to vote, or 50% or more of the total value of all of the outstanding stock of
such subsidiary. In addition, in determining the fair market value of AEP's
and Newco's total assets for the purposes of making this representation, AEP
and Newco shall exclude any cash and cash items (such as receivables),
government securities and, to the extent provided in the applicable Treasury
regulations, any assets acquired (through incurring indebtedness or
otherwise) for the purposes of causing AEP or Newco to not be characterized
as an entity described in (i) or (ii) of the first sentence of this paragraph
or causing AEP or Newco to meet the requirements of Section 368(a)(2)(F)(ii)
of the Internal Revenue Code of 1986, as amended (the "Code").
17. AEP, Newco and the Company will not be under the jurisdiction of a
court in a
<PAGE>
Simpson Thacher & Bartlett -4- April 14, 1998
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
18. The fair market value of the assets of the Company will equal or
exceed the sum of its liabilities plus the amount of liabilities, if any, to
which such assets will be subject.
19. The payment of cash in lieu of fractional shares of AEP Common Stock
is solely for the purpose of avoiding the expense and inconvenience to AEP of
issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the stockholders of the Company instead of issuing fractional shares of AEP
Common Stock will not exceed one percent of the total consideration that will be
issued in the Merger to the stockholders of the Company in exchange for their
shares of Company Common Stock. The fractional share interests of each
stockholder of the Company will be aggregated, and no stockholder of the Company
will receive cash in an amount equal to or greater than the value of one full
share of AEP Common Stock.
20. None of the compensation to be received by any shareholder-employees
of the Company will be separate consideration for, or allocable to, any of their
shares of the Company Common Stock; none of the AEP Common Stock to be received
by any shareholder-employees of the Company will be separate consideration for,
or allocable to, any employment agreement; and the compensation paid to any
shareholder-employees of the Company will be for services actually rendered (or
to be rendered) and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services.
AEP acknowledges that your tax opinion may not accurately describe the
tax consequences of the Merger if any of the foregoing facts or representations
is inaccurate.
Very truly yours,
American Electric Power Company, Inc.
/s/ G.P. Maloney
-------------------------------------
By: G.P. Maloney
Title: Vice President and Secretary
<PAGE>
Exhibit B
[Central and South West Corporation Letterhead]
April 14, 1998
Re: The Merger of Augusta Acquisition Corporation
With and into Central and South West Corporation
------------------------------------------------
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion regarding the material
United States federal income tax consequences of the merger (the "Merger") of
Augusta Acquisition Corporation ("Newco") with and into Central and South West
Corporation (the "Company") pursuant to the Agreement and Plan of Merger, dated
as of December 21, 1997, by and among American Electric Power Company, Inc.
("AEP"), Newco and the Company (the "Merger Agreement"). We understand that you
will be relying on such facts and representations in delivering this opinion.
Unless otherwise defined herein, capitalized terms shall have the meanings
ascribed to them in the Merger Agreement.
The undersigned, a duly authorized officer of the Company, hereby
represents and warrants, after due inquiry and investigation of such matters,
that, as of the Effective Time:
1. The Merger will be effected in accordance with the Merger Agreement.
2. The fair market value of the AEP Common Stock received by each
stockholder of the Company in the Merger will be approximately equal to the fair
market value of the Company Common Stock surrendered by such stockholder in the
Merger.
3. To the knowledge of the management of the Company, the stockholders of
the Company do not plan or intend to sell, exchange, or otherwise dispose of a
number of shares of the AEP Common Stock to be received by them in the Merger
that would reduce the ownership of AEP Common Stock by such stockholders to a
number of shares having a value, as of the Effective Time, of less than fifty
percent (50%) of the value of all the formerly outstanding shares of Company
Common Stock as of the same time. For purposes of this representation, shares
of Company Common Stock exchanged for cash or other property, or exchanged for
cash in lieu of fractional share interests of AEP Common Stock will be treated
as outstanding Company Common Stock on the date of
<PAGE>
Simpson Thacher & Bartlett -2- April 14, 1998
the Merger. Moreover, shares of Company Common Stock and shares of AEP Common
Stock held by stockholders of the Company and otherwise sold, redeemed or
disposed of prior or subsequent to and as part of the overall plan of Merger
will be considered in making this representation. In addition, and not in
limitation of the foregoing, the Company has considered in making this
representation any shares of Company Common Stock that have been sold, redeemed
or otherwise disposed of by stockholders who own or owned five percent (5%) or
more of the Company Common Stock after the announcement of the Merger and prior
to the Effective Time to the extent the management of the Company has knowledge
on the date hereof of any such sales, redemptions or dispositions. Except as
set forth on Exhibit 1 to this letter, to the knowledge of the management of the
Company, there are no stockholders who own five percent (5%) of the Company
Common Stock on the date hereof.
4. Following the Merger, to the knowledge of the Company, the Company
will hold at least 90% of the fair market value of the net assets and at least
70% of the fair market value of the gross assets held by the Company and Newco,
as the case may be, immediately prior to the Merger. For purposes of this
representation, amounts paid by the Company or Newco to shareholders of the
Company who receive cash or other property, amounts used by the Company and
Newco to pay expenses incurred in connection with the Merger and all redemptions
and distributions (except for regular, normal dividends) made by the Company
will be considered assets held by the Company or Newco, as the case may be,
immediately prior to the Merger.
5. To the knowledge of the Company, neither AEP nor any corporation
affiliated with AEP will (i) be under any obligation or will have entered into
any agreement or understanding to redeem or repurchase any of the AEP Common
Stock issued to stockholders of the Company in the Merger or to make any
extraordinary distributions in respect of such AEP Common Stock or (ii) have any
plan or intention to reacquire any of the AEP Common Stock issued in the Merger.
6. To the knowledge of the Company, AEP has no plan or intention to (i)
liquidate the Company, (ii) merge the Company with or into another corporation,
(iii) sell or otherwise dispose of the stock of the Company, except for
transfers of such stock to corporations controlled by AEP, or (iv) cause the
Company to sell or otherwise dispose of any of its assets, or any assets that it
acquired from Newco, except for dispositions in the ordinary course of its
business or transfers of assets to a corporation controlled by the Company.
7. Following the Merger, to the knowledge of the Company, the Company
will continue its historic business or use a significant portion of its historic
business assets in a business.
<PAGE>
Simpson Thacher & Bartlett -3- April 14, 1998
8. To the knowledge of the Company, Newco will have no liabilities that
will be assumed by the Company and it will not transfer any assets to the
Company in the Merger that are subject to any liabilities.
9. Pursuant to the Merger, at least 80% of the Company Common Stock will
be exchanged solely for AEP Common Stock. For purposes of this representation,
shares of Company Common Stock exchanged for cash or other property originating
with AEP will be treated as outstanding Company Common Stock on the Effective
Date.
10. At the Effective Time, the Company will not have any warrants,
options, convertible securities or any other type of right pursuant to which any
person could acquire any stock of the Company.
11. To the knowledge of the Company, AEP does not own, nor has it owned
during the past five years, any stock of the Company.
12. To the knowledge of the Company, the Company has no plan or intention
to issue any additional shares of stock that would cause AEP to own less than
(i) 80% of the total combined voting power of all classes of Company stock
entitled to vote or (ii) 80% of any other class of stock of the Company.
13. AEP, Newco and the Company and the stockholders of the Company will
pay their respective expenses, if any, incurred in connection with the Merger.
14. There will be no intercorporate indebtedness existing between AEP or
its subsidiaries and the Company or its subsidiaries that was issued, acquired
or will be settled at a discount.
15. The Company will (i) elect, or have in effect an election, to be
treated as a "regulated investment company" or as a "real estate investment
trust" or file any tax return consistent with such treatment or (ii) be a
corporation 50% or more of the fair market value of whose total assets are
stock or securities and 80% or more of the fair market value of whose total
assets are assets held for investment. In making the determinations
described in (ii) above, (x) the stock and securities of any subsidiary of
the Company shall be disregarded and the Company shall be deemed to own its
ratable share of such subsidiary's assets and (y) a corporation shall be
considered to be a subsidiary of the Company if the Company owns 50% or more
of the combined voting power of all classes of the stock of such subsidiary
that are entitled to vote, or 50% or more of the total value of all of the
outstanding stock of such subsidiary. In addition, in determining the fair
market value of its total assets for the purposes of making this
representation, the Company shall exclude any cash and cash items (such as
receivables), government securities and, to the extent provided in the
applicable Treasury regulations, any assets acquired (through incurring
indebtedness or otherwise) for purposes of causing the Company to not to be
characterized as an entity described in (i) or (ii) of the first
<PAGE>
Simpson Thacher & Bartlett -4- April 14, 1998
sentence of this paragraph or causing the Company to meet the requirements of
Section 368(a)(2)(F)(ii) of the Internal Revenue Code of 1986, as amended (the
"Code").
16. The Company will not be under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
17. The fair market value of the assets of the Company will equal or
exceed the sum of its liabilities plus the amount of liabilities, if any, to
which such assets will be subject.
18. To the knowledge of the Company, the payment of cash in lieu of
fractional shares of AEP Common Stock is solely for the purpose of avoiding the
expense and inconvenience to AEP of issuing fractional shares and does not
represent separately bargained-for consideration. To the knowledge of the
Company, the total cash consideration that will be paid in the Merger to the
stockholders of the Company instead of issuing fractional shares of AEP Common
Stock will not exceed one percent of the total consideration that will be issued
in the Merger to the stockholders of the Company in exchange for their shares of
Company Common Stock. To the knowledge of the Company, the fractional share
interests of each stockholder of the Company will be aggregated, and no
stockholder of the Company will receive cash in an amount equal to or greater
than the value of one full share of AEP Common Stock.
19. None of the compensation to be received by any shareholder-employees
of the Company will be separate consideration for, or allocable to, any of their
shares of the Company Common Stock; none of the AEP Common Stock to be received
by any shareholder-employees of the Company will be separate consideration for,
or allocable to, any employment agreement; and the compensation paid to any
shareholder-employees of the Company will be for services actually rendered (or
to be rendered) and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services.
The Company acknowledges that your tax opinion may not accurately
describe the tax consequences of the Merger if any of the foregoing facts or
representations is inaccurate.
Very truly yours,
Central and South West Corporation
/s/ Glenn D. Rosilier
----------------------------------
By: Glenn D. Rosilier
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 1
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the only persons or groups known to CSW as of April
14, 1998, with beneficial ownership of 5 percent or more of CSW's Shares.
NAME, ADDRESS OF
BENEFICIAL OWNERS
- ------------------
Mellon Bank and subsidiaries**
One Mellon Bank Center
Pittsburgh, PA 15258
** Mellon Bank Corporation and its subsidiaries, include Mellon Bank, N.A.,
and acts as trustees of an employee benefit plan of CSW.
<PAGE>
EXHIBIT 8.2
April 14, 1998
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, TX 75202
Reorganization Involving American Electric Power Company,
Inc. ("AEP"), Augusta Acquisition Corporation ("Sub"), and
Central and South West Corporation ("CSW")
Ladies and Gentlemen
We have been requested to render this opinion regarding certain matters of
U.S. federal income tax law in connection with the proposed merger in which Sub
will be merged with and into CSW, with CSW being a surviving corporation and a
wholly owned subsidiary of AEP ("Merger"). Pursuant to the Agreement and Plan of
Merger dated as of December 21, 1997, by and among AEP, Sub and CSW ("Merger
Agreement"), each of the shares of CSW Common Stock ("CSW Shares") will be
converted into a right to receive 0.60 of a share of AEP Common Stock ("AEP
Shares"). Unless otherwise defined herein, capitalized terms shall have the
meanings ascribed to them in the Merger Agreement.
You have asked our opinion regarding the qualification of the Merger as a
reorganization within the meaning of section 368(a) of the Internal Revenue Code
of 1986, as amended ("Code"). In rendering the opinion expressed below, we have
examined the Merger Agreement, the Joint Proxy Statement/Prospectus and such
other documents related to the Merger as we have deemed relevant and necessary.
Such opinion is subject, among other things, to the following conditions
and representations:
1. All original documents (including signatures) submitted to us are
authentic, all documents submitted to us as copies conform to the original
documents (which are
<PAGE>
Central and South West Corporation
Page 2 April 14, 1998
authentic), and there has been due execution and delivery of all documents where
due execution and delivery are prerequisites to the effectiveness thereof;
2. The documents we have reviewed are valid and enforceable under
applicable law;
3. The Merger will be effective under the applicable state law; and
4. AEP, Sub and CSW will report the Merger for U.S. federal income tax
purposes in a manner consistent with the opinion set forth below.
Furthermore, we have relied on the attached Certificates of Officers of AEP and
CSW, respectively, which set forth certain factual representations, without
undertaking any independent verification of such facts.
Based upon the foregoing documents, assumptions, conditions,
representations, and information, and subject to the further qualifications
set forth below, we are of the opinion that the Merger will qualify as a
reorganization within the meaning of section 368(a) of the Code, that AEP,
Sub and CSW each will be a party to the reorganization within the meaning of
section 368(b) of the Code, and that stockholders of CSW will not recognize
any gain or loss upon the receipt of AEP Shares in exchange for their CSW
Shares, other than with respect to cash received in lieu of fractional shares.
Our opinion set forth above is based on provisions of the Code, Treasury
Regulations, Internal Revenue Service ("IRS") rulings and pronouncements, and
judicial decisions currently applicable to the Merger, all of which are subject
to change at any time, possibly with retroactive effect. This opinion does not
address any state, local, or foreign tax consequences of the Merger.
In addition to your request for our opinion on this specific matter of
U.S. federal income tax law, you have asked us to review the discussion of U.S.
federal income tax issues contained in the Joint Proxy Statement/Prospectus. We
have reviewed the discussion entitled "Material U.S. Federal Income Tax
Consequences" contained in the Joint Proxy Statement/ Prospectus and believe
that such discussion accurately
<PAGE>
Central and South West Corporation
Page 3 April 14, 1998
describes the material U.S. federal income tax consequences to the holders of
CSW Shares as a result of the Merger. We hereby consent to the filing of this
opinion letter as an exhibit to the Joint Proxy Statement/Prospectus and to the
use of our name in the Joint Proxy Statement/Prospectus under the caption "The
Merger--Material U.S. Federal Income Tax Consequences."
No ruling has been or will be requested from the IRS concerning the
U.S. federal income tax consequences of the Merger. This opinion of counsel
represents only our best legal judgment and has no binding effect or official
status of any kind, and no assurance can be given that contrary positions
could not be taken by the IRS or that a court considering the issues would
not hold otherwise.
We do not undertake any obligation to update or supplement this letter to
reflect any facts or circumstances which may hereafter come to our attention
with respect to the opinion expressed above, including any changes in applicable
law which may hereafter occur.
Very truly yours,
/s/ Christy & Viener
CHRISTY & VIENER
<PAGE>
Exhibit A
[American Electric Power Company, Inc.'s letterhead]
CERTIFICATE OF OFFICER OF AMERICAN ELECTRIC POWER COMPANY,
INC.
Christy & Viener
620 Fifth Avenue
New York, NY 10020
Reorganization Involving American Electric Power
Company, Inc. ("AEP"), Augusta Acquisition
Corporation ("Sub"), and Central and South West
Corporation ("CSW")
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion regarding the material U.S.
federal income tax consequences of the merger of Sub with and into CSW
("Merger") pursuant to the Agreement and Plan of Merger dated as of December 21,
1997 by and among AEP, Sub and CSW ("Merger Agreement"). Pursuant to the Merger
Agreement, each of the shares of CSW Common Stock ("CSW Shares") will be
converted into a right to receive 0.60 of a share of AEP Common Stock ("AEP
Shares"). We understand that you will be relying on such facts and
representations in delivering your opinion. Unless otherwise defined herein,
capitalized terms shall have the meanings ascribed to them in the Merger
Agreement.
The undersigned, a duly authorized officer of AEP, hereby represents and
warrants, after due inquiry and investigation of such matters, that as of the
Effective Time:
1. The Merger will be effected in accordance with the Merger Agreement.
2. The fair market value of AEP Shares and other consideration received by
each CSW stockholder in the Merger will be approximately equal to the fair
market value of CSW Shares surrendered by such stockholder in the Merger.
3. To the knowledge of the management of AEP, the stockholders of CSW do not
plan or intend to sell,
<PAGE>
exchange or otherwise dispose of a number of AEP Shares to be received by
them in the Merger that would reduce the CSW stockholders' ownership of
AEP shares to a number of shares having a value, as of the Effective Time,
of less than 50% of the value of all formerly outstanding CSW Shares as of
that time. For purposes of this representation, CSW Shares exchanged for
cash or other property or exchanged for cash in lieu of fractional shares
of AEP Shares will be treated as outstanding on the date of the Merger.
Moreover, CSW Shares and AEP Shares held by the stockholders of CSW and
otherwise sold, redeemed, or disposed of prior or subsequent to, and as
part of the overall plan of, the Merger will be considered in making this
representation. In addition, without limiting the foregoing, AEP has
considered in making this representation any CSW Shares that have been
sold, redeemed or otherwise disposed of by stockholders who own or owned
5% or more of the CSW Shares after the announcement of the Merger and
prior to the Effective Time to the extent the management of AEP has
knowledge on the date hereof of any such sales, redemptions or
dispositions. Except as set forth in Exhibit 1 to this letter, to the
knowledge of the management of AEP, there are no stockholders who own 5%
of the CSW Shares on the date hereof.
4. Following the Merger, CSW will hold at least 90% of the fair market value
of its net assets and at least 70% of the fair market value of its gross
assets held immediately prior to the Merger, and CSW will also hold at
least 90% of the fair market value of Sub's net assets and at least 70% of
the fair market value of Sub's gross assets held immediately prior to the
Merger. For purposes of this representation, amounts paid by CSW or Sub to
stockholders of CSW who receive cash or other property, amounts used by
CSW or Sub to pay its reorganization expenses, and all redemptions and
distributions (except for regular, normal dividends) made by CSW or Sub
will be included as assets of CSW or Sub, respectively, held immediately
prior to the Merger.
5. Neither AEP nor any corporation affiliated with AEP will (i) be under any
obligation or will have entered into any agreement or understanding to
redeem or repurchase any of the AEP Shares issued to CSW stockholders in
the Merger or to make any extraordinary distributions in respect of AEP
Shares, or (ii) have any plan or intention to reacquire any of the AEP
Shares issued in the Merger.
6. AEP has no plan or intention to liquidate CSW, to merge CSW with or into
another corporation, to sell or otherwise dispose of the CSW Shares except
for transfers of stock to corporations controlled by AEP, or to cause CSW
to sell or otherwise dispose of any of its assets or of any of the assets
acquired from Sub except for dispositions made in the ordinary
-2-
<PAGE>
course of business or transfers of assets to a corporation controlled by
CSW.
7. Following the Merger, CSW will continue its historic business or use a
significant portion of its historic business assets in a business.
8. Prior to the Merger, AEP will own all of the outstanding stock of Sub.
9. Sub is being formed solely to effect the Merger and it will not conduct
any business or other activities prior to the Merger. Sub will have no
liabilities that will be assumed by CSW and it will not transfer any
assets to CSW in the Merger that are subject to any liabilities.
10. Pursuant to the Merger, at least 80% of the CSW Shares will be exchanged
solely for voting AEP Shares. For purposes of this representation, CSW
Shares exchanged for cash or other property originating with AEP will be
treated as outstanding CSW Shares at the Effective Time.
11. At the Effective Time, CSW will not have any warrants, options,
convertible securities or any other type of right pursuant to which any
person could acquire any stock of CSW.
12. AEP does not own, nor has it owned during the past five years, any stock
of CSW.
13. CSW has no plan or intention to issue any additional shares of CSW stock
that would result in AEP owning less than (i) 80% of the total combined
voting power of all classes of CSW stock entitled to vote or (ii) 80% of
any other class of stock of CSW.
14. AEP, Sub, CSW and CSW stockholders will pay their respective expenses, if
any, incurred in connection with the Merger.
15. There will be no intercorporate indebtedness existing between AEP or its
subsidiaries, and CSW or its subsidiaries, that was issued, acquired, or
will be settled at a discount.
16. Neither AEP nor Sub will (i) elect or have in effect an election to be
treated as a regulated investment company or a real estate investment
trust or file any tax return consistent with such treatment, or (ii) a
corporation 50% or more of the value of whose total assets are stock and
securities and 80% or more of the value of whose total assets are assets
held for investment. For purposes of clause (ii) in the preceding
sentence, stock and securities in any subsidiary of AEP or Sub shall be
disregarded and AEP or Sub, as the case may be, shall be deemed to own
its ratable share of such subsidiary's assets. A corporation shall be
considered a subsidiary of AEP or Sub, as the case may be, if AEP and/or
Sub owns either 50% or more of the combined voting
-3-
<PAGE>
power of all classes of the stock of such subsidiary that are entitled to
vote, or 50% or more of the total value of all outstanding stock of such
subsidiary. In determining the value of total assets for purposes of this
representation, there shall be excluded cash, cash equivalents (such as
receivables), government securities, and, to the extent provided in the
applicable Treasury regulations, assets acquired (through incurring
indebtedness or otherwise) for the purposes of causing AEP or Sub to fail
to be characterized as an entity described in clauses (i) or (ii)
of the first sentence of this paragraph or causing AEP or Sub to meet the
requirements of Section 368(a)(2)(F)(ii) of the Internal Revenue Code
of 1986, as amended.
17. AEP, Sub and CSW will not be under the jurisdiction of a court in a case
under Title 11 of the United States Code or a Federal or State court in a
receivership, foreclosure or similar proceeding.
18. At the Effective Time, the fair market value of the assets of CSW will
equal or exceed the sum of its liabilities plus the amount of liabilities,
if any, to which its assets will be subject.
19. The payment of cash in lieu of fractional shares of AEP Shares is solely
for the purpose of avoiding the expense and inconvenience of issuing
fractional shares and does not represent separately bargained for
consideration. The total cash consideration that will be paid in the
Merger to the stockholders of CSW instead of issuing fractional shares of
AEP Shares will not exceed 1% of the total consideration that will be
issued in the Merger to such stockholders in exchange for their CSW
Shares. The fractional share interests of each CSW stockholder will be
aggregated, and no CSW stockholder will receive cash in an amount greater
than the value of one full AEP Share.
20. None of the compensation received by any stockholder-employee of CSW will
be separate consideration for, or allocable to, any of their CSW Shares;
none of the AEP Shares received by any stockholder-employee of CSW will be
separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any stockholder-employee of CSW will be for
services actually rendered (or to be rendered) and will be commensurate
with amounts paid to third parties bargaining at arm's-length for similar
services.
-4-
<PAGE>
AEP acknowledges that your tax opinion may not accurately describe the tax
consequences of the Merger if any of the foregoing facts or representations is
inaccurate.
April 14, 1998
American Electric Power Company, Inc.
By: /s/ G. P. Maloney
----------------------
G. P. Maloney
Title: Vice President and Secretary
-5-
<PAGE>
Exhibit B
[Central and South West Corporation's letterhead]
CERTIFICATE OF OFFICER OF CENTRAL AND SOUTH WEST CORPORATION
Christy & Viener
620 Fifth Avenue
New York, NY 10020
Reorganization Involving American Electric Power
Company, Inc. ("AEP"), Augusta Acquisition
Corporation ("Sub"), and Central and South West
Corporation ("CSW")
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion regarding the material U.S.
federal income tax consequences of the merger of Sub with and into CSW
("Merger") pursuant to the Agreement and Plan of Merger dated as of December 21,
1997 by and among AEP, Sub and CSW ("Merger Agreement"). Pursuant to the Merger
Agreement, each of the shares of CSW Common Stock ("CSW Shares") will be
converted into a right to receive 0.60 of a share of AEP Common Stock ("AEP
Shares"). We understand that you will be relying on such facts and
representations in delivering your opinion. Unless otherwise defined herein,
capitalized terms shall have the meanings ascribed to them in the Merger
Agreement.
The undersigned, a duly authorized officer of CSW, hereby represents and
warrants, after due inquiry and investigation of such matters, that as of the
Effective Time:
1. The Merger will be effected in accordance with the Merger Agreement.
2. The fair market value of AEP Shares and other consideration received by
each CSW stockholder in the Merger will be approximately equal to the fair
market value of the CSW Shares surrendered by such stockholder in the
Merger.
3. To the knowledge of the management of CSW, the stockholders of CSW do not
plan or intend to sell, exchange or otherwise dispose of a number of AEP
Shares to be received by them in the Merger that would reduce the CSW
stockholders' ownership of AEP Shares to a number
<PAGE>
of shares having a value, as of the Effective Time, of less than 50% of
the value of all formerly outstanding CSW Shares as of that time. For
purposes of this representation, CSW Shares exchanged for cash or other
property or exchanged for cash in lieu of fractional shares of AEP Shares
will be treated as outstanding on the date of the Merger. Moreover, CSW
Shares and AEP Shares held by the stockholders of CSW and otherwise sold,
redeemed, or disposed of prior or subsequent to, and as part of the
overall plan of, the Merger will be considered in making this
representation. In addition, without limiting the foregoing, CSW has
considered in making this representation any CSW Shares that have been
sold, redeemed or otherwise disposed of by stockholders of CSW who own or
owned 5% or more of CSW Shares after the announcement of the Merger and
prior to the Effective Time to the extent the management of CSW has
knowledge on the date hereof of any such sales, redemptions or
dispositions. Except as set forth in Exhibit 1 to this letter, to the
knowledge of the management of CSW, there are no stockholders who own 5%
of CSW Shares on the date hereof.
4. Following the Merger, to the knowledge of CSW, CSW will hold at least 90%
of the fair market value of its net assets and at least 70% of the fair
market value of its gross assets held immediately prior to the Merger, and
CSW will also hold at least 90% of the fair market value of Sub's net
assets and at least 70% of the fair market value of Sub's gross assets
held immediately prior to the Merger. For purposes of this representation,
amounts paid by CSW or Sub to stockholders of CSW who receive cash or
other property, amounts used by CSW or Sub to pay its reorganization
expenses, and all redemptions and distributions (except for regular,
normal dividends) made by CSW or Sub, will be included as assets of CSW or
Sub, respectively, held immediately prior to the Merger.
5. To the knowledge of CSW, neither AEP nor any corporation affiliated with
AEP will (i) be under any obligation or will have entered into any
agreement or understanding to redeem or repurchase any of the AEP Shares
issued to CSW stockholders in the Merger, or to make any extraordinary
distributions in respect of AEP Shares, or (ii) have any plan or intention
to reacquire any AEP Shares issued in the Merger.
6. To the knowledge of CSW, AEP has no plan or intention to liquidate CSW, to
merge CSW with or into another corporation, to sell or otherwise dispose
of the CSW Shares except for transfers of stock to corporations controlled
by AEP, or to cause CSW to sell or otherwise dispose of any of its assets
or of any of the assets acquired from Sub, except for dispositions made in
the ordinary course of business or transfers of assets to a corporation
controlled by CSW.
-2-
<PAGE>
7. Following the Merger, to the knowledge of CSW, CSW will continue its
historic business or use a significant portion of its historic business
assets in a business.
8. To the knowledge of CSW, Sub will have no liabilities that will be assumed
by CSW and it will not transfer any assets to CSW in the Merger that are
subject to any liabilities.
9. In the Merger, at least 80% of the CSW Shares will be exchanged solely for
voting AEP Shares. For purposes of this representation, CSW Shares
exchanged for cash or other property originating with AEP will be treated
as outstanding CSW Shares at the Effective Time.
10. At the Effective Time, CSW will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to
which any person could acquire any stock of CSW.
11. To the knowledge of CSW, AEP does not own, nor has it owned during the
past five years, any stock of CSW.
12. To the knowledge of CSW, CSW has no plan or intention to issue additional
shares of CSW stock that would result in AEP owning less than (i) 80% of
the total combined voting power of all classes of CSW stock entitled to
vote or (ii) 80% of any other class of stock of CSW.
13. AEP, Sub, CSW and CSW stockholders will pay their respective expenses, if
any, incurred in connection with the Merger.
14. There will be no intercorporate indebtedness existing between AEP or its
subsidiaries, and CSW or its subsidiaries, that was issued, acquired, or
will be settled at a discount.
15. CSW will not (i) elect or have in effect an election to be treated as a
regulated investment company or a real estate investment trust or file
any tax return consistent with such treatment, or (ii) be a corporation
50% or more of the value of whose total assets are stock and securities
and 80% or more of the value of whose total assets are assets held for
investment. For purposes of clause (ii) in the preceding sentence, stock
and securities in any subsidiary of CSW shall be disregarded and CSW
shall be deemed to own its ratable share of such subsidiary's assets. A
corporation shall be considered a subsidiary of CSW if CSW owns either
50% or more of the combined voting power of all classes of the stock of
such subsidiary that are entitled to vote, or 50% or more of the total
value of all outstanding stock of such subsidiary. In determining the
value of total assets for purposes of this representation, there shall
be excluded cash, cash equivalents (such as receivables), government
securities, and, to the extent provided in the applicable Treasury
regulations, assets acquired (through incurring indebtedness or
otherwise) for the purposes of
-3-
<PAGE>
causing CSW to fail to be characterized as an entity described in clauses
(i) or (ii) of the first sentence of this paragraph or causing CSW
to meet the requirements of Section 368(a)(2)(F)(ii) of the Internal
Revenue Code of 1986, as amended.
16. CSW will not be under the jurisdiction of a court in a case under Title 11
of the United States Code or a Federal or State court in a receivership,
foreclosure or similar proceeding.
17. At the Effective Time, the fair market value of the assets of CSW will
equal or exceed the sum of its liabilities plus the amount of liabilities,
if any, to which those assets will be subject.
18. To the knowledge of CSW, the payment of cash in lieu of fractional shares
of AEP Shares is solely for the purpose of avoiding the expense and
inconvenience of issuing fractional shares and does not represent
separately bargained for consideration. To the knowledge of CSW, the total
cash consideration that will be paid in the Merger to the stockholders of
CSW instead of issuing fractional shares of AEP Shares will not exceed 1%
of the total consideration that will be issued in the Merger to such
stockholders in exchange for their CSW Shares. To the knowledge of CSW,
the fractional share interests of each CSW stockholder will be aggregated,
and no CSW stockholder will receive cash in an amount greater than the
value of one full AEP Share.
19. None of the compensation received by any stockholder-employee of CSW will
be separate consideration for, or allocable to, any of their CSW Shares;
none of the AEP Shares received by any stockholder-employee of CSW will be
separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any stockholder-employee of CSW will be for
services actually rendered (or to be rendered) and will be commensurate
with amounts paid to third parties bargaining at arm's-length for similar
services.
CSW acknowledges that your tax opinion may not accurately describe the tax
consequences of the Merger if any of the foregoing facts or representations is
inaccurate.
April 14, 1998
Central and South West Corporation
By: /s/ Glenn D. Rosilier
-----------------------
Glenn D. Rosilier
Title: Executive Vice President and
Chief Financial Officer
-4-
<PAGE>
EXHIBIT 1
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the only persons or groups known to CSW as of April
14, 1998, with beneficial ownership of 5 percent or more of CSW's Shares.
NAME, ADDRESS OF
BENEFICIAL OWNERS
- ------------------
Mellon Bank and subsidiaries**
One Mellon Bank Center
Pittsburgh, PA 15258
** Mellon Bank Corporation and its subsidiaries, include Mellon Bank, N.A.,
and acts as trustees of an employee benefit plan of CSW.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-50109 of American Electric Power Company, Inc. on
Form S-4 of our reports dated February 24, 1998, appearing in and incorporated
by reference in the Annual Report on Form 10-K of American Electric Power
Company, Inc. for the year ended December 31, 1997 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
April 16, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 16, 1998,
included in the Company's Form 10-K for the year ended December 31, 1997, and to
all references to our firm included in this registration statement.
/s/ Arthur Andersen LLP
-----------------------------------
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 16, 1998
<PAGE>
Exhibit 23.7
The Board of Directors
CSW UK Finance Company
We consent to the incorporation by reference in the registration statements on
Form S-4 dated 16 April 1998 of American Electric Power Company of our report
dated 19 January 1998, with respect to the consolidated balance sheet of CSW UK
Finance Company as of 31 December 1997, and the related consolidated statements
of earnings and cashflows for the year then ended and our report dated 22
January 1997 with respect to the consolidated balance sheet of CSW Investments
as of 31 December 1996, and the related consolidated statements of earnings and
cashflows for the year then ended, which reports are included in the annual
reports on Form 10-K of Central and South West Corporation.
/s/ KPMG Audit Plc
- ------------------------------
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 16 April 1998
<PAGE>
EXHIBIT 99.1
AMERICAN ELECTRIC POWER COMPANY, INC.
Proxy Solicited on Behalf of the Board of Directors
for the Annual Meeting to be held May 27, 1998
PROXY
- --------------------------------------------------------------------------------
The undersigned appoints E. Linn Draper, Jr., Peter J. DeMaria and Gerald P.
Maloney, and each of them, acting by a majority if more than one be present,
attorneys and proxies of the undersigned, with power of substitution, to
represent the undersigned at the annual meeting of shareholders of American
Electric Power Company, Inc. to be held on May 27, 1998, and at any adjournments
thereof, and to vote all shares of Common Stock of the Company which the
undersigned is entitled to vote on all matters coming before said meeting.
Trustee's Authorization. The undersigned authorizes Fidelity Management Trust
Company to vote all shares of Common Stock of the Company credited to the
undersigned's account under the American Electric Power System Employees Savings
Plan at the annual meeting in accordance with the instructions on the reverse
side.
Election of Directors. Nominees: 1. J.P. DesBarres, 2. E.L. Draper, Jr., 3.
R.M. Duncan, 4. R.W. Fri, 5. L.A. Hudson,
Jr., 6. L.J. Kujawa, 7. A.E. Peyton, 8. D.G.
Smith, 9. L.G. Stuntz, 10. K.D. Sullivan,
11. M. Tanenbaum.
You are encouraged to specify your choice by marking the appropriate boxes (SEE
REVERSE SIDE), but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations.
- --------------------------------------------------------------------------------
Comments:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(If you have written in the above space, please mark the "Special Attention" box
on the other side of this card.)
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
Your vote is important. You may vote the shares held in this account in any one
of the following three ways:
o Vote by mail. Complete, date, sign and mail your proxy card (above) in the
enclosed postage-paid envelope or, otherwise, return it to AEP, P.O. Box
8673, Edison, New Jersey 08818.
o Vote by phone. Call toll-free, 1-800-OK2-VOTE (1-800-652-8683) 24 hours a
day, 7 days a week from the U.S. and Canada to vote your proxy.
o Vote on the internet. Access the Web site at http://www.vote-by-net.com 24
hours a day, 7 days a week.
If you vote by phone or via the internet, please have your social security
number and proxy card available. The sequence of numbers appearing in the box on
the reverse side of this proxy card, just below the perforation, and your social
security number are necessary to verify your vote. A phone or internet vote
authorizes the named proxies in the same manner as if you marked, signed and
returned this proxy card.
If you vote by phone or vote using the internet, please do not mail your proxy.
THANK YOU FOR VOTING
Directions to the Fawcett Center
(614) 292-1342
State Route 315 to the Lane Avenue exit. [MAP OMITTED]
Go East on Lane Avenue.
Take Lane Avenue to Olentangy River Road.
Turn North (a left turn) on Olentangy River Road.
The Fawcett Center is the first driveway on
the East (right) side on Olentangy River Road.
[LOGO] PRINTED WITH SOY INK
[RECYCLE LOGO] Printed on recycled paper
<PAGE>
|X| Please mark your votes as in this example.
The proxies are directed to vote as specified below and in their discretion on
all other matters coming before the meeting. If no direction is made, the
proxies will vote FOR all nominees listed on the reverse side and FOR Proposals
1, 2, and 4.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR all nominees for election as
directors and FOR Proposals 1, 2, and 4.
- --------------------------------------------------------------------------------
1. Share issuance to CSW Stockholders Pursuant to Merger.
FOR AGAINST ABSTAIN
|_| |_| |_|
2. Increase Number of Authorized Shares of Common Stock.
FOR AGAINST ABSTAIN
|_| |_| |_|
3. Election of Directors (See Reverse).
FOR WITHHELD
|_| |_|
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------
4. Approval of Auditors.
FOR AGAINST ABSTAIN
|_| |_| |_|
SPECIAL ATTENTION
Mark here if you have written a comment on reverse. |_|
ANNUAL REPORT
Mark here to discontinue annual report mailing
for this account (for multiple-account holders only). |_|
ANNUAL MEETING
Mark here if you plan to attend the annual meeting. |_|
SIGNATURE(S)_____________________________ DATE _________________________, 1998
Please sign exactly as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- --------------------------------------------------------------------------------
^FOLD AND DETACH HERE^
------------------------------------------
FOR INSTRUCTIONS ON TELEPHONE AND INTERNET
VOTING SEE REVERSE
------------------------------------------
[LOGO] AMERICAN(R)
ELECTRIC
POWER
Annual Meeting
of Shareholders
Wednesday, May 27, 1998 o 9:30 a.m.
Admission Ticket Fawcett Center
- ----------------------- The Ohio State University
2400 Olentangy River Road
Columbus, Ohio
--------------------------------------------------------
Agenda
o Introduction and Welcome
o Issuance of Shares of AEP Common Stock to CSW
Stockholders Pursuant to the Merger Agreement
o Amend Restated Certificate of Incorporation to
Increase Number of Authorized Shares of AEP Common
Stock from 300,000,000 to 600,000,000
o Election of Directors
o Ratification of Auditors
o Chairman's Report
o Comments and Questions from Shareholders
- --------------------------------------------------------------------------------
If you plan to attend the 1998 annual meeting of shareholders and vote by mail,
please mark the "Annual Meeting" box on the proxy card above. Present this
ticket for admittance of shareholder(s) named above and a guest.
See reverse for directions and map of area.
<PAGE>
EXHIBIT 99.2
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION
PROXY: The undersigned hereby appoints E.R. Brooks,
Central and South West Molly Shi Boren, and Joe H. Foy, and each of them,
Corporation attorneys and proxies, with full power of substitution,
P.O. Box 660164 to vote all shares of stock of CENTRAL AND SOUTH WEST
Dallas, TX 75266-0164 CORPORATION held of record in the name of the
undersigned at the close of business on April 8, 1998,
at the annual meeting of stockholders of the Corporation
to be held on May 28, 1998, and at all adjournment(s)
thereof (Meeting):
The Corporation's Board of Directors (Board) recommends a vote IN FAVOR of items
(1), (2) and (3).
(1) APPROVAL AND ADOPTION OF THE MERGER AGREEMENT PROVIDING FOR THE
MERGER OF AUGUSTA ACQUISITION CORPORATION, A WHOLLY-OWNED SUBSIDIARY
OF AMERICAN ELECTRIC POWER, INC. WITH AND INTO CENTRAL AND SOUTH
WEST CORPORATION AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY.
FOR ______ AGAINST ______ ABSTAIN ______
(2) ELECTION OF DIRECTORS
_____ FOR all nominees listed below _______ WITHHELD AUTHORITY to vote
(except as marked to the for all nominees listed below
contrary below)
E.R. BROOKS, ROBERT W. LAWLESS AND JAMES L. POWELL, AS CLASS II DIRECTORS AND
WILLIAM R. HOWELL AND RICHARD L. SANDOR, AS CLASS III DIRECTORS
(INSTRUCTIONS: To withhold authority to vote for any individual nominee
write that nominee's name on the space provided below.)
--------------------------------------------------------------
(3) APPROVAL OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP BY THE BOARD AS
INDEPENDENT PUBLIC ACCOUNTANTS FOR 1998.
FOR ______ AGAINST ______ ABSTAIN ______
(4) THE TRANSACTION OF SUCH OTHER BUSINESS AS MAY PROPERLY BE PRESENTED
AT THE MEETING. THE CORPORATION'S BOARD AT THIS TIME KNOWS OF NO OTHER BUSINESS.
This Proxy when properly executed shall be voted as directed herein by the
undersigned stockholder. IN THE ABSENCE OF SPECIFIC DIRECTIONS, IT SHALL BE
VOTED FOR PROPOSALS 1 through 3.
Dated _______________, 1998
Please Sign Here
------------------------------------------
------------------------------------------
Sign exactly as name(s) printed at left.
State full title when signing in fiduciary
or representative capacity.
<PAGE>
EXHIBIT 99.3
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I, E.R. Brooks, hereby consent to the use of my name in Amendment No. 1 to
the Registration Statement of American Electric Power Company, Inc., to be filed
with the Securities and Exchange Commission as a person named therein as about
to become a director of American Electric Power Company, Inc. and the filing of
this consent as an exhibit to Amendment No. 1 to such Registration Statement.
/S/ E.R. BROOKS
--------------------------------------
E.R. Brooks
April 15, 1998
<PAGE>
Exhibit 99.4
American Electric Power Company, Inc.
The undersigned appoints E. Linn Draper, Jr., Peter J. DeMaria and Gerald P.
Maloney, and each of them, acting by a majority if more than one be present,
attorneys and proxies of the undersigned, with power of substitution, to
represent the undersigned at the annual meeting of shareholders of American
Electric Power Company, Inc. to be held on May 27, 1998, and at any adjournments
thereof, and to vote all shares of Common Stock of the Company which the
undersigned is entitled to vote on all matters coming before said meeting.
Trustee's Authorization. The undersigned authorizes Fidelity Management Trust
Company to vote all shares of Common Stock of the Company credited to the
undersigned's account under the American Electric Power System Savings Plan at
the annual meeting in accordance with the instructions below.
The Board of director Recommends a Vote:
"FOR" Proposals 1 and 2
"FOR" all Nominees for Director
"FOR" Proposal 4
Check this box to vote all proposals in accordance with the recommendations of
the board of Directors
The Board Recommends a Vote "FOR" Proposal 1 and 2
For Against Abstain
/ / / / / /
1. Share Issuance to CSW Stockholders Pursuant to Merger
For Against Abstain
/ / / / / /
2. Increase Number of Authorized Shares of Common Stock
The Board Recommends a Vote "FOR" all Nominees for Director
For all Nominees Withhold
Except as Noted As to all
Below Nominee
/ / / /
3. Election of Directors
Check the box for the director(s) from whom you wish to withhold your vote
J.P. DesBarres E.L. Draper, Jr. R.M. Duncan
R.W. Fri L.A. Hudson, Jr. L.J. Kujawa
A.E. Peyton D.G. Smith L.G. Stuntz
K.D. Sullivan M. Tanenbaum
<PAGE>
The board recommends a Vote "FOR" Proposal 4
For Against Abstain
/ / / / / /
4. Approval of Auditors
Check the box for the options which apply to you.
Discontinue Annual Report mailing for this account (for
multiple-account holders only).
Attend the Annual Meeting
To submit your vote please click the button below
(YOUR VOTE WILL NOT BE COUNTED UNTIL THE SUBMIT VOTE BUTTON IS PRESSED)
<PAGE>
Success! Your vote has been tabulated and will be applied within 24 hours.
Thank you for using First Chicago Trust Company's Vote-By-Net Facility.
To provide comments regarding the proxy you have just voted, please press the
button below.
You can now vote another proxy card, or return to
The First Chicago Trust Company Homepage
<PAGE>
Please send us your comments by filling out the following form.
Your Name:
E-mail address:
Mailing Address:
Daytime Phone:
Your Comments:
<PAGE>
Thank you for your comments!
You can now vote another proxy card, or return to
The First Chicago Trust Company Homepage.
<PAGE>
American Electric Power Company
1998 Vote-By-Phone Script
Thank you for calling First Chicago's proxy voting service. If you have a
United States social security number, press 1. If you do not have a United
States social security number, press 2.
>1 (GO TO (1.1)) >2 (GO TO (1.2))
(1.1) Using you touch tone phone, please enter the last four digits of your
social security number.
>xxx
(1.2) Please have your proxy card available before voting. Enter the voter
control number in the box including the pound sign as it appears below
the perforation on your proxy car.
>xxx#xxxx#xxxxxx#
(if the first part of the control number that identifies the company you are
voting is entered wrong, viz, xxx#xxxx#xxxxxx#
Is not a valid number. (go to (1.2))
(if good control number is entered)
the company you are voting is American Electric Power Company. If this is
correct, press1 now. If not, press 9.
>1
One moment please.
Your phone vote is subject to the same terms and authorization as indicated on
the proxy card. If also authorizes the named proxies to vote according to your
instructions at the meeting of shareholders. One moment please. (go to (1.3))
(If the second and/or third part of the control number is entered wrong, viz
xxx#xxxx#xxxxxx#)
I am unable to process this request at this time. (Go to (1.2))
<PAGE>
(If incorrect social security number is entered)
Our record show that you have a social security. (Go to (1.1))
>9 (go to (1.2))
(1.3) If you would like to attend the annual meeting, please press 1 now.
>1
Note. Attending!
>Nothing entered (Go to (1.4))
(1.4) If you would like us to discontinue mailing an annual report to this
account, press 1.
>1
Noted. Discontinue!
>Nothing entered. (Go to 1.5))
(1.5) To vote all proposals in accordance with the recommendations of the
board of Directors, press 1. If you wish to vote one proposal at a
time, press 2.
>1
You have voted with the recommendations of the board of directors on
all of the proposals. (Go to (1.8))
>2
Proposal #1
To vote For, please press 1. To vote Against, please press 2 to
Abstan, please press 3.
>1 (Go to next the proposal)
>2 (Go to next the proposal)
<PAGE>
>3 (Go to next the proposal)
Proposal #2
To vote For, please press 1. To vote Against, please press 2. To
Abstain, please press 3.
>1 (Go to next the proposal)
>2 (Go to next the proposal)
>3 (Go to next the proposal)
Directors, Proposal #3
To vote for, please press 1. To withhold from all directors, please
press 2. To withhold from individual directors, please press 3.
(Go to next the proposal)
(Go to next the proposal)
(Go to next the proposal)
(1.6) Using the proxy card, please press the corresponding number followed
by the number sign for each director from who you wish to withhold you
vote. When completed, press the number sign.
>Invalid number entered.
"xx is not a valid number for any of the directors listed on your proxy card."
(Go to (1.6)
>1# 3# 5## (go to next the proposal)
Auditors, Proposal #4
To vote For, please press 1. To vote Against, please press 2. To Abstain,
please press 3.
>1 (Go to next the proposal)
>2 (Go to next the proposal)
<PAGE>
>3 (go to next the proposal)
(1.7) I will now summarize your vote. Please confirm your vote at the end
of this message.
On proposal 1, you voted XXX
On proposal 2, you voted XXX
On proposal 3, you withheld your vote form director #1 #3 #5...
On proposal 4, you voted XXX
(1.8) to confirm your vote, press 1. To change it, press 9.
>1
One moment please.
Your vote has been successfully applied. It is not necessary for you to mail
your proxy card. If you wish to vote another proxy at this time, press 1.
Otherwise, you may hang up now.
>1 (Go to (1.2))
>9 (Go to (1.5))
Note: If no action is taken the following script applies.
> Nothing entered
Information needs to be entered using a touch tone telephone within the time
allowed. (Offer the script option that requires an action)
> Again, nothing entered
Information needs to be entered using a touch tone telephone within the time
allowed. (Offer the script option that requires an action)
The information entered continues to be invalid. I am unable to process your
request at this time. Thank you for calling. (Hang up) (End of call)
