Filed pursuant to Rule 424(b)(3)
SEC File No. 333-101576
PROPOSED MERGERYOUR VOTE IS VERY IMPORTANT
Black Hills Corporation, or Black Hills, and Mallon Resources Corporation, or Mallon, have agreed on a merger involving our two companies. Before we can complete the merger, we must obtain the approval of Mallons common shareholders. We are sending you this proxy statement/prospectus to ask you to vote in favor of the merger.
In the merger, Black Hills Acquisition Corp., a wholly-owned subsidiary of Black Hills, will merge with and into Mallon. Upon consummation of the merger, Mallon will be the surviving company and a wholly-owned subsidiary of Black Hills. As a Mallon shareholder, you will be entitled to receive .044 shares of Black Hills common stock for each share of Mallon common stock and cash instead of any fractional shares you would otherwise receive in the merger.
Black Hills common stock is traded on the New York Stock Exchange under the symbol BKH. On January 29, 2003, the closing price of Black Hills common stock was $24.04 per share and the closing price of Mallon common stock was $1.05 per share. We encourage you to obtain more recent quotations. Shares of Mallon common stock will be deregistered if the merger is consummated.
Mallon will hold a special meeting of its shareholders on March 10, 2003, at 9:00 a.m. local time, at the offices of Holme Roberts & Owen LLP, located at 1700 Lincoln Street, Suite 4100, Denver, Colorado 80203, to consider and vote on the merger agreement. At Mallons special meeting, Mallon will ask its common shareholders to consider and vote on the merger agreement. Shareholder approval of the proposal is a prerequisite to consummation of the merger. Holders of Mallon common stock are entitled to dissenters rights in connection with the merger, which are discussed in greater detail on page 38.
TO CAST YOUR VOTE FOR THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE.
The enclosed form of proxy, when executed and returned, will be voted as set forth therein. Any shareholder signing a proxy has the power to revoke the proxy in writing, addressed to Mallon, or in person at the meeting at any time before the proxy is exercised.
This document is a prospectus of Black Hills relating to the issuance of shares of Black Hills common stock in connection with the merger and a proxy statement for Mallon to use in soliciting proxies for its special meeting. It contains answers to frequently asked questions and a summary description of the merger followed by a more detailed discussion of the merger and related matters beginning on page 25. YOU SHOULD ALSO CONSIDER THE MATTERS DISCUSSED UNDER RISK FACTORS COMMENCING ON PAGE 11 OF THIS PROXY STATEMENT/PROSPECTUS. WE URGE YOU TO CAREFULLY REVIEW THIS ENTIRE DOCUMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED FEBRUARY 5, 2003 AND IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT FEBRUARY 7, 2003.
MALLON RESOURCES CORPORATION
999 18TH STREET, SUITE 1700
DENVER, COLORADO 80202
(303) 293-2333
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 2003
To Shareholders of Mallon Resources Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Mallon Resources Corporation, a Colorado corporation, or Mallon, will be held at the offices of Holme Roberts & Owen LLP located at 1700 Lincoln Street, Suite 4100, Denver, Colorado 80203, on March 10, 2003 at 9:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated October 1, 2002, among Black Hills Corporation, Black Hills Acquisition Corp. and Mallon.
2. To transact such other business incident to the conduct of the meeting as may properly come before the meeting or any adjournments or postponements thereof.
Only common shareholders of record at the close of business on January 23, 2003 are entitled to notice of and to vote at the Mallon special meeting or at any adjournments or postponements thereof. Approval of the merger agreement requires the affirmative vote of a majority of the outstanding shares of Mallon common stock. Approval of the merger agreement is a prerequisite to the completion of the merger. Holders of Mallon common stock are entitled to dissenters rights under the Colorado Business Corporation Act in respect of the merger.
The Mallon board of directors has determined that the terms of the merger agreement and the transactions contemplated by it are advisable and in the best interests of Mallon and its shareholders. Accordingly, the members of the Mallon board of directors have unanimously approved the merger and the merger agreement and recommend that common shareholders vote at the special meeting to approve the merger agreement.
Please do not send us any Mallon stock certificates at this time. If the merger is approved by the common shareholders of Mallon, and if the other conditions to the merger agreement are satisfied or waived, forms to be used to exchange your shares of Mallon common stock for shares of Black Hills Corporation common stock will be mailed to you.
By Order of the Board of Directors,
George O. Mallon, Jr.
Chairman
Denver, Colorado
February 7, 2003
YOUR VOTE IS VERY IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD AND THUS ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING IF YOU ARE UNABLE TO ATTEND. IF YOU DO ATTEND THE SPECIAL MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information about our companies from documents we have filed with the Securities and Exchange Commission, or SEC, but have not included or delivered with this document. If you call or write us, we will send you these documents, excluding exhibits, without charge. You can contact us at:
Black Hills Corporation 625 Ninth Street Rapid City, South Dakota |
Mallon Resources Corporation 999 18th Street, Suite 1700 Denver, Colorado 80202 | |
Attention: Steven J. Helmers 605-721-2300 |
Attention: Roy K. Ross 303-293-2333 |
PLEASE REQUEST DOCUMENTS FROM EITHER COMPANY NOT LATER THAN FEBRUARY 28, 2003. IF YOU REQUEST ANY DOCUMENTS, WE WILL MAIL THE DOCUMENTS TO YOU BY FIRST CLASS MAIL, OR ANOTHER EQUALLY PROMPT MEANS, BY THE NEXT BUSINESS DAY AFTER WE RECEIVE YOUR REQUEST.
See Where You Can Find More Information on page 128 for more information about the documents referred to in this document.
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Certain Material United States Federal Income Tax Consequences |
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Board of Directors and Management of the Surviving Corporation Following the Merger |
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Interests of Certain Persons in the Merger That Differ from Your Interests |
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Reasons for the Merger; Recommendations of Mallons Board of Directors |
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CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER |
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United States Federal Income Tax Consequences to U.S. Holders That Participate in the Merger |
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United States Federal Income Tax Consequences to Non-U.S. Holders That Participate in the Merger |
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United States Federal Income Tax Consequences to Mallon Shareholders That Exercise Dissenters |
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION |
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Black Hills Corporation Notes to Unaudited Pro Forma Combined Condensed Financial Statements |
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TABLE OF CONTENTS(Continued)
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Securities Ownership of Management and Principal Shareholders |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MALLON |
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE OF MALLON |
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SECURITIES OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF MALLON |
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TABLE OF CONTENTS(Continued)
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LIST OF ANNEXES
Annex A |
Agreement and Plan of Merger dated as of October 1, 2002 by and among Black Hills Corporation, Black Hills Acquisition Corp. and Mallon Resources Corporation | |
Annex B |
Opinion of Waterous & Co. Limited dated October 1, 2002 | |
Annex C |
Provisions of Colorado Business Corporation Act relating to dissenters rights |
iv
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: | WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? |
A: | The proposed merger will combine the businesses of Black Hills and Mallon. Our companies are proposing the merger because we believe that the combined company, with its larger, more diverse asset base and expanded cash flow, will be better positioned to continue growing in the independent energy industry. We believe that the merger will, among other things: |
| support Black Hills integrated energy strategy by substantially increasing its current natural gas production and reserves; |
| increase Black Hills exploitation drilling potential; |
| result in administrative cost savings and operating efficiencies on a combined basis; and |
| improve the liquidity of Mallons shareholders. |
Please review the more detailed description of our reasons for the merger on pages 29-30.
Q: | HOW WILL THE MERGER WORK? |
A: | Black Hills Acquisition Corp., a wholly-owned subsidiary of Black Hills, will merge with and into Mallon and Mallon will continue as the surviving corporation and will be a wholly-owned subsidiary of Black Hills. We refer to Black Hills Acquisition Corp. as Merger Sub in this document. Shareholders of Mallon will become shareholders of Black Hills. |
Q: | WHAT WILL HAPPEN TO MALLON COMMON STOCK AND STOCK OPTIONS IN THE MERGER? |
A: | Mallon shareholders will receive .044 of a share of Black Hills common stock for each share of Mallon common stock they own. Mallon shareholders will also receive cash for any fractional Black Hills shares they would otherwise receive in the merger. As of the close of business on the effective date of the merger, all outstanding options to purchase Mallon common stock that are not exercised will be cancelled and terminated automatically. Each holder of an option who exercises such option concurrently with the consummation of the merger will receive .044 of a share of Black Hills common stock for each share of Mallon common stock received upon exercise of such option. |
Q: | WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? |
A: | Subject to shareholder and regulatory approval, we hope to complete the merger in the first quarter of 2003. |
Q: | WHEN IS THE SPECIAL SHAREHOLDERS MEETING? |
A: | Mallons special meeting of shareholders will take place on March 10, 2003. The time and location of the special meeting is specified on the cover page of this document. |
Q: | WHAT WILL HAPPEN AT THE SPECIAL SHAREHOLDERS MEETING? |
A: | Mallons shareholders will vote on whether to approve the merger agreement and the transactions contemplated by the merger agreement. |
Q: | WHAT VOTE IS REQUIRED FOR THE PROPOSAL? |
A: | At the Mallon special meeting, approval of the merger agreement requires the affirmative vote of a majority of the outstanding shares of Mallon common stock. |
v
Q: | WHAT DO I NEED TO DO TO VOTE? |
A: | If you own Mallon common stock, after reading this document, indicate on the enclosed proxy how you want to vote, sign it and mail it in the enclosed return envelope as soon as possible so that your shares will be represented at the special meeting. If you sign and send in your proxy card and do not indicate how you want to vote, your proxy will be counted as a vote in favor of the proposals submitted at the special meeting. The failure to return your proxy card will have the same effect as voting against the merger. |
You may attend the special meeting and vote your shares in person, rather than signing and mailing your proxy card. In addition, you may revoke your proxy on or before the day of the special meeting by following the instructions on page 23. You then may either change your vote or attend the special meeting and vote in person. |
THE MEMBERS OF THE MALLON BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND RECOMMEND THAT MALLON SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT. |
Q: | IF MY SHARES ARE HELD IN STREET NAME BY MY BROKER, WILL MY BROKER VOTE THEM FOR ME? |
A: | Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares, following the procedure provided by your broker. |
Q: | SHOULD I SEND IN MY STOCK CERTIFICATES NOW? |
A: | No. After the merger is completed, we will send you written instructions that explain how to exchange your stock certificates for certificates representing Black Hills common stock. Please do not send in any stock certificates until you receive these written instructions and the letter of transmittal. |
Q: | WILL MALLON SHAREHOLDERS BE ABLE TO TRADE THE BLACK HILLS COMMON STOCK THAT THEY RECEIVE IN THE MERGER? |
A: | Yes. Except for Black Hills common stock to be held by certain affiliates of Mallon, the Black Hills common stock received in the merger will be freely tradable. The Black Hills common stock issued in connection with the merger will be listed on the New York Stock Exchange under the symbol BKH. |
Q: | AM I ENTITLED TO DISSENTERS RIGHTS? |
A: | Yes. Holders of Mallon common stock are entitled to dissenters rights in connection with the merger. See the detailed description beginning on page 38. |
Q: | WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO BLACK HILLS AND MALLON COMMON SHAREHOLDERS? |
A: | A summary of certain United States federal income tax consequences of the merger likely to be material to typical shareholders of Mallon and Black Hills is included in the section Certain Material United States Federal Income Tax Consequences of the Merger beginning on page 51. |
Q: | ARE THERE RISKS ASSOCIATED WITH THE MERGER THAT I SHOULD CONSIDER IN DECIDING HOW TO VOTE? |
A: | Yes. You should carefully read the detailed description of the risks associated with the merger and Black Hills beginning on page 11. |
vi
Q: | WHO CAN HELP ANSWER MY QUESTIONS? |
A: | If you have more questions about the merger you should contact: |
Roy K. Ross |
Mallon Resources Corporation |
999 18th Street, Suite 1700 |
Denver, Colorado 80202 |
(303) 293-2333 |
Q: | WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES? |
A: | Both of our companies file periodic reports with the SEC. You may read and copy this information at the SECs public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information about the reference room. This information is also available through the Internet at the Edgar database maintained by the SEC at http://www.sec.gov and, with respect to Black Hills, at the offices of the New York Stock Exchange. |
viii
This summary primarily highlights selected information from this document and does not contain all of the information that may be important to you. To understand the merger fully and for a more complete description of the terms of the merger, you should read carefully this entire document and the other available information referred to in Where You Can Find More Information on page 128. We have included page references parenthetically to direct you to more complete descriptions of the topics presented in this summary. The merger agreement is the legal document that governs the merger and is included as Annex A to this proxy statement/prospectus. If you are not familiar with certain industry terms used in this document, you should read Glossary of Oil and Gas Terms on pages 127-128.
The Companies (see pages 84-85 and pages 107-111)
Black Hills Corporation
P. O. Box 1400 (57709-1400)
625 Ninth Street
Rapid City, South Dakota 57701
605-721-1700
Black Hills is a growth oriented, diversified energy holding company operating principally in the United States. Its regulated and unregulated businesses have expanded significantly in recent years. Its integrated energy group produces and markets power and fuel. Black Hills produces and sells electricity in a number of markets, with a strong emphasis on the western United States. It also produces coal, natural gas and crude oil primarily in the Rocky Mountain region and markets fuel products nationwide. Its electric utility serves an average of 59,600 customers in South Dakota, Wyoming and Montana. Black Hills communications group offers state-of-the-art broadband communication services to over 23,700 residential and business customers in Rapid City and the northern Black Hills region of South Dakota. Its predecessor company was incorporated and began providing electric utility service in 1941 and began selling and marketing various forms of energy on an unregulated basis in 1956.
Mallon Resources Corporation
999 18th Street, Suite 1700
Denver, Colorado 80202
303-293-2333
Mallon is an independent energy company engaged in oil and natural gas exploration, development and production. Mallon conducts its operations through its wholly-owned subsidiary, Mallon Oil Company. Mallon operates primarily in New Mexico, where nearly all of its estimated proved reserves are located in the San Juan Basin. Mallon has been active in the San Juan Basin since 1984.
In the merger, Merger Sub will merge with and into Mallon and Mallon will continue as the surviving corporation and will be a wholly-owned subsidiary of Black Hills. Mallons shareholders will receive .044 of a share of Black Hills common stock for each share of Mallon common stock they own and cash in lieu of any fractional shares of Black Hills common stock. As of the close of business on the effective date of the merger, all outstanding options to purchase Mallon common stock that are not exercised will be cancelled and terminated automatically. Each holder of an option who exercises such option concurrently with the consummation of the merger will receive .044 of a share of Black Hills common stock for each share of Mallon common stock received upon exercise of such option and cash in lieu of any fractional shares of Black Hills common stock.
1
The Mallon Special Meeting (see pages 21-24)
A special meeting of Mallon shareholders will be held on March 10, 2003 at the offices of Holme Roberts & Owen LLP located at 1700 Lincoln Street, Suite 4100, Denver, Colorado, 80203, commencing at 9:00 a.m., local time. At the Mallon special meeting, holders of Mallon common stock will be asked to:
| approve the merger agreement and the transactions contemplated thereby; and |
| act on other matters that may be submitted to a vote at the meeting. |
Approval of the merger agreement is a prerequisite to completion of the merger.
Mallons Recommendation to Shareholders (see pages 29-30)
The Mallon board of directors has unanimously approved the merger and the merger agreement and recommends that holders of Mallon common stock vote FOR approval of the merger agreement.
Opinion of Mallons Financial Advisor (see pages 30-35)
In deciding to approve the merger agreement, the Mallon board of directors considered the opinion from its financial advisor. Mallon received a written opinion dated October 1, 2002 from its financial advisor, Waterous & Co. Limited, that as of that date, the exchange ratio was fair, from a financial point of view, to Mallons shareholders. The full text of this opinion describes the basis and assumptions on which it was rendered and is attached hereto as Annex B. You are encouraged to read this opinion in its entirety.
You can vote at the meeting of Mallon shareholders if you owned common stock at the close of business on January 23, 2003. You can cast one vote for each share of Mallon common stock you owned at such time.
The transaction of business at the Mallon special meeting requires the presence in person or by proxy of the holders of one third of the shares of Mallon common stock entitled to vote. Approval of the merger and adoption of the merger agreement requires the affirmative vote of a majority of the outstanding shares of Mallon common stock. Abstentions and broker non-votes will count in determining whether a quorum is present at the special meeting. However, abstentions and broker non-votes will be the equivalent of a no vote on the proposal to approve the merger and adopt the merger agreement.
Credit Agreement (see pages 50 and 102-104)
At the time of executing the merger agreement, Aquila Energy Capital Corporation, or Aquila, assigned to Black Hills the credit agreement dated as of September 9, 1999, as amended, that Aquila had in place with Mallon and Mallon Oil. At that time, Mallon and Mallon Oil owed to Aquila approximately $29.3 million in principal and accrued interest, which Black Hills paid to Aquila on October 1, 2002 in consideration for the assignment. Upon the assignment of the credit agreement to Black Hills, Mallon and Mallon Oil became indebted to Black Hills for that amount. In connection with the assignment of the credit agreement: (i) Aquila and Mallon released one another, and Black Hills and Aquila released one another, from all claims that may have arisen under the credit agreement, (ii) Aquila assigned to Mallon the 615,000 shares of Mallon common stock that Mallon had issued to Aquila in connection with the credit agreement and various amendments thereof (which shares were subsequently cancelled), (iii) Aquila and Mallon terminated their agency agreement, and (iv) Aquila Merchant Services, Inc., or AMS, Mallon and Mallon Oil terminated certain hedge agreements among them in exchange for a payment of approximately $1.2 million to AMS.
2
Immediately after the assignment of the credit agreement to Black Hills, Black Hills, Mallon and Mallon Oil entered into an amended and restated credit agreement dated as of October 1, 2002, by which the parties amended and restated the original credit agreement that had been assigned to Black Hills. Under the amended and restated credit agreement, Black Hills loaned to Mallon and Mallon Oil the following additional amounts subject to the following conditions: (i) approximately $1.2 million to be paid to AMS as consideration to AMS for the termination of two ISDA Master Agreements and the hedge agreements related thereto and (ii) approximately $1.4 million to settle a tax dispute with the Jicarilla Apache Indian Nation, or the Nation. Black Hills also agreed to loan at the request of Mallon and Mallon Oil, after Black Hills has received an applicable AFE acceptable to it in its reasonable discretion, amounts to cover costs incurred in drilling four wells on certain land of the Nation. The drilling advance is not to exceed the difference between $2.5 million and the advance made to the Nation to settle the tax dispute.
On December 19, 2002, Mallon and Black Hills executed the first amendment to the amended and restated credit agreement to, among other things, provide for an additional advance to Mallon of $753,266 consisting of: (i) amounts to be paid to certain Mallon employees in satisfaction of Mallons obligations to such employees under Mallons bonus pool and its severance and sale program; and (ii) amounts (not to exceed $10,766) required to satisfy the Medicare tax related to the payments described in clause (i).
Voting Agreements (see pages 21-22)
Each of George O. Mallon, Jr., Roy K. Ross, Peter H. Blum, Christopher H. B. Mills, Roger R. Mitchell, Francis J. Reinhardt, Jr., J.O. Hambro Capital Management Limited and Hare & Co. A/C Bank of New York entered into a voting agreement with Black Hills and Merger Sub to vote all of the shares of Mallon stock owned, controlled or subsequently acquired by them in favor of the merger agreement.
The aggregate amount of shares of Mallon common stock subject to the Mallon voting agreements represents approximately 11.56% of the outstanding Mallon common stock as of the record date for the Mallon special meeting. The Mallon voting agreements terminate upon the earlier to occur of the written mutual consent of the parties, the effective time of the merger, or the termination of the merger agreement in accordance with its terms.
Accounting Treatment (see page 36)
The merger will be accounted for as a purchase transaction for financial accounting purposes. Upon completion of the merger, Black Hills will record the assets acquired and the liabilities assumed from Mallon based upon their estimated fair market value. Black Hills will account for its oil and natural gas operations using the full cost method of accounting.
Certain Material United States Federal Income Tax Consequences (see pages 51-57)
We expect that, for United States federal income tax purposes, the merger will be classified as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Code. Assuming that the merger meets this classification: (1) Mallon shareholders who are United States persons (as defined in Section 7701(a)(30) of the Code) generally will not recognize any gain or loss as a result of the exchange of shares of Mallon common stock for shares of Black Hills common stock in the merger; (2) Mallon shareholders who are not United States persons (as defined in Section 7701(a)(30) of the Code) may recognize gain or loss as a result of the exchange of shares of Mallon common stock for shares of Black Hill common stock in the merger; (3) Mallon shareholders that exercise compensatory options to purchase Mallon common shares in connection with the merger will be required to recognize ordinary income with respect to such exercise; and (4) Mallon shareholders that successfully exercise dissenters rights in connection with the merger generally will be required to recognize gain or loss.
3
It is a condition to the merger that Black Hills and Mallon each receive an opinion from tax counsel to the effect that the merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. These opinions will be based on customary assumptions and customary representations made by, among others, Black Hills and Mallon. These opinions will represent the legal judgment of tax counsel to Black Hills and Mallon and will neither bind the Internal Revenue Service, or the IRS, nor preclude the IRS or the courts from adopting a contrary position. Neither Black Hills nor Mallon intends to obtain a ruling from the IRS regarding the tax consequences of the merger.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. MALLON SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
Board of Directors and Management of the Surviving Corporation Following the Merger
Upon completion of the merger, Merger Sub will merge with and into Mallon and Mallon will continue as the surviving corporation and will be a wholly owned subsidiary of Black Hills. The directors and officers of Merger Sub immediately prior to the merger will be the directors and officers of the surviving corporation. The articles of incorporation and bylaws of Merger Sub will be the articles of incorporation and bylaws of the surviving corporation. The surviving corporation will change its name to MRC Resources Corporation.
Regulatory Matters (see page 36)
To our knowledge, the merger does not require the approval of any U.S. federal or state agency, other than the effectiveness of the registration statement of which this proxy statement/prospectus is a part and compliance with the Colorado Business Corporation Act.
Comparative Per Share Market Price Information
Shares of Black Hills common stock are listed on the NYSE and shares of Mallon common stock are traded on the OTC Bulletin Board. The following table sets forth the closing prices per share of Black Hills common stock and Mallon common stock and the equivalent pro forma per share price for Mallon common stock as of October 1, 2002, the last trading day prior to the first public announcement of the execution of the merger agreement:
Black Hills |
$ |
26.57 | |
Mallon |
$ |
.43 | |
Mallon equivalent price |
$ |
1.17 |
Dissenters Rights for Shareholders (see pages 38-41)
Under Colorado law, holders of Mallon common stock are entitled to dissent and obtain payment of the fair value of their shares in connection with the merger. Shareholders who dissent from the merger may require Mallon to purchase their dissenting shares for cash at a price equal to the fair value of the shares. If the merger is approved, shareholders of Mallon who are then entitled to demand payment for their shares will be sent separately a notice of dissenters rights and instructions regarding how to exercise such rights.
4
Conditions to the Merger (see pages 47-48)
We will complete the merger only if a number of conditions to the merger are satisfied or waived. In addition to customary conditions relating to the accuracy of representations and warranties and Black Hills and Mallons compliance with the merger agreement, these conditions include the following:
| the merger and the merger agreement shall have been approved and adopted by the required vote of Mallon shareholders; |
| the waiting period applicable to the completion of the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, if any, shall be expired or terminated; |
| other than the articles of merger, all authorizations or orders or registrations, declarations or filings with, or expirations of waiting periods imposed by, any governmental authority shall have been filed, been obtained or occurred; |
| the registration statement, of which this proxy statement/prospectus is a part, shall have been declared effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order; |
| no governmental authority or court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, regulation or order which is in effect and which has the effect of making the merger illegal or otherwise prohibiting completion of the merger; |
| all of the shares of Black Hills common stock to be issued in connection with the merger shall have been approved for listing on the NYSE, subject to official notice of issuance; |
| the Mallon employee royalty bonus pool shall have been terminated; |
| Black Hills and Mallon shall have received an opinion from their respective counsel to the effect that the merger will be treated for United States federal income tax purposes as a reorganization; |
| Black Hills shall have received a comfort letter from Mallons independent auditors; |
| holders of not more than 5% of the shares of Mallon common stock entitled to vote on the merger shall have dissented to the merger; |
| Mallons officers and directors shall have resigned their positions; and |
| Mallon shall have taken all such actions as have been reasonably requested by Black Hills to satisfy any outstanding liens and obligations to the Nation pursuant to the notice of lien for possessory interest taxes for the year 2002. |
Termination of the Merger Agreement (see pages 48-49)
The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after approval by the common shareholders of Mallon:
| by the mutual written consent of Black Hills and Mallon; |
| by either Black Hills or Mallon in certain circumstances if the effective time of the merger shall not have occurred by April 30, 2003; |
| by either Black Hills or Mallon if there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in the merger agreement, which breach would, if uncured as of the effective time, cause certain closing conditions not to be satisfied and shall not have been cured within 20 business days following the breaching partys receipt of written notice of such breach from the other party; |
5
| by either Black Hills or Mallon if a court of competent jurisdiction or other governmental authority shall have issued a nonappealable final order or taken any other nonappealable final action, in each case having the effect of permanently enjoining or otherwise permanently prohibiting the merger; |
| by Black Hills if (i) the board of directors of Mallon has withdrawn or modified, in a manner adverse to Black Hills, its recommendation of the merger agreement or the merger; or (ii) the board of directors of Mallon has recommended to the shareholders of Mallon a superior proposal; |
| by Mallon in connection with the execution of a definitive agreement providing for a superior proposal in accordance with requirements of the merger agreement, provided that Mallon has complied with all applicable provisions of the merger agreement and, concurrently with such termination, Mallon pays the termination fee required by the merger agreement; |
| by either Black Hills or Mallon if any of the conditions to such partys obligation to consummate the transactions contemplated by the merger agreement will have become impossible to satisfy; or |
| by either Black Hills or Mallon if at the Mallon special meeting (including any adjournment or postponement thereof) the requisite shareholder approval is not obtained. |
Payments Upon Termination (see page 49)
Mallon will pay Black Hills a termination fee of $1,500,000 if the merger agreement is terminated in the following circumstances:
| by Black Hills if (i) the board of directors of Mallon has withdrawn or modified, in a manner adverse to Black Hills, its recommendation of the merger agreement or the merger; or (ii) the board of directors of Mallon has recommended to the shareholders of Mallon a superior proposal; or |
| by Mallon in connection with the execution of a definitive agreement providing for a superior proposal as described in the merger agreement. |
Interests of Certain Persons in the Merger That Differ from Your Interests (see pages 36-38)
Some Mallon directors and officers have interests in the merger that differ from, or are in addition to, your interest as a shareholder of Mallon. Some Mallon officers and directors hold stock options under which the exercise price will be reduced to $0.01 per share as a result of the merger. Some Mallon officers and directors will receive employment severance payments made under the Mallon Severance and Sale Program or under their employment contracts with Mallon. Some Mallon officers and directors will receive payments made in connection with the termination of the Mallon employee royalty bonus pool as a result of the merger. Two of Mallons officers and directors have entered into consulting agreements with Black Hills, which will become effective upon consummation of the merger. Three Mallon officers and directors own interests in Deep Gas, LLC, which has entered into a farmout agreement with Black Hills. Mallons board of directors was aware of these interests and considered them in approving the merger.
6
No Solicitation (see pages 45-46)
Mallon agreed, subject to certain exceptions, not to initiate or engage in any discussions with another party regarding a business combination while the merger is pending. However, prior to obtaining the requisite shareholder approval:
| Mallon may provide information to, and otherwise engage in discussions with, another person in response to an unsolicited acquisition proposal or an offer if Mallons board of directors determines in good faith that such action is legally advisable for the board to comply with its fiduciary duties, the offer or proposal is not subject to any financing contingencies or is, in the good faith judgment of Mallons board of directors, reasonably capable of being financed, and Mallons board of directors determines in good faith after consultation with its independent counsel and financial advisor that such offer or proposal constitutes or may reasonably be expected to result in a superior proposal. Mallon must obtain a confidentiality agreement from the interested third party prior to providing information in response to a proposal. Mallon must promptly notify Black Hills of such proposal. |
| The Mallon board of directors may approve or recommend an acquisition proposal but only if (i) a period of 24 hours has elapsed following the delivery of the required notice to Black Hills and (ii) the acquisition proposal is deemed to be a superior proposal by the affirmative vote of a majority of the Mallon board of directors, taking into account any adjustments to the terms of the merger proposed by Black Hills. |
| Mallon may enter into a definitive agreement with a third person regarding a superior proposal, provided that Mallon has complied with the provisions set forth above and has paid the termination fee. |
Material Differences in the Rights of Shareholders (see pages 120-126)
As a result of the merger, Merger Sub will merge with and into Mallon and Mallon will continue as the surviving corporation, which will be a wholly-owned subsidiary of Black Hills. Mallon shareholders will become shareholders of Black Hills. Mallon is a Colorado corporation and Black Hills is a South Dakota corporation. The rights of Mallon shareholders are currently governed by the Colorado Business Corporations Act, or the CBCA, and Mallons articles of incorporation and bylaws. As shareholders of Black Hills, their rights will be governed by the South Dakota Business Corporation Act, or the SDCA, and by Black Hills articles of incorporation and bylaws. South Dakota law and the articles of incorporation and bylaws of Black Hills differ in some material respects from Colorado law and the articles of incorporation and bylaws of Mallon.
7
Summary Selected Historical Consolidated Financial Data
The following tables set forth summary selected historical consolidated financial data for Black Hills and Mallon for the periods presented. The following data has been derived from, and should be read in conjunction with, the consolidated financial statements and other supplemental financial information incorporated by reference in this document.
Black Hills
Nine months ended September 30 |
Years ended December 31 |
|||||||||||||||||||||||||||
2002 |
2001 |
2001 |
2000 |
1999 |
1998 |
1997 |
||||||||||||||||||||||
(in thousands except per share data) |
||||||||||||||||||||||||||||
Total assets |
$ |
1,903,922 |
|
$ |
1,646,768 |
|
$ |
1,658,767 |
|
$ |
1,320,320 |
|
$ |
668,492 |
|
$ |
559,417 |
|
$ |
508,741 |
| |||||||
Property and investments: |
||||||||||||||||||||||||||||
Total property and investments |
$ |
1,829,247 |
|
$ |
1,499,231 |
|
$ |
1,564,664 |
|
$ |
1,072,013 |
|
$ |
699,928 |
|
$ |
619,549 |
|
$ |
598,306 |
| |||||||
Accumulated depreciation and depletion |
|
398,137 |
|
|
312,109 |
|
|
328,325 |
|
|
277,797 |
|
|
245,992 |
|
|
229,942 |
|
|
197,179 |
| |||||||
Capital expenditures |
|
201,792 |
|
|
502,601 |
|
|
594,142 |
|
|
173,517 |
* |
|
152,948 |
|
|
27,225 |
|
|
28,319 |
| |||||||
Capitalization: |
||||||||||||||||||||||||||||
Long-term debt |
$ |
561,399 |
|
$ |
434,993 |
|
$ |
415,798 |
|
$ |
307,092 |
|
$ |
160,700 |
|
$ |
162,030 |
|
$ |
163,360 |
| |||||||
Preferred stock equity |
|
5,549 |
|
|
5,549 |
|
|
5,549 |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
| |||||||
Common stock equity |
|
529,278 |
|
|
500,458 |
|
|
509,615 |
|
|
278,346 |
|
|
216,606 |
|
|
206,666 |
|
|
205,403 |
| |||||||
Total capitalization |
$ |
1,096,226 |
|
$ |
941,000 |
|
$ |
930,962 |
|
$ |
589,438 |
|
$ |
377,306 |
|
$ |
368,696 |
|
$ |
368,763 |
| |||||||
Capitalization ratios: |
||||||||||||||||||||||||||||
Long-term debt |
|
51.2 |
% |
|
46.2 |
% |
|
44.7 |
% |
|
52.1 |
% |
|
42.6 |
% |
|
43.9 |
% |
|
44.3 |
% | |||||||
Preferred stock equity |
|
0.5 |
|
|
0.6 |
|
|
0.6 |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
| |||||||
Common stock equity |
|
48.3 |
|
|
53.2 |
|
|
54.7 |
|
|
47.2 |
|
|
57.4 |
|
|
56.1 |
|
|
55.7 |
| |||||||
Total |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% | |||||||
Total operating revenues |
$ |
312,215 |
|
$ |
365,800 |
|
$ |
461,938 |
|
$ |
292,142 |
|
$ |
185,287 |
|
$ |
180,674 |
|
$ |
171,936 |
| |||||||
Income from continuing operations |
$ |
47,063 |
|
$ |
82,969 |
|
$ |
87,584 |
|
$ |
52,812 |
|
$ |
37,738 |
|
$ |
25,808 |
** |
$ |
32,359 |
| |||||||
Dividends paid on common stock |
$ |
23,326 |
|
$ |
20,752 |
|
$ |
28,517 |
|
$ |
23,527 |
|
$ |
22,602 |
|
$ |
21,737 |
|
$ |
20,540 |
| |||||||
Common stock data: |
||||||||||||||||||||||||||||
Shares outstanding, basic |
|
26,778 |
|
|
24,988 |
|
|
25,374 |
|
|
22,118 |
|
|
21,445 |
|
|
21,623 |
|
|
21,692 |
| |||||||
Shares outstanding, diluted |
|
27,052 |
|
|
25,404 |
|
|
25,771 |
|
|
22,281 |
|
|
21,482 |
|
|
21,665 |
|
|
21,706 |
| |||||||
Shares outstanding, end of period |
|
26,887 |
|
|
26,459 |
|
|
26,652 |
|
|
22,921 |
|
|
21,372 |
|
|
21,578 |
|
|
21,705 |
| |||||||
Basic earnings per shareContinuing operations |
$ |
1.75 |
|
$ |
3.30 |
|
$ |
3.43 |
|
$ |
2.39 |
|
$ |
1.76 |
|
$ |
1.19 |
|
$ |
1.49 |
| |||||||
Diluted earnings per shareContinuing operations |
$ |
1.74 |
|
$ |
3.27 |
|
$ |
3.40 |
|
$ |
2.37 |
|
$ |
1.76 |
|
$ |
1.19 |
|
$ |
1.49 |
| |||||||
Dividends paid per share |
$ |
0.87 |
|
$ |
0.84 |
|
$ |
1.12 |
|
$ |
1.08 |
|
$ |
1.04 |
|
$ |
1.00 |
|
$ |
0.95 |
|
* | Excludes the non-cash acquisition of Indeck Capital, Inc. |
** | Includes impact of $8.8 million after tax, or 41 cents per average share, write-down of certain oil and gas properties. |
8
Mallon
Nine months ended September 30 |
Years ended December 31 |
|||||||||||||||||||||||||||
2002 |
2001 |
2001 |
2000 |
1999 |
1998 |
1997 |
||||||||||||||||||||||
(in thousands except per share data) |
||||||||||||||||||||||||||||
Total assets |
$ |
33,559 |
|
$ |
45,777 |
|
$ |
37,971 |
|
$ |
91,710 |
|
$ |
65,426 |
|
$ |
58,452 |
|
$ |
51,426 |
| |||||||
Property and equipment: |
||||||||||||||||||||||||||||
Total property |
$ |
105,227 |
|
$ |
102,151 |
|
$ |
103,666 |
|
$ |
130,644 |
|
$ |
112,740 |
|
$ |
102,888 |
|
$ |
66,573 |
| |||||||
Accumulated depreciation and depletion |
|
74,818 |
|
|
69,280 |
|
|
70,414 |
|
|
59,057 |
|
|
53,428 |
|
|
48,748 |
|
|
26,393 |
| |||||||
Capital expenditures |
|
1,628 |
|
|
15,309 |
|
|
16,785 |
|
|
17,937 |
|
|
9,852 |
|
|
36,354 |
|
|
20,169 |
| |||||||
Capitalization: |
||||||||||||||||||||||||||||
Long-term debt |
$ |
3,724 |
|
|
28,130 |
|
$ |
28,970 |
|
$ |
40,180 |
|
$ |
34,874 |
|
$ |
27,183 |
|
$ |
1 |
| |||||||
Series B stock* |
|
|
|
|
|
|
|
|
|
|
798 |
|
|
1,341 |
|
|
1,329 |
|
|
1,317 |
| |||||||
Mandatorily redeemable common stock |
|
5,362 |
|
|
4,694 |
|
|
4,853 |
|
|
4,248 |
|
|
3,450 |
|
|
|
|
|
|
| |||||||
Total shareholders equity (deficit) |
|
(10,713 |
) |
|
4,872 |
|
|
(599 |
) |
|
28,536 |
|
|
19,490 |
|
|
22,164 |
|
|
40,196 |
| |||||||
Total capitalization |
$ |
(1,627 |
) |
$ |
37,696 |
|
$ |
33,224 |
|
$ |
73,762 |
|
$ |
59,155 |
|
$ |
50,676 |
|
$ |
41,514 |
| |||||||
Capitalization ratios: |
||||||||||||||||||||||||||||
Long-term debt |
|
328.9 |
% |
|
74.6 |
% |
|
87.2 |
% |
|
54.4 |
% |
|
59.0 |
% |
|
53.7 |
% |
|
0.0 |
% | |||||||
Series B stock* |
|
0.0 |
|
|
0.0 |
|
|
0.0 |
|
|
1.1 |
|
|
2.2 |
|
|
2.6 |
|
|
3.2 |
| |||||||
Mandatorily redeemable common stock |
|
429.6 |
|
|
12.5 |
|
|
14.6 |
|
|
5.8 |
|
|
5.9 |
|
|
0.0 |
|
|
0.0 |
| |||||||
Common stock equity |
|
(658.5 |
) |
|
12.9 |
|
|
(1.8 |
) |
|
38.7 |
|
|
32.9 |
|
|
43.7 |
|
|
96.8 |
| |||||||
Total |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% | |||||||
Total revenues |
$ |
8,001 |
|
$ |
16,893 |
|
$ |
19,795 |
|
$ |
17,307 |
|
$ |
13,298 |
|
$ |
13,178 |
|
$ |
8,651 |
| |||||||
Loss from continuing operations |
$ |
(8,523 |
) |
$ |
(25,851 |
) |
$ |
(31,365 |
) |
$ |
(6,531 |
) |
$ |
(2,777 |
) |
$ |
(18,186 |
) |
$ |
(3,704 |
) | |||||||
Common stock data: |
||||||||||||||||||||||||||||
Shares outstanding, basic** |
|
10,940 |
|
|
10,668 |
|
|
10,686 |
|
|
8,525 |
|
|
7,283 |
|
|
7,015 |
|
|
4,682 |
| |||||||
Shares outstanding, end of period |
|
11,395 |
|
|
10,725 |
|
|
10,772 |
|
|
10,605 |
|
|
7,833 |
|
|
7,021 |
|
|
6,995 |
| |||||||
Basic loss per shareContinuing operations |
$ |
(0.83 |
) |
$ |
(2.47 |
) |
$ |
(2.99 |
) |
$ |
(0.83 |
) |
$ |
(0.41 |
) |
$ |
(2.61 |
) |
$ |
(0.92 |
) |
* | Series B Mandatorily Redeemable Convertible Preferred Stock. |
** | Because of Mallons loss position for all years presented, all common stock equivalents are anti-dilutive; therefore, only basic shares and loss per share data are presented. |
9
Mallon Estimated Proved Oil and Gas Reserves
Set forth below is a summary of the net quantities of Mallons proved crude oil and natural gas reserves estimated by independent consulting petroleum engineering firms for the year ended December 31, 2001. All of Mallons reserves are located in the continental United States.
2001 |
||||||||
Oil |
Gas |
|||||||
(in thousands of barrels of oil and MMcf of gas) |
||||||||
Estimated proved developed and undeveloped reserves: |
||||||||
Balance at beginning of year |
|
2,138 |
|
|
110,471 |
| ||
Production |
|
(105 |
) |
|
(5,954 |
) | ||
Additions |
|
(2 |
) |
|
12,690 |
| ||
Property sales |
|
(1,782 |
) |
|
(28,858 |
) | ||
Revisions to previous estimates |
|
(221 |
) |
|
(35,210 |
) | ||
Balance at end of year |
|
28 |
|
|
53,139 |
| ||
Estimated proved developed reserves at end of year included above |
|
16 |
|
|
37,635 |
| ||
Year-end prices (average well-head) |
$ |
16.50 |
|
$ |
1.92 |
| ||
The following table sets forth certain historical per share data for Black Hills and Mallon and pro forma and combined per share data after giving effect to the proposed merger under the purchase method of accounting. The unaudited pro forma financial statements contained on pages 57 through 62 and other pro forma financial information in this document are provided for information purposes only, and do not purport to represent what the financial position and results of operations of the combined company would actually have been had the merger in fact occurred on the dates indicated in the pro forma disclosures. Further, the pro forma financials and information do not purport to represent the future results that the combined company will achieve after the merger.
Black Hills Historical |
Combined Company Pro Forma |
Mallon | |||||||||||
Historical |
Equivalent Pro Forma | ||||||||||||
Net earnings (loss) per share from continuing operations: |
|||||||||||||
Basic: |
|||||||||||||
Year ended December 31, 2001 |
$ |
3.43 |
$ |
2.74 |
$ |
(2.99 |
) |
$ |
0.12 | ||||
Nine months ended September 30, 2002 |
$ |
1.75 |
$ |
1.59 |
$ |
(0.83 |
) |
$ |
0.07 | ||||
Diluted: |
|||||||||||||
Year ended December 31, 2001 |
$ |
3.40 |
$ |
2.72 |
$ |
(2.99 |
) |
$ |
0.12 | ||||
Nine months ended September 30, 2002 |
$ |
1.74 |
$ |
1.58 |
$ |
(0.83 |
) |
$ |
0.07 | ||||
Cash dividends per share: |
|||||||||||||
Year ended December 31, 2001 |
$ |
1.12 |
$ |
1.12 |
$ |
|
|
$ |
0.05 | ||||
Nine months ended September 30, 2002 |
$ |
0.87 |
$ |
0.87 |
$ |
|
|
$ |
0.04 | ||||
Book value per share: |
|||||||||||||
As of September 30, 2002 |
$ |
19.89 |
$ |
20.00 |
$ |
(0.98 |
) |
$ |
0.88 |
Mallons equivalent pro forma amounts have been calculated by multiplying the combined companys pro forma net earnings from continuing operations, cash dividends and book value per share amounts by the exchange ratio of .044 shares of Black Hills common stock for each share of Mallon common stock.
10
In considering the merger, you should be aware that there are various risks including those described below. You should consider carefully these risks together with all of the other information included in this document and the documents to which we have referred you. See Where You Can Find More Information on pages 128-130.
The market value of shares of Black Hills common stock that Mallon shareholders receive in the merger will vary as a result of the fixed exchange ratio and possible stock price fluctuations.
As a result of the merger, each outstanding share of Mallon common stock will be converted into .044 of a share of Black Hills common stock. The exchange ratio is a fixed ratio that will not be adjusted as a result of any increase or decrease in the price of either shares of Black Hills common stock or shares of Mallon common stock. The price of shares of Black Hills common stock at the time the merger is completed may be higher or lower than the price of Black Hills common stock on the date of this document or on the date of the special meeting of shareholders. Changes in the business, operations or prospects of Black Hills, market assessments of the benefits of the merger and of the likelihood that the merger will be completed, regulatory considerations, oil and natural gas prices, general market and economic conditions, or other factors may affect the price of shares of Black Hills common stock. Most of these factors are beyond our control.
Because the merger will be completed only after the special meeting of Mallons shareholders, we cannot assure you that the price of the shares of Black Hills common stock now, or on the date of the special meeting, will be indicative of their respective prices at the time the merger is completed. We urge you to obtain current market quotations for both shares of Black Hills and Mallon common stock. Neither Black Hills nor Mallon has a right to terminate the merger agreement solely because of adverse changes in the oil and natural gas industry prior to the effective date of the merger.
Some of Mallons directors and officers have interests in the merger that are different from your interests.
Some of the directors and officers of Mallon are parties to agreements, or participate in other arrangements, that give them interests in the merger that are different from your interests. For a discussion of these interests, see The MergerInterests of Certain Persons in the Merger, on pages 36-38. Mallon shareholders should consider these interests in connection with their vote on the merger, including whether these interests may have influenced those directors and officers to recommend or support the merger.
Risk s Related to Black Hills After the Merger
Black Hills has substantial indebtedness and will require significant additional amounts of debt and equity capital to grow its businesses and service its indebtedness. Black Hills future access to these funds is not certain, and its inability to access funds in the future could adversely affect its liquidity.
Financing for construction requirements and operational needs is dependent upon the cost and availability of external funds from capital markets and financial institutions at both company and project levels. Access to funds is dependent upon factors such as:
| general economic conditions; |
| regulatory authorizations and policies; |
| its credit rating; |
| the operations of the projects funded; |
| the credit ratings of project counterparties; and |
| the economics of the projects under construction. |
11
Counterparty Credit Risk
Black Hills performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers current creditworthiness, as determined by its review of their current credit information. Black Hills continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issue that it has identified. Black Hills cannot guarantee that it will continue to experience the same credit loss rates that it has in the past or that an investment grade counterparty will not default, as was the case with Enron in 2001.
Black Hills agreements with counterparties that have recently experienced downgrades in their credit ratings expose it to the risk of counterparty default, which could adversely affect its cash flow and profitability.
The credit ratings of the senior unsecured debt of Public Service Company of Colorado (PSCo), Nevada Power Company and Allegheny Energy Supply Company, counterparties under tolling agreements with Black Hills subsidiaries, have recently been downgraded by one or more rating agencies. The credit ratings of Nevada Power Company, its parent holding company, Sierra Pacific Resources, and Allegheny Energy Supply Company, have all been downgraded to non-investment grade status. In addition, project level financing arrangements in place for projects in Colorado and New York provide for the potential acceleration of payment obligations in the event of nonperformance by a counterparty under related power purchase agreements. If these or other counterparties fail to perform their obligations under their respective power purchase agreements, Black Hills financial condition and results of operation may be adversely affected. Black Hills may not be able to enter into agreements in replacement of its existing power purchase agreements on terms as favorable as its existing agreements, or at all.
Black Hills rate freeze agreement with the South Dakota Public Utilities Commission, which prevents it, absent extraordinary circumstances, from passing on to its South Dakota retail customers cost increases it may incur during the rate freeze period, could decrease its operating margins.
Black Hills rate freeze agreement with the South Dakota Public Utilities Commission provides that, until January 1, 2005, it may not apply to the Commission for any increase in rates, except upon the occurrence of various extraordinary events. Black Hills utilitys historically stable returns could be threatened by plant outages, machinery failure, increases in purchased power costs over which it has no control, acts of nature or other unexpected events that could cause its operating costs to increase and its operating margins to decline. Moreover, in the event of unexpected plant outages or machinery failures, Black Hills may be required to purchase replacement power in wholesale power markets at prices, which exceed the rates it is permitted to charge its retail customers.
Because wholesale power, fuel prices and other costs are subject to volatility, Black Hills revenues and expenses may fluctuate.
A substantial portion of Black Hills growth in net income in recent years is attributable to increasing wholesale electricity and natural gas sales into a robust market. The prices of energy products in the wholesale power markets have declined significantly since the first half of 2001. Power prices are influenced by many factors outside its control, including:
| fuel prices; |
| transmission constraints; |
| supply and demand; |
| weather; |
| economic conditions; and |
| the rules, regulations and actions of the system operators in those markets. |
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Moreover, unlike most other commodities, electricity cannot be stored and therefore must be produced concurrently with its use. As a result, wholesale power markets are subject to significant price fluctuations over relatively short periods of time and can be unpredictable.
Black Hills broadband communications business is subject to significant competition for its services and to rapid technological change.
Black Hills communications group, which provides a full suite of communication services, faces strong competition for its services from the incumbent local exchange carrier as well as from long distance providers, Internet service providers, the incumbent cable television provider and others.
The communications industry is subject to rapid and significant changes in technology. There can be no assurance that future technological developments will not have a material adverse effect on its competitive position.
Black Hills ability to recover its capital investment is dependent on its ability to sustain its customer base and is subject to the risk that technological advances may render its network obsolete. If Black Hills determines that it will be unable to recover its investment, Black Hills would be required to take a non-cash charge to earnings in an amount that could be material in order to write down a portion of its investment in its broadband communications business.
Construction, expansion, refurbishment and operation of power generation and transmission and resource recovery facilities involve significant risks which could lead to lost revenues or increased expenses.
The construction, expansion, refurbishment and operation of power generation and transmission and resource recovery facilities involve many risks, including:
| the inability to obtain required governmental permits and approvals; |
| the unavailability of equipment; |
| supply interruptions; |
| work stoppages; |
| labor disputes; |
| social unrest; |
| weather interferences; and |
| unforeseen engineering, environmental and geological problems and unanticipated cost overruns. |
The ongoing operation of Black Hills facilities involves all of the risks described above, in addition to risks relating to the breakdown or failure of equipment or processes and performance below expected levels of output or efficiency. New plants may employ recently developed and technologically complex equipment, especially in the case of newer environmental emission control technology. Any of these risks could cause Black Hills to operate below expected capacity levels, which in turn could result in lost revenues, increased expenses, higher maintenance costs and penalties. While Black Hills maintains insurance, obtains warranties from vendors and obligates contractors to meet certain performance levels, the proceeds of such insurance, and its rights under warranties or performance guarantees may not be adequate to cover lost revenues, increased expenses or liquidated damage payments.
Estimates of Black Hills proved reserves may materially change due to numerous uncertainties inherent in estimating oil and natural gas reserves.
There are many uncertainties inherent in estimating quantities of proved reserves and their values. The process of estimating oil and natural gas reserves requires interpretations of available technical data and various
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assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of its reserves. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretations and judgment, and the assumptions used regarding quantities of recoverable oil and gas reserves and prices for oil and natural gas. Actual prices, production, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from those assumed in its estimates, and these variances may be significant. Any significant variance from the assumptions used could result in the actual quantity of its reserves and future net cash flow being materially different from the estimates in its reported reserves. In addition, results of drilling, testing and production and changes in oil and natural gas prices after the date of the estimate may result in substantial upward or downward revisions.
Black Hills faces potential claims related to a forest fire in South Dakota.
In June 2002, a forest fire damaged approximately 11,000 acres of private and governmental land located near Deadwood and Lead, South Dakota. The fire destroyed approximately 20 structures (seven houses and 13 outbuildings) and caused the evacuation of the cities of Lead and Deadwood for approximately 48 hours.
The cause of the fire was investigated by the State of South Dakota. Alleged contact between power lines owned by Black Hills and undergrowth were implicated as the cause. Black Hills has initiated its own investigation into the cause of the fire, including the hiring of expert fire investigators, and that investigation is continuing.
Black Hills has been put on notice of potential private civil claims for property damage and business loss. In addition, the State of South Dakota initiated a civil action in the Seventh Judicial Circuit Court, Pennington County, South Dakota, seeking recovery of damages for fire suppression costs, reclamation and remediation. If it is determined that power line contact was the cause of the fire and that Black Hills was negligent in the maintenance of those power lines, it could be liable for resultant damages. Black Hills cannot predict the outcome of either its investigation or the viability of potential claims. Management believes that any such claims will not have a material adverse effect on its financial condition or results of operations.
Black Hills business is subject to substantial governmental regulation and permitting requirements as well as on-site environmental liabilities it assumed when it acquired some of its facilities. Black Hills may be adversely affected by any future inability to comply with existing or future regulations or requirements or the potentially high cost of maintaining the compliance of its facilities.
Black Hills business is subject to extensive energy, environmental and other laws and regulations of federal, state and local authorities. Black Hills generally is required to obtain and comply with a wide variety of licenses, permits and other approvals in order to operate its facilities. In the course of complying with these requirements, it may incur significant additional costs. If it fails to comply with these requirements, it could be subject to civil or criminal liability and the imposition of liens or fines. In addition, existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to Black Hills or its facilities, and future changes in laws and regulation may have a detrimental effect on its business.
In acquiring some of its facilities, Black Hills assumed on-site liabilities associated with the environmental condition of those facilities, regardless of when such liabilities arose and whether known or unknown, and in some cases agreed to indemnify the former owners of those facilities for on-site environmental liabilities. Black Hills strives at all times to be in compliance with all applicable environmental laws and regulations. However, steps to bring its facilities into compliance, if necessary, could be expensive, and thus could adversely affect its financial condition. Furthermore, with the continuing trends toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the assets Black Hills operates, it expects its environmental expenditures to be substantial in the future.
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Ongoing changes in the United States utility industry, such as state and federal regulatory changes, a potential increase in the number of its competitors or the imposition of price limitations to address market volatility, could adversely affect Black Hills profitability.
The United States electric utility industry is currently experiencing increasing competitive pressures as a result of:
| consumer demands; |
| technological advances; |
| deregulation; and |
| greater availability of natural gas-fired generation and other factors. |
The FERC has implemented and continues to propose regulatory changes to increase access to the nationwide transmission grid by utility and non-utility purchasers and sellers of electricity. In addition, a number of states have implemented or are considering or currently implementing methods to introduce and promote retail competition. Industry deregulation in some states has led to the disaggregation of some vertically integrated utilities into separate generation, transmission and distribution businesses, and deregulation initiatives in a number of states may encourage further disaggregation. As a result, significant additional competitors could become active in the generation, transmission and distribution segments of its industry.
Proposals have been introduced in Congress to repeal the Public Utility Holding Company Act of 1935, or PUHCA, and the FERC has publicly indicated support for the PUHCA repeal effort. To the extent competitive pressures increase and the pricing and sale of electricity assume more characteristics of a commodity business, the economics of domestic independent power generation projects may come under increasing pressure.
In addition, the independent system operators who oversee most of the wholesale power markets have in the past imposed, and may in the future continue to impose, price limitations and other mechanisms to address some of the volatility in these markets. These types of price limitations and other mechanisms may adversely affect the profitability of its generation facilities that sell energy into the wholesale power markets. Given the extreme volatility and lack of meaningful long-term price history in some of these markets and the imposition of price limitations by independent system operators, Black Hills may not be able to operate profitably in all wholesale power markets.
Provisions of South Dakota law and Black Hills articles of incorporation and bylaws, and several other factors, could limit another partys ability to acquire Black Hills and could deprive Black Hills common shareholders of an opportunity to obtain a takeover premium for their shares of common stock.
A number of provisions under South Dakota law and that are contained in Black Hills articles of incorporation and bylaws could make it difficult for another company to acquire Black Hills and for Black Hills common shareholders to receive any related takeover premium for their shares. These provisions, among other things:
| provide for a staggered board of directors, which allows only one-third of Black Hills directors to be elected each year; |
| restrict the ability of shareholders to take action by written consent and to call a special meeting; |
| authorize the board of directors to designate the terms of and issue new series of preferred stock; and |
| impose restrictions on business combinations with various interested parties. |
In addition, the South Dakota Public Utility Commission may assert jurisdiction to review and authorize certain business combinations or other acquisitions of Black Hills capital stock. Any attempt to obtain control of
15
Black Hills by means of a tender offer, merger or otherwise could be discouraged, delayed or prevented if the South Dakota Public Utility Commission determines it has the authority or the obligation to review the transaction.
Black Hills can issue shares of preferred stock that can adversely affect a shareholder.
Black Hills articles of incorporation authorize Black Hills to issue up to 25,000,000 shares of preferred stock with designations, rights and preferences determined from time-to-time by Black Hills board of directors. Accordingly, Black Hills board is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of Black Hills common shareholders. For example, an issuance of shares of preferred stock could:
| adversely affect the voting power of the common shareholders; |
| make it more difficult for a third party to gain control of Black Hills; |
| discourage bids for Black Hills common stock at a premium; or |
| otherwise adversely affect the market price of the common stock. |
The holders of Black Hills outstanding Series 2000-A preferred stock in some circumstances have voting rights which may allow them to elect up to a majority of Black Hills board of directors, adversely affect the voting power of Black Hills common shareholders or inhibit Black Hills ability to merge or consolidate with another company.
Black Hills currently has issued and outstanding 5,177 shares of Series 2000-A preferred stock, which Black Hills refers to as the Series A preferred stock. If dividends accrued on the Series A preferred stock remain unpaid in an amount equivalent to four quarterly dividends, but less than eight, the holders of the Series A preferred stock, voting separately as one class for that purpose, will be entitled at the next succeeding annual meeting of the shareholders to elect that number of directors as will constitute one-third of the then board members. If the unpaid dividends accrued on the Series A preferred stock equal or exceed eight quarterly dividends, the holders of the Series A preferred stock will be entitled to elect a majority of Black Hills board. In addition, Black Hills must obtain the consent of the holders of two-thirds of the outstanding shares of Black Hills Series A preferred stock, voting separately as one class for that purpose, before Black Hills may, among other things, sell all or substantially all of Black Hills property and assets to, or merge or consolidate into or with, any other company. The voting rights of the Series A preferred shareholders may adversely affect the voting power of Black Hills common shareholders and make it more difficult for Black Hills to acquire another company or for another company to acquire Black Hills.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this proxy statement/prospectus include forward-looking statements as defined by the SEC. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this proxy statement/prospectus that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on assumptions, which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, including, among other things:
| unanticipated developments in the western power markets, including unanticipated governmental intervention, deterioration in the financial condition of counterparties, default on amounts due from counterparties, adverse changes in current or future litigation, adverse changes in the tariffs of the California Independent System Operator, market disruption and adverse changes in energy and commodity supply, volume and pricing and interest rates; |
| prevailing governmental policies and regulatory actions with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power and other capital investments, and present or prospective wholesale and retail competition; |
| the State of Californias efforts to reform its long-term power purchase contracts and recover refunds for alleged price manipulation; |
| changes in and compliance with environmental and safety laws and policies; |
| weather conditions; |
| population growth and demographic patterns; |
| competition for retail and wholesale customers; |
| pricing and transportation of commodities; |
| market demand, including structural market changes; |
| changes in tax rates or policies or in rates of inflation; |
| changes in project costs; |
| unanticipated changes in operating expenses or capital expenditures; |
| capital market conditions; |
| technological advances by competitors; |
| competition for new energy development opportunities; |
| legal and administrative proceedings that influence our business and profitability; |
| the effects on our business, including the availability of insurance, resulting from the terrorist actions on September 11, 2001, or any other terrorist actions or responses to such actions; |
| the effects on our business resulting from the financial difficulties of Enron and other energy companies, including their effects on liquidity in the trading and power industry, and their effects on the capital markets views of the energy or trading industry, and our ability to access the capital markets on the same favorable terms as in the past; |
17
| the effects on our business in connection with a lowering of our credit rating (or actions we may take in response to changing credit ratings criteria), including, increased collateral requirements to execute our business plan, demands for increased collateral by our current counterparties, refusal by our current or potential counterparties or customers to enter into transactions with us and our inability to obtain credit or capital in amounts or on terms favorable to us; |
| risk factors discussed in this proxy statement/prospectus; and |
| other factors discussed from time to time in our filings with the SEC. |
New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.
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MARKET PRICE AND DIVIDEND INFORMATION
Black Hills common stock is listed and traded on the NYSE under the symbol BKH and Mallon common stock is traded on the OTC Bulletin Board under the symbol MLRC. The following table sets forth the high and low trading prices per share of Black Hills common stock and Mallon common stock, for the periods indicated:
Black Hills Common Stock |
Mallon Common Stock(1) | |||||||||||
High |
Low |
High |
Low | |||||||||
2000 |
||||||||||||
First Quarter |
$ |
25.19 |
$ |
20.44 |
$ |
6.25 |
$ |
3.81 | ||||
Second Quarter |
$ |
25.19 |
$ |
20.88 |
$ |
9.75 |
$ |
5.25 | ||||
Third Quarter |
$ |
30.13 |
$ |
22.00 |
$ |
8.75 |
$ |
6.06 | ||||
Fourth Quarter |
$ |
46.06 |
$ |
27.00 |
$ |
7.68 |
$ |
4.94 | ||||
2001 |
||||||||||||
First Quarter |
$ |
45.74 |
$ |
31.00 |
$ |
8.38 |
$ |
5.88 | ||||
Second Quarter |
$ |
58.50 |
$ |
39.50 |
$ |
8.25 |
$ |
5.30 | ||||
Third Quarter |
$ |
45.55 |
$ |
27.76 |
$ |
5.96 |
$ |
2.00 | ||||
Fourth Quarter |
$ |
34.20 |
$ |
26.00 |
$ |
3.65 |
$ |
2.19 | ||||
2002 |
||||||||||||
First Quarter |
$ |
33.98 |
$ |
26.01 |
$ |
3.04 |
$ |
0.83 | ||||
Second Quarter |
$ |
36.90 |
$ |
31.62 |
$ |
1.50 |
$ |
0.33 | ||||
Third Quarter |
$ |
35.08 |
$ |
23.03 |
$ |
0.90 |
$ |
0.21 | ||||
Fourth Quarter |
$ |
27.75 |
$ |
18.36 |
$ |
1.15 |
$ |
0.43 |
(1) | Prior to October 1, 2002, Mallons common stock traded on the Nasdaq National Market. Mallons common stock was delisted from the Nasdaq National Market on that date and commenced trading on the OTC Bulletin Board. |
The following table sets forth the closing prices per share of Black Hills common stock and Mallon common stock and the equivalent pro forma per share price for Mallon common stock as of October 1, 2002, the last full trading day prior to the first public announcement of the execution of the merger agreement:
Black Hills |
$ |
26.57 | |
Mallon |
$ |
.43 | |
Mallon equivalent price |
$ |
1.17 |
We urge you to obtain current market quotations before making any decision with respect to the merger.
Following the completion of the merger, shares of Black Hills common stock will continue to be traded on the NYSE under the symbol BKH.
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Black Hills has declared common stock dividends payable in cash in each year since its predecessors incorporation in 1941. At its January 2002 meeting, the board of directors raised the quarterly dividend to $0.29 per share, equivalent to an annual dividend of $1.16 per share. Dividend payment dates are normally March 1, June 1, September 1 and December 1.
Dividends Paid | ||||||||||||
1st |
2nd |
3rd |
4th | |||||||||
Year Ended December 31, 2002 |
||||||||||||
Dividend per share |
$ |
0.29 |
$ |
0.29 |
$ |
0.29 |
$ |
0.29 | ||||
Year Ended December 31, 2001 |
||||||||||||
Dividend per share |
$ |
0.28 |
$ |
0.28 |
$ |
0.28 |
$ |
0.28 | ||||
Year Ended December 31, 2000 |
||||||||||||
Dividend per share |
$ |
0.27 |
$ |
0.27 |
$ |
0.27 |
$ |
0.27 |
Mallon has never paid a dividend on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. Any future cash dividends would depend on future earnings, capital requirements, Mallons financial condition and other factors deemed relevant by the Mallon board of directors. Under the terms of Mallons amended and restated credit facility, it may not pay dividends without the consent of Black Hills.
20
This proxy statement/prospectus is being sent in connection with the solicitation of proxies from the holders of Mallon common stock by the Mallon board of directors for use at the Mallon special meeting.
The Mallon special meeting will be held at the offices of Holme Roberts & Owen LLP located at 1700 Lincoln Street, Suite 4100, Denver, Colorado 80203, on March 10, 2003, at 9:00 a.m., local time.
Purpose of the Special Meeting
The purpose of the Mallon special meeting is to consider and vote upon:
| a proposal to approve the merger agreement and the transactions contemplated by the merger agreement; and |
| such other business incident to the conduct of the meeting as may properly come before the meeting or any adjournments or postponements thereof. |
Approval of the merger agreement is a prerequisite to the completion of the merger.
Outstanding Shares Held on Record Date
As of the record date, January 23, 2003, there were 10,784,902 shares of Mallon common stock outstanding that are entitled to notice of, and to vote at, the special meeting.
Shares Entitled to Vote at the Special Meeting
Only holders of record of shares of Mallon common stock at the close of business on the applicable record date are entitled to notice of, and to vote at, the Mallon special meeting.
The presence, in person or by proxy, at the Mallon special meeting of the holders of one third of the shares of Mallon common stock outstanding and entitled to vote at the Mallon special meeting is necessary to constitute a quorum at the Mallon special meeting. If a quorum is not represented at the meeting, a vote for adjournment will be taken among the present shareholders or those represented by proxy. Abstentions and broker non-votes will count in determining whether a quorum is present at the special meeting. A broker non-vote occurs with respect to a proposal when a broker is not permitted to vote on that proposal without instruction from the beneficial owner of the shares of Mallon common stock and no instruction is given.
Vote Necessary to Approve Merger
Each share of Mallon common stock will be entitled to one vote at the Mallon special meeting.
Approval of the merger requires the affirmative vote of a majority of the outstanding shares of Mallon common stock. Abstentions and broker non-votes will be the equivalent of a no vote on the merger.
Each of George O. Mallon, Jr., Roy K. Ross, Peter H. Blum, Christopher H.B. Mills, Roger R. Mitchell, Francis J. Reinhardt, Jr., J.O. Hambro Capital Management Limited and Hare & Co. A/C Bank of New York
21
entered into a voting agreement with Black Hills and Merger Sub to vote all of the shares of Mallon common stock owned, controlled or subsequently acquired by them:
| in favor of the merger and the merger agreement; |
| against any acquisition proposal, as defined in the merger agreement, and against any proposal for action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Mallon under the merger agreement, any change in the directors of Mallon, any change in the present capitalization of Mallon or any amendment to Mallons articles of incorporation or bylaws, which could reasonably be expected to impede, interfere with, delay, postpone or materially adversely affect the transactions contemplated by the merger agreement or the likelihood of such transactions being completed; and |
| in favor of any other matter necessary for completion of the merger which is considered at any such meeting of shareholders. |
Each of these individuals or entities also agreed to revoke all prior proxies or powers of attorney in respect of their shares of Mallon common stock and appoint Black Hills and Merger Sub with full power of substitution as their true and lawful attorney and proxy, to demand that the secretary of Mallon call a special meeting of the shareholders of Mallon for the purpose of considering the merger agreement and the merger and all actions necessary to complete the merger and to vote each of such shares as its proxy, at every annual, special, adjourned or postponed meeting of the shareholders of Mallon.
In addition, each of these individuals or entities has agreed not to:
| grant any proxies or enter into any voting trust or other agreement or arrangement with respect to the voting of the shares of Mallon common stock held by them; |
| sell, assign, transfer, encumber or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, assignment, transfer, encumbrance or other disposition of the shares of Mallon common stock held by them unless the purchaser, assignee, transferee or other recipient of the shares agrees to be bound by the same restrictions as contained in the voting agreements; |
| seek or solicit any such sale, assignment, transfer, encumbrance or other disposition or any contract, option or other arrangement or assignment or understanding with respect to the direct or indirect sale of the shares of Mallon common stock held by them; |
| initiate, solicit, encourage or otherwise facilitate any inquiries regarding or the making or implementation of any acquisition proposal; or |
| engage in any discussions or negotiations with, or provide any information to, any person relating to or that may reasonably be expected to lead to an acquisition proposal. |
The restrictions set forth in the voting agreements and described above do not apply to the actions of Mallons directors and officers when they are acting in their capacity as directors and officers. The actions of Mallons directors and officers are governed by the terms and provisions of the merger agreement.
The aggregate amount of shares of Mallon common stock subject to the Mallon voting agreements represents approximately 11.56% of the outstanding Mallon common stock as of the record date for the Mallon special meeting. The Mallon voting agreements terminate upon the earlier to occur of the written mutual consent of the parties, the effective time of the merger or the termination of the merger agreement in accordance with its terms.
As of the Mallon record date, the directors and executive officers of Mallon owned, directly and indirectly, an aggregate of 1,246,201 shares of Mallon common stock, representing approximately 11.56% of the Mallon
22
shares entitled to vote at the Mallon special meeting. All of such shares are subject to voting agreements with Black Hills and Merger Sub, pursuant to which such shares are obligated to be voted in favor of the merger agreement and the merger.
All shares of Mallon common stock represented by properly executed proxies received prior to or at the Mallon special meeting and not duly and timely revoked, will be voted in accordance with the instructions indicated on such proxies. If no instructions are indicated on a properly executed returned proxy, such proxy will be voted FOR the proposals set forth on the proxy.
Brokers are permitted to vote on discretionary items if they have not received instructions from the beneficial owners, but they are not permitted to vote (a broker non-vote) on non-discretionary items absent instructions from the beneficial owner. Shares represented by abstentions and broker non-votes will be counted for purposes of determining whether there is a quorum at a special meeting. In accordance with NASD rules, brokers and nominees are precluded from exercising their voting discretion with respect to the approval of the merger and the merger agreement, and thus, absent specific instructions from the beneficial owner of such shares, are not empowered to vote such shares with respect to the approval or adoption of such proposals. Abstentions and broker non-votes will be the equivalent of a no vote on the proposals for the merger at the Mallon special meeting.
Any proxy given pursuant to this solicitation may be revoked at any time before such proxy is voted. Attendance at the Mallon special meeting will not in and of itself constitute a revocation of a proxy. You may revoke your proxy before it is voted by:
| submitting a new proxy with a later date; |
| notifying Mallons secretary in writing before the special meeting that you have revoked your proxy; or |
| voting in person, or notifying Mallons secretary orally of your wish to revoke your proxy, at the special meeting. |
Voting in Person
If you plan to attend the special meeting and wish to vote in person, we will give you a ballot at the special meeting. However, if your shares of common stock are held in the name of a brokerage firm or trustee, you must obtain from the firm or trustee an account statement or letter of other evidence of your beneficial ownership of the common shares.
People with Disabilities
We can provide reasonable assistance to help you participate in the special meeting if you tell us about your disability and your plan to attend. Please call or write Mallons secretary at least two weeks before the special meeting at the number or address provided on page 1.
Solicitation of Proxies
Mallon, its directors, executive officers and certain members of management and employees may be considered participants in solicitation of proxies from Mallons shareholders in connection with the merger. Information regarding such persons and a description of their interests in the merger is contained herein, see The MergerInterests of Certain Persons in the Merger, on pages 36-38. Mallon has engaged Georgeson Shareholder Communications, Inc., or Georgeson, to solicit proxies on its behalf in connection with Mallons special meeting.
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Mallon and Black Hills will each pay the costs and expenses incurred by them in connection with preparing, printing, filing and mailing of this proxy statement/prospectus.
Georgeson will disseminate broker search cards, distribute proxy materials, solicit ADP brokers, banks and institutional holders and deliver executed proxies. It will perform these basic services for a fee of $7,500. In addition, Georgeson will directly solicit shareholders by telephone for a fee yet to be determined. Mallon will pay directly or reimburse Georgeson for costs and expenses it incurs in connection with soliciting Mallon shareholders.
In addition, directors, officers and employees of Mallon may solicit proxies from shareholders by telephone or other electronic means or in person. Any director or employee of Mallon used to solicit proxies will not receive additional compensation for these services.
DO NOT SEND IN MALLON STOCK CERTIFICATES WITH YOUR PROXY CARDS. THE EXCHANGE AGENT WILL MAIL TRANSMITTAL FORMS WITH INSTRUCTIONS FOR THE SURRENDER OF MALLON COMMON STOCK CERTIFICATES IN EXCHANGE FOR CERTIFICATES FOR BLACK HILLS COMMON STOCK AS SOON AS PRACTICABLE AFTER THE COMPLETION OF THE MERGER.
Other Business; Adjournments and Postponements
We currently are not aware of any business to be acted upon at Mallons special meeting other than as discussed herein. If, however, other matters are properly brought before Mallons special meeting, or any adjourned or postponed special meeting, your proxies will have discretion to vote or act on those matters according to their best judgment, including to adjourn the special meeting.
Adjournments or postponements of the special meetings may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of common shares representing a majority of the votes present in person or by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting.
24
For the last several years, Mallons management has evaluated participation in a strategic business combination as a solution to challenges facing Mallon, including its highly leveraged capital structure and its limited access to capital necessary to fund its operations, including its drilling program.
In March 2000, Mallon engaged Chase Securities, Inc. (now known as J. P. Morgan Securities) to seek and evaluate potential strategic alternatives for Mallon, including consideration of possible merger partners. Over the course of the following year, Chase introduced Mallon to a number of potential merger partners, but no transactions resulted from that effort.
In 2001, Black Hills decided to explore opportunities to acquire a company operating in the oil and gas industry. On August 22, 2001, representatives of Black Hills met with representatives of ABN AMRO to discuss investment opportunities. At this meeting, it was decided that Mallon, among others, was a potentially attractive investment opportunity.
In May 2001, Mallon engaged Waterous & Co. Limited, or Waterous, to sell its Delaware Basin oil and gas properties. That effort resulted in the sale of Mallons Delaware Basin properties to Magnum Hunter Resources Inc. on September 14, 2001.
On September 7, 2001, Paul McMenemy, a Managing Director of ABN AMRO, contacted George O. Mallon, Jr., Mallons Chairman and CEO, on behalf of Black Hills to inquire whether Mallon would consider a merger or other business transaction with Black Hills. Mr. Mallon suggested that the two companies should perform more in-depth reviews of each others properties and operations. On October 5, 2001, Black Hills and Mallon entered into a confidentiality agreement. Following execution of the confidentiality agreement, the two parties began to share information with each other about their respective properties and operations.
On October 18 and 19, 2001, representatives of Black Hills, including David R. Emery, Black Hills Vice President of Fuel Resources, visited Mallons offices in Denver, at which time confidential information concerning Mallon was presented.
On October 22, 2001, Mr. Mallon and Peter H. Blum, an Executive Vice President of Mallon, flew to Rapid City, South Dakota, where they met with Mr. Emery and Daniel P. Landguth, Black Hills Chairman and CEO, and other senior management personnel of Black Hills and Mr. McMenemy of ABN AMRO. On October 23, 2001, Black Hills made a presentation to Messrs. Mallon and Blum. In addition, Messrs. Mallon and Blum advised Black Hills that Mallon would be most interested in a transaction proposal involving a tax-free exchange of stock, but that other proposals would be considered.
On November 2, 2001, Mr. McMenemy called Mr. Blum on behalf of Black Hills and advised Mr. Blum that, subject to the completion of a substantial amount of additional due diligence concerning Mallon and its properties, Black Hills was interested in a potential business combination transaction between Black Hills and Mallon if such a transaction could be struck with Mallon shares valued at approximately their then current trading range.
On November 5, 2001, Mr. Emery discussed the status of reserve data and other matters related to the proposed transaction with Mr. Mallon and Don Erickson, Senior Vice President of Mallon Oil Company.
On November 9, 2001, Mr. Mallon advised Mr. McMenemy that Mallon was not interested in the preliminary valuation range suggested by Black Hills, but was willing to continue discussions with Black Hills.
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On November 13, 2001, representatives of Black Hills engaged in a conference call with representatives of Mallon and ABN AMRO regarding valuation concerns. In particular, the group discussed the timing of development of proved undeveloped, probable and possible reserves. These preliminary valuations were based on reserve information supplied by Mallon and were subject to an independent reserve evaluation to be made by petroleum engineers for Black Hills. Black Hills determined that it would examine Mallons reserves by 160 acre spacing unit, rather than by the producing formations of Mallons wells. Messrs. Mallon, Erickson and Wendell Bond of Mallon, and Reed Ferrell of Reed W. Ferrell & Associates, Inc., Mallons independent petroleum engineers, met with representatives of Black Hills in Mallons offices to discuss reserve matters on November 14, 2001.
Following the November 14 meeting, Mr. McMenemy called Mr. Blum and advised him that Black Hills could not justify making an offer for Mallon at or above Mallons then-current stock price.
Mallon determined that it was in its shareholders best interests to again engage Waterous, this time to solicit indications of interest from other persons in a merger or other business transaction with Mallon.
In November 2001, Waterous opened a Mallon data room in Houston and prepared a confidential information memorandum regarding Mallon. Waterous distributed the confidential information memorandum and made presentations regarding Mallon to representatives of various entities that had expressed interest in a merger or other business transaction. Black Hills was given copies of the confidential information memorandum and related computer data disk prepared by Waterous, but did not visit the data room in Houston.
On November 28, 2001, Mr. McMenemy and Mr. Blum discussed a new reserve study being conducted for Mallon.
Black Hills executed a second confidentiality agreement with Mallon on December 20, 2001 as part of the Waterous sales process.
After a review of data provided by Waterous, on February 4, 2002, Black Hills determined that it would not make an offer for Mallon.
Waterous requested persons interested in a transaction with Mallon to submit expressions of their interest to Waterous on or before February 11, 2002. On that date, several proposals were submitted. Mallon and Waterous evaluated each of the proposals received and found each of them unacceptable.
Between March and July 2002, Mallon made a number of presentations to industry participants that had expressed interest in a business combination or other transaction, in which Mallon sought a buyer for an up to 50% working interest in Mallons East Blanco Gas Project.
On June 6, 2002, Mr. Mallon called Mr. McMenemy to inquire whether Black Hills would be interested in acquiring a 50% working interest in Mallons East Blanco Gas Project. ABN AMRO informed Black Hills of Mallons desire to sell the 50% working interest in its East Blanco Gas Project. Mr. Emery indicated that Black Hills was not interested in a non-operating working interest, but that Mallons share price was at a level that could make a business combination with Black Hills possible.
During the ensuing week, Black Hills held several internal discussions regarding the possible negotiation of an acquisition of Mallon by Black Hills. On June 14, 2002, Mr. McMenemy and other representatives of ABN AMRO and Black Hills discussed the valuation of Mallon and such discussions continued over the course of the next two weeks.
On July 2, 2002, a presentation was made in Denver to Black Hills personnel, including Mr. Emery and Richard W. Kinzley, Black Hills Director of Corporate Development. On July 8, 2002, Mr. McMenemy of
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ABN AMRO called Mr. Mallon to inquire whether Mallon would entertain an offer from Black Hills for all of Mallon. Mr. Mallon advised that Mallon would consider such an offer if Black Hills would move rapidly.
Black Hills and ABN AMRO presented a proposal to acquire Mallon for a gross asset value of approximately $62 million, less known liabilities and obligations, during a conference call among representatives of Mallon, Black Hills and ABN AMRO on July 16, 2002. Mallon did not accept the proposal, but indicated that it was open to continuing the negotiations. Both parties agreed to approach Aquila Energy Capital Corporation, Mallons lender, together regarding Black Hills potential buyout of Aquilas credit agreement with Mallon.
At the regularly scheduled meeting of the Mallon board of directors held on July 17, 2002, the directors were apprised of the status of the discussions being held between Mallon and Black Hills. Mallons management advised its board that it would continue negotiations in an effort to reach tentative agreement on the terms of a possible merger, for further consideration of the board.
On July 19, 2002, Mallon made a technical presentation regarding its oil and gas properties and prospects to Black Hills and ABN AMRO personnel.
Mallons legal counsel circulated a draft merger agreement to all of the parties on July 23, 2002. On July 24, 2002, a meeting was held in Denver. Those present at the meeting included Messrs. Mallon and Blum from Mallon, outside legal counsel for Mallon, Messrs. Emery and Kinzley of Black Hills and Mr. McMenemy of ABN AMRO. At the meeting, the parties discussed the status of their respective due diligence efforts and the preparation of a definitive merger agreement by Black Hills legal counsel.
On July 31, 2002, the parties held a conference call to discuss the continuing Black Hills asset valuation analysis work, the timing of future meetings and discussions regarding Aquila and the terms of the draft merger agreement.
On August 2, 2002, legal counsel for Black Hills circulated a revised draft merger agreement to Black Hills, ABN AMRO, Mallon and Mallons legal counsel.
Representatives of ABN AMRO, Black Hills and Mallon met with representatives of Aquila on August 5, 2002 to discuss the buyout by Black Hills of Aquilas credit agreement with Mallon. The parties agreed that ABN AMRO would send Aquila a proposal for the complete buyout of the credit agreement.
During the week of August 5, representatives of Black Hills and its counsel conducted additional due diligence. Representatives of Black Hills discussed some of the due diligence findings and their effect on valuation with representatives of Mallon.
On August 13, 2002, acting on behalf of Mallon and Black Hills, ABN AMRO submitted a proposal to Aquila requesting that Aquila accept certain compromises in its credit arrangement with Mallon in exchange for an early pay-off of Mallons debt.
At the meeting of the Mallon board of directors held on August 14, 2002 to discuss Mallons filing of its Quarterly Report on Form 10-Q, the directors were again apprised of the status of the negotiations between Mallon and Black Hills. Mallons management advised its board that it intended to continue negotiations with Black Hills.
On August 15, 2002, representatives of Mallon came to the offices of Black Hills for the purpose of asking due diligence questions of representatives of Black Hills. Mr. McMenemy of ABN AMRO also attended and representatives of Waterous and Mallons legal counsel participated by telephone.
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Based on its due diligence review, Black Hills revised its gross asset valuation for Mallon and on August 21, 2002, representatives of Black Hills, Mallon and ABN AMRO held a conference call to discuss the revised gross asset valuation analysis.
On August 22, 2002, Aquila agreed to a proposal from Black Hills pursuant to which Black Hills would pay Aquila the principal balance of $29.2 million for assigning the credit agreement to Black Hills and approximately $1.2 million for unwinding certain energy hedge positions Mallon had with Aquila. Aquila also agreed to (i) release and terminate its put option relating to Mallon common stock owned by it under its credit agreement with Mallon, (ii) release and terminate all of its rights upon a change of control, as described in the credit agreement, and (iii) reassign to Mallon any Mallon common stock it currently held. Aquilas agreement was contingent upon the negotiation and execution of a merger agreement between Mallon and Black Hills.
ABN AMRO, Black Hills and its attorneys, and Mallons attorneys held a conference call on August 23, 2002, to discuss the effect that a proposed transaction with Deep Gas, LLC, a company in which Mallon, Mr. Mallon and two other directors of Mallon have ownership interests, would have on Black Hills proposed transaction with Mallon.
On August 23, 2002, Mr. Emery called Mr. Mallon to discuss the status of negotiations. Mr. Mallon advised Mr. Emery that he would be willing to go to the Mallon board of directors to seek approval of an offer of approximately $1.15 per share of Mallon common stock, subject to agreement with respect to the method of valuing Black Hills common stock.
On August 26, 2002, Mr. Emery and Mr. Kinzley, who had been updating Black Hills management periodically during the course of negotiations with Mallon, received informal internal senior management approval of the proposed transaction with Mallon and the related transactions.
Mr. Emery, Mr. Kinzley and other representatives of Black Hills and Mr. McMenemy of ABN AMRO made a presentation on August 30, 2002 to the Black Hills board of directors. The Black Hills board of directors approved the acquisition of Mallon and the purchase of the Mallon debt from Aquila, subject to review and approval by the Black Hills executive committee of the final terms to be negotiated over the next few weeks.
Throughout the month of September 2002, the parties negotiated the terms of a merger agreement, negotiated the terms of a buy-out of the debt owed to Aquila by Mallon and continued their due diligence efforts. During that period, Black Hills also arranged financing for the purchase of the Mallon debt from Aquila.
Black Hills and Deep Gas also commenced negotiation of an agreement under which Deep Gas would farmout its oil and gas acreage (which underlies a portion of Mallons East Blanco Gas Project) to Black Hills if Black Hills completed its acquisition of Mallon.
Also, Black Hills and Messrs. Mallon and Blum negotiated the terms of consulting agreements under which Messrs. Mallon and Blum would provide various services to Black Hills if Black Hills completed its acquisition of Mallon.
On September 30, 2002, the executive committee of Black Hills board of directors granted final approval of the merger agreement and related matters, with an exchange ratio of .044 shares of Black Hills common stock for each share of Mallon common stock.
The Mallon board of directors met to consider the proposed merger with Black Hills. Waterous, in its capacity as Mallons financial advisor, provided the directors with copies of drafts of its evaluations of Mallon and Black Hills, and a proposed form of fairness opinion. Representatives of Waterous described the several alternative methods Waterous had employed to evaluate Mallon and its probable value and Waterous evaluation of Black Hills. The Waterous representative indicated that Waterous was ready and willing to render an opinion
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to the effect that the terms of the proposed merger were fair to the shareholders of Mallon, from a financial point of view, if the final exchange ratio agreed upon was within the general parameters Waterous had been advised was likely to be the case.
Outside legal counsel reviewed provisions of the merger agreement, relevant requirements of Colorado law, the consulting agreements to be entered into between Black Hills and Messrs. Mallon and Blum, and the farmout agreement to be entered into between Black Hills and Deep Gas.
On October 1, 2002, while final negotiations relating to the merger and the merger agreement were conducted in Denver, the Mallon board of directors met again. Mr. Blum advised the Mallon board of directors as to the status of final negotiations with Black Hills. Mr. Blum reported that all requisite documents had been agreed upon and were ready for execution. He reported that the final exchange ratio agreed upon was .044 shares of Black Hills common stock for each share of Mallon common stock. The Waterous representative advised the Mallon board of directors that, at an exchange ratio of .044 shares of Black Hills common stock for each share of Mallon common stock, Waterous was ready and willing to render its opinion that the terms of the proposed merger were fair to the shareholders of Mallon, from a financial point of view. The Mallon board of directors voted, unanimously, to approve the merger and merger agreement.
The definitive merger agreement was promptly executed by the parties immediately following the board meeting. On October 1, 2002, Black Hills also acquired from Aquila the debt owed by Mallon.
Reasons for the Merger; Recommendations of Mallons Board of Directors
By unanimous vote at the meeting held on October 1, 2002, the Mallon board of directors determined the merger to be advisable and in the best interests of Mallon and its shareholders and approved the merger and the merger agreement. In reaching its decision to declare the merger advisable and approve the merger and the merger agreement and the transactions contemplated thereby, the Mallon board of directors consulted with Mallons legal and financial advisors, as well as with Mallons management. The Mallon board of directors considered a number of material factors, including:
| the Mallon board of directors understanding of the current and anticipated environment in the independent exploration and production sector of the energy industry, and the continued consolidation within this sector; |
| information concerning the financial condition, results of operations, prospects and businesses of Mallon and Black Hills, including their cash flows from operations, the recent stock market performance of Mallon common stock and Black Hills common stock, and the ratio of Mallons common stock price to Black Hills common stock price over various periods; |
| economic and market conditions; |
| the fact that Black Hills has a larger market capitalization and a more liquid trading market for its common stock; |
| a review of other strategic options available to Mallon (including other potential transactions) and their relative advantages and disadvantages vis-à-vis the merger; |
| information indicating that the proposed exchange ratio represented a premium of 116.9% and 66.7% over the trading price of Mallon common stock over the 30-day trading period and the 60-day trading period, respectively, ending on the last trading date prior to execution of the merger agreement; |
| presentations from, and discussions with, senior executives of Mallon, representatives of its outside legal counsel and representatives of Waterous regarding the business, financial and legal due diligence with respect to Black Hills and the terms and conditions of the merger agreement; and |
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| the analysis of Waterous and the Mallon board of directors receipt of an opinion from Waterous dated October 1, 2002 that, as of such date and subject to the matters reviewed with the board of directors and set forth in the opinion, the exchange ratio was fair from a financial point of view to the Mallon shareholders. |
The Mallon board of directors also considered certain risks and potential disadvantages associated with the merger, including the risk that the merger might not be completed as a result of a failure to satisfy the conditions to the merger and risks related to Black Hills business.
This discussion of the factors that the Mallon board of directors considered in its evaluation is not intended to be exhaustive. Because of the wide variety of factors considered in connection with its evaluation of the merger, the Mallon board of directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative significance to the specific factors considered in reaching its conclusions. In addition, individual directors may have given different significance to different factors.
THE MALLON BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE HOLDERS OF MALLON COMMON STOCK VOTE TO APPROVE THE MERGER AGREEMENT.
In considering the recommendation of the Mallon board of directors with respect to the merger, the merger agreement and the transactions contemplated thereby, Mallon shareholders should be aware that certain officers and directors of Mallon have certain interests in the proposed merger that are different from and in addition to the interests of Mallon shareholders generally. The Mallon board of directors was aware of these interests and considered them in approving the merger and the merger agreement. See Interests of Certain Persons in the Merger, on pages 36-38.
Opinion of Mallons Financial Advisor
Mallon retained Waterous to provide a fairness opinion in connection with the merger. Mallon selected Waterous based on its expertise in financial matters, its experience in providing financial advice related to mergers, acquisitions and divestitures of upstream energy companies and assets, and because Waterous is familiar with Mallon and its business. On October 1, 2002, at a meeting of the Mallon board of directors that was called and held to evaluate the merger, Waterous delivered its oral opinion, and confirmed its oral opinion by delivery of a written opinion dated October 1, 2002, that, as of that date, and based on and subject to the matters described in the written opinion, the exchange ratio was fair, from a financial point of view, to Mallons shareholders.
The full text of the Waterous opinion dated October 1, 2002 is included as Annex B to this proxy statement and is incorporated into this proxy statement by reference. The summary of the Waterous opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion. The opinion sets forth the procedures followed, assumptions made and matters considered, as well as the limitations of the review undertaken by Waterous in connection with its opinion. Waterous provided its opinion for the information and use of the Mallon board of directors in connection with its consideration of the Exchange Ratio in the proposed merger. The opinion does not constitute a recommendation as to how any Mallon shareholder should vote with respect to the merger. Waterous opinion is subject to the conditions, scope of engagement, limitations and understandings set forth in the opinion and in its engagement contract with Mallon. Mallon shareholders should read the Waterous opinion in its entirety.
In arriving at its opinion, Waterous, among other things, reviewed and relied upon the following:
1. | the draft merger agreement dated September 27, 2002; |
2. | the audited financial statements of Mallon for each of the years ended December 31, 1999, December 31, 2000 and December 31, 2001; |
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3. | the audited financial statements of Black Hills for each of the years ended December 31, 1999, December 31, 2000 and December 31, 2001; |
4. | the unaudited interim reports of Mallon for each of the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, March 31, 2002 and June 30, 2002; |
5. | the unaudited interim reports of Black Hills for each of the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, March 31, 2002 and June 30, 2002; |
6. | the Annual Reports on Form 10-K of Mallon for each of the years ended December 31, 1999, December 31, 2000 and December 31, 2001; |
7. | the Annual Reports on Form 10-K of Black Hills for each of the years ended December 31, 1999, December 31, 2000 and December 31, 2001; |
8. | the Quarterly Reports on Form 10-Q of Mallon for each of the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, March 31, 2002 and June 30, 2002; |
9. | the Quarterly Reports on Form 10-Q of Black Hills for each of the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, March 31, 2002 and June 30, 2002; |
10. | the Notices of Annual Meeting of Shareholders and Proxy Solicitation Materials on Form 14A of Mallon, dated August 3, 2001; |
11. | the Notices of Annual Meeting of Shareholders and Proxy Solicitation Materials on Form 14A of Black Hills, dated March 27, 2001 and April 15, 2002; |
12. | an evaluation of Mallons petroleum and natural gas reserves prepared by Netherland, Sewell & Associates, Inc., independent petroleum engineering consultants, effective December 31, 2001; |
13. | discussions with senior management of Mallon regarding the past, current and projected operations and financial prospects of Mallon and anticipated benefits of the merger; |
14. | certain discussions among representatives of Mallon and Black Hills; |
15. | a summary of all hedging positions maintained by Mallon as of August 15, 2002; |
16. | September 2002 NYMEX Futures prices for natural gas and oil; |
17. | a schedule of all Mallon stock options granted and outstanding as set forth in the merger agreement; |
18. | a summary of the current indebtedness and working capital position of Mallon, as prepared by Mallon management; |
19. | a summary of the estimated net operating loss carryforwards for Mallon prepared by Mallon management as of June 30, 2002; |
20. | discussions with Mallons outside legal counsel; |
21. | the employment and severance agreements provided to Waterous by Mallon, to which Mallon is a party; |
22. | information provided to Waterous by Mallon regarding the Mallon Employee Royalty Bonus Pool; |
23. | public information relating to the business, operations, financial performance and stock trading history of Mallon and Black Hills, and other selected public companies considered by Waterous to be comparable to Mallon; |
24. | public information with respect to other transactions of a comparable nature considered by Waterous to be relevant; |
25. | public information regarding the industry in which Mallon operates; |
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26. | representations made to Waterous by senior officers of Mallon as to the completeness and accuracy of the information provided by Mallon upon which the opinion is based; and |
27. | such other corporate, industry and financial market information, investigations and analyses as Waterous considered necessary or appropriate in the circumstances. |
In connection with its review, Waterous assumed that it had not been denied access by Mallon or Black Hills to any information requested by Waterous.
In connection with its review, Waterous assumed and relied upon the completeness, accuracy and fair representation of all financial and other information, data, advice, opinions and representations obtained by Waterous from public sources or provided to Waterous by Mallon or Black Hills and their consultants and advisors or otherwise pursuant to its engagement. Waterous conditioned its opinion on the completeness, accuracy and fairness of such information. Waterous assumed that the information did not, and does not, contain any untrue statement of a material fact in respect of Mallon and did not, and does not, omit to state a material fact in respect of Mallon necessary to make the information not misleading in light of the circumstances under which the information was made or provided. Waterous assumed that since the date the information was provided or obtained, there has been no material change, financial or otherwise, in the position of Mallon or in its financial condition, assets, liabilities (contingent or otherwise), business, operations or prospects and no material change has occurred that would render the information untrue or misleading in any material respect and that would have, or that would reasonably be expected to have, a material effect on its opinion. Waterous did not attempt to verify independently the accuracy or completeness of any of the information.
Waterous rendered its opinion on the basis of securities markets, economic and general business and financial conditions prevailing as at the date of the opinion. Waterous rendered its opinion on the basis of its evaluation of the condition and prospects, financial and otherwise, of Mallon and Black Hills as reflected in the information provided or obtained and as represented to Waterous in discussions with the management of Mallon, Black Hills and their respective consultants or advisors. In its analyses, and in preparing its opinion, Waterous made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters for which it believed there was a reasonable basis, but whether such assumptions prove to be accurate is beyond the control of Waterous and each of the parties involved in the Merger.
In preparing its opinion, Waterous assumed that there will be no material changes to the draft of the merger agreement that it reviewed, that all of the conditions required to implement the merger will be met, that the parties will close the merger without incurring unexpected expenses, that no divestiture of assets will be required before or after consummation of the merger, that the merger will be completed in a timely manner and that the parties consummation of the merger will be in compliance with all applicable laws. Waterous assumed that all the representations and warranties of the parties to the merger agreement are true and accurate and that the parties will perform their respective obligations under the merger agreement and related agreements.
Waterous did not prepare a formal valuation of Mallon, Black Hills or any of their respective securities or assets and its opinion should not be construed as such. However, Waterous did conduct such financial analyses as it considered to be appropriate and necessary to support the conclusions reached in its opinion.
In its opinion, Waterous expressed no opinion as to the underlying valuation, future performance or long-term viability of the combined entity following the merger. Waterous was not asked to consider, and its opinion does not address, the relative merits of the merger as compared to any alternative business strategies that might exist for Mallon, or the effect of any alternative transaction that Mallon might pursue. Waterous assumed that the merger will qualify as a tax-free reorganization under the Code. Waterous did not make any independent valuation or appraisal of the assets or liabilities of Mallon or Black Hills and, except as listed above, was not provided with any such valuations or appraisals. Waterous did not perform any inspection of the properties, facilities or other assets of Mallon or Black Hills. Waterous noted that it is not a legal, tax, accounting or regulatory expert and that it relied upon, without assuming any responsibility for independent verification or
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liability therefore, the assessment of Mallons legal, tax, accounting and regulatory advisors with respect to the legal, tax, accounting and regulatory matters related to the merger.
Waterous rendered its opinion as of the date thereof and Waterous disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion which may come, or be brought, to Waterous attention after the date of its opinion and to update its opinion after the date of the opinion. Waterous reserved the right to change, modify or withdraw its opinion in the event that there is any material change in any fact or matter affecting its opinion after the date of the opinion.
The analyses of Waterous must be considered as a whole. Selecting portions of the analyses or the factors considered by Waterous, without considering all factors and analyses together, could create a misleading view of the process underlying its opinion. The preparation of a fairness opinion is a complex process and does not lend itself to partial analysis or summary description and any attempt to do so could lead to undue emphasis on any particular factor or analysis. The opinion of Waterous did not address the merits of the underlying decision by Mallon to enter into the merger agreement and its opinion is not to be construed as a recommendation to any Mallon shareholder as to whether to vote in favor of the merger. Waterous expressed no view as to the prices at which the Mallon, the Black Hills or the combined entitys common stock will or should trade after the announcement or consummation of the merger.
Financial Analyses of Waterous
In connection with the preparation of its opinion, Waterous did not participate in the structuring of the merger or the negotiation of the merger consideration to be received by Mallon shareholders. The merger consideration was determined through arms-length negotiations between Mallon and Black Hills.
The following is a summary of the material financial analyses utilized by Waterous in connection with delivering its October 1, 2002 opinion to the Mallon board of directors. In accordance with customary investment banking practice, Waterous employed generally accepted valuation methods in supporting its opinion. Some of the analysis includes information presented in a tabular format. To understand fully the financial analysis used by Waterous, the table must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analysis. Considering the data set forth in the tables below without considering the full text description including methods and assumptions underlying the analysis could create an incomplete and misleading view of the Waterous analysis.
Broad Solicitation
In an agreement dated November 26, 2001, Mallon engaged Waterous to solicit and evaluate potential parties for a merger or other business transaction with Mallon. As part of this process, Mallon engaged Waterous as its exclusive financial advisor. Waterous conducted a formal comprehensive marketing campaign on behalf of Mallon, with a scheduled bid date of February 11, 2002. The following summarizes the scope of the process:
Number | ||
Introductory Letters Sent |
340 | |
Confidentiality Agreements Received & Initial Memorandums Sent |
53 | |
Data Room Visits |
21 |
Alternatives to maximize shareholder value were pursued through the formal comprehensive marketing campaign from December 2001 to February 2002. Waterous considered the number of parties that were solicited, as well as their comments as to the nature of Mallons assets and their comments as to the value of Mallon common stock. No acceptable offers were forthcoming at the bid date.
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After-Tax Discounted Cash Flow Analysis
Waterous conducted an after-tax, discounted cash flow analysis for the fiscal year ended December 31, 2002 to December 31, 2016 to determine the implied per share equity value of Mallons common stock. The after-tax discounted cash flow analysis was based in part on an evaluation of the reserves associated with Mallons properties conducted by Netherland, Sewell & Associates, Inc., or Netherland, Sewell, dated as of January 1, 2002. Waterous applied risk factors to the various reserve categories within the Netherland, Sewell Reserve Report to estimate future production, operating costs and capital costs as of September 30, 2002. The range of risk factors applied to the reserve categories are outlined below:
Low |
Base |
High |
|||||||
Proved Developed Producing |
80 |
% |
90 |
% |
100 |
% | |||
Proved Developed Non-producing |
60 |
% |
75 |
% |
90 |
% | |||
Proved Undeveloped |
30 |
% |
45 |
% |
60 |
% | |||
Probable |
0 |
% |
15 |
% |
30 |
% | |||
Possible |
0 |
% |
10 |
% |
20 |
% |
Current NYMEX strip pricing was assumed. All NYMEX pricing forecasts were adjusted for pipeline differentials, transportation costs, BTU content and other fees necessary to more accurately reflect wellhead pricing in the field.
General and administrative expense, interest expense and usage of net operating losses were based on the assumption that a change of control and restructuring would occur.
Based on the production and pricing forecasts and applied risk factors described above, the annual after-tax cash flows were discounted at 8% per year. Based on the closing price of Black Hills as of September 30, 2002, the analysis derived a range of implied share exchange ratios of below 0.0000 to 0.0477 Black Hills common shares per diluted Mallon common share after the redemption of options and warrants, with a base case share exchange ratio of 0.0084.
Private Market Value Analysis
Waterous reviewed comparable transactions involving the sale of natural gas and oil assets throughout the United States and, more specifically, in the Rocky Mountains and San Juan Basin areas over the last five years. Waterous calculated the implied proved reserve multiples for each transaction by dividing transaction value by total proved reserves. Waterous also calculated the implied production multiples for each transaction by dividing transaction value by current production. The resulting range of multiples was used to derive a per share value for Mallon (range calculated as 10% above and below the average multiple for the geographic area and time period). The resulting range of equity values for the four cases are presented below:
Private Market Value AnalysisTrailing Five Year United States Average. Based on the closing price of Black Hills common stock as of September 30, 2002, the analysis derived a range of implied share exchange ratios of below 0.0000 to 0.0305 shares of Black Hills common stock per diluted share of Mallon common stock after the redemption of options and warrants, with a base case share exchange ratio of 0.0118.
Private Market Value AnalysisTrailing One Year United States Average. Based on the closing price of Black Hills common stock as of September 30, 2002, the analysis derived a range of implied share exchange ratios of 0.0179 to 0.0607 shares of Black Hills common stock per diluted share of Mallon common stock after the redemption of options and warrants, with a base case share exchange ratio of 0.0393.
Private Market Value AnalysisTrailing Five Year San Juan Basin/Rockies Average. Based on the closing price of Black Hills common stock as of September 30, 2002, the analysis derived a range of
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implied share exchange ratios of below 0.0000 to 0.0271 shares of Black Hills common stock per diluted share of Mallon common stock after the redemption of options and warrants, with a base case share exchange ratio of 0.0084.
Private Market Value AnalysisTrailing One Year San Juan Basin/Rockies Average. Based on the closing price of Black Hills common stock as of September 30, 2002, the analysis derived a range of implied share exchange ratios of 0.0206 to 0.0638 shares of Black Hills common stock per diluted share of Mallon common stock after the redemption of options and warrants, with a base case share exchange ratio of 0.0420.
Premiums Paid Analysis
Waterous reviewed the share price premiums paid in 27 relevant transactions completed between January 1998 and September 2002 involving publicly traded independent energy companies. For the group of relevant transactions, Waterous calculated the median one-day, 30-day and 60-day implied market premiums paid for the specified number of trading days preceding announcement date. These figures were then compared with the implied premiums of the proposed merger based on the closing price of Black Hills common stock September 30, 2002. The following chart compares the range of premiums paid, defined as the median of the first and fourth quartiles of premiums paid in the selected transactions, the median market premium and the proposed merger premium.
Period Prior to Announcement |
Range |
Median |
Proposed Merger |
|||||
One Day |
2.7%73.7% |
29.4 |
% |
187.5 |
% | |||
Thirty Days |
6.6%76.8% |
33.7 |
% |
116.9 |
% | |||
Sixty Days |
0.1%82.5% |
20.9 |
% |
66.7 |
% |
The summary set forth above does not purport to be a complete description of the analyses performed by Waterous. Arriving at a fairness opinion is a complex process and is not necessarily susceptible to a summary description. Waterous believes that its analysis must be considered as a whole and that selecting a portion of the analysis or the factors considered by Waterous, without considering all such factors and analysis, could create an incomplete and misleading view of the Waterous analysis. The matters considered by Waterous in its analysis were based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business and economic conditions, Mallons financial situation and future prospects. Any estimates incorporated in the analysis performed by Waterous are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than such estimates. Estimated values do no purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and such estimates are inherently subject to uncertainty. None of the comparable transactions used in the analysis described above are identical to the assets of Mallon.
Miscellaneous
Mallon agreed to pay Waterous for its financial advisory services in connection with the merger a fee that is customary in transactions of this nature and that is contingent upon the consummation of the merger. Mallon also agreed to reimburse Waterous for its reasonable out-of pocket costs and expenses, including fees and costs of legal counsel, and to indemnify Waterous and related parties against liabilities, including liabilities under the federal securities laws, arising out of its engagement.
Waterous and its affiliates have in the past performed certain financial advisory and investment banking services for Mallon and have received customary fees for those services. Waterous has not been engaged to provide any financial advisory or investment banking services to Black Hills or its affiliates during at least the past three years.
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The merger will be accounted for as a purchase transaction for financial accounting purposes. On the date of the merger, Black Hills will record the assets acquired and the liabilities assumed from Mallon based upon their estimated fair market value. Black Hills will account for its oil and natural gas operations using the full cost method of accounting. For a presentation of the anticipated effect of the accounting treatment on the consolidated financial position and results of operations of Black Hills after giving effect to the merger, see Unaudited Pro Forma Combined Condensed Financial Information on pages 58-63.
To our knowledge, the merger does not require the approval of any U.S. federal or state agency, other than the effectiveness of the registration statement of which this proxy statement/prospectus is a part and compliance with the Colorado Business Corporation Act.
Interests of Certain Persons in the Merger
In considering the recommendation of Mallons board of directors with respect to the merger, shareholders of Mallon should be aware that certain officers, directors and employees of Mallon have the following interests in the merger that are separate from and in addition to the interests of shareholders of Mallon generally. Mallons board of directors was aware of these interests and took them into account in approving the merger agreement and the transactions contemplated thereby.
Severance Payments
Mallons Severance and Sale Program provides that all Mallon employees who do not have a separate agreement regarding payments upon a change of control are eligible to receive certain severance payments upon the completion of the merger. Each employee is entitled to receive a payment equal to one month of standard wages for each year of his or her employment by Mallon, up to a maximum of six months worth of wages. Also under the Severance and Sale Program, certain long-time non-employee directors of Mallon are entitled to receive $100,000 upon a change of control of Mallon. Mallon is a party to employment agreements with certain of its officers, under which Mallon is obligated to make severance payments upon a change of control of Mallon. The severance amounts payable by Mallon to its officers, directors and key employees under the Severance and Sale Program and its various employment agreements are as follows:
Name |
Position |
Amount of | ||
George O. Mallon, Jr. |
President, Chief Executive Officer and Director |
Up to $570,000 | ||
Roy K. Ross |
Executive Vice President and Director |
Up to $315,000 | ||
Peter H. Blum |
Executive Vice President and Director |
$290,000 | ||
Alfonso R. Lopez |
Vice PresidentFinance |
$48,525 | ||
George O. Mallon, III |
Vice PresidentLatin America |
Up to $70,000 | ||
Donald M. Erickson, Jr. |
Senior Vice President, Mallon Oil Company |
$127,500 | ||
Roger R. Mitchell |
Director |
$100,000 | ||
Francis J. Reinhardt, Jr. |
Director |
$100,000 |
Employee Royalty Bonus Pool
Upon the organization of Mallon in December 1988, the Mallon Employee Royalty Bonus Pool was established as a central part of Mallons compensation package for its employees. The pool accumulates a portion of the revenue generated by the sale of Mallons oil and gas production as a royalty to be distributed on a quarterly basis to Mallons employees. Pursuant to the merger agreement, Mallon is required to acquire or cause the termination of the Mallon Employee Royalty Bonus Pool prior to the completion of the merger, at a cost to
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Mallon of not more than $1,500,000. If necessary, Black Hills will loan Mallon the funds necessary for this purpose. In connection with the sale or termination of the pool, the following individuals will be paid the following amounts for their interests in the pool:
Name |
Position |
Amount of | |||
George O. Mallon, Jr. |
President, Chief Executive Officer and Director |
$ |
442,500 | ||
Roy K. Ross |
Executive Vice President and Director |
$ |
150,000 | ||
Peter H. Blum |
Executive Vice President and Director |
$ |
120,000 | ||
Alfonso R. Lopez |
Vice PresidentFinance |
$ |
135,000 | ||
Donald M. Erickson, Jr. |
Senior Vice President, Mallon Oil Company |
$ |
161,250 | ||
George O. Mallon, III |
Vice PresidentLatin America |
$ |
108,750 |
Deep Gas, LLC
Deep Gas owns a 60% interest in seven oil and gas lease contracts with the Nation. These contracts cover approximately 13,548 gross acres located on the Jicarilla Apache Indian reservation. Deep Gas interests are limited in depth to certain formations lying below the base of the Pictured Cliffs Formation. An agreement entered into between Deep Gas and Black Hills provides Black Hills the right, but not the obligation, to drill five test wells for oil and/or gas at legal locations of Black Hills choice and earn portions of Deep Gas leasehold interests. Black Hills will have a period of two years after the effective date of the agreement within which to drill the five test wells. Upon satisfying this requirement, Black Hills will be entitled to an additional one year within which to drill five subsequent wells under the same terms and conditions. The effective date of this agreement is the day after the completion date of the merger. The following is a summary of the interests of Mallon and certain officers and directors of Mallon in Deep Gas:
Name |
Position |
Ownership |
|||
George O. Mallon, Jr. |
President, Chief Executive Officer and Director |
37.3 |
% | ||
Roger R. Mitchell |
Director |
9.4 |
% | ||
Roy K. Ross |
Executive Vice President and Director |
5.0 |
% | ||
Mallon Resources Corporation |
N/A |
10.58 |
% | ||
Third Party Owners |
None |
37.72 |
% |
Consulting Agreements
George O. Mallon, Jr., and Black Hills have entered into a consulting agreement. The term of the agreement is for four years commencing the day after the merger is completed. Mr. Mallon will provide consulting services to Black Hills and will receive as compensation (1) $150,000 per year, payable in monthly installments, (2) a ten-year warrant to purchase 30,000 shares of Black Hills common stock at $26.14 per share, and (3) reimbursement of certain expenses he may incur.
Peter H. Blum and Black Hills have entered into a consulting agreement. The term of the agreement is for one year commencing the day after the merger is completed. Mr. Blum will provide consulting services to Black Hills and will receive as compensation (1) $1,000 payable on the completion date of the merger, and (2) a ten-year warrant to purchase 15,000 shares of Black Hills common stock at $26.14 per share.
Equity Participation Plan
Mallon has terminated its 1997 Equity Participation Plan, effective as of the completion of the merger. Upon the completion of the merger, the exercise price of some outstanding stock options that are held by employees or directors of Mallon will be reduced to $0.01 per share. The following table shows how many of such options
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are held by officers and directors of Mallon, all of which will be exercised prior to the close of business on the date the merger is completed:
Name |
Position |
Number of Mallon Shares Underlying Options | ||
Roy K. Ross |
Executive Vice President and Director |
56,122 | ||
Peter H. Blum |
Executive Vice President and Director |
11,735 | ||
Alfonso R. Lopez |
Vice President Finance |
22,000 | ||
George O. Mallon, III |
Vice President Latin America |
7,000 | ||
Roger R. Mitchell |
Director |
23,736 | ||
Francis J. Reinhardt, Jr. |
Director |
19,735 |
All outstanding options to purchase Mallon common stock that are not exercised will be cancelled and terminated automatically.
Directors and Officers Indemnification and Insurance
The merger agreement provides that Black Hills and Mallon will, following the completion of the merger, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the effective time of the merger, an officer or director of Mallon or any of its subsidiaries against all costs or expenses (including attorneys fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in settlement incurred in connection with any claim, action, suit, proceeding or investigation, arising out of matters existing or occurring at or prior to the effective time of the merger to the fullest extent permitted under Colorado law or Mallons articles of incorporation and bylaws. Any determination of whether a persons conduct complies with the required standard will be made by independent counsel mutually acceptable to Mallon and the indemnified party.
Black Hills agreed that it will, and will cause the surviving corporation to, provide Mallons officers and directors with liability insurance coverage similar to the coverage provided by Mallons existing officers and directors liability insurance policies for a period of not less than two years after the completion of the merger, but only to the extent related to actions or omissions occurring prior to the effective time; provided that, if similar coverage is unavailable, then Black Hills will, and will cause the surviving corporation to, maintain policies that provide the best available coverage at an annual premium no larger than the last annual premiums paid by Mallon for directors and officers insurance coverage.
General
Mallon shareholders have the right to dissent from the merger and to receive payment for their shares in accordance with the provisions of Sections 7-113-101 through 7-113-302, inclusive, of the CBCA. The following discussion is not intended to be a complete statement of these provisions and is qualified in its entirety by reference to the full text of those Sections, a copy of which is attached as Annex C hereto.
Each Mallon shareholder who desires to dissent and receive payment of the fair value for his or her shares and follows the procedures specified in Sections 7-113-202, 7-113-204 and 7-113-209 (Article 113) will be entitled to have the fair value of the shares held of record by the shareholder appraised by a district court in Colorado in a proceeding conducted in accordance with Sections 7-113-301 and 7-113-302 of the CBCA and receive a judgment for:
| the amount, if any, by which the court finds the fair value of the dissenters shares, plus interest, exceeds the amount paid by Mallon; or |
| the fair value, plus interest, of the dissenters shares for which the company elected to withhold payment under Section 7-113-208 of the CBCA, as determined by the court. |
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Exercise of Rights
Under Sections 7-113-202 and 7-113-204 of the CBCA, a Mallon shareholder who desires to exercise dissenters rights and who does not vote in favor of the merger must deliver to Mallon, before the vote on the merger agreement, written notice of the shareholders intention to demand payment for the shareholders shares if the proposed corporate action is completed. The written notice from the shareholder is separate from and in addition to any proxy or vote against the merger agreement. This written notice of intention to demand for payment should be delivered either in person to the corporate secretary of Mallon before the Mallon special meeting or at the Mallon special meeting before the vote on the merger agreement, or by mail, for receipt prior to the vote on the merger agreement at the Mallon special meeting, delivered to Mallon at the following address: Mallon Resources Corporation, 999 18th Street, Suite 1700, Denver, Colorado 80202, Attention: Corporate Secretary.
A Mallon shareholder of record may assert dissenters rights as to fewer than all the shares of Mallon common stock registered in such shareholders name only if the record shareholder dissents with respect to all shares beneficially owned by any one person and notifies Mallon in writing of the dissent and the name, address and federal taxpayer identification number, if any, of each person on whose behalf the record shareholder asserts dissenters rights.
A beneficial shareholder of shares of Mallon common stock may assert dissenters rights as to the shares held on his or her behalf only if Mallon receives the written consent of the shareholder of record to the dissent not later than the time the beneficial shareholder asserts dissenters rights and the beneficial owner so dissents with respect to all shares beneficially owned by him or her. A person who owns shares of Mallon common stock beneficially, but not of record, and who desires to exercise his or her dissenters rights is, therefore, advised to consult promptly with the person or entity that is the record holder of his or her shares in order to receive and submit his or her written consent to the exercise of these rights and to ensure the timely exercise of the same.
Notice
If the merger agreement and the merger are approved by the Mallon shareholders, Mallon will give a written dissenters notice to all shareholders who are entitled to demand payment for their shares. The notice will be sent no later than ten days after the effective time of the merger and will:
| state that the merger agreement and the merger were approved and the effective time of the merger; |
| state where the shareholder must deliver a demand for payment and the address where stock certificates must be deposited; |
| supply a form for demanding payment, which form will require the dissenting shareholder to state an address to which payment is to be made and require the dissenting shareholder to certify whether or not he or she acquired beneficial ownership before October 1, 2002, the date of the first public announcement of the merger; |
| set a date by which the written payment demand and certificates must be received by Mallon, which date cannot be fewer than 30 nor more than 60 days after the date Mallon sends the written dissenters notice; and |
| include a copy of Article 113. |
Shareholder Demand; Certification
A Mallon shareholder who receives a dissenters notice must demand payment in writing for his or her shares. If a dissenter fails to certify, as requested by Mallon in its dissenters notice, that he or she owned the shares before the date of the first public announcement of the merger, then Mallon may, in lieu of making the payment provided in the following paragraph, offer to make a payment only if the dissenter agrees to accept it in
39
full satisfaction of the demand. The Mallon shareholder who demands payment will be required to deposit his or her share certificates in accordance with the Mallon dissenters notice. A Mallon shareholder who demands payment and deposits his or her certificates retains all other rights of a shareholder, except the right to transfer the shares, until the effective time of the merger and thereafter has only the right to receive payment for the shares. The demand for payment and deposit of certificates is irrevocable except in the event that (i) the merger is not completed within 60 days after the date set for dissenters to demand payment or (ii) Mallon fails to make payment for the dissenting shareholders shares within 60 days after the date set for dissenters to demand payment. A Mallon shareholder who does not demand payment and deposits his or her certificates as required by the date specified in the dissenters notice is not entitled to payment of the fair value for his or her shares of Mallon stock.
Payment by Company
Upon the completion of the merger or upon receipt of a payment demand from a dissenting shareholder, whichever is later, Mallon must pay each dissenter who complied with the applicable requirement of Article 113 the amount Mallon estimates to be the fair value of the dissenters shares, plus accrued interest. The payment will be accompanied by:
| certain financial information of Mallon; |
| Mallons estimate of the fair value of the shares; |
| an explanation of how the interest was calculated; |
| a statement of the dissenters right to demand payment if he or she rejects Mallons estimate of the fair value of the shares; and |
| a copy of Article 113. |
If a dissenter fails to certify, as will be requested by Mallon in its dissenters notice, that he or she owned the Mallon shares before October 1, 2002 (the date of the first public announcement of the merger), then Mallon may, in lieu of making of payment provided above, offer to make a payment only if the dissenter agrees to accept it in full satisfaction of the demand.
Shareholder Demand; Appraisal
A dissenter may notify Mallon in writing of his or her own estimate of the fair value of the shares and interest due and demand payment of the estimated amount (less any amount already paid by Mallon) or reject Mallons estimate of the fair value of the shares, if: (1) the dissenter believes that the amount paid or offered is less than the fair value of the shares or that the interest due is incorrectly calculated; (2) Mallon fails to make payment within 60 days after the date set by Mallon for demanding the payment or (3) Mallon does not consummate the merger within 60 days after the date set for a dissenter to demand payment and does not return the dissenters share certificates and lift the transfer restrictions on such shares as required by Section 7-113-207. To be effective, Mallon must receive this written notification or rejection from the dissenter within 30 days after Mallon makes or offers payment to dissenting shareholders. If a demand for payment remains unresolved, Mallon may, within 60 days after receiving the payment demand, commence a proceeding and petition the court to determine the fair value of the shares and accrued interest. The proceeding will be commenced in the district court in the City and County of Denver, Colorado. If Mallon does not commence the proceeding within the 60 day period, it will pay to each dissenter whose demand remains unresolved the amount demanded.
In determining the fair value of the Mallon common stock, the court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. Each dissenter made a party to the proceeding will be entitled to judgment for the amount, if any, by which the Court finds that the fair value of the dissenters shares, plus accrued interest, exceeds any amount already paid by Mallon. No
40
representation can be made as to the outcome of an appraisal proceeding. Mallon shareholders also should be aware that the appraisal process is subject to uncertainties and to the possibility of lengthy and expensive litigation that could extend for a substantial period of time. Mallon shareholders also should recognize that an appraisal proceeding could result in a determination of a fair value higher or lower than or equal to the per share consideration that would otherwise be received in the merger.
The costs of an appraisal proceeding shall be assessed against Mallon; however, the court may assess costs against some or all of the dissenters in amounts the court deems equitable in the circumstances, to the extent the court finds the dissenters acted arbitrarily, vexatiously or not in good faith. The court may also assess the fees and expenses of counsel and experts for the respective parties in amounts the court finds equitable against Mallon or one or more dissenting shareholders.
If any holder of Mallon shares demands payment for his or her shares under Article 113, but fails to perfect, waives or loses his or her right to such payment, then the shares of such holder will be converted into the right to receive the merger consideration.
Strict Compliance; Consequences of Exercising Rights
The procedures set forth in Sections 7-113-202 and 7-113-204 of the CBCA must be complied with strictly. Failure to follow any of these procedures may result in the termination or waiver of dissenters rights.
Mallon shareholders should note that failure to execute and return a proxy does not perfect dissenters rights. In addition, neither voting against the merger nor abstaining from voting will constitute a demand for payment. However, voting in favor of the merger will waive a shareholders dissenters rights. If a shareholder returns a signed proxy card that does not specify a vote, the proxy will be voted in favor of the merger, which will have the effect of waiving the shareholders dissenters rights.
A shareholder who is entitled to dissent and obtain payment for his or her shares under Article 113 of the CBCA may not challenge the corporate action creating this entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the company.
Federal Securities Law Consequences; Resale Restrictions
All Black Hills common stock that Mallon shareholders will receive in the merger will be freely transferable, except for Black Hills common stock that is received by persons who are deemed to be affiliates of Mallon under the Securities Act at the time of the Mallon special meeting. These affiliates may resell the Black Hills common stock they receive in the merger only in transactions permitted by Rule 145 under the Securities Act or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of Mallon for the above purposes generally include individuals or entities that control, are controlled by or are under common control with Mallon, and include directors and certain executive officers of Mallon. The merger agreement requires that Mallon use its reasonable best efforts to cause each of these affiliates to deliver to Black Hills, prior to the effective time, a written agreement to the effect that these persons will not sell, transfer or otherwise dispose of any of the Black Hills common stock issued to them in the merger in violation of the Securities Act or the related SEC rules.
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The following is a summary of the material terms of the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus and incorporated herein by reference. This summary is qualified in its entirety by reference to the merger agreement. You should carefully read the merger agreement in its entirety because it, and not this document, is the legal document that governs the merger.
The merger agreement provides that, as soon as practicable on the day of the satisfaction or waiver of the conditions to effecting the merger, the parties will cause the merger to be completed upon the later of (1) filing properly executed articles of merger with the Secretary of State of the State of Colorado executed in accordance with the relevant provisions of the CBCA or (2) at such later time as the parties agree and set forth in such articles of merger. We currently anticipate that we will complete the merger shortly after the Mallon special meeting, if the merger agreement is approved at the Mallon special meeting and all other conditions to the merger have been satisfied or waived.
At the effective time of the merger, Merger Sub will merge with and into Mallon, and Mallon will continue as the surviving corporation and will be a wholly-owned subsidiary of Black Hills.
Manner and Basis of Converting Shares
As of the effective time of the merger, without any action on the part of the holders of Mallon common stock, each share of Mallon common stock issued and outstanding immediately prior to the effective time shall be converted into the right to receive .044 of a share of Black Hills common stock. All such Mallon common stock, when so converted, will no longer be outstanding and will automatically be canceled and retired and shall cease to exist. The holder of a certificate that, immediately prior to the effective time, represents outstanding shares of Mallon common stock will cease to have any rights with respect thereto, except the right to receive, upon the surrender of such certificate, a certificate representing the requisite number of shares of Black Hills common stock and any cash in lieu of fractional shares of Black Hills common stock to which such holder is entitled, without interest.
As of the effective time of the merger, each share of Merger Sub common stock issued and outstanding immediately prior to the effective time will be converted into one share of common stock of the surviving corporation. All shares of Merger Sub common stock, when so converted, will no longer be outstanding and will automatically be canceled and retired and will cease to exist.
No fractional shares of Black Hills common stock will be issued in the merger and fractional share interests will not entitle the holder of such fractional interests to vote or to any rights of a Black Hills shareholder. Mallon shareholders who would otherwise receive fractional shares will instead be entitled to receive a cash payment equal to the value of these fractional share interests as determined by multiplying the fraction of a share of Black Hills common stock to which such holder would have otherwise been entitled by the closing sales price of a share of Black Hills common stock on the trading day immediately preceding the effective time of the merger.
Any outstanding option to purchase Mallon common stock that is not exercised upon the completion of the merger will be cancelled and shall cease to exist. Any holder of an option to purchase shares of Mallon common stock that exercises such option concurrently with the completion of the merger will receive .044 of a share of Black Hills common stock for each share of Mallon common stock into which such option was exercisable.
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Promptly after the completion of the merger, an exchange agent will send a letter of transmittal to each holder of record of Mallon common stock along with instructions for effecting the surrender of certificates representing shares of Mallon common stock in exchange for certificates representing shares of Black Hills common stock (plus cash in lieu of fractional shares as provided above). Upon surrender of a Mallon stock certificate for cancellation, together with a duly executed and properly completed letter of transmittal, the holder of the stock certificate will be entitled to receive that number of whole shares of Black Hills common stock and, if applicable, cash that such holder has the right to receive pursuant to the merger agreement. Until surrendered, each Mallon stock certificate shall be deemed, at any time after the effective time of the merger, to represent only the right to receive shares of Black Hills common stock (and cash if applicable) in accordance with the merger agreement. MALLON SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL.
If your stock certificate has been lost, stolen or destroyed, you may make an affidavit of that fact and, if required by Black Hills, post a bond in such reasonable amount as Black Hills may direct as indemnity against any claim that may be made against it with respect to such stock certificate. Upon receipt of the affidavit and bond, if any, the exchange agent will issue in exchange for such lost, stolen or destroyed stock certificate a certificate representing the requisite number of shares of Black Hills common stock and, if applicable, cash and unpaid dividends and other distributions on such shares of Black Hills common stock.
Representations and Warranties
The merger agreement contains customary representations and warranties of Mallon and Black Hills relating to, among other things, certain aspects of their respective businesses and financial statements and certain other matters. The representations and warranties expire at the effective time of the merger.
Conduct of Business Prior to the Merger
Mallon and Black Hills agreed that, prior to the completion of the merger, unless contemplated by the merger agreement or otherwise consented to in writing by both parties, each of Mallon and Black Hills will, and will cause its subsidiaries to, conduct its respective businesses in the ordinary course in substantially the same manner as previously conducted and will use all reasonable efforts to preserve intact its business and relationships with third parties.
Mallon agreed that, until the effective time of the merger, subject to certain exceptions and unless consented to in writing by Black Hills, it will not do, and will not permit any of its subsidiaries to do, any of the following:
| accelerate, amend or change the period of exercisability of stock options, restricted stock, warrants or other awards or authorize cash payments in exchange for stock options, restricted stock, warrants or other awards; |
| declare or pay any dividend or other distribution with respect to any equity securities of Mallon or its subsidiaries; |
| split, combine or reclassify any of its equity securities or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for its equity securities, or purchase or otherwise acquire any of its equity securities except from former employees, directors and consultants in accordance with agreements providing for the repurchase of such securities in connection with any termination of service to such party; |
| issue, or authorize the issuance of, any of its equity securities or options or rights to acquire any of its equity securities other than the issuance of shares of its common stock pursuant to the exercise of options or rights outstanding on the date the merger agreement was executed; |
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| merge or consolidate with any other person (other than pursuant to the merger agreement) or acquire assets (in excess of $20,000) of, or an equity interest in, any other person, enter into any farm-out or similar arrangement, sell or dispose of any assets or equity securities, or release or relinquish any contract rights; |
| except in accordance with the terms of existing agreements or in connection with non-discretionary contributions to Mallons 401(k) plan: |
(i) | increase or agree to increase the compensation payable or to become payable to its employees or officers; |
(ii) | grant any new or additional severance or termination pay to, or enter into any employment, severance or other agreement with any person not terminable at will or which creates an obligation on behalf of Mallon or Black Hills to make any payments prior to, upon or after the closing of the merger or upon the termination of such person; |
(iii) | enter into any collective bargaining agreement; |
(iv) | amend any Mallon employee plan or establish, adopt, enter into or amend any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; |
(v) | pay any material benefit or amount not required by a plan or arrangement as in effect on the date of the merger agreement to any person; |
| adopt or propose any change to its articles of incorporation or bylaws; |
| incur, assume, guarantee or prepay any indebtedness for borrowed money; |
| modify or terminate any material contracts or waive or relinquish any right under any such contract, other than modifications not adverse to Mallon; |
| enter into any hedging transactions or fixed price commodity sales agreements; |
| settle or compromise any material tax liability or make any material tax election; |
| make or commit to make any capital expenditures except capital expenditures specifically authorized and capital expenditures not in excess of $15,000 in the aggregate for any single project, well or request for spending authorization, for any type of work, operations, materials, equipment or other spending pursuant to which Mallon would be obligated to make such expenditure; |
| change any method of accounting or accounting practices (except those required by applicable law or GAAP); |
| adopt or consent to a plan of complete or partial liquidation, dissolution or reorganization; |
| waive, release, assign or settle any material rights or claims on litigation matters; |
| enter into any contract, agreement, arrangement or understanding that materially limits or otherwise materially restricts Mallon or any of its subsidiaries, or that would, after the completion of the merger, limit or restrict Mallon or Black Hills from engaging in or competing in any line of business or in any geographic area (except for confidentiality agreements relating to specific prospects); |
| knowingly take any action not otherwise permitted by the merger agreement that is intended or is reasonably likely to result in (1) any of its representations and warranties set forth in the merger agreement being or becoming untrue in any material respect at any time at or prior to the effective time of the merger, (2) any of the conditions to the merger not being satisfied or (3) a material violation of any provision of the merger agreement except, in each case, as may be required by applicable law or regulation; or |
| agree or commit to do any of the foregoing. |
44
Black Hills agreed that, prior to the effective time of the merger, subject to certain exceptions and unless consented to in writing by Mallon, it will not do, and will not permit any of its subsidiaries to do, any of the following:
| adopt a plan of complete or partial liquidation, dissolution or reorganization; |
| change any method of accounting or accounting practices (except those required by applicable law or GAAP); or |
| agree or commit to do any of the foregoing. |
Mallon agreed that it and its subsidiaries will not, and will not authorize or permit any of its or its subsidiaries respective officers, directors, agents or representatives to, directly or indirectly, (1) initiate, solicit, encourage or facilitate any inquiries regarding or the making or implementation of any acquisition proposal (as defined below), (2) engage in any negotiations or discussions with or furnish any information to any person relating to or that may reasonably be expected to lead to an acquisition proposal, (3) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Black Hills, the approval or recommendation by the board of directors of Mallon of the merger or the merger agreement, (4) approve or recommend or propose publicly to approve or recommend any acquisition proposal, or (5) enter into any agreement relating to an acquisition proposal.
However, with respect to any bona fide written acquisition proposal, Mallon and its board of directors are permitted to (1) comply with Rules 14d-9 and 14e-2(a) promulgated by the SEC under the Securities Exchange Act of 1934, as amended, and (2) prior to approval of the merger agreement and the merger by the shareholders of Mallon, furnish information to, and negotiate or otherwise engage in any discussions with, any person who has delivered such an acquisition proposal; if and only to the extent that in connection with the foregoing clause (2):
| Mallons board of directors, after consultation with its independent legal counsel, determines in good faith that such action is legally advisable for the board of directors to comply with its fiduciary duties to its shareholders under applicable law; |
| such acquisition proposal is not subject to any financing contingencies or is, in the good faith judgment of Mallons board of directors, after consultation with its financial advisor, reasonably capable of being financed by the party making such acquisition proposal; and |
| Mallons board of directors determines in good faith after consultation with its independent legal counsel and financial advisor that the acquisition proposal constitutes or may reasonably be expected to result in a superior proposal (as defined below), provided that no information shall be furnished to such party until Mallon obtains a confidentiality agreement from such party with terms substantially similar to those contained in the confidentiality agreement executed between Mallon and Black Hills. |
Prior to obtaining the required vote of Mallons shareholders with respect to the merger agreement and the merger, Mallons board of directors may:
| approve or recommend an acquisition proposal, if (1) at least 24 hours have elapsed following the delivery to Black Hills of the written notice of the acquisition proposal from Mallon (as required by the merger agreement within 24 hours after receipt of such proposal) and (2) the board of directors of Mallon determines in good faith by affirmative vote of a majority of its members, that such acquisition proposal is a superior proposal (taking into account any adjustment to the terms and conditions of the merger proposed by Black Hills in response to such acquisition proposal); and |
| enter into a definitive agreement with respect to a superior proposal, if Mallon shall have complied with certain provisions contained in the merger agreement, including without limitation the payment of the termination fee as required under the merger agreement. |
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Mallon agreed, from the date of execution of the merger agreement until the completion of the merger, to notify Black Hills promptly, but in any event not later than 24 hours, of its receipt of an acquisition proposal or any indication of interest in making an acquisition proposal. In addition, Mallon agreed to update Black Hills with respect to any material changes or adjustments to the terms of any acquisition proposal received.
Mallon agreed to terminate all discussions or negotiations existing on the date of execution of the merger agreement with parties other than Black Hills with respect to any transaction that constitutes an acquisition proposal and to request the return or destruction of all confidential information furnished to any party in connection with any transaction that would constitute an acquisition proposal.
The term acquisition proposal means any inquiry, proposal or offer for a merger, consolidation, dissolution, liquidation, recapitalization or other business combination involving Mallon, any proposal or offer for the issuance by Mallon of over 10% of its equity securities as consideration for the assets or securities of any person or any proposal or offer to acquire over 10% of the equity securities or consolidated total assets of Mallon, in each case, other than the transactions contemplated by the merger agreement.
The term superior proposal means any proposal to acquire all or substantially all of the equity securities or assets of Mallon, pursuant to a tender or exchange offer, merger, consolidation, liquidation, dissolution, recapitalization, sale of assets or otherwise, which a majority of Mallons board of directors determines in its good faith judgment, taking into account all financial, regulatory, legal and other aspects of such proposal, to be (1) reasonably capable of being completed, and (2) more favorable to the holders of Mallon common stock than the transactions contemplated by the merger agreement (based on the advice of Mallons independent financial advisor that the value of the consideration provided for in such acquisition proposal exceeds the value of the consideration to be paid by Black Hills in the merger) taking into account all the terms and conditions of such proposal and the merger agreement (including any proposal by Black Hills to amend the terms of the transactions contemplated by the merger agreement).
Indemnification
Black Hills agreed that it will, and will cause the surviving corporation to, indemnify each present and former officer and director of Mallon and each subsidiary of Mallon as of the effective time of the merger for all costs incurred in connection with any claim arising out of matters existing or occurring prior to the effective time of the merger. Such indemnification will be to the fullest extent permitted under the CBCA and the articles of incorporation and bylaws of Mallon in effect on the date the merger agreement was executed. Black Hills will also advance costs to such officers and directors who are threatened to be named as a party to any action as a result of such persons status as an officer or director of Mallon.
Black Hills agreed to cause the surviving corporation to provide directors and officers liability insurance coverage for events occurring prior to the effective time of the merger for a period of two years following the effective time of the merger to individuals who were officers and directors of Mallon on the date the merger agreement was executed. The coverage under this insurance will be substantially similar to the coverage provided under Mallons directors and officers insurance policy existing on the date of execution of the merger agreement; provided, however, that Black Hills is not obligated to pay annual premiums in excess of the annual premiums paid by Mallon over the past two years for such coverage.
Benefit Matters
Mallon agreed to take all actions necessary to terminate all of its 401(k) plans upon the completion of the merger. Black Hills agreed to allow those employees of Mallon who are hired by Black Hills after the merger to roll over their account balances into Black Hills 401(k) plan.
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Mallon agreed to take all actions necessary to terminate its 1997 Equity Participation Plan upon the completion of the merger. Mallon notified option holders under such plan that the plan will be terminated. This notice also instructed option holders that all outstanding options issued under the plan that are not exercised will be cancelled and terminated automatically as of the close of business on the effective date of the merger.
At the effective time of the merger or following a reasonable transition period, those employees of Mallon who are continuing as employees of Black Hills will be eligible to participate in employee plans maintained by Black Hills for similarly situated employees of Black Hills to the extent that such plans provide the following benefits: medical/dental, life insurance, disability income, sick pay, holiday and vacation pay, 401(k) plan eligibility, benefit arrangements, profit-sharing programs, dependent care assistance, and employee stock option and stock purchase plans. Such employees will also be given credit for any accrued but unused vacation and sick leave time as of the day immediately prior to the completion of the merger.
Conditions to the Obligation of Each Party
Our respective obligations to effect the merger are subject to the fulfillment at or prior to the effective time of the following conditions:
| approval by Mallon shareholders of the merger and the merger agreement; |
| any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended has expired or terminated; |
| all approvals and filings with any governmental authority that, if not made or received, would have a material adverse effect on Black Hills or Mallon, will have been obtained or filed; |
| the SEC shall have declared the registration statement effective under the Securities Act and no stop order or proceedings seeking a stop order will have been made or commenced; |
| no governmental authority or court will have issued any law, regulation or order which has the effect of making the merger illegal or otherwise prohibiting consummation of the merger; |
| the Black Hills common shares to be issued in the merger shall have been approved for listing on the NYSE, subject to official notice of issuance; and |
| the Mallon employee royalty bonus pool will have been terminated. |
Conditions to the Obligations of Black Hills
The obligation of Black Hills to effect the merger is also subject to the satisfaction at or prior to the effective time of the following conditions, unless waived in writing by Black Hills:
| each of the representations and warranties of Mallon set forth in the merger agreement shall be true and correct as of the closing date of the merger, except for such failures of such representations and warranties to be true that would not have a material adverse effect on Mallon; |
| Mallon shall have performed in all material respects all obligations required to be performed by it under the merger agreement prior to the completion date of the merger; |
| Black Hills shall have received the written opinion of counsel to the effect that, subject to certain assumptions and limitations, (1) 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, (2) Black Hills, Merger Sub and Mallon will each be a party to that reorganization within the meaning of Section 368(b) of the Code, (3) except to the extent that cash is received in lieu of fractional shares of Black Hills common stock, no |
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gain or loss will be recognized by shareholders of Mallon that are United States persons (as defined in Section 7701(a)(30) of the Code), and (4) no gain or loss will be recognized by a shareholder of Mallon that is not a United States person (as defined in Section 7701(a)(30) of the Code) provided that such shareholder has not owned (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding common stock of Mallon at any time during the shorter of (a) the five-year period preceding the effective time of the merger or (b) the period during which such shareholder held Mallon common stock; |
| Black Hills shall have received from Mallon a letter or letters from Mallons independent auditors in form and substance customary for comfort letters delivered by independent accountants in accordance with Statement of Accounting Standards No. 72 and reasonably satisfactory to Black Hills; |
| holders of not more than 5% of the Mallon common stock entitled to vote on the merger agreement and the merger will have dissented to the merger in accordance with Article 113 of the CBCA; |
| all officers and directors of Mallon immediately prior to the completion date of the merger will have executed and delivered to Mallon resignations acceptable to Black Hills; and |
| Mallon shall have taken all actions as have been reasonably requested by Black Hills in order to satisfy any outstanding obligations to the Nation pursuant to the Notice of Lien for Possessory Interest Taxes for the year 2002. |
Conditions to the Obligations of Mallon
The obligation of Mallon to effect the merger is also subject to the satisfaction at or prior to the effective time of the following conditions, unless waived in writing by Mallon:
| the representations and warranties of Black Hills and Merger Sub set forth in the merger agreement shall be true and correct as of the completion date of the merger, except for changes specifically permitted by the merger agreement; |
| Black Hills and Merger Sub shall have performed in all material respects all obligations required to be performed by them under the merger agreement prior to the closing date of the merger; and |
| Mallon shall have received the written opinion of counsel to the effect that, subject to certain assumptions and limitations, (1) 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, (2) Black Hills, Merger Sub and Mallon will each be a party to that reorganization within the meaning of Section 368(b) of the Code, (3) except to the extent that cash is received in lieu of fractional shares of Black Hills common stock, no gain or loss will be recognized by shareholders of Mallon that are United States persons (as defined in Section 7701(a)(30) of the Code), and (4) no gain or loss will be recognized by a shareholder of Mallon that is not a United States person (as defined in Section 7701(a)(30) of the Code) provided that such shareholder has not owned (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding common stock of Mallon at any time during the shorter of (a) the five-year period preceding the effective time of the Merger or (b) the period during which such shareholder held Mallon common stock. |
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after approval by the shareholders of Mallon:
| by our mutual written consent; |
| by either of us in certain circumstances if the effective time of the merger has not occurred on or before April 30, 2003; |
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| by either of us if any governmental authority or court of competent jurisdiction has issued or entered any final nonappealable order or taken any other nonappealable final action, in each case having the effect of permanently enjoining or otherwise permanently prohibiting the merger; |
| by either of us if the requisite shareholder approval is not obtained upon a vote at a duly held meeting of Mallons shareholders or at any adjournment or postponement thereof; |
| by Black Hills if the Mallon board of directors (1) withdraws or modifies in a manner adverse to Black Hills its recommendation of the merger agreement or the merger or (2) has recommended to the shareholders of Mallon a superior proposal; |
| by Mallon following the execution of a definitive agreement providing for a superior proposal, provided that Mallon has met all its obligations in connection with such a termination as set forth in the merger agreement, including without limitation the payment of a $1,500,000 termination fee; |
| by either of us if there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in the merger agreement, and which breach would, if uncured, cause certain closing conditions not to be satisfied and will not have been cured within 20 business days following receipt by the breaching party of written notice of such breach from the other party; or |
| by either of us if any of the conditions to such partys obligations to consummate the merger becomes impossible to satisfy. |
General
The merger agreement provides that, except as provided below, all expenses incurred by the parties to the merger agreement shall be paid solely and entirely by the party that has incurred such expenses.
Termination Fees
The merger agreement generally provides that Mallon will pay to Black Hills a termination fee of $1,500,000 if the merger agreement is terminated in either of the following circumstances:
| by Black Hills if the Mallon board of directors (1) withdraws or modifies in a manner adverse to Black Hills its recommendation of the merger agreement or the merger or (2) has recommended to the shareholders of Mallon a superior proposal; or |
| by Mallon, if Mallon enters into a definitive agreement for a superior proposal in accordance with certain provisions of the merger agreement. |
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At the time of executing the merger agreement, Aquila assigned to Black Hills the credit agreement dated as of September 9, 1999, as amended, that Aquila had in place with Mallon and Mallon Oil. At that time, Mallon and Mallon Oil owed to Aquila approximately $29.3 million in principal and accrued interest, which Black Hills paid to Aquila on October 1, 2002 in consideration for the assignment. Upon the assignment of the credit agreement to Black Hills, Mallon and Mallon Oil became indebted to Black Hills for that amount. In connection with the assignment of the credit agreement: (i) Aquila and Mallon released one another, and Black Hills and Aquila released one another, from all claims that may have arisen under the credit agreement, (ii) Aquila assigned to Mallon the 615,000 shares of Mallon common stock that Mallon had issued to Aquila in connection with the credit agreement and various amendments thereof (which shares were subsequently cancelled), (iii) Aquila and Mallon terminated their agency agreement, and (iv) AMS, Mallon and Mallon Oil terminated certain hedge agreements among them in exchange for a payment of approximately $1.2 million to AMS.
Immediately after the assignment of the credit agreement to Black Hills, Black Hills, Mallon and Mallon Oil entered into an amended and restated credit agreement dated as of October 1, 2002, by which the parties amended and restated the original credit agreement that had been assigned to Black Hills. For a description of the terms of the amended and restated credit agreement see Managements Discussion and Analysis of Financial Condition and Results of Operation of MallonLiquidity and Capital Resources on pages 101-104.
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CERTAIN MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a general summary of certain United States federal income tax consequences that are expected to be material to shareholders of Mallon and Black Hills. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, applicable Treasury regulations, publicly available administrative interpretations and court decisions as in effect as of the date of this proxy statement/prospectus, all of which may change, possibly with retroactive effect. This discussion is also based on the information contained in this proxy statement/prospectus and other documents related to the merger, and on certain representations with respect to factual matters.
This discussion is included for general information purposes only and does not purport to be a complete technical analysis or listing of all potential tax considerations that may be relevant to parties to the merger. The discussion, to the extent it relates to Mallon shareholders, only addresses the tax consequences to U.S. Holders and Non-U.S. Holders (as defined below) that hold Mallon common stock as a capital asset and that, pursuant to the merger, either (1) exchange such stock for Black Hills common stock or (2) receive cash pursuant to the exercise of dissenters rights. The discussion, to the extent it relates to holders of compensatory options to purchase Mallon common stock, only addresses the tax consequences to U.S. Holders that received such options as compensation in exchange for services rendered to Mallon and assumes that such options are classified as nonstatutory or nonqualified options for tax purposes. This discussion does not address the consequences of the merger under state, local or foreign law and the discussion does not address all aspects of United States federal income taxation that may be important to a shareholder in light of that shareholders particular circumstances. This discussion also does not address the United States federal income tax consequences to a shareholder that is subject to special rules under the Code, such as:
| a financial institution or insurance company; |
| a tax-exempt organization, retirement plan or mutual fund; |
| a dealer, broker or trader in securities; |
| a shareholder that holds its Mallon common stock as part of a hedge, appreciated financial position, straddle or conversion transaction; |
| a shareholder that is a foreign person and that holds its Mallon common stock in connection with a trade or business conducted in the United States or in connection with an office or fixed place of business located in the United States; |
| a shareholder that is a nonresident alien individual and that either is present in the United States for 183 days or more in the taxable year or is subject to provisions of the Code applicable to expatriates; or |
| a shareholder that is affected by the provisions of an income tax treaty to which the United States is a party. |
For purposes of this discussion, the term U.S. Holder means a holder of Mallon common stock that qualifies as a United States person within the meaning of Section 7701(a)(30) of the Code. For purposes of Section 7701(a)(30) of the Code, a United States person means:
| a citizen or resident of the United States; |
| a corporation or partnership created or organized in the United States or under the laws of the United States or of any state or political subdivision thereof; |
| an estate the income of which is subject to United States federal income taxation regardless of its source; or |
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| a trust if its administration is subject to the primary supervision of a United States court and if one or more United States persons have the authority to control all substantial decisions of the trust. |
For purposes of this discussion, a Non-U.S. Holder means a holder of Mallon common stock that is not a U.S. Holder.
THIS DISCUSSION OF CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS NOT A COMPLETE ANALYSIS OR DESCRIPTION OF ALL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH, OR THAT ARE DEPENDENT ON, INDIVIDUAL CIRCUMSTANCES. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES OF THE MERGER. ACCORDINGLY, EACH MALLON SHAREHOLDER AND COMPENSATORY OPTION HOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL, FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE MERGER THAT MAY BE MATERIAL TO HIM OR HER.
It is a condition to the completion of the merger that Black Hills and Mallon each receive an opinion from its tax counsel, Holland & Hart LLP and Holme Roberts & Owen LLP, respectively, 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 and that Black Hills, Merger Sub and Mallon will each be a party to that reorganization within the meaning of Section 368(b) of the Code. Neither Black Hills nor Mallon intends to waive this condition.
The opinions of Holland & Hart LLP and Holme Roberts & Owen LLP regarding the tax consequences of the merger will rely on (1) representations, warranties and covenants made by Black Hills, Merger Sub and Mallon in the merger agreement and in representation letters signed by authorized representatives of Black Hills, Merger Sub and Mallon, and (2) specified assumptions, including assumptions that the merger will be completed in the manner contemplated by the merger agreement and that there will be no material changes in existing facts or in law. If any of those representations, warranties, covenants or assumptions is inaccurate, either Holland & Hart LLP or Holme Roberts & Owen LLP, or both, may not be able to provide its required opinion. The opinions to be delivered by Holland & Hart LLP and Holme Roberts & Owen LLP will neither bind the Internal Revenue Service, or IRS, nor preclude the IRS or the courts from adopting a contrary position. Neither Black Hills nor Mallon intends to obtain a ruling from the IRS regarding the tax consequences of the merger. THE FOLLOWING DISCUSSION ASSUMES THAT THE MERGER WILL QUALIFY AS A REORGANIZATION WITHIN THE MEANING OF SECTION 368(a) OF THE CODE AND THAT BLACK HILLS, MERGER SUB AND MALLON WILL EACH BE A PARTY TO THE REORGANIZATION WITHIN THE MEANING OF SECTION 368(b) OF THE CODE.
United States Federal Income Tax Consequences to U.S. Holders That Participate in the Merger
U.S. HoldersIn General. For United States federal income tax purposes, a U.S. Holder will not recognize any gain or loss upon its exchange of shares of Mallon common stock for shares of Black Hills common stock in the merger.
If a U.S. Holder receives cash instead of a fractional share of Black Hills common stock, the U.S. Holder will be required to recognize gain or loss, measured by the difference between the amount of cash received instead of that fractional share and the portion of the tax basis of that U.S. Holders shares of Mallon common stock allocable to that fractional share. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the share of Mallon common stock exchanged for that fractional share of Black Hills common stock was held for more than one year as of the effective time of the merger.
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A U.S. Holder generally will have a tax basis in the Black Hills common stock received in the merger equal to (1) the tax basis of the Mallon common stock surrendered by that U.S. Holder in the merger, less (2) any tax basis of the Mallon common stock surrendered that is allocable to any fractional share of Black Hills common stock for which cash is received.
A U.S. Holders holding period for shares of Black Hills common stock received in exchange for shares of Mallon common stock in the merger generally will include the holding period for the shares of Mallon common stock surrendered by that U.S. Holder in the merger.
U.S. Holders That Exercise Compensatory Options to Purchase Mallon Common Stock In Connection With the Merger. Any outstanding compensatory option to purchase Mallon common stock that has not been exercised prior to the close of business on the effective date of the merger will be cancelled and shall cease to exist (see generally Terms of the Merger AgreementCertain Additional AgreementsBenefit Matters at page 46 of this proxy statement/prospectus). Any holder of a compensatory option to purchase shares of Mallon common stock that exercises such option concurrently with the consummation of the merger will receive Black Hills common stock (and, if applicable, cash instead of a fractional share of Black Hills common stock) instead of the Mallon common stock into which such option was exercisable.
A U.S. Holder that holds a compensatory option to purchase Mallon common stock, and that exercises such option concurrently with the consummation of the merger, will recognize ordinary income. The amount of ordinary income recognized by that U.S. Holder will equal the difference between the sum of the fair market value of the Black Hills common stock (and cash, if any, received instead of a fractional share of Black Hills common stock) received in the merger and the exercise price paid by that U.S. Holder upon the exercise of the compensatory option. That U.S. Holder generally will have an aggregate tax basis in the shares of Black Hills common stock received in the merger equal to the fair market value of such shares as of the effective date of the merger. That U.S. Holders holding period for the Black Hills common stock received in the merger will begin the day after the merger is consummated.
Tax Basis And Holding Period of Certain U.S. Holders In Black Hills Common Stock Received In the Merger. A U.S. Holder that both exchanges Mallon common stock and exercises compensatory options to purchase Mallon common stock in connection with the merger generally will have an aggregate tax basis in the shares of Black Hills common stock received in the merger equal to: (1) the tax basis of the Mallon common stock surrendered by that U.S. Holder in the merger, plus (2) the exercise price paid and the amount of ordinary income recognized by that U.S. Holder upon the exercise of the compensatory options, less (3) the amount of any cash received instead of a fractional share of Black Hills common stock.
A U.S. Holder that both exchanges Mallon common stock and exercises compensatory options to purchase Mallon common stock in connection with the merger generally will obtain a split holding period with respect to each share of Black Hills common stock received in the merger. This split holding period will be based on the holding period attributable to, and the relative number of, shares of Mallon common stock and compensatory options exchanged by that U.S. Holder in the merger.
United States Federal Income Tax Consequences to Non-U.S. Holders That Participate in the Merger
Scope of Discussion With Respect to Non-U.S. Holders. As previously stated in this discussion under the heading Scope of Discussion, this discussion does not address the United States federal income tax consequences to shareholders that are subject to special rules such as: (1) a shareholder that is a foreign person and that holds its Mallon common stock in connection with a trade or business conducted in the United States or in connection with an office or fixed place of business located in the United States; (2) a shareholder that is a nonresident alien individual and that either is present in the United States for 183 days or more in the taxable year or is subject to provisions of the Code applicable to expatriates; or (3) a shareholder that is affected by the provisions of an income tax treaty to which the United States is a party. ANY NON-U.S. HOLDER THAT MAY
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BE SUBJECT TO SPECIAL TAX RULES SUCH AS THOSE THAT APPLY TO A NON U.S. HOLDER THAT CONDUCTS BUSINESS IN THE UNITED STATES, HAS BEEN PRESENT IN THE UNITED STATES, IS AN EXPATRIATE OF THE UNITED STATES, OR IS AFFECTED BY THE PROVISIONS OF AN INCOME TAX TREATY TO WHICH THE UNITED STATES IS A PARTY, IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO HIM OR HER OF THE MERGER.
Non-U.S. Holders That Have Never Held More Than 5% of Mallons Common Stock. Section 897 of the Code (enacted pursuant to United States tax legislation referred to as the Foreign Investment in Real Property Tax Act, or FIRPTA) generally subjects any gain realized by a foreign person in connection with the sale or exchange of a United States real property interest, or USRPI, to United States federal income tax as either ordinary income or capital gain, referred to here as the FIRPTA Tax.
For purposes of the FIRPTA Tax, stock held in a United States real property holding corporation, or USRPHC, generally is classified as a USRPI. A corporation generally is classified as a USRPHC if the fair market value of its interests in United States real property equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus any other assets used or held for use in its trade or business. However, a foreign shareholders interest in a USRPHC will not be treated as a USRPI if (1) the stock of the USRPHC is regularly traded on an established securities market for purposes of Section 897(c)(3) of the Code and (2) that foreign shareholder has never held (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding shares of the USRPHC.
For purposes of determining whether a foreign shareholder owns or has owned more than 5% of the outstanding shares of a USRPHC, the constructive ownership rules of Section 318 of the Code (as modified by Section 897(c)(6)(C) of the Code) treat a foreign shareholder as owning shares that are (1) owned by (or that are subject to an option held by) certain relatives, related corporations, partnerships, estates or trusts or (2) subject to an option held by that foreign shareholder.
Mallon believes that it has continuously been a USRPHC during each of the last five years and that it will be a USRPHC as of the effective time of the merger. Mallon also expects that Mallon common stock will continue to be regularly traded on the OTC Bulletin Board at all times leading up to and as of the effective time of the merger, such that Mallon common stock should be considered to be regularly traded on an established securities market for purposes of Section 897(c)(3) of the Code. If these expectations prove to be correct, the FIRPTA Tax will not apply to a Non-U.S. Holder that exchanges Mallon common stock for Black Hills common stock in the merger if that shareholder has never held (either directly or indirectly, after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding shares of Mallons common stock. Assuming the FIRPTA Tax does not apply:
| a Non-U.S. Holder will not recognize any gain or loss upon its exchange of shares of Mallon common stock for shares of Black Hills common stock in the merger; |
| if a Non-U.S. Holder receives cash instead of a fractional share of Black Hills common stock, any gain realized by that Non-U.S. Holder will not be subject to United States federal income tax; |
| a Non-U.S. Holder will have a tax basis in the Black Hills common stock received in the merger equal to (1) the tax basis of the Mallon common stock surrendered by that Non-U.S. Holder in the merger, less (2) any tax basis of the Mallon common stock surrendered that is allocable to any fractional share of Black Hills common stock for which cash is received; and |
| a Non-U.S. Holders holding period for shares of Black Hills common stock received in exchange for shares of Mallon common stock in the merger will include the holding period for the shares of Mallon common stock surrendered by that Non-U.S. Holder in the merger. |
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Non-U.S. Holders That Currently Hold or Have Held More Than 5% of Mallons Common Stock. If a Non-U.S. Holder owns or has owned (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding shares of Mallon common stock at any time during the shorter of (1) the five-year period preceding the effective time of the merger or (2) the period during which that Non-U.S. Holder has held its Mallon common stock, or the Testing Period, then the FIRPTA Tax will apply to that Non-U.S. Holder, referred to here as a Significant Non-U.S. Holder, unless the requirements of Treasury Regulation Section 1.897-6T are satisfied. If a Non-U.S. Holder has owned (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding shares of Mallon common stock, but such ownership was not held at any time during the Testing Period, then that Non-U.S. Holder generally will not be subject to the FIRPTA Tax.
In general, Treasury Regulation 1.897-6T enables a Significant Non-U.S. Holder to avoid the application of the FIRPTA Tax if: (1) that Significant Non-U.S. Holder exchanges its USRPI for another USRPI in connection with an exchange that is subject to the nonrecognition provisions of the Code (such as a reorganization under Section 368(a) of the Code); (2) the USRPI received in the exchange would be subject to United States federal income tax if it was sold immediately after the exchange; and (3) that Significant Non-U.S. Holder complies with certain filing requirements (including the filing of a United States federal income tax return). However, provided that Black Hills common stock continues to be regularly traded on the NYSE immediately after the merger, the requirement in clause (2) of the preceding sentence will not be satisfied unless a Significant Non-U.S. Holder owns (either directly or indirectly after the application of the constructive ownership rules of Section 318 of the Code as modified by Section 897(c)(6)(C) of the Code) more than 5% of the outstanding shares of Black Hills common stock immediately after the merger. As a result, unless a Significant Non-U.S. Holder directly or indirectly owns a substantial number of shares of Black Hills common stock immediately after the merger that were not received in the merger, it is expected that a Significant Non-U.S. Holder will be subject to the FIRPTA Tax.
A Significant Non-U.S. Holder subject to the FIRPTA Tax will recognize gain or loss measured by the difference between (1) the sum of the amount of any cash received instead of a fractional share of Black Hills common stock and the fair market value of the Black Hills common stock received in the merger over (2) that Significant Non-U.S. Holders tax basis in its Mallon common stock surrendered in the merger. Such gain or loss will be characterized as either ordinary or capital, depending on whether that Significant Non-U.S. Holder held its Mallon common stock as a capital asset. The aggregate tax basis of the Black Hills common stock received in the merger will equal the fair market value of that Black Hills common stock as of the effective date of the merger. The Significant Non-U.S. Holders holding period for the Black Hills common stock received in the merger will begin the day after the merger is consummated. A Significant Non-U.S. Holder subject to the FIRPTA Tax may also be required to:
| file a United States federal income tax return reporting the gain subject to the FIRPTA Tax as income effectively connected with the conduct of a trade or business within the United States and taxable as either ordinary income or capital gain; and |
| pay any FIRPTA Tax due upon the filing of such return or, depending upon the circumstances, earlier through estimated payments. |
The United States federal income tax consequences to a Significant Non-U.S. Holder that is not subject to the FIRPTA Tax should be the same as those previously described with respect to a Non-U.S. Holder that has never held more than 5% of the outstanding shares of Mallon common stock.
EACH NON-U.S. HOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE POSSIBLE APPLICATION OF THE FIRPTA TAX TO HIM OR HER AS A RESULT OF THE EXCHANGE OF MALLON COMMON STOCK FOR BLACK HILLS COMMON STOCK IN THE MERGER.
55
United States Federal Income Tax Consequences to Mallon Shareholders That Exercise Dissenters Rights
Holders of Mallon common stock are entitled to dissenters rights under Colorado law in connection with the merger (see generally the discussion under the heading The MergerDissenters Rights beginning at page 38 of this proxy statement/prospectus). If a U.S. Holder receives cash pursuant to the exercise of dissenters rights, that U.S. Holder generally will recognize gain or loss measured by the difference between the cash received and its adjusted tax basis in its Mallon common stock. This gain or loss may be capital gain or loss, and may be long- term capital gain or loss if the U.S. Holder held its Mallon common stock for more than one year as of the time at which any cash is received.
If a Non-U.S. Holder that is not a Significant Non-U.S. Holder receives cash pursuant to the exercise of dissenters rights, any gain realized by that Non-U.S. Holder should not be subject to United States federal income tax.
If a Significant Non-U.S. Holder receives cash pursuant to the exercise of dissenters rights, that Significant Non-U.S. Holder will be subject to the FIRPTA Tax. As a result, that Significant Non-U.S. Holder will recognize gain or loss measured by the difference between the amount of cash received and that Significant Non-U.S. Holders tax basis in its Mallon common stock. Such gain or loss will be characterized as either ordinary or capital, depending on whether that Significant Non-U.S. Holder held its Mallon common stock as a capital asset. A Significant Non-U.S. Holder subject to the FIRPTA Tax may also be required to file a United States federal income tax return and to pay any tax due upon the filing of such return or, depending upon the circumstances, earlier through estimated payments.
ANY HOLDER OF MALLON COMMON STOCK THAT PLANS TO EXERCISE DISSENTERS RIGHTS IN CONNECTION WITH THE MERGER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE RELATED TAX CONSEQUENCES.
Tax Consequences to Holders of Black Hills Common Stock
There will be no United States federal income tax consequences to holders of Black Hills common stock who do not hold any of their Black Hills common stock as a result of exchanging Mallon common stock for Black Hills common stock pursuant to the merger. Such holders will not recognize any gain or loss upon the consummation of the merger, will retain their tax basis in such Black Hills common stock as it existed before the merger, and will retain the holding period attributable to such Black Hills common stock as it existed before the merger. Such holders of Black Hills common stock will not have to file any returns or documentation with the IRS in order to achieve such non-recognition status, continued tax basis or continued holding period.
Backup Withholding and Information Reporting
U.S. Holders and Non-U.S. Holders that receive: (1) Black Hills common stock or cash instead of a fractional share of Black Hills common stock, or both, from the exchange agent in connection with the exchange of Mallon common stock (or compensatory options to purchase Mallon common stock) for Black Hills common stock in the merger or (2) cash from Mallon or its authorized agent in connection with the exercise of dissenters rights, may be subject to backup withholding with respect to such payments up to the rate of 30%, unless the U.S. Holder or Non-U.S. Holder:
| is a corporation or other exempt recipient and, when required, establishes this exemption; or |
| provides a correct taxpayer identification number, certifies that it is not currently subject to backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. |
Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules will be creditable against the United States federal income tax liability of a U.S. Holder or Non-U.S. Holder if
56
appropriate information is provided to the IRS. If, after the merger, a U.S. Holder or Non-U.S. Holder does not provide the exchange agent or Mallon or its authorized agent with a correct taxpayer identification number or any other document or certification required by the IRS (including a Form W-9 in the case of a U.S. Holder or Form W-8BEN or similar form in the case of a Non-U.S. Holder, or an acceptable substitute for these Forms), such Holders may be subject to penalties imposed by the IRS. The exchange agent and Mallon or its authorized agent will report the amount of any reportable payments made to U.S. Holders or Non-U.S. Holders (as well as any amounts withheld) to such Holders and to the IRS.
Under Section 1445 of the Code, a person acquiring a USRPI from a foreign person generally is required to deduct and withhold a tax equal to 10% of the amount realized by that foreign person on the sale or exchange of that USRPI, referred to here as FIRPTA Withholding. However, Section 1445(b)(6) of the Code exempts from FIRPTA Withholding the sale or exchange of a share of stock that is treated as a USRPI if that share of stock is regularly traded on an established securities market.
Mallon expects that the Mallon common stock will continue to be regularly traded on the OTC Bulletin Board at all times leading up to and as of the effective time of the merger, such that the Mallon common stock should be considered to be regularly traded on an established securities market for purposes of Section 897(c)(3) of the Code. Assuming that this expectation proves to be correct, neither Black Hills nor the exchange agent will be required to deduct and withhold amounts on account of FIRPTA Withholding with respect to a Non-U.S. Holders exchange of Mallon common stock for Black Hills common stock in the merger. In addition, Mallon or its authorized agent should not be required to deduct and withhold amounts on account of FIRPTA Withholding with respect to a Non-U.S. Holder that successfully exercises dissenters rights and receives a cash payment in exchange for its Mallon common stock.
Wage-Related Withholding and Information Reporting
The amount of ordinary income recognized by U.S. Holders that exercise compensatory options to purchase Mallon common stock in connection with the consummation of the merger will be classified as compensation (or wages) for United States federal income tax purposes. Mallon generally will be required to report these wage-related amounts to the IRS. Mallon generally will also be required to withhold in respect of these wage-related amounts and remit the withheld funds to the IRS. Mallon expects to satisfy its wage-related withholding obligations in respect of U.S. Holders that exercise compensatory options to purchase Mallon common stock in connection with the consummation of the merger by withholding from compensatory amounts that would otherwise be payable to such U.S. Holders.
57
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information has been prepared to assist in your analysis of the financial effects of the merger of Black Hills and Mallon. The unaudited pro forma combined condensed financial information is based on the historical financial statements of Black Hills and Mallon and should be read in conjunction with those historical audited and unaudited financial statements and related notes, which are incorporated by reference into this document.
The pro forma information is based on the estimates and assumptions set forth in the notes to such information. The pro forma financial information is preliminary and is being furnished solely for information purposes and, therefore, is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of future results that may occur.
The unaudited pro forma combined condensed financial statements and related notes are qualified by reference to, and should be read in conjunction with the historical financial statements and related notes incorporated by reference herein.
The accompanying unaudited pro forma combined condensed financial statements give effect to the merger of Black Hills and Mallon using the purchase method of accounting. The pro forma adjustments related to the merger are preliminary and are based on managements estimates of the fair value of the assets acquired and liabilities assumed. The actual adjustments may differ materially from those presented in these pro forma financial statements. The final purchase price allocation will be completed after asset and liability valuations are finalized. The preliminary assumptions are based on managements assumptions that they believe are reasonable. Any final adjustment may result in different allocations of purchase price which could affect the fair value assigned to the assets and could result in a change to the statements of operations.
The unaudited pro forma combined condensed balance sheet assumes that the merger took place on September 30, 2002.
The unaudited pro forma combined condensed statements of operations for the nine months ended September 30, 2002 and the year ended December 31, 2001 assume the merger took place as of January 1, 2001.
The pro forma results of operations do not reflect cost savings that are expected to be realized from the elimination of certain expenses and from the financial synergies to be created. No assurance can be given that the operating cost savings and financial synergies will be realized. Black Hills will account for the merger using the purchase method of accounting. No pro forma adjustments have been made with respect to the following unusual items. These items are reflected in the historical results of Mallon, and should be considered when making period-to-period comparisons, and when considering expected results after the merger:
| During the year ended December 31, 2001 and the nine month period ended September 30, 2002, Mallon recognized pre tax impairments related to its oil and gas properties totaling $16.4 million and $1.0 million, respectively. Additionally, during the year ended December 31, 2001, Mallon recognized a pre tax loss on the sale of certain of its properties of $3.1 million. |
| Black Hills has not reflected as adjustments to the historical data annual pre tax cost savings and synergies of approximately $5.0 to $8.0 million annually that Black Hills expects to result from operational efficiencies and synergies to be gained after the merger is completed. |
58
BLACK HILLS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
September 30, 2002
(in thousands)
Historical |
Pro Forma Adjustments |
Pro Forma Amounts |
||||||||||||||
Black Hills |
Mallon |
|||||||||||||||
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ |
74,778 |
|
$ |
1,104 |
|
$ |
|
|
$ |
75,882 |
| ||||
Receivables |
|
157,754 |
|
|
685 |
|
|
|
|
|
158,439 |
| ||||
Other current assets |
|
84,815 |
|
|
202 |
|
|
|
|
|
85,017 |
| ||||
Total current assets |
|
317,347 |
|
|
1,991 |
|
|
|
|
|
319,338 |
| ||||
Property, plant and equipment, net |
|
1,431,110 |
|
|
30,409 |
|
|
22,722 |
(a) |
|
1,484,241 |
| ||||
Other assets |
|
155,465 |
|
|
1,159 |
|
|
3,041 |
(b) |
|
159,665 |
| ||||
Total assets |
$ |
1,903,922 |
|
$ |
33,559 |
|
$ |
25,763 |
|
$ |
1,963,244 |
| ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ |
142,464 |
|
$ |
2,912 |
|
$ |
|
|
$ |
145,376 |
| ||||
Current maturities of long-term debt |
|
17,306 |
|
|
28,671 |
|
|
5,157 |
(c) |
|
51,134 |
| ||||
Notes payable |
|
383,521 |
|
|
|
|
|
6,130 |
(d) |
|
389,651 |
| ||||
Other current liabilities |
|
89,743 |
|
|
2,081 |
|
|
(1,229 |
)(e) |
|
90,595 |
| ||||
Total current liabilities |
|
633,034 |
|
|
33,664 |
|
|
10,058 |
|
|
676,756 |
| ||||
Long-term debt, net of current maturities |
|
561,399 |
|
|
3,724 |
|
|
(624 |
)(f) |
|
564,499 |
| ||||
Deferred credits and other liabilities |
|
158,046 |
|
|
1,522 |
|
|
(1,522 |
)(e) |
|
158,046 |
| ||||
Minority interest in subsidiaries |
|
16,616 |
|
|
|
|
|
|
|
|
16,616 |
| ||||
Mandatorily redeemable common stock |
|
|
|
|
5,362 |
|
|
(5,362 |
)(g) |
|
|
| ||||
Stockholders equity: |
||||||||||||||||
Preferred stock |
|
5,549 |
|
|
|
|
|
|
|
|
5,549 |
| ||||
Common stock equity |
|
27,056 |
|
|
109 |
|
|
373 |
(h) |
|
27,538 |
| ||||
Additional paid-in capital |
|
243,599 |
|
|
92,973 |
|
|
(80,955 |
)(h) |
|
255,617 |
| ||||
Retained earnings |
|
272,339 |
|
|
(101,044 |
) |
|
101,044 |
(h) |
|
272,339 |
| ||||
Treasury stock, at cost |
|
(1,756 |
) |
|
|
|
|
|
|
|
(1,756 |
) | ||||
Accumulated other comprehensive loss |
|
(11,960 |
) |
|
(2,751 |
) |
|
2,751 |
(e) |
|
(11,960 |
) | ||||
Total stockholders equity |
|
534,827 |
|
|
(10,713 |
) |
|
23,213 |
|
|
547,327 |
| ||||
Total liabilities and stockholders equity |
$ |
1,903,922 |
|
$ |
33,559 |
|
$ |
25,763 |
|
$ |
1,963,244 |
| ||||
Black Hills shares outstanding |
|
26,887 |
|
|
|
|
|
482 |
|
|
27,369 |
|
The accompanying notes to combined condensed financial statements are an integral part of these combined condensed financial statements.
59
BLACK HILLS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
For the Nine Months ended September 30, 2002
(in thousands, except per share amounts)
Historical |
Pro Forma Adjustments |
Pro Forma Amounts |
||||||||||||||
Black Hills |
Mallon |
|||||||||||||||
Operating revenues |
$ |
312,215 |
|
$ |
7,975 |
|
$ |
|
|
$ |
320,190 |
| ||||
Operating expenses: |
||||||||||||||||
Fuel and purchased power |
|
52,695 |
|
|
|
|
|
|
|
|
52,695 |
| ||||
Operations and maintenance |
|
47,296 |
|
|
5,302 |
|
|
|
|
|
52,598 |
| ||||
Administrative and general |
|
46,118 |
|
|
3,111 |
|
|
|
|
|
49,229 |
| ||||
Depreciation, depletion and amortization |
|
52,027 |
|
|
4,001 |
|
|
(742 |
)(i) |
|
55,286 |
| ||||
Taxes, other than income taxes |
|
17,889 |
|
|
|
|
|
|
|
|
17,889 |
| ||||
Impairment of oil and gas properties |
|
|
|
|
954 |
|
|
|
|
|
954 |
| ||||
|
216,025 |
|
|
13,368 |
|
|
(742 |
) |
|
228,651 |
| |||||
Equity in earnings of unconsolidated affiliates |
|
4,187 |
|
|
|
|
|
|
|
|
4,187 |
| ||||
Operating income (loss) |
|
100,377 |
|
|
(5,393 |
) |
|
742 |
|
|
95,726 |
| ||||
Other income (expense): |
||||||||||||||||
Interest expense |
|
(30,171 |
) |
|
(3,156 |
) |
|
2,369 |
(j) |
|
(30,958 |
) | ||||
Interest income |
|
1,748 |
|
|
26 |
|
|
|
|
|
1,774 |
| ||||
Other expense |
|
(206 |
) |
|
|
|
|
|
|
|
(206 |
) | ||||
Other income |
|
2,654 |
|
|
|
|
|
|
|
|
2,654 |
| ||||
|
(25,975 |
) |
|
(3,130 |
) |
|
2,369 |
|
|
(26,736 |
) | |||||
Income (loss) from continuing operations |
|
74,402 |
|
|
(8,523 |
) |
|
3,111 |
|
|
68,990 |
| ||||
Minority interest |
|
(2,614 |
) |
|
|
|
|
|
|
|
(2,614 |
) | ||||
Income taxes |
|
(24,725 |
) |
|
|
|
|
1,894 |
(k) |
|
(22,831 |
) | ||||
Net income (loss) |
|
47,063 |
|
|
(8,523 |
) |
|
5,005 |
|
|
43,545 |
| ||||
Accretion of mandatorily redeemable common stock |
|
|
|
|
(509 |
) |
|
509 |
(g) |
|
|
| ||||
Preferred stock dividends |
|
(168 |
) |
|
|
|
|
|
|
|
(168 |
) | ||||
Net income (loss) available for common stock |
$ |
46,895 |
|
$ |
(9,032 |
) |
$ |
5,514 |
|
$ |
43,377 |
| ||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
|
26,778 |
|
|
|
|
|
482 |
(h) |
|
27,260 |
| ||||
Diluted |
|
27,052 |
|
|
|
|
|
482 |
(h) |
|
27,534 |
| ||||
Earnings per share from continuing operations: |
||||||||||||||||
Basic |
$ |
1.75 |
|
|
|
|
|
|
|
$ |
1.59 |
| ||||
Diluted |
$ |
1.74 |
|
|
|
|
|
|
|
$ |
1.58 |
|
The accompanying notes to combined condensed financial statements are an integral part of these combined condensed financial statements.
60
BLACK HILLS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
For the Year ended December 31, 2001
(in thousands, except per share amounts)
Historical |
Pro Forma Adjustments |
Pro Forma Amounts |
||||||||||||||
Black Hills |
Mallon |
|||||||||||||||
Operating revenues |
$ |
461,938 |
|
$ |
19,340 |
|
$ |
|
|
$ |
481,278 |
| ||||
Operating expenses: |
||||||||||||||||
Fuel and purchased power |
|
86,245 |
|
|
|
|
|
|
|
|
86,245 |
| ||||
Operations and maintenance |
|
65,556 |
|
|
12,049 |
|
|
|
|
|
77,605 |
| ||||
Administrative and general |
|
78,339 |
|
|
6,439 |
|
|
|
|
|
84,778 |
| ||||
Depreciation, depletion and amortization |
|
53,811 |
|
|
7,399 |
|
|
(3,373 |
)(i) |
|
57,837 |
| ||||
Taxes, other than income taxes |
|
22,993 |
|
|
|
|
|
|
|
|
22,993 |
| ||||
Loss on sale of oil and gas properties |
|
|
|
|
3,109 |
|
|
|
|