UNITED STATES DISTRICT COURT WESTERN DISTRICT OF TEXAS EL PASO DIVISION X : IN RE EL PASO ELECTRIC COMPANY : EP-03-0004-DB SECURITIES LITIGATION : : X NOTICE OF PENDENCY OF CLASS ACTION AND PROPOSED SETTLEMENT, MOTION FOR ATTORNEYS’ FEES, AND SETTLEMENT FAIRNESS HEARING This notice provides you with important information in connection with the settlement of a lawsuit concerning El Paso Electric Company (“EPE”). Your rights may be affected by this Notice. If you wish to recover money you must act by October 15, 2005. You should read this Notice carefully. TO: ALL PERSONS WHO PURCHASED OR OTHERWISE ACQUIRED THE COMMON STOCK OF EL PASO ELECTRIC COMPANY DURING THE PERIOD FROM FEBRUARY 14, 2000 TO OCTOBER 21, 2002, INCLUSIVE (THE “SETTLEMENT CLASS”). A federal court authorized this notice. This is not a solicitation from a lawyer. • The Settlement will provide a $10,000,000 settlement fund for the benefit of investors who purchased or otherwise acquired shares of EPE common stock between February 14, 2000 and October 21, 2002, inclusive (the “Settlement Class Period”). • The Settlement resolves class litigation (the “Class Action”) over whether EPE misled investors about EPE’s contractual relationship with Enron, and whether the alleged misrepresentations and omissions inflated the price of its common stock, and caused financial injury to the investing public. • Your legal rights are affected whether you act, or do not act. Read this notice carefully. YOUR LEGAL RIGHTS AND OPTIONS IN THIS SETTLEMENT: SUBMIT A CLAIM FORM The only way to receive a payment. EXCLUDE YOURSELF Receive no payment. This is the only option that allows you to ever be part of any other lawsuit against EPE and the other Released Persons about the legal claims being released in this case. OBJECT Write to the Court about why you do not like the Settlement. GO TO A HEARING Ask to speak in Court about the fairness of the Settlement. DO NOTHING You will receive no payment, and give up your right to file your own lawsuit or participate in any other lawsuit against EPE and the other Released Persons concerning the legal claims being released in the case. • These rights and options – and the deadlines to exercise them – are explained in this notice. • The Court in charge of this case still has to decide whether to approve the Settlement. Payments will be made if the Court approves the Settlement, the Settlement becomes final after the resolution of all appeals, and after the claims processing procedure is complete. SUMMARY NOTICE Statement of Plaintiff Recovery Pursuant to the settlement described herein, a Settlement Fund consisting of $10,000,000 in cash, plus interest, has been established. Plaintiffs estimate that there were approximately 32.4 million shares of EPE common stock purchased or otherwise acquired during the Settlement Class Period which may have been damaged as a result of the purported acts or omissions alleged in the Class Action. Plaintiffs estimate that the average recovery per damaged share of EPE common stock under the settlement is 30.8¢ per damaged share1 before deduction of Court-awarded attorneys’ fees and expenses. A Settlement Class Member’s actual recovery will be a proportion of the Net Settlement Fund determined by that claimant’s Recognized Claim as compared to the total Recognized Claims of all Settlement Class Members who submit acceptable Proofs of Claim. An individual Settlement Class Member may receive more or less than this average amount depending on: (1) the number of claims filed; (2) when Settlement Class Members purchased or otherwise acquired their shares during the Settlement Class Period; (3) whether Settlement Class Members either sold their shares during the Settlement Class Period, or held their shares past the end of the Settlement Class Period; (4) administrative costs, including the costs of notice, for the lawsuit; and (5) the amount awarded by the Court for attorneys' fees, costs and expenses. Statement of Potential Outcome of Case The parties disagree on both liability and damages and do not agree on the average amount of damages per share that would be recoverable if plaintiffs were to have prevailed on each claim alleged. The Defendants deny that they are liable to the plaintiffs or the Settlement Class and deny that plaintiffs or the Settlement Class have suffered any damages. Statement of Attorneys’ Fees and Costs Sought Lead Plaintiff’s Counsel are moving the Court for an award of attorneys’ fees from the Gross Settlement Fund not to exceed thirty percent (30%), and reimbursement of expenses of no greater than $400,000. The requested fees and expenses would amount to an average of 10.5¢ per damaged share in total for fees and expenses. Lead Plaintiff’s Counsel have expended considerable time and effort in the prosecution of this litigation on a contingent fee basis, and have advanced the expenses of litigation with the expectation that if they were successful in recovering money for the Settlement Class, they would receive fees and be reimbursed for their expenses from the recovery. In this type of litigation it is customary for counsel to be awarded a percentage of the common fund recovery as their attorneys’ fees. Further Information Further information regarding the Class Action and this settlement may be obtained by contacting Lead Plaintiff’s Counsel: Katharine M. Ryan or Kay E. Sickles, Schiffrin & Barroway, LLP, 280 King of Prussia Road, Radnor, PA 19087, Telephone: 610-667-7706, or Robert Wallner or Clifford Goodstein, Milberg Weiss Bershad & Schulman, One Pennsylvania Plaza, New York, New York 10119-0165, Telephone: (212) 594-5300. Reasons for the Settlement The principal reason for the settlement is to provide a benefit to the Settlement Class now. This benefit must be compared to the risk that no recovery might be achieved after a contested trial and likely appeals, possibly years into the future. While Lead Plaintiff’s Counsel were prepared to go to trial and were confident in their ability to present a case, they recognize that a trial is a risky proposition and that Plaintiffs and the Settlement Class might not have prevailed on all their claims. The claims advanced by the Settlement Class involve numerous complex legal, financial and technological issues, requiring extensive expert testimony, which would add considerably to the expense and duration of the litigation. Even after extensive investigation and discovery, questions remain regarding the extent of Defendants’ liability, if any, the extent a jury might find them liable, if at all, and the true measure of the Settlement Class’ damages, if any. In particular, Defendants assert that they did not have a duty to disclose additional details about EPE’s contractual relationship with Enron. They assert further that Plaintiffs’ cannot support their burden to prove scienter as Defendants did not know, and were not reckless, with respect to Enron’s alleged use of the contractual relationship to engage in conduct which allegedly might have increased the price for electricity in California. With respect to damages, Defendants argue that because its stock price did not drop upon disclosure of additional details concerning its relationship with Enron, Plaintiffs faced a loss causation hurdle for a substantial portion of the damages they seek to attribute to Defendants’ conduct, creating a risk that Plaintiffs may not have been able to prove at trial that Plaintiffs’ losses were actually due to Defendants’ allegedly false and misleading statements. 1 An allegedly damaged share might have been traded more than once during the Class Period, and the indicated average recovery would be the total for all purchasers of that share. Question? Call toll free 1-800-339-0243, or visit, www.gardencitygroup.com 2 WHAT THIS NOTICE CONTAINS Page SUMMARY NOTICE ............................................................................................................................................................... 2 Statement of Plaintiff Recovery.................................................................................................................................. 2 Statement of Potential Outcome of Case................................................................................................................... 2 Statement of Attorneys’ Fees and Costs Sought....................................................................................................... 2 Further Information..................................................................................................................................................... 2 Reasons for the Settlement........................................................................................................................................ 2 BASIC INFORMATION ........................................................................................................................................................... 4 1. Why did I receive this notice package?......................................................................................................... 4 2. What is this lawsuit about? ........................................................................................................................... 4 3. Why is this lawsuit a class action?................................................................................................................ 4 4. Why is there a settlement? ..........................................................................................................................