AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1994
AMENDMENT NO. 2
TO
FORM S-4
MINNESOTA 3700 41-1790959
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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Copies of all communications to:
ANDRIS A. BALTINS GEORGE R. KROUSE, JR. HILLEL M. BENNETT BLAINE V. FOGG KAPLAN, STRANGIS AND KAPLAN, P.A. SIMPSON THACHER & BARTLETT STROOCK & STROOCK & LAVAN SKADDEN, ARPS, SLATE, MEAGHER & FLOM 90 SOUTH 7TH STREET 425 LEXINGTON AVENUE 7 HANOVER SQUARE 919 THIRD AVENUE MINNEAPOLIS, MN 55402 NEW YORK, NY 10017 NEW YORK, NY 10004 NEW YORK, NY 10022 (612) 375-1138 (212) 455-2730 (212) 806-6014 (212) 735-3900 |
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) (1) FEE
Common Stock, $.01 par
value...................... 18,110,684 $35.313 $639,542,584 $224,337.21
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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POLARIS INDUSTRIES PARTNERS L.P.
POLARIS INDUSTRIES INC.
November 21, 1994
Dear BAC Holder:
You are cordially invited to attend a Special Meeting of the holders of units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") of Polaris Industries Partners L.P. (the "Partnership") which will be held at Holiday Inn West, Highway 394, Minneapolis, Minnesota on Thursday, December 22, 1994 commencing at 9:00 a.m. local time.
At the Special Meeting, you will vote on a proposal -- sponsored by the senior operating management of Polaris (the "Sponsors") and recommended by EIP Associates L.P., the General Partner -- to convert the Partnership to corporate form (the "Conversion"). After the consummation of the Conversion, the business currently conducted by the Partnership will be conducted by Polaris Industries Inc., a newly formed Minnesota corporation (the "Corporation"), with the same operating management, but without involvement by the General Partner.
In the Conversion, each BAC will be exchanged for one share of Common Stock of the Corporation. BAC holders and holders of previously granted rights to acquire BACs will receive, in exchange for their BACs and upon exercise of such rights, 88.6%, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, 11.4%, of the Corporation's Common Stock to be outstanding immediately following the Conversion (assuming exercise of such rights). This allocation of ownership resulted from negotiations between certain of the Sponsors and the General Partner. The Sponsors own approximately 9.1% of the outstanding BACs and have no economic interest in the General Partner. The allocation was determined by reference to the rights of the General Partner and BAC holders under the agreement governing the Partnership, pursuant to which the General Partner and its affiliates receive 20.8% of Partnership distributions and an annual management fee of $500,000 and are entitled to reimbursement of certain expenses. Such distributions and fees totalled approximately $10.3 million in 1993 and will exceed $11 million in 1994. These arrangements and payments will end upon consummation of the Conversion.
Subject to legal and contractual requirements and the financial requirements of the business, the Sponsors intend to recommend that the Corporation's Board of Directors establish an initial cash dividend rate of $0.15 per share per quarter, and pay three special cash distributions, each of $1.92 per share, payable during each of the last three quarters of 1995 (reduced, if the Conversion is not consummated in 1994, to the extent that any cash distributions declared and paid by the Partnership after January 1, 1995 exceed, on a quarterly basis, $0.15 per BAC). Thus, it is expected that BAC holders who hold Common Stock from the date of the Conversion through 1997 will receive a total of $7.56 per share for the years 1995, 1996 and 1997 -- the amount per BAC they would have received had the Conversion not occurred and the Partnership maintained its existing cash distribution policy (i.e. $2.52 per BAC per annum).
If the Conversion Proposal is approved by BAC holders at the Special Meeting, it is expected that the Conversion will be consummated by the end of 1994. In that case, assuming the declaration by the Partnership of the regular quarterly distribution in accordance with past practice, BAC holders of record on or about December 15, 1994 would receive the regular quarterly distribution of $0.63 per BAC for the fourth quarter of 1994 on or about February 15, 1995, and there will be no further distributions by the Partnership to BAC holders.
The General Partner and the Sponsors believe that the Conversion is fair to BAC holders and recommend that BAC holders approve the Conversion proposal. In arriving at their recommendation, the General Partner and the Sponsors gave consideration to a number of factors including the fairness opinions of Smith Barney Inc. and Dillon, Read & Co. Inc., each delivered to the Partnership and each to the effect that, based upon the considerations and subject to the assumptions and limitations set forth in their opinions, each of the allocation of ownership between BAC holders and affiliates of the General Partner and the consideration to be received by BAC holders in the Conversion is fair, from a financial point of view, to BAC holders.
BAC holders are urged to review carefully the attached Proxy Statement, which contains a detailed description of the proposed Conversion and describes certain risk factors, conflicts of interest and other considerations for BAC holders. The Conversion is subject to the approval of BAC holders described below and certain other conditions more fully set forth in the Proxy Statement, including, among others, the receipt of all necessary government approvals, appraisal rights not being sought with respect to more than 5% of the outstanding BACs, and the receipt of certain tax opinions. Such conditions may be waived by the Corporation and/or the General Partner. In addition, the General Partner has the right to terminate the agreement relating to the Conversion if it determines that as a result of any subsequent development, such termination is necessary to discharge its fiduciary duties to BAC holders.
It is important that your BACs be represented at the Special Meeting. Accordingly, whether or not you plan to attend the Special Meeting, please sign, date and promptly return the enclosed proxy card in the postage-paid envelope that has been provided to you for your convenience. The Conversion Proposal will require (i) the approval of BAC holders holding a majority of BACs outstanding and (ii) the approval of unaffiliated BAC holders (BAC holders other than the Sponsors and affiliates of the General Partner) holding a majority of BACs held by them. Failure to forward a proxy or to vote in person at the Special Meeting will have the same effect as if a BAC holder had voted against the Conversion Proposal. BAC holders who do not vote for the Conversion Proposal and who follow the procedures described in the Proxy Statement are entitled to exercise appraisal rights.
Because of the significance of the proposed Conversion, your participation in the Special Meeting, in person or by proxy, is especially important. THE GENERAL PARTNER AND THE SPONSORS URGE YOU TO VOTE "FOR" THE CONVERSION PROPOSAL.
Sincerely,
[LOGO]
[LOGO]
Victor K. Atkins, Jr. W. Hall Wendel, Jr.
President, EIP Capital Corporation, Chief Executive Officer, Polaris
Managing General Partner of EIP Industries Capital Corporation, and
Associates L.P., the General Partner Chairman of the Board and Chief
Executive Officer, Polaris Industries
Inc.
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IF YOU HAVE ANY QUESTIONS CONCERNING THE CONVERSION OR NEED ASSISTANCE IN VOTING YOUR BACS, PLEASE CALL D.F. KING & CO., INC., THE INFORMATION AGENT FOR THE CONVERSION, TOLL FREE AT 1-800-488-8075.
[LOGO]
POLARIS INDUSTRIES PARTNERS L.P.
NOVEMBER 21, 1994
NOTICE OF SPECIAL MEETING OF BAC HOLDERS
TO BE HELD ON DECEMBER 22, 1994
To the Holders of BACs of Polaris Industries Partners L.P.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the holders ("BAC Holders") of units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") of Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership"), will be held at Holiday Inn West, Highway 394, Minneapolis, Minnesota on December 22, 1994 at 9:00 a.m., local time.
At the Special Meeting, BAC Holders will vote upon a proposal (the "Conversion Proposal") that, if approved and implemented, will result in the conversion of the Partnership to corporate form (the "Conversion"). The Conversion will be accomplished by merging a subsidiary partnership of Polaris Industries Inc., a newly formed Minnesota corporation (the "Corporation"), into the Partnership (the "Merger"). Upon consummation of the Merger, each BAC will be exchanged for one share of common stock, par value $.01 per share (the "Common Stock"), of the Corporation. If the Conversion Proposal is approved and the Conversion is effected, (i) the Corporation will, directly and indirectly, own 100% of the Partnership and will continue to conduct the business and operations of Polaris Industries L.P. (the "Operating Partnership" or "Polaris"), and (ii) BAC Holders and holders of previously granted rights to acquire BACs ("First Rights") will receive, in exchange for their BACs and upon exercise of such First Rights, as the case may be, 88.6% of the Common Stock of the Corporation, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock of the Corporation (after giving effect to the exercise of such First Rights).
The Merger, Conversion and related matters are more fully described in the attached Proxy Statement/Prospectus, which (together with the annexes thereto and the documents incorporated by reference therein) forms a part of this Notice and is incorporated herein by reference.
The Conversion Proposal will require (i) the approval of BAC Holders holding
a majority of BACs outstanding and (ii) the approval of unaffiliated BAC Holders
(BAC Holders other than the Sponsors and affiliates of the General Partner)
holding a majority of BACs held by them. Only BAC Holders of record at the close
of business on Monday, November 21, 1994 are entitled to notice of and to vote
at the Special Meeting and at any adjournment or postponement thereof.
You are cordially invited to attend the Special Meeting. If you cannot attend, please sign and date the accompanying form of proxy and return it promptly in the enclosed envelope. If you attend the meeting, you may vote in person regardless of whether you have given your proxy. Any proxy may be revoked at any time before it is exercised, as indicated herein. Failure to forward a proxy or to vote in person at the Special Meeting will have the same effect as if a BAC Holder had voted against the Conversion Proposal.
By Order of EIP Associates L.P., the General Partner Victor K. Atkins, Jr., President and Secretary, EIP Capital Corporation, Managing General Partner of the General Partner
YOUR VOTE IS IMPORTANT. ACCORDINGLY, YOU ARE URGED TO COMPLETE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU HAVE ANY QUESTIONS CONCERNING THE CONVERSION OR NEED ASSISTANCE IN VOTING YOUR BACS, PLEASE CALL D.F. KING & CO., INC., THE INFORMATION AGENT FOR THE CONVERSION, TOLL FREE AT 1-800-488-8075.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROXY STATEMENT/PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1994
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18,110,684 SHARES OF COMMON STOCK
This Proxy Statement (which is also a Prospectus) relates to the issuance of common stock, par value $.01 per share (the "Common Stock"), of Polaris Industries Inc., a Minnesota corporation, which has been newly formed by certain members of the senior operating management of Polaris Industries Capital Corporation, a Delaware corporation ("PICC"). PICC and its affiliates manage Polaris Industries L.P., a Delaware limited partnership, 99% of which is owned by Polaris Industries Partners L.P., a Delaware limited partnership. In this Proxy Statement, Polaris Industries Inc. is referred to as the "Corporation," Polaris Industries Partners L.P. is referred to as the "Partnership," PICC and Polaris Industries L.P. collectively are referred to as the "Operating Partnership," and the term "Polaris" refers to the business and operations of the Operating Partnership. Other frequently used capitalized terms are defined in the Glossary of Defined Terms attached as Annex A to this Proxy Statement.
This Proxy Statement is being sent by EIP Associates L.P., a Delaware limited partnership (the "General Partner"), which is the general partner of the Partnership, to the holders of units of Beneficial Assignment of Class A Limited Partnership Interests in the Partnership ("BACs") in connection with the solicitation by the General Partner of proxies (each, a "Proxy") to be voted at a special meeting (the "Special Meeting") of holders of BACs ("BAC Holders") in Minneapolis, Minnesota on Thursday, December 22, 1994 (the "Meeting Date"), and at any adjournment or postponement thereof. At the Special Meeting, BAC Holders will vote upon a proposal (the "Conversion Proposal") that, if approved, will result in the conversion of the Partnership to corporate form (the "Conversion"). The Conversion will be accomplished by merging a subsidiary partnership of the Corporation into the Partnership (the "Merger"). Upon consummation of the Merger, each BAC will be exchanged for one share of Common Stock of the Corporation. If the Conversion Proposal is approved and the Conversion is effected, (i) the Corporation will, directly and indirectly, own 100% of the Partnership and will continue to conduct the business and operations of the Operating Partnership, and (ii) BAC Holders and holders of rights to acquire BACs ("First Rights") previously granted will receive, in exchange for their BACs and upon exercise of such First Rights, as the case may be, 88.6% of the Common Stock of the Corporation, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock of the Corporation, after giving effect to the exercise of such First Rights (the "Exchange Ratio").
The Conversion Proposal is sponsored by the senior operating management of the Operating Partnership (the "Sponsors") who own an aggregate of approximately 9.1% of outstanding BACs and who have no economic interest in the General Partner. The Exchange Ratio was determined with reference to the existing economic interests of the General Partner and BAC Holders referred to above and the rights of the General Partner under various provisions of the amended and restated partnership agreement governing the Partnership (the "Partnership Agreement"). Currently, and for the foreseeable future, the General Partner and its affiliates receive 20.8% of the Partnership's distributions and $500,000 per year in management fees and are entitled to certain expense reimbursements from the Partnership. These arrangements and payments will end upon consummation of the Conversion.
The Sponsors and the General Partner recommend that BAC holders vote "FOR" the Conversion Proposal for the reasons set forth under "The Conversion -- Reasons for the Conversion" and "-- Alternatives to the Conversion" in this Proxy Statement.
Subject to legal and contractual requirements and the financial requirements of the business, the Sponsors intend to recommend that the Corporation's Board of Directors establish an initial cash dividend rate of $0.15 per share per quarter, and pay three special cash distributions, each of $1.92 per share, payable during each of the last three quarters of 1995 (reduced, if the Conversion is not consummated in 1994, to the extent that any cash distributions declared and paid by the Partnership after January 1, 1995 exceed, on a quarterly basis, $0.15 per BAC) (the "Proposed Distributions"). Thus, it is expected that BAC Holders who retain the Common Stock they receive in the Conversion through 1997 will receive a total of $7.56 per share for the years 1995, 1996 and 1997 -- the amount per BAC that BAC Holders would have received had the Conversion not occurred and the Partnership maintained its existing cash distribution policy.
THE GENERAL PARTNER AND THE SPONSORS BELIEVE THAT THE CONVERSION IS FAIR TO
BAC HOLDERS AND RECOMMEND THAT BAC HOLDERS VOTE "FOR" THE CONVERSION PROPOSAL.
NOVEMBER __, 1994
(COVER PAGE CONTINUED)
The Conversion involves certain additional factors that should be considered by all BAC Holders. The effects of the Conversion may differ for each BAC Holder and may be disadvantageous to some, depending upon their individual circumstances and investment objectives. See "Risk Factors, Conflicts of Interest and Other Considerations" and "The Conversion." In particular, BAC Holders should consider, among other factors described herein, that:
- Because of the Conversion, BAC Holders will forego the potential future tax benefits associated with an investment in a partnership (I.E. no tax paid at the Partnership level on its taxable income) immediately, rather than beginning after December 31, 1997.
- The General Partner may be viewed as having a conflict of interest with BAC Holders with respect to the determination of the Exchange Ratio in the Conversion, and the General Partner will benefit from the elimination of liability of the General Partner for obligations and liabilities of Polaris after the Conversion. In addition, BAC Holders were not represented separately in establishing the terms of the Conversion. Such representation might have caused the terms of the Conversion to be different in material respects from those described herein.
- The Corporation is under no legal obligation to make the Proposed Distributions and the timing and amount of future dividends and distributions will be at the discretion of the Board of Directors of the Corporation and will depend, among other things, on the future after-tax earnings, operations, capital requirements, borrowing capacity and financial condition of the Corporation and general business conditions.
- The Corporation expects to incur indebtedness in excess of that incurred by the Partnership, including indebtedness to finance the special cash distributions referred to above if such distributions are declared by the Board of Directors of the Corporation. Incurrence of indebtedness by the Corporation could have important consequences to investors in the Corporation's securities. There can be no assurance that the Corporation's future operating results will be sufficient for payment of the Corporation's indebtedness and other commitments.
- Prior to the Conversion there will have been no public market for the Common Stock. The Common Stock may trade at prices substantially below the historical trading levels of BACs. If a large number of holders of Common Stock were to offer their shares for sale immediately after consummation of the Conversion, the market price of the Common Stock could decline substantially absent a corresponding demand for Common Stock from institutional and retail investors.
- All costs and expenses to be incurred by the Partnership in connection with the Conversion, estimated to be approximately $9 million, will be paid by the Partnership whether or not the Conversion is consummated. An additional $2 million is expected to be paid by the Partnership only if the Conversion is consummated.
In addition to the factors noted above, an investment in Polaris (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, seasonal factors, industry conditions, regulatory developments and equity market conditions.
The Conversion Proposal will require (i) the approval of BAC Holders holding a majority of the BACs outstanding and (ii) the approval of unaffiliated BAC Holders (BAC Holders other than the Sponsors and affiliates of the General Partner) holding a majority of BACs held by them. See "Voting and Proxy Information." Such approval will bind all BAC Holders (other than those who exercise Appraisal Rights) regardless of whether some fail to vote in favor of the Conversion Proposal. See "Appraisal Rights." The affiliates of the General Partner and members of the senior operating management of the Operating Partnership, who own approximately 14% of outstanding BACs in the aggregate, have advised the Partnership that they will vote in favor of the Conversion Proposal. Failure to forward a Proxy or to vote in person at the Special Meeting will have the same effect as if a BAC Holder had voted against the Conversion Proposal.
This Proxy Statement and the related form of Proxy are first being sent to BAC Holders on or about November 21, 1994.
The Common Stock has been approved for listing on the American Stock Exchange and the Pacific Stock Exchange under the symbol "SNO", subject to official notice of issuance.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP, THE GENERAL PARTNER OR THE CORPORATION. THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE PARTNERSHIP OR THE CORPORATION SINCE THE DATE HEREOF.
UNTIL 25 DAYS AFTER THE DATE OF THIS PROXY STATEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROXY STATEMENT.
AVAILABLE INFORMATION
The Partnership is (and following the Conversion, the Corporation will be) subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files (and will file) reports and other information with the Securities and Exchange Commission (the "SEC"). Such reports and other information may be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at the prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. Such reports and other information concerning the Partnership can also be inspected at the office of the American Stock Exchange, 86 Trinity Place, New York, New York 10006, and the Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104, the exchanges on which the BACs are listed (and on which application has been made to list the Common Stock).
The Corporation has filed with the SEC a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Proxy Statement, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the SEC pursuant to the Securities Act and the rules and regulations of the SEC thereunder. Statements contained in this Proxy Statement as to the contents of any contract or other document are necessarily summaries of such documents, are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, is on file at the offices of the SEC and may be obtained upon payment of the fee prescribed by the SEC, or may be examined without charge at the public reference facilities of the SEC described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (WITHOUT EXHIBITS,
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE
AVAILABLE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROXY STATEMENT
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST ADDRESSED TO POLARIS INDUSTRIES
PARTNERS L.P., 1225 HIGHWAY 169 NORTH, MINNEAPOLIS, MINNESOTA 55441, ATTENTION:
JOHN H. GRUNEWALD, EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION,
TELEPHONE NUMBER (612) 542-0500. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY DECEMBER 14, 1994.
The following documents of the Partnership have been filed with the SEC and are incorporated herein by reference: (a) Annual Report on Form 10-K for the fiscal year ended December 31, 1993; (b) Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1994, June 30, 1994 and September 30, 1994; and (c) Current Reports on Form 8-K dated August 25, 1994 and October 14, 1994.
All documents filed by the Partnership pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and prior to the date of the Special Meeting shall be deemed to be incorporated by reference into this Proxy Statement and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document which also is incorporated herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded.
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 3
SUMMARY................................................................. 6
Overview of the Conversion............................................ 6
Risk Factors, Conflicts of Interest and Other Considerations.......... 7
Reasons for the Conversion............................................ 9
Existing Economic Interests of the Partners........................... 11
Alternatives to the Conversion........................................ 11
Allocation of Common Stock Between BAC Holder Interests and General
Partner Interests.................................................... 14
Fairness Opinions..................................................... 14
Recommendation of the General Partner and the Sponsors................ 14
Summary of Certain Federal Income Tax Considerations.................. 14
Conditions to the Conversion.......................................... 15
Consequences if Conversion Proposal is Not Approved or the Conversion
is Not Consummated................................................... 15
Management and Compensation........................................... 16
Voting at the Special Meeting......................................... 16
Appraisal Rights...................................................... 17
List of BAC Holders................................................... 17
The Partnership and the Corporation................................... 17
SUMMARY OF SELECTED FINANCIAL INFORMATION............................... 19
POLARIS ORGANIZATIONAL CHARTS........................................... 20
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS............ 21
Risks, Conflicts of Interest and Considerations Related to the
Conversion........................................................... 21
Adverse Tax Implications............................................ 21
Potential Conflicts of Interest..................................... 21
No Independent Representation....................................... 22
No Assurance of Future Distributions................................ 22
Effects of Additional Indebtedness.................................. 22
Uncertainty Regarding Market Price for Common Stock................. 22
Changes in Ownership Rights......................................... 22
Changes in Voting Rights............................................ 23
Elimination of General Partner Liability for Polaris Obligations.... 23
Changes in Fiduciary Obligations.................................... 23
Future Dilution of Common Stock..................................... 24
Costs of Conversion................................................. 24
Risks for Nonapproving BAC Holders.................................. 24
Provisions That May Discourage Changes of Control................... 24
Risks Related to the Business......................................... 24
Product Safety and Regulation....................................... 24
Informal Supply Arrangements........................................ 25
Competition......................................................... 26
Effects of Weather.................................................. 26
Product Liability................................................... 26
Warranties and Product Recalls...................................... 26
THE CONVERSION.......................................................... 27
The Partnership....................................................... 27
Background of the Conversion.......................................... 27
PAGE
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Reasons for the Conversion............................................ 30
Changes in Tax Status of the Partnership............................ 30
Proposed Distribution Equivalency................................... 30
Anticipated Reduction of Partnership Tax Benefit to Investors....... 31
Greater Access to Capital Markets and Expansion of Investor Base.... 31
Enhanced Growth Potential........................................... 31
Ability to Diversify................................................ 32
Tax Reporting....................................................... 32
Direct Election of the Board of Directors........................... 32
Structure of the Conversion........................................... 32
Existing Economic Interests of the Partners........................... 34
Benefit Plans after the Conversion.................................... 35
Alternatives to the Conversion........................................ 35
Continuance of the Partnership; No Cessation of Trading............. 35
Continuance of the Partnership; Cessation of Trading................ 36
Continuance of the Partnership; Cessation of Trading and Exchange
Offer of Stock in New Corporate Limited Partner.................... 36
Continuance of the Partnership; Cessation of Trading and Exchange
Offer of Debt Securities........................................... 36
Conversion to Corporation with Cash and Stock....................... 36
Conversion by Liquidation........................................... 36
Management Buyout or Other Strategic Sale........................... 37
Conversion Pursuant to Section 17.5 of the Partnership Agreement.... 37
Liquidation and Winding Up of the Partnership....................... 37
Future Alternatives Available to Polaris............................ 38
Fairness Opinions..................................................... 38
Opinion of Smith Barney............................................. 38
Opinion of Dillon Read.............................................. 42
Other............................................................... 45
Recommendation of the General Partner and the Sponsors................ 45
Effective Time........................................................ 46
Description of the Merger Agreement................................... 46
Consequences if Conversion Proposal is Not Approved or the Conversion
is Not Consummated................................................... 48
Costs of the Conversion............................................... 49
Exchange of Certificates.............................................. 49
COMPARATIVE RIGHTS OF BAC HOLDERS AND HOLDERS OF COMMON STOCK........... 50
Taxation.............................................................. 50
Distributions and Dividends........................................... 50
Voting Rights......................................................... 51
Rights to Call Special Meetings and Submit Proposals.................. 51
Removal of General Partner and Directors of the Corporation........... 52
Liquidation Rights.................................................... 52
Assessments and Limited Liability..................................... 53
Transferability....................................................... 53
Redemption Rights..................................................... 53
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Change of Control..................................................... 53
Management and Compensation........................................... 54
Indemnification....................................................... 55
Fiduciary Duties...................................................... 55
Limits on Management's Liability...................................... 56
Appraisal Rights...................................................... 56
Duration of Investment................................................ 57
Right to Investor Lists............................................... 57
Inspection of Books and Records....................................... 57
Dilution.............................................................. 58
Investment Policy..................................................... 58
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................... 58
Summary of Tax Consequences to BAC Holders............................ 59
Partnership Status and Taxation of the Partnership.................... 59
General Tax Treatment of the Merger and Issuance of Common Stock...... 59
Certain Tax Consequences of the Merger and Issuance of Common Stock to
BAC Holders.......................................................... 60
Other Tax Issues Affecting BAC Holders................................ 62
Exercise of Appraisal Rights.......................................... 62
Tax Consequences to the Corporation and the Partnership............... 62
Post-Conversion Treatment of the Corporation and Its Shareholders..... 63
Unrelated Business Taxable Income..................................... 64
Other Tax Aspects..................................................... 64
Proposed Legislation.................................................. 65
ACCOUNTING TREATMENT OF THE CONVERSION.................................. 65
VOTING AND PROXY INFORMATION............................................ 65
Voting Procedures..................................................... 65
Vote Required; Quorum................................................. 65
Proxies............................................................... 66
Revocation of Proxies................................................. 66
Solicitation of Proxies............................................... 66
Information Agent..................................................... 67
Independent Auditors.................................................. 67
APPRAISAL RIGHTS........................................................ 67
BUSINESS................................................................ 71
Industry Background................................................... 71
Products.............................................................. 71
Manufacturing Operations.............................................. 72
Production Scheduling................................................. 73
Sales and Marketing................................................... 73
Engineering, Research and Development................................. 74
Competition........................................................... 75
Product Safety and Regulation......................................... 75
Product Liability..................................................... 77
Effects of Weather.................................................... 77
Employment............................................................ 77
Properties............................................................ 77
Legal Proceedings..................................................... 78
CAPITALIZATION.......................................................... 79
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION................. 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 82
Results of Operations............................................... 82
Cash Distributions.................................................. 84
PAGE
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Net Income Per BAC.................................................. 83
Liquidity and Capital Resources..................................... 84
Inflation and Exchange Rates........................................ 86
MARKET PRICES AND DISTRIBUTIONS......................................... 87
MANAGEMENT.............................................................. 88
Directors and Executive Officers of EIPCC............................. 88
Directors and Executive Officers of PICC.............................. 89
Directors and Executive Officers of the Corporation after the
Conversion........................................................... 90
Executive Compensation................................................ 92
Summary Compensation Table............................................ 92
Death and Disability Benefits and Deferred Compensation............... 92
Long-Term Incentive Compensation...................................... 93
Retirement Savings Plan............................................... 95
Purchase of BACs...................................................... 95
Compensation Committee Interlocks and Insider Participation........... 95
Director Compensation................................................. 95
Certain Relationships and Related Transactions........................ 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 97
SUMMARY OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT.............. 99
Management of the Partnership......................................... 99
Liability of the General Partner and BAC Holders to Third Parties..... 99
Dissolution and Liquidation........................................... 99
Voting Rights of BAC Holders.......................................... 100
Removal of the General Partner........................................ 100
Withdrawal of the General Partner..................................... 100
Additional General Partners........................................... 100
Effect of Removal, Bankruptcy, Death, Dissolution, Incompetency or
Withdrawal of the General Partner.................................... 100
Reimbursement of General Partner Expenses............................. 101
Amendments............................................................ 101
Designation of Tax Matters Partner.................................... 101
Reorganization of the Partnership..................................... 101
Applicable law........................................................ 102
Books and Records..................................................... 102
Transferability of the BACs........................................... 102
DESCRIPTION OF CAPITAL STOCK............................................ 102
Common Stock.......................................................... 102
Preferred Stock....................................................... 102
Voting................................................................ 103
Board of Directors.................................................... 103
Anti-takeover Provisions.............................................. 103
Limitation of Liability............................................... 104
Transfer Agent and Registrar.......................................... 104
RESALE OF COMMON STOCK.................................................. 105
LEGAL MATTERS........................................................... 105
EXPERTS................................................................. 105
INDEX TO FINANCIAL STATEMENTS........................................... F-1
ANNEX A -- Glossary of Defined Terms.................................... A-1
ANNEX B -- Fairness Opinion of Smith Barney Inc. ....................... B-1
ANNEX C -- Fairness Opinion of Dillon, Read & Co. Inc. ................. C-1
ANNEX D -- Merger Agreement............................................. D-1
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SUMMARY
THE FOLLOWING IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ALL RESPECTS BY THE MORE DETAILED INFORMATION SET FORTH ELSEWHERE IN THIS PROXY STATEMENT AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN. A GLOSSARY OF FREQUENTLY USED CAPITALIZED AND OTHER SPECIALIZED TERMS IS ATTACHED AS ANNEX A. ORGANIZATIONAL CHARTS FOR THE PARTNERSHIP (BEFORE THE CONVERSION) AND THE CORPORATION (AFTER THE CONVERSION) ARE INCLUDED FOR REFERENCE ON PAGE 20. BAC HOLDERS ARE URGED TO REVIEW CAREFULLY THE ENTIRE PROXY STATEMENT AND TO REQUEST SUCH DOCUMENTS INCORPORATED BY REFERENCE HEREIN AS THEY DESIRE.
OVERVIEW OF THE CONVERSION
This Proxy Statement relates to a proposal (the "Conversion Proposal") by the senior operating management of Polaris Industries Capital Corporation, a Delaware Corporation ("PICC"), who conduct the business and operations of Polaris Industries L.P. (PICC and Polaris Industries L.P. collectively are referred to as the "Operating Partnership"), to convert Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership"), from a publicly traded limited partnership to a publicly traded corporation (the "Conversion"). The Conversion Proposal is sponsored by W. Hall Wendel, Jr., Chief Executive Officer, Kenneth D. Larson, President and Chief Operating Officer, John H. Grunewald, Executive Vice President, Finance and Administration, James Bruha, Vice President -- Manufacturing, Charles A. Baxter, Vice President -- Engineering and Product Safety, Ed Skomoroh, Vice President -- Sales and Marketing and Michael W. Malone, Chief Financial Officer and Treasurer (collectively, the "Sponsors"). Such individuals together comprise the senior operating management of the Operating Partnership and own in the aggregate approximately 9.1% of the outstanding units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") in the Partnership. Polaris Industries Inc. (the "Corporation") was formed recently by certain of the Sponsors in contemplation of the Conversion. Subsequent to consummation of the Conversion, the business currently conducted by the Partnership will be conducted by the Corporation with the same operating management, but without involvement by EIP Associates L.P., a Delaware limited partnership (the "General Partner").
Pursuant to the terms of an Agreement and Plan of Conversion, dated as of September 29, 1994, among the Corporation, the Partnership, the General Partner, the Operating Partnership, EIP Capital Corporation ("EIPCC"; the managing general partner of the General Partner) and the other parties thereto (the "Merger Agreement"), if the Conversion Proposal is approved and the Conversion is implemented, (i) each BAC will be exchanged tax-free for one share of common stock, par value $.01 per share ("Common Stock"), of the Corporation and each right to receive BACs ("First Rights") previously granted will be converted into the right to receive one share of Common Stock of the Corporation, (ii) the Corporation will, directly and indirectly, own 100% of the Partnership and will continue to conduct the business and operations of the Operating Partnership, and (iii) BAC Holders (including affiliates of the General Partner) and holders of previously granted First Rights will receive, in exchange for their BACs and upon exercise of such First Rights, as the case may be, 88.6% of the Common Stock of the Corporation, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock of the Corporation, each after giving effect to the exercise of such First Rights (the "Exchange Ratio").
The Exchange Ratio was agreed to after extended discussions and negotiations beginning in early June 1994 between W. Hall Wendel, Jr., the Chief Executive Officer of Polaris, and certain other members of the senior operating management of the Operating Partnership, who have no economic interest in the General Partner, and affiliates of the General Partner. The Exchange Ratio was determined with reference to the existing economic interests of the General Partner and BAC Holders referred to above and the rights of the General Partner under various provisions of the Partnership Agreement. Currently and for the foreseeable future, the General Partner and its affiliates receive 20.8% of the Partnership's distributions and $500,000 per year in management fees and are entitled to
certain expense reimbursements from the Partnership. Such distributions and fees totalled approximately $10.3 million in 1993 and will aggregate more than $11 million in 1994. These arrangements and payments will end upon consummation of the Conversion. See "The Conversion -- Existing Economic Interests of the Partners" and "The Conversion -- Background of the Conversion."
Subject to legal and contractual requirements and the financial requirements of the business, the Sponsors intend to recommend that the Corporation's Board of Directors establish an initial cash dividend rate of $0.15 per quarter, and pay three special cash distributions, each of $1.92 per share, payable during each of the last three quarters of 1995 (reduced, if the Conversion is not consummated in 1994, to the extent that any cash distributions declared and paid by the Partnership after January 1, 1995 exceed, on a quarterly basis, $0.15 per BAC) (the "Proposed Distributions"). Thus, it is expected that BAC Holders who hold Common Stock from the date of the Conversion through 1997 will receive a total of $7.56 per share for the years 1995, 1996 and 1997 -- the amount per BAC they would have received had the Conversion not occurred and the Partnership maintained its existing cash distribution policy (I.E. $2.52 per BAC per annum). The Sponsors and the General Partner believe that such distributions should ease the transition in the Corporation's ownership between primarily income-oriented investors in the Partnership and the growth-oriented and institutional investors that are expected to invest in the Corporation.
The affirmative vote by holders of (i) a majority of BACs outstanding on the Record Date and (ii) a majority of BACs held on the Record Date by BAC Holders other than the Sponsors and affiliates of the General Partner ("Unaffiliated BAC Holders"), is required to approve the Conversion Proposal. Since the approval of the Conversion Proposal by BAC Holders and Unaffiliated BAC Holders is a condition to the consummation of the Conversion, the Conversion will not occur if the requisite vote is not obtained. The affiliates of the General Partner (including Victor K. Atkins, Jr., a general partner of the General Partner and the President of EIPCC) and the Sponsors own approximately 14% of outstanding BACs in the aggregate, and they have advised the Partnership that they each will vote in favor of the Conversion Proposal. See "Voting and Proxy Information -- Vote Required; Quorum."
Subsequent to the consummation of the Conversion, the business currently conducted by the Partnership will be conducted by the Corporation with the same operating management and pursuant to substantially the same operating plan as the Partnership, but without involvement by the General Partner.
Except as required to accommodate the change to corporate form, all of the existing employee benefit plans of the Partnership and the Operating Partnership are expected to be assumed and adapted for use by the Corporation on substantially the same terms. Without limiting the generality of the foregoing, upon the Conversion, each of the outstanding First Rights representing the right to receive BACs under an employee benefit plan, whether vested or unvested, will be deemed to constitute the right to receive on the same terms and conditions as were applicable under such First Rights, the same number of shares of Common Stock as the holder of such First Rights would have been entitled to receive pursuant to the Merger had such holder received BACs upon exercise of such First Rights immediately prior to the Merger.
NOTHING IN THE MERGER AGREEMENT OR IN THIS PROXY STATEMENT SHALL BE INTERPRETED TO ALTER THE FIDUCIARY DUTY OF THE GENERAL PARTNER SET FORTH IN THE PARTNERSHIP AGREEMENT OR UNDER DELAWARE LAW, INCLUDING THE POSSIBLE OBLIGATION OF THE GENERAL PARTNER TO UNILATERALLY TERMINATE THE MERGER AGREEMENT IF SUCH TERMINATION SHOULD BE NECESSARY TO DISCHARGE SUCH FIDUCIARY DUTY.
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS
In evaluating the Conversion, BAC Holders should take into account the following risk factors, conflicts of interest and other special considerations, which are discussed at greater length herein under "Risk Factors, Conflicts of Interest and Other Considerations" and "The Conversion."
- Because of the Conversion, BAC Holders will forego the potential future tax benefits associated with an investment in a partnership (I.E. no tax paid at the Partnership level on its taxable income) immediately, rather than beginning after December 31, 1997. The General Partner has
participated in efforts to have the December 31, 1997 deadline extended or eliminated. To date such efforts have been inconclusive. Such efforts, in which the General Partner has ceased to participate, may or may not be successful in the future. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Adverse Tax Implications."
- The General Partner may be viewed as having a conflict of interest with BAC Holders with respect to the determination of the Exchange Ratio in the Conversion. Furthermore, the General Partner will benefit from the elimination of liability of the General Partner for obligations and liabilities of Polaris after the Conversion. In addition, BAC Holders were not represented separately in establishing the terms of the Conversion. Such independent representation might have caused the terms of the Conversion to be different in material respects from those described herein. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Potential Conflicts of Interest" and "-- No Independent Representation."
- The Corporation is under no legal obligation to make the Proposed Distributions and the timing and amount of future dividends and distributions will be at the discretion of the Board of Directors of the Corporation and will depend, among other things, on the future after-tax earnings, operations, capital requirements, borrowing capacity and financial condition of the Corporation and general business conditions. There can be no assurance that the foregoing dividends or distributions will be adopted or maintained by the Corporation. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Change in Distribution Policy."
- After the Conversion, the Corporation expects to incur indebtedness in excess of that previously incurred by the Partnership, including indebtedness to finance the Proposed Distributions if such distributions are declared by the Board of Directors of the Corporation. No commitments from lenders for such financing have been obtained. Incurrence of indebtedness by the Corporation could have important consequences to investors in the Corporation's securities, including the following: (i) the Corporation's ability to obtain additional financing in the future may be limited; (ii) a portion of the Corporation's income from operations and cash flow will be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Corporation for its operations; and (iii) the agreements relating to the indebtedness are likely to contain financial and other restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could adversely affect the Corporation. There can be no assurance that the Corporation's future operating results will be sufficient for payment of the Corporation's indebtedness and other commitments. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Effects of Additional Indebtedness."
- Prior to the Conversion, there will have been no public market for the Common Stock. The Common Stock may trade at prices substantially below the historical trading levels of BACs. If a large number of holders of Common Stock were to offer their shares for sale immediately after consummation of the Conversion, in the absence of a corresponding demand for Common Stock from institutional and retail investors, the market price of the Common Stock could decline substantially. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Uncertainty Regarding Market Price for Common Stock."
- As a result of the Conversion, BAC Holders will lose certain rights associated with their ownership of BACs, including, in particular, receipt of future quarterly distributions from the Partnership of Net Cash from Operations (after giving effect to appropriate reserves). See "Comparative Rights of BAC Holders and Holders of Common Stock."
- The fiduciary duties of a general partner to limited partners may differ from those of corporate directors to shareholders. Therefore, situations may occur in which owners of Common Stock of the Corporation would have less recourse, on the basis of breach of fiduciary duty, against directors of the Corporation than they would have had against the General Partner. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Changes in Fiduciary Obligations" and "Comparative Rights of BAC Holders and Holders of Common Stock -- Fiduciary Duties" and "-- Limits on Management's Liability."
- Transaction costs of approximately $9 million will be paid by the Partnership, whether or not the Conversion is consummated. An additional $2 million is expected to be paid by the Partnership only if the Conversion is consummated. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Costs of Conversion."
- If the Conversion Proposal is approved by the required vote of BAC Holders and Unaffiliated BAC Holders, all BAC Holders (other than those who exercise Appraisal Rights) will be bound by such approval even though they, individually, may not have voted in favor of the Conversion Proposal. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Risks for Nonapproving BAC Holders" and "Appraisal Rights."
In addition to the factors noted above, an investment in Polaris (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, weather conditions, regulatory developments and equity market conditions. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks Related to the Business."
REASONS FOR THE CONVERSION
The General Partner and the Sponsors believe that the following are the principal reasons to consummate the Conversion at this time:
- Under current law the Partnership will be treated as a corporation for federal income tax purposes after December 31, 1997, unless the Partnership takes action to prevent trading in BACs thereafter. See "Certain Federal Income Tax Considerations -- Partnership Status and Taxation of the Partnership." For the reasons more fully set forth in this Proxy Statement (see "The Conversion -- Alternatives to the Conversion"), the General Partner and the Sponsors did not consider cessation of trading of BACs or otherwise reducing the liquidity of the BACs after 1997 an advantageous way to preserve the tax status of the Partnership. The Sponsors and General Partner also did not believe that continuing to operate as a partnership while being taxed as a corporation after 1997 would be advantageous to BAC Holders.
- The General Partner and the Sponsors believe it is advantageous for the Partnership to convert to corporate form now because: (i) the Conversion will resolve uncertainty about the Partnership's future tax and organizational status, which uncertainty would otherwise increase as December 31, 1997 approaches, (ii) the receipt of shares of Common Stock in the Conversion can be effected on a tax-free basis under current law and (iii) the Conversion is facilitated by the Partnership's strong financial performance, currently favorable equity market conditions generally and other factors set forth below. See "The Conversion -- Reasons for the Conversion." Accordingly, the General Partner and the Sponsors believe that it is advantageous for the Partnership to convert to corporate form at the present time rather than postponing such a transaction until 1997, which could result in the Partnership's inability to consummate such a transaction in an orderly manner under favorable circumstances.
- The Conversion is not expected to adversely affect the anticipated amount of cash distributions to be received by investors through 1997. After the Conversion, and subject to legal and contractual limitations and the financial requirements of the business, the Sponsors intend to
recommend that the Corporation's Board of Directors pay the Proposed Distributions. Assuming the Corporation makes such distributions, each BAC Holder who continues to hold Common Stock received in the Conversion through 1997 will receive from the Partnership and the Corporation cash distributions and dividends during the period commencing January 1, 1995 and ending December 31, 1997 equal in amount to cash distributions ($7.56 per BAC) that BAC Holders would have received from the Partnership had the Conversion not occurred and the Partnership maintained its existing distribution policy. The Sponsors believe the Proposed Distributions should ease the transition in the Corporation's ownership between primarily income-oriented investors in the Partnership and the growth-oriented and institutional investors that are expected to invest in the Corporation. See "Market Prices and Distributions."
- The tax benefits to BAC Holders of the Partnership continuing to operate in partnership form (i.e. one level of income tax) are anticipated to diminish over time. Distributions to BAC Holders have remained relatively constant during the past three years and it is unlikely that the Partnership will increase the present level of cash distributions even if its taxable income was to continue to increase, because Polaris' continued growth could require reinvesting significant amounts of cash in its business. Accordingly, absent the Conversion, assuming income growth continues in 1994 and subsequent years, BAC Holders will be required to report and pay tax on their share of the Partnership's taxable income without a corresponding increase in cash distributions. It is expected that this disparity between taxable income and cash distributions will continue to increase in the foreseeable future and will be substantial, at least in 1994. See "The Conversion -- Reasons for the Conversion -- Anticipated Reduction of Partnership Tax Benefit to Investors."
- The Conversion is expected to provide Polaris with greater access to capital markets at a potentially lower cost of capital and thereby enhance its ability to fund future growth. In this regard, the Conversion should expand Polaris' potential investor base to a broader array of investors (e.g. pension plans, mutual funds and other institutional investors) who do not typically invest in publicly traded limited partnerships because of tax considerations and administrative burdens. Conversion also should result in increased research coverage of Polaris by investment analysts. Such factors should result in greater trading activity and liquidity for the Common Stock, as compared to the BACs. See "The Conversion -- Reasons for the Conversion -- Greater Access to Capital Markets and Expansion of Investor Base."
- Operating in corporate form should provide Polaris with greater flexibility to consummate acquisitions, including the use of its capital stock as acquisition currency and the ability to diversify into other lines of business without the constraints that presently are placed by the tax laws on publicly traded partnerships. Polaris believes the advantages of doing business in corporate form are demonstrated by the fact that Polaris is one of the few remaining substantial manufacturing concerns in the United States organized as a publicly traded partnership. See "The Conversion -- Reasons for the Conversion -- Enhanced Growth Potential" and "-- Ability to Diversify."
- The Conversion will simplify Polaris' organizational structure and reduce significantly costs of tax reporting for Polaris and investors in Polaris. See "The Conversion -- Reasons for the Conversion -- Tax Reporting."
- The General Partner will be replaced by a Board of Directors of the Corporation, which will be elected directly by holders of Common Stock. See "The Conversion -- Reasons for the Conversion -- Direct Election of the Board of Directors."
THE GENERAL PARTNER AND THE SPONSORS BELIEVE THAT THE CONVERSION IS FAIR TO
BAC HOLDERS AND RECOMMEND THAT BAC HOLDERS VOTE "FOR" THE CONVERSION PROPOSAL.
EXISTING ECONOMIC INTERESTS OF THE PARTNERS
Currently, the holders of BACs and General Partner interests in the Partnership have rights to quarterly distributions of the proceeds of available cash flow from operations of the Partnership and the proceeds of certain capital transactions by the Partnership.
The Partnership currently makes quarterly distributions of Cash Available for Distribution (generally cash flow from operations and sales of assets or refinancings, after deducting such reserves as the General Partner, in its sole discretion, determines to be necessary for Partnership expenses, debt payments, capital improvements, replacements and contingencies) in the following manner:
INTERESTS OF
CASH AVAILABLE INTERESTS OF GENERAL PARTNER AND
FOR DISTRIBUTION BAC HOLDERS ITS AFFILIATES
- ----------------------------------------------------------- ----------------------
Net Cash From Operations..................... 79.2 % 20.8%
Net Cash from Sales or Refinancings (after
return of capital to BAC Holders of $10 per
BAC)........................................ 98.0 % 2.0%
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For a more detailed description of rights of the General Partner and BAC Holders to Cash Available for Distribution, see "The Conversion -- Existing Economic Interests of the Partners" and "Comparative Rights of BAC Holders and Holders of Common Stock -- Distributions and Dividends."
In addition, if the General Partner is removed without cause, it can compel any successor to purchase its General Partner interest at "fair market value." See "Comparative Rights of BAC Holders and Holders of Common Stock -- Removal of General Partner and Directors of the Corporation -- BACs."
ALTERNATIVES TO THE CONVERSION
The alternatives to the Conversion that were considered by the Sponsors
were: (a) continuance of the Partnership with no cessation of trading, (b)
continuance of the Partnership and cessation of trading before 1998, (c)
conversion of the Partnership, with a single cash and stock distribution, (d)
conversion by liquidation, (e) a management buyout or other strategic sale of
the Partnership and (f) liquidation and winding up of the Partnership. The
alternatives to the Conversion that were considered by the General Partner, in
addition to (a), (b), (c) and (f), were: (g) continuance of the Partnership,
with cessation of trading and an exchange offer of stock in a new corporate
limited partner, (h) continuance of the Partnership, with cessation of trading
and an exchange offer of debt securities and (i) a conversion pursuant to
Section 17.5 of the Partnership Agreement.
- CONTINUANCE OF THE PARTNERSHIP; NO CESSATION OF TRADING. The Sponsors and the General Partner believe that the Conversion is a more beneficial alternative to BAC Holders than the continuance of the Partnership in its current form and that any benefits to be derived through the Partnership's current form are outweighed by the potential long term benefits anticipated to be derived from the Conversion. Under current law, after December 31, 1997, absent a cessation of trading, the Partnership would be treated as a corporation for tax purposes. See "The Conversion -- Alternatives to the Conversion" and "-- Reasons for the Conversion."
- CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING. The Sponsors and the General Partner considered continuing the Partnership and, before January 1998, delisting the BACs from the American Stock Exchange and Pacific Stock Exchange and prohibiting, except in very limited circumstances, transfers of BACs. Such a transaction would create a private security with virtually no liquidity or trading market value, but would preserve the current tax status of the Partnership after December 31, 1997. The Sponsors and the General Partner believed that the loss of liquidity resulting from such an alternative would be adverse to the interests of BAC Holders and the Partnership since BACs are publicly traded, listed securities, and therefore they did not pursue this alternative. See "The Conversion -- Alternatives to the Conversion -- Continuance of the Partnership; Cessation of Trading."
- CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING AND EXCHANGE OFFER OF STOCK IN NEW CORPORATE LIMITED PARTNER. The General Partner considered continuing the Partnership and, before January 1998, delisting the BACs and, except in very limited circumstances, prohibiting the transfer of BACs. At the same time, a new corporate limited partner would be admitted to the Partnership and BAC Holders would be given the opportunity to exchange their BACs for publicly traded shares of common stock in such corporation. However, exchanging BAC Holders would forego the potential future tax benefits associated with an investment in a partnership, and non-exchanging BAC Holders would be left with little, if any, liquidity. In addition, the General Partner believed this alternative would further complicate rather than simplify the capital structure of the Partnership and would not provide the benefits of operating in corporate form described under "Reasons for the Conversion" above. See "The Conversion -- Alternatives to the Conversion -- Continuance of the Partnership; Cessation of Trading and Exchange Offer of Stock in New Corporate Limited Partner."
- CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING AND EXCHANGE OFFER OF DEBT SECURITIES. The General Partner considered continuing the Partnership and, before January 1998, delisting the BACs and, except in very limited circumstances, prohibiting the transfer of BACs. At the same time, BAC Holders would be given the opportunity to exchange their BACs for publicly traded debt securities of the Partnership. Although such a transaction would preserve the current tax status of the Partnership, the General Partner believed it would not be optimal in that the Partnership could have burdensome leverage, the exchange might have adverse tax consequences to the electing BAC Holders, there could be no assurance of a liquid market in the debt securities, the non-exchanging BAC Holders would have little, if any, liquidity and such a transaction would generally not provide the benefits of operating in corporate form described under "Reasons for the Conversion" above. See "The Conversion -- Alternatives to the Conversion -- Continuance of the Partnership; Cessation of Trading and Exchange Offer of Debt Securities."
- CONVERSION TO CORPORATION WITH CASH AND STOCK. The Sponsors proposed to the General Partner that the Partnership be converted to a corporation in a transaction in which BAC Holders and affiliates of the General Partner, in exchange for their respective interests in the Partnership, would each receive a one-time cash distribution, as well as stock in the corporation surviving the transaction. The Sponsors proposed that the cash distribution be paid to BAC Holders, the General Partner and its affiliates in accordance with their respective economic interests and that the stock be distributed in accordance with the respective capital accounts of the partners. The General Partner felt that such a transaction would result in the successor corporation being burdened at the outset with significant indebtedness to pay such a one-time cash distribution and would reduce financial flexibility for the successor corporation going forward. In addition, the General Partner was concerned that the distribution would, in effect, be fully taxable to BAC Holders and the General Partner and its affiliates and did not believe that the proposed terms recognized the fair value of the General Partner's independent economic interest in the Partnership (on a going concern basis). The Sponsors did not pursue this transaction because of the General Partner's concerns. See "The Conversion -- Alternatives to the Conversion -- Conversion to Corporation with Cash and Stock."
- CONVERSION BY LIQUIDATION. The Sponsors also considered a transaction whereby the Partnership would be converted to a corporation in a transaction in which BAC Holders, the General Partner and its affiliates would, in exchange for their respective interests in the Partnership, each receive a one-time liquidating distribution consisting of cash and new common stock in the corporation surviving the transaction. Pursuant to the terms of the Partnership Agreement, liquidating distributions would be made in accordance with partners' capital accounts. Accordingly, the General Partner and its affiliates would receive approximately 2% of the cash and stock distributed. (For a more detailed description of the procedures required to effectuate a liquidation of the Partnership, see "The Conversion -- Alternatives to the Conversion --
Liquidation and Winding Up of the Partnership"). The Sponsors did not propose this transaction to the General Partner because of uncertainties under the Partnership Agreement of the Sponsors' ability to consummate such a transaction in a timely and tax effective manner, without the recommendation of the General Partner. The Sponsors believed that the General Partner's cooperation in such a transaction would be unlikely, since its terms did not recognize the fair value of the General Partner's independent economic interest in the Partnership (on a going concern basis) and because it understood that the General Partner believed that it had no duty to cooperate in a transaction which did not fairly value such economic interest and which the General Partner believed would constitute a termination without cause of the General Partner. See "The Conversion -- Existing Economic Interests of the Partners."
- MANAGEMENT BUYOUT OR OTHER STRATEGIC SALE. The Sponsors also considered proposing a management buyout or other strategic sale of the Partnership. These alternatives would not provide BAC Holders with their continuing equity interest in the Partnership and might not be able to be accomplished on a tax-advantaged basis. The Sponsors did not propose such transactions to the General Partner because they believed that, in the long term, the value of the Common Stock would exceed the value of cash and securities that would be distributed to BAC Holders in a management buyout or other strategic sale. See "The Conversion -- Alternatives to the Conversion -- Management Buyout or Other Strategic Sale."
- CONVERSION PURSUANT TO SECTION 17.5 OF THE PARTNERSHIP AGREEMENT. Section 17.5 of the Partnership Agreement permits the General Partner, in response to the tax law amendment treating publicly traded partnerships as corporations, in its sole discretion and without any partner consent, to convert the Partnership into a corporation in whatever manner and by whatever method the General Partner determines. See "Summary of Certain Provisions of the Partnership Agreement -- Reorganization of the Partnership." Under such section of the Partnership Agreement, the General Partner is required to effectuate the conversion so that, to the extent possible, the respective interests of BAC Holders and the General Partner in the assets and income of the successor entity immediately following such conversion are substantially equivalent to such interests immediately prior thereto. The General Partner is required to appoint two independent appraisers to determine the value of such interests. The General Partner decided not to proceed with a conversion under Section 17.5 in light of the proposal by the Sponsors which it believed was fair to both BAC Holders and the General Partner and which involved the additional procedural step of being submitted to BAC Holders and Unaffiliated BAC Holders for approval. See "The Conversion -- Alternatives to the Conversion -- Conversion Pursuant to Section 17.5 of the Partnership Agreement."
- LIQUIDATION AND WINDING UP OF THE PARTNERSHIP. The General Partner and the Sponsors rejected this alternative because liquidation would not provide BAC Holders and the General Partner with any continuing equity interest in the Partnership and would be unlikely to be accomplished on a tax-advantaged basis. The General Partner would not be able to determine with any certainty prior to dissolution whether and at what price there would be any buyers for the Partnership's assets. The General Partner believes that in the long term the value of the Partnership as a going concern, whether or not the Conversion is effected, to the General Partner and BAC Holders would exceed the value of the proceeds of a liquidation. See "The Conversion -- Alternatives to the Conversion -- Liquidation and Winding Up of the Partnership."
- FUTURE ALTERNATIVES AVAILABLE TO POLARIS. The General Partner and the Sponsors believe that other long-term strategies available to Polaris, such as diversification and acquisition of assets, or a management buyout or other strategic sale, are not adversely affected (and, in some cases, should be enhanced) by the decision to convert from partnership to corporate form and can be considered by the Corporation in the future if the Conversion is consummated. No other
transaction currently is being considered by the Partnership as an alternative to the Conversion, although the Partnership may from time to time explore other alternatives if the Conversion is not consummated, including a conversion pursuant to Section 17.5 of the Partnership Agreement. See "The Conversion -- Alternatives to the Conversion -- Future Alternatives Available to Polaris."
ALLOCATION OF COMMON STOCK BETWEEN BAC HOLDER INTERESTS AND GENERAL PARTNER INTERESTS
Upon consummation of the Conversion, BAC Holders (including the Sponsors and affiliates of the General Partner) and holders of previously granted First Rights will receive, in exchange for their BACs and upon exercise of such First Rights, as the case may be, 88.6% of the Common Stock of the Corporation, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock of the Corporation, after giving effect to the exercise of such First Rights.
The Exchange Ratio was agreed to after extended discussions and negotiations beginning in early June 1994 between W. Hall Wendel, Jr., the Chief Executive Officer of Polaris, and certain other members of the senior operating management of the Operating Partnership, who have no economic interest in the General Partner, and representatives of the General Partner. The Exchange Ratio was determined with reference to the existing economic interests of the General Partner and BAC Holders referred to above and the rights of the General Partner under various provisions of the Partnership Agreement. Currently and for the foreseeable future, the General Partner and its affiliates receive 20.8% of the Partnership's distributions and $500,000 per year in management fees and are entitled to certain expense reimbursements from the Partnership. Such distributions and fees totalled approximately $10.3 million in 1993 and will aggregate more than $11 million in 1994. These arrangements and payments will end upon consummation of the Conversion. See "The Conversion -- Background of the Conversion" and "-- Existing Economic Interests of the Partners."
FAIRNESS OPINIONS
On September 29, 1994 and the date hereof, each of Smith Barney Inc. ("Smith Barney") and Dillon, Read & Co. Inc. ("Dillon Read") delivered to the Partnership its written opinion to the effect that, as of the date of such opinion and based upon and subject to certain matters as stated therein, each of the Exchange Ratio and the consideration to be received by BAC Holders in the Conversion is fair, from a financial point of view, to such holders. The full text of the written opinions of Smith Barney and Dillon Read dated the date hereof, which set forth the assumptions made, matters considered and limitations on the review undertaken, are attached as Annex B and Annex C to this Proxy Statement and are incorporated herein by reference. BAC holders are urged to read these opinions carefully in their entirety. See "The Conversion -- Fairness Opinions."
RECOMMENDATION OF THE GENERAL PARTNER AND THE SPONSORS
As a result of their review of the business, properties and financial condition of the Partnership, their review of the terms of the Conversion, their analysis of the benefits and disadvantages of, and the alternatives to, the Conversion, and their review of fairness opinions from Smith Barney and Dillon Read, each to the effect that each of the Exchange Ratio and the consideration to be received by BAC Holders in the Conversion is fair, from a financial point of view, to BAC Holders, the General Partner and the Sponsors believe that the Conversion is fair to BAC Holders and recommend that BAC Holders approve the Conversion Proposal. See "The Conversion -- Fairness Opinions" and "-- Recommendation of the General Partner and the Sponsors."
SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the Conversion, each BAC Holder will receive one share of Common Stock in exchange for each BAC. BAC Holders will not be subject to federal income tax on the receipt of the shares of Common Stock and their tax basis in the shares received will be determined with reference to the tax basis of
their BACs immediately prior to the Conversion. BAC Holders are advised that the precise tax treatment to an individual BAC Holder will depend on each BAC Holder's particular situation. See "The Conversion" and "Certain Federal Income Tax Considerations."
The receipt by the Corporation of the BACs and other interests in connection with the Conversion will not be taxable to the Corporation.
For federal income tax purposes, the formation of the transitory partnership (the "Transitory Partnership") and its merger into the Partnership will be disregarded. The Partnership will continue its existence, with the Corporation, EIPCC and the General Partner as its sole partners. The merger of the Operating Partnership into the Partnership will not be a taxable event for the Partnership or the Operating Partnership.
As a corporation, the Corporation's net income, which will include the Partnership's net income, will be subject to federal corporation income tax. Distributions to shareholders, including the Proposed Distributions, if and when made, will be taxable as ordinary dividend income to the extent of the Corporation's earnings and profits and will be classified as investment or portfolio income. Sales of shares of Common Stock which are held as capital assets will produce capital gain or loss to the selling shareholder. See "Certain Federal Income Tax Considerations."
CONDITIONS TO THE CONVERSION
The Merger Agreement provides that neither the Corporation nor the
Partnership will be obligated to consummate the Conversion unless the following
conditions are satisfied or waived: (i) approval of the Conversion Proposal by
the affirmative vote of the holders of more than 50% of the outstanding BACs,
and by the affirmative vote of the holders of more than 50% of the outstanding
BACs held by Unaffiliated BAC Holders, (ii) listing of the Common Stock on the
American Stock Exchange and the Pacific Stock Exchange subject to official
notice of issuance, (iii) the receipt of certain necessary government approvals,
following certain government imposed waiting periods (including under the HSR
Act, if applicable) and the making of certain necessary governmental filings;
(iv) effectiveness of a Registration Statement under the Securities Act of 1933,
as amended, relating to the Common Stock to be issued in the Merger, and the
absence of any stop order or proceeding seeking a stop order with respect to
such Registration Statement; (v) the absence of any court order or legal
restraint preventing consummation of the Merger; (vi) Appraisal Rights not being
sought with respect to more than 5% of the outstanding BACs (which condition may
be waived by the Corporation); (vii) no withdrawal of the Smith Barney or Dillon
Read fairness opinions; (viii) the Corporation's receipt of a favorable opinion
of its special tax counsel, Skadden, Arps, Slate, Meagher & Flom, as to certain
matters related to the tax free nature of the Conversion to BAC Holders; and
(ix) the Partnership's receipt of a favorable opinion of its special counsel,
Stroock & Stroock & Lavan, as to certain matters related to the tax free nature
of the Conversion to BAC Holders and affiliates of the General Partner
transferring their partnership interests in the general partners of the
Partnership and the Operating Partnership and their stock of EIPCC to the
Corporation (such affiliates, the "Transferors"). See "The Conversion --
Description of the Merger Agreement -- Conditions."
CONSEQUENCES IF CONVERSION PROPOSAL IS NOT APPROVED OR THE CONVERSION IS NOT CONSUMMATED
If the Conversion Proposal is not approved by BAC Holders and Unaffiliated BAC Holders, or if the Conversion is not consummated for any other reason, the Partnership expects to continue to operate as an ongoing business in its current form and to continue making cash distributions at recent historical levels. As discussed under "-- Reasons for the Conversion," if Polaris continues to operate in partnership form, BAC Holders may be required to report taxable income from the Partnership that exceeds the amount of its cash distributions, and it is likely that BAC Holders will experience, on a per BAC basis, increasing taxable income without a corresponding increase in cash distributions. If current tax laws remain unchanged and if before 1998 the Partnership fails to take action to cease trading of BACs, the Partnership will be treated as a corporation for federal income tax purposes. No other transaction currently is being considered by the Partnership as an alternative to the Conversion, although the Partnership may from time to time explore other alternatives, including conversion
pursuant to Section 17.5 of the Partnership Agreement. See "The Conversion -- Alternatives to the Conversion" and "The Conversion -- Consequences if Conversion Proposal is Not Approved or the Conversion is Not Consummated."
MANAGEMENT AND COMPENSATION
The Partnership is managed exclusively by the General Partner. The General Partner and its affiliates are entitled to receive 20.8% of distributions from the Partnership, which approximated $9.8 million in 1993 and which are expected to approximate $10.6 million in 1994. See "The Conversion -- Existing Economic Interests of the Partners." Since the Partnership's inception, EIPCC, the managing general partner of the General Partner, has been paid an annual management fee of $500,000 a year and been entitled to be reimbursed for certain expenses. These arrangements and payments will end upon the consummation of the Conversion.
As authorized by Minnesota law and provided by the Corporation's Articles of Incorporation, the Corporation will be managed by and under the direction of its Board of Directors, any member of which may be removed, with or without cause, by the holders of 75% of the voting power of all outstanding shares then entitled to vote at an election of directors. Pursuant to the voting agreement between Victor K. Atkins, Jr., a general partner of the General Partner and the President of EIPCC, the managing general partner of the General Partner, and W. Hall Wendel, Jr. described under "The Conversion -- Background of the Conversion," Mr. Atkins has agreed that, for so long as he owns no less than 3% of the outstanding voting securities of the Corporation, he will vote such securities in favor of the Corporation's nominees for election to the Board of Directors of the Corporation.
W. Hall Wendel, Jr., the Operating Partnership's Chief Executive Officer, who owns approximately 5.4% of outstanding BACs, and other members of the senior operating management of the Operating Partnership, will become the officers of the Corporation at the time of the Conversion and will continue to operate Polaris after the Conversion. See "Management."
The Corporation will assume the Operating Partnership's existing employee benefit plans. Except as required to accommodate the change to corporate form, all of the existing employee benefit plans of the Partnership and the Operating Partnership are expected to be adapted for use by the Corporation on substantially the same terms. Without limiting the generality of the foregoing, upon the Conversion, each of the outstanding First Rights representing the right to receive BACs under an employee benefit plan, whether vested or unvested , will be deemed to constitute the right to receive, on the same terms and conditions as were applicable under such First Rights, the same number of shares of Common Stock as the holder of such First Rights would have been entitled to receive pursuant to the Merger had such holder received BACs upon exercise of such First Rights immediately prior to the Merger.
VOTING AT THE SPECIAL MEETING
The Special Meeting.......... The Special Meeting will be held at Holiday Inn West,
Highway 394, Minneapolis, Minnesota on Thursday, December
22, 1994 at 9:00 a.m., local time.
Voting....................... Each BAC entitles the holder thereof to one vote. Only BAC
Holders of record on November 21, 1994 (the "Record Date")
are entitled to vote at the Special Meeting and at any
adjournment or postponement thereof.
BACs Outstanding............. On the Record Date, 16,010,441 BACs were outstanding.
Approval Required............ The Conversion Proposal will require (i) the approval of BAC
Holders holding a majority of the BACs outstanding on the
Record Date and (ii) the approval of Unaffiliated BAC
Holders holding a majority of BACs held by such persons on
the Record Date. The Sponsors and affiliates of the General
Partner, owning, in the aggregate, approximately 14% of
outstanding BACs, have advised the Partnership that they
will vote "FOR" the Conversion Proposal.
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APPRAISAL RIGHTS
BAC Holders who have not voted in favor of, or consented in writing to, the Conversion Proposal will be entitled to contractual rights of appraisal ("Appraisal Rights") that are intended to be substantially identical to statutory rights of appraisal that stockholders of a Delaware corporation have under the Delaware General Corporation Law. BAC Holders who demand Appraisal Rights will not be entitled to receive any portion of the consideration to be received in the Merger, but will have the right to receive the value of their interests in the Partnership as determined in a separate proceeding and any distribution declared by the Partnership prior to the Conversion provided they were BAC Holders on the record date for such distribution. It is a condition to the consummation of the Merger that Appraisal Rights not be exercised by BAC Holders holding BACs representing more than 5% of the outstanding BACs (although this condition may be waived by the Corporation). See "The Conversion -- Description of the Merger Agreement -- Conditions." For a more complete description of the procedures that must be followed to perfect Appraisal Rights, see "Appraisal Rights."
LIST OF BAC HOLDERS
A list of all registered BAC Holders of the Partnership may be obtained by any BAC Holder from the Partnership upon written request to the Partnership, at 1225 Highway 169 North, Minneapolis, Minnesota 55441, Attention: John H. Grunewald, Executive Vice President, Finance and Administration, and at such BAC Holder's sole cost and expense, provided that such request is for a purpose that is reasonably related to such BAC Holder's interest in the Partnership.
THE PARTNERSHIP AND THE CORPORATION
The Partnership was formed under the Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, through the Operating Partnership, substantially all of the business and assets of Northwestern Equipment Manufacturing Company (then known as Polaris Industries Inc.), a Minnesota corporation ("Northwestern"), in 1987. Concurrently with the acquisition, the Partnership completed a public offering of $110 million of BACs. The funds received from the public offering were used by the Partnership to acquire an 80% undivided interest in substantially all of the assets of Northwestern. The remaining 20% was contributed by Northwestern to the Operating Partnership in exchange for additional BACs and Class B BACs (which have since been converted into BACs). See "The Conversion -- The Partnership."
The primary objectives of the Partnership are: (i) cash distributions from the operations of the Partnership sufficient to provide BAC Holders with not less than a 12% cumulative, noncompounded annual return on the initial purchase price of the BACs (as reduced by any distributions from sales and refinancings of the property of the Partnership), (ii) capital appreciation as a result of expanding distributable cash flow, and (iii) preservation and protection of the Partnership's capital. While the Partnership believes that it has to date achieved these objectives, the Partnership has no present intention of increasing the present level of cash distributions in the foreseeable future even if there is an increase in taxable income. See "Market Prices and Distributions."
Polaris designs, engineers and manufactures snowmobiles, all terrain vehicles ("ATVs") and motorized water scooters also known as personal watercraft ("PWC") and markets these products, together with related accessories, through dealers and distributors located principally in the United States, Canada and Europe. Polaris designs its products to provide superior performance and convenience at competitive prices.
Total revenues have grown from approximately $243 million in 1989 to approximately $528 million in 1993 (in excess of a 20% compound growth rate). Operating income has grown from approximately $26 million to approximately $53 million over the same period (in excess of a 19% compound growth rate). For the nine months ended September 30, 1994 total revenues increased approximately 52% over the first nine months of 1993, while operating income increased more than 50% during the same period.
Polaris' principal product lines include:
SNOWMOBILES: Polaris was founded in the mid-fifties as a manufacturer of a "gas powered sled," the forerunner of the Polaris snowmobile. Polaris has the largest share of the snowmobile market. Polaris produces a full line of snowmobiles including utility, economy, high performance and competition models with list prices for the 1994 model year ranging from approximately $2,450 to $8,150. Polaris believes its snowmobile has a long standing reputation for quality, dependability and performance. Polaris also believes that industry sales of snowmobiles were approximately 171,000 units for the season ended March 31, 1994, representing a 10% increase in units sold worldwide over the prior year.
ALL TERRAIN VEHICLES: Polaris also manufactures four-and six-wheel ATVs with balloon-style tires designed for off-road use in recreation and for utility purposes on farms, ranches and construction sites. Its line of ATVs consists of ten models with list prices for the 1994 model year ranging from approximately $2,900 to $6,200. Polaris ATVs offer a number of features developed by Polaris which it believes provide for enhanced control and stability. Polaris estimates worldwide demand for ATVs reached approximately 247,000 units in calendar 1993 representing an increase of approximately 13% over calendar 1992. Polaris believes it was the only major ATV manufacturer to chart a material increase in market share in 1993.
PERSONAL WATERCRAFT: Polaris' most significant new product was the introduction in 1992 of the Polaris PWC. PWC are sit down versions of water scooter vehicles designed for principally recreational use on lakes, rivers, bays and oceans. List prices for Polaris PWC ranged from $5,500 to $6,300 for the 1994 model year. Polaris estimates that the worldwide market for PWC was approximately 122,000 units in 1993, an increase of 27% over 1992. Polaris believes it is well positioned to take advantage of the opportunities in this growing market by utilizing its established reputation for quality and performance through its more than 1,200 PWC dealers worldwide.
Introduction of ATVs and PWC has significantly reduced Polaris' dependence on a single product line. In 1989 sales of snowmobiles accounted for 67% of total revenues. By 1993 sales of snowmobiles accounted for 50% of total revenues with sales of PWC (9%), ATVs (26%) and clothing, accessories and parts (15%) accounting for the rest. In addition to reducing dependence on a single product line, the introduction of PWC and ATVs has improved Polaris' plant utilization, reducing seasonal and employee downtime and improved Polaris' penetration of its dealer network by providing dealers with Polaris products to sell throughout the year.
Polaris currently employs approximately 2,650 full and part time workers, principally in its design and manufacturing facility in Roseau, Minnesota, and its manufacturing facility in Osceola, Wisconsin. It also recently entered into a lease, with an option to purchase, of an existing facility in Spirit Lake, Iowa which will be converted to PWC production, with snowmobiles and ATVs produced in the off season. Polaris maintains its executive offices at 1225 Highway 169 North, Minneapolis, Minnesota 55441 and the telephone number at that address is (612) 542-0500.
The Corporation is a Minnesota corporation which has been newly formed by certain of the Sponsors in connection with the Conversion. The principal executive offices of the Corporation are located at 1225 Highway 169 North, Minneapolis, Minnesota 55441, and the telephone number at that address is (612) 542-0500.
SUMMARY OF SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER BAC AND PRO FORMA PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------------
1989 1990 1991 1992 1993 1993 1994
-------- -------- -------- -------- -------- -------- ---------
STATEMENTS OF OPERATIONS DATA
Sales............................................... $242,618 $296,147 $297,677 $383,818 $528,011 $385,153 $ 584,725
-------- -------- -------- -------- -------- -------- ---------
Income before provision for income taxes............ 26,865 33,010 33,430 39,681 53,270 35,988 56,618
Provision for Income Taxes.......................... 675 1,647 1,968 4,980 7,457 4,546 6,007
-------- -------- -------- -------- -------- -------- ---------
Net income.......................................... $ 26,190 $ 31,363 $ 31,462 $ 34,701 $ 45,813 $ 31,442 $ 50,611
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Net income applicable to limited partners (1)....... $ 24,701 $ 24,840 $ 24,918 $ 27,483 $ 36,284 $ 24,902 $ 40,084
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Net income per BAC.................................. $ 1.65 $ 1.65 $ 1.65 $ 1.73 $ 2.25 $ 1.54 $ 2.46
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
UNAUDITED PRO FORMA INFORMATION (2)
Income before provision for income taxes............ $ 26,865 $ 33,010 $ 33,430 $ 39,681 $ 51,539 $ 35,619 $ 53,646
Provision for income taxes.......................... 9,670 11,885 12,035 14,285 18,555 12,825 19,313
-------- -------- -------- -------- -------- -------- ---------
Net income.......................................... $ 17,195 $ 21,125 $ 21,395 $ 25,396 $ 32,984 $ 22,794 $ 34,333
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Net income per share................................ $ 1.01 $ 1.23 $ 1.25 $ 1.41 $ 1.81 $ 1.25 $ 1.86
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
Weighted average number of common and common
equivalent shares outstanding (3).................. 17,088 17,136 17,162 17,968 18,215 18,225 18,415
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
CASH FLOW DATA
Cash flow from operating activities................. $ 44,447 $ 54,782 $ 46,642 $ 55,316 $ 79,323 $ 43,116 $ 77,801
Cash purchases of property and equipment............ 7,065 7,158 15,988 12,295 18,126 13,055 20,544
Cash distributions to partners...................... 32,514 42,582 42,581 44,025 46,493 34,641 37,322
Cash distributions per BAC.......................... 2.27 2.50 2.50 2.50 2.51 1.88 1.89
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
UNAUDITED PRO FORMA INFORMATION (2 and 4)
Dividends........................................... 10,925 8,193 8,193
Dividends per share................................. 0.60 0.45 0.45
Special cash distributions.......................... 104,877 69,918
Special cash distributions per share................ 5.76 3.84
-------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- ---------
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SEPTEMBER 30,
DECEMBER 31, -----------------------------------
------------------------------------------------ 1994
1989 1990 1991 1992 1993 1993 1994 PRO FORMA (5)
-------- -------- -------- -------- -------- -------- -------- ---------------
BALANCE SHEET DATA
Cash and cash equivalents........... $ 27,886 $ 32,025 $ 20,098 $ 19,094 $ 33,798 $ 14,514 $ 53,733 $ 7,931
Net increase (decrease) in cash and
cash equivalents................... 12,287 4,139 (11,927) (1,004) 14,704 (4,580) 19,935 (25,867)
Current assets...................... 60,344 66,893 59,200 74,999 109,748 110,705 178,443 144,641
Total assets........................ 137,628 138,704 135,509 146,681 180,548 181,030 250,377 246,575
Total liabilities................... 38,875 46,602 52,646 69,054 98,055 102,327 149,399 230,399
General Partner's capital
(deficit).......................... (419) (2,753) (5,066) (7,105) (7,397) (7,921) (4,817) --
Limited Partners' capital........... 99,172 94,855 87,929 84,732 89,890 86,624 105,795 --
Stockholders' equity (6)............ -- -- -- -- -- -- -- 16,176
Net book value per weighted average
BAC and BAC equivalents............ 6.59 6.13 5.50 4.89 5.12 4.88 6.19 --
Net book value per share (3 and
6)................................. -- -- -- -- -- -- -- 0.88
- ----------------------------------------
(1) Represents net income to BAC Holders after allocation to the General
Partner and its affiliates and therefore does not represent all of the net
income of the Partnership.
(2) The unaudited pro forma data are derived from the financial statements of
the Partnership as if the Conversion had occurred on January 1, 1993 for
the statements of operations and cash flows data. Such periods have been
adjusted to eliminate the General Partner's annual fee of $500,000. The pro
forma statements of operations and cash flows exclude the $11 million
estimated costs of the Conversion, which will be recognized at the time of
the Conversion. Adjustments have been made to the pro forma statements of
operations and cash flows to provide for interest expense on long-term
borrowings of approximately $70,000,000 anticipated to be incurred in the
third and fourth quarters of 1993, the year of the special pro forma cash
distributions. Further, the pro forma statements of operations and cash
flows assume the additional debt will be repaid at $8.75 million per
quarter, commencing in 1994, the year following the pro forma special
distributions. All periods have been adjusted to reflect a provision for
income taxes calculated at a rate of 36%. Such rate reflects a combined
federal and state statutory rate, net of related research and development
credits and anticipated foreign sales corporation benefits. See Note 10 of
Notes to Financial Statements for additional information regarding the pro
forma adjustments.
(3) Pro forma weighted average number of common and common equivalent shares
outstanding and the number of shares of common stock utilized to calculate
the unaudited pro forma net book value per share includes shares to be
issued to BAC Holders, to affiliates of the General Partner and to
employees in connection with First Rights granted but not yet converted to
BACs.
(4) Pro forma stockholder dividends, special cash distributions and the related
per share amounts reflect the Sponsors' intent to recommend that the
Corporation's Board of Directors establish an initial dividend rate of
$0.15 per share per quarter, and pay three special nonrecurring cash
distributions, each of $1.92 per share, payable during each of the last
three quarters of 1995. The Corporation is under no legal or contractual
obligation to make such distributions and dividends, and the timing and
amount of future distributions and dividends will be at the discretion of
the Board of Directors and will depend, among other things, on the future
after tax earnings, operations, capital requirements, borrowing capacity,
and financial condition of the Corporation and general business conditions.
There can be no assurance that such distributions and dividends will be
adopted or maintained by the Corporation.
(5) The unaudited pro forma balance sheet data are derived from the financial
statements of the Partnership as if the Conversion and anticipated cash
distributions and dividends for the year following the Conversion occurred
on September 30, 1994. Estimated deferred tax assets resulting from the
Conversion transaction of $42 million have been recorded and will be
recalculated when the Conversion is completed and actual temporary
differences can be determined. The change in deferred tax assets could be
material. The $11 million estimated costs of the Conversion were recorded
at the balance sheet date as an accrued expense. Anticipated cash
distributions and dividends on Polaris Industries Inc. common stock of
$115.8 million for the year following the Conversion were recorded at the
balance sheet date, resulting in a deficit in retained earnings, on a pro
forma basis. See footnote (4). The approximate $70 million expected to be
borrowed in connection with the proposed special cash distributions has
also been recorded at the balance sheet date.
(6) Pro forma stockholders' equity includes estimated amounts related to the
recording of anticipated cash distributions and dividends on Polaris Indus-
tries Inc. common stock of $115.8 million for the year following the
Conversion, expenses for the transaction and deferred tax assets, which
will be recalculated when the Conversion is completed and actual temporary
differences can be determined. The change in deferred tax assets could be
material. Pro forma net book value per share is adjusted for shares to be
issued to affiliates of the General Partner and for shares to be issued for
First Rights granted but not yet converted to BACs. For purposes of this
transaction, assets and liabilities will be recorded at historical cost.
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[LOGO]
ORGANIZATIONAL CHARTS
BEFORE CONVERSION
[CHART]
AFTER CONVERSION
[CHART]
RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER CONSIDERATIONS
BEFORE COMPLETING THE ENCLOSED FORM OF PROXY, EACH BAC HOLDER SHOULD CAREFULLY READ THIS ENTIRE PROXY STATEMENT, INCLUDING THE ANNEXES AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND SHOULD GIVE PARTICULAR ATTENTION TO THE FOLLOWING CONSIDERATIONS.
RISKS, CONFLICTS OF INTEREST AND CONSIDERATIONS RELATED TO THE CONVERSION
ADVERSE TAX IMPLICATIONS
A primary disadvantage of converting to corporate form is tax related. The
Corporation will pay taxes on its taxable income, and shareholders will pay
taxes on after-tax earnings of the Corporation distributed to them as dividends.
In contrast, the Partnership generally pays no income tax and its partners pay
tax on their distributive share (whether or not actually distributed) of the
Partnership's taxable income. See "Selected Historical and Pro Forma Financial
Information -- Unaudited Pro Forma Information" for the pro forma provision for
income taxes for fiscal year 1993 had Polaris been operating as a corporation
throughout such year. Under current law, the Partnership would be taxed as a
corporation after December 31, 1997 if the BACs continued to be actively traded.
The General Partner has participated in efforts to have the December 31, 1997
deadline extended or eliminated. To date such efforts have been inconclusive.
Such efforts, in which the General Partner has ceased to participate, may or may
not be successful in the future. See "Certain Federal Income Tax Considerations
- -- Partnership Status and Taxation of the Partnership."
POTENTIAL CONFLICTS OF INTEREST
DETERMINATION OF EXCHANGE RATIO. There is a potential conflict of interest between the General Partner and BAC Holders with respect to the determination of the Exchange Ratio in the Conversion. The Exchange Ratio was determined after extended discussions and negotiations between affiliates of the General Partner and W. Hall Wendel, Jr. and other members of the Sponsors with reference to the existing economic interests of the General Partner and BAC Holders and the rights of the General Partner under various provisions of the Partnership Agreement. BAC Holders were not separately represented in such discussions, and the interests of BAC Holders may differ from those of the representatives of the Sponsors who negotiated the Exchange Ratio with the General Partner.
Since the Sponsors have no economic interest in the General Partner and collectively own approximately 9.1% of the outstanding BACs, their interests in the determination of the Exchange Ratio should be closely aligned with those of BAC Holders generally. However, Victor K. Atkins, Jr. and W. Hall Wendel, Jr. have also entered into an agreement which provides, among other matters, that as long as he owns 3% of the outstanding Common Stock, Mr. Atkins will vote his shares of Common Stock in favor of the Corporation's nominees for election to its Board of Directors. Mr. Wendel is expected to be nominated to serve as Chairman of the Board of Directors of the Corporation. Accordingly, such agreement provides a benefit to the Sponsors that is not available to BAC Holders generally. This may present a conflict of interest to the Sponsors in recommending the Conversion to BAC Holders.
REDUCTION IN LIABILITY. As a result of the Conversion, affiliates of the General Partner will benefit from the elimination of their potential liability for obligations and liabilities of Polaris after the Conversion. Because BAC Holders are not liable for obligations and liabilities of the Partnership, BAC Holders will not realize this benefit from the Conversion. This may present a conflict of interest to the General Partner in recommending the Conversion to BAC Holders.
For additional information concerning the potential conflicts of interest among the General Partner, the Sponsors and BAC Holders in the Conversion, see "The Conversion -- Background of the Conversion," "-- Fairness Opinions" and "-- Recommendation of the General Partner and the Sponsors."
NO INDEPENDENT REPRESENTATION
The Conversion was proposed by certain of the Sponsors and negotiated with the General Partner without independent representation of BAC Holders. Independent representation on behalf of BAC Holders might have caused the terms of the Conversion to be different in material respects from those described herein. In addition, Dillon Read and Smith Barney, the independent investment banking firms that were retained on behalf of the Partnership to render their opinions as to the fairness, from a financial point of view, of the Exchange Ratio and the consideration to be received in the Conversion by BAC Holders, were not separately selected by BAC Holders.
NO ASSURANCE OF FUTURE DISTRIBUTIONS
The Corporation is under no legal or contractual obligation to make the Proposed Distributions and the timing and amount of future dividends and distributions will be at the discretion of the Board of Directors and will depend, among other things, on the future after-tax earnings, operations, capital requirements, borrowing capacity, and financial condition of the Corporation and general business conditions. In addition, the revolving credit line of the Partnership, which will be in place immediately following the Conversion, is insufficient in amount to fund, and contains restrictions on the ability of the Partnership to borrow for funding the Proposed Distributions if such distributions are declared by the Board of Directors of the Corporation. Although the Corporation believes it will be able to secure additional lines of credit (or waivers with respect to the existing credit line) on terms and conditions acceptable to the Corporation, the Corporation has no commitment for such lines of credit and does not intend to seek such commitment prior to the effective date of the Conversion. Accordingly, there can be no assurance that the foregoing dividends or distributions will be adopted or maintained by the Corporation.
EFFECTS OF ADDITIONAL INDEBTEDNESS
Incurrence of additional indebtedness by the Corporation, to fund the Proposed Distributions or otherwise, could have important consequences to investors in the Corporation's securities, including the following: (i) the Corporation's ability to obtain additional financing in the future may be limited, (ii) a portion of the Corporation's income from operations and cash flow will be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Corporation for operations and (iii) the agreements relating to the indebtedness are likely to contain financial and other restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could adversely affect the Corporation. There can be no assurance that the Corporation's future operating results will be sufficient for payment of the Corporation's indebtedness and other commitments.
UNCERTAINTY REGARDING MARKET PRICE FOR COMMON STOCK
At present, there is no trading market for the Common Stock. Application has been made to list the Common Stock on the American Stock Exchange and the Pacific Stock Exchange under the trading symbol "SNO." There can be no assurance that holders of the Common Stock will be able to sell their shares at favorable prices or that the per share trading prices for the Common Stock will be comparable to the trading prices for BACs prior to consummation of the Conversion. A large number of shares of Common Stock may be traded by former BAC Holders immediately following completion of the Conversion for various reasons, including in connection with the anticipated transition from primarily income-oriented to principally growth-oriented investors. If a large number of holders of Common Stock were to offer their shares for sale, in the absence of a corresponding demand for Common Stock from institutional and retail investors, the market price of the Common Stock could decline substantially. Various anti-takeover provisions which would apply to the Corporation after the Conversion could also have a negative effect on the market price of the Common Stock. See "-- Provisions That May Discourage Changes of Control" below.
CHANGES IN OWNERSHIP RIGHTS
As a result of the Conversion, BAC Holders will lose certain rights associated with their ownership of BACs, including, in particular, receipt of future quarterly distributions from the Partnership of
Net Cash from Operations (after giving effect to appropriate reserves), and will acquire instead rights associated with their ownership of shares of Common Stock. A comparison of these rights and related factors, which may relate to, or be inconsistent with, investment objectives of BAC Holders, is set forth in "Comparative Rights of BAC Holders and Holders of Common Stock."
CHANGES IN VOTING RIGHTS
The Conversion will effect a change in the voting rights of BAC Holders. BAC Holders are entitled to one vote per BAC on matters submitted to BAC Holders for a vote, including amendments to the Partnership Agreement, mergers and other extraordinary transactions. Most amendments to the Partnership Agreement require the approval of BAC Holders who own two-thirds of outstanding BACs. The General Partner is not permitted to vote its general partner interest on matters voted upon by BAC Holders, although the General Partner's consent is required to effect any merger of the Partnership under Delaware law and for certain other matters to be voted on by BAC Holders. The Sponsors and affiliates of the General Partner in the aggregate beneficially own approximately 14% of outstanding BACs and have the right to vote such BACs on matters voted upon by BAC Holders.
Each share of Common Stock received upon the Conversion will entitle its holder to cast one vote on matters as to which voting is permitted or required by Minnesota law. Generally, matters requiring the vote of the Common Stock are approved by the affirmative vote of the holders of a majority of the Common Stock at a meeting of shareholders at which a quorum is present, except for removal of directors, class voting under certain situations and the anti-takeover provisions of Minnesota law. Unlike the general partner interest now held by the General Partner, the Common Stock to be received in exchange for the general partner interest and interests in its affiliates (approximately 11.4% of the outstanding shares of Common Stock, after giving effect to the exercise of previously granted First Rights), together with the Common Stock received in exchange for the BACs already held by affiliates of the General Partner, will be entitled to vote on all matters submitted to shareholders together with all other outstanding shares of Common Stock. Mr. Atkins has agreed that for so long as Mr. Atkins owns no less than 3% of the outstanding Common Stock of the Corporation, he will vote his shares of Common Stock in favor of the Corporation's nominees for election to its Board of Directors. However, the General Partner will not have any exceptional veto or class voting rights. See "The Conversion -- Background of the Conversion" and "Comparative Rights of BAC Holders and Holders of Common Stock -- Voting Rights."
ELIMINATION OF GENERAL PARTNER LIABILITY FOR POLARIS OBLIGATIONS
Affiliates of the General Partner will benefit from the elimination of its liability for obligations and liabilities of Polaris after the Conversion. Under Delaware law, as a general partner of the Partnership, the General Partner is liable to the extent of its assets for the debts and obligations of the Partnership. If the Conversion is consummated, the affiliates of the General Partner will be shareholders of the Corporation and will not have liability for the debts and obligations of the Corporation. See "-- Potential Conflicts of Interest" above.
CHANGES IN FIDUCIARY OBLIGATIONS
A general partner in a limited partnership owes fiduciary duties of good faith, loyalty and fair dealing to all the limited partners. Under Minnesota law, a director of a corporation must discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. In addition, the Corporation's Articles of Incorporation limit the potential liabilities of the directors for breach of their fiduciary duties. Therefore, situations may occur in which owners of Common Stock of the Corporation would have less recourse, on the basis of breach of fiduciary duty, against directors of the Corporation than they would have had against the General Partner. See "Comparative Rights of BAC Holders and Holders of Common Stock -- Fiduciary Duties" and "-- Limits on Management's Liability."
FUTURE DILUTION OF COMMON STOCK
The Corporation will be permitted to issue additional equity or debt securities, including shares of preferred stock. The Corporation has no present intention to issue additional equity securities other than shares of Common Stock to be issued in connection with assumption and adaption of employee benefit plans by the Corporation on substantially the same terms as are currently in effect in the Partnership. Issuances of additional shares of Common Stock or shares of preferred stock could adversely affect the shareholders' equity interest in the Corporation and the market price of the Common Stock, and the interests in the assets, liabilities, cash flow and results of operations of the Corporation represented by the shares of Common Stock issued pursuant to the Conversion may be diluted. Issuances of additional shares may be more likely after the Conversion because the General Partner and the Sponsors believe that one of the advantages of the Conversion is that the corporate form will expand the potential investor base, provide Polaris with greater access to equity markets and permit its use of capital stock as acquisition currency. Holders of Common Stock will not be entitled to preemptive rights. Under the current partnership structure, the General Partner has the right to cause the issuance of authorized but unissued BACs which dilute the BAC Holders' interest but not the General Partner's interest.
COSTS OF CONVERSION
Transaction costs of approximately $9 million will be paid by the Partnership, whether or not the Conversion is completed. An additional $2 million is expected to be paid by the Partnership only if the Conversion is consummated. For a more detailed discussion of the costs and expenses expected to be incurred, see "The Conversion -- Costs of the Conversion."
RISKS FOR NONAPPROVING BAC HOLDERS
If the Conversion Proposal is approved, all BAC Holders (other than those who exercise Appraisal Rights) will be bound by such approval even though they, individually, may not have voted in favor of the Conversion Proposal. Non-approving BAC Holders who exercise Appraisal Rights will not be entitled to receive shares of Common Stock. See "Appraisal Rights."
PROVISIONS THAT MAY DISCOURAGE CHANGES OF CONTROL
The Corporation's Articles of Incorporation and By-laws, and Minnesota law, contain certain provisions that may have the effect of encouraging persons considering an acquisition or takeover of the Corporation to negotiate with the Board of Directors rather than to pursue non-negotiated acquisitions or takeover attempts that a shareholder might consider to be in the shareholders' best interest, including offers that might result in a premium over market price for the Common Stock. These provisions include a classified board of directors, authorization for the Board of Directors to issue classes or series of preferred stock, super-majority provisions relating to removal of directors and a prohibition on shareholder action by less than unanimous written consent. See "Description of Capital Stock -- Anti-takeover Provisions."
The Partnership Agreement contains many provisions which vest in the General Partner the right to manage the business of the Partnership and restrict the right of BAC Holders to approve transactions of a type which generally are subject to shareholder approval in the case of a corporation. The Partnership does not hold annual meetings of BAC Holders and does not permit BAC Holders to vote on many of the matters upon which shareholders of the Corporation will be permitted to vote.
RISKS RELATED TO THE BUSINESS
The following risk factors are relevant to an investment in Polaris, whether in partnership or corporate form. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business."
PRODUCT SAFETY AND REGULATION
Snowmobiles, all-terrain vehicles ("ATVs") and personal watercraft ("PWC") are motorized vehicles that may be operated at high speeds and in a careless or reckless manner. Accidents involving
property damage, personal injuries and deaths occur in the use of snowmobiles, ATVs and PWC. With respect to ATVs, the Consumer Products Safety Commission (the "CPSC") has found a greater incidence of such occurrences with three-wheel ATVs. Polaris presently manufactures only four-wheel and six-wheel ATVs. The CPSC has conducted investigations regarding the safety of ATVs, and has made recommendations regarding their regulation, marketing and use. Such recommendations include that the ATV industry voluntarily cease marketing ATVs intended for use by children under 12 years of age; that warning labels be placed on ATVs intended for use by adults, stating that such ATVs are not recommended for children under age 16; and that the CPSC work closely with states and other federal agencies to develop practical, uniform state regulations. In February 1987, the CPSC formally requested that the United States Department of Justice (the "Justice Department") initiate an enforcement action against the ATV industry seeking a recall of three-wheel ATVs and four-wheel ATVs intended for use by children under age 16 and requiring that ATV purchasers receive "hands on" training. In addition, in May 1987 the CPSC issued a safety alert advising of the potential risks associated with three-and four-wheel ATVs.
In May 1987, Polaris responded to the CPSC's proposed enforcement action indicating its willingness to adopt additional warning labels and notices to consumers and its support of various actions designed to enhance vehicle and user safety. On December 30, 1987, Polaris reached an agreement with the CPSC calling for the repurchase of all three-wheel ATVs remaining in the hands of its distributors and dealers, the provision of additional safety oriented point-of-purchase materials in all Polaris ATV dealerships, and the addition of a mandatory "hands on" consumer and dealer safety training program designed to give all Polaris ATV dealers and consumers maximum exposure to safe riding techniques, as outlined by the Specialty Vehicle Institute of America. Polaris conditions its ATV warranties described in "Business -- Product Liability" on completion of the mandatory "hands on" consumer training program.
In June 1989, the CPSC conducted an "undercover" survey of 227 ATV dealers selected randomly, including Polaris. Based on the survey results, the degree of compliance of Polaris' dealers with the provisions of the consent decree was better than the industry average in some areas and worse in others. Pursuant to an agreement with the CPSC, Polaris has procedures in place for ascertaining dealer compliance with the provisions of the CPSC consent decree, including random "undercover" on-site inspections of dealerships to ensure compliance with the age restriction. Polaris has notified its dealers that it will terminate any dealer it determines to have violated the provisions of the CPSC consent decree and to date has terminated five dealers for such reason.
The Partnership does not believe that the agreement with the CPSC has had or will have a material adverse effect on the Partnership or Polaris. Nevertheless, there can be no assurance that future recommendations or regulatory actions by the CPSC, the Justice Department or individual states would not have an adverse effect on the Partnership or Polaris. Certain state attorneys general have asserted that the CPSC agreement is inadequate and have indicated that they will seek stricter ATV regulation. The Partnership is unable to predict the outcome of such action or the possible effect on its ATV business.
Certain states have proposed certain legislation involving more stringent emission standards for two-cycle engines, the engines used on Polaris' snowmobiles, ATVs and PWC. In addition, certain materials used in snowmobile, ATV and PWC manufacturing which are toxic, flammable, corrosive, or reactive are classified by federal and state governments as "hazardous materials." Finally, local ordinances have been and may from time to time be considered and adopted which restrict the use of PWC to specified hours and locations.
For a more detailed description of the above risks related to Polaris' business, see "Business -- Product Safety and Regulation."
INFORMAL SUPPLY ARRANGEMENTS
Pursuant to informal agreements between Polaris and Fuji Heavy Industries in
Japan ("Fuji"), Fuji has been the exclusive manufacturer of the Polaris two
cycle snowmobile engines since 1968. Fuji has manufactured engines for Polaris'
ATV products since their introduction in the spring of 1985 and
also supplies engines for the PWC products. Such engines are developed by Fuji to the specific requirements of Polaris. In the fall of 1987, Fuji became a Partnership investor. Polaris believes its relationship with Fuji to be excellent. With the absence of a written agreement, if the informal relationship were terminated by Fuji, Polaris may be unable to enforce any rights, and interruption in the supply of engines would adversely affect Polaris' production pending the establishment of substitute supply arrangements. Currently, Polaris is in the process of investigating manufacturing alternatives for its engines to reduce the risk of dependence on a single supplier and to minimize the effect of fluctuations in the Japanese yen. Polaris anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components for which it relies upon limited sources of supply. There can be no assurance that alternate supply arrangements will be made on satisfactory terms.
COMPETITION
The snowmobile, ATV and PWC markets in the United States and Canada are
highly competitive. Competition in such markets is based upon a number of
factors, including price, quality, reliability, styling, product features and
warranties. At the dealer level, competition is based on a number of factors
including sales and marketing support programs (such as financing and
cooperative advertising). Certain of Polaris' competitors are more diversified
and have financial and marketing resources which are substantially greater than
those of Polaris. In addition, Polaris' products compete with many other
recreational products for the discretionary spending of consumers, and, to a
lesser extent, with other vehicles designed for utility applications.
EFFECTS OF WEATHER
Lack of snowfall in any year in any particular region of the United States or Canada may adversely affect snowmobile retail sales in that region. Polaris seeks to minimize this potential effect by stressing pre-season sales and shifting dealer inventories from one location to another. However, there is no assurance that weather conditions would not have a material effect on Polaris' sales of snowmobiles, ATVs or PWC.
PRODUCT LIABILITY
Product liability claims are made against Polaris from time to time. Since its inception in 1981 through September 30, 1994, Polaris has paid an aggregate of less than $1.4 million in product liability claims and had accrued $4.4 million at September 30, 1994, for the possible payment of pending claims. Polaris believes such accruals are adequate. Polaris does not believe that the outcome of any pending product liability litigation will have a material adverse effect on the operations of Polaris. However, no assurance can be given that its historical claims record, which did not include PWC prior to 1992, will not change or that material product liability claims against Polaris will not be made in the future.
Polaris' product liability insurance limits and coverages have been adversely affected by the general decline in the availability of liability insurance. As a result of the high cost of premiums and in view of the historically small amount of claims paid by Polaris, Polaris has been self-insured since June 1985. Adverse determination of material product liability claims made against Polaris would have a material adverse effect on Polaris' financial condition.
WARRANTIES AND PRODUCT RECALLS
Polaris warrants its snowmobiles, ATVs and PWC under a "limited warranty" for a period of one year, six months, and one year, respectively. For certain of its products, Polaris also offers for sale to its consumers an extended warranty contract for an additional one-year period. Although Polaris employs quality control procedures, a product is sometimes distributed which needs repair or replacement. Historically, product recalls have been administered through Polaris' dealers and distributors and have not had a material effect on Polaris' business.
THE CONVERSION
THE PARTNERSHIP
The Partnership was formed under the Delaware Revised Uniform Limited Partnership Act on April 7, 1987 for the purpose of acquiring, through the Operating Partnership, substantially all of the business and assets of Polaris' predecessor, Northwestern. The acquisition took place on September 9, 1987. Concurrently with the acquisition, the Partnership completed a public offering of $110 million of BACs. The funds received from the public offering were used by the Operating Partnership to acquire an 80% undivided interest in substantially all of the assets of Northwestern. The remaining 20% was contributed by Northwestern to the Operating Partnership in exchange for additional BACs and Class B BACs (which have since been converted into BACs).
The primary objectives of the Partnership are: (i) cash distributions from the operations of the Partnership sufficient to provide BAC Holders with not less than a 12% cumulative, noncompounded annual return on the initial purchase price of the BACs (as reduced by any distributions from sales and refinancings of the property of the Partnership), (ii) capital appreciation as a result of expanding distributable cash flow and (iii) preservation and protection of the Partnership's capital. Based on the history of the Partnership's distributions and recent sale prices for the BACs, management believes that it has to date achieved these objectives. Distributions to BAC Holders have remained relatively constant during each of the past three years and it is unlikely that the Partnership will increase the present level of cash distributions (i.e. $2.52 per BAC per annum) even if Polaris' taxable income was to continue to increase, because financing Polaris' continued growth could be expected to require reinvesting significant amounts of cash in the business. See "Market Prices and Distributions."
Neither the Sponsors nor the General Partner believe that the Partnership has experienced any material adverse financial developments since December 31, 1993, and are not aware of any fact that would make it likely that the Partnership will experience any material adverse financial developments in the forseeable future.
BACKGROUND OF THE CONVERSION
Pursuant to amendments to the Internal Revenue Code of 1986 (as amended, the
"Code") adopted in 1987 and a transition rule adopted thereunder (collectively,
the "1987 Code Amendments"),the Partnership will be treated as a corporation for
federal income tax purposes subsequent to December 31, 1997 if the BACs continue
to be publicly traded. From time to time, certain members of the senior
operating management of the Operating Partnership have considered and discussed
with various representatives of the General Partner what actions to take in
response to the 1987 Code Amendments including the possibility of converting the
Partnership to a corporation. See "The Conversion -- Reasons for the Conversion
- -- Changes in Tax Status of the Partnership."
Commencing in early 1994, certain members of the senior operating management held a series of discussions with various investment banking firms, including Smith Barney Inc. ("Smith Barney"), regarding various strategic alternatives available to Polaris, including, but not limited to, the conversion of the Partnership to a corporation. During 1994, Smith Barney made several presentations to the senior operating management of the Operating Partnership and representatives of the General Partner and delivered certain written materials to such parties analyzing alternatives to the Conversion. Such alternatives are more fully described under "The Conversion -- Alternatives to the Conversion" below.
In June and July 1994, representatives of Smith Barney and certain members of the senior operating management had several discussions with Victor K. Atkins, Jr., who is the President and principal shareholder of EIPCC (the managing general partner of the General Partner) and the individual general partner of the General Partner, in which it was proposed to Mr. Atkins that the General Partner pursue a conversion of the Partnership to corporate form in which the Partnership would incur indebtedness and BAC Holders and the General Partner and its affiliates would receive a one-time taxable cash distribution, as well as stock in the new corporation, for their interests in the
Partnership. During these discussions, Mr. Atkins stated that he would consider the proposal and suggested he needed additional time to do so. In addition, Mr. Atkins stated that he would continue to study other alternatives and indicated that he believed it desirable to continue to seek relief for the Partnership from the 1987 Code Amendments so that the Partnership could remain a partnership and be treated as a partnership for federal income tax purposes after 1997.
At a meeting on July 29, 1994 between Mr. Atkins and representatives of Smith Barney, Mr. Atkins stated that he thought a conversion of the Partnership to corporate form might be advisable and deserved further consideration and study. However, he said that he did not believe he was in a position to propose a conversion pending the resolution of a lawsuit brought on March 5, 1993 against him, EIPCC, Paul Bagley (a director of EIPCC) and others by Lehman Brothers Inc. ("Lehman Brothers"), the owner of a limited partner interest in the General Partner. Lehman Brothers had initiated such litigation to challenge Mr. Atkins' control over, and equity ownership in, the General Partner. Settlement discussions between Mr. Atkins and Lehman Brothers commenced in July 1994, at which time the discovery phase of the litigation had ended and the parties were preparing for trial. Mr. Atkins also indicated that he felt it would be preferable for the longer-term interests of BAC Holders and the successor entity that any conversion be accomplished on an equity-only, as opposed to a leveraged, basis. See "Management -- Directors and Executive Officers of EIPCC."
On July 29, 1994, Mr. Wendel advised Mr. Atkins, telephonically, that Mr. Wendel and other members of the senior operating management favored a conversion of the Partnership in which BAC Holders and the General Partner and its affiliates would receive a one-time cash distribution and stock in the new corporation. At that time, Mr. Atkins reiterated the position which he had conveyed earlier to Smith Barney regarding the litigation with Lehman Brothers and the form of the transaction.
On August 11, 1994, representatives of Smith Barney met with a representative of Lehman Brothers to advise Lehman Brothers of Smith Barney's discussions with members of the senior operating management and Mr. Atkins. The Lehman Brothers representative, while noting that Lehman Brothers did not control the General Partner, said that Lehman Brothers would not oppose a conversion of the Partnership, provided that such conversion was in the best interests of BAC Holders and that upon such conversion the General Partner and its affiliates would receive fair and adequate consideration for their interests in the Partnership.
During the period between August 12, 1994 and August 22, 1994, Mr. Wendel and Smith Barney had discussions regarding the views of the General Partner and the terms of an engagement of Smith Barney by Mr. Wendel and possibly other BAC Holders if a consensual plan of conversion with the General Partner could not be effected.
On August 23, 1994, Mr. Wendel and other members of the senior operating management, together with legal and financial advisors, met with Mr. Atkins and representatives of Lehman Brothers and the Partnership's legal advisor. Mr. Wendel outlined to the General Partner the basis for management's belief that a conversion of the Partnership to a corporation would be desirable at the present time. Mr. Wendel and his advisors then suggested to the General Partner that such conversion be accomplished in a transaction in which BAC Holders and the General Partner and its affiliates would each receive a one-time taxable cash distribution as well as stock in the corporation surviving the transaction. Mr. Wendel said that if the General Partner would not support such a conversion transaction, the Sponsors intended to propose such a transaction directly to BAC Holders. Representatives of the General Partner and Lehman Brothers agreed that converting the Partnership into a corporation was desirable at the present time, but they disagreed with the method proposed for accomplishing such conversion. The General Partner then proposed that the conversion be accomplished in a transaction in which BAC Holders and the affiliates of the General Partner receive only stock in the surviving corporation. The General Partner stated such a method was preferable to the leveraged transaction proposed by Mr. Wendel. See "The Conversion -- Alternatives to the Conversion." Mr. Wendel and other members of the senior operating management agreed to consider an all-equity conversion.
On August 24 and 25, 1994, Mr. Wendel and John F. Grunewald, Executive Vice President, Finance and Administration of Polaris, together with Smith Barney and their respective legal advisors, met with Mr. Atkins, representatives of Lehman Brothers and the Partnership's legal advisors. At that time, Mr. Wendel proposed to the representatives of the General Partner that (i) the Partnership be converted to a corporation in a transaction in which BAC Holders and the affiliates of the General Partner would receive only equity in the corporation surviving the transaction and (ii) consummation of the transaction be conditioned upon receipt of approval of the Conversion Proposal by BAC Holders and the receipt by the Partnership of an opinion of counsel to the effect that the receipt of such equity by BAC Holders and affiliates of the General Partner would be tax free for federal income tax purposes. Mr. Wendel in consultation with his advisors and consultants then negotiated with the representatives of the General Partner concerning the appropriate percentage allocation of the surviving corporation's equity between BAC Holders and the General Partner and its affiliates. After extensive negotiations, based in part on the General Partner's and the Operating General Partner's interests in distributions from the Partnership and the Operating Partnership, respectively, as described under "Existing Economic Interests of the Partners" below, and the $500,000 management fee that the Partnership has paid EIPCC annually since the Partnership's inception, the parties ultimately agreed that BAC Holders together with holders of previously granted First Rights outstanding at the time of such Conversion would receive 88.6% of the stock of the surviving corporation (including upon exercise of such First Rights) and the affiliates of the General Partner would receive the remaining 11.4% in exchange for their interests in the General Partner and its affiliates (after giving effect to exercise of such First Rights). On behalf of the Partnership, Smith Barney was engaged as financial advisor and Smith Barney orally advised the Partnership that the consideration to be received by BAC Holders in the proposed transaction was fair, from a financial point of view, to BAC Holders. The General Partner also advised Mr. Wendel that its willingness to proceed with the proposed transaction was conditioned upon receipt of a fairness opinion from a second investment banking firm.
On August 25, 1994, all parties to the action commenced by Lehman Brothers described above entered into a settlement agreement pursuant to which the action was subsequently dismissed with prejudice. See "Management -- Directors and Executive Officers of EIPCC."
On August 25, 1994, Mr. Wendel and Mr. Atkins entered into an agreement providing, among other things, that (i) each of Mr. Atkins and Mr. Wendel will vote their BACs in favor of the Conversion, (ii) subject to his fiduciary duties as advised by counsel, Mr. Atkins will work diligently to proceed with the Conversion and submit the Conversion Proposal to BAC Holders for their approval as soon as possible, (iii) each of Mr. Atkins and Mr. Wendel will use his best efforts to see that the business and affairs of Polaris will be conducted and distributions will be made only in the ordinary course and consistent with past practice and (iv) for so long as Mr. Atkins owns no less than 3% of the outstanding Common Stock of the Corporation, he will vote such securities in favor of the Corporation's nominees for election to its Board of Directors. In addition, the agreement states that it is understood that Mr. Atkins does not desire to and will not serve as an officer or director of the Corporation or its subsidiaries following consummation of the Conversion. On the same day, the Partnership issued a press release announcing its intention to undertake a plan of conversion.
On August 29, 1994, representatives of the General Partner and counsel for the Partnership and the Sponsors discussed with representatives of Lazard Freres & Co. ("Lazard") the possibility of Lazard being engaged to render an opinion as to the fairness, from a financial point of view, of the consideration to be received in the Conversion to BAC Holders. On September 14, 1994, a representative of Lazard advised representatives of the General Partner and counsel to Smith Barney that Lazard had decided not to accept the possible engagement. At no time did Lazard express any opinion as to the fairness or lack of fairness of the consideration to be received in the Conversion, from a financial point of view or otherwise.
On September 16, 1994, Dillon Read was engaged by the Partnership to render its opinion to the Partnership as to the fairness, from a financial point of view, to BAC Holders of the consideration to be received by BAC Holders in the Conversion. See "The Conversion -- Fairness Opinions."
In order to attempt to ease the transition between primarily income-oriented investors in the Partnership and the growth-oriented and institutional investors expected to invest in the Corporation following the Conversion, representatives of the Sponsors and Smith Barney met with representatives of the General Partner during the week of September 19 to discuss the anticipated dividend policy of the Corporation after the Conversion. They concluded that it would be in the best interests of current and future security holders of the Partnership and the Corporation that there be some continuation of cash dividends for three calendar quarters after the Conversion at a level approximating that of the cash distributions which the Partnership has paid in recent years. In this regard, the General Partner and the Sponsors agreed that some degree of leverage for the Corporation would be appropriate if necessary in connection therewith. See "Market Prices and Distributions."
REASONS FOR THE CONVERSION
The Sponsors and the General Partner believe that the following are the principal reasons to consummate the Conversion at this time. These factors are closely interrelated, and relative weights were not assigned to them.
CHANGES IN TAX STATUS OF THE PARTNERSHIP. The Partnership currently is treated as a partnership for federal income tax purposes under a grandfather provision of the 1987 Code Amendments. Assuming no cessation of trading of BACs, under the 1987 Code Amendments, this tax treatment ends immediately if the Partnership engages in a substantial new line of business, and in any event, ends on December 31, 1997, after which the Partnership will be treated as a corporation for federal income tax purposes. Thus, under current law, the principal advantage of conducting business as a publicly traded partnership will cease for the Partnership on December 31, 1997 unless the Partnership takes action to prevent trading in BACs thereafter or unless such provision is eliminated or extended. The General Partner has participated in efforts to have the grandfather protection made permanent or further extended, but these efforts have been inconclusive. Such efforts, in which the General Partner has ceased to participate, may or may not be successful in the future.
The General Partner and the Sponsors did not consider delisting the BACs
from the American Stock Exchange and the Pacific Stock Exchange, prohibiting the
transfer of BACs, except in very limited circumstances, and otherwise reducing
liquidity an advantageous way to preserve the tax status of the Partnership. The
General Partner and the Sponsors also did not believe that continuing to operate
as a partnership while being taxed as a corporation after 1997 would be
advantageous to BAC Holders. Instead, the General Partner and the Sponsors
believe that it is advantageous for the Partnership to convert to corporate form
now because: (i) the Conversion will resolve uncertainty about the Partnership's
future tax and organizational status, which uncertainty necessarily would
otherwise increase as December 31, 1997 approaches, (ii) the receipt of shares
in the Conversion can be effected on a tax-free basis under current law and
(iii) the Conversion is facilitated by the Partnership's strong financial
performance, currently favorable equity market conditions generally and other
factors set forth below. Accordingly, the General Partner and the Sponsors
believe that it is advantageous for the Partnership to convert to corporate form
at the present time rather than postpone such a transaction until 1997 and that
any potential benefit derived from maintaining the Partnership's current form is
outweighed by the (i) long-term benefits to be derived from the Conversion and
(ii) the risk that postponing such a conversion until a later date, when many
partnerships losing the benefit of the grandfather provision similarly are
expected to convert to corporate form, could result in the Partnership's
inability to consummate such a transaction in an orderly manner under favorable
circumstances.
PROPOSED DISTRIBUTION EQUIVALENCY. The Conversion is not expected to adversely affect the anticipated amount of cash distributions to be received by investors through 1997. After the Conversion and subject to legal and contractual limitations and the financial requirements of the business,
the Sponsors intend to recommend that the Corporation's Board of Directors pay the Proposed Distributions of $0.15 per share per quarter and three special cash distributions, each of $1.92 per share, payable during each of the last three quarters of 1995 (reduced to the extent that any cash distributions declared and paid by the Partnership after January 1, 1995 exceed, on a quarterly basis, $0.15 per BAC). Assuming the Corporation makes such distributions, each BAC Holder who continues to hold Common Stock received in the Conversion through 1997 will receive from the Partnership and the Corporation cash distributions and dividends during the period commencing January 1, 1995 and ending December 31, 1997 equal in amount to cash distributions ($7.56 per BAC) that BAC Holders would have received from the Partnership had the Conversion not occurred and the Partnership maintained its existing distribution policy. The Sponsors believe that the Proposed Distributions should ease the transition in the Corporation's ownership between primarily income-oriented investors in the Partnership and the growth-oriented and institutional investors that are expected to invest in the Corporation. See "Market Prices and Distributions."
ANTICIPATED REDUCTION OF PARTNERSHIP TAX BENEFIT TO INVESTORS. The tax benefits to BAC Holders of the Partnership continuing to operate in partnership form (i.e. one level of income tax) are anticipated to diminish over time. Distributions to BAC Holders have remained relatively constant during the past three years and the Partnership has no present intention of increasing the present level of cash distributions even if its taxable income continues to increase, because Polaris' continued growth could require reinvesting significant amounts of cash in its business. Accordingly, absent the Conversion, assuming income growth continues in 1994 and subsequent years, BAC Holders will be required to report and pay tax on their share of the Partnership's taxable income without a corresponding increase in cash distributions. It is expected that this disparity between taxable income and cash distributions will continue to increase for the forseeable future, and will be substantial at least in 1994. This disparity will be greater for those BAC Holders that have held BACs for longer periods of time and purchased their BACs at lower prices. Increases in taxable income are likely to correspond to increases in book income of the Partnership which, for the nine-month period ended September 30, 1994, increased by over 50% compared to the same period in 1993.
GREATER ACCESS TO CAPITAL MARKETS AND EXPANSION OF INVESTOR BASE. The General Partner and the Sponsors expect the Corporation will benefit from a simpler and more readily understandable capital structure which should result in greater access to capital markets than the Partnership, potentially enabling the Corporation to raise capital on more favorable terms than are now available to the Partnership. In this regard, the General Partner and the Sponsors expect that the Conversion should ultimately expand Polaris' potential investor base to a broader array of investors (e.g. pension plans, mutual funds and other institutional investors) that do not typically invest in publicly traded limited partnership securities because of various tax and administrative reasons. In addition, the General Partner and the Sponsors anticipate that the Common Stock (as compared to the BACs) should receive broadened investor interest through increased review and evaluation by investment research analysts. Although there can be no assurance in this regard, such factors should result in greater activity and liquidity for the Common Stock, as compared to the BACs.
ENHANCED GROWTH POTENTIAL. The General Partner and the Sponsors believe that current industry conditions may provide opportunities for Polaris to grow through acquisitions of businesses and assets. In certain cases, Polaris may want to be able to issue equity securities in payment of the purchase price for such acquisitions, and the General Partner and the Sponsors believe that in certain circumstances an equity interest in a corporation will be a more attractive acquisition currency to prospective sellers than BACs. From time to time Polaris contacts, and is contacted by, others concerning the acquisition by Polaris of assets of others in complementary lines of business. Occasionally, the sellers might have been willing to consider receiving equity of Polaris in payment of the asset purchase price if Polaris were reorganized as a corporation. None of these potential transactions progressed to the stage of an agreement in principle and no discussions are currently taking place concerning the issuance of Polaris' equity in payment of the purchase price of businesses or assets.
ABILITY TO DIVERSIFY. Under current tax laws, the Partnership is unable to enter into new lines of business without having to operate such businesses under substantial constraints (if it is to maintain its partnership tax status). By converting to corporate form, Polaris should have the ability, when appropriate, without constraint insofar as current tax laws are concerned, to enter into new lines of business that may present favorable opportunities, although the Partnership currently has no specific plans to enter into new lines of business. Polaris believes the advantages of doing business in corporate form are demonstrated by the fact that Polaris is one of the few remaining manufacturing concerns in the United States organized as a publicly traded partnership.
TAX REPORTING. The General Partner and the Sponsors believe that the complexities of tax reporting associated with partnership investments are regarded as unduly burdensome by many BAC Holders under current conditions, although there are proposals before Congress to simplify the procedures and eliminate the Schedule K-1 reporting requirement. The ownership of Common Stock rather than BACs will greatly simplify reporting with respect to an investment in Polaris on each BAC Holder's individual federal and state income tax returns for future years and will avoid the current requirement of multi-state income tax filings. Furthermore, such simplification of Polaris' organizational structure and tax reporting also will result in administrative and cost savings to the Corporation.
DIRECT ELECTION OF THE BOARD OF DIRECTORS. The Partnership is managed by the General Partner, which is in turn managed by the Managing General Partner. BAC Holders do not participate in the election of the Board of Directors of the Managing General Partner. After the Conversion, the Corporation will be managed by the Corporation's Board of Directors, which will be elected directly by the holders of Common Stock. As a result, holders of Common Stock will have an opportunity to evaluate, on an annual basis, the performance of the Corporation and to vote their shares for the election of directors accordingly, subject to the limitations on election and removal of the Board of Directors due to the staggered nature of the Board of Directors of the Corporation and subject to the agreement between Mr. Atkins and Mr. Wendel with respect to the voting of shares held by Mr. Atkins. See "Comparative Rights of BAC Holders and Holders of Common Stock" and "Description of Capital Stock."
FOR THE REASONS SET FORTH BELOW UNDER "RECOMMENDATION OF THE GENERAL PARTNER AND THE SPONSORS," THE GENERAL PARTNER AND THE SPONSORS BELIEVE THE CONVERSION IS FAIR TO BAC HOLDERS. THE GENERAL PARTNER AND THE SPONSORS RECOMMEND THAT BAC HOLDERS VOTE "FOR" THE CONVERSION PROPOSAL.
STRUCTURE OF THE CONVERSION
Pursuant to the terms of the Merger Agreement, if the Conversion Proposal is approved by BAC Holders and the other conditions thereto are satisfied or waived, the Conversion will be effected as described below. Each of the following steps is part of an integrated transaction, and all such steps must be completed to effect the Conversion. Organizational charts for the Partnership (before the Conversion) and the Corporation (after the Conversion) are included for reference on page 20.
MERGER OF PICC WITH EIPCC. PICC, which is the managing general partner of the Operating General Partner, will be merged with and into EIPCC. As a result, EIPCC will become the managing general partner of the Operating General Partner.
TRANSFER OF EIPCC COMMON STOCK TO THE CORPORATION. The stockholders of EIPCC will transfer all of their shares of EIPCC common stock to the Corporation in exchange for shares of Common Stock. As a result, EIPCC will become a wholly owned subsidiary of the Corporation and the former owners of EIPCC will own shares of Common Stock.
TRANSFER OF INTERESTS IN THE GENERAL PARTNER TO THE CORPORATION. The owners of partnership interests in the General Partner, other than EIPCC, will transfer their partnership interests in the General Partner to the Corporation in exchange for shares of Common Stock. As a result, the Corporation will directly and indirectly (through EIPCC) own all of the partnership interests in the General Partner, and the former owners of the General Partner, other than EIPCC, will own shares of Common Stock.
TRANSFER OF INTERESTS IN THE OPERATING GENERAL PARTNER TO THE CORPORATION. The owners of partnership interests in the Operating General Partner, other than EIPCC, will transfer their partnership interests to the Corporation in exchange for shares of Common Stock. As a result, the Corporation will directly and indirectly (through EIPCC) own all of the partnership interests in the Operating General Partner, and the former owners of the Operating General Partner, other than EIPCC, will own shares of Common Stock.
FORMATION OF TRANSITORY PARTNERSHIP. The Corporation will form a new Delaware limited partnership (the "Transitory Partnership"), with itself as a limited partner and EIPCC as a general partner.
MERGER. Pursuant to the terms of the Merger Agreement, the Transitory Partnership will be merged with and into the Partnership, with the Partnership as the surviving partnership. At the Effective Time of the Merger (as defined below under "-- Effective Time"), each outstanding BAC (other than BACs held by persons who have exercised Appraisal Rights) will automatically be exchanged for one share of Common Stock, and each previously granted First Right will automatically be converted into the right to receive one share of Common Stock. As a result of the Merger, the Corporation and EIPCC will be limited partners of the Partnership, and the General Partner will remain general partner of the Partnership.
MERGER OF THE OPERATING GENERAL PARTNER AND THE OPERATING PARTNERSHIP WITH PARTNERSHIP. The Operating Partnership and the Operating General Partner will be merged with and into the Partnership. As a result the Partnership will own the business and operations of the Operating Partnership and the Corporation will become a general partner in the Partnership and EIPCC's general partnership interest in the Operating Partnership will be converted into a limited partnership interest in the Partnership.
CONTINUATION OF THE PARTNERSHIP, THE GENERAL PARTNER AND EIPCC. As a result of the Conversion, the Corporation will directly and indirectly (through EIPCC and the General Partner) own all of the general and limited partnership interests in the Partnership. For a period of at least two years after the date the Conversion is consummated, the Corporation will keep the Partnership, the General Partner and EIPCC in existence and will not cause the Partnership or the General Partner to cease being treated as a partnership for federal income tax purposes.
As a result of the foregoing transactions, (i) the Corporation will, directly and indirectly, own 100% of the Partnership and will conduct the business and operations of Polaris after the Conversion, and (ii) BAC Holders and holders of previously granted First Rights will receive, in exchange for their BACs and upon exercise of such First Rights, as the case may be, 88.6% of the Common Stock of the Corporation, and affiliates of the General Partner will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock of the Corporation, after giving effect to the exercise of such First Rights.
The transaction was structured as described above for the following reasons:
(i) The integrated transaction including, in particular, formation and existence of the Transitory Partnership and its subsequent merger with and into the Partnership, provides a means of assuring that, upon approval of the Conversion Proposal by BAC Holders, all BAC Holders (other than those exercising Appraisal Rights) would participate in the exchange of their BACs for shares of Common Stock and the Partnership and all its affiliated entities would either be dissolved or directly or indirectly wholly owned by the Corporation.
(ii) For federal income tax purposes, the Merger will be treated as an exchange by BAC Holders of their BACs for shares of Common Stock in a tax-free transaction qualifying under Section 351 of the Code. As a result of such treatment, the aggregate tax basis of the Partnership's assets following the Conversion will be increased to reflect the aggregate tax basis of the BAC Holders in their BACs. See "Certain Federal Income Tax Considerations -- General Tax Treatment of the Merger and Issuance of Common Stock" and "-- Tax Consequences to the Corporation and the Partnership."
(iii) Legislation has been proposed that in certain circumstances would tax the distribution of marketable securities by a partnership. Although this provision is not directed at the type of transaction being proposed, structuring the transaction in the manner described above provides additional assurance that the provisions of the proposed legislation, if enacted, will not apply to the issuance of shares of Common Stock to BAC Holders and affiliates of the General Partner. See "Certain Federal Income Tax Considerations -- Proposed Legislation."
EXISTING ECONOMIC INTERESTS OF THE PARTNERS
Currently, BAC Holders, the General Partner and an affiliate, through their interests in the Partnership, and the Operating General Partner have rights to quarterly distributions of the proceeds of available cash flow from operations of the Operating Partnership and the proceeds of certain capital transactions by the Operating Partnership.
BAC Holders and the General Partner and its affiliate, the Operating General Partner, currently receive quarterly distributions of Cash Available for Distribution (generally cash flow from operations and sales of assets or refinancings, after deducting such reserves as the General Partner, in its sole discretion, determines to be necessary for Partnership expenses, debt payments, capital improvements, replacements and contingencies) in the following manner:
INTERESTS OF GENERAL
INTERESTS OF PARTNER AND ITS
CASH AVAILABLE FOR DISTRIBUTION BAC HOLDERS AFFILIATES
- ------------------------------------------------------- --------------- -------------------------
Net Cash From Operations............................... 79.2% 20.8%
Net Cash from Sales or Refinancings (after return of
capital to BAC Holders of $10 per BAC)................ 98.0% 2.0%
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The Operating General Partner receives 1% of all distributions (from operations and from sales and refinancings) from the Operating Partnership. Currently, the General Partner receives 20% and BAC Holders receive 80% of Net Cash From Operations (as defined in the Partnership Agreement) from the Partnership, after the 1% distribution to the Operating General Partner, so long as distributions to BAC Holders have provided them with a 15% per annum cumulative, noncompounded yield on the adjusted initial issuance price of BACs. The percentages in the above table reflect the various interests of the General Partner and its affiliates in these distributions. The 20.8% interest of the General Partner and its affiliates in Net Cash From Operations is derived by adding the 1% received by the Operating General Partner of Net Cash From Operations plus 20% of the remaining 99% of Net Cash From Operations distributable to the General Partner and the BAC Holders. After the 1% distribution to the Operating General Partner, the General Partner also receives 1% and BAC Holders receive 99% of Net Cash From Sales or Refinancings (as defined in the Partnership Agreement) from the Partnership after BAC Holders have received a return of the initial adjusted issuance price of the BACs ($10 per BAC after giving effect to the two-for-one split in 1993).
If distributions from the Partnership at any time do not provide BAC Holders with the specified return, distributions would be made instead 1% to the General Partner and 99% to BAC Holders until BAC Holders had received the specified return. Based on BAC Holders' prior distributions, current level of return and on the Partnership's business, results of operations and financial condition, the General Partner does not expect BAC Holders' return to fall below the specified return in the foreseeable future. Consequently, the General Partner should continue to receive 20% of cash distributions by the Partnership for the foreseeable future. See "Comparative Rights of BAC Holders and Holders of Common Stock -- Distributions and Dividends -- BACs."
Distributions and fees to the General Partner and its affiliates, including EIPCC, totalled approximately $10.3 million in 1993 and will exceed $11 million in 1994. EIPCC, the managing general
partner of the General Partner, has been paid an annual management fee of $500,000 and has been entitled to be reimbursed for certain expenses since the Partnership's inception. These arrangements and payments will end upon consummation of the Conversion.
In addition, if the General Partner is removed without cause, it can compel its successor to purchase its General Partner interest at "fair market value." For a definition of "fair market value," see "Comparative Rights of BAC Holders and Holders of Common Stock -- Removal of General Partner and Directors of the Corporation -- BACs."
Upon the formation of the Partnership and the Operating Partnership, the General Partner and the Operating General Partner each made $100 in capital contributions for their respective partnership interests. The General Partner and the Operating General Partner received their respective general partnership interests in exchange for structuring and completing the acquisition of Polaris by the Partnership and acting in the roles of general partners of the Partnership and the Operating Partnership, in which roles the general partners were responsible for the management of the respective partnerships and assumed unlimited liability for all partnership obligations (including, in the case of Mr. Atkins, the individual general partner of the general partners, unlimited personal liability).
BENEFIT PLANS AFTER THE CONVERSION
Except as required to accommodate the change to corporate form, all of the existing employee benefit plans of the Partnership and the Operating Partnership are expected to be adapted for use by the Corporation on substantially the same terms. The employee benefit plans of the Partnership and Operating Partnership in effect at the date that the Conversion is consummated will, to the extent practicable, remain in effect until otherwise determined by the Corporation. In the case of benefit plans which are continued and under which the employees' interests are based upon BACs, such interests shall be based on Common Stock in an equitable manner.
Without limiting the generality of the foregoing, upon the Conversion, each of the previously granted First Rights representing the right to receive BACs under an employee benefit plan, whether vested or unvested, will be deemed to constitute the right to receive on the same terms and conditions as were applicable under such First Rights, the same number of shares of Common Stock as the holder of such First Rights would have been entitled to receive pursuant to the Merger had such holder received BACs upon exercise of such First Rights immediately prior to the Merger.
ALTERNATIVES TO THE CONVERSION
As discussed above under "The Conversion -- Background of the Conversion," the Conversion was proposed to the General Partner by the Sponsors. The General Partner participated in determining the structure of the Conversion and recommends that BAC Holders vote to approve the Conversion Proposal. See "The Conversion -- Recommendation of the General Partner and the Sponsors" below.
The alternatives to the Conversion that were considered by the Sponsors were: (a) continuance of the Partnership with no cessation of trading, (b) continuance of the Partnership and cessation of trading before 1998, (c) conversion of the Partnership, with a single cash and stock distribution, (d) conversion by liquidation, (e) a management buyout or other strategic sale of the Partnership and (f) liquidation and winding up of the Partnership. The alternatives to the Conversion that were considered by the General Partner, in addition to (a), (b), (c) and (f) were: (g) continuance of the Partnership, with cessation of trading and an exchange offer of stock in a new corporate limited partner, (h) continuance of the Partnership, with cessation of trading and an exchange offer of debt securities and (i) a conversion pursuant to Section 17.5 of the Partnership Agreement
CONTINUANCE OF THE PARTNERSHIP; NO CESSATION OF TRADING. The Sponsors and the General Partner believe that the Conversion is a more beneficial alternative to BAC Holders than the continuance of the Partnership in its current form and that any benefit derived through the Partnership's current
form are outweighed by the potential long term benefits anticipated to be derived from the Conversion. Under current law, after December 31, 1997, absent a cessation of trading, the Partnership would be treated as a corporation for tax purposes. See "The Conversion -- Reasons for the Conversion" above.
CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING. The Sponsors and the General Partner considered continuing the Partnership and, before January 1998, delisting the BACs from the American Stock Exchange and Pacific Stock Exchange and prohibiting, except in very limited circumstances, transfers of BACs. Such a transaction would create a private security with virtually no liquidity or trading market value, but would preserve the current tax status of the Partnership after December 31, 1997. The Sponsors and the General Partner believed that the loss of liquidity resulting from such an alternative would be adverse to the interests of BAC Holders and the Partnership since BACs are publicly traded, listed securities, and therefore they did not pursue such a transaction.
CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING AND EXCHANGE OFFER OF STOCK IN NEW CORPORATE LIMITED PARTNER. The General Partner considered continuing the Partnership and, before January 1998, delisting the BACs and, except in very limited circumstances, prohibiting the transfer of BACs. At the same time, a new corporate limited partner would be admitted to the Partnership and BAC Holders would be given the opportunity to exchange their BACs for publicly traded shares of common stock in such corporation. However, exchanging BAC Holders would forego the potential future tax benefits associated with an investment in a partnership, and non-exchanging BAC Holders would be left with little, if any, liquidity. In addition, the General Partner believed that this alternative would further complicate rather than simplify the capital structure of the Partnership and would not provide the benefits of operating in corporate form described under "The Conversion -- Reasons for the Conversion."
CONTINUANCE OF THE PARTNERSHIP; CESSATION OF TRADING AND EXCHANGE OFFER OF DEBT SECURITIES. The General Partner considered continuing the Partnership and, before January 1998, delisting the BACs and, except in very limited circumstances, prohibiting the transfer of BACs. At the same time, BAC Holders would be given the opportunity to exchange their BACs for publicly traded debt securities of the Partnership. Although such a transaction would preserve the current tax status of the Partnership, the General Partner believed that it would not be optimal in that the Partnership could have burdensome leverage, the exchange might have adverse tax consequences to the electing BAC Holders, there could be no assurance of a liquid market in the debt securities, the non-exchanging BAC Holders would have little, if any, liquidity and such a transaction would generally not provide the benefits of operating in corporate form described under "The Conversion -- Reasons for the Conversion."
CONVERSION TO CORPORATION WITH CASH AND STOCK. The Sponsors proposed to the General Partner that the Partnership be converted to a corporation in a transaction in which BAC Holders and the affiliates of the General Partner, in exchange for their respective interests in the Partnership, would each receive a one-time cash distribution, as well as stock in the corporation surviving the transaction. The Sponsors proposed that the cash distribution be paid to BAC Holders, the General Partner and its affiliates in accordance with their respective economic interests and that the stock be distributed in accordance with the respective capital accounts of the partners. The General Partner felt that such a transaction would result in the successor corporation being burdened at the outset with significant indebtedness to pay such a one-time cash distribution and would reduce financial flexibility for the successor corporation going forward. In addition, the General Partner was concerned that the distribution would, in effect, be fully taxable to BAC Holders and the General Partner and its affiliates and did not believe that the proposed terms recognized the fair value of the General Partner's independent economic interest in the Partnership (on a going concern basis). The Sponsors did not pursue this transaction because of the General Partner's concerns.
CONVERSION BY LIQUIDATION. The Sponsors also considered a transaction whereby the Partnership could be converted to a corporation in a transaction in which BAC Holders, the General Partner and its affiliates, in exchange for their respective interests in the Partnership, would each receive a
one-time liquidating distribution consisting of cash and new common stock in the corporation surviving the transaction. Pursuant to the terms of the Partnership Agreement, liquidating distributions would be made in accordance with partners' capital accounts. Accordingly, the General Partner and its affiliates would receive approximately 2% of the cash and stock distributed. (For a more detailed description of the procedures required to effectuate a liquidation of the Partnership, see "The Conversion -- Liquidation and Winding Up of the Partnership"). The Sponsors did not propose this transaction to the General Partner because of uncertainties under the Partnership Agreement of the Sponsors' ability to consummate such a transaction in a timely and tax effective manner without the recommendation of the General Partner. The Sponsors believed that the General Partner's cooperation in such a transaction would be unlikely, since its terms did not recognize the fair value of the General Partner's independent economic interest in the Partnership (on a going concern basis) and because they understood that the General Partner believed that it had no duty to cooperate in a transaction which did not fairly value such economic interest and which the General Partner believed would constitute a termination without cause of the General Partner. See "The Conversion -- Existing Economic Interests of the Partners."
MANAGEMENT BUYOUT OR OTHER STRATEGIC SALE. The Sponsors also considered proposing a management buyout or other strategic sale of the Partnership. These alternatives would not provide BAC Holders with their continuing equity interest in the Partnership and might not be able to be accomplished on a tax-advantaged basis. The Sponsors did not propose such transactions to the General Partner because they believed that, in the long term, the value of the Common Stock would exceed the value of cash and securities that would be distributed to BAC Holders in a management buyout or other strategic sale.
CONVERSION PURSUANT TO SECTION 17.5 OF THE PARTNERSHIP AGREEMENT. Section 17.5 of the Partnership Agreement permits the General Partner, in response to the tax law amendment treating publicly traded partnerships as corporations, in its sole discretion and without any partner consent, to convert the Partnership into a corporation in whatever manner and by whatever method the General Partner determines. See "Summary of Certain Provisions of the Partnership Agreement -- Reorganization of the Partnership." Under such section of the Partnership Agreement, the General Partner is required to effectuate the conversion so that, to the extent possible, the respective interests of BAC Holders and the General Partner in the assets and income of the successor entity immediately following such conversion are substantially equivalent to such interests immediately prior thereto. The General Partner is required to appoint two independent appraisers to determine the value of such interests. The General Partner decided not to proceed with a conversion under Section 17.5 in light of the proposal by the Sponsors which it believed was fair to both BAC Holders and the General Partner and which involved the additional procedural step of being submitted to BAC Holders and Unaffiliated BAC Holders for approval.
LIQUIDATION AND WINDING UP OF THE PARTNERSHIP. Under the Partnership Agreement, two-thirds in interest of BAC Holders may vote to dissolve the Partnership. Upon dissolution of the Partnership, the General Partner is required to liquidate the assets of the Partnership as promptly as is consistent with obtaining the fair value thereof and apply and distribute the proceeds thereof. In the event the General Partner determines that an immediate sale of part or all of the Partnership's assets would cause undue loss to the General Partner and BAC Holders, the General Partner, in order to avoid such loss, may defer liquidation of and withhold from distribution for a reasonable time any assets of the Partnership except those necessary to satisfy the Partnership's debts and obligations. No BAC Holder has the right to demand or receive proceeds other than cash upon dissolution and termination of the Partnership. In the event of a dissolution and sale of the Partnership's assets, the General Partner and Operating General Partner would receive approximately 2% of distributions and BAC Holders would receive approximately 98%, after BAC Holders had received a return of their capital.
The General Partner and the Sponsors rejected this alternative because a liquidation would not provide BAC Holders and the General Partner with any continuing equity interest in the Partnership and would be unlikely to be accomplished on a tax-advantaged basis. The General Partner would not
be able to determine with any certainty prior to dissolution whether and at what price there would be any buyers for the Partnership's assets. The General Partner believes that in the long term the value of the Partnership as a going concern, whether or not the Conversion is effected, to the General Partner and BAC Holders would exceed the value of the proceeds of a liquidation.
FUTURE ALTERNATIVES AVAILABLE TO POLARIS. The General Partner and the Sponsors believe that other long-term strategies available to Polaris, such as diversification and acquisition of assets, or a management buyout or other strategic sale, are not adversely affected (and, in some cases, should be enhanced) by the decision to convert from partnership to corporate form and can be considered by the Corporation in the future if the Conversion is consummated. No other transaction currently is being considered by the Partnership as an alternative to the Conversion, although the Partnership may from time to time explore other alternatives if the Conversion is not consummated, including a conversion pursuant to Section 17.5 of the Partnership Agreement.
FAIRNESS OPINIONS
OPINION OF SMITH BARNEY
The Partnership has retained Smith Barney to act as its financial advisor in connection with the Conversion. In connection with its engagement, Smith Barney has delivered to the Partnership its written opinions, dated September 29, 1994 and the date hereof, each to the effect that, as of the date of each such opinion and based upon and subject to certain matters as stated therein, each of the consideration to be received by the holders of BACs and the Exchange Ratio in the Conversion is fair, from a financial point of view, to such holders.
In rendering its opinion dated the date hereof, Smith Barney, among other things, reviewed the Merger Agreement and certain other related agreements, this Proxy Statement and the partnership agreements of the Partnership and the Operating Partnership and held discussions with certain of the senior operating management of the Operating Partnership ("Management") and representatives and advisors of the Partnership to discuss the business, operations and prospects of the Partnership. Smith Barney also examined certain publicly available business and financial information relating to the Partnership as well as internal financial statements, forecasts and other financial and operating data concerning the Partnership prepared by Management. Smith Barney reviewed the financial terms of the Conversion as set forth in the Merger Agreement in relation to, among other things, current and historical market prices and trading volumes of the BACs, historical and projected earnings and operating data of the Partnership, and the capitalization and financial condition of the Partnership. Smith Barney considered, to the extent publicly available, the financial terms of certain other similar transactions which Smith Barney considered comparable to the Conversion and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations Smith Barney considered comparable to those of the Partnership. In addition to the foregoing, Smith Barney conducted such other analyses and examinations and considered such other financial, economic and market criteria as it deemed necessary to arrive at its opinion.
In rendering its opinion dated the date hereof, Smith Barney assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to or otherwise reviewed by or discussed with Smith Barney. With respect to financial forecasts and other information furnished to or otherwise reviewed by or discussed with Smith Barney, Smith Barney assumed that such forecasts and other information were reasonably prepared on bases reflecting the best currently available estimates and judgments of Management as to the expected future financial performance of the Partnership. Smith Barney assumed, with the Partnership's consent, that no material change has occurred in the business, operations, financial condition or prospects of Polaris as set forth in this Proxy Statement. Smith Barney did not express any opinion as to what the value of the Common Stock actually will be when issued to holders of BACs pursuant to the Conversion or the prices at which the Common Stock will trade subsequent to the Conversion. In addition, Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Partnership. Smith Barney was not asked to and did not express an opinion as to the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any other transaction in which the Partnership might engage. Smith Barney was not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership. Smith Barney's opinion is necessarily based upon financial, stock market and other conditions and circumstances existing and disclosed to Smith Barney as of the date of its opinion. No limitation was imposed by the Partnership on the scope of the investigation by Smith Barney in connection with its fairness opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED THE DATE HEREOF, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. BAC HOLDERS ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY BAC HOLDERS AND THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO BAC HOLDERS AND HAS BEEN PROVIDED SOLELY FOR THE USE OF THE GENERAL PARTNER IN ITS EVALUATION OF THE CONVERSION, DOES NOT ADDRESS ANY OTHER ASPECT OF THE CONVERSION OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY BAC HOLDER AS TO HOW SUCH HOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the Partnership dated the date hereof, Smith Barney performed a variety of financial and comparative analyses, including those described below. The summary of such analyses does not purport to be a complete description of the analyses underlying Smith Barney's opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to summary description. In arriving at its opinion, Smith Barney did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of such analysis and factor. Accordingly, Smith Barney believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and its opinion. In its analyses, Smith Barney made numerous assumptions with respect to the Partnership, the Operating Partnership, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Partnership. The estimates contained in such analyses are not necessarily indicative of actual values or predictive of actual future results or values, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of the businesses or securities do not purport to be appraisals or to reflect the prices at which the businesses or securities may actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
a group of eight selected comparable outdoor product corporations comprised of:
Anthony Industries, Arctco Inc., Brunswick Corp., Coleman Co. Inc., Harley
Davidson Inc., Huffy Corporation, Outboard Marine Corporation and Winnebago
Industries (collectively the "Comparable Companies").
Smith Barney compared market values as multiples of, among other things, historical net income and projected 1994 and 1995 net income. The multiples of latest twelve months ("LTM") net income and projected 1994 and 1995 net income of the Comparable Companies were between the following ranges: (i) LTM net income: 9.6x to 26.0x (with a mean of 16.5x and a median of 15.9x); (ii) projected 1994 income: 9.2x to 20.7x (with a mean of 15.5x and a median of 15.4x); and (iii) projected 1995 net income: 10.4x to 17.8x (with a mean of 14.1x and a median of 14.3x). Smith Barney also compared adjusted market value (equity market value, plus the book value of debt and preferred stock, less cash
and cash equivalents) to, among other things, historical earnings before interest, taxes, depreciation and amortization ("EBITDA"). The multiples of LTM EBITDA of the Comparable Companies were 4.7x to 11.8x (with a mean of 8.4x and a median of 9.0x).
Smith Barney also compared the profit margins, debt to capitalization ratios, historical revenue and net income growth, returns on average assets and equity, and projected earnings per share ("EPS") growth of the Comparable Companies. All projected EPS figures for the Comparable Companies were based on the consensus net income estimates of selected investment banking firms and all estimates for the Corporation were based on internal estimates prepared by management. All multiples were based on closing stock prices as of November 15, 1994.
Smith Barney applied a range of trading multiples representative of the Comparable Companies to pro forma historical and projected operating data of the Corporation (derived by adjusting such operating data of the Partnership to reflect consummation of the Conversion, but not for payment of the Special Distributions or for any borrowings to finance the same, and application of a 36% corporate tax rate) to arrive at a range of implied equity values for the shares of Common Stock to be exchanged for the BACs pursuant to the Conversion. Smith Barney applied multiples of 9.0x to 10.0x to LTM EBITDA, multiples of 16.0x to 19.0x to LTM net income, multiples of 15.0x to 17.0x to projected 1994 net income, and multiples of 14.0x to 16.0x to projected 1995 net income. Based on the average of such valuation methodologies Smith Barney arrived at an implied equity valuation range of $39.63 to $45.22 per share of Common Stock.
Smith Barney also applied the trading multiples of Arctco Inc., based on an Arctco closing stock price as of November 15, 1994 of $20.25, to arrive at an implied equity value for the shares of Common Stock to be issued in exchange for the BACs pursuant to the Conversion. Smith Barney believes Arctco is the most appropriate of the Comparable Companies for valuation purposes, given the similarity of Arctco's products, markets and general business conditions to those of the Partnership. Smith Barney applied Arctco's multiple of 21.1x to LTM net income, Arctco's multiple of 19.0x to projected 1994 net income, Arctco's multiple of 16.3x to projected 1995 net income, Arctco's multiple of 18.2x to LTM cash flow, Arctco's multiple of 1.9x to LTM sales, Arctco's multiple of 11.8x to LTM EBITDA and Arctco's multiple of 13.2x to LTM earnings before interest and taxes. Based on the average of such valuation methodologies Smith Barney arrived at an implied equity valuation of $54.32 per share of Common Stock.
No company used in the Comparable Company analyses as a comparison is identical to the Partnership. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading value of the Comparable Companies or the company to which they are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Smith Barney performed a discounted cash flow analysis of the projected free cash flows of the Corporation for the four fiscal years ended December 31, 1998, assuming the Conversion occurs December 31, 1994 and a 36% corporate tax rate. Smith Barney also assumed among other things, discount rates of 12%, 14% and 16% and terminal multiples of EBITDA of 7.5x to 8.5x. Smith Barney performed these analyses on the operating projections prepared by Management. These analyses resulted in an implied equity valuation range per share of Common Stock of $43.76 to $55.83 and a composite implied equity valuation range of $47.30 to $51.77.
Smith Barney then derived an implied equity valuation range of $43.47 to $48.49 for the shares of Common Stock to be exchanged for BACs in the Conversion by averaging the composite values derived through the Comparable Company analyses and the Discounted Cash Flow analyses described above. This range was compared to $36.50, the average of the closing market price of a BAC on the five trading days preceding August 25, 1994, the day the Partnership announced its intent to convert to a corporation (the "Announcement Date"). The range of premiums of such implied Common Stock price over such average market price for a BAC was 19.1% to 32.9%.
VALUATION OF GENERAL PARTNER INTERESTS. Smith Barney also analyzed the value of the Common Stock to be exchanged for the interests of the General Partner in the Partnership and the Operating Partnership pursuant to the Merger Agreement (the "General Partner Consideration") using the equity values implied by the Comparable Company, Arctco trading multiples, and Discounted Cash Flow analyses described above. Based on the Comparable Company analysis, Smith Barney estimated the range of the implied value of the General Partner Consideration to be $71.3 million to $88.4 million, with a composite valuation of $82.7 million. Based on the Arctco trading multiples, Smith Barney estimated the range of the implied value of the General Partner Consideration to be $94.1 million to $114 million with a composite value of $105.5 million. Based on the Discounted Cash Flow analysis, Smith Barney estimated the range of the value of the General Partner Consideration to be $99.7 million to $108.3 million with a composite valuation of $104.5 million. Smith Barney then averaged the composite values derived from the three valuation methodologies and derived an average implied equity value of the General Partner Consideration of $97.5 million.
Smith Barney then analyzed the value of the General Partner's current interests in the Partnership. Smith Barney performed a discounted cash flow analysis of the projected distributions made by the partnership to the General Partner through 2037, assuming (i) that the Partnership remains in limited partnership form through 2037, but pays corporate taxes at 36% beginning in 1998 ("Scenario One"), and (ii) that the Partnership remains in limited partnership form through 2037, but delists the BACs in 1997 ("Scenario Two"). Smith Barney also assumed discount rates of 12%, 14% and 16% for the purposes of its analysis. Smith Barney calculated the present value of the General Partner's interest assuming normal distributions of $2.52 per BAC plus the General Partner's interests, a 5% annual growth rate in distributions after 1998 and a 14.0% discount rate, which resulted in an implied present value of $112.5 million. Smith Barney calculated the present value of the maximum future distributions to the General Partner (I.E., the Partnership distributes 100% of distributable cash flow) assuming Scenario One, which resulted in an implied present value of $169.6 million. Smith Barney calculated the net present value of the maximum future distributions to the General Partner (I.E., the Partnership distributes 100% of distributable cash flow) assuming Scenario Two, which resulted in an implied present value of $232.6 million.
Smith Barney also analyzed the implied current equity value of the General Partner's interest in the Partnership by multiplying the number of BACs outstanding by the average market price on the five trading days preceding the Announcement Date, adjusting that value to reflect a 100% interest in the Partnership rather than the 79.2% interest in the Partnership's net cash from operations attributable to the BACs and assigning 20.8% of such value for the General Partner's interests. This resulted in an implied current equity value of $156.5 million. Smith Barney then compared the results of the discounted cash flow and implied current equity value analysis to $99.2 million, which represented the average of the composite values of the General Partner Consideration described above.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, Smith Barney considered certain other factors and conducted certain other comparative analyses, including among other things, a review of (i) the projected financial results of the Partnership, the Operating Partnership and the Corporation, (ii) the history of trading prices for the BACs and the relationship between movements of the BACs and movements of the common stock of the Comparable Companies, (iii) the treatment of general partner interests in selected partnership conversions, (iv) certain pro forma effects on the Corporation resulting from the Conversion and (v) the pro forma ownership of the Corporation.
The Partnership entered into an engagement letter with Smith Barney on August 25, 1994 pursuant to which the Partnership has agreed to pay Smith Barney a transaction fee of $5 million, comprised of a retainer fee of $1.5 million, which was payable upon execution of the engagement letter, an opinion fee of $1.5 million, payable upon delivery of Smith Barney's opinion, and the remainder of which is payable upon consummation of the Conversion. The Partnership has agreed to reimburse Smith Barney for its out-of-pocket expenses, including reasonable fees and disbursements of counsel.
The Partnership has also agreed, in a separate letter agreement, to indemnify Smith Barney and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Smith Barney or any of its affiliates against certain liabilities, including liabilities under the federal securities laws and expenses related to Smith Barney's engagement. In light of Smith Barney's familiarity with, and understanding of, the operations of the Partnership, the Sponsors believed that it was in the Partnership's best interest to engage Smith Barney in connection with the proposed Conversion and, in the event the proposed Conversion did not occur, any other extraordinary corporate transaction involving the Partnership. The terms of the engagement letter were designed to ensure the retention of Smith Barney's services through consummation of the Conversion or, if the Conversion was not consummated for any reason, through the consummation of any other transaction.
Smith Barney is a nationally recognized investment banking firm and is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Other than acting as financial advisor in connection with the Conversion (and delivery of its fairness opinion), Smith Barney has not previously rendered investment banking services to the Partnership in the past two years. In the ordinary course of its business, Smith Barney may, from time to time, buy and sell securities of the Partnership.
OPINION OF DILLON READ
Dillon Read has rendered its opinions to the Partnership dated September 29, 1994 and the date hereof, each to the effect that each of the Exchange Ratio and the consideration to be received by the BAC Holders in the conversion is fair, from a financial point of view, to the BAC Holders. DILLON READ'S OPINION, DATED THE DATE HEREOF, IS SET FORTH IN FULL AS ANNEX C TO THIS PROXY STATEMENT, AND SHOULD BE READ IN ITS ENTIRETY. Dillon Read's opinion does not constitute a recommendation to any BAC Holder as to how such holder should vote at the Special Meeting. The summary of the opinion of Dillon Read set forth in this Proxy Statement is qualified in its entirety by reference to the full text of such opinion.
In connection with rendering its opinion dated the date hereof and as more fully set forth therein, Dillon Read relied upon, without independent verification, the accuracy and completeness of this Proxy Statement, including the description under "Certain Federal Income Tax Considerations" of the tax consequences to the Partnership and the BAC Holders of the Conversion, as well as other information that was publicly available or furnished to Dillon Read by the Partnership, including the Merger Agreement and information provided during discussions with management. In addition, Dillon Read compared certain financial and operating data of the Partnership with that of certain other publicly traded corporations whose operations Dillon Read believed to be comparable to those of the Partnership, reviewed market prices and trading volumes of the BACs, reviewed the cash distributions that were made to the BAC Holders and the General Partner and the prospects for future cash distributions to the BAC Holders and the General Partner, compared the financial terms of the conversion as set forth in the Merger Agreement with the financial terms of selected partnership conversions which Dillon Read believed to be comparable to those of the Conversion and conducted such additional analyses as Dillon Read deemed appropriate. Dillon Read did not make or obtain any independent appraisal or valuation of the assets or liabilities of the Partnership. No limitation was imposed by the Partnership on the scope of the investigation by Dillon Read in connection with its fairness opinion.
In rendering its opinion dated the date hereof, Dillon Read assumed that financial forecasts and other information furnished to or otherwise reviewed by Dillon Read, were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of the Partnership as to the expected future financial performance of the Partnership. Dillon Read also assumed that no material change has occurred in the business, operations, financial condition or prospects of the Partnership as set forth in this Proxy Statement. Dillon Read did not express any opinion as to what the value of the Common Stock actually will be when issued to BAC Holders or the prices at which the
Common Stock will trade subsequent to the Conversion. Dillon Read's opinion is based upon economic, monetary and market conditions existing on the date of its opinion. Dillon Read was not requested to, and did not, recommend the decision to effect the Conversion or determine the Exchange Ratio or express any opinion as to whether any alternative transactions to the Conversion may be more or less favorable to the BAC Holders. Dillon Read was not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership.
In preparing its opinion dated the date hereof, Dillon Read performed a variety of financial and comparative analyses, including those described below. The summary of such analyses does not purport to be a complete description of the analyses underlying Dillon Read's opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to summary description. In arriving at its opinion, Dillon Read did not attribute any particular weight to each analysis or factor considered by it, but rather made qualitative judgements as to the significance and relevance of such analysis and factor. Accordingly, Dillon Read believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and its opinion. In its analyses, Dillon Read made numerous assumptions with respect to the Partnership, industry performance, general business, economic market and financial conditions and other matters, many of which are beyond the control of the Partnership. The estimates contained in such analyses are not necessarily indicative of actual values or of actual future results or values, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of the businesses or securities do not purport to be appraisals or to reflect the prices at which the businesses or securities may actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Dillon Read analyzed among other things, the financial performance, market values and trading multiples of a group of eight selected comparable corporations engaged in the sporting goods industry: Anthony Industries, Arctco Inc., Brunswick Corp., Coleman Co. Inc., Harley Davidson Inc., Huffy Corporation, Johnson Worldwide Associates, Inc., and Outboard Marine Corporation (collectively, the "Sporting Goods Comparable Companies").
Financial information analyzed included (i) market valuations and multiples
thereof, including LTM net income and projected 1994 and 1995 net income and
(ii) market valuation adjusted for net debt and book value of preferred stock
and multiples thereof, including (x) LTM sales, (y) LTM EBITDA, and (z) LTM
operating income. Dillon Read applied a range of trading multiples
representative of the Sporting Goods Comparable Companies to pro forma
historical and projected operating data of the Corporation (derived by applying
a 36% tax rate to Partnership net income) to arrive at an implied equity value
for the shares of Common Stock to be exchanged for the BACs pursuant to the
Conversion. Dillon Read's analysis consisted of applying trading multiples of
the Sporting Goods Comparable Companies: (a) a multiple of 7.7x the
Corporation's LTM EBITDA, (b) a multiple of 10.8x the Corporation's LTM
Operating Income, (c) a multiple of 16.4x the Corporation's LTM net income, (d)
a multiple of 16.3x the Corporation's projected 1994 net income and (e) a
multiple of 12.8x the Corporation's projected 1995 net income. The above
analysis yielded implied equity values per share of Common Stock ranging from
$39.28 to $45.57. Dillon Read also compared the profit margins, debt to
capitalization ratios, historical revenue and net income growth, returns on
average assets and equity, and projected earnings per share ("EPS") growth of
the Sporting Goods Comparable Companies. All projected EPS figures for the
Sporting Goods Comparable Companies were based on the consensus net income
estimates of selected investment banking firms and all estimates for the
Corporation were based on internal estimates prepared by management of the
Partnership. All multiples were based on closing stock prices as of November 16,
1994.
Dillon Read also applied the average trading multiples of Arctco Inc. and Harley Davidson Inc. to arrive at an implied equity value for the shares of Common Stock to be issued in exchange for the BACs pursuant to the Conversion. Dillon Read believes Arctco and Harley Davidson are more closely comparable to the Partnership than certain of the other Sporting Goods Comparable Companies. Dillon Read's analysis is based upon (a) Arctco's and Harley Davidson's average multiple of 19.3x the Corporation's LTM net income, (b) an average multiple of 21.2x the Corporation's projected 1994 net income, (c) an average multiple of 16.9x the corporation's projected 1995 net income, (d) an average multiple of 10.4x the Corporation's LTM EBITDA, and (e) an average multiple of 12.2x the Corporation's LTM EBIT. The above analysis yielded implied equity values per share of Common Stock ranging from $46.65 to $57.88. No company used in the Sporting Goods Comparable Company analyses as a comparison is identical to the Partnership. Accordingly, an analysis of the results of the foregoing is not entirely mathematical, rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading value of the Sporting Goods Comparable Companies or the company to which they are being compared.
ANALYSIS OF RELATIVE ALLOCATION OF EQUITY INTEREST TO THE LIMITED PARTNERS. Dillon Read performed discounted cash flow valuations of the Partnership assuming that the Partnership remains in limited partnership form through 2037 but begins paying taxes at 36% in 1998, while maintaining cash distributions as a percentage of cash available for distribution at levels similar to or higher than those currently paid. These projections were prepared by Dillon Read in consultation with Partnership management. For the period 2005 to 2037 Dillon Read varied the annual percentage growth of the Partnership's cash distributions from 2.5% to 7.5% in order to assess the relative value of the General Partner's interests compared to the BAC Holders' interests under these various growth scenarios. Assuming dissolution of the Partnership in the year 2037 pursuant to the terms of the Partnership Agreement, discount rates of 9.0%, 9.5% and 10% and terminal multiples of 10.0, 10.5 and 11.0x 2037 projected net income, the relative interest of the BAC Holders ranges from 79.6% to 82.4%.
ANALYSIS OF COMPARABLE CONVERSION TRANSACTIONS. Dillon Read analyzed the terms and allocations of economic interest between general and limited partners of selected conversions of publicly traded limited partnerships to corporate form. The limited partners' interest in these partnerships ranged from 75% to 99% of distributable cash from operations and 80% to 100% of the proceeds from sales of partnership assets, while the limited partners' interest in the common stock of the newly formed corporate entities in these conversions ranged from 85% to 100% of the total common stock outstanding. Each of these partnership structures has its own unique characteristics, and each of these conversions was undertaken considering its own unique circumstances; therefore none of the partnerships or conversion transactions utilized for comparison is identical to the Partnership or to the Conversion. An analysis of the results of such comparison is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable partnerships and conversion transactions and other factors that could affect the allocation of common stock between the general and limited partners in the comparable conversions.
For its services rendered in connection with its opinion, Dillon Read has received a fee of $1.5 million, of which one-half was payable upon execution of the engagement letter between Dillon Read and the Partnership. The remaining one-half was payable upon delivery of the opinion dated September 29, 1994 (whether or not favorable). In addition, the Partnership has agreed to reimburse Dillon Read for certain out-of-pocket expenses and has agreed to indemnify Dillon Read against certain liabilities, including certain liabilities under the federal securities laws. The fee was negotiated between the Partnership and Dillon Read.
Dillon Read is an internationally recognized investment banking firm engaged, among other things, in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities and private placements. In 1989 and 1990 Dillon Read performed general financial advisory services for the Partnership and received customary compensation for such services. In addition, in
the ordinary course of its business, Dillon Read may trade the BACs for its own account and for the account of customers and it may at any time hold a long or short position in such securities. The Partnership selected Dillon Read to render the opinion because of its expertise and its familiarity with the operations of the Partnership.
OTHER
Representatives of the General Partner discussed with representatives of Lazard the possibility of engaging Lazard, but Lazard decided not to accept the possible engagement. Lazard was not requested to, and did not, render any opinion in connection with the Conversion or otherwise. See "The Conversion -- Background of the Conversion."
RECOMMENDATION OF THE GENERAL PARTNER AND THE SPONSORS
As a result of their review of the business, properties and financial condition of the Partnership, their review of the terms of the Conversion, their analysis of the benefits and disadvantages of, and alternatives to, the Conversion, and their review of the fairness opinions from Smith Barney and Dillon Read, each to the effect that each of the Exchange Ratio and the consideration to be received in the Conversion is fair, from a financial point of view, to BAC Holders, the General Partner and the Sponsors believe that the Conversion is fair to BAC Holders and recommend that BAC Holders approve the Conversion Proposal. No particular weight was assigned to any one factor in arriving at their recommendation.
The General Partner's and the Sponsors' determination to recommend that the Partnership convert to corporate form is based on their belief that the Conversion will result in the benefits to BAC Holders described above under "-- Reasons for the Conversion." The General Partner and the Sponsors also considered the potential disadvantages of the Conversion, as described under "Risk Factors, Conflicts of Interest and Other Considerations," but believe that the advantages of the Conversion outweigh the potential disadvantages.
In making their recommendation, the General Partner and the Sponsors also gave significant weight to the analysis of the Conversion and the alternatives to the Conversion described above under "-- Alternatives to the Conversion." For the reasons described thereunder, the General Partner and the Sponsors believe that the Conversion is attractive and fair when compared to the viable alternatives they considered and that it is in the best interests of BAC Holders to consummate the Conversion at this time.
The General Partner and the Sponsors believe that the allocation of Common Stock between BAC Holders and the General Partner in the Partnership is fair to BAC Holders. This belief is principally based on the fairness opinions of Smith Barney and Dillon Read and the other considerations described under "The Conversion -- Background of the Conversion" and "-- Existing Economic Interests of the Partners." The General Partner also took into account the requirement that the Conversion would be subject to approval by BAC Holders holding a majority of the outstanding BACs and Unaffiliated BAC Holders holding a majority of BACs held by such persons.
The General Partner and the Sponsors sought to provide procedural fairness to the BAC Holders in connection with the consideration of the Conversion by (i) obtaining the fairness opinions from Smith Barney and Dillon Read that each of the Exchange Ratio and the consideration to be received in the Conversion is fair, from a financial point of view, to BAC Holders, (ii) giving BAC Holders who do not vote for the Conversion Proposal the right to exercise Appraisal Rights, and (iii) implementing the Conversion only if approved by the affirmative vote of BAC Holders holding a majority of BACs outstanding and Unaffiliated BAC Holders holding a majority of BACs held by such persons. Through these arrangements, the General Partner and the Sponsors sought to minimize the extent to which the determination of the terms of the Conversion was subject to conflicts of interest among the General Partner, the Sponsors and BAC Holders.
In reaching a recommendation with respect to the Conversion, the General Partner and the Sponsors also considered the consequences to the Partnership, the General Partner and BAC Holders
if the Conversion is not consummated, as discussed under "The Conversion -- Consequences if Conversion Proposal is Not Approved or the Conversion is Not Consummated" below and other information about the Conversion and the Corporation included in this Proxy Statement.
POTENTIAL CONFLICTS OF INTEREST
DETERMINATION OF EXCHANGE RATIO.__There is a potential conflict of interest between the General Partner and BAC Holders with respect to the determination of the Exchange Ratio in the Conversion. The Exchange Ratio was determined after extended discussions and negotiations between affiliates of the General Partner and W. Hall Wendel, Jr. and other members of the Sponsors with reference to the existing economic interests of the General Partner and BAC Holders and the rights of the General Partner under various provisions of the Partnership Agreement. BAC Holders were not separately represented in such discussions, and the interests of BAC Holders may differ from those of the representatives of the Sponsors who negotiated the Exchange Ratio with the General Partner.
Since the Sponsors have no economic interest in the General Partner and collectively own approximately 9.1% of the outstanding BACs, their interests in the determination of the Exchange Ratio should be closely aligned with those of BAC Holders generally. However, Victor K. Atkins, Jr. and W. Hall Wendel, Jr. have also entered into an agreement which provides, among other matters, that as long as he owns 3% of the outstanding Common Stock, Mr. Atkins will vote his shares of Common Stock in favor of the Corporation's nominees for election to its Board of Directors. Mr. Wendel is expected to be nominated to serve as Chairman of the Board of Directors of the Corporation. Accordingly, such agreement provides a benefit to the Sponsors that is not available to BAC Holders generally. This may present a conflict of interest to the Sponsors in recommending the Conversion to BAC Holders.
REDUCTION IN LIABILITY. As a result of the Conversion, affiliates of the General Partner will benefit from the elimination of their potential liability for obligations and liabilities of Polaris after the Conversion. Because BAC Holders are not liable for obligations and liabilities of the Partnership, BAC Holders will not realize this benefit from the Conversion. This may present a conflict of interest to the General Partner in recommending the Conversion to BAC Holders.
EFFECTIVE TIME
If the Conversion Proposal is approved at the Special Meeting, the Conversion is expected to be effected in accordance with the Merger Agreement, presently anticipated to be on or before December 30, 1994 (the "Effective Time").
DESCRIPTION OF THE MERGER AGREEMENT
The following summary of certain provisions of the Merger Agreement is
incomplete and is qualified by reference to the full text of the Merger
Agreement, a copy of which is attached to this Proxy Statement as Annex D.
CLOSING. The Merger Agreement provides that the Merger and other transactions outlined under "The Conversion -- Structure of the Conversion" (the "Transactions") shall be consummated at closings to be held on the date of the Special Meeting of BAC Holders or on such other date as the Corporation and the Partnership may agree (the "Closing"). If the Conversion Proposal is approved by BAC Holders at the Special Meeting, it is currently anticipated that the Closing will occur not later than December 30, 1994.
PARTNERSHIP DISTRIBUTIONS PENDING CLOSING. Pending the Closing, the Partnership expects to continue to make quarterly cash distributions to BAC Holders, the General Partner and the Operating General Partner in the same amounts as prior distributions in 1994 ($.63 per BAC per quarter). If the Effective Time occurs in a calendar quarter before declaration of the regular quarterly distribution, the final Partnership cash distribution for the quarter in which the Closing takes place will be prorated based on the number of days in such quarter prior to the Closing and be paid within 60 days after the Closing. However, if the Conversion Proposal is approved by BAC Holders at the Special Meeting and if the Partnership declares the regular distribution for the fourth quarter of 1994 in
accordance with prior practice, as is expected, the Effective Time is expected to occur prior to December 31, 1994, and BAC Holders of record on or about December 15, 1994 would receive on or about February 15, 1995 a regular distribution of $0.63 per BAC for the fourth quarter of 1994 and there will be no further distributions made by the Partnership to BAC Holders. Affiliates of the General Partner will be entitled to receive the cash distributions otherwise payable to the General Partner and the Operating General Partner which are not paid until after the Closing.
CONDITIONS. Consummation of the Conversion is subject to certain conditions, including (i) approval of the Conversion Proposal by the affirmative vote of the holders of more than 50% of the outstanding BACs, and by the affirmative vote of the holders of more than 50% of the outstanding BACs held by Unaffiliated BAC Holders, (ii) listing of the Common Stock on the American and Pacific Stock Exchanges subject to official notice of issuance, (iii) the receipt of certain necessary governmental approvals, the expiration of certain government imposed waiting periods (including under the HSR Act, if applicable) and the making of certain necessary governmental filings, (iv) effectiveness of a Registration Statement under the Securities Act of 1933, as amended, relating to the Common Stock to be issued in the Conversion and the absence of any stop order or proceeding seeking a stop order with respect to such Registration Statement, (v) the absence of any court order or legal restraint preventing consummation of the Merger, (vi) Appraisal Rights not being sought with respect to more than 5% of the outstanding BACs (which condition may be waived by the Corporation), (vii) no withdrawal of the Smith Barney or Dillon Read fairness opinions, (viii) the Corporation's receipt of a favorable opinion of its special tax counsel, Skadden, Arps, Slate, Meagher & Flom, as to certain matters related to the tax-free nature of the Conversion to BAC Holders and (ix) the Partnership's receipt of a favorable opinion of its special counsel, Stroock & Stroock & Lavan, as to certain matters related to the tax-free nature of the Conversion to BAC Holders and the Transferors who are transferring their partnership interest in the General Partner and the Operating Partnership and their stock of EIPCC to the Corporation.
TERMINATION. The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Conversion Proposal by BAC Holders, (a) by mutual consent of the Corporation and the General Partner, (b) by either the Corporation or the General Partner if the Transactions shall not have been consummated before April 15, 1995 (unless such failure is due to the willful action or failure to act in breach of the Merger Agreement by the party seeking termination) and (c) by the General Partner as described in the following sentence. The Merger Agreement provides that nothing contained therein shall alter the General Partner's fiduciary duties to BAC Holders, including the right to terminate the Merger Agreement if the General Partner, as advised by counsel, determines that, as a result of developments occurring after the date of the Merger Agreement, such termination is necessary to discharge its fiduciary duties.
REPRESENTATIONS, INDEMNITIES AND COVENANTS. The Merger Agreement contains representations and indemnities by the Transferors to the Corporation, which survive the consummation of the Transactions, with respect to such matters as their ability to comply with their obligations under the Merger Agreement; that such compliance will not result in liabilities to the Partnership or the Corporation; and that the General Partner, the Operating General Partner, EIPCC and PICC do not have certain tax or other liabilities. It also contains covenants by the Partnership and the Operating Partnership to conduct their businesses in the ordinary course and consistent with past practices pending consummation of the Transaction, and covenants by PICC, EIPCC, the General Partner and the Operating General Partner not to take certain actions with respect to their organization and capitalization, and covenants by the parties thereto to use reasonable best efforts to satisfy conditions and consummate the Transactions as soon as practicable.
INDEMNIFICATION. The Merger Agreement requires the Partnership, prior to the Conversion, and the Corporation, after the Conversion, to indemnify each person who is, or becomes prior to the Conversion, a director, officer, employee, shareholder or partner of the Partnership, the Operating Partnership, EIPCC, PICC, the Operating General Partner, the General Partner or the Corporation, or an employee, agent or affiliate of such person, in each case to the full extent a partnership is permitted under Delaware law to indemnify such persons or entities and a corporation is permitted
under Minnesota Law to indemnify its own directors, officers, employees, agents and affiliates; and that such persons will be indemnified by the Corporation for any expenses and liabilities incurred by them which is based on or arises out of the fact that such person served in one of the capacities described above. The Merger Agreement requires the Partnership and Corporation to indemnify the General Partner and its affiliates and their partners, officers, directors, employees and agents for any expenses and liabilities incurred by them based on, arising out of or pertaining to the Merger Agreement and the Transactions to the maximum extent permitted by law.
COSTS AND EXPENSES. The Merger Agreement provides that all costs and expenses incurred by the parties in connection with the Merger Agreement and the Transactions shall be paid by the Partnership whether or not the Transactions are consummated.
EMPLOYEE BENEFIT PLANS; FIRST RIGHTS. The Merger Agreement provides that the employee benefit plans of the Operating Partnership in effect at the date of the Merger Agreement shall, to the extent practicable, remain in effect and be adapted to the Corporation's corporate form, and that plans under which the employees' interests are based on BACs will be based on Common Stock in an equitable manner. Following consummation of the Transactions, First Rights, whether vested or unvested, shall be deemed to constitute the right to receive, on the same terms and conditions presently applicable, the same number of shares of Common Stock as the holders thereof would have received in the Merger had BACs been issued in respect thereof immediately prior to the Merger (one share for each BAC).
APPRAISAL RIGHTS. The Merger Agreement provides that BAC Holders who have not voted for the Merger and who have demanded appraisal rights in the manner provided in the Merger Agreement will be entitled to exercise the rights of appraisal that are provided therein. See "Appraisal Rights."
REGISTRATION RIGHTS. The Merger Agreement provides that, at or prior to the Closing, the Corporation and the two Transferors receiving the most Common Stock in the Transactions shall enter into a registration rights agreement providing such Transferors with demand and piggyback registration rights with respect to such Common Stock. The number of demand registrations will be limited to four (two for each such Transferor), each demand for registration must cover at least 300,000 shares and no demand for registration may be made within six months after the effective date of a prior demand registration statement. Generally, such Transferors will pay the expenses of demand registrations and the Corporation will pay the expenses of piggyback registrations.
CONSEQUENCES IF CONVERSION PROPOSAL IS NOT APPROVED OR THE CONVERSION IS NOT
CONSUMMATED
If the Conversion Proposal is not approved by BAC Holders and Unaffiliated
BAC Holders, or if the Conversion is not consummated for any other reason, the
Partnership currently expects to continue to operate as an ongoing business in
its current form and to continue making cash distributions at recent historical
levels. As discussed above under "-- Reasons for the Conversion," if Polaris
continues to operate in partnership form, BAC Holders may be required to report
and pay tax on taxable income from the Partnership that exceeds the amount of
its cash distributions, and it is likely that BAC Holders will experience, on a
per BAC basis, increasing taxable income relative to cash actually received. If
current tax laws remain unchanged, and if before 1998 the Partnership fails to
take action to cease trading BACs, the Partnership will be treated as a
corporation for federal income tax purposes. No other transaction currently is
being considered by the Partnership as an alternative to the Conversion,
although the Partnership may from time to time explore other alternatives,
including conversion pursuant to Section 17.5 of the Partnership Agreement. See
"The Conversion -- Alternatives to the Conversion."
COSTS OF THE CONVERSION
All costs and expenses incurred by the Partnership in connection with the Conversion will be paid by the Partnership out of available cash, whether or not the Conversion is consummated. The following is an estimate of certain anticipated fees and expenses to be incurred by the Partnership in connection with the Conversion:
Securities and Exchange Commission registration fees.......... $ 225,000
Stock exchange listing fees................................... 25,000
Legal fees and expenses....................................... 3,550,000
Financial advisory fees and expenses.......................... 6,550,000
Accounting fees and expenses.................................. 275,000
Solicitation fees and expenses................................ 200,000
Printing and engraving expenses............................... 150,000
Miscellaneous................................................. 25,000
-----------
Total..................................................... $11,000,000
-----------
-----------
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EXCHANGE OF CERTIFICATES
BAC Holders should not send any certificates with the enclosed Proxy. They should retain such certificates until they receive further instructions if the Conversion is consummated.
Promptly after the Effective Time, the Corporation will mail to all BAC Holders of record a letter of transmittal containing instructions with respect to the surrender of certificates for BACs in exchange for certificates representing shares of Common Stock. Upon surrender to the Corporation of one or more certificates for BACs, together with a properly completed letter of transmittal, there will be issued and mailed to former BAC Holders of record at the Effective Time a certificate or certificates representing the number of shares of Common Stock to which such holder is entitled. From and after the Effective Time, each such certificate for BACs will evidence only the right to receive certificates representing shares of Common Stock.
No dividends or other distributions with respect to the Common Stock payable to the holders of record thereof after the Effective Time will be paid to the holder of any unsurrendered certificates for BACs until such certificates are surrendered for exchange, at which time accumulated dividends will be paid, without interest, subject to any applicable escheat laws.
If any certificate representing Common Stock is to be issued in a name other than that in which the certificate for BACs surrendered in exchange thereof is registered on the books of the Partnership as of the Effective Time, it will be a condition of such issuance that (i) the certificate so surrendered be properly endorsed and otherwise in proper form for transfer and (ii) the person requesting such exchange pay to the Corporation any transfer or other taxes required by reason of the issuance of a certificate representing Common Stock in any name other than that of the registered owner of the certificate surrendered, or the person requesting such exchange establish to the satisfaction of the Corporation that such tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of transfers of BACs that were issued and outstanding immediately before such time. If, after the Effective Time, certificates representing BACs are presented for transfer, they will be cancelled and exchanged for one or more certificates representing shares of Common Stock.
COMPARATIVE RIGHTS OF BAC HOLDERS AND HOLDERS OF COMMON STOCK
The following summary compares a number of differences between ownership of BACs and ownership of shares of Common Stock and the effects relating thereto.
TAXATION
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Under current law, the Partnership is The Corporation will pay federal and
not a taxpaying entity. Rather, each state tax on its net income.
BAC Holder includes its share of the Shareholders will not be taxed with
Partnership's income or loss, as the respect to Corporation income, but
case may be, without regard to the will generally be taxed with respect
cash distributed to BAC Holders, in to dividends received from the
computing taxable income. Generally, Corporation to the extent of
cash distributions to BAC Holders are accumulated earnings and profits for
not taxable, unless distributions ex- tax purposes.
ceed a BAC Holder's basis in a BAC.
Under current tax law, the Partnership No portion of the earnings of, or any
will be taxed as a corporation if it dividends from, the Corporation will
engages in a substantially new line of constitute unrelated business taxable
business or, in any event, at the end income to tax-exempt shareholders,
of 1997, if the BACs remain publicly except to the extent that investment
tradeable. in stock of the Corporation is
debt-financed.
Substantially all of the Partnership's
taxable income constitutes unrelated
business taxable income and,
therefore, is taxable to BAC Holders
that are tax-exempt organizations.
DISTRIBUTIONS AND DIVIDENDS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement provides
that the
General Partner will make quarterly The By-laws of the Corporation provide
distributions of Net Cash From that the Board of Directors has the
Operations and Net Cash From Sales or authority and discretion to declare
Refinancings. The Operating General dividends and other distributions upon
Partner receives 1% of all the shares of the Corporation to the
distributions from the Operating extent permitted by law. Holders of
Partnership. The General Partner Common Stock will have no contractual
receives 20% and BAC Holders receive right to dividends.
80% of Net
Cash From Operations from the The Sponsors intend to recommend that
Partnership so long as the the Corporation's Board of Directors
distributions to BAC Holders provide pay the Proposed Distributions. See
them a 15% per annum cumulative, "Market Prices and Distributions."
noncompounded yield on the adjusted However, subject to legal and
initial issuance price of the BACs. If contractual limitations, dividends
the distributions made in such will be paid at the discretion of the
proportions do not provide BAC Holders Board of Directors and will depend,
with such return, distributions will among other things, on the future
be made instead 1% to the General earnings, operations, capital
Partner and 99% to BAC Holders until requirements, borrowing capacity, and
BAC Holders have received such return. financial condition of the Corporation
The General Partner believes, based on and general business conditions, and
prior distributions, that such there can be no assurance that the
threshold return will continue to be foregoing dividends and distributions
met for the foreseeable future. To will be paid.
date, the BAC Holders have received
distributions substantially in excess
of a 15% per annum cumulative
(noncompounded) yield on the adjusted
initial issuance price of the BACs.
The General Partner receives 1% of Net
Cash From Sales or Refinancings from
the Partnership after BAC Holders have
received a return of the adjusted
initial issuance price of the BACs
($10 per BAC).
For the years ended December 31, 1993,
1992 and 1991, cash distributions per
BAC aggregating $2.51, $2.50 and
$2.50, respectively, were declared by
the Partnership. See "Market Prices
and Distributions."
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VOTING RIGHTS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Except as described below, BAC Holders
do not
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have the right to participate in the Under Minnesota law and the management or control of the Corporation's Articles of Partnership's business. Each BAC Incorporation and By-laws,
Holder is entitled to one vote per BAC shareholders have voting rights with
on matters submitted to BAC Holders respect to (i) the election of
for a vote. Two-thirds in interest of directors, (ii) the removal of
BAC Holders, without the concurrence directors, (iii) certain mergers and
of the General Partner, may (i) share exchanges involving the
subject to certain exceptions Corporation, (iv) the sale, lease,
described below, amend the Partnership transfer or other disposal of
Agreement, (ii) approve or disapprove substantially all of the assets of the
the sale of all or substantially all Corporation other than in the regular
of the Partnership assets, except in course of business, (v) the
connection with the Partnership's dissolution of the Corporation, (vi)
dissolution and liquidation for a amendments to the Corporation's
reason other than such sale, (iii) Articles of Incorporation, and (vii)
dissolve the Partnership, and (iv) any other matters designated by the
remove a General Partner and elect a Board of Directors. Each share of
replacement. If a General Partner has Common Stock entitles its holder to
been removed without cause, the cast one vote on each matter presented
removed Gener- to shareholders. There is no
cumulative voting.
al Partner can compel any successor to Approval of any matter submitted to
acquire its general partnership shareholders requires the affirmative
interest at the then fair market value vote of the greater of (a) a majority
of such interest. See "-- Removal of of the voting power of the shares
General Partner and Directors of the present and entitled to vote on that
|
Corporation." Amendments to the item of business or (b) a majority of Partnership Agreement altering the the voting power of the minimum number rights, powers, fees or duties of the of shares entitled to vote that would General Partner, the interest of the constitute a quorum for the
General Partner in profits, losses and transaction of business at a duly held
distributions, provisions relating to meeting of shareholders; except that
changes in the General Partner or any the Corporation's Articles of Incorpo-
of the terms of the First Rights ration, pursuant to Minnesota law,
require the consent of the General provide that the affirmative vote of
Partner. The General Partner may in the holders of at least 75% of the
some circumstances amend the voting power of all outstanding shares
Partnership Agreement without the entitled to vote is required for the
consent of BAC Holders to correct removal of a director, with or without
certain deficiencies or comply with cause, from office.
certain legal requirements.
If the Corporation has more than one
class of stock outstanding in the
future, class voting will
Under Delaware law, a merger requires be required on certain matters that
the approval of the General Partner generally have a material adverse
and approval of a majority in interest effect on shares of a particular
of BAC Holders, unless otherwise class.
provided in the relevant partnership
agreement. The Partnership Agreement
is silent as to mergers.
RIGHTS TO CALL SPECIAL MEETINGS AND SUBMIT PROPOSALS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement provides Special meetings of shareholders may
that the General Partner or BAC be called for any purpose or purposes
Holders holding at least 10% of the at any time, by (i) the Corporation's
outstanding BACs may call a meeting of chief executive officer, (ii) the Cor-
the Partnership. The Partnership poration's chief financial officer,
Agreement provides that any request (iii) by the Board of Directors or any
for a meeting must state the purpose two or more members thereof, or (iv) a
of the proposed meeting and the shareholder or shareholders holding
matters to be acted upon at such 10% or more of the voting power of all
meeting, and no matter may be acted shares entitled to vote (except in
upon at the meeting other than as set specified circumstances when a special
forth in such request or as otherwise meeting must be called by 25% or more
permitted by the General Partner. of the voting power of all shares
entitled to vote).
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REMOVAL OF GENERAL PARTNER AND DIRECTORS OF THE CORPORATION
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
BAC Holders may, by vote of two-thirds Under the Corporation's Articles of
in interest, remove any General Incorporation, the Corporation will
Partner from the Partnership with or have a classified or staggered Board
without cause and consent to the of Directors and any one or all of the
appointment of a replacement therefor. directors may be removed at any time,
If removal is for cause, the removed with or without cause, by the
General Partner is entitled to no affirmative vote of the holders of 75%
consideration for its general part- of the voting power of all outstanding
nership interest. If removal is shares entitled to vote, voting
without cause, the removed General together as a single class.
Partner can compel any successor to
purchase its general partnership
interest at the then "fair market
value" of such interest in an amount
equal to the sum of (i) the present
value of such interest over the life
of the Partnership plus (ii) the
present value of the annual man-
agement fee of $500,000 over the life
of the Partnership. The fair market
value shall be determined by agreement
of the removed General Partner and its
successor, or if they cannot agree, by
arbitration.
LIQUIDATION RIGHTS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Upon liquidation of the Partnership, In the event of a liquidation of the
BAC Holders share in any assets Corporation, the holders of Common
available for distribution in Stock would be entitled to share
accordance with the applicable ratably in any assets remaining after
provisions of the Partnership the satisfaction of obligations to
Agreement. The liquidation provisions creditors and any liquidation
generally provide that the assets of preferences of any series of preferred
the Partnership remaining after the stock of the Corporation that may be
payment of all of its debts and then outstanding. Under the Articles
liabilities, and the establishment of of Incorporation, the Board of
a reasonable reserve in connection Directors is authorized to issue up to
therewith, will be distributed to the 20,000,000 shares of preferred stock
General Partner and BAC Holders in in one or more series and to fix and
accordance with their respective capi- determine relative rights and
tal account balances. preferences, including with respect to
preferences on liquidation.
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ASSESSMENTS AND LIMITED LIABILITY
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Under the terms of the Partnership Shares of Common Stock will be fully
Agreement, BAC Holders are not subject paid and nonassessable. Shareholders
to additional assessments. The generally will not be personally
liability of BAC Holders with respect liable for obligations of the Corpora-
to the activities of the Partnership tion. In certain circumstances, they
is generally limited to their original may be liable for amounts distributed
capital contributions, any additional or returned to them.
capital contributions, and their share
of assets and undistributed profits.
In certain circumstances, they may be
liable for amounts distributed or
returned to them. Under Delaware law,
BAC Holders may be personally liable
for the obligations of the Partnership
to the extent that they, in addition
to exercising their rights as BAC
Holders, also take part in the control
of Partnership business.
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TRANSFERABILITY
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The BACs are listed for trading on the The Common Stock will be freely
American Stock Exchange and the transferable, and has been approved
Pacific Stock Exchange. The for listing on the American Stock
Partnership may restrict or terminate Exchange and the Pacific Stock Ex-
transferability to prevent termination change, subject to official notice of
of the Partnership under federal tax issuance.
law or to preserve the tax status of
the Partnership as a partnership.
REDEMPTION RIGHTS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
There are no mandatory or optional The Common Stock is not subject to
redemption provisions in the mandatory or optional redemption.
Partnership Agreement.
CHANGE OF CONTROL
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
There is no provision in the Delaware Minnesota law (i) restricts specified
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Revised Uniform Limited Partnership transactions with a shareholder Act or in the Partnership Agreement, acquiring 10% or more of the voting except as described above under "-- shares of the Corporation unless the Removal of General Partner and Direc- share acquisition or transaction is tors of the Corporation," that approved by the Board of Directors
restricts change of control prior to the acquisition of such 10%
transactions with partners. Changes in interest, and (ii) requires approval
management can only be effected by by disinterested shareholders of any
removal of the General Partner. acquisition of voting power above
specified levels of ownership of the
Common Stock. The Corporation will
have a classified or staggered Board
of Directors, and its Articles of
Incorporation require a 75% vote of
all outstanding shares to remove a
director, with or without cause, which
may have the effect of making a change
of control move difficult. See
"Description of Capital Stock --
Anti-takeover Provisions."
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MANAGEMENT AND COMPENSATION
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The business and affairs of the The business and affairs of the
Partnership are managed by the General Corporation are managed by or under
Partner subject to certain narrow the direction of the Board of
limitations. Pursuant to the Manage- Directors of the Corporation. The
ment Agreement, EIPCC, the managing Articles of Incorporation of the
general partner of the General Corporation provide that for so long
Partner, receives an annual management as the Board of Directors consists of
fee of $500,000. In addition, the three or more persons, directors shall
General Partner and its affiliates are be divided into three classes, with
entitled to reimbursement from the each class of directors serving a
Partnership for the actual three-year term, staggered among the
out-of-pocket costs of direct classes. Approximately one-third of
telephone and travel expenses incurred the Board of Directors will be elected
by them on Partnership business, annually by shareholders to serve for
direct out-of-pocket fees, expenses three-year terms. An affirmative vote
and charges paid by them to third of 75% of the voting power of all
parties for rendering legal, outstanding shares entitled to vote is
consulting, auditing, accounting, required for the removal of a
bookkeeping and computer services, director, with or without cause, from
expenses of preparing and distributing office.
reports to BAC Holders, the cost of After consummation of the Conversion,
compliance with all state and federal the Corporation intends to pay
regulatory requirements and stock directors who are not also employees
|
exchange listing fees and charges and an annual director's fee of $27,500, other payments to third parties for at least $5,000 of which will be services rendered to the Partnership. payable in restricted stock of the The General Partner and Operating Corporation. See "Management -- General Partner also receive their Directors and Executive Officers of respective allocated shares of the Corporation After the Conversion." Partnership distributions. See "-- The individuals who will become
Distributions and Dividends." executive officers of the Corporation
on or before consummation of the
Conversion, all of whom currently hold
similar responsibilities in PICC, are
described in "Management -- Directors
and Executive Officers of the
Corporation After the Conversion." The
Corporation will assume the Operating
Partnership's existing executive
compensation and employee benefit
plans adapted for use by the
Corporation on substantially the same
terms. Executive compensation, death
and disability benefits and deferred
compensation, long-term incentive
compensation and retirement savings
plans are described in "Management --
Executive Compensation," "-- Death and
Disability Benefits and Deferred
Compensation," "-- Long-Term Incentive
Compensation" and "-- Retirement
Savings Plan."
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INDEMNIFICATION
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement provides The Corporation is required by
that the Partnership will indemnify Minnesota law to indemnify all
the General Partner, its employees, officers and directors of the Corpora-
agents or affiliates against any tion for expenses and liabilities
liability, loss or damage (including (including attorneys' fees) incurred
attorneys' fees) incurred by any such as the result of proceedings against
person in connection with the them in connection with their
Partnership in respect of services or capacities as officers or directors.
duties performed on behalf of the In order to be entitled to in-
Partnership, provided that any such demnification with respect to a
liability, loss or damage did not purported act or omission, an officer
result from such person's actual or director must (i) have acted in
fraud, gross negligence, willful or good faith, (ii) have received no
wanton misconduct or breach of improper personal benefit, (iii) in
fiduciary duty. In addition, any act the case of a criminal proceeding,
or omission, if done or omitted to be have had no reasonable cause to
done in reliance on the opinion of believe the conduct to be unlawful,
independent legal counsel, public and (iv) reasonably believed that the
accountants or consultants selected conduct was in the best interests of
with reasonable care, will be the Corporation. See, also, the
conclusively presumed to have been description of the indemnification
done or omitted in good faith and not provisions of the Merger Agreement
to constitute gross negligence or under "The Conversion -- Description
willful or wanton misconduct. See, of the Merger Agreement."
also, the description of the indem-
nification provisions of the Merger
Agreement under "The Conversion --
Description of the Merger Agreement."
FIDUCIARY DUTIES
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Under Delaware law, the General Under Minnesota law, a director of a
Partner of the Partnership has corporation must discharge the duties
fiduciary duties of good faith, of the position of director in good
loyalty and fair dealing to BAC faith, in a manner the director
Holders in the management of reasonably believes to be in the best
Partnership affairs. interests of the corporation, and with
the care an ordinarily prudent person
would exercise under similar
circumstances.
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LIMITS ON MANAGEMENT'S LIABILITY
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
As a general matter of Delaware law, The Corporation's Articles of
the General Partner has liability for Incorporation contains a provision
the payment of the obligations and that limits the liability of the
debts of the Partnership unless Corporation's directors as permitted
limitations on such liability are by the Minnesota Business Corporation
stated in the document or instrument Act. The provision eliminates per-
evidencing the obligation. Under the sonal liability of a director to the
Partnership Agreement, none of the Corporation or its shareholders for
General Partner, its employees, agents monetary damages for a breach of
or affiliates will have any liability fiduciary duty. The provision does not
to the Partnership or BAC Holders for change the liability of a director for
any liability, loss or damage that did a breach of duty of loyalty to the
not result from such person's actual Corporation or to shareholders, acts
fraud, gross negligence, willful or or omissions not in good faith or
wanton misconduct or breach of which involve intentional misconduct
fiduciary duty. or a knowing violation of the law, or
an act or omission for which the
liability of a director is expressly
provided for in an applicable statute,
or in respect of any transaction from
which a director received an improper
personal gain. Pursuant to the
Articles of Incorporation, the
liability of directors will be further
limited or eliminated without action
by shareholders if Minnesota law is
amended to further limit or eliminate
the personal liability of directors.
An officer of the Corporation is
required by Minnesota law to discharge
duties in good faith, in a manner
which the officer believes to be in
the best interests of the Corporation,
and with the care which an ordinary
prudent person in a like position
would exercise under similar
circumstances.
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APPRAISAL RIGHTS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Generally, none. However, the Merger Subject to certain exceptions,
Agreement provides for rights similar Minnesota law provides that a
to the appraisal rights of common shareholder who does not approve of a
stock under the Delaware General proposed amendment to the Articles of
Corporation Law in connection with the Incorporation that materially and
Merger. See "Appraisal Rights." adversely affects certain rights or
preferences of the dissenting share-
holder or certain fundamental
corporate changes may obtain payment
of the fair value of such dissenting
shareholder's shares.
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DURATION OF INVESTMENT
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement provides Minnesota law and the Corporation's
that the Partnership is to be Articles of Incorporation provide that
dissolved and its affairs wound up on the Corporation shall have a perpetual
the first to occur of (i) December 31, existence. Therefore, investors in the
2037, (ii) the bankruptcy of the Corporation would have to sell their
Partnership, (iii) the retirement, shares of Common Stock in order to
death, dissolution, legal disability liquidate their investment.
or the passage of 120 days after the
bankruptcy of a General Partner,
subject to the right of any remaining
General Partner(s) or, in lieu
thereof, the vote of all BAC Holders
to continue the Partnership, (iv) the
sale or other disposition of all or
substantially all of the assets of the
Partnership or of the Operating
Partnership, (v) the vote by two-
thirds in interest of BAC Holders to
dissolve the Partnership, or (vi) the
happening of any other event causing
the dissolution of the Partnership
under the laws of the State of
Delaware.
RIGHT TO INVESTOR LISTS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
Any BAC Holder or (a duly authorized Under Minnesota law, upon written
representative of a BAC Holder) has request, at reasonable times and for a
the right to receive by mail, upon proper purpose, a shareholder shall
written request to the Partnership and have the right to examine and copy
at such BAC Holder's sole cost and relevant corporate records including
expense, a copy of a list of names and the Corporation's share register.
addresses of BAC Holders and the
number of BACs owned by each of them,
provided that such request is for a
purpose that is reasonably related to
such BAC Holder's interest in the
Partnership.
INSPECTION OF BOOKS AND RECORDS
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement provides Under Minnesota law, upon written
that books and records of account be request, at reasonable times and for a
kept at the principal place of proper purpose, a shareholder shall
business of the Partnership and be have the right to examine and copy
open to inspection by any BAC Holder relevant corporate records including
(or by an authorized representative of the Corporation's share register.
a BAC Holder) upon reasonable notice
and during ordinary business hours.
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DILUTION
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The Partnership Agreement permits the The Board of Directors of the
issuance of additional BACs, pursuant Corporation is authorized to issue up
to which the interests in the assets, to 80,000,000 shares of Common Stock
liabilities, cash flow and results of and up to 20,000,000 shares of pre-
operations of the Partnership ferred stock. At the completion of the
represented by the BACs, but not the Conversion, 18,110,684 shares of
general partnership interest, may be Common Stock and no shares of
diluted. Issuance of additional BACs preferred stock will be outstanding
could dilute the existing BAC Holders' and 312,500 shares of Common Stock
equity interests in the Partnership, will be reserved for issuance for
but not the general partnership previously granted First Rights under
interest. employee compensation plans. Issuance
of additional authorized shares of
Common Stock as well as issuance of
shares of preferred stock could dilute
the existing shareholders' equity
interest in the Corporation.
INVESTMENT POLICY
BACS COMMON STOCK
- -------------------------------------- --------------------------------------
The purpose of the Partnership was to The Corporation may engage in any and
acquire, own and operate Polaris all activities permitted by law. The
through the Operating Partnership. The Corporation may borrow money and make
Operating Partnership may engage in acquisitions.
any and all activities related to or
incidental to the foregoing
activities. The Partnership and the
Operating Partnership have the power
to borrow money.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes the material federal income tax considerations relating to the Conversion. The discussion reflects, as to those matters noted, the opinion of Stroock & Stroock & Lavan, counsel to the Partnership and the General Partner. The discussion does not address all aspects of taxation that may be relevant to particular taxpayers in light of their personal circumstances, or to certain types of taxpayers (including dealers in securities, insurance companies, non-U.S. persons, financial institutions and tax-exempt entities) subject to special treatment under the federal income tax laws, and the opinion of counsel set forth herein, to the extent relevant, does not cover such persons. The Partnership and the General Partner have not requested and do not intend to request a ruling from the Internal Revenue Service (the "Service") concerning any of the matters discussed herein. An opinion of counsel is not binding on the Service or the courts, and no assurance can be given that the Service will not challenge the tax treatment of certain matters discussed herein or, if it does, that it will be unsuccessful. Accordingly, each BAC Holder should consult its tax advisor as to the specific tax consequences of the Conversion and the receipt of Common Stock, including the application and effect of state or local income and other tax laws.
The following discussion is based on existing provisions of the Code, existing and proposed regulations, existing administrative interpretations and court decisions. Future legislation, regulations, administrative interpretations or court decisions could significantly change such authorities either prospectively or retroactively.
SUMMARY OF TAX CONSEQUENCES TO BAC HOLDERS
In the Conversion, each BAC Holder will receive one share of Common Stock for each BAC held. The tax treatment of the Conversion to a BAC Holder is expected to be as follows:
- BAC Holders will not recognize gain or loss on the receipt of shares of Common Stock in exchange for their BACS.
- BAC Holders' tax basis in Common Stock received will be determined with reference to the tax basis of their BACs exchanged therefor immediately prior to the Conversion.
The precise tax treatment to individual BAC Holders will depend on each BAC Holder's particular situation.
With respect to the tax consequences to BAC Holders who exercise Appraisal
Rights, see "--
Exercise of Appraisal Rights" below.
PARTNERSHIP STATUS AND TAXATION OF THE PARTNERSHIP
Each of the Partnership and the Operating Partnership is properly classified for federal income tax purposes as a partnership rather than an association taxable as a corporation. The Partnership received a ruling from the Service that its manufacture and production of personal watercraft did not constitute a new line of business for purposes of maintaining its status as a grandfathered publicly-traded partnership.
Currently, the Partnership is not itself subject to federal income tax. Rather, each BAC Holder is subject to income tax based on its allocable share of Partnership taxable income, gain, loss, deduction, and credits, whether or not any cash is actually distributed to such BAC Holder. The federal income tax benefits resulting from the pass-through nature of the Partnership, however, are offset in part by the additional administrative expenses associated with tax reporting and other costs associated with operating in partnership form.
The Revenue Act of 1987 amended the Code to treat certain publicly-traded partnerships as corporations rather than partnerships for federal income tax purposes. Under a transition rule, however, an existing publicly-traded partnership, such as the Partnership, will not be classified as a corporation until the earlier of (i) the partnership's first taxable year beginning after December 31, 1997, or (ii) the time at which the partnership adds a new line of business that is substantial. In certain circumstances, an activity conducted by a corporation controlled by an existing partnership may be treated as an activity of the existing partnership if the effect of the arrangement, based upon all the facts and circumstances, is to permit the partnership to engage in an activity the income from which is not subject to a corporate-level tax and which would be a new line of business if conducted directly by the partnership. Under the above-described transition rule, the Partnership will be taxed as a corporation no later than its taxable year beginning on January 1, 1998. At that time the Partnership will be treated as if it had transferred all of its assets (subject to its liabilities) to a newly formed corporation in exchange for the stock of the corporation, and then distributed such stock to its partners in liquidation of their interests in the Partnership. Upon classification as a corporation for tax purposes, the Partnership would be subject to federal income tax on its earnings at a current maximum effective rate of 35%.
GENERAL TAX TREATMENT OF THE MERGER AND ISSUANCE OF COMMON STOCK
The Partnership has been a Delaware limited partnership since it began
operations in 1987. As two of the steps forming part of a single integrated
transaction resulting in BAC Holders becoming shareholders of the Corporation,
(i) pursuant to the Merger, the Transitory Partnership will merge with and into
the Partnership, with the Partnership surviving, and (ii) shares of Common Stock
will be issued by the Corporation directly to BAC Holders in exchange for their
BACs.
There is no specific authority dealing with the merger of a new limited partnership into an existing limited partnership under circumstances similar to the Merger. Accordingly, counsel cannot predict with certainty how the Merger and issuance of Common Stock will be treated for federal
income tax purposes. However, counsel is of the opinion that (i) the formation
and existence of the Transitory Partnership, and its subsequent merger with and
into the Partnership, will be disregarded for federal income tax purposes, and
(ii) BAC Holders will be treated as exchanging directly their BACs for shares of
Common Stock in an exchange described in Section 351(a) of the Code, pursuant to
which BAC Holders should not recognize gain or loss. The Partnership will be
treated as continuing in existence for federal income tax purposes, following a
constructive termination and reconstitution, with the Corporation, EIPCC, and
the General Partner as the sole partners.
Counsel's opinion that (i) the formation and existence of the Transitory Partnership, and its subsequent merger with and into the Partnership, will be disregarded for federal income tax purposes, and (ii) BAC Holders will be treated as exchanging directly their BACs for Common Stock of the Corporation, is based on the federal income tax treatment of analogous transactions involving corporations rather than partnerships. It is well settled, and the Service has issued published rulings to the effect that, if a parent corporation forms a transitory subsidiary corporation and merges it into a another corporation to enable the parent to acquire the stock of such other corporation, the merger of the transitory subsidiary corporation into such other corporation will be ignored, and the shareholders of the target corporation will be treated as receiving directly from the parent corporation stock or other property of the parent in exchange for their shares of the target. In addition, the Service has issued private letter rulings addressing the treatment of transactions in which a corporation forms a transitory partnership and merges it into an existing partnership as a means of transforming the partners of the existing partnership into shareholders of the corporation. The conclusions expressed in the private letter rulings are consistent with the treatment of the Merger and issuance of Common Stock expressed above. BAC Holders should be aware that, unlike published rulings, private letter rulings cannot be cited as authority, and may be relied upon only by the taxpayer requesting the ruling, although the conclusions expressed therein are indicative of the Service's thinking on a particular matter.
The Partnership and the Corporation intend to treat, for federal income tax purposes, the Merger and issuance of Common Stock in accordance with the positions reflected in the foregoing opinions and to prepare reports and tax information accordingly. Except as otherwise noted, the following discussion assumes the correctness of such treatment.
CERTAIN TAX CONSEQUENCES OF THE MERGER AND ISSUANCE OF COMMON STOCK TO BAC HOLDERS
NONRECOGNITION OF GAIN OR LOSS. Section 351(a) of the Code provides, in
general, that no gain or loss is recognized upon the transfer by one or more
persons of property (such as partnership interests) to a corporation solely in
exchange for stock in such corporation if, immediately after the exchange, such
person or persons are in control of the corporation to which the property was
transferred. Section 368(c) of the Code defines control as the ownership of
stock possessing at least 80% of the total combined voting power of all classes
of stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock. Section 351(b) of the Code provides that if money or
other property ("boot") is received in addition to stock in an otherwise
qualifying transaction, taxable income must be recognized in an amount equal to
the lesser of (i) any gain realized on the exchange or (ii) the amount of boot
received. For this purpose, gain realized is generally equal to the excess, if
any, of (x) the amount of cash and the fair market value of stock and other
property received from the corporation over (y) the adjusted basis of property
transferred to the corporation. In determining realized gain, a Partner's share
of partnership liabilities is treated as cash received upon the transfer.
Section 357(c) of the Code generally provides that if the sum of the liabilities
assumed in the Section 351 exchange exceeds the aggregate tax basis of the
assets transferred in the exchange, such excess is treated as gain from the sale
or exchange of the assets transferred. Section 752 of the Code generally
provides that a partner's tax basis for its partnership interest includes its
share of the liabilities of the partnership, as determined under Treasury
regulations. A published ruling issued by the Service holds that upon the
transfer of a partnership interest to a corporation in a Section 351
transaction, the transferor's share of partnership liabilities is treated as
assumed by the corporation for purposes of Section 357(c) of the Code.
Assuming the Merger and issuance of Common Stock is treated for federal income tax purposes in the manner described above under "-- General Tax Treatment of the Merger and Issuance of Common Stock," it is counsel's opinion that the exchange by BAC Holders of their BACs for shares of Common Stock will be treated as part of a transaction described in Code Section 351(a). Accordingly, BAC Holders should incur no federal income tax liability as a result of the exchange of their BACs for shares of Common Stock. See "-- Post-Conversion Treatment of the Corporation and its Shareholders -- Distributions by the Corporation" below for a discussion of the Federal income tax treatment of the Proposed Distributions. BAC Holders will not be permitted to recognize a loss on the exchange. This conclusion is based on the assumption that (i) BAC Holders exchanging BACs and the affiliates of the General Partner exchanging their interests in the General Partner and its affiliates (together, the "Transferors") to the Corporation as steps in the integrated transaction consisting of the Merger and issuance of Common Stock and related transactions will own, immediately after such transfers, more than 80% of the only class of stock of the Corporation and (ii) not more than 20% of the shares of Common Stock transferred to the Transferors pursuant to the Conversion will be subsequently disposed of pursuant to contracts or other formal or informal agreements entered into prior to the Conversion (the "Control Assumption"). If the Control Assumption were not correct, each BAC Holder could recognize gain or loss on the Conversion as if the BAC Holder had sold its interest in the Partnership in a taxable transaction for an amount equal to the value of the Common Stock received in the Conversion. Counsel is not aware of any contracts or other formal or informal agreements entered into by persons receiving shares of Common Stock to dispose of such shares. Notwithstanding the above, any BAC Holders who are treated as receiving shares of Common Stock in exchange for services will be taxed on the receipt of the Common Stock to the extent of the value thereof.
Based on information provided by the Partnership's independent accountants, no portion of the liabilities of the Partnership has ever been allocated to BAC Holders. In this circumstance, a BAC Holder's share of liabilities of the Partnership cannot exceed the tax basis of such BAC Holder's BACs, eliminating the possibility of any gain recognition by a BAC Holder on the exchange of BACs for shares of Common Stock under Section 357(c) of the Code.
BASIS AND HOLDING PERIOD OF COMMON STOCK. It is counsel's opinion that the basis of the Common Stock that a BAC Holder receives will be equal to the aggregate basis of its BACs immediately prior to the Merger.
A former BAC Holder's holding period for Common Stock received in the Conversion will include such BAC Holder's holding period for BACs, provided such BAC Holder held the BACs as capital assets at the time of the Conversion. Under a ruling issued by the Service, to the extent the Common Stock received by a BAC Holder is attributable to the holder's share of Partnership unrealized receivables, substantially appreciated inventory and certain other items including depreciation recapture ("Section 751 assets") that are neither Section 1231 assets nor capital assets of the Partnership, the BAC Holder's holding period for such Common Stock would commence on the day following the date of the Conversion. Due to such allocation, former BAC Holders would have a split holding period for their Common Stock. The Corporation intends to advise former BAC Holders of the Corporation's estimate of the percentage of such "Section 751" assets that were held by the Partnership on the date of the Merger.
If the Control Assumption described above is not correct and a BAC Holder's exchange of BACs for Common Stock is treated as a taxable transaction, each BAC Holder's basis in the Common Stock received would be equal to the value of the Common Stock received in the Conversion, and each BAC Holder's holding period in the shares of Common Stock received would begin on the day following the date of the Conversion.
OTHER TAX ISSUES AFFECTING BAC HOLDERS
PARTNERSHIP INCOME AND LOSS FOR YEAR OF MERGER. Because the Partnership is characterized as a partnership for federal income tax purposes, each BAC Holder currently is required to take into account its allocable share of each item of income, gain, loss, deduction and credit generated by the
Partnership. For the year in which the Merger occurs, BAC Holders will be allocated the income, gains, losses, deductions and credits generated by the Partnership for the period ending with the Merger regardless of the amount of cash attributable to such net income that is distributed to BAC Holders. If a BAC Holder's taxable year differs from the calendar year, there could be a "bunching" of more than one year of the Partnership's income or loss in such BAC Holder's tax return for such taxable year. The General Partner intends to advise BAC Holders as to the amount of income allocated to them for the period ending with the Merger.
EXERCISE OF APPRAISAL RIGHTS
RECOGNITION OF TAXABLE GAIN OR LOSS. Except as described below, a BAC Holder that holds its BACs as capital assets at the time of the Merger and that exercises its Appraisal Rights probably will recognize capital gain or loss at the time of the Merger equal to the difference between the amount realized by such BAC Holder and such BAC Holder's basis in its BACs. For this purpose, the amount realized generally should equal the trading value of the BACs held by such BAC Holder immediately prior to the Merger. Ordinary interest income (or capital loss) should be recognized by such BAC Holder upon the receipt of payment pursuant to the exercise of such BAC Holder's Appraisal Rights to the extent such payment exceeds (or is less than) the amount realized by such BAC Holder at the time of the Merger, as described above. BAC Holders should consult their tax advisors to determine the amount of gain or loss they would recognize on their exercise of Appraisal Rights.
CHARACTER OF GAIN OR LOSS. A portion of any gain realized at the time of the Merger as a result of the exercise of Appraisal Rights (as described above) will be taxed as ordinary income pursuant to Section 751(a) of the Code to the extent that such gain is attributable to a BAC Holder's share of the Partnership's Section 751 assets. The Corporation intends to provide former BAC Holders with information to assist them in determining the portion of their gain attributable to the Partnership's Section 751 assets.
Under certain circumstances, a BAC Holder that exercises Appraisal Rights may be taxed on ordinary income attributable to Section 751 assets in excess of the amount of gain otherwise recognized by reason of the Conversion; in which case such BAC Holder would also have a capital loss equal to the amount of such excess ordinary income. Alternatively, such ordinary income may be recognized even if a BAC Holder incurs a net taxable loss by reason of the Conversion.
CAPITAL GAINS AND LOSSES. In the case of individuals, there is currently a maximum tax rate differential of 11.6 percentage points between long-term capital gains and ordinary income. That is, ordinary income generally is taxed at a maximum rate of 39.6%, whereas net long-term capital gains are taxed at a maximum rate of 28%. Under present law, gain recognized on a capital asset held for more than one year on the date of disposition is treated as long-term capital gain. Net capital losses of individuals are deductible against ordinary income only to the extent of $3,000 per year, but are fully deductible against other capital gains of the taxpayer.
TAX CONSEQUENCES TO THE CORPORATION AND THE PARTNERSHIP
The following discussion assumes that the Merger and issuance of Common Stock will be treated for federal income tax purposes in the manner described above under "-- General Tax Treatment of the Merger and Issuance of Common Stock." In counsel's opinion, the acquisition by the Corporation of the various partnership interests (including the BACs) and other interests as a result of the Merger and issuance of Common Stock and related transactions will not give rise to the recognition of gain or loss by the Corporation or the Partnership, and the basis of the BACs received by the Corporation in exchange for shares of Common Stock will be determined by reference to the tax basis of the BACs in the hands of the exchanging BAC Holders immediately prior to the Conversion.
The acquisition of BACs by the Corporation will result in a constructive termination of the Partnership for federal income tax purposes under Section 708 of the Code. This section provides that a "sale or exchange" (which includes a transfer in connection with a Section 351 transaction) of 50% or more of the total interest in a partnership's capital and profits within a 12-month period terminates a partnership for tax purposes. Upon such termination, there is a hypothetical liquidation and distribution of the partnership's assets to the transferees of the partnership interests and the remaining partners, and a hypothetical contribution of the assets to the partnership, which for tax purposes is considered a new partnership. The constructive termination of the Partnership under Section 708 of the Code will result in the loss of substantial depreciation deductions for the year in which the Conversion occurs, and may result in the deferral of certain depreciation deductions for subsequent years, but is not expected to produce other material adverse tax consequences to the Corporation or the Partnership.
As part of the Conversion, the Operating Partnership will be merged with the Partnership. The merger of the Operating Partnership and the transfer of its assets to the Partnership will not result in the recognition of gain or loss to the Partnership or the Operating Partnership.
The computation of the Partnership's adjusted tax basis in its assets subsequent to the Conversion and constructive termination of the Partnership should be determined by reference to the Corporation's basis in the BACs it acquires in the Conversion. Such computation will depend in part on determinations of the adjusted tax basis and the relative fair market values of the assets held by the Partnership prior to the Merger and the effect of Section 743 of the Code on the adjusted tax basis of the Partnership's assets. The technical rules governing these matters are complex, and there can be no assurance that the Service will not challenge the manner in which the Partnership computes the adjusted tax basis of its assets, and depreciation and amortization with respect thereto.
POST-CONVERSION TREATMENT OF THE CORPORATION AND ITS SHAREHOLDERS
TAXATION OF THE CORPORATION'S INCOME AND LOSSES. The Corporation will be the common parent corporation of an affiliated group of corporations (the "Group") (which will include EIPCC), which will file a consolidated federal income tax return. The group's net income, which will include the Partnership's net income, will be subject to federal corporate income and state income, franchise and other taxes.
DISTRIBUTIONS BY THE CORPORATION. In general, any money or property distributed by the Corporation to its shareholders, other than in complete liquidation of the Corporation or redemption of all or a portion of a shareholder's interest in the Corporation (if certain tests contained in Section 302(b) of the Code are satisfied), will be taxable as ordinary dividend income, classified as investment or portfolio income, to the extent of the Corporation's accumulated or current earnings and profits for the taxable year of the distribution. If such distribution exceeds the Corporation's earnings and profits, the excess will be treated as a non-taxable return of capital, reducing the shareholder's adjusted basis in the Common Stock (but not below zero); any remaining portion of the distribution will be taxable to the shareholder as capital gain if the Common Stock is held as a capital asset. The Corporation will have no accumulated earnings and profits as it begins operations following consummation of the Conversion.
In counsel's opinion, the three anticipated special distributions should constitute corporate distributions rather than additional consideration to BAC Holders in exchange for their BACs. The right to these additional distributions belongs solely to the holders of the underlying shares on the applicable record date. In this sense, the right to the distributions is an attribute of the stock and not personal to the BAC Holders participating in the Conversion. Counsel's characterization of the anticipated additional distributions as corporate distributions is supported by a published ruling of the Service, which treated additional dividend rights on shares issued by the acquiring corporation in a tax-free reorganization in a similar manner. There can be no assurance that the Service will not
assert, or will not be successful in asserting, that any such additional distributions constitute additional consideration to BAC Holders in exchange for their BACs (i.e., boot). For the treatment of boot in a transaction qualifying under Section 351 of the Code, see "-- Certain Tax Consequences of the Merger and Issuance of Common Stock to BAC Holders -- Nonrecognition of Gain or Loss" above.
Dividends received by domestic corporate shareholders generally will be
eligible for a 70% dividends received deduction under Section 243 of the Code;
such deduction is increased to 80% in the case of a holder of 20% or more of the
Corporation's stock. BAC Holders receiving distributions on Common Stock may
also be affected by the taxable income limitations set forth in Section 246(b),
the holding period requirements of Section 246(c), the debt-financed portfolio
stock limitations of Section 246(a), and the "extraordinary dividend" rules of
Section 1059 of the Code.
Distributions made by the Corporation in connection with a complete liquidation of the Corporation or a redemption of all or a portion of a shareholder's interest in the Corporation will be treated as amounts received from the sale or exchange of the Common Stock, unless the redemption is treated as a dividend under Section 302 of the Code.
GAIN OR LOSS ON SALE OR EXCHANGE OF COMMON STOCK. Any gain or loss from the sale or exchange of the Common Stock will be characterized as capital gain or loss provided the Common Stock is held as a capital asset, unless the Common Stock is disposed of in a redemption treated as a dividend under Section 302 of the Code or in another reorganization transaction treated as a dividend. Gain or loss will be measured by the difference between the amount realized and the former BAC Holder's adjusted tax basis in the Common Stock sold or exchanged, and will be a long-term capital gain or loss if the former BAC Holder's holding period for the Common Stock sold or exchanged is more than one year, and otherwise will be a short-term capital gain or loss. See "-- Exercise of Appraisal Rights -- Capital Gains and Losses" above.
UNRELATED BUSINESS TAXABLE INCOME
Certain persons otherwise generally exempt from federal income taxes (such as pension plans and other exempt organizations) are taxed under Section 511 of the Code on unrelated business taxable income. Currently, substantially all taxable income generated by the Partnership is considered unrelated business taxable income for tax-exempt organizations. Dividends distributed by the Corporation, and gain from the sale or exchange of Common Stock, will not be taxed under Section 511 of the Code, except to the extent that the Common Stock is debt-financed property as that term is defined in Section 514 of the Code.
OTHER TAX ASPECTS
STATE AND LOCAL INCOME, INHERITANCE AND ESTATE TAXES. In addition to federal income taxes, BAC Holders may be subject to other taxes, such as state or local income taxes, that may be imposed by various jurisdictions and may be required to file tax returns through the date of the Merger in those states in which the Partnership or the Operating Partnership carries on business, or in which properties owned by either are located. BAC Holders may also be subject to income, intangible property, estate and inheritance taxes in their states of domicile. Counsel has expressed no opinion on these matters, and BAC Holders should consult their advisors with regard to their liability for state and local income, inheritance, estate and other taxes, as a result of the Merger and issuance of Common Stock or otherwise.
REPORTING OF THE EXCHANGE. Under Treasury regulations, each BAC Holder who receives shares of Common Stock in the Conversion must provide certain information concerning the exchange with its federal income tax return for the year in which the Conversion occurs. A BAC Holder also will be required to attach to such income tax return a statement setting forth certain information with respect to such BAC Holder's share of Section 751 assets and related matters. The Corporation intends to provide former BAC Holders with information that will assist them in meeting these requirements.
BACK-UP WITHHOLDING. Under the back-up withholding rules of the Code, holders of Common Stock may be subject to back-up withholding at the rate of 31% with respect to dividends paid by the Corporation on the Common Stock unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number and certifies under penalty of perjury that the taxpayer identification number is correct and that the holder is not subject to back-up withholding because of a failure to report all dividends and interest income. Any amount withheld under these rules will be credited against the holder's federal income tax liability. The Corporation may require holders of Common Stock to establish an exemption from back-up withholding or to make arrangements satisfactory to the Corporation with respect to the payment of back-up withholding.
PROPOSED LEGISLATION
Legislation has been proposed as a part of the implementation of the Uruguay Round of the General Agreement on Tariffs and Trade which would tax certain distributions of marketable securities by a partnership. The legislation in its proposed form would not change the tax treatment to BAC Holders upon the exchange of their BACs for Company Common Stock, as described above. Counsel cannot predict whether such legislation will be enacted and, if so, in what form and whether if such legislation is enacted, such legislation will adversely affect the tax treatment to BAC Holders and affiliates of the General Partner transferring interests in the Conversion.
ACCOUNTING TREATMENT OF THE CONVERSION
The Corporation will account for the transaction as a reorganization of affiliated entities, with the assets and liabilities of the Partnership recorded at their historical cost basis, except that it will also record deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, relating to the temporary differences for certain assets and liabilities at the date of conversion as discussed in Note 1 under the paragraph "Income Taxes." The costs of the conversion, estimated to be $11 million, will be accounted for as an expense in the statement of operations at the time of the conversion. Additionally, the Corporation will receive a significant step-up in the tax basis of the assets and liabilities acquired from the Partnership and, as a result, will record additional deferred tax assets at the conversion transaction date. The ultimate determination of the deferred tax assets discussed in this paragraph will be calculated based on the actual temporary differences existing at the conversion transaction date. See "Selected Historical and Pro Forma Financial Information."
VOTING AND PROXY INFORMATION
VOTING PROCEDURES
Under the Partnership Agreement, Polaris Industries Holdings Inc., a Delaware corporation (the "Initial Limited Partner"), will vote for the sole benefit of, and in accordance with the written instructions of, BAC Holders with respect to their BACs held as of the record date for the Special Meeting, with each BAC Holder being entitled to direct the vote of one Class A Limited Partnership Interest of the Partnership in respect of each BAC so held. The General Partner has set the close of business on Monday, November 21, 1994 as the Record Date for the determination of BAC Holders entitled to vote at the Special Meeting on Thursday, December 22, 1994 and at any adjournment or postponement thereof.
VOTE REQUIRED; QUORUM
Approval of the Conversion Proposal will require the affirmative vote of (i) BAC Holders holding a majority of BACs on the Record Date and (ii) Unaffiliated BAC Holders (BAC Holders other than the Sponsors and the affiliates of the General Partner) holding a majority of the BACs held by such persons. The presence, in person or by proxy, of BAC Holders holding an aggregate of more than 50% of the outstanding BACs (8,005,221) (including the Initial Limited Partner acting for and at the
direction of BAC Holders) will constitute a quorum at the Special Meeting. If no choice is specified on a signed proxy delivered to the Partnership, the BAC Holder returning such proxy will be deemed to have consented to the Conversion Proposal. As of the Record Date, there were 16,010,441 BACs outstanding. The Sponsors and the affiliates of the General Partner owning, in the aggregate, approximately 14% of the outstanding BACs, have advised the Partnership that they will vote in favor of the Conversion Proposal. For further information concerning the ownership of BACs by management and affiliates of the General Partner, see "Security Ownership of Certain Beneficial Owners and Management."
PROXIES
The accompanying form of Proxy is designed to permit each BAC Holder to approve, disapprove or to abstain from approving the Conversion Proposal. When a BAC Holder's Proxy is marked to abstain with respect to the Conversion Proposal, the BACs represented by the Proxy will be deemed by the General Partner to constitute disapproval of the Conversion Proposal. Failure to forward a Proxy or to vote at the Special Meeting will have the same effect as if a BAC Holder had specified on the Proxy disapproval of the Conversion Proposal.
BAC Holders are urged to promptly return the enclosed Proxy, signed and dated, in the enclosed postage prepaid envelope to the address set forth below or by hand delivery to the location indicated below:
Polaris Industries Partners L.P.
c/o Corporate Election Services
P.O. Box 1150
Pittsburgh, PA 15230-9954
To be effective, Proxies must be properly completed, executed, and delivered to the Partnership as described above on or before the date of the Special Meeting, unless extended by the General Partner in its sole discretion for as long as the General Partner deems necessary. The laws of the State of Delaware pertaining to the validity and use of corporate proxies will govern the validity and use of Proxies given by BAC Holders, except to the extent such laws are inconsistent with the Partnership Agreement.
REVOCATION OF PROXIES
BAC Holders will be permitted to revoke their Proxies at any time on or before the date of the Special Meeting. A BAC Holder who returns a Proxy may revoke the Proxy at any time on or before that date by (i) giving written notice to Polaris Industries Partners L.P., c/o Corporate Election Services, P.O. Box 1150, Pittsburgh, PA 15230-9954, of that revocation, (ii) delivering a later-dated Proxy to the Partnership at the address listed above, or (iii) voting in person at the Special Meeting.
Delivery of a written notice of revocation may be made in person or by mail. Any written notice of revocation must specify the name of the BAC Holder as it appears on the Proxy, must include the number of BACs to which it relates and must be properly executed.
SOLICITATION OF PROXIES
This solicitation is being made by the General Partner on behalf of the Partnership. The Partnership will pay the cost of soliciting Proxies and will reimburse brokerage houses and other nominees for their reasonable expenses of forwarding proxy materials to beneficial owners of BACs. The Partnership has retained D.F. King & Co., Inc. to act as Information Agent with respect to the Conversion. The Information Agent will solicit Proxies from holders of BACs by mail, telephone, telegram, personal interview or other means and will provide copies of this Proxy Statement and related proxy materials to holders of BACs. In connection with such engagement, the Information Agent will receive a fee of $55,000 and will be reimbursed by the Partnership for reasonable out-of-pocket expenses, but none of the compensation paid to the Information Agent will be contingent on the outcome of the solicitation
efforts or the result of the solicitation with respect to the Conversion Proposal or based on the number of affirmative votes received. In addition, the Partnership and certain directors, officers and regular employees or representatives of the Partnership, the Corporation and the General Partner may solicit Proxies by telephone, telegram or personal interview, as will persons employed by the Information Agent. In addition, representatives of Polaris may meet with brokers, research analysts and other members of the investment community to discuss the Conversion. Representatives of Polaris may also contact BAC Holders in person or by telephone, or arrange meetings with BAC Holders to discuss the Conversion.
INFORMATION AGENT
D.F. King & Co., Inc. has agreed to provide certain services as the Information Agent for a fee of $55,000 and reimbursement of its expenses. Requests for assistance regarding the Conversion or the Merger and for copies of related documents should be directed to the Information Agent at the address and telephone number set forth on the back cover page of this Proxy Statement.
INDEPENDENT AUDITORS
Representatives of McGladrey & Pullen, the Partnership's independent auditors, are expected to be present at the Special Meeting and will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.
APPRAISAL RIGHTS
Although neither the Partnership Agreement nor federal or Delaware law provides any rights for dissenting BAC Holders to have their respective BACs appraised or redeemed in connection with the Conversion, the Merger Agreement provides that BAC Holders who satisfy the conditions described below will be entitled to the rights of appraisal that are provided in Article VII of the Merger Agreement ("Appraisal Rights") and are similar to statutory rights of appraisal that stockholders of a Delaware corporation possess under Section 262 ("Section 262") of the General Corporation Law of the State of Delaware (the "DGCL"). However, it is a condition to the Corporation's obligations under the Merger Agreement (which can be waived by the Corporation) that BAC Holders owning more than 5% of the outstanding BACs shall have not notified the General Partner of their intention to exercise their contractual rights of appraisal under the Merger Agreement in connection with the Conversion. The following summary of the provisions of Article VII of the Merger Agreement is not intended to be a complete statement of the relevant provisions of the Merger Agreement and is qualified in its entirety by reference to the Merger Agreement which is annexed to this Proxy Statement as Annex D.
If a BAC Holder elects to exercise Appraisal Rights in accordance with the Merger Agreement, such BAC Holder must satisfy all of the following conditions:
(a) on or before the fifth day prior to the Meeting Date, such BAC Holder must deliver to the Partnership a written objection to the Conversion and a notice that, if the Conversion is consummated, such BAC Holder will exercise Appraisal Rights with respect to all BACs owned by such person, which objection and notice should reasonably inform the Partnership of the identity of the BAC Holder and that such BAC Holder demands Appraisal Rights with respect to the BACs owned by such holder; and
(b) such BAC Holder must not vote in favor of the Conversion (a failure to vote will satisfy this condition, but voting in favor of or delivering a Proxy in favor of the Conversion or an unmarked proxy will, in and of itself, constitute a waiver of such BAC Holder's right to appraisal and will nullify any previously filed written demand for appraisal); and
(c) such BAC Holder must hold the BACs for which appraisal is sought on the Record Date and continuously through the Effective Time, and otherwise comply with the provisions of the Merger Agreement relating to Appraisal Rights.
The written demand referred to in clause (a) above must be in addition to and separate from any Proxy abstaining from or voting against the approval of the Conversion Proposal. Neither voting against, abstaining from voting, nor failing to vote on the Conversion, will constitute a demand for appraisal within the meaning of the Merger Agreement.
Within ten days after the Effective Time, the Corporation will notify by mail each BAC Holder who has complied with clauses (a), (b) and (c) above that the Merger has been effected (including the date thereof).
Any BAC Holder who has complied with the requirements of the Merger Agreement which are described above shall be entitled to receive from the Corporation, upon a written request made within 120 days after the Effective Time, a statement setting forth the aggregate number of BACs not voted in favor of the Conversion and with respect to which demands for appraisal have been received, and the aggregate number of holders thereof. Such statement shall be mailed to such BAC Holder within ten days after the later of the date such request is received and the expiration of the period for delivery of demands for appraisal.
Within 120 days after the Effective Time, the Corporation or any BAC Holder who has qualified for an appraisal of BACs under the provisions of the Merger Agreement may file a petition in the Delaware Court of Chancery (the "Delaware Court") asking for a finding and determination of the Fair Value (as defined) of the BACs of all holders of BACs who have perfected Appraisal Rights pursuant to the Merger Agreement. Notwithstanding the foregoing, any BAC Holder may withdraw a demand for appraisal within 30 days after the Effective Time (or thereafter with the Corporation's written approval), provided that no payment for such BACs has been made, and receive the shares of Common Stock to be issued pursuant to the Conversion.
Upon the filing of any such petition by a BAC Holder, service of a copy thereof shall be made upon the Corporation, which shall within 20 days after such service file in the office of the Register in Chancery of the Delaware Court in which such petition was filed (the "Register in Chancery") a duly verified list containing the names and addresses of all BAC Holders who have demanded appraisal of their BACs in accordance with clause (a) above and not withdrawn such demand. If such petition shall be filed by the Corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Delaware Court, shall give notice of the time and place fixed for the hearing of such petition by certified or registered mail to the Corporation and BAC Holders on such list (at the addresses contained thereon). Such notice shall also be given by one or more publications at least one week before the day of the hearing in a newspaper of general circulation in the City of Wilmington, Delaware or such other publication as the Delaware Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Delaware Court and the costs thereof shall be borne by the Corporation.
If a petition for appraisal is timely filed, at the hearing on such petition, the Delaware Court will determine BAC Holders who have become entitled to Appraisal Rights and will appraise the BACs owned by such BAC Holders, determining their Fair Value, together with a fair rate of interest, if any, to be paid upon the amount determined to be the Fair Value (which interest may be simple or compound, as the Delaware Court may direct). In determining such Fair Value and fair rate of interest, the Delaware Court will take into account all relevant factors. Upon application by the Corporation or any BAC Holder entitled to participate in the appraisal proceeding, the Delaware Court may in its discretion permit discovery or other pre-trial proceedings and may proceed to trial upon the appraisal prior to the final determination of BAC Holders entitled to an appraisal. Any BAC Holder whose name appears on the duly verified list filed by the Corporation with the Delaware Court pursuant to the preceding paragraph may participate fully in all proceedings until it is finally determined that he or she is not entitled to Appraisal Rights pursuant to the Merger Agreement as described herein.
The Delaware Court shall direct payment of the Fair Value, together with interest, if any, by the Corporation to BAC Holders entitled thereto, and the Corporation shall make such payment forthwith. The Delaware Court's decree shall be enforceable as other decrees in the Delaware Court. Upon payment of the judgment, the dissenting BAC Holders shall cease to have any interest in their BACs or the Corporation.
BAC Holders considering seeking appraisal of their BACs should bear in mind that dissenting BAC Holders have no right to receive any shares of Common Stock with respect to such BACs, and that the Fair Value of the BACs determined under the Merger Agreement could be more than, the same as, or less than the value of the Common Stock which they would have received in the Conversion had they not sought appraisal of their BACs. The costs of the appraisal proceeding may be determined by the Delaware Court and assessed against the parties to the proceeding as the Delaware Court deems equitable in the circumstances. Upon application of a BAC Holder, the Delaware Court may order all or a portion of the expenses incurred by any BAC Holder in connection with the appraisal proceeding (including, without limitation, reasonable attorneys' fees and the fees and expenses of experts) to be charged pro rata against the value of all the BACs entitled to an appraisal. In the absence of such a determination or assessment, each party bears its own expenses.
In the event that the foregoing procedures cannot be followed, the Merger Agreement provides that the Corporation shall implement alternative procedures designed to produce results substantially similar to those that would be effected if Section 262 of the DGCL applied to the Merger. The Merger Agreement provides that if the Delaware Court shall refuse to recognize the rights and procedures in accordance with Section 262 set forth herein with respect to dissenting BAC Holders or shall otherwise refuse to follow the procedures set forth in the Merger Agreement to be followed by it, then the Corporation, within 45 days after learning of such refusal by the Delaware Court, shall make application to the American Arbitation Association, Inc., Philadelphia Branch, to select an independent appraiser (the "Special Appraiser") to determine the Fair Value of the BACs held by all such dissenting BAC Holders. Within 30 days after the Corporation is notified of the selection of the Special Appraiser, the Company shall deliver or mail to each dissenting BAC Holder a written notice stating that a Special Appraiser has been selected and identifying such Special Appraiser. From and after the delivery or mailing of such notice, all petitions, lists and other documents that would have been filed with the Delaware Court pursuant to the Merger Agreement shall be filed with the Special Appraiser and the Special Appraiser shall retain, maintain and make available such documents to the Corporation and the dissenting BAC Holders. If any such documents shall have already been filed with the Delaware Court, the Corporation, at its expense, shall obtain copies of such documents for the Special Appraiser. The Special Appraiser shall give any notices that would have been given by, and perform the functions and take the actions that would have been performed and taken by, the Delaware Court pursuant the procedures set forth above. The Fair Value finally determined by the Special Appraiser shall be final and binding upon all dissenting BAC Holders and the Corporation, and the provisions of the Merger Agreement with respect to the effect of such determination shall be applicable as nearly as practicable.
From and after the Effective Time, no BAC Holder who has duly demanded Appraisal Rights in compliance with the Merger Agreement shall be entitled to receive any portion of the shares of Common Stock of the Corporation, to vote such BACs for any purposes, to exercise any other rights of a BAC Holder, or to receive payment of distributions on such BACs (other than those payable to holders of record of BACs as of a date prior to the Effective Time); provided, that if no petition for an appraisal is filed within the time provided by the Merger Agreement, or if a BAC Holder delivers to the Corporation a written withdrawal of demand for an appraisal and an approval of the Conversion Proposal, either within 30 days after the Effective Time or thereafter with the written approval of the Corporation, then the right of such BAC Holder to an appraisal will cease. Notwithstanding the foregoing, no appraisal proceeding in the Delaware Court shall be dismissed with respect to any dissenting BAC Holder without the approval of the Delaware Court, and such dismissal may be conditioned on such terms as the Delaware Court deems just.
Failure to take any required step in connection with the exercise of Appraisal Rights may result in the termination or waiver of such rights. If any BAC Holder who demands Appraisal Rights with respect to the BACs fails to perfect, or effectively withdraws or loses, its right to appraisal, each BAC of such BAC Holder will be converted into shares of Common Stock in accordance with the Merger Agreement. A BAC Holder will fail to perfect, or effectively lose, its right to appraisal if no petition for appraisal is filed with the Delaware Court within 120 days of the Effective Time, or if such BAC Holder delivers to the Corporation a written withdrawal of its demand for appraisal and acceptance of the Conversion (except that any such attempt to withdraw made more than 30 days after the Effective Time will require the written approval of the Corporation), or if, after the hearing of a petition for appraisal, the Delaware Court shall determine that such BAC Holder is not entitled to the relief provided by the Merger Agreement. In any such case, such BAC Holder shall be bound by the Conversion and receive shares of Common Stock in accordance with the terms of the Merger Agreement.
In the absence of fraud or unfair dealing, the remedy of Appraisal Rights provided in the Merger Agreement to a BAC Holder objecting to the Conversion is the exclusive remedy for the recovery of the value of such holder's BACs or money damages to such BAC Holder with respect to the Conversion.
BUSINESS
Polaris designs, engineers and manufactures snowmobiles, four-and six-wheel all terrain recreational and utility vehicles ("ATVs"), and personal watercraft ("PWC") and markets them, together with related accessories, clothing and replacement parts through dealers and distributors principally located in the United States, Canada and Europe. Snowmobiles, ATVs, PWC and clothing, accessories and parts, accounted for the following approximate percentages of Polaris' sales for the periods indicated.
CLOTHING,
YEAR ENDED ACCESSORIES
DECEMBER 31, SNOWMOBILES ATVS PWC AND PARTS
- -------------------- ------------ ----- ------ ------------
1993................ 50% 26% 9% 15%
1992................ 54 25 7 14
1991................ 60 25 0 15
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INDUSTRY BACKGROUND
SNOWMOBILES. In the early 1950s, a predecessor to Polaris produced a "gas powered sled" which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954.
Originally conceived as a utility vehicle for northern, rural environments,
the snowmobile gained popularity as a recreational vehicle. From the mid-1950s
through the late 1960s, over 100 producers entered the snowmobile market and
snowmobile sales reached a peak of approximately 495,000 units in 1971. The
Polaris product survived the industry decline in which snowmobile unit sales
fell to a low point of approximately 87,000 units in 1983 and the number of
snowmobile manufacturers serving the North American market declined to four:
Yamaha, Bombardier, Arctco and Polaris. Polaris estimates that industry sales of
snowmobiles on a world wide basis was approximately 171,000 units for the season
ended March 31, 1994.
ALL TERRAIN VEHICLES. ATVs are four-wheel and six-wheel vehicles with balloon style tires designed for off road use and traversing rough terrain, swamps and marshland. ATVs are used for recreation, in such sports as fishing and hunting, as well as for utility purposes on farms, ranches and construction sites.
ATVs were introduced to the North American market in 1971 by Honda. By 1980, the number of ATV units sold in the North American market had increased to approximately 140,000 units. Other Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the North American market in the late 1970s and early 1980s, and in August 1994, Arctco announced its intention to enter the ATV market commencing in 1995. In 1985, the number of three-and four-wheel ATVs sold in North America peaked at approximately 650,000 units. Polaris estimates that since declining from that level the industry has stabilized and begun growing slowly with approximately 247,000 ATVs sold worldwide during calendar year 1993.
PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PWC are used primarily for recreational purposes and are designed for one, two or three passengers. Polaris entered the PWC market in 1992. Polaris estimates that the worldwide market for PWC was approximately 122,000 units in 1993. Other major PWC manufacturers are Yamaha, Bombardier, Kawasaki and Arctco.
PRODUCTS
SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of twenty-six models, ranging from utility and economy models to performance and competition models, with 1994 suggested retail prices ranging from approximately $2,450 to $8,150. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris has the largest share of the worldwide snowmobile market.
Polaris believes that the Polaris snowmobile has a long-standing reputation for quality, dependability and performance. Polaris believes that it and its predecessors were the first to develop several features for commercial use in snowmobiles, including independent front suspension, variable transmission, hydraulic disc brakes, liquid cooled engines and brakes, a three cylinder engine, and electronic fuel injection. Polaris also markets a full line of snowmobile accessories, such as luggage, tow hitches, hand warmers, specialized instrumentation, reverse gear, special traction products, cargo racks, oils, lubricants, paints and parts.
For the year ended December 31, 1993, snowmobiles accounted for approximately 50% of Polaris' sales.
ALL TERRAIN VEHICLES. Polaris entered the ATV market in the spring of 1985 with both a three-wheel and a four-wheel product. Polaris initially produced 1,700 three-wheel ATVs, but discontinued its manufacture of the three-wheel model to concentrate exclusively on the four-wheel and six-wheel products, which provide more stability for the rider. Polaris' line of ATVs, consisting of ten models, includes general purpose, sport and four-and six-wheel drive utility models, with 1994 suggested retail prices ranging from approximately $2,900 to $6,200.
Polaris' ATV features the totally automatic Polaris variable transmission which requires no manual shifting and a MacPherson strut front suspension, which Polaris believes enhances control and stability. Polaris' ATV is also the only ATV in its class that uses a two cycle engine and chain drive, which Polaris believes improves performance and efficiency.
Prior to 1989, the ATV industry experienced some softness arising from publicity surrounding safety-related and environmental concerns. However, management believes that this market has stabilized somewhat since 1989 and has begun to resume modest growth.
For the year ended December 31, 1993, ATVs accounted for approximately 26% of Polaris' sales.
PERSONAL WATERCRAFT. Polaris' most significant recent new product development was the introduction in 1992 of the Polaris SL650 personal watercraft, Polaris' first entry into this expanding product category. In 1993 the Polaris SL750 was added for even more power and performance. The SL650 and SL750 have the industry's first three-cylinder engines developed specifically for PWC. The introduction of the PWC capitalized on Polaris' engineering, production and distribution strengths, and also reduced Polaris' dependence on any single product line for overall sales and profitability. In late 1993 Polaris introduced a new, three passenger PWC, the Polaris SLT750. The 1994 suggested retail prices for Polaris' PWC range from approximately $5,500 to $6,300. Management believes Polaris is well positioned to take advantage of opportunities in this growing market through its network of nearly 1,200 PWC dealers.
For the year ended December 31, 1993, PWC accounted for approximately 9% of Polaris' sales.
CLOTHING, ACCESSORIES AND REPLACEMENT PARTS. Polaris produces or supplies a variety of replacement parts and accessories for its snowmobiles, ATVs and PWC. Polaris also markets a full line of recreational clothing, which includes suits, helmets, gloves, boots, hats, sweaters and jackets for its snowmobile, ATV and PWC lines. The clothing is designed to Polaris' specifications, purchased from independent vendors and sold by Polaris through its dealers and distributors under the Polaris brand name. Replacement parts and accessories are also marketed by Polaris.
For the year ended December 31, 1993, clothing, accessories and parts accounted for approximately 15% of Polaris' sales.
MANUFACTURING OPERATIONS
Polaris' products are assembled at its manufacturing facility at Roseau, Minnesota. Since snowmobiles, ATVs and PWC incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris emphasizes vertical integration in its manufacturing process, which includes machining, stamping, welding, clutch assembly and balancing, painting,
cutting and sewing, and manufacture of foam seats. Engines, fuel tanks, hoods and hulls, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ATVs and PWC. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polaris' work force is familiar with the use, operation and maintenance of the product, since many employees own snowmobiles, ATVs and PWC. In August of 1991, Polaris acquired an additional manufacturing facility in Osceola, Wisconsin in order to bring more component parts manufacturing in-house. In August 1994, Polaris signed a one-year lease agreement for a 223,000 square foot assembly facility located on 24 acres of land in Spirit Lake, Iowa. Polaris has an option to purchase the facility for $1.85 million at the end of the lease term. Polaris anticipates utilizing the facility to assemble its PWC product line, and potentially certain snowmobile and ATV models in the future.
Pursuant to informal agreements between Polaris and Fuji, Fuji has been the exclusive manufacturer of the Polaris two-cycle snowmobile engines since 1968. Fuji has manufactured engines for Polaris' ATV products since their introduction in the spring of 1985 and also supplies engines for the PWC product. Such engines are developed by Fuji to the specific requirements of Polaris. In the fall of 1987 Fuji became an investor in the Partnership.
Polaris believes its relationship with Fuji to be excellent. If, however, its informal relationship were terminated by Fuji, interruption in the supply of engines would adversely affect Polaris' production pending the establishment of substitute supply arrangements. Currently, Polaris is in the process of investigating manufacturing alternatives for its engines to reduce the risk of dependence on a single supplier and to minimize the effect of Japanese yen currency fluctuations. Polaris anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components for which it relies upon limited sources of supply.
Polaris' products are shipped from its manufacturing facilities by a contract carrier.
PRODUCTION SCHEDULING
Since snowmobiles are used principally in the northern United States, Canada and northern Europe in what is referred to as the "snow belt," sales of snowmobiles to consumers begin in the fall and continue during the winter season. Orders for each year's production of snowmobiles are placed in the spring and orders for ATVs and PWC are placed in fall and winter, after meetings with dealers and distributors, and units are built to order each year. In addition, non-refundable deposits made by consumers to dealers in the spring for snowmobiles assist in production planning. The budgeted volume of units to be produced each year is sold to dealers and distributors prior to production. Sales activity at the dealer level is monitored on a monthly basis for each of snowmobiles, ATVs and PWC.
Manufacture of snowmobiles commences in the spring and continues through late autumn or early winter. Polaris manufactures PWC during the winter and spring months. Since May 1993, Polaris has the ability to manufacture ATVs year round. Generally, Polaris commences ATV production in late autumn and continues through early autumn of the following year. For the past several years, Polaris has had virtually no carryover inventory at the dealer level of its production of snowmobiles, ATVs and PWC.
SALES AND MARKETING
With the exception of Illinois, upper Michigan, eastern Wisconsin and offshore markets, where Polaris sells its snowmobiles through independent distributors, Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States. Over the past several years, Polaris has placed an increasing emphasis on dealer-direct as opposed to distributor sales. Snowmobile sales in Europe are handled through distributors. See Note 7 of Notes to Financial Statements for discussion of foreign and domestic operations and export sales.
Most dealers and distributors of Polaris snowmobiles also distribute Polaris' ATVs and PWC. In the southern region of the United States, where snowmobiles are not used, Polaris has established a
direct dealer network. Since the beginning of 1986, Polaris has arranged approximately 500 dealerships in the southern United States. Unlike its competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC through lawn and garden, boat and marine, and farm implement dealers.
Dealers and distributors sell Polaris' products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. The dealer and distributor contracts may be canceled by either party on specified notice. Changes in dealers and distributors take place from time to time. Polaris believes that a sufficient number of qualified dealers and distributors exists in all areas to permit orderly transition whenever necessary.
Polaris has arrangements with Transamerica Commercial Finance Corporation, The Bank of Nova Scotia and ITT Commercial Finance, a division of ITT Industries of Canada, to provide floor plan financing for its dealers and distributors. Substantially all of Polaris' sales of snowmobiles, ATVs and PWC are financed under arrangements in which Polaris is paid within a few days of shipment of its product. Polaris participates in the cost of dealer and distributor financing and is required to repurchase products from the finance companies under certain circumstances and subject to certain limitations. Polaris has not historically recorded a sales return allowance because it has not been required to repurchase a significant number of units in the past. However, there can be no assurance that this will continue to be the case. If necessary, Polaris will record a sales return allowance at the time of sale should management anticipate material repurchases of units financed through the finance companies. See Note 4 of Notes to Financial Statements.
Polaris does not directly finance the purchase of Polaris snowmobiles, ATVs or PWC by consumers. However, retail financing plans are offered by certain of the dealers and Polaris has programs to make consumer financing available to its dealers through unaffiliated third parties.
Polaris' marketing activities are designed primarily to promote and communicate directly with consumers and secondarily to assist the selling and marketing efforts of its dealers and distributors. From time to time Polaris makes available discount or rebate programs or other incentives for its dealers and distributors to remain price competitive in order to accelerate reduction of retail inventories. Polaris advertises its products directly using print advertising in the industry press and in user group publications, on billboards, and, less extensively, on television and radio. Polaris also provides media advertising and partially underwrites dealer and distributor media advertising to a degree and on terms which vary by product and from year to year. Most dealer and distributor advertising appears in newspapers and on radio. Each season Polaris produces a promotional film for its snowmobiles, ATVs and PWC which is available to dealers for use in the showroom or at special promotions. Polaris also provides product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers.
ENGINEERING, RESEARCH AND DEVELOPMENT
Polaris employs approximately 180 persons who are engaged in the development and testing of existing products and research and development of new products and improved production techniques. Polaris believes that Polaris and its predecessors were the first to develop, for commercial use, independent front end suspension for snowmobiles, the long travel rear suspension for snowmobiles, direct drive of the snowmobile track, the use of liquid cooling in snowmobile engines and brakes, the use of hydraulic brakes in snowmobiles, the three cylinder engine in snowmobiles and PWC, the use of electronic fuel injection in snowmobile engines, the adaptation of the MacPherson strut front suspension and "on demand" four-wheel drive systems for use in ATVs and the application of a forced air cooled variable power transmission system to ATVs.
Polaris utilizes internal combustion engine testing facilities to design and optimize engine configurations for its products. Polaris utilizes specialized facilities for matching engine, exhaust system and clutch performance parameters in its products to achieve desired fuel consumption, power output,
noise level and other objectives. Polaris' engineering shop is equipped to make small quantities of new product prototypes for testing by Polaris' testing teams and for the planning of manufacturing procedures. In addition, Polaris' manufacturing facility in northern Minnesota has a proving ground where each of the products is extensively tested under actual use conditions.
Polaris expended for research and development approximately $4.8 million for 1991, $6.3 million for 1992 and $9.6 million for 1993, which amounts were included as a component of the cost of sales in the period incurred.
COMPETITION
The snowmobile, ATV and PWC markets in the United States and Canada are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing and cooperative advertising). Certain of Polaris' competitors are more diversified and have financial and marketing resources which are substantially greater than those of Polaris. See "-- Industry Background."
Polaris snowmobiles, ATVs and PWC are competitively priced and management believes Polaris' sales and marketing support programs for dealers are substantially the same as those provided by its competitors. Polaris' products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications.
PRODUCT SAFETY AND REGULATION
Snowmobiles, ATVs and PWC are motorized machines which may be operated at high speeds and in a careless or reckless manner. Accidents involving property damage, personal injuries and deaths occur in the use of snowmobiles, ATVs and PWC.
Laws and regulations have been promulgated or are under consideration in a number of states relating to the use or manner of use of snowmobiles, ATVs and PWC. State approved trails and recreational areas for snowmobile and ATV use have been developed in response to environmental and safety concerns. Polaris has supported laws and regulations pertaining to safety and noise abatement and believes that its products would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations.
In September 1986, the staff of the Consumer Products Safety Commission ("CPSC") ATV Task Force issued a report on regulatory options for ATVs. The Task Force found, among other things, that: children under 12 years of age are typically unable to operate any size ATV safely; the dynamic stability of four-wheel ATVs is better than that of three-wheel ATVs; the risk of accident is less on a four-wheel ATV (although the risk of death and serious injuries is equal for three-and four-wheel ATVs once an accident has occurred); and the number of fatal head injuries could be substantially reduced by the use of proper helmets. Based on its findings, the Task Force recommended that the ATV industry voluntarily cease marketing ATVs intended for use by children under 12 years of age. It proposed that warning labels be placed on ATVs intended for use by children under age 14 stating that these ATVs are not recommended for use by children under 12, and on adult-sized ATVs stating that these ATVs are not recommended for use by children under the age of 16. Warning labels were recommended for use on all ATVs stating that operator training is necessary to reduce risk of injury or death. The Task Force further recommended that the CPSC disseminate to the public information regarding ATVs, including findings describing the relative safety among ATV models. The CPSC staff was directed to carry out further technical work addressing the performance characteristics of adult-size ATVs, and to intervene in the development of the ATV voluntary regulatory standard.
In addition, based upon its findings that most states have not enacted laws regulating ATVs, the Task Force recommended that the CPSC work closely with states and other federal agencies to develop practical, uniform state legislation. Topics to be addressed included minimum operator age recommendations, licensing or certification standards requiring operator training, helmet requirements, and prohibitions on the use of alcohol and controlled-substances while operating ATVs.
In December 1986, in a follow-up measure to the Task Force Report, the CPSC voted unanimously to continue efforts with the ATV industry to develop a voluntary standard regarding the dynamic stability characteristics of ATVs. The staff was directed to develop an extensive notice program that expands upon the warning label recommendations proposed by the Task Force. In addition, the CPSC voted to ask a federal court to declare three-wheel ATVs to be an "imminent danger". In February 1987, the CPSC formally requested that the Justice Department initiate an enforcement action against the ATV industry seeking a voluntary recall of all three-wheel ATVs and four-wheel ATVs sold with the intention that they be used by children under 16, as well as a requirement that ATV purchasers receive "hands-on" training. The requested enforcement action also would call for "direct notice and wide-spread public notice" of the recall. In May 1987, the CPSC issued a safety alert advising consumers of the potential risks associated with three-and four-wheel ATVs, and recommending certain safety measures, including proper training and the use of helmets.
Except for 1,700 three-wheel models initially produced, Polaris manufactures only four-wheel and six-wheel ATVs. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons aged 16 or older (which warning was revised in 1987 to provide that only adults over age 18 should operate the vehicle), that operators should always wear proper safety helmets and that riders should complete proper training prior to operating an ATV. In May 1987, Polaris responded to the CPSC's proposed enforcement action by letter, indicating its willingness to adopt additional warning labels and notices to consumers and its support of various actions designed to enhance vehicle and user safety.
On December 30, 1987, Polaris reached an agreement with the CPSC regarding ATV safety. The agreement called for the repurchase of all three-wheel ATVs remaining in the hands of its distributors and dealers, the provision of additional safety oriented point-of-purchase materials in all Polaris ATV dealerships, and the addition of a mandatory "hands on" consumer and dealer safety training program designed to give all Polaris ATV dealers and consumers maximum exposure to safe riding techniques, as outlined by the Specialty Vehicle Institute of America. Polaris conditions its ATV warranties described below under "-- Product Liability" on completion of the mandatory "hands on" consumer training program.
Pursuant to the agreement with the CPSC, Polaris has procedures in place for ascertaining dealer compliance with the provisions of the CPSC consent decree, including random "undercover" on-site inspections of dealerships to ensure compliance with the age restriction. In June 1989, the CPSC conducted an "undercover" survey of 227 ATV dealers selected randomly from a national listing of dealers representing the five major manufacturers of ATVs, including Polaris. The study allegedly demonstrated varying degrees of consistency in adherence to the provisions of the consent decrees regarding not recommending adult-size ATVs for use by children. The study allegedly demonstrated that some dealers were ignoring the age restriction completely. The CPSC survey also allegedly demonstrated non-compliance among certain dealers with point-of-sale information provisions in the consent decree. Such provisions require the attachment of safety hang tags to all ATVs and the display of safety posters.
Based on the survey results, the degree of compliance of Polaris' dealers with the provisions of the consent decree was better than the industry average in some areas and worse in others. Polaris continually attempts to assure that its dealers are in compliance with the provisions of the CPSC consent decree. Polaris has notified its dealers that it will terminate any dealer it determines to have violated the provisions of the CPSC consent decree. To date, it has terminated five dealers for such reason.
The Partnership does not believe that the agreement with the CPSC has had or will have a material adverse effect on the Partnership or Polaris. Nevertheless, there can be no assurance that future recommendations or regulatory actions by the CPSC, the Justice Department or individual states would not have an adverse effect on the Partnership or Polaris. Certain state attorneys-general
have asserted that the CPSC agreement is inadequate and have indicated that they will seek stricter ATV regulation. The Partnership is unable to predict the outcome of such action or the possible effect on its ATV business.
Certain states, notably California and New York, have proposed certain legislation involving more stringent emissions standards for two-cycle engines. Such engines are used on Polaris' snowmobiles, ATVs and PWC. However, Polaris has developed and currently sells a four-cycle engine for its ATVs which produces lower-emissions. Polaris currently is unable to predict whether such legislation will be enacted and, if so, the ultimate impact on Polaris and its operations. Finally, local ordinances have been and may from time to time be considered and adopted which restrict the use of PWC to specified hours and locations.
PRODUCT LIABILITY
Product liability claims are made against Polaris from time to time. Since its inception in 1981 through September 30, 1994, Polaris has paid an aggregate of less than $1.4 million in product liability claims and had accrued $4.4 million at September 30, 1994 for the possible payment of pending claims. Polaris believes such accruals are adequate. Polaris does not believe that the outcome of any pending product liability litigation will have a material adverse effect on the operations of Polaris. However, no assurance can be given that its historical claims record, which did not include ATVs prior to 1985, or PWC prior to 1992, will not change or that material product liability claims against Polaris will not be made in the future.
Polaris' product liability insurance limits and coverages have been adversely affected by the general decline in the availability of liability insurance. As a result of the high cost of premiums, and in view of the historically small amount of claims paid by Polaris, Polaris has been self-insured since June 1985. Adverse determination of material product liability claims made against Polaris would have a material adverse effect on Polaris' financial condition. See Note 8 of Notes to Financial Statements.
Polaris warrants its snowmobiles, ATVs and PWC under a "limited warranty" for a period of one year, six months, and one year, respectively. For certain of its products, Polaris also offers for sale to its consumers an extended warranty contract for an additional one year period. Although Polaris employs quality control procedures, a product is sometimes distributed which needs repair or replacement. Historically, product recalls have been administered through Polaris' dealers and distributors and have not had a material effect on Polaris' business.
EFFECTS OF WEATHER
Lack of snowfall in any year in any particular region of the United States or Canada may adversely affect snowmobile retail sales in that region. Polaris seeks to minimize this potential effect by stressing pre-season sales (see "-- Production Scheduling") and shifting dealer inventories from one location to another. However, there is no assurance that weather conditions would not have a material effect on Polaris' sales of snowmobiles, ATVs or PWC.
EMPLOYMENT
Polaris employs a total of approximately 2,650 persons. Approximately 525 of its employees are salaried. Polaris considers its relations with its personnel to be excellent.
Historically, Polaris' snowmobile business was seasonal, resulting in significant differences in employment levels during the year. Despite such variations in employment levels, employee turnover was not high. With the introduction of the ATV line in 1985, Polaris' employment levels have become more stable. Polaris' employees have not been represented by a union since July 1982.
PROPERTIES
Polaris owns its principal manufacturing facility in Roseau, Minnesota. The facility consists of approximately 456,000 square feet of manufacturing space located on approximately 100 acres. In
August of 1991, Polaris acquired, for $8 million, a fabricating facility in order to bring more component parts manufacturing in-house. This facility consists of a 190,000 square foot plant situated on 38 acres and is located in Osceola, Wisconsin. Polaris makes ongoing capital investments in its facilities. These investments have increased production capacity for ATVs, snowmobiles and PWC. The Partnership believes that Polaris' manufacturing facilities are adequate in size and suitability for its present manufacturing needs.
Polaris owns all tooling and machinery (including heavy presses, conventional and computer-controlled welding facilities for steel and aluminum, assembly lines, paint lines, and sewing lines) used in the manufacture of its products. Although Polaris holds numerous patents and uses various registered trademarks and names, it believes that the loss of any of them would not have a material effect on its business.
Polaris leases its headquarters and warehousing facilities in Minneapolis,
Minnesota and in Winnipeg, Manitoba. The Minneapolis facilities are leased from
related parties pursuant to a lease that will terminate in 1997. See "Management
- -- Certain Relationships and Related Transactions." Polaris does not anticipate
any difficulty in securing alternate facilities on competitive terms, if
necessary, upon the termination of either lease.
In August 1994, Polaris signed a one-year lease agreement for a 223,000 square foot assembly facility located on 24 acres of land in Spirit Lake, Iowa. Polaris has an option to purchase the facility for $1.85 million at the end of the lease term. Polaris anticipates utilizing the facility to assemble its PWC product line, and potentially certain snowmobile and ATV models in the future.
LEGAL PROCEEDINGS
Polaris is involved in a number of legal proceedings, none of which is expected to have a material effect on the financial condition or the business of Polaris.
Injection Research Specialists commenced an action in June 1990 against Polaris in Colorado federal court alleging various claims arising out of Polaris' advertisement and sale of electronic fuel injection snowmobiles. Injection Research Specialists seeks compensatory and punitive damages, its fees and costs, and injunctive relief. Fuji and UNISIA Japanese Electronic Control Systems also are parties to the action. Polaris has filed counterclaims in that action and has instructed its counsel to contest the matter vigorously. Management does not believe that any judgment rendered against it in this matter would have a material adverse effect on the financial condition of Polaris.
In 1990, the Canadian income tax authorities proposed certain adjustments, principally relating to the original purchase price allocation to the Canadian subsidiary and transfer pricing matters for additional income taxes payable by Polaris' Canadian subsidiary for 1987 and 1988. The resolution of these proposed adjustments may also affect the Partnership's Canadian income tax expense for years subsequent to 1988. The Partnership has been informed of the Canadian income tax authorities' intent to initiate an audit of the tax years 1989 through 1992. Management intends to vigorously contest a substantial amount of the proposed adjustments, and the ultimate liability, if any, cannot be reasonably estimated. Management does not believe that the outcome of this matter will have a materially adverse impact on the financial position or continuing operations of Polaris. See Note 8 of Notes to Financial Statements.
CAPITALIZATION
The following table sets forth the historical capitalization of the Partnership and the pro forma current maturities of long-term debt and capitalization of the Corporation as if the Conversion and anticipated distributions and dividends for the year following the Conversion took place on September 30, 1994.
POLARIS
POLARIS INDUSTRIES
INDUSTRIES INC.
PARTNERS L.P. PRO FORMA
HISTORICAL (1)
------------- ---------
(IN THOUSANDS)
Current maturities of long-term debt (2)........... $ 35,000
---------
---------
Long-term debt, less current maturities (2)........ $ 35,000
---------
---------
Partners' Capital:
General Partner (deficit)........................ $ (4,817)
Limited Partners................................. 97,016
First rights assigned capital value.............. 8,779
-------------
100,978
-------------
Stockholders' Equity:
Preferred stock $.01 par value, authorized
20,000,000 shares; no issued and outstanding
shares..........................................
Common stock $.01 par value, authorized
80,000,000 shares; issued and outstanding
18,110,684 shares............................... 181
Additional paid-in capital....................... 100,797
Retained earnings (deficit) (3).................. (84,802 )
---------
16,176
---------
Total capitalization........................... $ 100,978 $ 51,176
------------- ---------
------------- ---------
- ------------------------
(1) See the unaudited pro forma financial statements and notes thereto included
in the Partnership financial statements for additional information
regarding pro forma adjustments.
(2) Represents the expected borrowings in connection with the proposed special
cash distributions.
(3) Represents the effect on Stockholders' Equity of recording anticipated
distributions and dividends on Polaris Industries Inc. common stock of
$115.8 million for the year following the Conversion and deferred tax
assets of $42 million at the date of the transaction, less transaction-
related expenses of $11 million.
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected financial data of the Partnership and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included elsewhere in this Prospectus. The selected statements of operations data, cash flow data and balance sheet data as of and for each of the fiscal years in the five-year period ended December 31, 1993, have been derived from the financial statements of the Partnership which have been audited by McGladrey & Pullen, independent public accountants. The selected statements of operations data, cash flow data and balance sheet data as of and for the nine months ended September 30, 1993 and 1994, have been derived from the Partnership's unaudited financial statements which, in the opinion of management, include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results for these periods and as of these dates. Results for interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or for other interim periods. The following unaudited pro forma data have been prepared based on the historical financial statements of Polaris Industries Partners L.P. adjusted for the transactions described in Note 10 of the Notes to Financial Statements.
(IN THOUSANDS, EXCEPT PER BAC AND PRO FORMA PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1989 1990 1991 1992 1993 1993 1994
-------- -------- -------- -------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA
Sales............................................... $242,618 $296,147 $297,677 $383,818 $528,011 $385,153 $584,725
-------- -------- -------- -------- -------- -------- --------
Income before provision for income taxes............ 26,865 33,010 33,430 39,681 53,270 35,988 56,618
Provision for income taxes.......................... 675 1,647 1,968 4,980 7,457 4,546 6,007
-------- -------- -------- -------- -------- -------- --------
Net income.......................................... $ 26,190 $ 31,363 $ 31,462 $ 34,701 $ 45,813 $ 31,442 $ 50,611
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income applicable to limited partners (1)....... $ 24,701 $ 24,840 $ 24,918 $ 27,483 $ 36,284 $ 24,902 $ 40,084
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income per BAC.................................. $ 1.65 $ 1.65 $ 1.65 $ 1.73 $ 2.25 $ 1.54 $ 2.46
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
UNAUDITED PRO FORMA INFORMATION (2)
Income before provision for income taxes............ $ 26,865 $ 33,010 $ 33,430 $ 39,681 $ 51,539 $ 35,619 $ 53,646
Provision for income taxes.......................... 9,670 11,885 12,035 14,285 18,555 12,825 19,313
-------- -------- -------- -------- -------- -------- --------
Net income.......................................... $ 17,195 $ 21,125 $ 21,395 $ 25,396 $ 32,984 $ 22,794 $ 34,333
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income per share................................ 1.01 1.23 1.25 1.41 $ 1.81 $ 1.25 $ 1.86
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Weighted average number of common and common
equivalent shares outstanding (3).................. 17,088 17,136 17,162 17,968 18,215 18,225 18,415
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
CASH FLOW DATA
Cash flow from operating activities................. $ 44,447 $ 54,782 $ 46,642 $ 55,316 $ 79,323 $ 43,116 $ 77,801
Cash purchases of property and equipment............ 7,065 7,158 15,988 12,295 18,126 13,055 20,544
Cash distributions to partners...................... 32,514 42,582 42,581 44,025 46,493 34,641 37,322
Cash distributions per BAC.......................... 2.27 2.50 2.50 2.50 2.51 1.88 1.89
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
UNAUDITED PRO FORMA INFORMATION (2 and 4)
Dividends........................................... 10,925 8,193 8,193
Dividends per share................................. 0.60 0.45 0.45
Special cash distributions.......................... 104,877 69,918
Special cash distributions per share................ 5.76 3.84
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
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NINE MONTHS ENDED SEPTEMBER 30,
YEARS ENDED DECEMBER 31, ------------------------------------
---------------------------------------------------- 1994
1989 1990 1991 1992 1993 1993 1994 PRO FORMA(5)
-------- -------- -------- -------- -------- -------- -------- --------------
BALANCE SHEET DATA
Cash and cash equivalents.......... $ 27,886 $ 32,025 $ 20,098 $ 19,094 $ 33,798 $ 14,514 $ 53,733 $ 7,931
Net increase (decrease) in cash and
cash equivalents.................. 12,287 4,139 (11,927) (1,004) 14,704 (4,580) 19,935 (25,867)
Current assets..................... 60,344 66,893 59,200 74,999 109,748 110,705 178,443 144,641
Total assets....................... 137,628 138,704 135,509 146,681 180,548 181,030 250,377 246,575
Total liabilities.................. 38,875 46,602 52,646 69,054 98,055 102,327 149,399 230,399
General Partner's capital
(deficit)......................... (419) (2,753) (5,066) (7,105) (7,397) (7,921) (4,817) --
Limited Partners' capital.......... 99,172 94,855 87,929 84,732 89,890 86,624 105,795 --
Stockholders' equity (6)........... -- -- -- -- -- -- -- 16,176
Net book value per weighted average
BAC and BAC equivalents........... 6.59 6.13 5.50 4.89 5.12 4.88 6.19 --
Net book value per share (3
and 6)............................ -- -- -- -- -- -- -- 0.88
- ------------------------------
(1) Represents net income to BAC Holders after allocation to the General
Partner and its affiliates and therefore does not represent all of the net
income of the Partnership.
(2) The unaudited pro forma data are derived from the financial statements of
the Partnership as if the Conversion had occurred on January 1, 1993 for
the statements of operations and cash flows data. Such periods have been
adjusted to eliminate the General Partner's annual fee of $500,000. The pro
forma statements of operations and cash flows exclude the $11 million
estimated costs of the Conversion, which will be recognized at the time of
the Conversion. Adjustments have been made to the pro forma statements of
operations and cash flows to provide for interest expense on long-term
borrowings of approximately $70 million anticipated to be incurred in the
third and fourth quarters of 1993, the year of the special pro forma cash
distributions. Further, the pro forma statements of operations and cash
flows assume the additional debt will be repaid at $8.75 million per
quarter, commencing in 1994, the year following the pro forma special
distributions. All periods have been adjusted to reflect a provision for
income taxes calculated at a rate of 36%. Such rate reflects a combined
federal and state statutory rate, net of related research and development
credits and anticipated foreign sales corporation benefits. See Note 10 of
Notes to Financial Statements for additional information regarding the pro
forma adjustments.
(3) Pro forma weighted average number of common and common equivalent shares
outstanding and the number of shares of common stock utilized to calculate
the unaudited pro forma net book value per share include shares to be
issued to BAC Holders, to the affiliates of the General Partner and to
employees in connection with First Rights granted but not yet converted to
BACs.
(4) Pro forma stockholder dividends, special cash distributions and the related
per share amounts reflect the Sponsors' intent to recommend that the
Corporation's Board of Directors establish an initial dividend rate of
$0.15 per share per quarter, and pay three special nonrecurring cash
distributions, each of $1.92 per share, payable during each of the last
three quarters of 1995. The Corporation is under no legal or contractual
obligation to make such distributions and dividends, and the timing and
amount of future distributions and dividends will be at the discretion of
the Board of Directors and will depend, among other things, on the future
after tax earnings, operations, capital requirements, borrowing capacity,
and financial condition of the Corporation and general business conditions.
There can be no assurance that such distributions and dividends will be
adopted or maintained by the Corporation.
(5) The unaudited pro forma balance sheet data are derived from the financial
statements of the Partnership as if the Conversion and anticipated cash
distributions and dividends for the year following the Conversion occurred
on September 30, 1994. Estimated deferred tax assets resulting from the
Conversion transaction of $42 million have been recorded and will be
recalculated when the Conversion is completed and actual temporary
differences can be determined. The change in deferred tax assets could be
material. The $11 million estimated costs of the Conversion were recorded
at the balance sheet date as an accrued expense. Anticipated cash
distributions and dividends on Polaris Industries Inc. common stock of
$115.8 million for the year following the Conversion were recorded at the
balance sheet date, resulting in a deficit in retained earnings, on a pro
forma basis. See footnote (4). The approximate $70 million expected to be
borrowed in connection with the proposed special cash distributions has
also been recorded at the balance sheet date.
(6) Pro forma stockholders' equity includes estimated amounts related to the
recording of anticipated cash distributions and dividends on Polaris
Industries Inc. common stock of $115.8 million for the year following the
Conversion, expenses for the transaction and deferred tax assets, which
will be recalculated when the Conversion is completed and actual temporary
differences can be determined. The change in deferred tax assets could be
material. Pro forma net book value per share is adjusted for shares to be
issued to affiliates of the General Partner and for shares to be issued for
First Rights granted but not yet converted to BACs. For purposes of this
transaction, assets and liabilities will be recorded at historical cost.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(HISTORICAL AND PRO FORMA)
The following discussion pertains to the results of operations and financial position of the Partnership for each of the three years ended December 31, 1991, 1992 and 1993, and the nine-month periods ended September 30, 1993 and 1994, and should be read in conjunction with the financial statements included elsewhere herein. Due to the seasonal nature of the snowmobile, all terrain vehicle (ATV) and personal watercraft (PWC) businesses in which the Partnership is engaged, and to certain changes in production and shipping cycles, results of interim periods are not necessarily indicative of the results to be expected for the complete year.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1994
Sales for the nine months ended September 30, 1994, increased to $584.7 million, representing a 52% increase over the $385.2 million of sales for the same period in 1993. Total finished goods shipments for the 1994 period have increased 43% over the same period in 1993. The Partnership's increase in sales in the 1994 period is primarily attributable to the broadening of the three product lines and the continued popularity of all Polaris products. Additional factors include the growth of the worldwide snowmobile market, the continuing favorable U.S. economy and an aggressive pricing strategy.
Snowmobile unit sales volume increased 16% during the 1994 period, primarily because of continued growth in sales of the high performance, lightweight XLT model.
ATV unit sales volume increased 45% during the 1994 period, primarily because of the continued growth in the utility and sports-enthusiasts' markets and the addition of a dedicated ATV production line with corresponding improvement in product availability at the dealer level.
PWC unit sales volume increased 160% during the 1994 period, primarily because of the fast growth in the PWC market and due to the introduction of models aimed at both the family and sports rider market segments.
The average sales per unit in the 1994 period increased by 3% for snowmobiles, 11% for ATVs and 3% for PWC, principally through the introduction and sale of more high-performance models that have a higher selling price than economy models.
The gross margin percentage decreased to 24% for the nine months ended September 30, 1994, compared to 27% for the comparable period in 1993. This decrease in percentage is primarily a result of: (a) the change in product mix towards a greater percentage of sales from ATVs and PWC which generate lower gross margins than snowmobiles; (b) continued increases in raw material purchase prices for certain component parts because of the weakening of the U.S. dollar in relation to the Japanese yen; and (c) strengthening of the U.S. dollar in relation to the Canadian dollar which results in lower gross margins from the Partnership's Canadian subsidiary operation.
Operating expenses increased $19.9 million (30%) for the nine-month period ended September 30, 1994 as a result of the sales volume increase, but as a percentage of sales, decreased to 14.7% for the nine-month period ended September 30, 1994, compared to 17.1% for the comparable period of 1993. The percentage decrease is due primarily to the Partnership's ability to support an increasing level of sales without a ratable increase in operating expenses, principally personnel.
The change in non-operating expense (income) for the 1994 nine-month period is primarily attributable to investment income generated by higher cash and cash equivalent balances during the 1994 period compared to the 1993 period.
Income tax expense increased $1.5 million for the 1994 nine-month period compared to the same period for 1993. This increase is attributable primarily to additional reserves established relating to the Canadian income tax examination in process.
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
Sales for 1993 were $528.0 million, an increase of 38% over 1992 sales of $383.8 million. Sales for 1992 increased 29% over 1991 sales of $297.7 million.
Management believes its success in the snowmobile market is attributable to its product superiority, aggressive consumer promotional programs and strong dealer network. The 1993 sales increase resulted from the introduction of new models and the continued success of other popular models, including the XLT Special. Snowmobile unit sales volume increased over the prior year by 13% in 1992 and 26% in 1993.
In 1993, the Partnership's ATV product line sales grew by 41% over 1992 sales as retail sales rose to the highest level in its history. ATV unit sales volume increased by 24% in 1992 over the prior year. Management believes it has been successful by targeting the all-purpose segment of the ATV market with new and improved products. The Partnership introduced several new models in 1993, including the Sportsman 4x4.
Manufacturing and sales of PWC commenced in the first quarter of 1992 with the introduction of the SL650 model. In 1993 the Partnership added the SL750 and the three-passenger SLT750 models designed for families and sports riders. PWC unit sales volume increased 62% in 1993 over the initial shipments of PWC product in 1992.
Except in 1993, when snowmobile sales per unit remained the same due to the dilutive effect of the Canadian currency exchange rates, average sales per unit have increased for each Polaris product line in each of the years 1991, 1992 and 1993. In each such year, the Partnership introduced and sold more high performance models. The average snowmobile sales per unit increased over the prior year by 4% in 1991 and 1992 and remained flat in 1993. The average ATV sales per unit increased over the prior year by 3% in 1991, 4% in 1992 and 5% in 1993. The average PWC sales per unit increased 11% in 1993 over the prior year.
The gross profit percentage decreased from 32% in 1991 to 30% in 1992 and to 27% in 1993 primarily due to an aggressive pricing strategy, changes in the product mix and foreign exchange rates. The growing ATV and PWC businesses provide a lower gross profit percentage than does the snowmobile business. Raw material purchase prices have increased since 1991 for certain component parts because of the weakening of the U.S. dollar in relation to the Japanese yen. Strengthening of the U.S. dollar in relation to the Canadian dollar throughout 1993 has caused gross margin erosion of the Partnership's Canadian subsidiary operation. Additionally, warranty expenses have increased during the past three years as a result of the emphasis on technological innovation and introduction of new high-performance models.
The Partnership continually invests in new product development, particularly in the areas of innovation and product diversification. New product development and research costs are recorded as cost of sales in the statement of operations. Research and development expenses, and the related percent to sales, were $4.8 million (1.6%) in 1991, $6.3 million (1.7%) in 1992 and $9.6 million (1.8%) in 1993. The Partnership incurred tooling expenditures for new products of $5.2 million in 1991, $7.1 million in 1992, and $9.3 million in 1993.
Operating expenses as a percentage of sales were 21.5% in 1991, 19.3% in 1992 and 17.2% in 1993. Operating expenses as a percentage of sales have decreased because the Partnership has been able to increase sales without incurring a ratable amount of general and administrative expenses. In addition, because of the strong demand and competitive pricing for the Partnership's products, sales and marketing program expenses have remained relatively constant.
The provision for income taxes is increasing at a rate greater than the growth in income from the Canadian subsidiary because the Partnership continues to accrue for certain of the proposed Canadian income tax adjustments.
CASH DISTRIBUTIONS
Since its inception, the Partnership has paid or declared the following quarterly cash distributions per BAC to the BAC holders (restated to reflect the two-for-one split effective August 1993):
QUARTER
YEAR 1 2 3 4 TOTAL
- --------------------------------------------------------- --------- --------- --------- --------- ---------
$ .073 $ .30 $ .373
1987..................................................... $ .30 $ .30 .30 .30 1.20
1989..................................................... .77 .375 .375 .75 2.27
1990..................................................... .625 .625 .625 .625 2.50
1991..................................................... .625 .625 .625 .625 2.50
1992..................................................... .625 .625 .625 .625 2.50
1993..................................................... .625 .625 .63 .63 2.51
1994..................................................... .63 .63 .63 * 1.89
---------
Total.................................................... $ 15.74
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* Not announced
Cumulative cash distributions have exceeded a 15% annual return on the original $10 per BAC investment (as adjusted for the two-for-one split effective August, 1993). Accordingly as provided for in the Partnership Agreement, cash distributions have been, and will continue to be, allocated 79.2% to Limited Partners and 20.8% to the General Partner as long as such distributions cumulatively exceed a 15% annual return.
The Partnership has no present intention of increasing cash distributions even if its taxable income increases. As in prior years, BAC Holders will be required to report and pay tax on their share of the Partnership's taxable income. In view of the Partnership's recent growth in book income, its taxable income currently is expected to exceed, by a substantial amount at least in 1994, the amount of cash distributions. Increases in taxable income are likely to correspond to increases in book income of the Partnership which, for the nine-month period ended September 30, 1994, increased by over 50% compared to the same period in 1993. The disparity between taxable income and cash distributions is expected to increase for the foreseeable future, and will be greater for those BAC Holders that have held BACs for longer periods of time and purchased their BACs at lower prices.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds have been cash provided by operating activities, a seasonal line of credit and a dealer financing program provided by third parties. The Partnership's primary uses of funds have been for distributions to partners, capital investments and for new product development.
During the nine months ended September 30, 1994, the Partnership generated net cash from operating activities of $77.8 million, which was utilized to fund distributions of $37.3 million and cash capital expenditures of $20.5 million. In 1993, the Partnership generated net cash from operating activities of $79.3 million, which was utilized to fund distributions of $46.5 million and cash capital expenditures of $18.1 million. At September 30, 1994, cash and cash equivalents totaled $53.7 million, an increase of $19.9 million from December 31, 1993. Working capital totaled $29.0 million at September 30, 1994, an increase of $17.3 million from December 31, 1993.
The seasonality of production and shipments causes working capital requirements to fluctuate during the year. The Operating Partnership has a $40 million unsecured bank line of credit arrangement expiring May 1, 1995 with interest charged at the prime interest rate, CD-based or LIBOR-based rates. In connection with this arrangement, the Operating Partnership has agreed to certain limitations on distributions from the Operating Partnership to the Partnership in certain circumstances. At September 30, 1994, the Operating Partnership had no short-term debt under this line of credit and had utilized its bank line to the extent of letters of credit outstanding of $17.5 million related to purchase obligations for raw materials.
The Partnership has arrangements with unrelated finance companies to provide floor plan financing for its distributors and dealers. These arrangements provide liquidity by financing distributor and dealer purchases of snowmobiles, ATVs and PWC without the use of working capital. Substantially all of the sales of snowmobiles, ATVs and PWC are financed under these arrangements whereby the Partnership receives payment within a few days of shipment of the product. The amount financed by distributors and dealers under these arrangements at December 31, 1993, and September 30, 1994, was approximately $64.9 million and $203.9 million, respectively. The Partnership participates in the cost of dealer and distributor financing up to certain limits. The Partnership has agreed to repurchase products repossessed by the finance companies to an annual maximum of 15% of the average amount outstanding during the prior calendar year. The Partnership's financial exposure under these agreements is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. However, an adverse change in the economy could cause this situation to change and thereby require the Partnership to repurchase financed units. Management intends to record a sales allowance when it becomes probable that returns under this program will be material.
The Partnership has made capital investments to increase production capacity and efficiency and for new product development. Over the past several years these investments have included the introduction of the PWC product line, the introduction of new snowmobile and ATV models to broaden those product lines, the expansion of manufacturing capacity, the purchase of enhanced fabrication and assembly equipment, and the continuing development and implementation of systems and programs to improve quality and efficiency and to reduce costs. Improvements in manufacturing capacity include the $8.0 million purchase of a component parts fabrication facility in 1991, the addition of an assembly line dedicated to year-round production of ATVs in 1993, improvements in plant lay-out and the expansion to a new leased assembly facility in 1994. The Partnership anticipates that capital expenditures for 1994 will approximate $36 million.
Revenue Canada, the Canadian income tax authorities, has proposed adjustments to the 1987 and 1988 income tax returns of the Partnership's Canadian subsidiary. The resolution of these proposed adjustments may also affect the Partnership's Canadian income tax returns for years subsequent to 1988. The Partnership has been informed of Revenue Canada's intent to initiate audits of the tax years 1989 through 1992. The proposed adjustments relate primarily to the original purchase price allocation of the Canadian subsidiary and certain transfer pricing matters. Management intends to vigorously contest a substantial amount of the proposed adjustments and the ultimate additional liability cannot be reasonably determined. Management does not believe the outcome of this matter will have a materially adverse impact on the financial position or continuing operations of the Partnership. At September 30, 1994, the Partnership had accrued $10.2 million for income taxes.
The proposed conversion of the Partnership will significantly impact future liquidity and capital resources, as a result of (a) the proposed plan to make special distributions aggregating approximately $104.9 million ($5.76 per share) to be paid in three equal installments during each of the last three quarters of 1995, (b) the proposed plan to pay regular quarterly dividends of $0.15 per share, or approximately $10.9 million per year, (c) the Partnership's incurrence of approximately $11 million in expenses in connection with the proposed conversion, and (d) the Corporation's payment of corporate federal, state and certain foreign income taxes on current earnings, which are estimated to be approximately 36% of pre-tax income. The Sponsors anticipate that a total of approximately $70 million in debt will be incurred in the third and fourth quarters of 1995 to finance the special distributions. As a result, the Corporation will be required to obtain financing in addition to the Partnership's current bank line of credit. The Sponsors believe that requisite financing can be obtained on acceptable terms.
At this time, management is not aware of any other factors that would have a materially adverse impact on cash flows beyond 1994.
INFLATION AND EXCHANGE RATES
The Partnership does not believe that inflation has had a material impact on the results of its operations. However, the changing relationship of the U.S. Dollar to the Canadian dollar and Japanese yen has had a material impact from time-to-time.
The principal competitors in ATVs are Japanese companies and one of the significant snowmobile and PWC competitors is a Japanese company. Over the past several years, weakening of the U.S. dollar in relation to the yen has resulted in higher raw material purchase prices. On average, in 1993 approximately 32% of the standard cost of each snowmobile, 24% of the standard cost of each ATV, and 44% of the standard cost of each PWC consist of material purchased from Japanese suppliers.
The Partnership operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 20% of total Polaris sales in 1993. Strengthening of the U.S. dollar in relation to the Canadian dollar throughout 1993 has caused unfavorable foreign currency fluctuations from prior periods resulting in lower gross margin levels.
In the past, the Partnership has been a party to, and in the future may enter into, foreign exchange hedging contracts for both the Japanese yen and the Canadian dollar to minimize the impact of exchange rate fluctuations within each year. To date, such contracts have not had a material impact on earnings.
MARKET PRICES AND DISTRIBUTIONS
The BACs are listed on the American Stock Exchange and the Pacific Stock Exchange under the symbol "SNO". At November 18, 1994, there were approximately 18,860 holders of record of the BACs. The following table sets forth the high and low sale prices per BAC as reflected on the composite tape for the periods indicated, all as adjusted to reflect the two-for-one unit split which became effective on August 18, 1993:
HIGH LOW
--------- ---------
1992
- ------------------------------------------------------------------------
First Quarter........................................................... $20 $18 1/16
Second Quarter.......................................................... 22 1/2 19
Third Quarter........................................................... 24 1/2 21 1/8
Fourth Quarter.......................................................... 23 3/4 21 1/16
1993
- ------------------------------------------------------------------------
First Quarter........................................................... 26 9/16 21 13/16
Second Quarter.......................................................... 30 15/16 25 13/16
Third Quarter........................................................... 36 27 15/16
Fourth Quarter.......................................................... 38 1/2 32 1/4
1994
- ------------------------------------------------------------------------
First Quarter........................................................... 37 3/8 29 1/8
Second Quarter.......................................................... 35 7/8 30 1/8
Third Quarter........................................................... 39 32 1/8
Fourth Quarter (through November 18).................................... 46 7/8 37 5/8
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The closing sale price as reflected on the composite tape on November 18,
1994, the last trading day prior to the mailing of this Proxy Statement, was
. The average closing price during the ten trading days ending August
24, 1994, the last trading day before the Partnership publicly announced the
planned Conversion, was $36.
The Partnership paid the following distributions per unit to BAC Holders during the years ended December 31, on or about the 15th day of the months indicated, all as adjusted for the two-for-one unit split which became effective on August 18, 1993:
1994 1993 1992 1991
--------- --------- --------- ---------
February............................................ $ 0.630 $ 0.625 $ 0.625 $ 0.625
May................................................. 0.630 0.625 0.625 0.625
August.............................................. 0.630 0.625 0.625 0.625
November............................................ 0.630 0.630 0.625 0.625
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On December 1, 1993, the Partnership declared a regular quarterly distribution of $0.63 per BAC to holders of record on December 15, 1993. This distribution was paid on February 15, 1994. On March 1, 1994 the Partnership declared a first quarter 1994 distribution of $0.63 per BAC which was paid on May 16, 1994 to holders of record as of March 15, 1994. On May 23, 1994, the Partnership declared a second quarter distribution of $0.63 per BAC which was paid on August 15, 1994 to holders of record as of June 15, 1994. On August 25, 1994 the Partnership declared a third quarter distribution of $0.63 per BAC which was paid on November 15, 1994 to holders of record as of September 15, 1994. If the Partnership declares the regular quarterly distribution on or about December 1, 1994 in accordance with prior practice, a fourth quarter distribution of $.63 per BAC would be paid on or about February 15, 1995 to holders of record on or about December 15, 1994.
If the Conversion is completed between the date of a declaration of a distribution to the General Partner, its affiliates and the BAC Holders, and the date of payment of such distribution, the Merger Agreement provides that persons who were BAC Holders on the record date for the distribution will receive such distribution and that the Transferors transferring interests in EIPCC, the General
Partner and the Operating General Partner will receive their pro rata shares of the distribution otherwise payable to the General Partner and the Operating General Partner. In addition, if the Conversion is completed in a fiscal quarter before declaration of the regular quarterly distribution, the Partnership intends to pay a cash distribution to BAC Holders of record on the closing date of the Merger equal to the pro rata portion of $0.63 corresponding to the portion of the Partnership's fiscal quarter ending on the Effective Date. Assuming the Conversion Proposal is approved by the BAC Holders at the Special Meeting and, as expected, the Conversion is consummated by December 31, 1994, there will be no further distributions by the Partnership after payment of the fourth quarter distribution referred to above. The Transferors transferring interests in EIPCC, the General Partner and the Operating General Partner will receive their pro rata shares of such special cash distribution otherwise payable to the General Partner and the Operating General Partner.
The Corporation, which was formed solely for the purpose of facilitating the Conversion, has no independent assets or operations. Hence no dividends have been paid on the Common Stock. The Sponsors, who will be the senior management of the Corporation following the Conversion, have determined to recommend that the Corporation's Board of Directors adopt a cash dividend distribution policy, a principal purpose of which will be to provide that the total amount of cash distributions made by the Partnership per BAC and cash dividends paid by the Corporation per share of Common Stock during the period commencing January 1, 1995 and ending December 31, 1997, will be equal to the amount ($7.56 per BAC) which BAC Holders would have received in cash distributions from the Partnership with respect to such period if the Conversion had not taken place. The Sponsors believe that such a policy would help facilitate the orderly transition in the capital markets during the months following the Conversion from primarily income-oriented investors to primarily growth-oriented and institutional investors expected to invest in the Corporation.
Accordingly, the Sponsors intend to recommend that the Corporation's Board of Directors pay the Proposed Distributions (i.e. an initial cash dividend rate of $0.15 per share of Common Stock per quarter and, in addition, pay special cash distributions for each of the last three quarters of 1995 in an amount per share equal to one-third of (a) $5.76 less (b) if the Conversion is not consummated in 1994, the amount per BAC of any cash distributions declared and paid by the Partnership on or after January 1, 1995 to the extent such distributions exceed $.15 per BAC).
The payment of dividends and distributions by the Corporation will be at the discretion of its Board of Directors, will be subject to legal and contractual limitations, and will depend upon the future earnings, operations, financial condition and capital and other requirements of the Corporation. There can be no assurance that the foregoing dividend and distribution policy will be adopted or that dividends and distributions in the amounts set forth above will in fact be paid. However, the General Partner and the Sponsors, after consultation with their financial and legal advisors, believe that the Corporation will be in a position to pay dividends and distributions in the amounts set forth above. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Change in Distribution Policy."
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF EIPCC
The General Partner, or an affiliate, manages the overall business of the Partnership and the Operating Partnership. The General Partner is managed by EIPCC, its managing general partner. EIPCC also acts as the management agent for the Partnership. The directors and executive officers of EIPCC are:
NAME AGE POSITION
- --------------------- --- --------------------------------------------------
Paul Bagley 51 Chairman and Director
Victor K. Atkins, Jr. 49 President, Secretary, Treasurer and Director
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Paul Bagley has been Chairman of EIPCC since April 1987. He is Chairman and Chief Executive Officer of FCM Fiduciary Capital Management, a registered investment advisor, and a Managing Partner of Stone Pine Capital, Inc. Mr. Bagley is also the Chairman and Chief Executive Officer of American National Security, Inc. ("ANS"). He is a director of America First Financial Fund 1987A, and a director and member of the executive committee of Eureka Bank, a federal savings bank. Mr. Bagley also serves as Chairman of the Board of Directors of Silver Screen Management, Inc., International Film Investors, Inc. and Franchise Finance Corporation of America II. Prior to October 1988, Mr. Bagley was with Shearson Lehman Hutton Inc., or its predecessor firm, E.F. Hutton & Company Inc. ("Hutton") since 1968, most recently as a Managing Director. Mr. Bagley is a graduate of the University of California at Berkeley and the Harvard Business School.
Victor K. Atkins, Jr. has been President of EIPCC and Chairman of Polaris Industries Capital Corporation ("PICC") since April 1987. Mr. Atkins also served as Chairman and director of Houston Biotechnology Inc. between May 1992 and June 1994, and has been President and a director of ANS since April 1991. Mr. Atkins is a graduate of Harvard College and the Harvard Business School.
EIPCC, Victor K. Atkins, Jr. and Paul Bagley were among the defendants in a lawsuit filed on March 5, 1993 by EIP Holdings L.P., a shareholder of EIPCC, Lehman Brothers Inc. and others, which sought the replacement of these two directors and monetary damages of unspecified amounts from the defendants. On March 8, 1993, certain of the defendants in the above action brought an action against one of the plaintiffs in the above action and others seeking, among other things, a determination that the two defendant directors had been properly elected as directors of EIPCC. On August 25, 1994, all the parties to the March 5, 1993 action entered into a settlement agreement. The March 8, 1993 action has been dismissed as moot. In connection with the settlement agreement, EIP Holdings L.P. is no longer a shareholder in EIPCC and cancelled the agreement pursuant to which it was entitled to elect one of the EIPCC board members. Accordingly, such member has resigned as a director of EIPCC. Pursuant to the settlement agreement, the litigation was subsequently dismissed with prejudice. The settlement does not effect the operations of the Operating Partnership or distributions to BAC Holders.
The day-to-day administration and operation of the Operating Partnership is managed by the Operating General Partner. The Operating General Partner is managed by its managing general partner, PICC, a wholly-owned subsidiary of EIPCC.
DIRECTORS AND EXECUTIVE OFFICERS OF PICC
The directors and executive officers of PICC are:
NAME AGE POSITION
- --------------------- --- --------------------------------------------------
Victor K. Atkins, Jr. 49 Chairman, Secretary and Director
W. Hall Wendel, Jr. 51 Chief Executive Officer and Director
Paul Bagley 51 Director
Kenneth D. Larson 54 President, Chief Operating Officer
John H. Grunewald 58 Executive Vice President, Finance and
Administration
James Bruha 54 Vice President - Manufacturing
Charles A. Baxter 46 Vice President - Engineering and Product Safety
Ed Skomoroh 56 Vice President - Sales and Marketing
Michael W. Malone 36 Chief Financial Officer and Treasurer
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W. Hall Wendel, Jr. has served as Chief Executive Officer of PICC, the Managing General Partner of Polaris Industries Associates L.P., which is the Operating General Partner of Polaris Industries L.P., since 1987. From 1981 to 1987, Mr. Wendel was Chief Executive Officer of the predecessor of Polaris, which was formed to purchase the snowmobile assets of the Polaris E-Z-Go Division of Textron. Before that time, Mr. Wendel was President of the Polaris E-Z-Go Division for two years and prior thereto, held marketing positions as Vice President of Sales and Marketing and National Sales Manager since 1974.
Kenneth D. Larson has been President and Chief Operating Officer of PICC since October 1988. Prior thereto, Mr. Larson was Executive Vice President of the Toro Company responsible for its commercial, consumer and international equipment businesses, and had held a number of general management positions since joining Toro Company in 1975.
John H. Grunewald has been Executive Vice President, Finance and Administration of PICC since September 1993. Prior to joining Polaris, Mr. Grunewald was employed for 16 years by Pentair, Inc., a diversified manufacturer of industrial products, most recently as Executive Vice President, Chief Financial Officer and Secretary.
James Bruha has been Vice President, Manufacturing since October 1989. Prior to joining Polaris in February 1989, Mr. Bruha held a variety of management positions with the Toro Company for the previous 17 years, including materials and operations management responsibilities for three different Toro divisions.
Charles A. Baxter has been Vice President - Engineering of Polaris since June 1981 and prior thereto, since 1970, was employed as Director of Engineering of the Polaris Division of Textron.
Ed Skomoroh was elected Vice President, Sales and Marketing in October 1988. Prior thereto he was Vice President, Polaris Canada and President, Secretary and Director of Polaris Industries Inc., an Ontario corporation and a wholly-owned subsidiary of the Partnership. Mr. Skomoroh joined Polaris in 1982 as General Manager, Canada, and was, for more than one year prior thereto, the General Manager for the Canadian operations of Arctic Enterprises, Inc., a snowmobile manufacturer.
Michael W. Malone has been Chief Financial Officer and Treasurer of Polaris since January 1993. Prior thereto he was Assistant Treasurer of the PICC. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen & Co.
The Board of Directors of PICC currently has two standing committees, the Compensation Committee and the Audit Committee. Victor K. Atkins, Jr. and Paul Bagley are the members of each such Committee.
DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION AFTER THE CONVERSION
The individuals listed below will be the directors and officers of the Corporation immediately upon completion of the Conversion:
NAME AGE POSITION
- ------------------- --- --------------------------------------------------
W. Hall Wendel, Jr. 51 Chairman and Chief Executive Officer, Director
Beverly F. Dolan 67 Director(1)
Robert S. Moe 63 Director(1)
Kenneth D. Larson 54 President and Chief Operating Officer, Director(1)
Stephen G. Shank 50 Director(1)
Gregory R. Palen 39 Director(1)
Andris A. Baltins 49 Director(1)
John H. Grunewald 58 Executive Vice President, Chief Financial Officer
and Secretary
James Bruha 54 Vice President-Manufacturing
Charles A. Baxter 46 Vice President-Engineering and Product Safety
Ed Skomoroh 56 Vice President-Sales and Marketing
Michael W. Malone 36 Vice President and Treasurer
- ------------------------
(1) Messrs. Dolan, Moe, Larson, Shank, Palen and Baltins have consented to
serve as directors of the Corporation upon completion of the Conversion.
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The Board of Directors of the Corporation will be divided into three classes serving staggered three-year terms. The term of office of Messrs. Larson and Baltins is to expire in 1995; the term of office of Messrs. Moe and Dolan is to expire in 1996; and the term of office of Messrs. Wendel, Palen and Shank is to expire in 1997.
Beverly F. Dolan was the Chairman and Chief Executive Officer of Textron, Inc., a multi-industry company with operations in aerospace technology, commercial products and financial services, from 1986 through 1992. Since 1992, he has been an investor. Mr. Dolan is a director of Textron, Inc.; First Union Corporation, a bank holding company; Ruddick Corporation, a multi-industry company with operations in retail grocery, thread manufacturing and printing; and FPL Group, Inc., a Florida electrical power producer. Mr. Dolan served on President Bush's Export Council and was elected Vice Chairman of the council in November 1990.
Robert S. Moe was Executive Vice President and Treasurer of PICC or Polaris from 1981 through 1992. Since 1992, he has been an investor.
Stephen G. Shank has been the President and Chief Executive Officer of Learning Ventures, Inc., a provider of education programs, since September 1991. Prior thereto, from 1988, he was Chairman and Chief Executive Officer of Tonka Corporation, a marketer and manufacturer of toy and game products. Mr. Shank is a director of National Computer Systems, Inc., an information services company, and Advance Circuits, Inc., a manufacturer of printed circuit boards and electronic interconnect devices. In addition, Mr. Shank is a director of various private and non-profit corporations.
Gregory R. Palen has been the Chairman and Chief Executive Officer of Spectro Alloys, an aluminum manufacturing company since 1989 and Chief Executive Officer of Palen/Kimball Company, a heating and air conditioning company, since 1980. He is a director of Valspar Corporation, a paint and coatings manufacturing company. In addition, Mr. Palen is a director of various private and non-profit corporations.
Andris A. Baltins has been a member of the law firm of Kaplan, Strangis & Kaplan, P.A. since 1978. He is a director of Affinity Group, Inc., a membership-based marketing company. In addition, Mr. Baltins is a director of various private and non-profit corporations.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by Polaris Industries L.P. to each of the chief executive officer and the four most highly compensated executive officers, each of whom will continue in such positions with the Corporation if the Conversion Proposal is approved and the Conversion is consummated, for services rendered in all capacities for the year ended December 31, 1993:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------- -----------
------------------------ OTHER ANNUAL RESTRICTED OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION STOCK(2) /SARS PAYOUTS(3) COMPENSATION(4)
- ---------------------------------------- ---- -------- -------- ------------ ---------- ------- ----------- ---------------
W. Hall Wendel, Jr. 1993 $240,000 $328,800 $ -0- $ 7,075
Chief Executive Officer 1992 240,000 249,600 3,736,049 6,866
1991 240,000 144,000 1,457,861 6,667
Kenneth D. Larson 1993 185,433 278,149 744,002 7,075
Chief Operating Officer 1992 183,750 199,920 858,297 6,866
and President 1991 183,750 115,763 765,000 6,667
Charles A. Baxter 1993 150,000 144,000 -0- 7,075
Vice President-- 1992 150,000 118,500 1,245,335 6,866
Engineering and Product 1991 150,000 85,500 485,966 6,667
Safety
Ed Skomoroh 1993 129,402 121,636 248,045 7,075
Vice President--Sales 1992 129,402 102,228 286,069 6,866
and Marketing 1991 129,402 73,759 765,000 6,667
James Bruha 1993 121,346 120,133 248,045 7,075
Vice President-- 1992 120,000 102,000 597,414 6,866
Manufacturing 1991 120,000 78,000 121,482 6,667
- ------------------------------
(1) Bonus payments are reported for the year in which the related services were
performed.
(2) In 1994 an additional 127,500 First Rights were granted pursuant to the
Management Plan, including 8,000, 10,000, 5,000, 5,000, and 15,000 to
Messrs. Wendel, Larson, Baxter, Skomoroh and Bruha, respectively. These
First Rights will convert to shares of Common Stock on January 1, 1997
(50%) and the remainder convert on January 1, 1998 (50%) if the Conversion
is consummated.
(3) These payments are First Rights which converted on December 28, 1993 for
1993, December 28, 1992 for 1992 and January 1, 1992 for 1991.
(4) Includes Operating Partnership matching contributions to the 401(k)
retirement savings plan.
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In addition, EIPCC, the managing general partner of the General Partner, acts as management agent (the "Management Agent") in the performance of certain administrative services on behalf of the Partnership and receives an annual management fee in the amount of $500,000 pursuant to a Management Agreement (the "Fee"). The Fee is applied towards salaries, overhead and other expenses of the Management Agent in connection with the administration of the Partnership. If the Merger is approved and the Conversion is consummated, the Management Agreement will be terminated and the Fee will no longer be paid.
DEATH AND DISABILITY BENEFITS AND DEFERRED COMPENSATION
An agreement with Mr. Wendel provides benefits in the event of death, disability, retirement or severance. If, during the term of his employment, Mr. Wendel becomes totally disabled, the Operating Partnership will pay monthly disability payments of $4,167 during his lifetime until age 65. In the event of the death of Mr. Wendel during his employment or while receiving disability payments, the Operating Partnership will pay Mr. Wendel's designated beneficiary a total of $500,000 in monthly payments over ten years. In the event of termination of employment without cause, the Operating Partnership will pay $500,000, in monthly installments over ten years commencing on Mr. Wendel's
65th birthday or, if later, retirement. In the event of voluntary termination of employment by Mr. Wendel, the Operating Partnership will pay $50,000 for each full year of service (including the period during which disability payments are received) after September 14, 1982, up to $500,000 in monthly installments over ten years commencing on Mr. Wendel's 65th birthday or, if later, retirement.
LONG-TERM INCENTIVE COMPENSATION
MANAGEMENT AND EMPLOYMENT PLANS. The Partnership Agreement provides for the issuance of up to 2,400,000 First Rights to acquire BACs as an incentive for operating management and employees of the Operating Partnership. Of such First Rights, 900,000 were reserved for issuance to non-management employees of the Operating Partnership (the "Employee Plan") and 1,500,000 were reserved for issuance to middle management and senior management (the "Management Plan"). As described below, as of the date hereof, 1,865,497 First Rights have already automatically converted into BACs, and the Partnership has already satisfied the criteria for automatic conversion of the remaining First Rights into BACs.
The Employee and the Management Plans are administered by a committee (the "Bonus Committee") consisting of Victor K. Atkins, Jr., W. Hall Wendel, Jr. and John H. Grunewald. Any actions taken by the Bonus Committee (with respect to the Employee and the Management Plans) must be consistent with the respective members' fiduciary obligations to the Partnership. Any actions of the Bonus Committee (with respect to the Employee and the Management Plans) are reviewed by the Board of Directors of PICC and shall be deemed appropriate unless such Board establishes otherwise. In addition to being President, Secretary, Treasurer and Director of EIPCC and the individual general partner of the General Partner, Mr. Atkins is also Chairman of PICC and the individual general partner of the Operating General Partner and a director of PICC. Mr. Wendel is Chief Executive Officer of the Operating Partnership and a director of PICC. Mr. Grunewald is Executive Vice President--Finance and Administration of the Operating Partnership. Mr. Wendel and Mr. Grunewald are participants in, and have been granted significant First Rights under, the Management Plan. No First Rights have been or will be granted to Mr. Atkins.
As of the date hereof, 2,177,997 First Rights have been issued. Of the amount, (i) 1,670,641 First Rights were converted into BACs and remain outstanding, (ii) 194,856 First Rights were canceled pursuant to a program (no longer in effect) adopted to assist First Rights plan participants in the payment of personal income tax in exchange for the cancellation of First Rights that were scheduled to convert to BACs, and (iii) 312,500 First Rights will convert into BACs on various dates in the future. 222,003 First Rights remain available for future issuance at the times and subject to the conditions specified by the Committee, in its discretion. The existing First Rights will be assumed by the Corporation, with only such changes as are necessary to reflect conversion to corporate form.
No First Rights may be granted under either plan after December 31, 1999, and the First Rights expire January 1, 2003.
If any employee who has been issued First Rights under the Management Plan ceases to be an employee for any reason other than death, before all of the BACs relating to First Rights granted to such employee have been issued, such First Rights relating to unissued BACs shall terminate and no additional BACs shall be issued to him or her under the Management Plan.
If a non-management employee who has been issued First Rights under the Employee Plan is terminated for any reason other than for cause, he or she shall be entitled to receive all or a portion (depending on years of service with the Operating Partnership) of the BACs issuable with respect to First Rights granted to him, at such times and under such conditions as are set forth in the Employee Plan and such First Rights.
The following table sets forth the numbers of First Rights granted since inception of the Management Plan to the following officers of the Operating Partnership, as well as those First Rights which have converted as of December 31, 1993:
REMAINING RIGHTS
RIGHTS RIGHTS REMAINING VALUE AT DECEMBER
GRANTED CONVERTED RIGHTS 31, 1993
--------- --------- ----------- -----------------
W. Hall Wendel, Jr..................... 248,000 240,000 8,000 $ 270,000
Kenneth D. Larson...................... 110,000 100,000 10,000 337,500
Charles A. Baxter...................... 85,000 80,000 5,000 168,750
Ed Skomoroh............................ 65,000 60,000 5,000 168,750
James Bruha............................ 55,000 40,000 15,000 506,250
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BONUS AND PROFIT SHARING PLANS. In addition to the issuance of First Rights, bonus and profit sharing plans have been established for employees who meet minimum service requirements and will be assumed by the Corporation, with only such changes as are necessary to reflect conversion to corporate form. Bonuses and profit sharing awards will be paid to the employees determined by the Bonus Committee in amounts determined by it. All actions taken by the Bonus Committee are to be consistent with the respective members' fiduciary obligations to the Partnership. The actions of the Bonus Committee are reviewed by the Board of Directors of PICC and deemed appropriate unless the Board establishes otherwise. Bonus awards are granted each year, based on "Pre-Tax Distributable Cash Flow," which means for any year, the pre-tax earnings of the Operating Partnership, without regard to any amounts payable pursuant to the bonus pool, as adjusted to (a) add the sum of (1) depreciation and amortization of fixed assets, tooling, inventory valuation step-up, intangible assets and goodwill and (2) compensation expense recorded in connection with the First Rights employee benefit plans, and to (b) subtract the sum of (1) capital expenditures of the Operating Partnership, and (2) permitted administrative expenses of both the Operating Partnership and the Partnership (exclusive of the annual management fee payable by the Partnership to the Management Agent), up to a maximum of the following:
PERCENTAGE
PARTICIPATION
PRE-TAX DISTRIBUTABLE CASH FLOW IN INCREMENT
- -------------------------------------------------------------------------------- -----------------
$0 -- $12,000,000....................................................... 0%
$12,000,001 -- $15,000,000...................................................... 5%
$15,000,001 -- $20,000,000...................................................... 10%
$20,000,001 -- $25,000,000...................................................... 15%
$25,000,001 -- $30,000,000...................................................... 20%
$30,000,001 or more............................................................. 25%
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In general, the Bonus Committee will consider factors such as the previous year's bonus, base compensation, responsibilities and performance of the individual employee and performance of the Operating Partnership as a whole in determining bonus awards.
In addition to the above computation, the Bonus Committee may, in its discretion, grant a certain amount of profits to be distributed to employees relating to an historical profit sharing plan. In the event with respect to any year the Bonus Committee does not grant awards in an amount equal to the maximum amount for such year, the difference between the maximum and actual amount of the award may, at the discretion of the Bonus Committee, be carried over to a subsequent year and added to the maximum amount with respect to which awards may be granted in such subsequent year. Awards will be paid in cash, in a lump sum, not later than 30 days following the completion of the Partnership's audit for such year. An employee designated by the Bonus Committee shall be eligible to receive an award if he or she is employed to the last day of the Partnership's fiscal year. It is intended that the bonus and profit sharing plans shall continue indefinitely; provided, however, that since
January 1, 1993, the Board of PICC has had the power to terminate the plans. The allocations to the bonus and profit sharing plans for the years ended December 31, 1993, 1992, and 1991, were $16,236,000, $11,411,000, and $9,475,000, respectively.
RETIREMENT SAVINGS PLAN
Effective June 1, 1985, Northwestern, the predecessor company, adopted a Retirement Savings Plan (the "Plan") for all employees who meet minimum service requirements. Such Plan was adopted by the Operating Partnership and will be assumed by the Corporation, with only such changes as are necessary to reflect conversion to corporate form. The Plan is intended to qualify as a retirement plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Under the Plan, employees may save up to 15% of their income through payroll deductions. The Operating Partnership may, if it elects, also make contributions which match the employee contributions up to 4% of the employee's income. The Operating Partnership's matching contribution immediately vests in the employee's account. Amounts in a participant's account are distributable upon termination of employment.
The Board of Directors of PICC may, at any time, amend or terminate the Plan. As of December 31, 1993, substantially all of the eligible employees participated in the Plan through payroll deductions. The Operating Partnership contributed matching contributions of approximately $1,099,000 under the plan for the year ended December 31, 1993, $898,000 for the year ended December 31, 1992, and $766,000 for the year ended December 31, 1991. For the year ended December 31, 1993 the Partnership made matching contributions to Messrs. Wendel, Larson, Baxter, Skomoroh and Bruha of approximately $7,075 each.
PURCHASE OF BACS
The Operating General Partner may, in its sole discretion, implement a program to enable employees of the Operating Partnership to purchase BACs. To date, no such program has been implemented.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to 1994, levels of base compensation and participation in the bonus and profit sharing pool were established by senior management of the Operating Partnership, including Messrs. Wendel, Grunewald and Larson, and were subject to approval by the Board of Directors of PICC. At December 31, 1993, the Board of Directors of PICC consisted of Messrs. Wendel, Atkins and Bagley. Late in 1993, the Board of Directors established a Compensation Committee consisting of Messrs. Atkins and Bagley to establish levels of base compensation and participation in the bonus and profit sharing pool for officers of the Operating Partnership for subsequent fiscal years. Messrs. Bagley and Atkins do not participate in the bonus and profit sharing pool.
DIRECTOR COMPENSATION
After consummation of the Conversion, the Corporation intends to pay directors who are not also employees (Messrs. Baltins, Dolan, Moe, Palen and Shank) an annual director's fee of $27,500, at least $5,000 of which is payable in restricted stock of the Corporation. Fees are proposed to be paid quarterly and restrictions on restricted stock are proposed to lapse upon cessation of board membership.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Operating Partnership leases offices and warehouse space in a suburb of Minneapolis, Minnesota from 1225 North County Road 18 Limited Partnership ("1225 Partnership"). The partners of the 1225 Partnership are former stockholders of Northwestern, including W. Hall Wendel, Jr., Robert S. Moe and Charles A. Baxter, who own (either directly or through their immediate families) 1,687,200 BACs. On October 27, 1988, Northwestern was liquidated and its assets were distributed to its stockholders. Under the lease entered into in 1983, and amended in 1990, the Operating Partnership leases 60,127 square feet of warehouse space and 31,733 square feet of office space from the 1225 Partnership. The lease is on a "triple net" basis and provides for annual rent of $2.50 per square foot
of warehouse space and $5.50 per square foot of office space and is adjusted annually by increases in the consumer price index, not to exceed 3.5% annually. Total lease payments for the years ended December 31, 1993, 1992, and 1991, were $443,000, $429,000, and $415,000, respectively. The term of the lease expires in 1997.
The Operating Partnership has assumed the liabilities of Northwestern under such lease agreement and has succeeded to the rights of Northwestern with respect to the 1225 Partnership. Any future transactions with the 1225 Partnership or any other related party will be on terms which management believes are no less favorable to the Operating Partnership or the Corporation than those which could reasonably be obtained from an unaffiliated party. Management does not believe that any of the arrangements with the 1225 Partnership will have any material impact on operating results.
Andris A. Baltins, who has consented to serve as a director of the Corporation upon completion of the Conversion, is a member of the law firm of Kaplan, Strangis and Kaplan, P.A., which provides legal services to the Corporation and has provided legal services to the Partnership and its subsidiaries. Of the $11 million in fees and expenses estimated to be incurred in connection with the Conversion, it is estimated that Kaplan, Strangis and Kaplan, P.A. will receive fees of approximately $1 million.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 18, 1994, the number of BACs,
and, upon completion of the Conversion, the number of shares of Common Stock
beneficially owned by (i) each person who is a director of EIPCC or PICC, (ii)
each person who has been nominated as a director of the Corporation, (iii) each
of the chief executive officer and the four most highly compensated executive
officers other than the chief executive officer of the Operating Partnership,
(iv) all directors of PICC, EIPCC and executive officers of PICC as a group (in
the case of BACs) and all directors, nominees for director and proposed
executive officers of the Corporation as a group (in the case of shares of
Common Stock), and (v) those persons known to the Partnership who beneficially
own more than 5% of any class of voting securities. For a description of the
relationships among the General Partner, Mr. Atkins, Lehman Brothers Holdings
Inc. ("LBHI") and certain other affiliates of the General Partner, see "The
Conversion -- Background of the Conversion."
BENEFICIAL OWNERSHIP (1)
------------------------------------------------
BACS SHARES OF COMMON STOCK
---------------------- ----------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------------------------------- --------- ------- --------- -------
Victor K. Atkins, Jr. (2) 425,132 2.66% 1,408,665 7.78%
President, Secretary, Treasurer and Director of EIPCC and Chairman
and Director of PICC
Paul Bagley (3) 18,475 * 18,475 *
Chairman and Director of EIPCC and Director of PICC
W. Hall Wendel, Jr. (4) 988,800 6.18% 988,800 5.46%
Chief Executive Officer of the Operating Partnership and Director of
PICC
Kenneth D. Larson (5) 105,376 * 105,376 *
President and Chief Operating Officer of PICC, Director (6)
Charles A. Baxter 280,000 1.75% 280,000 1.55%
Vice President--Engineering and Product Safety of PICC
Ed Skomoroh 49,020 * 49,020 *
Vice President--Sales and Marketing of PICC
James Bruha 7,460 * 7,460 *
Vice President--Manufacturing of PICC
Beverly F. Dolan -0- -0- -0- -0-
Director (6)
Stephen G. Shank -0- -0- -0- -0-
Director (6)
Gregory R. Palen -0- -0- -0- -0-
Director (6)
Andris A. Baltins (7) 4,550 * 4,550 *
Director (6)
Robert S. Moe (8) 418,400 2.61% 418,400 2.31%
Director (6)
Lehman Brothers Holdings Inc. (9) 325,507 2.03% 1,375,628(10) 7.60%
All directors and executive officers as a group 1,897,086 11.85% 1,876,429 10.36%
- ------------------------------
* Represents less than 1%.
(1) Unless otherwise indicated, beneficial ownership disclosed consists of sole
voting and investment power.
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(2) Includes certain shares which may be received by LBHI. See footnote (10)
below.
(3) Includes 11,475 BACs (shares) held indirectly by Mr. Bagley by virtue of
his 12% ownership of the outstanding stock of Boker Orr Corporation (of
which he is President), a 12.5% limited partner of EIP I L.P. Also includes
800 BACs (shares) held in trusts for Mr. Bagley's children, as to which he
disclaims any beneficial interest. Also includes 6,200 BACs (shares) owned
by Mr. Bagley and his spouse in several joint accounts. Mr. Bagley also has
an interest in an indeterminate number of shares pursuant to a partnership
agreement among a subsidiary of LBHI and Boker Orr Corporation. See
footnote (10) below.
(4) Includes 128,000 BACs (shares) held in a trust for Mr. Wendel's daughter as
to which he disclaims any beneficial interest.
(5) Includes 100 BACs (shares) held in a trust for Mr. Larson's child and
10,200 BACs (shares) owned by Mr. Larson's spouse, as to which he disclaims
any beneficial interest.
(6) Has agreed to serve as a director upon completion of the Conversion.
(7) Other members of the law firm of Kaplan, Strangis and Kaplan, P.A., of
which Mr. Baltins is a member and which serves as counsel for the
Corporation, beneficially own 39,750 BACs (shares).
(8) Includes 222,400 BACs (shares) held in a trust for Mr. Moe's children, as
to which he disclaims any beneficial interest.
(9) Includes BACs owned by certain wholly owned subsidiaries of LBHI.
(10) Does not include shares which may be received by LBHI, subject to certain
conditions not in the control of LBHI, pursuant to the preferred return set
forth in the partnership agreement of the General Partner. Includes shares
that may be beneficially owned by Boker Orr Corporation and not LBHI
pursuant to a partnership agreement among a subsidiary of LBHI and Boker
Orr Corporation. See footnotes (2) and (3) above.
|
The business address for Mr. Atkins is 33 Flying Point Road, Southampton, New York 11968.
The business address for Mr. Bagley is c/o Stone Pine Capital Ltd., 410 17th Street, Suite 400, Denver, Colorado 80202.
The business address for Messrs. Wendel, Larson, Baxter, Skomoroh and Bruha is 1225 Highway 169 North, Minneapolis, Minnesota 55441.
The address for LBHI is 3 World Financial Center, New York, New York 10285.
In connection with the Conversion, Mr. Wendel and Mr. Atkins entered into an agreement dated as of August 25, 1994 (the "Agreement"). The Agreement provides, among other things, that for so long as Mr. Atkins owns no less than 3% of the outstanding voting securities, he will vote such securities in favor of the Corporation's nominees for election to the Board of Directors of the Corporation. It is understood that Mr. Atkins does not desire to and will not serve as an officer or director of the Corporation or its subsidiaries following consummation of the Conversion.
SUMMARY OF CERTAIN PROVISIONS
OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement is the governing instrument which establishes the Partnership's right under the laws of the State of Delaware to operate under its name as a limited partnership and contains the rules under which the Partnership will be operated. Many of the principal provisions of the Partnership Agreement have been summarized elsewhere in this Proxy Statement under various headings, in particular under "Comparative Rights of BAC Holders and Holders of Common Stock," and certain other provisions of the Partnership Agreement are summarized below. For complete information, however, reference is made to the Partnership Agreement.
The following statements and other statements in this Prospectus concerning the Partnership Agreement and related matters are merely a summary, do not purport to be complete and in no way modify or amend the Partnership Agreement.
MANAGEMENT OF THE PARTNERSHIP
The General Partner, whose express duties and responsibilities are set forth in the Partnership Agreement, has full, complete and exclusive discretion to manage and control the Partnership. The BAC Holders have no authority to participate in or have any control over the Partnership business and have no authority or right to act for or bind the Partnership.
LIABILITY OF THE GENERAL PARTNER AND BAC HOLDERS TO THIRD PARTIES
The General Partner is liable for all general obligations of the Partnership to the extent not paid by the Partnership. All decisions made for or on behalf of the Partnership by the General Partner are binding upon the Partnership. The General Partner is not liable for the nonrecourse obligations of the Partnership.
No BAC Holder is personally liable for the debts, liabilities, contracts or any other obligations of the Partnership and shall only be liable to make the payments of its Capital Contribution to the Partnership as and when due, unless, in addition to the exercise of its rights and powers as a BAC Holder, he or she takes part in the control of the business of the Partnership.
The Delaware Revised Uniform Limited Partnership Act and the Partnership Agreement provide that, in certain circumstances, the BAC Holders may be liable to return amounts previously distributed to them.
DISSOLUTION AND LIQUIDATION
The Partnership shall continue in full force and effect until December 31, 2037, unless terminated earlier as a result of:
(1) the bankruptcy of the Partnership;
(2) the retirement (including resignation or removal), death, dissolution, legal disability or the passage of 120 days after the bankruptcy of a General Partner, unless the remaining general partners (or in the case of a General Partner who is at that time the sole General Partner), all of the BAC Holders agree to continue the business of the Partnership within 90 days of the occurrence of such an event;
(3) the sale or other disposition of all or substantially all of the assets of the Partnership or of the Operating Partnership;
(4) an election to dissolve the Partnership by two-thirds in interest of the BAC Holders; or
(5) the occurrence of any other event causing the dissolution of the Partnership under the laws of the State of Delaware.
Upon dissolution of the Partnership, the Partnership's assets will be liquidated and the proceeds of liquidation will be applied to the payment of obligations of the Partnership to third parties and the
setting up of any reserves for contingencies that the General Partner considers necessary. All remaining net assets will then be distributed among the General Partner and the BAC Holders in proportion to their respective Capital Accounts.
VOTING RIGHTS OF BAC HOLDERS
The BAC Holders do not have the right to participate in the management or control of the Partnership's business. The Partnership Agreement provides, however, that the Initial Limited Partner will vote its Class A Interests as directed by the BAC Holders. Accordingly, the Initial Limited Partner voting at the direction of the BAC Holders by vote of two-thirds in interest thereof may, among other matters:
(a) amend the Partnership Agreement, provided that the concurrence of the General Partner is required for any amendment which modifies the compensation or distributions to which the General Partner or its Affiliates are entitled, or which affects the duties of the General Partner or modifies the First Rights;
(b) approve or disapprove the sale of all or substantially all of the Partnership's assets in one transaction or in a related series of transactions, except in connection with the Partnership's dissolution and liquidation, in which case the General Partner will have exclusive authority;
(c) dissolve the Partnership; or
(d) remove any General Partner and consent to the admission of a replacement therefor.
The General Partner may at any time call a meeting of BAC Holders and is required to give notice of such a meeting within 10 days of receipt of a written request therefor signed by ten percent or more in interest of the BAC Holders.
REMOVAL OF THE GENERAL PARTNER
The BAC Holders may, by vote of two-thirds in interest, vote to remove any General Partner from the Partnership with or without cause and consent to the appointment of a replacement therefor.
WITHDRAWAL OF THE GENERAL PARTNER
The General Partner may not withdraw voluntarily from the Partnership or sell, transfer or assign all or any portion of its interest in the Partnership, unless a substitute general partner has been admitted in accordance with the terms of the Partnership Agreement. Among other things, the Partnership Agreement requires that the Partnership's accountants render an opinion that the net worth of the substitute general partner is sufficient to maintain the status of the Partnership as a partnership for Federal income tax purposes.
ADDITIONAL GENERAL PARTNERS
With the consent of two-thirds in interest of the BAC Holders, the General Partner may at any time designate one or more persons as additional general partners, provided that the interests of the BAC Holders are not reduced thereby. The designation must meet the conditions set out in the Partnership Agreement and comply with the provisions of the Delaware Revised Uniform Limited Partnership Act with respect to admission of an additional general partner. In addition to the requirement that the admission of a person as successor or additional general partner have the consent of the two-thirds in interest of the BAC Holders, the Partnership Agreement requires, among other things, that (i) such person agrees to and executes the Partnership Agreement, and (ii) counsel for the Partnership renders an opinion that such person's admission is in accordance with the Delaware Revised Uniform Limited Partnership Act.
EFFECT OF REMOVAL, BANKRUPTCY, DEATH, DISSOLUTION, INCOMPETENCY OR WITHDRAWAL OF THE GENERAL PARTNER
In the event of a removal, bankruptcy, death, dissolution, incompetency or withdrawal of the General Partner, the General Partner will cease to be a general partner of the Partnership and (except for removal without cause) its interest in the Partnership will be assigned to any remaining or successor general partners so that the remaining or successor general partners have not less than a
1% interest in the Partnership. Any such interest not so assigned will be retained by the General Partner, but will be converted into a limited partnership interest. The General Partner will remain liable for Partnership obligations arising prior to such removal, bankruptcy, death, dissolution, incompetency or withdrawal. In the event that the General Partner is removed without cause, the successor general partner has the obligation to acquire the interest of the General Partner in the Partnership at its fair market value, unless the General Partner elects to have its interest converted to a limited partnership interest. The fair market value will be the sum of the present value of the general partnership interest of the General Partner over the life of the Partnership plus the present value of the Management Fee over the life of the Partnership. If the General Partner is removed for cause, the removed General Partner shall transfer, for no consideration, its general partnership interest to any successor General Partner chosen by BAC Holders, but the rights of the General Partner as a Rights Holder will not be affected. Any disputes as to the fair market value of the General Partner's interest in the Partnership will be settled through arbitration.
REIMBURSEMENT OF GENERAL PARTNER EXPENSES
The Partnership will reimburse the General Partner for certain of its expenses. Such reimbursements may include reimbursement for actual out-of-pocket expenses incurred on Partnership business, direct out-of-pocket fees and expenses and charges for rendering legal, consulting, auditing, accounting, bookkeeping and computer services. The Partnership will not reimburse the General Partner for any salaries or fringe benefits of its officers, directors or employees, whether or not they are providing services to the Partnership, or for any items of general overhead, such as rent, utilities or the use of computer or office equipment.
AMENDMENTS
In addition to amendments adopted by two-thirds in interest of the BAC Holders, the Partnership Agreement may be amended by the General Partner, without the consent of the BAC Holders, in certain limited respects if such amendments are for the benefit of or not adverse to the interests of the BAC Holders. Also, the power of attorney contained in the Partnership Agreement empowers the General Partner to amend the Partnership Agreement to admit additional or substitute BAC Holders into the Partnership if such admission is effected in accordance with the terms of the Partnership Agreement.
DESIGNATION OF TAX MATTERS PARTNER
Pursuant to Section 6231 of the Code and the Regulations thereunder and the Partnership Agreement, the General Partner is designated the "tax matters partner" for purposes of Federal income tax audits of Partnership income, gain, loss, deduction or credit.
REORGANIZATION OF THE PARTNERSHIP
If legislation is passed, or if effective Treasury Department Regulations are adopted, which would have the effect of reclassifying the Partnership as an association taxable as a corporation for Federal income tax purposes, or if for any other reason the Partnership is treated as an association taxable as a corporation for Federal income tax purposes, the General Partner may, at its sole discretion and without the consent or approval of any other partner, take whatever action it deems necessary in the best interests of the Partnership, including the dissolution or reorganization of the Partnership into a newly organized corporation or other legal entity formed for such purpose, in whatever manner and by whatever method the General Partner determines in its sole discretion. The General Partner shall effectuate such reorganization so that, to the extent possible and legally permissible under the circumstances, the respective interests of the BAC Holders and General Partner in the assets and income of the successor entity immediately following such reorganization are substantially equivalent to such interests immediately prior thereto. The General Partner shall appoint two independent appraisers to determine the value of the foregoing interests. If such appraisers are unable to agree on any valuation, the value shall be the average of the two determinations.
APPLICABLE LAW
The Partnership Agreement shall be construed and enforced in accordance with the laws of the State of Delaware.
BOOKS AND RECORDS
The fiscal year of the Partnership will be the year ending December 31. The books and records of the Partnership shall be maintained at the office of the Partnership. Such books and records shall be available there for examination by any BAC Holder, or any duly authorized representative of such BAC Holder, upon reasonable notice. Any BAC Holder, or any duly authorized representative of such BAC Holder, shall, upon paying the costs of collection, duplication and mailing, be entitled to a copy of the list of the names and addresses of the BAC Holders.
TRANSFERABILITY OF THE BACS
A transfer or assignment of 50% or more of the capital and profits interests of the Partnership within a 12-month period will terminate the Partnership for Federal income tax purposes, which may result in adverse tax consequences to holders of BACs. In order to protect against such a termination, the Partnership Agreement permits the General Partner to defer any transfers or assignments of BACs as a group at any time after the General Partner determines that such a transfer or assignment may result in the termination of the Partnership for tax purposes, provided that the General Partner believes that the resulting termination of the Partnership for tax purposes would have a material adverse effect on the financial interests of the holders of BACs. The transferring holders of BACs will be notified of such deferral, and any deferred transfers or assignments will be effected (in chronological order to the extent practicable) as of the first day of the next succeeding period as of which such transfers or assignments can be effected without either termination of the Partnership for tax purposes or any adverse effects from such termination, as the case may be. In addition, any transfer of BACs which would result in a termination of the Partnership for Federal income tax purposes will be void and have no effect to the full extent permitted by law. The Partnership may also restrict or terminate transferability to preserve the tax status of the Partnership as a partnership.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Conversion, the authorized capital stock of the Corporation will consist of 80,000,000 shares of Common Stock, par value $.01 per share, and 20,000,000 shares of preferred stock, issuable in series. Of such authorized shares, 18,110,684 shares of Common Stock will be issued and outstanding immediately following the Conversion. All such outstanding shares of Common Stock will be fully paid and nonassessable.
COMMON STOCK
Holders of Common Stock have no preemptive rights to purchase or subscribe for securities of the Corporation and the Common Stock is not convertible or subject to redemption by the Corporation.
Subject to the rights of holders of any class of capital stock of the Corporation having any preference or priority over the Common Stock, none of which will be outstanding upon consummation of the Conversion, the holders of the Common Stock are entitled to dividends in such amounts as may be declared by the Board of Directors of the Corporation from time to time out of funds legally available for such payments and, in the event of liquidation, to share ratably in any assets of the Corporation remaining after payment in full of all creditors and provisions for any liquidation preferences on any outstanding preferred stock ranking prior to the Common Stock.
PREFERRED STOCK
The Board of Directors, without further action by the shareholders, is authorized to issue up to 20,000,000 shares of preferred stock in one or more series and to fix and determine as to any series all the relative rights and preferences of shares in such series, including, without limitation, preferences,
limitations or relative rights with respect to redemption rights, if any, voting rights, if any, dividend rights and preferences on liquidation. The Corporation has no present intention to issue any preferred stock, but may determine to do so in the future.
VOTING
Holders of Common Stock are entitled to cast one vote per share on matters submitted to a vote of shareholders. No holder of Common Stock will be entitled to any cumulative voting rights. Approval of any matter submitted to shareholders requires the affirmative vote of the greater of (a) a majority of the voting power of the shares present and entitled to vote on that item of business or (b) a majority of the voting power of the minimum number of shares entitled to vote that would constitute a quorum for the transaction of business at a duly held meeting of shareholders; except that the Corporation's Articles of Incorporation provide that the affirmative vote of holders of at least 75% of the voting power of all outstanding shares entitled to vote is required for the removal of a director, with or without cause, from office. If the Corporation has more than one class of stock outstanding in the future, class voting will be required on certain matters that generally have a material adverse effect on shares of a class.
BOARD OF DIRECTORS
The Corporation's Articles of Incorporation provide that the business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than one (not less than three after there is more than one shareholder) nor more than 15 persons, who need not be shareholders. The number of directors may be increased by shareholders or the Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of the Articles of Incorporation, provided, however, that any change in the number of directors on the Board of Directors shall be approved by the affirmative vote of not less than 75% of the voting power of all outstanding shares entitled to vote, entitled to be cast by the holders of the then outstanding voting shares, voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors. The directors will be divided into three classes, designated Class I, Class II and Class III. The term of the initial Class I directors shall terminate on the date of the 1995 annual meeting of shareholders, the term of the initial Class II directors shall terminate on the date of the 1996 annual meeting of shareholders, and the term of the initial Class III directors shall terminate on the date of the 1997 annual meeting of shareholders. At each succeeding meeting of annual shareholders beginning in 1995, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. Removal of a director from office, with or without cause, requires the affirmative vote of not less than 75% of the voting power of all outstanding shares entitled to vote, voting together as a single class.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Corporation's Articles of Incorporation and By-laws and the Minnesota Business Corporation Act ("MBCA") could have an anti-takeover effect. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Corporation's Board of Directors and management and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Corporation if the Board of Directors determines that such takeover is not in the best interests of the Corporation and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Corporation or remove incumbent management even if some, or a majority of, shareholders deemed such an attempt to be in their best interests.
ARTICLES OF INCORPORATION PROVISIONS. Pursuant to the Corporation's Articles of Incorporation, at such time that the Board of Directors consists of three or more persons, the Board of Directors of the Corporation shall be divided into three classes serving staggered three-year terms. In accordance with the MBCA, Directors can be removed from office, with or without cause, only by the affirmative vote of holders of 75% of the outstanding shares entitled to vote.
BY-LAW PROVISIONS. The By-laws provide that any action required or permitted to be taken by the shareholders of the Corporation may be effected only at a regular or special meeting of shareholders and prohibits shareholder action by less than unanimous written consent in lieu of a meeting. Special meetings of shareholders may be called by a shareholder or shareholders holding 10% of the voting power of all shares entitled to vote; except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote.
MINNESOTA CONTROL SHARE/FAIR PRICE LAW. Section 671 of the MBCA provides that, generally, a person who becomes the beneficial owner of 20% or more of the voting power of the shares of the Corporation in the election of directors may exercise only an aggregate of 20% of the voting power of the Corporation's shares in the absence of special shareholders' approval. That approval can only be obtained by resolution adopted by (i) the affirmative vote of the holders of the majority of the voting power of all shares entitled to vote, including all shares held by the acquiring person, and (2) the affirmative vote of the holders of the majority of the voting power of all shares entitled to vote, excluding all "interested shares" (shares held by the acquiring person, any officer of the Corporation or any director of the Corporation who is also an officer of the Corporation). If the shareholders approve a share acquisition that would increase the acquiring person's beneficial interest to 20% or more, but less than 33 1/3%, of the voting power of the Corporation's shares, a similar shareholder vote is required to permit the acquiring person to exercise voting power with respect to 33 1/3% or more of the outstanding shares upon becoming beneficial owner of shares otherwise entitled to one-third or more of the voting power of the Corporation's shares. A similar shareholder vote generally is necessary to permit the acquiring person to exercise the majority of voting power following acquisition of shares otherwise entitled to the majority of such voting power.
Section 673 of the MBCA restricts transactions with a shareholder acquiring 10% or more of the voting power of the shares of the Corporation entitled to vote unless the share acquisition or the transaction has been approved by the Board of Directors prior to the acquisition of the 10% interest. For four years after the 10% threshold is exceeded (absent prior board approval), the Corporation cannot have a sale of substantial assets, merger, loan, substantial issuance of stock, plan of liquidation or reincorporation involving such shareholder or its affiliates.
Section 675 of the MBCA generally provides that, in the absence of disinterested director approval, an offeror may not acquire shares of the Corporation from a shareholder within two years following the offeror's last purchase of shares of the same class pursuant to a takeover offer, unless the shareholder is afforded a reasonable opportunity at that time to dispose of the shares to the offeror on terms substantially equivalent to the terms of the earlier takeover offer.
LIMITATION OF LIABILITY
As permitted by Minnesota law, the Corporation's Articles of Incorporation provide that directors of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) relating to prohibited dividends or distributions or the repurchase or redemption of stock, or (iv) for any transaction from which the director derives an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank Minnesota, N.A.
RESALE OF COMMON STOCK
Shares of Common Stock received by persons who may be deemed to be
"affiliates" of the Partnership may be sold by those persons only (i) in
accordance with the provisions of Rule 145 under the Securities Act, (ii)
pursuant to an effective registration statement under the Securities Act, or
(iii) in transactions that are exempt from registration under the Securities
Act. Rule 145 provides, in general, that those shares of Common Stock may be
sold by such persons during the two years following the date the shares were
acquired from the Corporation if (a) there is available adequate current public
information with respect to the Corporation and (b) the number of shares of
Common Stock sold within any three-month period does not exceed the greater of
1% of the total number of outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the SEC
and (c) the shares of Common Stock are sold in transactions directly with a
"market maker" or in "brokers' transactions" within the meaning of Rule 144
under the Securities Act. Rule 145 further provides that during the third year
following the date the shares were acquired from the Corporation such persons
may sell such shares if they are not affiliates of the Corporation and there is
available adequate public information with respect to the Corporation, and
thereafter such persons may sell such shares without restriction if they are
not, and have not been for at least three months, affiliates of the Corporation.
The Corporation has entered into an agreement with affiliates of the General
Partner affording them certain registration rights. See also "The Conversion --
Description of the Merger Agreement -- Registration Rights."
LEGAL MATTERS
The validity of the shares of Common Stock under Minnesota law and certain legal matters in connection with the offering of the Common Stock hereby will be passed upon for the Corporation by Kaplan, Strangis & Kaplan, P.A., Minneapolis, Minnesota. Certain legal matters in connection with the offering of the Common Stock hereby will be passed upon for the Partnership by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York, and Stroock & Stroock & Lavan, New York, New York. Certain federal income tax matters set forth under "Certain Federal Income Tax Considerations," will be passed upon by Stroock & Stroock & Lavan.
EXPERTS
The financial statements of Polaris Industries Partners L.P. as of December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993, and the balance sheet of Polaris Industries Inc. as of September 23, 1994, included in this Proxy Statement and the Registration Statement of which this Proxy Statement forms a part, have been audited by McGladrey & Pullen, independent auditors, as set forth in their reports appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
CONTENTS PAGE - ---------------------------------------------------------------------------------------------------------- --------- POLARIS INDUSTRIES PARTNERS L.P. Independent Auditor's Report on the Financial Statements.................................................. F-2 Financial Statements Balance Sheets as of December 31, 1992 and 1993, and September 30, 1994 (unaudited)..................... F-3 Statements of Operations for the years ended December 31, 1991, 1992 and 1993, and the nine-month periods ended September 30, 1993 and 1994 (unaudited).................................................. F-4 Statements of Partners' Capital for the years ended December 31, 1991, 1992 and 1993, and the nine-month period ended September 30, 1994 (unaudited)............................................................ F-5 Statements of Cash Flows for the years ended December 31, 1991, 1992 and 1993, and the nine-month periods ended September 30, 1993 and 1994 (unaudited).................................................. F-6 Notes to Financial Statements for the years ended December 31, 1991, 1992 and 1993, and the nine-month periods ended September 30, 1993 and 1994 (unaudited).................................................. F-7 POLARIS INDUSTRIES INC. Independent Auditor's Report on the Balance Sheet......................................................... F-16 Balance Sheet and Note to Financial Statement as of September 23, 1994.................................... F-17 |
INDEPENDENT AUDITOR'S REPORT
To the Partners
Polaris Industries Partners L.P.
We have audited the accompanying balance sheets of POLARIS INDUSTRIES PARTNERS L.P. (a Delaware limited partnership) as of December 31, 1992 and 1993, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polaris Industries Partners L.P. as of December 31, 1992 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN
Minneapolis, Minnesota
February 11, 1994, except for Notes 9 and 10
as to which the date is October 14, 1994
POLARIS INDUSTRIES PARTNERS L.P.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31, SEPTEMBER 30, 1994
-------------------- ------------------------
1992 1993 HISTORICAL PRO FORMA
--------- --------- ----------- -----------
(UNAUDITED)
Current Assets
Cash and cash equivalents......................................... $ 19,094 $ 33,798 $ 53,733 $ 7,931
Trade receivables................................................. 16,875 21,340 42,114 42,114
Inventories (Note 3).............................................. 37,576 52,057 78,645 78,645
Prepaid expenses and other........................................ 1,454 2,553 3,951 3,951
Deferred tax assets (Note 10)..................................... 12,000
--------- --------- ----------- -----------
Total current assets.......................................... 74,999 109,748 178,443 144,641
--------- --------- ----------- -----------
Deferred Tax Assets (Note 10)....................................... 30,000
--------- --------- ----------- -----------
Property and Equipment
Land, buildings and improvements.................................. 9,558 10,737 13,165 13,165
Equipment and tooling............................................. 43,580 56,480 70,508 70,508
--------- --------- ----------- -----------
53,138 67,217 83,673 83,673
Less accumulated depreciation..................................... 19,691 27,486 37,970 37,970
--------- --------- ----------- -----------
33,447 39,731 45,703 45,703
--------- --------- ----------- -----------
Intangibles
Cost in excess of net assets of business acquired, net of
amortization of $4,199 1992; $4,968 1993 and $5,534 1994......... 26,479 25,710 25,144 25,144
Dealer network, net of amortization of $33,523 1992; $39,811 1993
and $44,000 1994................................................. 10,477 4,189
Other, net of amortization of $2,202 1992; $2,311 1993 and $2,394
1994............................................................. 1,279 1,170 1,087 1,087
--------- --------- ----------- -----------
38,235 31,069 26,231 26,231
--------- --------- ----------- -----------
$ 146,681 $ 180,548 $ 250,377 $ 246,575
--------- --------- ----------- -----------
--------- --------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Current maturities of long-term debt.............................. $ $ $ $ 35,000
Accounts payable.................................................. 24,946 36,122 65,500 65,500
Distributions payable (Notes 2 and 10)............................ 11,127 11,851 12,735 12,735
Accrued expenses:
Compensation (Note 5)........................................... 14,404 20,060 23,865 23,865
Sales promotion programs........................................ 2,749 3,691 12,539 12,539
Warranties...................................................... 5,705 11,412 13,013 13,013
Other........................................................... 6,493 7,165 11,590 22,590
Income taxes payable (Note 8)..................................... 3,630 7,754 10,157 10,157
--------- --------- ----------- -----------
Total current liabilities..................................... 69,054 98,055 149,399 195,399
--------- --------- ----------- -----------
Long-term debt, less current maturities (Note 10)................... 35,000
-----------
Commitments and Contingencies (Notes 4, 5, 6, 8, and 10)
Partners' Capital (Notes 2, 4, and 5)
General Partner................................................... (7,105) (7,397) (4,817)
Limited Partners:
BACs (issued and outstanding, 14,504 units 1992, 14,936 units
1993 and 16,010 units 1994).................................... 76,139 81,069 97,016
First Rights:
Assigned capital value........................................ 9,102 8,821 8,779
Deferred compensation......................................... (509)
Stockholders' Equity (Note 10)
Preferred stock $0.01 par value, authorized 20,000 shares, no
issued and outstanding shares....................................
Common stock $0.01 par value, authorized 80,000 shares, issued and
outstanding 18,111 shares........................................ 181
Additional paid-in capital........................................ 100,797
Retained earnings (deficit)....................................... (84,802)
--------- --------- ----------- -----------
77,627 82,493 100,978 16,176
--------- --------- ----------- -----------
$ 146,681 $ 180,548 $ 250,377 $ 246,575
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Pro Forma Net Book Value Per Share (Note 10) $ 0.88
-----------
-----------
|
See Notes to Financial Statements.
POLARIS INDUSTRIES PARTNERS L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AND PRO FORMA PER SHARE DATA)
UNAUDITED PRO FORMA
----------------------------------
FOR THE NINE MONTHS
FOR THE FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER ENDED SEPTEMBER 30, YEAR ENDED
31, DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- -------------------- ------------ --------------------
1991 1992 1993 1993 1994 1993 1993 1994
--------- --------- --------- --------- --------- ------------ --------- ---------
(UNAUDITED)
Sales................................ $ 297,677 $ 383,818 $ 528,011 $ 385,153 $ 584,725 $ 528,011 $ 385,153 $ 584,725
Cost of Sales........................ 201,883 269,199 383,916 282,420 443,093 383,916 282,420 443,093
--------- --------- --------- --------- --------- ------------ --------- ---------
Gross profit..................... 95,794 114,619 144,095 102,733 141,632 144,095 102,733 141,632
--------- --------- --------- --------- --------- ------------ --------- ---------
Operating Expenses
Selling, general and
administrative.................... 50,968 61,931 77,402 55,460 74,808 76,902 55,085 74,433
First Rights compensation.......... 5,548 4,570 6,300 5,029 6,140 6,300 5,029 6,140
Amortization of intangibles........ 7,560 7,427 7,166 5,378 4,838 7,166 5,378 4,838
--------- --------- --------- --------- --------- ------------ --------- ---------
Total operating expenses......... 64,076 73,928 90,868 65,867 85,786 90,368 65,492 85,411
--------- --------- --------- --------- --------- ------------ --------- ---------
Operating income................. 31,718 40,691 53,227 36,866 55,846 53,727 37,241 56,221
Nonoperating Expense (Income), net... (1,712) 1,010 (43) 878 (772) (43) 878 (772)
Interest Expense (Note 10)........... -- -- -- -- -- 2,231 744 3,347
--------- --------- --------- --------- --------- ------------ --------- ---------
Income before income taxes....... 33,430 39,681 53,270 35,988 56,618 51,539 35,619 53,646
Provision for Income Taxes (Notes 8
and 10)............................. 1,968 4,980 7,457 4,546 6,007 18,555 12,825 19,313
--------- --------- --------- --------- --------- ------------ --------- ---------
Net Income....................... $ 31,462 $ 34,701 $ 45,813 $ 31,442 $ 50,611 $ 32,984 $ 22,794 $ 34,333
------------ --------- ---------
------------ --------- ---------
Allocation of Net Income to General
Partner (Note 2).................... 6,544 7,218 9,529 6,540 10,527
--------- --------- --------- --------- ---------
Net income applicable to Limited
Partners........................ $ 24,918 $ 27,483 $ 36,284 $ 24,902 $ 40,084
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per unit.............. $ 1.65 $ 1.73 $ 2.25 $ 1.54 $ 2.46
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share............. $ 1.81 $ 1.25 $ 1.86
------------ --------- ---------
------------ --------- ---------
Weighted Average Number of BACs and
BAC Equivalents Outstanding......... 15,062 15,868 16,115 16,125 16,315
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding......................... 18,215 18,225 18,415
------------ --------- ---------
------------ --------- ---------
|
See Notes to Financial Statements.
POLARIS INDUSTRIES PARTNERS L.P.
STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
LIMITED PARTNERS' INTEREST
----------------------------------------------
FIRST RIGHTS
------------------------ TOTAL
GENERAL ASSIGNED LIMITED
PARTNER'S CAPITAL DEFERRED PARTNERS'
INTEREST BACS VALUE COMPENSATION INTEREST TOTAL
----------- --------- --------- ------------- --------- ---------
Balance, December 31, 1990.................. $ (2,753) $ 81,624 $ 21,154 $ (7,923) $ 94,855 $ 92,102
First Rights grants and amortization...... -- -- 309 5,239 5,548 5,548
Cancellation of 192 First Rights.......... -- (1,319) (2,349) -- (3,668) (3,668)
Net income for the year................... 6,544 24,918 -- -- 24,918 31,462
Cash distributions declared............... (8,857) (33,724) -- -- (33,724) (42,581)
----------- --------- --------- ------------- --------- ---------
Balance, December 31, 1991.................. (5,066) 71,499 19,114 (2,684) 87,929 82,863
First Rights conversion to BACs........... -- 12,407 (12,407) -- -- --
First Rights grants and amortization...... -- -- 2,395 2,175 4,570 4,570
Net income for the year................... 7,218 27,483 -- -- 27,483 34,701
Cash distributions declared............... (9,257) (35,250) -- -- (35,250) (44,507)
----------- --------- --------- ------------- --------- ---------
Balance, December 31, 1992.................. (7,105) 76,139 9,102 (509) 84,732 77,627
First Rights conversion to BACs........... -- 6,042 (6,072) -- (30) (30)
First Rights grants and amortization...... -- -- 5,791 509 6,300 6,300
Net income for the year................... 9,529 36,284 -- -- 36,284 45,813
Cash distributions declared............... (9,821) (37,396) -- -- (37,396) (47,217)
----------- --------- --------- ------------- --------- ---------
Balance, December 31, 1993.................. (7,397) 81,069 8,821 -- 89,890 82,493
First Rights conversion to BACs
(unaudited).............................. -- 6,122 (6,182) -- (60) (60)
First Rights grants and amortization
(unaudited).............................. -- -- 6,140 -- 6,140 6,140
Net income for the nine months
(unaudited).............................. 10,527 40,084 -- -- 40,084 50,611
Cash distributions declared (unaudited)... (7,947) (30,259) -- -- (30,259) (38,206)
----------- --------- --------- ------------- --------- ---------
Balance, September 30, 1994 (unaudited)..... $ (4,817) $ 97,016 $ 8,779 $ -- $ 105,795 $ 100,978
----------- --------- --------- ------------- ---------
----------- --------- --------- ------------- ---------
Less general partner's negative capital
account balance (unaudited).............. (4,817)
---------
Amount available to the limited partner
interest assuming a liquidation at net
book value at September 30, 1994
(unaudited).............................. $ 100,978
---------
---------
|
See Notes to Financial Statements
POLARIS INDUSTRIES PARTNERS L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER ENDED SEPTEMBER 30,
31,
------------------------------- --------------------
1991 1992 1993 1993 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
Cash Flows From Operating Activities
Net income............................................. $ 31,462 $ 34,701 $ 45,813 $ 31,442 $ 50,611
Adjustments to reconcile net income to cash flow from
operating activities
Depreciation......................................... 6,270 9,830 12,446 9,034 14,572
Amortization......................................... 7,560 7,427 7,166 5,378 4,838
First Rights compensation............................ 5,548 4,570 6,300 5,029 6,140
Changes in current operating items
Trade receivables.................................. (1,350) (6,372) (4,465) (17,307) (20,774)
Inventories........................................ (4,584) (10,528) (14,481) (21,986) (26,588)
Accounts payable................................... 2,711 11,605 11,176 20,289 29,378
Other.............................................. (975) 4,083 15,368 11,237 19,624
--------- --------- --------- --------- ---------
Net cash provided by operating activities........ 46,642 55,316 79,323 43,116 77,801
Cash Flows From Investing Activities
Purchase of property and equipment..................... (15,988) (12,295) (18,126) (13,055) (20,544)
--------- --------- --------- --------- ---------
Distributable cash................................... 30,654 43,021 61,197 30,061 57,257
Cash Distributions to Partners........................... (42,581) (44,025) (46,493) (34,641) (37,322)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents....... (11,927) (1,004) 14,704 (4,580) 19,935
Cash and Cash Equivalents
Beginning.............................................. 32,025 20,098 19,094 19,094 33,798
--------- --------- --------- --------- ---------
Ending................................................. $ 20,098 $ 19,094 $ 33,798 $ 14,514 $ 53,733
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental Schedule of Noncash Investing and Financing
Activities
BAC repurchase liability............................... 3,668
Asset purchase note payable............................ 1,500
Capital lease obligation............................... 840
---------
---------
|
UNAUDITED PRO FORMA
----------------------------------
FOR THE YEAR
ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------ --------------------
1993 1993 1994
------------ --------- ---------
Cash Flows From Operating Activities
Net income................................................................ $ 32,984 $ 22,794 $ 34,333
Adjustments to reconcile net income to cash flow from operating activities
Depreciation............................................................ 12,446 9,034 14,572
Amortization............................................................ 7,166 5,378 4,838
First Rights compensation............................................... 6,300 5,029 6,140
Deferred income taxes................................................... 3,231 2,423 2,423
Changes in current operating items
Trade receivables..................................................... (4,465) (17,307) (20,774)
Inventories........................................................... (14,481) (21,986) (26,588)
Accounts payable...................................................... 11,176 20,289 29,378
Other................................................................. 15,368 11,237 19,624
------------ --------- ---------
Net cash provided by operating activities........................... 69,725 36,891 63,946
------------ --------- ---------
Cash Flows From Investing Activities
Purchase of property and equipment........................................ (18,126) (13,055) (20,544)
------------ --------- ---------
Cash Flows From Financing Activities
Proceeds from long-term borrowings........................................ 70,000 35,000 --
Payments on long-term borrowings.......................................... -- -- (26,250)
Stockholder dividends..................................................... (10,925) (8,193) (8,193)
Stockholder special cash distributions.................................... (104,877) (69,918) --
------------ --------- ---------
Net cash used in financing activities................................. (45,802) (43,111) (34,443)
------------ --------- ---------
Increase (decrease) in cash and cash equivalents...................... 5,797 (19,275) 8,959
Cash and Cash Equivalents
Beginning................................................................. 19,094 19,094 33,798
------------ --------- ---------
Ending (deficit).......................................................... $ 24,891 $ (181) $ 42,757
------------ --------- ---------
------------ --------- ---------
Supplemental Schedule of Noncash Investing and Financing Activities
Pro forma payments for income taxes..................................... $ 11,098 $ 8,279 $ 13,306
------------ --------- ---------
------------ --------- ---------
|
See Notes to Financial Statements.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 1. PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: Polaris Industries Partners L.P. (Partners) is a Delaware limited partnership. Operations are conducted through Polaris Industries L.P. (the Operating Partnership), a Delaware limited partnership, and its wholly-owned Canadian subsidiary. Partners is the sole limited partner of the Operating Partnership. The Operating Partnership is engaged in a single industry segment consisting of the design, engineering and manufacture of recreational and utility vehicles and markets them together with related parts and accessories through a network of dealers, distributors and its Canadian subsidiary. The combined activities of Partners and the Operating Partnership (including the Canadian subsidiary) are referred to herein as activities of the Partnership.
The general partner of Partners is EIP Associates L.P. (the General Partner), a Delaware limited partnership. The managing general partner of the General Partner is EIP Capital Corporation (the Managing General Partner). The Managing General Partner, through a series of affiliates, is the general partner of the Operating Partnership. The Managing General Partner, directly or through its affiliates, receives a) an annual management fee of $500,000 for the performance of certain administrative services on behalf of the Partnership, b) a 1 percent general partner interest in the Operating Partnership, and c) a right to cash distributions from the Partnership (see Note 2).
PARTNERSHIP AGREEMENT: The Partnership Agreement of Partners authorizes the issuance of a total of 40,000,000 BACs. One BAC represents one Assigned Class A Beneficial Limited Partnership Interest.
See Note 2 regarding the distribution of Partnership funds and the allocation of Partnership profits and losses.
BASIS OF PRESENTATION: The financial statements of the Partnership include the accounts of Partners and the Operating Partnership and its Canadian subsidiary. All significant inter-company transactions and balances have been eliminated in the combination.
REVENUE RECOGNITION: Revenues are recognized at the time of delivery to the dealer or distributor customer. The Partnership has not historically recorded an allowance for product returns because such returns, whether in the normal course of business or resulting from repossession under its customer financing program (see Note 4), have not been material. However, management intends to record a return allowance when it becomes probable such returns will be material. The Partnership provides for estimated sales promotion expenses at the time of sale to the dealer or distributor customer.
CASH EQUIVALENTS: Cash in excess of daily requirements is invested in money market funds of quality financial institutions in amounts which frequently exceed federally insured limits. The Partnership has not experienced any losses on these funds. Such investments have maturities of less than three months and are deemed to be cash equivalents for purposes of the statements of cash flows.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided using the straight-line method based on the estimated useful life of individual assets over the following periods:
YEARS
----------
Buildings and improvements.............. 10 - 20
Equipment and tooling................... 3 - 7
Cost in excess of net assets of business
acquired............................... 40
Dealer network.......................... 7
Other intangibles....................... 5 - 17
|
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 1. PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Fully depreciated tooling is eliminated from the Partnership's accounting
records annually.
The Partnership reviews its intangibles quarterly to determine potential impairment by comparing the carrying value of the intangibles with expected future net cash flows provided by operating activities of the business. Should the sum of the expected future net cash flows be less than the carrying value, the Partnership would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the intangible. Fair value will be determined based on appraised market value. To date, management has determined that no impairment of intangibles exists.
PRODUCT WARRANTIES: The Partnership provides for estimated normal and extended warranty costs at the time of sale to distributors and dealers and for other costs associated with specific items at the time their existence and amounts are determinable.
INCOME TAXES: The Partnership is not a taxpaying entity for United States federal and state income tax purposes. As a result, the taxable income or loss, which may vary significantly from the financial reporting income or loss, is includable in tax returns of the individual BAC holders.
The Partnership's Canadian subsidiary is a corporation which is subject to Canadian federal and provincial income taxes, at a current combined effective rate of 44 percent. Income tax expense on the accompanying statements of operations includes a provision for income taxes on the annual earnings of the Canadian subsidiary. There are no significant temporary differences relating to the financial reporting and the tax bases of assets and liabilities of the Canadian subsidiary.
Publicly traded partnerships are scheduled to become taxable entities in the United States for years beginning after December 31, 1997. However, the Partnership would become a taxable entity prior to January 1, 1998, if it were to add a substantial new line of business.
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, requires public enterprises not subject to income taxes to disclose the net differences between the tax bases and the reported amounts of the enterprise's assets and liabilities. The principal temporary differences related to elements of the Partnership's United States partnership income tax return and its financial statement were as follows (in thousands):
TAX BASIS IN EXCESS
OF (LESS THAN)
REPORTED AMOUNTS
--------------------
DECEMBER 31,
1993
--------------------
Inventories............................. $ 4,077
Property and equipment.................. (6,924)
Accrued expenses........................ 26,858
First Rights compensation............... 8,821
--------
$32,832
--------
--------
|
FOREIGN CURRENCY: The Partnership's Canadian subsidiary maintains its books of record using Canadian currency and uses United States currency as the functional currency. Canadian assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect. Translation and exchange gains and losses are reflected in earnings.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 1. PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged
to operations as incurred and totaled $4,761,000, $6,345,000 and $9,554,000 for
1991, 1992 and 1993, respectively and $6,813,000 and $7,579,000 for the
nine-month periods ended September 30, 1993 and 1994. These costs are included
as a component of cost of sales on the accompanying statements of operations.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and notes related thereto as of September 30, 1994, and for the nine-month periods ended September 30, 1993 and 1994, are unaudited, but, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. The operating results for the interim periods are not necessarily indicative of the operating results to be expected for a full fiscal year or for other interim periods.
NOTE 2. CASH DISTRIBUTIONS AND THE ALLOCATION OF PROFITS AND LOSSES
CASH DISTRIBUTIONS FROM OPERATIONS: Cash distributions from operations are determined at the discretion of the General Partner and are allocated 79.2 percent to the limited partners and 20.8 percent to the General Partner.
CASH DISTRIBUTIONS ON SALE OR REFINANCING: Cash distributions on sale or refinancing of the Partnership would be allocated in accordance with the Partnership agreement.
ALLOCATION OF PROFITS AND LOSSES: Net income is allocated to the general and limited partners in proportion to the cash distributions to them. Since cash distributions have exceeded net income, this method results in a negative capital balance for the General Partner. Captions are presented on the statement of partners' capital to emphasize that in a current liquidation at book value, the amount available to limited partners cannot be expected to exceed the total net assets of the Partnership.
NET INCOME PER UNIT: Net income per unit (which differs from taxable income) is calculated based on the weighted average number of BACs and BAC equivalents outstanding during each period. BAC equivalents represent the number of BACs issuable upon conversion of the First Rights outstanding. Beginning in 1992, 850,000 Second Rights have been included as BAC equivalents in the net income per unit calculation. If the Second Rights had been included as BAC equivalents in prior periods, net income per unit would have been $1.57 in 1991.
NOTE 3. INVENTORIES
The major components of inventories are as follows (in thousands):
DECEMBER 31, SEPTEMBER
---------------- 30,
1992 1993 1994
------- ------- -------
Raw materials................. $15,214 $21,571 $26,648
Service parts................. 19,616 23,379 28,319
Finished goods................ 2,746 7,107 23,678
------- ------- -------
$37,576 $52,057 $78,645
------- ------- -------
------- ------- -------
|
NOTE 4. FINANCING
BANK FINANCING: The Operating Partnership has an unsecured bank line of credit arrangement to meet seasonal short-term financing needs with a maximum available of $40,000,000. Interest is charged at the prime interest rate, C.D.-based or LIBOR-based rates, and the agreement is scheduled for renewal on May 1, 1995. The Operating Partnership holds substantially all net assets of the Partnership and has agreed to certain limitations on distributions to Partners.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 4. FINANCING (CONTINUED)
CUSTOMER FINANCING PROGRAM: Unrelated finance companies provide floor plan
financing to distributors and dealers on the purchase of the Partnership's
products. The amount financed by distributors and dealers under these
arrangements at December 31, 1993, and September 30, 1994, was approximately
$64,855,000 and $203,895,000, respectively. The Partnership has agreed to
repurchase products repossessed by the finance companies to an annual maximum of
15 percent of the average amounts outstanding during the prior calendar year.
The Partnership's financial exposure under these arrangements is limited to the
difference between the amount paid to the finance companies and the amount
received on the resale of the repossessed product. No material losses have been
incurred under these agreements during the periods presented.
As a part of its marketing program, the Partnership will from time to time pay a specified portion of the floor plan interest expense payable by its distributors and dealers.
NOTE 5. EMPLOYEE BENEFIT PLANS
The Partnership has various employee benefit plans for management and
employees of the Operating Partnership. Cash and noncash compensation expense
recorded under these plans was $14,197,000, $15,969,000 and $22,538,000 for
1991, 1992 and 1993, respectively, and $16,117,000 and $24,777,000 for the
nine-month periods ended September 30, 1993 and 1994, respectively. Accrued
compensation includes approximately $11,411,000 and $16,236,000 for certain of
these plans at December 31, 1992 and 1993, respectively, and $19,001,000 at
September 30, 1994. A summary of these plans follows:
FIRST RIGHTS TO ACQUIRE BACS: The Partnership Agreement of Partners provides for the issuance of up to 2,400,000 First Rights to acquire BACs as an incentive for management and employees of the Operating Partnership. Of such First Rights, 900,000 have been reserved for issuance to employees (the Employee Plan) and 1,500,000 have been reserved for issuance to middle management and senior management (the Management Plan). First Rights will not be granted after December 31, 1999, and expire January 1, 2003.
First Rights under the Employee Plan are vested when granted. First Rights under the Management Plan contain no vesting provisions and terminate if employment ceases prior to the issuance of the related BACs.
The First Rights require no cash payments by the recipients and began converting to BACs beginning January 1, 1992. At December 31, 1993, the Partnership has achieved cash distribution levels which provide for the conversion of all 2,400,000 First Rights to BACs.
As of December 31, 1993, and September 30, 1994, 135,060 and 215,500 First Rights under the Management Plan and 183,200 and 97,000 First Rights under the Employee Plan, respectively, are outstanding as summarized below:
OUTSTANDING
AT END OF
GRANTED CONVERTED FORFEITED YEAR
--------- ---------- ---------- -------------
1991.................................... 135,300 -- -- 1,680,806
1992.................................... 105,000 (1,205,784) -- 580,022
1993.................................... 171,594 (433,356) -- 318,260
--------- ---------- --- -------------
--------- ---------- --- -------------
September 30, 1994...................... 220,597 (226,357) -- 312,500
--------- ---------- --- -------------
--------- ---------- --- -------------
|
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 5. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prior to 1993, the Partnership recorded these rights at the fair market
value of a BAC on the date of grant, with a corresponding charge to deferred
compensation for certain portions of the management plan which is included in
partners' capital accounts.
Effective in 1993, the Partnership recognizes compensation expense in the year of grant, since the cash distribution criteria have been achieved.
BONUS AND PROFIT SHARING PLANS: A bonus pool has been established for employees with amounts determined annually at the discretion of a Partnership management committee. In addition, the Partnership has a profit sharing plan covering substantially all employees and an employee retirement savings plan.
NOTE 6. LEASES
The Partnership leases warehouse and office space from a partnership
controlled by certain BAC holders (certain executive officers of the Operating
Partnership) under an operating lease agreement expiring in April 1997. The
lease requires payments of $458,000 annually plus taxes, utilities, insurance
and other operating costs. In addition, the Partnership leases other buildings
and equipment from unrelated parties under noncancelable operating leases. Total
rent expense under all lease agreements was $1,301,000, $1,564,000 and
$1,643,000 for 1991, 1992 and 1993, respectively, and $1,183,000 and $1,345,000
for the nine-month periods ended September 30, 1993 and 1994, respectively.
Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 1993, are (in thousands):
Years ending December 31: 1994.................................. $912 1995.................................. 908 1996.................................. 570 1997.................................. 272 1998.................................. 41 |
In August 1994, the Partnership signed a one-year lease for a manufacturing facility in Spirit Lake, Iowa. Lease payments are $10,000 monthly and the Partnership has an option to purchase the facility for $1,850,000 at the end of the lease term.
NOTE 7. FOREIGN OPERATIONS
United States operations include export sales of $18,563,000, $21,091,000
and $27,179,000 for 1991, 1992, and 1993, respectively, and $19,005,000 and
$28,959,000 for the nine-month periods ended September 30, 1993 and 1994,
respectively.
The following data relates to Canadian operations (in thousands of United States dollars):
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------
1991 1992 1993 1993 1994
------- ------- -------- ------- -------
Sales................................... $75,477 $99,286 $106,664 $79,218 $88,329
Operating income........................ 4,851 6,541 6,887 4,856 5,961
Identifiable assets..................... 14,679 16,639 15,248 21,836 25,481
|
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 8. COMMITMENTS AND CONTINGENCIES
MAJOR SUPPLIER: During 1991, 1992 and 1993, purchases totaling 24 percent, 26 percent and 26 percent, respectively, and 31 percent for each of the nine-month periods ended September 30, 1993 and 1994, respectively, of the Partnership's cost of sales were from a single supplier.
PRODUCT LIABILITY: The Partnership is subject to product liability claims in the normal course of business and has elected not to insure for product liability losses. The costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is determinable. At December 31, 1992 and 1993, and September 30, 1994, the Partnership has accrued $2,458,000, $3,513,000 and $4,380,000, respectively, in connection with product liability claims.
WORKERS' COMPENSATION: The Partnership is self-insured for workers' compensation losses. The costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is determinable.
HEALTH BENEFITS: The Partnership is self-insured for employee health benefits. The costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is determinable.
CANADIAN INCOME TAX LITIGATION: In 1990, the Canadian income tax authorities proposed certain adjustments, principally relating to the original purchase price allocation to the Canadian subsidiary and transfer pricing matters, for additional income taxes payable by the Partnership's Canadian subsidiary for 1987 and 1988. The resolution of these proposed adjustments may also affect the Partnership's Canadian income tax expense for years subsequent to 1988. The Partnership was recently informed of the Canadian income tax authorities' intent to initiate an audit of the tax years 1989 through 1992. Management intends to vigorously contest a substantial amount of the proposed adjustments, and the ultimate liability, if any, cannot be reasonably estimated. Management does not believe that the outcome of this matter will have a materially adverse impact on the financial position or continuing operations of the Partnership. Income tax expense reflected on the accompanying statements of operations includes a provision related to certain of the proposed Canadian income tax adjustments.
LITIGATION: The Partnership is a defendant in lawsuits and subject to claims arising in the normal course of business. While it is not feasible to predict or determine the outcome of any of these cases, it is the opinion of management that their outcomes will not have a material adverse effect on the financial position or operations of the Partnership.
LETTERS OF CREDIT: At December 31, 1993, and September 30, 1994, the Partnership has open letters of credit totaling approximately $11,822,000 and $17,503,000. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received.
NOTE 9. SUBSEQUENT EVENTS
In August 1994, EIP Capital Corporation (the Managing General Partner), its
president, and two of its directors settled a lawsuit filed by a minority
shareholder of the Managing General Partner, with no resulting impact on the
Partnership's financial statements.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 10. PROPOSED CONVERSION FROM PARTNERSHIP TO CORPORATE STRUCTURE AND PRO
FORMA FINANCIAL INFORMATION
On August 25, 1994, the Partnership announced plans to convert from its
current limited partnership structure to a taxable C corporation structure. The
proposed conversion must be approved by the Partnership's Limited Partners and
will be effected through the formation of a new corporation (Polaris Industries
Inc.).
Polaris Industries Inc. will issue 16,010,441 shares of $0.01 par value common stock to the Partnership's Limited Partners in exchange for their limited partner interests, 2,100,243 shares of such common stock to affiliates of the General Partner in exchange for the entire general partnership interests and rights and ultimately 312,500 shares of such common stock to the holders of 312,500 First Rights that are issued and outstanding at September 30, 1994. This conversion will be a tax-free transaction for the Limited Partners, the affiliates of the General Partner and the Partnership. This transaction will include the merger of certain affiliates of the Managing General Partner as described in Note 1, which are individually and jointly immaterial to the Partnership's financial statements.
Management of Polaris Industries Inc. has expressed its intent to establish an initial annual cash dividend of $0.15 per share per quarter in the year after the successful completion of the Conversion transaction. In addition, subject to the approval of the Board of Directors, management of Polaris Industries Inc. has expressed its intent to declare a special cash distribution of $5.76 per share payable in three equal installments of $1.92 each during each of the last three quarters of 1995 (reduced to the extent that any distributions declared and paid by the Partnership after January 1, 1995 exceed, on a quarterly basis, $.15 per BAC). Management expects to incur indebtedness of approximately $70,000,000 in connection with the payment of the special distribution.
Polaris Industries Inc. will account for the transaction as a reorganization of affiliated entities, with the assets and liabilities of the Partnership recorded at their historical cost basis, except that it will also record deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, relating to the temporary differences for certain assets and liabilities at the date of conversion as discussed in Note 1 under the paragraph "Income Taxes." The costs of the conversion, estimated to be $11,000,000, will be accounted for as an expense in the statement of operations at the time of the Conversion. Additionally, Polaris Industries Inc. will receive a significant step-up in the tax basis of the assets and liabilities acquired from the Partnership and, as a result, will record additional deferred tax assets at the Conversion transaction date. The ultimate determination of the deferred tax assets discussed in this paragraph will be calculated based on the actual temporary differences existing at the Conversion transaction date. Polaris Industries Inc. will record a provision for U.S. federal, Canadian and state income taxes on its earnings.
The unaudited pro forma financial information has been prepared based on the historical financial statements of the Partnership as if the conversion transaction had occurred at the beginning of the earliest pro forma period presented for the statements of operations and cash flows and as of the date presented for the balance sheet.
A summary of the unaudited pro forma adjustments to the statements of operations and cash flows for the year ended December 31, 1993, and for the nine-month periods ended September 30, 1993 and 1994, follows:
1) Selling, general and administrative expenses have been reduced for the $500,000 annual management fee paid to the Managing General Partner.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 10. PROPOSED CONVERSION FROM PARTNERSHIP TO CORPORATE STRUCTURE AND PRO
FORMA FINANCIAL INFORMATION (CONTINUED)
2) A provision for income taxes has been calculated at a rate of 36
percent. Such rate reflects a combined federal and state statutory rate, net
of related research and development credits and foreign sales corporation
benefits.
3) A special distribution on Polaris Industries Inc. common stock of $5.76 per share payable in three equal installments of $1.92 each during each of the last three quarters of the earliest pro forma period presented, and future regular dividends estimated at $0.15 per share per quarter were recorded in the pro forma financial statements.
4) In connection with the proposed special cash distribution, interest expense has been recorded at 8.5 percent on the approximate $70,000,000 expected to be borrowed during the third and fourth quarters subsequent to the Conversion. The debt is expected to be repaid over a two-year period following the fourth quarter subsequent to the Conversion.
A summary of the unaudited pro forma adjustments to the September 30, 1994 balance sheet follows:
1) Deferred tax assets of $12,000,000 were recorded for the temporary differences that existed at December 31, 1993, between the tax bases and reported amounts of assets and liabilities as discussed in Note 1.
2) Deferred tax assets of $30,000,000 have been recorded for the estimated step-up in the tax bases of the assets and liabilities of Polaris Industries Inc. resulting from the Conversion transaction. Estimated temporary differences as of December 31, 1993, were used for purposes of this calculation. Deferred taxes resulting from the step-up in basis will be recalculated when the Conversion is completed and the actual temporary differences can be determined. The change in deferred tax assets could be material.
3) Expenses of the Conversion transaction are estimated to be $11,000,000 and were recorded at the balance sheet date as an accrued expense. These expenses are excluded from the pro forma statements of operations and cash flows.
4) Anticipated cash distributions and dividends on Polaris Industries Inc. common stock of $115,802,000 for the year following the Conversion were recorded at the balance sheet date, resulting in a deficit in retained earnings, on a pro forma basis. Polaris Industries Inc. is under no legal or contractual obligation to make such distributions and dividends, and the timing and amount of future distributions and dividends will be at the discretion of the Board of Directors and will depend, among other things, on the future after tax earnings, operations, capital requirements, borrowing capacity, and financial condition of Polaris Industries Inc. and general business conditions. There can be no assurance that such distributions and dividends will be adopted or maintained by Polaris Industries Inc. The approximate $70,000,000 expected to be borrowed in connection with the proposed special cash distribution has also been recorded at the balance sheet date.
POLARIS INDUSTRIES PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1993 AND 1994 IS UNAUDITED.)
NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
NET
INCOME
GROSS NET PER UNIT
SALES PROFIT INCOME (NOTE 2)
-------- -------- -------- ---------
1992:
First Quarter......................... $ 70,227 $ 16,788 $ 2,133 $ .11
Second Quarter........................ 85,467 24,288 6,181 .31
Third Quarter......................... 121,548 40,211 15,850 .78
Fourth Quarter........................ 106,576 33,332 10,537 .52
-------- -------- --------
Totals.............................. $383,818 $114,619 $34,701 $ 1.73
-------- -------- -------- ---------
-------- -------- -------- ---------
1993:
First Quarter......................... $107,115 $ 25,748 $ 6,138 $ .30
Second Quarter........................ 111,235 28,389 6,542 .32
Third Quarter......................... 166,803 48,596 18,762 .92
Fourth Quarter........................ 142,858 41,362 14,371 .71
-------- -------- --------
Totals.............................. $528,011 $144,095 $45,813 $ 2.25
-------- -------- -------- ---------
-------- -------- -------- ---------
1994:
First Quarter......................... $145,471 $ 31,260 $ 8,566 $ .42
Second Quarter........................ 180,884 36,994 10,542 .51
Third Quarter......................... 258,370 73,378 31,503 1.53
-------- -------- --------
Totals.............................. $584,725 $141,632 $50,611 $ 2.46
-------- -------- -------- ---------
-------- -------- -------- ---------
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INDEPENDENT AUDITOR'S REPORT
To the Stockholder
Polaris Industries Inc.
We have audited the accompanying balance sheet of POLARIS INDUSTRIES INC. (a Minnesota corporation) as of September 23, 1994. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Polaris Industries Inc. as of September 23, 1994, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN
Minneapolis, Minnesota
September 23, 1994
POLARIS INDUSTRIES INC.
BALANCE SHEET
SEPTEMBER 23, 1994
ASSETS
Investment in Polaris Industries Partners L.P.
(3,000 BACs at $22.50)........................... $ 67,500
--------
--------
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STOCKHOLDER EQUITY
Preferred stock $.01 par value, authorized
20,000,000 shares, no issued and outstanding
shares........................................... $ --
Common stock $.01 par value, authorized 80,000,000
shares, issued and outstanding 3,000 shares...... 30
Additional paid-in capital........................ 67,470
--------
Total stockholder equity.................... $ 67,500
--------
--------
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NOTE 1. THE CORPORATION
Polaris Industries Inc. (Polaris) is a Minnesota corporation formed on September 23, 1994, as the successor business of Polaris Industries Partners L.P. (Partners) in a proposed transaction that would result in the Conversion of the limited partnership to corporate form. Partners is a Delaware limited partnership whose operations are conducted through Polaris Industries L.P. (the Operating Partnership), also a Delaware limited partnership, and its wholly-owned Canadian subsidiary. Partners is the sole limited partner of the Operating Partnership. The Operating Partnership is engaged in a single industry segment consisting of the design, engineering, and manufacture of recreational and utility vehicles, and markets them, together with related parts and accessories, through a network of dealers and distributors, and its Canadian subsidiary. Polaris will continue the operations of the Operating Partnership.
At September 23, 1994, there were no operations of Polaris.
The stockholder transferred 3,000 BACs of Partners to capitalize Polaris. The BACs are recorded at the historical cost basis of the stockholder.
ANNEX A
GLOSSARY OF DEFINED TERMS
1987 Code Amendments to the Code adopted in 1987 and a transition
Amendments......... rule adopted thereunder, pursuant to which the
Partnership will be treated as a corporation for federal
income tax purposes subsequent to December 31, 1997 if
the BACs continue to be publicly traded.
Agreement........... An Agreement dated as of August 25, 1994, entered into
by Mr. Wendel and Mr. Atkins in connection with the
Conversion, which provides, among other matters, that
Mr. Atkins, for as long as he owns not less than 3% of
the outstanding Common Stock, will vote his shares of
Common Stock in favor of the Corporation's nominees to
the Board of Directors.
Appraisal Rights.... The rights of appraisal which are provided in Article
VII of the Merger Agreement.
ATVs................ All terrain recreational and utility vehicles.
BAC Holders......... The holders of BACs.
BACs................ Units of Beneficial Assignment of Class A Limited
Partnership Interests.
Bonus Committee..... A committee consisting of Victor K. Atkins, Jr., W. Hall
Wendel, Jr. and John H. Grunewald which determines the
amount of bonuses and profit sharing awards which will
be paid to the employees of the Operating Partnership
and which administers the Employee Plan and Management
Plan.
Closing............. The date of the Special Meeting of BAC Holders or such
other date as the Corporation and the Partnership may
agree on which the closings shall be held to consummate
the Transactions.
Code................ The Internal Revenue Code of 1986, as amended.
Common Stock........ Common stock, par value $.01 per share, of the
Corporation.
Control The assumption that (i) the Transferors will own,
Assumption......... immediately after such transfers, more than 80% of the
only class of stock of the Corporation and (ii) that not
more than 20% of the shares of Common Stock transferred
to the Transferors pursuant to the Conversion will be
subsequently disposed of pursuant to contracts or other
formal or informal agreements entered into prior to the
Conversion.
Conversion.......... The conversion of the Partnership to corporate form.
Conversion The proposal to be voted upon by BAC Holders at the
Proposal........... Special Meeting.
Corporation......... Polaris Industries Inc., a Minnesota corporation.
CPSC................ The Consumer Products Safety Commission.
Delaware Court...... The Delaware Court of Chancery.
DGCL................ The General Corporation Law of the State of Delaware.
Dillon Read......... Dillon, Read & Co. Inc., a Connecticut corporation.
Effective Time...... The date on which the Conversion will become effective.
EIPCC............... EIP Capital Corporation, a Delaware corporation, which
is managing general partner of the General Partner.
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Employee Plan....... Reservation of 900,000 First Rights to acquire BACs for
issuance to non-management employees of the Operating
Partnership.
Exchange Act........ The Securities Exchange Act of 1934, as amended.
Exchange Ratio...... The percentage of Common Stock of the Corporation to be
received by (i) BAC Holders and holders of previously
received First Rights in exchange for their BACs and
upon exercise of such First Rights, as the case may be,
and (ii) affiliates of the General Partner in exchange
for their interests in the General Partner and its
affiliates. In the Conversion, BAC Holders (including
affiliates of the General Partner) and holders of
previously received First Rights will receive 88.6% of
the Common Stock and affiliates of the General Partner
will receive 11.4% of the Common Stock, after giving
effect to the exercise of such First Rights.
Fair Value.......... The value of the BACs as of the day immediately
preceding the Effective Time, excluding any appreciation
or depreciation in such value arising from the
accomplishment or expectation of the Conversion, as
determined by the Delaware Court of Chancery.
Fee................. An annual management fee in the amount of $500,000
received by EIPCC, pursuant to a Management Agreement,
in return for acting as Management Agent.
First Rights........ Rights to acquire BACs pursuant to the Employee Plan and
the Management Plan.
General Partner..... EIP Associates L.P., a Delaware limited partnership,
which is the general partner of the Partnership.
Group............... An affiliated group of corporations (which will include
EIPCC) which has, as the common parent corporation, the
Corporation.
Information Agent... D.F. King & Co., Inc., a Delaware corporation.
Initial Limited Polaris Industries Holdings Inc., a Delaware
Partner............ corporation.
Justice
Department......... The United States Department of Justice.
Lehman Brothers..... Lehman Brothers Inc., a Delaware corporation.
Management Agent.... EIPCC, the managing general partner of the General
Partner, acting as management agent in the performance
of certain administrative services on behalf of the
Partnership.
Management Plan..... The reservation of 1,500,000 First Rights to acquire
BACs for issuance to middle management and senior
management of the Operating Partnership.
MBCA................ The Minnesota Business Corporation Act.
Meeting Date........ Thursday, December 22, 1994, the date of the Special
Meeting of BAC Holders in Minneapolis, Minnesota. At the
Special Meeting, the holders of BACs will vote upon the
Conversion Proposal.
Merger.............. The merger of the Transitory Partnership with and into
the Partnership, with the Partnership surviving,
pursuant to which, among other matters, each BAC (other
than BACs held by persons who have exercised Appraisal
Rights) will automatically be exchanged for one share of
Common Stock, and each outstanding First Right will
automatically be converted into the right to receive one
share of Common Stock.
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Merger Agreement.... The Agreement and Plan of Conversion, dated as of
September 29, 1994, among the Corporation, the
Partnership, the General Partner, the Operating
Partnership, EIPCC and the other parties thereto, as may
be amended, modified or supplemented from time to time.
Northwestern........ Northwestern Equipment Manufacturing Company, a
Minnesota corporation, formerly Polaris Industries Inc.,
the predecessor of the Partnership.
Operating Polaris Industries L.P., a Delaware limited partnership;
Partnership........ and the collective reference to PICC and Polaris
Industries L.P.
Operating General Polaris Industries Associates L.P., the general partner
Partner............ of the Operating Partnership.
Partnership......... Polaris Industries Partners L.P., a Delaware limited
partnership.
Partnership The amended and restated partnership agreement governing
Agreement.......... the Partnership.
PICC................ Polaris Industries Capital Corporation, a Delaware
corporation.
Plan................ A Retirement Savings Plan adopted by Polaris Industries,
Inc, the predecessor Company, for all employees who meet
minimum service requirements. The Plan was adopted by
the Operating Partnership.
Polaris............. The business and operations of the Operating
Partnership.
Proposed The initial cash dividend rate of $0.15 per quarter and
Distributions...... three special cash distributions, each of $1.92 per
share (reduced to the extent that any cash distributions
declared and paid by the Partnership after January 1,
1995 exceed, on a quarterly basis, $0.15 per BAC),
payable during each of the last three quarters of 1995,
which the Sponsors intend to recommend to the
Corporation's Board of Directors.
Proxy............... A proxy to be voted at the Special Meeting.
PWC................. Personal watercraft.
Record Date......... November 21, 1994, the date set for the determination of
BAC Holders entitled to vote at the Special Meeting.
Register in The office of the Register in Chancery of the Delaware
Chancery........... Court in which a BAC Holder has filed a petition
demanding a determination of the Fair Value of the BACs
of all holders of BACs who have perfected Appraisal
Rights pursuant to the Merger Agreement.
SEC................. The Securities and Exchange Commission.
Section 751 Partnership unrealized receivables, substantially
assets............. appreciated inventory and certain other items including
depreciation recapture.
Securities Act...... The Securities Act of 1933, as amended.
Service............. The Internal Revenue Service.
Smith Barney........ Smith Barney Inc., a Delaware corporation.
SNO................. The symbol under which the Partnership's BACs are listed
on the American and Pacific Stock Exchanges.
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Special Appraiser... An independent appraiser selected by the American
Arbitration Association, Inc. to determine the Fair
Value of the BACs held by dissenting BAC Holders.
|
Special Meeting..... The special meeting of BAC Holders to be held at Holiday
Inn West, Highway 394, Minneapolis, Minnesota, on the
Meeting Date to vote upon the proposed Conversion.
Sponsors............ The following officers of the Operating Partnership: W.
Hall Wendel, Jr., Chief Executive Officer, Kenneth D.
Larson, President and Chief Operating Officer, John H.
Grunewald, Executive Vice President, Finance and
Administration, James Bruha, Vice
President--Manufacturing, Charles A. Baxter, Vice
President--Engineering and Product Safety, Ed Skomoroh,
Vice President--Sales and Marketing and Michael W. Ma-
lone, Chief Financial Officer and Treasurer.
Transactions........ The Merger and certain other related transactions
contemplated by the Merger Agreement.
Transferors......... Affiliates of the General Partner transferring their
interests in the General Partner and its affiliates to
the Corporation as steps in the integrated transaction
consisting of the Merger and issuance of Common Stock
and related transactions.
Transitory A newly formed Delaware subsidiary limited partnership
Partnership........ of the Corporation to be merged into the Partnership,
with the Partnership surviving, in which Merger all BAC
Holders and holders of currently outstanding First
Rights will receive one share of Common Stock in
exchange for each BAC held by them.
Unaffiliated BAC BAC Holders on the Record Date other than the Sponsors,
Holders............ the General Partner and its affiliates.
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ANNEX B
[Letterhead of Smith Barney]
Polaris Industries Partners L.P. November 21, 1994
1225 Highway 169 North
Minneapolis, Minnesota 55441
Attention: General Partner
Gentlemen:
In connection with the proposed conversion of Polaris Industries Partners L.P. (the "Partnership") to corporate form (the "Conversion"), you have requested our opinion as to the fairness, from a financial point of view, to holders of Units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") of the Partnership of the consideration to be received by holders of BACs and the Exchange Ratio (as defined herein) in the Conversion. The Conversion is subject to the conditions set forth in the Agreement and Plan of Conversion dated as of September 29, 1994 (the "Conversion Agreement") by and among Polaris Industries Inc. (the "Corporation"), the Partnership, Polaris Industries L.P. (the "Operating Partnership" or "Polaris"), EIP Associates L.P. (the "General Partner"), Polaris Industries Associates L.P., Polaris Industries Capital Corporation, EIP Capital Corporation, and the other parties named therein. The Conversion Agreement provides for, among other things, (i) the merger of a newly formed transitory partnership, wholly owned directly or indirectly by the Corporation with and into the Partnership (the "Merger"), with the Partnership as the surviving entity, whereby the holders of BACs (together with the holders of the previously granted first rights (the "First Rights")) will receive, in exchange therefor, 88.6% of the common stock, par value $.01 per share, of the Corporation ("Common Stock"), after giving effect to the exercise of such First Rights, and (ii) the transfers by affiliates of the General Partner of their interests in the General Partner and its affiliates in exchange for 11.4% of the Common Stock (after giving effect to the exercise of such First Rights). The 88.6% of the Common Stock to be received by BAC holders (and holder of such First Rights upon exercise) and the 11.4% of the Common Stock (after giving effect to the exercise of such First Rights) to be received by affiliates of the General Partner are referred to herein as the "Exchange Ratio."
In arriving at our opinion, we have reviewed the Conversion Agreement and certain related agreements, the Proxy Statement of the Partnership dated the date hereof (the "Proxy Statement"), and the limited partnership agreements of the Partnership and the Operating Partnership, and held discussions with certain senior operating management of the Operating Partnership ("Management") and representatives and advisors of the Partnership to discuss the business, operations and prospects of Polaris and the Partnership. We have examined certain publicly available business and financial information relating to the Partnership as well as internal financial statements, forecasts and other financial and operating data concerning the Partnership prepared by Management. We have reviewed the financial terms of the Conversion as set forth in the Conversion Agreement in relation to, among other things: current and historical market prices and trading volumes of the BACs; historical and projected earnings and operating data of the Partnership; the capitalization and financial condition of the Partnership; and the pro forma effect of the Conversion. We also considered, to the extent publicly available, the financial terms of certain other similar transactions which we considered comparable to the Conversion and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered comparable to those of the Partnership. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to
or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information furnished to or otherwise reviewed by or discussed with us, we assumed that such forecasts and other information were reasonably prepared on bases reflecting the best currently available estimates and judgments of Management as to the expected future financial performance of the Partnership. We have also assumed, with your consent, that no material change has occurred in the business, operations, financial condition or prospects of Polaris as set forth in the Proxy Statement.
We are not expressing any opinion as to what the value of the Common Stock actually will be when issued to holders of BACs or the prices at which the Common Stock will trade subsequent to the Conversion. We have not made or been provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Partnership. We have not been asked to express an opinion as to the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any other transaction in which the Partnership might engage. We were not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership. Our opinion is necessarily based upon financial, stock market and other conditions and circumstances existing and disclosed to us as of the date hereof.
Smith Barney has been engaged to render financial advisory services to the Partnership in connection with the Conversion and will receive a fee for our services, a portion of which is contingent upon consummation of the Conversion. We also will receive a fee for the delivery of this opinion. In the ordinary course of business, we and our affiliates may actively trade the BACs for our own account or for the account of our customers and, accordingly, may at any time hold a position in such securities.
It is understood that this opinion is for the information of the Partnership only and may not be used for any other purpose without prior written consent, except that we hereby consent to the reference of this letter in, and its inclusion as an attachment or exhibit to, the Registration Statement on Form S-4 which has been filed by the Corporation with the Securities and Exchange Commission in connection with the Proxy Statement contained therein which will be mailed to the BAC holders.
Based upon and subject to the foregoing, our experience as investment bankers and other factors we deemed relevant, we are of the opinion that, as of the date hereof, each of the consideration to be received by the holders of BACs and the Exchange Ratio in the Conversion is fair, from a financial point of view, to the holders of BACs.
Very truly yours,
SMITH BARNEY INC.
ANNEX C
[LETTERHEAD OF DILLON, READ & CO. INC.]
November 21, 1994
Polaris Industries Partners L.P.
1225 Highway 169 North
Minneapolis, Minnesota 55441
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of view, to the holders ("BAC Holders") of units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") in Polaris Industries Partners L.P., a Delaware Limited Partnership (the "Partnership"), of the Exchange Ratio (as defined below) and the consideration to be received by such BAC Holders in a proposed conversion (the "Conversion") of the Partnership to corporate form. We understand that the Conversion will be effected through the merger (the "Merger") of an indirect wholly-owned subsidiary partnership of Polaris Industries Inc., a newly formed Minnesota corporation (the "Corporation") into the Partnership, pursuant to which (i) the BAC Holders (together with the holders of the previously granted first rights (the "First Rights")) will receive, in exchange therefor, 88.6% of the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") after giving effect to the exercise of such First Rights and (ii) affiliates of EIP Associates L.P., the general partner of the Partnership (the "General Partner"), will receive, in exchange for their interests in the General Partner and its affiliates, the remaining 11.4% of the Common Stock (after giving effect to the exercise of such First Rights) (the "Exchange Ratio"), as described in the Partnership's Proxy Statement dated the date hereof (the "Proxy Statement").
Dillon, Read & Co. Inc. has, in the past, performed general financial advisory services for, and received compensation from, the Partnership. In the ordinary course of our business we may trade the BACs for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.
In connection with our opinion, we have reviewed the Proxy Statement and the Agreement and Plan of Conversion dated as of September 29, 1994 as well as financial and other information that was publicly available or furnished to us by the Partnership, including information provided during discussions with management of the Partnership. In addition, we have compared certain financial and operating data of the Partnership with that of various other publicly traded corporations whose operations we believed to be comparable to those of the Partnership, reviewed market prices and trading volumes for the BACs, reviewed the cash distributions that have been paid to BAC Holders and the General Partner and the prospects for future cash distributions to the BAC Holders and the General Partner, reviewed the terms of selected partnership conversions which we believed to be comparable to the Conversion and conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of the opinion.
In our review and analysis, and in arriving at our opinion, we have, with your consent, assumed and relied upon the accuracy and completeness in all material respects of the information contained in the Proxy Statement, including the description of the tax consequences to the Partnership and the BAC Holders of the Conversion, and all financial information that was publicly available or furnished or otherwise communicated to us by the Partnership and have not attempted to verify independently any of such information. We have also assumed, with your consent, that no material change has occurred in the business, operations, financial condition or prospects of the Partnership as set forth in the Proxy Statement. We have not made an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Partnership, nor have we been furnished with any such evaluation or appraisal. We are not expressing any opinion as to what the value of the Common Stock
actually will be when issued to BAC Holders or the prices at which the Common Stock will trade subsequent to the Conversion. Our opinion is based upon economic, monetary and market conditions existing on the date hereof. You have not requested us to express, and we are not expressing, any opinion with respect to the decision to effect the Conversion or as to whether any alternative transactions to the Conversion may be more or less favorable to the BAC Holders. We were not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership.
It is understood that this opinion is for the information of the Partnership only and may not be used for any other purpose without our prior written consent, except that we hereby consent to the reference of this letter in, and its inclusion as an attachment or exhibit to, the Registration Statement on Form S-4 which has been filed by the Corporation with the Securities and Exchange Commission in connection with the Proxy Statement contained therein which will be mailed to the BAC Holders.
Based upon, and subject to, the foregoing, it is our opinion that, as of the date hereof, each of the Exchange Ratio and the consideration to be received by the BAC Holders in the Conversion is fair, from a financial point of view, to the BAC Holders.
Very truly yours,
Dillon, Read & Co. Inc.
ANNEX D
POLARIS INDUSTRIES INC.
POLARIS INDUSTRIES PARTNERS L.P.
AGREEMENT AND PLAN OF CONVERSION
DATED AS OF
SEPTEMBER 29, 1994
TABLE OF CONTENTS
PAGE
---------
AGREEMENT AND PLAN OF CONVERSION
ARTICLE I -- THE PICC MERGER.................................................................................... D-6
Section 1.1 The PICC Merger................................................................... D-6
Section 1.2 Effects of the PICC Merger........................................................ D-6
ARTICLE II -- THE EIPCC STOCK EXCHANGE.......................................................................... D-6
Section 2.1 The EIPCC Stock Exchange.......................................................... D-6
ARTICLE III -- THE PARTNERSHIP GP EXCHANGE...................................................................... D-7
Section 3.1 The Partnership GP Exchange....................................................... D-7
ARTICLE IV -- THE OPERATING PARTNERSHIP GP EXCHANGE............................................................. D-7
Section 4.1 The Operating Partnership GP Exchange............................................. D-7
ARTICLE V -- THE MERGER......................................................................................... D-7
Section 5.1 Formation of PTP.................................................................. D-7
Section 5.2 The Merger........................................................................ D-7
Section 5.3 Effects of the Merger............................................................. D-8
ARTICLE VI -- THE OPERATING PARTNERSHIP MERGER.................................................................. D-8
Section 6.1 The Operating Partnership Merger.................................................. D-8
Section 6.2 Effects of the Operating Partnership Merger....................................... D-8
ARTICLE VII -- CONVERSION OF UNITS IN THE MERGER................................................................ D-9
Section 7.1 Conversion of Units............................................................... D-9
Section 7.2 Exchange of Certificates.......................................................... D-9
Section 7.3 Procedures for Dissent by Record Holders of Units................................. D-10
Section 7.4 Provisions Affecting Remedies of Dissenting Unitholders........................... D-13
ARTICLE VIII -- THE CLOSINGS.................................................................................... D-14
Section 8.1 The Closings...................................................................... D-14
Section 8.2 Deliveries at the First Closing................................................... D-14
Section 8.3 Deliveries at the Second Closing.................................................. D-14
Section 8.4 Deliveries at the Third Closing................................................... D-15
Section 8.5 Deliveries at the Fourth Closing.................................................. D-15
Section 8.6 Deliveries at the Fifth Closing................................................... D-16
Section 8.7 Deliveries at the Sixth Closing................................................... D-16
ARTICLE IX -- JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF CERTAIN PARTNERSHIP ENTITIES..................
D-16
Section 9.1 Organization...................................................................... D-16
Section 9.2 Capitalization.................................................................... D-16
Section 9.3 Authority......................................................................... D-17
ARTICLE X -- SEVERAL REPRESENTATIONS AND WARRANTIES OF CERTAIN PARTNERSHIP ENTITIES.............................
D-17
Section 10.1 Representations and Warranties of the EIPCC Stockholders.......................... D-17
Section 10.2 Representations and Warranties of the Partnership GP Partners..................... D-19
Section 10.3 Representations and Warranties of the Operating Partnership GP Partners........... D-21
ARTICLE XI -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................... D-22
Section 11.1 Organization...................................................................... D-22
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PAGE
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Section 11.2 Capitalization.................................................................... D-23
Section 11.3 Authority......................................................................... D-23
Section 11.4 No Activity....................................................................... D-23
ARTICLE XII -- COVENANTS........................................................................................ D-23
Section 12.1 Conduct of Business of Certain Partnership Entities............................... D-23
Section 12.2 Conduct of Business of the Company................................................ D-25
Section 12.3 Reasonable Best Efforts........................................................... D-25
Section 12.4 Letter of the Partnership's Accountants........................................... D-25
Section 12.5 Access to Information............................................................. D-25
Section 12.6 Unitholders Meeting............................................................... D-26
Section 12.7 Legal Conditions to Merger........................................................ D-26
Section 12.8 Affiliates........................................................................ D-26
Section 12.9 Stock Exchange Listing............................................................ D-26
Section 12.10 Employee Benefit Plans............................................................ D-26
Section 12.11 Partnership Plans................................................................. D-26
Section 12.12 Fees and Expenses................................................................. D-27
Section 12.13 Brokers or Finders................................................................ D-27
Section 12.14 Indemnification................................................................... D-27
Section 12.15 Indemnification of The Transferors, The Partnership GP, The Operating Partnership
GP, EIPCC, PICC and Agents....................................................... D-28
Section 12.16 Preservation of Partnership, Partnership GP and EIPCC............................. D-30
Section 12.17 Notification of Certain Matters................................................... D-30
Section 12.18 Publicity......................................................................... D-31
Section 12.19 Certain Tax Matters............................................................... D-31
Section 12.20 Registration Rights............................................................... D-33
Section 12.21 Delivery of Documents............................................................. D-33
Section 12.22 Partnership Distributions......................................................... D-33
ARTICLE XIII -- CONDITIONS...................................................................................... D-34
Section 13.1 Conditions to Each Party's Obligation To Effect the Transactions Contemplated
Hereby........................................................................... D-34
Section 13.2 Conditions to Obligations of The Company.......................................... D-34
Section 13.3 Conditions to Obligations of the Partnership Entities............................. D-35
ARTICLE XIV -- INDEMNITIES...................................................................................... D-36
Section 14.1 EIPCC Stockholders Indemnity...................................................... D-36
Section 14.2 Partnership GP Partners Indemnity................................................. D-36
Section 14.3 Operating Partnership GP Partners Indemnity....................................... D-37
Section 14.4 General Tax Indemnity............................................................. D-37
Section 14.5 Exception to Certain Indemnities.................................................. D-37
Section 14.6 Indemnification of W. Hall Wendel, Jr. and the Company............................ D-37
Section 14.7 Procedures for Indemnification.................................................... D-38
ARTICLE XV -- TERMINATION AND AMENDMENT......................................................................... D-39
Section 15.1 Termination....................................................................... D-39
Section 15.2 Effect of Termination............................................................. D-39
Section 15.3 Amendment......................................................................... D-39
ARTICLE XVI -- MISCELLANEOUS.................................................................................... D-39
Section 16.1 Fiduciary Duties.................................................................. D-39
Section 16.2 Nonsurvival of Representations and Warranties..................................... D-39
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PAGE
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Section 16.3 Notices........................................................................... D-39
Section 16.4 Interpretation.................................................................... D-40
Section 16.5 Counterparts...................................................................... D-40
Section 16.6 Entire Agreement; No Third Party Beneficiaries.................................... D-40
Section 16.7 Governing Law..................................................................... D-40
Section 16.8 Specific Performance.............................................................. D-40
Section 16.9 Assignment; Successors............................................................ D-41
ANNEX I -- List of Partnership GP Partners
ANNEX II -- List of Operating Partnership GP Partners
ANNEX III -- List of EIPCC Stockholders
EXHIBIT A -- Form of Registration Rights Agreement
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AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of September 29, 1994, by and among Polaris Industries Inc., a Minnesota corporation (the "Company"); Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership"); Polaris Industries L.P., a Delaware limited partnership owned by the Partnership (the "Operating Partnership"); EIP Associates L.P., a Delaware limited partnership and the general partner of the Partnership (the "Partnership GP"); Polaris Industries Associates L.P., a Delaware limited partnership and the general partner of the Operating Partnership (the "Operating Partnership GP"); EIP Capital Corporation, a Delaware corporation and the managing general partner of the Partnership GP ("EIPCC"); Polaris Industries Capital Corporation, a Delaware corporation wholly owned by EIPCC and the managing general partner of the Operating Partnership GP ("PICC"); the partners of the Partnership GP named on Annex I attached hereto (the "Partnership GP Partners"); the partners of the Operating Partnership GP named on Annex II hereto (the "Operating Partnership GP Partners"); and the stockholders of EIPCC named on Annex III hereto (the "EIPCC Stockholders"). The Partnership, the Operating Partnership, the Partnership GP, the Operating Partnership GP, PICC, EIPCC, the Partnership GP Partners, the Operating Partnership GP Partners and the EIPCC Stockholders are collectively referred to herein as the "Partnership Entities". The Partnership GP Partners, the Operating Partnership GP Partners and the EIPCC Stockholders are collectively referred to herein as the "Transferors."
WHEREAS, the parties hereto desire to convert the structure of the Partnership from that of a master limited partnership to that of a corporation (the "Conversion") through consummation of the following transactions (collectively, the "Transactions"):
(i) First, PICC shall be merged with and into EIPCC, with EIPCC as the
surviving corporation (the "PICC Merger"); (ii) Second, the EIPCC
Stockholders, owning all the issued and outstanding capital stock of EIPCC,
shall transfer such capital stock to the Company in exchange for shares of
Company Common Stock (as hereinafter defined) (the "EIPCC Stock Exchange");
(iii) Third, the Partnership GP Partners, owning all the issued and
outstanding partnership interests of the Partnership GP not presently owned
by EIPCC, shall transfer such partnership interests to the Company in
exchange for shares of Company Common Stock (the "Partnership GP Exchange");
(iv) Fourth, the Operating Partnership GP Partners, owning all the issued
and outstanding partnership interests of the Operating Partnership GP not
presently owned by PICC, shall transfer such partnership interests to the
Company in exchange for shares of Company Common Stock (the "Operating
Partnership GP Exchange"); (v) Fifth, the Company and EIPCC shall form a new
Delaware limited partnership named PTP LP, or such other name as they
determine ("PTP"), with the Company as PTP's sole limited partner and EIPCC
as PTP's sole general partner; (vi) Sixth, PTP shall be merged with and into
the Partnership (the "Merger"), in which the Partnership shall be the
surviving partnership with the Partnership GP as the Partnership's general
partner and the Company and EIPCC as the Partnership's limited partners and
the outstanding Units of Beneficial Assignment of Class A Limited
Partnership Interests of the Partnership (the "Units") shall be converted
into shares of Company Common Stock; and (vii) Seventh, the Operating
Partnership and the Operating Partnership GP shall be merged with and into
the Partnership (the "Operating Partnership Merger"), in which the
Partnership shall be the surviving partnership with the Partnership GP and
the Company as the Partnership's general partners, and the Company and EIPCC
as the Partnership's limited partners;
WHEREAS, pursuant to the Merger, each Unit then outstanding (other than Units to be cancelled pursuant to Section 7.1(a) hereof and Units as to which the holders thereof shall have exercised appraisal rights pursuant to Section 7.3 hereof, if any) shall be converted into one share of common stock, par value $.01 per share of the Company ("Company Common Stock");
WHEREAS, pursuant to the EIPCC Stock Exchange, the Partnership GP Exchange and the Operating Partnership GP Exchange, the Transferors shall collectively receive in the aggregate 2,100,243 shares of Company Common Stock (the "Transferors' Number");
WHEREAS, as a result of the Transactions, EIPCC will be wholly owned by the Company; the Partnership GP will be wholly owned by the Company (as a general partner and limited partner) and EIPCC (as managing general partner); the Partnership will be wholly owned by the Company (as a general partner and a limited partner), the Partnership GP (as a general partner), and EIPCC (as a limited partner); the Partnership Entities (other than EIPCC, the Partnership GP, the Partnership and the Transferors) will cease to exist; and the Transferors (other than in their capacities as Unitholders) will own 11.4% of Company Common Stock to be issued and outstanding after giving effect to the exercise of previously granted First Rights (as defined herein) and the Unitholders together with holders of outstanding First Rights (upon exercise of such First Rights) will own in the aggregate 88.6% of the Company Common Stock to be issued and outstanding after giving effect to the exercise of such First Rights;
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
THE PICC MERGER
Section 1.1 THE PICC MERGER. Upon the terms and subject to the conditions hereof, at the First Closing (as hereinafter defined), a certificate of merger (the "PICC Certificate of Merger") shall be duly prepared, executed and acknowledged by EIPCC, the surviving corporation in the PICC Merger, and thereafter delivered to the Secretary of State of the State of Delaware, for filing, as provided in the Delaware General Corporation Law (the "DGCL"). The PICC Merger shall become effective at the date and time set forth in the PICC Certificate of Merger filed with the Secretary of State of the State of Delaware (the "PICC Effective Time").
Section 1.2 EFFECTS OF THE PICC MERGER. The PICC Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the PICC Effective Time, all the properties, rights, privileges, powers and franchises of PICC shall vest in EIPCC, as the surviving corporation in the PICC Merger, and all debts, liabilities and duties of PICC shall become the debts, liabilities and duties of EIPCC. In addition, from and after the PICC Effective Time, all outstanding shares of PICC capital stock shall be cancelled without consideration and cease to exist.
ARTICLE II
THE EIPCC STOCK EXCHANGE
Section 2.1 THE EIPCC STOCK EXCHANGE.
(a) Upon the terms and subject to the conditions hereof, at the Second Closing (as hereinafter defined), the Company shall acquire from each of the EIPCC Stockholders and each of the EIPCC Stockholders shall assign, transfer, convey and deliver to the Company, the shares of common stock, par value $1.00 per share, of EIPCC owned by such EIPCC Stockholders, as set forth opposite the EIPCC Stockholders' names on Annex III hereto, together constituting all the issued and outstanding shares of capital stock of EIPCC (the "EIPCC Common Stock"), free and clear of all liens, charges, pledges, security interests, claims and encumbrances whatsoever (collectively, "Liens").
(b) As payment in full for the EIPCC Common Stock being acquired by it from the EIPCC Stockholders hereunder, and against delivery thereof as aforesaid, at the Second Closing, the Company shall issue to each of the EIPCC Stockholders a number of shares of Company Common Stock equal to the Transferors' Number multiplied by the fraction set forth opposite such EIPCC Stockholder's name on Annex III hereto.
ARTICLE III
THE PARTNERSHIP GP EXCHANGE
Section 3.1 THE PARTNERSHIP GP EXCHANGE.
(a) Upon the terms and subject to the conditions hereof, at the Third Closing (as defined herein), the Company shall acquire from each of the Partnership GP Partners, and each of such Partnership GP Partners shall assign, transfer, convey and deliver to the Company, the partnership interests in the Partnership GP owned by such Partnership GP Partners, as set forth opposite the Partnership GP Partners' names on Annex I hereto (the "Partnership GP Interests"), constituting (together with EIPCC's interest in the Partnership GP) all the issued and outstanding partnership interests of the Partnership GP, free and clear of all Liens.
(b) As payment in full for the Partnership GP Interests being acquired by it from the Partnership GP Partners hereunder, and against delivery thereof as aforesaid, at the Third Closing, the Company shall issue to each of the Partnership GP Partners a number of shares of Company Common Stock equal to the Transferors' Number multiplied by the fraction set forth opposite such Partnership GP Partner's name on Annex I hereto.
ARTICLE IV
THE OPERATING PARTNERSHIP GP EXCHANGE
Section 4.1 THE OPERATING PARTNERSHIP GP EXCHANGE.
(a) Upon the terms and subject to the conditions hereof, at the Fourth Closing (as hereinafter defined), the Company shall acquire from each of the Operating Partnership GP Partners, and each of such Operating Partnership GP Partners shall assign, transfer, convey and deliver to the Company, the partnership interests in the Operating Partnership GP owned by the Operating Partnership GP Partners, as set forth opposite the Operating Partnership GP Partners' names on Annex II hereto (the "Operating Partnership GP Interests"), constituting (together with EIPCC's interest in the Operating Partnership GP) all the issued and outstanding partnership interests of the Operating Partnership GP, free and clear of all Liens.
(b) As payment in full for the Operating Partnership GP Interests being acquired by it from the Operating Partnership GP Partners hereunder, and against delivery thereof as aforesaid, at the Fourth Closing, the Company shall issue to each of the Operating Partnership GP Partners a number of shares of Company Common Stock equal to the Transferors' Number multiplied by the fraction set forth opposite such Operating Partnership GP Partners' name on Annex II hereto.
ARTICLE V
THE MERGER
Section 5.1 FORMATION OF PTP. Upon the terms and subject to the conditions hereof, at the Fifth Closing (as hereinafter defined), a certificate of limited partnership (the "PTP Certificate of Limited Partnership") shall be duly prepared, executed and acknowledged by EIPCC, the general partner of PTP, and delivered to the Secretary of State of the State of Delaware, for filing, as provided in the Delaware Revised Uniform Limited Partnership Act (the "DRULPA"). PTP shall be formed upon the filing of the PTP Certificate of Limited Partnership with the Secretary of State of the State of Delaware. PTP shall be formed by EIPCC, as general partner, and the Company as limited partner and shall be capitalized with $100 in capital, with $90 being contributed by the Company and $10 being contributed by EIPCC. PTP shall qualify as a partnership for federal income tax purposes.
Section 5.2 THE MERGER. Upon the terms and subject to the conditions hereof, at the Fifth Closing, immediately following the consummation of the transactions set forth in Section 5.1 hereof a
certificate of merger (the "Certificate of Merger") shall be duly prepared, executed and acknowledged by the Partnership, the surviving partnership in the Merger, and delivered to the Secretary of State of the State of Delaware, for filing, as provided in the DRULPA. The Merger shall become effective at the date and time set forth in the Certificate of Merger filed with the Secretary of State of the State of Delaware (the "Effective Time"). The partnership agreement of the Partnership, as in effect immediately prior to the Effective Time shall be the Partnership Agreement of the Partnership following the Effective Time unless and until amended in accordance with the terms thereof and applicable law.
Section 5.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in the DRULPA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of PTP shall vest in the Partnership as the surviving Partnership in the Merger, and all debts, liabilities and duties of PTP shall become the debts, liabilities and duties of the Partnership. In addition, at the Effective Time, all outstanding Units (other than Units to be cancelled pursuant to Section 7.1(a) hereof, and other than Units as to which the holders thereof shall have exercised appraisal rights pursuant to Section 7.3 hereof, if any) will be converted into shares of Company Common Stock as provided in Article VII hereof; at the Effective Time, EIPCC's general partnership interest in PTP shall be converted into a limited partnership interest of 0.0001% in the Partnership and EIPCC's capital contribution to PTP shall be returned; and at the Effective Time, the Company's limited partnership interest in PTP shall be converted into a limited partnership interest in the Partnership and the Company's capital contribution to PTP shall be returned. The partnership interests of the Partnership GP in the Partnership and the partnership interests of the Company and EIPCC in the Partnership GP shall not be affected by the Merger.
ARTICLE VI
THE OPERATING PARTNERSHIP MERGER
Section 6.1 THE OPERATING PARTNERSHIP MERGER. Upon the terms and subject to the conditions hereof, at the Sixth Closing (as hereinafter defined), a certificate of merger (the "Operating Partnership Certificate of Merger") shall be duly prepared, executed and acknowledged by the Partnership, the surviving partnership in the Operating Partnership Merger, and delivered to the Secretary of State of the State of Delaware, for filing, as provided in the DRULPA. The Operating Partnership Merger shall become effective at the date and time set forth in the Operating Partnership Certificate of Merger filed with the Secretary of State of the State of Delaware (the "Operating Partnership Effective Time"). The partnership agreement of the Partnership, as in effect immediately prior to the Operating Partnership Effective Time, shall be the Partnership Agreement of the Partnership following the Operating Partnership Effective Time unless and until amended in accordance with the terms thereof and applicable law.
Section 6.2 EFFECTS OF THE OPERATING PARTNERSHIP MERGER. The Operating Partnership Merger shall have the effects set forth in the DRULPA. Without limiting the generality of the foregoing, and subject thereto, at the Operating Partnership Effective Time, all the properties, rights, privileges, powers and franchises of the Operating Partnership and the Operating Partnership GP shall vest in the Partnership, as the surviving partnership in the Operating Partnership Merger, and all debts, liabilities and duties of the Operating Partnership and the Operating Partnership GP shall become the debts, liabilities and duties of the Partnership. In addition, from and after the Operating Partnership Effective Time, all outstanding interests in the Operating Partnership shall be cancelled without consideration and cease to exist; and at the Operating Partnership Effective Time, (i) the Company's general partnership interest and limited partnership interest in the Operating Partnership GP shall be converted into a general partnership interest and a limited partnership interest in the Partnership; and (ii) EIPCC's general partnership interest in the Operating Partnership GP shall be converted into a limited partnership interest in the Partnership.
ARTICLE VII
CONVERSION OF UNITS IN THE MERGER
Section 7.1 CONVERSION OF UNITS. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Units (each a "Unitholder"):
(a) CANCELLATION OF UNITS HELD BY THE COMPANY. All Units that are owned by the Company or any Subsidiary (as hereinafter defined) of the Company shall be cancelled and retired and shall cease to exist and no capital stock of the Company or other consideration shall be delivered in exchange therefor. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect or remove a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party together with its Subsidiaries.
(b) EXCHANGE RATIO FOR UNITS. Each Unit issued and outstanding at the Effective Time (other than Units to be cancelled in accordance with Section 7.1(a) and other than Units as to which the holders thereof shall have exercised appraisal rights pursuant to Section 7.3 hereof, if any) shall be converted into one (1) (the "Conversion Number") fully paid and nonassessable share of Company Common Stock (the "Conversion Consideration"). At the Effective Time, such Units shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Units shall cease to have any rights with respect thereto, except the right to receive a certificate representing shares of Company Common Stock and Distributions (as defined in Section 12.22 hereof).
Section 7.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, the Company shall deposit with Norwest Bank, Minnesota, N.A. (the "Exchange Agent"), for the benefit of the holders of Units, for exchange in accordance with this Article VII, through the Exchange Agent, certificates representing the shares of Company Common Stock (such shares of Company Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 7.1 in exchange for certificates which immediately prior to the Effective Time represented outstanding Units.
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time, the Company shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding Units (the "Certificates") whose Units were converted pursuant to Section 7.1 into shares of Company Common Stock (i) a letter of transmittal (which shall be in such form and have such provisions as the Company and the Partnership GP may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Company Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by the Company, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of shares of Company Common Stock which such holder has the right to receive pursuant to the provisions of this Article VII, and the Certificate so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of Units which is not registered in the transfer records of the Partnership, a certificate representing the proper number of shares of Company Common Stock may be issued to a transferee if the Certificate is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable transfer taxes have been paid. Until surrendered as contemplated by this Section 7.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender a certificate representing shares of Company Common Stock.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED UNITS. No dividends or other distributions declared or made after the Effective Time with respect to Company Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Company Common Stock which such holder is entitled to receive upon the surrender thereof in accordance with this Section 7.2 until the holder of record of such Certificate shall so surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing shares of Company Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such shares of Company Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to surrender payable with respect to such shares of Company Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN UNITS. All certificates representing shares of Company Common Stock issued upon the surrender for exchange of Certificates in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Units (except the right to receive previously declared but unpaid distributions from the Partnership), and there shall be no further registration of transfers on the transfer books of the Partnership of the Units which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Partnership or the Company for any reason, they shall be cancelled and exchanged as provided in this Article VII.
(e) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which remains undistributed to the Certificate holders for one year after the Effective Time shall be delivered to the Company, upon demand, and any Certificate holders who have not theretofore complied with this Article VII shall thereafter look only to the Company for payment of their claim for certificates representing shares of Company Common Stock and any dividends or distributions with respect to Company Common Stock.
(f) NO LIABILITY. None of the Company, the Partnership or any Partnership Entity shall be liable to any holder of Units, Certificates or Company Common Stock, as the case may be, for such securities (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.
Section 7.3 PROCEDURES FOR DISSENT BY RECORD HOLDERS OF UNITS.
(a) Notwithstanding anything in this Agreement to the contrary, Units that are outstanding immediately prior to the Effective Time and are held by Unitholders who did not vote for the Merger and who shall have delivered to the Executive Vice President, Finance and Administration, of the Company a written objection in accordance with clause (i) of Section 7.3(b) (each a "Dissenting Unitholder") shall not be deemed converted into the Conversion Consideration, but the Unitholders thereof shall be entitled to payment of the Fair Value (as defined below) of such Units in accordance with the provisions of Sections 7.3 and 7.4 hereof ("Appraisal Rights"); PROVIDED, HOWEVER, that if the right of any Dissenting Unitholder to be paid the Fair Value of his or her Units shall cease in accordance with clause (iii) of Section 7.3(b) or otherwise, such Units shall be deemed to have been exchanged as of the Effective Time for the Conversion Consideration without interest thereon. Any Unitholder seeking Appraisal Rights must (A) hold his or her Units for which appraisal is sought on the Record Date, (B) continuously hold such Units through the Effective Time, and (C) otherwise comply with the following provisions of this Section 7.3. "Fair Value" as used herein shall mean, with respect to the Units, the value thereof as of the day immediately preceding the Effective Time, excluding any appreciation or depreciation in such value arising from the accomplishment or expectation of the Merger or the Transactions.
(b) (i) A Unitholder who desires to exercise his or her right to dissent to the Merger (and thereby his Appraisal Rights) must be a holder of record on, and have filed with the Partnership on or before,
the fifth day prior to the date of the Unitholders' meeting referred to in
Section 12.6 hereof (the "Meeting Date"), a written objection to the Merger and
a notice stating that the Unitholder's right to dissent will be exercised if the
Merger is effected and giving the Unitholder's address, to which notice shall be
delivered or mailed in that event. Such objection and notice must have (A)
reasonably informed the Partnership of the identity of the Unitholder and that
such Unitholder demands Appraisal Rights with respect to his or her Units and
(B) be separate from any proxy relating to the Merger.
(ii) If the Merger is effected, the Company shall, within 10 days after the Merger is effected, mail to each Unitholder of record at the Effective Time who filed an objection and notice pursuant to clause (i) of this Section 7.3(b) and did not vote in favor of the Merger written notice that the Merger has been effected (including the date thereof).
(iii) Any Unitholder who (A) voted in favor of the Merger or delivered a proxy in favor of the Conversion or an unmarked proxy, or (B) failed to make the written objection and notice in accordance with clause (i) of this Section 7.3(b), shall not be entitled to Appraisal Rights but shall otherwise be bound by the Merger. Neither voting against, abstaining from voting, nor failing to vote on the Merger by any Unitholder, will constitute a demand by such Unitholder for Appraisal Rights within the meaning of Section 7.3(a) hereof or this Section 7.3(b).
(c) At any time within 120 days after the Effective Time, any Dissenting Unitholder who has complied with the requirements of Section 7.3(b) hereof, upon written request, shall be entitled to receive from the Company a statement setting forth the aggregate number of Units not voted in favor of the Merger and with respect to which demands for Appraisal Rights have been received and the aggregate number of Unitholders who hold such Units. Such written statement shall be mailed to the requesting Dissenting Unitholder within 10 days after the later of his written request for such a statement is received by the Company and the expiration of the period for delivery of demands for appraisal.
(d) At any time within the period of 120 days after the Effective Time, any Dissenting Unitholder or the Company may file a petition in the Delaware Court of Chancery (the "Chancery Court") asking for a finding and determination of the Fair Value of the Dissenting Unitholder's Units. Upon the filing of any such petition by the Dissenting Unitholder, service of a copy thereof shall be made upon the Company, which shall, within 20 days after service, file in the office of the Register in Chancery of the Chancery Court in which such petition was filed (the "Register in Chancery") a duly verified list containing the names and addresses of all Unitholders who have demanded payment for their Units and not withdrawn such demand in accordance with Section 7.3(b) hereof. If the petition shall be filed by the Company, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Chancery Court, shall give notice of the time and place fixed for the hearing of the petition by certified or registered mail to the Company and to the Unitholders named on the list at the addresses therein stated. Such notice shall also be given by one or more publications, at least one week prior to the scheduled date of the hearing, in a newspaper of general circulation in the City of Wilmington, Delaware or such other publication as the Chancery Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Chancery Court, and the costs thereof shall be borne by the Company. All Dissenting Unitholders thus notified and the Company shall thereafter be bound by the final judgment of the Chancery Court.
(e) At the hearing on the petition, the Chancery Court shall determine the Dissenting Unitholders who have complied with the provisions of this Section 7.3 and have become entitled to the valuation of and payment for their Units. After determining the Unitholders entitled to Appraisal Rights, the Chancery Court shall appraise the Units, determining their Fair Value, together with a fair rate of interest, if any, to be paid upon the amount determined to be the Fair Value. In determining such Fair Value, the Chancery Court shall take into account all relevant factors. In determining the fair rate of interest, the Chancery Court may consider all relevant factors, including the rate of interest which the Company would have had to pay to borrow money during the pendency of the
proceeding. The Chancery Court shall have power to examine any of the books and records of the Company. Upon application by the Company or by any Unitholder entitled to participate in the proceeding, the Chancery Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the Unitholders entitled to an appraisal. Any Dissenting Unitholder whose name appears on the list filed by the Company pursuant to Section 7.3(d) may participate fully in all proceedings until it is finally determined that he or she is not entitled to Appraisal Rights under Section 7.3 and 7.4 hereof.
(f) The Chancery Court shall by its judgment determine the Fair Value of the Units of the Dissenting Unitholders entitled to payment for their Units and shall direct the payment of that Fair Value, together with interest, if any, thereon, by the Company to the Dissenting Unitholders entitled to payment. Interest may be simple or compound, as the Chancery Court may direct. The Chancery Court's judgment shall be enforceable as other judgments in the Chancery Court. Upon payment of the judgment, the Dissenting Unitholders shall cease to have any interest in their Units or the Company. The costs of the proceeding shall be allotted between the parties in the manner that the Chancery Court determines to be equitable under the circumstances. Upon application of a Dissenting Unitholder, the Chancery Court may order all or a portion of the expenses incurred by any Dissenting Unitholder in connection with the proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the Units whose Fair Value is determined pursuant to the proceeding. In the absence of such a determination of assessment by the Chancery Court, each party shall bear his, her or its own expenses.
(g) Each Unit acquired by the Company pursuant to the payment of the judgment entered for the Fair Value of the Units, as provided in this Section 7.3, shall be cancelled and of no force or effect.
(h) The remedy provided by this Section 7.3 to a Dissenting Unitholder objecting to the Merger is the exclusive remedy for the recovery of the value of his or her Units or money damages to the Unitholder with respect to the Merger. If the Company complies with the requirements of this Section 7.3, any Dissenting Unitholder who fails to comply with the requirements of this Section 7.3 shall not be entitled to bring suit for the recovery of the value of his or her Units or money damages to the Dissenting Unitholder with respect to the Merger.
(i) Without limitation of the generality of Section 7.3(c) hereof, if the Chancery Court shall refuse to recognize the rights and procedures set forth in Sections 7.3 and 7.4 hereof with respect to Dissenting Unitholders, or shall otherwise refuse to follow the procedures set forth in this Section 7.3 to be followed by it, then the Company within 45 days after learning of such refusal by the Chancery Court, shall make application to the American Arbitration Association ("AAA"), Philadelphia Branch, to select an independent appraiser (the "Special Appraiser") to determine the Fair Value of the Units held by all such Dissenting Unitholders. Within 30 days after the Company is notified of the selection of the Special Appraiser, the Company shall deliver or mail to each Dissenting Unitholder a written notice stating that a Special Appraiser has been selected in accordance with this Section 7.3(i) and specifying the name and address of the Special Appraiser. From and after the delivery or mailing of such notice, all petitions, lists and other documents that would have been filed under Section 7.3(d) or (e) hereof with the Register in Chancery and the Chancery Court shall be filed instead with the Special Appraiser. The Special Appraiser shall retain all such documents filed with him in clearly-identifiable files, shall maintain an index or log listing all such documents and the time and date on which they were filed, and shall make all such documents and files available to the Company and any Dissenting Unitholders during the same business hours as those that are maintained by the clerks of the Chancery Court. If any such documents shall have already been filed with the Register in Chancery and the Chancery Court, the Company, at its expense, shall obtain copies of such documents from the applicable clerk of the Chancery Court and shall file such copies with the Special Appraiser. The Special Appraiser shall give any notices that would have been given by the Chancery Court or its clerk pursuant to Sections 7.3(d), (e) and (f) hereof. The Special Appraiser shall perform the functions and
take the actions that would have been performed and taken by the Chancery Court under Sections 7.3(d), (e) and (f) hereof. In doing so, the Special Appraiser shall follow the procedures set forth in such Sections as nearly as practicable. The Fair Value finally determined by the Special Appraiser shall be final and binding upon all such Dissenting Unitholders and the Company, and the other provisions of Sections 7.3 and 7.4 hereof with respect to the effect of such determination and the rights of Dissenting Unitholders (including, without limitation, pursuant to Section 7.3(h) hereof) shall be applicable as nearly as practicable. Should the Special Appraiser die or become unable or unwilling to serve, the Company shall promptly make application to the AAA for selection of a substitute Special Appraiser, who shall have the same powers and duties as the original Special Appraiser and who shall obtain from the original Special Appraiser (or his estate) all documents and files pertaining to the Merger.
Section 7.4 PROVISIONS AFFECTING REMEDIES OF DISSENTING UNITHOLDERS.
(a) Subject to the right of a Dissenting Unitholder pursuant to Section 7.4(b) hereof to withdraw his or her demand for payment, from and after the Effective Time, any Dissenting Unitholder who has demanded payment for his or her Units in accordance with Section 7.3 shall not thereafter be entitled to vote, to exercise any other rights of a Unitholder or to receive payment of any distributions with respect thereto, except the right to receive payment for his or her Units pursuant to the provisions of Section 7.3 hereof, the right to receive distributions payable to the Dissenting Unitholders on or prior to the Effective Date and the right to maintain an appropriate action to obtain relief on the grounds that the Merger would be or was fraudulent or unfair, and the respective Units for which payment has been demanded shall not thereafter be considered outstanding for the purposes of any subsequent vote of Unitholders.
(b) Any Dissenting Unitholder who has demanded payment for his or her Units in accordance with Section 7.3 hereof may withdraw such demand by delivering to the Company a written notice of such withdrawal and a consent to the Merger; PROVIDED that (i) no such demand may be withdrawn after payment for his or her Units and (ii) any such notice of withdrawal delivered later than 30 days after the Effective Time shall not be effective without the consent of the Company; PROVIDED, FURTHER, that if any such notice of withdrawal is delivered after any petition has been filed pursuant to Section 7.3 hereof asking for a finding and determination of the Fair Value of such Units, dismissal of the appraisal proceeding with respect to such Units shall be subject to approval by the Chancery Court or, if applicable, the Special Appraiser. If, however, such demand shall be withdrawn as hereinbefore provided, or if no petition asking for a finding and determination of Fair Value of such Units by the Chancery Court shall have been filed within the time provided in Section 7.3 hereof, or if after the hearing of a petition filed pursuant to Section 7.3 hereof, the Chancery Court shall determine that such Unitholder is not entitled to the relief provided by Section 7.3 hereof, then, in any such case, such Unitholder and all persons claiming under him or her shall be bound by the Merger and entitled to receive the Conversion Consideration, the right of such Unitholder to be paid the Fair Value of his or her Units shall cease, and his or her status as a Unitholder of Units exchanged in the Merger shall be restored without prejudice to any proceedings that may have been taken by the Company during the interim, and such Unitholder shall be entitled to receive any distributions made with respect to such Conversion Consideration in the interim.
(c) The provisions of Sections 7.3 and 7.4 hereof relating to the procedures to be followed to determine the Fair Value of the Units shall be conformed as nearly as practicable to the procedure required to be followed in connection with the exercise of dissenters' rights by a stockholder of a corporation formed under the DGCL as set forth in Section 262 of the DGCL. In the event that such procedures cannot be followed, then the Company shall implement alternative procedures designed to produce results substantially similar to those that would be effected if Section 262 of the DGCL applied to the Merger.
ARTICLE VIII
THE CLOSINGS
Section 8.1 THE CLOSINGS. Each of the Transactions set forth herein and each of the closings of such Transactions as set forth below are contingent upon, and shall not be consummated unless, all of the Transactions set forth herein and all of the closings of such Transactions as set forth below are consummated as provided herein.
(a) Upon the terms and conditions hereof, the closing of the transactions contemplated by Article I hereof (the "First Closing") shall take place at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017 (the "Place of Closing") at 10:00 a.m., New York City time, on the Meeting Date, or at such other date, time and place as the Company and the Partnership GP shall agree (the "Closing Date").
(b) The closing of the transactions contemplated by Article II hereof (the "Second Closing") shall take place at the Place of Closing on the Closing Date promptly following consummation of the First Closing.
(c) The closing of the transactions contemplated by Article III hereof (the "Third Closing") shall take place at the Place of Closing on the Closing Date promptly following consummation of the Second Closing.
(d) The closing of the transactions contemplated by Article IV hereof (the "Fourth Closing") shall take place at the Place of Closing on the Closing Date promptly following consummation of the Third Closing.
(e) The closing of the transactions contemplated by Article V hereof (the "Fifth Closing") shall take place at the Place of Closing on the Closing Date promptly following consummation of the Fourth Closing.
(f) The closing of the transactions contemplated by Article VI hereof (the "Sixth Closing") shall take place at the Place of Closing on the Closing Date promptly following consummation of the Fifth Closing.
Section 8.2 DELIVERIES AT THE FIRST CLOSING. At the First Closing, EIPCC shall cause the PICC Merger to become effective pursuant to Article I hereof, and shall execute, deliver and file, or cause to be executed, delivered and filed, all such other documents, instruments or writings required to effect the PICC Merger, required to be delivered pursuant to this Agreement or otherwise required in connection herewith.
Section 8.3 DELIVERIES AT THE SECOND CLOSING.
(a) At the Second Closing, the EIPCC Stockholders shall deliver or cause to be delivered (unless previously delivered) the following to the Company:
(i) stock certificates representing the EIPCC Common Stock accompanied by stock powers duly endorsed in blank or accompanied by duly executed instruments of transfer, with all necessary transfer tax and other revenue stamps affixed thereto;
(ii) the stock books, stock ledgers, minute books and corporate seal of EIPCC and PICC;
(iii) written resignations of all directors and officers of EIPCC and PICC; and
(iv) all other documents, instruments and writings required to be delivered by the EIPCC Stockholders to the Company pursuant to this Agreement or otherwise required in connection herewith.
(b) At the Second Closing, the Company shall deliver or cause to be delivered (unless previously delivered) the following to the EIPCC Stockholders:
(i) one or more unlegended certificates, in definitive form and registered in the names of the EIPCC Stockholders or their assignees, representing the shares of the Company Common Stock to be issued to them pursuant to Section 2.1(b) hereof; PROVIDED, that, in the event any transfer or other taxes become payable by reason of the issuance of any certificate representing Company Common Stock in any name other than that of a EIPCC Stockholder, such assignee must pay such tax to the Company or must establish to the satisfaction of the Company that such tax has been paid or is not payable; and
(ii) all other documents, instruments and writings required to be delivered by the Company to the EIPCC Stockholders pursuant to this Agreement or otherwise required in connection herewith.
Section 8.4 DELIVERIES AT THE THIRD CLOSING.
(a) At the Third Closing, the Partnership GP Partners shall deliver or cause to be delivered (unless previously delivered) to the Company duly executed assignments of the Partnership GP Interests; and EIPCC shall deliver to the Company, (i) written resignations of all directors and officers of the Partnership GP (or of the individuals holding similar offices or performing comparable functions at the Partnership GP); and (ii) all other documents, instruments and writings required to be delivered by the Partnership GP Partners to the Company pursuant to this Agreement or otherwise required in connection herewith.
(b) At the Third Closing, the Company shall deliver or cause to be delivered (unless previously delivered) the following to the Partnership GP Partners:
(i) one or more unlegended certificates, in definitive form and registered in the names of the Partnership GP Partners or their assignees, representing the shares of Company Common Stock to be issued to them pursuant to Section 3.1(b) hereof; PROVIDED, that, in the event any transfer or other taxes become payable by reason of the issuance of any certificate representing Company Common Stock in any name other than that of a Partnership GP Partner, such assignee must pay such tax to the Company or must establish to the satisfaction of the Company that such tax has been paid or is not payable; and
(ii) all other documents, instruments and writings required to be delivered by the Company, to the Partnership GP Partners pursuant to this Agreement or otherwise required in connection herewith.
Section 8.5 DELIVERIES AT THE FOURTH CLOSING.
(a) At the Fourth Closing, the Operating Partnership GP Partners shall
deliver or cause to be delivered (unless previously delivered) to the Company
duly executed assignments of the Operating Partnership GP Interests; and EIPCC
shall deliver to the Company (i) written resignations of all directors and
officers of the Operating Partnership GP (or of the individuals holding similar
offices or performing comparable functions at the Operating Partnership GP); and
(ii) all other documents, instruments and writings required to be delivered by
the Operating Partnership GP Partners to the Company pursuant to this Agreement
or otherwise required in connection herewith.
(b) At the Fourth Closing, the Company shall deliver or cause to be delivered (unless previously delivered) the following to the Operating Partnership GP Partners:
(i) one or more unlegended certificates, in definitive form and registered in the names of the Operating Partnership GP Partners or their assignees, representing the shares of Company Common Stock to be issued to them pursuant to Section 4.1(b) hereof; PROVIDED, that, in the event
any transfer or other taxes become payable by reason of the issuance of any certificate representing Company Common Stock in any name other than that of a Operating Partnership GP Partner, such assignee must pay such tax to the Company or must establish to the satisfaction of the Company that such tax has been paid or is not payable; and
(ii) all other documents, instruments and writings required to be delivered by the Company, to the Operating Partnership GP Partners pursuant to this Agreement or otherwise required in connection herewith.
Section 8.6 DELIVERIES AT THE FIFTH CLOSING.
(a) At the Fifth Closing, the Company and EIPCC shall execute, deliver and
file, or cause to be executed, delivered and filed, all such documents,
instruments or writings required to effect the formation of PTP as set forth in
Section 5.1 hereof, required to be delivered pursuant to this Agreement or
otherwise required in connection herewith.
(b) At the Fifth Closing, immediately following consummation of the deliveries set forth in clause (a) above, the Partnership shall cause the Merger to become effective pursuant to Article V hereof, and shall execute, deliver and file, or cause to be executed, delivered and filed, all such other documents, instruments or writings required to effect the Merger, required to be delivered pursuant to this Agreement or otherwise required in connection herewith, and shall return the Company's and EIPCC's capital contributions in PTP.
Section 8.7 DELIVERIES AT THE SIXTH CLOSING. At the Sixth Closing, the Partnership shall cause the Operating Partnership Merger to become effective pursuant to Article VI hereof, and shall execute, deliver and file, or cause to be executed, delivered and filed, all such other documents, instruments or writings required to effect the Operating Partnership Merger, required to be delivered pursuant to this Agreement or otherwise required in connection herewith.
ARTICLE IX
JOINT AND SEVERAL
REPRESENTATIONS AND WARRANTIES OF
CERTAIN PARTNERSHIP ENTITIES
The Partnership, the Operating Partnership, the Partnership GP, the Operating Partnership GP, PICC, EIPCC and Victor K. Atkins, Jr., as general partner of the Partnership GP and the Operating Partnership GP, jointly and severally represent and warrant to the Company as follows:
Section 9.1 ORGANIZATION. Each of the Partnership and the Operating Partnership is a limited partnership duly organized, validly existing and in good standing under the limited partnership laws of the jurisdiction of its organization and has all requisite partnership power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Partnership and the Operating Partnership taken as a whole. As used in this Agreement, any reference to any event, change or effect being material or having a material adverse effect on or with respect to an entity (or group of entities taken as a whole) means such event, change or effect is materially adverse to the business, properties, assets, results of operations, financial condition or prospects of such entity (or such group of entities taken as a whole) or the ability of such entity (or such group of entities) to consummate any of the Transactions in accordance with this Agreement.
Section 9.2 CAPITALIZATION. As of the date hereof, (a)(i) 16,010,441 Units are issued and outstanding and (ii) the Partnership GP is the sole general partner in the Partnership and (b)(i) all the limited partnership interests in the Operating Partnership are validly issued and owned by the Partnership free and clear of all Liens and (ii) the Operating Partnership GP is the sole general partner in the Operating Partnership. As of the date hereof 534,503 Units were reserved for issuance
upon the exercise of rights ("First Rights") pursuant to the Operating Partnership's 1987 Employee Ownership Plan (the "Employee Plan") and 1987 Management Ownership Plan (the "Management Plan" and together with the Employee Plan, the "Partnership Plans") and First Rights in respect of 312,500 Units have been granted and are outstanding. As of the date hereof, no bonds, debentures, notes or other indebtedness having the right to vote (or convertible into securities having the right to vote) ("Voting Debt") of the Partnership or the Operating Partnership are issued or outstanding. Except as set forth above, there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued Units or other partnership interests or Voting Debt of the Partnership or the Operating Partnership or obligating the Partnership or the Operating Partnership to issue, transfer or sell or cause to be issued, transferred or sold any Units or other partnership interests or Voting Debt of, or other equity interests in, the Partnership or the Operating Partnership or securities convertible into or exchangeable for such Units or other partnership interests or equity interests or obligating the Partnership or the Operating Partnership to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment. There are no outstanding contractual obligations of the Partnership or the Operating Partnership to repurchase, redeem or otherwise acquire any Units or other partnership interests of the Partnership or the Operating Partnership.
Section 9.3 AUTHORITY. Each of the Partnership and the Operating Partnership has the requisite partnership power and authority to execute and deliver this Agreement and to consummate the Transactions contemplated hereby (other than, with respect to the Merger, the approval and adoption of the proposal to effect the Conversion (the "Conversion Proposal") by the required vote of the Unitholders). The execution, delivery and performance of this Agreement by each of the Partnership and the Operating Partnership and the consummation by the Partnership and the Operating Partnership of the Transactions contemplated hereby have been duly authorized by all necessary partnership action on the part of the Partnership and the Operating Partnership and no other partnership action on the part of the Partnership or the Operating Partnership is necessary to authorize this Agreement or to consummate the Transactions so contemplated (other than, with respect to the Merger, the approval and adoption of the Conversion Proposal by the required vote of the Unitholders). This Agreement has been duly executed and delivered by the Partnership and the Operating Partnership.
ARTICLE X
SEVERAL REPRESENTATIONS AND
WARRANTIES OF CERTAIN PARTNERSHIP ENTITIES
Section 10.1 REPRESENTATIONS AND WARRANTIES OF THE EIPCC STOCKHOLDERS. Mr.
Atkins represents and warrants to the Company with respect to clauses (a), (b),
(c)(ii), (d) (to the extent applicable to EIPCC or PICC), (e) and (g) of this
Section 10.1 and each of the EIPCC Stockholders severally and not jointly
represents and warrants to the Company with respect to clauses (c)(i), (d) (to
the extent applicable to the EIPCC stockholders) and (f) of this Section 10.1,
as follows:
(a) ORGANIZATION. Each of EIPCC and PICC is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on EIPCC and PICC. The EIPCC Stockholders will provide the Company with true and correct copies of the Certificate of Incorporation and By-laws of EIPCC and PICC, together with all amendments thereto.
(b) CAPITALIZATION. As of the date hereof, (i) the issued and outstanding capital stock of EIPCC consists of 70 shares of EIPCC Common Stock, and (ii) all of the issued and outstanding capital stock of PICC (the "PICC Common Stock") is owned beneficially and of record by EIPCC. No Voting Debt of EIPCC or PICC is issued or outstanding. Except for this Agreement, there are no options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to
the issued or unissued capital stock or Voting Debt of EIPCC or PICC or obligating EIPCC or PICC to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity or partnership interests in, EIPCC or PICC or of any of their Subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligating EIPCC or PICC to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment.
(c) AUTHORITY. (i) Such EIPCC Stockholder has the requisite power and authority and full legal capacity to execute, deliver and perform this Agreement and to consummate the Transactions contemplated hereby. This Agreement has been duly executed and delivered by such EIPCC Stockholder and assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of such EIPCC Stockholder enforceable against such person in accordance with its terms.
(ii) Each of EIPCC and PICC has requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of EIPCC and PICC and the consummation by each of EIPCC and PICC of the Transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of each of EIPCC and PICC and no other corporate proceedings on the part of EIPCC or PICC is necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by each of EIPCC and PICC and assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of each of EIPCC and PICC enforceable against it in accordance with its terms.
(d) CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, the Securities Act, state securities or blue sky laws, the HSR Act, the DGCL, the DRULPA, the laws of other states in which EIPCC is qualified to do or is doing business, neither the execution, delivery or performance of this Agreement by such EIPCC Stockholder nor the consummation by such EIPCC Stockholder of the transactions contemplated hereby nor compliance by such EIPCC Stockholder with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws of EIPCC, (ii) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not have a material adverse effect on such EIPCC Stockholder, EIPCC or PICC), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, lease, contract, agreement or other instrument or obligation to which such EIPCC Stockholder, EIPCC or PICC is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such EIPCC Stockholder, EIPCC or PICC, except, in the case of clauses (iii) or (iv), for violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on such EIPCC Stockholder, EIPCC or PICC; provided, however, the representations in this clause (d) shall apply to the EIPCC Stockholders in their individual capacity only and shall not be deemed to apply to such EIPCC Stockholders in any other capacity.
(e) SUBSIDIARIES; UNITS. (i) Other than PICC, the Operating Partnership GP, the Operating Partnership and wholly owned Subsidiaries of the Operating Partnership, EIPCC has no Subsidiaries. EIPCC owns its direct and indirect interests in PICC, the Operating Partnership GP and the Operating Partnership free and clear of any and all Liens. EIPCC does not own, and prior to the Effective Time will not acquire, any Units.
(ii) Other than the Operating Partnership GP and the Operating Partnership and wholly owned Subsidiaries of the Operating Partnership, PICC has no Subsidiaries. PICC owns its general partnership interest in the Operating Partnership GP free and clear of any and all Liens. PICC does not own, and prior to the Effective Time will not acquire, any Units.
(f) OWNERSHIP OF SHARES; TITLE. Such EIPCC Stockholder is the owner of record and beneficially of the shares of EIPCC Common Stock set forth opposite such EIPCC Stockholder's name on Annex III hereto. Such EIPCC Stockholder has not received any notice of any adverse claim to the ownership of any such EIPCC Common Stock and does not have any reason to know of any such adverse claim that may be justified. On the Closing Date, such EIPCC Stockholder shall have good and transferable title to the EIPCC Common Stock set forth opposite such EIPCC Stockholder's name on Annex III hereto, free and clear of all Liens. The delivery of certificates for the EIPCC Common Stock owned by such EIPCC Stockholder to the Company pursuant to this Agreement will transfer to the Company good and transferable title to the EIPCC Common Stock set forth opposite such EIPCC Stockholder's name on Annex III hereto free and clear of all Liens.
(g) NO LIABILITIES. (i) EIPCC has not engaged in any business or activity of any kind, or entered into any agreement or arrangement with any person or entity, except, in each case, in connection with its ownership of 100% of the capital stock of PICC and serving as managing general partner of the Partnership GP. EIPCC has not incurred, directly or indirectly, any liabilities or obligations, except for liabilities or obligations incurred by EIPCC acting in its capacity as managing general partner of the Partnership GP (such liabilities being referred to as "Partnership GP Liabilities").
(ii) PICC has not engaged in any business or activity of any kind, or entered into any agreement or arrangement with any person or entity except, in each case, in connection with serving as a general partner of the Operating Partnership GP. PICC has not incurred, directly or indirectly, any liabilities or obligations, except for liabilities or obligations incurred by PICC acting in its capacity as general partner of the Operating Partnership GP (such liabilities being herein referred to as "Operating Partnership GP Liabilities").
Section 10.2 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP GP
PARTNERS. Mr. Atkins represents and warrants to the Company with respect to
clauses (a), (b), (d) (to the extent applicable to the Partnership GP), (e) and
(g) of this Section 10.2 and each of the Partnership GP Partners severally and
not jointly represents and warrants to the Company with respect to clauses (c),
(d) (to the extent applicable to such Partnership GP Partner) and (f) of this
Section 10.2, as follows:
(a) ORGANIZATION. The Partnership GP is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Partnership GP. The Partnership GP Partners will provide the Company with true and correct copies of the partnership agreement and certificate of limited partnership of the Partnership GP, together with all amendments thereto.
(b) CAPITALIZATION. Annex I hereto sets forth all of the outstanding Partnership GP Interests. No Voting Debt of the Partnership GP is issued or outstanding. Except for this Agreement, there are no options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued partnership interests or Voting Debt of the Partnership GP or obligating the Partnership GP to issue, transfer or sell or cause to be issued, transferred or sold any partnership interests or Voting Debt of, or other equity interests in, the Partnership GP or of any of its Subsidiaries or securities convertible into or exchangeable for such partnership interests or equity interests or obligating the Partnership GP to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment.
(c) AUTHORITY. Such Partnership GP Partner has the requisite power and authority to execute, deliver and perform this Agreement and to consummate the Transactions contemplated hereby. The
execution, delivery and performance of this Agreement by such Partnership GP Partner and the consummation of the Transactions contemplated hereby, have been duly authorized by all necessary action on the part of such Partnership GP Partner, as applicable, and no other action on the part of such Partnership GP Partner is necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by such Partnership GP Partner and assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of such Partnership GP Partner enforceable against it in accordance with its terms.
(d) CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, state
securities or blue sky laws, the HSR Act, the DGCL, the DRULPA, the laws of
other states in which the Partnership GP is qualified to do or is doing
business, neither the execution, delivery or performance of this Agreement by
such Partnership GP Partner nor the consummation by such Partnership GP Partner
of the transactions contemplated hereby nor compliance by such Partnership GP
Partner with any of the provisions hereof will (i) conflict with or result in
any breach of any provision of the partnership agreement of the Partnership GP
or such Partnership GP Partner, as applicable, or the certificate of
incorporation or by-laws of such Partnership GP Partner, as applicable, (ii)
require any filing with, or permit, authorization, consent or approval of, any
Governmental Entity (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have a
material adverse effect on such Partnership GP Partner or the Partnership GP),
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, license, lease, contract,
agreement or other instrument or obligation to which such Partnership GP Partner
or the Partnership GP is a party or by which any of them or any of their
properties or assets may be bound or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to such Partnership GP Partner or
the Partnership GP, except, in the case of clauses (iii) or (iv), for
violations, breaches or defaults which would not, individually or in the
aggregate, have a material adverse effect on such Partnership GP Partner or the
Partnership GP; provided, however, the representations in this clause (d) shall
apply to the Partnership GP Partners in their individual capacity only and shall
not be deemed to apply to such Partnership GP Partners in any other capacity.
(e) SUBSIDIARIES; UNITS. Other than the Partnership, the Operating Partnership and wholly owned Subsidiaries of the Operating Partnership, the Partnership GP has no Subsidiaries. The Partnership GP owns its partnership interest in the Partnership free and clear of any and all Liens. The Partnership GP does not own, and prior to the Effective Time will not acquire, any Units.
(f) OWNERSHIP OF PARTNERSHIP INTERESTS; TITLE. Such Partnership GP Partner is the owner of record and beneficially of the Partnership GP Interests set forth opposite such Partnership GP Partner's name on Annex I hereto. Such Partnership GP Partner has not received any notice of any adverse claim to the ownership of any such Partnership GP Interests and does not have any reason to know of any such adverse claim that may be justified. On the Closing Date, such Partnership GP Partner shall have good and transferable title to the Partnership GP Interests set forth opposite such Partnership GP Partner's name on Annex I hereto, free and clear of all Liens. The delivery of assignments for the Partnership GP Interests owned by such Partnership GP Partners to the Company pursuant to this Agreement will transfer to the Company good and transferable title to the Partnership GP Interests set forth opposite such Partnership GP Partner's name on Annex I hereto free and clear of all Liens.
(g) NO LIABILITIES. The Partnership GP has not engaged in any business or activity of any kind, or entered into any agreement or arrangement with any person or entity, except in each case in connection with serving as the general partner of the Partnership. The Partnership GP has not
incurred, directly or indirectly, any liabilities or obligations, except for liabilities or obligations incurred by the Partnership GP acting in its capacity as general partner of the Partnership (such liabilities being herein referred to as "Partnership Liabilities").
Section 10.3 REPRESENTATIONS AND WARRANTIES OF THE OPERATING PARTNERSHIP GP PARTNERS. Mr. Atkins represents and warrants to the Company with respect to clauses (a), (b), (d) (to the extent applicable the to the Operating Partnership GP), (e) and (g) of this Section 10.3 and each of the Operating Partnership GP Partners severally and not jointly represents and warrants to the Company with respect to clauses (c), (d) (to the extent applicable to such Operating Partnership GP Partner) and (f) of this Section 10.3, as follows:
(a) ORGANIZATION. The Operating Partnership GP is a limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Operating Partnership GP. The Operating Partnership GP Partners will provide the Company with true and correct copies of the partnership agreement and certificate of limited partnership of the Operating Partnership GP, together with all amendments thereto.
(b) CAPITALIZATION. Annex II hereto sets forth all of the outstanding Operating Partnership GP Interests. No Voting Debt of the Operating Partnership GP is issued or outstanding. Except for this Agreement, there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued partnership interests or Voting Debt of the Operating Partnership GP or obligating the Operating Partnership GP to issue, transfer or sell or cause to be issued, transferred or sold any partnership interests or Voting Debt of, or other equity interests in, the Operating Partnership GP or of any of its Subsidiaries or securities convertible into or exchangeable for such partnership interests or equity interests or obligating the Operating Partnership GP to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment.
(c) AUTHORITY. Such Operating Partnership GP Partner has the requisite power and authority to execute, deliver and perform this Agreement and to consummate the Transactions contemplated hereby. The execution, delivery and performance of this Agreement by such Operating Partnership GP Partner and the consummation of the Transactions contemplated hereby, have been duly authorized by all necessary action on the part of such Operating Partnership GP Partner, as applicable, and no other action on the part of such Operating Partnership GP Partner is necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by such Operating Partnership GP Partner and assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of such Operating Partnership GP Partner enforceable against it in accordance with its terms.
(d) CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, the Securities Act, state securities or blue sky laws, the HSR Act, the DGCL, the DRULPA, the laws of other states in which the Operating Partnership GP is qualified to do or is doing business, neither the execution, delivery or performance of this Agreement by such Operating Partnership GP Partner nor the consummation by such Operating Partnership GP Partner of the transactions contemplated hereby nor compliance by the Operating Partnership GP Partner with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the partnership agreement
of the Operating Partnership GP, or the certificate of incorporation or by-laws
of such Operating Partnership GP Partner, as applicable, (ii) require any filing
with, or permit, authorization, consent or approval of, any Governmental Entity
(except where the failure to obtain such permits, authorizations, consents or
approvals or to make such filings would not have a material adverse effect on
such Operating Partnership GP Partner or the Operating Partnership GP), (iii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, lease, contract, agreement or
other instrument or obligation to which such Operating Partnership GP Partner or
the Operating Partnership GP is a party or by which any of them or any of their
properties or assets may be bound or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to such Operating Partnership GP
Partner or the Operating Partnership GP, except, in the case of clauses (iii) or
(iv), for violations, breaches or defaults which would not, individually or in
the aggregate, have a material adverse effect on such Operating Partnership GP
Partner or the Operating Partnership GP; provided, however, the representations
in this clause (d) shall apply to the Operating Partnership GP Partners in their
individual capacity only and shall not be deemed to apply to such Operating
Partnership GP Partners in any other capacity.
(e) SUBSIDIARIES; UNITS. Other than the Operating Partnership and wholly owned Subsidiaries of the Operating Partnership, the Operating Partnership GP has no Subsidiaries. The Operating Partnership GP owns its general partnership interest in the Operating Partnership free and clear of any and all Liens. The Operating Partnership GP does not own, and prior to the Effective Time will not acquire, any Units.
(f) OWNERSHIP OF PARTNERSHIP INTERESTS; TITLE. Such Operating Partnership GP Partner is the owner of record and beneficially of the Operating Partnership GP Interests set forth opposite such Operating Partnership GP Partner's name on Annex II hereto. Such Operating Partnership GP Partner has not received any notice of any adverse claim to the ownership of any such Operating Partnership GP Interests and does not have any reason to know of any such adverse claim that may be justified. On the Closing Date, such Operating Partnership GP Partner shall have good and transferable title to the Operating Partnership GP Interests set forth opposite such Operating Partnership GP Partner's name on Annex II hereto, free and clear of all Liens. The delivery of assignments for the Operating Partnership GP Interests owned by such Operating Partnership GP Partner to the Company pursuant to this Agreement will transfer to the Company good and transferable title to the Operating Partnership GP Interest set forth opposite such Operating Partnership GP Partner's name on Annex II hereto, free and clear of all Liens.
(g) NO LIABILITIES. The Operating Partnership GP has not engaged in any business or activity of any kind, or entered into any agreement or arrangement with any person or entity, except, in each case, in connection with serving as the general partner of the Operating Partnership. The Operating Partnership GP has not incurred, directly or indirectly, any liabilities or obligations, except for liabilities or obligations incurred by the Operating Partnership GP acting in its capacity as general partner of the Operating Partnership (such liabilities being herein referred to as "Operating Partnership Liabilities").
ARTICLE XI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Partnership Entities as follows:
Section 11.1 ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being
conducted and as contemplated to be conducted following the Conversion, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Company.
Section 11.2 CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of: (i) 80,000,000 shares of Company Common Stock, of which 3,000 shares were issued and outstanding and none of which were held in treasury; and (ii) 20,000,000 shares of preferred stock, par value $.01 per share, none of which are issued and outstanding. All the outstanding shares of the Company's capital stock are, and all shares of Company Common Stock which are to be issued to Unitholders pursuant to the Merger or issued to the Transferors pursuant to the Transactions set forth in this Agreement, or which may be issued pursuant to the Partnership Plans after the Merger will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable and free of any preemptive rights in respect thereto. No Voting Debt of the Company is issued or outstanding. Except as set forth above and except for shares of Company Common Stock that may be issued pursuant to the Partnership Plans and except for this Agreement, there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued capital stock or Voting Debt of the Company or obligating the Company to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interests in, the Company or securities convertible into or exchangeable for such shares or equity interests or obligating the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment.
Section 11.3 AUTHORITY. The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the Merger and the other Transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by the Company and assuming this Agreement constitutes a valid and binding obligation of the Partnership Entities, constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms.
Section 11.4 NO ACTIVITY. The Company has not engaged in any business or activity of any kind, or entered into any agreement or arrangement with any person or entity or incurred, directly or indirectly, any material liabilities or obligations, except in connection with its incorporation and capitalization, the Merger and the other Transactions and the negotiation of this Agreement. The Company owns at least 3,000 Units.
ARTICLE XII
COVENANTS
Section 12.1 CONDUCT OF BUSINESS OF CERTAIN PARTNERSHIP ENTITIES.
(a) CONDUCT OF BUSINESS OF THE OPERATING PARTNERSHIP AND THE PARTNERSHIP. Except as contemplated by this Agreement and the transactions contemplated hereby, or with the prior written consent of the Company, and subject to the provisions of Section 16.1 hereof, during the period from the date of this Agreement to the Effective Time, the Operating Partnership and the Partnership each will conduct its operations only in the ordinary and usual course of business consistent with past practice and not take any action that would or is reasonably likely to result in any of the conditions to the Transactions set forth in Article XIII not being satisfied or would materially impair the ability of such party to consummate any of the Transactions in accordance with the terms hereof or materially delay such consummation.
(b) CONDUCT OF BUSINESS OF PICC AND EIPCC. Except as contemplated by this Agreement and the transactions contemplated hereby, or with the prior written consent of the Company, during the period from the date of this Agreement to the Effective Time, the EIPCC Stockholders will not, directly or indirectly, sell, transfer, pledge or otherwise convey all or any part of their interest in EIPCC or PICC, or take any action that would or is reasonably likely to result in any of the conditions to the Transactions set forth in Article XIII not being satisfied or would materially impair the ability of such party to consummate any of the Transactions in accordance with the terms hereof or materially delay such consummation. Except as otherwise expressly provided in this Agreement and the transactions contemplated hereby, EIPCC and PICC, prior to the Effective Time, without the prior written consent of the Company, will not:
(i) adopt any amendment to its certificate of incorporation or by-laws;
(ii) issue, reissue, sell, deliver or pledge or authorize or propose the issuance, reissuance, sale, delivery or pledge of additional shares of capital stock of any class or securities convertible into capital stock of any class, or any rights, warrants or options to acquire any of the foregoing;
(iii) adjust, split, combine, subdivide, reclassify or redeem, purchase or otherwise acquire, or propose to redeem or purchase or otherwise acquire, any shares of its capital stock or any of its other securities; or
(iv) sell, lease, transfer, pledge or dispose of EIPCC's interest in PICC or PICC's interest in the Operating Partnership GP.
(c) CONDUCT OF BUSINESS OF THE PARTNERSHIP GP. Except as contemplated by this Agreement and the transactions contemplated hereby, or with the prior written consent of the Company, during the period from the date of this Agreement to the Effective Time, the Partnership GP Partners will not, directly or indirectly, sell, transfer, pledge or otherwise convey all or any part of their interest in the Partnership GP, or take any action that would or is reasonably likely to result in any of the conditions to the Transactions set forth in Article XIII not being satisfied or would materially impair the ability of such party to consummate any of the Transactions in accordance with the terms hereof or materially delay such consummation. Except as otherwise expressly provided in this Agreement and the transactions contemplated hereby, the Partnership GP, prior to the Effective Time, without the prior written consent of the Company, will not:
(i) adopt any amendment to its partnership agreement;
(ii) issue, reissue, sell, deliver or pledge or authorize or propose the issuance, reissuance, sale, delivery or pledge of additional Units or other partnership interests, or securities convertible into Units or other partnership interests, or any rights, warrants or options to acquire any of the foregoing;
(iii) adjust, split, combine, subdivide, reclassify or redeem, purchase or otherwise acquire, or propose to redeem or purchase or otherwise acquire, any Units or other partnership interests or any of its other securities; or
(iv) sell, lease, transfer, pledge or dispose of the Partnership GP's interest in the Partnership.
(d) CONDUCT OF BUSINESS OF THE OPERATING PARTNERSHIP GP. Except as contemplated by this Agreement and the transactions contemplated hereby, or with the prior written consent of the Company, during the period from the date of this Agreement to the Effective Time, the Operating Partnership GP Partners will not, directly or indirectly, sell, transfer, pledge or otherwise convey all or any part of their interest in the Operating Partnership GP, or take any action that would or is reasonably likely to result in any of the conditions to the Transactions set forth in Article XIII not
being satisfied or would materially impair the ability of such party to consummate any of the Transactions in accordance with the terms hereof or materially delay such consummation. Except as otherwise expressly provided in this Agreement and the transactions contemplated hereby, the Operating Partnership GP, prior to the Effective Time, without the prior written consent of the Company, will not:
(i) adopt any amendment to its partnership agreement;
(ii) issue, reissue, sell, deliver or pledge or authorize or propose the issuance, reissuance, sale, delivery or pledge of additional Units or other partnership interests, or securities convertible into Units or other partnership interests, or any rights, warrants or options to acquire any of the foregoing;
(iii) adjust, split, combine, subdivide, reclassify or redeem, purchase or otherwise acquire, or propose to redeem or purchase or otherwise acquire, any Units or other partnership interests or any of its other securities; or
(iv) sell, lease, transfer, pledge or dispose of its interest in the Operating Partnership.
Section 12.2 CONDUCT OF BUSINESS OF THE COMPANY. Prior to the Effective Time, the Company shall not engage in any business or activity other than in connection with, or in furtherance of, its capitalization, the consummation of the Transactions contemplated hereby and the Conversion generally.
Section 12.3 REASONABLE BEST EFFORTS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement including, without limitation, (i) the prompt preparation and filing with the SEC of the S-4 and the Proxy Statement, (ii) such actions as may be required to have the S-4 declared effective under the Securities Act and to have the Proxy Statement cleared by the SEC, in each case as promptly as practicable, including by consulting with each other as to, and responding promptly to, any SEC comments with respect thereto, and (iii) such actions as may be required to be taken under applicable state securities or Blue Sky laws in connection with the issuance of shares of Company Common Stock contemplated hereby. Each party shall promptly consult with the other with respect to, provide any necessary information with respect to and provide the other (or its counsel) copies of, all filings made by such party with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. In addition, if at any time prior to the Effective Time any event or circumstances relating to any of the parties hereto, or any of their respective officers, directors, or general partners, should be discovered by the party hereto, and which should be set forth in an amendment or supplement to the S-4 or the Proxy Statement, the discovering party shall promptly inform the other parties of such event or circumstance.
Section 12.4 LETTER OF THE PARTNERSHIP'S ACCOUNTANTS. The Partnership shall use its reasonable best efforts to cause to be delivered to the Partnership and the Company a letter of McGladrey & Pullen, the Partnership's independent auditors, dated a date within two business days before the date on which the S-4 shall become effective and addressed to the Partnership and the Company, in form and substance reasonably satisfactory to the Partnership and the Company and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the S-4, which letter shall be brought down to the Effective Time.
Section 12.5 ACCESS TO INFORMATION. Upon reasonable notice, the Operating Partnership, the Partnership, the Partnership GP, the Operating Partnership GP, PICC, and EIPCC, on the one hand, and the Company, on the other hand, shall each afford to the officers, employees, accountants, counsel and other representatives of the other, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such
period, each of the Operating Partnership, the Partnership, the Partnership GP, the Operating Partnership GP, PICC, and EIPCC and the Company shall furnish promptly to the other (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. Unless otherwise required by law, the parties will hold any such information which is nonpublic in confidence until such time as such information otherwise becomes publicly available through no wrongful act of either party, and in the event of termination of this Agreement for any reason each party shall promptly return all nonpublic documents obtained from any other party, and any copies made of such documents, to such other party.
Section 12.6 UNITHOLDERS MEETING. The Partnership GP shall call a meeting
of Unitholders to be held as promptly as practicable for the purpose of voting
upon the Conversion Proposal and related matters. Subject to the provisions of
Section 16.1 hereof the Partnership GP will recommend to Unitholders approval of
such matters.
Section 12.7 LEGAL CONDITIONS TO MERGER. Each of the parties hereto will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Merger and the other Transactions (which actions shall include, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any Governmental Entity and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them in connection with the Merger and the other Transactions). Each of the parties hereto will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained or made by any party hereto in connection with the Merger or the other Transactions or the taking of any action contemplated thereby or by this Agreement.
Section 12.8 AFFILIATES. Prior to the Closing Date the Partnership GP shall deliver to the Company a letter identifying all persons who are, at the time this Agreement is submitted for approval to the Unitholders of the Partnership, "affiliates" of the Partnership for purposes of Rule 145 under the Securities Act. The Partnership GP shall use its reasonable best efforts to cause each such person to deliver to the Company on or prior to the Closing Date executed affiliates' letters in customary form.
Section 12.9 STOCK EXCHANGE LISTING. The Company shall use its reasonable best efforts to cause the shares of Company Common Stock to be issued in the Merger to be approved for listing on the American Stock Exchange (the "ASE") and the Pacific Stock Exchange ("PSE") and any other national securities exchange on which shares of Company Common Stock may at such time be listed, subject to official notice of issuance, prior to the Closing Date. The Units will be delisted at or immediately after the Effective Time.
Section 12.10 EMPLOYEE BENEFIT PLANS. The benefit plans of the Operating Partnership in effect at the date of this Agreement shall, to the extent practicable, remain in effect until otherwise determined after the Effective Time. The Company shall take only such action necessary to adapt such plans to the Company's corporate form. In the case of benefit plans which are continued and under which the employees' interests are based upon Units, the Company and the Partnership agree that such interests shall be based on Company Common Stock in an equitable manner (and in the case of any such interests outstanding at the Effective Time, on the basis of the Conversion Number).
Section 12.11 PARTNERSHIP PLANS. (a) At the Effective Time, each of the outstanding First Rights representing the right to receive Units under a Partnership Plan, whether vested or unvested, shall be deemed to constitute the right to receive, on the same terms and conditions as were applicable under such First Rights, the same number of shares of Company Common Stock as the holder of such
First Rights would have been entitled to receive pursuant to the Merger had such holder been distributed Units in exchange for such First Rights immediately prior to the Effective Time (not taking into account whether or not such First Rights were in fact convertible).
(b) As soon as practicable after the Effective Time, the Company shall deliver to the participants in the Partnership Plans appropriate notices setting forth such participants' rights pursuant thereto and the grants or awards pursuant to the Partnership Plans shall continue in effect following the Effective Time on the same terms and conditions (subject to the adjustments required by this Section 12.11 after giving effect to the Merger).
(c) The Company shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Company Common Stock for delivery under the Partnership Plans assumed in accordance with this Section 12.11.
Section 12.12 FEES AND EXPENSES. Whether or not the Transactions are consummated, all costs and expenses incurred by the parties hereto in connection with this Agreement and the transactions contemplated hereby shall be paid by the Partnership.
Section 12.13 BROKERS OR FINDERS. Each of the Company, on the one hand, and the Partnership, on the other hand, represents, as to itself, its subsidiaries, if any, and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Smith Barney Inc. and Dillon, Read & Co., Inc., each of whose fees and expenses will be paid by the Partnership in accordance with the Partnership's agreements with such firms, and each of the Company, on the one hand, and the Partnership, on the other hand, agree to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliate.
Section 12.14 INDEMNIFICATION.
(a) The Partnership shall, and from and after the Effective Time, the Company shall, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date of this Agreement or who becomes prior to the Effective Time, an officer, director, employee, shareholder or partner of EIPCC, PICC, the Partnership, the Operating Partnership, the Operating Partnership GP, the Partnership GP or the Company or an employee, agent or affiliate of such person (the "Indemnified Parties") against all losses, claims, damages, costs, expenses, liabilities or judgments, or amounts that are paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of, or in connection with, any claim, action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the fact that such person is or was an officer, director, employee, shareholder or partner of EIPCC, PICC, the Partnership, the Operating Partnership, the Operating Partnership GP, the Partnership GP or the Company or an employee, agent or affiliate of such person, whether pertaining to any matter existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities") in each case to the full extent a partnership is permitted under Delaware law to indemnify such persons or entities and a corporation is permitted under the Minnesota Business Corporation Act (the "Minnesota BCA") to indemnify its own directors, officers, employees, agents, and affiliates, as the case may be and the Partnership (and after the Effective Time, the Company) will pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law upon receipt of any undertaking to repay such expenses if and when requested to do so by applicable law. Without limiting the foregoing, in the event any such claim, action, suit, proceeding or investigation is brought against any Indemnified Party (whether arising before or after the Effective Time), (i) the Indemnified Parties may retain counsel satisfactory to them and the Partnership (and after the Effective Time, them and the Company), (ii) the Partnership (and after the Effective Time, the Company) shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received,
and (iii) the Partnership (and after the Effective Time, the Company) will use all reasonable efforts to assist in the vigorous defense of any such matter, provided that neither the Partnership nor the Company shall be liable for any settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any Indemnified Party wishing to claim indemnification under this Section 12.14, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Partnership (and after the Effective Time, the Company) (but the failure so to notify the Partnership or the Company, as the case may be, shall not relieve the Partnership or the Company, as the case may be, from any liability which it may have under this Section 12.14 except to the extent such failure prejudices such party), and shall deliver to the Partnership (and after the Effective Time, the Company) the undertaking referred to above. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties.
(b) The provisions of this Section 12.14 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives.
Section 12.15 INDEMNIFICATION OF THE TRANSFERORS, THE PARTNERSHIP GP, THE OPERATING PARTNERSHIP GP, EIPCC, PICC AND AGENTS.
(a) DEFINITIONS. For purposes of this Section 12.15 only, the following terms shall have the following meanings:
(i) "Agent" means any person who is or was a partner, director, officer, employee, consultant or other agent of the Partnership, the Operating Partnership, the Partnership GP, EIPCC, the Operating Partnership GP, PICC or the Company, or any of their predecessor entities, or is or was serving at the request of, for the convenience of, or to represent the interests of, the Partnership GP, EIPCC, the Operating Partnership GP, PICC or the Company or any of their predecessor entities.
(ii) "Enforcement Proceeding" means any Proceeding in which the Indemnitee is a party concerning the interpretation or enforcement of the rights of the Indemnitee under this Section 12.15.
(iii) "Expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, claims, damages, judgments, losses, and liabilities of any type or nature whatsoever or amounts that are paid in settlement, and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee either in connection with the investigation, defense, adjudication, settlement or appeal of a Proceeding or in connection with establishing or enforcing a right to indemnification under this Agreement, a partnership agreement, applicable law or otherwise.
(iv) "Indemnitee" means individually or collectively, as the case may be, the Transferors and their affiliates (including their respective officers, directors, employees and partners), the Partnership GP, EIPCC, PICC, the Operating Partnership GP, an Agent, or any of them.
(v) "Proceeding" means any threatened, pending or completed action, suit, investigation or other proceeding whether civil, criminal, administrative, investigative or any other type whatsoever.
(b) INDEMNIFICATION. The Partnership (and from and after the Effective Time, the Partnership and the Company, as a separate and independent obligation of each) shall, to the maximum extent permitted by each under applicable law, indemnify, defend and hold harmless the Indemnitee against all Expenses if the Indemnitee was or is a party or is threatened to be made a party to any Proceeding based (in whole or in part) on, arising (in whole or in part) out of, or pertaining to this Agreement, the Merger or any other Transactions.
(c) ADVANCEMENT OF EXPENSES. Prior to the final disposition of a Proceeding, the Partnership (and from and after the Effective Time, the Partnership and the Company, as a separate and independent obligation of each) shall, not later than seven (7) calendar days after a written request by the Indemnitee is sent, advance to the Indemnitee, all Expenses incurred, accrued, or reasonably expected by the Indemnitee, in its sole discretion, to be incurred within sixty (60) calendar days from such request, by the Indemnitee in connection with the investigation, defense, adjudication, settlement or appeal of any such Proceeding based (in whole or in part) on, arising (in whole or in part) out of, or pertaining to this Agreement, the Merger or any other Transactions; PROVIDED, HOWEVER, that the Indemnitee gives a written undertaking to repay such Expenses advanced if, and only to the extent that, a court having jurisdiction pursuant to Section 12.15(i)(1) hereof shall ultimately determine that the Indemnitee is not entitled to be indemnified by the Partnership (and from and after the Effective Time, the Company) for such Expenses. All funds requested hereunder by the Indemnitee shall be deemed to be reasonable unless and until the Partnership (and from and after the Effective Time, the Company) shall prove, by clear and convincing evidence, in a court having jurisdiction pursuant to Section 12.15(i)(1), that the funds requested are not reasonable. Further, if the Partnership (and from and after the Effective Time, the Company) shall not advance the funds requested by the Indemnitee within the time period set forth herein, the Partnership (and from and after the Effective Time, the Company) shall pay to the Indemnitee, in addition to the amount requested, interest on the amount requested, from the time of the request, at the highest rate permitted under the law of the State of Delaware until said amount is paid in full.
(d) PROCEEDINGS INVOLVING THIS AGREEMENT. Notwithstanding any other provision in this Agreement to the contrary, the Partnership (and from and after the Effective Time, the Partnership and the Company, as a separate and independent obligation of each) shall, to the maximum extent permitted by each under applicable law, indemnify, defend and hold harmless the Indemnitee against all Expenses incurred by the Indemnitee in connection with any Enforcement Proceeding unless a court having jurisdiction pursuant to Section 12.15(i)(1) hereof finds that each of the claims and/or defenses of the Indemnitee in any such Enforcement Proceeding was frivolous or made in bad faith. Prior to the final disposition of an Enforcement Proceeding, the Partnership (and from and after the Effective Time, the Company) shall, not later than seven (7) calendar days after a written request by the Indemnitee is sent, advance to the Indemnitee all Expenses incurred, accrued, or reasonably expected by the Indemnitee, in its sole discretion, to be incurred within sixty (60) calendar days from such request, by the Indemnitee in connection with any such Enforcement Proceeding; provided, however, that the Indemnitee gives a written undertaking of the kind referred to in the proviso to Section 12.15(c) hereof. All funds requested hereunder by the Indemnitee shall be deemed to be reasonable unless and until the Partnership (and from and after the Effective Time, the Company) shall prove, by clear and convincing evidence, in a court having jurisdiction pursuant to Section 12.15(i)(1), that the funds requested are not reasonable. Further, if the Partnership (and from and after the Effective Time, the Company) shall not advance the funds requested by the Indemnitee within the time period set forth herein, the Partnership (and from and after the Effective Time, the Company), shall pay to the Indemnitee, in addition to the amount requested, interest on the amount requested, from the time of the request, at the highest rate permitted under the law of the State of Delaware until said amount is paid in full.
(e) NOTICE OF PROCEEDINGS AND DEFENSE.
(i) NOTICE. Promptly after receipt by the Indemnitee of notice of the commencement or the threat of commencement of any Proceeding with respect to which the Indemnitee believes that the Indemnitee may be entitled to Indemnification or the advancement of Expenses under this Agreement, the Indemnitee shall notify in writing the Partnership (and from and after the Effective Time, the Company) of the commencement or the threat of commencement thereof; PROVIDED, HOWEVER, that the failure so to notify the Partnership (and from and after the Effective
Time, the Company) shall not relieve the Partnership (and from and after the
Effective Time, the Company) from any liability which it may have under this
Section 12.15 except to the extent such failure prejudices such party.
(ii) DEFENSE. In the event any Proceeding is brought against the Indemnitee, the Indemnitee may retain counsel satisfactory to it and the Partnership and the Company will use all reasonable efforts to assist in the vigorous defense of any such matter.
(f) NON-EXCLUSIVITY. The benefits provided the Indemnitees under this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any law, other agreements or otherwise and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.
(g) INTERPRETATION. The parties hereto intend for this Agreement to be interpreted and enforced so as to provide indemnification and advancement of Expenses to the Indemnitee to the fullest extent now or hereafter permitted by applicable law and, in the event that the validity, legality or enforceability of any provision of this Agreement is in question, such provision shall be interpreted in a manner such that the provision will be valid, legal and enforceable.
(h) PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under this Agreement to indemnification by the Partnership or the Company for some or a portion of any Expenses incurred in connection with any Proceeding but is not entitled to indemnification for the full amount thereof, the Partnership (and from and after the Effective Time, the Company) shall indemnify the Indemnitee for such full amount thereof less the portion thereof to which a court having jurisdiction pursuant to Section 12.15(i)(1) hereof determines the Indemnitee is not entitled.
(i) CONSENT TO JURISDICTION AND ENFORCEMENT.
(1) The Partnership, the Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the States of Delaware and Minnesota for all purposes in connection with any dispute, action or proceeding which arises out of or relates to this Section 12.15 and agree that any action instituted under this Section 12.15 shall be brought only in the state courts of the States of Delaware or Minnesota.
(2) In the event of any dispute of any type whatsoever under this Agreement involving the obligations of the Partnership or the Company to indemnify or advance Expenses to the Indemnitee, the Partnership or the Company, as the case may be, shall have the burden of proving by clear and convincing evidence that the Partnership or the Company, as the case may be, is not so obligated to indemnify or advance Expenses to the Indemnitee.
(j) NO OBLIGATIONS TO MITIGATE. Under no circumstances shall the Indemnitee be required or obligated to seek recovery from third parties or otherwise mitigate its losses in order to maintain a claim against the Partnership or the Company. The Partnership and the Company agree that the failure to pursue such recovery or mitigate loss will in no way reduce the amounts recoverable by Indemnitee from the Partnership or the Company.
Section 12.16 PRESERVATION OF PARTNERSHIP, PARTNERSHIP GP AND EIPCC. For a period of two years after the Effective Time, the Company will not dissolve, liquidate, merge, or transfer all or substantially all the assets out of, or otherwise cause the discontinuance of the existence of, EIPCC, the Partnership or the Partnership GP or cause the Partnership and the Partnership GP to cease being treated as partnerships for federal income tax purposes.
Section 12.17 NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to the Partnership GP, and the Partnership Entities shall give
prompt notice to the Company, of (a) the occurrence, or non-occurrence, of any
known event the occurrence, or non-occurrence, of which would be likely to cause
(i) any representation or warranty contained in this Agreement to be untrue or
inaccurate or (ii) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied and (b) any known failure of the
Company or any of the Partnership
Entities, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 12.17 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice.
Section 12.18 PUBLICITY. Except as otherwise required by law or the rules of the ASE and PSE, for so long as this Agreement is in effect, none of the parties hereto shall, or shall permit any of their subsidiaries or affiliates to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the written consent of the Company and the Partnership GP, which consent shall not be unreasonably withheld.
Section 12.19 CERTAIN TAX MATTERS.
(a) The Company and Victor K. Atkins, Jr. (or his designee, collectively "Atkins") agree that Atkins will duly and timely prepare and file all federal, state and local tax returns and information reports required to be filed by the Partnership, the Operating Partnership, the Partnership GP and the Operating Partnership GP, including without limitation the federal Form 1065 and Schedules K-1, required for any taxable year of any of such entities ending on or before the Closing Date. The parties hereto acknowledge that a termination for federal income tax purposes pursuant to Section 708(b)(1)(B) of the Code (a "Termination") will occur with respect to the Partnership, the Operating Partnership, the Partnership GP and the Operating Partnership GP on the Closing Date, and that as a consequence of such Termination, the taxable year of each of such entities will end on such date. Atkins agrees to prepare and file the above mentioned returns consistent with past practice. Atkins will not make any election related to taxes or change any method of accounting for taxes with respect to such returns or reports without the prior written consent of the Company except that Atkins may make an election to adjust the basis of partnership assets under section 754 of the Code for any of such partnerships if such election has not already been made. At least ten (10) business days prior to their respective due dates, Atkins will forward a copy to the Company of all proposed income tax returns required to be filed by the Partnership, the Operating Partnership, the Partnership GP and the Operating Partnership GP for the taxable year ending on the Closing Date (each a "Final Year Income Tax Return"), and, absent prior written notice from the Company, Atkins agrees not to file any Final Year Income Tax Return for at least ten (10) business days following the Company's receipt of such Final Year Income Tax Return; provided, however, the filing of any such Final Year Income Tax Return shall be within the sole discretion of Atkins.
(b) In the event any tax return or report of the Partnership, the Operating Partnership, the Partnership GP and the Operating Partnership GP, relating to any taxable year of any of such entities ending on or prior to the Closing Date is examined by the Internal Revenue Service or any other taxing authority, the Company, upon receipt of actual notice of such examination by it or any of its Subsidiaries, shall give Atkins prompt written notice thereof and keep Atkins fully informed as to the conduct of any such tax audits and any subsequent administrative or judicial proceedings relating thereto. Subject to applicable Treasury Regulations, Atkins shall be permitted to act as the "Tax Matters Partner" within the meaning of Section 6231(a)(7) of the Code (and in any similar capacity under applicable state or local tax law) as to the Partnership, the Operating Partnership, the Partnership GP and the Operating Partnership GP with respect to the taxable years of any of such entities ending on or prior to the Closing Date. In the event Atkins is not permitted to act as the Tax Matters Partner of the Partnership, the Operating Partnership, the Partnership GP or the Operating Partnership GP in accordance with the preceding sentence for any reason, but the Company (or any of its affiliates) is permitted to act as the Tax Matters Partner of any of such entities, the Company (or such affiliate) shall act in such capacity for such entity at the direction and control of Atkins to the fullest extent permitted by law. Each of Atkins and the Company shall keep the other party fully informed, through written communications or otherwise, of any examination, audit, or administrative or judicial proceeding referred to above. Atkins agrees not to settle or otherwise compromise any issue in any examination, audit, or administrative or judicial proceeding referred to above without the prior
written consent of the Company, such consent not to be unreasonably withheld, if Atkins receives a written statement from the Company's auditors or counsel stating that such settlement or compromise of such issue will adversely affect the Company to a material extent.
(c) From and after the Closing Date, the Company shall afford to Atkins and
his attorneys, accountants, and other authorized representatives, free and full
access to the books and records of the Partnership, the Operating Partnership,
the Partnership GP and the Operating Partnership GP in connection with (i) any
examination or audit by the Internal Revenue Service or any other taxing
authority of any tax return or report of any of such entities relating to any
taxable year of any of such entities ending on or prior to the Closing Date or
(ii) the preparation by Atkins of any federal, state and local tax returns and
information reports required to be filed by the Partnership, the Operating
Partnership, the Partnership GP and the Operating Partnership GP for any taxable
year of any of such entities ending on or prior to the Closing Date, provided
that the access of Atkins to the books and records of the Partnership, the
Operating Partnership, the Partnership GP and the Operating Partnership GP shall
not unreasonably interfere with the operations of any of such entities. The
Company shall cause the Partnership, the Operating Partnership, the Partnership
GP and the Operating Partnership GP to make available, as reasonably requested,
their personnel (including technical), agents and other representatives who are
responsible for preparing or maintaining information, records or other
documents, or who may have particular knowledge with respect to any such matter.
The books and records of the Partnership, the Operating Partnership, the
Partnership GP and the Operating Partnership GP shall be preserved by the
Company for a period of five years after the Closing Date or such longer period
as shall reasonably be requested, in writing, by Atkins to permit the completion
of any audit of taxes or subsequent administrative or judicial proceedings
relating thereto for any period ending on or prior to the Closing Date, and
Atkins shall have the right to make copies thereof.
(d) The Company will indemnify and reimburse Atkins for all reasonable expenses, including, without limitation, legal and accounting fees, travel and telephone expenses, claims, liabilities, losses and damages incurred in connection with performing the duties described above including his duties in connection with any audit or administrative or judicial proceeding with respect to the tax liability of the Partnership or the Operating Partnership, PROVIDED, HOWEVER, that the Company shall not indemnify or otherwise reimburse Atkins for any such expenses, claims, liabilities, losses or damages to the extent they were incurred as a result of the gross negligence or willful misconduct of Atkins. The Company will pay any such expenses to Atkins not later than seven days after written request by him, and in advance of the final disposition of any such action, audit or proceeding.
(e) The Company and each of the EIPCC Stockholders agree that the EIPCC Stockholders (or their designee) shall duly and timely prepare and file any federal, state and local tax returns and information reports required to be filed by EIPCC and PICC for any taxable year of any of such entities ending on or before or including the Closing Date. The EIPCC Stockholders shall provide the Company with a copy of all such tax returns and reports promptly after their filing.
(f) In the event any tax return or report of EIPCC or PICC relating to any taxable year of any of such entities ending on or before or including the Closing Date is examined by the Internal Revenue Service or any other taxing authority, the Company, upon receipt of actual notice of such examination by it or any of its Subsidiaries, shall give the EIPCC Stockholders prompt written notice thereof and keep the EIPCC Stockholders fully informed as to the conduct of any such tax audits and any subsequent administrative or judicial proceedings relating thereto. The EIPCC Stockholders (or their designee) shall have the sole right to control any such audit or proceeding, refund claims and litigation, and to contest, resolve and defend any assessment, notice of deficiency or other adjustment or proposed adjustment relating to any and all taxes for any such taxable years. In the event the EIPCC Stockholders are not permitted to act in the capacity described above for any reason but the Company (or any of its affiliates) is permitted to act in such capacity, the Company (or such affiliate) shall act in
such capacity at the direction and control of the EIPCC Stockholders (or their designee) to the fullest extent possible. The EIPCC Stockholders agree to keep the Company fully informed as to the conduct and status of any such audit, proceeding, refund claim or litigation.
(g) From and after the Closing Date, the Company shall afford to the EIPCC Stockholders and their attorneys, accountants, and other authorized representatives, free and full access to the books and records of EIPCC and PICC in connection with (i) any examination or audit by the Internal Revenue Service or any other taxing authority of any tax return or report of any of such entities relating to any taxable year of any of such entities ending on or before or including the Closing Date or (ii) the preparation by the EIPCC Stockholders (or their designee) of any federal, state and local tax returns and information reports required to be filed by EIPCC or PICC for any taxable year of any of such entities ending on or before or including the Closing Date, provided that the access of the EIPCC Stockholders (or their designee) to the books and records of EIPCC or PICC shall not unreasonably interfere with the operations of any of such entities. The Company shall cause EIPCC or PICC to make available, as reasonably requested, their personnel (including technical), agents and other representatives who are responsible for preparing or maintaining information, records or other documents, or who may have particular knowledge with respect to any such matter. The books and records of EIPCC and PICC shall be preserved by the Company for a period of five years after the Closing Date or such longer period as shall reasonably be requested, in writing, by the EIPCC Stockholders to permit the completion of any audit of taxes or subsequent administrative or judicial proceedings relating thereto for any period ending on or prior to or including the Closing Date, and the EIPCC Stockholders shall have the right to make copies thereof.
Section 12.20 REGISTRATION RIGHTS. At or prior to the Closing Date, the Company and the Transferors shall enter into a registration rights agreement substantially in the form attached hereto as Exhibit A.
Section 12.21 DELIVERY OF DOCUMENTS. At the request of the Company following the Closing, and at the Company's expense, the Partnership GP shall deliver or cause to be delivered (if not previously delivered) to the Company at its business address all documents, files and records of EIPCC, PICC, the Partnership GP and the Operating Partnership GP.
Section 12.22 PARTNERSHIP DISTRIBUTIONS.
(a) For each full calendar quarter prior to the Effective Time and, subject to Section 12.22(b), the calendar quarter in which the Effective Time occurs, the Partnership shall continue to pay regular quarterly distributions to Unitholders, on the one hand, and the Partnership GP and Operating Partnership GP, on the other hand, in the same amounts as the quarterly distributions heretofore paid to such persons in 1994 and otherwise consistent with past practice ("Regular Distributions").
(b) If the Effective Time occurs prior to the declaration of any regular quarterly distribution in respect of the calendar quarter in which the Effective Time occurs, the Partnership shall make a final regular quarterly distribution (as described in (a) above) to Unitholders of record immediately prior to the Effective Time, on the one hand, and the Partnership GP and the Operating Partnership GP, on the other hand; PROVIDED, HOWEVER, that such regular quarterly distribution shall be pro rated for the period from the beginning of the calendar quarter during which the Effective Time occurs to the Effective Time (the "Final Distribution," and together with Regular Distributions, the "Distributions"). The Final Distribution shall be paid no later than 60 days after the Effective Time.
(c) Notwithstanding the foregoing, the Transferors will receive their pro rata share of all distributions otherwise payable to the Partnership GP and the Operating Partnership GP which are not paid until after the Closing.
ARTICLE XIII
CONDITIONS
Section 13.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE TRANSACTIONS CONTEMPLATED HEREBY. The respective obligations of the parties to effect the Transactions contemplated hereby shall be subject to the satisfaction, on or prior to the Closing Date, of the following conditions:
(a) UNITHOLDER APPROVAL. This Agreement shall have been approved and adopted by the affirmative vote of (x) the holders of more than 50% of Units (excluding Units held by the Partnership GP, affiliates of the Partnership GP and senior operating management of the Operating Partnership) and (y) the holders of Units entitled to cast more than 50% of the total number of votes entitled to be cast.
(b) STOCK EXCHANGE LISTING. The shares of Company Common Stock issuable to the Unitholders pursuant to this Agreement shall have been authorized for listing on the ASE and the PSE, subject to official notice of issuance.
(c) OTHER APPROVALS. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity the failure to obtain which would have a material adverse effect on the Company or the Partnership and the Operating Partnership, taken as a whole, shall have been filed, occurred or been obtained. The Company shall have received all state securities or "Blue Sky" permits and other authorizations necessary to issue the Company Common Stock pursuant to this Agreement.
(d) REGISTRATION STATEMENT. The S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceeding seeking a stop order.
(e) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect (each party agreeing to use all reasonable efforts to have any such order reversed or injunction lifted).
(f) HSR APPROVAL. Any applicable waiting period under the HSR Act shall have expired or been terminated.
(g) FAIRNESS OPINIONS. Neither of the fairness opinions delivered to the Partnership by Smith Barney Inc. and Dillon, Read & Co. Inc. shall have been rescinded prior to the Effective Time.
Section 13.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company to effect the Merger and the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived by Company:
(a) REPRESENTATIONS AND WARRANTIES. (i) The aggregate effect of all inaccuracies in the representations and warranties of the Partnership Entities set forth in this Agreement does not and will not have a material adverse effect on the Partnership and the Operating Partnership taken as a whole and (ii) the representations and warranties of the Partnership Entities contained in this Agreement shall be true and correct in all material respects as of the date hereof, and, as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and the Company shall have received a certificate of each of the Partnership Entities signed by the general partner or the chief executive officer, or individually, as appropriate, to such effect with respect to the representations and warranties made by such Partnership Entity.
(b) PERFORMANCE OF OBLIGATIONS OF THE PARTNERSHIP ENTITIES. The Partnership Entities shall have performed in all material respects all obligations required to be performed by them under
this Agreement at or prior to the Closing Date, and the Company shall have received certificates of each of the Partnership Entities signed by the general partner or chief executive officer, or individually, as appropriate, to such effect.
(c) TAX OPINION. The Company shall have received an opinion of
Skadden, Arps, Slate, Meagher & Flom, special tax counsel to the Company, in
form and substance reasonably acceptable to the Company substantially to the
effect that on the basis of facts, representations and assumptions set forth
in such opinion, and in accompanying certificates signed by appropriate
officers of the Company and the Partnership or Operating Partnership, which
are consistent with the state of facts then existing, for federal income tax
purposes (i) the formation and existence of PTP and its subsequent merger
with and into the Partnership will be disregarded; (ii) the transfers of
Units by Unitholders and other property described herein by the Transferors
to the Company in exchange for Company Common Stock pursuant to the
Transactions shall, in the aggregate, constitute a transaction described in
Section 351(a) of the Code; and (iii) Unitholders should not recognize gain
or loss as a result of the exchange of their Units for Company Common Stock
pursuant to the Transactions. Insofar as relevant, such opinion will not
address the tax results to certain types of taxpayers, including taxpayers
who are not United States persons (as defined in Section 7701(a)(30) of the
Code), insurance companies, financial institutions and taxpayers holding
their Units in the capacity as dealers in securities.
(d) MATERIAL CONSENTS. All third party consents necessary to effect the Transactions shall have been obtained, to the extent the failure to obtain such consents would (i) materially adversely affect the Company's or the Partnership Entities' ability to consummate the Transactions, (ii) impose material liability on the Company or the Partnership or the Operating Partnership, or have a material adverse effect on the Company's or the Partnership's or the Operating Partnership's assets and properties, or (iii) materially detract from the Company's or the Partnership's or the Operating Partnership's assets and Properties.
(e) DISSENTING UNITHOLDERS. No more than 5% of the outstanding Units shall be held by Dissenting Unitholders.
Section 13.3 CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP ENTITIES. The obligation of the Partnership Entities to effect the Transactions contemplated hereby is subject to the satisfaction of the following conditions, on or prior to the Closing Date, unless waived by the Partnership GP:
(a) REPRESENTATIONS AND WARRANTIES. (i) The aggregate effect of all inaccuracies in the representations and warranties of the Company set forth in this Agreement does not and will not have a material adverse effect on the Company and (ii) the representations and warranties of the Company contained in Sections 11.1, 11.2 and 11.3 shall be true and correct in all material respects as of the date hereof, and, as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and the Partnership shall have received a certificate signed on behalf of the Company by its chief executive officer to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. Company shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and the Partnership shall have received a certificate signed on behalf of the Company by its chief executive officer of the Company to such effect.
(c) TAX OPINION. The Partnership shall have received an opinion of Stroock & Stroock & Lavan, special counsel to the Partnership, in form and substance reasonably acceptable to the Partnership, substantially to the effect that on the basis of facts, representations and assumptions set forth in such opinion, and in accompanying certificates signed by appropriate officers of the Company and the Partnership or Operating Partnership, which are consistent with the state of facts then existing, for federal income tax purposes (i) the formation and existence of PTP and its subsequent merger with and into the Partnership will be disregarded; (ii) the transfers of Units by Unitholders and other property (described herein) by the Transferors to the Company in
exchange for Company Common Stock pursuant to the Transactions shall, in the
aggregate, constitute a transaction described in Section 351(a) of the Code;
(iii) Unitholders should not recognize gain or loss as a result of the
exchange of their Units for Company Common Stock pursuant to the
Transactions; and (iv) the Transferors should not recognize gain or loss as
a result of exchanging their partnership interests in the Partnership GP or
the Operating Partnership GP, or shares of common stock of EIPCC, as the
case may be, for shares of Company Common Stock pursuant to the Transactions
except to the extent any Transferor recognizes gain pursuant to Section
357(c) of the Code. Insofar as relevant, such opinion will not address the
tax results to certain types of taxpayers, including taxpayers who are not
United States persons (as defined in Section 7701(a)(30) of the Code),
insurance companies, financial institutions and taxpayers holding their
Units in the capacity as dealers in securities.
(d) MATERIAL CONSENTS. All third party consents necessary to effect the Transactions shall have been obtained, to the extent the failure to obtain such consents would (i) materially adversely affect the Company's or the Partnership Entities ability to consummate the Transactions in the aggregate, or (ii) impose material liability on the Partnership Entities in the aggregate.
ARTICLE XIV
INDEMNITIES
Section 14.1 EIPCC STOCKHOLDERS INDEMNITY.
(a) Mr. Atkins agrees to indemnify the Partnership and the Company and their
respective successors and assigns from and against (i) all debts, claims,
liabilities and obligations of EIPCC that are not Partnership GP Liabilities,
(ii) all debts, claims, liabilities and obligations of PICC that are not
Operating Partnership GP Liabilities, and (iii) any breach of the
representations and warranties set forth in Sections 10.1(a), 10.1(b),
10.1(c)(ii), 10.1(d) (to the extent applicable to EIPCC or PICC), 10.1(e) and
10.1(g), and to pay all costs and expenses (including fees and disbursements of
counsel) incurred by the Partnership and the Company and their respective
successors and assigns in connection therewith.
(b) Each EIPCC Stockholder severally and not jointly agrees to indemnify the Partnership and the Company and their respective successors and assigns from and against any breach of any of such EIPCC Stockholder's representations and warranties set forth in Sections 10.1(c)(i), 10.1(d) (to the extent applicable to such EIPCC stockholder) and 10.1(f), and to pay all costs and expenses (including fees and disbursements of counsel) incurred by the Partnership and the Company and their respective successors and assigns in connection therewith.
Section 14.2 PARTNERSHIP GP PARTNERS INDEMNITY.
(a) Mr. Atkins agrees to indemnify the Partnership and the Company and their respective successors and assigns from and against (i) all debts, claims, liabilities and obligations of the Partnership GP that are not Partnership Liabilities and (ii) any breach of any of the representations and warranties set forth in Sections 10.2(a), 10.2(b), 10.2(d) (to the extent applicable to the Partnership GP), 10.2(e) and 10.2(g), and to pay all costs and expenses (including fees and disbursements of counsel) incurred by the Partnership and the Company and their respective successors and assigns in connection therewith.
(b) Each Partnership GP Partner severally and not jointly agrees to indemnify the Partnership and the Company and their respective successors and assigns from and against any breach of such Partnership GP Partner's representations and warranties set forth in Sections 10.2(c), 10.2(d) (to the extent applicable to such Partnership GP Partner) and 10.2(f) and to pay all costs and expenses (including fees and disbursements of counsel) incurred by the Partnership and the Company and their respective successors and assigns in connection therewith.
Section 14.3 OPERATING PARTNERSHIP GP PARTNERS INDEMNITY.
(a) Mr. Atkins agrees to indemnify the Partnership and the Company and their respective successors and assigns against (i) all debts, claims, liabilities and obligations of the Operating Partnership GP that are not Operating Partnership Liabilities and (ii) any breach of any of the representations and warranties set forth in Sections 10.3(a), 10.3(b), 10.3(d) (to the extent applicable to the Operating Partnership GP), 10.3(e) and 10.3(g), and to pay all costs and expenses (including fees and disbursements of counsel) incurred by the Partnership and the Company in connection therewith.
(b) Each Operating Partnership GP Partner severally and not jointly agrees to indemnify the Partnership and the Company against any breach of any of such Operating Partnership GP Partner's representations and warranties set forth in Sections 10.3(c), 10.3(d) (to the extent applicable to such Operating Partnership GP Partner) and 10.3(f), and to pay all costs and expenses (including fees and disbursements of counsel) incurred by the Partnership and the Company and their respective successors and assigns in connection therewith.
Section 14.4 GENERAL TAX INDEMNITY.
(a) Mr. Atkins shall indemnify and hold the Partnership and the Company and their respective successors and assigns harmless from and against all liabilities for all taxes actually imposed on and paid by each of the Partnership GP, the Operating Partnership GP, PICC and EIPCC (the "Indemnity Entities") for all tax periods or portions thereof of the Indemnity Entities ending on or before the Closing Date, excluding all tax liabilities incurred by any of the Indemnity Entities resulting from any of the Transactions; provided, however, that Mr. Atkins' obligation to indemnify and hold harmless the above parties shall be reduced to the extent EIP I L.P. and LB I Group Inc. are obligated to indemnify the above parties pursuant to paragraph (b) below.
(b) EIP I L.P. and LB I Group Inc. jointly and severally shall indemnify and hold harmless the Partnership and the Company and their respective successors and assigns from and against 50% of all liabilities (Mr. Atkins being responsible for the remaining 50% pursuant to paragraph (a) above) for all taxes actually imposed on and paid by each of the Partnership GP and the Operating Partnership GP (the "Partnership Indemnity Entities") for all tax periods or portions thereof of the Partnership Indemnity Entities ending on or before the Closing Date excluding all tax liabilities incurred by any of the Partnership Indemnity Entities resulting from any of the Transactions; provided, however, that EIP I L.P. and LB I Group Inc. shall not bear any portion of such liabilities of the Partnership Indemnity Entities that resulted from Mr. Atkins' own actual fraud, gross negligence, willful or wanton misconduct or, if applicable, breach of fiduciary duty to the Partnership Indemnity Entities (any act or omission done in reliance upon the opinion of independent legal counsel or public accountants or other consultants selected with reasonable care will be conclusively presumed to have been done or omitted in good faith and not to constitute gross negligence or willful or wanton misconduct), and provided, further, however, that the maximum liability of EIP I L.P. and LB I Group Inc. under this paragraph shall not exceed the liability of Mr. Atkins pursuant to paragraph (a) above and, in any event, shall not exceed $1,000,000.
Section 14.5 EXCEPTION TO CERTAIN INDEMNITIES. Notwithstanding the provisions of Sections 14.1, 14.2 and 14.3 above requiring certain persons to indemnify the Partnership and Corporation, and their respective successors and assigns for certain liabilities, to the extent such persons are otherwise entitled to be indemnified by the Partnership or the Company for such liabilities pursuant to Sections 12.14 and 12.15 hereof or otherwise, then such persons shall not be required to make the indemnifications to the Partnership or the Company pursuant to Sections 14.1, 14.2 and 14.3 hereof for such liabilities. Notwithstanding anything in this Agreement to the contrary, no Transferor shall have any liability in respect of a Partnership Liability or an Operating Partnership Liability.
Section 14.6 INDEMNIFICATION OF W. HALL WENDEL, JR. AND THE COMPANY. If, after the Company has been incorporated, the Transactions contemplated by this Agreement are not consummated for any reason and the Company subsequently liquidates and distributes any Units to its shareholders, the Partnership shall indemnify and hold harmless, on an after-tax basis without reduction for any tax
benefit that may be realized due to a step-up in basis or otherwise, each of the Company and W. Hall Wendel Jr. ("Wendel") for all taxes payable by the Company and Wendel as a result of the distribution of any Units by the Company to Wendel.
Section 14.7 PROCEDURES FOR INDEMNIFICATION.
(a) In order for the party from whom indemnity may be sought pursuant to this Article XIV (the "Indemnitor") to be fully informed at all times concerning its possible obligations to give indemnity to the claimant thereof under the provisions thereof (the "Indemnitee") and to permit the amounts thereof to be minimized, if the Indemnitee suffers or is threatened with or incurs any loss, damage or expense for which it would be entitled to be indemnified, the Indemnitee shall promptly give written notice to Indemnitor after obtaining knowledge of any claim and, if such indemnity shall arise from the claim of a third party, shall permit Indemnitor to assume the defense of any such claim or any Proceeding (as defined in Section 12.15) resulting from such claim. Notwithstanding the foregoing notice requirement, the right to indemnification shall not be affected by any failure of Indemnitee to give such notice or any delay by Indemnitee in giving such notice unless, and then only to the extent that, the rights and remedies of indemnitor shall have been prejudiced as a result of the failure to give, or delay in giving, such notice. Failure by Indemnitor to notify the Indemnitee of its election to defend any such claim or Proceeding by a third party, within fourteen days after written notice thereof shall have been given to Indemnitor, shall be deemed a waiver by Indemnitor of its right to defend such claim or action.
(b) If Indemnitor assumes the defense of such claim or Proceeding by a third party, the obligations of Indemnitor hereunder as to such claim or Proceeding shall include taking all steps necessary in the defense or settlement of such claim or proceeding, including the retention of counsel reasonably satisfactory to the Indemnitee, and holding the Indemnitee harmless from and against any and all claims caused by or arising out of any settlement approved by Indemnitor or any judgment in connection with such claim or Proceeding. Without the prior written consent of Indemnitee, Indemnitor shall not, in the defense of such claim or Proceeding, consent to the entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee of a release, in form reasonably satisfactory to the Indemnitee, from all liability in respect of such claim or Proceeding. Notwithstanding the foregoing, the Indemnitee will be entitled to participate at its expense in the defense of such claim or Proceeding. If the defendants in any such Proceeding include both the Indemnitee and Indemnitor and the Indemnitee shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnitor, the Indemnitee shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such Proceeding on behalf of such Indemnitee and at the expense of the Indemnitor.
(c) If Indemnitor does not assume the defense of any such claim or Proceeding by a third party, the Indemnitee may defend against such claim or Proceeding in such manner as it deems appropriate and, unless Indemnitor shall deposit with Indemnitee a sum equivalent to the total amount demanded in such claim or Proceeding plus the Indemnitee's estimate of the cost of defending the same, the Indemnitee may settle such claim or Proceeding on such terms as it deems appropriate and Indemnitor shall, in accordance with the provisions hereof promptly reimburse the Indemnitee for the amount of such settlement and for all losses and expenses incurred by Indemnitee in connection with the defense against or settlement of such claim or Proceeding. Indemnitor agrees to cooperate fully with the Indemnitee in the conduct of any defense against any claim or Proceeding.
(d) Each of Indemnitor and Indemnitee will cooperate with the other in resolving or attempting to resolve any claim and will permit the other party access to all books and records which might be useful for such purpose, during normal business hours and at the place where the same are normally kept, with full right to make copies thereof or extracts therefrom at the cost of the copying party.
(e) The provisions of this Section 14.7 are subject to the provisions of
Section 12.19.
ARTICLE XV
TERMINATION AND AMENDMENT
Section 15.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Conversion Proposal by the Unitholders of the Partnership or the Company:
(a) by mutual consent of the Company and the Partnership GP;
(b) by either the Company or the Partnership GP if the Transactions shall not have been consummated before April 15, 1995 (unless the failure to so consummate the Transactions before such date shall be due to the wilful action or failure to act of the party seeking to terminate this Agreement which action or failure to act constitutes a breach of this Agreement); and
(c) by the Partnership GP in accordance with the provisions of Section 16.1 hereof.
Section 15.2 EFFECT OF TERMINATION. In the event of a termination of this Agreement by either the Partnership GP or the Company as provided in Section 15.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Company or the Partnership Entities or their respective officers or directors, other than the provisions of Sections 12.12, 12.13, 12.14, 12.15, and 12.18; provided, however that any such termination shall not relieve any party from liability for willful breach of any of its covenants or agreements set forth in this Agreement.
Section 15.3 AMENDMENT. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors or general partners, at any time before or after approval of the matters presented in connection with the Merger by the Unitholders of the Partnership or of the Company, but, after any such approval, no amendment shall be made which by law requires further approval by such Unitholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
ARTICLE XVI
MISCELLANEOUS
Section 16.1 FIDUCIARY DUTIES. Nothing contained in this Agreement shall be deemed to alter the Partnership GP's fiduciary duties to Unitholders under the Partnership's partnership agreement or the DRULPA, including, but not limited to, the right to terminate this Agreement if the Partnership GP, as advised by counsel, determines that as a result of any developments occurring after the date of this Agreement, such termination is necessary to discharge its fiduciary duties.
Section 16.2 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Articles X and XI shall survive the Effective Time in perpetuity. All other representations and warranties in this Agreement shall not survive the Effective Time.
Section 16.3 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
(a) if to the Company, to Polaris Industries Inc. 1225 North Highway 169 Minneapolis, Minnesota 55441 Attention: John H. Grunewald, Executive Vice President,
Chief Financial Officer and Secretary
with a copy to
Kaplan, Strangis and Kaplan, P.A.
90 South 7th Street
Minneapolis, Minnesota 55402
Attention: Andris A. Baltins, Esq.
and
(b) if to any of the Partnership Entities (other than the Transferors), to
EIP Capital Corporation 33 Flying Point Road Southampton, New York 11963 Attention: Victor K. Atkins, Jr.
with a copy to
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004
Attention: Hillel M. Bennett, Esq.
and
Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: George R. Krouse, Jr., Esq.
and
(c) if to any of the Transferors, to the addresses set forth on Annex I, II or III, respectively.
Section 16.4 INTERPRETATION. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement," "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to September 29, 1994.
Section 16.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.
Section 16.6 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement (including the documents and the instruments referred to herein), (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 12.14, 12.15 or 14.6 is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.
Section 16.7 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts of law.
Section 16.8 SPECIFIC PERFORMANCE. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached,
irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity.
Section 16.9 ASSIGNMENT; SUCCESSORS. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by and against the parties and their respective heirs, executors, administrators, successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.
POLARIS INDUSTRIES INC.
By: /s/ W. HALL WENDEL, JR.
--------------------------------------
Name: W. Hall Wendel, Jr.
Title: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
|
POLARIS INDUSTRIES PARTNERS L.P.
By: EIP Associates L.P.
Its General Partner
By: EIP Capital Corporation
Its General Partner
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: PRESIDENT
|
POLARIS INDUSTRIES L.P.
By: Polaris Industries Associates L.P.
Its General Partner
By: Polaris Industries Capital Corporation
Its General Partner
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: CHAIRMAN
|
EIP ASSOCIATES L.P.
By: EIP Capital Corporation
Its General Partner
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: PRESIDENT
|
POLARIS INDUSTRIES ASSOCIATES L.P.
By: POLARIS INDUSTRIES CAPITAL
CORPORATION
Its General Partner
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: CHAIRMAN
|
POLARIS INDUSTRIES CAPITAL CORPORATION
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: CHAIRMAN
|
EIP CAPITAL CORPORATION
By: /s/ VICTOR K. ATKINS, JR.
--------------------------------------
Name: Victor K. Atkins, Jr.
Title: PRESIDENT
|
THE PARTNERSHIP GP PARTNERS
(as set forth on Annex I hereto)
/s/ VICTOR K. ATKINS, JR. ------------------------------------------ Victor K. Atkins, Jr., the general partner |
EIP I, L.P., a limited partner
By: EIP I, Inc. Its General Partner
By: /s/ RON HIRAM
--------------------------------------
Name: Ron Hiram
Title: PRESIDENT
|
LB I GROUP INC., a limited partner
By: /s/ RON HIRAM
--------------------------------------
Name: Ron Hiram
Title: VICE PRESIDENT
|
THE OPERATING PARTNERSHIP GP PARTNERS
(as set forth on Annex II hereto)
LB I GROUP INC., a limited partner
By: /s/ RON HIRAM
--------------------------------------
Name: Ron Hiram
Title: VICE PRESIDENT
/s/ VICTOR K. ATKINS, JR.
------------------------------------------
VICTOR K. ATKINS, JR., A GENERAL PARTNER
/S/ G. A. MYLES
------------------------------------------
G.A. Myles, a limited partner
|
THE EIPCC STOCKHOLDERS
(as set forth on Annex III hereto)
/s/ VICTOR K. ATKINS, JR. ------------------------------------------ Victor K. Atkins, Jr. /s/ NANCY FLAHERTY ------------------------------------------ Nancy Flaherty /s/ WALTER D. O'HEARN ------------------------------------------ Walter D. O'Hearn /s/ ANN ROGERS EGAN ------------------------------------------ Ann Rogers Egan |
ANNEX I
PARTNERSHIP GP PARTNERS
PERCENTAGE
OF
PARTNERSHIP TRANSFERORS'
PARTNERSHIP GP PARTNER GP INTERESTS NUMBER
- -------------------------------------------------- ---------------------- ----------
EIP I L.P......................................... 45% ltd. partner 41.0526%
c/o Lehman Brothers Holdings, Inc.
3 World Financial Ctr.
New York, NY 10285
Victor K. Atkins, Jr.............................. 40% gen'l partner 36.4912%
(LESS PRIORITY DISTRIBUTION TO LB I GROUP, INC.,
PURSUANT TO THE PARTNERSHIP GP PARTNERSHIP AGREEMENT)
c/o EIP Capital Corporation
33 Flying Point Road
Southampton, NY 11968
LB I Group Inc.................................... 5% ltd. partner 4.5614%
(PLUS PRIORITY DISTRIBUTION FROM VICTOR K. ATKINS, JR.,
PURSUANT TO THE PARTNERSHIP GP PARTNERSHIP AGREEMENT)
c/o Lehman Brothers Holdings Inc.
3 World Financial Ctr.
New York, NY 10285
--
----------
TOTAL..................................... 90% 82.1052%
--
--
----------
----------
|
ANNEX II
OPERATING PARTNERSHIP GP PARTNERS
PERCENTAGE
OF
OPERATING PARTNERSHIP TRANSFERORS'
OPERATING PARTNERSHIP GP PARTNER GP INTERESTS NUMBER
- -------------------------------------------------- ---------------------- ----------
LB I Group Inc.................................... 50% ltd. partner 4.3860%
c/o Lehman Brothers Holdings, Inc.
3 World Financial Ctr.
New York, NY 10285
Victor K. Atkins, Jr.............................. 40% gen'l partner 3.5087%
c/o EIP Capital Corporation
33 Flying Point Road
Southampton, NY 11968
G.A. Myles........................................ 5% ltd. partner .4386%
c/o EIP Capital Corporation
33 Flying Point Road
Southampton, NY 11968
--
----------
TOTAL..................................... 95% 8.3333%
--
--
----------
----------
|
ANNEX III
EIPCC STOCKHOLDERS
PERCENTAGE
OF
NUMBER TRANSFERORS'
EIPCC STOCKHOLDER OF SHARES NUMBER
- -------------------------------------------------- ---------- ----------
Victor K. Atkins, Jr.............................. 50 6.8296%
c/o EIP Capital Corporation
33 Flying Point Road
Southampton, NY 11968
Walter D. O'Hearn, Jr............................. 10 1.3659%
c/o Keane Securities Co., Inc.
50 Broadway, 13th Floor
New York, NY 10004
Ann Rogers Egan................................... 5 .6830%
c/o EIP Capital Corporation
33 Flying Point Road
Southampton, NY 11968
Nancy A. Flaherty................................. 5 .6830%
167 Nancy Lane
Wyckoff, NJ 07481
--
----------
TOTAL..................................... 70 9.5615%
--
--
----------
----------
|
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation is required by Minnesota law to indemnify all officers and directors of the Corporation for expenses and liabilities (including attorneys' fees) incurred as the result of proceedings against them in connection with their capacities as officers or directors. In order to be entitled to indemnification with respect to a purported act or omission, an officer or director must (i) have acted in good faith, (ii) have received no improper personal benefit, (iii) in the case of a criminal proceeding, have had no reasonable cause to believe the conduct to be unlawful, and (iv) reasonably believed that the conduct was in the best interests of the Corporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The exhibits filed as part of this Registration Statement are listed below. The pages contained in the executed copy of the Registration Statement filed with exhibits thereto have been numbered sequentially in the lower right hand corner of each page. The exhibits described below may be found in such copy of the registration statement at the relevant page described under the column "Sequential Page Number" on the Exhibit Index attached hereto.
EXHIBIT
NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------------------------------
(2) Agreement and Plan of Conversion, dated as of September 29, 1994 (included as Annex D
to the Proxy Statement/Prospectus).
(3)(a)** Articles of Incorporation of Polaris Industries Inc., as amended.
(b)* By-laws of Polaris Industries Inc.
(4)* Specimen stock certificate of Polaris Industries Inc.
(5)* Opinion of Kaplan, Strangis & Kaplan, P.A.
(8)* Opinion of Stroock & Stroock & Lavan.
(10)(a)* Certificate of Limited Partnership of Polaris Industries Partners L.P.
(b)* Certificate of Limited Partnership of Polaris Industries L.P.
(c) Amended and Restated Limited Partnership Agreement of Polaris Industries Partners
L.P., incorporated by reference to Exhibit A to the Prospectus contained in the Form
S-1.
(d)* Amendment to Amended and Restated Limited Partnership Agreement of Polaris Industries
Partners L.P.
(e) Form of Beneficial Assignment Certificate, incorporated by reference to Exhibit 4(a)
to the Form S-1.
(f) Profit Sharing Plan, incorporated by reference to Exhibit 10(f) to the Form S-1.
(g) Retirement Savings Plan, incorporated by reference to Exhibit 10(g) to the Form S-1.
(h) 1987 Management Ownership Plan, incorporated by reference to Exhibit 10(h) to the Form
S-1.
(i) 1987 Employee Ownership Plan, incorporated by reference to Exhibit 10(i) to the Form
S-1.
(j) Management Bonus Plan, incorporated by reference to Exhibit 10(j) to the Form S-1.
|
II-1
EXHIBIT
NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------------------------------
(k) Minutes of Meeting of Board of Directors of Polaris Industries Capital Corporation,
dated March 3, 1988, incorporated by reference to Exhibit 10(j) to the Form 10-K for
Polaris Industries Partners L.P., dated as of April 11, 1988.
(l) Management Agreement, incorporated by reference to Exhibit 10(k) to the Form S-1.
(m) Plymouth, Minnesota, Executive Office Lease, incorporated by reference to Exhibit
10(m) to the Form S-1.
(n) Transamerica Commercial Finance Corporation, formerly Borg Warner Acceptance
Corporation Repurchase Agreement, incorporated by reference to Exhibit 10(p) to the
Form S-1.
(o) First Bank National Association, formerly First National Bank of Minneapolis Line of
Credit Agreement, incorporated by reference to Exhibit 19 to the Quarterly Report on
Form 10-Q for Polaris Industries Partners L.P., dated as of November 12, 1987.
(p) Intentionally Omitted.
(q) Subsidiaries of Polaris Industries Partners L.P., incorporated by reference to Exhibit
22 to the Form 10-K for Polaris Industries partners L.P., dated as of April 11, 1988.
(r) Consent of McGladrey & Pullen incorporated by reference to Exhibit 24 to the Form 10-K
for Polaris Industries Partners L.P., dated as of December 31, 1993.
(s)** Form of Registration Rights Agreement.
(11)** Computation of Net Income Per Unit (not covered by Auditor's Report).
(23)(a) Consent of Kaplan, Strangis & Kaplan, P.A. (contained in Exhibit 5).
(b) Consent of Stroock & Stroock & Lavan (contained in Exhibit 8).
(c)* Consent of McGladrey & Pullen.
(d)* Consent of McGladrey & Pullen.
(99)(a) Fairness Opinion of Smith Barney Shearson Inc. (included as Annex B to the Proxy
Statement/Prospectus).
(b) Fairness Opinion of Dillon, Read & Co. Inc. (included as Annex C to the Proxy
Statement/Prospectus).
(c)** Consent of Beverly F. Dolan to be named as a prospective director of Polaris
Industries Inc., dated September 15, 1994.
(d)** Consent of Kenneth D. Larson to be named as a prospective director of Polaris
Industries Inc., dated September 15, 1994.
(e)** Consent of Robert S. Moe to be named as a prospective director of Polaris Industries
Inc., dated September 20, 1994.
(f)** Consent of Stephen G. Shank to be named as a prospective director of Polaris
Industries Inc., dated October 7, 1994.
(g)** Consent of Gregory R. Palen to be named as a prospective director of Polaris
Industries Inc., dated October 7, 1994.
(h)** Consent of Andris A. Baltins to be named as a prospective director of Polaris
Industries Inc., dated October 19, 1994.
(i)* Form of Proxy Card.
(j)* Presentation Materials of Smith Barney Inc., dated May 31, 1994
(k)* Presentation Materials of Smith Barney Inc., dated June 1994
|
II-2
EXHIBIT
NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------------------------------
(l)* Presentation Materials of Smith Barney Inc., dated July 13, 1994
(m)* Presentation Materials of Smith Barney Inc., dated July 1994
(b) Financial Statement Schedules:
Independent Auditor's Report on Financial Statement Schedules.
Schedule VIII -- Valuation and Qualifying Accounts.
Schedule IX -- Short-Term Borrowings.
Schedule X -- Supplementary Income Statement Information.
- ------------------------
* Filed herewith.
** Previously filed.
|
II-3
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
The undersigned Registrant hereby undertakes that every prospectus: (i) that is filed pursuant to paragraph (l) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1993 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, Polaris Industries Inc., has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on the 18th day of November, 1994.
POLARIS INDUSTRIES INC.
By: ______/S/_W. HALL WENDEL, JR._____
TITLE: Chairman of the Board and
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
Chairman of the Board and Chief
/S/W. HALL WENDEL, JR. Executive Officer and Director November 18, 1994
W. Hall Wendel, Jr. (Principal Executive Officer)
Executive Vice President, Chief
/S/JOHN H. GRUNEWALD Financial Officer and Secretary
John H. Grunewald (Principal Financial and November 18, 1994
Accounting Officer)
|
II-5
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULES
To the Partners
Polaris Industries Partners L.P.
Our audit of the financial statements of POLARIS INDUSTRIES PARTNERS L.P. (a Delaware limited partnership) included schedules VIII, IX and X contained herein, for the years ended December 31, 1991, 1992, and 1993.
In our opinion, such schedules present fairly the information required to be set forth therein in conformity with generally accepted accounting principles.
MCGLADREY & PULLEN
Minneapolis, Minnesota
February 11, 1994, except for Notes 9 and 10
as to which the date is October 14, 1994
POLARIS INDUSTRIES PARTNERS L.P.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END OF
OF PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ----------- ------------- ---------
For the Year Ended December 31, 1991:
Allowance for doubtful accounts............................. $ 403 $ 156 $ (161)(a) $ 398
Warranty reserve............................................ 3,370 7,017 (5,649)(b) 4,738
Product liability claims reserve............................ 1,822 500 (166)(c) 2,156
Workers' compensation claims reserve........................ 64 341 (225)(d) 180
For the Year Ended December 31, 1992:
Allowance for doubtful accounts............................. 398 176 (295)(a) 279
Warranty reserve............................................ 4,738 7,230 (6,263)(b) 5,705
Product liability claims reserve............................ 2,156 500 (198)(c) 2,458
Workers' compensation claims reserve........................ 180 471 (349)(d) 302
For the Year Ended December 31, 1993:
Allowance for doubtful accounts............................. 279 482 (196)(a) 565
Warranty reserve............................................ 5,705 14,220 (8,513)(b) 11,412
Product liability claims reserve............................ 2,458 1,250 (195)(c) 3,513
Workers' compensation claims reserve........................ 302 351 (390)(d) 263
- ------------------------
(a) Uncollected receivables written off, net of recoveries.
(b) Warranty credits issued, net of recoveries.
(c) Claims paid, net of recoveries.
(d) Workers' compensation claims paid.
|
POLARIS INDUSTRIES PARTNERS L.P.
SCHEDULE IX -- SHORT-TERM BORROWINGS
(IN THOUSANDS)
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE END OF INTEREST DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD (A) PERIOD (B)
- ------------------------- ----------- ----------- ----------- ----------- -------------
For the Year Ended December 31, 1991:
Note payable to bank.............................. $ -- -- $ 9,000 $ 8,500 8.50%
For the Year Ended December 31, 1992:
Note payable to bank.............................. -- -- 23,900 11,500 6.28
For the Year Ended December 31, 1993:
Note payable to bank.............................. -- -- 3,900 -- 6.00
- ------------------------
(a) Average amount outstanding during the period is computed by dividing the
total month-end outstanding principal balances by the number of months the
note was outstanding.
(b) Weighted average interest rate disclosed is equal to actual interest rate
on amounts outstanding.
|
POLARIS INDUSTRIES PARTNERS L.P.
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992, AND 1993 1991 1992 1993 - ------------------------------------------------------------------------------- --------- --------- --------- Maintenance and repairs........................................................ $ * $ * $ * Depreciation and amortization of intangibles................................... 7,560 7,427 7,166 Taxes, other than payroll and income taxes..................................... * * * Royalties...................................................................... * * * Advertising costs.............................................................. 19,489 24,232 29,914 - ------------------------ * Less than 1 percent of total sales. |
BYLAWS
OF
POLARIS INDUSTRIES INC.
-O0O-
Polaris Industries Inc., a corporation organized under Minnesota Statutes Chapter 302A.
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1.01 PLACE OF MEETINGS. Each meeting of the shareholders shall be held at the principal executive office of the Corporation or at such other place as may be designated by the Board of Directors or the Chief Executive Officer; provided, however, that any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the Corporation is located.
Section 1.02 REGULAR MEETINGS. Regular meetings of the shareholders may be held on an annual or other less frequent basis as determined by the Board of Directors; provided, however, that if a regular meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding three percent (3%) or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written demand given to the Chief Executive Officer or Chief Financial Officer of the Corporation. At each regular meeting the shareholders shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and may transact any other business as may properly come before them, provided, however, that no business with respect to which special notice is required by law shall be transacted unless such notice shall have been given.
Section 1.03 SPECIAL MEETINGS. A special meeting of the shareholders may be called for any purpose or purposes at any time by the Chief Executive Officer; by the Chief Financial Officer; by the Board of Directors or any two or more members thereof; or by one or more shareholders holding not less than ten percent (10%) of the voting power of all shares of the Corporation entitled to vote, who shall demand such special meeting by written notice given to the Chief Executive Officer or the Chief Financial Officer of the Corporation specifying the purposes of such meeting except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by
twenty five percent (25%) or more of the voting power of all shares entitled to vote.
Section 1.04 MEETINGS HELD UPON SHAREHOLDER DEMAND. Within 30 days after receipt of a demand by the Chief Executive Officer or the Chief Financial Officer from any shareholder or shareholders entitled to call a meeting of the shareholders, it shall be the duty of the Board of Directors of the Corporation to cause a special or regular meeting of shareholders, as the case may be, to be duly called and held on notice no later than 90 days after receipt of such demand. If the Board fails to cause such a meeting to be called and held as required by this Section, the shareholder or shareholders making the demand may call the meeting by giving notice as provided in Section 1.06 hereof at the expense of the Corporation.
Section 1.05 ADJOURNMENTS. Any meeting of the shareholders may be adjourned from time to time to another date, time and place. If any meeting of the shareholders is so adjourned, no notice as to such adjourned meeting need be given if the date, time and place at which the meeting will be reconvened are announced at the time of adjournment. At any adjourned meeting at which a quorum is present, any business may be transacted which may have been transacted at the meeting as originally noticed.
Section 1.06 NOTICE OF MEETINGS. Unless otherwise required by law, written notice of each meeting of the shareholders, stating the date, time and place and, in the case of a special meeting, the purpose or purposes, shall be given at least ten days and not more than 60 days prior to the meeting to every holder of shares entitled to vote at such meeting except as specified in Section 1.05 or as otherwise permitted by law. The business transacted at a special meeting of shareholders is limited to the purposes stated in the notice of the meeting.
Section 1.07 WAIVER OF NOTICE. A shareholder may waive notice of the date, time, place and purpose or purposes of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, unless the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.
Section 1.08 VOTING RIGHTS. Subdivision 1. A shareholder shall have one vote for each share held which is entitled to vote. Except as otherwise required by law, a holder of shares entitled to vote may vote any portion of the shares in any way the shareholder
chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all of the shares in that way.
Subdivision 2. The Board of Directors may fix a date not more than 60 days before the date of a meeting of shareholders as the record date for the determination of the holders of shares entitled to notice of and entitled to vote at the meeting. When a record date is so fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders notwithstanding any transfer of shares on the books of the Corporation after any record date so fixed. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting.
Section 1.09 PROXIES. A shareholder may cast or authorize the casting of a vote by filing a written appointment of a proxy with an officer of the Corporation at or before the meeting at which the appointment is to be effective. The shareholder may sign or authorize the written appointment by telegram, cablegram or other means of electronic transmission setting forth or submitted with information sufficient to determine that the shareholder authorized such transmission. Any copy, facsimile, telecommunication or other reproduction of the original of either the writing or transmission may be used in lieu of the original, provided that it is a complete and legible reproduction of the entire original.
Section 1.10 QUORUM. The holders of a majority of the voting power of the shares entitled to vote at a shareholder's meeting are a quorum for the transaction of business at a regular or special meeting. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of the shareholders originally present leaves less than the proportion or number otherwise required for a quorum.
Section 1.11 ACTS OF SHAREHOLDERS. Subdivision 1. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the shareholders shall take action by the affirmative vote of the holders of the greater of (a) a majority of the voting power of the shares present and entitled to vote on that item of business or (b) a majority of the voting power of the minimum number of shares entitled to vote that would constitute a quorum for the transaction of business at a duly held meeting of shareholders.
Subdivision 2. A shareholder voting by proxy authorized to vote on less than all items of business considered at the meeting shall be considered to be present and entitled to vote only with
respect to those items of business for which the proxy has authority to vote. A proxy who is given authority by a shareholder who abstains with respect to an item of business shall be considered to have authority to vote on that item of business.
Section 1.12 ACTION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action.
ARTICLE II
DIRECTORS
Section 2.01 NUMBER. The number of directors of the Corporation shall be no less than three (3) and no more than fifteen (15) as determined from time to time by the Board of Directors. Except as otherwise required in the Articles of Incorporation and as provided by Section 2.02 of this Article II, directors shall be elected by a majority of the votes cast at annual meetings of shareholders, and each director as elected shall hold office as provided in Article X of the Articles of Incorporation.
Section 2.02 VACANCIES. Vacancies on the Board of Directors resulting from the death, resignation, removal or disqualification of a director may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum. Vacancies on the Board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time such directorships are created. Each person elected to fill a vacancy shall hold office until a qualified successor is elected by the shareholders at the next regular meeting or at any special meeting duly called for that purpose.
Section 2.03 PLACE OF MEETINGS. Each meeting of the Board of Directors shall be held at the principal executive office of the Corporation or at such other place as may be designated from time to time by a majority of the members of the Board or by the Chief Executive Officer. A meeting may be held by conference among the directors using any means of communication through which the directors may simultaneously hear each other during the conference.
Section 2.04 REGULAR MEETINGS. Regular meetings of the Board of Directors for the election of officers and the transaction of any other business shall be held without notice at the place of and immediately after each regular meeting of the shareholders.
Section 2.05 SPECIAL MEETINGS. A special meeting of the Board of Directors may be called for any purpose or purposes at any time by any member of the Board by giving not less than two days' notice to all directors of the date, time and place of the meeting, provided that when notice is mailed, at least four days' notice shall be given. The notice need not state the purpose of the meeting.
Section 2.06 WAIVER OF NOTICE; PREVIOUSLY SCHEDULED MEETINGS. Subdivision 1. A director of the Corporation may waive notice of the date, time and place of a meeting of the Board. A waiver of notice by a director entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does not participate in the meeting.
Subdivision 2. If the day or date, time and place of a Board meeting have been provided herein or announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken of the date, time and place at which the meeting will be reconvened.
Section 2.07 QUORUM. The presence in person of a majority of the directors currently holding office shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time without further notice until a quorum is present. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of the directors originally present leaves less than the proportion or number otherwise required for a quorum.
Section 2.08 ACTS OF BOARD. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the Board shall take action by the affirmative vote of a majority of the directors present at a duly held meeting.
Section 2.09 PARTICIPATION BY ELECTRONIC COMMUNICATIONS. A director may participate in a Board meeting by any means of communication through which the director, other directors so participating and all directors physically present at the meeting may simultaneously hear each other during the meeting. A director so participating shall be deemed present in person at the meeting.
Section 2.10 ABSENT DIRECTORS. A director of the Corporation may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not
present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.
Section 2.11 ACTION WITHOUT A MEETING. An action required or permitted to be taken at a Board meeting may be taken without a meeting by written action signed by all of the directors. Any action, other than an action requiring shareholder approval, if the Articles of Incorporation so provide, may be taken by written action signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. The written action is effective when signed by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date.
Section 2.12 COMMITTEES. A resolution approved by the affirmative vote of a majority of the Board may establish committees having the authority of the Board in the management of the business of the Corporation only to the extent provided in the resolution. Committees may include a special litigation committee consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the Corporation in whether those rights and remedies should be pursued. Committees, other than special litigation committees and committees formed pursuant to Section 302A.673, subdivision 1, paragraph (d) of the Minnesota Statutes. Committees shall be subject at all times to the direction and control of the Board. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present at a duly held Board meeting. Section 2.03 and Sections 2.05 and 2.11 hereof shall apply to committees and members of committees to the same extent as those sections apply to the Board and directors. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director.
Section 2.13 COMPENSATION. The Board may fix the compensation, if any, of directors.
ARTICLE III
OFFICERS
Section 3.01 NUMBER AND DESIGNATION. The Corporation shall have one or more natural persons exercising the functions of the offices of Chief Executive Officer and Chief Financial Officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the Corporation, with such powers, rights, duties and responsibilities as may be determined by the Board, including, without limitation, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these Bylaws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person.
Section 3.02 CHIEF EXECUTIVE OFFICER. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Executive Officer (a)
shall have the general active management of the business of the Corporation; (b)
shall, when present, preside at all meetings of the shareholders and Board; (c)
shall see that all orders and resolutions of the Board are carried into effect;
(d) may maintain records of and certify proceedings of the Board and
shareholders; and (e) shall perform such other duties as may from time be
assigned by the Board.
Section 3.03 CHIEF FINANCIAL OFFICER. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Financial Officer (a) shall keep accurate financial records for the Corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the Corporation in such banks and depositories as the Board shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the Corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the Corporation, as ordered by the Board; (e) shall render to the Chief Executive Officer and the Board, whenever requested, an account of all of such officer's transactions as Chief Financial Officer and of the financial condition of the Corporation; and (f) shall perform such other duties as may be prescribed by the Board or the Chief Executive Officer from time to time.
Section 3.04 PRESIDENT. Unless otherwise determined by the Board of Directors, the President shall be the Chief Executive Officer of the Corporation. If an officer other than the President is designated Chief Executive Officer, the President shall perform such duties as may from time to time be assigned by the Board.
Section 3.05 VICE PRESIDENTS. Any one or more Vice Presidents, if any, may be designated by the Board of Directors as Executive Vice Presidents or Senior Vice Presidents. During the absence or disability of the President, it shall be the duty of the highest ranking Executive Vice President, and, in the absence of any such Vice President, it shall be the duty of the highest
ranking Senior Vice President or other Vice President, who shall be present at the time and able to act, to perform the duties of the President. The determination of who is the highest ranking of two or more persons holding the same office shall, in the absence of specific designation of order of rank by the Board, be made on the basis of the earliest date of appointment or election, or in the event of simultaneous appointment or election, on the basis of the longest continuous employment by the Corporation.
Section 3.06 SECRETARY. The Secretary, unless otherwise determined by the Board of Directors, shall attend all meetings of the shareholders and all meetings of the Board, shall record or cause to be recorded all proceedings thereof in a book to be kept for that purpose, and may certify such proceedings. Except as otherwise required or permitted by law or by these Bylaws, the Secretary shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board.
Section 3.07 TREASURER. Unless otherwise determined by the Board of Directors, the Treasurer shall be the Chief Financial Officer of the Corporation. If an officer other than the Treasurer is designated Chief Financial Officer, the Treasurer shall perform such duties as may from time to time be assigned by the Board.
Section 3.08 AUTHORITY AND DUTIES. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may, without the approval of the Board, delegate some or all of the duties and powers of an office to other persons.
Section 3.09 TERM. Subdivision 1. All officers of the Corporation shall hold office until their respective successors are chosen and have qualified or until their earlier death, resignation or removal.
Subdivision 2. An officer may resign at any time by giving written notice to the Corporation. The resignation is effective without acceptance when the notice is given to the Corporation, unless a later effective date is specified in the notice.
Subdivision 3. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting.
Subdivision 4. A vacancy in an office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the office of Chief Executive Officer or
Chief Financial Officer shall, be filled for the unexpired portion of the term by the Board.
Section 3.10 SALARIES. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or by the Chief Executive Officer if authorized by the Board.
ARTICLE IV
CERTIFICATE OF SHARES
Section 4.01 CERTIFICATE OF SHARES. Subdivision 1. Each certificate of shares of the Corporation shall be signed by the Chief Executive Officer, or the President or any Vice President, and the Chief Financial Officer, or the Secretary or any Assistant Secretary, but when a certificate is signed by a transfer agent or a registrar, the signature of any such officer and the corporate seal upon such certificate may be facsimiles, engraved or printed. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent or registrar of the Corporation, the certificate may be issued by the Corporation, even if the person has ceased to serve in that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue.
Subdivision 2. A certificate representing shares issued by the Corporation shall, if the Corporation is authorized to issue shares of more than one class or series, set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as they have been determined, and the authority of the Board to determine the relative rights and preferences of subsequent classes or series.
Section 4.02 DECLARATION OF DIVIDENDS AND OTHER DISTRIBUTIONS. The Board of Directors shall have the authority to declare dividends and other distributions upon the shares of the Corporation to the extent permitted by law.
Section 4.03 TRANSFER OF SHARES. Shares of the Corporation may be transferred only on the books of the Corporation by the holder thereof, in person or by such person's attorney. In the case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares. The Board of Directors, however, may appoint one or more transfer agents and registrars to maintain the share records of the Corporation and to effect transfers of shares.
Section 4.04 RECORD DATE. The Board of Directors may fix a time, not exceeding 60 days preceding the date fixed for the payment of any dividend or other distribution, as a record date for the determination of the shareholders entitled to receive payment of such dividend or other distribution, and in such case only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend or other distribution, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed.
ARTICLE V
MISCELLANEOUS
Section 5.01 EXECUTION OF INSTRUMENTS. All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Corporation shall be signed on behalf of the Corporation by the Chief Executive Officer, or the President, or any Vice President, or by such other person or persons as may be designated from time to time by the Board of Directors. If a document must be executed by persons holding different offices or functions and one person holds such offices or exercises such functions, that person may execute the document in more than one capacity if the document indicates each such capacity.
Section 5.02 ADVANCES. The Corporation may, without a vote of the directors, advance money to its directors, officers or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance.
Section 5.03 FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors.
Section 5.04 CORPORATE SEAL. The Corporation shall have no corporate seal.
ARTICLE VI
INDEMNIFICATION
Section 6.01 INDEMNIFICATION. The Corporation shall indemnify all officers and directors of the Corporation, for such expenses and liabilities, in such manner, under such circumstances and to such extent as permitted by section 302A.521 of the Minnesota Business Corporation Act, as now enacted or hereafter amended. The Board of Directors may authorize the purchase and maintenance of insurance and/or the execution of individual agreements for the purpose of such indemnification, and the Corporation shall advance all reasonable costs and expenses
(including attorneys' fees) incurred in defending any action, suit or proceeding to all persons entitled to indemnification under this Section 6.01, all in the manner, under the circumstances and to the extent permitted by Section 302A.521 of the Minnesota Business Corporation Act, as now enacted or hereafter amended. Unless otherwise approved by the Board of Directors, the Corporation shall not indemnify any employee of the Corporation who is not otherwise entitled to indemnification pursuant to this Section 6.01.
ARTICLE VII
SECURITIES OF OTHER CORPORATIONS
Section 7.01 VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf on the Corporation (a) to attend any meeting of security holders of other corporations in which the Corporation may hold securities and vote such securities on behalf of the Corporation; (b) to execute any proxy for such meeting on behalf of the Corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of the Corporation. At such meeting, the Chief Executive Officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the Corporation possesses. The board of directors may, from time to time, grant such power and authority to one or more other persons andy may remove such power and authority from the Chief Executive Officer or any other person or persons.
Section 7.02 PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the Corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the Corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon other person or persons.
ARTICLE VIII
AMENDMENTS
Section 8.01. AMENDMENTS. Subject to the power of shareholders to adopt, amend, or repeal these Bylaws as provided in Minnesota Statutes Section 302A.181, subdivision 3, any Bylaw may be amended or repealed by the Board of Directors at any meeting, provided that, after adoption of the initial Bylaws, the Board shall not adopt, amend, or repeal a Bylaw fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board, or fixing the number
of directors or their classifications, qualifications, or terms of office. The Board may adopt or amend a Bylaw to increase the number of directors.
EXHIBIT 4
POLARIS
COMMON STOCK POLARIS INDUSTRIES INC.
SEE REVERSE FOR
INCORPORATED UNDER THE LAWS OF THE CERTAIN DEFINITIONS
STATE OF MINNESOTA CUSIP 731068 10 2
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
POLARIS INDUSTRIES INC.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this certificate properly endorsed.
This certificate is not valid until countersigned and registered by the
transfer agent and registrar.
IN WITNESS WHEREOF, the said Corporation has caused this certificate to be
signed in facsimile by its duly authorized officers.
Dated
/s/ Jon H. Grunewald /s/ W. Hall Wendel, Jr.
SECRETARY CHIEF EXECUTIVE OFFICER
|
The Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued by the Corporation, so far as they have been determined, and the authority of the board of directors of this Corporation to determine the relative rights and preferences of subsequent classes or series.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--____________Custodian____________
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________
in common (State)
|
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________ HEREBY SELL, ASSIGN, AND TRANSFER,
UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
--------------------------------------------------------------------SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
__________________________________________________________________ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION
WITH FULL POWER OF SUBSTITUTION IN THE PREMISES
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Exhibit 5
[Kaplan, Strangis & Kaplan KSK Letterhead]
November 7, 1994
Polaris Industries Inc.
1225 Highway 169 North
Minneapolis, Minnesota 55441
Gentlemen:
We have acted as counsel to Polaris Industries Inc., a Minnesota corporation (the "Company"), in connection with the Registration Statement on Form S-4 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), relating to the proposed issuance of up to 18,110,684 shares of the Company's Common Stock, par value (the "Common Stock"). The Common Stock is being registered in connection with the merger of PTP LP, an indirect wholly owned partnership subsidiary of the Company, with Polaris Industries Partnership L.P. (the ""Merger'') pursuant to an Agreement and Plan of Conversion between the Company and Polaris Industries Partners L.P., a Delaware Limited Partnership, dated as of September 29, 1994 (the ""Conversion Agreement''). The Common Stock is described in the Proxy Statement/Prospectus included in the Registration Statement to which this opinion is an exhibit.
We have examined an executed copy of the Registration Statement (including the exhibits thereto), the Articles of Incorporation of the Company filed with the Secretary of State of the State of Minnesota (the "Articles") and such corporate records,
Polaris Industries Inc. -2- November 17, 1994
documents and other instruments and have made such other examinations and inquiries as we have deemed necessary to enable us to express the opinions set forth herein.
Based upon the foregoing and subject to the qualifications and limitations stated herein, and assuming the effectiveness of the Registration Statement under the Act, we are of the opinion that:
The shares of Common Stock issuable uponthe Merger have been duly authorized and, upon issuance, delivery and exchange as described in the Conversion Agreement, will be validly issued, fully paid and nonassessable.
The opinions set forth herein relate solely to the laws of the State of Minnesota and the federal laws of the United States.
We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the prospectus forming a part of the Registration Statement.
Very truly yours, Kaplan, Strangis & Kaplan, P.A.
EXHIBIT 8
November 16, 1994
Polaris Industries Partners L.P.
1225 Highway 169 North
Minneapolis, Minnesota 55441
Ladies and Gentlemen:
We have acted as counsel to Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership"), and EIP Associates L.P., a Delaware limited partnership and the general partner of the Partnership (the "General Partner"), in connection with the proposal to convert the Partnership to corporate form (the "Conversion") pursuant to the Agreement and Plan of Conversion dated as of September 29, 1994 (the "Plan of Conversion") among the Partnership, the General Partner, Polaris Industries Inc., a Delaware corporation (the "Company") and the other parties named therein. Unless otherwise defined herein, capitalized terms used herein have the same meanings as set forth in the Plan of Conversion.
We have reviewed the following documents pertaining to the Conversion: (i) Amendment No. 1 dated November 10, 1994, to the Registration Statement on Form S-4, filed on behalf of the Company pursuant to the Securities Act of 1933, as amended, with the Securities and Exchange Commission; (ii) the Proxy Statement/Prospectus forming part of the Registration Statement (the "Prospectus"), subject to completion, dated November 10, 1994; (iii) the Plan of Conversion; (iv) the Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of September 9, 1987, as heretofore amended; (v) the Agreement of Limited Partnership of Polaris Industries L.P., a Delaware limited partnership (the "Operating Partnership"), dated as of September 9, 1987; (vi) the Amended and Restated Limited Partnership Agreement of the General Partner, dated as of July 1, 1994; (vii) the Amended and Restated Agreement of Polaris Industries Associates L.P. (the "Operating General Partner"), dated as of July 1, 1994; and (viii) such other documents as we have deemed necessary or relevant for the purposes of this opinion. In this regard, we have assumed that the partnership agreements described above of the Partnership, the Operating Partnership, the General Partner and the Operating General Partner are the documents pursuant to which each of such entities, respectively, have operated to the date hereof. As to various questions of fact material to this opinion, where relevant facts were not independently established by us, we have relied upon statements of, and written information provided by, representatives of the Partnership, the Operating Partnership, the General Partner, the Operating General Partner and the Company, and certain holders of Units of Beneficial Assignment of Class A Interests in the Partnership. We have also examined such matters of law as we have deemed necessary or appropriate for the purposes of this opinion and the opinions attributed to us in the Prospectus. We note that our opinions are based on our examination of such law, our review of the
Polaris Industries Partners L.P.
November 16, 1994
documents described above, the statements, representations and assumptions referred to above and in the Prospectus, the provisions of the Internal Revenue Code of 1986, as amended, the regulations and published rulings thereunder, and the judicial interpretations thereof currently in effect. Any change in applicable law or any of the facts and circumstances described in the Prospectus, or inaccuracy of any statements, representations or assumptions on which we have relied, may affect the continuing validity of these opinions. The continuing validity of these opinions is conditioned upon the receipt, on and as of the Closing Date, of written representations provided by representatives of the Partnership, the Operating Partnership, the General Partner, the Operating General Partner and the Company, and certain holders of Units of Beneficial Assignment of Class A Interests in the Partnership, as to certain factual matters.
We further note that we have not independently verified any of the assumptions set forth in the Prospectus, and we express no opinion with respect thereto.
Subject to the caveats and conditions set forth above, and to the discussion set forth under the heading "Certain Federal Income Tax Considerations" in the Prospectus, it is our opinion that the discussion contained in the "Certain Federal Income Tax Considerations" section of the Prospectus presents a fair and reasonable analysis of all material Federal income tax issues relevant to a holder of Units of Beneficial Assignment of Class A Interests in the Partnership. As indicated under such heading, the discussion contained in the "Certain Federal Income Tax Considerations" section of the Prospectus does not address all aspects of taxation that may be relevant to particular taxpayers in light of their personal circumstances or to certain types of taxpayers (including dealers in securities, insurance companies, non-U.S. persons, financial institutions and tax-exempt entities) subject to special treatment under the Federal income tax laws, and this opinion, to the extent relevant, does not cover such persons. In addition, the Prospectus correctly represents the nature and extent of the opinions attributed to us therein with respect to the Federal income tax consequences of the Conversion. We note, however, that the tax matters relating to the Conversion are complex and are subject to varying interpretations. Some of these matters involve issues with respect to which the tax law is not clear and is in a state of flux. Thus, there can be no assurance that the Internal Revenue Service would not take a position in conflict with the opinions expressed in the Prospectus and that such position might not ultimately be sustained by the courts.
Polaris Industries Partners L.P.
November 16, 1994
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-4 of which the Prospectus is a part and to the use of our name in the section entitled "Certain Federal Income Tax Considerations" in the Prospectus.
Very truly yours,
/s/ Stroock & Stroock & Lavan STROOCK & STROOCK & LAVAN |
EXHIBIT 10(a)
STATE OF DELAWARE PAGE 1
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY "POLARIS INDUSTRIES PARTNERS L.P." IS DULY FORMED UNDER THE LAWS OF THE STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL EXISTENCE SO FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE SIXTEENTH DAY OF NOVEMBER, A.D. 1994.
AND I DO HEREBY FURTHER CERTIFY THAT THE ANNUAL TAXES HAVE BEEN PAID TO
DATE.
[Seal] /s/ EDWARD J. FREEL
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION: 7304055
DATE: 11-16-94
|
EXHIBIT 10(b)
STATE OF DELAWARE PAGE 1
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY "POLARIS INDUSTRIES L.P." IS DULY FORMED UNDER THE LAWS OF THE STATE OF DELAWARE AND IS IN GOOD STANDING AND HAS A LEGAL EXISTENCE SO FAR AS THE RECORDS OF THIS OFFICE SHOW, AS OF THE SIXTEENTH DAY OF NOVEMBER, A.D. 1994.
AND I DO HEREBY FURTHER CERTIFY THAT THE ANNUAL TAXES HAVE BEEN PAID TO
DATE.
[Seal] /s/ EDWARD J. FREEL
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION: 7304052
DATE: 11-16-94
|
FIRST AMENDMENT
This First Amendment (the "First Amendment") to the Amended and Restated Limited Partnership Agreement of Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership"), dated August 18, 1993 between EIP Associates L.P., a Delaware limited partnership and the general partner of the Partnership (the "General Partner"), and Polaris Industries Holdings Inc., a Delaware corporation and the initial limited partner of the Partnership (the foregoing are sometimes collectively referred to herein as the "Parties").
WITNESSETH:
WHEREAS, the Parties entered into an Amended and Restated Limited Partnership Agreement dated as of September 9, 1987 (the "Agreement");
WHEREAS, the General Partner has obtained the consent of two- thirds in interest of the BAC Holders (as defined in the Agreement) to amend the Agreement as set forth in this First Amendment; and
WHEREAS, the Parties desire to amend certain provisions of the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual promises contained in this First Amendment and intending to be legally bound hereby, the Parties agree as follows:
1. The following definitions shall be amended to read in their entireties as follows:
"ADJUSTED CONTRIBUTION' means, with respect to a BAC Holder or Class B BAC Holder, $10 per BAC or per Class B BAC reduced by all distributions to such Holder of Net Cash from Sales or Refinancings pursuant to Section 8.2(d)."
"'FIRST RIGHTS' means the rights to acquire up to a fixed number of BACs issuable to senior management, middle management and employees pursuant to the 1987 Management Ownership Plan and the 1987 Employee Ownership Plan adopted by the Partnership substantially in the form of Exhibits to the Registration Statement, as such Plans may be amended from time to time."
"'HUTTON' means E.F. Hutton & Company Inc., a Delaware corporation, and its successors and assigns."
"'SECOND RIGHTS' means the rights to acquire up to a fixed number of BACs issued to the General Partner in the form of a Second Rights Certificate substantially in the form of Exhibit 10(j) to the Registration Statement, as such Certificate may be amended from time to time."
2. The first sentence of Article III of the Agreement is amended to read in its entirety as follows:
"The principal place of business and the principal executive and administrative office of the Partnership is located at 1225 Highway 169 North, Minneapolis, MN 55441."
3. The first sentence of Article VI of the Agreement is amended to read in its entirety as follows:
"The General Partner of the Partnership is EIP Associates L.P., having offices at 1225 Highway 169 North, Minneapolis, MN 55441."
4. The third sentence of Article VI of the Agreement is amended to read in its entirety as follows:
"The address of the Management Agent is 33 Flying Point Road, Southampton, New York 11968."
5. Section 8.2(d) of the Agreement is amended to replace "$20" with "$10".
6. The preamble to Section 9.3(b) of the Agreement is amended to replace "$20" with "$10".
7. Section 9.3(b)(iv) of the Agreement is amended to replace "$20" with "$10".
8. The preamble to Section 9.3(c) of the Agreement is amended to replace "$20" with "$10".
9. Section 9.3(c)(iv) of the Agreement is amended to replace "$20" with "$10".
10. Section 9.3(d)(iv) of the Agreement is amended to replace "$20" with "$10".
11. Section 9.3(d)(v) of the Agreement is amended to replace "$20" with "$10".
12. Section 9.11(b) of the Agreement is amended to replace "$20" with "$10".
13. Section 10.1(a) of the Agreement is amended by inserting the following after the sixth sentence thereof:
"In the event of any other issuance of BACs hereunder, the General Partner will issue to the Initial Limited Partner, and the Initial Limited Partner will be credited on the books and records of the Partnership with, the number of Class A Interests corresponding to the number of BACs issued."
14. Section 10.1(a) of the Agreement is amended to replace the eighth sentence thereof (after taking into account the insertion provided for in Paragraph 13 above) with the following:
"In addition, upon the conversion of Class B BACs by a Class B BAC Holder pursuant to Article XV hereof, exercise of a First or Second Right by a Rights Holder, or other issuance of BACs hereunder, the converting Class B BAC Holder, exercising Rights Holder or other such Holder will be deemed to have assigned the Class A Interests received upon conversion, exercise or otherwise to the Initial Limited Partner in exchange for the assignment by the Initial Limited Partner of all its rights and interests in and to such Class A Interests, except as provided below."
15. Section 11.2(a) of the Agreement is amended to add a new paragraph (xx) as follows:
"(xx) to effect splits of Limited Partnership Interests and BACs, and to make appropriate conforming changes to this Agreement (including, without limitation, changing per BAC dollar amounts);"
and to redesignate existing paragraphs (xx), (xxi), (xxii) and (xxiii) as paragraphs (xxi), (xxii), (xxiii) and (xxiv), respectively.
16. The first sentence of Article XV of the Agreement is amended to replace "12,000,000" with "40,000,000".
17. The first two sentences of Section 15.1 of the Agreement are amended to read in their entirety as follows:
"15.1 CLASS A INTERESTS. Of the 40,000,000 authorized Class A Interests, 11,250,000 shall be reserved for issuance to the Initial Limited Partner in connection with the Offering of BACs and any split of such Class A Interests, 2,500,000 shall be reserved for issuance to the Initial Limited Partner upon conversion of the Class B BACs pursuant to Sections 15.2 and 15.3 hereof and any split of such Class A Interests, and 2,400,000 and 850,000 shall be reserved for issuance to the Initial Limited Partner upon exercise of the First Rights and Second Rights, respectively, and any split of such First or Second Rights or Class A Interests. The General Partner is authorized to cause the issuance of the remaining 23,000,000 BACs as well as any BACs not sold in the Offering, utilized upon conversion of Class B BACs, exercise of First Rights or Second Rights or issued in any split, at any time or from time to time, to any Persons, in order to raise additional capital, acquire assets, redeem or retire Partnership Indebtedness, repurchase BACs if required pursuant to Section 9.9, provide benefits to employees of the Partnership of the Operating Partnership, effect any split or for any other Partnership purpose, all without any consent or approval of the Limited Partners."
18. Section 15.3 of the Agreement is amended to insert "(in each case, prior to the effect of any split)" after the words "Right exercised".
19. Section 22.11 of the Agreement is amended to read in its entirety as follows:
"22.11 NOTICE. A copy of any Notification of the Partnership or General Partner shall be sent to EIP Capital Corporation, 33 Flying Point Road, Southampton, New York 11968."
20. Any further changes to the Agreement necessary to effect the split of Class A Interests and related BACs or First or Second Rights described above are hereby considered to have been made, and the General Partner is authorized to take such action as is required to evidence such changes.
IN WITNESS WHEREOF, the Parties have executed this First Amendment on August 18, 1993.
GENERAL PARTNER:
EIP ASSOCIATES L.P.
By: EIP CAPITAL CORPORATION
Its General Partner
By: /s/ Victor K. Atkins, Jr.
------------------------------
Victor K. Atkins, Jr.
President
|
LIMITED PARTNER:
POLARIS INDUSTRIES HOLDINGS INC.
Title:
"15.1 CLASS A INTERESTS. Of the 40,000,000 authorized Class A Interests, 11,250,000 shall be reserved for issuance to the Initial Limited Partner in connection with the Offering of BACs and any split of such Class A Interests, 2,500,000 shall be reserved for issuance to the Initial Limited Partner upon conversion of the Class B BACs pursuant to Sections 15.2 and 15.3 hereof and any split of such Class A Interests, and 2,400,000 and 850,000 shall be reserved for issuance to the Initial Limited Partner upon exercise of the First Rights and Second Rights, respectively, and any split of such First or Second Rights or Class A Interests. The General Partner is authorized to cause the issuance of the remaining 23,000,000 BACs as well as any BACs not sold in the Offering, utilized upon conversion of Class B BACs, exercise of First Rights or Second Rights or issued in any split, at any time or from time to time, to any Persons, in order to raise additional capital, acquire assets, redeem or retire Partnership Indebtedness, repurchase BACs if required pursuant to Section 9.9, provide benefits to employees of the Partnership of the Operating Partnership, effect any split or for any other Partnership purpose, all without any consent or approval of the Limited Partners."
18. Section 15.3 of the Agreement is amended to insert "(in each case, prior to the effect of any split)" after the words "Right exercised".
19. Section 22.11 of the Agreement is amended to read in its entirety as follows:
"22.11 NOTICE. A copy of any Notification of the Partnership or General Partner shall be sent to EIP Capital Corporation, 33 Flying Point Road, Southampton, New York 11968."
20. Any further changes to the Agreement necessary to effect the split of Class A Interests and related BACs or First or Second Rights described above are hereby considered to have been made, and the General Partner is authorized to take such action as is required to evidence such changes.
IN WITNESS WHEREOF, the Parties have executed this First Amendment on August 18, 1993.
GENERAL PARTNER:
EIP ASSOCIATES L.P.
By: EIP CAPITAL CORPORATION
Its General Partner
President
INITIAL LIMITED PARTNER:
POLARIS INDUSTRIES HOLDINGS INC.
By: /s/ Ron Hiram
------------------------------
Name: Ron Hiram
Title: President
|
EXHIBIT (23)(C)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report, dated February 11, 1994, except for Notes 9 and 10 as to which the date is October 14, 1994, on the financial statements of Polaris Industries Partners L.P. (a Delaware Limited Partnership) included in or made a part of this Registration Statement. We also consent to the reference to our Firm under the captions "Experts" and "Selected Financial Data and Summary of Operations" in such Prospectus.
McGLADREY & PULLEN
Minneapolis, Minnesota
November 18, 1994
EXHIBIT (23)(D)
CONSENT OF INDEPENDENT ACCOUNTANTS
____We hereby consent to the use of our report, dated September 23, 1994, on the financial statement of Polaris Industries Inc. included in or made a part of this Registration Statement. We also consent to the reference to our Firm under the captions "Experts" and "Selected Financial Data and Summary of Operations" in such Prospectus.
McGLADREY & PULLEN
Minneapolis, Minnesota
November 18, 1994
POLARIS INDUSTRIES PARTNERS L.P.
PROXY FOR MEETING OF BAC HOLDERS TO BE HELD
DECEMBER 22, 1994 AND ANY ADJOURNMENT THEREOF
The undersigned BAC Holder hereby instructs the Initial Limited Partner to
vote all Class A Limited Partnership Interests of the Partnership which the
undersigned is entitled to direct the voting of (PLEASE CHECK ONE):
/ / FOR / / AGAINST / / ABSTAIN
a proposal (the "Conversion Proposal") to approve the Agreement and Plan of Conversion, dated as of September 29, 1994, by and among Polaris Industries Partners L.P. (the "Partnership"), Polaris Industries Inc. (the "Corporation"), EIP Associates L.P., Polaris Industries L.P., EIP Capital Corporation and the other persons named therein, pursuant to which, among other matters, a newly formed subsidiary partnership of the Corporation will be merged with and into the Partnership, with the Partnership as the surviving entity, and each BAC then outstanding will be exchanged for one share of Common Stock of the Corporation.
Capitalized terms used but not defined herein shall have the meanings set forth in the Proxy Statement/ Prospectus distributed by order of EIP Associates L.P., the general partner of the Partnership (the "General Partner"), on or about November 21, 1994. THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER.
THE GENERAL PARTNER AND THE SPONSORS RECOMMEND THAT BAC HOLDERS VOTE "FOR"
THE CONVERSION PROPOSAL.
This Proxy Card, when properly executed, constitutes an instruction to the
Initial Limited Partner to vote for, against or to abstain with respect to the
Conversion Proposal as directed herein by the undersigned BAC Holder. IF NO
DIRECTION IS MADE, THIS PROXY CARD, WHEN SIGNED AND DELIVERED, WILL CONSTITUTE
AN INSTRUCTION TO VOTE FOR THE CONVERSION PROPOSAL. ABSTENTION OR FAILURE TO
FORWARD A PROXY OR TO VOTE AT THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS
IF A BAC HOLDER HAD VOTED "AGAINST" THE CONVERSION PROPOSAL.
Please sign exactly as name appears below. When BACs are held by joint
tenants, both must sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature(s):
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Exhibit 99(j)
PROJECT REDWING
MAY 31, 1994
SMITH BARNEY SHEARSON INC.
SMITH BARNEY SHEARSON INC.
- - Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
- - Travelers Inc. and Smith Barney Shearson. . . . . . . . . . . . . . . 2.
- - Overview of Redwing . . . . . . . . . . . . . . . . . . . . . . . . . 3.
- Historical Perspective
- Current Status
- Redwing Summary Financial Data
- Redwing Projected Performance
- Redwing Summary Ownership Profile
- - Comparable Company Analysis: Selected MLP Companies . . . . . . . . . 4.
|
- - Comparable Company Analysis: Selected Outdoor Product C-Corporations. 5.
- - Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
- - Strategic Alternatives. . . . . . . . . . . . . . . . . . . . . . . . 7.
- Taxable as a C-Corp Status in 1997 (Do Nothing)
- Grandfathering - MLP Forever
- Sale of Company
- Leveraged Recapitalization
- Summary Quantitative Analysis of Strategic Alternatives
- - Summary of Plan of Leveraged Recapitalization . . . . . . . . . . . . 8.
- Objectives of Leveraged Recapitalization
- Transaction Structure
- Summary of Distributions
- Benefits of Leveraged Recapitalization
|
PROJECT REDWING
|
TABLE OF CONTENTS (CONTINUED)
- - Leveraged Recapitalization & Pro Forma Valuation Analysis . . . . . . 9.
- - Selected Mergers and Acquisitions . . . . . . . . . . . . . . . . . . 10.
- - Cumulative Rate of Return Analysis. . . . . . . . . . . . . . . . . . 11.
- - Ownership Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . 12.
- Redwing Individual Shareholder Analysis
- Detailed MLP Ownership Analysis
- Detailed Comparable Company Ownership Analysis
- - Overview of Smith Barney Shearson . . . . . . . . . . . . . . . . . . 13.
|
1
|
PROJECT REDWING
|
- - Smith Barney Shearson ("SBS") has analyzed Redwing from the perspective of the investment community.
- - Redwing has an outstanding track-record of performance and excellent prospects.
- - Almost 30% of Redwing's stock is in SBS system.
- Management of the Company own approximately 13%.
- - Redwing faces tremendous uncertainty brought on by the anticipated expiration of MLP status in 1997. Pressure to address this issue will increase particularly with L.P. concern over potential loss of liquidity in their investment.
- - In addition, the Company has numerous strategic and investment opportunities available in the near term which may be restricted by the MLP structure.
- - These factors combine to place Redwing at a strategic crossroads.
- - In this environment an analysis of comparable MLP's and operating companies yields a clear conclusion: Redwing is trading at a discount to its potential value.
- - This discount appears to be directly related to Redwing's MLP status.
- - These factors may make Redwing vulnerable to a "low ball" acquisition offer.
- - A Leveraged Recapitalization and conversion to corporate form yields excellent results for Unitholders delivering:
- Upfront cash
- Long-term value
- Tax efficiency
- - The Travelers is one of the world's leading diversified financial services companies with assets of $100 billion and a market capitalization of over $12 billion.
- - SBS is a leading Investment Banking firm with $2.1 billion of equity capital.
- - SBS has more than 11,000 Financial Consultants in more than 500 offices throughout the United States.
- - SBS clients control approximately $334 billion of assets in 5 million accounts.
- - SBS has a highly regarded worldwide Institutional Network with more than 360 professionals located in the U.S. and overseas.
- - SBS has highly ranked securities research capability.
- - SBS is a leading underwriter of securities. In 1993 we ranked:
- #2 in Common Stock
- #1 in IPOs
- #2 in Preferred Stock
- #2 in Convertible Debt.
- - SBS Advisory Activities have more than doubled during past 12 months including high profile representation of Viacom in the acquisition of Paramount.
- - SBS is also establishing a $1.1 billion Bridge Fund for acquisition financing, private investment and other merchant banking and other activities.
SMITH BARNEY: OVERVIEW
Graphic:
Map of United States outlining Smith Barney offices by state.
Text:
Smith Barney: Overview
521 offices in 49 states and Puerto Rico
Overview
Channel Sales People Offices Accounts
Retail (1) 11,240 506 5,107,300
Middle Market (2) 241 114 5,000
Institutional (1) 265 15 2,837
- --------------------
(1) Includes Robinson-Humphrey
(2) The Middle market sales force is a component of
the retail sales force
|
SMITH BARNEY: RETAIL DISTRIBUTION
Graphic:
Pie chart representing client asset profile of Smith
Barney
Text:
Smith Barney: Retail Distribution
Client Asset Profile
$334 Billion (1)
Common Stock 32.6% $109 Billion Preferred Stock 2.0% $ 7 Billion Government Bonds 8.3% $ 28 Billion Municipal Bonds 16.2% $ 54 Billion Mutual Funds 15.4% $ 51 Billion Money Market Funds 10.1% $ 34 Billion High Yield 1.6% $ 5 Billion Corporate Bonds 3.4% $ 11 Billion Other 10.5% $ 35 Billion - ----------------------- (1) Includes Robinson-Humphrey |
HISTORICAL PERSPECTIVE
- - Redwing assets were purchased from Textron in a management led LBO in June 1981.
- - Redwing was primarily a manufacturer of snowmobiles and related equipment (over 80% of sales).
- - In 1987 Redwing became a public company via an initial public offering of BACs at $10 per unit (split adjusted) in 1987 through EF Hutton.
- - Many BACs continue to be held by their original purchasers and now reside in the Smith Barney Shearson system following acquisition of EF Hutton by Shearson and Shearson by Smith Barney.
- - Redwing has delivered outstanding operating and financial performance since its IPO.
- - Revenues and net income have increased from $171.5 million and $17.6 million in 1988 to $528.0 million and $45.8 million in 1993, respectively. This represents an excess of 20% compound annual growth.
- - Price of BACs have increased from $10 per unit to $33. Cumulative pre-tax distributions per unit to date of $14.48 (split adjusted). [Original purchasers tax basis approximately $7.00.]
- - Total return since IPO of approximately 900% vs. 197% for S&P 500.
CURRENT STATUS
- - Manufacturer of snowmobiles, ATVs and personal watercraft with leading
market shares in attractive markets.
- Snowmobiles - industry leader - #1 market share with 40% share -
moderate growth
- ATVs - #3 market share position - some growth as market moves from
utility/commercial to consumer
- Personal watercraft - introduced in 1992 - #3 market share position -
rapidly growing market
- Accessories - 15% of sales - grows with success of core products
- - Overall market for outdoor recreation products expected to grow at a brisk pace with underlying economy.
- - Redwing has several attractive investment opportunities: Capacity expansion, engine production and strategic acquisitions are available.
- - BACs are trading on a current yield basis of 7.4%.
- - The Company has no debt.
- - The Company has virtually no institutional ownership or sponsorship.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
-------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
SALES
Snowmobiles $120,047 $162,554 $198,418 $178,606 $207,262 $264,006
ATVs 27,440 46,097 56,268 74,419 95,955 137,283
PWC - - - - 26,867 47,521
Clothing, accessories & parts 24,010 33,967 41,461 44,652 53,735 79,202
-------- -------- -------- -------- -------- --------
Total $171,497 $242,618 $296,147 $297,677 $383,818 $528,011
Gross Profit $ 56,448 $ 83,362 $ 99,730 $ 95,794 $114,619 $144,095
Depreciation and Amortization 12,116 19,651 17,199 19,378 21,827 25,912
Other operating expenses 25,869 37,410 51,719 44,698 52,101 64,956
-------- -------- -------- -------- -------- --------
Operating income $ 18,463 $ 26,301 $ 30,812 $ 31,718 $ 40,691 $ 53,227
Total net income $ 17,605 $ 26,190 $ 31,363 $ 31,462 $ 34,701 $ 45,813
Allocated to General Partner 350 1,489 6,523 6,544 7,218 9,529
Allocated to limited partners 17,255 24,701 24,840 24,918 27,483 36,284
CASH FLOW DATA
EBITDA $ 30,579 $ 45,952 $ 48,011 $ 51,096 $ 62,518 $ 79,139
Cash flow from operating activities $ 37,542 $ 44,447 $ 54,782 $ 46,642 $ 55,316 $ 79,323
Cash purchases of property & equipment 2,724 7,065 7,158 15,988 12,295 18,126
Cash distributions declared
Class A BACs $ 13,436 $ 26,883 $ 31,642 $ 33,724 $ 35,250 $ 37,396
Class B BACs 3,933 3,783 2,083 - - -
General Partner 353 1,848 8,857 8,857 9,257 9,821
-------- -------- -------- -------- -------- --------
Total $ 17,722 $ 32,514 $ 42,582 $ 42,581 $ 44,507 $ 47,217
BALANCE SHEET DATA
Cash and cash equivalent $ 15,599 $ 27,886 $ 32,025 $ 20,098 $ 19,094 $ 33,798
Current assets 36,377 60,344 66,893 59,200 74,999 109,748
Total assets 118,070 137,628 138,704 135,509 146,681 180,548
Current liabilities 20,665 38,875 46,602 52,646 69,054 98,055
Partner's capital 97,405 98,753 92,102 82,863 77,627 82,493
-------- -------- -------- -------- -------- --------
UNIT AND TRADING DATA
Year End Price Per BAC $7.69 $12.25 $13.69 $19.13 $22.81 $33.75
High 7.75 12.31 13.68 19.25 22.88 34.63
Low 7.56 12.12 13.50 19.00 22.56 33.75
BACs outstanding 14,038 14,988 15,036 15,062 15,868 16,115
Net income per unit $ 1.23 $ 1.65 $ 1.65 $ 1.65 $ 1.73 $ 2.25
Cash distributions declared
per unit to Class A BACs $ 1.20 $ 2.27 $ 2.50 $ 2.50 $ 2.50 $ 2.51
|
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA (a)
SALES
Snowmobiles $280,681 $327,189 $352,669 $383,920 $406,956
ATVs 209,283 243,094 262,025 285,244 302,359
PWC 102,277 118,801 128,052 139,400 147,764
Clothing, accessories & parts 85,595 99,423 107,166 116,662 123,662
-------- -------- -------- -------- --------
Total $678,836 $788,507 $849,912 $925,217 $980,740
Gross Profit $185,843 $218,936 $231,561 $249,763 $264,748
Depreciation and Amortization $ 16,700 $ 18,836 $ 22,226 $ 22,817 $ 24,186
Other operating expenses 92,108 104,814 109,623 120,830 128,080
-------- -------- -------- -------- --------
Operating income $ 71,789 $ 91,842 $ 95,642 $101,616 $110,097
CASH FLOW DATA
EBITDA $ 93,735 $114,122 $121,938 $128,933 $136,668
Cash distributions declared
Class A BACs $ 40,449 $ 40,449 $ 40,449 $ 40,449 $ 40,449
General Partner 9,529 9,529 9,529 9,529 9,529
-------- -------- -------- -------- --------
Total $ 49,978 $ 49,978 $ 49,978 $ 49,978 $ 49,978
Cash distributions declared
per unit to Class A BACs $ 2.52 $ 2.52 $ 2.52 $ 2.52 $ 2.52
BACs outstanding 16,210 16,210 16,210 16,210 16,210
(a) Before goodwill amortization and certain other partnership charges.
|
- ---------------------------------------------------------
% of Total
----------
Management 2,320 14.3%
Insiders & 5% Owners 396 2.4%
Institutional 367 2.3%
Retail Float 13,127 81.0%
------ ------
Total 16,210 100.0%
- ---------------------------------------------------------
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- ---------------------------------------------------------
Purchase Year
Shares %
------ ---
IPO 2,712 19.3
1989 2,234 14.9
1990 1,857 12.4
1991 1,921 12.8
1992 2,127 13.4
1993 455 2.8
- ---------------------------------------------------------
|
- ------------------------------------------------------------
REDWING SHARES IN THE SBS SYSTEM BY DIVISION
DIVISION QUANTITY CUSTOMERS
-------- -------- ---------
1 Michigan 541,512 495
2 Midwest 342,726 784
3 Southern 327,217 436
4 N. California 303,377 475
5 Illinois 297,336 428
6 Mid South 263,280 498
7 Mountain 234,049 376
8 Southwestern 229,649 352
9 Southeast 181,851 273
10 North Central 158,740 199
11 Central Pa. 128,799 213
12 San Francisco 128,017 141
13 Southern Florida 125,070 182
14 Mid California 114,949 153
15 Northwest 109,304 230
16 N. Florida 106,423 189
17 South California 105,244 166
18 L.A. Metro 100,843 122
19 Washington 90,472 170
20 Chesapeake Bay 88,983 132
21 New England 84,477 161
22 N.Y. Suburban 68,494 94
23 North East 68,448 121
24 Ohio 65,693 174
25 N. New Jersey 49,937 59
26 Manhattan 47,288 66
27 Departmental 1,000 1
28 SB Inst'l Other Div. 500 1
- ---------------------------------------------------------------
Total 4,363,678 6,691
% of BACs 27%
Outstanding (1)
- ---------------------------------------------------------------
(1) 16,210 BACs outstanding as of 3/31/94.
|
- - At the peak in 1987 there were approximately 71 MLP's which had a market capitalization exceeding $25 million. Natural Resource MLP's (Timber and Oil and Gas) represented 28.2% of this total by number.
- - At the peak, there were 41 non-natural resource MLPs. Since then almost 50% have ceased to be MLPs, most electing to return to C-Corp status or electing REIT status.
- - Redwing appears to be the only MLP that was ever in a manufacturing business.
- - The universe of MLP comparables consists of three "operating companies". These companies are not ideal comparables: One owns and operates an NBA franchise, another an amusement park and the third distributes industrial supplies.
- - On a current yield basis Redwing trades at a modestly higher yield implying a discounted value to these MLP's -- MLP comparables average yield 6.6% vs 7.4% for Redwing.
- - On an EBITDA basis Redwing trades at a discount -- MLP comparables average EBITDA multiple 8.8x vs. Redwing 7.2x.
- - On an EPS basis Redwing also trades at a discount to the MLP comparables that generated earnings.
- - In general Redwing is trading at a modest discount to the trading values of this group of MLP comparables.
- - However, based on Redwing's strong performance and prospects it should trade at a substantial premium to the averages, and more in line with Cedar Fair which has also achieved excellent operating performance.
- - One reason for this underperformance is a low level of institutional ownership. Cedar Fair is the only comparable with any significant institutional ownership which may also explain its premium valuation relative to the MLP comparables.
Current
Filing Market
Offer Ticker Amount Capital-
Date Issuer Symbol Business Description ($ mil) ization Current Status
- -------- --------------------------- ------ ------------------------------- ------- ------- -----------------------------------
HOMEBUILDERS/DEVELOPERS
08/16/85 UDC-Universal Development UDC Construct homes; RE development $30.8 $71.20 Converted to C-Corp
03/05/86 Newhall Land & Farming NHL Real estate development firm 59.2 537.56 MLP
06/17/86 * NVHomes NVH Build homes, condos, apts 19.8 Private
11/20/86 * Cal Fed Income Partners CFI Real estate agents 75.0 LP, Now "CF Income Partners" -
Bankruptcy/Delisted 3/1/94
01/15/87 Standard Pacific LP SPF Construct homes;mnfr furniture 51.1 290.76 Converted to C-Corp
02/06/87 * Emerald Homes EHP Construct single family homes 27.5 MLP - Suspended 10/19/92
02/11/87 Interstate General LP IGC RE development firm, RE agency 24.0 70.57 MLP
REALTY AGENTS
08/19/86 * US Realty Partners USRL Real estate agent 38.0 0.08 MLP
06/18/87 * Fine Homes International FHI Real estate brokerage services 120.0 Acquired by Merryl Lynch Mortgage
Corp.
REAL ESTATE
08/10/84 Southwest Realty SWL Operate residential buildings 14.5 190.67 Converted to a REIT - Now
"Southwestern Properties Trust"
08/20/86 EQK Green Acres EGA Operate a shopping mall 92.6 87.74 Converted to a REIT
12/23/86 Equitable Real Estate EQM Own and operate shopping malls 107.0 16.05 MLP
Shopping
04/09/87 Shopco Laurel Centre LSC Own, operate a shopping mall 46.6 15.73 MLP
07/23/87 Sahara Casino Partners SAH Own, op hotels and casinos 62.0 51.01 Converted to C-Corp - Merged with
Sahara Gaming Corp.
08/28/87 * American Income Properties IPS Operate shopping centers 50.0 Acquired by Dial REIT
INVESTMENT MANAGEMENT
10/03/86 Airlease FLY Lease commercial aircraft 79.6 73.42 MLP
11/12/86 Commonwealth Mortgage CMA Mortgage bank 125.0 Liquidated Assets 9/30/92
America
05/21/87 Reich & Tang RTP Mutual fund invt advisory svcs 36.9 587.89 MLP, Now "New England Investors"
07/01/87 Oppenheimer Capital OCC Venture capital firm 99.0 351.63 MLP
11/17/87 Thomson McKinnon Asset TMA Investment management svcs 36.3 358.75 MLP, Now "Thomson Advisory Group
Mgmt LP LP."
04/14/88 Alliance Capital Mgmt AC Investment advisory services 66.6 1,497.86 MLP
CABLE T.V.
05/12/86 * Vista Organization TVOP Produce, dist motion pictures 60.0 Private
Partnership
11/20/86 Jones Intercable Investors JTV Operate cable TV systems 46.4 82.19 MLP
12/23/86 Falcon Cable Systems FAL Own, operate cable TV systems 82.9 62.39 Converted to C-Corp
02/27/87 * De Laurentiis Film Partners DFP Produce, dist motion pictures 65.0 Private
03/12/87 Galaxy Cablevision GTV Own, operate cable TV systems 43.0 34.14 MLP
|
Current
Filing Market
Offer Ticker Amount Capital-
Date Issuer Symbol Business Description ($ mil) ization Current Status
- -------- --------------------------- ------ ------------------------------- ------- ------- -----------------------------------
HOTEL/RESTAURANT
02/20/86 Burger King Investors BKP Lease Burger King restaurants $81.40 $75.32 MLP
10/09/86 Perkins Family Restaurant PFR Operate, franchise restaurants 65.6 188.25 MLP
12/17/86 Prime Motor Inns LP PMP Operate hotels, holding co 70.0 4.00 MLP
03/27/87 Allstar Inns SAI Own and operate hotels 99.4 1.85 Converted to C-Corp
04/07/87 Red Lion Inns RED Operate hotels, holding co 95.8 101.80 MLP
07/23/87 Aircoa Hotel partners AHT Operate Hotels 50.0 14.69 MLP
Motel Six SIX Owns and Operates Hotels Sold
12/19/86 Winchell's Donut Houses WDH Operate retail bakeries 114.0 Company liquidated 11/24/89
HEALTH CARE
10/21/86 Angell Care Master ACR Lease nursing home facilities 68.0 140.34 Converted to REIT, Now "Health
Equity Properties"
12/19/86 Forum Retirement Partners FRL Rental retirement centers 74.2 32.48 MLP
OPERATING COMPANIES
12/04/86 Boston Celtics BOS Professional basketball team 52.0 129.50 MLP
02/05/87 Sun Distributors SDP Wholesale industrial supplies 96.9 116.55 MLP
04/07/87 Maritrans Partners TUG Marine transportation svcs 117.5 61.05 Converted to C-Corp
04/23/87 Cedar Fair FUN Own, operate amusement parks 164.0 745.04 MLP
* Indicates prices are unavailable
|
Multiples of Market Value
---------------------------
LTM
Unit Tang. ----------------
Price Current Market Book Net Cash
Company Symbol 05/26/94 Yield Value Value(2) Income Flow(3)
- ------- ------ -------- ------- ------ -------- ------ -------
Boston Celtics Limited Partnership BOS $20.125 6.2% $128.8 NM x NM x 8.0 x
Sun Distributors L.P. SDP $ 7.441(1) 7.4% $240.6 2.7 13.1 9.1
Cedar Fair, L.P. FUN $32.875 6.1% $731.1 8.3 14.5 11.2
---------------------------------------------------------
MEAN 6.6% 5.5 x 13.8 x 9.4 x
MEDIAN 6.2% 5.5 13.8 9.1
HIGH 7.4% 8.3 14.5 11.2
LOW 6.1% 2.7 13.1 8.0
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Redwing (5) SNO $34.000 7.4% $554.4 6.9 x 14.5 x 8.1 x
- ------------------------------------------------------------------------------------------------------
Multiples of Price as a
AMV Multiple
------------------------ of Projected
Adjusted LTM LTM Cal. EPS
Market ----------------------- ------------------------- ---------------
Company Value(4) Sales EBITDA EBIT Sales EBITDA EBIT 1994 1995
- ------- -------- ----- ------ ---- ----- ------ ---- ---- ----
Boston Celtics Limited Partnership $135.4 $83.1 $25.4 $9.3 1.6 x 5.3 x 14.5 x NA x NA x
Sun Distributors L.P. $352.6 $655.7 $36.8 $28.9 0.5 9.6 12.2 NA NA
Cedar Fair, L.P. $817.7 $178.9 $72.0 $57.5 4.6 11.4 14.2 12.6 11.5
--------------------------------------------------------------------------------------
MEAN 2.2 x 8.8 x 13.6 x 12.6 x 11.5 x
MEDIAN 1.6 9.6 14.2 12.6 11.5
HIGH 4.6 11.4 14.5 12.6 11.5
LOW 0.5 5.3 12.2 12.6 11.5
--------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Redwing (5) $547.4 $566.4 $76.1 $55.6 1.0 x 7.2 x 9.8 x 12.1 x 10.1 x
- ---------------------------------------------------------------------------------------------------------------
|
IMPLIED
LATEST TWELVE MONTHS UNIT 5 YEAR TOTAL
------------------------------------ INCOME PROJ. DEBT
GROSS EBITDA EBIT NET GROWTH GROWTH AS A %
COMPANY MARGIN MARGIN MARGIN MARGIN '94E-'95E (6) OF CAP. BUSINESS DESCRIPTION
- ------- ------ ------ ------ ------ --------- --- ------- --------------------
Boston Celtics Limited 66.9% 30.6% 11.3% -0.7% NA NA 374.7% (7) Owns and operates the
Partnership Boston Celtics
Cedar Fair, L.P. 89.1% 40.2% 32.1% 28.1% 10.0% 9.5% 46.5% Owns and operates three
amusement parks
Sun Distributors L.P. 38.6% 5.6% 4.4% 2.8% NA NA 62.2% Wholesale distributor of
industrial products
------------------------------------------------------------------------
64.9% 25.5% 15.9% 10.1% 10.0% 9.5% 54.4%
66.9% 30.6% 11.3% 2.8% 10.0% 9.5% 54.4%
89.1% 40.2% 32.1% 28.1% 10.0% 9.5% 374.7%
38.6% 5.6% 4.4% -0.7% 10.0% 9.5% 46.5%
------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Redwing (5) 28.6% 13.4% 9.8% 6.7% 20.5% 20.0%(8) NM Manufactures snowmobiles
and related products
- -----------------------------------------------------------------------------------------------------------------------------------
NOTES
- --------------------------------------------------------------------------------
(1) Weighted average of class A and class B unit prices.
(2) Tangible Book Value is defined as shareholders' equity minus intangible
assets.
(3) Cash flow is defined as net income from cont. operations plus depreciation,
amortization and deferrals.
(4) Adjusted market value is defined as market value of the common equity plus
net debt (total debt less cash) plus book value of preferred stock.
(5) Net income projections are taken from the latest John G. Kinnard & Co.
research report. Earnings are not tax-effected.
(6) Five year growth projections from IBES (Institutional Brokerage Estimate
Services).
(7) Total debt/total capitalization is greater than 100% due to the fact that
shareholders' equity is negative.
(8) Projected growth provided by latest Kinnard & Co. research report.
Outliers are shaded and are not included in median and mean calculations.
|
CASH DISTRIBUTIONS PER UNIT
--------------------------------------------------------
1989 1990 1991 1992 1993 5 YEAR CAGR
----- ----- ----- ----- ----- -----------
Company
- ------------------------------------
Boston Celtics Limited Partnership $1.60 $1.35 $1.40 $2.25 $1.25 -6.0%
Sun Distributors L.P. $1.40(1) $0.69 $0.46 $0.46 $0.55 -7.4%(1)
Cedar Fair, L.P. $1.18 $1.35 $1.53 $1.73 $1.93 13.0%
Redwing $2.27 $2.50 $2.50 $2.50 $2.51 2.5%
EARNINGS PER UNIT
--------------------------------------------------------
1989 1990 1991 1992 1993 5 Year CAGR
----- ----- ----- ----- ----- -----------
Company
- ------------------------------------
Boston Celtics Limited Partnership $1.88 $1.19 $0.32 $0.18 $0.80 -19.2%
Sun Distributors L.P. $1.67(1) $0.69 $0.46 $0.54 $0.55 -7.4%(1)
Cedar Fair, L.P. $1.48 $1.55 $1.68 $1.96 $2.75 16.8%
Redwing $1.65 $1.65 $1.65 $1.73 $2.25 8.1%
|
EARNINGS AS A % OF DISTRIBUTION
-----------------------------------------------------------
1989 1990 1991 1992 1993
------ ------ ------ ------ -------
- --------------------------------------------------------------------------------------------------
Boston Celtics Limited Partnership 117.5% 88.1% 22.9% 8.0% 64.0%
Sun Distributors L.P. 119.3% 100.0% 100.0% 117.3% 100.0%
Cedar Fair, L.P. 125.4% 114.8% 110.2% 113.6% 142.9%
Redwing 72.7% 66.0% 66.0% 69.2% 89.6%
- -------------------------------------------------------------------------------------------
(1) In 1989, no class B units were outstanding (compared to 21,675,746 in later
years). Growth rate calculated for years 1990 - 1993.
|
ADJUSTED
MARKET VALUE/ PRICE/PROJ. MARKET VALUE/ NUMBER OF
EBITDA (1) EARNINGS (1) YIELD (1) CASH FLOW (1) COMPANIES
--------- ----------- -------- ------------ ---------
HOMEBUILDERS/DEVELOPERS
LTM 18.1 NA 0.7% 9.4 1
1993 24.5 NA 0.0% 11.0
1992 NM NA 0.0% NM
1991 7.9 NA 0.0% 11.6
1990 9.0 NA 20.9% 3.1
1989 33.5 NA 10.2% 5.5
REAL ESTATE
LTM 28.8 NA 18.7% 9.1 2
1993 NA NA 22.2% NA
1992 16.3 NA 28.6% 8.0
1991 6.1 NA 25.0% 7.9
1990 7.5 NA 33.5% 8.5
1989 13.5 NA 14.3% 11.5
INVESTMENT MANAGEMENT
LTM 10.4 8.1 9.1% 10.5 5
1993 20.0 12.0 6.7% 16.1
1992 33.9 9.9 10.1% 10.1
1991 35.3 5.1 10.8% 9.7
1990 23.4 5.1 13.7% 11.0
1989 24.1 4.1 11.0% 9.5
|
ADJUSTED
MARKET VALUE/ PRICE/PROJ. MARKET VALUE/ NUMBER OF
EBITDA(1) EARNINGS(1) YIELD(1) CASH FLOW(1) COMPANIES
------------- ----------- --------- ------------- ---------
CABLE T.V.
LTM 10.6 NA 3.0% 9.0 2
1993 11.1 NA 2.5% 10.4
1992 5.1 NA 15.3% 5.8
1991 5.4 NA 7.0% 6.7
1990 5.0 NA 15.2% 13.7
1989 6.7 NA 9.7% 17.5
HOTEL/RESTAURANT
LTM 8.9 10.5 5.2% 7.1 5
1993 13.7 9.1 5.0% 9.9
1992 10.8 7.6 6.0% 10.0
1991 8.6 6.9 6.6% 8.1
1990 9.1 8.6 16.9% 5.6
1989 11.7 5.3 9.4% 6.7
HEALTH CARE
LTM 10.8 NA 0.0% 19.8 1
1993 8.8 NA 0.0% 22.7
1992 5.6 NA 0.0% NA
1991 NA NA 0.0% NA
1990 7.1 NA 22.9% 10.6
1989 6.0 NA 60.4% NA
|
Adjusted
Market Value/ Price/Proj. Market Value/ Number of
EBITDA(1) Earnings(1) Yield(1) Cash Flow(1) Companies
------------- ----------- -------- ------------- ---------
Operating Companies
LTM 8.8 12.6 6.6% 9.4 3
1993 24.7 14.6 8.8% 14.3
1992 22.7 13.2 11.0% 14.2
1991 19.7 11.8 10.2% 10.8
1990 17.4 17.3 10.7% 10.6
1989 10.7 13.6 10.3% 5.9
Oil, Gas, and Natural Resource Companies
LTM 6.8 13.3 8.7% 9.2 30
1993 16.2 16.1 8.9% 8.0
1992 15.6 17.2 13.8% 6.7
1991 17.4 13.1 8.8% 7.7
1990 16.2 15.5 11.2% 6.9
1989 22.3 12.7 9.6% 9.9
Total
LTM 10.1 12.2 7.9% 8.0 49
1993 13.1 12.8 7.6% 10.3
1992 11.8 12.7 8.8% 7.5
1991 14.7 9.8 8.6% 8.2
1990 10.5 11.4 14.0% 7.4
1989 14.9 9.7 10.3% 9.5
Notes:
(1) Stock prices as of December 31, except for LTM. For adjusted market value,
cash flow and EBITDA, fiscal year end balance sheets and income statements
were used.
|
(Shares in Thousands)
Boston Celtics Cedar Fair Sun Distributors
---------------------------- --------------------------- --------------------------
% of Shares % of Shares % of Shares
Shares Outstanding Shares Outstanding Shares Outstanding
----------- ----------- ----------- ----------- ----------- -----------
Total Institutional Ownership 35 0.5% 6,992 31.4% 1,506 14.1%
Number of Accounts 4 63 21
Average Account Size 9 111 72
Top 5 Institutional Accounts 35 4,568 1,278
% of Institutional Ownership 100.0% 65.3% 84.9%
Insiders and Beneficial Owners 886 13.8% 3,835 17.2% 120 1.1%
Implied Retail Ownership 5,479 85.6% 11,413 51.3% 9,040 84.8%
Total Units Outstanding 6,400 100.0% 22,240 100.0% 10,666 100.0%
Redwing
----------------------------
% of Shares
Shares Outstanding
----------- -----------
Total Institutional Ownership 367 2.3%
Number of Accounts 20
Average Account Size 18
Top 5 Institutional Accounts 269
% of Institutional Ownership 73.3%
Insiders and Beneficial Owners 2,716 16.8%
Implied Retail Ownership 13,127 81.0%
Total Units Outstanding 16,210 100.0%
|
- - There appear to be eight companies reasonably comparable to Redwing ranging from Arctco, a direct competitor, to Harley-Davidson, a leader in the motorcycle industry.
- - The general theme is outdoor recreation products.
- - Redwing trades at a significant discount to the comparables on a Cash Flow and EBITDA multiple basis.
REDWING COMPARABLES
Cash Flow 12.2x 13.4x
EBITDA 7.2x 10.2x
|
- - This seems contradictory for a company that should trade on a cash flow basis because it is an MLP.
- - Redwing trades approximately equal to its comparables on a pro-forma after-tax earnings basis.
- - This implies that Redwing is receiving no "valuation credit" for making distributions to its L.P.'s.
- - In addition, there is an enormous discount implied by Redwing's unleveraged balance sheet.
MULTIPLES OF MARKET VALUE
---------------------------
LTM
---------------
INDICATED TANG ADJUSTED
LATEST PRICE DIVIDEND MARKET BOOK NET CASH MARKET
COMPANY TICKER FINANCIALS 05/26/94 YIELD VALUE VALUE (1) INCOME FLOW (2) VALUE (3)
- -------- ------ ---------- -------- --------- -------- ---------- ------ -------- ---------
Anthony Industries ANT Mar-94 $14.875 8.9% $167.1 2.3 15.6 8.9 $265.8
Arctco Inc. ACAT Mar-94 $27.875 0.8% $549.7 4.6 21.5 18.4 $473.1
Brunswick Corp. BC 03/30/94 $24.500 5.4% $2,352.1 20.0 33.1 12.4 $2,559.6
Coleman Co. Inc. CLN Mar-94 $28.000 0.0% $750.6 9.2 20.4 12.6 $915.1
Harley-Davidson Inc. HDI Mar-94 $49.500 0.7% $1,907.3 5.5 30.9 19.9 $1,893.5
Huffy Corporation HUF Mar-94 $16.875 1.8% $253.0 2.2 16.8 7.1 $328.2
Outboard Marine Corporation OM Mar-94 $22.625 1.8% $455.2 3.3 NM NM $628.2
Winnebago Industries WGO Feb-94 $11.625 0.0% $293.7 4.4 23.0 14.2 $298.0
Mean 2.4% 6.4 23.0 13.4
Median 1.3% 4.5 20.9 12.5
High 8.9% 20.0 33.1 19.9
Low 0.0% 2.2 15.6 7.1
Redwing SNO Mar-94 $34.000 7.4% $554.4 6.9 22.3 12.2(4) $547.4
MULTIPLES OF
AMV MULTIPLE
------------------- OF PROJECTED
LTM LTM CAL. EPS
------------------------------------------------------ --------------
SALES EBITDA EBIT NI SALES EBITDA EBIT 1994 1995
-------- ------ ------ ------- ----- ------ ---- ------ -----
Anthony Industries $443.4 $28.7 $20.6 $10.7 0.6 9.3 12.9 13.5 10.6
Arctco Inc $248.4 $41.6 $37.3 $25.6 1.9 11.4 12.7 17.6 15.2
Brunswick Corp. $2,298.9 $240.9 $123.0 $71.1 1.1 10.6 20.8 24.7 16.9
Coleman Co. Inc. $595.6 $94.4 $71.6 $36.7 1.5 9.7 12.8 17.8 15.1
Harley-Davidson Inc. $1,291.5 $168.8 $134.8 $61.8 1.5 11.2 14.0 20.3 17.3
Huffy Corporation $732.1 $55.5 $35.0 $15.1 0.4 5.9 9.4 12.0 10.2
Outboard Marine Corporation $1,036.1 $66.7 $21.0 ($59.7) 0.6 9.4 NM 22.4 12.7
Winnebago Industries $426.8 $20.9 $13.0 $12.8 0.7 14.3 23.0 14.4 NA
Mean 1.0 10.2 15.1 17.9 14.0
Median 0.9 10.2 12.9 17.7 13.9
High 1.9 14.3 23.0 24.7 17.3
Low 0.4 5.9 9.4 12.0 10.2
Redwing $566.4 $76.1 $55.6 $24.9 1.0 7.2 9.8 19.0(5) 15.8(5)
|
LATEST TWELVE MONTHS RETURN 4 YEAR CAGR
----------------------------- ON AVERAGE ------------- E.P.S. DEBT
GROSS EBITDA EBIT NET ------------- NET GROWTH PROJ. AS A %
MARGIN MARGIN MARGIN MARGIN ASSETS EQUITY SALES INCOME '94E-'95E GROWTH (6) OF CAP.
------ ------ ------ ------ ------ ------ ------ ------ --------- ----------- --------
Anthony Industries 27.2% 6.5% 4.6% 2.4% 4.1% 12.1% 3.0% -4.6% -9.1% 15.0% 52.3%
Arctco Inc. 30.4% 16.8% 15.0% 10.3% 18.8% 24.1% 18.5% 20.9% 20.6% 14.5% 0.6%
Brunswick Corp. 31.5% 10.5% 5.4% 3.1% 3.6% 8.7% -6.0% NM 73.7% 14.1% 26.6%
Coleman Co. Inc. 33.8% 15.8% 12.0% 6.2% 6.6% 15.7% NA NA 20.8% 17.7% 41.9%
Harley-Davidson Inc. 29.9% 13.1% 10.4% 4.8% 10.3% 18.4% 47.6% NM 64.9% 20.1% 7.1%
Huffy Corporation 21.2% 7.6% 4.8% 2.1% 4.5% 10.9% 22.6% 47.0% NM 10.9% 40.3%
Outboard Marine Corporation 27.4% 6.4% 2.0% -5.8% NM NM -8.3% NM NM 13.8% 59.3%
Winnebago Industries 16.4% 4.9% 3.0% 3.0% 8.0% 17.2% 58.0% NM NM 22.5% 6.4%
Mean 27.2% 10.2% 7.2% 3.3% 8.0% 15.3% 14.6% 34.0% 26.5% 17.3% 29.3%
Median 28.7% 9.0% 5.1% 3.0% 5.6% 13.9% 10.8% 20.9% 20.6% 16.3% 33.5%
High 33.8% 16.8% 15.0% 10.3% 18.8% 24.1% 58.0% 47.0% 73.7% 22.5% 59.3%
Low 16.4% 4.9% 2.0% -5.8% 3.6% 8.7% -8.3% 20.9% -9.1% 14.1% 0.6%
Redwing 29% 13% 10% 4%(4) 14% 18%(4) 21% 18% 20.5% 20%(7) NM
NOTES
- ---------------
(1) Tangible Book Value is defined as shareholders' equity minus intangible
assets.
(2) Cash flow is defined as net income from cont. operations plus depreciation,
amortization and deferrals.
(3) Adjusted market value is defined as market value of the common equity plus
net debt (total debt less cash) plus book value of
preferred stock.
(4) Net income available to the limited partners tax effected at a rate of 36%.
(5) Estimated net income available to limited partners from latest Kinnard & Co.
research report tax effected at a rate of 36%.
(6) Five year growth projections from Bloomberg Financial Services.
(7) Projected growth provided by latest Kinnard & Co. research report.
|
SUMMARY OPERATING PERFORMANCE
1990 1991 1992 1993
------------------ --------------- --------------- ------------------
POLARIS COMPS (1) POLARIS COMPS POLARIS COMPS POLARIS COMPS (2)
------- --------- ------- ------ ------- ------ ------- ---------
MARGINS
Gross margin 35.4% 25.2% 34.3% 26.6% 32.4% 27.5% 29.6% 27.3%
EBITDA margin 19.4% 12.2% 19.6% 9.7% 15.8% 11.5% 15.2% 11.2%
EBIT margin 16.1% 9.7% 15.6% 7.9% 12.0% 9.5% 11.8% 9.1%
(1) Comparable companies include Arctco, Brunswick, Coleman, and Harley
Davidson. Outboard Marine is exclude from comparable
averages due to inconsistent performance.
(2) Based latest twelve months through December 31, 1993.
|
OWNERSHIP SUMMARY
ANTHONY INDUSTRIES ARCTCO INC. BRUNSWICK CORP. COLEMAN CO. INC.
------------------- ------------------- ------------------- -------------------
% OF SHARES % OF SHARES % OF SHARES % OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
------ ----------- ------ ----------- ------ ----------- ------ -----------
Institutional Ownership 3,260 30.6% 7,419 37.9% 64,285 67.5% 5,007 18.6%
Number of Accounts 30 44 165 27
Average Account Size 109 169 390 185
Top 5 Accounts 2,088 3,741 28,958 3,376
64.0% 50.4% 45.0% 67.4%
Insiders and Beneficial Owners 6,038 56.7% 8,195 41.9% 13,248 13.9% 21,687 80.8%
Implied Retail Ownership 1,349 12.7% 3,938 20.1% 17,703 18.6% 161 0.6%
Total Units Outstanding 10,647 100.0% 19,552 100.0% 95,236 100.0% 26,855 100.0%
HUFFY CORP. WINNEBAGO HARLEY DAVIDSON OUTBOARD MARINE
------------------- ------------------- ------------------- -------------------
% OF SHARES % OF SHARES % OF SHARES % OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
------ ----------- ------ ----------- ------ ----------- ------ -----------
Institutional Ownership 8,788 59.9% 5,603 22.3% 27,049 71.2% 15,551 78.5%
Number of Accounts 68 36 164 104
Average Account Size 129 156 165 150
Top 5 Accounts 3,170 3,007 6,212 7,954
36.1% 53.7% 23.0% 51.1%
Insiders and Beneficial Owners 665 4.5% 11,725 46.6% 4,173 11.0% 4,007 20.2%
Implied Retail Ownership 5,216 35.6% 7,817 31.1% 6,743 17.8% 249 1.3%
Total Units Outstanding 14,669 100.0% 25,145 100.0% 37,965 100.0% 19,807 100.0%
REDWING
-------------------
% OF SHARES
SHARES OUTSTANDING
------ -----------
Institutional Ownership 367 2.3%
Number of Accounts 20
Average Account Size 18
Top 5 Accounts 269
73.3%
Insiders and Beneficial Owners 2,716 16.8%
Implied Retail Ownership 13,127 81.0%
Total Units Outstanding 16,210 100.0%
|
Anthony Industries Inc. Manufactures and distributes a variety of products
through its Outdoor Sporting Goods, Active & Sporting
Apparel and Home Recreational Products Divisions. The
Company manufactures, among other things, skis under
the K2, Olin and PRE brand names. The Company also
makes fishing tackle, water safety products, industrial
products and others.
Arctco Inc. Designs, engineers, manufactures and markets
snowmobiles under the "Arctic Cat" brand name and a
personal watercraft under the "Tigershark" brand name.
Brunswick Corp. Manufactures pleasure and recreational boats and marine
engines. The Company is also involved in "Zebco"
fishing products, bowling centers and products and
defense related business. Brand name boats include
"Bayliner" and "Sea Ray" along with Mercury and Mariner
outboard engines.
Coleman Co. Inc. Manufactures and markets brand name consumer products
for the camping and related outdoor recreational
markets throughout the world. Products include
lanterns, stoves, coolers, jugs and sleeping bags.
Through Coleman Spas, Inc., the Company manufactures
and distributes spas.
Harley-Davidson Inc. Manufactures heavyweight motorcycles, recreational
vehicles and specialized commercial vehicles. The
Company is the only American manufacturer of
motorcycles. Through its wholly-owned subsidiary,
Holiday Rambler Corporation, it manufactures
recreational vehicles, principally motor homes and
travel trailers.
Huffy Corp. Manufactures bicycles, juvenile products, sporting
goods and offers assembly and repair services to
retailers. The Company produces "Huffy" bicycles,
portable cribs, "Gerry" car seats, infant carriers,
strollers and toilet trainers and "Temper" lawn and
garden tools.
Outboard Marine Corp. Manufactures and markets marine products for leisure
time purposes. Its principal products are outboard
and inboard engines and boats under a variety of brand
names.
Winnebago Industries Manufactures recreational vehicles. The Company
produces motor homes under the "Winnebago," "Itasca,"
"Elante" and "Vectra" brand names. Other operations
include van conversions, the manufacture of component
parts and the satellite transmission of commercials.
|
PROJECT REDWING
CONFIDENTIAL MAY 31, 1994
- --------------------------------------------------------------------------------
|
CONCLUSIONS
- - Redwing trades at a discount to its MLP peers. This discount is particularly acute in the context of Redwing's historical performance and prospects.
- - In a "performance context" Redwing should trade at equity yield, EBITDA and earnings multiples close to Cedar Fair. In fact Redwing trades at an implied discount ranging from 15% to 40%.
- - Redwing also trades at discount to its C-Corp comparables. The Cash Flow and EBITDA multiple discounts are particularly troubling for an MLP.
- - The inescapable conclusion is that Redwing is inappropriately valued by the market place.
- - Problems include:
-Equity securities address an inappropriate marketplace -- income
buyers, no growth buyers
-Lack of market recognition of performance and prospects -- no
research following
-Lack of institutional sponsorship -- less than 3% ownership
-Perception of 1997 difficulties -- volatility
-Loss of strategic direction -- opportunities
- - Historically this type of situation leads to vulnerability.
- - Redwing vulnerability is highlighted by:
-Balance Sheet Cash
-Low leverage
-Retail stock holdings
- - MLP structure and distribution policy is not appropriate for a manufacturing growth company.
TAXABLE AS A C-CORP IN 1997: This represents a "do nothing" scenario.
* UNITHOLDER OUTCOMES - Continued distributions totalling approximately $10 between now and 1997 with various after-tax taxation values to Limited Partners depending on when their BACs were purchased.
- After 1997, earnings available for distributions is reduced by corporate tax. This is not a practical alternative.
- Thus, there is a virtual certainty of material change in Redwing's financial structure and operating strategy.
PROS CONS
- -------------------------------------- --------------------------------
- - Certainty of outcome. - Pressure on market value of
BACs as '97 approaches due to
uncertainty of capital
structure and distribution
policy.
- - Maintains status quo (except for new - Vulnerability to opportunistic
corporate tax). acquiror.
- - Minimal transaction expenses. - Uncertain interest rates and
business environment.
- May not maximize current
value.
- Decrease in distributions due
to corporate tax likely to
have a negative effect on the
market price of BACs.
- MLP structure inappropriate
for manufacturing growth
company.
|
PROJECT REDWING
CONFIDENTIAL MAY 31, 1994
- --------------------------------------------------------------------------------
|
STRATEGIC ALTERNATIVES (continued)
GRANDFATHERING: Lobby Congress to enact legislation "Grandfathering" Redwing's tax status forever or over a longer term.
* UNITHOLDER OUTCOMES - Tax status will not be threatened so "status quo" continues. There will be no adverse taxation as a result of 1997 changeover.
- After 1997, no significant changes occur.
PROS CONS
- -------------------------------------- --------------------------------
- - Single level taxation preserved. - Perpetuates value discount.
- - Minimal transaction expenses. - Vulnerability to opportunistic
acquiror.
- No certainty until success
achieved. No reason for
optimism of passage of
legislation. No certainty of
timing of legislation.
- Alternative strategies can
yield higher current
unitholder value and
distributions.
- MLP structure inappropriate
for manufacturing growth
company.
|
PROJECT REDWING
CONFIDENTIAL MAY 31, 1994
- --------------------------------------------------------------------------------
STRATEGIC ALTERNATIVES (continued)
SALE OF COMPANY: Announce decision to explore ways to "enhance
shareholder value" including the possibility of a
sale.
|
* UNITHOLDER OUTCOMES - No effect on current distributions until a sale is consummated. Thereafter, sale proceeds less basis is taxable gain. Sale price could approach $50 per unit.
PROS CONS
- -------------------------------------- --------------------------------
- - Will attract many prospective buyers. - Could lose control of process
resulting in forced sale to
highest cash buyer rather than
best long term value.
- - Will achieve substantial premium to - No turning back.
current value.
- - Will be perceived as pro-active.
|
PROJECT REDWING
CONFIDENTIAL MAY 31, 1994
- --------------------------------------------------------------------------------
STRATEGIC ALTERNATIVES (continued)
LEVERAGED RECAPITALIZATION: General Partner sponsors a plan recapitalizing
Redwing via borrowings (distributed to LPs) and
converts partnership to corporate status.
|
* UNITHOLDER OUTCOMES - A single immediate cash distribution of $___ which equals nominal value of anticipated distributions between now and 1997. Otherwise, a principally non-taxable conversion of MLP units to common shares of a regular "C" corporation.
- No consequences caused by 1997.
PROS CONS
- ------------------------------------------ --------------------------------
- - Maximizes value. - Possible to lose control to a
higher offer.
- - Anticipated cash distribution delivered. - Substantial change from status
quo.
- - Premium in value delivered.
- - Pro-active.
- - 1997 uncertainty removed.
- - Capital structure stabilized -- strategic
opportunities can be addressed.
|
PROJECT REDWING
CONFIDENTIAL MAY 31, 1994
- --------------------------------------------------------------------------------
|
SUMMARY QUANTITATIVE ANALYSIS OF STRATEGIC ALTERNATIVES
(DOLLARS IN MILLION EXCEPT PER BAC)
SALE OF COMPANY TO
CORPORATE ACQUIROR
GP SPONSORED ------------------------
RECAPITALIZATION LOW HIGH
---------------- --------- ----------
Consideration to GP(1)
Cash $37.5 $13.8 $16.4
Liquidating distribution 12.0
---------------
Total $49.5
Consideration per BAC
Cash $8.82 $42.00 $50.00
Stock 36.45 0.00 0.00
----- ------ ------
Total $45.27 $42.00 $50.00
Premium to Market (2) 33.1% 26.3% 50.4%
Total Debt $166.1 NA NA
Debt/1994 EBITDA 1.3 x NA NA
1994 EBITDA/Interest 1.3 x NA NA
Debt/Total Capitalization (3) 59.8% NA NA
- -----------------------------------------------
(1) Equal to 1.99% of total value in sale of company.
(2) Redwing BAC closing price equals $34.00 on May 26, 1994.
(3) Total capitalization equals market value of NEWCO equity plus total debt.
|
OBJECTIVES:
* Maximize value for Limited Partners.
* Proactively address 1997 expiration of grandfather provision by eliminating uncertainty and avoiding risk to value of BACs.
* Take advantage of generally favorable financial and business market conditions.
* Provide Redwing with appropriate capital structure and flexibility to pursue business opportunities and growth.
TRANSACTION STRUCTURE
* Redwing L.P. makes cash distributions to Limited Partners and General Partners equal to the nominal value of expected distributions through December 1997.
* Reorganize into a public C-Corporation by distributing new shares of C-Corp stock to holders of BACs on a substantially tax free basis.
CASH STOCK (1) TOTAL
---- --------- -----
SUMMARY OF DISTRIBUTIONS GENERAL PARTNERS: '94-'97 Distributions (3) $37,549 $0 $37,549
Liquidating distributions 0 11,997 11,997
------- ------- -------
TOTAL(2) $37,549 $11,997 $49,546
LIMITED PARTNERS: '94-'97 Distributions (3) $142,975 0 $143,975
Reorganization into NEWCO 0 502,892 590,892
------- ------- -------
TOTAL $142,975 $602,889 $748,077
Per BAC $8.82 $36.45 45.27
Premium to current market $34.00 on May 26, 1994 33.1%
NOTES:
- ------
(1) Redwing C-Corp common stock equity valued at 19.0x forward 1994 net income.
(2) Assumes distributions through 1997 at current level.
|
BENEFITS OF RECAPITALIZATION
- - Maximizes value for Limited Partners. Value of cash plus new stock exceeds current price for BACs by 40%.
- - Provides cash equal to expected distributions through expiration of grandfather provision.
- - Avoids volatility in market value of BACs as 1997 approaches.
- - New capital structure provides Redwing with the flexibility to pursue strategic opportunities.
- - Provides Redwing access to institutional equity investors as a source of additional capital and support of existing equity capitalization.
- - C-Corp conversion creates substantial deferred tax asset worth approximately $75 million in cash flow over ten years.
CONFIDENTIAL PROJECT REDWING
MAY 31, 1994
- -------------------------------------------------------------------------------
LEVERAGED RECAPITALIZATION
(AMOUNTS IN THOUSANDS EXCEPT PER BAC)
|
CASH DISTRIBUTIONS
LIMITED PARTNERS
Cash distributions per BAC $8.82
BACs outstanding 16,210
----------
TOTAL CASH TO LP $142,975
----------
----------
GENERAL PARTNERS
Cash distributions $37,549
Liquidating distribution of common stock 11,997
----------
TOTAL CASH TO GP $49,546
----------
----------
SUMMARY PRO FORMA RESULTS
Pro Forma Projected
1993(1) 1994
--------- ---------
Sales $528,011 $678,836
Gross profit 156,546 185,843
EBITDA 80,372 93,735
EBIT 62,196 71,789
Interest expense 11,328 11,328
Goodwill amortization 7,741 5,496
Taxes @ 42.3% 18,230 23,234
--------- ---------
Net Income $24,897 $31,731
--------- ---------
--------- ---------
EPS $1.51 $1.92
Shares outstanding 16,539 16,539
Capital expenditures $18,126 $28,800
Free Cash Flow $55,920 $45,141
RATIOS
EBITDA/Interest 7.1 x 8.3 x
EBIT/Interest 5.5 6.3
Debt/Total Capitalization 0.8 0.6
Interest
SOURCES OF FUNDS Amount % Rate
--------- --------- ---------
Senior term debt $136,364 68.2% 7.00%
Revolving credit facility 29,713 14.9% 6.00%
Subordinated debt 0 0.0% NA
Excess balance sheet cash 33,798 16.9% 3.50%
--------- ---------
Total sources of funds $199,875 100.0%
--------- ---------
--------- ---------
USES OF FUNDS Amount
---------
Cash distributions to partners $180,524
Payment of accrued distributions 11,851
Debt refinancing 0
Transaction costs 7,500
---------
Total uses of funds $199,875
---------
---------
CAPITALIZATION
Actual Pro Forma Projected
1993 1993(1) 1994
--------- --------- ---------
Senior debt $0 $136,364 $91,224
Subordinated debt 0 0 0
Revolver 0 29,713 29,713
--------- --------- ---------
Total long term debt $0 $166,077 $120,936
Equity $82,493 $44,469 $81,446
--------- --------- ---------
Total Capitalization $82,493 $210,546 $202,382
--------- --------- ---------
--------- --------- ---------
(1) Pro forma as if reorganization was effective January 1, 1993
|
CONFIDENTIAL PROJECT REDWING
MAY 31, 1994
- -------------------------------------------------------------------------------
REDWING PRO FORMA VALUATION ANALYSIS
(DOLLARS IN MILLIONS EXCEPT PER BAC OR SHARE)
|
CURRENT PROJECTED PRICE/EARNINGS RATIOS
PRICE 5 YEAR ---------------------------------------------------------------------
COMPANY 05/26/94 GROWTH 1993A 1994P 1995P
- ------- --------- --------- ---------------------------------------------------------------------
P/E EPS (1) P/E EPS (1) P/E EPS (1)
-------- -------- -------- -------- -------- --------
Arctco Inc. $27.88 15.3% 21.3x $1.31 17.6x $1.58 15.2x $1.84
Brunswick Corp. 24.50 17.9% 43.0 0.57 24.7 0.99 16.9 1.45
Coleman Co Inc. 28.00 18.0% 21.5 1.30 17.8 1.57 15.1 1.85
Harley-Davidson Inc. 49.50 20.3% 33.4 1.48 20.3 2.4 17.3 2.86
Outboard Marine Corp. 22.63 13.5% NM (3.46) 22.4 1.0 15.5 1.79
- -------------------------------------------------------------------------------------------------------------------
MEAN: 17.0% 24.8x 16.1x 12.8x
MEDIAN: 17.9% 27.5 20.3 15.5
- -------------------------------------------------------------------------------------------------------------------
IMPLIED VALUATION PER SHARE
----------------------------------
PROJECTED
POLARIS EPS APPROPRIATE P/E RANGE IMPLIED VALUE
- ------- --------- --------------------------------- ------------------------------
1993 $1.51 22.0x 23.5x 25.0x $33.12 $35.37 $37.63
1994 $1.92 18.0 19.0 20.0 34.53 36.45 38.37
1995 1995
EPS GROWTH PROJECTED
RATE EPS IMPLIED VALUE
---------- --------- ------------------------------
1995 15.0% $2.21 15.0 16.0 17.0 $33.09 $35.30 $37.51
1995 20.0% 2.30 15.0 16.0 17.0 34.53 36.84 39.14
1995 25.0% 2.40 15.0 16.0 17.0 35.97 38.37 40.77
MEAN: $34.25 $36.47 $38.68
(1) Earnings per share are calendarized Zack's estimates as of May 27, 1994.
|
CONFIDENTIAL PROJECT REDWING
MAY 31, 1994
- -------------------------------------------------------------------------------
|
SELECTED MERGERS AND ACQUISITIONS IN THE RECREATIONAL PRODUCTS INDUSTRY
(DOLLARS IN THOUSANDS)
MULTIPLES OF MULTIPLES OF
PURCHASE PRICE TRANSACTION VALUE
--------------- ------------------
TANGIBLE
TARGET/ ANNOUNCEMENT PURCHASE TRANSACTION NET BOOK TOTAL
ACQUIROR DATE PRICE(1) VALUE(2) INCOME VALUE SALES EBITDA ASSETS DEAL SUMMARY
- ------------------- ------------ ---------- ----------- ------ -------- ----- ------ ------ ------------------------------------
Fisher-Price Inc./ 08/19/93 $1,001,644 $1,145,644 25.5 x 4.6 x 1.4 x 11.2 x 2.2 x Mattel acquired Fisher-Price in a
Mattel Inc. stock swap meger valued at $1.1
billion. Mattel offered 1.275
common shares for each Fisher price
share and assumed $144 million of
liabilities. Fisher Price
manufactures games, toys and
childrens' vehicles.
Monaco Coach Co/ 03/15/93 18,000 18,710 3.5 2.8 0.3 3.4 2.0 Monaco Coach Corp, an investor
Monaco Coach Corp group comprised of Cariad Capital,
Liberty Partners, Tucker Anthony and
the management of Monaco Coach Co,
acquired Monaco Coach Co for $18.0
million.
Tonka Corp/ 01/13/91 115,920 524,800 NM NM 0.7 8.2 0.6 Hasbro acquired Tonka for
Hasbro Bradley Inc. $540.1 million. Hasbro paid $7 in
cash per share or $115.9 million,
bondholders received $.928 on the
dollar or $178.2 million for Series
A and $.932 on the dollar or $122.1
million for Series B. Hasbro also
assumed $111 million of Tonka's long
term debt.
Coleman Co. Inc/ 03/30/89 572,632 691,823 23.4 3.3 1.1 11.5 1.6 Ronald Perelman's MacAndrews &
MacAndrews & Forbes Forbes acquired 95% of Coleman for
$74 per share or $544 million. The
transaction followed an auction of
Coleman that was prompted by a $64
per share buyout proposal from the
Coleman's Chairman (9.8x EBITDA).
MacAndrews acquired 95% of the
million shares outstanding through a
tender offer and effected merger for
the remaining shares. Coleman
manufactures outdoor recreation
products, heating, air condition and
lighting products.
|
CONFIDENTIAL PROJECT REDWING
MAY 31, 1994
- -------------------------------------------------------------------------------
MULTIPLES OF MULTIPLES OF
PURCHASE PRICE TRANSACTION VALUE
--------------- ------------------
TANGIBLE
TARGET/ ANNOUNCEMENT PURCHASE TRANSACTION NET BOOK TOTAL
ACQUIROR DATE PRICE(1) VALUE(2) INCOME VALUE SALES EBITDA ASSETS DEAL SUMMARY
- ------------------- ------------ ---------- ----------- ------ -------- ----- ------ ------ ------------------------------------
Minstar Inc- 03/03/89 $160,000 $564,927 11.0 x NM x 1.1 x 8.6 x 1.5 x Minstar sold its Sports Products
Sports Products Gro Group to HTM Sports Holding, a
HTM Sports Holding BV group of investors including
management, Freeman Spogli, Nissho
Iwai, Osawa, Komatsu and investor
Robert S. Coleman, for $160 in cash
plus the assumption of liabilities.
Minstar manufactures sporting goods.
Wilson Sporting 02/17/89 181,275 390,000 NM NM 0.9 3.0 1.2 Amer Group a Finland based tobacco,
Goods Co/ sports equipment and communications
Amer Group Ltd manufacturer acquired Wilson for
$24.17 per share plus $190 million
of assumed debt, or $390 million.
Amer bought all other outstanding
stock, warrants and convertible
securities for 22% of Wilson's 7.25
million shares.
(1) Aggregate dollar amount paid for the outstanding common and preferred
equity as well as for any convertible securities and options.
(2) Cost of acquiring stock, convertible securities and options less cash and
cash equivalents plus short term and long term debt.
|
HISTORICAL ANALYSIS
-------------------
ACTUAL TOTAL
DIVIDENDS ACTUAL BACs NET NET INCOME PRO FORMA AFTER TAX NET
PER UNIT DIVIDENDS OUTSTANDING INCOME(2) PER UNIT TAXES(3) INCOME(4)
--------- --------- ----------- -------- ---------- --------- --------------
1988 $1.20 $16,846 14,038 $17,255 $1.23 $6,212 $11,043
1989 2.27 34,023 14,988 24,701 1.65 8,892 15,809
1990 2.50 37,590 15,036 24,840 1.65 8,942 15,898
1991 2.50 37,655 15,062 24,918 1.65 8,970 15,948
1992 2.50 39,670 15,868 27,483 1.73 9,894 17,589
1993 2.51 40,449 16,115 36,284 2.25 13,062 23,222
HISTORICAL ANALYSIS
-------------------
AFTER TAX ACTUAL HISTORICAL HISTORICAL
NET INCOME AFTER TAX PRO FORMA SHAREHOLDERS AVERAGE UNIT
PER UNIT(5) DIVIDENDS(6) DIVIDENDS(7) EQUITY ROE(8) PRICE
----------- ----------- ------------- ------------ ---------- ---------
1988 $0.79 $0.82 $0.76 $97,405 11.3% $7.69
1989 1.05 1.54 1.68 98,753 16.1% $12.25
1990 1.06 1.70 1.91 92,102 16.7% $13.69
1991 1.06 1.70 1.90 82,863 18.2% $19.13
1992 1.11 1.70 1.88 77,627 21.9% $22.81
1993 1.44 1.71 1.70 82,493 29.0% $33.75
|
L.P. CUMULATIVE TOTAL RETURN
CAG
---
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
PRE TAX DIVIDENDS TO PURCHASE UNITS
BEGINNING UNITS - 13.01 15.97 19.05 21.95 24.57
DIVIDENDS(9) - $29.53 $39.92 $47.62 $54.87 $61.66
UNITS PURCHASED(10) - 2.96 3.08 2.90 2.62 2.18
ENDING UNITS 13.01 15.97 19.05 21.95 24.57 26.75
----- ------ ------ ------ ------ ------
TOTAL RETURN $100.00 $195.62 $260.72 $419.79 $560.44 $902.72 55.3%
AFTER TAX DIVIDENDS TO PURCHASE UNITS
BEGINNING UNITS - 13.01 15.02 16.99 18.75 20.27
AFTER TAX DIVIDENDS(6) - $20.08 $25.54 $28.88 $31.88 $34.60
UNITS PURCHASED(10) - 2.01 1.97 1.76 1.52 1.22
ENDING UNITS 13.01 15.02 16.99 18.75 20.27 21.49
----- ------ ------ ------ ------ ------
TOTAL RETURN $100.00 $184.01 $232.56 $358.61 $462.44 $725.44 48.6%
AFTER TAX DIVIDENDS TAKEN AS CASH
BEGINNING UNITS 13.01 13.01 13.01 13.01 13.01 13.01
AFTER TAX DIVIDENDS(6) - $20.08 $25.54 $28.88 $31.88 $34.60
----- ------ ------ ------ ------ ------
TOTAL RETURN $100.00 $179.42 $203.58 $277.65 $328.61 $473.59 36.5%
|
C CORP REINVESTMENT OF CASH FLOW - CUMULATIVE TOTAL RETURN
CAG
---
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
ROE 11.3% 16.1% 16.7% 18.2% 21.9% 29.0%
AFTER TAX INCOME $11,043 $15,809 $15,898 $15,948 $17,589 $23,222
1989 3,299 6,599 6,599 6,599 6,599
1990 3,710 7,421 7,421 7,421
1991 4,068 8,136 8,136
1992 5,191 10,382
1993 7,340
PRO FORMA NET INCOME(11) $19,108 $26,207 $34,035 $44,936 $63,099
PRO FORMA EPS $1.27 $1.74 $2.26 $2.83 $3.92
GROWTH GROUP P/E RATIO(12) 21.6x 16.4x 24.9x 24.2x 24.1x
PRO FORMA SHARE PRICE $27.54 $28.59 $56.31 $68.41 $94.20
ENDING SHARES 13.01 13.01 13.01 13.01 13.01 13.01
------ ------ ------ ------ ------ --------
TOTAL RETURN $100.00 $358.24 $371.94 $732.46 $889.80 $1,225.33 65.1%
|
C CORP SHARE REPURCHASE - CUMULATIVE TOTAL RETURN
CAG
---
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
BEGINNING SHARES 14,038 12,170 11,149 9,923 9,180
------ ------ ------ ------ ------ ------
PRO FORMA DIVIDENDS(7) $25,130 $28,648 $28,685 $29,776 $27,386
SHARES REPURCHASED(13) 1,868 1,021 1,226 743 592
------ ------ ------ ------ ------ ------
ENDING SHARES 12,170 11,149 9,923 9,180 8,588
PRO FORMA EPS $0.79 $1.30 $1.43 $1.61 $1.92 $2.70
GROWTH GROUP P/E RATIO(12) 17.1x 21.6x 16.4x 24.9x 24.2x 24.1x
PRO FORMA SHARE PRICE $13.46 $28.06 $23.39 $40.05 $46.29 $65.05
ENDING SHARES 13.01 13.01 13.01 13.01 13.01 13.01
------ ------ ------ ------ ------ ------
TOTAL RETURN $100.00 $365.00 $304.28 $520.93 $602.06 $846.17 53.3%
|
CONFIDENTIAL PROJECT REDWING
MAY 31, 1994
- --------------------------------------------------------------------------------
RATE OF RETURN ANALYSIS - REDWING (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BREAKEVEN ANALYSIS
------------------
|
ACTUAL TOTAL AFTER TAX
DIVIDENDS ACTUAL BACs NET NET INCOME PRO FORMA AFTER TAX NET NET INCOME AFTER TAX
PER UNIT DIVIDENDS OUTSTANDING INCOME(2) PER UNIT TAXES(3) INCOME(4) PER UNIT(5) DIVIDENDS(6)
--------- --------- ----------- --------- ---------- --------- ------------- ----------- ------------
1988 $1.20 $16,846 14,038 $17,255 $1.23 $6,212 $11,043 $0.79 $0.82
1989 2.27 34,023 14,988 24,701 1.65 8,892 15,809 1.05 1.54
1990 2.50 37,590 15,036 24,840 1.65 8,942 15,898 1.06 1.70
1991 2.50 37,655 15,062 24,918 1.65 8,970 15,948 1.06 1.70
1992 2.50 39,670 15,868 27,483 1.73 9,894 17,589 1.11 1.70
1993 2.51 40,449 16,115 36,284 2.25 13,062 23,222 1.44 1.71
ACTUAL HISTORICAL HISTORICAL
PRO FORMA SHAREHOLDERS AVERAGE BREAKEVEN UNIT
DIVIDENDS(7) EQUITY ROE(8) ROE(9) PRICE
------------ ------------ ---------- --------- ----------
1988 $0.76 $97,405 11.3% 7.0% $7.69
1989 1.68 98,753 16.1% 7.0% $12.25
1990 1.91 92,102 16.7% 7.0% $13.69
1991 1.90 82,863 18.2% 7.0% $19.13
1992 1.88 77,627 21.9% 7.0% $22.81
1993 1.70 82,493 29.0% 7.0% $33.75
|
L.P. CUMULATIVE TOTAL RETURN
CAG
---
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
PRE TAX DIVIDENDS TO PURCHASE UNITS
BEGINNING UNITS - 13.01 15.97 19.05 21.95 24.57
DIVIDENDS(10) - $29.53 $39.92 $47.62 $54.87 $61.66
UNITS PURCHASED(11) - 2.96 3.08 2.90 2.62 2.18
ENDING UNITS 13.01 15.97 19.05 21.95 24.57 26.75
----- ----- ----- ----- ----- ----- -----
TOTAL RETURN $100.00 $195.62 $260.72 $419.79 $560.44 $902.72 55.3%
-----
AFTER TAX DIVIDENDS TO PURCHASE UNITS
BEGINNING UNITS - 13.01 15.02 16.99 18.75 20.27
AFTER TAX DIVIDENDS(10) - $20.08 $25.54 $28.88 $31.88 $34.60
UNITS PURCHASED(11) - 2.01 1.97 1.76 1.52 1.22
ENDING UNITS 13.01 15.02 16.99 18.75 20.27 21.49
----- ----- ----- ----- ----- ----- -----
TOTAL RETURN $100.00 $184.01 $232.56 $358.61 $462.44 $725.44 48.6%
-----
AFTER TAX DIVIDENDS TAKEN AS CASH
BEGINNING UNITS 13.01 13.01 13.01 13.01 13.01 13.01
AFTER TAX DIVIDENDS(6) - $20.08 $25.54 $28.88 $31.88 $34.60
----- ----- ----- ----- ----- ----- -----
TOTAL RETURN $100.00 $179.42 $203.58 $277.65 $328.61 $473.59 36.5%
-----
|
C CORP REINVESTMENT OF CASH FLOW - CUMULATIVE TOTAL RETURN
CAG
---
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
ROE(9) 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
AFTER TAX INCOME $11,043 $15,809 $15,898 $15,948 $17,589 $23,222
1989 1,423 2,845 2,845 2,845 2,845
1990 1,548 3,096 3,096 3,096
1991 1,551 3,102 3,102
1992 1,646 3,292
1993 1,759
PRO FORMA NET INCOME(12) $17,231 $20,291 $23,440 $28,278 $37,315
PRO FORMA EPS $1.15 $1.35 $1.56 $1.78 $2.32
GROWTH GROUP P/E RATIO(13) 21.6 x 16.4 x 24.9 x 24.2 x 24.1 x
PRO FORMA SHARE PRICE $24.84 $22.14 $38.78 $43.05 $55.71
ENDING SHARES 13.01 13.01 13.01 13.01 13.01 13.01
----- ----- ----- ----- ----- ----- -----
TOTAL RETURN $100.00 $323.05 $287.98 $504.43 $559.95 $724.63 48.6%
-----
|
C CORP SHARE REPURCHASE - CUMULATIVE TOTAL RETURN
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
BEGINNING SHARES 14,038 12,170 11,149 9,923 9,180
------ ------ ------ ----- -----
PRO FORMA DIVIDENDS(7) $25,130 $28,648 $28,685 $29,776 $27,386
SHARES REPURCHASED(14) 1,868 1,021 1,226 743 592
------ ------ ------ ----- -----
ENDING SHARES 12,170 11,149 9,923 9,180 8,588
PRO FORMA EPS $0.79 $1.30 $1.43 $1.61 $1.92 $2.70
GROWTH GROUP P/E RATIO(13) 17.1 x 21.6 x 16.4 x 24.9 x 24.2 x 24.1 x
PRO FORMA SHARE PRICE $13.46 $28.06 $23.39 $40.05 $46.29 $65.05
ENDING SHARES 13.01 13.01 13.01 13.01 13.01 13.01
----- ----- ----- ----- ----- ----- -----
TOTAL RETURN $100.00 $365.00 $304.28 $520.93 $602.06 $846.17 53.3%
-----
|
Shareholder Name City State No. Units Percent
--------------------------- ------------- ----- --------- -------
General Partner Entities 850,000 5.34%
Atkins, Victor Southampton NY 2,000 0.01%
Bagley, James Princeton NJ 7,000 0.04%
Paul/Kathleen
SUB TOTAL - DIRECTORS 859,000 5.40%
Wendel, Hall and Family Wayzata MN 991,700 6.23%
Moe, Robert and Family Plymouth MN 410,400 2.58%
Baxter, Charles Roseau MN 280,000 1.76%
Ochs, Arnie and Family Traverse City MI 136,700 0.86%
Larson, Kenneth and Family Bloomington MN 104,376 0.66%
Skomoroh, Eddy and Family Plymouth MN 49,020 0.31%
Fiebelkorn, John Excelsior MN 47,034 0.30%
Libbey, Keith and Family Afton MN 36,618 0.23%
Malone, Michael and Family Maple Grove MN 16,823 0.11%
Bruha, James C. Roseau MN 29,772 0.19%
Grunewald, John H. Minneapolis MN 5,000 0.03%
SUB TOTAL - OTHERS 2,107,443 13.24%
MGMT/Employee>999 MPLS/Rosea 315,257 1.98%
Units u/Osceola
Wadleigh, Theodore and Manchester NH 170,000 1.07%
Family
Rollings Fund Investment Atlanta GA 103,000 0.65%
Pillsbury Foundation/Joyce St. Louis MO 89,000 0.56%
Kaplan, Strangis, Kaplan et al Minneapolis MN 57,110 0.36%
Tommasini, John A. New York NY 46,000 0.29%
Colonial Life and Accident Columbia SC 40,000 0.25%
Fiebelborn, Nancy West Chicago IL 39,873 0.25%
Bagley, Raymond Tiburon CA 37,740 0.24%
Rollins, et al Atlanta Ga 35,200 0.22%
|
Project Redwing
CONFIDENTIAL May 11, 1994
- --------------------------------------------------------------------------------
REDWING INDIVIDUAL SHAREHOLDER ANALYSIS - JANUARY 1994
(Listing of all holders over 25,000 units)
Shareholder Name City State No. Units Percent
--------------------------- ----------- ----- --------- -------
Doshan, Michael D. Wayzata MN 32,800 0.21%
Bank of Tokyo (FUJI) New York NY 30,000 0.19%
Bagley, James P. Santa Barbara CA 29,000 0.18%
Roskin, Preston/Linda St. Louis MO 26,510 0.17%
Rex Lumber Atlanta GA 26,000 0.16%
Lynch, Emmett R. Morgantown WV 25,000 0.16%
Morgan, Jay & Trust Eden Prairie MN 23,320 0.15%
Allen, Neal M. & Family Marietta GA 22,555 0.14%
Larson Olson Company Minneapolis MN 16,000 0.10%
Atkins, Victor K. Sr. San Francisco CA 8,000 0.05%
Young, Leslie Medicine MN 1,200 0.01%
Lake
Ehlert, John Wayzata MN 1,000 0.01%
Marrs Leisure-Skidoo Winnipeg Canada 200 0.00%
Distributor
Arctco Inc. Thief River MN 20 0.00%
Falls
SUB TOTAL 1,174,785 7.38%
Others not individually listed on this summary 10,555,984 66.31%
Unreconciled difference from report to actual shares 1,512,788 7.68%
TOTALS 16,210,000 100.0%
|
CURRENT
BOSTON SUN INVESTMENT
CELTICS CEDAR FAIR DISTRIBUTORS REDWING VALUE
------- ---------- ------------ ------- ----------
--------------------------------------------------------------------------------------
CURRENT STOCK PRICE $20.125 $32.875 $7.441 $34.000
--------------------------------------------------------------------------------------
INSTITUTION
- --------------------------
TOP 25 INSTITUTIONS
FIDELITY MGMT & RES CORP 0 2280 0 0 $74,955
WISCONSIN INVESTMT BOARD 0 1153 0 0 37,905
SOCIETY NATL BANK 0 450 0 0 14,794
NEWSOUTH CAPITAL MGMT. 0 374 0 0 12,295
HARRIS ASSOCIATES, L.P. 0 311 0 51 11,958
FIRST PACIFIC ADVISORS 0 256 0 0 8,416
PRICE T ROWE ASSOCIATE 0 156 235 0 6,877
LASALLE NATL TRUST N.A. 0 199 0 0 6,542
CALIF PUBLIC EMP. RET. 9 112 304 0 6,125
GOFEN & GLOSSBERG INC 0 185 0 0 6,082
SMITH BARNEY SHEARSON 4 85 81 49 5,144
RRH CAPITAL MGMT INC 0 134 0 0 4,405
CHIEFTAIN CAPITAL MGMT. 0 0 566 0 4,212
HAWAIIAN TRUST CO LTD 0 121 0 0 3,978
NORWEST CORPORATION 0 108 0 0 3,551
BAHL & GAYNOR INC 0 107 0 0 3,518
BEESE FULMER & PINCOE 0 100 0 0 3,288
DOMINO, CARL ASSOCS L.P. 0 86 0 0 2,827
BOSTON SEC. COUNSELLORS 0 82 0 0 2,696
KENNEDY CAPITAL MANAGEMENT 0 0 0 76 2,584
MORGAN STANLEY GROUP INC 0 26 92 25 2,389
GREENLEAF CAPITAL MGMT. 0 66 0 0 2,170
INVESCO 0 0 0 58 1,972
NATIONAL CITY BK/CLEVELD 0 58 0 0 1,907
CRAWFORD INVT COUNSEL 0 41 0 0 1,348
63 OTHER INSTITUTIONS 22 631 228 242 $31,111
- --------------------------------------------------------------------------------------------------------------------------------
|
HARLEY OUTBOARD CURRENT
ANTHONY ARCTCO BRUNSWICK COLEMAN HUFFY WINNEBAGO DAVIDSON MARINE INVESTMENT
INDUSTRIES INC. CORP. CO. INC. CORP. INDUSTRIES INC. CORP. REDWING VALUE
---------- ------ --------- -------- ----- ---------- --------- -------- ------- ----------
----------------------------------------------------------------------------------------------------------------
CURRENT STOCK PRICE $14.875 $27.875 $24.500 $28.000 $16.875 $11.625 $49.500 $22.625 $34.000
----------------------------------------------------------------------------------------------------------------
INSTITUTION
- -------------------------
SHARES (UNITS) OWNED BY TP 25 INSTITUTIONS
BERNSTEIN SANFORD C & CO 0 0 9,022 0 48 0 0 1,821 0 $263,049
BARROW HANLEY MEWHINNEY 0 0 8,727 0 0 0 0 0 0 213,812
FIDELITY MGMT & RES CORP 96 1,354 2,119 15 135 0 17 1,762 0 134,491
WELLS FARGO INST. TR NA 232 268 2,356 104 272 360 534 485 0 117,737
BANKERS TRUST N Y CORP 167 416 2,121 13 317 45 330 510 0 100,155
GSB INVESTMENT MGMT 0 0 3,127 0 0 0 0 1,487 51 111,989
COLLEGE RETIRE EQUITIES 599 47 945 0 337 511 508 197 0 74,603
WELLINGTON MANAGEMENT CO 0 0 2,654 181 0 0 31 0 0 71,626
SMITH BARNEY SHEARSON 21 0 1,914 6 24 42 63 453 0 61,634
CAPITAL GUARDIAN TRUST 0 0 2,186 317 0 0 0 0 0 62,433
BABSON DAVID L & CO 652 751 0 0 837 0 0 0 0 44,757
MELLON BANK CORPORATION 70 372 754 137 99 169 321 160 49 58,531
LOOMIS SAYLES & COMPANY 0 0 0 0 0 0 0 1,958 0 44,300
INVISTA CAPITAL MGMT INC 0 0 897 0 27 0 0 926 0 43,383
ARK ASSET MGMT CO INC 0 0 1,843 0 0 0 0 0 0 45,154
NICHOLAS-APPLEGATE CAP 0 453 0 455 0 0 924 0 0 71,105
STATE STREET BOSTON CORP 29 30 946 14 65 38 134 375 0 41,493
JANUS CAPITAL CORP. 0 0 1,002 495 0 0 0 0 0 38,409
WANGER ASSET MGMT L P 0 675 0 0 0 0 820 0 0 59,406
INVESTORS RESEARCH CORP 0 0 525 0 0 0 950 0 0 59,888
KR CAPITAL ADVISORS INC 0 0 1,467 0 0 0 0 0 25 36,792
NORWEST BK MINNESOTA NA 0 0 151 21 25 800 330 29 0 31,001
CAPITAL RESEARCH & MGMT 0 0 1,250 110 0 0 0 0 76 36,289
DIMENSIONAL FUND ADVS. 490 7 44 0 240 338 0 223 0 21,587
PROVIDENT INVT COUNSEL 0 0 0 0 0 0 1,279 0 0 63,311
- - - - - - ----- - - ------
------ ------ ------- ------ ------ ------ ------ ------- ---- -----------
TOTAL 2,356 4,373 44,050 1,868 2,426 2,303 6,241 10,386 201 $1,906,930
- ----------------------------------------------------------------------------------------------------------------------------------
|
SMITH BARNEY: EQUITY
Graphic:
Map of the world with flags of certain countries
Text:
Smith Barney: Equity
International Institutional Network
Foreign Office Sales Force Amsterdam Equity Bahrain Equity & Debt Geneva Equity Hong Kong Equity & Debt London Equity & Debt Paris Equity Singapore Equity & Debt Tapei/Dubai (to be opened) Tokyo Equity & Debt Zurich Equity |
Overview Channel Sales People Office Accounts International Equity 154 8 1,525 International Fixed-Income 10 5 235 Robinson-Humphrey Institutional 25 1 400 |
Institutional Distribution of US Equities in Europe
Salesforce Market Share by Aggregate
Institutional Commissions of
Listed US Securities Sold in
Europe
30 Institutional equity Over 10% market share of
salespeople listed US equities sold in
Europe
12 years average tenure at 14% market share of listed US
Smith Barney equities sold in largest Eu-
ropean Markets*
18 years average professional
experience
__________________________
|
* U.K., Germany, France, Switzerland
1992 - 1993
BY NUMBER OF ISSUES
FULL CREDIT TO EACH MANAGER, EXCLUDING FUNDS
- ------------------------------------------------------------------------------------------------------------------------
1992 1993
AMOUNT AMOUNT
RANK MANAGER # OF ISSUES (MILLIONS) MANAGER # OF ISSUES (MILLIONS)
- ---- ------- ----------- ---------- ------- ----------- ----------
1 Merrill Lynch & Co 165 $28,815.0 Merrill Lynch & Co. 225 $36,030.1
2 Smith Barney 53 7,078.0 Smith Barney 224 23,360.9
- ------------------------------------------------------------------------------------------------------------------------
3 Lehman Brothers 125 17,828.9 Lehmian Brothers 158 23,729.1
4 Alex, Brown & Sons 104 7,828.1 Alex, Brown & Sons 149 10,843.9
5 PaineWebber 103 12,898.0 Pain Webber 148 17,515.6
6 Goldman, Sachs & Co. 100 18,529.4 Goldman, Sachs & Co. 124 22,743.2
7 First Boston 86 12,436.9 Donaldson, Lufkin & Jenrette 110 17,407.3
8 Donaldson, Lufkin & Jenrette 84 8,389.9 Salomon Brothers 105 19,985.1
9 Kidder, Peabody 76 10,533.2 Prudential Securities 102 8,326.5
10 Prudential Securities 73 9,820.6 Morgan Stanley 100 19,558.2
- ------------------------------------------------------------------------------------------------------------------------
|
RANKING CRITERIA
RANK
SMITH BARNEY ----
1992 1993
- -------------------------------------------------------------------
FULL CREDIT TO LEAD MANAGER
Excluding Funds, # of Issues 4 2
Excluding Funds, Dollar Volume 6 6
Including Funds, # of Issues 5 2
Including Funds, Dollar Volume 9 7
FULL CREDIT TO ALL MANAGERS
Excluding Funds, # of Issues 2 2
Excluding Funds, Dollar Volume 6 5
Including Funds, # of Issues 2 2
Including Funds, Dollar Volume 4 3
- -------------------------------------------------------------------
|
1992 - 1993
BY NUMBER OF ISSUES
FULL CREDIT TO EACH MANAGER, EXCLUDES FUNDS
- -------------------------------------------------------------------------------------------------------------------------
1992 1993
---- ----
AMOUNT AMOUNT
RANK MANAGER # OF ISSUES (MILLIONS) MANAGER # OF ISSUES (MILLIONS)
- ---- ------- ----------- ----------- ------- ----------- ----------
1 Smith Barney 55 $4,019.6 Smith Barney 68 $ 6,499.9
2* Alex, Brown & Sons 46 3,227.0 Merrill Lynch & Co. 62 12,849.3
2* Merrill Lynch & Co. 46 7,268.8 Donaldson, Lufkin & Jenrette 58 10,373.1
4* Lehman Brothers 45 5,544.4 PaineWebber 53 7,325.4
4* Donaldson, Lufkin & Jenrette 45 4,972.6 Lehman Brothers 52 8,918.4
6 First Boston 37 4,441.8 Salomon Brothers 52 9,781.2
7 Morgan Stanley 35 4,493.2 Alex, Brown & Sons 51 2,784.3
8* Goldman, Sachs & Co. 34 5,971.5 Morgan Stanley 49 10,196.7
8* Montgomery Securities 34 1,157.6 Goldman, Sachs & Co. 49 10,979.2
10 PaineWebber 30 2,008.6 Montgomery Securities 48 1,981.7
- ------------------------------------------------------------------------------------------------------------------------
|
RANKING CRITERIA
RANK
SMITH BARNEY ----
1992 1993
- -------------------------------------------------------------------
FULL CREDIT TO LEAD MANAGER
Excluding Funds, # of Issues 7 2
Excluding Funds, Dollar Volume 7 5
Including Funds, # of Issues 5 2
Including Funds, Dollar Volume 8 6
FULL CREDIT TO ALL MANAGERS
Excluding Funds, # of Issues 1 1
Excluding Funds, Dollar Volume 8 8
Including Funds, # of Issues 2 1
Including Funds, Dollars Volume 4 2
- -------------------------------------------------------------------
|
1992 - 1993
BY NUMBER OF COMPLETED DEALS
FULL CREDIT TO TARGET ADVISORS
1992 1993
---- ----
RANK MANAGER # OF ISSUES RANK MANAGER # OF ISSUES
- ---- ------- ----------- ---- ------- -----------
1 Goldman, Sachs 77 1 Merrill Lynch & Co 77
2 CS First Boston 64 2 Goldman, Sachs 50
3* Lehman Brothers 46 3* CS First Boston 39
3* Merrill Lynch & Co. 46 3* Lehman Brothers 37
5 Morgan Stanley 33 5 Morgan Stanley 34
6 Kidder, Peabody 28 6 Smith Barney 31
7* Saloman Brothers 25 7* Lazard Houses 28
7* Donaldson, Lufkin & Jenette 25 7* Donaldson, Lufkin & Jenette 27
9* J.P. Morgan & Co. Inc. 17 9* J.P. Morgan & Co. Inc. 25
21* Smith Barney 8 17 Alex, Brown & Sons 23
- ---------------------------------------------------------------------------------------------------------------------------
|
RANKING CRITERIA
RANK
------------------------------------------
ALL ANNOUNCED COMPLETED
-------------- ---------------
SMITH BARNEY 1992 1993 1992 1993
- ------------------------------ ---- ---- ---- ----
FULL CREDIT TO TARGET ADVISORS
# of Deals 17 7 21 6
Value of Deal 26 16 20 14
FULL CREDIT TO ACQUIROR ADVISOR
# of Deals 14 11 16* 12
Value of Deals 13 4 15 6
FULL CREDIT TO ALL ADVISORS
# of Deals 18 7 19 7
Value of Deals 19 10 20 12
- --------------------------------------------------------------------------------
|
SMITH BARNEY: INVESTMENT BANKING -- MERGERS & ACQUISITIONS
Graphic:
Pie Chart of 1993 Mergers for Acquisitions Transaction
Breakdown
Text:
Smith Barney: Investment Banking - Mergers & Acquisitions
1993 Mergers & Acquisitions Transaction Breakdown 60 transactions in which transaction value was disclosed
Below $ 50 million 20.0% $50 - $ 99 million 23.3% $100 - $249 million 28.3% $250 - $499 million 11.7% |
over $500 million 16.7%
SMITH BARNEY: INVESTMENT BANKING -- MERGERS AND ACQUISITIONS
HIGH PROFILE TRANSACTIONS
TRANSACTION VALUE
CLIENT TRANSACTION ($ MILLIONS)
- ---------------------------- ------------------------------------------------------ ------------------
Viacom Contested Acquisition of Paramount Communications $10,200
Viacom Acquisition of Blockbuster Entertainment 8,400
Primerica Corporation Acquisition of The Travelers 4,000
Federated Department Stores Contested Acquisition of R.H. Macy's 3,500
Continental Airlines Sale to Air Canada and Air Partners 2,410
Viacom Sale of Equity Securities to NYNEX 1,200
Primerica Corporation Acquisition of Shearson Retail Brokerage 1,150
FHP International Contested Acquisition of TakeCare, Inc. 1,100
Epic Holdings, Inc. Sale to HealthTrust, Inc. - The Hospital Company 1,000
Red Roof Inns Sale to Morgan Stanley Equity Funds 600
Curaflex Four-way Merger with T2, HealthInfusion, and Medisys 550
Kemper Corporation Divestiture of Property Casualty Subsidiaries 525
First American Metro Sale to First Union Corporation 453
O.Y.L. Industries/
Hong Leong Group Malaysia Cross-border Acquisition of SnyderGeneral Corporation 420
Cardinal Distribution Acquisition of Whitmire Distribution 400
The Olsten Corporation White Knight Acquisition of Lifetime Corporation 358
HealthSouth Acquisition of National Medical Enterprise's
Rehabilitation Business 350
Energy Service Company Acquisition of Penrod Drilling 350
Proffitt's Inc. Acquisition of McRae's Inc. 337
Schein Pharmaceutical, Inc. Strategic Investment by Miles, Inc. (Bayer AG) 310
-----------
(selling shareholders)
-----------
-----------
TOTAL $37,613
|
SMITH BARNEY: PERFORMANCE
1992 - 1993
BY NUMBER OF ISSUES
Full credit to each manager, includes funds
- -------------------------------------------------------------------------------------------------------------
1992 1993
---- ----
Amount Amount
Rank Manager # of Issues (Millions) Manager # of Issues (Millions)
- ---- ------- ----------- ---------- ------- ----------- ----------
1 MERRILL LYNCH & CO. 140 $15,807.4 MERRILL LYNCH & CO. 179 $15,547.9
2 LEHMAN BROTHERS 91 13,082.1 SMITH BARNEY 131 11,787.0
3 SMITH BARNEY 89 8,057.1 LEHMAN BROTHERS 127 14,836.0
4 PAINEWEBBER 85 11,030.5 PAINEWEBBER 126 13,583.4
5 PRUDENTIAL SECURITIES 76 7,085.5 PRUDENTIAL SECURITIES 115 13,047.6
6 KIDDER, PEABODY 70 6,917.4 GOLDMAN, SACHS & CO. 104 14,151.1
7 GOLDMAN, SACHS & CO. 63 7,477.5 KIDDER, PEABODY 100 10,134.6
8 DEAN WITTER REYNOLDS 35 7,172.5 ALEX, BROWN & SONS 49 2,120.1
9* A.G. EDWARDS & SONS 26 2,721.5 MORGAN STANLEY 45 5,430.4
9* MORGAN STANLEY 26 2,958.0 A.G. EDWARDS & SONS 43 5,848.5
|
RANKING CRITERIA
- -----------------------------------------------------
RANK
------------
SMITH BARNEY 1992 1993
- -----------------------------------------------------
FULL CREDIT TO LEAD MANAGER
Excluding Funds, # of Issues 5 7
Excluding Funds, Dollar Volume 5 10
Including Funds, # of Issues 4 4
Including Funds, Dollar Volume 5 7
FULL CREDIT TO ALL MANAGERS
Excluding Funds, # of Issues 3 4
Excluding Funds, Dollar Volume 6 6
Including Funds, # of Issues 3 2
Including Funds, Dollar Volume 4 6
- ----------------------
Source: Securities Data Corporation
Related to include Robinson-Humphrey
* Denotes tie
|
SMITH BARNEY: PERFORMANCE
1992-1993
BY NUMBER OF ISSUES
Full credit to each manager
- -----------------------------------------------------------------------------------------------------------------
1992 1993
---- ----
Amount Amount
Rank Manager # of Issues (Millions) Manager # of Issues (Millions)
- ---- ------- ----------- ---------- ------- ----------- ----------
1 MERRILL LYNCH & CO. 12 $4,505.8 1 MERRILL LYNCH & CO. 21 $7,841.0
2 SMITH BARNEY 9 645.0 2 SMITH BARNEY 15 2,349.2
3* FIRST BOSTON 8 1,680.0 3 CS FIRST BOSTON 12 1,731.7
3* DONALDSON, LUFKIN &
JENRETTE 8 1,421.7 4 LEHMAN BROTHERS 10 2,173.5
3* GOLDMAN, SACHS & CO. 8 945.0 5* ALEX, BROWN & SONS 8 790.0
6 SALOMON BROTHERS 7 510.0 5* PAINEWEBBER 8 665.0
7* LEHMAN BROTHERS 6 1,008.0 6 MONTGOMERY SECURITIES 6 605.0
7* KIDDER, PEABODY 6 375.0 7 GOLDMAN, SACHS & CO. 5 1,306.9
9 J.P.MORGAN & CO. INC. 5 1,091.7 8* KEMPER SECURITIES 4 132.5
10 MONTGOMERY SECURITIES 4 445.0 8* BEAR STEARNS 4 26.0
|
RANKING CRITERIA
- -----------------------------------------------------
RANK
------------
SMITH BARNEY 1992 1993
- -----------------------------------------------------
FULL CREDIT TO LEAD MANAGER
# of Issues 4 2
Dollar Volume 8 6
FULL CREDIT TO ALL MANAGERS
# of Issues 2 2
Dollar Volume 8 2
- ----------------------
Source: Securities Data Corporation
Restated to include Robinson-Humphrey
* Denotes tie
|
SMITH BARNEY: PERFORMANCE
BY NUMBER OF ISSUES
Full credit to lead manager
- -------------------------------------------------------------------------------------------------------------------
1992 1993
---- ----
Amount Amount
Rank Manager # of Issues (Millions) Rank Manager # of Issues (Millions)
- ---- ------- ----------- ---------- ---- ------- ----------- ----------
1 MERRILL LYNCH & CO. 297 $45,466 1 MERRILL LYNCH & CO. 526 $110,408
2 GOLDMAN, SACHS & CO. 230 36,791 2 GOLDMAN, SACHS & CO. 448 100,773
3 MORGAN STANLEY 173 22,961 3 SALOMON BROTHERS 433 89,623
4 LEHMAN BROTHERS 164 25,717 4 LEHMAN BROTHERS 320 65,874
5 FIRST BOSTON 150 26,800 5 CS FIRST BOSTON 297 74,974
6 SALOMON BROTHERS 124 20,775 6 MORGAN STANLEY 294 68,212
7 KIDDER, PEABODY & CO. INC. 81 5,547 7 J.P.MORGAN & CO. 294 54,243.7
8 CITICORP 50 1,238 8 BEAR STEARNS 152 27,669
9 J.P. MORGAN & CO. INC. 45 7,363 9 KIDDER, PEABODY 136 19,792
10 BEAR STEARNS 28 3,359 10 CITICORP 131 12,147
11 SMITH BARNEY 19 1,873 12 SMITH BARNEY 93 11,565
|
RANKING CRITERIA
- -----------------------------------------------------
RANK
------------
SMITH BARNEY 1992 1993
- -----------------------------------------------------
FULL CREDIT TO LEAD MANAGER
# of Issues 11 12
Dollar Volume 11 13
FULL CREDIT TO ALL MANAGERS
# of Issues 13 13
Dollar Volume 14 15
- ----------------------
Source: Securities Data Corporation
Restated to include Robinson-Humphrey
* Denotes tie
|
SMITH BARNEY: PERFORMANCE
BY NUMBER OF ISSUES
Full credit to lead manager
1992 1993
---- ----
Amount Amount
Rank Manager # of Issues (Millions) Rank Manager # of Issues (Millions)
- ---- ------- ----------- ---------- ---- ------- ----------- ----------
1 MERRILL LYNCH & CO. 33 7,724.6 1 MERRILL LYNCH & CO. 62 12,872.1
2 DONALDSON, LUFKIN & J. 24 3,832.8 2 DONALDSON, LUFKIN & J 52 8,176.6
3 MORGAN STANLEY 21 3,873.8 3 MORGAN STANLEY 32 6,457.5
4 GOLDMAN, SACHS & CO. 29 5,379.1 4 GOLDMAN, SACHS & CO. 30 4,462.9
5 SALOMON BROTHERS 16 2,741.9 5 SALOMON BROTHERS 26 4,638.6
6 BEAR, STEARNS 9 1,340.6 6 BEAR, STEARNS 20 2,498.6
7 LEHMAN BROTHERS 18 3,056.8 7 LEHMAN BROTHERS 17 2,555.8
8 CS FIRST BOSTON 26 4,464.9 8 CITICORP 14 1,927.5
9* BANKERS TRUST 8 1,444.0 9* BANKERS TRUST 12 2,049.6
12 SMITH BARNEY 5 429.8 14 SMITH BARNEY 5 434.5
|
RANKING CRITERIA
# of Issue 1992 & 1993
RANK
------------
SMITH BARNEY 1992 1993
- -------------------------------------------------------
FULL CREDIT TO LEAD MANAGER
# of Issues 12 14
Dollar Volume 13 16
FULL CREDIT TO ALL MANAGERS
# of Issues 15 17
Dollar Volume 19 20
- ----------------------
Source: Securities Data Corporation
Restated to include Robinson-Humphrey
* Denotes tie
|
SMITH BARNEY: INVESTMENT BANKING OVERVIEW
GREENWICH STREET BRIDGE FUND, L.P.
Bridge financing for clients seeking
short-term subordinated acquisition financing
Fund size: $500 million
Lead investor: Travelers Corp.
Other investors: Group of four to five
commercial banks
Typical
investment size: $100-$200 million
|
GREENWICH STREET CAPITAL PARTNERS, L.P.
Privately negotiated equity or subordinated capital in COOPERATION with our clients
Fund size: $600 million
- $100 million Travelers Corp.
- $500 million outside investors
- Employee investment
30% of investments in emerging markets
- China
- Latin America
- Southeast Asia
PROJECT REDWING
JUNE 1994
SMITH BARNEY INC.
- - Summary of Analysis................................................. I
- - Analytical Framework Used By Rating Agencies........................ II
- - Investment Grade Structure.......................................... III
- - Representative Term Sheets.......................................... IV
A. Bank Facility
B. Senior Notes
|
SUMMARY OF ANALYSIS
- - The objective of this presentation is to evaluate Redwing's investment grade borrowing capacity.
- - The "Investment Grade" structure estimates the maximum amount of borrowing available to Redwing while maintaining an Investment Grade rating on all of Redwing's outstanding public debt.
- - Based on this analysis it appears Redwing could borrow approximately $200 million while maintaining a low investment grade rating (BBB- from Standard & Poors or Baa3 from Moody's) through a combination of a Bank Facility and public Senior Notes.
- - Achievement of these outcomes depends on many factors which are "deal specific" thus not related to Redwing's historical performance, current financial condition or prospects. For example, Use of Proceeds and continued MLP status will have a major impact on the achievement of a rating level and success of a deal.
- - The presentation contains a section discussing the analytical framework utilized by the rating agencies to round out these considerations.
- - The presentation also contains representative terms sheets for both Senior Notes and a Bank Facility for reference purposes.
INVESTMENT GRADE
--------------------------------------------
INTEREST ACTUAL PRO FORMA PROJECTED
CAPITALIZATION RATE 1993 1993 1994
- -------------- -------- -------- --------- ---------
Bank facility (1)(2) 5.75% $0 $50,000 $50,000
Senior notes 8.35% 0 150,000 150,000
Senior subordinated notes NA 0 0 0
-------- --------- ---------
Total long term debt $0 $200,000 $200,000
Stockholders equity (3) $82,493 ($42,507) ($47,283)
-------- --------- ---------
Total capitalization (4) $82,493 $157,493 $152,717
-------- --------- ---------
-------- --------- ---------
Total shares outstanding 16,210 16,210 16,210
Estimated price per share $32,625 NA NA
-------- --------- ---------
Total market capitalization (5)(6) $528,851 $480,368 $602,576
OPERATING DATA
- --------------
EBITDA $79,182 $79,182 $89,193
EBIT $53,270 $45,770 $59,007
Interest expense $0 $15,400 $15,400
Net income $45,812 $17,523 $25,161
Capital expenditures $18,126 $18,126 $28,800
Cash $33,798 $33,798 $34,000
CREDIT STATISTICS
- -----------------
Total debt/EBITDA 2.53x 2.24x
EBITDA/Interest 5.14x 5.79x
EBITDA - Capital expenditures/Interest 3.96x 3.92x
Debt/Total capitalization 127.0% 131.0%
Debt/Total market capitalization 41.6% 33.2%
- ---------------
(1) Reflects revolving line draw down. Total availability under the bank
facility may be higher.
(2) Investment grade rate is 6 mo. Libor + 75 basis points. High yield rate is
6 mo. Libor + 225 basis points.
(3) Assumes all debt proceeds distributed to shareholders and $75MM deferred
tax asset created with conversion to corporate form.
(4) Total capitalization equals shareholders equity plus total debt.
(5) 1993 total market capitalization equals market value 16,210 BACs at
current price of $32 5/8 per share (6/28/94 close).
(6) Pro forma and projected market capitalization equal 16 x Pro forma 1993
and 1994 net income plus term debt.
|
ANALYTICAL FRAMEWORK
USED BY RATING AGENCIES
- - The major rating agencies essentially employ an analytical framework that evaluates business and financial risk.
- - Business risk evaluation is necessarily dynamic and ultimately requires qualitative judgements. Areas of focus include:
MARKET CONSIDERATIONS MANAGEMENT
Brand recognition/customer loyalty Performance
Strength of competition Planning
Distribution network Depth
Breadth of product line Controls
Geographic penetration Tenure
SIZE CONSIDERATIONS CAPITALIZATION
Ability to absorb losses Mix of fund sources
Financial flexibility Future financing requirements
Off balance sheet financing
Leverage
OPERATIONAL CONSIDERATIONS
Length of track record
Cost effectiveness of operations
|
- - Financial risk measurement is a quantitative process which employs a more static perspective of both traditional measures and, more importantly, measures relevant to an outdoor recreation products company including:
- Stability of revenues and earnings
- EBITDA interest coverage
- EBIT interest coverage
- Operating margins
- Total debt as a percent of capitalization
- - The final determination of a rating tends to place more emphasis on business risk, although absolute size tends to become a significant factor in determining the final rating, notwithstanding the greater flexibility generally available to smaller and medium sized companies.
In addition to an analysis of the historical and pro forma credit statistics of the Company, the rating agencies and institutional investors will consider a broad range of industry and company specific factors in determining a credit rating and pricing the new security. For example, Redwing may be asked to address the following:
- Business strategy - growth through acquisitions; geographic diversification
- Financial strategy - target debt equity ratio; sources of additional debt and equity
- Depth and experience of management
- Industry conditions - historical and projected pricing trends; competitive environment
- Asset valuation - remaining life of assets; recent transactions
- Regulatory, political and environmental concerns
The Company's must anticipate these questions and either address them directly in formal presentations or be prepared to respond during a question and answer format.
INVESTMENT GRADE STRUCTURE
- - The "Investment Grade" alternative estimates the maximum amount of borrowing available to Redwing while maintaining an Investment Grade rating on all of Redwing's outstanding public debt.
- - The immediately following pages provide a pro forma analysis of Redwing's 1993 and 1994 results based on $200 million of borrowings. The analysis presumes $150 million of Senior Notes rated BBB-/Baa3 and a $50 million working capital line (fully drawn).
- - A pricing sheet is also included to measure all-in costs and prices. Based on this data, Redwing could issue Senior Notes with an 8.30 to 8.40 coupon which represents 105 to 115 basic points over the ten year Treasury.
- - The "ANALYSIS OF KEY FINANCIAL RATIOS" provides a strictly "quantitative" rating agency analysis. This analysis seems to indicate a median debt rating ranging from A to BBB.
- - The key to achieving any good rating is a sound rating agency presentation
describing Redwing's historical performance, underlying business and
financial status. The rating agency presentation should emphasize Redwing's:
clean balance sheet, current earning power, prospects and pro-forma coverage
ratios.
- - From a qualitative standpoint the rating agencies are likely to focus on the following challenging issues for Redwing:
- LOW LEVEL OF BOOK EQUITY: Redwing has a very low book equity account
which will be reduced further if borrowing
proceeds are distributed to unitholders. Some
care will be required when presenting this
feature to the rating agencies including an
emphasis on the accounting effects of
operating as an MLP and making large
distributions to equity holders.
- USE OF PROCEEDS: Rating Agencies always focus carefully on the
use of proceeds. Funding distributions to
equity holders will not be a plus from a
rating agency standpoint. However, earning
power, prospects and coverage ratios will also
present an attractive picture. Overall, it
appears that any use of proceeds not primarily
targeted for reinvestment in the business may
cause up to a one level downgrade. Even if
this were to happen it is estimated Redwing's
debt would still qualify for low investment
grade ratings.
|
CONFIDENTIAL PROJECT REDWING
- ------------------------------------------------------------------------------
INVESTMENT GRADE STRUCTURE
- MLP STATUS: Rating Agencies will likely take a negative
view towards continued MLP status. From an
economic standpoint continued MLP status means
continued high distributions (relative to
income). These distributions are anathema to
rating agencies and lenders.
From a qualitative standpoint 1997 and
governance issues raise further negatives to
the rating agencies. 1997 is an issue because
there is uncertainty regarding resolution.
Governance is an issue because it falls
outside rating agency norms which expect that
operating management holds controlling
corporate governance positions.
Overall it may be very difficult to achieve an
investment grade rating for any Senior Debt in
the context of maintaining MLP status.
|
PROJECT REDWING
- -------------------------------------------------------------------------------
|
SUMMARY OF DEBT FINANCING ALTERNATIVES
COUPON
SPREAD OVER ALL-IN-SPREAD
TREASURY US TREASURY COUPON ALL-IN-COST OVER TREASURY
TREASURY YIELD (SEMI-ANNUAL) (SEMI-ANNUAL) SMITH (SEMI-ANNUAL) (SEMI-ANNUAL)
CALL/SF BENCHMARK (SEMI- OFFERING BARNEY
MATURITY PROVISIONS (COUP/MAT.) ANNUAL) LOWER UPPER LOWER UPPER PRICE FEES LOWER UPPER LOWER UPPER
- ----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATINGS: A2/A
5-Yrs NC-L 6.750%-06/99 6.88% 0.40% 0.50% 7.28% 7.38% 100.00% 0.600% 7.43% 7.53% 0.55% 0.65%
7-Yrs NC-L 8.000%-05/01 7.08% 0.50% 0.60% 7.58% 7.68% 100.00% 0.625% 7.70% 7.80% 0.62% 0.72%
10-Yrs NC-L 7.250%-05/04 7.25% 0.60% 0.70% 7.85% 7.95% 100.00% 0.650% 7.95% 8.05% 0.70% 0.80%
- ----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATINGS: Baa2/BBB
5-Yrs NC-L 6.750%-06/99 6.88% 0.70% 0.80% 7.58% 7.68% 100.00% 0.600% 7.73% 7.83% 0.85% 0.95%
7-Yrs NC-L 8.000%-05/01 7.08% 0.80% 0.90% 7.88% 7.98% 100.00% 0.625% 8.00% 8.10% 0.92% 1.02%
10-Yrs NC-L 7.250%-05/04 7.25% 0.90% 1.00% 8.15% 8.25% 100.00% 0.650% 8.25% 8.35% 1.00% 1.10%
- ----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATINGS: Baa3/BBB-
5-Yrs NC-L 6.750%-06/99 6.88% 0.85% 0.95% 7.73% 7.83% 100.00% 0.600% 7.88% 7.98% 1.00% 1.10%
7-Yrs NC-L 8.000%-05/01 7.08% 0.95% 1.05% 8.03% 8.13% 100.00% 0.625% 8.15% 8.25% 1.07% 1.17%
10-Yrs NC-L 7.250%-05/04 7.25% 1.05% 1.15% 8.30% 8.40% 100.00% 0.650% 8.40% 8.50% 1.15% 1.25%
|
(Industrial Companies Only)
S & P MEDIANS (1990-1992) "AAA" "AA" "A" "BBB" "BB" "B" "CCC"
Medians Medians Medians Medians Medians Medians Medians
------- ------- ------- ------- ------- ------- -------
Pretax interest coverage (x) 16.70 x 9.31 x 4.41 x 2.30 x 1.31 x 0.77 x (0.06) x
Pretax interest coverage including rents (x) 6.77 4.83 2.93 1.80 1.23 0.88 0.54
EBITDA interest coverage (x) 20.12 12.67 6.42 4.02 2.36 1.51 0.57
Funds from operations/total debt (%) 128.50% 72.70% 43.10% 27.70% 16.10% 9.20% 4.80%
Free operating cash flow/total debt (%) 34.80 30.60 13.30 4.10 1.30 (1.90) 2.70
Operating income/sales (%) 21.60 16.00 13.90 12.30 10.30 9.70 9.80
Long-term debt/capitalization (%) 11.10 17.00 29.70 40.40 53.00 56.80 74.80
Total debt/capitalization including short-term debt (%) 21.90 26.40 37.20 46.50 59.70 65.90 84.60
Total debt/capitalization including short-term debt (%) 33.00 37.80 48.10 58.50 72.70 75.10 87.10
(including 8 times rents)
- -----------------------------------------------------------------------------------------------------------------------------
|
ACTUAL PRO FORMA
COMPANY RATIOS ---------------------------- --------------
1993 1994 1993 1994
---- ---- ---- ----
Pretax interest coverage (x) 53,270.00 x 66,507.00 x 2.97 x 3.83 x
Pretax interest coverage including rents (x) 33.40 41.95 2.78 3.56
EBITDA interest coverage (x) 79,182.00 89,193.00 5.14 5.79
Funds from operations/ total debt (%) 7,172,400.00 % 7,988,200.00 % 25.47 % 27.67%
Free operating cash flow / total debt (%) 6,119,600.00 5,349,300.00 20.20 14.48
Operating income / sales (%) 15.00 13.39 15.00 13.39
Long-term debt / capitalization (%) 0.00 0.00 126.99 130.96
Total debt / capitalization including
short-term debt (%) 0.00 0.00 126.99 130.96
Total debt / capitalization including
short-term debt (%)
(including 8 times rents) 13.74 8.51 124.91 128.54
- -----------------------------------------------------------------------------------------------------------------------------
|
CLOSEST S&P MEDIANS
-------------------------------------------------------------------
ACTUAL PRO FORMA
CREDIT SUMMARY ---------------------------- --------------
1993 1994 1993 1994
---- ---- ---- ----
Pretax interest coverage (x) AAA AAA BBB+ A-
Pretax interest coverage including rents (x) AAA AAA A A+
EBITDA interest coverage (x) AAA AAA BBB+ A-
Funds from operations / total debt (%) AAA AAA BBB- BBB
Free operating cash flow / total debt (%) AAA AAA A+ A
Operating income / sales (%) AA- A- AA- A-
Long-term debt / capitalization (%) AAA AAA CCC CCC
Total debt / capitalization including
short-term debt (%) AAA AAA CCC CCC
Total debt / capitalization including
short-term debt (%)
(including 8 times rents) AAA AAA CCC CCC
|
INVESTMENT GRADE
ACTUAL PRO FORMA PROJECTED
1993 ADJUSTMENTS 1993 1994
------ ----------- --------- ---------
Sales $528,011 $0 $528,011 $666,341
COGS 383,916 0 383,916 486,820
-------- ----------- -------- --------
Gross profit $144,095 $0 $144,095 $179,521
EBITDA $79,182 $0 $79,182 $89,193
EBIT (1) 53,227 (7,500) 45,770 59,007
Interest expense 0 15,400 15,400 15,400
Taxes (2) 7,457 12,847 18,446
-------- ------- -------
Net Income $45,812 $17,523 $25,161
-------- ------- -------
-------- ------- -------
INTEREST EXPENSE RATE
Bank facility 5.75% $0 $2,875 $2,875 $2,875
Senior note 8.35% 0 12,525 12,525 12,525
Senior subordinated NA 0 0 0 0
-------- ------- ------- -------
Total Interest Expense $0 $15,400 $15,400 $15,400
-------- ------- ------- -------
-------- ------- ------- -------
- -------------------------------------------------------------------------------
(1) Conversion to corporate from will create a deferred tax asset
of $75 million, which will be amortized over 10 years.
(2) Pro forma combined federal and local tax rate 42.3%
|
INVESTMENT GRADE
- ----------------
ACTUAL PRO FORMA PROJECTED
1993 ADJUSTMENTS 1993 1994
-------- ----------- --------- ---------
Current Assets $109,748 $0 $109,748 $126,255
PP & E 39,731 0 39,731 49,730
Other Assets (1) 31,069 75,000 106,069 94,861
-------- ----------- --------- ---------
Total Assets $180,548 $75,000 $255,548 $270,846
Current Liabilities $98,055 $0 $98,055 $118,129
Bank facility 0 50,000 50,000 50,000
Senior notes 0 150,000 150,000 150,000
Senior subordinated 0 0 0 0
-------- ----------- --------- ---------
Total term debt $0 $200,000 $200,000 $200,000
Total liabilities $98,055 $200,000 $298,055 $318,129
-------- ----------- --------- ---------
NEWCO EQUITY (2) $82,493 $0 ($42,507) ($47,283)
-------- ----------- --------- ---------
-------- ----------- --------- ---------
|
COLLATERAL ANALYSIS
- -------------------
AS OF ADVANCE BORROWING
12/31/93 RATE BASE
-------- ------- ---------
Accounts Receivable $21,340 80% $17,072
Inventory 52,057 50% 26,029
PP & E, net 39,731 50% 19,866
-------- ---------
Total $113,128 $62,966
-------- ---------
-------- ---------
Revolver $50,000
Excess availability $12,966
- ---------------
(1) Conversion to corporate form will create a deferred tax asset of
approximately $75MM, which is amortized over ten years.
(2) Assumes all debt proceeds distributed to BAC holders.
|
ACTUAL PROJECTED PRO FORMA
-------- --------- ----------------------
FISCAL FISCAL FISCAL FISCAL
1993 1994 1993 1994
-------- --------- -------- --------
Sales $528,011 $666,341 $528,011 $666,341
Cost of goods sold 383,873 486,820 383,873 486,820
-------- --------- -------- --------
Gross profit $144,138 $179,521 $144,138 $179,521
GROSS PROFIT MARGIN 27.3% 26.9% 27.3% 26.9%
SG&A 64,956 90,328 $64,956 $90,328
Amortization & Other 25,912 22,686 33,412 30,186
-------- --------- -------- --------
EBIT $53,270 $66,507 $45,770 $59,007
EBIT MARGIN 10.1% 10.0% 8.7% 8.9%
Gross interest expense 1 1 15,400 15,400
Capitalized interest 0 0 0 0
-------- --------- -------- --------
INTEREST EXPENSE 1 1 15,400 15,400
Interest income 0 0 0 0
Other income 0 0 0 0
-------- --------- -------- --------
Pre-tax income 53,269 66,506 30,370 43,607
Taxes (1) 7,457 9,310 12,847 18,446
-------- --------- -------- --------
Net income (loss) $45,812 $57,196 $17,523 $25,161
-------- --------- -------- --------
-------- --------- -------- --------
Average # of shares outstanding 16,210 16,210 16,210 16,210
Earnings per share $2.25 $3.53 $1.08 $1.55
- --------------
Note:
(1) Pro forma combined federal and local tax rate 42.3%
|
ACTUAL PROJECTED PRO FORMA
------- --------- ----------------------
FISCAL FISCAL FISCAL FISCAL
1993 1994 1993 1994
------- --------- -------- --------
Pretax income from cont. operations $53,269 $66,506 $37,870 $43,607
Interest expense 1 1 15,400 15,400
Depreciation & amortization (incl. deferred taxes) 25,912 22,686 33,412 30,186
------- --------- -------- --------
EBITDA $79,182 $89,193 $86,682 $89,193
------- --------- -------- --------
------- --------- -------- --------
Net income $45,812 $57,196 $21,851 $25,161
Depreciation & amortization 25,912 22,686 25,912 22,686
Other non-cash items (incl. deferred taxes) 0 0 7,500 7,500
------- --------- -------- --------
FUNDS FROM OPERATIONS $71,724 $79,882 $55,263 $55,347
Add: Change in working capital 7,598 2,411 7,598 2,411
Subtract: Capital expenditures 18,126 28,800 18,126 28,800
------- --------- -------- --------
FREE OPERATING CASH FLOW $61,196 $53,493 $44,735 $28,958
------- --------- -------- --------
------- --------- -------- --------
Gross rental expense 1,643 1,623 1,643 1,623
Stockholders' equity (1) 82,493 139,689 (42,507) (47,283)
Cash 33,798 34,000 33,798 34,000
Long-term debt 0 0 200,000 200,000
Short-term debt 1 1 0 0
Current maturities of long-term debt 0 0 0 0
------- --------- -------- --------
Total debt $1 $1 $200,000 $200,000
- --------------
Note:
(1) Conversion to corporate form will create a deferred tax asset of
approximately $75 million, which is amortized over ten years.
|
REPRESENTATIVE TERM SHEETS
BANK CREDIT FACILITY
REPRESENTATIVE TERM SHEET
NOTE: These terms are presented for discussion purposes.
BORROWER: "Redwing" ("Borrower" or the "Company")
AGENT BANK: The "Bank" or "Agent"
LENDERS: The Agent and other lenders mutually acceptable to the
Agent and the Borrower.
UNDERWRITING RISKS: The Agent and other banks or banks mutually acceptable
to the Agent and the Borrower.
CREDIT FACILITY: A $_______ senior secured credit facility consisting of:
1) A $_______ three-year revolving credit facility
available for direct borrowing and Import Letters of
Credit. Import Letters of Credit shall be issued by
First Credit with risk sharing on a pro-rata basis
by the Lenders. Import L/C's will not count as
usage for purposes of calculating the commitment
fee.
PURPOSE: To fund special distribution and to fund ongoing working
capital requirements.
INTEREST RATES: Loans under the Credit Facilities ("LOANS"), shall be
maintained as either Base Rate, Eurodollar or CD based
Loans. The Base Rate will fluctuate daily while the
Eurodollar and the CD based loans will have an
applicable interest period of 1, 2, 3, or, if
available, 6 months, as the Borrower may elect from
time to time.
It is anticipated that the initial margin above the Base
Rate will be approximately ____%, and the initial margin
above the Eurodollar and CD based rates will be
approximately ____%. These margins would decrease or
increase based on a cash flow leverage test with
specific levels to be determined.
|
CONFIDENTIAL PROJECT REDWING - ------------------------------------------------------------------------------- |
REPRESENTATIVE TERM SHEET FOR BANK CREDIT FACILITY (continued)
If senior debt becomes investment grade (BBB or better) by Moody's and Standard and Poors, the Applicable Margins shall reduce by approximately .50%.
The final documentation will include customary interest period indemnity and breakage, capital adequacy, withholding tax, and yield protection provisions.
LETTER OF CREDIT FEES: The Borrower will pay a per annum fee on the average
daily face amount of all Letters of Credit outstanding
under the Revolver B as follows: 1) for standby Letters
of Credit, an amount equal to the then-effective
Eurodollar Applicable Margin; 2) for commercial Letters
of Credit, standard pricing of the Agent.
COMMITMENT FEE: ___ of 1% per annum on the average unused portion of
the revolvers, charged quarterly in arrears.
COLLATERAL: All obligations of the Borrower to the Lenders shall be
secured by a perfected first priority lien and security
interest in substantially all assets of the borrower
and its subsidiaries.
REPAYMENT: Payable in full at maturity, and extendible for up to
two years upon approval by the banks.
|
OTHER TERMS AND CONDITIONS APPLICABLE TO ALL FACILITIES
UP-FRONT FEE: An up front fee in the range of ____% on the total
amount of the credit facilities. One-half will be
payable at the time a definitive commitment letter is
executed by both parties and the remaining one-half
will be due at the time of funding.
UNDERWRITING FEE: .___% on the total amount of the credit facilities
committed to by the underwriting banks.
EXPENSES: The Borrower will reimburse the Bank for all of its
expenses including but not limited to its legal and
initial and ongoing appraisal expenses (if any)
associated with this transaction.
ANNUAL CLEAN-DOWN: Revolver outstandings (excluding Letters of Credit) must
be reduced below $____ million for at least 60
consecutive days during each year.
|
CONFIDENTIAL PROJECT REDWING
- -------------------------------------------------------------------------------
REPRESENTATIVE TERM SHEET FOR BANK CREDIT FACILITY (continued)
AGENCY FEE: To be determined.
COVENANTS: FINANCIAL COVENANTS (precise covenant package would
depend on credit quality of issuer)
- minimum net worth;
- minimum working capital ratio;
- minimum fixed charge coverage ratio;
- maximum funded debt / (EBITDA - Cap Ex.) ratio;
- minimum interest coverage ratio;
- capital expenditures limitation;
- total rent and lease expense limitation;
with covenant levels to be negotiated based on
Borrower's projections provided to the Agent.
Standard affirmative, negative and informational
covenants for the Agent's similar financings and such
others as the Agent shall deem appropriate for the
Credit Facilities, including (without limitation);
compliance with law; payment of taxes; maintenance of
properties and insurance; preservation of existence;
reporting requirements to include, without limitation:
REPORTING REQUIREMENTS
- monthly financial reports;
- quarterly financial statements and accompanying
officer's certificate;
- audited annual financial statements, accompanying
officer's certificate and auditor's management
letters;
- annual projections through 2000 (monthly for the
initial year and annual for subsequent years);
- ERISA and environmental reporting;
- notice of litigation and default;
- SEC filings and reports from any subordinated debt
trustee;
EVENTS OF DEFAULT: Standard events of default with customary grace periods
(if any) for the Agents' similar financings and such
others as the Agent deems appropriate for the Credit
Facilities, including (without limitation): nonpayment;
material breach of representations and warranties or
covenants; bankruptcy or insolvency; material unstayed
judgment; ERISA events of default; and material
cross-default.
|
INDEMNIFICATION: Standard indemnification by the Borrower and its
subsidiaries included in the Agent's similar
financings, and such other indemnifications as the
Agency shall reasonably deem appropriate for the Credit
Facilities.
REPRESENTATIONS, Standard and usual for this type of transaction,
WARRANTIES AND OTHER including, but not limited to, financial covenants,
COVENANTS: limitations on liens, capital expenditures,
indebtedness, investments, guaranties, mergers
and acquisitions, sale of assets, transactions with
affiliates, insurance requirements, compliance with
pension, environmental and other laws and regulations,
and other such customary covenants.
|
CONFIDENTIAL PROJECT REDWING - ------------------------------------------------------------------------------- |
REPRESENTATIVE TERM SHEETS
SENIOR NOTES
REPRESENTATIVE TERM SHEET
ISSUER: Redwing (the "Company")
SECURITY: Senior Notes
SIZE: $____ million
MATURITIES: Up to 30 years
REDEMPTION PROVISIONS: Both callable and noncallable structures are
available.
INTEREST RATE: A fixed-rate of interest to be determined at
the time of offering. Interest will be
calculated on the basis of a 360-day year
comprised of twelve 30-day months.
INTEREST PAYMENT DATES: Interest on notes will be payable semiannually.
DENOMINATION: Minimum of $1,000, with integral multiples of
$1,000 thereafter.
RANKINGS: Senior unsecured, general obligations of the
Company.
RATINGS: Moody's Investors Service, Inc. and Standard &
Poor's Corporation.
SEC REGISTRATION: Required.
EXCHANGE LISTING: Not required.
LIMITATION ON TRANSFERABILITY: The notes will be publicly registered
securities and, as such, no secondary market
restrictions apply.
FORM OF NOTES: Fully registered as to principal and interest.
|
CONFIDENTIAL PROJECT REDWING
- -------------------------------------------------------------------------------
REPRESENTATIVE TERM SHEET FOR SENIOR NOTES
SETTLEMENT: Book entry or physical settlement in New York
City in next day ("Clearinghouse") funds, five
business days after pricing, unless otherwise
determined at the time of the offering.
SIGNIFICANT COVENANTS
LIMITATIONS ON LIENS The Company and its subsidiaries may not
issue, assume, incur or guarantee any
indebtedness for borrowed money secured by a
mortgage, pledge, lien or other encumbrance,
directly or indirectly, upon any assets,
whether now owned or hereafter acquired,
without effectively providing that the new
debt securities shall be secured equally and
ratably with, or prior to, any such secured
indebtedness so long as such indebtedness
remains outstanding.
LIMITATION ON SALE AND Sale and lease-back transactions are
LEASE-BACK TRANSACTIONS prohibited unless (a) the Company is entitled
to incur indebtedness secured by a lien of
an equivalent amount on the assets to be
leased; or (b) the proceeds of the sale of
assets to be leased are at least equal to
their fair market value and are applied to the
purchase or acquisition of assets or the
retirement of senior debt, subject to
exceptions.
CONSOLIDATION, MERGER The Company may consolidate with, or sell,
AND SALE OF ASSETS lease or convey all or substantially all of
its assets to, or merge with or into any
other corporation, provided that (a) either
the Company shall be the continuing
corporation or the successor corporation shall
be a United States corporation and shall
expressly assume payment of the principal of
(and premium, if any) and interest on all the
debt securities and the performance and
observance of all the covenants and conditions
of the indenture; and (b) the Company or such
successor corporation shall not immediately
thereafter be in default under the indenture.
MODIFICATION OR WAIVER Modification and amendment of the indenture
may be made by the Company and the trustee
with the consent of the holders of ____% of
the principal amount of all outstanding
indenture securities issued under the
indenture that are affected by such
modification or amendment; however, certain
modifications of the original terms require
unanimous consent of the holders.
|
Exhibit 99(L)
PROJECT REDWING
JULY 13, 1994
SMITH BARNEY INC.
- - Comparable Company Analysis: Selected Outdoor Product C-Corporations. . . 1 - - Pro Forma Redwing Financial Statements. . . . . . . . . . . . . . . . . . 2 - - Pro Forma Valuation Analysis. . . . . . . . . . . . . . . . . . . . . . . 3 |
PROJECT REDWING
|
COMPARABLE COMPANY ANALYSIS: SELECTED OUTDOOR PRODUCT C-CORPORATIONS
Multiples of Market Value
-------------------------
LTM
Indicated Tang ------------------
Latest Price Dividend Market Book Net Cash
Company Ticker Financials 07/12/94 Yield Value Value Income Flow(2)
- ------- ------ ---------- -------- --------- ------ ----- ------ -------
Anthony Industries ANT Mar-94 $15.250 2.9% $171.3 2.3 16.0 9.1
Arctco Inc ACAT Mar-94 $29.750 0.6% $586.8 5.0 22.9 19.6
Brunswick Corp BC Mar-94 $23.375 1.9% $2,242.9 19.1 31.5 11.9
Coleman Co Inc CLN Mar-94 $29.000 0.0% $777.4 9.5 21.2 13.1
Harley-Davidson Inc HDI Mar-94 $49.750 0.5% $1,917.1 5.5 31.0 20.0
Huffy Corporation HUF Mar-94 $15.625 0.5% $233.9 2.1 15.5 6.6
Outboard Marine Corporation OM Mar-94 $20.750 1.9% $416.2 3.0 NM NM
Winnebago Industries WGO Feb-94 $9.000 0.0% $226.9 3.4 17.8 11.0
-----------------------------------------------------------
MEAN 1.0% 6.2 22.3 13.0
MEDIAN 0.6% 4.2 19.5 11.4
HIGH 2.9% 19.1 31.5 20.0
LOW 0.0% 2.1 15.5 6.6
-----------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Redwing Mar-94 $32,750 7.7% $534.1 10.5 21.5 11.8(4)
- -------------------------------------------------------------------------------------------------------------
Multiples of
AMV Multiple
------------------------ of Projected
Adjusted LTM LTM Cal. EPS
Market --------------------------------------------------------------- ------------
Company Value(3) Sales EBITDA EBIT NI Sales EBITDA EBIT 1994 1995
- ------- -------- ----- ------ ---- -- ----- ------ ---- ---- ----
Anthony Industries $270.0 $443.4 $28.7 $20.6 $10.7 0.6 9.4 13.1 13.7 10.5
Arctco Inc $510.2 $248.4 $41.6 $37.3 $25.6 2.1 12.3 13.7 18.5 16.0
Brunswick Corp $2,450.4 $2,298.9 $240.9 $123.0 $71.1 1.1 10.2 19.9 22.1 15.4
Coleman Co Inc $941.9 $595.6 $94.4 $71.6 $36.7 1.6 10.0 13.2 18.4 15.6
Harley-Davidson Inc $1,903.2 $1,291.5 $168.8 $134.8 $61.8 1.5 11.3 14.1 20.0 17.2
Huffy Corporation $309.2 $732.1 $55.5 $35.0 $15.1 0.4 5.6 8.8 11.2 9.9
Outboard Marine Corporation $589.2 $1,036.1 $66.7 $21.0 ($59.7) 0.6 8.8 NM 18.9 12.0
Winnebago Industries $231.2 $426.8 $20.9 $13.0 $12.8 0.5 11.1 17.8 11.0 NA
---------------------------------------------------------------------------------------------------------
MEAN 1.0 9.8 14.4 16.7 13.8
MEDIAN 0.8 10.1 13.4 18.4 13.7
HIGH 2.1 12.3 19.9 22.1 17.2
LOW 0.4 5.6 8.8 11.0 9.9
---------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Redwing $527.0 $566.4 $76.1 $55.6 $24.9 0.9 6.9 9.5 18.3(5) 15.2(5)
- -------------------------------------------------------------------------------------------------------------------
Latest Twelve Months Return 4 Year CAGR
--------------------------------- on Average -------------- E.P.S. Proj. Debt
Gross EBITDA EBIT Net --------------- Net Growth Growth as a %
Margin Margin Margin Margin Assets Equity Sales Income '94E-'95E (6) of Cap.
------ ------ ------ ------ ------ ------ ----- ------ --------- ------ -------
Anthony Industries 27.2% 6.5% 4.6% 2.4% 4.1% 12.1% 3.0% -4.6% -9.9% 15.0% 52.3%
Arctco Inc 30.4% 16.8% 15.0% 10.3% 18.8% 24.1% 18.5% 20.9% 22.9% 15.3% 0.6%
Brunswick Corp 31.5% 10.5% 5.4% 3.1% 3.6% 8.7% -6.0% NM 86.0% 18.3% 26.6%
Coleman Co Inc 33.8% 15.8% 12.0% 6.2% 6.6% 15.7% NA NA 21.5% 18.0% 41.9%
Harley-Davidson Inc 29.9% 13.1% 10.4% 4.8% 10.3% 18.4% 47.6% NM 68.2% 19.5% 7.1%
Huffy Corporation 21.2% 7.6% 4.8% 2.1% 4.5% 10.9% 22.6% 47.0% NM 10.7% 40.3%
Outboard Marine Corporation 27.4% 6.4% 2.0% -5.8% NM NM -8.3% NM NM 15.7% 59.3%
Winnebago Industries 16.4% 4.9% 3.0% 3.0% 8.0% 17.2% 58.0% NM NM 17.5% 6.4%
--------------------------------------------------------------------------------------------------------------------
MEAN 27.2% 10.2% 7.2% 3.3% 8.0% 15.3% 14.6% 34.0% 30.1% 17.2% 29.3%
MEDIAN 28.7% 9.0% 5.1% 3.0% 5.6% 13.9% 10.8% 20.9% 21.5% 17.8% 33.5%
HIGH 33.8% 16.8% 15.0% 10.3% 18.8% 24.1% 58.0% 47.0% 86.0% 18.3% 59.3%
LOW 16.4% 4.9% 2.0% -5.8% 3.6% 8.7% -8.3% 20.9% -9.9% 15.0% 0.6%
--------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Redwing 29% 13% 10% 4%(4) 14% 18%(4) 21% 18% 20.5% 20%(7) NM
- -----------------------------------------------------------------------------------------------------------------------------------
NOTES
- --------------------------------------------------------------------------------
(1) Tangible Book Value is defined as shareholders' equity minus intangible
assets.
(2) Cash flow is defined as net income from cont. operations plus depreciation,
amortization and deferrals.
(3) Adjusted market value is defined as market value of the common equity plus
net debt (total debt less cash) plus book value of preferred stock.
(4) Net Income available to the limited partners tax effected at a rate of 36%.
(5) Estimated net income available to limited partners from latest Kinnard &
Co. research report tax effected at a rate of 36%.
(6) Five year growth projections from Bloomberg Financial Services.
(7) Projected growth provided by latest Kinnard & Co. research report.
|
ACTUAL PRO FORMA
3/31/94 ADJUSTMENTS 3/31/94
------- ----------- ---------
ASSETS
Current $103,193 ($21,947) $81,246
Property, Plant & Equipment 40,787 40,787
Deferred Tax Asset 0 75,000 (1) 75,000
Intangibles 29,282 29,282
-------- --------
TOTAL ASSETS $173,262 $53,053 $226,315
-------- --------
-------- --------
LIABILITIES
Current $93,214 $93,214
Long Term Debt 0 166,077 (2) 166,077
-------- --------
TOTAL LIABILITIES 93,214 259,291
PARTNERS' CAPITAL
Deferred Tax Asset - 75,000 (1) 75,000
Distribution - (180,524)(3) (180,524)
Expenses - (7,500) (7,500)
-------- ------------ --------
TOTAL PARTNERS' CAPITAL 80,048 (113,024) (32,976)
TOTAL LIABILITIES AND PARTNERS' CAPITAL $266,476 $53,053 $226,315
-------- --------
-------- --------
(1) Reflects creation of new Deferred Tax Asset upon conversion to corporate
form. Amount represents purchase price of units since August 1, 1991 in
excess of tax basis of assets.
(2) Reflects total borrowings of $166.1 million to fund cash distribution to
Partners. $136 million senior term debt and $30 million revolving credit
facility.
(3) Reflects distribution of $180.5 million cash to Partners.
|
PROJECTED PRO FORMA
1994 ADJUSTMENTS 1994
--------- ----------- ---------
REVENUES $678,836 $678,836
GROSS PROFIT 185,843 185,843
Operating Expenses 92,108 92,108
-------- --------
EBITDA 93,735 93,735
Interest 0 12,010(1) 12,010
Depreciation 4,174 4,174
Amortization 12,526 12,526
First Rights Compensation 5,246 5,246
Tax Deductable Goodwill 5,496 5,496
-------- --------
Taxable Income 66,293 54,283
Tax 5,460 17,485(2) 22,945
NET INCOME $60,833 $31,338
-------- --------
-------- --------
NET INCOME PER UNIT/SHARE $3.75 $1.89
UNITS/SHARES OUTSTANDING 16,210 16,539
(1) Reflects interest expense of 7.5% on $136 million of senior term debt and
6% on $30 million revolving credit facility.
(2) Reflects total federal and local taxes at 42.3% combined rate.
|
PROJECTED PRO FORMA
1994 ADJUSTMENTS 1994
--------- ----------- ---------
NET INCOME $60,833 ($29,495)(1) $31,338
Depreciation 4,174 4,174
Amortization 12,526 12,526
First Rights Compensation 5,246 5,246
Goodwill 5,496 5,496
Amortization of Deferred Tax Asset 0 6,250(2) 6,250
Changes in Working Capital (2,268) (2,268)
------- -------
NET CASH FROM OPERATING ACTIVITIES 86,007 62,762
Purchase of Property and Equipment (29,508) (29,508)
------- -------
FREE CASH FLOW 56,499 33,254
Increase in Borrowings 0 0
------- -------
DISTRIBUTABLE CASH 56,499 33,254
Cash Distribution (50,533) 0
------- -------
INCREASE (DECREASE) IN CASH $5,966 $33,254
------- -------
------- -------
(1) Represents cumulative change in net income due to increased interest
expense of $12,010 and an increase in taxes payable of $17,485.
(2) Amortization of deferred tax asset over 12 years. This is a source of cash,
representing a reduction of actual taxes payable from accrued tax liability
pursuant to GAAP.
|
PROJECT REDWING
CONFIDENTIAL JULY 13, 1994
- --------------------------------------------------------------------------------
REDWING PRO FORMA VALUATION ANALYSIS 07:11 PM
(DOLLARS IN MILLION EXCEPT PER BAC OR SHARE) 07/12/94
|
CURRENT PROJECTED PRICE/EARNINGS RATIOS
PRICE 5 YEAR -------------------------------------------------------
COMPANY 07/12/94 GROWTH 1993A 1994P 1995P
- ------- -------- --------- ---------------- ---------------- ----------------
P/E EPS (1) P/E EPS (1) P/E EPS (1)
------- ------- ------- ------- ------- -------
Arctco Inc. $29.75 15.3% 22.7x $1.31 18.5x $1.61 16.0x $1.86
Brunswick Corp. 23.38 18.3% 41.0 0.57 22.1 1.06 15.4 1.52
Coleman Co Inc. 29.00 18.0% 22.3 1.30 18.4 1.58 15.6 1.86
Harley-Davidson Inc. 49.75 19.5% 33.6 1.48 20.0 2.49 17.2 2.90
Outboard Marine Corp. 20.75 15.7% NM (3.46) 19.7 1.05 17.0 1.75
- -------------------------------------------------------------------------------------------------
MEAN: 17.4% 24.6x 19.7x 16.0x
MEDIAN: 18.0% 28.0 19.7 15.6
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
|
IMPLIED VALUATION PER SHARE
PROJECTED ------------------------------
REDWING EPS APPROPRIATE P/E RANGE IMPLIED VALUE
- ------- --------- ------------------------------- ------------------------------
1993 $1.48 22.0x 23.5x 25.0x $32.59 $34.82 $37.04
1994 $1.89 18.0 19.0 20.0 34.10 36.00 37.89
1995 1995
EPS GROWTH PROJECTED
REDWING RATE EPS APPROPRIATE P/E RANGE IMPLIED VALUE
- ------- ---------- --------- ------------------------------- ------------------------------
1995 15.0% $2.18 15.0 16.0 17.0 $32.68 $34.86 $37.04
1995 20.0% 2.27 15.0 16.0 17.0 34.10 36.38 38.65
1995 25.0% 2.37 15.0 16.0 17.0 35.53 37.89 40.26
MEAN: $33.80 $35.99 $38.18
(1) Earnings per share are calendarized Zack's estimates as of July 12, 1994.
|
PROJECT REDWING
DISCUSSION MATERIALS
JULY 1994
SMITH BARNEY INC.
TABLE OF CONTENTS SECTION ONE: TAB [Intentionally Ommitted] SECTION TWO: DISCUSSION MATERIALS Summary of Leveraged Recapitalizations . . . . . . . . . . . . . . . . . . 4 MLP Conversions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 |
CONFIDENTIAL PROJECT REDWING
- --------------------------------------------------------------------------------
SUMMARY OF LEVERAGED RECAPITALIZATIONS
- - There have been approximately 27 leveraged recapitalizations since 1986.
- - Most recapitalizations occurred in response to unsolicited acquisition
proposals or perceived vulnerability.
- - In almost all cases, the combined value of the distribution/dividend (cash
and/or securities) and the "stub equity" exceeded the value of the equity
prior to the announcement of the recapitalization.
- - The vast majority of the stub equities traded in line with the broader
equity market post recapitalization.
|
CONFIDENTIAL PROJECT REDWING - -------------------------------------------------------------------------------- SUMMARY OF LEVERAGED RECAPITALIZATIONS 1986-PRESENT |
STOCK
PRICE
FORM OF ONE WEEK
DATE DATE DIVIDEND PRIOR TO VALUE POST
COMPANY ANNOUNCED EFFECTIVE PER SHARE ANNOUNCEMENT EFFECTIVE DATE COMMENT
- ----------------------------- --------- --------- ----------------------- ------------ -------------- -----------------
Curtiss-Wright Corp. 07/12/90 08/15/90 $30.0 Cash $64.0 $36.9 Stock Distribution of
30.0 Dividend special one-time
---- -------- dividend from
$66.9 Total funds set aside
for equity
investments in
other companies.
Georgia Gulf Corp. 11/21/89 04/27/90 $30.0 Cash $53.6 $9.1 Stock Recapitalization
8.5 15% Note 38.5 Dividend as a defense to
--- ---- -------- hostile offer by
$38.5 $47.6 Total NL Industries of
$43.5 per share.
Each holder could
elect to receive
5.5 shares of new
common stock.
Phelps Dodge Corp. 09/06/89 10/10/89 $10.0 Cash $37.3 $29.3 Stock Distribution of
10.0 Dividend special cash
---- -------- dividend after
$39.3 Total the company was
unable to find a
suitable company
to acquire.
Interlake Corp. 08/11/89 09/28/89 $45.0 Cash $54.0 $16.5 Stock Defense to
45.0 Dividend possible takeover
---- -------- by Mark IV
$61.5 Total Industries. Part
of a
comprehensive
restructuring
that included an
ESOP, stock
repurchase and
divestiture of
peripheral
operations.
Rexene Corp. 06/05/89 07/10/89 $7.0 Cash $14.5 $8.0 Stock Payout funded
7.0 Dividend by issue of $500
--- -------- million in debt
$15.0 Total securities.
Service Merchandise Co. Inc. 05/03/89 07/25/89 $10.0 Cash $8.7 $6.6 Stock Response to
10.0 Dividend persistent
---- -------- takeover rumors.
$16.6 Total
Sealed Air Corp. 05/27/89 05/27/89 $40.0 Cash $22.8 $9.5 Stock Dividend was not
40.0 Dividend in response to an
---- -------- offer. Entered
$49.5 Total into a $215M
credit agreement
and $180M
subordinated
securities
purchase
agreement to
finance the
dividend.
Triad Systems Corp. 03/21/89 08/09/89 $15.0 Cash $17.1 $4.1 Stock Response to a
15.0 Dividend hostile $17-per-
---- -------- share offer from
$19.1 Total Volt Information
Sciences.
SPX Corp. 03/06/89 05/30/89 $13.0 Cash $38.1 $28.5 Stock One-time cash
13.0 Dividend dividend financed
---- -------- through the sale
$41.5 Total of their
automotive
business.
CUC International 03/03/89 06/06/89 $5.0 Cash $5.1 $5.9 Stock One-time cash
7.0 Cvt. Sub. Notes 12.0 Dividend dividend.
--- ---- --------
$12.0 Total $17.9 Total
|
STOCK
PRICE
FORM OF ONE WEEK
DATE DATE DIVIDEND PRIOR TO VALUE POST
COMPANY ANNOUNCED EFFECTIVE PER SHARE ANNOUNCEMENT EFFECTIVE DATE COMMENT
- ----------------------------- --------- --------- ----------------------- ------------ -------------- -----------------
Whittaker 02/27/89 06/29/89 $40.0 Cash $46.6 $11.5 Stock Followed the
40.0 Dividend rejection of an
---- -------- offer made by
$51.5 Total Caiola
Associates.
Shaklee Corp. 02/03/89 03/20/89 $20.0 Cash $26.0 $27.8 Stock One-time cash
20.0 Dividend dividend to
------------- distribute
$47.8 Total proceeds from
sale of stake in
Shaklee Japan.
Quantum ChemicalCorp. 12/28/88 01/10/89 $50.0 Cash $85.2 $55.0 Stock Special cash
50.0 Dividend dividend financed
---- -------- with $800M in
$105.0 Total debentures.
Zayre Corp. 12/05/88 06/14/89 $3.5 Cash $24.4 $17.4 Stock Recapitalization
3.5 Dividend that included the
---- -------- spinoff of its
$20.9 Total warehouse club
division and the
merger with its
83% owned TJX
Cos. unit.
Kroger Co. 09/13/88 10/28/88 $40.0 Cash $36.6 $18.3 Stock Defense to a $55
8.0 Sub. Deb. 48.0 Dividend per share take-
---- ---- -------- over attempt by
$48.0 $66.3 Total the Haft family.
Entertainment 07/20/88 06/28/89 $23.0 Cash NA -- Stock Response to two
Publications Inc. 23.0 Dividend failed attempts
---- -------- by a management-
$23.0 Total led investor
group to take the
company private
through a
leveraged buyout.
INTERCO Inc. 07/18/88 12/19/88 $38.6 Cash $45.3 $3.1 Stock Defense to $74-
11.0 13.75% Sr. Sub. 70.8 Dividend per-share hostile
6.6 14% Debs. ---- -------- bid from City
5.6 14.5% Debs. $73.9 Total Capital.
9.0 17.5% Exch. Pfd.
---
$70.8
USG Corp. 05/02/88 07/22/88 $37.0 Cash $39.8 $6.9 Stock Defense against
5.0 16% Jr. Sub. Debs. 42.0 Dividend hostile takeover
--- --- -------- bid by Desert
$42.0 $48.9 Total Partners.
Shoney's Inc. 03/07/88 07/26/88 $16.0 Cash $23.3 $11.5 Stock Special cash
4.0 12% Sub. Debs. 20.0 Dividend dividend and
---- ---- -------- recapitalization.
$20.0 $31.5 Total
|
STOCK
PRICE
FORM OF ONE WEEK
DATE DATE DIVIDEND PRIOR TO VALUE POST
COMPANY ANNOUNCED EFFECTIVE PER SHARE ANNOUNCEMENT EFFECTIVE DATE COMMENT
- ----------------------------- --------- --------- ----------------------- ------------ -------------- -----------------
Santa Fe Southern Pacific 12/11/87 02/12/88 $25.0 Cash $41.8 $17.3 Stock Defense to
Corp. 5.0 Debs. 30.0 Dividend threatened
---- ---- -------- takeover attempt
$30.0 $47.3 Total by Henley Group
which had
acquired a stake
in the company.
Newmont Mining Corp. 09/21/87 10/09/87 $33.0 Cash $76.5 $36.6 Stock Defense to $72-
33.0 Dividend per-share offer
---- -------- by Ivanhoe
$69.6 Total Partners. Ivanhoe
withdrew its
offer after
Consolidated
Gold Fields
raised its
stake in Newmont
from 25.9% to
49.3% through a
street sweep.
Harcourt Brace Jovanovich 05/26/87 07/28/87 $40.0 Cash $48.0 $12.3 Stock Defense to $44-
Inc. 10.0 Pfd. 50.0 Dividend per-share hostile
---- ---- -------- bid by Robert
$50.0 $62.3 Total Maxwell's British
Printing &
Communications.
Carter Hawley Hale Stores 12/08/86 08/27/87 $17.0 Cash, or $54.3 $15.3 Stock Defense to $60-
Inc. 17.0 Stock to Mgt. 59.8 Div./Stock per-share offer
$42.8 Stock in Spin-off ---- ---------- made by Retail
----- $75.0 Total Partners. Senior
$59.8 management
received $17 in
stock instead of
cash.
Holiday Corp. 11/12/86 04/22/87 $65.0 Cash $72.6 $17.1 Stock Holiday was
65.0 Dividend rumored to be a
---- -------- likely takeover
$82.1 Total candidate.
Leveraged
recapitalization
plan included
share for share
exchange.
Owens-Corning Fiberglass 08/28/86 11/05/86 $52.0 Cash $81.3 $12.1 Stock Defense to a $74-
Corp. 17.5 Jr.Sub. Deb. 69.5 Dividend per-share hostile
---- ---- -------- takeover bid from
$69.5 $81.6 Total Wickes. Each
share held by
employee benefit
plans converted
into 5.6 new
common shares,
giving employees
a 25% stake in
the new company.
Colt Industries Inc. 07/18/86 12/30/86 $85.0 Cash $66.4 $11.7 Stock Recapitalization
85.0 Dividend was intended to
---- -------- maximize
$96.7 Total shareholder value
and was not an
anti-takeover
move. The
retirement plan
received one
share and was to
receive
additional shares
based on price 15
days after the
recapitalization.
FMC Corp. 02/20/86 05/29/86 $80.0 Cash $70.5 $19.3 Stock Defense to
80.0 Dividend possible hostile
---- -------- takeovers.
$99.3 Total Reduced public
ownership from
81% to 59%.
Management,
employee benefit
plans and the
ESOP received
5.667 shares at a
value of $109.1M.
The employee
thrift plan
received 4.209
new shares and
$25 cash at a
value of $106.0M.
|
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
FEBRUARY 1990 - AUGUST 1991
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
NOVEMBER 1989 - APRIL 1991
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
APRIL 1989 - OCTOBER 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
MARCH 1989 - SEPTEMBER 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1989 - JULY 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1989 - JULY 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1988 - DECEMBER 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
FEBRUARY 1989 - AUGUST 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
NOVEMBER 1988 - MAY 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
DECEMBER 1988 - JUNE 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
DECEMBER 1988 - JUNE 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
SEPTEMBER 1988 - APRIL 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
SEPTEMBER 1988 - JANUARY 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
NOVEMBER 1988 - JUNE 1990
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
APRIL 1988 - OCTOBER 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JUNE 1988 - DECEMBER 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1988 - JULY 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1988 - JULY 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
SEPTEMBER 1988 - MARCH 1989
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
APRIL 1987 - OCTOBER 1988
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1987 - JULY 1988
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
OCTOBER 1986 - AUGUST 1988
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
OCTOBER 1986 - APRIL 1988
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
MAY 1986 - NOVEMBER 1987
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
JANUARY 1986 - OCTOBER 1987
[Graph of price per share and earnings per share pre-announcement date through post-effective date of leveraged recapitalization]
NOVEMBER 1985 - MAY 1987
- - At the peak in 1987 there were over 70 MLPs which had a market capitalization exceeding $25 million. Natural Resource MLPs, (Timber and Oil and Gas), represented approximately 40% of this total by number.
- - Since then, approximately 50% have ceased to be MLPs, many electing to return to C-Corp status or electing REIT status.
Converted to C-Corp: 4 De-listed: 3 Liquidated: 3 Private: 3 Converted to REIT: 2 Bankrupt: 2 Out of Business: 7 Merged: 14
- - A total of six MLPs have converted straight to corporate or REIT form. Twelve MLPs have merged with existing corporate entities and two others have merged with existing MLPs.
- - At least one MLP, LMH Mortgage Securities, is planning to convert to corporate form within the next few months.
CONVERSION TO CORPORATE FORM
- - Of the four MLPs that have converted to corporate form, two companies' share prices continued to appreciate at the announcement of the conversion, and sustained the increase throughout the year subsequent to the conversion.
- - The other two companies' share prices jumped significantly at the announcement of the conversion, but proceeded to decline in the following month. This decline appears to be attributable more to an earnings decline than their conversion.
- - Of the two MLPs that elected REIT status, one company's share price appreciated significantly post-conversion despite negative earnings. The other company's share price depreciated consistently, a decline again associated with a decline in earnings.
CONVERSION DATE: Maritrans Partners L.P. converted to corporate form on 3/31/93.
COMPANY DESCRIPTION: Transports petroleum and petroleum products by tug and barge on the East Coast and Gulf Coast of the U.S.
REASONS FOR THE CONVERSION:
- Eliminate distributions to unitholders.
- Expansion of potential investor base to include institutional and other investors, and increased coverage by research analysts.
- Greater access to equity markets, potentially enabling the company to raise capital on more favorable terms.
- In light of opportunities to grow through acquisitions, the GP believed that an equity interest in a corporation is a more attractive acquisition currency than an interest in a partnership.
STRUCTURE OF THE CONVERSION:
- The Partnership transferred all of its asset and liabilities to Maritrans Inc., a Delaware Corp. newly formed on behalf of the Partnership, and dissolved.
- Each unit was exchanged for one share of common stock.
- The Managing G.P. and the Special G.P. will together own 2% of the outstanding capital stock of the corporation.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
NOVEMBER 1992 - MARCH 1993
CONVERSION DATE: Standard Pacific, L.P. converted to corporate form on 12/6/91.
COMPANY DESCRIPTION: Geographically diversified builder of medium-priced single- family homes, operating primarily in California and Texas.
REASONS FOR THE CONVERSION:
- Greater access to capital markets.
- Simplified tax reporting.
- Expansion of potential investor base to include institutional and other investors, and increased coverage by research analysts.
- Negative perception of Limited Partnerships in the marketplace.
- Reduced distributions and the need to retain earnings due to the limited availability of construction financing.
STRUCTURE OF THE CONVERSION:
- In the merger, SPC, a newly organized corporation, succeeded to all of the assets and liabilities of the Partnership.
- Each unitholder received one share of common stock per unit.
- The General Partners received a cash payment equal to 1% of the partnership's capital account.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
JUNE 1991 - DECEMBER 1992
CONVERSION DATE: UDC-Universal Development L.P. converted to corporate form on 9/22/92.
COMPANY DESCRIPTION: Develops land for its subdivisions and planned communities, designs and builds housing products appropriate for such developments, and sells those homes primarily to the retirement and family markets.
REASONS FOR THE CONVERSION:
- Eliminate distributions to LPs.
- Expansion of potential investor base and greater access to capital markets.
- Simplified tax reporting.
- Limited marketability of the L.P. units.
- Common stock provides more valuable acquisition currency.
STRUCTURE OF THE CONVERSION:
- The Partnership merged with UDC Homes, Inc., a newly formed corporation.
- The General Partners and affiliates entitled to certain ongoing consulting and origination fees.
- Each common unitholder received one share of common stock per unit.
- Series A and Series B Preferred Unitholders had the option receiving either:
a) one share of series A or series B preferred stock per preferred
unit,
b) 2 1/4 shares of Prime Preferred Exchangeable stock, or
c) 2 1/4 shares of common stock
d) The managing G.P. became a subsidiary of the Company.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
MARCH 1992 - SEPTEMBER 1993
CONVERSION DATE: Western Gas Processors, LP. ("WGP"), which operated all of Western Gas Resources Inc.'s ("WGR") business, merged into WGR, its sole general partner, on May 1, 1991.
COMPANY DESCRIPTION: Acquires, designs, constructs and operates natural gas gathering and processing facilities and markets and transports natural gas and NGLs.
REASONS FOR THE RESTRUCTURING:
- Emphasize growth by fixing the level of cashflow distributed and investing the remainder in capital expansion.
- Enhanced access to capital markets through the issuance of equity and debt securities.
- Potential to issue more marketable securities as consideration for acquisitions.
- Enhanced liquidity.
- Eliminate investor and market confusion regarding the Company's dual equity capital structure.
- Simplified tax reporting and reduction of administrative costs.
- Simplified management structure and removal of potential conflicts of interest.
STRUCTURE OF THE CONVERSION:
- The GP transferred all common units they owned to WGR in exchange for an equal number of shares of common stock.
- All remaining outstanding units were converted into an equal number of shares of common stock.
- The owners of the Preference units received their final preference distribution and their units were converted into an equal number of shares of common stock.
- WGR assumed all liabilities and assets of WGP, and WGP dissolved.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
NOVEMBER 1993 - JUNE 1994
CONVERSION DATE: EQK Green Acres L.P. converted to a REIT on 3/01/94.
COMPANY DESCRIPTION: Acquires, develops, lends to and manages primarily income producing retail properties and other real estate investments, in particular, Green Acres Mall.
REASONS FOR THE CONVERSION:
- To create an alternative for existing Unitholders who do not want to recognize substantial taxable income as a result of the required termination of the Partnership as of a specified date.
- To have flexibility in determining the timing and disposition of Green Acres Mall to assist in realizing maximum value for the property.
- Under prevailing market conditions, total market valuation of REITs as a percentage of their underlying asset value was generally higher than that of publicly-traded partnerships.
- To retain its investment in Green Acres Mall while seeking to diversify through the acquisition of additional real estate investments, thereby reducing the risk inherent in the ownership by the Partnership of a single asset.
- Greater access to equity markets.
STRUCTURE OF THE CONVERSION:
- Partnership merged into the Green Acres subsidiary which succeeded to the Partnerships assets and liabilities.
- Each unitholder received one share of common stock per Unit, constituting 85.46% of the outstanding common shares following the conversion.
- The GP received the equivalent of .88% of all common shares outstanding after the conversion.
- The special GP received the equivalent of 11.06% of the shares outstanding after the conversion.
- The Advisor received 2.60% of the outstanding shares following the conversion.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
NOVEMBER 1993 - JUNE 1994
CONVERSION DATE: Southwest Realty, Ltd. ("SRL") converted to a REIT on 9/8/92.
COMPANY DESCRIPTION: Operates as a self-administered, equity real estate investment trust which owns and manages real estate properties located in Texas and Oklahoma. The Company's real estate investments include garden apartment complexes and interests in other real estate partnerships.
REASONS FOR THE CONVERSION:
- Increase annual cash flow through the retirement of existing debt.
- Reduce the number of fully diluted shares of common stock outstanding by approximately 25%.
- Expand potential investor base.
- Create a more conservative debt-to-asset-value ratio.
- Simplified tax reporting.
- Anticipated value of common shares vs. L.P. units due to increased liquidity specifically in regards to the concurrent offering of convertible debentures.
STRUCTURE OF THE CONVERSION:
- 1 share of common stock for 5 common LPs, DRs or SAC shares.
- $21.00 per share to redeem the Preferred DRs and Preferred LPs which were not converted into common DRs or common LPs prior to the offering (in order to receive 2 shares of common stock for each Preferred LP and Preferred DR converted).
- $687,000 to repurchase 333,100 DRs and 915,697 warrants in settlement of certain litigation.
- GP received 1% of a) the value of the common stock issued to SRL (# of shares x initial trading price), and b) the amount of SRLs liabilities assumed by the company.
- Completed a $55 million convertible subordinated-debenture offering in part to fund the distribution (interest rate between 6.5% - 7.5%), and to retire existing indebtedness.
[Graph of price per share and earnings per share pre-announcement date through post-conversion date]
MARCH 1992 - SEPTEMBER 1993