-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kw1Wv7AiC1v+WzWr00kqqHhRjfkgfL1PnTdqq0fG1MZjtRaW8ZDN4pautzmYZzO9 rhiD1OtAIgyVsuu/JQs/jg== 0000912057-94-003313.txt : 19941006 0000912057-94-003313.hdr.sgml : 19941006 ACCESSION NUMBER: 0000912057-94-003313 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19941005 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS INDUSTRIES INC/MN CENTRAL INDEX KEY: 0000931015 STANDARD INDUSTRIAL CLASSIFICATION: STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-55769 FILM NUMBER: 94551560 BUSINESS ADDRESS: STREET 1: 1225 HIGHWAY 169 NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55441 MAIL ADDRESS: STREET 1: C/O SIMPSON THACHER & BARTLETT STREET 2: 425 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1994 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ POLARIS INDUSTRIES INC. (Exact name of registrant as specified in its charter) Minnesota 3700 41-1790959 (State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
1225 HIGHWAY 169 NORTH MINNEAPOLIS, MN 55441 (612) 542-0500 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ JOHN H. GRUNEWALD EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY POLARIS INDUSTRIES INC. 1225 HIGHWAY 169 NORTH MINNEAPOLIS, MN 55441 (612) 542-0500 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------------ 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
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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...................... 18,423,184 $35.313 $650,577,897 $224,337.21
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) under the Securities Act of 1933 based on the average of the high and low prices of BACs of Polaris Industries Partners, L.P. on the American Stock Exchange on September 28, 1994. ------------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- POLARIS INDUSTRIES INC. CROSS-REFERENCE SHEET
ITEM NUMBER IN FORM S-4 LOCATION IN PROSPECTUS -------- ---------------------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................ Forepart of Registration Statement, Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Incorporation of Certain Documents by Reference, Available Information, Inside Front Cover Page, Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................................... Summary, Risk Factors, Conflicts of Interest and Other Considerations, Certain Federal Income Tax Considerations, Voting and Proxy Information, Appraisal Rights, Selected Historical and Pro Forma Financial Information 4. Terms of the Transaction............................ Summary, The Conversion, Description of Capital Stock, Comparative Rights of BAC Holders and Holders of Common Stock, Certain Federal Income Tax Considerations, Accounting Treatment of the Conversion 5. Pro Forma Financial Information..................... Summary, Selected Historical and Pro Forma Financial Information 6. Material Contacts with the Company Being Acquired... * 7. Additional Information Required for Reoffering by Persons and Parties Deemed to Be Underwriters....... * 8. Interests of Named Experts and Counsel.............. The Conversion, Selected Historical and Pro Forma Financial Information, Experts, Management's Discussion and Analysis of Financial Condition and Results of Operations 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities......................................... * B. INFORMATION ABOUT THE REGISTRANT 10. Information with respect to S-3 Registrants......................................... * 11. Incorporation of Certain Information by Reference... * 12. Information with Respect to S-2 or S-3 Registrants......................................... *
13. Incorporation of Certain Information by Reference................................. * 14. Information with Respect to Registrants Other Than S-2 or S-3 Registrants......... Summary, The Conversion C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies................................. * 16. Information with Respect to S-2 or S-3 Companies................................. Incorporation of Certain Documents By Ref- erence, Summary, The Conversion, Busi- ness, Selected Historical and Pro Forma Financial Data, Market Prices and Distribution, Management's Discussion and Analysis of Financial Condition and Results of Operations 17. Information with Respect to Companies Other Than S-2 or S-3 Companies........... * D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Autho- rizations are to be Solicited............. Summary, Voting and Proxy Information, Appraisal Rights, Management 19. Information if Proxies, Consents or Autho- rizations are not to be Solicited or in an Exchange Offer............................ *
- ------------------------ * Omitted because the item is inapplicable or the answer thereto is negative. POLARIS INDUSTRIES PARTNERS L.P. POLARIS INDUSTRIES INC. 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 , 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"). Subsequent to 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 tax-free 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 the General Partner and its affiliates will receive, in exchange for their interests in such entities, 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, 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 dividend rate of $.15 per share per quarter, and pay three special cash distributions, each of $1.92 per share, payable during 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). 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 distribution policy (i.e. $2.52 per BAC per annum). The Sponsors 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 Sponsors and the General Partner urge you to vote "FOR" the Conversion primarily for the following reasons: - 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. While the General Partner has participated in legislative efforts to change current law, to date these efforts have been inconclusive. Neither the alternative of operating in partnership form and being taxed as a corporation after 1997 nor preventing trading in BACs would be advantageous to BAC holders. - 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 were to continue to increase because Polaris' continued growth could require reinvesting significant amounts of cash in the business. Accordingly, assuming income growth continues in 1994 and subsequent years, BAC holders may be required to report and pay tax on additional taxable income from the Partnership without a corresponding increase in cash distributions. It is expected that this disparity will continue to increase in the foreseeable future. - There are non-tax business reasons for the Conversion. The Conversion is expected to enhance the ability of Polaris to grow and diversify; to result in greater trading activity and market liquidity for Polaris' securities by attracting a broader array of institutional and other investors and increasing investment analysts' coverage of Polaris; and to reduce significantly the costs of tax reporting for Polaris and its investors. Polaris is believed to be one of the few remaining substantial manufacturing concerns organized as a publicly traded partnership. - The Sponsors and the General Partner believe that now is the right time to convert because current law is favorable to participants in the Conversion; at present the operations and financial condition of Polaris are strong; and general business and market conditions currently are favorable. Postponing the Conversion could result in increasing uncertainty about the future organization and status of Polaris and might jeopardize the Partnership's ability to convert in a manner and at a time advantageous 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. BAC holders are urged to review carefully the attached Proxy Statement, which contains a detailed description of the proposed Conversion and the fairness opinions delivered to the Partnership in connection therewith. 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. 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, the General Partner and its affiliates) 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. Sincerely, Victor K. Atkins, Jr. W. Hall Wendel, Jr. President, EIP Capital Corporation, as 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. 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. 2 OCTOBER , 1994 NOTICE OF SPECIAL MEETING OF BAC HOLDERS TO BE HELD ON , 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 , 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, would 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 tax-free 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, the General Partner and its affiliates) holding a majority of BACs held by them. Only BAC Holders of record at the close of business on Friday, , 1994 are entitled to notice of and to vote at the Special Meeting. 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, as 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. (COVER PAGE CONTINUED) SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1994 PRELIMINARY PROXY STATEMENT/PROSPECTUS POLARIS INDUSTRIES INC. [ ] 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 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, its affiliates and Polaris Industries L.P. are collectively 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 (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 tax-free 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 Exchange Ratio was agreed to after extended discussions and negotiations beginning in early June 1994 between affiliates of the General Partner and W. Hall Wendel, Jr., the Chief Executive Officer of Polaris, and certain other members of senior operating management of the Operating Partnership. The Conversion Proposal is sponsored by the senior operating management of the Operating Partnership 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, $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 exceed $11 million in 1994. These arrangements and payments will end upon consummation of the Conversion. The Sponsors and the General Partner urge you to vote "FOR" the Conversion primarily for the following reasons: - 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. While the General Partner has participated in legislative efforts to change current law, to date these efforts have been inconclusive. Neither the alternative of operating in partnership form and being taxed as a corporation after 1997 nor preventing trading in BACs would be advantageous to BAC Holders. (CONTINUED ON NEXT PAGE) ------------------------ NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ OCTOBER , 1994 2 (COVER PAGE CONTINUED) - 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 dividend rate of $.15 per share per quarter, and pay three special cash distributions, each of $1.92 per share, payable during 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). 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 distribution policy. The Sponsors 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 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 were to continue to increase, because Polaris' continued growth could require reinvesting significant amounts of cash in its business. Accordingly, assuming income growth continues in 1994 and subsequent years, BAC Holders may be required to report and pay tax on additional taxable income from the Partnership without a corresponding increase in cash distributions. It is expected that this disparity will continue to increase in the foreseeable future. - There are non-tax business reasons for the Conversion. The Conversion is expected to enhance the ability of Polaris to grow and diversify; to result in greater trading activity and market liquidity for Polaris' securities by attracting a broader array of institutional and other investors and by increasing investment analysts' coverage of Polaris; and to reduce significantly the costs of tax reporting for Polaris and its investors. Polaris is believed to be one of the few remaining substantial manufacturing concerns organized as a publicly traded partnership. - The Sponsors and the General Partner believe that now is the right time to convert because current law is favorable to participants in the Conversion; at present the operations and financial condition of Polaris are strong; and general business and market conditions currently are favorable. Postponing the Conversion could result in increasing uncertainty about the future organization and status of Polaris and might jeopardize the Partnership's ability to convert in a manner and at a time advantageous to BAC Holders. 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. 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. Although 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. - 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. 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. However, certain members of senior operating management of the Operating Partnership, who have no economic interest in the General Partner, negotiated the terms of the Conversion with the General Partner; consummation of the Conversion is contingent upon receipt of the approval of both BAC Holders and unaffiliated BAC Holders (BAC Holders other than the Sponsors, the General Partner and its affiliates); and dissenting BAC Holders are entitled to Appraisal Rights. - As more fully described under "Market Prices and Distributions", the Sponsors intend to recommend to the Board of Directors of the Corporation that the Corporation establish an initial dividend rate of $.15 per share per quarter and make three special cash distributions, each of $1.92 per share, payable during 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). The Corporation is under no legal obligation to make such dividends or distributions and the timing and amount of future dividends and distributions will be at 3 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. - The Corporation expects to incur indebtedness in excess of that incurred by the Partnership, including indebtedness to fund 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 has 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, the General Partner and its affiliates) 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 General Partner, affiliates of the General Partner and members of senior operating management of the Operating Partnership, who own approximately 14% of outstanding BACs in the aggregate, have advised the Partnership that they intend to 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 October , 1994. Application will be made to list the Common Stock on the American Stock Exchange and the Pacific Stock Exchange. 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. 4 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 will be 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 [DATE FIVE BUSINESS DAYS PRIOR TO THE MEETING DATE] , 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 and June 30, 1994; and (c) Current Report on Form 8-K dated August 25, 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. 5 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION................................................... 4 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 4 SUMMARY................................................................. 7 Overview of the Conversion............................................ 7 Reasons for the Conversion............................................ 9 Risk Factors, Conflicts of Interest and Other Considerations.......... 10 Existing Economic Interests of the Partners........................... 12 Alternatives to the Conversion........................................ 13 Allocation of Common Stock Between BAC Holder Interests and General Partner Interests.................................................... 15 Fairness Opinions..................................................... 16 Recommendation of the General Partner................................. 16 Summary of Certain Federal Income Tax Considerations.................. 16 Conditions to the Conversion.......................................... 16 Consequences if Conversion Proposal is Not Approved or the Conversion is Not Consummated................................................... 17 Management and Compensation........................................... 17 Voting at the Special Meeting......................................... 18 Appraisal Rights...................................................... 18 List of BAC Holders................................................... 18 The Partnership and the Corporation................................... 19 Summary of Selected Financial Information............................. 21 Summary............................................................... RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS............ 22 Risks, Conflicts of Interest and Considerations Related to the Conversion........................................... 22 Tax Implications.................................................... Potential Conflicts of Interest..................................... 22 No Independent Representation....................................... 22 Future Dividends and Distributions.................................. 23 Indebtedness........................................................ 23 Uncertainty Regarding Market Price for Common Stock................. 23 Change in Ownership Rights.......................................... 23 Voting Rights....................................................... 23 Elimination of General Partner Liability for Polaris Obligations.... 24 Fiduciary Obligations............................................... 24 Future Dilution of Common Stock..................................... 24 Costs of Conversion................................................. 25 Risks for Nonapproving BAC Holders.................................. 25 Provisions That May Discourage Changes of Control................... 25 Risks Related to the Business......................................... 25 Product Safety and Regulation....................................... 25 Supply Arrangements................................................. 26 Competition......................................................... 27 Effects of Weather.................................................. 27 Product Liability................................................... 27 Warranties.......................................................... 27 THE CONVERSION.......................................................... 28 The Partnership....................................................... 28 Background of the Conversion.......................................... 28 Reasons for the Conversion............................................ 31 Changes in Tax Status of the Partnership............................ 31 PAGE ---- Distribution Equivalency............................................ 31 Reduction of Tax Impact to Investors................................ 32 Greater Access to Capital Markets and Expansion of Investor Base.... 32 Enhanced Growth Potential........................................... 32 Ability to Diversify................................................ 32 Tax Reporting....................................................... 32 Direct Election of the Board of Directors........................... 33 Structure of the Conversion........................................... 34 Existing Economic Interests of the Partners........................... 36 Benefits Plans after the Conversion................................... 37 Alternatives to the Conversion........................................ 38 Continuance of the Partnership; No Cessation of Trading............. 38 Continuance of the Partnership; Cessation of Trading................ 38 Continuance of the Partnership; Cessation of Trading and Exchange Offer of Stock in New Corporate Limited Partner.................... 38 Continuance of the Partnership; Cessation of Trading and Exchange Offer of Debt Securities........................................... 38 Conversion to Corporation with Cash and Stock....................... 38 Conversion by Liquidation........................................... 39 Management Buyout or Other Strategic Sale........................... 39 Conversion Pursuant to Section 17.5 of the Partnership Agreement.... 39 Liquidation and Winding Up of the Partnership....................... 39 Future Alternatives Available to Polaris............................ 40 Fairness Opinions..................................................... 40 Opinion of Smith Barney............................................. 40 Opinion of Dillon Read.............................................. 44 Comparable Company Analysis......................................... 45 Recommendation of the General Partner................................. 47 Effective Time........................................................ 48 Description of the Merger Agreement................................... 48 Consequences if Conversion Proposal is Not Approved or the Conversion is Not Consummated................................................... 50 Costs of the Conversion............................................... 50 Exchange of Certificates.............................................. 50 COMPARATIVE RIGHTS OF BAC HOLDERS AND HOLDERS OF COMMON STOCK........... 52 Taxation.............................................................. 52 Distributions and Dividends........................................... 52 Voting Rights......................................................... 53 Rights to Call Special Meetings and Submit Proposals.................. 53 Removal of General Partner and Directors of the Corporation........... 54 Liquidation Rights.................................................... 54 Assessments and Limited Liability..................................... 54 Transferability....................................................... 55 Redemption Rights..................................................... 55 Change of Control..................................................... 55 Management and Compensation........................................... 55 Indemnification....................................................... 56 Fiduciary Duties...................................................... 56
5
PAGE ---- Limits on Management's Liability...................................... 56 Appraisal Rights...................................................... 57 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................................ 61 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.............................................. 71 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 Net Income Per BAC.................................................. 84 Liquidity and Capital Resources..................................... 85 PAGE ---- Inflation and Exchange Rates........................................ 86 MARKET PRICES AND DISTRIBUTIONS......................................... 86 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................................................ 90 SUMMARY COMPENSATION TABLE............................................ 91 Death and Disability Benefits and Deferred Compensation............... 91 Long-Term Incentive Compensation...................................... 92 Retirement Savings Plan............................................... 94 Purchase of BACs...................................................... 94 Compensation Committee Interlocks and Insider Participation........... 94 Certain Relationships and Related Transactions........................ 94 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 95 SUMMARY OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT.............. 96 Management of the Partnership......................................... 96 Liability of the General Partner and BAC Holders to Third Parties..... 96 Dissolution and Liquidation........................................... 97 Voting Rights of BAC Holders.......................................... 97 Removal of the General Partner........................................ 98 Withdrawal of the General Partner..................................... 98 Additional General Partners........................................... 98 Effect of Removal, Bankruptcy, Death, Dissolution, Incompetency or Withdrawal of the General Partner.................................... 98 Reimbursement of General Partner Expenses............................. 98 Amendments............................................................ 99 Designation of Tax Matters Partner.................................... 99 Reorganization of the Partnership..................................... 99 Applicable law........................................................ 99 Books and Records..................................................... 99 Transferability of the BACs........................................... 99 DESCRIPTION OF CAPITAL STOCK............................................ 100 Common Stock.......................................................... 100 Preferred Stock....................................................... 100 Voting................................................................ 100 Board of Directors.................................................... 100 Anti-takeover Provisions.............................................. 101 Limitation of Liability............................................... 102 Transfer Agent and Registrar.......................................... 102 RESALE OF COMMON STOCK.................................................. 102 LEGAL MATTERS........................................................... 102 EXPERTS................................................................. 103 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
6 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. BAC HOLDERS ARE URGED TO REVIEW CAREFULLY THE ENTIRE PROXY STATEMENT AND TO REQUEST SUCH DOCUMENTS INCORPORATED BY REFERENCE HEREIN AS THEY DESIRE. A CHART DESCRIBING THE ORGANIZATIONAL STRUCTURE OF POLARIS BEFORE AND AFTER THE CONVERSION IS INCLUDED ON THE NEXT PAGE. 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, its affiliates and Polaris Industries L.P., collectively, the "Operating Partnership"), to convert 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 Operating Partnership and own in the aggregate approximately 9.1% of outstanding units of Beneficial Assignment of Class A Limited Partnership Interests ("BACs") in Polaris Industries Partners L.P., a Delaware limited partnership (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 Corp. ("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 previously granted right to receive BACs ("First Rights") 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 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"). 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 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, $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." 7 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, the General Partner and its affiliates ("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 General Partner, 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 intend to vote in favor of the Conversion Proposal. See "Voting and Proxy Information -- Vote Required; Quorum". ORGANIZATIONAL STRUCTURE POLARIS INDUSTRIES PARTNERS L.P. -- BEFORE CONVERSION -- POLARIS INDUSTRIES INC. -- AFTER CONVERSION -- 8 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 OBLIGATIONS 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 REQUIRED TO DISCHARGE SUCH FIDUCIARY DUTY. 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 an advantageous way to preserve the tax status of the Partnership. However, 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 establish an initial dividend rate of $.15 per share per quarter, and pay three special cash distributions, each of $1.92 per share, payable during 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, $.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 9 occurred and the Partnership maintained its existing distribution policy. The Sponsors believe 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. 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 were 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 may be required to report and pay tax on additional taxable income from the Partnership without a corresponding increase in cash distributions. It is expected that this disparity will continue to increase in the foreseeable future. See "The Conversion -- Reasons for the Conversion -- Reduction of Tax Impact 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 increase 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 Potential 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 is demonstrated by the fact that Polaris is one of the few remaining 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 -- Reason 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. 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 10 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 Consequences". - 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. 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. However, certain members of senior operating management of the Operating Partnership, who have no economic interest in the General Partner, negotiated the terms of the Conversion with the General Partner, consummation of the Conversion is contingent upon receipt of the approval of the Conversion Proposal by both BAC Holders and Unaffiliated BAC Holders, and dissenting BAC Holders are entitled to Appraisal Rights. 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". - As more fully described under "Market Prices and Distributions", the Sponsors intend to recommend that the Corporation's Board of Directors establish an initial dividend rate of $.15 per share per quarter and pay three special cash distributions, each of $1.92 per share, payable during 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). The Corporation is under no legal obligation to make such dividends or 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 -- Future Dividends and Distributions." - After the Conversion, the Corporation expects to incur indebtedness in excess of that previously incurred by the Partnership, including indebtedness to fund 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, 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 -- Indebtedness". - Prior to the Conversion, there has 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 11 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 and will acquire certain rights associated with their ownership of shares of Common Stock. See "Comparative Rights of BAC Holders and Holders of Common Stock." - 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. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Possible Reduction in Fiduciary Obligations" and "Comparative Rights of BAC Holders and Holders of Common Stock -- Fiduciary Duties" and "-- Limits on Management's Liability". - 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. See "Risk Factors, Conflicts of Interest and Other Considerations -- Risks, Conflicts of Interest and Considerations Related to the Conversion -- Costs of the 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." 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 GENERAL PARTNER CASH AVAILABLE INTERESTS OF AND ITS FOR DISTRIBUTION BAC HOLDERS AFFILIATES - --------------------------------------------------------------- --------------- ----------------- Net Cash From Operations....................................... 79.2% 20.8% Net Cash from Sales or Refinancings (after return of capital)...................................................... 98.0% 2.0%
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." 12 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. Neither the Sponsors nor the General Partner believed such an alternative to be in the best interests of BAC Holders and the Partnership and therefore did not pursue such a transaction. 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. Although such a transaction would preserve the current tax status of the Partnership, the General Partner believed it 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 -- Alternatives to the Conversion -- Continuance of the Partnership; Cessation of Trading and Exchange Offer of Stock in New 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-electing BAC Holders would have little, if any, liquidity and such a 13 transaction would generally not provide the benefits of operating in corporate form described under "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 would, in exchange for their respective interests in the Partnership, 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, the General Partner and its affiliates and did not believe that the proposed terms recognized the fair value of the affiliates 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 and the General Partner would, in exchange for their respective interests in the Partnership, 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 as an Alternative".) 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 any continuing equity interest in the Partnership and would be unlikely to 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 will 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 14 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 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, 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, the General Partner 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 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, $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 15 and payments will end upon consummation of the Conversion. See "-- Existing Economic Interests of the Partners" and "The Conversion -- Background of the Conversion" and "-- Existing Economic Interests of the Partners". FAIRNESS OPINIONS On September 29, 1994, 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 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. The full text of the written opinions of Smith Barney and Dillon Read dated September 29, 1994, which set forth the assumptions made, matters considered and limitations on the review undertaken, are attached as Annex C and Annex D 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 As a result of its review of the business, properties and financial condition of the Partnership, its review of the terms of the Conversion, its analysis of the benefits and disadvantages of, and the alternatives to, the Conversion, and its 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 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 recommends that BAC Holders approve the Conversion Proposal. See "The Conversion -- Fairness Opinions" and "-- Recommendation of the General Partner." 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 three special cash distributions, if 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 more than 50% of the outstanding BACs held by Unaffiliated BAC Holders, (ii) listing of the Common Stock on the American and Pacific Stock 16 Exchanges subject to official notice of issuance, (iii) the receipt of certain necessary 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; (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 interest 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 is 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. 17 W. Hall Wendel, Jr., the Operating Partnership's Chief Executive Officer, who owns approximately 5.4% of outstanding BACs, and other members of 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 , 1994 at 9:00 a.m., local time. Voting....................... Each BAC entitles the holder thereof to one vote. Only BAC Holders of record on , 1994 (the "Record Date") are entitled to vote at the Special Meeting. 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, the General Partner and affiliates of the General Partner, owning, in the aggregate, approximately 14% of outstanding BACs, have advised the Partnership that they intend to vote "FOR" the Conversion Proposal.
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, 18 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 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. 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 successfully captured and maintained 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. The Company 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. The Company's 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. 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 six months ended June 30, 1994 total revenues increased approximately 49% over the first six months of 1993 while operating income increased more than 40% during the same period. 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%), ATV's (26%) and clothing accessories and parts accounting (15%) for the rest. In addition to reducing dependence on a single product line, the 19 introduction of PWC and ATV's has improved the Company's 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 2,400 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 for an option to purchase, 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. The Partnership was formed under the Delaware Revised Uniform Limited Partnership Act for the purpose of purchasing, 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, it is unlikely that the Partnership will increase the level of cash distributions in the foreseeable future even if there is an increase in taxable income. See "Market Prices and Distributions." 20 SUMMARY OF SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER BAC AND PRO FORMA PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- -------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- --------- STATEMENTS OF OPERATIONS DATA Sales............................................... $242,618 $296,147 $297,677 $383,818 $528,011 $218,350 $ 326,355 -------- -------- -------- -------- -------- -------- --------- Income Before Provision for Income Taxes............ 26,865 33,010 33,430 39,681 53,270 15,170 21,761 Provision for Income Taxes.......................... 675 1,647 1,968 4,980 7,457 2,490 2,653 -------- -------- -------- -------- -------- -------- --------- Net Income.......................................... $ 26,190 $ 31,363 $ 31,462 $ 34,701 $ 45,813 $ 12,680 $ 19,108 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Net Income Applicable to Limited Partners (1)....... $ 24,701 $ 24,840 $ 24,918 $ 27,483 $ 36,284 $ 10,043 $ 15,134 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Net Income Per BAC.................................. $ 1.65 $ 1.65 $ 1.65 $ 1.73 $ 2.25 $ 0.62 $ 0.93 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- UNAUDITED PRO FORMA INFORMATION (2) Income before provision for income taxes.......... $ 27,365 $ 33,510 $ 33,930 $ 40,181 $ 51,539 $ 15,420 $ 22,011 Provision for income taxes (3).................... 9,850 12,065 12,215 14,465 18,555 5,550 7,925 -------- -------- -------- -------- -------- -------- --------- Net income........................................ $ 17,515 $ 21,445 $ 21,715 $ 25,716 $ 32,984 $ 9,870 $ 14,086 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Net income per share.............................. $ 1.02 $ 1.25 $ 1.27 $ 1.43 $ 1.81 $ 0.54 $ 0.77 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- Weighted average common and common equivalent shares outstanding (4)........................... 17,088 17,136 17,162 17,968 18,215 18,226 18,407 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- --------- CASH FLOW DATA Cash flow from operating activities................. $ 44,447 $ 54,782 $ 46,642 $ 55,316 $ 79,323 $ 22,338 $ 28,063 Cash purchases of property and equipment............ 7,065 7,158 15,988 12,295 18,126 9,248 13,679 Cash distributions to partners...................... 32,514 42,582 42,581 44,025 46,493 22,884 24,587 Cash distributions per BAC.......................... 2.27 2.50 2.50 2.50 2.51 1.25 1.26 -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- ---------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------------------------- ------------------------------------------------ 1994 1989 1990 1991 1992 1993 1993 1994 PRO FORMA -------- -------- -------- -------- -------- -------- -------- --------------- BALANCE SHEET DATA Cash and cash equivalents........... $ 27,886 $ 32,025 $ 20,098 $ 19,094 $ 33,798 $ 9,300 $ 23,595 $ 23,595 Net increase (decrease) in cash and cash equivalents................... 12,287 4,139 (11,927) (1,004) 14,704 (9,794) (10,203) (10,203) Current assets...................... 60,344 66,893 59,200 74,999 109,748 82,345 127,016 139,016 Total assets........................ 137,628 138,704 135,509 146,681 180,548 153,323 198,873 240,873 Total liabilities................... 38,875 46,602 52,646 69,054 98,055 83,390 119,231 130,231 General Partner capital (deficit)... (419) (2,753) (5,066) (7,105) (7,397) (9,359) (8,721) -- Limited Partners' capital........... 99,172 94,855 87,929 84,732 89,890 79,292 88,363 -- Stockholders' equity (4 and 5)...... -- -- -- -- -- -- -- 110,642 Net book value per BAC.............. 6.59 6.13 5.50 4.89 5.12 4.34 4.88 -- Net book value per share (4 and 5)................................. -- -- -- -- -- -- -- 6.01 - ------------------------------ (1) Represents net income to BAC Holders after allocation to the General Partner 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 at the beginning of the periods presented for statements of operations data and as of the balance sheet date for the balance sheet data. Additionally, for the year ended December 31, 1993, adjustments have been made 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 the year in connection with the payment of the special cash distributions and all periods have been adjusted to eliminate the General Partner's annual fee of $500,000. See Note 10 of Notes to Financial Statements for additional information regarding the pro forma adjustments. (3) The unaudited pro forma adjustment to reflect a provision for income taxes for all periods presented herein has been calculated at a rate of 36%. Such rate reflects a combined federal and state statutory rate, net of related research and development credits and foreign sales corporation benefits. (4) Pro forma weighted average 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 16,010,441 shares to be issued to BAC Holders, 2,100,243 shares to be issued to the affiliates of the General Partner and 297,000 shares be issued to employees in connection with first rights granted but not yet converted to BACs. (5) Pro forma stockholders' equity includes estimated amounts related to the recording of expenses for the transaction and for 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 the General Partner and its affiliates and for shares to be issued for First Rights granted but not yet converted to BAC's. For purposes of this transaction, assets and liabilities will be recorded at historical cost.
21 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 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 Corportion distributed to them. 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, gain, loss, deductions and credits. 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 The General Partner believes that the Conversion is fair to BAC Holders. The General Partner may, however, be viewed as having a conflict of interest with BAC Holders with respect to the determination of the Exchange Ratio. Furthermore, the General Partner will benefit from the elimination of its potential liability for obligations and liabilities of Polaris after the Conversion. In addition, the voting agreement entered into between Victor K. Atkins, Jr. and W. Hall Wendel, Jr. may be viewed as involving potential conflicts of interest among the General Partner, the Sponsors and BAC Holders. A potential conflict of interest may also exist with regard to the fact that Dillon Read was selected by the General Partner and Smith Barney was selected by the Sponsors, each on behalf of the Partnership, to give an opinion as to the fairness, from a financial point of view, of the consideration to be received in the Conversion to BAC Holders. If these potential conflicts of interest did not exist, it is possible that the terms of the Conversion might be materially different than the terms proposed by the Sponsors and recommended by the General Partner. However, certain members of senior operating management of the Operating Partnership, who have no economic interest in the General Partner, negotiated the terms of the Conversion with the General Partner, and consummation of the Conversion is contingent upon receipt of the approval of the Conversion Proposal by both BAC Holders and Unaffiliated BAC Holders (BAC Holders other than the Sponsors, the General Partner and its affiliates), and dissenting BAC Holders are entitled to Appraisal Rights. 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." NO INDEPENDENT REPRESENTATION The Conversion was proposed by certain of the Sponsors and negotiated with the General Partner without independent representation of BAC Holders. Such separate representation might have caused the terms of the Conversion to be different in material respects from those described herein. However, consummation of the Conversion is contingent upon, among other matters, receipt of the approval of the Conversion Proposal by both BAC Holders and Unaffiliated BAC Holders, and dissenting BAC Holders are entitled to Appraisal Rights. 22 FUTURE DIVIDENDS AND DISTRIBUTIONS As more fully described under "Dividends and Distributions", the Sponsors intend to recommend that the Corporation's Board of Directors establish an initial dividend rate of $.15 per share per quarter and pay three special cash distributions, each of $1.92 per share, payable during 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, $.15 per BAC). The Corporation is under no legal or contractual obligation to make such 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. INDEBTEDNESS The revolving credit line, under which approximately $30 million was available for borrowing at September 1, 1994, is insufficient in amount to fund the cash dividends and distributions referred to above 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 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. Incurrence of additional 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 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 will be made to list the Common Stock on the American 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. CHANGE IN OWNERSHIP RIGHTS As a result of the Conversion, BAC Holders will lose rights associated with their ownership of BACs and will acquire 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." 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 23 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, the General Partner and affiliates of the General Partner 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 conversion of granted First Rights), together with the Common Stock received in exchange for the BACs already held by the General Partner and its affiliates, 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 management'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 Merger" and "Comparative Rights of BAC Holders and Holders of Common Stock -- Voting Rights." ELIMINATION OF GENERAL PARTNER LIABILITY FOR POLARIS OBLIGATIONS 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 General Partner would be a shareholder of the Corporation and would not have liability for the debts and obligations of the Corporation. 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. Therefore, in a partnership, the fiduciary duties of the general partner flow directly to the other partners while, in a corporation, the duties of the directors flow directly to the corporation and only derivatively to the shareholders. In addition, the Corporation's Articles of Incorporation limit the potential liabilities of the directors for breach of their fiduciary duties. 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. Issuances of additional shares of Common Stock or shares of preferred stock could adversely affect 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 24 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 All costs and expenses 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 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 25 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-wheeled 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. 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 are 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." 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 product. 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. If, however, its informal relationship were terminated, 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. 26 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 regions of the United States or Canada may adversely affect snowmobile retail sales in those regions. 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 June 30, 1994, Polaris has paid an aggregate of less than $1.4 million in product liability claims and had accrued $4.0 million at June 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 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. 27 THE CONVERSION THE PARTNERSHIP The Partnership was formed under the Delaware Revised Uniform Limited Partnership Act on April 7, 1987 for the purpose of purchasing, through the Operating Partnership, substantially all of the business and assets of Polaris' predecessors. 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 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 were 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, the Partnership will be treated as a corporation for federal income tax purposes subsequent to December 31, 1997 (the "1987 Code Amendment"). 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 the possibility of converting the Partnership to a corporation. See "-- Reasons for the Conversion -- Changes in Tax Status of the Partnership." Commencing in early 1994, certain members of 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. See "-- Alternatives to the Conversion." In June and July 1994, representatives of Smith Barney and certain members of senior operating management had several discussions with Victor K. Atkins, Jr., who is the President 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 Amendment so that the Partnership could remain a partnership and be treated as a partnership for federal income tax purposes after 1997. 28 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 against him 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. 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 senior operating management favored a conversion of the Partnership in which BAC Holders and the General Partner 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 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 would receive fair and adequate consideration for its interest 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 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 affiliates of the General Partner 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 "-- Alternatives to the Conversion." Mr. Wendel and other members of 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 and 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 29 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. 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 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 and holders of First Rights outstanding at the time of such Conversion would receive 88.6% of the stock of the surviving corporation (including upon exercise of currently granted 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 such exercise of the First Rights). On behalf of the Partnership, Smith Barney was engaged as financial advisor and Smith Barney orally advised the Partnership that the terms of the proposed transaction were 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 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 "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 their financial advisors 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 for there to be 30 some continuation of 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 Code enacted in 1987. Under the amendments to the Code, so long as the Partnership remains publicly traded, this grandfather protection ends immediately if the Partnership engages in a substantially 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 and, except in very limited circumstances, prohibiting the transfer of BACs and otherwise reducing liquidity an advantageous way to preserve the tax status of the Partnership. 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. 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 (i) establish an initial dividend rate of $.15 per share per quarter and (ii) pay three special cash distributions, each of $1.92 per share, payable during 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, $.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 such distributions should ease 31 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. REDUCTION OF TAX IMPACT 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 it is unlikely that the Partnership will increase the present level of cash distributions even if its taxable income were to continue to increase, because Polaris' continued growth could require reinvesting significant amounts of money in its business. Accordingly, absent the Conversion, assuming income growth continues in 1994 and subsequent years, BAC Holders may be required to report and pay tax on additional taxable income from the Partnership that exceeds the amount of their 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. This trend has existed for the last several years and is expected that this disparity will continue for the foreseeable future. Such reduction will be greater for those BAC Holders that have held BACs for longer periods of time and purchased their BACs at lower prices. 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 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 would 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, the Partnership 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 to Polaris, 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 32 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", THE GENERAL PARTNER BELIEVES THE CONVERSION IS FAIR TO BAC HOLDERS. THE GENERAL PARTNER RECOMMENDS THAT BAC HOLDERS VOTE "FOR" THE CONVERSION PROPOSAL. 33 STRUCTURE OF THE CONVERSION The following charts describe the ownership structure of Polaris before and after the Conversion: POLARIS INDUSTRIES PARTNERS L.P. ORGANIZATIONAL STRUCTURE -- BEFORE CONVERSION -- POLARIS INDUSTRIES INC. ORGANIZATIONAL STRUCTURE -- AFTER CONVERSION -- 34 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. 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. 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. 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 outstanding 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 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 35 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 tax basis of the Partnership's assets following the Conversion will be increased to reflect each BAC Holder's tax basis in its BACs, resulting in substantial additional depreciation deductions to the Corporation after the Conversion. 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 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 Legislations." EXISTING ECONOMIC INTERESTS OF THE PARTNERS Currently, the holders of BACs and the General Partner, 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).............................................. 98.0% 2.0%
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 36 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 issuance price of the BACs ($10 per BAC after giving effect to the 2-for-1 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 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 a year 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 paid $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). BENEFITS 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 terminated by the Corporation and, to the extent that such benefit plans are not continued, the Corporation will maintain for a period of one year after the date of the Conversion, benefit plans which are no more or less favorable, in the aggregate, to the employees covered by such plans. 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 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 First Rights immediately prior to the Merger. 37 ALTERNATIVES TO THE CONVERSION As discussed above under "-- 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 "-- Recommendation of the General Partner" 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 corporate 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 "-- 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 1988, 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. Neither the Sponsors nor the General Partner believed such an alternative to be in the best interests of BAC Holders and the Partnership and therefore 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. Although such a transaction would preserve the current tax status of the Partnership, the General Partner believed that it 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." 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-electing 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." 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. 38 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 affiliates 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 and the General Partner would in exchange for their respective interests in the partnership, receive a one-time liquidating distribution consisting of cash and new common stock in the Corporation serving 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 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 "-- 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 any continuing equity interest in the Partnership and would be unlikely to 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 will 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, 39 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 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, 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 opinion, dated September 29, 1994, 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 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, Smith Barney, among other things, reviewed the Merger Agreement and certain other related agreements, this preliminary Proxy Statement and the 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 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. 40 In rendering its opinion, 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 preliminary 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 SEPTEMBER 29, 1994, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PRELIMINARY 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 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 PRELIMINARY PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. In preparing its opinion to the Partnership, 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 judgements 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 predicative 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. 41 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 including: 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: 13.8x to 29.0x (with a mean of 19.5x and a median of 19.2x); (ii) projected 1994 income: 11.9x to 22.9x (with a mean of 17.7x and a median of 17.9x); and (iii) projected 1995 net income: 10.4x to 18.9x (with a mean of 14.7x and a median of 13.7x). 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 4.9x to 11.9x (with a mean of 8.9x and a median of 8.6x). 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 September 23, 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 - 10.0x to LTM EBITDA, multiples of 19.0x - -22.0x to LTM net income, multiples of 18.0x - 20.0x to projected 1994 net income, and multiples of 14.0x - 17.0x to projected 1995 net income. Based on the average of such valuation methodologies Smith Barney arrived at an implied equity valuation range of $43.25 - $49.60 per share of Common Stock. Smith Barney also applied the trading multiples of Arctco Inc., based on an Arctco closing stock price as of September 23, 1994 of $19.75, 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 20.4x to LTM net income, Arctco's multiple of 18.6x to projected 1994 net income, Arctco's multiple of 16.0x to projected 1995 net income, Arctco's multiple of 17.6x to LTM cash flow, Arctco's multiple of 1.9x to LTM sales, Arctco's multiple of 11.9x 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 $53.56 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 42 assumed among other things, discount rates of 12%, 14% and 16% and terminal multiples of EBITDA of 7.5x - 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 $45.28 - $50.69 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 24.1% to 38.9%. 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 $82.7 million to $102.6 million, with a composite valuation of $89.8 million. Based on the Arctco trading multiples, Smith Barney estimated the range of the implied value of the General Partner Consideration to be $91.2 million to $114 million with a composite value of $103.3 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 $99.2 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 Partners' 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 43 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 $1,500,000 which was payable upon execution of the engagement letter, an opinion fee of $1,500,000 which is 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. 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. The Partnership selected Smith Barney as its financial advisor on the basis of such expertise and Smith Barney's reputation. 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 opinion to the Partnership 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 SEPTEMBER 29, 1994, IS SET FORTH IN FULL AS ANNEX D 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 preliminary Proxy Statement is qualified in its entirety by reference to the full text of such opinion. In connection with rendering its opinion and as more fully set forth therein, Dillon Read relied upon, without independent verification, the accuracy and completeness of the preliminary 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 the Partnership's 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. In rendering its opinion, 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 judgements of management of the Partnership as to the 44 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 the Preliminary Proxy Statement/Prospectus. 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, 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 "Comparable Companies"). Financial information analyzed included (i) market valuations and multiples thereof, including (x) last twelve months ("LTM") net income and projected 1994 and 1995 net income; (ii) market valuation adjusted for net debt and book value of preferred stock and multiples thereof, including (x) LTM sales, (y) LTM earnings before, interest, taxes, depreciation and amortization ("EBITDA"), and (z) LTM operating income. Dillon Read applied a range of trading multiples representative of the Comparable Companies to pro forma historical and projected operating data of the Corporation (derived by applying 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 Comparable Companies to: (a) a multiple of 8.6x the Corporation's LTM EBITDA, (b) a multiple of 12.3x the Corporation's LTM Operating Income, (c) a multiple of 19.9x the Corporation's LTM net income, (d) a multiple of 17.2x the Corporation's projected 1994 net income, (e) a multiple of 13.9x the Corporation's projected 1995 net income. The above analysis yielded implied equity values per share of Common Stock ranging from $41.25 to $48.91. 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 45 ("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 of the Partnership. All multiples were based on closing stock prices as of September 23, 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 Comparable Companies. Dillon Read's analysis is based upon (a) Arctco's and Harley Davidson's average multiple of 21.6x the Corporation's LTM net income, (b) an average multiple of 19.0x 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 14.3x 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 $44.82 to $51.96. 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. 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 interest 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 range 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%-99% of distributable cash from operations and 80%-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 difference 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 $1,500,000, 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 (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. 46 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 service. 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 "Background of the Conversion". RECOMMENDATION OF THE GENERAL PARTNER As a result of its review of the business, properties and financial condition of the Partnership, its review of the terms of the Conversion, its analysis of the benefits and disadvantages of, and alternatives to, the Conversion, and its 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 believes that the Conversion is fair to BAC Holders and recommends that BAC Holders approve the Conversion Proposal. No particular weight was assigned to any one factor in arriving at its decision. The General Partner's determination to recommend that the Partnership convert to corporate form is based on its belief that the Conversion will result in the benefits to BAC Holders described above under "-- Reasons for the Conversion". The General Partner also considered the potential disadvantages of the Conversion, as described under "Risk Factors, Conflicts of Interest and Other Considerations", but believes that the advantages of the Conversion outweigh the potential disadvantages. In making its recommendation, the General Partner 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 believes that the Conversion is attractive and fair when compared to the viable alternatives it considered and that it is in the best interests of BAC Holders to consummate the Conversion at this time. The General Partner believes 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 "Risk Factors, Conflicts of Interest and Other Considerations -- Allocation of Common Stock Between 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 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 the consideration to be received in the Conversion is fair, from a financial point of view, to BAC Holders, (ii) giving BAC Holders who affirmatively disapprove of 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 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. 47 In reaching a recommendation with respect to the Conversion, the General Partner also considered the consequences to the Partnership and the General Partner and BAC Holders if the Conversion is not consummated, as discussed under "-- 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. EFFECTIVE TIME If the Conversion Proposal is approved at the Special Meeting, the Conversion is expected to be effected as soon as practicable on or after the Meeting Date (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/Prospectus as Annex B. CLOSING. The Merger Agreement provides that the Merger and other transactions outlined under "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"). PARTNERSHIP DISTRIBUTIONS PENDING CLOSING. Pending the Closing, the Partnership has agreed to continue to make quarterly distributions to BAC Holders and the General Partner in the same amounts as prior distributions in 1994 ($.63 per BAC per quarter), with the final Partnership distribution for the quarter in which the Closing takes place to be prorated based on the number of days in such quarter prior to the Closing and to be paid within 30 days after the Closing. Affiliates of the General Partner will be entitled to receive the distributions otherwise payable to the 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 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 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; (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 of the General Partner transferring their partnership interest in the general partners of the Partnership and the Operating Partnership and their stock of EIPCC to the Corporation (such affiliates, the "Transferors"). 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 Corporation if it determines, as a result of developments occurring after the date of the Merger Agreement, that consummation of the Transactions is not in the best interests of BAC Holders. The Merger Agreement provides that nothing contained therein shall alter 48 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 AND COVENANTS. The Merger Agreement contains representations and covenants by the Transferors to the Company, which survive the consummation of the Transactions, with respect to such matters as their ability to comply with their obligations under the Merger Agreement and that such compliance will not result in liabilities to the Partnership or the Corporation. 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 its organization, capitalization and assets, 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, an officer, employee or general partner of the Partnership, the Operating Partnership, EIPCC, PICC or the Corporation, or any employee, agent or affiliate of such general partner, 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 each under applicable law 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 to acquire BACs, 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 affirmatively withheld consent 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 Company and 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. 49 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
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 50 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. 51 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 not a tax- paying entity. Rather, each BAC Holder includes its The Corporation will pay federal and state tax on its share of the Partnership's income or loss, as the case net income. Shareholders will not be taxed with respect may be, without regard to the cash distributed to BAC to Corporation income, but will generally be taxed with Holders, in computing taxable income. Generally, cash respect to dividends received from the Corporation. distributions to BAC Holders are not taxable, unless distributions exceed a No portion of the earnings of, or any dividends from, BAC Holder's basis in a BAC. Under current tax law, the the Corporation will constitute unrelated business Partnership will be taxed as a corporation if it engages taxable income to tax-exempt shareholders, except to the in a substantially new line of business or, in any extent that investment in stock of the Corporation is event, at the end of 1997, if the BACs remain publicly debt-financed. tradeable. 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 distributions of Net The By-laws of the Corporation provide that the Board of Cash From Operations and Net Cash From Sales or Directors has the authority and discretion to declare Refinancings. The Operating General Partner receives 1% dividends and other distributions upon the shares of the of all distributions from the Operating Partnership. The Corporation to the extent permitted by law. Holders of General Partner receives 20% and BAC Holders receive 80% Common Stock will have no contractual right to of Net dividends. Cash From Operations from the Partnership so long as the The Sponsors intend to recommend that the Corporation's distributions to BAC Holders provide them a 15% per Board of Directors establish an initial dividend rate of annum cumulative, noncompounded yield on the adjusted $.15 per share per quarter, and pay three special cash initial issuance price of the BACs. If the distributions distributions, each of $1.92 per share, payable during made in such proportions do not provide BAC Holders with the last three quarters of 1995 (reduced to the extent such return, distributions will be made instead 1% to that any cash distributions declared and paid by the the General Partner and 99% to BAC Holders until BAC Partnership after January 1, 1995 exceed, on a quarterly Holders have received such return. The General Partner basis, $.15 per BAC). See "Market Prices and Distri- believes, based on prior distributions, that such butions". However, subject to legal and contractual threshold return will continue to be met for the limitations, dividends will be paid at the discretion of foreseeable future. To date, the BAC Holders have the Board of Directors and will depend, among other received distributions substantially in excess of a 15% things, on the future earnings, operations, capital per annum cumulative (noncompounded) yield on the requirements and financial condition of the Corporation adjusted initial issuance price of the BACs. The General and general business conditions, and there can be no Partner receives 1% of Net Cash From Sales or assurance that the foregoing dividend rate will be Refinancings from the Partnership after BAC Holders have adopted or maintained. received a return of the initial issuance price of the BACs. 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 have the right to participate in the Under Minnesota law and the Corporation's management or control of the Partnership's Articles of Incorporation and By-laws, business. Each BAC Holder is entitled to one shareholders have voting rights with respect vote per BAC on matters submitted to BAC to (i) the election of directors, (ii) the Holders for a vote. Two-thirds in interest of removal of directors, (iii) certain mergers BAC Holders, without the concurrence of the and share exchanges involving the General Partner, may (i) subject to certain Corporation, (iv) the sale, lease, transfer exceptions described below, amend the or other disposal of substantially all of the Partnership Agreement, (ii) approve or assets of the Corporation other than in the disapprove the sale of all or substantially regular course of business, (v) the all of the Partnership assets, except in dissolution of the Corporation, (vi) connection with the Partnership's dissolution amendments to the Corporation's Articles of and liquidation for a reason other than such Incorporation, and (vii) any other matters sale, (iii) dissolve the Partnership, and designated by the Board of Directors. Each (iv) remove a General Partner and elect a share of Common Stock entitles its holder to replacement. If a General Partner has been cast one vote on each matter presented to removed without cause, the removed Gener- shareholders. There is no cumulative voting. al Partner can compel any successor to Approval of any matter submitted to acquire its general partnership interest at shareholders requires the affirmative vote of the then fair market value of such interest. the greater of (a) a majority of the voting See "-- Removal of General Partner and power of the shares present and entitled to Directors of the Corporation." Amendments to vote on that item of business or (b) a the Partnership Agreement altering the majority of the voting power of the minimum rights, powers, fees or duties of the General number of shares entitled to vote that would Partner, the interest of the General Partner constitute a quorum for the transaction of in profits, losses and distributions, provi- business at a duly held meeting of sions relating to changes in the General shareholders; except that, the Corporation's Partner or any of the terms of the First Articles of Incorporation, pursuant to Rights require the consent of the General Minnesota law, provide that the affirmative Partner. The General Partner may in some vote of the holders of at least 75% of the circumstances amend the Partnership Agreement voting power of all outstanding shares enti- without the consent of BAC Holders to correct tled to vote is required for the removal of a certain deficiencies or comply with certain director, with or without cause, from office. 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 the be required on certain matters that generally unanimous approval of the General Partner and have a material adverse effect on shares of a approval of a majority in interest of BAC particular class. Holders, unless otherwise 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 that the Special meetings of shareholders may be General Partner or BAC Holders holding at called for any purpose or purposes at any least 10% of the outstanding BACs may call a time, by (i) the Corporation's chief meeting of the Partnership. The Partnership executive officer, (ii) the Corporation's Agreement provides that any request for a chief financial officer, (iii) by the Board meeting must state the purpose of the of Directors or any two or more members proposed meeting and the matters to be acted thereof, or (iv) a shareholder or upon at such meeting, and no matter may be shareholders holding 10% or more of the acted upon at the meeting other than as set voting power of all shares entitled to vote; forth in such request or as otherwise except that a special meeting for the pur- permitted by the General Partner. pose 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.
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REMOVAL OF GENERAL PARTNER AND DIRECTORS OF THE CORPORATION BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- BAC Holders may, by vote of two-thirds in Under the Corporation's Articles of interest, remove any General Partner from the Incorporation, the Corporation has a Partnership with or without cause and consent classified or staggered board of directors to the appointment of a replacement therefor. and any one or all of the directors may be If the General Partner is removed for cause, removed at any time, with or without cause, the removed General Partner shall transfer, by the affirmative vote of the holders of 75% for no consideration, its entire general of the voting power of all outstanding shares partnership interest to any successor chosen entitled to vote, voting together as a single by BAC Holders. If a General Partner has been class. removed without cause, the removed General Partner can compel any successor to purchase its general partnership interest at the then "fair market value" of such interest. The then fair market value of the removed General Partner's interest shall be the sum of (i) the present value of such interest over the life of the Partnership plus (ii) the present value of the annual management 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, BAC In the event of a liquidation of the Holders share in any assets available for Corporation, the holders of Common Stock distribution in accordance with the would be entitled to share ratably in any applicable provisions of the Partnership assets remaining after the satisfaction of Agreement. The liquidation provisions obligations to creditors and any liquidation generally provide that the assets of the preferences of any series of preferred stock Partnership remaining after the payment of of the Corporation that may be then out- all of its debts and liabilities, and the standing. Under the Articles of establishment of a reasonable reserve in Incorporation, the Board of Directors is connection therewith, will be distributed to authorized to issue up to 20,000,000 shares the General Partner and BAC Holders in of preferred stock in one or more series and accordance with their respective capital to fix and determine relative rights and account balances. preferences, including with respect to preferences on liquidation. ASSESSMENTS AND LIMITED LIABILITY BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- Under the terms of the Partnership Agreement, Shares of Common Stock will be fully paid and BAC Holders are not subject to additional nonassessable. Shareholders generally will assessments. The liability of BAC Holders not be personally liable for obligations of with respect to the activities of the the Corporation. In certain circumstances, Partnership is generally limited to their they may be liable for amounts distributed or original capital contributions, any returned to them. additional 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 transferable American Stock Exchange and the Pacific Stock and application will be made for listing the Exchange. The Partnership may restrict or Common Stock on the American Stock Exchange terminate transferability to prevent and the Pacific Stock Exchange. termination of the Partnership under federal tax law or to preserve the tax status of the Partnership as a partnership. REDEMPTION RIGHTS BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- There are no mandatory or optional redemption The Common Stock is not subject to mandatory provisions in the Partnership Agreement. or optional redemption. CHANGE OF CONTROL BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- There is no provision in the Delaware Revised Minnesota law (i) restricts specified Uniform Limited Partnership Act or in the transactions with a shareholder acquiring 10% Partnership Agreement, except as described or more of the voting shares of the above under "-- Removal of General Partner Corporation unless the share acquisition or and Directors of the Corporation," that transaction is approved by the Board of restricts change of control transactions with Directors prior to the acquisition of such partners. Changes in management can only be 10% interest, and (ii) requires approval by effected by removal of the General Partner. disinterested shareholders of any acquisition of voting power above specified levels of ownership of the Common Stock. The Corporation has a classified or staggered Board of Directors, and its Articles of Incorporation require a 75% vote of all out- standing 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 -- Antitakover Provisions." MANAGEMENT AND COMPENSATION BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- The business and affairs of the Partnership The business and affairs of the Corporation are managed by the General Partner subject to are managed by or under the direction of the certain narrow limitations. Pursuant to the Board of Directors of the Corporation. The Management Agreement, EIPCC, the managing individuals who will become directors of the general partner of the General Partner, Corporation on or before consummation of the receives an annual management fee of Conversion are described in "Management -- $500,000. In addition, the General Partner Directors and Executive Officers of the and its affiliates are entitled to General Partner." The Articles of reimbursement from the Partnership for the Incorporation of the Corporation provide that actual out-of-pocket costs of direct directors shall be divided into three telephone and travel expenses incurred by classes, with each class of directors serving them on Partnership business, direct a three-year term, staggered among the out-of-pocket fees, expenses and charges paid classes. Approximately one-third of the Board by them to third parties for rendering legal, of Directors will be elected annually by consulting, auditing, accounting, book- shareholders to serve for three-year terms. keeping and computer services, expenses of An affirmative vote of 75% of the voting preparing and distributing reports to BAC power of all outstanding shares entitled to Holders, the cost of compliance with all vote is required for the removal of a state and federal regulatory requirements and director, with or without cause, from office. stock exchange listing fees and charges and other payments to third parties for services rendered to the Partnership. The General Partner and Operating General Partner also receive their respective allocated shares of Partnership distributions. See "-- Dis- tributions and Dividends."
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INDEMNIFICATION BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- The Partnership Agreement provides that the The Corporation is required by Minnesota law Partnership will indemnify the General to indemnify all officers and directors of Partner, its employees, agents or affiliates the Corporation for expenses and liabilities against any liability, loss or damage (including attorneys' fees) incurred as the (including attorneys' fees) incurred by any result of proceedings against them in such person in connection with the connection with their capacities as officers Partnership in respect of services or duties or directors. In order to be entitled to in- performed on behalf of the Partnership, demnification with respect to a purported act provided that any such liability, loss or or omission, an officer or director must (i) damage did not result from such person's have acted in good faith, (ii) have received actual fraud, gross negligence, willful or no improper personal benefit, (iii) in the wanton misconduct or breach of fiduciary case of a criminal proceeding, have had no duty. In addition, any act or omission, if reasonable cause to believe the conduct to be done or omitted to be done in reliance on the unlawful, and (iv) reasonably believed that opinion of independent legal counsel, public the conduct was in the best interests of the accountants or consultants selected with Corporation. See, also, the description of reasonable care, will be conclusively the indemnification provisions of the Merger presumed to have been done or omitted in good Agreement under "The Conversion -- faith and not to constitute gross negligence Description of the Merger Agreement -- or willful or wanton misconduct. See, also, Indemnification." the description of the indemnification provisions of the Merger Agreement under "The Conversion -- Description of the Merger Agreement -- Indemnification." FIDUCIARY DUTIES BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- Under Delaware law, the General Partner of Under Minnesota law, a director of a the Partnership has fiduciary duties of good corporation must discharge the duties of the faith, loyalty and fair dealing to BAC position of director in good faith, in a Holders in the management of Partnership manner the director reasonably believes to be affairs. in the best interests of the corporation, and with the care an ordinarily prudent person would exercise under similar circumstances. LIMITS ON MANAGEMENT'S LIABILITY BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- As a general matter of Delaware law, the The Corporation's Articles of Incorporation General Partner has liability for the payment contains a provision that limits the of the obligations and debts of the liability of the Corporation's directors as Partnership unless limitations on such permitted by the Minnesota Business liability are stated in the document or Corporation Act. The provision eliminates instrument evidencing the obligation. Under personal liability of a director to the the Partnership Agreement, none of the Corporation or its shareholders for monetary General Partner, its employees, agents or damages for a breach of fiduciary duty. The affiliates will have any liability to the provision does not change the liability of a Partnership or BAC Holders for any liability, director for a breach of duty of loyalty to loss or damage that did not result from such the Corporation or to shareholders, acts or person's actual fraud, gross negligence, omissions not in good faith or which involve willful or wanton misconduct or breach of intentional misconduct or a knowing violation fiduciary duty. 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, Minnesota law Agreement provides for rights similar to the provides that a shareholder who does not appraisal rights of common stock under the approve of a proposed amendment to the Delaware General Corporation Law in Articles of Incorporation that materially and connection with the Merger. See "Appraisal adversely affects certain rights or Rights." preferences of the dissenting shareholder or certain fundamental corporate changes may obtain payment of the fair value of such dis- senting shareholder's shares. DURATION OF INVESTMENT BACS COMMON STOCK - --------------------------------------------- --------------------------------------------- The Partnership Agreement provides that the Minnesota law and the Corporation's Articles Partnership is to be dissolved and its of Incorporation provide that the Corporation affairs wound up on the first to occur of (i) shall have a perpetual existence. Therefore, December 31, 2037, (ii) the bankruptcy of the investors in the Corporation would have to Partnership, (iii) the retirement, death, sell their shares of Common Stock in order to dissolution, legal disability or the passage liquidate their investment. of 120 days after the bankruptcy of a General Partner, subject to the right of any re- maining 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 request, at representative of a BAC Holder) has the right reasonable times and for a proper purpose, a to receive by mail, upon written request to shareholder shall have the right to examine the Partnership and at such BAC Holder's sole and copy relevant corporate records including cost and expense, a copy of a list of names the Corporation's share register. and 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 that books Under Minnesota law, upon written request, at and records of account be kept at the reasonable times and for a proper purpose, a principal place of business of the shareholder shall have the right to examine Partnership and be open to inspection by any and copy relevant corporate records including BAC Holder (or by an authorized the Corporation's share register. representative of a BAC Holder) upon rea- sonable 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 Corporation is issuance of additional BACs, pursuant to authorized to issue up to 80,000,000 shares which the interests in the assets, of Common Stock and up to 20,000,000 shares liabilities, cash flow and results of of preferred stock. At the completion of the operations of the Partnership represented by Conversion, 18,110,684 shares of Common Stock the BACs, but not the general partnership and no shares of preferred stock will be interest, may be diluted. As of , outstanding and 312,500 shares of Common 1994, there were [23,989,559] authorized but Stock will be reserved for issuance for unissued BACs. Issuance of additional BACs granted First Rights under employee could dilute the existing BAC Holders' equity compensation plans. Issuance of additional interests in the Partnership, but not the authorized shares of Common Stock as well as general partnership interest. 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 all acquire, own and operate Polaris through the activities permitted by law. The Corporation Operating Partnership. The Operating may borrow money and make acquisitions, Partnership may engage in any and all although it currently has no plans to do so. activities related to or incidental to the foregoing activities. The Partnership and the Operating Partnership have the power to borrow money.
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 opinions of counsel set forth herein, to the extent relevant, are not addressed to 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. 58 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. 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, is 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 59 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 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) 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 a 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. 60 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 will incur no federal income tax liability as a result of the exchange of their BACs for shares of Common Stock. 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 would 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. Based on information provided by the General Partner, 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 after 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 and deductions 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 61 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. It should be noted that such information will be needed by BAC Holders in order to compute precisely their tax basis for their Common Stock. 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 who exercise their Appraisal Rights and who receive solely cash for their BACs will recognize taxable gain or loss measured by the difference between (x) the amount of cash received and (y) their aggregate adjusted basis in their BACs. 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 Corporation will solicit each BAC Holder to provide information as to the tax basis of its BACs immediately prior to the Conversion. 62 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. That 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 is not expected to produce material adverse tax consequences to the Corporation or the Partnership, although it may result in the deferral or loss of certain depreciation deductions. 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 a corporation, and 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 of 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 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 reorganization in a similar manner. Assuming the three special distributions are made, a portion thereof may be a tax-free return of capital to the recipients depending upon the earnings of the Corporation and the basis in the recipients' shares. There can be no assurance that the Service will not assert that any such additional distributions constitute additional consideration to the BAC Holders in exchange for their BACs, and if such treatment were upheld, it is anticipated that any such distributions would be fully taxable to the BAC Holders. 63 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 246A, 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. 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 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 64 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 Board of the General Agreement on Tarrifs 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 $11,000,000, will be accounted for as an expense in the statement of operations at the time of the conversion. Additionally, the Corporation will receive a signficant 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. 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 Friday, , 1994 as the Record Date for the determination of BAC Holders entitled to vote at the Special Meeting. 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, the General Partner and its affiliates) 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 General Partner, its affiliates and the Sponsors owning, in the aggregate, approximately 14% of the outstanding BACs have advised the Partnership that they intend to 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." 65 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. 66 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 have affirmatively withheld consent in the manner provided herein will be entitled to exercise 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 five percent 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 B. If a BAC Holder elects to exercise Appraisal Rights in accordance with the Merger Agreement, such BAC Holder must satisfy both of the following conditions, in addition to the procedures required after the Effective Time described below: (a) on or before the fifth day prior to the Meeting Date, such BAC Holder must deliver to the General Partner a written objection to the Conversion and a notice that, if the Conversion is consummated, such BAC Holder intends to exercise Appraisal Rights with respect to BACs owned by such person, which objection and notice (i) should reasonably inform the Partnership of the identity of the BAC Holder and that such BAC Holder intends thereby to demand an appraisal of and payment of the fair value of the BACs owned by such Holder and (ii) must be separate from any Proxy regarding the Conversion; and (b) such BAC Holder must not vote in favor of or consent in writing to 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). 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. Any BAC Holder seeking Appraisal Rights must hold the BACs for which appraisal is sought on the Record Date and continuously through the Meeting Date, and otherwise comply with the provisions of the Merger Agreement relating to Appraisal Rights. 67 In addition, a BAC Holder that desires Appraisal Rights and who has satisfied the foregoing conditions must comply with the procedures required to be followed after the Effective Time, which are set forth below. Within 10 days after the Effective Time, the Corporation will notify by mail each BAC Holder who has complied with clauses (a) and (b) 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 10 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") 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. 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 clauses (a) and (b) 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. 68 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 from 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. 69 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 in the Conversion, 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. If the Corporation complies with the requirements of the Merger Agreement, any BAC Holder who fails to comply with the requirements of the Merger Agreement shall not be entitled to bring suit for the recovery of the value of BACs or money damages to such BAC Holder with respect to the Conversion. 70 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
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. 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. Polaris entered the ATV market in the spring of 1985 and is currently the only major United States manufacturer of ATVs. 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 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. 71 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 ("PVT") 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, 72 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, 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 73 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, 74 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 are extensively tested under actual use conditions. Polaris has 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. 75 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. 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. 76 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 are 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 June 30, 1994, Polaris has paid an aggregate of less than $1.4 million in product liability claims and had accrued $4.0 million at June 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 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 the 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 2,400 personnel. 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 $8.0 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 77 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 judgement 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 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 Polaris. See Note 8 of Notes to Financial Statements. 78 CAPITALIZATION The following table sets forth the historical capitalization of the Partnership and the pro forma capitalization of the Corporation as if the Conversion took place on June 30, 1994.
JUNE 30, 1994 -------------------------- POLARIS POLARIS INDUSTRIES INDUSTRIES PARTNERS L.P. INC. HISTORICAL PRO FORMA ------------- --------- (IN THOUSANDS) Partners' Capital: General Partner (deficit)........................ $ (8,721) $ -- Limited Partners................................. 82,152 -- First rights assigned capital value.............. 6,211 -- ------------- --------- 79,642 -- ------------- --------- Stockholders' Equity: (1) Preferred stock $0.1 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....................... -- 79,461 Retained earnings (2)............................ -- 31,000 ------------- --------- -- 110,642 ------------- --------- Total capitalization........................... $ 79,642 $ 110,642 ------------- --------- ------------- --------- - ------------------------ (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 effect on the Stockholders' Equity of recording deferred tax assets of $42 million at the date of the transaction, less transaction-related expenses of $11 million.
79 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 for the six months ended June 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. SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER BAC AND PRO FORMA PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- -------- STATEMENTS OF OPERATIONS DATA Sales............................................... $242,618 $296,147 $297,677 $383,818 $528,011 $218,350 $326,355 -------- -------- -------- -------- -------- -------- -------- Income Before Provision for Income Taxes............ 26,865 33,010 33,430 39,681 53,270 15,170 21,761 Provision for Income Taxes.......................... 675 1,647 1,968 4,980 7,457 2,490 2,653 -------- -------- -------- -------- -------- -------- -------- Net Income.......................................... $ 26,190 $ 31,363 $ 31,462 $ 34,701 $ 45,813 $ 12,680 $ 19,108 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income Applicable to Limited Partners(1)........ $ 24,701 $ 24,840 $ 24,918 $ 27,483 $ 36,284 $ 10,043 $ 15,134 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income Per BAC.................................. $ 1.65 $ 1.65 $ 1.65 $ 1.73 $ 2.25 $ 0.62 $ 0.93 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- UNAUDITED PRO FORMA INFORMATION (2) Income before provision for income taxes.......... $ 27,365 $ 33,510 $ 33,930 $ 40,181 $ 51,539 $ 15,420 $ 22,011 Provision for income taxes (3).................... 9,850 12,065 12,215 14,465 18,555 5,550 7,925 -------- -------- -------- -------- -------- -------- -------- Net income........................................ $ 17,515 $ 21,445 $ 21,715 $ 25,716 $ 32,984 $ 9,870 $ 14,086 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income per share.............................. $ 1.02 $ 1.25 $ 1.27 $ 1.43 $ 1.81 $ 0.54 $ 0.77 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding (4)........................... 17,088 17,136 17,162 17,968 18,215 18,226 18,407 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- CASH FLOW DATA Cash flow from operating activities................. $ 44,447 $ 54,782 $ 46,642 $ 55,316 $ 79,323 $ 22,338 $ 28,063 Cash purchases of property and equipment............ 7,065 7,158 15,988 12,295 18,126 9,248 13,679 Cash distributions to partners...................... 32,514 42,582 42,581 44,025 46,493 22,884 24,587 Cash distributions per BAC.......................... 2.27 2.50 2.50 2.50 2.51 1.25 1.26 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
80
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------------------ ---------------------------------------------------- 1994 1989 1990 1991 1992 1993 1993 1994 PRO FORMA -------- -------- -------- -------- -------- -------- -------- -------------- BALANCE SHEET DATA Cash and cash equivalents.......... $ 27,886 $ 32,025 $ 20,098 $ 19,094 $ 33,798 $ 9,300 $ 23,595 $ 23,595 Net increase (decrease) in cash and cash equivalents.................. 12,287 4,139 (11,927) (1,004) 14,704 (9,794) (10,203) (10,203) Current assets..................... 60,344 66,893 59,200 74,999 109,748 82,345 127,016 139,016 Total assets....................... 137,628 138,704 135,509 146,681 180,548 153,323 198,873 240,873 Total liabilities.................. 38,875 46,602 52,646 69,054 98,055 83,390 119,231 130,231 General Partner capital (deficit)......................... (419) (2,753) (5,066) (7,105) (7,397) (9,359) (8,721) -- Limited Partners' capital.......... 99,172 94,855 87,929 84,732 89,890 79,292 88,363 -- Stockholders' equity (4 and 5)..... -- -- -- -- -- -- -- 110,642 Net book value per BAC............. 6.59 6.13 5.50 4.89 5.12 4.34 4.88 -- Net book value per share (4 and 5)................................ -- -- -- -- -- -- -- 6.01 - ------------------------------ (1) Represents net income to BAC Holders after allocation to the General Partner 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 at the beginning of the periods presented for statements of operations data and as of the balance sheet date for the balance sheet data. Additionally, for the year ended December 31, 1993, adjustments have been made 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 the year in connection with the payment of the special cash distribution and all periods have been adjusted to eliminate the General Partner's annual fee of $500,000. See Note 10 of Notes to Financial Statements for additional information regarding the pro forma adjustments. (3) The unaudited pro forma adjustment to reflect a provision for income taxes for all periods presented herein has been calculated at a rate of 36%. Such rate reflects a combined federal and state statutory rate, net of related research and development credits and foreign sales corporation benefits. (4) Pro forma weighted average 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 16,010,441 shares to be issued to BAC Holders, 2,100,243 shares to be issued to the affiliates of the General Partner and 297,000 shares be issued to employees in connection with first rights granted but not yet converted to BACs. (5) Pro forma stockholders' equity includes estimated amounts related to the recording of expenses for the transaction and for 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 the General Partner and its affiliates 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.
81 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 in the period ended December 31, 1993 the quarters and six-month periods ended June 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, ATV and PWC business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year. RESULTS OF OPERATIONS The Partnership generated record levels of sales, profitability and cash flow during 1993, resulting from significant growth in all three of its product lines. These results were possible because of the continued commitment to deliver innovation, quality and value to its customers. The commitment to operating efficiency and product diversification also played a key role in this success. Additionally, the Partnership has been successful in managing production levels and in utilizing marketing skills and its strong dealer network to minimize retail inventory carryover from each model year. Significant variations in operations over the last three years are discussed in the following paragraphs. The Partnership has successfully captured and maintained the largest share of the snowmobile market. Innovative new model introductions, combined with an aggressive pricing strategy, fueled significant growth in the Partnership's snowmobile retail sales for the past two selling seasons. This followed the economic slowdown of the 1991-1992 selling season which caused a decrease in demand in the snowmobile market. Management believes its success in the snowmobile market is attributable to its product superiority, aggressive consumer promotional programs and strong dealer network. The snowmobile product is the foundation of the Polaris reputation for innovation, quality and value. This reputation has been achieved by a continuing effort to introduce new and improved products to each of the high performance segment, the family segment, and the first time buyer segment. Snowmobile unit sales volume decreased 13% in 1991 and increased by 13% in 1992 and 26% in 1993. The Partnership's success in 1993 was assisted by the growth in ATV product line sales as retail sales rose to the highest level in history. Increases in market share were posted for the fifth straight year, while the ATV market as a whole has begun to achieve modest growth. Management believes it has been successful by targeting the all-purpose segment of the ATV market with new and improved products sold through refined marketing and distribution efforts. ATV unit sales volume increased 27% in 1991, 24% in 1992 and 41% in 1993. Manufacturing and sales of PWC of commenced in the first quarter of 1992. The Partnership's entry into this expanding market has been very well received by the industry. PWC unit sales volume increased 62% in 1993 over the initial shipments of PWC product in 1992. The Partnership carefully manages its annual snowmobile, ATV and PWC unit production levels to match anticipated consumer demand. Additionally, sales incentive programs have been successfully utilized to increase sell-through at the retail level when consumer demand has been softer than expected. For example, in the fourth quarter of 1990, $5.0 million of additional snowmobile incentive programs were implemented which successfully reduced retail inventory levels by March 1991 and snowmobile unit production was decreased in anticipation of the continuing soft economy. By March 1992, the retail inventory levels of snowmobiles were again at acceptable levels, which allowed the Partnership to increase snowmobile unit production in 1992. In March 1994, the retail inventory levels of snowmobiles, as well as ATVs and PWC, are at record low levels. The Partnership has continually increased the average revenue per unit of each product line. An exception to this occurred in 1993 when snowmobile revenue per unit remained the same due to the dilutive effects of the Canadian currency exchange rates. In each of the past few years, the Partnership 82 has introduced and sold more high performance models. These products have a higher selling price and gross margin than economy models. The average snowmobile revenue per unit increased 4% in 1991 and 1992 and 0% in 1993. The average ATV revenue per unit increased 3% in 1991, 4% in 1992, and 5% in 1993. The average PWC revenue per unit increased 11% in 1993. The gross profit percentage decreases in 1992 from 32% to 30% and in 1993 from 30% to 27% are primarily due to changes in the product mix and foreign exchange rates. The rapidly 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 models. Operating expenses as a percentage of sales were 21.5% in 1991, 19.3% in 1992 and 17.2% in 1993. The Partnership continually invests in new product development, particularly in the areas of innovation and product diversification. 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. Historically, production and shipments during the second quarter of each year have been devoted primarily to snowmobiles. However, with the introduction of the PWC in 1992, together with the continued growth of the ATV product line, snowmobiles comprised just 25% of all finished goods unit shipments during the second quarter of 1994, as compared to 57% for the second quarter of 1993. ATV unit sales volume increased 155% over the prior year second quarter, while PWC unit sales volume increased 274%. To allow for this increased production of ATVs and PWC, the start of snowmobile production was delayed in 1994 compared to 1993, causing the second quarter unit sales volume of snowmobiles to decrease by 29%. For the year-to-date period ended June 30, 1994, these increases in demand resulted in an overall 42% increase in finished goods shipments compared to 1993. These factors are the principal cause for the $69.6 million increase in sales for the second quarter of 1994 to $180.9 million. This represents a 63% increase in sales over the $111.2 million recorded in the second quarter of 1993. Sales for the year-to-date period ended June 30, 1994 of $326.4 million represent a 49% increase over the prior year-to-date period. The gross margin percentage decreased to 20.5% for the second quarter and 20.9% for the year-to-date period ended June 30, 1994 compared to 25.5% and 24.8% for the comparable periods in 1993. These decreases in gross margin percentages are primarily a result of the following: (a) the change in product mix in the first half of 1994 since sales of ATVs and PWC generate lower gross margins than snowmobiles; and (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. Operating expenses increased $4.9 million during the second quarter and $8.0 million for the six-month period as a result of the sales volume increase, but as a percentage of sales, decreased to 14.0% for the second quarter and 14.3% for the six-month period ended June 30, 1994 compared to 18.4% and 17.8% for the comparable periods of 1993. Management currently anticipates that total year 1994 unit production and sales for each of snowmobiles, ATVs, and PWC will increase appreciably over 1993 levels. Management currently believes that its operating results for the full year 1994 also will be appreciably better than those of 1993, although there can be no assurance in this regard. Moreover, certain quarter-to-quarter results may not be comparable because of anticipated differences in the product mix and shipment dates. 83 CASH DISTRIBUTIONS On May 23, 1994, the General Partner declared and a regular distribution was paid on August 15, 1994 to BAC Holders of $0.63 per unit totaling $12.7 million, including distributions to the General Partner. On August 25, 1994, the General Partner declared its third quarter distribution of $0.63 per share, to be paid on November 15, 1994 to holders of record as of September 15, 1994. As at the date hereof, the cumulative cash distributions declared continue to exceed a 15% return on the original $10 per unit investment as adjusted for the split. 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 and its affiliates as long as such distributions cumulatively exceed a 15% return on a quarterly basis. Since its inception, the Partnership has paid or declared the following quarterly cash distributions per BAC to the BAC holders (restated to reflect the 2-for-1 split effective August, 1993):
QUARTER - -------------------------------------------------------------------------------- YEAR 1 2 3 4 TOTAL - ------------------------------ ------- ------- ------- ------- -------- 1987.......................... $ .073 $ .30 $ .373 1988.......................... $ .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 N/A 1.89 -------- Total $15.74 - ------------------------ N/A = Not announced
NET INCOME PER BAC Net income per unit differs significantly from cash distributions per unit of the Partnership for the following reasons: (i) Distributable cash has generally exceeded financial reporting net income because of the significant amount of non-cash expenses recorded for the amortization of intangibles and First Rights. These expenses reduce reported net income but do not affect cash available for distributions. BAC Holders' capital may decline if cash distributions exceed financial reporting net income. (ii) Cash distributions are made to actual units outstanding while net income per unit is diluted for the impact of BAC equivalents outstanding (e.g. First Rights granted). There were approximately 1,573,000, 1,565,000 and 1,198,000 BAC equivalents included in the net income per unit computation in 1991, 1992, and 1993, respectively, which had the effect of reducing net income per unit by $0.19 in each of 1991 and 1992 and $0.18 in 1993. The 850,000 Second Rights which were converted to BACs in January 1994 have been included as BAC equivalents in the net income per unit calculation since the first quarter 1992. (iii) There is an adverse effect on net income allocated to the BAC Holders when cumulative cash distributions are in excess of cumulative net income and the General Partner share of cash distributions increases from 1.99% to 20.8%. As discussed in Note 2 of Notes to Financial Statements, the Partnership allocates income to the General Partner and BAC Holders in proportion to the cash distributions to them. The BAC Holders have received a 79.2% share of distributions and income since the fourth quarter of 1989, and a 98.01% share prior to that time. The BAC Holders will be allocated 79.2% of the net income in 1994 because the General Partner and its affiliates will receive a 20.8% share of the planned distributions in 1994. 84 LIQUIDITY AND CAPITAL RESOURCES The seasonality of production and shipments causes working capital requirements to fluctuate during the year. At June 30, 1994 the Operating Partnership had no short-term debt and had utilized its bank line to the extent of letters of credit outstanding of $7.1 million related to purchase obligations for raw materials. Effective March 31, 1994, the Operating Partnership entered into a $40 million unsecured bank line of credit arrangement with interest charged at the prime interest rate, CD-based or LIBOR-based rates, expiring May 1, 1995. The Operating Partnership has agreed to certain limitations on distributions from the Operating Partnership to the Partnership in certain circumstances. Management believes this credit arrangement will be sufficient to meet the Partnership's needs through 1994. The Partnership and the Corporation currently intend to take such actions as may be required to maintain such facility in place for the Corporation following the Conversion. The Partnership has continually made significant investments to strengthen its position for the future. Over the past several years these investments have included the introduction of the PWC product line, acquisition of additional plant capacity to reduce costs and improve quality, a fourth assembly line dedicated to year round production of ATVs, and continuing development and implementation of systems and programs to improve quality and efficiency. In August 1991, the Partnership purchased for $8.0 million the Northern Metal Specialty Division of Western Industries, Inc., a raw materials and component parts fabrication facility. This acquisition of plant and equipment has provided improved cost efficiencies, quality control and additional plant capacity. 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 December 31, 1993, cash and cash equivalents totalled $33.8 million, an increase of $14.7 million from 1992. Working capital totalled $11.7 million, an increase of $5.7 million from 1992. In addition to expanded plant capacity with a new assembly line, improved plant layout and enhanced fabrication and assembly equipment, the 1993 capital expenditures include approximately $9.3 million of tooling expenditures relating to the design and development of numerous new models introduced in 1993 or to be introduced in future periods. The Partnership anticipates that capital expenditures for 1994 will approximate $36 million, reflecting the continued commitment to new product design and development as well as capacity expansions. The Partnership continues to negotiate with Revenue Canada, the Canadian income tax authorities regarding certain proposed adjustments to the 1987 and 1988 income tax returns of its 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 to 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, if any, 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 December 31, 1992 and 1993 the Partnership has accrued $3.6 million and $7.8 million, respectively, for income taxes. Planned distributions will total $12.7 million for each quarter of 1994. However, all future distributions are conditioned on continuing levels of performance and the financial strength of the Partnership and are declared quarterly. Management believes that existing cash balances, cash flow to be generated from operating activities and available borrowing capacity will be sufficient to fund operations, regular quarterly 85 distributions and capital requirements for the balance of 1994. Other than the declaration and payment in 1995 of the special distributions to shareholders that the Sponsor currently intend to recommend to the Board of Directors of the Corporation, at this time, management is not aware of any 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 largest snowmobile and PWC manufacturers 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, 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 materials purchased from Japanese suppliers. The Partnership operates in Canada through its wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 20% of total Company 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. MARKET PRICES AND DISTRIBUTIONS The BACs are listed on the American Stock Exchange and the Pacific Stock Exchange under the symbol "SNO". At October , 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 (through September 28).................................... 39 32 1/8
The closing sale price as reflected on the composite tape on October , 1994, the last trading day prior to the mailing of this Proxy Statement, was . The closing price on August 24, 1994, the last trading day before the Partnership publicly announced the planned Conversion, was 38 1/8. 86 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 0.625 0.625
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 its 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 its second quarter distribution of $0.63 per unit which was paid on August 15, 1994 to holders of record as of June 15, 1994. On August 25, 1994 the Partnership declared its third quarter distribution of $0.63 per unit, to be paid on November 15, 1994 to holders of record as of September 15, 1994. If the Conversion is completed between the date of a declaration of a distribution to the General Partner 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 distributions otherwise payable to the General Partner and the Operating General Partner. In addition, the Partnership intends to pay a special 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. 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 dividend distributions policy a principal purpose of which will be to provide that the total amount of distributions made by the Partnership per BAC and dividends paid by the Corporation per share of Common Stock during the period commencing January 1, 1995 and ending December 31, 1997, equal to the amount ($7.56 per BAC) which BAC Holders would have received in 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 establish an initial 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) 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. As stated above, the Partnership expects to continue pay quarterly distributions of $0.63 per BAC until the closing of the Conversion, with the distribution for the quarter during which the closing occurs being prorated based on the number of days in such quarter prior to the closing. A portion of such distributions during 1995 may constitute a tax free return of capital depending on the Corporation's 1995 earnings and profits for tax purposes and the shareholder's tax basis in the shares. 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 87 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." 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
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 had been 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 stockholder 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. 88 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
W. Hall Wendel, Jr. has served as Chief Executive Officer of Polaris Industries Capital Corporation ("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 had been 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. 89 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 Dolan -- Director(1) Robert S. Moe 63 Director(1) Kenneth D. Larson 54 President and Chief Operating Officer, Director(1) To be identified -- Director To be identified -- Director To be identified -- Director 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 and Larson have consented to serve as directors of the Corporation upon completion of the Conversion.
The Board of Directors of the Corporation is divided into three classes serving staggered three-year terms. The terms of office of Mr. Wendel and Mr. Moe expire in 1995; the term of office of Mr. Dolan expires in 1996; and the terms of office of Mr. Larson and Mr. expire in 1997. Beverly Dolan was Chairman of Textron, Inc. from August 1986 to December 1992. Robert S. Moe was Executive Vice President and Treasurer of PICC or Polaris from June 1981 to January 1993. 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 90 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.
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 91 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. 92 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
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 add (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 subtract (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%
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 of Northwestern. 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. 93 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. 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., Mr. Robert S. Moe and Charles A. Baxter, 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 made 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 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. 94 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of , 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 or EIPCC and executive officers of PICC as a group, and (v) those persons known to the Partnership who beneficially own more than five percent of any class of voting securities.
BENEFICIAL OWNERSHIP (1) ------------------------------------------------ BACS SHARES OF COMMON STOCK ---------------------- ---------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT - ---------------------------------------------------------------------- --------- ------- --------- ------- Victor K. Atkins, Jr. 425,136 2.66% 1,389,669 7.67% President, Secretary, Treasurer and Director of EIPCC and Chairman and Director of PICC Paul Bagley (2) 18,475 * 18,475 * Chairman and Director of EIPCC and Director of PICC W. Hall Wendel, Jr. (3) 988,800 6.18% 988,800 5.46% Chief Executive Officer of the Operating Partnership and Director of PICC Kenneth D. Larson (4) 105,376 * 105,376 * President and Chief Operating Officer of PICC 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 Robert S. Moe (5) 418,400 2.61% 418,400 2.31% Director Lehman Brothers Holdings Inc. 325,507(6) 2.03% 1,530,628(7) 8.45% All directors and executive officers as a group 1,897,090 11.85% 1,871,879 10.34% - ------------------------ * Represents less than 1%. (1) Unless otherwise indicated, beneficial ownership disclosed consists of sole voting and investment power. (2) 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. (3) Includes 128,000 BACs (Shares) held in a trust for Mr. Wendel's daughter as to which he disclaims any beneficial interest.
95 (4) Includes 100 BACs (shares) held in a trust for Mr. Larson's child and 10,200 BACs (shares) by Mr. Larson's spouse, as to which he disclaims any beneficial interest. (5) Mr. Moe has agreed to serve as a director of the Corporation following the Conversion. Includes 222,400 BACs (shares) held in a trust for Mr. Moe's children, as to which he disclaims any beneficial interest. (6) Includes BACs owned by certain Lehman Brothers Holdings Inc. affiliates (collectively, "LBHI"). (7) Includes Shares owned by LBHI. 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 approximately 155,000 shares that would be received by LBHI in the conversion pursuant to the preferred return set forth in the partnership agreement of the LBHI limited partner in the General Partner.
The business address for Mr. Atkins is 33 Flying Point Road, Southampton, New York 11968. The business address for Mr. Bagley is 936 Broadway, 5th Floor, New York, New York 10010. 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. 96 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. 97 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. 98 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 suspend or defer any transfers or assignments of BACs as a group at any time after the General Partner determines that 40% or more of all BACs may have been transferred (as defined by the Federal income tax laws) within a 12-month period, provided that the General Partner believes that the resulting termination of the Partnership for tax purposes would adversely affect the economic interest of the holders of BACs. The transferring holders of BACs will be notified of such suspension or 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 99 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 Company 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 Company 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 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 100 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 shall 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, the Board of Directors of the Corporation is 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. 101 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, 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 without restriction if the seller has not been, for at least three months before sale, an affiliate of the Corporation and a period of at least two years has elapsed since the date the securities were acquired from the Corporation. In all other circumstances, those shares may be sold during the three years following the Merger by any person that was an affiliate of the Partnership prior to the Merger only if (a) there is available adequate public information with respect to the Company and, unless such person has held the Common Stock for at least two years, only if (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. 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. 102 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. 103 POLARIS INDUSTRIES PARTNERS L.P. INDEX TO FINANCIAL STATEMENTS
CONTENTS PAGE - ---------------------------------------------------------------------------------------------------------- --------- Independent Auditor's Report on the Financial Statements.................................................. F-2 Financial Statements of the Partnership Balance Sheets as of December 31, 1992 and 1993, and June 30, 1994 (unaudited).......................... F-3 Statements of Operations for the years ended December 31, 1991, 1992 and 1993, and the six-month periods ended June 30, 1993 and 1994 (unaudited)............................................................... F-4 Statements of Partners' Capital for the years ended December 31, 1991, 1992 and 1993, and the six-month period ended June 30, 1994 (unaudited)................................................................. F-5 Statements of Cash Flows for the years ended December 31, 1991, 1992 and 1993, and the six-month periods ended June 30, 1993 and 1994 (unaudited)............................................................... F-6 Notes to Financial Statements for the years ended December 31, 1991, 1992 and 1993, and the six-month periods ended June 30, 1993 and 1994 (unaudited)....................................................... F-8 Financial Statement of Polaris Industries Inc. Balance Sheet as of September 23, 1994 (audited)........................................................ F-16
F-1 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 September 9, 1994 F-2 POLARIS INDUSTRIES PARTNERS L.P. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS DECEMBER 31, JUNE 30, 1994 -------------------- ------------------------ 1992 1993 HISTORICAL PRO FORMA --------- --------- ----------- ----------- (UNAUDITED) Current Assets Cash and cash equivalents......................................... $ 19,094 $ 33,798 $ 23,595 $ 23,595 Trade receivables................................................. 16,875 21,340 22,104 22,104 Inventories (Note 3).............................................. 37,576 52,057 79,083 79,083 Prepaid expenses and other........................................ 1,454 2,553 2,234 2,234 Deferred tax assets (Note 10)..................................... 12,000 --------- --------- ----------- ----------- Total current assets.......................................... 74,999 109,748 127,016 139,016 --------- --------- ----------- ----------- Deferred Tax Assets (Note 10)....................................... 30,000 ----------- Property and Equipment Land, buildings and improvements.................................. 9,558 10,737 10,793 10,793 Equipment and tooling............................................. 43,580 56,480 70,055 70,055 --------- --------- ----------- ----------- 53,138 67,217 80,848 80,848 Less accumulated depreciation..................................... 19,691 27,486 36,491 36,491 --------- --------- ----------- ----------- 33,447 39,731 44,357 44,357 Intangibles Cost in excess of net assets of business acquired, net of amortization of $4,199 1992; $4,968 1993 and $5,345 1994......... 26,479 25,710 25,333 25,333 Dealer network, net of amortization of $33,523 1992; $39,811 1993 and $42,947 1994................................................. 10,477 4,189 1,053 1,053 Other, net of amortization of $2,202 1992; $2,311 1993 and $2,367 1994............................................................. 1,279 1,170 1,114 1,114 --------- --------- ----------- ----------- 38,235 31,069 27,500 27,500 --------- --------- ----------- ----------- $ 146,681 $ 180,548 $ 198,873 $ 240,873 --------- --------- ----------- ----------- --------- --------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL Current Liabilities Accounts payable.................................................. $ 24,946 $ 36,122 $ 56,972 $ 56,972 Distributions payable (Note 2 and 10)............................. 11,127 11,851 12,736 12,736 Accrued expenses: Compensation (Note 5)........................................... 14,404 20,060 10,857 10,857 Sales promotion programs........................................ 2,749 3,691 11,259 11,259 Warranties...................................................... 5,705 11,412 10,078 10,078 Other........................................................... 6,493 7,165 9,809 20,809 Income taxes payable (Note 9)..................................... 3,630 7,754 7,520 7,520 --------- --------- ----------- ----------- Total current liabilities..................................... 69,054 98,055 119,231 130,231 --------- --------- ----------- ----------- Commitments and Contingencies (Notes 4, 5, 6, 8, and 10) Partners' Capital (Notes 2, 4, and 5) General Partner................................................... (7,105) (7,397) (8,721) Limited Partners: BACs (issued and outstanding, 14,504 units 1992, 14,936 units 1993 and 16,010 units 1994).................................... 76,139 81,069 82,152 First Rights: Assigned capital value........................................ 9,102 8,821 6,211 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 18,110 shares........................................ 181 Additional paid-in capital........................................ 79,461 Retained earnings................................................. 31,000 --------- --------- ----------- ----------- 77,627 82,493 79,642 110,642 --------- --------- ----------- ----------- $ 146,681 $ 180,548 $ 198,873 $ 240,873 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Pro Forma Net Book Value Per Share (Note 10) $ 6.01 ----------- -----------
See Notes to Financial Statements. F-3 POLARIS INDUSTRIES PARTNERS L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER UNIT AND PRO FORMA PER SHARE DATA)
FOR THE FOR THE YEARS ENDED DECEMBER FOR THE SIX MONTHS YEAR ENDED FOR THE SIX MONTHS 31, ENDED JUNE 30, DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- ---------------------------------- 1991 1992 1993 1993 1994 1993 1993 1994 --------- --------- --------- --------- --------- ------------ --------- --------- (UNAUDITED) (PRO FORMA) Sales................................ $ 297,677 $ 383,818 $ 528,011 $ 218,350 $ 326,355 $ 528,011 $ 218,350 $ 326,355 Cost of Sales........................ 201,883 269,199 383,916 164,213 258,101 383,916 164,213 258,101 ------------------------------- -------------------- ---------------------------------- Gross profit..................... 95,794 114,619 144,095 54,137 68,254 144,095 54,137 68,254 ------------------------------- -------------------- ---------------------------------- Operating Expenses Selling, general and administrative.................... 50,968 61,931 77,402 32,043 39,639 76,902 31,793 39,389 First Rights compensation.......... 5,548 4,570 6,300 3,170 3,572 6,300 3,170 3,572 Amortization of intangibles........ 7,560 7,427 7,166 3,588 3,569 7,166 3,588 3,569 ------------------------------- -------------------- ---------------------------------- Total operating expenses......... 64,076 73,928 90,868 38,801 46,780 90,368 38,551 46,530 ------------------------------- -------------------- ---------------------------------- Operating income................. 31,718 40,691 53,227 15,336 21,474 53,727 15,586 21,724 Nonoperating Expense (Income), net... (1,712) 1,010 (43) 166 (287) (43 ) 166 (287) Interest Expense (Note 10)........... -- -- -- -- -- 2,231 -- -- ------------------------------- -------------------- ---------------------------------- Income before income taxes....... 33,430 39,681 53,270 15,170 21,761 51,539 15,420 22,011 Provision for Income Taxes (Note 8).................................. 1,968 4,980 7,457 2,490 2,653 18,555 5,550 7,925 ------------------------------- -------------------- ---------------------------------- Net Income....................... 31,462 34,701 45,813 12,680 19,108 $ 32,984 $ 9,870 $ 14,086 ---------------------------------- ---------------------------------- Allocation of Net Income to General Partner (Note 2).................... 6,544 7,218 9,529 2,637 3,974 ------------------------------- -------------------- Net income applicable to Limited Partners........................ $ 24,918 $ 27,483 $ 36,284 $ 10,043 $ 15,134 ------------------------------- -------------------- ------------------------------- -------------------- Net income per unit.............. $ 1.65 $ 1.73 $ 2.25 $ 0.62 $ 0.93 ------------------------------- -------------------- ------------------------------- -------------------- Net income per share............. $ 1.81 $ 0.54 $ 0.77 Weighted Average Number of BACs and BAC Equivalents Outstanding......... 15,062 15,868 16,115 16,126 16,307 ------------------------------- -------------------- ------------------------------- -------------------- Weighted Average Number of Common and Common Equivalent Shares Outstanding....................... 18,215 18,226 18,407
See Notes to Financial Statements. F-4 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)............................... -- -- 3,572 -- 3,572 3,572 Net income for the six months (unaudited)............................... 3,974 15,134 -- -- 15,134 19,108 Cash distributions declared (unaudited).... (5,298) (20,173) -- -- (20,173) (25,471) ----------- --------- --------- ------------- ----------- --------- Balance, June 30, 1994 (Unaudited)........... $ (8,721) $ 82,152 $ 6,211 $ -- $ 88,363 $ 79,642 ----------- --------- --------- ------------- --------- ----------- --------- --------- ------------- --------- Less general partner's negative capital account balance (unaudited)............... (8,721) ----------- Amount available to the limited partner interest assuming a liquidation at net book value at June 30, 1994 (unaudited)... $ 79,642 ----------- -----------
See Notes to Financial Statements F-5 POLARIS INDUSTRIES PARTNERS L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE SIX MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------- ---------------------- 1991 1992 1993 1993 1994 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Cash Flows From Operating Activities Net income.................................... $ 31,462 $ 34,701 $ 45,813 $ 12,680 $ 19,108 Adjustments to reconcile net income to cash flow from operating activities: Depreciation................................ 6,270 9,830 12,446 6,364 9,053 Amortization................................ 7,560 7,427 7,166 3,588 3,569 First Rights compensation................... 5,548 4,570 6,300 3,170 3,572 ---------- ---------- ---------- ---------- ---------- 50,840 56,528 71,725 25,802 35,302 Changes in current operating items: Trade receivables......................... (1,350) (6,372) (4,465) 5,331 (764) Inventories............................... (4,584) (10,528) (14,481) (22,535) (27,026) Accounts payable.......................... 2,711 11,605 11,176 16,256 20,850 Other..................................... (975) 4,083 15,368 (2,516) (299) ---------- ---------- ---------- ---------- ---------- Net cash provided by operating activities............................... 46,642 55,316 79,323 22,338 28,063 Cash Flows From Investing Activities Purchase of property and equipment............ (15,988) (12,295) (18,126) (9,248) (13,679) ---------- ---------- ---------- ---------- ---------- Distributable cash.......................... 30,654 43,021 61,197 13,090 14,384 Cash Distributions to Partners.................. (42,581) (44,025) (46,493) (22,884) (24,587) ---------- ---------- ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents.................................. (11,927) (1,004) 14,704 (9,794) (10,203) Cash and Cash Equivalents Beginning..................................... 32,025 20,098 19,094 19,094 33,798 ---------- ---------- ---------- ---------- ---------- Ending........................................ $ 20,098 $ 19,094 $ 33,798 $ 9,300 $ 23,595 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Supplemental Schedule of Noncash Investing and Financing Activities BAC repurchase liability...................... 3,668 -- -- -- -- Asset purchase note payable................... 1,500 -- -- -- -- Capital lease obligation...................... 840 335 604 78 107 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Financial Statements. F-6 POLARIS INDUSTRIES PARTNERS L.P. STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
FOR THE YEAR ENDED FOR THE SIX MONTHS DECEMBER 31, ENDED JUNE 30, ---------------------------------------- 1993 1993 1994 ---------------------------------------- (PRO FORMA) Cash Flows From Operating Activities Net income........................................................... $ 32,984 $ 9,870 $ 14,086 Adjustments to reconcile net income to cash flow from operating activities: Depreciation....................................................... 12,446 6,364 9,053 Amortization....................................................... 7,166 3,588 3,569 First Rights compensation.......................................... 6,300 3,170 3,572 Deferred income taxes.............................................. 3,231 1,615 1,615 ------------ ------------ ------------ 62,127 24,607 31,895 Changes in current operating items: Trade receivables.................................................. (4,465 ) 5,331 (764) Inventories........................................................ (14,481 ) (22,535) (27,026) Accounts payable................................................... 11,176 16,256 20,850 Other.............................................................. 15,368 (2,516) (299) ------------ ------------ ------------ Net cash provided by operating activities........................ 69,725 21,143 24,656 ------------ ------------ ------------ Cash Flows From Investing Activities Purchase of property and equipment................................... (18,126 ) (9,248) (13,679) ------------ ------------ ------------ Cash Flows From Financing Activities Proceeds from long-term borrowings................................... 70,000 -- -- Stockholder dividends................................................ (10,925 ) (5,462) (5,462) Stockholder special cash distributions............................... (104,877 ) (34,959) (34,959) ------------ ------------ ------------ Net cash used in financing activities............................ (45,802 ) (40,421) (40,421) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents................. 5,797 (28,526) (29,444) Cash and Cash Equivalents Beginning............................................................ 19,094 19,094 33,798 ------------ ------------ ------------ Ending (deficit)..................................................... $ 24,891 $ (9,432) $ 4,354 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental Schedule of Noncash Investing and Financing Activities Pro forma payments for income taxes................................ 11,098 3,060 5,272 Capital lease obligation........................................... 604 78 107 ------------ ------------ ------------ ------------ ------------ ------------
See Notes to Financial Statements. F-7 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 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 AGREEMENTS: 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 intercompany 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. F-8 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994 IS UNAUDITED.) NOTE 1. PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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
Fully depreciated tooling is eliminated from the Partnership's accounting records annually. 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 basis 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. As of December 31, 1993, 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 -------------------- 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. F-9 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 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 $4,712,000 and $5,136,000 for the six-month periods ended June 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 June 30, 1994, and for the six-month periods ended June 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. 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 and its affiliates. 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. 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, JUNE ---------------- 30, 1992 1993 1994 ------- ------- ------- Raw materials................. $15,214 $21,571 $22,581 Service parts................. 19,616 23,379 30,937 Finished goods................ 2,746 7,107 25,565 ------- ------- ------- $37,576 $52,057 $79,083 ------- ------- ------- ------- ------- -------
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. F-10 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 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 June 30, 1994, was approximately $64,855,000 and $141,324,000, 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 $7,730,000 and $10,796,000 for the six-month periods ended June 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 $7,588,000 at June 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 June 30, 1994, 135,060 and 200,000 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 --------- ---------- --- ------------- --------- ---------- --- ------------- June 30, 1994........................... 205,097 (226,357) -- 297,000 --------- ---------- --- ------------- --------- ---------- --- -------------
F-11 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 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 $785,000 and $794,000 for the six-month periods ended June 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
LEASE COMMITMENT: 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 $1.85 million 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 $11,366,000 and $18,096,000 for the six-month periods ended June 30, 1993 and 1994, respectively. The following data relates to Canadian operations (in thousands of United States dollars):
FOR THE SIX FOR THE YEARS ENDED MONTHS ENDED DECEMBER 31, JUNE 30, -------------------------- ---------------- 1991 1992 1993 1993 1994 ------- ------- -------- ------- ------- Sales................................... $75,477 $99,286 $106,664 $41,913 $39,414 Operating income........................ 4,851 6,541 6,887 2,418 2,713 Identifiable assets..................... 14,679 16,639 15,248 15,787 15,184
F-12 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994 IS UNAUDITED.) NOTE 8. COMMITMENTS AND CONTINGENCIES ECONOMIC DEPENDENCE: During 1991, 1992 and 1993, purchases totaling 24 percent, 26 percent and 26 percent, respectively, and 29 percent for each of the six-month periods ended June 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 June 30, 1994, the Partnership has accrued $2,458,000, $3,513,000 and $4,004,000, 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. 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 June 30, 1994, the Partnership has open letters of credit totaling approximately $11,822,000 and $7,919,000. 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. 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 F-13 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994 IS UNAUDITED.) NOTE 10. PROPOSED CONVERSION FROM PARTNERSHIP TO CORPORATE STRUCTURE AND PRO FORMA FINANCIAL INFORMATION (CONTINUED) such common stock to the affiliates of the General Partner in exchange for the entire general partnership interests and rights and ultimately 297,000 shares of such common stock to the holders of 297,000 First Rights that are issued and outstanding at June 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 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 second and third installments of the special cash 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 periods 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 six-month periods ended June 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. 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. F-14 POLARIS INDUSTRIES PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION PERTAINING TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1993 AND 1994 IS UNAUDITED.) NOTE 10. PROPOSED CONVERSION FROM PARTNERSHIP TO CORPORATE STRUCTURE AND PRO FORMA FINANCIAL INFORMATION (CONTINUED) 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 the last three quarters of the periods 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 quarter subsequent to the conversion. A summary of the unaudited pro forma adjustments to the June 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 basis of the assets and liabilities of Polaris Industries Inc. resulting from the conversion transaction. 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. NOTE 11. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
NET INCOME NET 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 -------- -------- -------- Totals.............................. $326,355 $ 68,254 $19,108 .$93 -------- -------- -------- --------- -------- -------- -------- ---------
F-15 POLARIS INDUSTRIES INC. BALANCE SHEET SEPTEMBER 23, 1994 ASSETS Investment in Polaris Industries Partners L.P. (3,000 BACs at $22.50)........................... $ 67,500 -------- --------
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 -------- --------
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. F-16 ANNEX A GLOSSARY OF DEFINED TERMS 1987 Code Amendments to the Code adopted in 1987, pursuant to Amendment.......... which the Partnership will be treated as a corporation for federal income tax purposes subsequent to December 31, 1997. 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 BACs in favor of the Conversion. 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.
A-1 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 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........ Currently outstanding rights to acquire BAC. 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........ , 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.
A-2 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. Northwestern........ Northwestern Equipment Manufacturing Company, a Minnesota corporation, formerly PII. Operating Polaris Industries L.P., a Delaware limited partnership; Partnership........ and the collective reference to PICC, its affiliates 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. Proxy............... A proxy to be voted at the Special Meeting. PWC................. Personal watercraft. Record Date......... , 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. Special Appraiser... An independent appraiser selected by the then-Senior United States Federal District Judge for the District of Delaware 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.
A-3 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......... BAC Holders and the affiliates of the General Partner exchanging 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 indirect 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.
A-4 ANNEX B [Letterhead of Smith Barney] Polaris Industries Partners L.P. September 29, 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 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 Preliminary Proxy Statement dated September 29, 1994, 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 B-1 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 Preliminary 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 to be 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. B-2 ANNEX C [LETTERHEAD OF DILLON, READ & CO. INC.] September 29, 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 Preliminary Proxy Statement/ Prospectus furnished to us by the Partnership substantially in the form to be filed with the Securities and Exchange Commission (the "Preliminary Proxy Statement/Prospectus"). 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 Preliminary Proxy Statement/Prospectus and the Agreement and Plan of Conversion dated September 29 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 Preliminary Proxy Statement/Prospectus, 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 Preliminary Proxy Statement/Prospectus. We have not made an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the C-1 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. 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. C-2 ANNEX D POLARIS INDUSTRIES INC. POLARIS INDUSTRIES PARTNERS L.P. ------------------ AGREEMENT AND PLAN OF CONVERSION ------------------------ DATED AS OF SEPTEMBER 29, 1994 ------------------------ D-1 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 --------- 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-30 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-33 Section 13.1 Conditions to Each Party's Obligation To Effect the Transactions Contemplated Hereby........................................................................... D-33 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-36 Section 14.4 General Tax Indemnity............................................................. D-36 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-37 ARTICLE XV -- TERMINATION AND AMENDMENT......................................................................... D-38 Section 15.1 Termination....................................................................... D-38 Section 15.2 Effect of Termination............................................................. D-38 Section 15.3 Amendment......................................................................... D-38 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 --------- Section 16.3 Notices........................................................................... D-39 Section 16.4 Interpretation.................................................................... D-39 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-40 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
D-4 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"); D-5 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 upon the filing of the PICC Certificate of Merger 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. D-6 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 D-7 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 upon the filing of the Certificate of Merger 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 upon the filing of the Operating Partnership Certificate of Merger 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. D-8 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. D-9 (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 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 D-10 "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 D-11 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 D-12 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. D-13 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. D-14 (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 D-15 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 ole general partner in the Operating Partnership. As of the date hereof 534,503 Units were reserved for issuance upon the D-16 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 D-17 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. D-18 (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), (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) 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. D-19 (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 or any of its Subsidiaries 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. D-20 (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), (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) 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 D-21 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 or any of its Subsidiaries 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. D-22 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, D-23 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; D-24 (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 D-25 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). D-26 (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, employee or general 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 general partner (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, employee or general 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 general partner, 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 such Indemnified Party 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 D-27 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 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, 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 D-28 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. D-29 (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. D-30 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 D-31 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 D-32 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, 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 end of a calendar quarter, 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 30 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. D-33 (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 D-34 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. D-35 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 D-36 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. D-37 (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. 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. D-38 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. D-39 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. D-40 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 D-41 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: VICE PRESIDENT D-42 LB I GROUP INC., a limited partner By: /s/_RON HIRAM_________________________ Name: Ron Hiram Title: 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 D-43 ANNEX I PARTNERSHIP GP PARTNERS
PARTNERSHIP PERCENTAGE OF PARTNERSHIP GP PARTNER GP INTERESTS TRANSFERORS' 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) 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% -- -- -------- --------
D-44 ANNEX II OPERATING PARTNERSHIP GP PARTNERS
OPERATING PARTNERSHIP PERCENTAGE OF OPERATING PARTNERSHIP GP PARTNER GP INTERESTS TRANSFERORS' 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% 33 Flying Point Road Southampton, NY 11968 G.A. Myles........................................ 5% ltd. partner .4386% 139 Cooper's Farm Road Southampton, NY 11968 -- ------- TOTAL..................................... 95% 8.3333% -- -- ------- -------
D-45 ANNEX III EIPCC STOCKHOLDERS
NUMBER PERCENTAGE OF EIPCC STOCKHOLDER OF SHARES TRANSFERORS' NUMBER - -------------------------------------------------- ---------- -------------------- Victor K. Atkins, Jr.............................. 50 6.8296% 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% 2247 Seaman's Neck Road Seaford, NY 11783 Nancy A. Flaherty................................. 5 .6830% 167 Nancy Lane Wyckoff, NJ 07481 -- ------- TOTAL..................................... 70 9.5615% -- -- ------- -------
D-46 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. (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 (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) Computation of Net Income Per Unit. (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 to 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. (13)(a)* Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as filed in electronic format. (b)* Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, as filed in electronic format. (c)* Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994, as filed in electronic format. (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. (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 serve as director of Polaris Industries Inc., dated September 15, 1994. (d) Consent of Kenneth D. Larson to serve as director of Polaris Industries Inc., dated September 15, 1994. (e) Consent of Robert S. Moe to serve as director of Polaris Industries Inc., dated September 20, 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.
- ------------------------ * To be filed by amendment. II-2 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. 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 Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant, Polaris Industries Inc., has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on the 30th day of September, 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 Registration Statement 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 September 30, 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 September 30, 1994 Accounting Officer)
II-4 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 September 9, 1994 S-1 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.
S-2 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.
S-3 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.
S-4 EXHIBIT INDEX
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. (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. (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) Computation of Net Income Per Unit.
(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 to 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. (13)(a)* Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as filed in electronic format. (b)* Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, as filed in electronic format. (c)* Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1994, as filed in electronic format. (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. (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 serve as director of Polaris Industries Inc., dated September 15, 1994. (d) Consent of Kenneth D. Larson to serve as director of Polaris Industries Inc., dated September 15, 1994. (e) Consent of Robert S. Moe to serve as director of Polaris Industries Inc., dated September 20, 1994. - ------------------------ * To be filed by amendment.
EX-10.(P) 2 EXHIBIT 10(P) EXHIBIT (10)(P) POLARIS INDUSTRIES PARTNERS L.P. COMPUTATION OF NET INCOME PER UNIT (NOT COVERED BY AUDITOR'S REPORT)
QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL 1993 1993 1993 1993 1993 ----------- --------- ------------- ------------ --------- Total Net Income for Period...................... $ 6,138 $ 6,542 $ 18,762 $ 14,371 $ 45,813 Allocated To General partner................................ 1,277 1,361 3,902 2,989 9,529 ----------- --------- ------------- ------------ --------- Limited partners............................... $ 4,861 $ 5,181 $ 14,860 $ 11,382 $ 36,284 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Average BACs..................................... 14,899 14,899 14,899 14,917 14,917 Average First Rights............................. 377 377 376 348 348 Average Second Rights............................ 850 850 850 850 850 ----------- --------- ------------- ------------ --------- Total BACs and equivalents................... 16,126 16,126 16,125 16,115 16,115 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ --------- Income Per Unit.................................. $ .30 $ .32 $ .92 $ .71 $ 2.25 ----------- --------- ------------- ------------ --------- ----------- --------- ------------- ------------ ---------
EX-23.(C) 3 EXHIBIT 23(C) EXHIBIT (23)(C) CONSENT OF INDEPENDENT AUDITORS 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 September 9, 1994) on the financial statements of Polaris Industries Partners L.P. and to the use of our report, dated September 23, 1994, on the balance sheet 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 Historical and Pro Forma Financial Data" in such Prospectus. McGLADREY & PULLEN Minneapolis, Minnesota September 30, 1994 EX-99.(C) 4 EXHIBIT (99)(C) Mr. W. Hall Wendel, Jr. Polaris Industries, Inc. 5500 Norwest Center Minneapolis, Minnesota 55402 RE: POLARIS INDUSTRIES, INC. (THE "COMPANY") REGISTRATION STATEMENT ON FORM S-4 Dear Mr. Wendel: I hereby consent to my identification in the Proxy Statement on Form S-4 for the merger of Polaris Industries Partners, L.P. and a wholly-owned indirect subsidiary of the Company (the "Merger") as a person who has consented to serve as a director of the Company upon completion of the Merger pursuant to the Registration Statement. Very truly yours, /s/ B. F. Dolan ------------------------------- Date: September 15, 1994 ----------------------- EX-99.(D) 5 EXHIBIT (99)(D) Mr. W. Hall Wendel, Jr. Polaris Industries, Inc. 5500 Norwest Center Minneapolis, Minnesota 55402 RE: POLARIS INDUSTRIES, INC. (THE "COMPANY") REGISTRATION STATEMENT ON FORM S-4 Dear Mr. Wendel: I hereby consent to my identification in the Proxy Statement on Form S-4 for the merger of Polaris Industries Partners, L.P. and a wholly-owned indirect subsidiary of the Company (the "Merger") as a person who has consented to serve as a director of the Company upon completion of the Merger pursuant to the Registration Statement. Very truly yours, /s/ Kenneth D. Larson ------------------------------- Date: September 15, 1994 ---------------------- EX-99.(E) 6 EXHIBIT (99)(E) Mr. W. Hall Wendel, Jr. Polaris Industries, Inc. 5500 Norwest Center Minneapolis, Minnesota 55402 RE: POLARIS INDUSTRIES, INC. (THE "COMPANY") REGISTRATION STATEMENT ON FORM S-4 Dear Mr. Wendel: I hereby consent to my identification in the Proxy Statement on Form S-4 for the merger of Polaris Industries Partners, L.P. and a wholly-owned indirect subsidiary of the Company (the "Merger") as a person who has consented to serve as a director of the Company upon completion of the Merger pursuant to the Registration Statement. Very truly yours, /s/ Robert S. Moe ------------------------------- Date: September 20, 1994 ------------------------ -----END PRIVACY-ENHANCED MESSAGE-----