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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Milwaukee Land Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
April 28, 1997
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Notes:
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MILWAUKEE LAND COMPANY
547 WEST JACKSON BOULEVARD
CHICAGO, ILLINOIS 60661
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 27, 1997
Chicago, Illinois
April 29, 1997
The Special Meeting of Stockholders of Milwaukee Land Company (the
"Company") will be held at The LaSalle National Bank, 135 South LaSalle
Street, 43rd Floor, Chicago, Illinois 60603, on May 27, 1997, at 11:00 A.M.
local time, for the following purposes:
1. To consider and vote on a proposal to approve the purchase by the Company
and the Company's newly formed, wholly-owned subsidiary PG Newco Corp. ("PG
Newco") of substantially all the assets of PG Design Electronics, Inc. ("PG
Design") pursuant to an Asset Purchase Agreement among the Company, PG
Newco, PG Design and the shareholders of PG Design (the "Purchase
Agreement") and all transactions contemplated thereby (such transactions
hereinafter referred to as the "Acquisition"); and in connection with the
Acquisition to approve changes in the Company's fundamental policies:
(a) limiting the Company's ability to borrow money,
(b) limiting the Company's investments in securities of companies in a
single industry, and
(c) prohibiting most purchases of real estate or interests in real estate.
2. To consider and vote on a proposal to de-register the Company as an
investment company under the Investment Company Act of 1940 (the "De-
registration").
3. To consider and vote on a new investment advisory agreement with OFFITBANK
that would provide for (x) services beginning on the date of the Special
Meeting for compensation at the same rate as under the Company's old
advisory agreement, and (y) compensation for the period January 1, 1997
through February 17, 1997, during which time OFFITBANK performed services
for which it has not been paid.
4. To consider and vote upon a proposal to approve the Milwaukee Land Company
1997 Incentive and Capital Accumulation Plan (the "Plan"). A copy of the
Plan is included in Appendix G to the accompanying Proxy Statement.
5. To transact such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on Tuesday, April 29,
1997, as the record date for the determination of stockholders entitled to
notice of, and to vote at, the meeting and at any adjournment or adjournments
thereof.
Whether or not you intend to be present in person or to be otherwise
represented at the meeting, you are requested to complete, sign and date the
enclosed proxy card and return it in the enclosed envelope. This action will
not limit your right to revoke your proxy in the manner described in the
accompanying Proxy Statement or to vote in person if you wish to attend the
Special Meeting and vote personally.
By order of the Board of Directors
LOGO
Leon F. Fiorentino
Secretary
<PAGE>
MILWAUKEE LAND COMPANY
547 W. JACKSON BOULEVARD
CHICAGO, ILLINOIS 60661
(312) 822-0400
----------------
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
MAY 27, 1997
----------------
This Proxy Statement is being furnished to the holders of shares of Common
Stock, par value $.30 per share (the "Common Stock"), of Milwaukee Land
Company (the "Company") in connection with the solicitation of proxies by the
Board of Directors of the Company for use at the Special Meeting of
Stockholders of the Company (the "Special Meeting") to be held on Tuesday, May
27, 1997, at 11:00 A.M. local time, at The LaSalle National Bank, 135 South
LaSalle Street, 43rd Floor, Chicago, Illinois 60603, and at any adjournment or
adjournments thereof.
At the Special Meeting, stockholders of the Company will be asked to approve
each of the proposals listed in the Notice of the Meeting. This Proxy
Statement contains details on these matters, and we urge you to give it your
attention.
If a stockholder properly executes and returns the enclosed form of proxy,
it will be voted and, if a stockholder specifies a choice with respect to any
matter to be acted upon at the Special Meeting, it will be voted according to
his or her instructions. If no instructions are given, it will be voted FOR
each proposal listed in the Notice of the Meeting and in the discretion of the
proxies with respect to any other matter properly presented for a vote in
accordance with the judgment of the persons acting as proxies. Any proxy may
be revoked by giving notice of revocation to the Company in writing or in open
meeting before the proxy is exercised. No appraisal rights exist for any
action proposed to be taken at the Special Meeting.
The Company will pay the expenses of soliciting proxies, including the
charges and expenses of brokers, nominees, fiduciaries and custodians incurred
in sending proxy materials to principals and obtaining their instructions. In
addition to the use of mail, proxies may be solicited in person or by
telephone or telegraph. Directors, officers and regular employees of the
Company may solicit proxies without additional compensation.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders on or about April 29, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 4
The Special Meeting..................................................... 4
The Acquisition......................................................... 4
De-registration......................................................... 6
New Advisory Agreement.................................................. 7
The Plan................................................................ 7
Proposals of Stockholders............................................... 8
THE SPECIAL MEETING....................................................... 9
Record Date............................................................. 9
The Proposals........................................................... 9
Voting.................................................................. 9
Required Votes.......................................................... 9
Proxies................................................................. 10
Proxy Solicitation...................................................... 10
Adjournment............................................................. 10
1. THE PROPOSED ACQUISITION............................................... 11
General................................................................. 11
Background of the Acquisition........................................... 11
Reasons for the Acquisition............................................. 12
Terms of the Acquisition................................................ 12
Employment Agreement with Peter G. Vanheusden........................... 15
Information about PG Design............................................. 15
Selected Financial Data--PG Design...................................... 17
Discussion of Financial Condition and Results of Operations of PG
Design................................................................. 18
Condensed Pro Forma Financial Information............................... 20
Condensed Pro Forma Consolidated Balance Sheet.......................... 21
Notes to Condensed Pro Forma Consolidated Balance Sheet................. 22
Condensed Pro Forma Consolidated Statement of Operations................ 23
Notes to Condensed Pro Forma Consolidated Statement of Operations....... 24
Statement of Public Accountants......................................... 25
Risk Factors............................................................ 25
Accounting Treatment.................................................... 26
Certain Federal Income Tax Consequences................................. 26
1940 Act................................................................ 27
Required Vote........................................................... 29
2. DE-REGISTRATION........................................................ 29
Background.............................................................. 29
Required Vote........................................................... 30
3. APPROVAL OF NEW ADVISORY AGREEMENT..................................... 30
Background.............................................................. 30
Description of the New Agreement........................................ 31
Factors Considered by the Board......................................... 31
Information about Offitbank............................................. 32
Required Vote........................................................... 33
4. APPROVAL OF THE PLAN................................................... 33
General................................................................. 33
Description of the Plan................................................. 34
Other Terms of Benefits................................................. 36
</TABLE>
2
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<TABLE>
<S> <C>
Federal Income Tax Consequences.......................................... 36
Benefits Expected to Be Granted Under the Plan........................... 39
Consequences of Inability to De-register................................. 39
Required Vote............................................................ 39
5. OTHER MATTERS........................................................... 40
ADDITIONAL INFORMATION ABOUT THE COMPANY................................... 40
General.................................................................. 40
Heartland Partners L.P. and CMC Heartland Partners....................... 40
Executive Officers....................................................... 41
Executive Compensation................................................... 41
Security Ownership of Certain Beneficial Owners.......................... 42
Security Ownership of Management......................................... 43
Selected Financial Data--The Company..................................... 43
Discussion of the Financial Condition and Results of Operations of the
Company................................................................. 44
Comparative Market Price and Dividend Data............................... 45
PROPOSALS OF STOCKHOLDERS FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS...... 45
AVAILABLE INFORMATION...................................................... 45
APPENDIX A PURCHASE AGREEMENT
APPENDIX B UNAUDITED (UNCONSOLIDATED) PRO FORMA FINANCIAL INFORMATION
APPENDIX C AUDITED FINANCIAL STATEMENTS--PG Design
APPENDIX D UNAUDITED FINANCIAL STATEMENTS--PG Design
APPENDIX E AUDITED FINANCIAL STATEMENTS--The Company
APPENDIX F PROPOSED NEW ADVISORY AGREEMENT
APPENDIX G 1997 INCENTIVE AND CAPITAL ACCUMULATION PLAN
</TABLE>
3
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SUMMARY
Certain significant matters discussed in this Proxy Statement are summarized
below. This Summary is not intended to be complete and is qualified in all
respects by reference to the more detailed information appearing or
incorporated by reference in this Proxy Statement. Stockholders are urged to
review carefully the entire Proxy Statement (including the Appendices and any
documents incorporated herein by reference).
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE The Special Meeting of the Company's stockholders
MEETING..................... is to be held on Tuesday, May 27, 1997, at 11:00
A.M. local time, at The LaSalle National Bank,
135 South LaSalle Street, 43rd Floor, Chicago,
Illinois 60603.
RECORD DATE; SHARES Holders of record of shares of Common Stock at
ENTITLED TO VOTE............ the close of business on the Record Date are
entitled to notice of and to vote at the Special
Meeting. At the close of business on the Record
Date, there were 1,671,238 shares of Common Stock
issued and outstanding, each of which will be
entitled to one vote on each matter to be acted
upon or which may properly be brought before the
Special Meeting.
PURPOSE OF THE MEETING...... At the Special Meeting, stockholders of the
Company will be asked to (1) approve the
Acquisition and, in connection therewith, changes
in the Company's fundamental policies (a)
limiting the Company's ability to borrow money,
(b) limiting the Company's investments in
securities of companies in a single industry, and
(c) prohibiting most purchases of real estate or
interests in real estate; (2) approve the de-
registration of the Company (the "De-
registration") as an investment company under the
Investment Company Act of 1940 (the "1940 Act");
(3) approve a new advisory agreement with
OFFITBANK; (4) approve a new incentive
compensation plan; and (5) transact such other
business as may properly come before the meeting
or any adjournment or adjournments thereof. Each
of the proposals is discussed briefly below and
in more detail in the main body of this Proxy
Statement.
VOTE REQUIRED............... The vote required to approve each of the
proposals to be presented at the Special Meeting
is included in the discussion of each proposal.
THE ACQUISITION
GENERAL..................... The first proposal to be presented to
stockholders is to approve the acquisition by the
Company and its newly formed, wholly-owned
subsidiary PG Newco Corp. ("PG Newco") of
substantially all the assets and the assumption
by PG Newco of certain liabilities of PG Design
Electronics, Inc. ("PG Design"), a company
engaged in the business of the contract design
and manufacture of printed circuit boards for
computer products.
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<PAGE>
BACKGROUND.................. The Company's Board of Directors believes that
concentrating the assets of the Company in a few
operating businesses would be in the best
interests of the Company's stockholders. After an
extensive search, the Company identified PG
Design as an attractive business for acquisition.
The Company subsequently negotiated the Purchase
Agreement pursuant to which the Company intends
to acquire, with PG Newco, substantially all the
assets of PG Design. As part of the proposed
Acquisition, PG Newco will assume certain
liabilities of PG Design. See "THE PROPOSED
ACQUISITION--Background of the Acquisition" and
"DE-REGISTRATION--Background."
REASONS FOR THE In connection with the determination that the
ACQUISITION................. Acquisition should be submitted to stockholders
for approval, the Board of Directors of the
Company carefully reviewed the financial,
business, tax and legal implications of the
Acquisition and considered a number of factors,
including without limitation: the Purchase Price;
the operations of PG Design; the financial
condition of PG Design; the terms and conditions
of the Purchase Agreement and the other
agreements and transactions contemplated thereby;
the Company's anticipated De-registration as an
investment company as a result of the
Acquisition; and the position of the Company if
the Acquisition were not consummated. See "THE
PROPOSED ACQUISITION--Reasons for the
Acquisition."
PURCHASE PRICE.............. Subject to the terms, conditions and procedures
set forth in the Purchase Agreement, (i) PG Newco
shall deliver to PG Design $12,000,000 and shall
deliver to PG Design's lenders sufficient cash,
approximately $1,400,000 but in no event to
exceed $2,500,000, to effect the payment in full
of PG Design's outstanding bank debt, and (ii)
the Company shall deliver to PG Design two
promissory notes (the "Notes"), each in the
aggregate principal amount of $1,500,000 and
paying 8% interest. One Note will be due on the
third anniversary and the other will be due on
the fifth anniversary of Peter G. VanHeusden
entering an employment contract with PG Newco.
However, if Peter G. VanHeusden voluntarily
leaves the employ of PG Newco, any and all
remaining payment obligations due under the Notes
shall immediately and forever cease to exist. See
"THE PROPOSED ACQUISITION--Terms of the
Acquisition" and "--Employment Agreement with
Peter G. VanHeusden."
ACCOUNTING TREATMENT........ As long as the Company is a registered investment
company, PG Newco will be carried on the books of
the Company as an investment. The Company will
determine the cost of the acquisition in
accordance with generally accepted accounting
principles, and the investment will thereafter be
carried at a fair value determined in good faith
by the Board of Directors of the Company. If the
Company de-registers as an investment company, as
the Company expects to do if the Acquisition and
De-registration are approved by stockholders, the
investment in PG Newco will thereafter be carried
5
<PAGE>
at cost. See "THE PROPOSED ACQUISITION--
Accounting Treatment."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................
Consummation of the Acquisition will not affect
the status of the Company for federal income tax
purposes. See "THE PROPOSED ACQUISITION--Certain
Federal Income Tax Consequences."
1940 ACT.................... The Company is a non-diversified, closed-end
management investment company registered with the
Securities and Exchange Commission ("SEC") under
the 1940 Act. As an investment company, the
Company is subject to certain provisions of that
Act which may be deemed to provide greater
protections than those provided under the
Securities Exchange Act of 1934 (the "1934 Act")
and to be particularly restrictive on management
of investment companies. See "THE PROPOSED
ACQUISITION--1940 Act--Status as an Investment
Company" and "--Regulations Governing Investment
Companies."
The Company's present investment objective of
providing as high a level of current income as is
consistent with prudent investment designed to
preserve capital may be changed by the Board of
Directors of the Company without stockholder
approval. The Board of Directors intends to
change the investment objective when the
Acquisition is completed to providing long-term
capital appreciation and growth. See "THE
PROPOSED ACQUISITION--1940 Act--Investment
Objective."
The Company is subject to a number of investment
restrictions designed to promote the investment
objective of the Company that may be amended only
with stockholder approval. The Company must amend
three fundamental investment restrictions in
order to consummate the Acquisition and therefore
a vote in favor of the Acquisition will also be a
vote in favor of modifying these three
restrictions. See "THE PROPOSED ACQUISITION--1940
Act--Changes to Investment Restrictions to Permit
Consummation of the Acquisition" and "--
Borrowing" and "--Industry Concentration" and "--
Investments in Real Estate."
DE-REGISTRATION
BACKGROUND.................. The Company expects that if it completes the
Acquisition it will no longer be an investment
company as defined by the 1940 Act. The 1940 Act
requires that the Company have the approval of
its stockholders before changing the nature of
its business so as to cease to be an investment
company. If De-registration is approved by the
stockholders and the Acquisition is completed,
the Company intends to apply to the SEC for an
order declaring that it has ceased to be an
investment company. If the SEC approves De-
registration, the stockholders of the Company
will no longer have the benefit of the
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regulatory protections provided by the 1940 Act
but will continue to have the protections
afforded by certain provisions of the 1934 Act.
See "THE PROPOSED ACQUISITION--1940 Act--
Definition of Investment Company" and "DE-
REGISTRATION--Background."
NEW ADVISORY AGREEMENT
BACKGROUND.................. Stockholders will be asked to approve a new
investment advisory agreement with OFFITBANK, the
Company's current investment adviser. The new
agreement will provide for OFFITBANK to continue
to render the services it currently renders, in
return for payment by the Company of fees at the
same rates as under the Company's old advisory
agreement. In addition, the new agreement will
permit the Company to compensate OFFITBANK (at
the same rate as under the old and new advisory
agreements) for services it performed during the
period January 1, 1997 through February 17, 1997,
for which it has not been paid. See "APPROVAL OF
NEW ADVISORY AGREEMENT."
THE PLAN
BACKGROUND.................. Stockholders will be asked to approve the
Milwaukee Land Company 1997 Incentive and Capital
Accumulation Plan (the "Plan"). In addition to
the requisite approval of the stockholders of the
Company, the Plan is conditioned upon the entry
of an order by the SEC pursuant to Section 8(f)
of the 1940 Act declaring that the Company has
ceased to be an investment company (the "De-
registration Order"). If the De-registration
Order is not entered, the Plan will not be
adopted and the requested approval by the
stockholders at this Special Meeting will have no
effect. See "DE-REGISTRATION--Background" and
"APPROVAL OF THE PLAN--General" and "--
Consequences of Inability to De-register." The
Plan is designed to provide incentives that will
enable the Company to attract, retain and
motivate highly competent persons as key
employees of the Company and any subsidiary of
the Company. See "APPROVAL OF THE PLAN--General."
The Plan will be administered by a Compensation
Committee (the "Committee") which the Board of
Directors appointed at a meeting held on February
18, 1997. See "APPROVAL OF THE PLAN--Description
of the Plan--Administration."
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BENEFITS UNDER THE PLAN..... The Plan makes available for benefits, subject to
certain adjustments, 100,000 shares of Common
Stock to be reserved for stock option grants and
75,000 shares of Common Stock to be reserved for
SARs. The aggregate amount of shares of Common
Stock subject to benefits under the Plan is
expected to be 175,000. See "APPROVAL OF THE
PLAN--Description of the Plan--Shares Available."
As of the date of this Proxy Statement, the Plan
has not been adopted and no benefits have been
granted. Upon fulfillment of the necessary pre-
conditions, it is expected that the Company will
recommend to the Committee to grant to (i) Peter
G. VanHeusden, Stock Options for 50,000 shares of
Common Stock and SARs with respect to 25,000
shares of Common Stock; (ii) Edwin C. Jacobson,
Stock Options for 50,000 shares of Common Stock
and SARs with respect to 25,000 shares of Common
Stock and (iii) certain other executives of PG
Newco and the Company, SARs with respect to up to
25,000 shares of Common Stock, all in
consideration of their continued employment in
their respective capacities. The Benefits
expected to be granted to Edwin C. Jacobson will
vest one year after the Closing Date. The
Benefits expected to be granted to Peter G.
VanHeusden and anyone else will vest five years
after the Closing Date. See "APPROVAL OF THE
PLAN--Benefits Granted Under the Plan."
FEDERAL INCOME TAX Certain benefits under the plan are intended to
CONSEQUENCES................ meet the definitional requirements of Section
422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"), for "incentive stock
options" ("ISOs"). An employee who receives an
ISO does not recognize any taxable income upon
the grant of such a benefit and, generally, the
exercise of an ISO does not give rise to federal
income tax to the employee. Other benefits under
the Plan will not qualify as ISOs. Although an
employee does not recognize any taxable income
upon the grant of such a non-qualifying benefit,
generally, an employee will recognize taxable
income upon exercise of that benefit. See
"APPROVAL OF THE PLAN--Federal Income Tax
Consequences."
PROPOSALS OF STOCKHOLDERS
BACKGROUND.................. Any stockholder who wishes to present a proposal
for action at the 1998 annual meeting of
stockholders and who wishes to have it set forth
in the proxy statement and identified in the form
of proxy prepared by the Company must notify the
Company in such manner so that such notice is
received by the Company by February 24, 1998 and
in such form as is required under the rules and
regulations promulgated by the Securities and
Exchange Commission.
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THE SPECIAL MEETING
This proxy statement is furnished to the stockholders of the Company in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Special Meeting of Stockholders of the Company (the
"Special Meeting") to be held on Tuesday, May 27, 1997, at 11:00 A.M. local
time, at The LaSalle National Bank, 135 South LaSalle Street, 43rd Floor,
Chicago, Illinois 60603, and at any adjournment or adjournments thereof, for
the purposes set forth below. This Proxy Statement and the accompanying form of
proxy are first being mailed to stockholders of the Company on or about April
29, 1997. The 1997 Annual Meeting is expected to be held in August 1997.
RECORD DATE
The Board of Directors has fixed the close of business on Tuesday, April 29,
1997 as the Record Date (the "Record Date") for determining stockholders
entitled to notice of, and to vote at, the Special Meeting and any adjournments
or postponements thereof. On the Record Date, there were 1,671,238 shares of
Common Stock, par value $.30, of the Company issued and outstanding ("Common
Stock"). No other class of stock is outstanding.
THE PROPOSALS
At the Special Meeting, holders of shares of the Company's Common Stock,
outstanding as of the close of business on the Special Meeting Record Date,
will be asked to:
1. To consider and vote on a proposal to approve the purchase by the
Company and PG Newco of substantially all the assets of PG Design
pursuant to an Asset Purchase Agreement among the Company, PG Newco, PG
Design and the shareholders of PG Design (the "Purchase Agreement") and
all transactions contemplated thereby (such transactions hereinafter
referred to as the "Acquisition"); and in connection with the
Acquisition to approve changes in the Company's fundamental policies:
(a) limiting the Company's ability to borrow money,
(b) limiting the Company's investments in securities of companies in a
single industry, and
(c) prohibiting most purchases of real estate or interests in real
estate.
2. To consider and vote on a proposal to de-register the Company as an
investment company ("De-registration") under the Investment Company Act
of 1940 (the "1940 Act").
3. To consider and vote on a new investment advisory agreement with
OFFITBANK that would provide for (x) services beginning on the date of
the Special Meeting for compensation at the same rate as under the
Company's old advisory agreement, and (y) compensation for the period
January 1, 1997 through February 17, 1997, during which time OFFITBANK
performed services for which it has not been paid.
4. To consider and vote upon a proposal to approve the Milwaukee Land
Company 1997 Incentive and Capital Accumulation Plan (the "Plan"). A
copy of the Plan is included as Appendix G to this Proxy Statement.
5. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
Each of these proposals is discussed in detail in this Proxy Statement.
VOTING
Proxies are tabulated by LaSalle Bank. Under Delaware law (under which the
Company is organized) and the Company's bylaws, a majority of the shares
outstanding on the Record Date, excluding shares held in the Company's
treasury, must be present at the meeting in person or by proxy to constitute a
quorum for the transaction of business.
REQUIRED VOTES
The vote required to approve each of the proposals is discussed in the
section of the proxy statement relating to that proposal.
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PROXIES
This Proxy Statement is being furnished to stockholders in connection with
the solicitation of proxies by and on behalf of the Board of Directors for use
at the Special Meeting.
Proxies properly executed and returned in a timely manner will be voted at
the Special Meeting in accordance with the directions specified therein. If no
direction is indicated, proxies will be voted FOR each of the proposals
discussed in this Proxy Statement and in accordance with the judgment of the
persons acting under the proxies on any other matters properly presented for a
vote.
No appraisal rights exist for any action proposed to be taken at the Special
Meeting.
A stockholder who abstains from a vote will be deemed present at the Special
Meeting for quorum purposes and will be deemed not to have voted on the
particular matter. Similarly, in the event a nominee holding shares for
beneficial owners votes on certain matters pursuant to discretionary authority
or instructions from beneficial owners, but with respect to one or more other
matters does not receive instructions from beneficial owners and does not
exercise discretionary authority (a so-called "non-vote"), the shares held by
the nominee will be deemed present at the Special Meeting for quorum purposes
and will be deemed not to have voted on such other matters.
The enclosed form of proxy, if executed, may be revoked by the person giving
it at any time before it is voted. Proxies may be revoked by any of the
following actions: (i) the filing with the Secretary of the Company, at or
before the Special Meeting, a written notice of revocation bearing a date
later than the proxy; (ii) properly executing and submitting prior to the
Special Meeting a subsequently dated proxy; or (iii) voting in person at the
Special Meeting (although attendance at the Special Meeting will not, in and
of itself, constitute a revocation of a proxy). Any written notice revoking a
proxy should be sent to: Leon F. Fiorentino, Secretary, Milwaukee Land
Company, 547 West Jackson Boulevard, P.O. Box 6205, Chicago, Illinois 60680-
6205.
PROXY SOLICITATION
Proxies are being solicited by and on behalf of the Company's Board of
Directors. The expense of this solicitation will be borne by the Company.
Officers and regular employees of the Company, in the ordinary course of
business and at nominal expense, may supplement this solicitation by mail,
personal call, telephone, telegraph or letter, for which they will be
reimbursed for out-of-pocket expenses but will receive no additional
compensation. The Company has retained D.F. King & Co., Inc. to assist in the
distribution of proxy solicitation materials and with the solicitation of
proxies, at a cost of approximately $4,000 plus reimbursement of reasonable
out-of-pocket expenses. Brokers or other persons holding Common Stock in their
names or in the names of their nominees will, upon request, be reimbursed for
their actual expenses in forwarding proxies and proxy material to the
beneficial owners of such stock.
The Company's 1996 Annual Report, which includes the Company's statement of
assets and liabilities at December 31, 1996, statement of operations for the
fiscal year ended December 31, 1996 and statement of changes in net assets for
the fiscal years ended December 31, 1996 and 1995, was mailed to stockholders
prior to the mailing of the Proxy Statement. ANY STOCKHOLDER MAY OBTAIN A COPY
OF THE 1996 ANNUAL REPORT, WITHOUT CHARGE, BY CONTACTING THE SECRETARY OF THE
COMPANY AT 547 W. JACKSON BOULEVARD, SUITE 1510, CHICAGO, IL 60661 OR BY
CALLING (800) 962-6247.
ADJOURNMENT
Any decision to adjourn the meeting would be made by vote of the shares
present at the meeting, in person or by proxy. Proxies would be voted in favor
of adjournment if there were not enough shares present at the meeting to
constitute a quorum. If sufficient shares were present to constitute a quorum,
but insufficient votes had been cast in favor of an item to approve it,
proxies would be voted in favor of adjournment only if the Board of Directors
determined that adjournment and additional solicitation was reasonable and in
the best interest of stockholders, taking into account the nature of the
proposal, the percentage of votes actually cast, the percentage of negative
votes, the nature of any further solicitation that might be made and the
information provided to stockholders about the reasons for additional
solicitation.
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<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
"FOR" EACH OF THESE PROPOSALS.
1. THE PROPOSED ACQUISITION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE ACQUISITION.
GENERAL
At a meeting held on April 4, 1997, the Board of Directors of the Company,
including those Directors who are not "interested persons" of the Company
under the 1940 Act, considered and unanimously approved for the submission to
the stockholders of the Company a proposal to purchase substantially all the
assets and assume certain liabilities of PG Design pursuant to the Purchase
Agreement attached hereto as Appendix A. Completion of the Acquisition would
cause the Company to cease to be an investment company as defined in the 1940
Act. The Board of Directors believes that concentrating the Company's assets
in operating businesses is in the best interests of the stockholders.
The Company is currently subject to investment restrictions that limit the
Company's ability to borrow money, limit the Company's investments in
securities of companies in a single industry, and prohibit most purchases of
real estate or interests in real estate. Those restrictions may not be changed
without the approval of the Company's stockholders, and must be changed in
order to permit completion of the Acquisition. Therefore, a vote to approve
the Acquisition will also be deemed to be a vote to amend each of those
restrictions as discussed in more detail in "1940 Act" below. The Board of
Directors expects that it would also change the Company's investment
objective, which may be changed by the Board without stockholder approval.
If the proposal to approve the Acquisition and De-registration are approved,
the Company will consummate the Acquisition and will then apply for an order
of the Securities and Exchange Commission declaring that the Company has
ceased to be an investment company as defined in the 1940 Act. See "DE-
REGISTRATION--Background." If the proposals are not approved, the Acquisition
will not be completed, the Company will remain a closed-end investment
company, and the Board of Directors will consider whether alternative actions,
if any, should be taken.
As of the Record Date, officers and directors of the Company and certain
affiliated persons had the power to vote approximately 6.3% of the outstanding
shares of Common Stock. All such persons have expressed their intent to vote
their respective shares in favor of the Acquisition.
BACKGROUND OF THE ACQUISITION
As stockholders of the Company are aware, the Company has been engaged in a
search for one or more acquisitions of operating businesses since it was
established as an independent company. The Company is currently engaged in the
active management of the business and affairs of Heartland Partners, L.P. and
CMC Heartland Partners, of which the Company is general partner. See
"ADDITIONAL INFORMATION ABOUT THE COMPANY--Heartland Partners L.P. and CMC
Heartland Partners," below. However, a significant portion of the Company's
assets (about 62% at March 31, 1997) has been held for investment purposes and
invested largely in U.S. treasury obligations and corporate debt securities.
The Company's Board of Directors believes that the Company's assets would be
better used to acquire an operating business that would be managed by the
Company. The business strategy proposed by the Board of Directors has, in the
opinion of the Board of Directors, the potential for greater long-term capital
appreciation than investments in the type of securities currently being held.
After an extensive review of potential businesses for acquisition, the
Company identified PG Design as an attractive business to acquire. The Company
has negotiated the Purchase Agreement, a copy of which is attached as Appendix
A to this Proxy Statement, pursuant to which the Company will acquire, in most
part through PG Newco, a newly formed, wholly-owned subsidiary of the Company,
substantially all the assets and certain liabilities of PG Design if
stockholders approve the Acquisition and De-registration. PG Design is engaged
in the business of contract design and manufacture of printed circuit boards
for computer products. Information about PG Design appears under the heading
"Information About PG Design," below.
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<PAGE>
REASONS FOR THE ACQUISITION
In connection with the determination that the Acquisition should be approved
and submitted to the stockholders, the Company's Board of Directors carefully
reviewed the financial, business, tax and legal implications of the
Acquisition. In reaching this determination, the Board of Directors considered
a number of factors, including, without limitation, the following:
. the Purchase Price to be paid pursuant to the Purchase Agreement;
. the effect of the Acquisition on the ability of the Company to develop
or acquire operating businesses which may favorably impact the interests
of the Company and the stockholders;
. the Company's anticipated De-registration as an investment company as a
result of the Acquisition;
. the position of the Company if the Acquisition were not consummated;
. the financial condition and business operations of PG Design; and
. the terms and conditions of the Purchase Agreement and the agreements
and transactions contemplated thereby.
On April 4, 1997, the Board of Directors of the Company and the directors of
PG Newco unanimously approved the Purchase Agreement.
TERMS OF THE ACQUISITION
Consideration. Subject to the terms, conditions and procedures set forth in
the Purchase Agreement, the Company and PG Newco shall acquire substantially
all of the assets (the "Assets") and PG Newco will assume certain liabilities
("Assumed Liabilities") of PG Design. See "Information about PG Design--
Properties" for a description of the Assets. On the closing date of the
Acquisition (the "Closing Date"), as consideration for the acquisition of the
Assets and the assumption of the Assumed Liabilities of PG Design and subject
to the Purchase Agreement, (i) PG Newco shall deliver to PG Design $12,000,000
and shall deliver to PG Design's lenders sufficient cash to pay in full the
outstanding balance of PG Design's bank debt, estimated to be approximately
$1,400,000 but in no event to exceed $2,500,000 (together, the "Initial Cash
Consideration") and (ii) the Company shall deliver to PG Design two promissory
notes, each in the aggregate principal amount of $1,500,000 and paying 8%
interest, executed by the Company and guaranteed by the Company and PG Newco
(the "Notes" and together with the Initial Cash Consideration, the "Purchase
Price"). Payment on the Notes is subject to certain terms and conditions as set
forth therein. Subject to the terms of the Notes, interest on the Notes will be
paid on a quarterly basis and principal is payable on one Note on the third
anniversary and on the other Note on the fifth anniversary of Peter G.
VanHeusden entering a employment agreement with PG Newco. However, if Peter G.
VanHeusden voluntarily leaves the employ of PG Newco, any and all remaining
payment obligations due under the Notes shall immediately and forever cease to
exist. See "THE PROPOSED ACQUISITION--Employment Agreement." The Company's use
of available free cash is restricted under the terms of the Notes, up to the
principal amount owing under the Notes, to funding its corporate operations and
obligations and supporting the growth of the business of PG Newco.
The Consideration was determined through negotiations between the parties and
was approved by the Board of Directors of the Company, by the Board of PG Newco
and by PG Design.
Financing. In connection with the Acquisition, the Company will provide
approximately $9,500,000 for use by PG Newco to finance the Initial Cash
Consideration. PG Newco will be obligated to repay the Company any amounts
borrowed from the Company on commercially reasonable terms. The Company will
not borrow any funds in connection with the Acquisition. PG Newco intends to
borrow from a third party lender approximately $4,000,000 pursuant to a
financing secured by the equipment to be acquired from PG Design and up to
$4,000,000 pursuant to a revolving credit facility.
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<PAGE>
Representations and Warranties of PG Newco and the Company. PG Newco and the
Company have made certain representations and warranties in the Purchase
Agreement concerning (i) certain customary corporate law matters; (ii) the
absence of any conflict between the Purchase Agreement and applicable laws and
regulations; (iii) the absence of any legal proceedings pertaining to the
Acquisition and (iv) the absence of any broker or other person, other than the
officers and directors of the Company or PG Newco, who served as a broker,
finder or financial advisor to PG Newco or the Company in connection with the
negotiations relating to the Acquisition and the absence of any fee or
commission or like payment other than from the Company or PG Newco in respect
to the Purchase Agreement based on agreements, understandings or arrangements
made by or on behalf of PG Newco.
Representations and Warranties of PG Design and the Shareholders of PG
Design. PG Design and shareholders of PG Design (the "PG Shareholders") have
made certain representations and warranties in the Purchase Agreement
concerning (i) certain customary corporate law matters; (ii) the absence of
any conflict between the Purchase Agreement and applicable laws or regulations
or any conflict between the Purchase Agreement and any contract or order to
which PG Design is a party; (iii) the absence of any violation of any law
applicable to PG Design or the PG Shareholders or the need for any
governmental consents other than for the transfer of certain tax abatements;
(iv) the status of title to the assets and personal properties of PG Design;
(v) the status of the leased real property of PG Design; (vi) the completeness
and accuracy of certain financial statements of PG Design and the financial
position of PG Design; (vii) the absence of certain specified developments
since November 30, 1996; (viii) the status of certain contracts deemed
material; (ix) the status of certain specified intangibles such as trademarks,
trade names, service marks and copyrights; (x) the absence of certain tax
liabilities and the status of PG Design and its assets in relation to
applicable tax regulations; (xi) the status of employee benefit plans and
employee arrangements of PG Design; (xii) the absence of litigation pertaining
to the business or assets of PG Design, the Acquisition or the validity of the
Purchase Agreement; (xiii) the status of accounts receivable of PG Design;
(xiv) the quality of the inventory of PG Design; (xv) the absence of any
claims, suits or proceedings relating to any environmental laws; (xvi) the
absence of brokers, finders or financial advisors, other than those disclosed,
used by PG Design or any PG Shareholder in connection with the Acquisition and
the absence of any fee, commission or like payment in respect to the
Acquisition based on agreements, understandings or arrangements with such
persons; (xvii) the existence and enforceability of certain insurance policies
and other contracts; (xviii) the absence of certain transactions with related
parties; (xix) the status of business relationships with significant customers
and suppliers and (xx) the absence of any untrue material statement of fact or
any omission of a material fact necessary to make other statements not
misleading.
Conditions to the Acquisition. The obligations of PG Newco and the Company
to consummate the transactions contemplated by the Purchase Agreement are
conditioned upon (unless otherwise waived) (i) the representations and
warranties of PG Design and the PG Shareholders being true and correct in all
material respects as of the Closing Date; (ii) the performance in all material
respects by PG Design and the PG Shareholders of the covenants and provisions
of the Purchase Agreement; (iii) the delivery by PG Design of a certificate,
signed by Peter G. VanHeusden and dated as of the Closing Date, certifying
that each of the foregoing conditions has been satisfied; (iv) the delivery of
a bill of sale duly executed and dated the Closing Date and all other
necessary deeds, assignments and certificates of title and other such
documents as PG Newco may reasonably request; (v) the delivery of an
employment agreement executed by Peter G. VanHeusden; (vi) the receipt by PG
Newco of a satisfactory legal opinion; (vii) the delivery of an affidavit of
PG Design as to tax matters; (viii) the delivery of a receipt for the Purchase
Price; (ix) the delivery of a certificate of good standing for PG Design from
the Secretary of State of Michigan dated as soon as practicable prior to the
Closing Date; (x) the delivery of a certain non-competition agreement executed
by Peter G. VanHeusden and dated the Closing Date; (xi) the delivery of a
certificate of the Secretary of PG Design dated the Closing Date as to the
resolutions adopted by the Board of Directors and shareholders of PG Design
relating to the Acquisition; (xii) the delivery of copies of all documents
evidencing all necessary third party approvals, licenses, consents and waivers
of rights of first refusal and other rights; (xiii) the absence of any law or
order of any court or administrative agency prohibiting PG Newco from
consummating the Acquisition; (xiv) the absence of any instituted, pending or,
to
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<PAGE>
the best of the knowledge of PG Design and PG Newco, threatened litigation or
other proceedings which seeks to enjoin or prevent the Acquisition; (xv) the
full force and effect of all necessary regulatory approvals; (xvi) the
completion of due diligence with satisfactory results in the sole discretion
of PG Newco and (xvii) the approval of the Acquisition by stockholders of the
Company.
The obligations of PG Design to consummate the transactions contemplated by
the Purchase Agreement are conditioned upon (unless otherwise waived) (i) the
representations and warranties of PG Newco and the Company being true and
correct in all material respects as of the Closing Date; (ii) the performance
in all material respects by PG Newco and the Company of the covenants and
provisions of the Purchase Agreement; (iii) the delivery by both PG Newco and
the Company of a certificate, signed by an officer and dated as of the Closing
Date, certifying that each of the foregoing conditions has been satisfied;
(iv) the immediate availability of the Initial Cash Consideration by wire
transfer; (v) the delivery of the two Notes; (vi) the delivery by both PG
Newco and the Company of a Certificate of the Secretary as to the resolutions
adopted by their respective Board of Directors relating to the Acquisition;
(vii) the delivery of an agreement, duly executed by PG Newco, evidencing PG
Newco's assumption of certain liabilities of PG Design; (viii) the delivery of
the Employment Agreement, duly executed by PG Newco; (ix) the absence of any
law or order of any court or administrative agency prohibiting PG Newco from
consummating the Acquisition; (x) the absence of any instituted, pending or,
to the best of the knowledge of PG Design and PG Newco, threatened litigation
or other proceedings which seeks to enjoin or prevent the Acquisition and (xi)
the full force and effect of all necessary regulatory approvals.
Indemnification. The Purchase Agreement provides that PG Design and the PG
Shareholders will jointly and severally agree to indemnify and hold harmless
PG Newco and the Company from and against any and all liabilities,
obligations, damages, losses, deficiencies, costs, penalties, interest and
expenses (collectively, the "Losses") arising out of, based upon, attributable
to or resulting from (i) any misrepresentation or breach of warranty made by
PG Design or any PG Shareholder in the Purchase Agreement or any other
documents of PG Design (the "Seller's Documents"); (ii) any failure of PG
Design or any PG Shareholder to comply with the covenants of the Purchase
Agreement or the Seller's Documents; (iii) certain excluded liabilities; (iv)
any injury to person or property attributable to any goods manufactured or
services rendered by PG Design prior to the Closing (such Losses shall be net
of any insurance proceeds); (v) certain claims by employees for damages,
compensation and employee benefits; (vi) any environmental claims or actions
arising out of or relating to anything relating to the use of the assets of or
the operation of the business of PG Design prior to the Closing Date; (vii)
any third party claims with respect to occurrences or events occurring prior
to the Closing Date and relating to PG Design or its employees and (viii) all
actions, suits, proceedings, demands, assessments, judgments, costs, penalties
and expenses, including reasonable attorneys' fees, incident to any of the
foregoing.
The Purchase Agreement provides that PG Newco will indemnify and hold
harmless PG Design from and against any and all Losses arising out of, based
upon, attributable to or resulting from (i) any misrepresentation or breach of
warranty made by PG Newco in the Purchase Agreement or any other documents of
PG Newco (the "PG Newco's Documents"); (ii) any failure of PG Newco to comply
with the covenants of the Purchase Agreement or PG Newco's Documents; (iii)
the liabilities assumed by PG Newco pursuant to the Purchase Agreement; (iv)
certain claims by certain employees for compensation, vacation, damages and
employee benefits; (v) any environmental claims or actions arising out of or
relating to anything relating to the use of the assets of or the operation of
the business of PG Newco after the Closing Date; (vi) any third party claims
with respect to occurrences or events occurring after the Closing Date and
relating to the operation of the business of PG Newco after the Closing Date
and (vii) all actions, suits, proceedings, demands, assessments, judgments,
costs, penalties and expenses, including reasonable attorneys' fees, incident
to any of the foregoing.
Any indemnification payment pursuant to the Purchase Agreement which is
taxable shall be increased to cover the taxes payable and any related costs
incurred by the party receiving such indemnification.
Depending on the nature of the Loss, the obligation to indemnify may be
limited. In most circumstances, the parties to the Purchase Agreement shall
not be liable for any Losses pursuant to the indemnification provisions
therein unless the aggregate amount of Losses and expenses finally determined
to arise thereunder
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<PAGE>
exceeds $50,000. If the aggregate amount of Losses and expenses exceeds
$50,000, the indemnifying party shall be required to pay the entire amount of
such Losses and expenses in excess of $50,000. However, Losses based upon,
attributable to or resulting from the failure of certain specified
representations and warranties of PG Design and the PG Shareholders (those set
forth in Sections 4.9, 4.10, 4.11, 4.12, 4.17, 4.18 and 4.20 of the Purchase
Agreement) are indemnifiable without regard to the aggregate amount of such
losses.
Depending on the representation or warranty giving rise to a Loss, the
obligation to indemnify remains in effect (i) for thirty-six (36) months after
the Closing Date or (ii) for the period determined by the applicable statute
of limitation. In general, any claims or actions with respect to the
representations and warranties contained in the Purchase Agreement and in any
certificate, document or instrument delivered in connection therewith shall
terminate unless within thirty-six (36) months of the Closing Date written
notice of any such claim is given to PG Design or the PG Shareholders or such
actions are commenced. Claims for indemnification with respect to
representations and warranties contained in Sections 4.9, 4.10, 4.11, 4.12,
4.17, 4.18 and 4.20 of the Purchase Agreement shall survive for periods
coterminous with any applicable statues of limitation.
Termination and Amendment. The Purchase Agreement provides that it may be
terminated (i) by the written agreement of the Company, PG Newco and PG
Design; (ii) by the Company, PG Newco or PG Design (a) if there shall be in
effect a non-appealable order of a court of competent jurisdiction permanently
prohibiting the consummation of the Acquisition or (b) if the Closing shall
not have occurred on or before June 30, 1997 or (iii) by the Company, PG
Newco, PG Design or the PG Shareholders if the Acquisition is not approved by
the stockholders of the Company. Upon the termination of the Purchase
Agreement, no party thereto shall have any further liability or obligation
thereunder, but no such termination shall relieve any party for any breach of
the Purchase Agreement prior to the date of such termination.
The Purchase Agreement provides that it may be amended if such amendment is
in writing and signed by the Company, PG Newco, PG Design and the PG
Shareholders. Any provision of the Purchase Agreement may be waived prior to
the Closing Date if the waiver is in writing and signed by the party against
whom the waiver is to be effective. No failure or delay by any party in
exercising any right, power or privilege under the Purchase Agreement shall
operate as a waiver nor shall any single or partial exercise thereof preclude
any other or future exercise thereof or any other right, power or privilege.
EMPLOYMENT AGREEMENT WITH PETER G. VANHEUSDEN
Pursuant to the Purchase Agreement and subject to the terms, provisions and
conditions of the Employment Agreement, Peter G. VanHeusden will enter into an
employment agreement with PG Newco to be President and Chief Executive Officer
of PG Newco for a minimum of five years. Peter G. VanHeusden will earn a base
salary for his services at the rate of $225,000 per year. Additionally,
subject to, (i) the approval of the Plan by the compensation committee (the
"Committee") appointed by the Board of Directors and by the stockholders of
the Company and (ii) the entry of a De-registration Order, as discussed in the
section herein entitled "DE-REGISTRATION--Background" and as defined in the
section herein entitled "APPROVAL OF THE PLAN--General," the Company will
recommend to the Committee that Peter G. VanHeusden receive certain stock
options and stock appreciation rights pursuant to the Plan. See "DE-
REGISTRATION--Background" and "APPROVAL OF THE PLAN--General and Description
of Plan."
INFORMATION ABOUT PG DESIGN
General. PG Design is a medium-size, privately held company located at 48700
Structural Drive, Chesterfield, Michigan 48251, which designs and manufactures
printed circuit board ("PCB") products for computer applications on a contract
basis. PG Design uses surface mount technology ("SMT") in which the electronic
devices are soldered directly to the circuits on the surface of the circuit
board. PG Design's core products are memory modules. A memory module is a
printed circuit board containing one or more memory chips and associated
electronic devices and circuitry. While PG Design does produce standard memory
modules of the type used in typical desktop computers, PG Design specializes
in the design, production and testing of "custom" memory modules for high-end
workstations. PG Design has also developed and manufactures a product which is
used in retail stores to demonstrate the capabilities of computer printers
("printer POD").
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PG Design also designs and manufactures other PCB products for computer
manufacturers. PG Design is focused in the high margin segment of the PCB
contract manufacturing business. PG Design produces products which are
difficult to manufacture and which involve low volume production runs and
require the use of modern technology and production techniques and the latest
equipment.
For the twelve months ended December 31, 1996, PG Design's sales exceeded
$25,000,000 and its earnings before interest, taxes, depreciation and
amortization before certain non-recurring expenses were approximately
$3,700,000. See "THE PROPOSED ACQUISITION--Selected Financial Data--PG Design"
and "--Discussion of Financial Condition and Results of Operations of PG
Design" and Appendix C and Appendix D.
Customer Base. PG Design's customers are major computer, printer and
semiconductor manufacturers. During the past several years, the Company has
provided contract manufacturing services to NEC, Hewlett Packard, Silicon
Graphics, Apple Computer, Zenith Data Systems, Zycad Corporation, Canon, OKI
Semiconductor, Texas Instruments and others. The majority of PG Design's
customers are located in the United States, however their products are shipped
internationally. Nearly 95% of 1997 sales are projected to be generated from
its top five customers which include NEC, Hewlett Packard, Canon, Hyundai and
Texas Instruments. At the present time, NEC accounts for approximately 76% of
PG Design's business, up from 60% in calendar 1996.
Strategy. PG Design's strategy is to grow within its niche of technically
advanced design and manufacturing, which PG Design believes is appropriate for
its strengths and long-terms objectives. PG Design plans to grow with existing
customers and to add other computer, printer and semiconductor manufacturers
as customers. PG Design may also seek new customers in other industries which
use printed circuit boards, such as the telecommunications industry. PG Design
is adding manufacturing capacity and is working on the design and prototyping
of new products.
Significant Recent Investment. PG Design has made significant recent
investments in modern equipment to expand its capacity and establish its
quality processes. PG Design has invested over $6 million in four modern
surface mount automatic assembly machines, x-ray laminography and high speed
testing equipment. PG Design invested about $1.5 million in 1996 in new
equipment and projects capital investment of approximately $1 million for
1997.
Competition. Significant competitive pressures in the market for printed
circuit boards include product quality, responsiveness to customers,
manufacturing, engineering and design skills and price. PG Design believes
that competition in the market segments it serves is based on product and
service quality, reliability and timely delivery to PG Design's customers.
Proprietary Rights. Although PG Design does not have any patents, it has
developed product innovations, such as its printer PODs. PG Design's printer
PODs are powered by the printer power supply and are re-programmable in the
retail store. PG Design has developed modifications to standard testing
equipment which allow PG Design to perform high speed testing with lower
capital investment.
PG Design has a number of trademarks. These include: Xceed; Xceed
Technology; Xceed Technology and Design; Color Fusion and Resolutionary.
Legal Proceedings. PG Design is currently a party to a lawsuit brought by a
supplier. The lawsuit will not be assumed by the Company or PG Newco.
Employees. PG Design is currently privately-owned. Peter G. VanHeusden,
founder, President and Chief Executive Officer of PG Design, owns 85% of the
corporate stock. The balance of the outstanding stock of PG Design is owned by
other members of the VanHeusden family. PG Design has nearly 100 factory and
25 office employees. There are no employment contracts.
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Properties. PG Design's principal fixed assets include machinery and
manufacturing lines, furniture and fixtures, and office and other equipment.
As of December 31, 1996, such equipment represented approximately 97.5% of PG
Design's total fixed assets.
PG Design's corporate and manufacturing headquarters are located at 48700
Structural Drive, Chesterfield, Michigan. The building, which operates both as
an office and a plant, has 25,000 square feet of floor space. This facility is
leased at a monthly rate of $13,000 for a ten year term ending January 31,
2004, with an option to purchase the building and property at the end of the
term.
Market. Technology Forecasters, a consulting firm, estimates that the
worldwide contract manufacturing industry was $42 billion in 1995.
Technical Capabilities. PG Design has developed technical abilities in the
use of modern equipment, design skills, engineering capabilities and technical
expertise in test engineering. Peter G. VanHeusden and PG Design's engineers
provide consulting and engineering to improve testing and manufacturing of
components as well as full-circuit design services.
SELECTED FINANCIAL DATA--PG DESIGN
The following condensed summary of sales and income before taxes and
financial position is derived from unaudited financial statements of PG Design
for the five years ended June 30, 1996 and the audited statements of PG Design
for the calendar year 1996:
PG DESIGN ELECTRONICS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALENDAR
YEAR YEARS ENDED JUNE 30,
-------- ---------------------------------------
1996 1996 1995 1994 1993 1992
-------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $25,021 $22,903 $20,472 $11,266 $6,418 $3,045
Total expenses............ 22,945 21,836 19,840 11,644 6,738 3,279
Income (loss) before
taxes.................... 2,076 1,067 635 (378) (322) (234)
ADDBACKS; NON-RECURRING
ITEMS
Bonus Payments............ $ 775 $ 775 -- -- -- --
Obsolescence.............. 600 600 -- -- -- --
Profit Sharing Pension.... 275 150 50 -- -- --
Net income (loss)......... 3,726 2,592 685 (378) (322) (234)
FINANCIAL POSITION AT END OF
YEAR:
Total assets.............. $11,435 $ 9,302 $10,236 $ 6,903 $5,837 $4,900
Total liabilities......... 6,010 5,106 6,724 3,809 2,498 1,352
Total stockholders'
equity................... 5,425 4,196 3,512 3,094 3,339 3,548
</TABLE>
- --------
Notes:
(1) 1996 calendar and fiscal years income reflects bonus payments to owner
employees of $653,000.
(2) Obsolescence write off of $350,000 in fiscal and calendar year 1996
represents a non-recurring charge resulting from a world wide revaluation
of the market price of a DRAM module.
(3) PG Design has a pension plan which provides for mandatory contributions of
10% of compensation annually and a discretionary profit sharing plan which
provides for contribution of up to 15% of compensation. These plans will
be discontinued as of the closing date and new plans will be implemented.
PG Design's audited financial statements attached as Appendix C to this
Proxy Statement reflect the actual results of PG Design's operations during
1996.
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<PAGE>
DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PG DESIGN
The following information should be read in conjunction with the Selected
Financial Data and the Financial Statements and related notes appearing
elsewhere in this Proxy Statement. See "PROPOSED ACQUISITION--Selected
Financial Data," APPENDIX C and APPENDIX D.
The information and discussion below are based on the financial condition
and results of operations for PG Design for the years ended December 31, 1996
and June 30, 1996, 1995 and 1994.
Results of Operations
For the Twelve Months Ended December 31, 1996 Compared to the Twelve Months
Ended December 31, 1995.
PG Design reported net income of $1,255,179 for the 12 months ended December
31, 1996 compared to $730,131 for the 12 months ended December 31, 1995. Sales
of $25,021,647 in 1996 were about the same as in 1995. Gross margins in 1996
improved to $4,863,568 from $2,719,551 in 1995. Management bonus payments in
1996 totaled $775,000 compared to no payments in 1995. Inventory write-offs
totaled $900,000 in 1996 compared to $600,000 in 1995. Inventory management
controls intended to improve inventory obsolescence write-offs were put in
place in late 1996.
For the Year Ended June 30, 1996 Compared to the Year Ended June 30, 1995.
PG Design reported net income of $684,214 in 1996 compared with $417,520 in
1995. Income before taxes for 1996 was $1,066,704 compared with $635,020 in
1995. The 1996 income before taxes included an increase of approximately
$775,000 for payment of bonuses to management and $600,000 for a write-off of
obsolete inventory. The increase in income before taxes in 1996 was primarily
because of a 11.9% increase in net sales and a change in product line mix
toward more profitable products. PG Design spent $1,375,150 in capital
expenditures in 1996 compared to $788,796 in 1995. These capital expenditures
provided additional capacity and new technology procedures needed to produce
advanced products.
For the Year Ended June 30, 1995 Compared to the Year Ended June 30, 1994.
PG Design reported net income of $417,520 in 1995 compared to a loss of
$244,953 in 1994. Income before taxes was $635,020 in 1995 compared to a loss
of $378,953 in 1994. The increase in income before taxes in 1995 was due
primarily to an increase in net sales of 81.7% and a reduction in costs. Many
of the costs in 1994 were incurred in the move to the new, larger facility. PG
Design spent $789,796 in capital expenditures in 1995 compared to $2,430,601
in 1994. The reduction in capital expenditures was also the result of the non-
recurrence of expenditures resulting from the 1994 move to the new facility.
For the Year Ended June 30, 1994 Compared to the Year Ended June 30, 1993
PG Design reported net losses of $244,953 in 1994 compared to net losses of
$209,125 in 1993. Losses before taxes were $378,973 in 1994 compared with
losses before taxes of $322,125 in 1993. PG Design increased its net sales
75.5% primarily through new low margin product offerings. PG Design moved into
a new facility in 1994. The combination of low margins and start-up costs from
the move to the new facility resulted in the increase in losses from 1993. PG
Design spent $2,430,601 in capital expenditures in 1994 compared to $867,172
in 1993. The major increase in capital expenditures was also in conjunction
with PG Design moving into a new facility and purchasing equipment for the
facility.
18
<PAGE>
Financial Condition
For the Twelve Months Ended December 31, 1996 Compared to the Twelve Months
Ended December 31, 1995.
Working capital increased $1,035,030 in 1996. Cash balances increased
$77,683 from year-end 1995 to year-end 1996 and long-term debt decreased by
$216,548. PG Design's investment in property and equipment increased $253,648
in 1996. Current ratio increased to 1.7 at year-end 1996 from 1.6 at year end
1995.
For the Year Ended June 30, 1996 Compared to the Year Ended June 30, 1995
PG Design's financial condition improved during 1996. During the year,
working capital increased $100,004 while long-term debt was reduced by
$282,802. PG Design's cash balance increased from $60,375 to $1,468,399.
Current ratio increased to 1.56 at year-end 1996 compared to 1.41 at year-end
1995.
For the Year Ended June 30, 1995 Compared to the Year Ended June 30, 1994
PG Design's financial condition declined slightly in 1995. During the year,
working capital increased $693,358 while long-term debt increased $61,061. PG
Design's cash balance decreased from $429,405 to $60,375. Current ratio
decreased from 1.59 at year-end 1994 to 1.41 at year-end 1995.
For the Year Ended June 30, 1994 Compared to the Year Ended June 30, 1993
During the year, PG Design's working capital decreased $1,021,715 and long-
term debt increased $837,099. PG Design's cash balance increased $162,014.
Current ratio decreased from 2.20 at year-end 1993 to 1.59 at year-end 1994.
19
<PAGE>
CONDENSED PRO FORMA FINANCIAL INFORMATION
FOR THE COMPANY
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
The following unaudited Condensed Pro Forma Balance Sheet and Statement of
Operations (collectively, the "Pro Forma Financial Statements") are based on
historical financial statements of the Company and PG Design after giving
effect to the following relating to the Acquisition.
The Pro Forma Financial Statements were prepared as if the transaction had
occurred as of January 1, 1996 for Statement of Operations purposes and as of
December 31, 1996 for Statement of Assets and Liabilities purposes. The Pro
Forma Financial Statements are not necessarily indicative of the future
financial position or future results of operations of the Company after the
Acquisition, or of the financial position or results of operations of the
Company had the Acquisition occurred on the dates indicated above or been in
effect for the period presented.
Financial statements of an investment company may not be consolidated with
the financial statements of subsidiaries which are not also investment
companies. Because PG Design is not an investment company, consolidation of PG
Design in the Company's financial statements is prohibited until the SEC
approves the De-registration. Accordingly, until such time, the Company will
carry its investment in PG Design at a fair value as determined by its Board
of Directors. The Pro Forma Unconsolidated Financial Statements attached
hereto as Appendix B reflect the acquisition of PG Design on an unconsolidated
basis as required until SEC approval of the De-registration. The following
unaudited Condensed Pro Forma Financial Consolidated Statements reflect the
acquisition of PG Design and approval by the SEC of the De-registration.
The purchase price of PG Design (exclusive of transaction costs) for
financial reporting purposes is based on the total Purchase Price, including
the Notes. The Deferred Consideration will be allocated to the goodwill
associated with the Acquisition.
The Pro Forma Adjustments are based upon available information and upon
certain assumptions the Company believes are reasonable. The Pro Forma
Financial Statements and accompanying notes should be read in conjunction
with, and are qualified in their entirety by, the historical financial
statements and other financial information pertaining to the Company, and
related notes thereto, included elsewhere in this Proxy Statement. See
"ADDITIONAL INFORMATION ABOUT THE COMPANY--Selected Financial Data--The
Company," APPENDIX C, APPENDIX D AND APPENDIX E.
20
<PAGE>
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
FOR THE COMPANY
DECEMBER 31, 1996
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
MILWAUKEE PG DESIGN
LAND ELECTRONICS, PRO FORMA PRO
COMPANY(1) INC.(1) ADJUSTMENTS FORMA
---------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Assets
Investments
--Non Affiliates............... $ 9,535 $(9,535)(4) $ 0
--Affiliates................... 7,589 7,589
------- ------- -------
17,124 (9,535) 7,589
Cash............................. 1,192 $ 1,119 5,535 (5) 7,846
Receivables...................... 687 3,730 4,417
Inventories...................... 2,731 2,731
Prepaid and other assets......... 62 961 (666)(2) 357
Property and equipment........... 2,894 1,106 (3) 4,000
Goodwill......................... 8,128 (3) 8,128
------- ------- ------- -------
$19,065 $11,435 $ 4,568 $35,068
======= ======= ======= =======
Liabilities
Accounts payable and accrued
liabilities................... $ 1,481 $ 4,275 $(1,007)(2) $ 4,749
Notes Payable.................... 3,000 (4) 3,000
Debt............................. 1,735 8,000 (4) 9,735
------- ------- ------- -------
1,481 6,010 9,993 17,484
Stockholders Equity.............. 17,584 5,425 (5,425)(6) 17,584
------- ------- ------- -------
$19,065 $11,435 $ 4,568 $35,068
======= ======= ======= =======
</TABLE>
See notes to Condensed Pro Forma Consolidated Balance Sheet
21
<PAGE>
NOTES TO CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
FOR THE COMPANY
(In Thousands)
(1) Represents the historical financial position at December 31, 1996.
(2) To adjust for income tax assets ($666) and liabilities ($1,007) of PG
Design not acquired/assumed in the acquisition
(3) To record the purchase of PG Design
<TABLE>
<S> <C>
Purchase price
Cash paid and Promissory Notes--................................. $15,000
Liabilities assumed (net of income taxes payable of $1,007)...... 5,003
-------
Total purchase price......................................... $20,003
=======
Allocation--
Historical book value of assets acquired (net of deferred tax
asset of $666)................................................ $10,769
Fair value of machinery and equipment in excess of historical
book value.................................................... 1,106
Goodwill....................................................... 8,128
-------
$20,003
=======
</TABLE>
(4) To record debt issued in connection with the purchase
<TABLE>
<S> <C>
Total purchase price............................................. $20,003
Less: Liabilities assumed........................................ (5,003)
Cash paid ($4,000) and Promissory Notes ($3,000)................. (7,000)
-------
Debt issued...................................................... $ 8,000
=======
</TABLE>
(5) Excess of cash proceeds on the sale of investments in non-affiliates
($9,535) over cash paid per adjustment in Note 4 above ($4,000).
(6) To eliminate historical net assets of PG Design of $5,425
22
<PAGE>
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE COMPANY
YEAR ENDED
DECEMBER 31, 1996
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
MILWAUKEE PG DESIGN
LAND ELECTRONICS, PRO FORMA
COMPANY(1) INC.(1) ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue
Investment income including
realized gain of $57........ $ 1,257 $ (207)(2) $ 1,050
Sales.......................... $25,022 25,022
------- ------- ------- -------
1,257 25,022 (207) 26,072
Expenses
Cost of sales................ 20,158 20,158
Other expenses............... 1,075 2,788 935 (3) 4,798
(989)(4) (989)
203 (5) 203
Unrealized depreciation on
investments................... 1,567 (1,567)(7) --
------- ------- ------- -------
Income (loss) before income
taxes......................... (1,385) 2,076 1,211 1,902
Income taxes................... (821) 262 (6) (559)
------- ------- ------- -------
Net Income (loss).............. $(1,385) $ 1,255 $ 1,473 $ 1,343
======= ======= ======= =======
</TABLE>
See notes to Condensed Pro Forma Consolidated Statement of Operations
23
<PAGE>
NOTES TO CONDENSED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE COMPANY
(In Thousands)
(1) Represents historical results of operations for the year ended December
31, 1996
(2) To reduce investment income in consideration of investments liquidated to
accomplish the purchase
<TABLE>
<S> <C>
Investments liquidated........................................... $ 3,000
1996 average investment returns.................................. 6.9%
-------
$ 207
=======
</TABLE>
(3) To record interest expense on the additional debt required to accomplish
the purchase
<TABLE>
<S> <C>
Promissory Notes................................................. $ 3,000
Debt issued...................................................... 8,000
-------
Total Promissory Notes and Debt Issued........................... 11,000
Expected interest rate........................................... 8.5%
-------
$ 935
=======
</TABLE>
(4) To reduce general and administrative expense for (a) non-recurring 1996
bonuses paid to shareholders of PG Design ($693) and (b) the effect of the
termination of employee benefit plans ($296).
(5) To record amortization of the goodwill arising in the purchase over a
forty-year period.
(6) To reduce consolidated income tax expense for the Company net operating
loss that would be available (after consideration of adjustments above).
(7) As a result of the purchase of PG Design, the Company expects to de-
register as an investment company. Consequently, changes in the fair value
of its investments would not be reflected in the statement of operations
in accordance with the provisions of Statement of Financial Accounting
Standards No. 115.
24
<PAGE>
STATEMENT OF ACCOUNTANTS
Representatives of Ernst & Young LLP the principal auditor for the Company
for the current year and for the most recently completed fiscal year: (i) are
expected to be present at the Special Meeting; (ii) will have the opportunity
to make a statement if they desire to do so and (iii) are expected to be
available to respond to appropriate questions.
RISK FACTORS
The principal risk factors to which the Company will be subject if the
Acquisition is completed are discussed below. Some of those risk factors
describe circumstances that have in the past affected the business of PG
Design. Those factors are expected to continue to apply to the business of PG
Newco.
Inexperience. The Company has no experience or operating history in the
business of designing and manufacturing computer components. However, as a
part of the Acquisition, Peter G. VanHeusden will enter into an employment
agreement with PG Newco pursuant to which he will serve as President and Chief
Executive Officer of PG Newco and will be primarily responsible for management
of the business acquired from PG Design.
Concentration of Business. Upon consummation of the Acquisition, the
Company's assets will be concentrated in two operating businesses (the real
estate development business operated through Heartland Partners, L.P. and CMC
Heartland Partners and the computer component contract design and
manufacturing business acquired from PG Design) instead of a variety of U.S.
government obligations and corporate debt obligations. The failure of, or poor
performance by, either of those businesses would have significant adverse
consequences on the Company and the stockholders' investment in the Company.
The investment return to the Company's stockholders will be dependent upon the
performance of those operating businesses rather than on the returns from the
relatively lower-risk fixed-income investment securities which the Company
currently owns.
Dependence on Key Employees and Management. PG Design is currently dependent
on Peter G. VanHeusden for design and product development. PG Design is also
dependent, to a large extent, on Peter G. VanHeusden for maintaining customer
relationships. Loss of Peter G. VanHeusden's services could have a material
adverse impact on the financial performance of PG Newco. As noted above, Peter
G. VanHeusden will enter into a five-year employment agreement and a non-
competition agreement as part of the Acquisition. The Company intends to
obtain a "key man" life insurance policy on Peter G. VanHeusden's life. Also,
payment under the Notes will be forfeited if Peter G. VanHeusden voluntarily
terminates his employment with PG Newco before the Notes become due.
Dependence on Computer Industry. PG Design provides products for original
equipment manufacturers of computers and computer printers. Downturns in the
demand for those products could have a material adverse effect on PG Newco's
financial results.
Concentration of Customers. In 1996, a single customer, NEC, accounted for
approximately 60% of PG Design's sales and three customers (NEC, Hewlett-
Packard and Canon) provided 89% of PG Design's sales. It is anticipated that
NEC will account for approximately 76% of sales in 1997. The Company has
interviewed representatives of these customers and believes that PG Design has
strong relationships with all three and will continue to maintain its levels
of business with them in the near future. However, PG Newco could lose one or
all of these customers and the loss of one or all of them could have a
material adverse effect on PG Newco's financial results. PG Design does not
have, and PG Newco does not expect to have, any long-term contractual
relationships with any of its customers.
Competition. The electronics assembly and manufacturing industry is
comprised of a large number of companies, several of which have achieved
substantial market share. PG Design faces intense competition from a number of
established competitors. Certain competitors have greater financial resources
and manufacturing capacity than PG Design. PG Design also faces competition
from similar niche players who focus on customized production. In the future,
PG Newco may encounter competition from larger electronic manufacturers which
are beginning to sell contract manufacturing services. PG Newco may also face
competition from current and potential customers, including OEMs themselves,
who may decide to manufacture components internally.
25
<PAGE>
During periods of recession in the electronics industry, PG Design's
competitive advantages in the areas of quick-turnaround manufacturing and
responsive customer service may be of reduced importance to electronics OEMs,
who may become more price sensitive. Although PG Design generally does not
pursue high-volume, highly price-sensitive interconnect product business, it
may be at a competitive disadvantage with respect to price when compared to
manufacturers with lower cost structures, particularly those manufacturers
with offshore facilities where labor and other costs are lower.
Environmental Liability. Proper waste disposal is a consideration for
printed circuit board manufacturers such as PG Design because metals and
chemicals are used in the manufacturing process. Water used in the
manufacturing process must be treated to remove metal particles and other
contaminants before it can be discharged in the municipal sanitary sewer
system. Maintenance of environmental controls is also important in the
electronics assembly process. A manufacturing facility must operate under an
effluent discharge permit issued by the appropriate government authority and
renewed periodically. PG Design is also subject to environmental laws relating
to storage, use and disposal of chemicals, solid waste and other hazardous
materials.
Although PG Design believes that it is currently in compliance with all
applicable environmental protection requirements in all material respects,
there is no assurance that violations will not occur in the future as a result
of human error, equipment failure or other causes. The implications of such
potential failure include litigation, fines and other penalties such us the
revocation of the necessary permits. Also, new or more stringent environmental
laws may be passed in the future.
Technological Change. The markets in which PG Design's customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services. These dynamics frequently
result in short product life cycles. PG Newco's success in the future will
depend to a great extent on the success achieved by its customers in
developing and marketing their products. The success of PG Newco may be
adversely affected if technologies or standards relevant to PG Newco's or its
customers' products become obsolete or fail to gain widespread commercial
acceptance.
Management of Growth. There can be no assurance that PG Design's historical
revenue growth will continue. There can also be no assurance that PG Newco
will successfully manage the business and assets of PG Design. PG Newco may
experience difficulties managing the growth of the business of PG Design as it
may face certain inefficiencies as it integrates new operations, adds new
customers and expands geographically. If expenditures are made in anticipation
of growth in future sales which does not materialize, profits will be
adversely affected.
Proprietary Rights. Although PG Design does not believe it infringes on the
intellectual property rights of others, there can be no assurance against
claims that PG Design is infringing intellectual property rights of others. If
such a claim were brought there is the potential that it would adversely
affect production, sales and revenues.
ACCOUNTING TREATMENT
PG Newco will be carried on the books of the Company as an investment as
long as the Company is a registered investment company. The Company will
determine the cost of the acquisition in accordance with generally accepted
accounting principles, and the investment will thereafter be carried at a fair
value determined in good faith by the Board of Directors of the Company.
After entry by the SEC of an order declaring that the Company is no longer
an investment company, the financial statements of PG Newco will be
consolidated with those of the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Acquisition will be treated as a taxable transaction with respect to PG
Design. The Acquisition has no tax consequences with respect to the Company's
stockholders.
26
<PAGE>
PG Newco will be a member of the Company's affiliated group for federal
income tax purposes and will join in the filing of a consolidated federal
income tax return with the Company. The De-registration of the Company will
not affect its tax status for federal income tax purposes.
The Purchase Price, together with certain Assumed Liabilities, will be
allocated among the Assets for federal income tax purposes pursuant to the
Purchase Agreement.
1940 ACT
Status as an Investment Company. The Company is a non-diversified, closed-
end management investment company registered with the SEC under the 1940 Act.
The 1940 Act defines an investment company to include (i) any corporation
which is or holds itself out as being engaged primarily in the business of
investing, reinvesting or trading in securities and (ii) any corporation which
is primarily engaged in the business of investing, reinvesting, owning,
holding or trading in securities, and owns investment securities which, on an
unconsolidated basis, have a value exceeding 40% of the value of its total
assets. In addition, the 1940 Act excludes from classification as an
investment company (i) any corporation primarily engaged, directly or through
a wholly-owned subsidiary or subsidiaries, in a business or businesses other
than that of investing, reinvesting, owning, holding or trading in securities
and (ii) any corporation which the SEC determines and declares to be primarily
engaged, either directly or through majority-owned subsidiaries, or controlled
companies conducting similar types of businesses, in one or more businesses
other than that of investing, reinvesting, owning, holding or trading in
securities. Thus, an investment company is primarily engaged in investing and
reinvesting funds in, and acquiring and disposing of securities and deriving
dividends, interest and gains from securities transactions. An investment
company is significantly different from an operating company which obtains
income from the business or businesses it operates. The 1940 Act regulates and
restricts a registered investment company, but does not apply to an operating
company.
Regulations Governing Investment Companies. The following is a brief summary
of certain important provisions of the 1940 Act and does not purport to be
complete. For the most part, the provisions cited are those that are specific
to registered investment companies and highlight areas in which investment
company regulation may be deemed (i) to give stockholders greater protection
than stockholders of companies which are subject only to regulation under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii) to be
particularly restrictive on management of investment companies.
The 1940 Act regulates the form, content and frequency of financial reports
to stockholders; requires that the Company file with the SEC periodic reports
which are designed to disclose compliance with the 1940 Act and to present
other financial information; prohibits the Company from changing the nature of
its business or fundamental investment policies without the prior approval of
its stockholders; regulates the composition of the Board of Directors by
preventing investment bankers and securities brokers from constituting more
than a majority of the directors of the Company; limits the number of
"interested persons" of the Company who may be directors of the Company to 60%
or fewer and prevents officers, directors or employees of any one bank from
constituting more than a minority of the Company's directors; requires any
investment advisory agreement to be submitted to the stockholders for their
approval; prohibits certain transactions between the Company and affiliated
persons, including directors and officers of the Company and affiliated
companies, unless such transactions are exempted by the SEC; prohibits payment
by the Company of incentive compensation to its officers and employees unless
the payment is exempted by the SEC; regulates the capital structure of the
Company by restricting certain issuances of senior equity and debt securities
and restricts the issuance of stock options, rights and warrants; prohibits
pyramiding of investment companies and the cross ownership of securities;
provides for the custody of securities and bonding of certain employees;
prohibits voting trusts; and requires stockholder ratification of the
selection of accountants.
Investment Objective. The Company's present investment objective is to
provide as high a level of current income as is consistent with prudent
investment designed to preserve capital. That objective may be changed by the
Board of Directors without stockholder approval. If the Acquisition is
completed, the Board of Directors expects to change the Company's investment
objective to providing long-term capital growth and appreciation.
27
<PAGE>
Changes to Investment Restrictions to Permit Consummation of the Acquisition.
As noted above, the 1940 Act prohibits the Company from changing any of its
fundamental investment restrictions without the prior approval of its
stockholders. The Company's investment restrictions are designed to promote the
Company's current stated investment objective and therefore limit the Company's
investment flexibility with respect to the amount and kind of investments the
Company may make.
The Company is now subject to three fundamental investment restrictions that
will prevent the consummation of the Acquisition unless they are amended.
Because the Acquisition cannot be completed without modification of these
restrictions, a vote in favor of the Acquisition will be deemed to be a vote in
favor of modification of the restrictions. Each of those restrictions and the
extent to which modification of the restriction will be made are discussed
below. If the Acquisition is not completed, the proposed modifications to the
Company's investment restrictions will not be implemented.
Borrowing. The Company's fundamental investment restriction on borrowing, as
it is proposed to be amended, is as shown below. The language proposed to be
added is underlined and deletions are in brackets.
"The Company will not borrow money, except that (A) the Company may
borrow money from banks and other lending institutions in negotiated
transactions and may issue, publicly or privately and from time to time,
bonds, debentures or notes, in series or otherwise, with such interest
rates and other terms and provisions, including conversion rights, as the
Board of Directors of the Company may determine to be advisable; provided
that [(i)] the proceeds of each such borrowing or issuance will be used for
the payment of dividends, working capital or for temporary or emergency
purposes, OR IN CONNECTION WITH THE ACQUISITION BY THE COMPANY AND PG NEWCO
CORP. OF SUBSTANTIALLY ALL THE ASSETS OF PG DESIGN ELECTRONICS, INC.
PURSUANT TO AN ASSET PURCHASE AGREEMENT DATED AS OF APRIL 4, 1997 AMONG THE
COMPANY, PG NEWCO CORP. AND PG DESIGN ELECTRONICS, INC. AND THE
SHAREHOLDERS OF PG DESIGN ELECTRONICS, INC. AND ALL TRANSACTIONS
CONTEMPLATED THEREBY OR IN CONNECTION WITH INVESTMENTS BY THE COMPANY IN PG
NEWCO CORP. and [(ii)] (B) THE COMPANY MAY GUARANTEE OBLIGATIONS OF PG
NEWCO CORP.; PROVIDED THAT, IN THE CASE OF BOTH (A) AND (B), after giving
effect to such borrowing, [or] issuance OR GUARANTEE, the Company's senior
securities representing indebtedness (as defined in the 1940 Act) will have
an asset coverage of at least 300% and all other applicable requirements of
the 1940 Act are met."
The Company's current investment restriction limits borrowings to those for
the purpose of paying dividends, providing working capital or for temporary or
emergency purposes. The proposed amendment eliminates that restriction as to
purpose.
The Company will issue the Notes offered as part of the Purchase Price for PG
Newco. See "THE PROPOSED ACQUISITION--Terms of the Acquisition--Consideration."
During the life of the Notes the Company will use its free cash for the
corporate operations of the Company and to support the growth of PG Newco
through investment in PG Newco or acquisitions of assets or businesses related
to or complementary to PG Newco. The Company may use free cash for other
purposes, including the payment of dividends to its stockholders or acquiring
assets or businesses in or investing in areas not related to the business of PG
Newco to the extent there is free cash flow beyond what is needed to pay the
Notes.
As described under "Terms of the Acquisition--Financing" above, PG Newco
intends to borrow an aggregate of $8,000,000 from an unrelated lender to
finance a portion of the purchase price of the Acquisition and will borrow
$6,535,000 from the Company. Although it is not currently contemplated that the
Company will guarantee PG Newco's obligations to the unrelated lender, the
proposed revised investment restriction would permit the Company to do so.
28
<PAGE>
Industry Concentration. The Company currently has a fundamental investment
restriction that provides that the Company will not invest more than 25% of
the value of the Company's total assets in securities of companies the primary
business of which is in a single industry. The proposed Acquisition will
require investment of more than 25% of the Company's total assets and
therefore cannot be completed unless this investment restriction is amended.
The restriction as proposed to be amended is shown below (with proposed new
language underlined):
"The Company will not invest 25% or more of the value of its total assets
in securities of issuers the primary business of which is in one particular
industry, except that this restriction does not apply to investments in
obligations of the U.S. government or its agencies, authorities or
instrumentalities, or TO THE COMPANY'S INVESTMENT IN PG NEWCO CORP. OR THE
ACQUISITION BY THE COMPANY AND PG NEWCO CORP. OF SUBSTANTIALLY ALL THE
ASSETS OF PG DESIGN ELECTRONICS, INC. PURSUANT TO AN ASSET PURCHASE
AGREEMENT DATED AS OF APRIL 4, 1997 AMONG THE COMPANY, PG NEWCO CORP. AND
PG DESIGN ELECTRONICS, INC. AND THE SHAREHOLDERS OF PG DESIGN ELECTRONICS,
INC. AND ALL TRANSACTIONS CONTEMPLATED THEREBY."
Investments in Real Estate. Among the assets of PG Design to be acquired by
the Company is a leasehold interest in the real estate on which PG Design's
operations are headquartered and its plant is located. The Company now has a
fundamental investment restriction that prohibits investments in real estate
or interests in real estate other than the Company's interests in Heartland
Partners L.P. and CMC Heartland Partners. Because PG Design's leasehold
interest is essential to the continued operation of the business to be
acquired by the Company, the Acquisition cannot be completed without amendment
of this restriction. The restriction as proposed to be amended is shown below
(with proposed new language underlined and proposed deletions in brackets):
"The Company will not purchase or sell real estate or interests in real
estate except to the extent (i) such investments are deemed to be, or sales
are deemed to involve, obligations of the U.S. government or its agencies,
authorities or instrumentalities, [and] (ii) of the Company's interest in
Heartland (Partners L.P.) and (CMC Heartland Partners) and the Company's
relationships with such Partnerships, AND (iii) OF THE COMPANY'S INTEREST
IN REAL ESTATE, INCLUDING ANY LEASEHOLD INTEREST, ACQUIRED IN THE PURCHASE
BY THE COMPANY AND THE COMPANY'S WHOLLY-OWNED SUBSIDIARY PG NEWCO CORP. OF
SUBSTANTIALLY ALL THE ASSETS OF PG DESIGN ELECTRONICS, INC. PURSUANT TO AN
ASSET PURCHASE AGREEMENT DATED AS OF APRIL 4, 1997 AMONG THE COMPANY, PG
NEWCO CORP. AND PG DESIGN ELECTRONICS, INC. AND THE SHAREHOLDERS OF PG
DESIGN ELECTRONICS, INC. AND ALL TRANSACTIONS CONTEMPLATED THEREBY."
REQUIRED VOTE
Approval of the Acquisition requires the affirmative vote of the holders of
the lesser of (i) 67% or more of the Common Stock present at the Special
Meeting if the holders of more than 50% of the outstanding Common Stock are
present or represented by proxy or (ii) more than 50% of the outstanding
Common Stock.
2. DE-REGISTRATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF DE-REGISTRATION
BACKGROUND
If the Company consummates the Acquisition, the Company expects that it will
no longer be a company primarily engaged in the business of investing,
reinvesting, owning, holding or trading in securities and will no longer own
investment securities which have a value exceeding 40% of its total assets.
Accordingly, the Company will no longer be an investment company. See "THE
PROPOSED ACQUISITION--1940 Act--Definition of Investment Company." Therefore,
following the stockholders' approval of the Acquisition and the completion of
the Acquisition, the Company intends to apply to the SEC for an order under
Section 8(f) of the 1940 Act declaring that it has ceased to be an investment
company (the "De-registration Order"). See "THE
29
<PAGE>
PROPOSED ACQUISITION--1940 Act--Definition of Investment Company." After
reviewing the application, the SEC can require the Company to supply
additional information, which may result in one or more amendments to the
application. In addition, the SEC can, on its own motion or on the motion of
any interested party, order a public hearing on the application. In the event
that the SEC acts favorably on this application, the Company will no longer be
registered as an investment company with the SEC or subject to regulation
under the 1940 Act. However, such an order may be subject to conditions not
determinable at the present time. There can be no assurance that the SEC will
grant the Company's application for de-registration, and no prediction can be
made with respect to how long it will take the SEC to issue a de-registration
order.
If the Acquisition is completed and the SEC approves de-registration under
Section 8(f) of the 1940 Act, the stockholders would no longer have the
benefit of the regulatory protections provided by the 1940 Act as outlined
above. However, following De-registration, stockholders will continue to have
the protection afforded by certain provisions of the 1934 Act, which regulates
publicly-traded companies, including, but not limited to, provisions dealing
with: soliciting proxies from stockholders; filing interim and annual reports
with the SEC; filing securities ownership reports by directors, officers and
principal stockholders; certain prohibitions against engaging in insider
trading in securities or using manipulative devices in connection with certain
securities transactions and making misleading statements in reports or
documents filed with the SEC; and requiring certain disclosures in connection
with the solicitation of proxies from stockholders.
REQUIRED VOTE
Approval of De-registration requires the affirmative vote of the holders of
the lesser of (i) 67% or more of the Common Stock present at the Special
Meeting if the holders of more than 50% of the outstanding Common Stock are
present or represented by proxy or (ii) more than 50% of the outstanding
Common Stock. If the Acquisition is not approved by the Stockholders, or is
approved but not completed, the Company will remain an investment company.
3. APPROVAL OF NEW ADVISORY AGREEMENT
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE NEW AGREEMENT.
BACKGROUND
OFFITBANK manages the Company's investment portfolio pursuant to an interim
investment advisory agreement (the "Interim Agreement") with the Company dated
February 18, 1997. Through December 31, 1996, OFFITBANK served as the
Company's investment adviser pursuant to an advisory agreement dated August
11, 1994 (the "Old Agreement"). The Old Agreement provided for compensation to
OFFITBANK in the amount of 0.20% annually of the value of the Company's assets
under OFFITBANK's management, payable quarterly in arrears and based on the
average month-end values of those assets during that quarter. The Old
Agreement also provided, as required by the 1940 Act, that it would terminate
at December 31, 1994, but could be continued from year to year thereafter
provided that continuation was approved either by (i) the Board of Directors
or (ii) the vote of a "majority of the outstanding voting securities" of the
Company (as defined in the 1940 Act), provided that in either case,
continuation must also be approved by the vote of a majority of the members of
the Board of Directors who are not "interested persons" (as defined in the
1940 Act) of the Company or OFFITBANK, cast in person at a meeting called for
the purpose of voting on continuation.
On December 10, 1996, the Board of Directors met to consider, among other
things, continuation of the Old Agreement. However, although both of the
Company's non-interested directors attended the meeting and voted in favor of
continuation, only one of those non-interested directors was present in
person. As a result, the Old Agreement was terminated as of the close of
business on December 31, 1996.
30
<PAGE>
On February 18, 1997, the Board of Directors met and unanimously approved the
Interim Agreement, with both of the Company's non-interested board members
present in person. Under the Interim Agreement, OFFITBANK will serve as the
Company's investment adviser, on terms identical to those of the Old Agreement,
from February 18, 1997 through April 30, 1997, the last date on which the
Company is permitted by the 1940 Act to operate with an investment advisory
agreement that has not been approved by stockholders. After April 30, 1997, the
Company will manage its own assets.
DESCRIPTION OF THE NEW AGREEMENT
The Board of Directors also unanimously approved the New Agreement, a copy of
which is included as Appendix F to this Proxy Statement, on February 18, 1997.
The New Agreement is identical to the Old Agreement with two exceptions. First,
the effective and termination dates are different. Second, the New Agreement
provides for payment to OFFITBANK of a lump-sum of $2,900 as compensation for
its services during the period January 1, 1997 through February 17, 1997,
during which time OFFITBANK served as investment adviser without being paid.
The amount of that retroactive compensation is the same amount that OFFITBANK
would have received had the Old Agreement been continued, or had the New
Agreement been in effect during that time.
Under the New Agreement OFFITBANK will resume management of the Company's
portfolio of investment securities, in return for quarterly compensation at the
annual rate of 0.20% of the value of the Company's assets under OFFITBANK's
management. The Company paid advisory fees to OFFITBANK during 1996 totaling
$19,457.
The New Agreement is for an initial term beginning on the date of its
approval by stockholders and continuing through December 31, 1998. Unless
terminated by the Company and OFFITBANK, the New Agreement will continue from
year to year after the expiration of its initial term only so long as such
continuation is approved at least annually by (1) the Board of Directors or the
vote of a majority of the outstanding voting securities of the Company, and (2)
a majority of the directors who are not interested persons of any party to the
agreement, cast in person at a meeting called for the purpose of voting on such
approval. The New Agreement may be terminated by the Company at any time,
without penalty, by a vote of a majority of the outstanding Common Stock of the
Company or by OFFITBANK, in either case on sixty days written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
If the Acquisition described in this Proxy Statement is completed, the
Company expects that a substantial portion of the assets currently under
OFFITBANK's management would be used to fund that Acquisition, and that the
relatively small amount of liquid assets remaining would thereafter be managed
by the Company's officers and employees without an investment adviser. As a
result, the Company expects to terminate the New Agreement, effective upon
consummation of the Acquisition, and OFFITBANK has agreed to waive the notice
otherwise required to permit termination at that time.
FACTORS CONSIDERED BY THE BOARD
The decision to propose the New Agreement was driven by the inadvertent
failure to continue the Old Agreement in the manner required before the date of
its termination. It was not the intention of the Board of Directors to
terminate OFFITBANK's services at December 31, 1996. OFFITBANK has managed the
Company's portfolio of investment securities since 1987. The Board of Directors
believes that OFFITBANK's services have met the Company's needs and that the
rate of compensation the Company pays to OFFITBANK is lower than the rate of
compensation that would be charged to the Company by other investment advisers.
The Board of Directors considered the services and personnel provided by
OFFITBANK, the performance of the Company's investment assets compared to
appropriate benchmarks, and the investment advisory fees paid by the Company
and the Company's total expense ratio compared to those of other investment
companies. The Board of Directors also expressed its belief that, because the
Company does not expect to continue to need an investment adviser after
completion of the Acquisition, it is not realistic to expect other investment
advisers to be eager to enter into such a relationship with the Company.
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<PAGE>
After consideration of the above, and such other factors and information as
they deemed relevant, the Board of Directors, including all of the directors
who are not "interested persons" (as such term is defined by the 1940 Act) of
the Company or OFFITBANK, unanimously approved the New Agreement and voted to
recommend its approval by the Company's stockholders.
If the New Agreement is not approved, OFFITBANK would not provide portfolio
management services to the Company after April 30, 1997, and it would not be
compensated for the services it provided to the Company during the period
January 1, 1997 through February 17, 1997. The assets of the Company that would
otherwise be managed by OFFITBANK would be managed by the Company's officers
and employees.
INFORMATION ABOUT OFFITBANK
OFFITBANK, 520 Madison Avenue, New York, New York 10022, is engaged in the
business of rendering investment advisory services to individuals, pension and
profit sharing plans, trusts, estates and corporations. As of December 31,
1996, OFFITBANK had approximately $8 billion of assets, including those of the
Company, under management.
The names, business addressed and principal occupations of the directors and
the principal executive officer of OFFITBANK are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
---------------- ----------------------------------------
<C> <S>
Morris W. Offit Director of OFFITBANK; Chairman of the
OFFITBANK Board of OFFITBANK
520 Madison Avenue
New York, NY 10022
H. Furlong Baldwin Director of OFFITBANK; Chairman of the
Mercantile Bankshares Inc. Board of Mercantile Bankshares Inc.
Two Hopkins Plaza-2nd Floor (banking)
Baltimore, MD 21201
Edward V. Regan Director of OFFITBANK; President of The
31 West 52nd Street, 17th floor Jerome Levy Economics Institute of Bard
New York, NY 10019 College
Ricardo Steinbrunch Director of OFFITBANK
Grupo Vicuhna
Rua Itacolomi 412, Higienopolis
San Paulo, S.P. 01239-020
Brazil
Director of OFFITBANK; Chairman and
David I. Margolis Chief Executive Officer of Coltec Indus-
147 East 48th Street tries, Inc. (manufacturer of aerospace,
New York, NY 10017 automotive and industrial products)
Harvey M. Meyerhoff Director of OFFITBANK; Chairman of the
Magna Holdings, Inc. Board of Magna Holdings, Inc.
25 South Charles St., Suite 2100
Baltimore, MD 21201
Alessandro di Montezemolo Director of OFFITBANK; Former Chairman
P.O. Box 5057 and Chief Executive Officer of Marsh &
200 Murray Place McLennan, Inc. (insurance brokers)
Southampton, NY 11969
George R. Packard Director of OFFITBANK; Dean of the Johns
4425 Garfield Street, N.W. Hopkins University School of Advanced
Washington, D.C. 20007 International Studies
B. Lance Sauertieg, Esq. Director of OFFITBANK; President of
130 Edgehill Road First Spring Corporation
New Haven, CT 06511
</TABLE>
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<PAGE>
Morris W. Offit, the Chairman and President of OFFITBANK, owns approximately
29.0% of OFFITBANK's outstanding voting securities and is the only person who
owns 10% or more of OFFITBANK's outstanding securities.
OFFITBANK also acts as investment adviser to the following registered
investment companies that have investment objectives similar to the Company's
current investment objective with respect to its portfolio of investment
securities, which is to provide as high a level of current income as is
consistent with prudent investment designed to preserve capital:
<TABLE>
<CAPTION>
NAME SIZE RATES OF FEE
- ---- ------------ ---------------------------------
<S> <C> <C>
Blanchard Flexible Income Fund................ $177,754,901 .30% of 1% on first $25 million
.25% of 1% on next $25 million
.20% of 1% on balance
Blanchard Short Term Bond Fund............... $152,432,623 .30% of 1% on first $25 million
.25% of 1% on next $25 million
.20% of 1% on balance
OFFITBANK High Yield Fund.................... $844,806,527 .85% of 1% on first $200 million
.75% of 1% on next $400 million
.65% of 1% on balance
OFFITBANK Emerging Markets Fund.............. $111,636,021 .90% of 1% on first $200 million
.80% of 1% on balance
CVO Greater China Fund....................... $ 4,968,019 1.25% of 1% on balance
OFFITBANK Latin America Total Return Fund.... $ 13,276,949 1.00% of 1% on balance
OFFITBANK New York Municipal Fund............ $ 20,078,911 .40% of 1% on balance
OFFITBANK VIP High Yield Fund................ $ 11,176,609 .85% of 1% on first $200 million
.75% of 1% on balance
OFFITBANK VIP Emerging Markets Fund.......... $ 3,117,367 .90% of 1% on first $200 million
.80% of 1% on balance
</TABLE>
REQUIRED VOTE
The favorable vote of the holders of the lesser of (a) 67% of the Company's
outstanding Common Stock present at the Special Meeting if the holders of more
than 50% of the outstanding Common Stock are present in person or by proxy or
(b) more than 50% of the Company's outstanding Common Stock, is required to
approve the New Agreement.
4. APPROVAL OF THE PLAN
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THE PLAN.
GENERAL
The Board of Directors is proposing for stockholder approval the Milwaukee
Land Company 1997 Incentive and Capital Accumulation Plan (the "Plan"). The
Plan is intended to provide incentives which will attract and retain highly
competent persons as key employees of the Company and its subsidiaries, by
providing them opportunities to acquire shares of stock or to receive monetary
payments based on the value of such shares pursuant to the Benefits described
herein. Furthermore, the Plan is intended to assist in aligning the interest of
the Company's key employees with those of its stockholders. After a thorough
process involving competitive analysis, review of proprietary and proxy
information, and deliberations by the Compensation Committee (as previously
defined, the "Committee"), the Committee adopted, and the Board of Directors
ratified, subject to stockholder approval, the Plan.
33
<PAGE>
The following description of the Plan is not intended to be complete and is
qualified in its entirety by reference to the Plan, a copy of which is
attached as Exhibit B to this proxy Statement.
In addition to the requisite approval of the stockholders of the Company,
the Plan is conditioned upon the entry of an order by the SEC pursuant to
Section 8(f) of the 1940 Act declaring that the Company has ceased to be an
investment company (the "De-registration Order"). IF THE DE-REGISTRATION ORDER
IS NOT ENTERED, THE PLAN WILL NOT BE ADOPTED AND THE REQUESTED APPROVAL BY THE
STOCKHOLDERS AT THIS SPECIAL MEETING WILL HAVE NO EFFECT. HOWEVER, AS
DISCUSSED BELOW, THE COMPANY WILL SEEK EXEMPTIVE RELIEF. See "DE-
REGISTRATION--Background" and "APPROVAL OF THE PLAN--Consequences of Inability
to De-register."
No benefits will be granted and no participant shall have any rights under
the Plan until the Plan becomes effective and the Plan will not become
effective until after the De-registration Order is entered.
DESCRIPTION OF THE PLAN
In structuring the Plan, the Committee sought to provide for a variety of
awards that could be flexibly administered to carry out the purposes of the
Plan. This authority will permit the Company to keep pace with changing
developments in management compensation and make the Company competitive with
those companies that offer creative incentives to attract and keep key
employees. The flexibility of the Plan will allow the Company to respond to
changing circumstances such as changes in tax laws, accounting rules,
securities regulations and other rules regarding benefit plans. The Plan
grants the Committee discretion in establishing the terms and restrictions
deemed appropriate for particular awards as circumstances warrant.
The following summary of the Plan is not intended to be complete and is
qualified in its entirety by reference to the Plan, a copy of which is
attached as Exhibit B to this Proxy Statement.
Shares Available. The Plan makes available for Benefits (as defined below)
subject to certain adjustments,100,000 shares of Common Stock to be reserved
for stock option grants and 75,000 shares to be reserved for SARs. The
aggregate amount of shares of Common Stock subject to Benefits under the Plan
is expected to be 175,000. During the term of the Plan, the maximum number of
shares of Common Stock with respect to which Benefits may be granted (or
measured) to any individual participant may not exceed 175,000. Subject to
limited exceptions, any shares of Common Stock subject to a stock option or
stock appreciation right which for any reason is cancelled or terminated
without having been exercised, any shares subject to stock awards, performance
awards or stock units which are forfeited, any shares subject to performance
awards settled in cash or any shares delivered to the Company as part of full
payment for the exercise of a stock option or stock appreciation right shall
again be available for Benefits under the Plan.
Administration. At a meeting held on February 18, 1997, the Board of
Directors of the Company appointed the Committee which is to be comprised
solely of not less than two members who shall be (i) "Non-Employee Directors"
within the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated
under the Exchange Act and (ii) unless otherwise determined by the Board of
Directors, "outside directors" within the meaning of Treasury Regulation
Section 1.162-27(e)(3) and Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). The Committee is authorized, subject to the
provisions of the Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make such
determinations and interpretations and to take such action in connection with
the Plan and any Benefits granted as it deems necessary or advisable. Thus,
among the Committee's powers are the authority to select officers and other
key employees of the Company and its subsidiaries to receive Benefits, and
determine the form, amount and other terms and conditions of Benefits. The
Committee also has the power to modify or waive restrictions on Benefits, to
amend Benefits and to grant extensions and accelerations of Benefits.
Eligibility for Participation. Executive management and key employees of the
Company or any of its subsidiaries are eligible to participate in the Plan.
The selection of participants from eligible key employees is within the
discretion of the Committee. All key employees are currently eligible to
participate in the Plan.
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<PAGE>
Types of Benefits. The Plan provides for the grant of any or all of the
following types of benefits: (1) stock options, including incentive stock
options and non-qualified stock options; (2) stock appreciation rights; (3)
stock awards, including restricted stock; (4) performance awards; and (5) stock
units (collectively, "Benefits"). Benefits may be granted singly, in
combination, or in tandem as determined by the Committee. Stock awards,
performance awards and stock units may, as determined by the Committee in its
discretion, constitute Performance-Based Awards, as described below.
Stock Options. Under the Plan, the Committee may grant awards in the form of
options to purchase shares of Common Stock. Options may be either incentive
stock options, qualifying for special tax treatment, or non-qualified options.
The Committee will, with regard to each stock option, determine the number of
shares subject to the option, the manner and time of the option's exercise and
vesting, and the exercise price per share of stock subject to the option;
provided, however, that the exercise price shall not be less than 100% of the
fair market value of the Common Stock on the date the stock option is granted.
In the case of incentive stock options granted to any holder of capital stock
of the Company (or any subsidiary) representing 10% or more of the voting power
of the Company (or any subsidiary), the exercise price shall not be less than
110% of the fair market value of the Common Stock on the date the stock option
is granted. The exercise price may be paid in cash or, in the discretion of the
Committee, by the delivery of shares of Common Stock for which a stock option
is exercisable, by delivering to the Company an executed promissory note (or
such other form of indebtedness) on such terms and conditions as the Committee
shall determine in its sole discretion at the date of grant, or by a
combination of those methods. In the discretion of the Committee, payment may
also be made by delivering a properly executed exercise notice to the Company
together with a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds to pay the exercise
price. The Committee may prescribe any other method of paying the exercise
price that it determines to be consistent with applicable law and the purpose
of the Plan. In determining which methods a participant may utilize to pay the
exercise price, the Committee may consider such factors as it determines are
appropriate.
Stock Appreciation Rights (SARs). The Plan authorizes the Committee to grant
an SAR either in tandem with a stock option or independent of a stock option.
An SAR is a right to receive a payment, in cash or Common Stock, equal to the
excess of (x) the fair market value, or other specified valuation (which shall
not be greater than the fair market value), of a specified number of shares of
Common Stock on the date the right is exercised over (y) the fair market value,
or other specified valuation (which shall be less than fair market value), of
such shares of Common Stock on the date the right is granted, all as determined
by the Committee. Each SAR shall be subject to such terms and conditions as the
Committee shall impose from time to time.
Stock Awards. The Plan authorizes the Committee to grant awards in the form
of restricted or unrestricted shares of Common Stock ("Stock Awards"), which
includes mandatory stock bonus incentive compensation and which may constitute
Performance-Based Awards. Such awards will be subject to such terms,
conditions, restrictions, and/or limitations, if any, as the Committee deems
appropriate including, but not by way of limitation, restrictions on
transferability, continued employment and performance goals established by the
Committee over a designated period of time.
Performance Awards. The Plan allows for the grant of performance awards which
may take the form of shares of Common Stock or stock units, or any combination
thereof and which may constitute Performance-Based Awards. Such awards will be
contingent upon the attainment over a period to be determined by the Committee
of certain performance goals. The length of the performance period, the
performance goals to be achieved and the measure of whether and to what degree
such goals have been achieved will be determined by the Committee. Payment of
earned performance awards will be made in accordance with terms and conditions
prescribed or authorized by the Committee. The participant may elect to defer,
or the Committee may require the deferral of, the receipt of performance awards
upon such terms as the Committee deems appropriate.
Stock Units. The Committee may, in its discretion, grant Stock Units to
participants, which may constitute Performance-Based Awards. A "Stock Unit"
means a notational account representing one share of Common Stock. The
Committee determines the criteria for the vesting of Stock Units and whether a
participant granted a
35
<PAGE>
Stock Unit shall be entitled to Dividend Equivalent Rights (as defined in the
Plan). Upon vesting of a Stock Unit, unless the Committee has determined to
defer payment with respect to such unit or a participant has elected to defer
payment, shares of Common Stock representing the Stock Units will be
distributed to the participant unless the Committee, with the consent of the
participant, provides for the payment of the Stock Units in cash, or partly in
cash and partly in shares of Common Stock, equal to the value of the shares of
Common Stock which would otherwise be distributed to the participant.
Performance-Based Awards. Certain Benefits granted under the Plan may be
granted in a manner such that the Benefits qualifies for the performance-based
compensation exemption to Section 162(m) of the Code ("Performance-Based
Awards"). As determined by the Committee in its sole discretion, either the
granting or vesting of such Performance-Based Awards will be based upon one or
more of the following factors: net sales, pre-tax income before allocation of
corporate overhead and bonus, budget, earnings per share, net income, division,
group or corporate financial goals, return or stockholders' equity, return on
assets, attainment of strategic and operational initiatives, appreciation in
and/or maintenance of the price of the Common Stock or any other publicly-
traded securities of the Company, market share, gross profits, earnings before
interest and taxes, earnings before interest, taxes, dividends and
amortization, economic value-added models and comparisons with various stock
market indices, reductions in costs, or any combination of the foregoing.
With respect to Performance-Based Awards, the Committee shall establish in
writing, (x) the objective performance-based goals applicable to a given period
and (y) the individual employees or class of employees to which such
performance-based goals apply no later than 90 days after the commencement of
such period (but in no event after 25% of such period has elapsed). No
Performance-Based Award shall be payable to or vest with respect to, as the
case may be, any participant for a given fiscal period until the Committee
certifies in writing that the objective performance goals (and any other
material terms) applicable to such period have been satisfied.
OTHER TERMS OF BENEFITS
The Plan provides that Benefits shall not be transferable other than by will
or the laws of descent and distribution. The Committee shall determine the
treatment to be afforded to a participant in the event of termination of
employment for any reason including death, disability or retirement.
Notwithstanding the foregoing, other than with respect to incentive stock
options, the Committee may permit the transferability of an award by a
participant to members of the participant's immediate family or trusts for the
benefit of such person or family partnerships.
Upon the grant of any Benefit under the Plan, the Committee, may, by way of
an agreement with the participant, establish such other terms, conditions,
restrictions and/or limitations covering the grant of the Benefit as are not
inconsistent with the Plan. No Benefit shall be granted under the Plan after
April 3, 2007. The Board of Directors reserves the right to amend, suspend or
terminate the Plan at any time, subject to the rights of participants with
respect to any outstanding Benefits.
The Plan contains provisions for equitable adjustment of Benefits in the
event of a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, reverse stock split, split up, spin-off, combination of
shares, exchange of shares, dividend in kind or other like change in capital
structure or distribution (other than normal cash dividends) to stockholders of
the Corporation.
FEDERAL INCOME TAX CONSEQUENCES
The statements in the following paragraphs of the principal federal income
tax consequences of Benefits under the Plan are based on statutory authority
and judicial and administrative interpretations, as of the date of this Proxy
Statement, which are subject to change at any time (possibly with retroactive
effect). The law is technical and complex and the discussion below represents
only a general summary.
Incentive Stock Options. Incentive stock options ("ISOs") granted under the
Plan are intended to meet the definitional requirements of Section 422(b) of
the Code for "incentive stock options."
36
<PAGE>
An employee who receives an ISO does not recognize any taxable income upon
the grant of such ISO. Similarly, the exercise of an ISO generally does not
give rise to federal income tax to the employee, provided that (i) the federal
"alternative minimum tax," which depends on the employee's particular tax
situation, does not apply and (ii) the employee is employed by the Corporation
from the date of grant of the option until three months prior to the exercise
thereof, except where such employment terminates by reason of disability (where
the three month period is extended to one year) or death (where this
requirement does not apply). If an employee exercises an ISO after these
requisite periods, the ISO will be treated as an NSO (as defined below) and
will be subject to the rules set forth below under the caption "Non-Qualified
Stock Options and Stock Appreciation Rights."
Further, if after exercising an ISO, an employee disposes of the Common Stock
so acquired more than two years from the date of grant and more than one year
from the date of transfer of the Common Stock pursuant to the exercise of such
ISO (the "applicable holding period"), the employee will normally recognize a
long-term capital gain or loss equal to the difference, if any, between the
amount received for the shares and the exercise price. If, however, an employee
does not hold the shares so acquired for the applicable holding period, thereby
making a "disqualifying disposition", the employee would realize ordinary
income on the excess of the fair market value of the shares at the time the ISO
was exercised over the exercise price and the balance, if any, income would be
long-term capital gain (provided the holding period for the shares exceeded one
year and the employee held such shares as a capital asset at such time).
An employee who exercises an ISO by delivering Common Stock previously
acquired pursuant to the exercise of another ISO is treated as making a
"disqualifying disposition" of such Common Stock if such shares are delivered
before the expiration of their applicable holding period. Upon the exercise of
an ISO with previously acquired shares as to which no disqualifying disposition
occurs, despite some uncertainty, it appears that the employee would not
recognize gain or loss with respect to such previously acquired shares.
The Company will not be allowed a federal income tax deduction upon the grant
or exercise of an ISO or the disposition, after the applicable holding period,
of the Common Stock acquired upon exercise of an ISO. In the event of a
disqualifying disposition, the Company generally will be entitled to a
deduction in an amount equal to the ordinary income included by the employee,
provided that such amount constitutes an ordinary and necessary business
expense to the Company and is reasonable and the limitations of Sections 280G
and 162(m) of the Code (discussed below) do not apply.
Non-Qualified Stock Options and Stock Appreciation Rights. Non-qualified
stock options ("NSOs") granted under the Plan are options that do not qualify
as ISOs. An employee who receives an NSO or an SAR will not recognize any
taxable income upon the grant of such NSO or SAR. However, the employee
generally will recognize ordinary income upon exercise of an NSO in an amount
equal to the excess of (i) the fair market value of the shares of Common Stock
at the time of exercise over (ii) the exercise price. Similarly, upon the
receipt of cash or shares pursuant to the exercise of an SAR, the individual
generally will recognize ordinary income in an amount equal to the sum of the
cash and the fair market value of the shares received.
As a result of Section 16(b) of the Exchange Act, under certain
circumstances, the timing of income recognition may be deferred (generally for
up to six months following the exercise of an NSO or SAR (i.e., the "Deferral
Period")) for any individual who is an officer or director of the Company or a
beneficial owner of more than ten percent (10%) of any class of equity
securities of the Company. Absent a Section 83(b) election (as described below
under "Other Awards"), recognition of income by the individual will be deferred
until the expiration of the Deferral Period, if any.
The ordinary income recognized with respect to the receipt of shares or cash
upon exercise of a NSO or an SAR will be subject to both wage withholding and
other employment taxes. In addition to the customary methods of satisfying the
withholding tax liabilities that arise upon the exercise of an SAR for shares
or upon the exercise of a NSO, the Company may satisfy the liability in whole
or in part by withholding shares of Common Stock from those that otherwise
would be issuable to the individual or by the employee tendering other shares
owned by him or her, valued at their fair market value as of the date that the
tax withholding obligation arises.
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<PAGE>
A federal income tax deduction generally will be allowed to the Company in an
amount equal to the ordinary income included by the individual with respect to
his or her NSO or SAR, provided that such amount constitutes an ordinary and
necessary business expense to the Company and is reasonable and the limitations
of Sections 280G and 162(m) of the Code do not apply.
If an individual exercises an NSO by delivering shares of Common Stock to the
Company, other than shares previously acquired pursuant to the exercise of an
ISO which is treated as a "disqualifying disposition" as described above, the
individual will not recognize gain or loss with respect to the exchange of such
shares, even if their then fair market value is different from the individual's
tax basis. The individual, however, will be taxed as described above with
respect to the exercise of the NSO as if he or she had paid the exercise price
in cash, and the Company likewise generally will be entitled to an equivalent
tax deduction.
Other Awards. With respect to other Benefits under the Plan that are settled
either in cash or in shares of Common Stock that are either transferable or not
subject to a substantial risk of forfeiture (as defined in the Code and the
regulations thereunder), employees generally will recognize ordinary income
equal to the amount of cash or the fair market value of the Common Stock
received.
With respect to Benefits under the Plan that are settled in shares of Common
Stock that are restricted as to transferability or subject to a substantial
risk of forfeiture, absent a written election pursuant to Section 83(b) of the
Code filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the award (a "Section 83(b) election"), an
individual will recognize ordinary income at the earlier of the time at which
(i) the shares become transferable or (ii) the restrictions that impose a
substantial risk of forfeiture of such shares (the "Restrictions") lapse, in an
amount equal to the excess of the fair market value (on such date) of such
shares over the price paid for the award, if any. If a Section 83(b) election
is made, the individual will recognize ordinary income, as of the transfer
date, in an amount equal to the excess of the fair market value of the Common
Stock as of that date over the price paid for such award, if any.
The ordinary income recognized with respect to the receipt of cash, shares of
Common Stock or other property under the Plan will be subject to both wage
withholding and other employment taxes.
The Company generally will be allowed a deduction for federal income tax
purposes in an amount equal to the ordinary income recognized by the employee,
provided that such amount constitutes an ordinary and necessary business
expense and is reasonable and the limitations of Sections 280G and 162(m) of
the Code do not apply.
Dividends and Dividend Equivalents. To the extent Benefits under the Plan
earn dividend or dividend equivalents, whether paid currently or credited to an
account established under the Plan, an individual generally will recognize
ordinary income with respect to such dividend or dividend equivalents.
Change in Control. In general, if the total amount of payments to an
individual that are contingent upon a "change of control" of the Company (as
defined in Section 280G of the Code), including payments under the Plan that
vest upon a "change in control," equals or exceeds three times the individual's
"base amount" (generally, such individual's average annual compensation for the
five calendar years preceding the change in control), then, subject to certain
exceptions, the payments may be treated as "parachute payments" under the Code,
in which case a portion of such payments would be non-deductible to the Company
and the individual would be subject to a 20% excise tax on such portion of the
payments.
Certain Limitations on Deductibility of Executive Compensation. With certain
exceptions, Section 162(m) of the Code denies a deduction to publicly held
corporations for compensation paid to certain executive officers in excess of
$1 million per executive per taxable year (including any deduction with respect
to the exercise of an NSO or SAR or the disqualifying disposition of stock
purchased pursuant to an ISO). One such exception applies to certain
performance-based compensation provided that such compensation has been
approved by stockholders in a separate vote and certain other requirements are
met. The Company believes that Stock Options, SARs and Performance-Based Awards
granted under the Plan should qualify for the performance-based compensation
exception to Section 162(m).
38
<PAGE>
BENEFITS EXPECTED TO BE GRANTED UNDER THE PLAN
As of the date of this proxy statement, no Benefits have been granted under
the Plan. The Plan will not be adopted unless the Plan is approved by
stockholders and the De-registration Order is entered. On the first business
day following the satisfaction of each of the conditions described above in
"APPROVAL OF THE PLAN--General" [or on such other date within 90 days following
such date as the Committee may determine], it is expected that the Company will
recommend to the Committee to grant to (i) Peter G. VanHeusden, Stock Options
for 50,000 shares of Common Stock and SARs with respect to 25,000 shares of
Common Stock; (ii) Edwin C. Jacobson, Stock Options for 50,000 shares of Common
Stock and SARs with respect to 25,000 shares of Common Stock and (iii) certain
other executives of PG Newco and the Company, SARs with respect to up to 25,000
shares of Common Stock, all in consideration of their continued employment in
their respective capacities. The Benefits expected to be granted to Edwin C.
Jacobson will vest one year after the Closing Date. The Benefits expected to be
granted to Peter G. VanHeusden and anyone else will vest five years after the
Closing Date.
Benefits which are expected to be granted under the Plan, subject to
stockholder approval and the satisfaction of the other conditions, are
displayed in the following table.
<TABLE>
<CAPTION>
STOCK
APPRECIATION
NAME AND POSITION STOCK OPTIONS (#) RIGHTS (#)
----------------- ----------------- ------------
<S> <C> <C>
Robert S. Davis............................ 0 0
Clarence G. Frame.......................... 0 0
Edwin Jacobson, Chief Executive Officer.... 50,000 25,000
Ezra K. Zilkha............................. 0 0
Executive Group (i)........................ 100,000 75,000
Non-Executive Director Group............... 0 0
Non-Executive Employee Group............... 0 0
</TABLE>
- --------
(i) In addition to the Benefits which are expected to be granted to Edwin
Jacobson, Peter G. VanHeusden, who will be the President and Chief
Executive Officer of PG Newco, will be eligible for 50,000 Stock Options
and 25,000 SARs and other executives of PG Newco or the Company will be
eligible, in the aggregate, for up to 25,000 SARs under the Plan.
CONSEQUENCES OF INABILITY TO DE-REGISTER
If the De-registration Order is not entered, the Plan will not be adopted.
However, PG Newco has agreed, pursuant to the Employment Agreement with Peter
G. VanHeusden, that, if the De-registration Order is not entered, the Company
will use its best efforts to obtain from the SEC an order exempting PG Newco
and the Company from those provisions of the 1940 Act and the Rules thereunder
that would otherwise prohibit the incentive compensation, to permit PG Newco
and the Company to adopt an incentive compensation plan pursuant to which the
same incentive compensation described above would be granted. If such an
exemptive order were sought and obtained, the Company would be required to seek
stockholder approval of the new plan after entry of the exemptive order.
REQUIRED VOTE
Approval of the Plan requires the affirmative vote of the holders of the
majority of the Common Stock represented at the meeting and voting on the
issue, whether in person or by proxy.
39
<PAGE>
5. OTHER MATTERS
The management of the Company does not intend to bring any other matters
before the meeting and it does not know of any proposals to be presented to the
meeting by others. If any other matter comes before the meeting, however, the
persons named in the proxy solicited by the Board of Directors will vote
thereon in accordance with their judgment.
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is a non-diversified, closed-end management investment company.
The Company does not attempt to reduce risk by diversifying its investments.
HEARTLAND PARTNERS, L.P. AND CMC HEARTLAND PARTNERS
The Company is engaged in the business of real estate development through its
general partner interests in Heartland Partners, L.P., a publicly-traded
limited partnership ("Heartland"), and CMC Heartland Partners, a general
partnership in which the Company and Heartland are the general partners and the
Company is the managing general partner ("CMC Heartland"). Heartland and CMC
Heartland are engaged in the development of real estate consisting primarily of
properties formerly owned by the Company, as described below.
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC Heartland which entitles the Company to .01% of CMC Heartland's
available cash for distribution and an allocation of taxable income and loss
before distributions and allocations are made by Heartland. The Company also
owns the Class B limited partnership interest in Heartland (the "Class B
Interest"). In general, the Class B Interest entitles the holder to .5% of
Heartland's available cash for distribution and allocation of taxable income
and loss. In addition, items of deduction, loss, credit and expense
attributable to the satisfaction of Plan Liabilities (described below) are
specially allocated 99% to the holder of the Class B Interest and 1% to the
Company as the general partner until the aggregate amount of all such items
allocated to the Class B Interest equals the aggregate capital contribution
with respect to the Class B Interest. If the aggregate amount of such items
specially allocated to the holder of the Class B Interest is less than the
amounts contributed by such holder to Heartland, such excess will be reflected
in the capital account of the Class B Interest. The Company's interests in
Heartland and CMC Heartland (collectively, the "Partnerships"), together with
the Class B Interest referred to below, are included in investments and were
valued at approximately $7.6 million at December 31, 1996.
The Company, by reason of its serving as the general partner of each of the
Partnerships, is liable and responsible to third parties for such Partnerships'
liabilities to the extent the assets of such partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate business, and in connection with the real estate
transfer, the Partnerships have assumed primary responsibility and liability
for the resolution and satisfaction of most of the liabilities for claims
remaining under the plan of reorganization of the predecessor of CMC Real
Estate Corporation ("CMCRE"), formerly a wholly-owned subsidiary of the
Company's former parent corporation, and previously named the Chicago,
Milwaukee, St. Paul and Pacific Railroad Company (the "Railroad"), certain
other contingent liabilities with respect to the properties transferred to CMC
Heartland arising after the consummation of such plan, and the costs and
expenses in resolving such plan and other contingent liabilities (collectively,
the "Plan Liabilities"). Included in the Plan Liabilities are known
environmental liabilities associated with certain of the properties transferred
to the Partnerships arising out of the activities of the Railroad or certain
lessees or other third parties. Further environmental obligations as yet
unknown in respect of these properties may become due and owing in the future.
A majority of the known environmental matters stem from the use of petroleum
products, such as motor oil and diesel fuel, in the operation of a railroad,
the primary business of the Railroad. The Company and/or the Partnerships have
been notified by governmental agencies of potential liabilities in connection
with certain of these real estate properties.
40
<PAGE>
The Company assumed from Chicago Milwaukee Corporation ("CMC"), its former
parent corporation, any obligations for which CMC was or might become liable
(the "MLC Assumed Liabilities") arising out of any matters existing on or
occurring prior to June 30, 1993 other than (i) the Plan Liabilities, (ii)
liabilities directly related to CMC's business of investing and managing its
investment securities, (iii) the lawsuit then pending (and since resolved)
against CMC relating to its preferred stock, or (iv) any liabilities relating
to federal, state, local or foreign income or other tax matters. Although CMC
remained liable to third party obligees in connection with the MLC Assumed
Liabilities, CMC has since ceased operation and dissolved.
Pursuant to a management agreement between the Company and CMC Heartland, CMC
Heartland is required to pay to the Company an annual management fee in the
amount of approximately $425,000. The management fee for 1996 was paid on
February 14, 1997.
EXECUTIVE OFFICERS
The following table sets forth certain information with regard to executive
officers of the Company who do not serve as directors.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
COMPANY AND PRINCIPAL
NAME AGE OCCUPATION DURING PAST 5 YEARS
---- --- ------------------------------
<C> <C> <S>
Lawrence S. Adelson 47 Vice President and General Counsel of the Company
(since October 1988);
Vice President and General Counsel of CMC (since
November 1988); General Counsel of CMC Real Estate
Corporation (1985-1989).
Leon F. Fiorentino 72 Vice President--Finance, Secretary and Treasurer
(since September, 1990);
Vice President--Finance (since May 1981), Treasurer
(since May 1982) and Secretary (since May 1984) of
CMC.
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by MLC for the
fiscal year ended December 31, 1996 to (i) each of the directors of the Company
and (ii) to the executive officer of the Company whose aggregate compensation
paid by the Company exceeded $60,000, and (iii) to each director of the Company
by the Company and CMC in the aggregate.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME AND POSITION FROM THE COMPANY
----------------- ----------------
<S> <C>
Robert S. Davis.......................................... $12,000
Director
Edwin Jacobson........................................... $90,000
Director, President and Chief Executive Officer
Clarence G. Frame........................................ $22,656
Director
Ezra K. Zilkha........................................... $12,750
Director
</TABLE>
The Company does not currently maintain any pension, profit-sharing, option,
stock, bonus or similar plan for its officers and directors. Insurance benefit
programs are non-discriminatory. The Company does have a deferred compensation
arrangement available to its officers and directors. Compensation for 1996 that
was deferred is included in the table above.
The compensation received by Mr. Jacobson from the Company was in his
capacity as President and Chief Executive Officer of the Company. Mr. Jacobson
does not receive any compensation from the Company for his services as
director. Mr. Jacobson's services to the Company are pursuant to an employment
agreement (the "Employment Agreement") with the Company. Mr. Jacobson's current
Employment Agreement provides for an annual base salary of $90,000, all or a
portion of which may be deferred at Mr. Jacobson's election. Upon the
successful completion of the proposed Acquisition, Mr. Jacobson will enter into
a new employment agreement (the "New Employment Agreement") with the Company
pursuant to which he will serve as the President and Chief Executive Officer of
the Company for a period of five years and will earn an annual base salary of
$175,000, all or a portion of which may be deferred at Mr. Jacobson's election.
41
<PAGE>
During the term of the current Employment Agreement, Mr. Jacobson has the
right to continue his employment with CMC Heartland and to pursue other
employment and business activities not in competition with the activities of
the Company (after prior notice of such activities has been delivered by him to
the Chairman of the Executive Committee of the Board of Directors of the
Company), and is not obligated to devote full time to the activities of the
Company. Mr. Jacobson is, however, required to devote an amount of time to the
activities of the Company determined by the Board of Directors of the Company
to be required of him to accomplish the business objectives of the Company. The
New Employment Agreement contemplates a similar arrangement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information concerning persons who are known by
the Company to be beneficial owners of more than 5% of the outstanding shares
of the Company's Common Stock as of the date shown in the corresponding
footnote.
<TABLE>
<CAPTION>
NAME AND NUMBER OF
ADDRESS OF SHARES OF PERCENT
BENEFICIAL COMMON OF
OWNER (I) STOCK OWNED CLASS
---------- ----------- -------
<S> <C> <C>
Ezra K. Zilkha(ii)
767 Fifth Avenue
New York, New York 10153.................................. 87,500 5.2%
======= ====
Schedule 13D Group(iii)
- --Orion Capital Corporation
600 Fifth Avenue
New York, New York 10020.................................. 97,300 5.8%
======= ====
Spears, Benzak, Salomon & Farrell, Inc.(iv)
45 Rockefeller Plaza
New York, New York 10111.................................. 496,780 29.7%
======= ====
MSR Capital Partners(v)
One Embaracadero Center - Suite 2330
San Francisco, CA 94111................................... 106,000 6.3%
======= ====
</TABLE>
- --------
(i) Nature of ownership is direct, except as otherwise indicated herein.
(ii) All shares are held directly with sole voting and investment power except
for 1,500 shares owned by Mr. Zilkha's wife, as to which Mr. Zilkha shares
voting and dispositive power, 15,000 shares owned by the Zilkha
Foundation, Inc. as to which Mr. Zilkha may be deemed to share voting and
dispositive power with the other directors and officers of this foundation
and 24,500 shares owned by Zilkha & Sons, Inc. as to which Mr. Zilkha may
be deemed to be a beneficial owner.
(iii) Based on a statement filed on Schedule 13D, as amended through April 10,
1997, this Schedule 13D Group consists of Orion Capital Corporation, six
of Orion's wholly-owned subsidiaries (Connecticut Specialty Insurance,
Design Professionals Insurance Company, EBI Indemnity Company, The Fire &
Casualty Insurance Company of Connecticut, Security Insurance Company of
Hartford and Security Reinsurance Company), Guaranty National
Corporation, an affiliate of Orion, and Guaranty National Insurance
Company, a subsidiary of Guaranty National Corporation. No member of the
Schedule 13D Group except Orion Capital Corporation beneficially owned in
excess of 5% of the outstanding shares of Common Stock of the Company.
Orion Capital Corporation may be deemed to be the beneficial owner of all
the Common Stock of the Company owned by the subsidiaries and the
affiliates.
(iv) Based on a statement filed on Schedule 13G, as amended through February
14, 1997, Spears, Benzak, Salomon & Farrell, Inc. ("Spears") serves as an
investment advisor for a variety of individuals, groups and corporations
with whom Spears shares the power to dispose or direct the disposition of
such shares of the Company's Common Stock with various customers for whom
the shares were purchased. However, in each case the customer has the
ultimate power to dispose and may at any time revoke Spears' authority to
dispose. Spears has no power to vote or direct the vote of such shares.
(v) Based on a statement filed on Schedule 13D dated January 10, 1996, MSR
Capital Partners, a California Limited Partnership organized to purchase,
hold for investment and sell marketable securities, has sole voting and
dispositive power with respect to the shares owned.
42
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Set forth in the following table is certain information concerning the
beneficial ownership of the Company's Common Stock by each director, each
nominee for election as director and by all directors, officers and nominees as
a group as of February 3, 1997:
<TABLE>
<CAPTION>
NAME OF
BENEFICIAL
OWNER AND NUMBER OF
NUMBER OF SHARES OF PERCENT
PERSONS IN COMMON STOCK OF
GROUP(I) OWNED CLASS
---------- ------------ -------
<S> <C> <C>
Robert S. Davis..................................... 300 --%
Clarence G. Frame................................... 500 --%
Edwin C. Jacobson................................... 19,000 1.1%
Ezra K. Zilkha(ii).................................. 87,500 5.2%
All directors, officers and nominees of the Company
(7 persons)........................................ 107,300 6.3%
</TABLE>
- --------
(i) Nature of ownership is direct, except as otherwise indicated herein. Unless
shown, ownership is less than 1%
of class.
(ii) Included in the table are 1,500 shares owned by Mr. Zilkha's wife to which
Mr. Zilkha shares voting and dispositive power, 15,000 shares owned by The
Zilkha Foundation, Inc. as to which Mr. Zilkha may be deemed to share
voting and dispositive power with the directors and officers of this
foundation and 24,500 shares owned by Zilkha & Sons, Inc. as to which Mr.
Zilkha may be deemed to be a beneficial owner.
SELECTED FINANCIAL DATA--THE COMPANY
The following table shows selected financial data of the Company for each
year in the five-year period ended December 31, 1996.
The following information should be read in conjunction with the "Discussion
of the Financial Condition and Results of Operations of the Company" and the
audited financial statements of the Company in Appendix E.
MILWAUKEE LAND COMPANY
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUDITED
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Investment Income.................. $ 1,200 $ 1,131 $ 1,079 $ 659 $ 654
Expenses........................... 1,075 1,008 996 631 369
Net Investment Income.............. 125 123 83 28 285
Net Realized/Unrealized Gain/Loss.. (1,510) (4,144) 529 1,361 --
Capital Contribution from Chicago
Milwaukee Corporation............. -- -- -- 9,975 --
Net Increase (Decrease) in Net
Assets............................ $(1,385) $(4,021) $ 612 $11,364 $ 285
Per Common Share.................. $ (.83) (2.41) $ .37 $ 6.80 $ .17
FINANCIAL POSITION AT END OF YEAR:
Total Assets....................... $19,065 $20,576 $26,219 $24,363 $11,014
Total Liabilities.................. 1,481 1,608 3,229 1,985 --
Net Assets......................... $17,584 $18,968 $22,990 $22,378 $11,014
</TABLE>
43
<PAGE>
DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
Results of Operations
For the Year Ended December 31, 1996 Compared to the Year Ended December 31,
1995.
Revenues in 1996 were substantially the same as compared to 1995. The current
yield on the portfolio at year-end 1996 was 6.95% compared to 6.72% at year-end
1995. The current yield on high-yield corporate bonds was 9.26% compared to
9.17% at the end of 1995 while the annual yield on Treasuries was 6.12%
compared to 5.09% at year-end 1995.
The net unrealized loss on securities of $1,510,000 was substantially all
attributed to a reduction in the valuation of the Class B interest in Heartland
Partners, which was determined by the Board of Directors, in good faith, to be
a fair value.
For the Year Ended December 31, 1995 Compared to the Year Ended December 31,
1994.
Revenue in 1995 was substantially the same as in 1994. The current yield on
the portfolio at year-end 1995 was 6.72% compared to 6.90% at year-end 1994.
The current yield on high-yield corporate bonds was 9.17% compared to 9.76% at
year-end 1994. The current yield on Treasuries was 5.09% compared to 4.7% at
year-end 1994.
The net unrealized loss on securities of $4,144,000 in 1995 was substantially
all attributed to a fair value determination of the Class B interest in
Heartland Partners by the Board of Directors as a result of a change approved
by the Board of Directors in the methodology used for valuing the Class B
Interest. The newer methodology imputes a value to the Class B Interest based
on the market value of the publicly traded Class A limited partnership unit.
For the Year Ended December 31, 1994 Compared to the Year Ended December 31,
1993.
Revenues in 1994 were $420,000 higher as compared to 1993. The current yield
on the portfolio at year-end 1994 was 7.03% compared to 5.19% at year-end 1993.
Expense increased in 1994 as compared to 1993 because of much higher legal and
professional fees associated with an SEC examination and higher expenses
associated with a stand alone public company for the full year 1994.
The net unrealized gain on securities in 1994 increased primarily due to an
increase in the valuation of the Class B Interest as determined by the Board of
Directors in accordance with the methodology in effect.
Financial Condition
For the Year Ended December 31, 1996 Compared to the Year Ended December 31,
1995.
The financial condition of the Company remained very strong in 1996 with
securities of non-affiliates totaling $9,535,374 at year-end 1996.
Additionally, the Company had cash of $1,191,774 and other current assets of
$748,972 at year-end 1996. Total liabilities amounted to $1,481,101 at year-end
1996.
For the Year Ended December 31, 1995 Compared to the Year Ended December 31,
1994.
The financial condition of the Company remained strong in 1995 with
securities of non-affiliates totaling $9,617,748 at year-end 1995.
Additionally, the Company had cash of $300,134 and other current assets of
$1,499,563 at year-end 1995. Total liabilities amounted to $1,607,556 at year-
end 1995.
For the Year Ended December 31, 1994 Compared to the Year Ended December 31,
1993.
The financial condition of the Company remained strong in 1994 with
securities of non-affiliates totaling $9,813,444 at year-end 1994. Total
liabilities amounted to $3,229,420 at year-end 1994 which included a deferred
tax liability of $1,628,622 attributable to an increase in value of the Class B
Interest in Heartland Partners.
44
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND DATA
Market Price and Net Asset Value Information. Company Common Stock is
admitted for trading on the AMEX under the symbol "MWK".
<TABLE>
<CAPTION>
DISCOUNT
AS A
PERCENTAGE
NET ASSET OF NET
VALUE PER MARKET ASSET
SHARE(A) PRICES VALUE(B)
------------- ----------- -------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter......................... $13.44 $13.83 $7.50 $6.13 44% 56%
Second Quarter........................ 13.83 13.81 7.13 6.63 48 52
Third Quarter......................... 14.29 13.86 7.00 6.25 51 55
Fourth Quarter........................ 14.29 13.76 7.50 6.75 48 51
1995
First Quarter......................... $14.08 $13.71 $7.50 $7.00 47% 49%
Second Quarter........................ 14.34 13.91 8.50 7.00 41 50
Third Quarter......................... 14.09 13.96 8.25 7.25 41 48
Fourth Quarter........................ 14.14 11.35 7.75 6.13 45 46
1996
First Quarter......................... $11.53 $11.24 $7.63 $6.75 34% 40%
Second Quarter........................ 11.28 10.61 7.13 6.13 37 42
Third Quarter......................... 10.74 10.66 7.88 6.13 27 43
Fourth Quarter........................ 10.52 10.32 6.69 6.06 36 41
</TABLE>
- --------
(a) Calculated at end of month.
(b) Reflects the discount of the high or low sales price during the quarter
from the high or low NAV during the quarter. The high sale price and the
high net asset value, or the low sale price and the low NAV, during any
quarter may not have been on the same date. The Company calculates NAV only
on the last day of each month.
Dividends and Distributions.
The Company has not paid any dividends since 1992.
PROPOSALS OF STOCKHOLDERS FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS
Any stockholder who wishes to present a proposal for action at the 1998
annual meeting of stockholders and who wishes to have it set forth in the proxy
statement and identified in the form of proxy prepared by the Company must
notify the Company in such manner so that such notice is received by the
Company by February 24, 1998 and in such form as is required under the rules
and regulations promulgated by the SEC.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
April 29, 1997
45
<PAGE>
APPENDIX A
ASSET PURCHASE AGREEMENT
AMONG
MILWAUKEE LAND COMPANY
AND
PG NEWCO CORP.
as Purchasers
AND
PG DESIGN ELECTRONICS, INC.
as Seller
AND
THE SHAREHOLDER INDEMNITORS NAMED HEREIN
Dated as of April 4, 1997
<PAGE>
Table of Contents
-----------------
Page
----
ARTICLE I
SALE AND PURCHASE OF ASSETS
1.1 Acquisition and Transfer of Assets............... 1
1.2 Excluded Assets.................................. 4
1.3 Assumed Liabilities.............................. 5
ARTICLE II
PURCHASE PRICE
2.1 Purchase Price and Payment....................... 5
2.2 Allocation of Purchase Price..................... 6
ARTICLE III
THE CLOSING
3.1 Closing Date..................................... 6
3.2 Proceedings at Closing........................... 6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE
SHAREHOLDER INDEMNITORS
4.1 Organization, Good Standing and Corporate Records 7
4.2 Authorization of Agreement....................... 8
4.3 No Violations; Consents.......................... 8
4.4 Title to Assets Other than Leased Real Property.. 9
4.5 Leased Real Property............................. 9
4.6 Financial Statements............................. 10
4.7 Absence of Certain Developments.................. 11
4.8 Material Contracts............................... 13
4.9 Intangible Property.............................. 14
4.10 Tax and Other Returns and Reports............... 14
4.11 Employees and Employee Benefits................. 16
4.12 Litigation...................................... 17
4.13 Compliance with Law............................. 17
4.14 Receivables..................................... 17
4.15 Inventory....................................... 18
4.16 Assets Necessary to Conduct Business............ 18
4.17 Environmental Matters........................... 18
4.18 Brokers......................................... 18
4.19 Permits......................................... 19
4.20 Ownership; Subsidiaries......................... 19
4.21 No Undisclosed Liabilities...................... 20
(i)
<PAGE>
4.22 Insurance....................................... 20
4.23 Related Party Transactions...................... 20
4.24 Customers and Suppliers......................... 20
4.25 Banks........................................... 21
4.26 No Misrepresentation............................ 21
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
5.1 Organization and Good Standing................... 21
5.2 Authorization of Agreement....................... 21
5.3 No Violations; Consents.......................... 22
5.4 Litigation....................................... 23
5.5 Brokers.......................................... 23
ARTICLE VI
COVENANTS OF THE SELLER AND THE SHAREHOLDER INDEMNITORS
6.1 Cooperation...................................... 23
6.2 Access to the Shareholder Indemnitors' Documents;
Opportunity to Ask Questions..................... 24
6.3 Conduct of Business.............................. 24
6.4 Consents and Conditions; Assignment of Assets.... 27
6.5 Notices of Certain Events........................ 28
6.6 Non-Competition Agreement........................ 28
ARTICLE VII
COVENANTS OF THE PURCHASER
7.1 Reasonable Best Efforts.......................... 29
7.2 Consents and Conditions.......................... 29
ARTICLE VIII
COVENANTS RELATING TO EMPLOYMENT AND EMPLOYEE MATTERS
8.1 Offer of Employment.............................. 29
8.2 Health Plan Benefits............................. 30
ARTICLE IX
CONDITIONS PRECEDENT TO THE PURCHASERS' OBLIGATIONS
9.1 Representations, Warranties and Covenants........ 30
9.2 Deliveries by the Seller to the Purchasers....... 30
9.3 No Prohibition................................... 32
9.4 No Proceeding or Litigation...................... 32
9.5 Regulatory Approvals............................. 32
9.6 Due Diligence Investigation...................... 32
9.7 MLC Stockholder Approval......................... 32
9.8 MLC Board Approval............................... 32
(ii)
<PAGE>
ARTICLE X
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS
10.1 Representations, Warranties and Covenants....... 33
10.2 Deliveries by the Purchasers to the Seller...... 33
10.3 No Prohibition.................................. 33
10.4 No Proceeding or Litigation..................... 34
10.5 Regulatory Approvals............................ 34
ARTICLE XI
ADDITIONAL COVENANTS
11.1 Further Assurances.............................. 34
11.2 Public Announcements............................ 35
11.3 Joint Post-Closing Covenant of the Seller and the
Purchasers...................................... 35
11.4 Books and Records; Personnel.................... 36
ARTICLE XII
INDEMNIFICATION AND RELATED MATTERS
12.1 Indemnification................................. 37
12.2 Survival of Representations and Warranties...... 40
12.3 Indemnification Procedures...................... 40
12.4 Tax Matters..................................... 41
ARTICLE XIII
TERMINATION
13.1 Termination..................................... 43
13.2 Liabilities After Termination................... 43
ARTICLE XIV
MISCELLANEOUS
14.1 Certain Definitions............................. 43
14.2 Prorations...................................... 50
14.3 Waiver of Compliance with Bulk Transfer Laws.... 51
14.4 Intentionally left blank........................ 51
14.5 Entire Agreement................................ 51
14.6 Governing Law................................... 51
14.7 Transfer and Other Taxes........................ 51
14.8 Expenses........................................ 52
14.9 Table of Contents and Headings.................. 52
14.10 Notices........................................ 52
14.11 Severability................................... 53
14.12 Binding Effect; No Assignment.................. 53
14.13 Amendments..................................... 53
14.14 Counterparts................................... 54
(iii)
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SCHEDULES AND EXHIBITS
Schedule 1.1(d) -- Leased Real Property
Schedule 1.1(e) -- Patents and Patent Applications
Schedule 1.1(f) -- Intangible Assets
Schedule 1.1(i) -- Permits
Schedule 1.1(j) -- Included Contracts
Schedule 1.2(b) -- Excluded Contracts
Schedule 1.2(f) -- Excluded Assets
Schedule 4.1 -- Foreign Qualifications
Schedule 4.3 -- Consents
Schedule 4.6 -- Financial Statements
Schedule 4.7(d) -- Severance Agreement
Schedule 4.7(e) -- Contracts for Equipment
Schedule 4.7(k) -- Capital Expenditures
Schedule 4.7(m) -- Certain Distributions
Schedule 4.10 -- Tax Returns and Other Reports
Schedule 4.11(b)(i) -- Employee Benefit Plans
Schedule 4.11(b)(ii) -- Employment and Severance Contracts
Schedule 4.12 -- Litigation
Schedule 4.18 -- Brokers
Schedule 4.22 -- Insurance Policies
Schedule 4.23 -- Related Party Transactions
Schedule 4.24 -- Customers and Suppliers
Schedule 4.25 -- Banks
Schedule 6.3(b)(viii) -- Material Properties and Assets
Schedule 8.1 -- Certain Employees
Schedule 14.1 -- Purchase Money Liens
Exhibit A -- Form of Employment Agreement
Exhibit B -- Purchase Price Allocation
Exhibit C -- Form of Bill of Sale
Exhibit D -- Form of Opinion of Seller's Counsel
Exhibit E -- Form of Non-Competition Agreement
Exhibit F -- Form of Assumption Agreement
Exhibit G -- Form of Notes
(iv)
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ASSET PURCHASE AGREEMENT
------------------------
ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of April 4,
1997, by and among Milwaukee Land Company, a Delaware corporation ("MLC"), PG
Newco Corp., a Delaware corporation and a wholly-owned subsidiary of MLC ("PG
Newco," and together with MLC, the "Purchasers"), PG Design Electronics, Inc., a
Michigan corporation (the "Seller" or the "Company"), and each of the Seller's
shareholders listed on the signature pages hereto (individually, a "Shareholder
Indemnitor" and collectively the "Shareholder Indemnitors").
W I T N E S S E T H:
-------------------
WHEREAS, the Seller is engaged in the business of designing and
manufacturing printed circuit boards, printer PODS and related services and
products (the "Business"); and
WHEREAS, the Purchasers desire to purchase, and the Seller desires to
sell, all of the assets and properties of the Seller employed in the Business
and, as part of such purchase and sale, PG Newco is willing to assume certain
obligations and liabilities of the Business, subject, in each case, to the
exceptions, terms and conditions set forth herein; and
WHEREAS, certain capitalized terms used herein are defined in Section
14.1 hereof;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, and
upon the terms and subject to the conditions hereinafter set forth, the
Purchasers, the Seller and the Shareholder Indemnitors hereby agree as follows:
ARTICLE I
SALE AND PURCHASE OF ASSETS
1.1 ACQUISITION AND TRANSFER OF ASSETS. Upon the terms and subject
to the conditions hereinafter set forth, on the Closing Date (as defined in
Section 3.1 hereof) the Seller shall sell, assign, transfer, convey and deliver
to the Purchasers, and the Purchasers shall purchase, acquire and accept from
the Seller, free and clear of all Liens,
<PAGE>
other than Permitted Exceptions, and in such allocation as set forth on Exhibit
B hereof, all of the Seller's assets, properties, rights, contracts and claims,
including the assets, properties, rights, contracts and claims employed in, or
identified on the books and records of, the Business (except as otherwise set
forth in Section 1.2 hereof), of every kind and description, wherever located,
whether tangible or intangible, real, personal or mixed, as the same shall exist
on the Closing Date (collectively, the "Assets"). The Assets shall include,
without limitation, all of the Seller's right, title and interest in and to all
assets, properties, rights, contracts and claims described in the following
paragraphs (a) through (p):
(a) all furnishings, furniture, office equipment and supplies,
vehicles, spare parts, tools, dies, machinery and equipment and other tangible
personal property;
(b) all items of inventory, including, without limitation, raw
materials, work-in-process, finished goods, supplies, spare parts and samples
(collectively, the "Inventory");
(c) all accounts receivable and all notes receivable (whether short-
term or long-term) from third parties and all deposits with third parties,
together with all unpaid interest accrued thereon from the respective obligors
and all security or collateral therefor, including recoverable deposits
(collectively, the "Accounts Receivable");
(d) all of the leased real property set forth on Schedule 1.1(d)
hereto (collectively, the "Leased Real Property"), including all buildings and
improvements located thereon, all of the fixtures attached thereto, all prepaid
rent, security deposits and options to renew or purchase in connection therewith
and all Permits relating thereto;
(e)(i) all patents and patent applications owned by the Seller or
licensed to the Seller by third parties, including, without limitation, those
listed on Schedule 1.1(e) hereto, (ii) all research, development and
manufacturing processes, trade secrets, know-how, inventions (whether or not
patentable), designs, concepts, specifications, diagrams, drawings, schematics,
blueprints, documentation, plans, proposals, financial, marketing and business
data, business and marketing plans, customer and supplier lists, and
manufacturing, engineering and other
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technical information, whether owned by the Seller or licensed to the Seller by
third parties, (iii) all mask works (whether or not registered), whether
embodied in semiconductor chips, layout drawings, computer plots, masks,
magnetic tape or other physical media, and registration or application therefor,
and (iv) all notebooks, records, reports and data relating to, and any tangible
embodiment of, any of the foregoing (the assets referred to in clauses (i)
through (iv) are collectively referred to herein as the "Patent-Related
Assets");
(f) all trademarks, trade names, service marks and copyrights, all
applications and registrations for any of the foregoing, and all computer
systems, computer hardware, databases and software programs, including, without
limitation, databases and software programs developed by the Seller in the
operation of the Business, object codes, source codes and user manuals, in each
case, owned by the Seller or licensed to the Seller by third parties, listed on
Schedule 1.1(f) hereto (collectively, together with the Patent-Related Assets,
the "Intangible Assets");
(g) all catalogues, marketing brochures and materials and other
printed and written materials relating to the Business;
(h) all rights under or pursuant to all warranties, representations
and guarantees made by vendors, suppliers, manufacturers and contractors in
connection with the operation of the Business or affecting the Assets;
(i) all Permits held by the Seller including, without limitation,
those listed on Schedule 1.1(i) hereto;
(j) all Contracts including, without limitation, those listed on
Schedule 1.1(j) hereto;
(k) all cash, bank accounts, certificates of deposit, treasury bills,
notes and marketable securities;
(l) all deferred and prepaid charges, sums and fees, and all insurance
premiums;
(m) all claims, credits, causes of action or rights of set-off against
third parties;
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(n) all customer and vendor lists and all files, documents, books,
records and other data relating to the Business;
(o) all goodwill relating to the foregoing Assets; and
(p) to the extent assignable, the real and personal property tax
abatements awarded to Seller by Seller's local taxing authority. Seller makes
no warranties as to the assignability of the abatements. It shall be the
obligation of Purchasers to pursue, at their expense, the assignment of such
abatements. Seller will cooperate with Purchasers in pursuit of such
assignment.
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary
contained in Section 1.1 hereof, the Seller, the Shareholder Indemnitors and the
Purchasers expressly understand and agree that the Seller is not hereunder
selling, assigning, transferring, conveying or delivering to the Purchasers any
of the following assets, properties, rights, contracts and claims (collectively,
the "Excluded Assets"):
(a) pension or other funded employee benefit plan assets;
(b) Contracts that relate solely to the Excluded Assets or the
Excluded Liabilities;
(c) all prepaid charges, sums and fees pertaining to any of the
Excluded Assets or the Excluded Liabilities;
(d) except as otherwise set forth in Section 11.1(c) hereof, any of
Seller's right, title and interest under any Contracts, agreements, licenses,
Permits, exemptions, franchises, variances, waivers, consents, approvals or
other authorizations or arrangements that are not transferrable without consent
(unless such consent has been obtained);
(e) any claims for refunds or rebates of any previously paid taxes,
levies or duties and funds paid by Seller for corporate income, state and local
taxes accruing up to the Closing; and
(f) the other assets listed on Schedule 1.2(f) hereto.
4
<PAGE>
1.3 ASSUMED LIABILITIES. (a) Upon the terms and subject to the
conditions hereinafter set forth, effective as of the Closing, PG Newco shall
assume and be liable for the liabilities and obligations of the Business
reflected on the Closing Balance Sheet to the extent such liabilities and
obligations so reflected (i) are of a type which were reflected on the Initial
Balance Sheet and (ii) were incurred in the ordinary course of business since
the date of the Initial Balance Sheet, consistent with past practice in
accordance with Section 6.3 hereof, and (iii) have been approved by PG Newco,
but excluding any liability for the payment of Taxes (collectively, the "Assumed
Liabilities").
(b) Notwithstanding any provisions in this Agreement or any other
writing to the contrary, PG Newco is assuming only the Assumed Liabilities and
is not assuming any other liability or obligation of the Seller (or any
predecessor owner of all or part of the Business) of whatever nature whether in
existence on the Closing Date or arising thereafter. All such other liabilities
and obligations shall be retained by and remain obligations and liabilities of
the Seller, all such liabilities and obligations not being assumed being herein
referred to as the "Excluded Liabilities".
ARTICLE II
PURCHASE PRICE
2.1 PURCHASE PRICE AND PAYMENT. In consideration of the sale of the
Assets by the Seller to the Purchasers, PG Newco shall, on the Closing Date,
deliver to the Seller (i) $12,000,000 plus (ii) an amount in cash sufficient to
pay in full all of the outstanding balance of the Seller's bank debt (currently
estimated to be $1,400,000), as of the Closing Date, but in no event more than $
2,500,000, all in U.S. dollars by wire transfer of immediately available funds,
in the case of the payment referred to in clause (i), to the account or accounts
designated by the Seller and, in the case of the payment referred to in clause
(ii), to the account designated by the Seller's bank lenders (the "Cash
Consideration"), and MLC shall, on the Closing Date, deliver to the Seller two
promissory notes signed by MLC, each in the aggregate principal amount of
$1,500,000 (the "Notes"), which Notes shall be substantially in the form
attached hereto as Exhibit G. Payment on the Notes is subject to certain terms
and conditions, all as set forth therein. The
5
<PAGE>
Notes plus the Cash Consideration shall be referred to herein as the "Purchase
Price."
2.2 ALLOCATION OF PURCHASE PRICE. The Purchasers and the Seller
hereby agree that the Purchase Price of the Assets plus the Assumed Liabilities
will be allocated as set forth on Exhibit B hereto. Subject to the requirements
of any applicable tax law, all tax returns (including amended returns and claims
for refunds) and information reports filed by the Purchasers, the Seller and the
Shareholder Indemnitors shall be prepared consistently with such allocation and
such parties shall use their reasonable best efforts to sustain such allocation
in any subsequent tax audit or tax dispute. In the event of any adjustment to
the Purchase Price hereunder, the Purchasers and the Seller agree to adjust such
allocation to reflect such adjustment and the Purchasers, the Seller and the
Shareholder Indemnitors hereby agree to file consistently any tax returns and
reports required as a result of such adjustment. Each of the parties agrees to
cooperate with the other party in the preparation and filing of any tax returns
required under any applicable law.
ARTICLE III
THE CLOSING
3.1 CLOSING DATE. The Closing shall take place at the offices of
Weil, Gotshal & Manges LLP, located at 767 Fifth Avenue, New York, New York
10153, on the third business day following the date that the conditions to
Closing set forth herein have been satisfied or waived, or at such other place
and at such other time and date as may be mutually agreed upon by the Purchasers
and the Seller. The date of the Closing is referred to in this Agreement as the
"Closing Date."
3.2 PROCEEDINGS AT CLOSING. All proceedings to be taken and all
documents to be executed and delivered by the Seller in connection with the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory in form and substance to the Purchasers and their counsel. All
proceedings to be taken and all documents to be executed and delivered by the
Purchasers in connection with the consummation of the transactions contemplated
hereby shall be reasonably satisfactory in form and substance to the Seller and
its counsel. All
6
<PAGE>
proceedings to be taken and all documents to be executed and delivered by all
parties at the Closing shall be deemed to have been taken, executed and
delivered simultaneously, and no proceedings shall be deemed taken nor any
documents executed or delivered until all have been taken, executed and
delivered.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE
SHAREHOLDER INDEMNITORS
The Seller and each Shareholder Indemnitor, hereby represents and
warrants to the Purchasers as follows:
4.1 ORGANIZATION, GOOD STANDING AND CORPORATE RECORDS. (a) The
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of Michigan and has all requisite corporate power
and authority to carry on its business as it is now being conducted. The Seller
is duly qualified or authorized to do business as a foreign corporation and is
in good standing under the laws of (a) each jurisdiction in which it owns or
leases real property and (b) each other jurisdiction in which the conduct of its
business or the ownership of its properties requires such qualification or
authorization. Schedule 4.1 sets forth a true, correct and complete list of
each jurisdiction in which the Seller is qualified or authorized to do business
as a foreign corporation.
(b) The Seller has delivered to the Purchasers true, correct and
complete copies of the certificate of incorporation (certified by the Secretary
of State or other appropriate official of the applicable jurisdiction of
organization) and by-laws (certified by the secretary, assistant secretary or
other appropriate officer) or comparable organizational documents of the
Company.
(c) The minute books of the Company previously made available to the
Purchasers contain complete and accurate records of all meetings and accurately
reflect all other corporate action of the stockholders and board of directors
(including committees thereof) of the Company. The stock certificate books and
stock transfer ledgers of the Company previously made available to the
Purchasers are true, correct and complete.
7
<PAGE>
4.2 AUTHORIZATION OF AGREEMENT. The Seller and the Shareholder
Indemnitors have full power and authority to execute and deliver this Agreement
and each other agreement, document, instrument or certificate contemplated by
this Agreement or to be executed by them in connection with the consummation of
the transactions contemplated by this Agreement (all such other agreements,
documents, instruments and certificates required to be executed by the Seller
and the Shareholder Indemnitors being hereinafter referred to, collectively, as
the "Seller Documents"), and to perform fully their obligations hereunder and
thereunder. The execution, delivery and performance by the Seller of this
Agreement and each of the Seller Documents has been duly authorized by all
necessary corporate action on the part of the Seller, including the approval of
the company's shareholders. This Agreement has been, and each of the Seller
Documents will be at or prior to the Closing, duly executed and delivered by the
Seller and the Shareholder Indemnitors, and (assuming the due authorization,
execution and delivery by the other parties hereto and thereto) this Agreement
constitutes, and the Seller Documents when so executed and delivered will
constitute, legal, valid and binding obligations of the Seller and the
Shareholder Indemnitors, enforceable against them in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
4.3 NO VIOLATIONS; CONSENTS. None of the execution and delivery by
the Seller and the Shareholder Indemnitors of this Agreement and the Seller
Documents, or the consummation of the transactions contemplated hereby or
thereby, or compliance by them with any of the provisions hereof or thereof will
(a) conflict with, or result in the breach of, any provision of the articles of
incorporation or by-laws of the Seller,, (b) conflict with, violate, result in
the breach or termination of, or constitute a default or give rise to any
"takeback" right or right of termination or acceleration or right to increase
the obligations or otherwise modify the terms under any Contract or Order to
which the Seller is a party or by which it or any of its properties or assets is
bound or subject, (c) constitute a violation of any Law applicable to the Seller
or the Shareholder Indemnitors, or (d) result in the creation of any Lien (other
than any Lien in favor of the Purchasers)
8
<PAGE>
upon the Assets. Except as set forth on Schedule 4.3, no consent, waiver,
approval, Order, Permit or authorization of, or declaration or filing with, or
notification to, any Person, including, without limitation, any Governmental
Body, is required on the part of the Seller or the Shareholder Indemnitors in
connection with the execution, delivery and performance of this Agreement or the
Seller Documents, or the compliance by the Seller or the Shareholder Indemnitors
with any of the provisions hereof or thereof.
4.4 TITLE TO ASSETS OTHER THAN LEASED REAL PROPERTY. (a) The Seller
owns and has good and valid, marketable title to or, in the case of leased
properties, a valid leasehold interest in, all of the Assets other than the
Leased Real Property, including all of such Assets reflected on the Initial
Balance Sheet, except Assets disposed of in the ordinary course of business
after November 30, 1996, free and clear of all Liens, other than Permitted
Exceptions.
(b) Upon consummation of the transactions contemplated hereby, the
Purchasers will have acquired, on and as of the Closing Date, good and valid
title in and to, or a valid leasehold interest in, the Assets other than the
Leased Real Property, free and clear of all Liens, other than Permitted
Exceptions.
4.5 LEASED REAL PROPERTY. (a) The Seller does not own or hold any
interest in real property other than its leasehold interests in the Leased Real
Property, as described on Schedule 1.1(d).
(b) The Seller has a valid leasehold interest in all of the Leased
Real Property free and clear of all Liens, other than Permitted Exceptions. All
leases in respect of the Leased Real Property are valid, binding and enforceable
in accordance with their respective terms, and there does not exist under any
such lease any default on the part of the Seller or any event which with notice
or lapse of time or both would constitute such a default. No such lease has
been modified or amended in writing except as evidenced by the instruments
attached to Schedule 1.1(d) hereof. The Seller has not received from any party
to any such lease any written notice of, or written claim with respect to, any
breach or default thereof. The Seller has not granted any sublease, license or
other agreement granting to any person or entity any right to the use or
occupancy of the Leased
9
<PAGE>
Real Property or any portion thereof, or the right to purchase such Leased Real
Property or any portion thereof, and has no knowledge of any such grant by any
other Person.
(c) The plants, buildings, structures and equipment included in the
Leased Real Property are in good operating condition, free of any material
defects or deferred maintenance, and are substantially suited for their present
uses (giving due account to the age and length of use of same).
(d) No violation of any law, regulation or ordinance (including laws,
regulations or ordinances relating to zoning, city planning or similar matters)
relating to the Leased Real Property currently exists, except for violations
which would not have a Material Adverse Effect. Seller has not received notice
of any contemplated governmental actions which might reasonably be expected to
materially detract from the value of any Leased Real Property, materially
interfere with any present use of any Leased Real Property or materially
adversely affect the marketability of any Leased Real Property. There is no
action pending or, to Seller's knowledge, threatened to initiate a condemnation
in respect of any Leased Real Property.
(e) Upon consummation of the transactions contemplated hereby,
Purchasers will have acquired, on and as of the Closing Date, a valid leasehold
interest in the Leased Real Property, free and clear of all Liens, other than
Permitted Exceptions.
4.6 FINANCIAL STATEMENTS. As set forth on Schedule 4.6, the Seller
has delivered to the Purchasers copies of (i) the unaudited balance sheets of
the Company as at June 30, 1995 and June 30, 1996, and the related unaudited
statements of income and of cash flows of the Company for the years then ended
and (ii) the unaudited balance sheets of the Company as at November 30, 1996 and
December 31, 1996 and the related statements of income and cash flows of the
Company for the one month period then ended (such unaudited statements,
including the related notes and schedules thereto, are referred to herein as the
"Financial Statements"). In addition, Purchasers are in possession of an
audited balance sheet and related statement of income and retained earnings
prepared by Ernst & Young LLP, retained by Purchasers for purposes of conducting
such
10
<PAGE>
audit. Each of the Financial Statements is complete and correct in all material
respects, has been prepared in accordance with GAAP (subject to normal year-end
adjustments) and in conformity with the practices consistently applied by the
Company and consistent with the books and records of the Company, without
modification of the accounting principles used in the preparation thereof and
presents (or will present) fairly the financial position, results of operations
and cash flows of the Company as at the dates and for the periods indicated.
4.7 ABSENCE OF CERTAIN DEVELOPMENTS. Since November 30, 1996:
(a) The Seller has operated the Business in the ordinary course
consistent with past practice;
(b) There has not been any Material Adverse Change;
(c) There has not been any damage, destruction or loss, whether or not
covered by insurance, with respect to the Assets;
(d) Except as set forth on Schedule 4.7(d), the Seller has not entered
into any employment, deferred compensation, severance or similar agreement (nor
amended any such existing agreement) or agreed to increase the compensation
payable or to become payable by it to any of its directors, officers, employees,
agents or representatives or agreed to increase the coverage or benefits
available under any severance pay, termination pay, vacation pay, company
awards, salary continuation or disability, sick leave, deferred compensation,
bonus or other incentive compensation, insurance, pension or other employee
benefit plan, payment or arrangement made to, for or with such directors,
officers, employees, agents or representatives (other than normal increases in
the ordinary course of business consistent with past practice and that in the
aggregate have not resulted in a material increase in the benefits or
compensation expense of the Seller);
(e) Except as set forth on Schedule 4.7(e), the Seller has not entered
into any transaction or Contract (other than purchase orders with customers of
the Seller, entered into in the ordinary course of business) having, in the
aggregate, a value or requiring payments in excess of $10,000;
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<PAGE>
(f) The Seller has not failed to pay and discharge current liabilities
within 90 days, except where disputed in good faith by appropriate proceedings
(if such proceedings are necessary);
(g) The Seller has not made any loans, advances or capital
contributions to, or investments in, any Person, other than loans or advances to
employees in the ordinary course of business of the Seller and which, in the
aggregate, do not exceed $10,000;
(h) Except as set forth on Schedule 4.7(e), the Seller has not
mortgaged, pledged or subjected to any Lien any of the Assets, or acquired or
sold, assigned, transferred, conveyed, leased or otherwise disposed of any
property, right or asset or any interest therein that otherwise would have been
included as part of the Assets, except for (i) Permitted Exceptions, and (ii)
any such properties, rights or assets or interests therein acquired or sold,
assigned, transferred, conveyed, leased or otherwise disposed of in the ordinary
course of business consistent with past practice of the Seller and which do not,
in the aggregate, have a value in excess of $10,000;
(i) The Seller has not amended, canceled, terminated, relinquished,
waived or released any Contract or right that otherwise would have been included
as part of the Assets, except for any such Contract that has terminated in
accordance with its terms due solely to the lapse of time;
(j) The Seller has not suffered any Extraordinary Loss or
Extraordinary Losses (as defined in Opinion No. 30 of the Accounting Principles
Board of the American Institute of Certified Public Accountants and any
amendments thereto);
(k) Except as set forth on Schedules 4.7(e) and 4.7(k) hereto, the
Seller has not made or committed to make any capital expenditures or capital
additions or betterments to any of the Business in excess of $35,000
individually or $175,000 in the aggregate;
(l) The Seller has not made any change in any method of accounting or
accounting practice with respect to the Business except for any such change
after the date hereof required by reason of a concurrent change in GAAP;
(m) Except as set forth on Schedule 4.7(m) hereto, the Seller has not
paid any dividend or made any
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distribution or other payment, in cash or otherwise, to the Shareholder
Indemnitors; and
(n) The Seller has not agreed to do any of the foregoing.
4.8 MATERIAL CONTRACTS. (a) Schedule 1.1(j) hereto accurately
identifies each Contract with respect to the Assets or the Business to which the
Seller is a party, which is being assigned to the Purchasers hereunder and which
involves the payment to or from the Seller of amounts in excess of $10,000 per
year or which is otherwise material to the Business (collectively, the "Material
Contracts").
(b) All of the Material Contracts are valid, binding and enforceable
in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity), and there does not exist under any Material
Contract any default on the part of the Seller or any event which with notice or
lapse of time or both would constitute such a default on the part of the Seller.
The Seller has not received from any other party to any Material Contract any
written notice of, and Seller has no actual knowledge of, any default on the
part of such other party or any event which with notice or lapse of time or both
would constitute such a default on the part of such other party. No Material
Contract has been modified or amended in writing except as evidenced by the
instruments attached to Schedule 1.1(j) hereto.
(c) Seller has not received any notice or communication from any party
to a Material Contract relating to such party's intent to modify, terminate or
fail to renew the arrangements and relationships set forth therein.
(d) Except as set forth on Schedule 1.1(j) hereto, Seller is not a
party to or subject to:
(i) any agency, dealer, sales representative, resale or similar
agreement;
(ii) any agreement, contract or commitment that substantially
limits the freedom of Seller to compete in any line of business or with any
Person or
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in any area, or to own, operate, sell, transfer, pledge or otherwise
dispose of or encumber any Asset or which would so limit the freedom of the
Purchasers after the Closing Date; or
(iii) any agreement, contract or commitment between the
Seller and any affiliate of the Seller.
(e) From and after the Closing, the Purchasers shall enjoy all of the
benefits of each of the Material Contracts without the necessity of any consent,
authorization or agreement from or with any Person.
4.9 INTANGIBLE PROPERTY. Schedules 1.1(e) and 1.1(f) hereto set
forth a complete and accurate list of all patents, trademarks, trade names,
service marks and copyrights included in the Intangible Assets as well as a list
of all registrations thereof and pending applications therefor. Except as set
forth in Schedules 1.1(e) and 1.1(f), each of the Intangible Assets is owned by
the Seller, and upon the consummation of the transaction contemplated herein
will be owned by the Purchaser, free and clear of any and all Liens (other than
Permitted Exceptions) and no other Person has any claim of ownership or rights
with respect thereto. The Seller has adequate licenses or other valid rights to
use all of the Intangible Assets which it does not own and which are material to
the conduct of the Business as presently conducted. The Seller's use of the
Intangible Assets does not conflict with, infringe upon, violate or interfere
with any intellectual property rights, including, without limitation, any
patent, copyright, trademark, trade secret, moral rights, mask works rights, or
other proprietary rights of any other Person. Except as set forth in Schedules
1.1(e) and 1.1(f), Seller has not granted to any Person any license or right,
whether written or oral, in or to the Intangible Assets. No claims have been
asserted or threatened by Seller against any Person, or by any Person against
Seller, challenging the use of, or the validity or enforceability of any
Intangible Assets, and Seller is not aware of any facts that would serve as a
basis for any such claim.
4.10 TAX AND OTHER RETURNS AND REPORTS. (a) Except as set forth in
Schedule 4.10: (1) all federal Tax Returns required to be filed by Seller have
been filed on a timely basis with the appropriate governmental agencies in all
jurisdictions in which such Tax Returns are required to be filed and all Taxes
shown as due thereon have been timely
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paid; (2) all Taxes due from Seller (A) have been fully and timely paid or (B)
adequately provided for on the Financial Statements and are being contested in
good faith by appropriate proceedings and are not material, individually or in
the aggregate, to Seller; (3) Seller will pay in full all Taxes which are due
and payable in respect of any taxable period ending on or prior to the date of
the Closing whether or not shown on any Tax Return; (4) no claim has been made
by an authority in a jurisdiction where Seller does not file Tax Returns that
may be subject to taxation by that jurisdiction; (5) Seller has withheld all
Taxes required to have been withheld under all applicable statutes and
regulations in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party and such
withholdings have either been paid to the appropriate governmental agencies as
and when due in accordance with Law or set aside in accounts for such purpose;
and (6) no waivers of statutes of limitation have been given by or requested of
Seller in connection with its Tax Returns or with respect to any Taxes payable
by it. Schedule 4.10 lists all Tax Returns of, or covering, Seller which have
been examined or which are currently under examination by the Internal Revenue
Service or by other appropriate taxing authorities, or with respect to which the
applicable statute of limitations (including all extensions and tolling periods)
has not yet run and, except as and to the extent shown on such Schedule or
provided for on the Financial Statements, all deficiencies asserted or
assessments made as a result of such examinations have been fully paid, and
there are no other unpaid deficiencies asserted or assessments made by any
taxing authority against, Seller. Seller has delivered to Purchasers correct
and complete copies of all Tax Returns of Seller or its respective operations or
assets filed since June 30, 1994, all examination reports relating to Tax
Returns filed by Seller, and statements of deficiencies assessed against or
agreed to by Seller in respect of any Taxes of Seller.
(b) Except as set forth in Schedule 4.10, none of the Assets of Seller
is (1) "tax-exempt use property" within the meaning of Section 168(h)(1) of the
Code, (2) used predominantly outside the United States within the meaning of
Prop. Reg. (S) 1.168-2(g)(5), (3) "tax-exempt bond financed property" within the
meaning of Section 168(g)(5) of the Code, or (4) "limited use property" as that
term is used in Rev. Proc. 76-30. Following the Closing, none of the Assets of
Seller will be property that Purchasers will be required to treat as being owned
by any other Person pursuant to the
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provisions of Section 168(f)(8) of the 1954 Code, as amended and in effect
immediately before the enactment of the Tax Reform Act of 1986.
(c) Seller is not a foreign person within the meaning of Section 1445
of the Code; Seller is not a party to any Tax allocation or sharing agreement or
is or has been a member of an affiliated group filing a consolidated federal
income Tax Return or a combined, consolidated or unitary group for state or
local tax purposes.
(d) With respect to Leased Assets placed in service on or before the
date hereof, and except as a result of acts, errors or omissions, including
breaches of representation, by the lessee thereunder, each of the Lease
Contracts (excluding property sold on installment sales contracts) will be
treated as a "true lease" for federal income tax purposes.
(e) The transactions contemplated by this Agreement are not subject to
tax withholding pursuant to the provisions of Section 3406 or Subchapter A of
Chapter 3 of the Code or any other provision of applicable law.
(f) There are no liens as a result of any unpaid Taxes encumbering any
of the Assets.
4.11 EMPLOYEES AND EMPLOYEE BENEFITS.
(a)(i) The Seller is not a party to any collective bargaining
agreement applicable to the Employees; (ii) none of the Employees is represented
by any labor organization, and (iii) there is no labor strike, work stoppage or
slowdown pending against the Seller and no pending lockout by the Seller, in
each case, with respect to the Business.
(b) Schedule 4.11(b)(i) hereto lists all employee benefit plans as
defined in Section 3(3) of ERISA of the Seller covering any employee or former
employee of the Business ("Employee Benefit Plans"). Schedule 4.11(b)(ii)
hereto lists all employment severance contracts, consulting agreements, and all
bonus or other incentive compensation, deferred compensation, salary
continuation during any absence from active employment for disability or other
reasons, severance, sick days, stock award, stock option, stock purchase,
tuition assistance, and vacation pay arrangements, all plans and arrangements
providing for termination or similar coverage and all written compensation
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policies and practices maintained by the Seller covering any employee or former
employee of the Business and that is not an Employee Benefit Plan ("Benefit
Arrangements").
(c) Each Employee Benefit Plan is in compliance with the applicable
requirements of ERISA and the Code.
4.12 LITIGATION. Except as set forth on Schedule 4.12, there is no
Legal Proceeding pending or, to the knowledge of the Seller, threatened (a)
against the Seller in connection with the operation of the Business or in
respect of any of the Assets; (b) that seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated by this Agreement;
or (c) that questions the validity of this Agreement, any of the Seller
Documents or any action taken or to be taken by the Seller in connection with
the consummation of the transactions contemplated hereby or thereby.
4.13 COMPLIANCE WITH LAW. (a) The Business is currently operating
in compliance with all applicable Laws and Orders of Governmental Bodies. The
Seller has neither received, nor knows of the issuance of, any notice of any
violation or alleged violation of any applicable Laws and Orders of Governmental
Bodies.
(b) To Seller's knowledge, Seller is not under investigation with
respect to any violation of any Law, Order or judgment entered by any court,
arbitrator or Governmental Body, applicable to the Assets or the conduct of the
Business.
4.14 RECEIVABLES. All of the Accounts Receivable reflected on the
Initial Balance Sheet have arisen from bona fide transactions in the ordinary
course of business consistent with past practice and are properly reflected
therein in accordance with GAAP. All of the Accounts Receivable generated since
the date of the Initial Balance Sheet have arisen from bona fide transactions in
the ordinary course of business consistent with past practice. To the Seller's
knowledge, all of the Accounts Receivable are collectible in the ordinary course
of business consistent with past practice; provided, however, that nothing in
-------- -------
this Section 4.14 shall be construed as a guaranty by the Seller or the
Shareholder Indemnitors that such Accounts Receivable shall be collected in
full.
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4.15 INVENTORY. The Inventory of the Business as of the date hereof
is of a quality sufficient for its use in the ordinary course of the Business
consistent with past practice and is owned free and clear of all Liens, other
than Permitted Exceptions.
4.16 ASSETS NECESSARY TO CONDUCT BUSINESS. The Assets comprise all
of the assets used in the operation of the Business as presently being
conducted, other than the Excluded Assets.
4.17 ENVIRONMENTAL MATTERS. (a) There are no pending or, to the
best of the Seller's knowledge, threatened claims, suits or proceedings arising
out of or related to any noncompliance with any environmental law in connection
with the Business or the ownership or use of the Assets, including, without
limitation, statutes related to air quality, water quality, solid waste
management, hazardous or toxic substances or protection of health or the
environment, including, but not limited to, the Federal Insecticide, Fungicide
and Rodenticide Act (7 U.S.C. 136 ET SEQ. as amended), the Federal Water
Pollution Control Act (33 U.S.C. 1251 ET SEQ. as amended), the Resource
Conservation and Recovery Act (42 U.S.C. 6901 ET SEQ. as amended), the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
(42 U.S.C. 9601 ET SEQ. as amended), the Clean Air Act (42 U.S.C. 7401 ET SEQ.
as amended), the Toxic Substances Control Act (15 U.S.C. 2601 ET SEQ. as
amended), and any similar state or local laws, rules and regulations
(collectively, "Environmental Laws"). The Seller has received all Permits
necessary for the operation of the Business, including all air, water and waste
Permits and Permits for emission and/or disposal of solid, liquid and gaseous
materials from manufacturing operations, and the Business is operating in
conformance with such Permits. The Seller has kept all records and made all
filings required by applicable Law with respect to emissions into the
environment (including solids, liquids and gases) and the proper disposal of
such materials (including solid waste materials).
(b) The Seller is not in violation of any Environmental Laws with
respect to the Assets or the conduct of the Business.
4.18 BROKERS. Except as described on Schedule 4.18 hereof, the fees
and expenses of which Person shall be borne solely by the Seller, no other
Person has acted
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directly or indirectly as a broker, finder or financial advisor for the Seller
or any of the Shareholder Indemnitors in connection with the negotiations
relating to or the transactions contemplated by this Agreement, and no other
Person is entitled to any fee, commission or like payment in respect thereof
based in any way on any agreement, arrangement or understanding made by or on
behalf of the Seller or any of the Shareholder Indemnitors.
4.19 PERMITS. Schedule 1.1(i) is a complete list of all Permits
issued by any Government Body in respect of the Business. Such Permits
constitute all licenses, franchises, permits or similar authorizations required
by any Law for the Seller to own and conduct the Business, and there are no
outstanding violations of any such Permits, and no action pending or, to the
knowledge of Seller threatened, to cancel, modify or not renew any such Permit.
4.20 OWNERSHIP; SUBSIDIARIES. (a) The authorized capital stock of
the Seller consists of [50,000] shares of common stock, par value $1.00 per
share, of which 1,200 shares are issued and outstanding and none of which are
held by the Seller as treasury stock (the "Seller Shares"). All of the Seller
Shares are owned, beneficially and of record and free and clear of any Liens, by
each of the Shareholder Indemnitors. The Seller Shares were duly authorized for
issuance, are validly issued, fully paid and non-assessable, and constitute 100%
of the issued and outstanding shares of capital stock of the Seller. There is
no existing option, warrant, call, right, commitment or other agreement of any
character to which the Seller or any Shareholder Indemnitor is a party
requiring, and there are no securities of the Seller outstanding which upon
conversion or exchange would require, the issuance, sale or transfer of any
additional shares of capital stock or other securities of the Seller or other
securities convertible into, exchangeable for or evidencing the right to
subscribe for or purchase shares of capital stock or other securities of the
Seller. Neither the Seller nor any of the Shareholder Indemnitors is a party to
any voting trust or other voting agreement with respect to any of the Seller
Shares or to any agreement relating to the issuance, sale, redemption, transfer
or other disposition of the capital stock or other securities of the Seller.
(b) The Seller has no subsidiaries.
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4.21 NO UNDISCLOSED LIABILITIES. Except as set forth on Exhibit
4.7(e), the Company has no indebtedness, obligations or liabilities of any kind
(whether accrued, absolute, contingent or otherwise, and whether due or to
become due) other than indebtedness, obligations or liabilities, reflected in,
reserved against or otherwise described in the Initial Balance Sheet or the
notes thereto or incurred in the ordinary course of business consistent with
past practice since November 30, 1996.
4.22 INSURANCE. Schedule 4.22 sets forth a complete and accurate
list of all policies of insurance of any kind or nature covering the Company or
any of its employees, properties or assets, including, without limitation,
policies of life, disability, fire, theft, workers compensation, employee
fidelity and other casualty and liability insurance. All such policies are in
full force and effect, and, to the Seller's knowledge, the Company is not in
default of any provision thereof, except for such defaults as would not,
individually or in the aggregate, have a Material Adverse Effect.
4.23 RELATED PARTY TRANSACTIONS. Except as set forth on Schedule
4.23, none of the Shareholder Indemnitors nor any Affiliate of any Shareholder
Indemnitor or of the Company has borrowed any moneys from or has outstanding any
indebtedness or other similar obligations to the Company. Except as set forth
in Schedule 4.23, none of the Shareholder Indemnitors nor any Affiliate of any
Shareholder Indemnitor or of the Company nor any officer or employee of any of
them (i) owns any direct or indirect interest of any kind in, or controls or is
a director, officer, employee or partner of, or consultant to, or lender to or
borrower from or has the right to participate in the profits of, any Person
which is (A) a competitor, supplier, customer, landlord, tenant, creditor or
debtor of the Company, (B) engaged in a business related to the business of the
Company, or (C) a participant in any transaction to which the Company is a party
or (ii) is a party to any Contract with the Company.
4.24 CUSTOMERS AND SUPPLIERS. Schedule 4.24 sets forth a list of the
ten (10) largest customers and the ten (10) largest suppliers of the Company, as
measured by the dollar amount of purchases therefrom or thereby, during each of
the fiscal years ended June 30, 1995 and June 30, 1996, showing the approximate
total sales by the Company to each such customer and the approximate total
purchases by the Company from each such supplier, during such period. Since
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November 30, 1996, there has not been any material adverse change in the
business relationship of the Company with any customer or supplier listed on
Schedule 4.24.
4.25 BANKS. Schedule 4.25 contains a complete and correct list of
the names and locations of all banks in which Company has accounts or safe
deposit boxes and the names of all persons authorized to draw thereon or to have
access thereto. Except as set forth on Schedule 4.25, no person holds a power
of attorney to act on behalf of the Company.
4.26 NO MISREPRESENTATION. No representation or warranty of the
Seller or any Shareholder Indemnitor contained in this Agreement or in any
schedule hereto or in any certificate or other instrument furnished by the
Seller or any Shareholder Indemnitor to the Purchasers pursuant to the terms
hereof, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby represents and warrants to the Seller and the
Shareholder Indemnitors that:
5.1 ORGANIZATION AND GOOD STANDING. Such Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to carry
on its business as it is now being conducted.
5.2 AUTHORIZATION OF AGREEMENT. Such Purchaser has full corporate
power and authority to execute and deliver this Agreement and each other
agreement, document, instrument or certificate contemplated by this Agreement or
to be executed by such Purchaser in connection with the consummation of the
transactions contemplated by this Agreement (all such other agreements,
documents, instruments and certificates required to be executed by the
Purchasers being hereinafter referred to, collectively, as the "Purchaser
Documents") and, subject to receipt of the approval of the stockholders and the
Board of Directors of
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MLC, to perform fully its obligations hereunder and thereunder. The execution,
delivery and performance by such Purchaser of this Agreement and each Purchaser
Document has been duly authorized by all necessary action on the part of such
Purchaser. This Agreement has been, and the Purchaser Documents will be at or
prior to the Closing, duly executed and delivered by such Purchaser and
(assuming the due authorization, execution and delivery by the other parties
hereto and thereto) this Agreement constitutes, and the Purchaser Documents when
so executed and delivered will constitute, legal, valid and binding obligations
of such Purchaser, enforceable against such Purchaser in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
5.3 NO VIOLATIONS; CONSENTS. None of the execution and delivery by
such Purchaser of this Agreement and the Purchaser Documents, or the
consummation of the transactions contemplated hereby or thereby, or compliance
by such Purchaser with any of the provisions hereof or thereof will (a) conflict
with, or result in the breach of, any provision of the certificate of
incorporation or by-laws of such Purchaser; (b) conflict with, violate, result
in the breach or termination of, or constitute a default or give rise to any
right of termination or acceleration or right to increase the obligations or
otherwise modify the terms under any Contract or Order to which such Purchaser
is a party or by which it or any of its properties or assets is bound or
subject; or (c) subject to receipt of the approval of the stockholders and the
Board of Directors of MLC, constitute a violation of any Law applicable to such
Purchaser. Subject to receipt of the approval of the stockholders and the Board
of Directors of MLC, no consent, waiver, approval, Order, Permit or
authorization of, or declaration or filing with, or notification to, any Person,
including, without limitation, any Governmental Body, is required on the part of
such Purchaser in connection with the execution and delivery of this Agreement
or the Purchaser Documents, or the compliance by such Purchaser with any of the
provisions hereof or thereof, except, in each case, for violations, conflicts,
breaches or defaults which individually or in the aggregate would not materially
hinder or impair the transactions contemplated hereby.
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5.4 LITIGATION. There is no Legal Proceeding pending or, to the
knowledge of such Purchaser, threatened, that seeks to enjoin or obtain damages
in respect of the consummation of the transactions contemplated by this
Agreement or that questions the validity of this Agreement, the Purchaser
Documents or any action taken or to be taken by such Purchaser in connection
with the consummation of the transactions contemplated hereby or thereby.
5.5 BROKERS. No Person (other than the officers and directors of
such Purchaser) has acted directly or indirectly as a broker, finder or
financial advisor for such Purchaser in connection with the negotiations
relating to or the transactions contemplated by this Agreement and no Person is
entitled to any fee or commission or like payment (other than from such
Purchaser) in respect thereof based in any way on agreements, arrangements or
understandings made by or on behalf of such Purchaser.
ARTICLE VI
COVENANTS OF THE SELLER AND THE SHAREHOLDER INDEMNITORS
From and after the date hereof and until the Closing, the Seller and
the Shareholder Indemnitors hereby covenant and agree with the Purchasers that:
6.1 COOPERATION. (a) The Seller and the Shareholder Indemnitors
shall use their reasonable best efforts to cause the consummation of the
transactions contemplated hereby in accordance with the terms and conditions
hereof.
(b) At the request of either Purchaser on a case-by-case basis, the
Seller shall execute and deliver instruments sufficient to constitute and
appoint, effective as of the Closing Date, such Purchaser and its successors and
assigns as the true and lawful attorney of Seller with full power of
substitution in the name of such Purchaser or in the name of Seller, but for the
benefit of such Purchaser (i) to collect for the account of such Purchaser any
Assets specified in such Purchaser's request and (ii) to institute and prosecute
all proceedings which such Purchaser may in its sole discretion deem proper in
order to assert or enforce any right, title or interest in, to or under the
Assets, and to defend or compromise any and all actions,
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suits or proceedings in respect of such Assets or the Assumed Liabilities.
6.2 ACCESS TO THE SHAREHOLDER INDEMNITORS' DOCUMENTS; OPPORTUNITY TO
ASK QUESTIONS. The Seller and the Shareholder Indemnitors shall provide either
Purchaser with such information as such Purchaser from time to time reasonably
may request with respect to the Business, and shall permit such Purchaser and
any of the directors, officers, employees, counsel, representatives, accountants
and auditors (collectively, the "Purchaser Representatives") reasonable access,
during normal business hours and upon reasonable prior notice, to the
properties, corporate records and books of accounts of the Business, as such
Purchaser from time to time reasonably may request. No investigation pursuant
to this Section shall affect any representation or warranty given by the Seller
and the Shareholder Indemnitors in this Agreement.
6.3 CONDUCT OF BUSINESS.
(a) Except as otherwise expressly contemplated by this Agreement or
with the prior written consent of both Purchasers, the Seller and the
Shareholder Indemnitors shall, and shall cause the Company to:
(i) conduct the business of the Company only in the ordinary course
consistent with past practice;
(ii) use their best efforts to (A) preserve its present business
operations, organization (including, without limitation, management and the
sales force) and goodwill of the Company and (B) preserve their present
relationship with Persons having business dealings with the Company;
(iii) maintain (A) all of the assets and properties of the Company in
their current condition, ordinary wear and tear excepted and (B) insurance
upon all of the properties and assets of the Company in such amounts and of
such kinds comparable to that in effect on the date of this Agreement;
(iv) (A) maintain the books, accounts and records of the Company in
the ordinary course of business consistent with past practices, (B)
continue to collect accounts receivable and pay accounts payable utilizing
normal procedures and without discounting or
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accelerating payment of such accounts, and (C) comply with all contractual
and other obligations applicable to the operation of the Company; and
(v) comply in all material respects with applicable laws, including,
without limitation, Environmental Laws.
(b) Except as otherwise expressly contemplated by this Agreement or
with the prior written consent of both Purchasers, the Seller and the
Shareholder Indemnitors shall not, and shall cause the Company not to:
(i) declare, set aside, make or pay any dividend or other distribution
in respect of the capital stock of the Company or repurchase, redeem or
otherwise acquire any outstanding shares of the capital stock or other
securities of, or other ownership interests in, the Company;
(ii) transfer, issue, sell or dispose of any shares of capital stock
or other securities of the Company or grant options, warrants, calls or
other rights to purchase or otherwise acquire shares of the capital stock
or other securities of the Company;
(iii) effect any recapitalization, reclassification, stock split or
like change in the capitalization of the Company;
(iv) amend the certificate of incorporation or by-laws of the
Company;
(v) (A) materially increase the annual level of compensation of any
employee of the Company, (B) increase the annual level of compensation
payable or to become payable by the Company to any of its executive
officers, (C) grant any unusual or extraordinary bonus, benefit or other
direct or indirect compensation to any employee, director or consultant,
except that the Company may, immediately prior to the Closing, grant a
bonus to Peter G. VanHeusden in an amount up to 50% of the Income Before
Taxes (as such term is defined in Section 14.1 hereof) of the Company,
provided that, any such bonus will be paid on an estimated basis, subject
to a post-Closing adjustment following the closing of Seller's books and
review by Seller's and Purchasers' auditors, other than in the ordinary
course consistent
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with past practice and in such amounts as are fully reserved against in the
Financial Statements, (D) increase the coverage or benefits available under
any (or create any new) severance pay, termination pay, vacation pay,
company awards, salary continuation for disability, sick leave, deferred
compensation, bonus or other incentive compensation, insurance, pension or
other employee benefit plan or arrangement made to, for, or with any of the
directors, officers, employees, agents or representatives of the Company or
otherwise modify or amend or terminate any such plan or arrangement or (E)
enter into any employment, deferred compensation, severance, consulting,
non-competition or similar agreement (or amend any such agreement) to which
the Company is a party or involving a director, officer or employee of the
Company in his or her capacity as a director, officer or employee of the
Company;
(vi) except for trade payables and for indebtedness for borrowed
money incurred in the ordinary course of business and consistent with past
practice, borrow monies for any reason or draw down on any line of credit
or debt obligation, or become the guarantor, surety, endorser or otherwise
liable for any debt, obligation or liability (contingent or otherwise) of
any other Person;
(vii) subject to any Lien (except for leases that do not materially
impair the use of the property subject thereto in their respective
businesses as presently conducted), any of the properties or assets
(whether tangible or intangible) of the Company;
(viii) acquire any material properties or assets or sell, assign,
transfer, convey, lease or otherwise dispose of any of the material
properties or assets (except for fair consideration in the ordinary course
of business consistent with past practice) of the Company;
(ix) cancel or compromise any debt or claim or waive or release any
material right of the Company except in the ordinary course of business
consistent with past practice;
(x) enter into any commitment for capital expenditures of the Company
in excess of $35,000 for
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any individual commitment and $150,000 for all commitments in the
aggregate;
(xi) enter into, modify or terminate any labor or collective
bargaining agreement of the Company or, through negotiation or otherwise,
make any commitment or incur any liability to any labor organization with
respect to the Company;
(xii) introduce any material change with respect to the operation of
the Company, including any material change in the types, nature,
composition or quality of its products or services, experience any material
change in any contribution of its product lines to its revenues or net
income, or, other than in the ordinary course of business, make any change
in product specifications or prices or terms of distributions of such
products;
(xiii) permit the Company to enter into any transaction or to make or
enter into any Contract which by reason of its size or otherwise is not in
the ordinary course of business consistent with past practice;
(xiv) permit the Company to enter into or agree to enter into any
merger or consolidation with, any corporation or other entity, and not
engage in any new business or invest in, make a loan, advance or capital
contribution to, or otherwise acquire the securities of any other Person;
(xv) except for transfers of cash pursuant to normal cash management
practices, permit the Company to make any investments in or loans to, or
pay any fees or expenses to, or enter into or modify any Contract with, any
Shareholder Indemnitor or any Affiliate of any Shareholder Indemnitor; or
(xvi) agree to do anything prohibited by this Section 6.3 or anything
which would make any of the representations and warranties of the Seller or
any Shareholder Indemnitor in this Agreement or the Seller Documents untrue
or incorrect in any material respect as of any time through and including
the Closing Date.
6.4 CONSENTS AND CONDITIONS; ASSIGNMENT OF ASSETS. The Seller and
the Shareholder Indemnitors shall
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use their reasonable best efforts to obtain all approvals, consents or waivers
from all Persons, including, without limitation, Governmental Bodies, necessary
to assign to the Purchasers all of the Seller's interest in the Assets or any
claim, right or benefit arising thereunder or resulting therefrom (each, an
"Interest") as soon as practicable.
6.5 NOTICES OF CERTAIN EVENTS. The Seller and the Shareholder
Indemnitors shall promptly notify the Purchasers of:
(a) any notice or other communication (i) alleging that the consent of
any person is or may be required in connection with the transactions
contemplated by this Agreement, or (ii) from any person to the effect that such
person intends not to continue to conduct business with either Purchaser (as
successor to the Business) after the Closing;
(b) any notice or other communication from any Government Body in
connection with the transactions contemplated by this Agreement; and
(c) any action, suits, claims, investigations or proceedings to its
knowledge commenced or threatened against, relating to or involving or otherwise
affecting the Seller or the Business that, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
4.12 hereof or that relate to the consummation of the transactions contemplated
by this Agreement.
6.6 NON-COMPETITION AGREEMENT. The Seller hereby agrees that, on or
prior to the Closing Date, it shall execute and deliver to the Purchasers a Non-
Competition Agreement, substantially in the form of Exhibit E hereto (the "Non-
Competition Agreement").
ARTICLE VII
COVENANTS OF THE PURCHASER
From and after the date hereof, and until the Closing Date, each
Purchaser hereby covenants and agrees with the Seller that:
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7.1 REASONABLE BEST EFFORTS. Subject to such Purchaser's
satisfaction, in its sole discretion, of the results of the due diligence
investigation and review referred to in Section 9.6 hereof, such Purchaser shall
use its reasonable best efforts to cause the consummation of the transactions
contemplated hereby in accordance with the terms and conditions hereof.
7.2 CONSENTS AND CONDITIONS. Such Purchaser shall use its reasonable
efforts to obtain all approvals, consents or waivers from Persons, including,
without limitation, Governmental Bodies, necessary to consummate the
transactions contemplated by this Agreement.
ARTICLE VIII
COVENANTS RELATING TO EMPLOYMENT AND EMPLOYEE MATTERS
8.1 OFFER OF EMPLOYMENT. (a) Schedule 8.1 hereof is a preliminary
list of all Employees as of the date hereof. Within fifteen days prior to the
Closing Date, the Seller shall deliver to the Purchasers a final list of the
employees of Seller, which list shall separately identify those employees of the
Seller (i) who are active employees as of that date (including those on
vacation, sickness, or a leave of absence of less than ninety days for any
reason, including disability) (the "Active Employees"), and (ii) who are not
actively working on such date by reason of a leave of absence of more than
ninety days (the "Inactive Employees").
(b) PG Newco shall employ, effective as of the Closing Date, all of
the Active Employees who have not retired on or prior to the Closing Date, who
have not rejected on or prior to Closing Date PG Newco's offer of employment,
and who are actually at work on the Closing Date; provided, however, that
notwithstanding the foregoing, any temporary or employment agency employees
shall be included as Active Employees solely at the discretion of PG Newco. For
any Active Employee who has not retired or rejected PG Newco's offer of
employment on or prior to the Closing Date but is not actually at work on the
Closing Date, the offer of employment shall continue for a ninety-day period
from the Closing Date and the date of effective employment shall be the date of
return to employment within such ninety-day period.
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8.2 HEALTH PLAN BENEFITS. Seller and Purchasers shall take all
necessary action and cooperate in good faith with the objective of obtaining
health plan benefits without any pre-existing condition exclusions for the
Transferred Employees effective as of the Closing Date.
ARTICLE IX
CONDITIONS PRECEDENT TO THE PURCHASERS' OBLIGATIONS
The obligation of each Purchaser to consummate the purchase of the
Assets and the assumption of the Assumed Liabilities on the Closing Date is, at
the option of such Purchaser, subject to the satisfaction of the following
conditions:
9.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Each of the representations and warranties of the Seller and the
Shareholder Indemnitors contained herein shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as though the same had been made on and as of the Closing Date.
(b) The Seller and the Shareholder Indemnitors shall have performed
and complied in all material respects with the covenants and provisions of this
Agreement required to be performed or complied with by them at or prior to the
Closing Date.
9.2 DELIVERIES BY THE SELLER TO THE PURCHASERS.
At the Closing, the Seller shall deliver, or shall cause to be
delivered, to the Purchasers the following:
(a) a certificate of the Seller, dated as of the Closing Date and
signed by the President of the Seller, certifying as to the fulfillment of the
conditions set forth in Section 9.1;
(b) (i) a Bill of Sale, dated the Closing Date, substantially in the
form of Exhibit C, duly executed and delivered by the Seller, and (ii) executed
deeds, assignments, patent assignments, trademark assignments in recordable
form, certificates of title, and such other instruments and documents as the
Purchasers shall reasonably
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request, transferring to the Purchasers all of the Seller's right, title and
interest in and to the Assets;
(c) an employment agreement in form and substance satisfactory to the
Purchasers, executed and delivered by Peter G. VanHeusden (the "Employment
Agreement");
(d) an opinion of counsel for the Seller, dated the Closing Date,
substantially in the form attached hereto as Exhibit D;
(e) an affidavit, in a form reasonably satisfactory to the Purchasers,
of the Seller stating under penalties of perjury the Seller's United States
taxpayer identification number and that the Seller is not a foreign person
within the meaning of Section 1445(b)(2) of the Code;
(f) a receipt for the Purchase Price (including the Notes);
(g) a good standing certificate for the Seller from the Secretary of
State of the State of Michigan, dated as soon as practicable prior to the
Closing Date;
(h) a non-competition agreement, dated the Closing Date, substantially
in the form of Exhibit E, duly executed and delivered by Peter G. VanHeusden
(the "Non-Competition Agreement");
(i) a certificate of the Secretary of the Seller as to the
resolutions adopted by the Seller's Board of Directors and shareholders relating
to the transactions contemplated hereby;
(j) copies of all documents evidencing all third party approvals,
licenses, consents, including those listed on Schedule 4.3, and waivers of
rights of first refusal and other rights, necessary on the part of Seller to
consummate the transactions contemplated hereby;
(k) if NEC Corporation ("NEC") has not been invoiced by Seller in
full for certain materials it purchased from Seller for the Midas 3 and Midas 4
Programs, in the approximate amount of $500,000, a letter from NEC (the "NEC
Letter") indicating that NEC will pay Seller for such materials by December 31,
1997, which letter will be validly assigned to PG Newco at the Closing; and
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(l) all written representations and warranties of the Seller and the
Shareholder Indemnitors, as required pursuant to the Securities Act of 1933, as
amended, in connection with Seller's acquisition of the Notes.
9.3 NO PROHIBITION. No Law or Order of any court or administrative
agency shall be in effect which prohibits either Purchaser from consummating the
transactions contemplated hereby.
9.4 NO PROCEEDING OR LITIGATION. Except as set forth on Schedule
4.12, there shall not be instituted, pending, or, to the knowledge of either
Purchaser or the Seller, threatened, any suit, action, investigation, inquiry,
or other proceeding by or before any court or administrative agency or by any
other Person which seeks to enjoin or otherwise prevent consummation of the
transactions contemplated by this Agreement.
9.5 REGULATORY APPROVALS. All Orders, permits, and regulatory
approvals applicable to either Purchaser or the Seller and necessary to permit
the consummation of the transactions contemplated by this Agreement shall have
been obtained and be in full force and effect.
9.6 DUE DILIGENCE INVESTIGATION. The Purchasers shall have completed
their due diligence investigation and review in respect of the Assets and the
Business with satisfactory results in its sole discretion.
9.7 MLC STOCKHOLDER APPROVAL. MLC shall have received the requisite
consent of its stockholders to the consummation of the transactions contemplated
by this Agreement.
9.8 MLC BOARD APPROVAL. MLC shall have received the requisite
approval of its Board of Directors to the consummation of the transactions
contemplated by this Agreement.
ARTICLE X
CONDITIONS PRECEDENT TO THE SELLER'S OBLIGATIONS
The obligation of the Seller to consummate the sale, transfer and
assignment to the Purchasers of the Assets and the assignment of the Assumed
Liabilities on the
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Closing Date is, at the option of the Seller, subject to the satisfaction of the
following conditions.
10.1 REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Each of the representations and warranties of the Purchasers
contained herein shall be true and correct in all material respects as of the
Closing Date with the same force and effect as though the same had been made on
and as of the Closing Date.
(b) Each Purchaser shall have performed and complied in all material
respects with the covenants and provisions in this Agreement required herein to
be performed or complied with by it at or prior to the Closing Date.
10.2 DELIVERIES BY THE PURCHASERS TO THE SELLER. At the Closing, the
Purchasers shall deliver to the Seller the following:
(a) a certificate of each Purchaser, dated as of the Closing Date and
signed by an officer of such Purchaser, certifying as to the fulfillment of the
conditions set forth in Section 10.1;
(b) immediately available funds for the Cash Consideration referred to
in Section 2.1 hereof, by wire transfer as provided in Section 2.1 hereof;
(c) the two Notes signed by MLC, each in the aggregate principal
amount of $1,500,000, as described in Section 2.1 hereof;
(d) a certificate of the Secretary of each Purchaser as to the
resolutions adopted by such Purchaser's Board of Directors relating to the
transactions contemplated hereby;
(e) an assumption agreement, substantially in the form of Exhibit F
hereto (the "Assumption Agreement"), dated the Closing Date, duly executed by PG
Newco, evidencing PG Newco's assumption of the Assumed Liabilities; and
(f) the Employment Agreement, duly executed by PG Newco.
10.3 NO PROHIBITION. No Law or Order of any court or administrative
agency shall be in effect which
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prohibits the Seller from consummating the transactions contemplated hereby.
10.4 NO PROCEEDING OR LITIGATION. There shall not be instituted,
pending, or, to the knowledge of the Seller, threatened, any suit, action,
investigation, inquiry, or other proceeding by or before any court or
administrative agency or by any other Person which seeks to enjoin or otherwise
prevent consummation of the transactions contemplated by this Agreement.
10.5 REGULATORY APPROVALS. All Orders, permits, and regulatory
approvals applicable to either Purchaser or the Seller and necessary to permit
the consummation of the transactions contemplated by this Agreement shall have
been obtained and be in full force and effect.
ARTICLE XI
ADDITIONAL COVENANTS
11.1 FURTHER ASSURANCES.
(a) From time to time after the Closing Date, the Seller and the
Shareholder Indemnitors shall, at their sole cost and expense (unless specified
otherwise in this Agreement), at the reasonable request of either Purchaser,
execute and deliver such other and further instruments of sale, assignment,
assumption, transfer and conveyance and take such other and further action as
such Purchaser may reasonably request in order to vest in such Purchaser and put
such Purchaser in possession of the Assets as of the Closing and to transfer to
such Purchaser as of the Closing any Contracts and rights of the Seller relating
to the Assets and assure to such Purchaser the benefits thereof, and, at the
reasonable request of the Seller, to give effect, as of the Closing, to such
Purchaser's assumption of the Assumed Liabilities.
(b) To the extent any of the approvals, consents or waivers referred
to in Section 6.4 hereof have not been obtained by the Seller as of the Closing,
the Seller shall use its reasonable best efforts to do the following:
(i) cooperate with the Purchasers in any reasonable and lawful
arrangements designed to provide the benefits of such Interest to the
Purchasers as long
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as the Purchasers promptly reimburse the Seller for all payments, charges
or other liabilities made or suffered by the Seller in connection
therewith; and
(ii) enforce, at the request of the Purchasers and at the
expense and for the account of the Purchasers, any and all rights of the
Seller arising from such Interest against such issuer or grantor thereof or
the other party or parties thereto (including the right to elect to
terminate such Interest in accordance with the terms thereof upon the
written advice of the Purchasers).
(c) To the extent that the Seller enters into lawful arrangements
designed to provide the benefits of any Interest as set forth in clause (b)(i)
above, such Interest shall be deemed to have been assigned to the Purchasers as
of the Closing for purposes of Section 1.1 hereof.
11.2 PUBLIC ANNOUNCEMENTS. Neither the Seller (nor any of its
affiliates) nor the Purchasers (nor any of their affiliates) shall make any
public statement, including, without limitation, any press release, with respect
to this Agreement and the transactions contemplated hereby, without the prior
written consent of the other party (which consent may not be unreasonably
withheld), except as may be required (a) by Law, and (b) in the case of MLC,
pursuant to its obligations resulting from the inclusion of its common stock in
the American Stock Exchange, in either case, as advised by counsel.
11.3 JOINT POST-CLOSING COVENANT OF THE SELLER AND THE PURCHASERS.
The Seller and the Purchasers jointly covenant and agree that, from and after
the Closing Date, the Seller and the Purchasers will cooperate with each other
in defending or prosecuting any action, suit, proceeding, investigation or audit
of the other relating to (a) the preparation and audit of the Seller's and the
Purchasers' tax returns, and (b) any audit of the Purchasers and/or the Seller
with respect to the sales, transfer and similar taxes imposed by the laws of any
state, in each of cases (a) and (b) relating to the transactions contemplated by
this Agreement, and in each such case at the sole cost and expense of the party
requesting cooperation or assistance. In furtherance hereof, the Purchasers and
the Seller further covenant and agree to respond to all reasonable inquiries
related to such matters and to provide, to the extent possible, substantiation
of transactions and to make
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available and furnish appropriate documents and personnel in connection
therewith.
11.4 BOOKS AND RECORDS; PERSONNEL. For a period of six years after
the Closing Date (or such longer period as may be required by any Governmental
Body or ongoing Legal Proceeding):
(a) The Purchasers shall not dispose of or destroy any of the business
records and files of the Business. If the Purchasers wish to dispose of or
destroy such records and files after that time, they shall first give 30 days'
prior written notice to the Seller and the Seller shall have the right, at its
option and expense, upon prior written notice to the Purchasers within such 30
day period, to take possession of the records and files within 60 days after the
date of the Seller's notice to the Purchasers.
(b) The Purchasers shall allow the Seller and its Representatives
access to all business records and files of the Business which are transferred
to the Purchasers in connection herewith, during regular business hours and upon
reasonable notice at PG Newco's principal place of business or at any location
where such records are stored, and the Seller shall have the right, at its own
expense, to make copies of any such records and files; PROVIDED, HOWEVER, that
any such access or copying shall be had or done in such a manner so as not to
interfere with the normal conduct of the Purchasers' business or operations. To
the extent commercially practicable, the Purchasers shall send copies of such
business records and files to the Seller, at the expense of the Purchasers, by
overnight courier or other delivery service, as reasonably requested by the
Seller.
(c) The Purchasers shall make available to the Seller, upon written
request and at the Seller's expense (i) the Purchasers' personnel to assist the
Seller in locating and obtaining records and files maintained by the Purchasers
and (ii) any of the Purchasers' personnel previously in the Seller's employ
whose assistance or participation is reasonably required by the Seller in
anticipation of, or preparation for, existing or future litigation, arbitration,
administrative proceeding, tax return preparation or other matters in which the
Seller or any of its affiliates is involved and which is related to the
Business.
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ARTICLE XII
INDEMNIFICATION AND RELATED MATTERS
12.1 INDEMNIFICATION.
(a) Irrespective of any due diligence investigation conducted by the
Purchasers or the Purchaser Representatives with regard to the transactions
contemplated hereby, the Seller and each Shareholder Indemnitor jointly and
severally agree to indemnify and hold each Purchaser harmless from and against
any and all liabilities, obligations, damages, losses, deficiencies, costs,
penalties, interest and expenses (collectively, "Losses") arising out of, based
upon, attributable to or resulting from:
(i) any and all Losses incurred or suffered by such Purchaser
resulting from or arising out of any misrepresentation or breach of
warranty made by the Seller or any of the Shareholder Indemnitors in this
Agreement or in any of the Seller Documents;
(ii) any and all Losses incurred or suffered by such Purchaser
resulting from or arising out of the failure of the Seller or any
Shareholder Indemnitor to comply with any of the covenants contained in
this Agreement or in any of the Seller Documents which are required to be
performed by Seller or any Shareholder Indemnitor;
(iii) any and all Losses incurred or suffered by such
Purchaser resulting from or arising out of Excluded Liabilities;
(iv) any claims for any injury to person or property
attributable to any goods manufactured or services rendered by the Seller
prior to the Closing, regardless of whether such claims are asserted prior
to or after the Closing (it being understood and agreed that Losses under
this clause (iv) shall be net of any proceeds received by such Purchaser
under any policy of insurance maintained by such Purchaser in respect of
such claims);
(v) any claims for damages, compensation and/or other employee
benefits (including, but not limited to, severance pay, disability
benefits, health,
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workers' compensation, and death benefits) (A) accruing at any time with
respect to persons who were employed in the Business and do not become
Transferred Employees, (B) accruing prior to the date a person becomes a
Transferred Employee, and (C) accruing with respect to employment or
termination of employment with the Seller, and related costs and
liabilities, regardless of whether such claims and related costs and
liabilities are made or incurred before, on or after the Closing Date,
except wages and vacation to the extent accrued or reflected on the Closing
Balance Sheet;
(vi) any Environmental Claim or any Remedial Action arising out
of or based upon anything relating to the use of the Assets prior to the
Closing, or the operation of the Business prior to the Closing;
(vii) any third party claims with respect to occurrences or
events which occurred on or prior to the Closing Date and relate to the
Seller and/or its Employees; and
(viii) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable attorneys'
fees, incident to the foregoing.
(b) PG Newco agrees to indemnify and hold the Seller harmless from and
against any and all Losses arising out of, based upon, attributable to or
resulting from:
(i) any and all Losses incurred or suffered by the Seller
resulting from or arising out of any misrepresentation or breach of
warranty made by PG Newco in this Agreement or in any of the Purchaser
Documents;
(ii) any and all Losses incurred or suffered by the Seller
resulting from or arising out of the failure of PG Newco to comply with any
of the covenants contained in this Agreement or in any of the Purchaser
Documents which are required to be performed PG Newco;
(iii) the Assumed Liabilities;
(iv) any and all claims by Transferred Employees (A) for
compensation and vacation accrued on
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or prior to the Closing Date to the extent reflected on the Closing Balance
Sheet, and (B) for damages, compensation, vacation and/or other employee
benefits (including, but not limited to, severance pay, disability
benefits, health, workers' compensation, and death benefits) as provided by
PG Newco accruing at any time after the date a person becomes a Transferred
Employee;
(v) any Environmental Claim or any Remedial Action arising out
of or based upon anything relating to the use of the Assets after the
Closing, or the operation of the Business after the Closing;
(vi) any third party claims with respect to occurrences or
events which occur after the Closing Date and relate to the operation of
the Business by PG Newco after the Closing; and
(vii) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable attorneys'
fees, incident to the foregoing.
(c) If any indemnification payment under Article XII is determined to
be taxable to the party receiving such payment by any taxing authority, the
paying party shall also indemnify the party receiving such payment for any Taxes
incurred by reason of the receipt of such payment (taking into account any
actual reduction in tax liability to the receiving party) and any related costs
incurred by the party receiving such payment in connection with such Taxes (or
any asserted deficiency, claim, demand, action, suit, proceeding, judgment or
assessment, including the defense or settlement thereof, relating to such
Taxes).
(d) Notwithstanding anything to the contrary contained in this
Agreement, neither the Seller nor any Shareholder Indemnitor, on the one hand,
nor PG Newco, on the other hand, shall be liable for any Losses under this
Article XII unless the aggregate amount of Losses and expenses finally
determined to arise hereunder based upon, attributable to or resulting from the
failure of any representation or warranty to be true and correct, other than the
representations and warranties set forth in Sections 4.9, 4.10, 4.11, 4.12,
4.17, 4.18 and 4.20 hereof (with respect to which the limitations set forth in
this Section 12.1(d) shall not apply), exceeds $50,000 (the
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"Basket") and, in such event, the indemnifying party shall be required to pay
the entire amount of such Losses and expenses in excess of $50,000 (the
"Deductible").
12.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The parties
hereto hereby agree that the representations and warranties contained in this
Agreement or in any certificate, document or instrument delivered in connection
herewith, shall survive the execution and delivery of this Agreement, and the
Closing hereunder, regardless of any investigation made by the parties hereto;
provided, however, that any claims or actions with respect thereto (other than
claims for indemnifications with respect to the representation and warranties
contained in Sections 4.9, 4.10, 4.11, 4.12, 4.17, 4.18 and 4.20 which shall
survive for periods coterminous with any applicable statutes of limitation)
shall terminate unless within thirty-six (36) months after the Closing Date
written notice of such claims is given to the Seller and the Shareholder
Indemnitors or such actions are commenced.
12.3 INDEMNIFICATION PROCEDURES. (a) In the event that any Legal
Proceedings shall be instituted or that any claim or demand ("Claim") shall be
asserted by any Person in respect of which payment may be sought under Section
12.1 hereof (regardless of the Basket or the Deductible referred to above), the
indemnified party shall reasonably and promptly cause written notice of the
assertion of any Claim of which it has knowledge which is covered by this
indemnity to be forwarded to the indemnifying party. The indemnifying party
shall have the right, at its sole option and expense, to be represented by
counsel of its choice, which must be reasonably satisfactory to the indemnified
party, and to defend against, negotiate, settle or otherwise deal with any Claim
which relates to any Losses indemnified against hereunder. If the indemnifying
party elects to defend against, negotiate, settle or otherwise deal with any
Claim which relates to any Losses indemnified against hereunder, it shall within
ten (10) days (or sooner, if the nature of the Claim so requires) notify the
indemnified party of its intent to do so. If the indemnifying party elects not
to defend against, negotiate, settle or otherwise deal with any Claim which
relates to any Losses indemnified against hereunder, fails to notify the
indemnified party of its election as herein provided or contests its obligation
to indemnify the indemnified party for such Losses under this Agreement, the
indemnified party may defend against, negotiate, settle or otherwise deal with
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such Claim. If the indemnified party defends any Claim, then the indemnifying
party shall reimburse the indemnified party for the Expenses of defending such
Claim upon submission of periodic bills. If the indemnifying party shall assume
the defense of any Claim, the indemnified party may participate, at his or its
own expense, in the defense of such Claim; PROVIDED, HOWEVER, that such
indemnified party shall be entitled to participate in any such defense with
separate counsel at the expense of the indemnifying party if, (i) so requested
by the indemnifying party to participate or (ii) in the reasonable opinion of
counsel to the indemnified party, a conflict or potential conflict exists
between the indemnified party and the indemnifying party that would make such
separate representation advisable; and PROVIDED, FURTHER, that the indemnifying
party shall not be required to pay for more than one such counsel for all
indemnified parties in connection with any Claim. The parties hereto agree to
cooperate fully with each other in connection with the defense, negotiation or
settlement of any such Claim.
(b) After any final judgment or award shall have been rendered by a
court, arbitration board or administrative agency of competent jurisdiction and
the expiration of the time in which to appeal therefrom, or a settlement shall
have been consummated, or the indemnified party and the indemnifying party shall
have arrived at a mutually binding agreement with respect to a Claim hereunder,
the indemnified party shall forward to the indemnifying party notice of any sums
due and owing by the indemnifying party pursuant to this Agreement with respect
to such matter and the indemnifying party shall be required to pay all of the
sums so due and owing to the indemnified party by wire transfer of immediately
available funds within 10 business days after the date of such notice.
(c) The failure of the indemnified party to give reasonably prompt
notice of any Claim shall not release, waive or otherwise affect the
indemnifying party's obligations with respect thereto except to the extent that
the indemnifying party can demonstrate actual loss and prejudice as a result of
such failure.
12.4 TAX MATTERS. (a) Seller and Purchasers shall cooperate fully
with each other and make available or cause to be made available to each other
in a timely fashion such tax data, prior tax returns and filings and other
information as may be reasonably required for the
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preparation by Purchasers or Seller of any tax returns, elections, consents or
certificates required to be prepared and filed by Purchasers or Seller and any
audit or other examination by any taxing authority, or judicial or
administrative proceeding relating to liability for Taxes. Purchasers and
Seller will each retain and provide to the other party all records and other
information which may be relevant to any such Tax Return, audit or examination,
proceeding or determination, and will each provide the other party with any
final determination of any such audit or examination, proceeding or
determination that affects any amount required to be shown on any Tax Return of
the other party for any period. Without limiting the generality of the
foregoing, each of the Purchasers and Seller will retain copies of all Tax
Returns, supporting work schedules and other records relating to tax periods or
portions thereof ending prior to or on the Closing Date.
(b) Seller and each Shareholder Indemnitor jointly and severally agree
to be responsible for, and indemnify and hold harmless each Purchaser against
all losses, claims, damages, liabilities (liquidated or unliquidated, accrued,
contingent, or otherwise), obligations, judgments, settlements, reasonable out-
of-pocket costs, expenses and attorneys' fees (including such costs, expenses
and attorneys' fees incurred in connection with any investigation or in
enforcing such right of indemnification against any Indemnitor), fines and
penalties, if any (collectively "Damages") attributable to all Taxes with
respect to the ownership, use or leasing of the Assets on or prior to the
Closing Date and PG Newco shall be responsible for, and shall indemnify and hold
harmless Seller, in respect of any Damages attributable to all Taxes with
respect to the ownership, use or leasing of the Assets after the Closing Date.
Seller's share of all real and personal property Taxes, state and local ad
valorem Taxes and assessments applicable to the Assets for any period commencing
on or prior to the Closing Date and ending after the Closing Date shall be
determined on a pro rata basis based on the length of such period and when the
Closing Date occurs therein. Seller and each Shareholder Indemnitor jointly and
severally agree to indemnify and hold harmless each Purchaser, in respect of any
Damages attributable to Taxes of Seller in respect of periods prior to the
Closing (which Taxes shall be determined on the basis of an interim closing of
the books).
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(c) Seller agrees to furnish either Purchaser upon request clearance
certificates or similar documents that may be required by any state, local or
other taxing authority to relieve such Purchaser of any obligations to withhold
any portion of the purchase consideration to be transferred pursuant to Article
II hereof.
ARTICLE XIII
TERMINATION
13.1 TERMINATION. This Agreement may be terminated:
(a) by the written agreement of each Purchaser and the Seller;
(b) by either Purchaser or by the Seller if there shall be in effect a
non-appealable order of a court of competent jurisdiction permanently
prohibiting the consummation of the transactions contemplated hereby;
(c) by either Purchaser or by the Seller or the Shareholder
Indemnitors if the stockholders of MLC fail to approve the transactions to be
consummated in connection herewith at any meeting of the stockholders of MLC
called and held for such purpose; and
(d) by either Purchaser or by the Seller if the Closing shall not have
occurred on or before June 30, 1997.
13.2 LIABILITIES AFTER TERMINATION. Upon any termination of this
Agreement pursuant to Section 13.1 hereof, no party hereto shall thereafter have
any further liability or obligation hereunder, but no such termination shall
relieve either party hereto of any liability to the other party hereto for any
breach of this Agreement prior to the date of such termination.
ARTICLE XIV
MISCELLANEOUS
14.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
terms have the following meanings
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(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"ACCOUNTS RECEIVABLE" has the meaning set forth in Section 1.1(c)
hereof.
"ACTIVE EMPLOYEEs" has the meaning set forth in Section 8.1(a) hereof.
"AFFILIATE" means, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person.
"ASSETS" has the meaning set forth in Section 1.1 hereof.
"ASSUMED LIABILITIES" has the meaning set forth in Section 1.3 hereof.
"BENEFIT ARRANGEMENTS" has the meaning set forth in Section 4.11(b).
"BUSINESS" has the meaning set forth in the recitals hereto.
"CASH CONSIDERATION" has the meaning set forth in Section 2.1 hereof.
"CLOSING" means the consummation of the transactions contemplated by
this Agreement.
"CLOSING BALANCE SHEET" means that certain Statement of Assets and
Assumed Liabilities for the Business as of the Closing Date, prepared by the
Purchasers and Seller as soon as practicable (but in no event later than 30
days) following the Closing Date, and delivered to Ernst & Young LLP
(Purchasers' accountant).
"CLOSING DATE" has the meaning set forth in Section 3.1 hereof.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONTRACT" means any contract (including, without limitation, any
resale agreement and any manufacturer authorization or medallion or sales or
distribution contract), agreement, indenture, note, bond, loan,
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instrument, lease, conditional sale contract, mortgage, license, franchise,
insurance policy, commitment or other arrangement or agreement, whether written
or oral.
"EMPLOYEE BENEFIT PLAN" has the meaning set forth in Section 4.11(b)
hereof.
"EMPLOYEES" means all persons employed in the Business, including any
persons on disability, sick leave, layoff or leave of absence from the Business.
"ENVIRONMENTAL CLAIM" means any allegation, notice of violation,
action, claim, Lien, demand, abatement or other Order or direction (conditional
or otherwise) by any Governmental Body or any other Person for personal injury
(including sickness, disease or death), tangible or intangible property damage,
damage to the environment, nuisance, pollution, contamination or other adverse
effects on the environment, or for fines, penalties, or restrictions resulting
from or based upon (a) the existence, or the continuation of the existence, of a
Release (including, without limitation, sudden or non-sudden accidental or non-
accidental Releases) of, or exposure to, any Hazardous Material or other
substance, chemical, material, pollutant, contaminant, odor, audible noise, or
other Release in, into or onto the environment (including, without limitation,
the air, soil, surface or groundwater) at, in, by, from or related to any of the
Leased Real Estate or any activities conducted thereon; (b) the environmental
aspects of the transportation, storage, treatment or disposal of Hazardous
Materials in connection with the operation of any of the Business; or (iii) the
violation, or alleged violation, of any Environmental Law, Order or Permit of or
from any Governmental Body relating to environmental matters connected with the
Business.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 4.17(a).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCLUDED ASSETS" has the meaning set forth in Section 1.2 hereof.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 4.6
hereof.
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"GAAP" means generally accepted accounting principles in the United
States as in effect from time to time.
"GOVERNMENTAL BODY" means any government or governmental or regulatory
body thereof, or political subdivision thereof, whether federal, state, local or
foreign, or any agency or instrumentality thereof, or any court or arbitrator
(public or private).
"HAZARDOUS MATERIAL" means any substance, material or waste, or any
constituent thereof, which is regulated by any local Governmental Body,
Governmental Body in any jurisdiction in which the Seller or any Subsidiary or
affiliate of the Seller conducts business, or the United States or other
national government, or is regulated by or forms the basis of liability under
any Environmental Law, including, without limitation, any material or substance
which is defined as a "hazardous waste," "hazardous material," "hazardous
substance," "extremely hazardous waste" or "restricted hazardous waste,"
"subject waste," "contaminants," "toxic waste" or "toxic substance" under any
provision of Law, including but not limited to, petroleum products, asbestos and
polychlorinated biphenyls.
"INACTIVE EMPLOYEES" has the meaning set forth in Section 8.1(a)
hereof.
"INCOME BEFORE TAXES" shall mean that amount which is equal to the
increase in the income before taxes of the Seller, for the period beginning
December 1, 1996 and ending on the Closing Date. For purposes of such
calculation, the income before taxes of the Seller as of December 1, 1996 are
agreed to be $1,850,212.47, as set forth on Seller's income statement for the
period from July 1, 1996 to November 30, 1996 (the "INCOME STATEMENT"). For
purposes of the calculation of Income Before Taxes, such income is calculated
without regard to federal, state or local income taxes. The Income Before Taxes
shall be jointly determined by the respective accountants for Seller and
Purchasers using the same methods employed by Seller's accountants in
determining the income before taxes shown on the Income Statement. If the
respective accountants for Seller and Purchasers cannot agree on the Income
Before Taxes, they shall together select a third accounting firm to render a
binding determination, the costs of which third firm shall be shared equally by
Seller and Purchasers.
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"INDEMNITEE" has the meaning set forth in Section 12.3(a) hereof.
"INDEMNITOR" has the meaning set forth in Section 12.3(a) hereof.
"INITIAL BALANCE SHEET" means the unaudited balance sheet of the
Business at November 30, 1996, attached as part of Schedule 4.6 hereto.
"INSOLVENCY EVENT" means any of the following events: (a) any Person,
pursuant to or within the meaning of any bankruptcy or insolvency law: (i)
commences a voluntary case; (ii) consents to the entry of an order for relief
against it in an involuntary case; (iii) consents to the appointment of a
custodian of it or for all or substantially all of its property; (iv) makes a
general assignment for the benefit of its creditors; (v) is unable or admits it
is unable to pay its debts as the same become due; (vi) commences, or has
commenced against it, any proceeding for liquidation or dissolution; or (vii)
takes any steps to accomplish any of the foregoing; or (b) a court of competent
jurisdiction enters an order or decree under any bankruptcy or insolvency law
that: (i) is for relief against such Person in an involuntary case; (ii)
appoints a custodian of such Person or for all or substantially all of its
property; or (iii) orders the liquidation or dissolution of such Person.
"INTANGIBLE ASSETS" has the meaning set forth in Section 1.1(f)
hereof.
"INTEREST" has the meaning set forth in Section 6.4 hereof.
"LAW" means any federal, state, local or foreign law (including common
law), statute, code, ordinance, rule, or regulation.
"LEASED REAL PROPERTY" has the meaning set forth in Section 1.1(d)
hereof.
"LEGAL PROCEEDING" means any judicial, administrative or arbitral
action, suit, proceeding (public or private), claim, investigation or
governmental proceeding.
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"LIEN" means any lien, pledge, mortgage, deed of trust, security
interest, claim, lease, charge, option, right of first refusal, easement or
other real estate declaration, covenant, condition, restriction or servitude,
transfer restriction under any shareholder or similar agreement, encumbrance or
any other restriction or right in favor of any third party.
"MATERIAL ADVERSE CHANGE" means any material adverse change on, or in,
any material portion of the Assets or the business, condition (financial or
otherwise), results of operations or liabilities of the Business.
"MATERIAL ADVERSE EFFECT" means an effect that results in or causes,
or has a reasonable likelihood of resulting in or causing, a Material Adverse
Change.
"NEC LETTER" has the meaning set forth in Section 9.2(k) hereof.
"NOTES" has the meaning set forth in Section 2.1 hereof.
"NOTICE OF HEARING" has the meaning set forth in Section 4.3 hereof.
"ORDER" means any order, injunction, judgment, decree, ruling, writ,
assessment or arbitration award.
"PATENT-RELATED ASSETS" has the meaning set forth in Section 1.1(e)
hereof.
"PERMIT" means any written approval, authorization, consent,
franchise, license, permit or certificate by any Governmental Body.
"PERMIT APPLICATION" has the meaning set forth in Section 4.3 hereof.
"PERMITTED EXCEPTIONS" means (a) statutory Liens for current taxes,
assessments or other governmental charges not yet delinquent or the amount or
validity of which is being contested in good faith by appropriate proceedings,
(b) mechanics', carriers', workers', repairers' and similar Liens arising or
incurred in the ordinary course of business that are not in the aggregate
material to the Business or the Assets, (c) zoning, entitlement and other land
use and environmental regulations by Governmental Bodies, provided
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that such regulations have not been violated, and (d) purchase money Liens or
purchase money security interests upon or in any Inventory acquired or held by
the Seller in the ordinary course of business to secure the purchase price of
such Inventory or to secure indebtedness incurred solely for the purpose of
financing the acquisition of such Inventory, as set forth on Schedule 14.1
hereto.
"PERSON" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or Governmental Body.
"PURCHASE PRICE" has the meaning set forth in Section 2.1 hereof.
"PURCHASERS" has the meaning set forth in the recitals hereto.
"PURCHASER DOCUMENTS" has the meaning set forth in Section 5.2 hereof.
"PURCHASER REPRESENTATIVES" has the meaning set forth in Section 6.2
hereof.
"REMEDIAL ACTION" means any action, including, without limitation, any
capital expenditure, required or voluntarily undertaken to (a) clean up, remove,
treat, or in any other way address any Hazardous Material or other substance in
the indoor or outdoor environment, (b) prevent the Release or threat of Release,
or minimize the further Release of any Hazardous Material or other substance so
it does not migrate or endanger or threaten to endanger public health or welfare
of the indoor or outdoor environment, (c) perform pre-remedial studies and
investigations or post-remedial monitoring and care, or (d) bring any Asset into
compliance with all Environmental Laws and Permits.
"SELLER" has the meaning set forth in the recitals hereto.
"SELLER DOCUMENTS" has the meaning set forth in Section 4.2 hereof.
"TAX RETURNS" shall mean any report, return, information return or
other information required to be supplied to a taxing authority in connection
with Taxes.
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"TAXES" means (i) all federal, state, local or foreign taxes, charges,
fees, imposts, levies or other assessments, including, without limitation, all
net income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments and
charges of any kind whatsoever, (ii) all interest, penalties, fines, additions
to tax or additional amounts imposed by any taxing authority in connection with
any item described in clause (i) and (iii) any transferee liability or liability
pursuant to contract or other arrangement in respect of any items described in
clauses (i) and/or (ii).
"TRANSFERRED EMPLOYEES" means all Active Employees who accept offers
of employment from PG Newco on or after the Closing Date.
"TRANSFERRED PLANS" has the meaning set forth in Section 8.2 hereof.
14.2 PRORATIONS. (a) PG Newco and the Seller hereby agree as
follows with regard to prorations applicable to the consummation of the
transactions contemplated hereby. The parties agree that all operational
expenses incurred directly in the operation of the Business, including, without
limitation, utility bills, the expense of supplies, the expense of fuel, and the
like, shall be prorated between the parties as of the Closing Date, and as of
the Closing Date shall become the obligation and responsibility of PG Newco.
Prorations which are to be effected on the Closing Date shall be made on the
Closing Date or, if such prorations cannot reasonably be made as of the Closing
Date, as soon thereafter as possible and "as of" the Closing Date.
(b) All personal and real property taxes and special and general
assessments relating to the Assets shall be prorated by the parties as of the
Closing Date, and all such taxes applicable to periods of time prior to and
through such date shall be the sole obligation, responsibility and expense of
the Seller, and shall be paid by the Seller. All such assessments and taxes
applicable to periods following the Closing Date shall be the sole obligation,
responsibility and expense of PG Newco.
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14.3 WAIVER OF COMPLIANCE WITH BULK TRANSFER LAWS. The Purchasers
hereby waive compliance by Seller with the provisions of the "bulk sales", "bulk
transfer" or similar laws of any state of the United States. The Seller and
each Shareholder Indemnitor hereby jointly and severally indemnify the
Purchasers from any Losses resulting from Seller's failure to comply with any
such "bulk sales," "bulk transfer" or similar laws.
14.4 Intentionally left blank.
14.5 ENTIRE AGREEMENT. This Agreement (with its Schedules and
Exhibits) contains, and is intended as, a complete statement of all of the terms
and the arrangements between the parties hereto with respect to the matters
provided for herein, and supersedes any and all previous agreements and
understandings between the parties hereto with respect to those matters.
14.6 GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of Delaware applicable to agreements
made and to be performed in such jurisdiction. Except as expressly set forth in
Article XII hereof, any action to enforce, which arises out of or in any way
relates to, any of the provisions of this Agreement or the instruments,
agreements and other documents contemplated hereby shall be brought and
prosecuted in the courts of the State of Delaware or of the United States for
the District of Delaware. Each party irrevocably: (a) submits to the exclusive
jurisdiction of the aforesaid courts, and (b) waives any objection which it may
have at any time to the laying of venue of any suit, action or proceeding
("Proceedings") brought in any such court, waives any claim that such
Proceedings have been brought in an inconvenient forum and further waives the
right to object, with respect to such Proceedings, that such court does not have
jurisdiction over such party. The parties irrevocably consent to service of
process given in the manner provided for notices in Section 14.10. Nothing in
this Agreement will affect the right of any party to serve process in any other
manner permitted by law.
14.7 TRANSFER AND OTHER TAXES. The Seller shall be responsible for
the cost of all transfer and documentary taxes and fees imposed with respect to
instruments of conveyance in the transaction contemplated hereby and shall bear
the cost of all sales, use, gains, excise and other transfer or similar taxes
applicable in respect of the
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transfer of the Assets contemplated hereunder. The Seller shall execute and
deliver to the Purchasers at the Closing any certificates or other documents as
the Purchasers may reasonably request to perfect any exemption from any such
transfer, documentary, sales, gains, excise or use tax.
14.8 EXPENSES. Each of the parties hereto shall bear its own
expenses (including, without limitation, fees and disbursements of its counsel,
accountants, investment bankers, brokers and other experts), incurred by it in
connection with the preparation, negotiation, execution, delivery and
performance of this Agreement, each of the other documents and instruments
executed in connection with or contemplated by this Agreement and the
consummation of the transactions contemplated hereby and thereby.
14.9 TABLE OF CONTENTS AND HEADINGS. The table of contents and
section headings of this Agreement are for reference purposes only and are to be
given no effect in the construction or interpretation of this Agreement.
14.10 NOTICES. All notices and other communications under this
Agreement shall be in writing (including, without limitation, telegraphic,
telex, telecopy or cable communication) and mailed, telegraphed, telexed,
telecopied, cabled or delivered by hand or by a nationally recognized courier
service guaranteeing overnight delivery to a party at the following address (or
to such other address as such party may have specified by notice given to the
other party pursuant to this provision):
If to the Seller or any of its stockholders, to:
Peter G. VanHeusden
c/o PG Design Electronics Inc.
48700 Structural Drive
Chesterfield, Michigan 48051
Facsimile: (810) 598-8008
With a copy to:
David J. Wellman, Esq.
Colombo & Colombo
1500 Woodward Avenue, Suite 300
P.O. Box 2028
Bloomfield Hills, Michigan 48303-2028
Facsimile: (810) 645-5418
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If to either Purchaser, to:
PG Newco Corp.
c/o Milwaukee Land Company
547 West Jackson Boulevard
Suite 1510
Chicago, Illinois 60661
Attention: Edwin Jacobson
Facsimile: (312) 663-9397
With a copy to:
Raymond O. Gietz, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Facsimile: (212) 310-8007
All such notices and communications shall, when mailed, telegraphed, telexed,
telecopied, cabled or delivered, be effective three days after deposit in the
mails, delivered to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the cable company,
delivered by hand to the addressee or one day after delivery to the courier
service.
14.11 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validly or enforceability of
any other provision of this Agreement, each of which shall remain in full force
and effect.
14.12 BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. Nothing in this Agreement shall create or be deemed to create any
third party beneficiary rights in any person or entity not party to this
Agreement. No assignment of this Agreement or of any rights or obligations
hereunder may be made by any party (by operation of law or otherwise) without
the prior written consent of each of the other parties hereto and any attempted
assignment without such required consents shall be void.
14.13 AMENDMENTS. (a) Any provision of this Agreement may be
amended or waived prior to the Closing Date if, and only if, such amendment or
waiver is in writing and
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signed, (i) in the case of an amendment, by both Purchasers, the Seller, and the
Shareholder Indemnitors, and (ii) in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or future exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
14.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this instrument
as of the date and year first above written.
MILWAUKEE LAND COMPANY
By: /s/ Edwin Jacobson
---------------------------------
Name: Edwin Jacobson
Title: President and Chief Executive Officer
PG NEWCO CORP.
By: /s/ Edwin Jacobson
---------------------------------
Name: Edwin Jacobson
Title: Chairman of the Board
PG DESIGN ELECTRONICS, INC.
By: /s/ Peter G. VanHeusden
---------------------------------
Name: Peter G. VanHeusden
Title: President
/s/ Peter G. VanHeusden
---------------------------------
Peter G. VanHeusden, as
Shareholder Indemnitor
/s/ Adrian J. VanHeusden
---------------------------------
Adrian J. VanHeusden, as
Shareholder Indemnitor
/s/ Marie VanHeusden
---------------------------------
Marie VanHeusden, as
Shareholder Indemnitor
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APPENDIX B
MILWAUKEE LAND COMPANY
CONDENSED PRO FORMA UNCONSOLIDATED BALANCE SHEET
December 31, 1996
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Milwaukee
Land Pro Forma
Company/(1)/ Adjustments/(2)/ Pro Forma
------------- ---------------- ---------
<S> <C> <C> <C>
Assets
Investments
Non Affiliates $ 9,535 $(9,535) $ 0
Affiliates 7,589 12,535 20,124
------- ------- -------
17,124 3,000 20,124
Cash 1,192 1,192
Receivables 687 687
Prepaid and other assets 62 62
--------------------------------------
$19,065 $ 3,000 $22,065
======================================
Liabilities
Accounts payable and
accrued liabilities $ 1,481 1,481
Note Payable 3,000 3,000
Net Assets 17,584 17,584
--------------------------------------
$19,065 3,000 22,065
======================================
</TABLE>
See Notes to Condensed Pro Forma Unconsolidated Balance Sheet
MILWAUKEE LAND COMPANY
NOTES TO CONDENSED PRO FORMA UNCONSOLIDATED BALANCE SHEET
(In Thousands)
(1) Represents the historical financial position at December 31, 1996.
(2) Milwaukee Land Company will sell marketable securities of $9,535 and invest
$3,000 in and lend $6,535 to a wholly-owned non-investment company
subsidiary which borrows additional amounts necessary to acquire certain
assets and liabilities of PG Design Electronics. Milwaukee Land Company
also issues two $1,500 Promissory Notes to PG Design Electronics to acquire
certain assets and liabilities. These assets and liabilities are
transferred to Milwaukee Land Company's wholly owned subsidiary.
<PAGE>
MILWAUKEE LAND COMPANY
CONDENSED PRO FORMA UNCONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
December 31, 1996
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Milwaukee
Land Pro Forma
Company(/1/) Adjustments Pro Forma
------- ----------- ---------
<S> <C> <C> <C>
Investment income $ 1,200 $ (207) /(2)/ $ 993
Expenses 1,075 1,075
----------------------------------------------
Net investment income (loss) 125 (207) (82)
Realized gains on sales of
investments 57 57
Unrealized depreciation on
investments (1,567) 1,255 /(3)/ (312)
----------------------------------------------
Net decrease in assets resulting
from operations $ (1,385) $ 1,048 $ (337)
==============================================
</TABLE>
See notes to Condensed Pro Forma Unconsolidated Statement of Operations
MILWAUKEE LAND COMPANY
NOTES TO CONDENSED PRO FORMA UNCONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
(1) Represents historical results of operations for the year ended December 31,
1996
(2) To reduce investment income in consideration of investment liquidated to
accomplish the purchase
Investments liquidated $(9,535)
1996 average investment returns 6.9%
------
(658)
Debt investment in P G Newco 6,535
1996 average investment returns 6.9%
------
451
------
(207)
======
(3) To record an increase in the fair value of the investment in PG Electronics
equal to its 1996 net income.
C-2
<PAGE>
APPENDIX C
Financial Statements and
Additional Information
P G Design Electronics, Inc.
Year ended December 31, 1996 with
Report of Independent Auditors
[LOGO OF ERNST & YOUNG LLP APPEARS HERE]
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
--------
Page
----
<S> <C>
Report of Independent Auditors C-1
Financial statements
Balance sheet C-2
Statement of income and retained earnings C-4
Statement of cash flows C-5
Notes to financial statements C-6 - C-9
Additional information: C-10
Summary of cost of sales C-11
Summary of general and administrative expenses C-12
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors
P G Design Electronics, Inc.
We have audited the accompanying balance sheet of P G Design Electronics, Inc.
as of December 31, 1996 and the related statements of income and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides 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 P G Design Electronics, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying summary of cost of sales and
summary of general and administrative expenses are presented for purposes of
additional analysis and are not a required part of the financial statements.
Such information has been subjected to the auditing procedures applied in our
audit of the financial statements and, in our opinion, is fairly stated in all
material respects in relation to the financial statements taken as whole.
/s/ Ernst & Young LLP
February 13, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
C-1
<PAGE>
P G DESIGN ELECTRONICS, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
<TABLE>
<S> <C>
Current assets:
Cash $ 1,118,624
Accounts receivable, net of allowance for doubtful
accounts of $63,978 3,729,971
Inventories 2,730,539
Deferred income taxes 666,000
Prepaid expenses 102,437
-----------
Total current assets 8,347,571
-----------
Property and equipment:
Machinery and equipment 7,251,160
Furniture and equipment 462,425
Leasehold improvements 192,014
-----------
7,905,599
Less accumulated depreciation
and amortization 5,011,741
-----------
2,893,858
-----------
Other assets:
Intangibles, net of amortization of $11,400 11,000
Note receivable, officer 82,297
Deposits 100,450
-----------
193,747
-----------
$11,435,176
===========
</TABLE>
C-2
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C>
Current liabilities:
Note payable, bank $ 100,000
Current portion of long-term debt 612,565
Accounts payable, trade 2,499,211
Accrued expenses:
Payroll taxes withheld and accrued 15,528
Pension and profit sharing 498,018
Other 255,133
Income taxes payable 1,007,467
-----------
Total current liabilities 4,987,922
-----------
Long-term debt 1,022,240
-----------
Stockholders' equity:
Common stock, $1 par value
Authorized - 50,000 shares
Issued and outstanding - 1,200 shares 1,200
Retained earnings 5,423,814
-----------
5,425,014
-----------
$11,435,176
===========
</TABLE>
See accompanying notes.
C-3
<PAGE>
P G DESIGN ELECTRONICS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Sales $25,021,647
Cost of sales 20,158,079
-----------
Gross margin 4,863,568
General and administrative expenses 2,667,188
-----------
Income from operations 2,196,380
-----------
Other income (expense):
Interest expense (191,063)
Interest income 70,564
Miscellaneous income 298
-----------
(120,201)
-----------
Income before income taxes 2,076,179
Income taxes 821,000
-----------
Net income 1,255,179
Retained earnings, beginning of period 4,168,635
-----------
Retained earnings, end of period $ 5,423,814
===========
</TABLE>
See accompanying notes.
C-4
<PAGE>
P G DESIGN ELECTRONICS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash flows provided by (used in) operating activities:
Net income $ 1,255,179
------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,264,513
Amortization 2,000
Deferred income taxes (410,000)
Add (deduct) changes in working capital:
Increase in receivables (2,361,044)
Decrease in inventories 395,794
Increase in prepaid expenses (25,160)
Increase in accounts payable 836,253
Increase in accrued expenses 313,720
Increase in income taxes payable 690,336
------------
704,412
------------
Net cash provided by operting activities 1,961,591
------------
Cash flows provided by (used in) investing activties:
Purchases of property and equipment (1,518,161)
Sale of investments 373,966
Increase in note receivable, officer (7,953)
------------
Net cash used ininvesting activities (1,152,148)
------------
Cash flows provided by (used in) financing activities:
Short-term borrowing, net of repayments (464,000)
Proceeds from issuance of long-term debt 340,000
Principal payments onlong-term debt (607,760)
------------
Net cash used in financing activities (731,760)
------------
Net increase in cash and cash equivalents 77,683
Cash and cash equivalents at beginning of period 1,040,941
------------
Cash and cash equivalents at end of period $ 1,118,624
============
</TABLE>
See accompanying notes.
C-5
<PAGE>
P G DESIGN ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Summary of accounting policies
------------------------------
This summary of accounting policies of P G Design Electronics, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management which is responsible for their integrity and objectivity.
Cash and cash equivalents
-------------------------
Cash and cash equivalents are defined as cash on hand and demand deposits
in banks plus short term investments that are readily convertible to cash
as well as investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market.
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation is determined using
accelerated methods over the estimated useful lives of the property and
equipment which range from five to seven years for equipment and 39 years
for leasehold improvements.
Intangibles
-----------
The cost of the intangibles acquired are being amortized on a straight-line
basis over their estimated remaining life of ten years.
Income Taxes
------------
Deferred income taxes have been provided on temporary differences arising
primarily form inventory costs for financial reporting purposes and for
income tax purposes.
2. Inventories
-----------
Inventories consist of the following:
Raw material $ 2,078,266
Work-in-process 565,708
Finished goods 86,565
-----------
$ 2,730,539
===========
C-6
<PAGE>
3. Note receivable, officer
------------------------
The note receivable, officer, is an 8% unsecured note with no specific
repayment terms. No payments are expected to be made in the coming year.
4. Note payable, bank
------------------
The Company has established a line of credit with a bank. Under the terms
of the line of credit the company can borrow up to $2,000,000 at the prime
lending rate (8.25% at December 31, 1996) based upon eligible accounts
receivable. The line is collateralized by accounts receivable, inventory
and machinery and equipment, is personally guaranteed by the major
stockholder of the Company and is cross collateralized with the equipment
loan described in Note 5. Borrowing against this line of credit at December
31, 1996 was $100,000.
5. Long-term debt
--------------
The company has established an equipment line of credit with a bank. The
Company may borrow up to $2,300,000 for the acquisition of new or used
equipment. Currently the Company has approximately $769,000 available under
this line of credit. Interest is at the prime lending rate and is cross
collateralized with the note payable described in Note 4 and is personally
guaranteed by an officer of the Company.
<TABLE>
<CAPTION>
<S> <C>
Long-term debt is comprised of the following:
Payable in monthly installments of $7,324
plus interest, due 1999. $ 227,044
Payable in monthly installments of $7,017
plus interst, due 1999. 252,592
Payable in monthly installments of $14,679
plus interest, due 1999. 396,334
Payable in monthly installments of $1,167
plus interest, due 1999. 32,680
Payable in monthly installments of $6,521,
plus interest, due 2000. 293,430
Payable in monthly installments of $5,667
plus interest, due 2001. 328,667
Equipment lease 104,058
----------
1,634,805
Less current portion 612,565
-----------
$ 1,022,240
===========
</TABLE>
C-7
<PAGE>
5. Long-term debt (continued)
--------------------------
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 508,506
1999 330,418
2000 126,650
2001 56,666
------------
$ 1,022,240
============
</TABLE>
6. Leases
------
The Company leases its office and plant facilities. The lease is for a
period of ten years beginning February, 1994 at a monthly rental of
$13,000. Rent expense for the facilities lease included in operations
amounted to $156,000.
In addition, the Company is currently leasing office equipment under a
non-cancelable lease expiring in 2000.
The following is a schedule of future minimum rental payments required
under the above operating leases as of December 31, 1996:
<TABLE>
<S> <C>
1997 $ 161,012
1998 161,012
1999 161,012
2000 157,671
2001 156,000
Thereafter 325,000
------------
$ 1,121,707
============
</TABLE>
7. Cash flows
----------
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
<S> <C>
Interest $ 193,377
=========
Income taxes $ 542,664
=========
</TABLE>
8. Pension and profit sharing
--------------------------
The Company sponsors a profit sharing plan and a defined contribution
pension plan which covers substantially all of its employees.
Contributions of 10% of eligible employee payroll are required to be made
to the defined contribution pension plan. For the current year
contributions to be defined contribution pension plan were $220,118.
Contributions to the profit sharing plan are determined annually by the
Board of Directors of P G Design Electronics, Inc. A contribution of
$233,405 was made to the profit sharing plan for the current year.
C-8
<PAGE>
9. Income taxes
------------
Income tax expense consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Currently payable $ 1,231,000
Deferred income taxes (410,000)
------------
$ 821,000
============
</TABLE>
Deferred taxes result from differences in the recognition of expenses for
income tax and financial reporting purposes and relate principally to
inventory.
10. Major customers
---------------
A material part of the Company's business is dependent on a few customers,
the loss of any one could have a material effect on the Company. During
the current year four customers accounted for $21,568,000 of sales.
C-9
<PAGE>
ADDITIONAL INFORMATION
C-10
<PAGE>
P G DESIGN ELECTRONICS, INC.
SUMMARY OF COST OF SALES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Raw materials:
Inventories, beginning of period $ 2,531,645
Purchases 13,683,559
Inventories, end of period (2,078,266)
-----------
14,136,938
-----------
Labor and manufacturing overhead:
Production labor 1,600,029
Production engineering 666,899
Production development 462,496
Temporary production labor 522,341
Depreciation 1,197,966
Insurance 313,123
Rent 156,000
Repairs and maintenance 94,754
Shipping - inbound 160,546
Shipping - freight 15,522
Shipping supplies 168,840
Shop supplies 506,550
Payroll taxes 138,609
Utilities 123,088
-----------
6,126,763
Increase in labor and overhead applicable
to inventory (105,622)
-----------
6,021,141
-----------
$20,158,079
===========
</TABLE>
C-11
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
SUMMARY OF GENERAL AND ADMINISTRATIVE EXPENSES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Administrative salaries $ 325,222
Executive salaries 869,520
Advertising 25,834
Bank and credit card charges 18,000
Commission expense 34,200
Consulting fees 12,177
Entertainment and promotion 37,527
Automotive and travel expenses 107,752
Bad debts 52,338
Depreciation 66,547
Amortization of intangibles 2,000
Dues and subscriptions 2,163
Equipment rental 14,598
Legal and accounting 87,832
Office supplies 122,559
Pension and profit sharing contribution 453,523
Payroll taxes 82,670
Single business tax 175,011
Other taxes 96,723
Telephone 34,098
Officer life insurance 932
Temporary office services 7,922
Office repairs and maintenance 11,727
Donations 300
Tuition expenses 26,013
----------
$2,667,188
==========
</TABLE>
C-12
<PAGE>
APPENDIX D
UNAUDITED FINANCIAL STATEMENTS--PG Design
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
--------------------------
FINANCIAL STATEMENTS
and
ADDITIONAL INFORMATION
with
ACCOUNTANTS' REVIEW REPORT
YEARS ENDED JUNE 30, 1996 AND 1995
------------------
<PAGE>
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accountants' Review Report 1
Financial statements:
Balance sheets 2
Statements of income and retained earnings 3
Statements of cash flows 4
Notes to financial statements 5-7
Additional information
Summary of cost of sales 8
Summary of general and administrative expenses 9
</TABLE>
<PAGE>
[LETTERHEAD OF HIRZEL, JACKSON & SWAINE, P.C. APPEARS HERE]
ACCOUNTANTS' REVIEW REPORT
--------------------------
The Board of Directors
P.G. Design Electronics, Inc.
Chesterfield, Michigan
We have reviewed the accompanying balance sheets of P.G. Design Electronics,
Inc. as of June 30, 1996 and 1995, and the related statements of income and
retained earnings and cash flows for the years then ended, in accordance with
standards established by the American Institute of Certified Public Accountants.
All information included in these financial statements is the representation of
the management of P.G. Design Electronics, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
Our review was made primarily for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements for them to be in conformity with generally accepted accounting
principles. The other data accompanying the financial statements, presented
only for analysis purposes, has been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements. We did not
become aware of any material modifications that should be made to the other
data.
/s/ Hirzel, Jackson, & Swaine
August 30, 1996
<PAGE>
2
P.G. DESIGN ELECTRONICS, INC.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
June 30
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 1,468,399 $ 60,375
Investments - 571,067
Accounts receivable, net of allowance for doubtful
accounts of $13,000 in 1996 1,939,010 3,139,145
Current portion of notes receivable, officer - 15,000
Inventories 2,972,542 3,839,512
Refundable income taxes - 10,394
Prepaid expenses 66,855 46,859
----------- -----------
Total current assets 6,446,806 7,682,352
----------- -----------
Property and equipment:
Machinery and equipment 6,456,793 5,121,938
Furniture and equipment 426,851 390,031
Leasehold improvements 192,014 188,539
----------- -----------
7,075,658 5,700,508
Less accumulated depreciation
and amortization 4,411,950 3,317,538
----------- -----------
2,663,708 2,382,970
----------- -----------
Other assets:
Intangibles, net of amortization 12,000 14,000
Note receivable, officer 79,132 56,461
Deposits 100,450 100,450
----------- -----------
191,582 170,911
----------- -----------
$ 9,302,096 $10,236,233
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current liabilities:
Note payable, bank $ 750,000 $ 1,103,000
Current portion of notes payable, officer - 4,770
Current portion of long-term debt 614,276 505,066
Accounts payable, trade 2,230,099 3,384,832
Accrued expenses:
Payroll taxes witheld and accrued 4,083 14,088
Pension and profit sharing 317,196 200,491
Other 116,239 247,788
Income taxes payable 92,593 -
----------- -----------
Total current liabilities 4,124,486 $ 460,035
----------- -----------
Long-term debt 981,832 1,264,634
----------- -----------
Stockholders' equity:
Common stock, $1 par value
Authorized - 50,000 shares 1,200 1,200
Issued and outstanding - 1,200 shares 4,194,578 3,510,364
----------- -----------
Retained earnings 4,195,778 3,511,564
----------- -----------
$ 9,302,096 $10,236,233
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
3
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales $22,903,181 $20,472,208
Cost of sales 19,278,802 18,290,907
----------- -----------
Gross margin on sales 3,624,379 2,181,301
General and administrative expenses 2,505,316 1,378,626
----------- -----------
Income from operations 1,119,063 802,675
----------- -----------
Other income (expense):
Interest expense (221,538) (294,126)
Interest income 70,859 43,803
Miscellaneous income 572 21
Gain on disposal of equipment 97,748 82,647
----------- -----------
(52,359) (167,655)
----------- -----------
Income before income taxes 1,066,704 635,020
Income taxes 382,490 (217,500)
----------- -----------
Net income 684,214 417,520
Retained earnings, beginning of year 3,510,364 3,092,844
----------- -----------
Retained earnings, end of year $4,194,578 $3,510,364
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
4
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 684,214 $ 417,520
----------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,192,160 1,196,019
Amortization 2,000 4,160
Gain on disposal of equipment (97,748) (82,647)
Add (deduct) changes in working capital:
Decrease (increase) in receivables 1,200,135 (2,395,713)
Decrease (increase) in inventories 866,970 (1,482,497)
Decrease in refundable income taxes 10,394 246,722
(Increase) in prepaid expenses (19,996) (8,832)
(Decrease) increase in accounts payable (1,154,733) 2,166,983
(Decrease) increase in accrued expenses (24,849) 332,317
Increase in income taxes payable 92,593 -
----------- ------------
2,066,926 (23,488)
----------- ------------
Cash and cash equivalents provided by
operating activities 2,751,140 394,032
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (1,502,162) (1,007,533)
Sale (purchase) of investments 571,067 (266,063)
Decrease in note payable, officer (4,770) -
Increase in note receivable, officer (7,671) (71,461)
----------- ------------
Net cash used in investing activities (943,536) (1,345,057)
----------- ------------
Cash flows from financing activities
Short-term borrowings, net of repayments (353,000) 553,000
Proceeds from sale of equipment 127,012 166,257
Proceeds from issuance of long-term debt 378,898 860,440
Principal payments on long-term debt (552,490) (997,455)
Increase in deposits - (247)
----------- ------------
Net cash (used-in) provided by financing activities (399,580) 581,995
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,408,024 (369,030)
Cash and cash equivalents at beginning of year 60,375 429,405
----------- ------------
Cash and cash equivalents at end of year $ 1,468,399 $ 60,375
=========== ============
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
5
P.G. DESIGN ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
1. Summary of accounting policies
------------------------------
This summary of accounting policies of P.G. Design Electronics, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management which is responsible for their integrity and objectivity.
Cash and cash equivalents
-------------------------
Cash and cash equivalents are defined as cash on hand and demand deposits
in banks plus short term investments that are readily convertible to cash
as well as investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis or market.
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation is determined using
accelerated methods over the estimated useful lives of the property and
equipment which range from five to seven years for equipment and 39 years
for leasehold improvements.
Intangibles
-----------
The cost of the intangibles acquired are being amortized on a straight-
line basis over their estimated remaining life of ten years.
Cash flows
----------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
2. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw material $2,332,833 $2,933,171
Work-in-process 518,383 582,923
Finished goods 121,326 323,418
---------- ----------
$2,972,542 $3,839,512
========== ==========
</TABLE>
<PAGE>
6
3. Note receivable, officer
------------------------
The note receivable, officer, is an 8% note with no specific repayment
terms. No payments are expected to be made in the coming year.
4. Note payable, bank
------------------
The Company has established a line of credit with a bank. Under the terms
of the line of credit the Company can borrow up to $1,500,000 at the prime
lending rate based upon eligible accounts receivable. The line is
collateralized by accounts receivable, inventory and property and
equipment, is personally guaranteed by the major stockholder of the
Company and is cross collateralized with the equipment loan described in
Note 5. Borrowings against this line of credit for 1996 and 1995 were
$750,000 and $1,103,000, respectively.
5. Long-term debt
--------------
The Company has established an equipment line of credit with a bank. The
Company may borrow up to $2,300,000 for the acquisition of new or used
equipment. Currently the Company has approximately $877,000 available under
this line of credit. Interest is at the prime lending rate and is cross
collateralized with the note payable described in Note 4 and is personally
guaranteed by an officer of the Company.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Payable in monthly installments of $7,324
plus interest, due 2000. $ 270,988 $ 358,876
Payable in monthly installments of $7,017
plus interest, due 2000. 294,694 378,898
Payable in monthly installments of $14,679
plus interest, due 1999. 484,408 660,556
Payable in monthly installments of $1,167
plus interest, due 1999. 39,682 53,688
Payable in monthly installments of $6,521
plus interest, due 2001. 332,554 -
Payable in monthly installments of $11,342
plus interest, due 1995. - 45,366
The Company has entered into a lease agreement
which has been classified as a financing arrangement.
Monthly payments are $10,501, including interest,
due in 1996. 173,782 272,316
---------- ----------
1,596,108 1,769,700
Less current portion 614,276 505,066
---------- ----------
$ 981,832 $1,264,634
========== ==========
</TABLE>
<PAGE>
7
5. Long-term debt (continued)
--------------------------
<TABLE>
Maturities of long-term debt are as follows:
<S> <C>
1998 $ 440,494
1999 394,123
2000 127,654
2001 19,561
----------
$ 981,832
==========
</TABLE>
6. Leases
------
The Company leases its office and plant facilities. The lease is for a
period of ten years beginning February, 1994 at a monthly rental of $13,000.
Rent expense for the facilities lease included in operations for 1996 and
1995 amounted to $156,000.
7. Cash flows
----------
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Interest $ 221,538 $ 291,424
Income taxes $ 279,503 $ 175,000
</TABLE>
8. Pension and profit sharing
--------------------------
The Company sponsors a profit sharing plan and a defined contribution
pension plan which covers substantially all of its employees. Contributions
of 10% of eligible employee payroll are required to be made to the defined
contribution pension plan. For 1996 and 1995 the contributions to the
defined contribution pension plan were $197,195 and $92,158, respectively.
Contributions to the profit sharing plan are determined annually by the
Board of Directors of P.G. Design Electronics, Inc. For 1996, a contribution
of $120,000 was made to the profit sharing plan. For 1995, a contribution of
$108,333 was made to the profit sharing plan.
9. Major customers
---------------
A material part of the Company's business is dependent on a few customers,
the loss of any one could have a material effect on the Company. During the
year ended June 30, 1996, four customers accounted for $20,295,000 of sales.
<PAGE>
ADDITIONAL INFORMATION
<PAGE>
8
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Summary of cost of sales
- ------------------------
Raw materials:
Inventories, beginning of year $ 3,839,512 $ 2,357,015
Purchases 13,462,501 14,875,338
Inventories, end of year (2,972,542) (3,839,512)
----------- -----------
14,329,471 13,392,841
----------- -----------
Labor and manufacturing overhead:
Production labor 1,291,218 816,123
Production engineering 489,303 644,237
Production development 323,815 452,361
Temporary production labor 296,336 576,508
Depreciation 1,123,631 1,132,302
Insurance 267,183 190,229
Rent 156,000 156,000
Repairs and maintenance 97,647 27,056
Shipping - inbound 146,541 151,367
Shipping - freight 27,566 59,093
Shipping supplies 107,961 93,693
Shop supplies 408,644 449,721
Payroll taxes 118,268 104,295
Utilities 108,758 87,320
----------- -----------
4,962,871 4,940,305
Increase in labor and overhead applicable
to inventory (13,540) (42,239)
----------- -----------
4,949,331 4,898,066
----------- -----------
$19,278,802 $18,290,907
=========== ===========
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
9
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Summary of general and administrative expenses
- ----------------------------------------------
Administrative salaries $ 1,202,160 $ 256,175
Executive salaries 188,200 85,120
Advertising 35,745 134,684
Bank and credit card charges 10,897 14,535
Commission expense 13,500 30,187
Consulting fees 5,954 640
Entertainment and promotion 25,471 30,538
Automotive and travel expenses 106,782 65,829
Bad debts 15,716 4,666
Depreciation 68,529 63,717
Amortization of intangibles 2,000 4,160
Dues and subscriptions 1,694 5,176
Equipment rental 17,213 15,460
Legal and accounting 49,077 63,849
Office supplies 145,962 80,029
Pension and profit sharing contribution 317,195 200,491
Payroll taxes 91,795 52,019
Single business tax 77,500 51,667
Other taxes 43,143 110,100
Telephone 33,627 32,365
Officer life insurance 1,253 897
Temporary office services 22,704 48,741
Moving expenses 1,575 4,638
Office repairs and maintenance 5,283 9,650
Donations 300 100
Tuition expenses 22,041 13,193
----------- -----------
$ 2,505,316 $ 1,378,626
----------- -----------
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
P.G. DESIGN ELECTRONICS, INC
----------------------
FINANCIAL STATEMENTS
and
ADDITIONAL INFORMATION
with
ACCOUNTANTS' REVIEW REPORT
YEARS ENDED JUNE 30, 1995 AND 1994
-------------
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
--------
Page
----
<S> <C>
Accountants' Review Report 1
Financial Statements:
Balance sheet 2
Statements of income and retained earnings 3
Statements of cash flows 4
Notes to financial statements 5-8
Additional information:
Summary of cost of sales 9
Summary of general and administrative expenses 10
</TABLE>
<PAGE>
1
[LETTERHEAD OF HIRZEL, JACKSON & SWAINE, P.C. APPEARS HERE]
ACCOUNTANTS' REVIEW REPORT
--------------------------
The Board of Directors
P.G. Design Electronics, Inc.
Chesterfield, Michigan
We have reviewed the accompanying balance sheets of P.G. Design Electronics,
Inc. as of June 30, 1995 and 1994, and the related statements of operations and
retained earnings and cash flows for the years then ended, in accordance with
standards established by the American Institute of Certified Public Accountants.
All information included in these financial statements is the representation of
the management of P.G. Design Electronics, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
Our review was made primarily for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements for them to be in conformity with generally accepted accounting
principles. The other data accompanying the financial statements, presented only
for analysis purposes, have been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements. We did not
become aware of any material modifications that should be made to the other
data.
/s/ Hirzel, Jackson & Swaine
September 30, 1995
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
BALANCE SHEET
ASSETS
------
<TABLE>
<CAPTION>
June 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 60,375 $ 429,405
Investments 571,067 305,004
Accounts receivable 3,139,145 743,432
Current portion of notes receivable, officer 15,000 -
Inventories 3,839,512 2,357,015
Refundable income taxes 10,394 257,116
Prepaid expenses 46,859 38,027
----------- -----------
Total current assets 7,682,352 4,129,999
----------- -----------
Property and equipment:
Machinery and equipment 5,121,938 4,405,222
Furniture and equipment 390,031 322,647
Leasehold Improvements 188,539 182,843
----------- -----------
5,700,508 4,910,712
Less accumulated depreciation
and amortization 3,317,538 2,255,646
----------- -----------
2,382,970 2,655,066
----------- -----------
Other assets:
Intangibles, net of amortization 14,000 18,160
Note receivable, officer 56,461 -
Deposits 100,450 100,203
----------- -----------
170,911 118,363
----------- -----------
$10,236,233 $ 6,903,428
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current liabilities:
Note payable, bank $ 1,103,000 $ 550,000
Current portion of notes payable, officers 4,770 4,472
Current portion of long-term debt 505,066 698,670
Accounts payable, trade 3,384,832 1,217,849
Payroll taxes withheld and accrued 14,088 1,322
Accrued expenses:
Pensions and profit sharing 200,491 76,005
Other 247,788 52,723
----------- -----------
5,460,035 2,601,041
----------- -----------
Note payable, officers -0- 4,770
----------- -----------
Long-term debt 1,264,634 1,203,573
----------- -----------
Stockholders' equity:
Common stock, $1 par value
Authorized - 50,000 shares
Issued and outstanding - 1,200 shares 1,200 1,200
Retained earnings 3,510,364 3,092,844
----------- -----------
3,511,564 3,094,044
----------- -----------
$10,236,233 $ 6,903,428
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
3
<TABLE>
<CAPTION>
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years Ended June 30,
----------------------------
1995 1994
----------- ------------
<S> <C> <C>
Sales $20,472,208 $11,266,072
Cost of sales 18,290,907 10,456,822
----------- ------------
Gross margin on sales 2,181,301 809,250
General and administrative expenses 1,378,626 1,103,402
----------- -----------
Loss from operations 802,675 (294,152)
----------- -----------
Other income (expense):
Interest expense (294,126) (99,695)
Interest income 43,803 34,990
Miscellaneous income 21 1,788
Gain (loss) on disposal of equipment 82,647 (21,884)
----------- -----------
(167,655) (84,801)
----------- -----------
Income (loss) before income taxes 635,020 (378,953)
Income taxes refundable (expense) (217,500) 134,000
----------- -----------
Net income (loss) 417,520 (244,953)
Retained earnings, beginning of year 3,092,844 3,337,797
----------- -----------
Retained earnings, end of year $ 3,510,364 $ 3,092,844
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
4
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ 417,520 $ (244,953)
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,196,019 916,553
Amortization 4,160 2,240
(Gain) loss on disposal of equipment (82,647) 21,884
Add (deduct) changes in working capital:
(Increase) decrease in receivables (2,395,713) 556,191
Increase in note receivable, officer (15,000) -
Increase in inventories (1,482,497) (188,289)
Decrease (increase) in refundable taxes 246,722 (38,099)
(Increase) in prepaid expenses (8,832) (24,771)
Increase (decrease) in accounts payable 2,166,983 (548,896)
Increase (decrease) in accrued expenses 332,317 (22,538)
----------- -----------
(38,488) 674,275
----------- -----------
Cash and cash equivalents provided by
operating activities 379,032 429,322
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,007,533) (2,455,255)
Purchase of investments (266,063) 399,646
Purchase of intangibles - (2,400)
Increase in note receivable, officer (56,461) -
----------- -----------
Net cash used in investing activities (1,330,057) (2,058,009)
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net of repayments 553,000 550,000
Proceeds from sale of equipment 166,257 -
Proceeds from issuance of long-term debt 860,440 1,634,106
Principal payments on long-term debt (997,455) (300,994)
Increase in deposits (247) (92,411)
----------- -----------
Net cash provided by financing activities 581,995 1,790,701
----------- -----------
Net (decrease) increase in cash and cash equivalents (369,030) 162,014
Cash and cash equivalents at beginning of year 429,405 267,391
----------- -----------
Cash and cash equivalents at end of year $ 60,375 $ 429,405
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
5
P.G. DESIGN ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1994
1. Summary of accounting policies
------------------------------
This summary of accounting policies of P.G. Design Electronics, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management which is responsible for their integrity and objectivity.
Cash and cash equivalents
-------------------------
Cash and cash equivalents are defined as cash on hand and demand deposits
in banks plus short term investments that are readily convertible to cash
as well as investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market.
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation is determined using
accelerated methods over the estimated useful lives of the property and
equipment which range from five to seven years for equipment and 39 years
for leasehold improvements.
Intangibles
-----------
The cost of the intangibles acquired are being amortized on a
straight-line basis over their estimated remaining life of ten years.
Cash flows
----------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
2. Investments
-----------
Investments consist of the following:
Comerica certificate of deposit of $208,091 including accrued interest at
6.03%, maturing October 3, 1995.
Comerica certificate of deposit of $362,976 including accrued interest at
6.03%, maturing October 31, 1995.
<PAGE>
6
3. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw material $2,933,171 $1,819,968
Work-in-process 582,923 220,660
Finished goods 323,418 316,387
---------- ----------
$3,839,512 $2,357,015
========== ==========
</TABLE>
4. Note payable, officer
---------------------
The note receivable, officer, is comprised of the following:
<TABLE>
<S> <C>
Note receivable, payable in monthly
installments of $1,250, plus interest
at 6% per annum, unsecured $ 71,461
Less current portion 15,000
----------
$ 56,461
==========
</TABLE>
5. Note payable, bank
------------------
The Company has established a line of credit with a bank. Under the terms
of the line of credit the Company can borrow up to $1,500,000 at the prime
lending rate based upon eligible accounts receivable. The line is
collateralized by accounts receivable, inventory and property and equipment
and is personally guaranteed by the major stockholder of the company, and
is cross collateralized with the equipment loan described in Note 6. At
year-end, borrowings against this line of credit amounted to $1,103,000.
6. Note payable, officers
----------------------
Note payable, officers is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Note payable, due in 1996, payable in monthly
installments of $445 including interest at 12%,
unsecured $ 4,770 $ 9,242
---------- ----------
4,770 9,242
Less current portion 4,770 4,472
---------- ----------
$ -0- $ 4,770
========== ==========
</TABLE>
<PAGE>
7
7. Long-term debt
--------------
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
The Company has established an equipment line
of credit with a bank. Under the line, the
Company may borrow up to $1,500,000 for the
acquisition of new or used equipment. Interest
is at the prime lending rate and is cross
collateralized with the note payable described
in Note 4 and is personally guaranteed by an
officer of the company. Following are the
borrowings against this line:
Payable in monthly installments of $11,342
plus interest, due 1995 $ 45,366 $ 181,465
Payable in monthly installments of $7,324
plus interest, due 2000 358,876 -
Payable in monthly installments of $7,017
plus interest, due 2000 378,898 -
Payable in monthly installments of $14,679
plus interest, due 1999 660,556 836,705
Payable in monthly installments of $1,167
plus interest, due 1999 53,688 67,694
The Company has entered into two lease agreements
which have been classified as financing arrange-
ments, monthly payments are $7,314, including
interest, due in 1996 and 1997. 272,315 503,111
Note payable, payable in monthly installments
of $28,393, including interest, due 1995 - 313,268
---------- ----------
1,769,699 1,902,243
Less current portion 505,066 698,670
---------- ----------
$1,264,633 $1,203,573
========== ==========
Maturities of long-term debt are as follows:
1997 $ 534,946
1998 361,166
1999 314,795
2000 53,726
----------
$1,264,633
==========
</TABLE>
<PAGE>
8
8. Leases
------
The Company leases its office and plant facilities. The lease is for a
period of ten years beginning February, 1994 at a monthly rental of $13,000.
Rent expense for the facilities lease included in operations for 1995 and
1994 amounted to $156,000 and $136,504, respectively.
9. Cash flows
----------
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Interest $ 291,424 $ 96,948
Income taxes $ 175,000 $ 70,000
</TABLE>
10. Pension and profit sharing
--------------------------
The Company sponsors a profit sharing plan and a defined contribution
pension plan which covers substantially all of its employees. Contributions
of 10% of eligible employee payroll are required to be made to the defined
contribution pension plan. For 1995 and 1994 the contributions to the
defined contribution pension plan were $92,158 and $76,005, respectively.
Contributions to the profit sharing plan are determined annually by the
Board of Directors of P.G. Design Electronics, Inc. For 1995, a contribution
of $108,333 was made to the profit sharing plan. No contribution was made to
the profit sharing plan in 1994.
11. Major customers
---------------
A material part of the Company's business is dependent on a few customers,
the loss of any one could have a material effect on the Company. During the
year ended June 30, 1995, four customers accounted for $16,352,000 of sales.
<PAGE>
ADDITIONAL INFORMATION
----------------------
<PAGE>
9
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Summary of cost of sales
- ------------------------
Raw materials:
Inventories, beginning of year $ 2,357,015 $ 2,168,726
Purchases 14,875,338 7,951,022
Inventories, end of year (3,839,512) (2,357,015)
------------ ------------
13,392,841 7,762,733
------------ ------------
Labor and manufacturing overhead:
Production labor 816,123 310,574
Production engineering 644,237 296,770
Production development 452,361 152,362
Temporary production labor 576,508 315,579
Depreciation 1,132,302 850,162
Insurance 190,229 109,398
Rent 156,000 136,504
Repairs and maintenance 27,056 20,861
Shipping inbound 151,367 63,277
Shipping - freight 59,093 23,082
Shipping supplies 93,693 50,722
Shop supplies 449,721 213,959
Payroll taxes 104,295 53,704
Utilities 87,320 59,707
------------ ------------
4,940,305 2,656,661
(Increase) decrease in labor and overhead
applicable to inventory (42,239) 37,428
------------ ------------
4,898,066 2,694,089
------------ ------------
$ 18,290,907 $ 10,456,822
============ ============
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
10
<TABLE>
<CAPTION>
1995 1994
---------- ----------
Summary of general and administrative expenses
- ----------------------------------------------
<S> <C> <C>
Administrative salaries $ 256,175 $ 295,039
Executive salaries 85,120 104,271
Advertising 134,684 45,457
Bank and credit card charges 14,535 11,323
Commission expense 30,187 55,663
Consulting fees 640 495
Entertainment and promotion 30,538 29,029
Automotive and travel expenses 65,829 45,305
Bad Debts 4,666 -
Depreciation 63,717 66,391
Amortization of intangibles 4,160 2,240
Dues and subscriptions 5,176 16,331
Equipment rental 15,460 29,073
Legal and accounting 63,849 81,068
Office supplies 80,029 73,216
Pension and profit sharing contribution 200,491 76,005
Payroll taxes 52,019 35,308
Single business tax 51,667 -
Other taxes 110,100 63,123
Telephone 32,365 37,742
Officer life insurance 897 962
Temporary office services 48,741 -
Moving expenses 4,638 30,225
Office repairs and maintenance 9,650 -
Donations 100 250
Tuition expenses 13,193 4,886
---------- ----------
$1,378,626 $1,103,402
========== ==========
</TABLE>
The accompanying accountants' review report
should be read with this information
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
-----------------------------
FINANCIAL STATEMENTS
and
ADDITIONAL INFORMATION
with
ACCOUNTANTS' REVIEW REPORT
YEARS ENDED JUNE 30, 1994 AND 1993
--------------
<PAGE>
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accountants' Review Report 1
Financial statements:
Balance sheet 2
Statement of operations and retained earnings 3
Statement of cash flows 4
Notes to financial statements 5-8
Additional information:
Summary of cost of sales 9
Summary of general and administrative expenses 10
</TABLE>
<PAGE>
[LETTERHEAD OF HIRZEL, JACKSON & SWAINE, P.C. APPEARS HERE]
ACCOUNTANTS' REVIEW REPORT
--------------------------
The Board of Directors
P.G. Design Electronics, Inc.
Chesterfield, Michigan
We have reviewed the accompanying balance sheets of P.G. Design Electronics,
Inc. as of June 30, 1994 and 1993, and the related statements of operations and
retained earnings and cash flows for the years then ended, in accordance with
standards established by the American Institute of Certified Public Accountants.
All information included in these financial statements is the representation of
the management of P.G. Design Electronics, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
Our review was made primarily for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements for them to be in conformity with generally accepted accounting
principles. The other data accompanying the financial statements, presented
only for analysis purposes, have been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements. We did not
become aware of any material modifications that should be made to the other
data.
/s/ Hirzel, Jackson & Swaine
September 30, 1994
<PAGE>
2
P.G. DESIGN ELECTRONICS, INC.
BALANCE SHEET
ASSETS
------
<TABLE>
<CAPTION>
June 30,
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 429,405 $ 267,391
Investments 305,004 704,850
Accounts receivable 743,432 1,299,623
Inventories 2,357,015 2,168,726
Refundable income taxes 257,116 219,017
Prepaid expenses 38,027 13,256
---------- ----------
Total current assets 4,129,999 4,672,663
---------- ----------
Property and equipment:
Machinery and equipment 4,405,222 2,196,657
Furniture and equipment 322,647 258,800
Leasehold improvements 182,843 24,654
---------- ----------
4,910,712 2,480,111
Less accumulated depreciation
and amortization 2,255,646 1,341,863
---------- ----------
2,655,066 1,138,248
---------- ----------
Other assets:
Intangibles, net of amortization 18,160 18,000
Deposits 100,203 7,792
---------- ----------
118,363 25,792
---------- ----------
$6,903,428 $5,836,703
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable, bank $ 550,000 $ -
Current portion of notes payable, officers 4,472 8,292
Current portion of long-term debt 698,670 194,365
Accounts payable, trade 1,217,849 1,766,745
Payroll taxes withheld and accrued 1,322 3,489
Accrued expenses:
Pension and profit sharing 76,005 58,102
Other 52,723 90,997
---------- ----------
2,601,041 2,121,990
---------- ----------
Note payable, officers 4,770 9,242
---------- ----------
Long-term debt 1,203,573 366,474
---------- ----------
Stockholders' equity:
Common stock, $1 par value
Authorized - 50,000 shares
Issued and outstanding - 1,200 shares 1,200 1,200
Retained earnings 3,092,844 3,337,797
---------- ----------
3,094,044 3,338,997
---------- ----------
$6,903,428 $5,836,703
========== ==========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
<TABLE>
<CAPTION>
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years Ended June 30,
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Sales $11,266,072 $ 6,418,333
Cost of sales 10,456,822 5,806,078
----------- -----------
Gross margin on sales 809,250 612,255
General and administrative expenses 1,103,402 927,092
----------- -----------
Loss from operations (294,152) (314,837)
----------- -----------
Other income (expense):
Interest expense (99,695) (51,167)
Interest income 34,990 42,868
Miscellaneous income 1,788 1,011
Loss on disposal of equipment (21,884) -
----------- -----------
(84,801) (7,288)
----------- -----------
Loss before refundable income taxes (378,953) (322,125)
Refundable income taxes 134,000 113,000
----------- -----------
Net loss (244,953) (209,125)
Retained earnings, beginning of year 3,337,797 3,546,922
----------- -----------
Retained earnings, end of year $ 3,092,844 $ 3,337,797
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
4
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (244,953) $ (209,125)
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 916,553 370,415
Amortization 2,240 2,000
Loss on disposal of equipment 21,884 -
Add (deduct) changes in working capital:
Decrease (increase) in receivables 556,191 (965,797)
Increase in inventories (188,289) (846,569)
Increase in refundable taxes (38,099) (55,062)
(Increase) decrease in prepaid expenses (24,771) 59,678
(Decrease) increase in accounts payable (548,896) 714,136
(Decrease) increase in accrued expenses (22,538) 83,985
----------- -----------
674,275 (637,214)
----------- -----------
Cash and cash equivalents provided by (used in)
operating activities 429,322 (846,339)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (2,455,255) (867,172)
Redemption of investments 399,646 (704,650)
Purchase of intangibles (2,400) -
----------- -----------
Net cash used in investing activities (2,058,009) (1,571,822)
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net of repayments 550,000 -
Proceeds from issuance of long-term debt 1,634,106 626,035
Principal payments on long-term debt (300,994) (278,745)
Increase in deposits (92,411) -
----------- -----------
Net cash provided by financing activities 1,790,701 347,290
----------- -----------
Net increase (decrease) in cash and cash equivalents 162,014 (2,070,871)
Cash and cash equivalents at beginning of year 267,391 2,338,262
----------- -----------
Cash and cash equivalents at end of year $ 429,405 $ 267,391
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
5
P.G. DESIGN ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1994 and 1993
1. Summary of accounting policies
------------------------------
This summary of accounting policies of P.G. Design Electronics, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management which is responsible for their integrity and objectivity.
Cash and cash equivalents
-------------------------
Cash and cash equivalents are defined as cash on hand and demand deposits
in banks plus short term investments that are readily convertible to cash
as well as investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market.
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation is determined using
accelerated methods over the estimated useful lives of the property and
equipment which range from five to seven years for equipment and 39 years
for leasehold improvements.
Intangibles
-----------
The cost of the intangibles acquired are being amortized on a straight-line
basis over their estimated remaining life of ten years.
Cash flows
----------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
2. Investments
-----------
Investments consist of the following:
Comerica certificate of deposit of $305,004 including accrued interest at
3.25%, maturing October 31, 1994.
This certificate is held by the bank as collateral for a letter of credit.
The letter of credit expires on the above maturity date.
<PAGE>
6
3. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Raw material $1,819,968 $1,737,504
Work-in-process 220,660 320,595
Finished goods 316,387 110,627
---------- ----------
$2,357,015 $2,168,726
========== ==========
</TABLE>
4. Note payable, bank
------------------
The Company has established a line of credit with a bank. Under the terms
of the line of credit the Company can borrow up to $1,000,000 at the prime
lending rate based upon eligible accounts receivable. The line is
collateralized by accounts receivable, inventory and property and equipment
and is personally guaranteed by the major stockholder of the company, and
is cross collateralized with the equipment loan described in Note 6. At
year-end, borrowings against this line of credit amounted to $550,000.
5. Note payable, officers
----------------------
Note payable, officers is comprised of the following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Note payable, due in 1994, payable in monthly
installments of $432 including interest at 12%,
unsecured $ - $ 4,324
Note payable, due in 1996, payable in monthly
installments of $445 including interest at 12%,
unsecured 9,242 13,210
---------- ----------
9,242 17,534
Less current portion 4,472 8,292
---------- ----------
$ 4,770 $ 9,242
========== ==========
Maturities of note payable, officer are as follows:
Years Ended June 30,:
--------------------
1996 $ 4,770
==========
</TABLE>
<PAGE>
6. Long-term debt
--------------
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1994 1995
------------ -----------
<S> <C>
The Company has established an equipment line
of credit with a bank. Under the line, the
Company may borrow up to $1,500,000 for the
acquisition of new or used equipment. Interest
is at the prime lending rate and is cross
collateralized with the note payable described
in Note 4 and is personally guaranteed by an
officer of the company. Following are the
borrowings against this line:
Payable in monthly installments of $11,342
plus interest, due 1995 $ 181,465 $ 317,564
Payable in monthly installments of $4,256
plus interest, due 1994 - 25,537
Payable in monthly installments of $14,679
plus interest, due 1999 836,705 -
Payable in monthly installments of $1,167
plus interest, due 1999 67,694 -
The Company has entered into a lease agreement
which has been classified as financing arrange-
ments, monthly payments are $8,787, including
interest, due in 1996 and 1997. 503,111 217,738
Note payable, payable in monthly installments
of $28,393, including interest, due 1995 313,268 -
---------- -----------
1,902,243 560,839
Less current portion 698,670 194,365
---------- -----------
$ 1,203,573 $ 366,474
========== ===========
Maturities of long-term debt are as follows:
1996 $ 505,701
1997 363,935
1998 190,154
1999 143,783
----------
$ 1,203,573
==========
</TABLE>
<PAGE>
8
7. Leases
------
The Company leases its office and plant facilities. The lease is for a
period of ten years beginning February, 1994 at a monthly rental of
$13,000. Rent expense included in operations for 1994 and 1993 amounted
to $136,504 and $75,867, respectively.
8. Cash flows
----------
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Interest $ 96,948 $ 51,167
Income taxes $ 70,000 $ -
</TABLE>
9. Pension and profit sharing
--------------------------
The Company sponsors a profit sharing plan and a defined contribution
pension plan which covers substantially all of its employees.
Contributions of 10% of eligible employee payroll are required to be made
to the defined contribution pension plan. For 1994 and 1993 the
contributions to the defined contribution pension plan were $76,005 and
$58,102, respectively. Contributions to the profit sharing plan are
determined annually by the Board of Directors of P. G. Design Electronics,
Inc. For 1994 and 1993 no contributions were made to the profit sharing
plan.
10. Major customers
---------------
A material part of the Company's business is dependent on a few customers,
the loss of any one could have a material effect on the Company. During
the year ended June 30, 1994, three customers accounted for $6,693,440 of
sales.
<PAGE>
ADDITIONAL INFORMATION
----------------------
<PAGE>
9
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Summary of cost of sales
- ------------------------
Raw materials:
Inventories, beginning of year $ 2,168,726 $ 1,322,157
Purchases 7,951,022 5,240,664
Inventories, end of year (2,357,015) (2,168,726)
----------- -----------
7,762,733 4,394,095
----------- -----------
Labor and manufacturing overhead:
Production labor 310,574 208,319
Production engineering 296,770 216,171
Production development 152,362 136,894
Temporary production labor 315,579 105,719
Depreciation 850,162 313,709
Insurance 109,398 97,087
Rent 136,504 75,867
Repairs and maintenance 20,861 466
Shipping inbound 63,227 40,674
Shipping - freight 23,082 21,780
Shipping supplies 50,722 49,051
Shop supplies 213,959 140,041
Payroll taxes 53,704 51,124
Utilities 59,707 26,692
----------- -----------
2,656,661 1,484,194
(Increase) decrease in labor and overhead
applicable to inventory 37,428 (72,211)
----------- -----------
2,694,089 1,411,983
----------- -----------
$10,456,822 $ 5,806,078
=========== ===========
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
<TABLE>
<CAPTION>
1994 1993
------------ -----------
Summary of general and administrative expenses
- ----------------------------------------------
<S> <C> <C>
Administrative salaries $ 295,039 $ 223,993
Executive salaries 104,271 102,175
Advertising 45,457 71,626
Bank and credit card charges 11,323 8,085
Commission expense 55,663 48,146
Consulting fees 495 18,750
Entertainment and promotion 29,029 9,799
Automotive and travel expenses 45,305 47,169
Bad Debts - 29,362
Depreciation 66,391 56,706
Amortization of intangibles 2,240 2,000
Dues and subscriptions 16,331 6,782
Equipment rental 29,073 7,376
Legal and accounting 81,068 45,332
Office supplies 71,052 84,257
Postage 2,164 2,562
Pension and profit sharing contribution 76,005 58,102
Payroll taxes 35,308 11,519
Single business tax - 10,007
Other taxes 63,123 45,201
Telephone 37,742 34,691
Officer life insurance 962 770
Miscellaneous - 85
Moving expenses 30,225 1,807
Donations 250 250
Tuition expenses 4,886 540
------------ -----------
$ 1,103,402 $ 927,092
============ ===========
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
P.G. DESIGN ELECTRONICS, INC.
------------------------------
FINANCIAL STATEMENTS
and
ADDITIONAL INFORMATION
with
ACCOUNTANTS' REVIEW REPORT
YEARS ENDED JUNE 30, 1993 AND 1992
--------------
<PAGE>
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accountants' Review Report 1
Financial statements:
Balance sheet 2
Statement of operations and retained earnings 3
Statement of cash flows 4
Notes to financial statements 5-8
Additional information:
Summary of cost of sales 9
Summary of general and administrative expenses 10
</TABLE>
<PAGE>
[LETTERHEAD OF HIRZEL, JACKSON & SWAINE, P.C. APPEARS HERE]
ACCOUNTANTS' REVIEW REPORT
--------------------------
The Board of Directors
P.G. Design Electronics, Inc.
Richmond, Michigan
We have reviewed the accompanying balance sheets of P.G. Design Electronics,
Inc. as of June 30, 1993 and 1992, and the related statements of operations and
retained earnings and cash flows for the years then ended, in accordance with
standards established by the American Institute of Certified Public Accountants.
All information included in these financial statements is the representation of
the management of P.G. Design Electronics, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
Our review was made primarily for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements for them to be in conformity with generally accepted accounting
principles. The other data accompanying the financial statements, presented only
for analysis purposes, have been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements. We did not
become aware of any material modifications that should be made to the other
data.
/s/ Hirzel, Jackson & Swaine
September 23, 1993
<PAGE>
2
P.G DESIGN ELECTRONICS, INC.
BALANCE SHEET
ASSETS
------
<TABLE>
<CAPTION>
June 30,
-----------------------
1993 1992
---------- ----------
<S> <C> <C>
Current assets
Cash $ 267,391 $2,338,262
Investments 704,650 --
Accounts receivable, net of allowance for
doubtful accounts of $17,925 in 1992 1,299,623 333,826
Inventories 2,168,726 1,322,157
Refundable income taxes 219,017 163,955
Prepaid expenses 13,256 72,934
---------- ----------
Total current assets 4,672,663 4,231,134
---------- ----------
Property and equipment:
Machinery and equipment 2,196,657 1,380,025
Furniture and equipment 258,800 212,040
Leasehold improvements 24,654 20,874
---------- ----------
2,480,111 1,612,939
Less accumulated depreciation
and amortization 1,341,863 971,448
---------- ----------
1,138,248 641,491
---------- ----------
Other assets:
Trademark, net of amortization 18,000 20,000
Deposits 7,792 7,792
---------- ----------
25,792 27,792
---------- ----------
$5,836,703 $4,900,417
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
-----------------------
1993 1992
---------- ----------
Current liabilities:
Current portion of notes payable, officers $ 8,292 $ 7,897
Current portion of long-term debt 194,365 180,115
Accounts payable, trade 1,766,745 1,052,609
Payroll taxes withheld and accrued 3,489 3,123
Accrued expenses:
Pension and profit sharing 58,102 44,445
Other 90,997 21,035
---------- ----------
2,121,990 1,309,224
---------- ----------
Note payable, officers 9,242 17,534
---------- ----------
Long-term debt 366,474 25,537
---------- ----------
Stockholders' equity:
Common stock, $1 par value
Authorized - 50,000 shares
Issued and outstanding - 1,200 shares 1,200 1,200
Retained earnings 3,337,797 3,546,922
---------- ----------
3,338,997 3,548,122
---------- ----------
$5,836,703 $4,900,417
========== ==========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
3
<TABLE>
<CAPTION>
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years Ended June 30,
---------------------------
1993 1992
----------- -----------
<S> <C> <C>
Sales $ 6,418,333 $ 3,045,088
Cost of sales 5,806,078 2,702,778
----------- -----------
Gross margin on sales 612,255 342,310
General and administrative expenses 927,092 656,203
----------- -----------
Loss from operations (314,837) (313,893)
----------- -----------
Other income (expense):
Interest expense (51,167) (29,953)
Interest income 42,868 109,564
Miscellaneous income 1,011 128
----------- -----------
(7,288) 79,739
----------- -----------
Loss before refundable income taxes (322,125) (234,154)
Refundable income taxes (113,000) (52,000)
----------- -----------
Net loss (209,125) (182,154)
Retained earnings, beginning of year 3,546,922 3,729,076
----------- -----------
Retained earnings, end of year $ 3,337,797 $ 3,546,922
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
4
P.G. DESIGN ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1993 1992
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (209,125) $ (182,154)
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 370,415 222,758
Amortization 2,000 -
Add (deduct) changes in working capital:
(Increase) decrease in receivables (965,797) 1,195,671
Increase in inventories (846,569) (210,092)
Increase in refundable taxes (55,062) (91,590)
Decrease (increase) in prepaid expenses 59,678 (59,503)
Increase in accounts payable 714,136 558,153
Increase (decrease) in accrued expenses 83,985 (183,701)
----------- -----------
(637,214) 1,431,696
----------- -----------
Cash and cash equivalents (used in) provided by
operating activities (846,339) 1,249,542
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (867,172) (266,282)
Purchase of investments (704,650) -
Purchase of trademark - (20,000)
----------- -----------
Net cash used in investing activities (1,571,822) (286,282)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 626,035 -
Principal payments on long-term debt (278,745) (198,345)
----------- -----------
Net cash provided by (used in) financing activities 347,290 (198,345)
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,070,871) 764,915
Cash and cash equivalents at beginning of year 2,338,262 1,573,347
----------- -----------
Cash and cash equivalents at end of year $ 267,391 $ 2,338,262
=========== ===========
</TABLE>
The accompanying notes and accountants' review report
should be read with these financial statements.
<PAGE>
5
P.G. DESIGN ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1993 and 1992
1. Summary of accounting policies
------------------------------
This summary of accounting policies of P.G. Design Electronics, Inc. is
presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management which is responsible for their integrity and objectivity.
Cash and cash equivalents
-------------------------
Cash and cash equivalents are defined as cash on hand and demand deposits
in banks plus short term investments that are readily convertible to cash
as well as investments with original maturities of three months or less.
Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market.
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation is determined using
accelerated methods over the estimated useful lives of the property and
equipment which range from five to seven years for equipment and 31.5 years
for leasehold equipment.
Trademark
---------
The cost of the trademark acquired is being amortized on a straight-line
basis over its estimated remaining life of ten years.
Cash flows
----------
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
2. Cash
----
Included with cash are short-term investments of $2,038,895 at June 30,
1992, are carried at cost plus accrued interest which approximates market
value. These consist principally of a money market fund and bank
certificates of deposit.
<PAGE>
6
3. Investments
-----------
Investments consist of the following:
Comerica certificate of deposit of $301,094 including accrued interest
at 3.04%, maturity December 1, 1991.
Comerica certificate of deposit of $403,556 including accrued interest
at 3.05%, maturity October 31, 1993.
These certificates are held by the bank as collateral for two letters of
credit. The letters of credit expire on the above maturity dates.
4. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Raw material $1,737,504 $ 819,233
Work-in-process 320,595 3,704
Finished goods 110,627 499,220
---------- ----------
$2,168,726 $1,322,157
========== ==========
</TABLE>
5. Note payable, bank
------------------
The Company has established a line of credit with a bank. Under the terms
of the line of credit the Company can borrow up to $750,000 above the prime
lending rate based upon eligible accounts receivable. The line is
collateralized by accounts receivable, inventory and property and equipment
and is personally guaranteed by the major stockholder of the company, and
is cross collateralized with the equipment loan described in Note 7. At
year-end there were no borrowings against this line of credit.
6. Note payable, officers
----------------------
Note payable, officers is comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Note payable, due in 1994, payable in monthly
installments of $432 including interest at 12%,
unsecured $ 4,324 $ 8,699
Note payable, due in 1996, payable in monthly
installments of $445 including interest at 12%,
unsecured 13,210 16,752
---------- ----------
17,534 25,431
Less current portion 8,292 7,897
---------- ----------
$ 9,242 $ 17,534
========== ==========
Maturities of note payable, officer are as follows:
Years Ended June 30,:
--------------------
1995 $ 4,472
1996 4,770
----------
$ 9,242
==========
</TABLE>
<PAGE>
7. Long-term debt
--------------
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
The Company has established an equipment line
of credit with a bank. Under the line, the
Company may borrow up to $1,100,000 for the
acquisition of new or used equipment. Interest
is at the prime lending rate and is cross
collateralized with the note payable described
in Note 5 and is personally guaranteed by an
officer of the company. Following are the
borrowings against this line:
Payable in monthly installments of $11,342
plus interest, due 1995 $ 317,564 $ -
Payable in monthly installments of $4,256
plus interest, due 1994 25,537 76,610
Payable in monthly installments of $5,369
plus interest, due 1993 - 59,063
Payable in monthly installments of $4,893
plus interest, due 1993 - 53,821
Payable in monthly installments of $1,347
plus interest, due 1993 - 16,158
The Company has entered into a lease agreement
which has been classified as a financing
arrangement, monthly payments are $4,660,
including interest, due 1996 217,738 -
---------- ----------
560,839 205,652
Less current portion 194,365 180,115
---------- ----------
$ 366,474 $ 25,537
========== ==========
Maturities of long-term debt are as follows:
1995 $ 182,871
1996 183,603
----------
$ 366,474
==========
</TABLE>
<PAGE>
8
8. Leases
------
The Company leases its office and plant facilities. The lease is for a
period of five years beginning March, 1989. Rent expense included in
operations for 1993 and 1992 amounted to $75,867 and $64,087, respectively.
Future obligations over the primary terms of the Company's long term leases
are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,: Amount
----------
<S> <C>
1994 $ 51,924
==========
</TABLE>
In addition, the Company has leased certain equipment used in its
operations. Future obligations under the lease are as follows:
<TABLE>
<S> <C>
1993 $ 19,058
1994 19,058
1995 19,058
----------
$ 57,174
==========
</TABLE>
9. Cash flows
----------
Cash paid for interest and income taxes amounted to the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Interest $ 51,167 $ 29,953
Income taxes $ - $ 30,000
</TABLE>
10. Pension and profit sharing
--------------------------
The Company sponsors a profit sharing plan and a defined contribution
pension plan which covers substantially all of its employees. Contributions
of 10% of eligible employee payroll are required to be made to the defined
contribution pension plan. For 1993 and 1992 the contribution to the
defined contribution pension plan were $58,102 and $44,445, respectively.
Contribution to the profit sharing plan are determined annually by the
Board of Directors of P.G. Design Electronics, Inc. For 1993 and 1992 no
contributions were made to the profit sharing plan.
11. Major customers
---------------
A material part of the Company's business is dependent on a few customers,
the loss of any one could have a material effect on the Company. During the
year ended June 30, 1993, three customers accounted for $3,639,765 of
sales.
<PAGE>
ADDITIONAL INFORMATION
----------------------
<PAGE>
9
<TABLE>
<CAPTION>
1993 1992
----------- -----------
Summary of cost of sales
- ------------------------
<S> <C> <C>
Raw materials:
Inventories, beginning of year $ 1,322,157 $ 1,112,065
Purchases 5,240,664 2,056,631
Inventories, end of year (2,168,726) (1,322,157)
----------- -----------
4,394,095 1,846,539
----------- -----------
Labor and manufacturing overhead:
Production labor 208,319 162,098
Production engineering 216,171 86,914
Production development 136,894 37,605
Temporary production labor 105,719 27,373
Depreciation 313,709 194,088
Insurance 97,087 75,269
Rent 75,867 64,087
Repairs and maintenance 466 1,773
Shipping in bound 40,674 16,245
Shipping - freight 21,780 5,464
Shipping supplies 49,051 66,023
Shop supplies 140,641 60,662
Payroll taxes 51,124 19,812
Utilities 26,692 24,026
----------- -----------
1,484,194 841,439
(Increase) decrease in labor and overhead
applicable to inventory (72,211) 14,800
----------- -----------
1,411,983 856,239
----------- -----------
$ 5,806,078 $ 2,702,778
=========== ===========
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
10
<TABLE>
<CAPTION>
1993 1992
---------- ----------
Summary of general and administrative expenses
- ----------------------------------------------
<S> <C> <C>
Administrative salaries $ 223,993 $ 168,819
Executive salaries 102,175 102,302
Advertising 71,626 2,292
Bank and credit card charges 8,085 7,841
Commission expense 48,146 464
Consulting fees 18,750 -
Entertainment and promotion 9,799 10,241
Automotive and travel expenses 47,169 60,688
Bad debts 29,362 17,933
Depreciation 56,706 28,670
Amortization of trademark 2,000 -
Dues and subscriptions 6,782 5,657
Equipment rental 7,376 5,493
Legal and accounting 45,332 37,093
Office supplies 84,257 55,034
Postage 2,562 751
Pension and profit sharing contribution 58,102 44,445
Payroll taxes 11,519 21,570
Single business tax 10,007 5,000
Other taxes 45,201 48,671
Telephone 34,691 15,515
Penalties - 5,654
Officer life insurance 770 770
Miscellaneous 85 -
Employee moving expenses 1,807 11,000
Donations 250 300
Tuition expenses 540 -
---------- ----------
$ 927,092 $ 656,203
========== ==========
</TABLE>
The accompanying accountants' review report
should be read with this information.
<PAGE>
APPENDIX E
AUDITED FINANCIAL STATEMENTS--The Company
<PAGE>
MILWAUKEE
LAND
COMPANY
- --------------------------------------------------------------------------------
1996 ANNUAL REPORT
<PAGE>
To Our Shareholders:
For the year ended December 31, 1996, the net decrease in net assets resulting
from operations was $1,384,702. Net investment income for the same period
totaled $125,510, compared to $122,543 in 1995, or an increase of $2,967.
The net realized gain from sales of investments for 1996 amounted to $57,132,
compared to a loss of $52,728 in 1995. Together, net investment income and
realized gains on sales of investments for 1996 totaled $182,642, or $.11 per
common share, compared to net investment income plus realized losses on sales of
investments of $69,815, or $.04 per common share in 1995. Income per share of
common stock is based on the weighted average number of common shares
outstanding.
The unrealized depreciation on investments for 1996 increased $1,567,344. The
increase is primarily attributable to the decreased valuation of the Heartland
Partners L.P. Class B Interest and general partnership interest that were
transferred to Milwaukee Land Company by Chicago Milwaukee Corporation as part
of its conversion to an open-end investment company. The Class B Interest is
not publicly traded and is stated in the financial statements at a fair value as
determined by the Company's Board of Directors. The methodology used to
determine a fair value imputes a value to the Class B Interest based on the
market value of the publicly traded Class A limited partnership units at date of
valuation. Due to the inherent uncertainty of valuation, the recorded value of
the Class B Interest on the Company's financial statements may differ from the
value that would have been used had a ready market existed for the Class B
Interest, and the difference could be material.
The Company's principal investments in securities of nonaffiliates at year-end
consisted of portfolio securities invested in direct obligations of the U.S.
Government (all U.S. Treasury Notes and Bills) and high yield corporate
obligations. At December 31, 1996, 14.56% of the Company's net assets was
invested in high yield corporate obligations, 39.62% in U.S. Treasury
Obligations and .05% in cash equivalents. The current yield on high yield
corporate bonds held by the Company at December 31, 1996 was 9.26% with a yield
to maturity of 8.65%. The current yield on U.S. Government securities held by
the Company at December 31, 1996 was 6.12% with a yield to maturity of 5.95%.
The average maturity of all of the Company's portfolio investments in securities
of nonaffiliates at December 31, 1996 was 2.7 years and the current yield was
6.95%.
At December 31, 1996, the net asset value per common share amounted to $10.52
based on 1,671,238 common shares outstanding.
On December 31, 1996, the Company signed a letter of intent for the acquisition
of PG Design Electronics, a contract and product design manufacturer of printed
circuit boards for the computer industry. The Company is currently conducting
due diligence. The acquisition is subject to negotiation of a final contract and
approval by the Company's Board of Directors and shareholders. If the
acquisition is consummated, the Company will cease to be an Investment Company
within the meaning of the Investment Company Act of 1940 and will seek to
deregister.
Sincerely,
/s/ Edwin Jacobson
Edwin Jacobson
President and Chief Executive Officer
February 28, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Milwaukee Land Company
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Milwaukee Land Company as of December 31, 1996,
the related statement of operations for the year then ended, and the statement
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the four years in the period then ended.
These financial statements and the financial highlights are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits. The
financial highlights for the year ended December 31, 1992, were audited by other
auditors whose report dated February 19, 1993, expressed an unqualified opinion
on the financial statements and financial highlights.
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 and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosure in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1996 by correspondence with the custodian. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of
Milwaukee Land Company at December 31, 1996, the results of its operations for
the year then ended, and the changes in its net assets for each of the two years
in the period then ended and financial highlights for each of the four years in
the period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
February 18, 1997
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at Value:
Nonaffiliates (cost $9,477,090)................. $ 9,535,374
Affiliates (cost $12,260,845)................... 7,589,129
-----------
Total Investments............................... 17,124,503
Cash............................................... 1,191,774
Receivables:
Management fees - affiliate....... $425,006
Accrued interest.................. 169,200
Partnership distribution ......... 41,054
affiliates
Other............................. 51,770
--------
Total Receivables.................................. 687,030
Prepaid expenses................................... 61,942
-----------
Total Assets 19,065,249
LIABILITIES
Directors and officers............................. 12,389
Allowance for claims and liabilities............... 1,309,278
Other.............................................. 159,434
-----------
Total Liabilities............................... 1,481,101
NET ASSETS......................................... $17,584,148
===========
COMMON SHARES OUTSTANDING.......................... 1,671,238
===========
NET ASSET VALUE PER COMMON SHARE................... $10.52
===========
</TABLE>
See accompanying Notes to Financial Statements
2
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Interest - nonaffiliates.............................. $ 658,005
Interest - affiliates................................. 107,331
Management fee from affiliate......................... 425,006
Equity in earnings - affiliates....................... 7,131
Other 2,696
-----------
Total Investment Income.............................. $ 1,200,169
Expenses:
Compensation and benefits............................. 427,482
Directors' fees and expenses.......................... 28,258
Professional fees..................................... 209,684
Advisory fees......................................... 19,457
Custodian fees........................................ 6,079
Franchise taxes....................................... 19,997
Insurance............................................. 90,186
Facility expense allocation........................... 37,128
General and administrative expenses................... 236,388
-----------
Total Expenses....................................... 1,074,659
------------
Net Investment Income.................................... 125,510
Net Realized Gain and Unrealized Depreciation on Investments:
Net realized gain on sales of investments................ 57,132
Net Change in Unrealized Depreciation on Investments:
Nonaffiliates......................................... (31,435)
Affiliates............................................ (1,535,909)
-----------
Net change in unrealized depreciation on investments (1,567,344)
-----------
Net Realized Gain and Unrealized Depreciation on Investments. (1,510,212)
------------
Net Decrease in Net Assets Resulting From Operations..... $(1,384,702)
============
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Year Ended
---------------------------
12/31/96 12/31/95
----------- -----------
<S> <C> <C>
Operations:
Net investment income............................................. $ 125,510 $ 122,543
Net realized gain (loss) on sales of investments.................. 57,132 (52,728)
Net change in unrealized depreciation on investments.............. (1,567,344) (4,090,796)
----------- -----------
Net Decrease in Net Assets Resulting From Operations.......... (1,384,702) (4,020,981)
Net Assets at Beginning of Year................................... 18,968,850 22,989,831
----------- -----------
Net Assets at End of Year (including undistributed net
investment income of $10,332,605 at December 31, 1996 and
$10,207,095 at December 31, 1995)............................. $17,584,148 $18,968,850
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
MILWAUKEE LAND COMPANY
SCHEDULE OF INVESTMENTS
December 31, 1996
NON-AFFILIATES
FIXED INCOME SECURITIES
Principal
U.S. Treasury Obligations -- 39.62% Amount Value
- ----------------------------------- ---------- -----------
<S> <C> <C>
U.S. Treasury bill, due 5/22/97........................................ $1,655,000 $ 1,617,956
U.S. Treasury notes, 6.125% due 3/31/98................................ 950,000 954,598
U.S. Treasury notes, 6.375% due 1/15/99................................ 1,600,000 1,614,992
U.S. Treasury notes, 6.875% due 7/31/99................................ 1,500,000 1,530,465
U.S. Treasury notes, 5.750% due 10/31/00............................... 1,265,000 1,248,201
-----------
Total U.S. Treasury Obligations (cost 6,968,346)................ 6,966,212
Corporate Obligations -- 14.56%
- -------------------------------
Navistar Finl Sr Sub Nt, 8.875%, due 11/15/98.......................... 150,000 153,750
Revlon Consumer Prods Corp Sr Nt, 9.500%, due 6/1/99................... 150,000 153,750
Unisys Corp Nt, 10.625%, due 10/1/99................................... 200,000 207,250
SIFTO CDA Inc Gtd Sr Secd Nt, 8.500% due 7/15/00....................... 200,000 199,000
Armco Inc. Sr Nt, 9.375%, due 11/1/00.................................. 250,000 251,250
Reliance Group Hldgs Inc Sr Nt, 9.000%, due 11/15/00................... 150,000 154,500
Stone Consol Corp Sr Secd Nt, 10.250%, due 12/15/00.................... 200,000 213,000
Repap Wis Inc 1st Priority Sr Secd Nt, 9.250%, due 2/1/02.............. 200,000 201,500
Sequa Corp Sr Nt, 8.75%, due 12/15/01.................................. 250,000 250,000
Century Communications Corp Sr Nt, 9.750%, due 2/15/02................. 200,000 206,000
Owens Il Inc Sr Sub Nt, 10.500%, due 6/15/02........................... 200,000 211,000
Rogers Cablesystems Ltd Sr Secd 2nd Priority Nt, 9.625%, due 8/1/02.... 200,000 208,500
CTC Mansfield Fdg Corp Sec Lease Oblig, 10.250%, due 3/30/03........... 149,000 151,199
-----------
Total Corporate Obligations (cost $2,500,281)....................... 2,560,699
Money Market Fund -- .05%
- -------------------------
Norwest Cash Investment Fund (cost $8,463)............................. 8,463
-----------
Total Non-Affiliates (cost $9,477,090).............................. 9,535,374
AFFILIATES -- 43.16%
- --------------------
Heartland Partners, L.P. - 1% General Partnership Interest and
.5% Class B Limited Partnership Interest (a)....................... 7,587,854
CMC Heartland Partners - .01% General Partnership Interest (a)........ 1,275
-----------
Total Affiliates (cost $12,260,845)................................. 7,589,129
-----------
Total Investments (cost $21,737,935) - 97.39%....................... 17,124,503
OTHER ASSETS AND LIABILITIES, NET -- 2.61%............................. 459,645
-----------
NET ASSETS - 100%...................................................... $17,584,148
===========
</TABLE>
(a) Investments not readily marketable
See accompanying Notes to Financial Statements
5
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Milwaukee Land Company (the "Company") registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as a non-diversified, closed-
end management investment company on March 23, 1988. Prior to June 30, 1993 the
Company was a wholly owned subsidiary of Chicago Milwaukee Corporation ("CMC").
Security valuation:
Investments are stated at value. Securities traded on securities exchanges
or on the NASDAQ National Market System are valued at the last sales price on
the principal exchange or market on which they are traded or listed or, if there
has been no sale that day, at the mean of closing bid and asked prices. Fixed-
income securities are valued at the most recent bid quotation. Money market
instruments are valued at cost, which approximates market value. Other
securities for which prices are not readily available are valued for reporting
purposes under the 1940 Act at a fair value as determined by the Board of
Directors.
The Company's investment in the Class B limited partnership interest and
the general partner interest (together, the "Class B Interest") of Heartland
Partners, L.P. is not publicly traded, and accordingly there are no available
market quotations. On December 7, 1995, the Board of Directors of the Company
changed the methodology for valuing the Class B Interest. In making its
determination of a fair value for the Class B Interest, the Board of Directors
of the Company considers an imputed value based on the change in the market
value of the publicly traded Class A limited partnership interests in Heartland
Partners, L.P. (the "Units"). The percentage change in the market value of the
publicly traded Units from June 30, 1990, is applied to the initial cost of the
Class B Interest (approximately $9.6 million) to the date of valuation.
Due to the inherent uncertainty of valuation, the recorded value of the
Class B Interest and the general partnership interest in Heartland on the
Company's financial statements may differ from values that would have been used
had a ready market existed for these interests, and the difference could be
material.
The change in methodology adopted by the Board resulted in a decrease in
the value of the Class B Interest of $6.2 million in 1995 and reduced unrealized
gains $4.5 million, net of tax. The effect on the net asset value of the
Company at December 31, 1995 was a decrease of $2.69 per share.
Investment transactions and investment income:
Security transactions are accounted for on the trade date. Realized gains
and losses on investment transactions are determined on an identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of premium and accretion of discount on securities owned.
Use of Estimates:
Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
6
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 2. NET ASSETS
Net assets at December 31, 1996 consisted of the following items:
<TABLE>
<S> <C>
Common stock - $0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding.................... $ 501,371
Paid in capital..................................................... 10,773,419
Undistributed net investment income................................. 10,332,605
Undistributed net realized gains on investment transactions......... 590,185
Net unrealized depreciation on investments.......................... (4,613,432)
-----------
Net Assets......................................................... $17,584,148
===========
</TABLE>
Certain reclassifications have been made within the components of net
assets as of December 31, 1995 to conform to the 1996 presentation.
NOTE 3. INVESTMENT SERVICES
During 1996 the Company paid advisory fees for investment advisory services
under an agreement with OFFITBANK, a nonaffiliated investment advisor. For the
services rendered by OFFITBANK under the agreement, the Company paid OFFITBANK
an annual investment advisory fee equal to .20 of 1% per annum of the value of
the portfolio under management. The agreement provides that the advisory fee is
payable quarterly in arrears based on the average month-end value of the
portfolio during such quarter.
NOTE 4. FEDERAL INCOME TAXES
As of December 31, 1996, the Company has deferred tax assets consisting of
tax NOL carryforwards of approximately $146,000, AMT credit carryforwards of
approximately $919,000 and tax unrealized investment losses of approximately
$1,113,000. The NOL carryforwards expire in 2009 and 2010. For financial
reporting purposes, a valuation allowance has been provided to offset the
deferred tax assets.
Based on cost of investments for federal income tax purposes of $19,773,509
on December 31, 1996, net unrealized depreciation was $2,649,006, consisting of
gross unrealized appreciation of $77,650 and gross unrealized depreciation of
$2,726,656.
7
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 5. INTERESTS IN PARTNERSHIPS AND RELATED TRANSACTIONS
The Company has a 1% general partnership interest in Heartland Partners,
L.P. ("Heartland") which entitles the Company to 1% of Heartland's available
cash for distribution and allocation of taxable income and loss. The Company
also has a .01% general partnership interest in CMC Heartland Partners ("CMC
Heartland") which entitles the Company to .01% of CMC Heartland's available cash
for distribution and an allocation of taxable income and loss before
distributions and allocations are made by Heartland. The Company's interests in
Heartland and CMC Heartland (collectively, the "Partnerships"), including the
Class B Interest in Heartland described below, were included in investments at a
value of $7,589,129 at December 31, 1996.
The Company, in its capacity as the general partner of Heartland and the
managing general partner of CMC Heartland, has full, exclusive and complete
discretion to manage the business and affairs of the Partnerships and is
authorized in general to perform all acts necessary or appropriate to carry out
the purposes and conduct the business of the Partnerships.
In general, the Class B Interest entitles the holder to .5% of Heartland's
available cash for distribution and allocations of taxable income and loss. In
addition, items of deduction, loss, credit and expense attributable to the
satisfaction of Plan Liabilities (as defined below) are specially allocated 99%
to the holder of the Class B Interest and 1% to the Company as the general
partner until the aggregate amount of all such items allocated to the Class B
Interest equals to the aggregate capital contribution with respect to the Class
B Interest. If the aggregate amount to such items specially allocated to the
holder of the Class B Interest is less than the amounts contributed by such
holder to Heartland, such excess will be reflected in the capital account of the
Class B Interest. Plan Liabilities consist of most of the liabilities for
claims remaining under the plan of reorganization of the predecessor of CMC Real
Estate Corporation, formerly a wholly owned subsidiary of CMC, and previously
named the Chicago Milwaukee, St. Paul and Pacific Railroad Company (the
"Railroad"), certain other contingent liabilities with respect to the properties
transferred to CMC Heartland arising after the consummation of such plan, and
the costs and expenses incurred in resolving such plan and other contingent
liabilities, for which the Partnerships have assumed primary liability.
The Company has a management agreement with CMC Heartland, pursuant to
which CMC Heartland is required to pay to the Company an annual management fee
in the amount of $425,006. On December 31, 1996, the Company received
$1,180,853 related to previously accrued management fees including $107,331 for
interest related to past due amounts. The 1996 accrued management fee in the
amount of $425,006 was paid on February 14, 1997.
For the year ended December 31, 1996, the Company paid CMC Heartland
approximately $141,000 for staff salary and operating expense allocations.
8
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 6. CONTINGENT LIABILITIES
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for the Partnerships'
liabilities to the extent the assets of the Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate business, the Partnerships assumed primary
responsibility for the Plan Liabilities (see Note 5).
Included in the Plan Liabilities are known environmental liabilities
associated with certain of the properties transferred to the Partnerships
arising out of the activities of the Railroad or certain lessees or other third
parties. Further environmental obligations as yet unknown in respect of these
properties may become due and owing in the future. A majority of the known
environmental matters stem from the use of petroleum products, such as motor oil
and diesel fuel, in the operation of a railroad, the primary liabilities in
connection with certain of these real estate properties. Descriptions of the
known material environmental matters are included in the reports filed by
Heartland with the Securities and Exchange Commission pursuant to the provisions
of the Securities Exchange Act of 1934, as amended.
NOTE 7. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1996 (excluding
short-term investments) are as follows:
<TABLE>
<S> <C>
Purchases................................ $3,504,625
Proceeds from sales and maturities....... $4,920,861
</TABLE>
9
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 8. CERTAIN DISCLOSURES PURSUANT TO RULE 8b-16, AS AMENDED
The Company has no divided reinvestment plan and has no plans to implement
such a plan. The Company's Certificate of Incorporation and By-laws contain
several provisions intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by such board. These provisions provide for, among other
things, a classified board of directors, the prohibition of stockholder action
by written consent, the authorization of "blank ticket" preferred stock, the
prohibition of calling special stockholder meetings unless requested by the
Chairman, President or the holders of not less than 80% of the outstanding
common stock of the Company, and the prohibition of calling special Board
meetings unless requested by the Chairman, President or 75% of the directors.
The portfolio manager associated with the investment policies of the fund
has not changed. No material changes to the Company's investment objective or
policies were made during 1996.
NOTE 9. POTENTIAL ACQUISITION
On December 31, 1996, the Company signed a letter of intent for the
acquisition of PG Design Electronics, a contract and product design manufacturer
of printed circuit boards for the computer industry. The Company is currently
conducting due diligence. The acquisition is subject to negotiation of a final
contract and approval by the Company's Board of Directors and shareholders. If
the acquisition is consummated, the Company will cease to be an Investment
Company within the meaning of the Investment Company Act of 1940 and will seek
to deregister.
10
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Concluded)
December 31, 1996
NOTE 10. FINANCIAL HIGHLIGHTS
The table below reflects per share financial highlights and ratios for a
share of common stock outstanding during the years presented.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of Year......................... $ 11.35 $ 13.76 $ 13.39 $ 6.59 $ 6.42
Net Investment Income.............. .08 .07 .05 .02 .17
Net (Losses)/Gains on Securities
(realized and unrealized)....... (.91) (2.48) .32 .81 ---
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations...................... (0.83) (2.41) .37 .83 .17
Capital Contribution
From CMC........................ --- --- --- 5.97 ---
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of
Year............................ $ 10.52 $ 11.35 $ 13.76 $ 13.39 $ 6.59
=========== =========== =========== =========== ===========
Per Share Market Value,
End of Year..................... $ 6.19 $ 7.38 $ 8.00 $ 6.50 N/A
Total Investment Return:
Market.......................... (16.11%) (7.81%) 23.08% (10.34%) N/A
Net Asset Value................. (7.31%) (17.51%) 2.76% 103.19% 2.65%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Year............ $17,584,148 $18,968,850 $22,989,831 $22,377,842 $11,013,637
Ratio of:
Expenses to Average
Net Assets.................... 5.89% 4.17% 5.82% 6.52% 3.4%
Net Investment Income to
Average Net Assets............ .69% .53% .36% .17% 2.6%
Portfolio Turnover Rate............ 22.09% 35.16% 24.25% 99.64% 2.24%
</TABLE>
11
<PAGE>
MILWAUKEE LAND COMPANY
Board of Directors Milwaukee Land Company
CLARENCE G. FRAME A closed-end management
Chairman of the Board investment company traded on the
Milwaukee Land Company American Stock Exchange, symbol
MWK.
EDWIN JACOBSON
President and Chief Executive Officer 547 W. Jackson Blvd.
Milwaukee Land Company Chicago, IL 60661
(312) 294-0497
ROBERT S. DAVIS
Consultant Investment Advisor
OFFITBANK
EZRA K. ZILKHA 520 Madison Avenue
President, Zilkha & Sons, Inc. New York, NY 10022
Officers Custodian
Norwest Bank Minnesota, N.A.
EDWIN JACOBSON Norwest Center
President and Chief Executive Officer 6th and Marquette
Minneapolis, MN 55479-0065
LEON F. FIORENTINO
Vice President - Finance, Transfer Agent, Stock Registrar and
Secretary and Treasurer Dividend Disbursing Agent
LaSalle National Trust, N.A.
LAWRENCE S. ADELSON 135 S. LaSalle Street
Vice President and General Counsel Room 1811
Chicago, IL 60690
THOMAS F. REDLER (312) 904-2450
Assistant Treasurer and
Assistant Secretary Independent Auditors
Ernst & Young LLP
233 S. Wacker Drive
Chicago, IL 60606
<PAGE>
MILWAUKEE
LAND
COMPANY
________________________________________________________________________________
1995 ANNUAL REPORT
<PAGE>
To Our Shareholders:
For the year ended December 31, 1995, the net decrease in net assets resulting
from operations was $4,020,981. Net investment income for the same period
totalled $122,543, compared to $83,363 in 1994, or an increase of $39,180.
The net realized loss from sales of investments for 1995 amounted to $52,728,
compared to a loss of $17,943 in 1994. Together, net investment income and
realized losses on sales of investments net of taxes for 1995 totalled $69,815,
or $.04 per common share, compared to net investment income plus realized losses
on sales of investments of $65,420, or $.04 per common share in 1994. Income per
share of common stock is based on the weighted average number of common shares
outstanding.
The unrealized appreciation on investments for 1995 decreased $4,090,796, net of
taxes. The decrease is primarily attributable to the decreased valuation of the
Heartland Partners L.P. Class B Interest that was transferred to Milwaukee Land
Company by Chicago Milwaukee Corporation as part of its conversion to an open-
end investment company. The Class B Interest is not publicly traded and is
stated in the financial statements at a fair value as determined by the
Company's Board of Directors. On December 7, 1995, the Board of Directors of
Milwaukee Land Company changed the methodology for valuing this interest due to
their determination that operating losses of Heartland Partners, L.P. could
cause anomalous results in the application of the former methodology. The new
methodology imputes a value to the Class B Interest based on the market value of
the publicly traded Class A limited partnership units at date of valuation. Due
to the inherent uncertainty of valuation, the recorded value of the Class B
Interest on the Company's financial statements may differ from the value that
would have been used had a ready market existed for the Class B Interest, and
the difference could be material.
The Company's principal investments in securities of nonaffiliates at year-end
consisted of portfolio securities invested in direct obligations of the U.S.
Government (all U.S. Treasury Notes) and high yield corporate obligations. At
December 31, 1995, 21% of the Company's net assets was invested in high yield
corporate obligations, 28% in Treasury Notes and 2% in cash equivalents. The
current yield on high yield corporate bonds at December 31, 1995 was 9.17% with
a yield to maturity of 9.26%. The current yield on Treasury Notes at December
31, 1995 was 5.09% with a yield to maturity of 5.25%. The average maturity of
the portfolio investment in securities of nonaffiliates is 2.8 years and the
current yield is 6.72%.
At December 31, 1995, the net asset value per common share amounted to $11.35
based on 1,671,238 common shares outstanding.
The Company continues to search for one or more acquisitions of real estate
and/or operating businesses. Any acquisition that would result in the Company's
ceasing to be an "investment company" within the meaning of the Investment
Company Act of 1940 (which the Company believes would be a desirable result)
would require approval by the Company's shareholders.
Sincerely,
/s/ Edwin Jacobson
Edwin Jacobson
President and Chief Executive Officer
February 29, 1996
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Milwaukee Land Company
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Milwaukee Land Company as of
December 31, 1995, the related statement of operations for the year then
ended, and the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of
the three years in the period then ended. These financial statements and
the financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for each of the two years in the period ended
December 31, 1992, were audited by other auditors whose report dated
February 19, 1993, expressed an unqualified opinion on the financial
statements and financial highlights.
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
and financial highlights are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1995 by
correspondence with the custodian. 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, financial statements and financial highlights referred
to above present fairly, in all material respects, the financial
position of Milwaukee Land Company at December 31, 1995, the results of
its operations for the year then ended, and the changes in its net
assets for each of the two years in the period then ended and financial
highlights for each of the three years in the period then ended in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 20, 1996
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
ASSETS
Investments at Value:
Nonaffiliates (cost $9,528,029)............................. $ 9,617,748
Affiliates (cost $12,294,768)............................... 9,158,961
-----------
Total Investments......................................... 18,776,709
300,134
Receivables
Management fees-affiliate..................... $425,006
Note Receivable-affiliate..................... 648,134
Securities sold............................... 156,665
Accrued interest.............................. 188,829
Other......................................... 50,805
--------
Total Receivables............................................. 1,469,439
Prepaid and deferred expenses and other assets................ 30,124
-----------
Total Assets.............................................. 20,576,406
LIABILITIES
Directors and officers........................................ 8,438
Allowance for claims and liabilities.......................... 1,348,789
Deferred taxes................................................ 72,946
Other......................................................... 177,383
-----------
Total Liabilities......................................... 1,607,556
-----------
NET ASSETS.................................................... $18,968,850
===========
COMMON SHARES OUTSTANDING..................................... 1,671,238
===========
NET ASSET VALUE PER COMMON SHARE.............................. $ 11.35
===========
See accompanying Notes to Financial Statements
2
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
Investment Income:
Interest............................................ $ 704,455
Management fee from affiliate....................... 425,006
Other............................................... 1,250
-----------
Total Investment Income........................... $ 1,130,711
Expenses:
Compensation and benefits........................... 287,544
Directors' fees and expenses........................ 38,482
Professional fees................................... 359,031
Advisory fees....................................... 21,386
Custodian fees...................................... 6,102
Taxes............................................... 46,622
Insurance........................................... 59,644
Facility expense allocation......................... 39,732
General and administrative expenses................. 102,214
-----------
Total Expenses.................................... 960,757
-----------
Investment Income Before Taxes........................ 169,954
Provision for Income Taxes............................ 47,411
-----------
Net Investment Income................................. 122,543
Net Realized and Unrealized Gain(Loss) on Investments:
Net realized loss on sales of investments............. (73,129)
Net change in unrealized appreciation/depreciation
on investments:
Nonaffiliates....................................... 571,836
Affiliates.......................................... (6,245,318)
-----------
Net change in unrealized appreciation/depreciation
on investments.................................... (5,673,482)
-----------
Net Realized and Unrealized Gain/(Loss) on
Investments Before Taxes............................. (5,746,611)
Income Tax Benefit.................................... (1,603,087)
-----------
Net Realized and Unrealized (Loss) on Investments..... (4,143,524)
-----------
Net Decrease in Net Assets Resulting From Operations.. $(4,020,981)
===========
See accompanying Notes to Financial Statements
3
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Year Ended
---------------------------
12/31/95 12/31/94
----------- -----------
<S> <C> <C>
Operations:
Net investment income...................................... $ 122,543 $ 83,363
Net realized loss on sales of investments, net of taxes.... (52,728) (17,943)
Net change in unrealized depreciation/appreciation on
investments, net of taxes................................. (4,090,796) 546,569
----------- -----------
Net (Decrease) Increase in Net Assets Resulting From
Operations.............................................. (4,020,981) 611,989
Net Assets at Beginning of Year........................... 22,989,831 22,377,842
----------- -----------
Net Assets at End of Year (including undistributed net
investment income of $10,184,650 at December 31, 1995
and $10,062,107 at December 31, 1994)................... $18,968,850 $22,989,831
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
MILWAUKEE LAND COMPANY
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-AFFILIATES
FIXED INCOME SECURITIES
PRINCIPAL
U.S. TREASURY OBLIGATIONS -- 27.69% AMOUNT VALUE
- ----------------------------------- ----------- -----------
<S> <C> <C>
U.S. Treasury notes, 4.250% due 5/15/96................................... $1,105,000 $ 1,101,033
U.S. Treasury notes, 6.875% due 10/31/96.................................. 650,000 658,326
U.S. Treasury notes, 5.250% due 7/31/98................................... 1,260,000 1,260,391
U.S. Treasury notes, 6.375% due 1/15/99................................... 1,300,000 1,340,417
U.S. Treasury notes, 6.875% due 7/31/99................................... 850,000 892,500
-----------
Total U.S. Treasury Obligations (cost $5,194,569)....................... 5,252,667
CORPORATE OBLIGATIONS -- 21.43%
- -------------------------------
Triton Energy Corp 1997 Sr Sub, 0%, due 11/1/97........................... 250,000 215,625
Navistar Finl Sr Sub Nt, 8.875%, due 11/15/98............................. 250,000 247,500
Revlon Consumer Prods Corp Sr Nt, 9.500%, due 6/01/99..................... 150,000 151,500
Unisys Corp Nt, 10.625%, due 10/1/99...................................... 200,000 177,000
Penn Central Corp Sub Nt. 10.625% due 4/15/00............................. 150,000 160,284
Riverwood Intl Corp Sr Nt II, 10.750%, due 6/15/00........................ 200,000 215,000
SIFTO CDA Inc Gtd Sr Secd Nt, 8.500% due 7/15/00.......................... 200,000 192,000
Texas New Mex Pwr Hldgs Inc Sr Nt, 9.250%, due 9/15/00.................... 200,000 214,234
Armco Inc. Sr Nt, 9.375%, due 11/01/00.................................... 250,000 247,500
Reliance Group Hldgs Inc Sr Nt, 9.000%, due 11/15/00...................... 250,000 257,188
American Annuity Group Sr Nt, 9.500%, due 8/15/01......................... 250,000 260,000
Repap Wis Inc 1st Priority Sr Secd Nt, 9.250, due 2/01/02................. 200,000 190,000
Sequa Corp Sr Nt, 8.750%, due 12/15/01.................................... 250,000 237,500
Penn Traffic Co New Sr Nt, 10.250%, due 2/15/02........................... 150,000 142,875
Century Communications Sr Nt, 9.750%, due 2/15/02......................... 200,000 209,000
Continental Cablevision Sr Sub Nt, 10.625%, due 6/15/02................... 200,000 213,500
Owens II Inc Sr Sub Nt, 10.500%, due 6/15/02.............................. 200,000 212,500
Rogers Cablesystems Ltr Sr Secd 2nd Priority Nt. 9.625% due 8/1/02........ 200,000 209,500
CTC Mansfield Fdg Corp Sec Lease Oblig, 10.250%, due 3/30/03.............. 150,000 152,063
Phoenix RE Corp Sr Nt, 9.750%, due 8/15/03................................ 150,000 160,312
-----------
Total Corporate Obligations (cost $4,033,460)........................... 4,065,081
MONEY MARKET FUND -- 1.58%
- --------------------------
Norwest Cash Investment Fund (cost $300,000).............................. 300,000
-----------
Total Non-Affiliates (cost $9,528,029).................................. 9,617,748
AFFILIATES -- 48.29%
- --------------------
Heartland Partners, L.P. - 1% General Partnership Interest and
.5% Class B Limited Partnership Interest (a)............................ 9,157,461
CMC Heartland Partners - .01% General Partnership Interest (a)........... 1,500
-----------
Total Affiliates (cost $12,294,768).................................... 9,158,961
-----------
Total Investments (cost $21,822,797) - 98.99%.......................... 18,776,709
OTHER ASSETS AND LIABILITIES, NET - 1.01%................................. 192,141
-----------
NET ASSETS - 100%......................................................... $18,968,850
===========
(a) Investments not readily marketable
</TABLE>
5
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Milwaukee Land Company (the "Company") registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as a non-diversified, closed-end
management investment company on March 23, 1988. Prior to June 30, 1993 the
Company was a wholly owned subsidiary of Chicago Milwaukee Corporation ("CMC").
Security valuation:
Investments are stated at value. Securities traded on securities exchanges or
on the NASDAQ National Market System are valued at the last sales price on the
principal exchange or market on which they are traded or listed or, if there has
been no sale that day, at the mean of closing bid and asked prices. Fixed-income
securities are valued at the most recent bid quotation. Short-term securities
are valued at amortized cost, which approximates market value. Other securities
for which prices are not readily available are valued at a fair value as
determined by the Board of Directors for reporting purposes under the 1940 Act.
The Company's investment in the Class B limited partnership interest (the
"Class B Interest") of Heartland Partners, L.P. is not publicly traded, and
accordingly there are no available market quotations. On December 7, 1995, the
Board of Directors of the Company changed the methodology for valuing the Class
B Interest.
In making its determination of a fair value for the Class B Interest, the
Board of Directors of the Company considers an imputed value based on the market
value of the publicly traded Class A limited partnership interest in Heartland
Partners, L.P. (the "Units") and the operating results of Heartland Partners,
L.P. The Board of Directors of the Company determined that operating losses of
Heartland Partners, L.P. could cause anomalous results in the application of the
valuation methodology which had been utilized for the Class B Interest.
Therefore, the Board of Directors adopted an alternate method of imputing value
based on the market value of the publicly traded Units. Under the new
methodology, the percentage change in the market value of the publicly traded
Units from June 30, 1990, is applied to the initial cost of the Class B Interest
(approximately $9.6 million) to the date of valuation.
Due to the inherent uncertainty of valuation, the recorded value of the Class
B Interest and the general partnership interests in Heartland Partners, L.P. and
CMC Heartland Partners on the Company's financial statements may differ from
values that would have been used had a ready market existed for these interests,
and the difference could be material.
The change in methodology adopted by the Board resulted in a decrease in the
value of the Class B Interest of $6.2 million in 1995, and reduced unrealized
gains $4.5 million, net of tax. The effect on the net asset value of the Company
at December 31, 1995 is a decrease of $2.69 per share.
Investment transactions and investment income:
Security transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Interest income is recorded on the accrual basis and includes amortization of
premium and accretion of discount on securities owned.
6
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1995
NOTE 2. NET ASSETS
Net assets at December 31, 1995 consisted of the following items:
Common stock - $0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding............... $ 501,371
Paid in capital................................................ 9,973,419
Undistributed net investment income *.......................... 10,184,650
Undistributed net realized gains on investment transactions *.. 462,974
Net unrealized depreciation on investments *................... (2,153,564)
-----------
Net Assets................................................. $18,968,850
===========
* Net of tax provision
NOTE 3. INVESTMENT SERVICES
The Company pays advisory fees for investment advisory services under a
revised agreement with OFFITBANK, a nonaffiliated investment advisor. For the
services rendered by OFFITBANK under the revised agreement, the Company paid
OFFITBANK an annual investment advisory fee equal to .20 of 1% per annum of the
value of the portfolio under management. The revised agreement provides that the
advisory fee is payable quarterly in arrears based on the average month-end
value of the portfolio during such quarter.
NOTE 4. FEDERAL INCOME TAXES
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for the year ended December 31, 1995 is as follows:
Statutory rate 35.0%
Effect of:
State income taxes 7.0
Difference in tax basis
investment in affiliate (14.1)
-----
Effective Rate 27.9%
=====
As of December 31, 1995, the Company has deferred tax assets consisting of tax
NOL carryforwards of approximately $262,000, AMT credit carryforwards of
approximately $919,000 and tax unrealized investment losses of approximately
$425,000. The NOL carryforwards expire in 2009 and 2010. For financial reporting
purposes, a valuation allowance of approximately $1,606,000 has been provided to
reduce the deferred tax liabilities of approximately $73,000 primarily related
to timing differences between book and tax accounting.
Based on cost of investments for federal income tax purposes of $19,788,174 on
December 31, 1995, net unrealized depreciation was $1,011,465, consisting of
gross unrealized appreciation of $158,745 and gross unrealized depreciation of
$1,170,210.
7
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1995
NOTE 5. INTERESTS IN PARTNERSHIPS AND RELATED TRANSACTIONS
At the close of business on June 27, 1990, CMC and the Company transferred to
CMC Heartland Partners ("CMC Heartland") at the direction of Heartland Partners,
L.P. ("Heartland"), substantially all of their respective real estate properties
and certain miscellaneous assets and liabilities related to those properties.
The Company has a 1% general partnership interest in Heartland which entitles
the Company to 1% of Heartland's available cash for distribution and allocation
of taxable income and loss. The Company also has a .01% general partnership
interest in CMC Heartland which entitles the Company to .01% of CMC Heartland's
available cash for distribution and an allocation of taxable income and loss
before distributions and allocations are made by Heartland. The Company's
interests in Heartland and CMC Heartland, including the Class B Interest in
Heartland described below, were included in investments at a value of $9,158,961
at December 31, 1995.
The Company distributed Units, received from Heartland in the real estate
transfer, to CMC which then distributed the Units to its common stockholders on
June 30, 1990. The Company, in its capacity as the general partner of Heartland
and the managing general partner of CMC Heartland, has full, exclusive and
complete discretion to manage the business and affairs of Heartland and CMC
Heartland (collectively, the "Partnerships") and is authorized in general to
perform all acts necessary or appropriate to carry out the purposes and conduct
the business of the Partnerships.
In connection with the real estate transfer, Heartland and CMC Heartland have
assumed primary responsibility and liability for the resolution and satisfaction
of most of the liabilities for claims remaining under the plan of reorganization
of the predecessor of CMC Real Estate Corporation ("CMCRE"), formerly a wholly
owned subsidiary of CMC, and previously named the Chicago, Milwaukee, St. Paul
and Pacific Railroad Company (the "Railroad"), certain other contingent
liabilities with respect to the properties transferred to CMC Heartland arising
after the consummation of such plan, and the costs and expenses incurred in
resolving such plan and other contingent liabilities (collectively, the "Plan
Liabilities"). CMC was required to contribute to Heartland, over time, cash in
the amount of $18.1 million (the "Deferred Capital Contribution"), plus
interest, for settlement of Plan Liabilities. In consideration of such
commitment, Heartland issued to CMC the Class B Interest. On August 28, 1990 and
February 15, 1991, pursuant to an authorization of the Board of Directors of CMC
on May 7, 1990, CMC made additional capital contributions to Heartland of
approximately $3.6 million in the aggregate, representing an increase in CMC's
Class B Interest in Heartland. As part of CMC's conversion from a closed-end
management investment company to an open-end management investment company, the
Class B Interest was transferred to the Company on July 1, 1993. In general, the
Class B Interest entitles the holder to .5% of Heartland's available cash for
distribution and allocations of taxable income and loss. In addition, items of
deduction, loss, credit and expense attributable to the satisfaction of Plan
Liabilities are specially allocated 99% to the holder of the Class B Interest
and 1% to the Company as the general partner until the aggregate amount of all
such items allocated to the Class B Interest equals the aggregate capital
contribution with respect to the Class B Interest. If the aggregate amount of
such items specially allocated to the holder of the Class B Interest is less
than the amounts contributed by such holder to Heartland, such excess will be
reflected in the capital account of the Class B Interest.
Effective July 1, 1993, CMC transferred to the Company its rights and
obligations under the management agreement with CMC Heartland. Pursuant to the
management agreement, CMC Heartland is required to pay to the Company an annual
management fee in the amount of $425,006. On December 29, 1995, the Company
advanced CMC Heartland $648,134 for payment of the management fee accrued
through December 31, 1994, (which includes management fees accruing since July
1993). On February 14, 1996, the Company advanced CMC Heartland $425,006 for
payment of the 1995 management fee. Each advance by the Company to CMC Heartland
is in the form of a demand note accruing simple interest at the prime rate plus
2.25% (10.75% at December 31, 1995).
For the year ended December 31, 1995, the Company paid CMC Heartland
approximately $109,000 for staff salary and operating expense allocations.
8
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1995
NOTE 6. CONTINGENT LIABILITIES
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for the Partnerships'
liabilities to the extent the assets of the Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate business, the Partnerships assumed, in connection with
Heartland's spin-off in June, 1990, primary responsibility for certain
contingent liabilities related to (i) the plan of reorganization of the Railroad
and (ii) the real estate properties conveyed to CMC Heartland in the spin-off
(collectively, the "Heartland Assumed Liabilities"). CMC remains liable to third
party obligees for the Heartland Assumed Liabilities, and the Partnerships have
indemnified CMC from and against any and all damages, costs or expenses that may
be incurred in connection therewith. In consideration of the Partnerships'
assumption of the Heartland Assumed Liabilities, and in further consideration of
the issuance of the Class B Interest to CMC, CMC agreed to contribute to
Heartland by December 31, 1993, cash in the aggregate amount of $18.1 million,
plus interest.
Included in the Heartland Assumed Liabilities are known environmental
liabilities associated with certain of the properties transferred to the
Partnerships arising out of the activities of the Railroad or certain lessees or
other third parties. Further environmental obligations as yet unknown in respect
of these properties may become due and owing in the future. A majority of the
known environmental matters stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad, the primary business
activity of the Railroad. The Company and/or the Partnerships have been notified
by government agencies of potential liabilities in connection with certain of
these real estate properties. Descriptions of the known material environmental
matters are included in the reports filed by Heartland with the Securities and
Exchange Commission pursuant to the provisions of the Securities Exchange Act of
1934, as amended.
In connection with CMC's conversion to an open-end management investment
company and the transactions related thereto, CMC assigned to the Company, and
the Company assumed from CMC, any obligation for which CMC is or may become
liable (the "MLC Assumed Liabilities") arising out of any matters existing on or
occurring prior to the effective time of the conversion other than (i) the
Heartland Assumed Liabilities, (ii) liabilities directly related to CMC's
business of investing and managing its investment securities, (iii) certain
litigation against CMC relating to CMC's preferred stock which was pending
against CMC at the time of the conversion but which was subsequently dismissed,
or (iv) any liabilities relating to federal, state, local or foreign income or
other tax matters. In addition, in connection with the assignment of the MLC
Assumed Liabilities and the transfer of the Class B Interest to the Company, CMC
contributed to Heartland the balance of the deferred capital contribution in
respect of the Class B Interest. Following the consummation of the conversion
and the transactions related thereto, CMC will continue to remain liable to
third party obligees in connection with the MLC Assumed Liabilities. The Company
will indemnify CMC from any and all damages, costs or expenses that CMC may
incur in connection with the MLC Assumed Liabilities, although there can be no
assurance that the Company will be able to fully satisfy such indemnification
obligations.
NOTE 7. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1995 (excluding money
market investments) are as follows:
Purchases.................................... $8,640,540
Proceeds from sales and maturities........... $9,112,483
9
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1995
NOTE 8. CERTAIN DISCLOSURES PURSUANT TO RULE 8B-16, AS AMENDED
The Company has no dividend reinvestment plan and has no plans to implement
such a plan. The Company's Certificate of Incorporation and By-laws contain
several provisions intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by such board. These provisions provide for, among other
things, a classified board of directors, the prohibition of stockholder action
by written consent, the authorization of "blank ticket" preferred stock, the
prohibition of calling special stockholder meetings unless requested by the
Chairman, President or the holders of not less than 80% of the outstanding
common stock of the Company, and the prohibition of calling special Board
meetings unless requested by the Chairman, President or 75% of the directors.
The portfolio manager associated with the investment policies of the fund has
not changed. During 1994, the Company's investment guidelines were revised to
extend from three years to six years the permissible average maturity of non-
investment grade U.S. dollar denominated securities in which the Company may
invest. In 1995, the investment guidelines were further modified to provide for
up to a maximum of 35% of the portfolio to be invested in non-investment grade
U.S dollar denominated securities.
10
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
DECEMBER 31, 1995
NOTE 9. FINANCIAL HIGHLIGHTS
The table below reflects per share financial highlights and ratios for a share
of common stock outstanding during the years presented.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of period......................... $ 13.76 $ 13.39 $ 6.59 $ 6.42 $ 6.44
Net Investment Income.............. .07 .05 .02 .17 .35
Net (Losses)/Gains on Securities
(realized and unrealized)......... (2.48) .32 .81 --- .20
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations........................ (2.41) .37 .83 .17 .55
Capital Contribution
From CMC.......................... --- --- 5.97 --- ---
Less Distributions:
From Net Investment Income to
Common Shareholders.............. --- --- --- --- .57
----------- ----------- ----------- ----------- -----------
Total Distributions................ --- --- --- --- .57
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of
Period............................ $ 11.35 $ 13.76 $ 13.39 $ 6.59 $ 6.42
=========== =========== =========== =========== ===========
Per Share Market Value,
End of Period..................... $ 7.38 $ 8.00 $ 6.50 N/A N/A
Total Investment Return:
Market............................ (7.81)% 23.08% (10.34%) N/A N/A
Net Asset Value................... (17.51)% 2.76% 103.19% 2.65% 8.54%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period.......... $18,968,850 $22,989,831 $22,377,842 $11,013,637 $10,727,836
Ratio of:
Expenses to Average
Net Assets....................... 4.17% 5.82% 6.52% 3.4% 2.1%
Net Investment Income to
Average Net Assets............... .53% .36% .17% 2.6% 5.2%
Portfolio Turnover Rate............ 35.16% 24.25% 99.64% 2.24% 98.2%
</TABLE>
11
<PAGE>
MILWAUKEE LAND COMPANY
BOARD OF DIRECTORS MILWAUKEE LAND COMPANY
ROBERT S. DAVIS
Consultant A closed-end management
investment company traded on the
American Stock Exchange, symbol
MWK.
CLARENCE G. FRAME
Chairman of the Board
Milwaukee Land Company
547 W. Jacjson Blvd.
EDWIN JACOBSON Chicago, IL 60661
President and Chief Executive Officer (312) 294-0497
Milwaukee Land Company
Investment Advisor
EZRA K. ZILKHA OFFITBANK
President, Zilkha & Sons, Inc. 520 Madison Avenue
New York, NY 10022
OFFICERS Custodian, Transfer
Agent, Stock Registrar and
CLARENCE G. FRAME Dividend Disbursing Agent
Chairman of the Board Norwest Bank Minnesota, NA
Stock Transfer Department
EDWIN JACOBSON Post Office Box 738
President and Chief Executive Officer S. St. Paul, MN 55075
(612) 450-4101
LEON F. FIORENTINO
Vice President - Finance, Independent Auditors
Secretary and Treasurer Ernst & Young LLP
233 S. Wacker Drive
LAWRENCE S. ADELSON Chicago, IL 60606
Vice President and General Counsel
THOMAS F. REDLER
Assistant Treasurer and
Assistant Secretary
<PAGE>
MILWAUKEE
LAND
COMPANY
- --------------------------------------------------------------------------------
1994 ANNUAL REPORT
<PAGE>
To Our Shareholders:
For the year ended December 31, 1994, the net increase in net assets
resulting from operations was $611,989. Net investment income for the same
period totalled $83,363, compared to $28,574 for 1993, or an increase of
$54,789. The increase is attributable primarily to higher interest income due to
the investment of a significant portion of the portfolio in high yield corporate
obligations.
The net realized loss from sales of investments for 1994 amounted to
$17,943, compared to gain of $278,724, net of taxes, in 1993. Together, net
investment income and realized losses on sales of investments for 1994 totalled
$65,420, or $.04 per common share, compared to net investment income plus
realized gains on sales of investments, of $307,298, net of tax provision, or
$.18 per common share in 1993. Income per share of common stock is based on the
weighted average number of common shares outstanding.
The unrealized appreciation on investments for 1994 increased $885,453.
This increase is attributable to the increased valuation of the Heartland
Partners Class B Interest that was transferred to Milwaukee Land Company by
Chicago Milwaukee Corporation as part of its conversion to an open-end
investment company. The Class B Interest is stated in the financial statements
at a fair value as determined by the Company's Board of Directors. In making
this determination of fair value, the Board of Directors utilized a methodology
whereby a liquidation value was imputed based upon the publicly traded value of
the Class A limited partnership interest in Heartland Partners, L.P. Due to the
inherent uncertainty of valuation, the recorded value of the Class B Interest on
the Company's financial statements may differ from values that would have been
used had a ready market existed for this interest, and the difference could be
material.
The Company's principal investments in securities of nonaffliates at
year-end consisted of portfolio securities invested in direct obligations of the
U.S. Government (all U.S. Treasury Notes) and high yield corporate obligations.
At December 31, 1994, 20% of the Company's net assets were invested in high
yield corporate obligations, 21% in Treasury Notes and 2% in cash equivalents.
The current yield on high yield corporate bonds at December 31, 1994 was 9.76%
with a yield to maturity of 11.29%. The current yield on investment grade
securities at December 31, 1994 was 4.70% with a yield to maturity of 6.90%. The
average maturity of the portfolio investment in securities of nonaffliates is
3.5 years, and the current yield is 7.03%.
At December 31, 1994, the net asset value per common share amounted to
$13.76 based upon 1,671,238 common shares outstanding.
At the Annual Meeting of Stockholders held on August 9, 1994, the Company's
stockholders voted to: (i) elect Robert S. Davis as a Class I director for a
three year term; (ii) approve an Amended and Restated Investment Advisory
Agreement with OFFITBANK increasing the investment advisory fee; and (iii)
ratify the Board of Directors' selection of Ernst & Young as independent
auditors for the Company for 1994.
The Company continues to search for one or more acquisitions of real estate
and/or operating businesses. If an acquisition is consummated, the Company would
seek to deregister as a closed-end management company under the Investment
Company Act of 1940 if the acquisition resulted in the Company no longer meeting
the definition of "investment company" thereunder.
Sincerely,
/s/ Edwin Jacobson
Edwin Jacobson,
President and Chief Executive Officer
February 28, 1995
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Milwaukee Land Company
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Milwaukee Land Company as of December
31, 1994, and the related statement of operations for the year then ended and
the statement of changes in net assets and financial highlights for each of the
two years in the period then ended. These financial statements and the financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the three years in the period ended December 31, 1992 were audited by other
auditors whose report dated February 19, 1993, expressed an unqualified opinion
on the financial statements and financial highlights.
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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1994, by correspondence with the custodian. 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of
Milwaukee Land Company at December 31, 1994, and the results of its operations
for the year then ended and changes in its net assets and financial highlights
for each of the two years in the period then ended in conformity with generally
accepted accounting principles.
As explained in Note 1, the financial statements include securities valued
at $15,404,279 (67% of net assets), whose values have been estimated by the
Board of Directors in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Board of Directors in arriving at their
estimate of value of such securities and have inspected underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the securities
existed, and the differences could be material.
ERNST & YOUNG LLP
Chicago, Illinois
February 24, 1995
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment at Value:
Nonaffiliates (cost $10,295,561).......................... $ 9,813,444
Affiliates (cost $12,294,768)............................. 15,404,279
-----------
Total Investments................................... 25,217,723
Cash.......................................................... 107,816
Receivables................................................... 863,630
Prepaid and deferred expenses and other assets................ 30,082
-----------
Total Assets........................................ 26,219,251
LIABILITIES
Directors and officers........................................ 7,875
Allowance for claims and liabilities.......................... 1,353,849
Deferred taxes................................................ 1,628,622
Other......................................................... 239,074
-----------
Total Liabilities................................... 3,229,420
-----------
NET ASSETS.................................................... $22,989,831
===========
COMMON SHARES OUTSTANDING..................................... 1,671,238
===========
NET ASSET VALUE PER COMMON SHARE.............................. $ 13.76
===========
</TABLE>
See accompanying Notes to Financial Statements
2
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Interest...................................................... $ 653,656
Other......................................................... 425,006
----------
Total Investment Income...................................... 1,078,662
Expenses:
Compensation and benefits..................................... 263,629
Directors' fees and expenses.................................. 39,452
Professional fees............................................. 291,302
Advisory fees................................................. 7,923
Custodian fees................................................ 7,541
Taxes......................................................... 25,272
Insurance..................................................... 56,681
Printing...................................................... 62,931
Credit expense................................................ 79,255
Facility expense allocation................................... 50,197
General and administrative expenses........................... 72,412
----------
Total Expenses............................................... 956,595
---------
Investment Income Before Taxes................................... 122,067
Provision for Income Taxes....................................... 38,704
---------
Net Investment Income........................................ 83,363
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized loss on sales of investments............................. (17,943)
Net change in unrealized appreciation on investments:
Nonaffiliates................................................. (493,021)
Affiliates.................................................... 1,378,474
----------
Net change in unrealized appreciation on investments......... 885,453
----------
Net Realized and Unrealized Gain on Investments Before Taxes..... 867,510
Provision for Income Taxes....................................... 338,884
----------
Net Realized and Unrealized Gain on Investments.................. 528,626
----------
Net Increase in Net Assets Resulting From Operaions.............. $ 611,989
==========
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
12/31/94 12/31/93
---------- ----------
<S> <C> <C>
Operations:
Net investments income..................................................... $ 83,363 $ 28,574
Net realized gain (loss) on sales of investments, net of taxes............. (17,943) 278,724
Net change in unrealized appreciation on investments....................... 546,569 1,082,117
----------- -----------
Net Increase in Net Assets Resulting From Operations................. 611,989 1,389,415
Capital contribution from Chicago Milwaukee Corporation...................... -- 9,974,790
----------- -----------
Total Increase in Net Assets......................................... 611,989 11,364,205
Net Assets at Beginning of Year.............................................. 22,377,842 11,013,637
----------- -----------
Net Assets at End of Year (Including undistributed net investment income of
$10,062,107 at December 31, 1994 and $9,978,744 at December 31, 1993)....... $22,989,831 $22,377,842
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
MILWAUKEE LAND COMPANY
SCHEDULE OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
NON-AFFILIATES
FIXED INCOME SECURITIES
U.S. TREASURY OBLIGATIONS--20.59%
- ---------------------------------
PRINCIPAL
AMOUNT VALUE
---------- -----------
<S> <C> <C>
U.S. Treasury notes, 4.125% due 5/31/95...................................... $ 750,000 $ 743,085
U.S. Treasury notes, 4.625% due 2/15/96...................................... 1,850,000 1,794,204
U.S. Treasury notes, 4.250% due 5/15/96...................................... 1,550,000 1,485,582
U.S. Treasury notes, 6.875% due 3/31/97...................................... 725,000 711,856
-----------
Total U.S. Treasury Obligations (cost $4,900,193)....................... 4,734,727
CORPORATE OBLIGATIONS--19.72%
- ----------------------------
U.S. Air Group Inc Equip Tr Ctr, 9.300% due 7/15/95.......................... 150,000 147,235
Triton Energy Corp 1997 Sr Sub, 0% due 11/1/97............................... 250,000 183,750
Navistar Finl Sub Nt, 8.875% due 11/15/98.................................... 250,000 235,000
Unisys Corp Nt, 10.625% due 1/01/99.......................................... 200,000 202,000
Revlon Consumer Prods Corp Sr Nt, 9.500% due 6/01/99......................... 150,000 138,750
RJR Nabisco Inc, 8.000% due 1/15/00.......................................... 200,000 187,426
Riverwood Intl Corp Sr Nt II, 10.750% due 6/15/00............................ 200,000 203,500
Texas New Mex Pwr Co 1 St Mtg Ser U, 9.250% due 9/15/00...................... 200,000 193,496
Armco Inc Sr Nt, 9.375% due 11/01/00......................................... 250,000 227,500
Reliance Group Hldgs Inc Sr Nt, 9.000% due 11/15/00.......................... 250,000 227,500
Presidential Life, 9.500% due 12/15/00....................................... 150,000 139,500
Healthsouth Rehab Sr Sub, 9.505 due 4/1/01................................... 200,000 192,500
American Annuity Group Sr Nt, 9.500%, due 8/15/01............................ 250,000 236,250
Sequa Corp Sr Nt, 8.750% due 12/15/01........................................ 250,000 212,500
Repap Nis Inc 1wt Priority Sr Secd Nt, 9.25% due 2/1/02...................... 200,000 180,000
Penn Traffic Co New Sr Nt, 10.25% due 2/15/02................................ 150,000 144,000
Century Communications Sr Nt, 9.75% due 2/15/02.............................. 200,000 192,000
Owens II Inc Sr Sub Nt, 10.500% due 6/15/02.................................. 200,000 197,500
Ralphs Grocery Co Sr Sub Nt, 10.25% due 7/15/02.............................. 200,000 196,500
Kroger Co Sr Sub Deb, 9.875% due 8/1/02...................................... 150,000 151,125
Lomas Mtg USA Inc Nt, 10.250% due 10/01/02................................... 250,000 207,500
CTC Mansfield Fdg Corp Sec Lease Oblig, 10.250% due 3/30/03.................. 150,000 139,500
Kearney St R/E LP Secd Pay Thru Nt, 9.560% due 7/15/03....................... 250,000 250,703
Phoenix RE Corp Sr Nt, 9.750% due 8/15/03.................................... 150,000 147,000
-----------
Total Corporate Obligations (cost $4,849,386)........................... 4,532,735
MONEY MARKET FUND--2.38%
- ------------------------
Norwest Cash Investment Fund (cost $545,982)................................. 545,982
-----------
Total Non-Affiliates (cost $10,295,561)................................. 9,813,444
AFFILIATES--67.00%
Heartland Partners, L.P.--1% General Partnership Interest and .5% Class B
Limited Partnership Interest............................................... 15,402,779
CMC Heartland Partners--.01% General Partnership Interest.................... 1,500
-----------
Total Affiliates (cost $12,294,768)..................................... 15,404,279
-----------
Total Investments (cost $22,590,329)--109.69%........................... 25,217,723
OTHER ASSETS AND LIABILITIES, NET--(9.69%)................................... (2,227,892)
-----------
NET ASSETS--100%............................................................. $22,989,831
===========
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Milwaukee Land Company (the "Company") registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, closed-
end management investment company on March 23, 1988. Prior to June 30, 1993, the
Company was a wholly owned subsidiary of Chicago Milwaukee Corporation ("CMC").
Security valuation:
Investments are stated at value. Securities traded on securities exchanges
or on the NASDAQ National Market System are valued at the last sales price on
the principal exchange or market on which they are traded or listed or, if there
has been no sale that day, at the mean of closing bid and asked prices. Fixed-
income securities are valued at the most recent bid quotation. Short-term
securities are valued at amortized cost, which approximates market value. Other
securities for which prices are not readily available are valued at fair value
as determined by the Board of Directors for reporting purposes under the 1940
Act.
In making its determinations of fair value for the Class B limited
partnership interest in Heartland Partners, L.P. (the "Class B Interest"), the
Board of Directors of the Company utilized a methodology whereby a liquidation
value was imputed based on the publicly traded value of the Class A limited
partnership interest in Heartland Partners, L.P. (the "Units"). Due to the
inherent uncertainty of valuation, the recorded value of the Class B Interest
and the general partnership interests in Heartland Partners, L.P. on the
Company's financial statements may differ from values that would have been used
had a ready market existed for these interests, and the difference could be
material.
Investment transactions and investment income:
Security transactions are accounted for on the trade date. Realized gains
and losses on investment transactions are determined on an identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of premium and accretion of discount on securities owned.
NOTE 2. NET ASSETS
Net assets at December 31, 1994 consist of the following items:
<TABLE>
<CAPTION>
<S> <C>
Common stock--$0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding................. $ 501,371
Paid in capital.................................................. 9,173,419
Undistributed net investment income*............................. 10,062,107
Undistributed net realized gains on investment transactions*..... 515,702
Net unrealized appreciation on investments*...................... 2,737,232
-----------
Net Assets............................................... $22,989,831
===========
</TABLE>
- -------------------
*Net of tax provision.
6
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
NOTE 3. INVESTMENT SERVICES
The Company pays advisory fees for investment advisory services under an
agreement with OFFITBANK, a nonaffiliated investment advisor. For the services
rendered by OFFITBANK under the agreement, the Company paid OFFITBANK through
August 9, 1994, an annual investment advisory fee equal to .05 of 1% per annum
of the value of the portfolio under management. An Amended and Restated
Investment Advisory Agreement with OFFITBANK was approved at the August 9, 1994
Annual Meeting of Stockholders. The annual fee under the revised agreement is
.20 of 1% per annum of the value of the portfolio under management. The amended
and restated agreement provides that the advisory fee is payable quarterly in
arrears based on the average month-end value of the portfolio during such
quarter.
NOTE 4. FEDERAL INCOME TAXES
The Company's deferred tax provision of $377,588 at December 31, 1994 is
primarily attributable to the unrealized gain on the Class B Interest in
Heartland Partners, L.P. The existing minimum tax credit carryforward at
December 31, 1994 was approximately $900,000.
NOTE 5. INTERESTS IN PARTNERSHIPS AND RELATED TRANSACTIONS
At the close of business on June 27, 1990, CMC and the Company transferred
to CMC Heartland Partners ("CMC Heartland"), at the direction of Heartland
Partners, L.P. ("Heartland"), substantially all of their respective real estate
properties and certain miscellaneous assets and liabilities related to those
properties.
The Company has a 1% general partnership interest in Heartland which
entitles the Company to 1% of Heartland's available cash for distribution and
allocation of taxable income and loss. The Company also has a .01% general
partnership interest in CMC Heartland which entitles the Company to .01% of CMC
Heartland's available cash for distribution and an allocation of taxable income
and loss before distributions and allocations are made by Heartland. The
Company's interests in Heartland and CMC Heartland, including the Class B
Interest in Heartland described below, were included in investments at a value
of $15,404,279 at December 31, 1994.
The Company distributed Units, received from Heartland in the real estate
transfer to CMC, which then distributed the Units to its common stockholders on
June 30, 1990. The Company, in its capacity as the general partner of Heartland
and the managing general partner of CMC Heartland, has full, exclusive and
complete discretion to manage the business and affairs of Heartland and CMC
Heartland (collectively, the "Partnerships") and is authorized in general to
perform all acts necessary or appropriate to carry out the purposes and conduct
the business of the Partnerships.
In connection with the real estate transfer, Heartland and CMC Heartland
have assumed primary responsibility and liability for the resolution and
satisfaction of most of the liabilities for claims remaining under the plan of
reorganization of the predecessor of CMC Real Estate Corporation ("CMCRE"),
formerly
7
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
a wholly owned subsidiary of CMC, and previously named the Chicago Milwaukee,
St. Paul and Pacific Railroad Company (the "Railroad"), certain other
contingent liabilities with respect to the properties transferred to CMC
Heartland arising after the consummation of such plan, and the costs and
expenses incurred in resolving such plan and other contingent liabilities
(collectively, the "Plan Liabilities"). CMC was required to contribute to
Heartland, over time, cash in the amount of $18.1 million (the "Deferred Capital
Contribution"), plus interest, for settlement of Plan Liabilities. In
consideration of such commitment, Heartland issued to CMC the Class B Interest.
On August 28, 1990 and February 15, 1991, pursuant to an authorization of the
Board of Directors of CMC on May 7, 1990, CMC made additional capital
contributions to Heartland of approximately $3.6 million in the aggregate,
representing an increase in CMC's Class B Interest in Heartland. As part of
CMC's conversion from a closed-end management investment company to an open-end
management investment company, the Class B Interest was transferred to the
Company on July 1, 1993. In general, the Class B Interest entitles the holder to
.5% of Heartland's available cash for distribution and allocations of taxable
income and loss. In addition, items of deduction, loss, credit and expense
attributable to the satisfaction of Plan Liabilities are specially allocated 99%
to the holder of the Class B Interest and 1% to the Company as the general
partner until the aggregate amount of all such items allocated to the Class B
Interest equals the aggregate capital contribution with respect to the Class B
Interest. If the aggregate amount of such items specially allocated to the
holder of the Class B Interest is less than the amounts contributed by such
holder to Heartland, such excess will be reflected in the capial account of the
Class B Interest.
Effective July 1, 1993, CMC transferred to the Company its rights and
obligations under the management agreement with CMC Heartland. Pursuant to the
management agreement, CMC Heartland is required to pay to the Company an annual
management fee in the amount of approximately $425,000. At the discretion of
Heartland, the management fee may be accrued and not paid for up to 5 full years
after the real estate transfer.
For the year ended December 31, 1994, the Company paid CMC Heartland
approximately $140,000 for staff salary and operating expense allocations.
NOTE 6. CONVERSION OF CMC FROM A CLOSED-END MANAGEMENT INVESTMENT
COMPANY TO OPEN-END MANAGEMENT INVESTMENT COMPANY
After the May 12, 1993 approval by CMC's stockholders of its conversion to
an open-end management investment company, the following transactions were
effected:
1. All of CMC's outstanding preferred stock was redeemed on June 16,
1993.
2. CMC sold its waste water treatment facility to Heartland for its
fair market value.
3. CMC paid Heartland the $7.9 million balance of the Deferred Capital
Contribution and related accrued interest; CMC Heartland paid CMC $1.2
million, representing the accrued management fee due and owing to CMC under
the management agreement through the date of payment and $200,000 in
reimbursement of CMC's payment of Heartland's organization expenses.
8
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
4. CMC transferred to the Company:
A. The Class B Interest;
B. CMC's rights and obligations under the management agreement
with CMC Heartland, other than the right to receive management fees
accrued through the date of transfer; and
C. All of its remaining illiquid assets and certain of its
contingent liabilities.
CMC distributed the common stock of the Company to CMC's common
stockholders after the close of business on June 30, 1993. One share of the
Company's common stock was distributed for each share of CMC's common stock that
was held as of June 18, 1993, the record date for the distribution. The
Company's common stock is now traded on the American Stock Exchange under the
symbol MWK. CMC became an open-end management investment company on July 1,
1993.
NOTE 7. CONTINGENT LIABILITIES
The Company, by reason of its serving as the general partner of the
Partnership is liable and responsible to third parties for the Partnerships'
liabilities to the extent the assets of the Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate business, the Partnerships assumed, in connection with
Heartland's spin-off in June 1990, primary responsibility for certain contingent
liabilities related to (a) the plan of reorganization of the Railroad and (b)
the real estate properties conveyed to CMC Heartland in the spin-off
(collectively, the "Heartland Assumed Liabilities"). CMC remained liable to
third party obligees for the Heartland Assumed Liabilities, and the Partnerships
have indemnified CMC from and against any and all damages, costs or expenses
that may be incurred in connection therewith. In consideration of the
Partnerships' assumption of the Heartland Assumed Liabilities, and in further
consideration of the issuance of the Class B Interest to CMC, CMC agreed to
contribute to Heartland, by December 31, 1993, cash in the aggregate amount of
$18.1 million, plus interest.
Included in the Heartland Assumed Liabilities are known environmental
liabilities associated with certain of the properties transferred to the
Partnerships arising out of the activities of the Railroad or certain lessees or
other third parties. Further environmental obligations as yet unknown in respect
of these properties may become due and owing in the future. A majority of the
known environmental matters stem from the use of petroleum products, such as
motor oil and diesel fuel, in the operation of a railroad the primary business
activity of the Railroad. The Company and/or the Partnerships have been notified
by governmental agencies of potential liabilities in connection with certain of
these real estate properties. Descriptions of the known material environmental
matters are included in the reports filed by Heartland with the Securities and
Exchange Commission pursuant to the provisions of the Securities Exchange Act of
1934, as amended.
In connection with CMC's conversion to an open-end management investment
company and the transactions related thereto, CMC assigned to the Company, and
the Company assumed from CMC, any obligation for which CMC is or may become
liable (the "MLC Assumed Liabilities") arising out of any matters existing on or
occurring prior to the effective time of the conversion other than (i) the
Heartland Assumed Liabilities, (ii) liabilities directly related to CMC's
business of investing and managing its investment
9
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
securities, (iii) certain litigation against CMC relating to CMC's preferred
stock which was pending against CMC at the time of the conversion but which was
subsequently dismissed, or (iv) any liabilities relating to federal, state,
local or foreign income or other tax matters. In addition, in connection with
the assignment of the MLC Assumed Liabilities and the transfer of the Class B
Interest to the Company, CMC contributed to Heartland the balance of the
deferred capital contribution in respect of the Class B Interest. Following the
consummation of the conversion and the transactions related thereto, CMC will
continue to remain liable to third party obligees in connection with the MLC
Assumed Liabilities. The Company will indemnify CMC from any and all damages,
costs or expenses that CMC may incur in connection with the MLC Assumed
Liabilities, although there can be no assurance that the Company will be able to
fully satisfy such indemnification obligations.
NOTE 8. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1994 (excluding
money market instruments) are as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases.................................................... $5,765,352
Proceeds from sales.......................................... 5,970,089
</TABLE>
The cost of investments at December 31, 1994 for federal income tax
purposes is $19,097,904, which includes gross unrealized appreciation of
$5,319,819.
NOTE 9. CERTAIN DISCLOSURES PURSUANT TO RULE 8B-16, AS AMENDED
The Company has no dividend reinvestment plan and has no plans to implement
such a plan. The Company's Certificate of Incorporation and By-laws contain
several provisions intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by such Board. These provisions provide for, among other
things, a classified board of directors, the prohibition of stockholder action
by written consent, the authorization of "blank ticket" preferred stock, the
prohibition of calling special stockholder meetings unless requested by the
Chairman, President or the holders of not less than 80% of the outstanding
common stock of the Company, and the prohibition of calling special Board
meetings unless requested by the Chairman, President or 75% of the directors.
The portfolio manager associated with the investment policies of the fund
has not changed. During 1994, the Company's investment guidelines were revised
to extend from three years to six years the permissable average maturity of
non-investment grade U.S. dollar denominated securities in which the Company may
invest. The investment guidelines have also been modified to provide for up to a
maximum of 50% of the portfolio to be invested in non-investment grade U.S.
dollar denominated securities.
10
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1994
NOTE 10. FINANCIAL HIGHLIGHTS
The table below reflects per share financial highlights and ratios for a
share of common stock outstanding during the periods presented.
<TABLE>
<CAPTION>
1994 1993 1992(a) 1991(a) 1990(a)
----------- ----------- ----------- ----------- -----------
PER SHARE OPERATING
PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................................ $ 13.39 $ 6.59 $ 6.42 $ 6.44 $ 13.29
Net Investment Income........................... .05 .02 .17 .35 .29
Net Gains or Losses on Securities
(both realized and unrealized)................ .32 .81 .20 .27
----------- ----------- ----------- ----------- -----------
Total From Investment Operations................ .37 .83 .17 .55 .56
Capital Contribution from Chicago
Milwaukee Corporation......................... 5.97
Less Distributions:
From Net Investment Income to
Common Shareholders......................... .57 1.38
From Capital Gains to Common
Shareholders................................ 3.00
From Retained Earnings to
Common Shareholders......................... 3.03
----------- ----------- ----------- ----------- -----------
Total Distributions............................. -- -- -- .57 7.41
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period.................. $ 13.76 $ 13.39 $ 6.59 $ 6.42 $ 6.44
=========== =========== =========== =========== ===========
Per Share Market Value, End of
Period........................................ 8.00 6.50 N/A N/A N/A
Total Investment Return--Market................. 23.08% (10.34)% N/A N/A N/A
Total Investment Return--Net
Asset Value................................... 2.76% 103.19% 2.65% 8.54% 4.21%
RATIO/SUPPLEMENTAL
DATA
Net Assets, End of Period....................... $22,989,831 $22,377,842 $11,013,637 $10,727,836 $10,764,672
Ratio of Expenses to Average Net
Assets........................................ 5.82% 6.52% 3.4% 2.1% 1.3%
Ratio of Net Investment Income to
Average Net Assets............................ .36% .17% 2.6% 5.2% 3.0%
Portfolio Turnover Rate......................... 24.25% 99.64% 2.24% 98.2% --
</TABLE>
- ----------
(a) Restated to reflect the change from 5,000 common shares outstanding to
1,671,238 pursuant to the July 1, 1993 spin-off of the common stock of
Milwaukee Land Company by Chicago Milwaukee Corporation on a pro-rata basis.
11
<PAGE>
MILWAUKEE LAND COMPANY
<TABLE>
<CAPTION>
BOARD OF DIRECTORS MILWAUKEE LAND COMPANY
<S> <C>
ROBERT S. DAVIS
Consultant A closed-end management investment company
traded on the American
CLARENCE G. FRAME Stock Exchange, symbol MWK
Chairman of the Board
Milwaukee Land Company
547 W. Jackson Boulevard
EDWIN JACOBSON Chicago, Illinois 60661
President and Chief Executive Officer (312) 294-0497
Milwaukee Land Company
Investment Advisor
JACK NASH OFFITBANK
General Partner 520 Madison Avenue
Odyssey Partners, L.P. New York, New York 10022
EZRA K. ZILKHA Custodian,
President, Zilkha & Sons, Inc. Transfer Agent,
Stock Registrar and
OFFICERS Dividend Disbursing Agent,
Norwest Bank Minnesota, N.A.
CLARENCE G. FRAME Stock Transfer Department
Chairman of the Board Post Office Box 738
S. St. Paul, Minnesota 55075-0738
EDWIN JACOBSON (612) 450-4101
President and Chief Executive Officer
LEON F. FIORENTINO Independent
Vice President--Finance, Auditors
Secretary and Treasurer Ernst & Young LLP
233 S. Wacker Drive
LAWRENCE S. ADELSON Chicago, Illinois 60606
Vice President and
General Counsel and
Assistant Secretary
THOMAS F. REDLER
Assistant Treasurer and
Assistant Secretary
</TABLE>
<PAGE>
APPENDIX F
PROPOSED NEW ADVISORY AGREEMENT
<PAGE>
APPENDIX F
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT made this ___ day of _________ 1997 between OFFITBANK,
a New York banking organization organized under the New York Banking Law, having
its principal office at 520 Madison Avenue, New York, New York 10022 (the
"Bank") and Milwaukee Land Company, a Delaware corporation, having its principal
office at 547 West Jackson Boulevard, Chicago, Illinois 60661 (the "Client").
W I T N E S S E T H :
WHEREAS, the Client is a non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Bank provided investment advisory services to the Client
from August 11, 1994 through December 31, 1996 pursuant to an investment
advisory agreement which terminated effective December 31, 1996; and
WHEREAS, the Bank continued to provide investment advisory services to
the Client from January 1, 1997 through February 17, 1997 without compensation
and the Client desires to compensate the Bank for services provided during those
periods; and
WHEREAS, the Client desires the Bank to continue to render investment
advisory services pursuant to this Agreement upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Investment Management Services: The Client hereby retains the Bank
to manage the investment of such securities and other assets comprising the
investment portfolio as may be placed under the supervision of the Bank by the
undersigned (which portfolio, together with all additions, substitutions and
alterations occurring during the term of this Agreement, is referred to herein
as the "Portfolio"). Subject to the provisions of paragraph 2 hereof, the Bank
is authorized, without further approval by, or notice to, the undersigned, to
make all investment decisions concerning the Portfolio and to make purchases and
sales, and otherwise to effect transactions in stocks, bonds and other
securities in the Portfolio on behalf of the Client. The aforesaid authorization
shall remain in full force and effect until termination of this Agreement by law
or in accordance with its terms or until revoked by the Client by written notice
addressed to the Bank (or to such other address as the Bank may notify the
Client during the term thereof), but such termination or revocation shall not
affect any liability in any way resulting from transactions initiated prior to
the Bank's receipt of such revocation notice. In order that the Bank may render
efficient services to the Client under this Agreement, the Client shall notify
the Bank of any and all changes in the general financial circumstances and
investment objectives of the Client during the term of this Agreement.
<PAGE>
2. Duties of the Bank:
(a) The Bank, in the performance of its duties under this Agreement,
shall act in conformity with the Client's investment objectives, policies,
restrictions and directives, as communicated in writing from time to time by the
Board of Directors of the Client (the "Board of Directors") or Investment
Committee thereof (the "Investment Committee"), and will conform to and comply
with the requirements of the 1940 Act and all other applicable federal and state
laws and regulations.
(b) The Bank, as agent for the Client, will effect portfolio
transactions either directly with the issuer of a particular security or with a
broker and/or dealer in such securities.
(c) The Bank may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be sold
or purchased on behalf of the Client with securities to be sold or purchased on
behalf of the Bank. In such event, allocation of the securities so purchased or
sold on behalf of the Client, as well as the expenses incurred in the
transaction, will be made by the Bank in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Client and, if
applicable, to such other clients.
(d) The Bank shall maintain books and records with respect to the
securities transactions of the Client and shall render to the Board of Directors
(or Investment Committee) such periodic and special reports as the Board of
Directors (or Investment Committee) may reasonably request consistent with past
practices.
3. Delivery of Funds and Securities: All transactions in the Portfolio
shall be carried out through such custodian(s) as the Client shall designate in
writing; the Bank is hereby authorized to issue instructions to such
custodian(s) with respect to all deliveries of funds or securities in connection
with transactions by the Bank pursuant to this Agreement. The Bank shall have no
obligations or liabilities with respect to the Client's custodial arrangements.
4. Brokers/Dealers: The Bank is authorized to select the brokers
and/or dealers that will execute the purchases and sales of portfolio securities
for the Client and shall endeavor to obtain the best net available price and
execution, except as described herein. Unless and until otherwise directed by
the Board of Directors or the Investment Committee, the Bank also may effect
individual securities transactions at commission rates in excess of the minimum
commission rates available, if the Bank determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage or
research services provided by such broker or dealer, viewed in terms of either
that particular transaction or the Bank's overall responsibilities with respect
to the Client. The execution of such transactions shall not be deemed to
represent an unlawful act or breach of any duty created by this Agreement or
otherwise.
F-2
<PAGE>
5. Books and Records: The Bank shall keep the Client's books and
records required to be maintained by it pursuant to paragraph 2 of this
Agreement. The Bank agrees that all records which it maintains for the Client
are property of the Client, and it will promptly surrender copies of any of such
records to the Client upon the Client's request. The Bank further agrees to
preserve for the periods prescribed by Rule 31a-2 promulgated by the Commission
under the 1940 Act any such records as are required to be maintained by the Bank
with respect to the Client by Rule 31a-1 promulgated by the Commission under the
1940 Act.
6. Fee Schedule:
(a) For its services hereunder on and after the date of this
Agreement, the Bank shall be entitled to a fee in accordance with the fee
schedule annexed as Annex A. During the term of this Agreement, the Bank will
pay all expenses incurred by it in connection with its activities under this
Agreement, other than the cost of securities purchased for the Client (including
taxes and brokerage commissions, custodian fees and other charges if any).
(b) For its services during the period January 1, 1997 through
February 17, 1997, the Bank shall be entitled to a fee in the total amount of
$2,900, which shall be paid by the Client to the Bank within 10 days after the
effective date of this Agreement.
7. Confidentiality: All information, recommendations and advice
furnished by the Bank to the Client under this Agreement shall be regarded as
confidential by the Client and shall not be communicated to a third party except
to officers, directors or other representatives of the Company who need to know
such information or except as may be required by law or pursuant to any court or
other proceeding.
8. Service to Other Clients: It is understood that the Bank may
perform investment advisory and management services for various clients,
including investment companies. The Bank may give advice and take action in the
performance of its duties with respect to any of its other clients which may
differ from advice given to, or the timing and nature of action taken with
respect to, the Client. This Agreement shall not be deemed to confer upon the
Bank any obligation to recommend to the Client a position in any security which
the Bank, or its principals, affiliates or employees, may acquire for its or
their own accounts of any other client, if in the sole and absolute discretion
of the Bank, it is not for any reason practical or desirable to recommend a
position in such security for the Client. The Bank shall not be liable for any
loss incurred in connection with recommendations made to the Client due to
errors of judgment or by reason of its advice, actions or otherwise, so long as
the Bank shall have acted in good faith, and if negligence, willful or reckless
misconduct or violation of applicable law is not involved; nor shall the Bank be
responsible for any loss incurred by reason of any act or omission of any
executing broker. Transactions in securities may be accomplished on behalf of
other clients from whom the Bank has discretionary authority prior to the time
that recommendations or transactions in the same securities may be communicated
to the Client (or
F-3
<PAGE>
executed by or on behalf of the Client) and at prices which may be different at
which transactions in the same securities are executed by or on behalf of the
Client.
9. Effectiveness and Term: This Agreement shall become effective
upon its execution by both parties hereto. Unless terminated as provided in
Section 10 or Section 11, this Agreement will remain in effect until December
31, 1998, and will continue in effect for 12-month periods ending on December 31
thereafter so long as such continuance is approved at least annually either by
(i) the Board of Directors or (ii) the vote of a majority of the outstanding
voting securities of the Client (as defined in the 1940 Act); provided, however,
that in either event, the continuance must also be approved by the vote of a
majority of the members of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, cast in
person at a meeting called for the purpose of voting upon such approval.
10. Termination: The Client has the right to terminate this
Agreement at any time, without the payment of any penalty, either by vote of the
Board of Directors or by vote of a majority of the outstanding voting securities
of the Client (as defined in the 1940 Act), on 60 days' written notice to the
Bank. The Bank has the right to terminate this Agreement on 60 days' written
notice to the Board of Directors.
11. Transfer and Assignment: This Agreement may not be transferred
or assigned by the Bank, and this Agreement shall automatically and immediately
terminate in the event of its "assignment" (as defined in the 1940 Act).
12. Representation by the Client: The execution and delivery of this
Agreement by the Client shall constitute the representation by the Client that
(a) the terms hereof do not violate any obligation by which the Client is bound,
whether arising by contract, operation of law or otherwise, (b) this Agreement
will be binding upon the Client in accordance with its terms, and (c) the Client
will deliver to the Bank such evidence of such authority as the Bank may
reasonably require, whether by way of a certified corporate resolution or
otherwise.
13. Independent Contractor: The Bank shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Directors from time to time, have
no authority to act for or represent the Client in any way or otherwise be
deemed to be an agent of this Client.
14. Amendment: This Agreement may be amended by mutual consent, but
the consent of the Client must be approved (a) by vote of a majority of those
Directors of the Client who are not "interested persons" (as defined in the 1940
Act) of any party to this Agreement, cast in person at a meeting called for
purpose of voting on such amendment, and (b) solely to the extent required by
the provisions of the 1940 Act, by vote of a majority of the outstanding voting
securities of the Client (as defined in the 1940 Act).
F-4
<PAGE>
15. Entire Agreement: This Agreement contains the entire agreement
of the parties and supersedes all other representations, warranties, agreements
and understandings between the parties with respect to the matters contained
herein, including the provisions of the Existing Agreement and any amendment
thereto.
16. Notices: All notices pursuant this Agreement shall be given in
writing hand delivered or by certified mail, postage prepaid, return receipt
requested, to the address set forth in the first paragraph of this Agreement as
the principal office of the Bank or the Client, as the case may be.
17. Governing Law: This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
negotiated, executed and wholly performed within such state and the applicable
provisions of the 1940 Act. To the extent applicable law of the State of New
York or any of the provisions herein conflict with applicable provisions of the
1940 Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed on their behalf by them or their duly authorized representatives as
of the day and year first above written.
OFFITBANK
By:
--------------------------------------
Attest:
- -----------------------------------
MILWAUKEE LAND COMPANY
By:
--------------------------------------
Attest:
- -----------------------------------
F-5
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ANNEX A
The annual fees for the services of OFFITBANK shall be .20 of 1%. The
annual fees shall be payable quarterly in arrears based upon the average month-
end value of the portfolio during such quarter.
<PAGE>
APPENDIX G
MILWAUKEE LAND COMPANY
1997 INCENTIVE AND CAPITAL ACCUMULATION PLAN
1. PURPOSE. The Milwaukee Land Company 1997 Incentive and Capital
Accumulation Plan (the "Plan") is intended to provide incentives which will
attract, retain and motivate highly competent persons as key employees of
Milwaukee Land Company (the "Company") and of any subsidiary corporation now
existing or hereafter formed or acquired, by providing them opportunities to
acquire shares of the common stock, par value $0.30 per share, of the Company
("Common Stock") or to receive monetary payments based on the value of such
shares pursuant to the Benefits (as defined below) described herein.
Furthermore, the Plan is intended to assist in aligning the interests of the
Company's key employees to those of its stockholders.
2. ADMINISTRATION.
(a) The Plan will be administered by a committee of the Board of Directors
of the Company (the "Board") or a subcommittee of a committee of the Board
(which may be the Company's Compensation Committee), appointed by the Board from
among its members (the "Committee"), and shall be comprised solely of not less
than two members who shall be (i) "Non-Employee Directors" within the meaning of
Rule 16b-3(b)(3) (or any successor rule) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and (ii) unless otherwise
determined by the Board of Directors, "outside directors" within the meaning of
Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Committee is authorized,
subject to the provisions of the Plan, to establish such rules and regulations
as it deems necessary for the proper administration of the Plan and to make such
determinations and interpretations and to take such action in connection with
the Plan and any Benefits (as defined below) granted hereunder as it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all participants and their legal
representatives. No member of the Board of Directors, no member of the
Committee and no employee of the Company shall be liable for any act or failure
to act hereunder, except in circumstances involving his or her bad faith, gross
negligence or willful misconduct, or for any act or failure to act hereunder by
any other member or employee or by any agent to whom duties in connection with
the administration of this Plan have been delegated. The Company shall
indemnify members of the Committee and any agent of the Committee who is an
employee of the Company, against any and all liabilities or expenses to which
they may be subjected by reason of any act or failure to act with respect to
their duties on behalf of the Plan, except in circumstances involving such
person's bad faith, gross negligence or willful misconduct.
(b) The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee, or any person to whom it has delegated duties as aforesaid, may
employ one or more persons to render advice with respect to any responsibility
the Committee or such person may have under the Plan. The Committee may employ
such legal or other counsel, consultants and agents as it may deem desirable for
the administration of the Plan and may rely upon any opinion or computation
received from any such counsel, consultant or agent. Expenses incurred by the
Committee in the engagement of such counsel, consultant or agent
<PAGE>
shall be paid by the Company, or the subsidiary or affiliate whose employees
have benefitted from the Plan, as determined by the Committee.
3. PARTICIPANTS. Participants will consist of such key employees of the
Company and any subsidiary corporation of the Company as the Committee in its
sole discretion determines to be in a position to impact the success and future
growth and profitability of the Company and whom the Committee may designate
from time to time to receive Benefits under the Plan. Designation of a
participant in any year shall not require the Committee to designate such person
to receive a Benefit in any other year or, once designated, to receive the same
type or amount of Benefit as granted to the participant in any other year. The
Committee shall consider such factors as it deems pertinent in selecting
participants and in determining the type and amount of their respective
Benefits.
4. TYPE OF BENEFITS. Benefits under the Plan may be granted in any one or
a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Awards, and (e) Stock Units (each as described below,
and collectively, the "Benefits"). Stock Awards, Performance Awards, and Stock
Units may, as determined by the Committee in its discretion, constitute
Performance-Based Awards, as described in Section 11 below. Benefits shall be
evidenced by agreements (which need not be identical) in such forms as the
Committee may from time to time approve; provided, however, that in the event of
any conflict between the provisions of the Plan and any such agreements, the
provisions of the Plan shall prevail.
5. COMMON STOCK AVAILABLE UNDER THE PLAN. The aggregate number of shares
of Common Stock that may be subject to Benefits, including Stock Options,
granted under this Plan shall be 175,000 shares of Common Stock, which may be
authorized and unissued or treasury shares, subject to any adjustments made in
accordance with Section 12 hereof. The maximum number of shares of Common Stock
with respect to which Benefits may be granted or measured to any individual
participant under the Plan during the term of the Plan shall not exceed 175,000,
PROVIDED, HOWEVER, that the maximum number of shares of Common Stock with
respect to which Stock Options and Stock Appreciation Rights may be granted to
an individual participant under the Plan during the term of the Plan shall not
exceed 175,000 (in each case, subject to adjustments made in accordance with
Section 12 hereof). Other than those shares of Common Stock subject to Benefits
that are cancelled or terminated as a result of the Committee's exercise of its
discretion with respect to Performance-Based Awards as provided for in Section
11, any shares of Common Stock subject to a Stock Option or Stock Appreciation
Right which for any reason is cancelled or terminated without having been
exercised, any shares subject to Stock Awards, Performance Awards or Stock Units
which are forfeited, any shares subject to Performance Awards settled in cash or
any shares delivered to the Company as part or full payment for the exercise of
a Stock Option or Stock Appreciation Right shall again be available for Benefits
under the Plan. The preceding sentence shall apply only for purposes of
determining the aggregate number of shares of Common Stock subject to Benefits
but shall not apply for purposes of determining the maximum number of shares of
Common Stock with respect to which Benefits (including the maximum number of
shares of Common Stock subject to Stock Options and Stock Appreciation Rights)
that may be granted to any individual participant under the Plan.
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<PAGE>
6. STOCK OPTIONS. Stock Options will consist of awards from the Company
that will enable the holder to purchase a specific number of shares of Common
Stock, at set terms and at a fixed purchase price. Stock Options may be
"incentive stock options" ("Incentive Stock Options"), within the meaning of
Section 422 of the Code, or Stock Options which do not constitute Incentive
Stock Options ("Nonqualified Stock Options"). The Committee will have the
authority to grant to any participant one or more Incentive Stock Options,
Nonqualified Stock Options, or both types of Stock Options (in each case with or
without Stock Appreciation Rights). Each Stock Option shall be subject to such
terms and conditions consistent with the Plan as the Committee may impose from
time to time, subject to the following limitations:
(a) EXERCISE PRICE. Each Stock Option granted hereunder shall have such
per-share exercise price as the Committee may determine at the date of
grant; provided, however, subject to subsection (d) below, that the per-
share exercise price shall not be less than 100% of the Fair Market Value
(as defined below) of the Common Stock on the date the option is granted.
(b) PAYMENT OF EXERCISE PRICE. The option exercise price may be paid in
cash or, in the discretion of the Committee determined at the date of
grant, by the delivery of shares of Common Stock of the Company then owned
by the participant, by the withholding of shares of Common Stock for which
a Stock Option is exercisable, by delivering to the Company an executed
promissory note (or such other form of indebtedness) on such terms and
conditions as the Committee shall determine in its sole discretion at the
date of grant, or by a combination of these methods. In the discretion of
the Committee determined at the date of grant, payment may also be made by
delivering a properly executed exercise notice to the Company together with
a copy of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds to pay the exercise price. To
facilitate the foregoing, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms. The Committee may
prescribe any other method of paying the exercise price that it determines
to be consistent with applicable law and the purpose of the Plan,
including, without limitation, in lieu of the exercise of a Stock Option by
delivery of shares of Common Stock of the Company then owned by a
participant, providing the Company with a notarized statement attesting to
the number of shares owned, where, upon verification by the Company, the
Company would issue to the participant only the number of incremental
shares to which the participant is entitled upon exercise of the Stock
Option. In determining which methods a participant may utilize to pay the
exercise price, the Committee may consider such factors as it determines
are appropriate.
(c) EXERCISE PERIOD. Stock Options granted under the Plan shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee; provided, however, that no Stock
Option shall be exercisable later than ten years after the date it is
granted. All Stock Options shall terminate at such earlier times and upon
such conditions or circumstances as the Committee shall in its discretion
set forth in such option agreement at the date of grant.
3
<PAGE>
(d) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options may
be granted only to participants who are employees of the Company or
subsidiary corporation of the Company at the date of grant. The aggregate
market value (determined as of the time the option is granted) of the
Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by a participant during any calendar year (under all
option plans of the Company) shall not exceed $100,000. For purposes of
the preceding sentence, (i) Incentive Stock Options will be taken into
account in the order in which they are granted and (ii) Incentive Stock
Options granted before 1987 shall not be taken into account. Incentive
Stock Options may not be granted to any participant who, at the time of
grant, owns stock possessing (after the application of the attribution
rules of Section 424(d) of the Code) more than 10% of the total combined
voting power of all outstanding classes of stock of the Company or any
subsidiary corporation of the Company, unless the option price is fixed at
not less than 110% of the Fair Market Value of the Common Stock on the date
of grant and the exercise of such option is prohibited by its terms after
the expiration of five years from the date of grant of such option.
Notwithstanding anything to the contrary contained herein, no Incentive
Stock Option may be exercised later than ten years after the date it is
granted. In addition, no Incentive Stock Option shall be issued to a
participant in tandem with a Nonqualified Stock Option.
7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant
Stock Appreciation Rights to the holders of any Stock Options granted hereunder.
In addition, Stock Appreciation Rights may be granted independently of, and
without relation to, options. A Stock Appreciation Right means a right to
receive a payment, in cash, Common Stock or a combination thereof, in an amount
equal to the excess of (x) the Fair Market Value, or other specified valuation,
of a specified number of shares of Common Stock on the date the right is
exercised over (y) the Fair Market Value, or other specified valuation (which
shall be no less than the Fair Market Value), of such shares of Common Stock on
the date the right is granted, all as determined by the Committee; provided,
however, that if a Stock Appreciation Right is granted retroactively in tandem
with or in substitution for a Stock Option, the designated Fair Market Value in
the award agreement may be the Fair Market Value on the date such Stock Option
was granted. Each Stock Appreciation Right shall be subject to such terms and
conditions as the Committee shall impose from time to time.
8. STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards
(which may include mandatory payment of bonus incentive compensation in stock)
consisting of Common Stock issued or transferred to participants with or without
other payments therefor as additional compensation for services to the Company.
Stock Awards may be subject to such terms and conditions as the Committee
determines appropriate, including, without limitation, restrictions on the sale
or other disposition of such shares, the right of the Company to reacquire such
shares for no consideration upon termination of the participant's employment
within specified periods, and may constitute Performance-Based Awards, as
described below. The Committee may require the participant to deliver a duly
signed stock power, endorsed in blank, relating to the Common Stock covered by
such an Award. The Committee may also require that the stock certificates
evidencing such shares be held in custody or bear restrictive legends until the
restrictions thereon shall have lapsed. The Stock Award shall specify whether
the participant shall have, with respect to the shares of Common Stock subject
to a Stock
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<PAGE>
Award, all of the rights of a holder of shares of Common Stock of the Company,
including the right to receive dividends and to vote the shares.
9. PERFORMANCE AWARDS.
(a) Performance Awards may be granted to participants at any time and from
time to time, as shall be determined by the Committee. Performance Awards may,
as determined by the Committee in its sole discretion, constitute Performance-
Based Awards. The Committee shall have complete discretion in determining the
number, amount and timing of awards granted to each participant. Such
Performance Awards may be in the form of shares of Common Stock or Stock Units.
Performance Awards may be awarded as short-term or long-term incentives. With
respect to those Performance Awards that are intended to constitute Performance-
Based Awards, the Committee shall set performance targets at its discretion
which, depending on the extent to which they are met, will determine the number
and/or value of Performance Awards that will be paid out to the participants,
and may attach to such Performance Awards one or more restrictions. Performance
targets may be based upon, without limitation, Company-wide, divisional and/or
individual performance.
(b) With respect to those Performance Awards that are not intended to
constitute Performance-Based Awards, the Committee shall have the authority at
any time to make adjustments to performance targets for any outstanding
Performance Awards which the Committee deems necessary or desirable unless at
the time of establishment of goals the Committee shall have precluded its
authority to make such adjustments.
(c) Payment of earned Performance Awards shall be made in accordance with
terms and conditions prescribed or authorized by the Committee. The participant
may elect to defer, or the Committee may require or permit the deferral of, the
receipt of Performance Awards upon such terms as the Committee deems
appropriate.
10. STOCK UNITS.
(a) The Committee may, in its discretion, grant Stock Units to participants
hereunder. Stock Units may, as determined by the Committee in its sole
discretion, constitute Performance-Based Awards. The Committee shall determine
the criteria for the vesting of Stock Units. A Stock Unit granted by the
Committee shall provide payment in shares of Common Stock at such time as the
award agreement shall specify. Shares of Common Stock issued pursuant to this
Section 10 may be issued with or without other payments therefor as may be
required by applicable law or such other consideration as may be determined by
the Committee. The Committee shall determine whether a participant granted a
Stock Unit shall be entitled to a Dividend Equivalent Right (as defined below).
(b) Upon vesting of a Stock Unit, unless the Committee has determined to
defer payment with respect to such unit or a Participant has elected to defer
payment under subsection (c) below, shares of Common Stock representing the
Stock Units shall be distributed to the participant unless the Committee, with
the consent of the participant, provides for the payment of the Stock Units in
cash or partly in cash
5
<PAGE>
and partly in shares of Common Stock equal to the value of the shares of Common
Stock which would otherwise be distributed to the participant.
(c) Prior to the year with respect to which a Stock Unit may vest, the
participant may elect not to receive Common Stock upon the vesting of such Stock
Unit and for the Company to continue to maintain the Stock Unit on its books of
account. In such event, the value of a Stock Unit shall be payable in shares of
Common Stock pursuant to the agreement of deferral.
(d) A "Stock Unit" means a notational account representing one share of
Common Stock. A "Dividend Equivalent Right" means the right to receive the
amount of any dividend paid on the share of Common Stock underlying a Stock
Unit, which shall be payable in cash or in the form of additional Stock Units.
11. PERFORMANCE-BASED AWARDS. Certain Benefits granted under the Plan may
be granted in a manner such that the Benefits qualify for the performance-based
compensation exemption of Section 162(m) of the Code ("Performance-Based
Awards"). As determined by the Committee in its sole discretion, either the
granting or vesting of such Performance-Based Awards are to be based upon one or
more of the following factors: net sales, pretax income before allocation of
corporate overhead and bonus, budget, earnings per share, net income, division,
group or corporate financial goals, return on stockholders' equity, return on
assets, attainment of strategic and operational initiatives, appreciation in
and/or maintenance of the price of the Common Stock or any other publicly-traded
securities of the Company, market share, gross profits, earnings before interest
and taxes, earnings before interest, taxes, dividends and amortization, economic
value-added models and comparisons with various stock market indices, reductions
in costs or any combination of the foregoing. With respect to Performance-Based
Awards, (i) the Committee shall establish in writing (x) the objective
performance-based goals applicable to a given period and (y) the individual
employees or class of employees to which such performance-based goals apply no
later than 90 days after the commencement of such period (but in no event after
25% of such period has elapsed) and (ii) no Performance-Based Awards shall be
payable to or vest with respect to, as the case may be, any participant for a
given period until the Committee certifies in writing that the objective
performance goals (and any other material terms) applicable to such period have
been satisfied. With respect to any Benefits intended to qualify as
Performance-Based Awards, after establishment of a performance goal, the
Committee shall not revise such performance goal or increase the amount of
compensation payable thereunder (as determined in accordance with Section 162(m)
of the Code) upon the attainment of such performance goal. Notwithstanding the
preceding sentence, the Committee may reduce or eliminate the number of shares
of Common Stock or cash granted or the number of shares of Common Stock vested
upon the attainment of such performance goal.
12. ADJUSTMENT PROVISIONS; CHANGE IN CONTROL.
(a) If there shall be any change in the Common Stock of the Company,
through merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, reverse stock split, split up, spinoff, combination of shares,
exchange of shares, dividend in kind or other like change in capital structure
or distribution (other than normal cash dividends) to stockholders of the
Company, an
6
<PAGE>
adjustment shall be made to each outstanding Stock Option and Stock Appreciation
Right such that each such Stock Option and Stock Appreciation Right shall
thereafter be exercisable for such securities, cash and/or other property as
would have been received in respect of the Common Stock subject to such Stock
Option or Stock Appreciation Right had such Stock Option or Stock Appreciation
Right been exercised in full immediately prior to such change or distribution,
and such an adjustment shall be made successively each time any such change
shall occur. In addition, in the event of any such change or distribution, in
order to prevent dilution or enlargement of participants' rights under the Plan,
the Committee will have authority to adjust, in an equitable manner, the number
and kind of shares that may be issued under the Plan, the exercisability and
vesting pensions of such Benefits, the number and kind of shares subject to
outstanding Benefits, the exercise price applicable to outstanding Benefits, and
the Fair Market Value of the Common Stock and other value determinations
applicable to outstanding Benefits. Appropriate adjustments may also be made by
the Committee in the terms of any Benefits under the Plan to reflect such
changes or distributions and to modify any other terms of outstanding Benefits
on an equitable basis, including modifications of performance targets and
changes in the length of performance periods. In addition, other than with
respect to Stock Options, Stock Appreciation Rights and other awards intended to
constitute Performance-Based Awards, the Committee is authorized to make
adjustments to the terms and conditions of, and the criteria included in,
Benefits in recognition of unusual or nonrecurring events affecting the Company
or the financial statements of the Company, or in response to changes in
applicable laws, regulations, or accounting principles. Notwithstanding the
foregoing, (i) any adjustment with respect to an Incentive Stock Option shall
comply with the rules of Section 424(a) of the Code, and (ii) in no event shall
any adjustment be made which would render any Incentive Stock Option granted
hereunder other than an incentive stock option for purposes of Section 422 of
the Code.
(b) In the event of a Change in Control (as defined below), the Committee,
in its discretion, may take such actions as it deems appropriate with respect to
outstanding Benefits, including, without limitation, accelerating the
exercisability or vesting of such Benefits.
The Committee, in its discretion, may determine that, upon the occurrence
of a Change in Control of the Company, each Stock Option and Stock Appreciation
Right outstanding hereunder shall terminate within a specified number of days
after notice to the holder, and such holder shall receive, with respect to each
share of Common Stock subject to such Stock Option or Stock Appreciation Right,
an amount equal to the excess of the Fair Market Value of such shares of Common
Stock immediately prior to the occurrence of such Change in Control over the
exercise price per share of such Stock Option or Stock Appreciation Right; such
amount to be payable in cash, in one or more kinds of property (including the
property, if any, payable in the transaction) or in a combination thereof, as
the Committee, in its discretion, shall determine.
For purposes of this Section 12(b), a "Change in Control" of the Company
shall be deemed to have occurred upon any of the following events:
(A) A person or entity or group of persons or entities, acting in
concert, shall become the direct or indirect beneficial owner (within the
meaning of Rule 13d-3 of the Exchange Act) of securities of the Company
representing fifty-one percent (51%) or more of the combined voting
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<PAGE>
power of the issued and outstanding common stock of the Company (a
"Significant Owner"), unless such shares are originally issued to such
Significant Owner by the Company; or
(B) The majority of the Company's Board of Directors is no longer
comprised of the incumbent directors who constitute the Board of Directors
on the Effective Date (as hereinafter defined) and any other individual(s)
who becomes a director subsequent to the Effective Date whose initial
election or nomination for election as a director, as the case may be, was
approved by at least a majority of the directors who comprised the
incumbent directors as of the date of such election or nomination; or
(C) A sale of all or substantially all of the assets of the Company; or
(D) The Board of Directors shall approve any merger, consolidation, or
like business combination or reorganization of the Company, the
consummation of which would result in the occurrence of any event described
in clause (C) above, and such transaction shall have been consummated.
13. TRANSFERABILITY. Each Benefit granted under the Plan to a participant
shall not be transferable otherwise than by will or the laws of descent and
distribution, and shall be exercisable, during the participant's lifetime, only
by the participant. In the event of the death of a participant, each Stock
Option or Stock Appreciation Right theretofore granted to him or her shall be
exercisable during such period after his or her death as the Committee shall in
its discretion set forth in such option or right at the date of grant and then
only by the executor or administrator of the estate of the deceased participant
or the person or persons to whom the deceased participant's rights under the
Stock Option or Stock Appreciation Right shall pass by will or the laws of
descent and distribution. Notwithstanding the foregoing, at the discretion of
the Committee, an award of a Benefit other than an Incentive Stock Option may
permit the transferability of a Benefit by a participant solely to the
participant's spouse, siblings, parents, children and grandchildren or trusts
for the benefit of such persons or partnerships, corporations, limited liability
companies or other entities owned solely by such persons, including trusts for
such persons, subject to any restriction included in the award of the Benefit.
14. OTHER PROVISIONS. The award of any Benefit under the Plan may also be
subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines, at the date of
grant, appropriate, including, without limitation, for the installment purchase
of Common Stock under Stock Options, for the installment exercise of Stock
Appreciation Rights, to assist the participant in financing the acquisition of
Common Stock, for the forfeiture of, or restrictions on resale or other
disposition of, Common Stock acquired under any form of Benefit, for the
acceleration of exercisability or vesting of Benefits in the event of a change
in control of the Company, for the payment of the value of Benefits to
participants in the event of a change in control of the Company, or to comply
with federal and state securities laws, or understandings or conditions as to
the participant's employment in addition to those specifically provided for
under the Plan.
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<PAGE>
15. FAIR MARKET VALUE. For purposes of this Plan and any Benefits awarded
hereunder, Fair Market Value shall be the closing price of the Company's Common
Stock on the date of calculation (or on the last preceding trading date if
Common Stock was not traded on such date) if the Company's Common Stock is
readily tradeable on a national securities exchange or other market system, and
if the Company's Common Stock is not readily tradeable, Fair Market Value shall
mean the amount determined in good faith by the Committee as the fair market
value of the Common Stock of the Company.
16. WITHHOLDING. All payments or distributions of Benefits made pursuant
to the Plan shall be net of any amounts required to be withheld pursuant to
applicable federal, state and local tax withholding requirements. If the
Company proposes or is required to distribute Common Stock pursuant to the Plan,
it may require the recipient to remit to it or to the corporation that employs
such recipient an amount sufficient to satisfy such tax withholding requirements
prior to the delivery of any certificates for such Common Stock. In lieu
thereof, the Company or the employing corporation shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
such corporation to the recipient as the Committee shall prescribe. The
Committee may, in its discretion and subject to such rules as it may adopt
(including any as may be required to satisfy applicable tax and/or non-tax
regulatory requirements), permit an optionee or award or right holder to pay all
or a portion of the federal, state and local withholding taxes arising in
connection with any Benefit consisting of shares of Common Stock by electing to
have the Company withhold shares of Common Stock having a Fair Market Value
equal to the amount of tax to be withheld, such tax calculated at rates required
by statute or regulation.
17. TENURE. A participant's right, if any, to continue to serve the
Company as a director, officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the Plan.
18. UNFUNDED PLAN. Participants shall have no right, title, or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations under the Plan. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a trust of any kind, or a fiduciary relationship between the Company and any
participant, beneficiary, legal representative or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be
paid from the general funds of the Company and no special or separate fund shall
be established and no segregation of assets shall be made to assure payment of
such amounts except as expressly set forth in the Plan. The Plan is not
intended to be subject to the Employee Retirement Income Security Act of 1974,
as amended.
19. NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan or any Benefit. The Committee shall
determine whether cash, or Benefits, or other property shall be issued or paid
in lieu of fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
9
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20. DURATION, AMENDMENT AND TERMINATION. No Benefit shall be granted more
than ten years after the Effective Date; provided, however, that the terms and
conditions applicable to any Benefit granted prior to such date may thereafter
be amended or modified by mutual agreement between the Company and the
participant or such other persons as may then have an interest therein. The
Committee may amend the Plan from time to time or suspend or terminate the Plan
at any time. However, no action authorized by this Section 20 shall reduce the
amount of any existing Benefit or change the terms and conditions thereof
without the participant's consent. No amendment of the Plan shall, without
approval of the stockholders of the Company, (i) increase the total number of
shares which may be issued under the Plan or the maximum number of shares with
respect to Stock Options, Stock Appreciation Rights and other Benefits that may
be granted to any individual under the Plan or (ii) modify the requirements as
to eligibility for Benefits under the Plan; provided, however, that no amendment
may be made without approval of the stockholders of the Company if the amendment
will disqualify any Incentive Stock Options granted hereunder.
21. GOVERNING LAW. This Plan, Benefits granted hereunder and actions
taken in connection herewith shall be governed and construed in accordance with
the laws of the State of Delaware (regardless of the law that might otherwise
govern under applicable Delaware principles of conflict of laws).
22. EFFECTIVE DATE. (a) The Plan shall be effective as of [February] __,
1997, the date on which the Plan was adopted by the Committee (the "Effective
Date"), provided that the Plan is approved by the stockholders of the Company at
an annual meeting or any special meeting of stockholders of the Company within
12 months of the Effective Date, and such approval of stockholders shall be a
condition to the right of each participant to receive any Benefits hereunder.
Any Benefits granted under the Plan prior to such approval of stockholders shall
be effective as of the date of grant (unless, with respect to any Benefit, the
Committee specifies otherwise at the time of grant), but no such Benefit may be
exercised or settled and no restrictions relating to any Benefit may lapse prior
to such stockholder approval, and if stockholders fail to approve the Plan as
specified hereunder, any such Benefit shall be cancelled.
(b) This Plan shall terminate on April 3, 2007 (unless sooner terminated by
the Committee).
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PROXY MILWAUKEE LAND COMPANY
- --------------------------------------------------------------------------------
SPECIAL MEETING OF STOCKHOLDERS--MAY 27, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints EDWIN JACOBSON, LEON F. FIORENTINO and LAWRENCE
S. ADELSON and each or any of them, as proxies, with full power of
substitution, to vote all shares of Common Stock of MILWAUKEE LAND COMPANY (the
"Company") represented by this proxy which the undersigned is entitled to vote
at the Special Meeting of Stockholders to be held on May 27, 1997, and at any
adjournments thereof, with all powers the undersigned would possess if
personally present at such meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4
1. Approval of the purchase by the Company and its newly formed, wholly-owned
subsidiary PG Newco Corp. of substantially all the assets of PG Design
Electronics, Inc., all transactions contemplated thereby and the necessary
changes to the Company's fundamental policies, as described in the
accompanying Proxy Statement.
FOR [_]AGAINST [_]ABSTAIN [_]
2. Approval of the de-registration of the Company as an investment company
under the Investment Company Act of 1940.
FOR [_]AGAINST [_]ABSTAIN [_]
3. Approval of the new investment advisory agreement with OFFITBANK described
in the accompanying Proxy Statement.
FOR [_]AGAINST [_]ABSTAIN [_]
4. Approval of the Milwaukee Land Company 1997 Incentive and Capital
Accumulation Plan described in the accompanying Proxy Statement.
FOR [_]AGAINST [_]ABSTAIN [_]
5. In their sole discretion on any other matters properly coming before the
meeting or any adjournment or adjournments thereof.
(Please DATE AND SIGN on the reverse side and return promptly in the enclosed
envelope.)
THIS PROXY IS REVOCABLE AND WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1, FOR PROPOSAL 2, FOR PROPOSAL 3, FOR
PROPOSAL 4 AND IN THE SOLE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR ADJOURNMENTS
THEREOF.
Dated _______________________________, 1997
-------------------------------------------
-------------------------------------------
Signature
IMPORTANT: PLEASE DATE AND SIGN EXACTLY AS
YOUR NAME APPEARS HEREON. WHEN
SIGNING AS EXECUTOR, ADMINISTRA-
TOR, TRUSTEE, AGENT, ATTORNEY,
GUARDIAN, OR CORPORATE OFFICER,
PLEASE SET FORTH YOUR FULL TITLE.
JOINT OWNERS SHOULD EACH SIGN.
