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§7.102PROSY STATEMENTS: STRATEGY & FORMS 7-116 © 1992 Jefren Publishing Company, Inc. PROPOSED MERGER WITH THE GROSSMAN CORPORATION The Company and The Grossman Corporation (“TGC”) have entered into an Agreement and Plan of Merger (the “Agreement”), a copy of which is attached hereto as Exhibit A, whi ch provides for the merger of TGC with and into the Company. As hereinafter indicated, the Boa rd of Directors of the Company has unanimously approved the Agreement and recommends its approval by the shareholders (see “Shareholder Vote Required” herein). The merger of TGC into the Company was proposed to the Company by TGC. The shareholders of TGC desire that TGC be merged into the Company in order to achieve the benefits of direct ownership by them of common stock of the Company (see “TGC” herein for information relating to the benefits of the transaction to the shareholders of TGC). The shareholders of TGC would not contemplate seeking the desired result unless it could be achieved in a manner that would be tax-free, as by a merger. Management of the Company is of the opinion that the proposed merger will have no adverse accounting, income tax or corporate or securities law consequences to the Company, and that from the point of view of the Company, the proposed merger amounts to no more than transferring the number of shares of common stock of the Company registered in the name of TGC into the names of the shareholders of TGC. For N. Bud Grossman and Harold I. Grossman, the income tax laws make it advisable that the achievement of this sim ple result be accomplished by means of a merger. Nature of the Proposed Merger The Agreement requires that TGC sell or otherwise dispose of all of its assets, except shares of common stock of the Company, and that TGC satisfy all of its obligations, prior to the effective date of the merger. If TGC is unable to satisfy certain contingent lia bilities, the Company may waive TGC’s failure to satisfy completely all of its obligations wi th respect thereto, but in any event, shall be provided with an unconditional indemnification by the shareholders of TGC. The only possible contingent liabilities relate to (i) mortgages given by TGC on properties, all of which will have been disposed of prior to the effective dat e of the merger and which mortgages have been assumed by the buyer, and (ii) claims of the kind occurring in the usual course of the conduct of automobile dealerships which may, after the effective date of the merger, be asserted. The shareholders of TGC will receive the same number of shares of common stock of the Company as that owned by TGC at the effective dat e of the merger. Thus, the merger will have no effect on the number of shares of common stock of the Company outstanding, no effect on the assets and liabilities of the Company, and no change in control will result from the transaction. The rights of existing holders of the common stock of the Company will not be affected by the merger. Each share of the Company’s common stock issued and outstanding at the effect ive date of the merger will continue as one share of the Company’s common stock, except t hat the shares of the Company’s common stock owned by TGC at that date will be cancelled. The Certificate of Incorporation and Bylaws of the Company will not be changed by virtue of the merger. The directors and officers of the Company will continue to be its directors and officers in accordance with the Restated Articles of Incorporation and Bylaws of the Company. In order that the merger not result in any increase in the number of shares of common stoc k of the Company outstanding, and to avoid the valuation problems that would be inherent in t he exchange of shares for cash or other property, the Agreement requires that TGC dispose of all of CORPORATE RESTRUCTURING§ 7.102 7-117 its non-cash assets and apply its cash to the purchase of additional outstanding shares of common stock of the Company, unless paid out in dividends to its shareholders, so that on the effect ive date of the merger, the assets of TGC will consist solely of common stock of the Company. §7.102PROSY STATEMENTS: STRATEGY & FORMS 7-118 © 1992 Jefren Publishing Company, Inc. The Agreement requires TGC or its shareholders to pay all expenses of the transaction, whether or not the transaction is consummated, exclusive of normal costs associated wit h the holding of the Annual Meeting of Shareholders of the Company. The Agreement also requires the shareholders of TGC to indemnify and hold harmless the Company and each of its offic ers and directors (other than N. Bud Grossman and Harold I. Grossman) from and against, among other things, any and all liabilities or obligations of or claims against TGC, and any and all actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses incident to the merger. In keeping with the provisions of the Agreement, the Company and TGC, on the 10th day of October, 1978, filed an application with the Internal Revenue Service for a ruling to the effect that the consummation of the merger called for by the Agreement will not result i n the recognition of taxable income to either the Company or TGC or the shareholders of the l atter. Unless a favorable ruling is secured within one year from the date of its filing, eit her party may terminate the Agreement. The merger will become effective upon the filing of t he Agreement with the Secretary of State of the State of Minnesota on such date as the President of the Company will prescribe which, it is hoped, will be well within the indicated year. TGC TGC was incorporated on the 13th day of February, 1953, under the laws of the State of Minnesota. In the intervening years, it has, either directly or through subsidiaries, operated automobile dealerships and engaged in certain investment activities. In 1969, TGC wa s the controlling parent of the Company, owning beneficially 89.6% of the total number of its common shares outstanding. Pursuant to a registration statement, made effective by the Securities and Exchange Commission on the 28th day of May, 1969, TGC sold to the public through underwriters a substantial number of its shares, reducing its beneficial ownership to 68.3%. Thereafter, TGC made certain charitable gifts and compensation transfers of it s common shares in the Company, reducing its beneficial ownership by late 1971 to 63.2%. Pursuant to a registration statement, made effective by the Securities and Exchange Commission on the 8th day of December, 1971, TGC sold to the public through underwriters a substantial number of its shares, reducing its beneficial ownership to 39.5%. Thereafter, TGC made certain charita ble gifts of its common shares in the Company, reducing its beneficial ownership to 1,201,158 shares. Pursuant to a registration statement, made effective by the Securities and Excha nge Commission on December 14, 1972, TGC sold to the public through underwriters 282,000 shares, reducing its beneficial ownership to 919,158 shares. Subsequently, in connection with the merger of Feld Leasing Company, Inc. into the Company, TGC acquired three additional shares. Therefore, when the Agreement was entered into, TGC owned beneficially 919,161 shares. In keeping with TGC’s commitment in the Agreement to convert its cash and other assets into com mon shares of the Company, TGC has in compliance with the purchase guidelines promulgated by the Securities and Exchange Commission pursuant to Section 10(b) of the Securities Exchange Act of 1934, as amended, purchased 130,600 additional shares, so that on the record date for the December 15, 1978 Annual Meeting of Shareholders, its beneficial holding of the Company’s common shares amounted to 1,049,761, constituting 15.59% of the total then outstanding. TGC has already disposed of all its real estate holdings and certain of its aut omobile dealerships. Prior to the merger becoming effective, TGC anticipates selling its remaining automobile dealerships and discharging all its accrued obligations, so that when the me rger becomes effective, it will be free of debt and its only assets will be shares of the common stock CORPORATE RESTRUCTURING§ 7.102 7-119 of the Company. §7.102PROSY STATEMENTS: STRATEGY & FORMS 7-120 © 1992 Jefren Publishing Company, Inc. Because on the effective date of the merger TGC will be conducting no active busi ness whatsoever, no corporate purpose will be served by its existence. The merger will result in di rect ownership of the Company’s common stock by the shareholders of TGC, by means of a tax-free transaction (see “Tax Consequences of the Merger”). Elimination of the separate corpora te existence of TGC will remove all administrative expenses and taxes incurred by TGC. Approval of the Merger by the Board of Directors The merger was proposed to the Board of Directors of the Company by TGC on September 21, 1978. After consultation between the officers of the Company and its outside counsel, Management concluded that from the point of view of the Company, the proposed merger amounts to no more than transferring the number of shares of common stock of the Company registered in the name of TGC into the names of the shareholders of TGC, namely N. B ud Grossman and Harold I. Grossman. Since the transaction will have no adverse consequences of any kind to the Company, although it will be of benefit to the shareholders of TGC, Manageme nt sees no reason for the Company to urge that Messrs. Grossman not receive such benefit, which is cost-free to the Company. On October 20, 1978, the Board of Directors of the Company duly approved the Agreement (Messrs. N. Bud Grossman and Harold I. Grossman not voting). The Agreement provides that the shareholders of TGC will receive the Company’s share as “restricted stock,” without any present commitment for registration thereof. Although no sa les of shares of the Company’s common stock are presently anticipated by the shareholders of TGC, Management of the Company believes that the merger will be beneficial to t he Company in providing, through removal of the intermediate corporate ownership, an opportunity for greater dispersion of share ownership in the future by the shareholders of TGC. Under Rule 144 promulgated by the Securities and Exchange Commission, each of N. Bud Grossman and Harold I. Grossman would, if they so elect, be entitled after the merger becomes effective to sell, within any 90-day period prescribed by the Rule, in a broker’s transaction in conformity with such Rul e the higher of (i) one percent of the total number of the Company’s common shares then outstanding, or (ii) the average weekly number of shares traded on the New York Stock Exchange within the four calendar weeks next preceding the filing of the notice require d by the Rule. Management also believes that such direct ownership can be of benefit to the Company and its shareholders in facilitating estate planning by the shareholders of TGC, thereby avoiding untimely sales of large blocks of the Company’s stock, in order to pay estate taxes, i n the event of the death of one of the shareholders. Because N. Bud Grossman and Harold I. Grossman may be deemed to be “parents” of the Company within the meaning of the Securities Act of 1933, as amended, and since the firm of Leonard, Street and Deinard acts as counsel to the Company and has also acted as counsel to TGC, no representation can be made that the terms of the Agreement were arrived at as a result of arms-length negotiation between TGC and the Company. Shareholder Vote Required Consummation of the merger under Minnesota law and the Restated Articles of Incorporation of the Company requires adoption and approval of the Agreement by the affirmative vote at the meeting of the holders of a majority of the outstanding shares of the Company’s common stock. TGC has advised the Company that it will vote its shares in favor of the merger. Appraisal Rights Under the laws of the State of Minnesota (Section 301.44 of Minnesota Statutes), no CORPORATE RESTRUCTURING§ 7.102 7-121 dissenting stockholder’s right of appraisal or payment for shares is available to stockholders §7.102PROSY STATEMENTS: STRATEGY & FORMS 7-122 © 1992 Jefren Publishing Company, Inc. of the Company as the surviving corporation who may object to or vote against the proposed merger. The Merger Agreement requires the unanimous approval of the shareholders of TGC and, accordingly, no dissenting stockholder’s right of appraisal or payment for shares will be available to the shareholders of TGC under the mentioned section of Minnesota Statutes. The Agreement Set forth below is a summary of certain provisions of the Agreement. This summary is qualified in its entirety by reference to the Agreement, a copy of which is attac hed hereto as Exhibit A. Terms of the Merger. TGC will be merged with and into the Company in a statutory merger pursuant to Minnesota law. The effective date of the merger will be the day of fili ng of the Agreement with the Secretary of State of Minnesota prescribed by the President of the Com pany. When the merger becomes effective, the separate corporate existence of TGC will cease and the Company will acquire all of the assets of TGC subject to any liabilities, if any. On the effective date of the merger, each of the two stockholders of TGC will receive that number of shares of common stock of the Company which is equal to one-half of the number of shares of common stock of the Company owned by TGC on that date. Prior to the effective date of the merger, each of the shareholders of TGC must enter into an agreement, substantially in the form of Exhibit I to the Agreement, to the effect that they are acquiring the shares of common stock of the Company to be issued to them pursuant to the merger for their own account and not with a view to any distribution of such shares within the meaning of the Securities Act of 1933, as amended; and an agreement on the part of eac h of them, jointly and severally, to indemnify and hold harmless the Company and its offic ers and directors (exclusive of Messrs. N. Bud Grossman and Harold I. Grossman) against (i) all liabilities or obligations of or claims against TGC at the effective date of the merger, (ii) any and all damage or deficiency resulting from any misrepresentation, breach of warranty or non- fulfillment of any agreement on the part of TGC under the Agreement, and (iii) a ny and all actions, suits, proceedings, demands, judgments, costs and legal and other expenses incident t o the merger. The Agreement provides that it may be terminated or abandoned at any time prior t o the effective date of the merger by mutual consent of the Board of Directors of the Company and TGC, or in the other events recited in Article 9 of the Agreement, and it ma y be amended or revised before approval by the shareholders of the Company. Conditions of the Merger. The Agreement provides various conditions which must be met prior to effectuation of the merger. These conditions include accuracy at the effe ctive date of the merger of representations to the Company on the part of TGC relating to its organizati on, existence, capitalization, financial statements, authority to enter into the transaction, tax matters, title to its assets, and absence of unpaid accrued liabilities and obligations a nd adverse changes in its business. The merger is also conditioned on receipt by the Company of a balance shee t of TGC, dated as of the effective date of the merger, showing no assets of any nature, other than shares of the Company’s common stock, and no accrued and unpaid liabilities of any nature. Either party has the right to waive conditions not satisfied by the other party and proce ed with the merger; however, action with respect to waiver, extension or modification of any t erm or condition of the agreement can be taken by the Company after approval of the agreem ent by the shareholders of the Company only if in the opinion of the Board of Directors of the Company CORPORATE RESTRUCTURING§ 7.102 7-123 such action will not have any material adverse effect on the Company or its shareholders. §7.102PROSY STATEMENTS: STRATEGY & FORMS 7-124 © 1992 Jefren Publishing Company, Inc. TGC is a defendant in law suits, covered by insurance, relating to claims for persona l injury, property damage or death arising in the ordinary course of TGC’s automobile business. If any other suit should be brought, the contingent liability, if any, with respect thereto would be covered by the indemnification provided to the Company by the shareholders of TGC. The merger is also conditioned on the listing on the New York Stock Exchange, upon official notice of issuance, of the requisite number of shares of the common stock of the Company to be issued pursuant to the Agreement, and the favorable opinion of counsel for the respective partie s as to specified aspects of the transaction. Costs and Expenses of the Merger; Indemnification TGC will pay all of the costs and expenses incurred or to be incurred by TGC and by the Company in negotiating and preparing the Agreement, calling and holding the meetings of shareholders for the purpose of voting on the merger (exclusive of the normal costs associated with the holding of the Company’s Annual Meeting of Shareholders), effecting the merger and carrying out the transactions contemplated by the Agreement. The Agreement requires indemnification by the shareholders of TGC to the extent the c osts and expenses of the merger exceed the amount paid by TGC prior to the merger. In the event the merger is terminated or abandoned by either or both of the parties for any reason, the Agreeme nt requires TGC to reimburse the Company for any such costs or expenses paid or incurred in relation to the merger. Federal Tax Consequences In the opinion of Management, there will be no tax consequences to the holders of the Company’s common stock by reason of the merger. The entire transaction is conditional upon the receipt from the Internal Revenue Service of a ruling that the merger will constitute a tax-free reorganization under applicable provisions of the Internal Revenue Code of 1954, as amended; that no gain or loss will be recognized to the Company or to TGC as a result of the merger; and that no gain or loss will be recognized to the shareholders of TGC on the exchange of the ir TGC stock for shares of the Company’s common stock. Financial Statements No financial statements of TGC or the Company are included herein since the Agreeme nt requires that TGC sell or otherwise dispose of all of its assets, with the exception of shares of the common stock of the Company owned by it, and that it satisfy all of its obligations prior to the effective date of the merger. No pro forma combined financial statements of TGC and t he Company and subsidiaries are included herein because such statements would reflect no changes as a result of the merger from the consolidated financial statements included in the Company’s Annual Report to Shareholders for the fiscal year ended July 31, 1978, previously mailed to the shareholders of the Company. MANAGEMENT RECOMMENDS A VOTE “FOR” ADOPTION AND APPROVAL OF THE PROPOSED AGREEMENT AND PLAN OF MERGER.