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
Minnesota Power & Light 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)(1) 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.):
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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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[LOGO]
NOTICE AND PROXY STATEMENT
------------------------------
Annual Meeting of Shareholders
Tuesday, May 13, 1997
Duluth, Minnesota
------------------------------
[LOGO OF MINNESOTA POWER] March 20, 1997
Dear Shareholder:
You are cordially invited to attend Minnesota Power's 1997 Annual Meeting
of Shareholders on Tuesday, May 13, 1997 at 10:30 a.m. in the auditorium at the
Duluth Entertainment Convention Center (DECC). The DECC is located on the
waterfront at 350 Harbor Drive in Duluth. Free parking is available in the
adjoining lot. On behalf of the Board of Directors, I encourage you to attend.
This year 13 nominees are standing for election to the Board. We are
pleased to have a new nominee, Ms. Kathleen A. Brekken, President and CEO of
Midwest of Cannon Falls. With her election, Ms. Brekken will bring to the Board
the entrepreneurial and marketing skills she has used to build her family-owned
business in Cannon Falls, Minnesota into a successful enterprise serving major
markets in the U.S. and Canada.
Also to be acted upon at our meeting is a shareholder proposal recommending
that the Shareholder Rights Plan adopted by the Board on July 26, 1996 be
repealed unless it is approved by shareholders. As explained more fully within,
your Board of Directors believes the Rights Plan to be an important tool
available to the Board for assuring that any party interested in acquiring
Minnesota Power pay all shareholders full value for their shares. Therefore, we
urge you to vote against this shareholder proposal.
After our Annual Meeting, we invite you to visit with our directors,
officers and employees over a box lunch. A summary of the Annual Meeting
proceedings will be mailed in early June to all shareholders. If you plan on
attending please return the enclosed reservation card.
It is important that your shares be represented at the Annual Meeting. At
your earliest convenience, please sign, date, and mail the enclosed proxy card
in the envelope provided.
Thank you for your continued support.
Sincerely,
Edwin L. Russell
Edwin L. Russell
Chairman, President and
Chief Executive Officer
MINNESOTA POWER & LIGHT COMPANY
- - --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - MAY 13, 1997
- - --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of Minnesota Power & Light Company
will be held in the auditorium at the Duluth Entertainment Convention Center,
350 Harbor Drive, Duluth, Minnesota, on Tuesday, May 13, 1997 at 10:30 a.m. for
the following purposes:
1. To elect a Board of 13 directors to serve for the ensuing year;
2. To appoint Price Waterhouse LLP as the Company's independent accountants
for 1997;
3. To vote on a shareholder proposal regarding the Company's Shareholder
Rights Plan; and
4. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Shareholders of record on the books of the Company at the close of business
on March 14, 1997, are entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited and encouraged to attend the meeting
in person. The holders of a majority of the shares entitled to vote at the
meeting must be present in person or by proxy to constitute a quorum.
We would appreciate your signing and returning the enclosed proxy card at
your earliest convenience to facilitate an efficient tally of your votes.
By order of the Board of Directors,
Philip R. Halverson
Philip R. Halverson
Vice President, General Counsel
and Secretary
Dated at Duluth, Minnesota
March 20, 1997
If you have not received the Minnesota Power 1996 Annual Report, which
includes financial statements, kindly notify Minnesota Power Shareholder
Services, 30 West Superior Street, Duluth, MN 55802, telephone number
1-800-535-3056 or 1-218-723-3974, and a copy will be sent to you.
MINNESOTA POWER & LIGHT COMPANY
30 West Superior Street
Duluth, Minnesota 55802
- - --------------------------------------------------------------------------------
PROXY STATEMENT
- - --------------------------------------------------------------------------------
Solicitation
The Proxy accompanying this statement is solicited on behalf of the Board
of Directors of Minnesota Power & Light Company (Minnesota Power or Company) for
use at the Annual Meeting of Shareholders to be held on May 13, 1997, and any
adjournments thereof. The purpose of the meeting is to elect a Board of 13
Directors to serve for the ensuing year, to appoint Price Waterhouse LLP as the
Company's independent accountants for 1997, to consider a shareholder proposal
regarding the Company's Shareholder Rights Plan, and to transact such other
business as may properly come before the meeting. All properly executed proxies
received at or before the meeting, and entitled to vote, will be voted at the
meeting.
This Proxy Statement and enclosed proxy card were first mailed on or about
March 20, 1997. Each proxy delivered pursuant to this solicitation is revocable
any time before it is voted, by written notice delivered to the Secretary of the
Company.
The Company expects to solicit proxies primarily by mail. Proxies also may
be solicited in person and by telephone at a nominal cost by regular or retired
employees of the Company. The expenses of such solicitation are the ordinary
ones in connection with preparing, assembling, and mailing the material and also
include charges and expenses of brokerage houses and other custodians, nominees,
or other fiduciaries for communicating with shareholders. Additional
solicitation of proxies will be made by mail, telephone, and in person by
Corporate Investor Communications, Inc., a firm specializing in the solicitation
of proxies, at a cost to the Company of approximately $6,000 plus expenses. The
total amount of such costs will be borne by the Company.
Outstanding Shares and Voting Procedures
The outstanding shares of capital stock of the Company, as of March 14,
1997, were as follows:
Preferred Stock 5% Series ($100 par value).......................113,358 shares
Serial Preferred Stock A $7.125 Series (without par value).......100,000 shares
Serial Preferred Stock A $6.70 Series (without par value)........100,000 shares
Common Stock (without par value)..............................32,934,958 shares
Each share of the Company's Common Stock and preferred stocks of record on
the books of the Company at the close of business on March 14, 1997, is entitled
to notice of the Annual Meeting and to one vote.
The affirmative vote of a majority of the shares of stock present and
entitled to vote at the Annual Meeting is required for election of each director
and for
1
approval of the other items to be acted upon by shareholders. An automated
system administered by the Company's Shareholder Services Department tabulates
the votes. Abstentions are included in determining the number of shares present
and voting and are treated as votes against the particular proposal. Broker
non-votes are not counted for or against any proposal.
Unless contrary instructions are indicated on the Proxy, all shares
represented by valid proxies will be voted "FOR" the election of all nominees
for director named herein, "FOR" the appointment of Price Waterhouse, LLP as the
Company's independent accountants for 1997, and "AGAINST" the shareholder
proposal regarding the Company's Shareholder Rights Plan.
Proposals of Shareholders for the 1998 Annual Meeting
All proposals from shareholders to be considered at the Annual Meeting
scheduled for May 12, 1998 must be received by the Secretary at 30 West Superior
Street, Duluth, Minnesota 55802, not later than November 21, 1997.
Security Ownership of Certain Beneficial Owners and Management
The following table lists the only persons known to the Company who owned
beneficially as of March 1, 1997, more than 5 percent of any class of the
Company's voting securities. Unless otherwise indicated, the beneficial owners
shown have sole voting and investment power over the shares listed.
Number of Shares Percentage
Title of Class Name and Address of Beneficial Owner Beneficially Owned of the Class
- - -------------- ------------------------------------ ------------------ ------------
Serial Preferred ISACO 150,000 75.0%
Stock A c/o IDS Trust
P.O. Box 1450
Minneapolis, MN 55485
- - ----------------------------------------------------------------------------------------------
Serial Preferred HARE & Co. 30,000 15.0%
Stock A c/o Bank of New York
P.O. Box 11203
New York, NY 10249
- - ----------------------------------------------------------------------------------------------
Serial Preferred Auer & Co. 10,000 5.0%
Stock A c/o Bankers Trust Co.
P.O. Box 704
New York, NY 10015
- - ----------------------------------------------------------------------------------------------
Serial Preferred Sigler & Co. 10,000 5.0%
Stock A c/o Manufacturers Hanover Trust Co.
P.O. Box 50000
Newark, NJ 07101-8006
- - ----------------------------------------------------------------------------------------------
Common Stock Mellon Bank, N.A. 4,865,604 15.0%
One Mellon Bank Center
Pittsburgh, PA 15258
- - ----------------------------------------------------------------------------------------------
Mellon Bank holds 4,371,481 shares in its capacity as Trustee of the
Minnesota Power and Affiliated Companies Employee Stock Ownership Plan and
Trust (ESOP). Generally, these shares will be voted in accordance with
instructions received by Mellon Bank from participants in the ESOP.
2
The following table presents the shares of Common Stock of the Company
(Common Stock) beneficially owned by directors, nominees for director, executive
officers named in the Summary Compensation Table appearing subsequently in this
Proxy Statement, and all directors and executive officers of the Company as a
group, as of March 14, 1997. Unless otherwise indicated, the persons shown have
sole voting and investment power over the shares listed.
Shares Stock Shares Stock
Name of Beneficial Owner Owned* Options Name of Beneficial Owner Owned* Options
- - ------------------------ ------- --------- ------------------------ -------- ---------
Kathleen A. Brekken 200 0 Bruce W. Stender 2,081 1,450
Merrill K. Cragun 3,912 1,450 Edwin L. Russell 43,947 26,890
Dennis E. Evans 5,900 1,450 Arend J. Sandbulte 32,667 725
Peter J. Johnson 5,252 1,450 Donald C. Wegmiller 3,804 1,450
George L. Mayer 2,000 1,450 John Cirello 1,000 10,267
Paula F. McQueen 2,700 1,450 Donnie R. Crandell 2,907 10,684
Robert S. Nickoloff 7,964 1,450 Robert D. Edwards 10,672 11,642
Jack I. Rajala 9,400 1,450 David G. Gartzke 5,486 9,072
Nick Smith 1,725 1,450
Directors and Executive Officers as a Group (24 in Group) 275,570
- - -------------------------------------------------------------------------------------------------------------------
*Each director, nominee for director, and executive officer owns only a fraction of 1 percent of any class of
Company stock and all directors and executive officers as a group also own less than 1 percent of any class.
- - -------------------------------------------------------------------------------------------------------------------
Twenty-five percent of stock options are currently exercisable.
Voting and investment power for all shares is shared with his spouse.
Includes 25 shares owned by his spouse.
Includes 24,387 shares for which voting and investment power is shared
with his spouse, 1,488 shares held as custodian for his children and
18,000 shares of restricted stock in which voting power is shared with
his spouse.
Includes 3,655 shares for which voting and investment power is shared
with his spouse.
Shares owned includes 623 shares owned by his spouse and stock
options includes 2,625 options owned by his spouse.
- - --------------------------------------------------------------------------------
ITEM NO. 1 - ELECTION OF DIRECTORS
- - --------------------------------------------------------------------------------
It is intended that the shares represented by the enclosed Proxy will be
voted, unless authority is withheld, "FOR" the election of the 13 nominees for
Director named in the following section. Directors are elected to serve until
the next annual election of directors and until a successor is elected and
qualified or until a director's earlier resignation or removal. In the event
that any nominee should become unavailable, which is not anticipated, the Board
of Directors may provide by resolution for a lesser number of directors or
designate substitute nominees, who would receive the votes represented by the
enclosed Proxy.
3
Nominees for Director
All nominees are currently serving as directors except for Kathleen A. Brekken.
Director
Since
--------
PHOTO KATHLEEN A. BREKKEN, 47, Cannon Falls, MN. President and CEO of -
Midwest of Cannon Falls, Inc., a wholesale distributor of seasonal
gift items, exclusive collectibles, and distinctive home decor, with
fifteen showrooms in major markets throughout the U.S. and Canada.
Board of Regents of St. Olaf College in Minnesota.
PHOTO MERRILL K. CRAGUN, 65, Brainerd, MN. President of Cragun Corp., a 1991
resort and conference center. Director of MP Real Estate Holdings,
Inc. (MP Real Estate), and MP Water Resources, Inc.* (MP Water).
PHOTO DENNIS E. EVANS, 58, Minneapolis, MN. Member of the Executive and the 1986
Executive Compensation Committees. President and CEO of the Hanrow
Financial Group, Ltd., a merchant banking firm. Director of MP
Water, ADESA Corporation (ADESA), Angeion Corporation and
Astrocom Corporation.
PHOTO PETER J. JOHNSON, 60, Tower, MN. Member of the Electric Operations 1994
Committee. President and CEO of Hoover Construction Company, a highway
and heavy construction contractor. Chairman of Michigan Limestone
Operations, which produces limestone. Director of Queen City Federal
Savings and of Queen City Bancorp, Inc.
PHOTO GEORGE L. MAYER, 52, Essex, CT. Founder and President of Manhattan 1996
Realty Group which manages various real estate properties located
predominantly in northeastern United States. Director of MP Real
Estate. A consultant to the board of directors of Schwaab, Inc.,
one of the country's largest manufacturers of handheld rubber stamps
and associated products.
- - --------------------------------------------------------------------------------
A wholly owned subsidiary of Minnesota Power.
- - --------------------------------------------------------------------------------
4
Director
Since
--------
PHOTO PAULA F. McQUEEN, 50, Punta Gorda, FL. Member of the Executive and 1993
Audit Committees. Partner of Webb, McQueen & Co., P.L., a certified
public accounting firm. President and CEO of Allied Engineering &
Testing Inc., an engineering and materials testing company. Was
previously Director and President of PGI Sales Incorporated, a
southwest Florida community developer. Director of MP Water, MP
Real Estate, and SouthTrust Bank of Southwest Florida, N.A.
PHOTO ROBERT S. NICKOLOFF, 67, St. Paul, MN. Chairman of the Executive 1986
Compensation Committee and member of the Executive Committee. Board
Chairman of Medical Innovation Capital, Inc., and General Partner of
Medical Innovation Partners and Medical Innovation Partners II, all
venture capital firms. Self-employed as an attorney. Director of
ADESA, Green Tree Financial Corporation and Integ, Inc.
PHOTO JACK I. RAJALA, 57, Grand Rapids, MN. Member of the Executive and 1985
Electric Operations Committees. Chairman and CEO of Rajala Companies
and Director and President of Rajala Mill Company, which manufacture
and trade lumber. Director of Grand Rapids State Bank.
PHOTO EDWIN L. RUSSELL, 52, Duluth, MN. Chairman, President and CEO of 1995
Minnesota Power. Member of the Executive and Electric Operations
Committees. Director of ADESA, MP Water, MP Real Estate,
American Paging, Inc., Capital Re, Inc., Tennent Co., Lake Superior
Center, United Way of Greater Duluth and Advantage Minnesota. Was
previously Group Vice President of J. M. Huber Corporation, a $1.5
billion diversified manufacturing and natural resources company.
PHOTO AREND J. SANDBULTE, 63, Duluth, MN. Former Chairman, President and CEO 1983
of Minnesota Power. Member of the Executive Committee. Director of
ADESA, St. Mary Land and Exploration Company, Iowa State
University Foundation, and the Community Board of Norwest Bank
Minnesota North. Chairman of Lake Superior Center.
- - --------------------------------------------------------------------------------
A wholly owned subsidiary of Minnesota Power.
- - --------------------------------------------------------------------------------
5
Director
Since
--------
PHOTO NICK SMITH, 60, Duluth, MN. Member of the Executive Compensation and 1995
Electric Operations Committees. Chairman of and attorney with
Fryberger, Buchanan, Smith & Frederick, P.A., a law firm. Director of
MP Water and North Shore Bank of Commerce. Chair and CEO of
Northeast Ventures Corporation, a venture capital firm investing in
northeastern Minnesota.
PHOTO BRUCE W. STENDER, 55, Duluth, MN. Member of the Audit Committee. 1995
President and CEO of Labovitz Enterprises, Inc. which owns and manages
hotel properties. Director of ADESA. Chairman of the Sota Tech
Fund, a non-profit corporation developing new technologies, and a
Trustee of the C. K. Blandin Foundation.
PHOTO DONALD C. WEGMILLER, 58, Minneapolis, MN. Chairman of the Audit 1992
Committee and member of the Executive Compensation Committee.
President and CEO of Management Compensation Group/HealthCare, a
national executive compensation and benefits consulting firm. Was
previously Vice Chairman and President of Health Span Health System
and President and CEO of Health One Corporation, diversified health
services organizations. Director of G. D. Searle and Co., HBO &
Company, Medical Graphics Corporation, InPhyNet Medical Management,
Inc., Life Rate Systems, Inc. and Possis Medical, Inc.
- - --------------------------------------------------------------------------------
A wholly owned subsidiary of Minnesota Power.
- - --------------------------------------------------------------------------------
Board and Committee Meetings in 1996
During 1996 the Board of Directors held 6 meetings. The Executive
Committee, which held 6 meetings during 1996, provides oversight of corporate
financial matters, performs the functions of a director nominating committee,
and is authorized to exercise the authority of the Board in the intervals
between meetings. Shareholders may recommend nominees for director to the
Executive Committee by addressing the Secretary of the Company, 30 West
Superior Street, Duluth, Minnesota 55802. The Audit Committee, which held
4 meetings in 1996, recommends the selection of independent accountants,
reviews and evaluates the Company's accounting and financial practices, and
reviews and recommends approval of the annual audit report. The Executive
Compensation Committee, which held 3 meetings in 1996, establishes compensation
and benefit arrangements for Company officers and other key executives
intended to be equitable, competitive
6
with the marketplace, and consistent with corporate objectives. The Electric
Operations Committee, which held 4 meetings in 1996, provides oversight of the
Company's MP Electric business unit. Directors on the boards of MP Water
Resources, Inc., ADESA Corporation and MP Real Estate Holdings, Inc., all wholly
owned subsidiaries of Minnesota Power, have oversight of Minnesota Power's
water, automotive, and real estate operations, respectively. All directors
attended 75 percent or more of the aggregate number of meetings of the Board of
Directors and applicable committee meetings in 1996.
Director Compensation
Employee directors receive no additional compensation for their services as
directors. In 1996 the Company paid each director an annual retainer fee of
$5,000 and 500 shares of Common Stock under the terms of the Company's Director
Stock Plan. In addition, each director was paid $950 for each Board, Committee,
and subsidiary board meeting attended, except that $500 was paid for attendance
at a second meeting held the same day as another meeting. Each director who is
the Chairman of a Committee received an additional $150 for each Committee
meeting attended. A $250 fee was paid for all conference call meetings.
Directors may elect to defer all or a part of the cash portion of their retainer
fees and meeting fees. The shares of Common Stock paid to directors during 1996
had an average market price of $27.24 per share. The Company also provides life
insurance of $5,000 on the life of each director at an aggregate cost to the
Company of $713 in 1996. At the Board's direction, Director Evans was paid
$43,000 in 1996 for services related to the search for and hiring of Mr. Russell
to assume the office of President of the Company in 1995, and for his continuing
services as advisor and Board liaison to Mr. Russell when he became Chief
Executive Officer (CEO) in January 1996.
Effective January 1, 1996, non-employee directors receive automatic grants
of 725 stock options every year and performance shares valued at $10,000 every
other year pursuant to the Director Long-Term Stock Incentive Plan. The stock
options vest 50 percent after the first year, the remaining 50 percent after the
second year and expire on the tenth anniversary of the date of grant. The
exercise price for each grant is the closing sale price of Company Common Stock
on the date of grant. The two-year performance periods for performance shares
end on December 31st the year following the date of grant. Dividend equivalents
in the form of additional performance shares accrue during the performance
period and are paid only to the extent the underlying grant is earned. The
performance goal of each performance period is Total Shareholder Return (defined
as stock price appreciation plus dividends reinvested on the ex-dividend date
throughout the performance period, divided by the fair market value of a share
at the beginning of the performance period) for the Company in comparison to the
Total Shareholder Return for 16 diversified utilities.
7
Compensation of Executive Officers
The following information describes compensation paid in the years 1994
through 1996 for the Company's named executive officers.
SUMMARY COMPENSATION
- - ------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
--------------------- ------------------------
Awards
Name Restricted Securities All
and Stock Underlying Other
Principal Salary Bonus Award(s) Options/ Comp.
Position Year ($) ($) ($) SARs (#) ($)
- - ------------------------------------------------------------------------------------------------------------------
Edwin L. Russell 1996 322,981 370,439 687,000 13,230 26,976
Chairman, President
and Chief Executive Officer
Arend J. Sandbulte 1996 168,077 269,674 0 0 60,002
Former Chairman, President 1995 371,090 191,014 0 0 48,974
and Chief Executive Officer 1994 352,587 45,953 0 0 74,925
Robert D. Edwards 1996 221,693 146,544 0 5,570 27,799
Executive Vice President 1995 208,481 110,132 0 0 16,588
and President-MP Electric 1994 196,154 30,860 0 0 20,173
John Cirello 1996 195,000 163,056 0 5,051 0
Executive Vice President 1995 81,000 40,000 0 0 51,218
and President and CEO
of MP Water Resources
Donnie R. Crandell 1996 178,904 111,062 0 3,886 14,611
Senior Vice President and 1995 172,827 53,963 0 0 20,261
President - MP Real Estate 1994 37,635 5,340 0 0 2,199
Holdings
David G. Gartzke 1996 172,625 77,380 0 4,378 17,909
Senior Vice President- 1995 165,089 57,924 0 0 11,013
Finance and CFO 1994 140,446 17,440 0 0 14,126
- - ------------------------------------------------------------------------------------------------------------------
Amounts shown include compensation earned by the named executive
officers, as well as amounts earned but deferred at the election of
those officers. The "Bonus" column is comprised of amounts earned
pursuant to Results Sharing and the Annual Incentive Plan.
The amount shown represents the value of 24,000 shares of restricted
Common Stock granted on January 2, 1996, pursuant to the Executive Long
Term Incentive Compensation Plan. At December 31, 1996, Mr. Russell
held 18,000 shares of restricted Common Stock valued at $495,000. Mr.
Russell receives non-preferential dividends on this stock. This award
vests at a rate of 6,000 shares per year.
Consistent with his retirement plans, Mr. Sandbulte stepped down from
the Office of Chief Executive Officer effective January 23, 1996, and
from the office of Chairman of the Board effective May 14, 1996, and
retired effective May 31, 1996.
The amounts shown for 1996 include the following Company contributions
for the named executive officers:
Above-Market
Annual Annual Interest
Annual Company Company Earned on
Company Contribution Contribution Compensation
Contribution to the to the Deferred
to the Employee Supplemental Under
Flexible Stock Executive Executive
Benefit Ownership Retirement Incentive
Name Plan Plan Plan Plan *
- - --------------------------------------------------------------------------------
Edwin L. Russell 5,325 2,001 19,650 0
Arend J. Sandbulte 4,604 1,393 22,216 31,789
Robert D. Edwards 6,825 3,009 12,843 5,122
Donnie R. Crandell 6,825 3,009 4,777 0
John Cirello 0 0 0 0
David G. Gartzke 6,825 3,008 4,420 3,656
* The Company made investments in corporate-owned life insurance which will
recover the cost of these above-market benefits if actuarial factors and other
assumptions are realized.
8
OPTIONS GRANTS IN LAST FISCAL YEAR
- - -------------------------------------------------------------------------------
Alternative
Grant
Individual Grants Date Value
- - -------------------------------------------------------------------------------
Number of % of Total
Securities Options Exercise Grant Date
Underlying Granted to or Base Present
Options Employees in Price Expiration Value
Name Granted (#) Fiscal Year ($/Sh) Date $
- - ---- ----------- ------------ -------- ---------- ---------
Edwin L. Russell 13,230 11.2 28.625 1/2/06 89,435
Arend J. Sandbulte 0 0 0 0 0
Robert D. Edwards 5,570 4.7 28.625 1/2/06 37,653
Donnie R. Crandell 3,886 3.3 28.625 1/2/06 26,269
John Cirello 5,051 4.3 28.625 1/2/06 34,145
David G. Gartzke 4,378 3.7 28.625 1/2/06 29,595
- - -------------------------------------------------------------------------------
The stock options vest 50 percent on January 2, 1997, and 50 percent
on January 2, 1998, and are subject to a change in control acceleration
provision.
The grant date dollar value of the stock options is based on a
combination Black-Scholes, binomial price method. The blended ratio
associated with the January 2, 1996 option grants is .236, based on an
average industry Black-Scholes ratio of .373 and a Minnesota Power binomial
ratio (as of January 2, 1996) of .099. The method is a complicated
mathematical formula premised on immediate exercisability and
transferability of the options, which are not features of the Company's
options granted to executive officers and other employees. The values shown
are theoretical and do not necessarily reflect the actual values the
recipients may eventually realize. Any actual value to the officer or other
employee will depend on the extent to which the market value of the
Company's common shares at a future date exceeds the exercise price. In
addition to the stock prices at grant and the exercise prices, which are
identical, and the ten-year term of each option, the following assumptions
for modeling were used to calculate the values shown for the options
granted on January 2, 1996: expected dividend yield of 7.59 percent (based
on most recent quarterly dividend), expected stock price volatility of .149
(based on 250 trading days previous to January 2, 1996), and the ten-year
option term and a risk-free rate of return of 5.65 percent (based on
Treasury yields). The assumptions and the calculations used for the model
were provided by an independent consulting firm.
9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
- - --------------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Value Options Options
Acquired Realized at FY-End (#) at FY-End ($)
Name on Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
- - ---- -------------- -------- ----------- ------------- ----------- -------------
Edwin L. Russell 0 0 0 13,230 0 0
Arend J. Sandbulte 0 0 0 0 0 0
Robert D. Edwards 0 0 0 5,570 0 0
Donnie R. Crandell 0 0 0 3,886 0 0
John Cirello 0 0 0 5,501 0 0
David G. Gartzke 0 0 0 4,378 0 0
- - --------------------------------------------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS -
AWARDS IN THE LAST FISCAL YEAR
- - --------------------------------------------------------------------------------
Estimated Future Payouts under
Non-Stock Price-Based Plans
-------------------------------
Number of Performance
Shares, Units or Other
or Other Period Until
Rights Maturation or Threshold Target Maximum
Name (#) Payout (#) (#) (#)
- - ---- -------------- ------------- --------- ------ -------
Edwin L. Russell 6,245 2 years 3,122 6,245 12,489
Arend J. Sandbulte 0 0 0 0 0
Robert D. Edwards 2,629 2 years 1,314 2,629 5,258
Donnie R. Crandell 1,834 2 years 917 1,834 3,668
John Cirello 2,384 2 years 1,192 2,384 4,769
David G. Gartzke 2,066 2 years 1,033 2,066 4,133
- - --------------------------------------------------------------------------------
The table directly above reflects the number of shares of Common Stock that
can be earned for the 1996-1997 performance period if the Total Shareholder
Return of the Company (or, for business unit executives, other financial
measures established for business units selected because of their correlation to
Total Shareholder Return) meets goals established by the Executive Compensation
Committee. These goals are based on the Company's ranking against a peer group
of 16 diversified electric utilities. The threshold performance share award will
be earned if the Company's Total Shareholder Return ranking is at the 40th
percentile, the target award will be earned if the Company is at the 50th
percentile, and the maximum award will be earned if the Company is at the 76th
percentile. Dividend equivalents accrue during the performance period and are
paid in shares only to the extent performance goals are achieved. If earned, 50
percent of the performance shares will be paid in stock after the end of the
performance period; the remaining 50 percent will be paid in stock, half on the
first anniversary of the end of the performance period and half on the second
anniversary thereof. Payment is accelerated upon a change in control of
10
the Company at 200 percent of the target number of performance shares granted as
increased by dividend equivalents for the performance period.
Retirement Plans
The following table sets forth examples of the estimated annual
retirement benefits that would be payable to participants in the Company's
Retirement Plan and Supplemental Executive Retirement Plan after various
periods of service, assuming no changes to the plans and retirement at the
normal retirement age of 65:
PENSION PLAN
Years of Service
- - --------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
- - --------------------------------------------------------------------------------
$125,000 $15,000 $33,500 $39,750 $46,000 $52,250
150,000 18,000 40,200 47,700 55,200 62,700
175,000 21,000 46,900 55,650 64,400 73,150
200,000 24,000 53,600 63,600 73,600 83,600
225,000 27,000 60,300 71,550 82,800 94,050
250,000 30,000 67,000 79,500 92,000 104,500
300,000 36,000 80,400 95,400 110,400 125,400
400,000 48,000 107,200 127,200 147,200 167,200
500,000 60,000 134,000 159,000 184,000 209,000
600,000 72,000 160,800 190,800 220,800 250,800
700,000 84,000 187,600 222,600 257,600 292,600
800,000 96,000 214,400 254,400 294,400 334,400
900,000 108,000 241,200 286,200 331,200 376,200
- - --------------------------------------------------------------------------------
Represents the highest annualized average compensation (salary and
bonus) received for 48 consecutive months during the employee's last 15
years of service with the Company. For determination of the pension
benefit, the 48-month period for highest average salary may be different
from the 48-month period of highest aggregate bonus compensation.
Retirement benefit amounts shown are in the form of a straight-life annuity
to the employee and are based on amounts listed in the Summary Compensation
Table under the headings Salary and Bonus. Retirement benefit amounts shown are
not subject to any deduction for Social Security or other offset amounts. The
Retirement Plan provides that the benefit amount at retirement is subject to
adjustment in future years to reflect cost of living increases to a maximum
adjustment of 3 percent per year. As of December 31, 1996 (except for Mr.
Sandbulte whose service is determined as of May 31, 1996, his retirement date),
the executive officers named in the Summary Compensation Table had the following
number of years of credited service under the plan:
Edwin L. Russell 2 years John Cirello 2 years
Arend J. Sandbulte 31 years Donnie R. Crandell 15 years
Robert D. Edwards 20 years David G. Gartzke 21 years
With certain exceptions, the Internal Revenue Code of 1986, as amended,
(Code) restricts the aggregate amount of annual pension which may be paid to an
11
employee under the Retirement Plan to $120,000 for 1996, which amount is subject
to adjustment in future years to reflect cost of living increases. The Company's
Supplemental Executive Retirement Plan provides for supplemental payments by the
Company to eligible executives (including the executive officers named in the
Summary Compensation Table) in amounts sufficient to maintain total retirement
benefits upon retirement at a level which would have been provided by the
Retirement Plan if benefits were not restricted by the Code.
Report of Board Executive Compensation Committee on Executive Compensation
Described below are the compensation policies of the Executive Compensation
Committee of the Board of Directors effective for 1996 with respect to the
executive officers of the Company. Composed entirely of independent outside
directors, the Executive Compensation Committee is responsible for recommending
to the Board policies which govern the executive compensation program of the
Company and for administering those policies. To assist the Executive
Compensation Committee in connection with the performance of such
responsibilities for 1996, the Board retained the services of William M. Mercer,
Inc. (Mercer), a benefits and compensation consulting firm.
The role of the executive compensation program is to help the Company
achieve its corporate goals by motivating performance, rewarding positive
results, and encouraging teamwork. Recognizing that the potential impact an
individual employee has on the attainment of corporate goals tends to increase
at higher levels within the Company, the executive compensation program provides
greater variability in compensating individuals based on results achieved as
their levels within the Company rise. In other words, individuals with the
greatest potential impact on achieving the stated goals have the greatest amount
to gain when goals are achieved and the greatest amount at risk when goals are
not achieved.
The program also recognizes that, in order to attract and retain
exceptional executive talent, compensation must be competitive in the national
market when measured against comparable companies within that market. For those
executives engaged primarily or exclusively in electric operations, the relevant
market for purposes of comparison is other electric utilities throughout the
country which, on average, are comparable in size to the Company. For those
executives engaged substantially in the Company's diversification activities,
the market for purposes of comparison includes both electric utilities and
general industry. Comparisons with the general industry market allow recognition
of skills required in diversification activities and compensation levels of
executives in other industries.
To determine market levels of compensation for executive officers in 1996,
the Executive Compensation Committee relied upon comparative information
provided by Mercer, based on seven surveys including data from over 100
utilities and several hundred general industrial companies. All data were
analyzed to determine median compensation levels for comparable positions in
comparably-sized companies. While these companies are not the same as those in
the peer group used in the performance graph, the Executive Compensation
Committee believes that these companies are
12
appropriate for market compensation comparison, primarily because they are
approximately the same size as the Company as measured by sales revenue.
The Executive Compensation Committee determined that executive base salary
plus additional performance-based compensation at the target level should
approximate the midpoint of the range of base salary plus total
performance-based compensation in the appropriate market. Executive compensation
actually paid by the Company for 1996 was above target, on average, reflecting
the fact that both financial and non-financial goals were, on average, met or
exceeded. As a result, executive compensation paid in 1996 fell at the upper end
of the mid-range of executive compensation paid by comparable companies.
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to the corporation's CEO and four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The stock options and
performance shares granted to the executive officers in 1996 under the Executive
Long-Term Incentive Compensation Plan are intended to qualify as
performance-based compensation and should therefore be fully deductible for
Federal income tax purposes. The Company currently intends to structure the
performance-based portion of its executive officer compensation to achieve
maximum deductibility under Section 162(m) so long as this can be done without
sacrificing flexibility and corporate objectives.
As described below, executive officers of the Company receive a
compensation package which consists of four basic elements: base salary,
performance-based compensation, supplemental executive benefits and perquisites.
The CEO's compensation is discussed separately.
Base Salary
Base salaries are set at a level so that, if the target level of
performance is achieved under the performance-based plans as described below,
executive officers' total compensation, including amounts paid under each of the
performance-based compensation plans, will be near the midpoint of market
compensation as described above. Base salaries of the executive officers were
increased by an average of 7.6 percent in 1996, reflecting market adjustments,
merit increases and promotions.
Performance-Based Compensation
Performance-based compensation includes stock options and performance
shares awarded under the new Executive Long-Term Incentive Plan, Common Stock
under the old Long-Term Incentive Plan, as well as the opportunity to earn cash
awards under Results Sharing and the Annual Incentive Plan. Performance goals
are approved in advance by the Executive Compensation Committee and the Board. A
target level of performance under the performance-based plans represents
performance that is either consistent with or above budget, or represents at
least median Total Shareholder Return performance as measured against the peer
groups described below. Total Shareholder Return is defined as stock price
appreciation plus dividends reinvested on the ex-dividend date throughout the
relevant performance
13
period, divided by the fair market value of a share at the beginning of the
performance period. With target performance, plus the value of stock options
granted, executive compensation will be near the midpoint of the relevant
market. If no performance awards are earned, and no value is attributed to the
stock options granted, compensation of the Company's executive officers would
be approximately 70 percent of the market compensation level, while performance
at increments above the target level will result in total compensation above
the midpoint of the market.
The Company's performance-based compensation plans include:
- Results Sharing. The Results Sharing award opportunity rewards annual
performance of the executive's responsibility area as well as overall
corporate performance. Awards are available to all employees on the same
percentage of pay basis. Target financial performance will result in an
award of 5 percent of base salary, assuming non-financial goals
established by the Executive Compensation Committee are also
accomplished. For 1996 the electric and water utility business units
earned Results Sharing awards equaling 6.8 percent and 9.5 percent of
base salary, respectively, based on business unit pre-tax operating
income results (weighted 75 percent) and earnings per share performance
(weighted 25 percent). Based on its contributions to the Company's
earnings per share target, the real estate business unit earned an award
of 7.5 percent of base salary. The Corporate group earned an award of 7.3
percent of base salary, which is an average of the above business unit
results, weighted by payroll of each business unit. To earn these awards,
non-financial goals approved by the Executive Compensation Committee were
also achieved.
- Annual Incentive Plan. The Annual Incentive Plan is intended to focus
executive attention on meeting and exceeding annual financial and
non-financial business unit goals established by the Executive
Compensation Committee. For 1996 corporate executive officers were
rewarded for corporate performance as measured by earnings per share of
the Company's Common Stock, while the executive officers of the real
estate business unit were rewarded for the contribution of their business
unit to earnings per share. The executive officers of the Company's
electric and water business units were rewarded for performance of their
respective business units in 1996 as measured by operating cash return on
investment (weighted 50 to 60 percent) and operating free cash flow
(weighted 40 to 50 percent). These measures of financial performance were
chosen by the Executive Compensation Committee because they are
positively correlated with the Total Shareholder Return achieved by the
Company for its shareholders. Target level performance is earned if
budgeted financial results are achieved. In 1996 executive officers in
the Corporate group earned awards averaging 38 percent of base salary by
achieving earnings of $2.28 per share of Common Stock of the Company
compared to the budget of $2.25, and achieving certain non-financial
goals. The top executive officer in each of the electric, water and real
estate business units earned awards ranging from 53.7 to 74.1 percent of
base salary by exceeding financial and non-financial goals established by
the Executive Compensation Committee.
14
- Long-Term Incentive Plans. The Long-Term Incentive Plan is
designed to motivate long-term strategic planning and reward long-term
corporate performance, as measured by Total Shareholder Return over
four-year performance periods commencing each January. At the outset of
each performance period, the executive officers were given a maximum
award opportunity of a stated number of shares of the Company's Common
Stock. Sixty percent of the award opportunity with respect to the
four-year period ending December 31, 1996, was based upon rank among a
peer group of ten utilities operating in the same geographic region as
the Company (Upper Midwest), and 40 percent of this award opportunity was
based on rank among the S&P 500 companies. For the four-year performance
period ending December 31, 1996, the maximum award opportunity ranged
from 2,000 to 5,000 shares for the executive officers. The maximum award
opportunity is earned if the Company ranks first or second in the peer
group and at or above the 90th percentile among the S&P 500 companies.
The Company must achieve at least a 55th percentile ranking among a peer
group of ten utilities or a 40th percentile ranking among the S&P 500
companies for any award to be earned. For the four-year performance
period ending December 31, 1996, no awards were earned because the
Company did not achieve a Total Shareholder Return at the level required
for a payout under the plan. To motivate the CEO to maintain a focus on
the long-term performance of the Company during the last years before the
CEO's retirement, the Executive Compensation Committee has provided for
the continuing participation of the CEO in the Long-Term Incentive Plan
after retirement. Consistent with this practice, in 1995, and effective
with his retirement from the office of CEO in January 1996, the Board
provided for the continued participation of Mr. Sandbulte in the
Long-Term Incentive Plan with four-year performance periods commencing on
each January 1 from 1996 through the year 2000, with a target opportunity
in each year equal to 27 percent of his 1996 base salary. Any awards will
be paid to Mr. Sandbulte in cash.
Effective for 1996 no further performance periods were initiated under
the Long-Term Incentive Plan, except for Mr. Sandbulte as stated above,
and, with shareholder approval, the new Executive Long-Term Incentive
Compensation Plan was implemented. Under the new plan, in 1996 the
executive officers of the Company were awarded stock options and
performance shares having target award values ranging from 25 percent to
35 percent of the executives' base salaries. The value of each award
opportunity was divided equally between stock options and performance
shares. The stock options will have value if the Company's Common Stock
price appreciates. The performance shares will have value if, in two
years from the date of grant, the Total Shareholder Return of the Company
(or, for business unit executives, other financial measures established
for business units selected because of their correlation to Total
Shareholder Return) meets goals established by the Executive Compensation
Committee. These goals are based on the Company's ranking against a peer
group of 16 diversified electric utilities recommended by Mercer and
adopted by the Executive Compensation Committee as
15
appropriate comparators. The threshold performance share award will be
earned if the Company's Total Shareholder Return ranking is at the 40th
percentile, the target award will be earned if the Company is at the
50th percentile, and the maximum award will be earned if the Company
is at the 76th percentile. Dividend equivalents accrue during the
performance period and are paid in shares only to the extent performance
goals are achieved. If earned, 50 percent of the performance shares will
be paid in stock after the end of the performance period; the remaining
50 percent will be paid in stock, half on the first anniversary of the
end of the performance period and half on the second anniversary
thereof. Payment is accelerated upon a change in control of the Company
at 200 percent of the target number of performance shares granted as
increased by dividend equivalents for the performance period. These
awards are consistent with the Executive Compensation Committee's
philosophy of linking a significant portion of the executive officers'
compensation to the performance of the Company as measured by Total
Shareholder Return or by other measures of financial performance which
correlate with Total Shareholder Return.
Supplemental Executive Benefits
The Company has established a Supplemental Executive Retirement Plan (SERP)
to treat employees, including the executive officers, equitably by replacing
benefits not provided by the Company's Flexible Benefit Plan and the Employee
Stock Ownership Plan due to government-imposed limits and to provide retirement
benefits which are competitive with those offered by other businesses with which
the Company competes for managerial talent. The SERP also provides employees
whose salaries exceed the salary limitations for tax-qualified plans imposed by
the Code with additional benefits such that they receive in aggregate the
benefits they would have been entitled to receive had such limitations not been
imposed.
The Company has also adopted Executive Investment Plans whereby executive
officers may enter into agreements with the Company to irrevocably defer a
portion of their compensation until after termination of service, retirement or
death. The Executive Investment Plans are non-qualified deferred compensation
plans under which benefits result wholly from deferred compensation.
Perquisites
The Company provides various perquisites to assist selected executive
officers in fulfilling their business responsibilities in a cost and time
efficient manner, to the extent they are consistent with competitive practice.
Perquisites provided by the Company to the named executive officers did not
exceed the lesser of $50,000 or 10 percent of the total salary and bonus shown
for them in the Summary Compensation Table. The perquisites provided by the
Company were reviewed by the Executive Compensation Committee and determined to
be reasonable and in line with electric utility companies of comparable size.
Chief Executive Officer Compensation
In January 1996 the Board of Directors increased Mr. Russell's annual base
16
salary 8.3 percent in conjunction with his election to the office of CEO. Under
the Company's Results Sharing Plan, Mr. Russell was awarded $23,416, or 7.3
percent of his base salary, which was calculated based on an average of the
Results Sharing awards paid to the Company's business units for 1996
performance, weighted by the payroll of each business unit. In April 1996 Mr.
Russell was paid a bonus of $125,000, which the Executive Compensation Committee
determined would be appropriate based upon Mr. Russell's contributions to the
Company in 1995. Under Minnesota Power's Annual Incentive Plan for the Company's
performance in 1996, Mr. Russell earned an award of $220,220, or 67.8 percent of
his base salary, based on a formula established in advance by the Executive
Compensation Committee which rewarded Mr. Russell, as well as other executive
officers in the Corporate group, for above-budget earnings per share performance
by the Company in 1996, as well as for achievement of non-financial goals
established by the Executive Compensation Committee.
Mr. Russell's compensation plan also contains elements which motivate him
to focus on the longer-term performance of the Company. To align Mr. Russell's
financial interests with those of the shareholders and to help retain his
services for the full four-year vesting period, Mr. Russell was awarded 24,000
shares of restricted Common Stock of the Company effective January 2, 1996,
pursuant to the Company's Executive Long-Term Incentive Compensation Plan,
subject to the restriction that his right to retain ownership in said stock
would vest at the rate of 6,000 shares per year beginning in 1996. Also under
the Executive Long-Term Incentive Compensation Plan, in January 1996, Mr.
Russell was awarded a target opportunity valued at 55 percent of his base
salary. This value was divided equally between stock options and performance
shares. The stock options become fully exercisable in two years and expire 10
years from the date of grant. The options will have value if the Company's stock
price appreciates. The performance shares will have target value if, in two
years from the date of grant, the Total Shareholder Return realized by Company
shareholders is at the 50th percentile of a peer group of 16 diversified
utilities recommended by Mercer and adopted by the Executive Compensation
Committee as appropriate comparators.
To recruit Mr. Russell from general industry and retain his services at
Minnesota Power, the Executive Compensation Committee has endeavored to provide
Mr. Russell with a compensation package that is half-way between the midpoints
of compensation paid by electric utilities and compensation paid by general
industrial companies the approximate size of the Company. The Compensation
Committee has designed Mr. Russell's compensation package to provide substantial
incentive to achieve and exceed the Board's Total Shareholder Return goals for
the Company's shareholders.
March 20, 1997
Executive Compensation Committee
Robert S. Nickoloff, Chairman Dennis E. Evans
Donald C. Wegmiller Nick Smith
17
Compensation Committee Interlocks and Insider Participation
The members of the Executive Compensation Committee are Robert S.
Nickoloff, Chairman, Dennis E. Evans, Nick Smith, and Donald C. Wegmiller.
LAREX Economic Development Project
In 1995 Minnesota Power began developing plans for an energy park to be
located on its property adjacent to its Boswell Energy Center in Cohasset, MN.
The first tenant of the energy park is LAREX International, Inc. LAREX developed
a process to extract from certain tree species a substance that is used in a
variety of commercial applications. Minnesota Power, through a subsidiary,
entered into a contract to pay M. A. Mortenson Company $1.336 million for
construction of the buildings to be occupied by LAREX, and agreed to lease these
buildings to LAREX. The Iron Range Resources and Rehabilitation Board (IRRRB), a
local economic development agency, has agreed to purchase the buildings from
Minnesota Power's subsidiary for an amount equal to the cost of construction,
and the subsidiary will then assign the building lease to the IRRRB. Minnesota
Power has entered into a separate ground lease with LAREX at an economic
development rate which Minnesota Power will offer to other tenants of the energy
park. Minnesota Power has also provided financing to LAREX in the amount of
$200,000 under the customary terms of the Minnesota Power's Economic Development
Loan Program. This financing was used to purchase equipment in which Minnesota
Power has retained a security interest. LAREX is providing quality jobs and
represented an important first step in the development of the energy park.
Following the sale of the building and assignments of the leases as described
above, only the Economic Development Loan will remain an obligation to the
Company.
LAREX was founded in 1993 by Medical Innovation Fund II of Minneapolis and
Northeast Ventures of Duluth. To date, LAREX's owners have invested $7.434
million in LAREX as follows: Medical Innovation Fund II has invested $3.406
million and holds 53.0 percent of all stock currently outstanding; Northeast
Ventures has invested $1,030,000 and holds 16.3 percent of the currently issued
and outstanding stock; and the remaining investment and stock is held by various
individuals and entities including Larex International Investors Ltd. (LII), a
partnership of which Kolya Management Company is the general partner. LII has
invested $1.1 million. Medical Innovation Fund II, Northeast Ventures, and LII,
in addition to certain other investors in LAREX, have received warrant rights
based on their respective participation in specific periodic financing activity
in LAREX.
Minnesota Power Director Robert Nickoloff serves as a General Partner of
Medical Innovation Partners II, possessing a 20 percent ownership interest.
Medical Innovation Partners II is the general partner of Medical Innovation Fund
II. In addition, Mr. Nickoloff serves on the boards of directors of Northeast
Ventures and LAREX. Northeast Ventures, together with its affiliate Iron Range
Ventures, is a $9.0 million venture capital fund investing in northeastern
Minnesota. Minnesota Power purchased a 21 percent interest in Northeast Ventures
for $1 million in 1989 at a time when there were no relationships between
Northeast Ventures and
18
Minnesota Power or its directors or employees. Minnesota Power invested in
Northeast Ventures as an economic development contribution and agreed that it
will not withdraw its investment. Mr. Gregory Sandbulte, the son of Arend
Sandbulte, former Minnesota Power Chairman, CEO and President, and current
Director, is currently president of Northeast Ventures and a director of LAREX.
Mr. Nick Smith serves as chairman and CEO of Northeast Ventures, and is a member
of the Minnesota Power and LAREX boards of directors. Geraldine R. VanTassel,
former Vice President - Corporate Resource Planning of Minnesota Power, is a
director of Northeast Ventures. Mr. Gregory Sandbulte and Mr. Smith, along with
a third party, are general partners in Kolya Management Company, holding a five
percent ownership interest. Mr. Bo Nickoloff, the son of Mr. Robert Nickoloff,
is an employee of LAREX.
Minnesota Power Common Stock Performance
The following graph compares the Company's cumulative Total Shareholder
Return on its Common Stock with the cumulative return of the S&P 500 Index
and the S&P Utilities Index, a capitalization-weighted index of 26 stocks,
which is designed to measure the performance of the electric power utility
company sector of the S&P 500 Index. The S&P 500 Index is a capitalization-
weighted index of 500 stocks designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries. Because this composite index has a broad
industry base, its performance may not closely track that of a composite index
comprised solely of electric utilities. In previous Proxy Statements, the
Company used the Duff & Phelps Electric Utility Index which is no longer
published. The calculations assume a $100 investment on December 31, 1991,
and reinvestment of all dividends at the time paid.
[GRAPHIC MATERIAL OMMITTED-PERFORMANCE GRAPH]
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Minnesota Power 100.00 111.90 113.31 94.14 114.02 118.99
S&P Utilities
Index (Electrics) 100.00 105.89 119.24 103.66 135.88 135.46
S&P 500 100.00 107.61 118.41 119.98 165.02 202.87
Duff & Phelps Electric 100.00 108.90 119.04 106.42 136.19 N/A
19
Certain Relationships and Related Transactions
Effective August 21, 1996, Minnesota Power acquired the remaining 17
percent ownership interest in ADESA Corporation from the ADESA management
shareholders. In connection with the transaction, Mr. D. Michael Hockett
resigned from his positions as Director of Minnesota Power and Chairman,
Director and CEO of ADESA, and Mr. Larry Wechter resigned from his positions as
Director and President of ADESA. Mr. Hallett, who was previously President of
ADESA-Canada and a director of ADESA, was elected President and CEO of ADESA. In
connection with this transaction, Minnesota Power paid $36.0 million to Mr.
Hockett, $2.7 million to Mr. Wechter, $1.2 million to Mr. James P. Hallett, and
$1.7 million to Mr. John E. Fuller.
In 1996 ADESA leased space for its principal offices in an office building
located at 1919 S. Post Road, Indianapolis, Indiana, from CIL, Inc., an entity
that is wholly owned by the former Chairman, President and CEO of ADESA, Mr.
Hockett. This lease terminates on February 28, 1998, and ADESA management does
not plan on renewal. ADESA paid an aggregate of $144,000 in lease payments to
CIL during 1996. Management believes that the terms of the lease are comparable
to terms that could be obtained by ADESA from unrelated parties for comparable
rental property. As specified under a services agreement with CIL, ADESA
received $99,623 in fees from CIL in 1996 for providing certain general and
administrative services to CIL.
See the disclosure herein of transactions by the Company with LAREX, Inc.
under "Compensation Committee Interlocks and Insider Participation."
- - --------------------------------------------------------------------------------
ITEM NO. 2 - APPOINTMENT OF INDEPENDENT ACCOUNTANTS
- - --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors of the Company has
recommended the appointment of Price Waterhouse as independent accountants for
the Company for the year 1997. Price Waterhouse has acted in the same capacity
since October 1963.
A representative of the accounting firm will be present at the Annual
Meeting of Shareholders, will have an opportunity to make a statement if he or
she so desires, and will be available to respond to appropriate questions.
In connection with the 1996 audit, Price Waterhouse reviewed the Company's
annual report, examined the related financial statements, and reviewed interim
financial statements and certain of the Company's filings with the Federal
Energy Regulatory Commission and the Securities and Exchange Commission.
The Board of Directors recommends a vote "FOR" the appointment of Price
Waterhouse as the Company's independent accountants for 1997.
20
Change in Accountants
On September 3, 1996, the Board of Directors of ADESA Corporation resolved
to engage Price Waterhouse LLP as independent accountants for ADESA for the year
ended December 31, 1996, and dismiss Ernst & Young LLP (E&Y) as such independent
accountants. This change was effected for purposes of administrative efficiency
and cost effectiveness following the purchase by Minnesota Power of the
remaining 17 percent minority interest in ADESA in August 1996. During the two
fiscal years ended December 31, 1995, and the subsequent interim period through
September 3, 1996, there were no disagreements with E&Y on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which, if not resolved to the satisfaction of E&Y, would
have caused E&Y to make reference to the matter in their report. E&Y reports on
ADESA's financial statements for the fiscal year ended December 31, 1994, and
six-month periods ended June 30, 1995, and December 31, 1995, contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty or audit scope. E&Y's letter dated September 5, 1996, addressed
to the Securities and Exchange Commission stated it agreed with the above
statements.
- - --------------------------------------------------------------------------------
ITEM NO. 3 - SHAREHOLDER PROPOSAL REGARDING THE
COMPANY'S SHAREHOLDER RIGHTS PLAN
- - --------------------------------------------------------------------------------
The following proposal was submitted by Mr. Kenneth Steiner of Great Neck,
NY who owns 394 shares of Minnesota Power Common Stock. The Minnesota Power
Board of Directors recommends a vote "AGAINST" this resolution.
RESOLVED, that the shareholders of Minnesota Power & Light Company urge the
board of directors to redeem any shareholder rights plan unless the issue is
approved by the affirmative vote of a majority of the outstanding shares at a
meeting of the shareholders held as soon as possible.
Supporting Statement: Minnesota Power & Light Company adopted a
"Shareholder Rights Plan" in July 1996 that provides formidable protection from
acquirers who would seek to purchase the company without board approval. The
Rights Plan, commonly known as a "Poison Pill" would become exercisable if a
person or group were to acquire 15 percent or more of the company's common
stock.
I believe that this Poison Pill is both unnecessary and harmful. It serves
to entrench management and the board of directors. It makes it more difficult
for an outside concern to acquire our stock at a premium price because they
could not go directly to the shareholders with a tender offer. Minnesota Power &
Light stock has under performed its peer group and the S&P 500 in 1993 and 1994,
as can be seen on page 20 of last year's proxy statement. The board of directors
owns very little common stock of Minnesota Power & Light, which can be seen on
page 3 of last year's proxy statement. They have unilaterally taken action to
institute the "Poison Pill" plan without asking the other shareholders (who own
99% of the company's stock) what they think. The Shareholder Rights Plan is both
untimely and ill-conceived, in my opinion.
21
Recently Phillip Morris and Chase Manhattan both voluntarily redeemed their
own Poison Pills. Minnesota Power & Light Company should attempt to emulate
these well-run companies and do the same. At the very least, it should be put to
a shareholder vote.
I urge your support. Vote for this proposal.
Board of Directors Statement Opposing the Resolution
The Board of Directors authorized the Rights Agreement, dated July 24,
1996, between the Company and the Corporate Secretary of the Company, as Rights
Agent ("Rights Plan") to protect the interests of Minnesota Power shareholders
in the event that Minnesota Power is confronted with an acquisition proposal at
a price deemed by the Board to be inadequate, and to protect against
acquisitions that would result in unequal treatment among shareholders. The
Rights Plan is designed to prevent a potential acquiror from gaining control of
the Company without offering all shareholders what the Board believes to be the
full value of their investment and to otherwise preserve the long-term value of
the Company for all shareholders. The Rights Plan is also designed to prevent a
potential acquiror from acquiring a controlling interest in the Company through
open market purchases without paying a control premium to all shareholders and
can prevent other takeover tactics that the Board concludes are not in the best
interests of Minnesota Power's shareholders.
The rights are excercisable only if a person or group of affiliated or
associated persons (1) acquires, or obtains the right to acquire, beneficial
ownership of 15 percent or more of the outstanding Common Stock of the Company
or (2) commences, or intends to commence, a tender or exchange offer that would
result in the beneficial ownership by such person or group of 15 percent or more
of the outstanding Common Stock of the Company. The Rights Plan is similar to
those adopted by over 1,500 United States corporations, including at least 65
electric and gas utility companies. An explanation of the Rights Plan was
provided to all shareholders at the time of its adoption in July 1996.
The proponent asserts that the Rights Plan makes it more difficult for an
outside concern to acquire Minnesota Power Common Stock at a premium price
because it could not go directly to the shareholders with a tender offer. The
Rights Plan does not prohibit a tender offer, but does encourage a potential
acquiror to negotiate directly with the Board. The purpose of encouraging the
outsider to negotiate with the Board is to ensure that an acquiror pays
Minnesota Power shareholders a premium reflecting the full value of the Company.
The Board is in a stronger position than individual shareholders to negotiate a
price that maximizes the value for all of the Company's shareholders. By
creating inducements for a potential acquiror to negotiate with the Board, the
Rights Plan creates an orderly process that allows the Board sufficient time to
evaluate whether a takeover offer is beneficial to all of the Company's
shareholders, while retaining the Board's flexibility to develop alternatives
that may result in greater value for the Company's shareholders. A basic
objective of the Rights Plan is to encourage potential acquirors to come forward
with a sound offer at the earliest possible time and to negotiate with the
Board. It is well recognized that the price an acquiror is ultimately willing to
pay
22
for a company's stock can far exceed the initial offer, especially when the
acquiror must negotiate with the company's board of directors.
The Company's Rights Plan is administered by and under the control of the
Minnesota Power Board of Directors. Eleven of the Company's twelve current
directors are neither employees nor officers of the Company. The Board possesses
a broad range of experience in business, finance and law. In the event of an
offer that is in the best interests of the shareholders, the Board would have a
fiduciary obligation to redeem the Rights to permit the offer to proceed. The
Board is knowledgeable of its fiduciary duty to represent the interests of
shareholders when evaluating the merits of any acquisition proposal.
The Board believes that the proper time to consider redemption of the
Rights is when a specific offer is made to acquire the Company's Common Stock.
Redemption of the Rights prior to that time would expose the Company's
shareholders to abusive takeover tactics, remove any incentive for the potential
acquiror to approach the Board, and deprive the Board of the time to evaluate
any third party offer and maximize value for all shareholders of the Company
either through negotiations or development of alternatives.
The Board of Directors unanimously recommends a vote "AGAINST" this
shareholder proposal. The affirmative vote of a majority of shares present and
entitled to vote will be required for approval of this shareholder proposal.
- - --------------------------------------------------------------------------------
OTHER BUSINESS
- - --------------------------------------------------------------------------------
The Board of Directors does not know of any other business to be presented
at the meeting. However, if any other matters properly come before the meeting,
it is the intention of the persons named in the accompanying proxy card to vote
pursuant to the proxies in accordance with their judgment in such matters.
It is important that all proxy cards be forwarded promptly in order that
the necessary vote may be present at the meeting. We respectfully request that
you sign and return the accompanying proxy card at your earliest convenience.
By order of the Board of Directors,
Dated March 20, 1997
Philip R. Halverson
Philip R. Halverson
Vice President, General Counsel
and Secretary
23
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