BASIS OF CONSOLIDATION1

A corporation to be formed under the laws of the State of Michigan, with a paid-up capital of ten million dollars, to be apportioned into 6 per cent. preferred stock and common stock, as the parties interested may hereafter determine.

This corporation to purchase all the assets, property, good-will, etc., of all the four companies and to pay therefor in preferred and common stock and by an assumption of the indebtedness of each company.

The amount of preferred and common stock, to be paid to each company, to be determined by the value of the net tangible assets and the valuation placed upon the earning power of each company.

In placing a value upon the tangible assets, same to be reached as follows:

(1) The land, buildings, machinery, tools, and patterns, to be determined by appraisers, to be chosen by a majority of a committee made up of one appointed by each of the companies; on failure of this committee to agree on appraisers the selection to be left to the committee who present these suggestions.

(2) Inventories of raw materials, work in progress and manufactured stock to be taken, and valuations placed thereon by the individual companies, and this to be done under the supervision of a disinterested party, to be named by the committee.

The inventories are to be made as of the same date, and to be taken at substantially the same time.

When completed the inventories are to be passed and agreed upon by a committee consisting of a representative of each of the companies and one to be named by the committee. The decision of these five to be binding.

(3) In reaching the value of the earning power of the several companies, consideration is to be given to the following details:

(a) That profits are incidental to the business and have not been anticipated.

(b) To the charging to operating expenses of items, exceptional or unusual, and which have had the effect of reducing profits below normal.

(c) The effect upon the earnings of the money paid out as interest upon borrowed capital, in case it be found that the borrowings (loans) made by the several companies are disproportionate to each other.

(d) That all charges to operating expenses are proper charges

1 Quoted by W. H. Lough in his Corporation Finance from an article in the Journal of Accountancy by F. H. McPherson, F.C.A. (November, 1908).

against the business and that they are made for and during the proper period.

(e) That proper and reasonable allowances have been made for repairs and renewals and that these have been charged against earnings.

(f) That charges against earnings for depreciation are adjusted upon an equitable basis.

(g) Such other matters as appear from an examination of the accounts and which would prejudicially affect the earnings of any of the companies, either advantageously or disadvantageously.

(h) The value of the earning power to be determined by a consideration of the business done by each of the several companies for the three years, 1903, 1904 and 1905.

(i) Accountants to be selected by the committee and questions which may arise as to treatment of various matters and about which there is difference of opinion, to be determined by the committee.

(j) All costs and expenses incurred in making appraisals, examination of accounts, or of performing the other duties in connection with the formation of the proposed new company to be charged to and borne by the new company; should the new company not be formed, then such costs, expenses, and disbursements to be borne by the four individual companies in proportion to the number of men employed by each.

AGREEMENT TO CONSOLIDATE.

Each vendor executing this agreement also executes and delivers a schedule of the entire property, which it sells to said purchaser, setting forth briefly the various classes of property, with the sufficient description of the several items of real estate, plant and movables to identify the same, which schedule sets forth the value of the entire property so sold, the tangible and intangible property in separate items, the tangible property being valued as prescribed by subdivisions a and b in the Method of Appraisal hereinafter set forth, and the value of its intangible property ascertained and certified by one or more responsible public accountants, as prescribed by subdivision. c of said Method of Appraisal, together with a statement of any additional facts, and of the valuations based thereon, which, in the vendor's judgment, may aid the Appraisal Committee in exercising the discretion conferred upon it by subdivision b of said Method of Appraisal. The valuations of the tangible and intangible properties so made by each vendor shall be considered as prima facie evidence of the true value of said vendor's property for the purposes of sale, but shall in no case be controlling upon the Appraisal or Executive Committee hereinafter appointed, such valuations or prices being subject in all cases to any investigation and modification which the said committee. or committees may deem that justice requires; the total of such valuations as verified or modified according to the terms of this agreement, to be the purchase price which said vendor is to receive for its entire property so sold.

PURCHASE PRICE

The purchase price to be paid to such vendor for the property sold by it to the purchaser shall be the total value of its tangible and intangible property and shall be paid in stock of the purchaser at par, as follows:

1. Tangible property paid for in preferred, etc.

Each vendor whose net earnings for the six months ending July 1st, 1898, amount to 4 per cent.—that is, at the rate of 8 per cent. per annum-on the value of its land and plant, ascertained as above, shall receive preferred stock for the full value of all its tangible property.

Any vendor whose net earnings for the said period of six months shall amount to less than at the rate of 8 per cent. per annum on the

1 Quoted by W. H. Lough in his Corporation Finance as an "actual agreement where several fair-sized manufacturing corporations and partnerships were to be consolidated."

value of its land and plant, shall receive preferred stock to the amount of twenty-five times its net earnings for said six months; and the balance of the value of said tangible property it shall receive in common stock.

Each vendor has upon its schedule set forth a statement of its net earnings for said period, which is subject to modification by said committee under the above rules applicable thereto.

2. Intangible property paid for in common stock.

The entire value of the intangible property, ascertained as per this agreement, shall be paid by the purchaser in its common stock at par. Simultaneous with the sale and transfer of its properties each vendor shall receive from the purchaser in stock, or if permanent certificates are not ready, then script for the same, one-half of the purchase price to which it claims to be entitled by its schedule, less an amount of preferred stock equal to 125 per cent. of its mortgage indebtedness, if any, and the remainder of said stock shall be withheld by the purchaser until the exact amount of the purchase price shall have been finally determined as herein provided, whereupon the vendor shall become entitled to the remainder of the purchase price, but the purchaser may out of such remaining stock retain an amount thereof sufficient to secure it against any defective title and against any indebtedness which is not otherwise sufficiently provided for.

APPRAISAL, ETC.

Each vendor expressly covenants and agrees that the property set forth by it in its schedule has been fairly and honestly valued in accordance with the following rules and methods, which shall be the rules and methods to govern the Appraisal and Executive Committees in their verification or modification of the same.

METHOD OF APPRAISAL

(1) Tangible Property.

(a) Land:

Land shall be separately appraised at its actual value without reference to plants thereon, and consideration shall be given to special adaptability or want of adaptability to the business.

Plants shall be appraised apart from the bare land at their value to-day to a going concern for the purpose for which used, based upon present cost of construction at the same places respectively. No vendor shall set forth in its schedule any unimproved land or other property belonging to it which is neither a part of the plant of such vendor nor essential in the operation of the same, nor shall the same be purchased by the second party.

(b) Materials, Supplies and Manufactured Product.

These shall be appraised at what it would cost to replace the same at the place and date of the transfer of the same to the purchaser.

(2) Intangible Property.

(c) Intangible property shall be appraised by multiplying by ten the average yearly earnings during the past five and one-half years, which shall be ascertained as follows:

In order to arrive at the earnings of the property sold by each vendor and to determine on a uniform basis fair for all, the earning power of the property so sold, each vendor shall add to its net profits such of the following items as have been theretofore deducted by said vendor in ascertaining its net profits during said period.

3. Arbitrary items of depreciation or wear and tear not paid out or actually incurred as a debt, and all items of new construction.

4. Also salaries and compensation paid to officers, directors, partners, trustees, superintendents of departments or works, general managers, auditors, cashiers and chief accountants, but all wages, salaries and compensation paid to laborers, servants, foremen, clerks and employees in subordinate positions shall remain charged against earnings.

5. The accountants must ascertain the amounts expended by each of said vendors for repairs, renewals and maintenance of plant which have been deducted from earnings during said period of five and onehalf years, and the said amounts so ascertained are set forth on the schedules of said vendors.

In order to place said vendors on a uniform basis as to the amounts expended, or which ought to have been expended, for repairs, renewals and maintenance of plant and charged against or deducted from the earnings during said five and one-half years or other period, each vendor shall add to said earnings any amount actually expended by it for repairs, renewals and maintenance of plant which it has heretofore charged against and deducted from said earnings, and there shall then be charged against and deducted from said earnings of each vendor ascertained as aforesaid, annually a sum equal to 3 per cent. of the schedule value of the plant of said vendor completed prior to the last date of the five and one-half years or other period applicable to said vendor.

In the case of those vendors, if any, which shall not have kept a separate repair account the amounts expended by them for repairs, as required by this subdivision shall be ascertained as nearly as possible