AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE TORO COMPANY
(Exact Name of Registrant as specified in its charter)
DELAWARE 3524 41-0580470
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
J. LAWRENCE MCINTYRE, ESQ.
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH 8111 LYNDALE AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55420-1196 MINNEAPOLIS, MINNESOTA 55420-1196
(612) 888-8801 (612) 888-8801
(Address, including zip code, and (Name, address, including zip code,
telephone number, including area code, and telephone number, including area
of Registrant's principal executive code, of agent for service)
offices)
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COPIES TO:
J. ANDREW HERRING, ESQ. RICHARD A. DEWITT, ESQ.
Dorsey & Whitney LLP Croker, Huck, Kasher, DeWitt,
Pillsbury Center South Anderson & Gonderinger, P.C.
220 South Sixth Street Commercial Federal Tower, Suite 1250
Minneapolis, Minnesota 55402 2120 South 72nd Street
Omaha, Nebraska 68124
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after this Registration Statement becomes
effective and the effective time of the proposed merger (the "Merger") of a
subsidiary of the Registrant with and into Exmark Manufacturing Company
Incorporated, as described in the Agreement and Plan of Merger, dated as of
October 23, 1997, attached as Exhibit A to the Proxy Statement/ Prospectus
forming a part of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _____________________________.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________________________________________________.
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
Common/Preferred Contingent Payment
Rights.................................... 22,847(2) (2) (2) (2)
Class B Contingent Payment Rights........... 10,000(3) (3) (3) (3)
Common Stock, $1.00 par value............... 1,646,600(4) Not Applicable Not Applicable $1,756.10
(1) This Registration Statement relates to the securities of the Registrant
issuable to holders of capital stock of Exmark Manufacturing Company
Incorporated in connection with the Merger, including the preferred share
purchase rights associated with the Common Stock of the Registrant as
described herein.
(2) Based on the estimated maximum number of shares of Common Stock and
Preferred Stock of Exmark Manufacturing Company Incorporated that may be
outstanding immediately prior to the Merger.
(3) Based on the estimated maximum number of shares of Class B Preferred Stock
of Exmark Manufacturing Company Incorporated that may be outstanding
immediately prior to the Merger.
(4) Pursuant to Rule 457(f)(2) and (3), the registration fee was calculated
based upon the book value, calculated as of August 31, 1997 (the latest
practicable date before filing this Registration Statement) of the
securities to be received by the Registrant in the Merger (or $9,167,121),
less $3,372,000 representing cash to be provided by the Registrant in such
Merger based on the minimum potential payments under the terms of the
contingent payments described in the Merger.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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[EXMARK MANUFACTURING COMPANY INCORPORATED LETTERHEAD]
, 1997
Dear Stockholder of Exmark Manufacturing Company Incorporated:
You are cordially invited to attend a Special Meeting of Stockholders of
Exmark Manufacturing Company Incorporated ("Exmark"), to be held at Exmark's
corporate offices, 2101 Ashland Avenue, P.O. Box 808, Beatrice, Nebraska 68310,
on , 1997, at 9:00 a.m. local time. A notice of the Special Meeting,
Proxy Statement/Prospectus and proxy card containing information about the
matters to be acted upon are enclosed. All holders of outstanding shares of
common stock, $10.00 par value, of Exmark ("Exmark Common Stock"), and preferred
stock, $40.00 par value, of Exmark ("Exmark Preferred Stock"), as of
, 1997 (the "Record Date"), will be entitled to notice of and to vote
at the Special Meeting and any postponement or adjournment thereof.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger (as it may be
amended, the "Merger Agreement"), dated as of October 23, 1997, by and among
Exmark, The Toro Company, a Delaware corporation ("Toro"), and EMCI Acquisition
Corp., a Nebraska corporation and wholly owned subsidiary of Toro ("Merger
Subsidiary"), pursuant to which, among other things, Merger Subsidiary will
merge with and into Exmark (the "Merger"), with Exmark continuing as the
surviving corporation (the "Surviving Corporation"). If the Merger Agreement is
approved and the Merger becomes effective, then, except for shares of Exmark
capital stock with respect to which dissenters' rights have been properly
exercised ("Dissenting Shares") and shares of Exmark capital stock issued and
outstanding prior to the effective time of the Merger that are owned by Toro,
Exmark or Merger Subsidiary ("Canceled Shares") (1) each issued and outstanding
share of Exmark Common Stock will be converted into and become a right to
receive (a) cash and shares of common stock, $1.00 par value, of Toro ("Toro
Common Stock") representing the Initial Per Share Payment Consideration (as
defined in the Merger Agreement) and (b) one Common/Preferred Contingent Payment
Right (as defined in the Merger Agreement), (2) each issued and outstanding
share of Exmark Preferred Stock will be converted into and become a right to
receive (a) four times the Initial Per Share Payment Consideration and (b) four
Common/Preferred Contingent Payment Rights, (3) each issued and outstanding
share of Class B preferred stock, $.01 par value, of Exmark ("Exmark Class B
Stock") will be converted into and become a right to receive (a) one-tenth of a
share of Toro Common Stock and (b) one Class B Contingent Payment Right (as
defined in the Merger Agreement), and (4) each issued and outstanding share of
Class C preferred stock, $.01 par value, of Exmark ("Exmark Class C Stock") will
be converted into and become a right to receive the Initial Per Share Payment
Consideration. The cash portion of the aggregate Merger Consideration (as
defined in the Merger Agreement) will be approximately 12% and the remainder
will be shares of Toro Common Stock; however, Exmark stockholders may elect to
receive a greater or lesser percentage of their portion of the Merger
Consideration in cash.
The aggregate amount of cash and shares of Toro Common Stock to be paid by
Toro with respect to the total Initial Per Share Payment Consideration (in the
aggregate, the "Initial Payment") to be exchanged for the Exmark Common Stock,
Exmark Preferred Stock and Exmark Class C Stock will be equal to $28,100,000
(subject to the holdback of 15% of such amount plus an additional $100,000 of
such amount, certain offsets and other adjustments described in the enclosed
Proxy Statement/Prospectus). Based on the Initial Toro Share Price (as defined
in the Merger Agreement) as of October 31, 1997, the Initial Per Share
Consideration would be 576.01 consisting of 12.239 shares of Toro Common Stock
and cash equal to $69.12 (or a total of $487.56 in cash and Toro Common Stock
after such holdbacks and certain other adjustments), in the absence of any
election to receive more or less of the Merger Consideration in cash. However,
in the event the Merger is not consummated prior to November 30, the Initial
Toro Share Price may be a different amount and may result in the payment of more
or less shares of Toro Common Stock as part of Initial Per Share Consideration.
Each Common/Preferred Contingent Payment Right and Class B Contingent
Payment Right entitles the holder thereof to receive cash and shares of Toro
Common Stock based on the performance of the Surviving Corporation from November
1, 1997 until October 31, 1999, subject to certain limitations and offsets. The
maximum amount of cash and shares of Toro Common Stock that may be paid by Toro
with respect to the Common/Preferred Contingent Payment Rights will not exceed
$14,000,000 (subject to certain offsets and other adjustments described in the
enclosed Proxy Statement/Prospectus). Similarly, the maximum amount of cash and
shares of Toro Common Stock that may be paid by Toro with respect to the Class B
Contingent Payment Rights will not exceed $14,000,000 (subject to certain
offsets and other adjustments described in the enclosed Proxy
Statement/Prospectus). No assurance can be given that any cash and shares of
Toro Common Stock will be paid with respect to either of such rights.
Details of the proposed Merger and other important information are set forth
in the accompanying Proxy Statement/Prospectus, which you are urged to read
carefully. The Merger is subject to the satisfaction of a number of conditions,
including, among others, approval of the Merger Agreement by the holders of
two-thirds of the number of outstanding shares of Exmark Common Stock and Exmark
Preferred Stock, voting together as one class. Each share of Exmark Common Stock
and Exmark Preferred Stock is entitled to one vote per share.
Pursuant to agreements with Toro dated October 23, 1997, certain
stockholders of Exmark, in their individual capacities as stockholders, have
agreed to vote all of their shares of Exmark Common Stock and Exmark Preferred
Stock (approximately 63.8% of the combined voting power of the outstanding
shares of Exmark Common Stock and Exmark Preferred Stock of record as of the
Record Date) in favor of approval of the Merger Agreement, the Merger and the
other proposals described below and have granted an irrevocable proxy to Toro to
vote their respective shares.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the Merger Agreement and proposed Merger. In addition, your Board
of Directors has received the opinion of its financial advisor, McCarthy & Co.,
that the Merger Consideration is fair, from a financial point of view, to the
stockholders of Exmark.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND
THE MERGER.
In addition, you will be asked to consider and act upon three other
proposals relating to the Merger Agreement and the Merger. First, you will be
asked to consider and act upon a proposal to adopt amended and restated articles
of incorporation (the "New Articles of Incorporation"), which authorize the
issuance of the Exmark Class B Stock and the Exmark Class C Stock and clarify
the four-to-one distribution preference associated with the Exmark Preferred
Stock. The Exmark Class B Stock will be issued to certain officers, directors
and employees of Exmark pursuant to the exercise of certain previously issued
stock purchase rights. The Exmark Class C Stock will be issued in exchange for
all of the outstanding shares of capital stock of the Holiman Co., Inc., all of
which shares are owned by Roger Smith, an officer and director of Exmark.
Second, you will be asked to consider and act upon a proposal to approve the
payment in connection with the Merger of signing bonuses (the "Signing Bonuses")
to H. John Smith and Ray Rickard, each of whom is an officer and director of
Exmark, to be paid by Toro in cash in the aggregate amount of $2,075,000
pursuant to new employment agreements between each of Messrs. Smith and Rickard,
respectively, and Exmark and Toro, which employment agreements also include
noncompete covenants. Stockholder approval of such signing bonuses is being
requested so that such bonuses will not constitute "excess parachute payments"
pursuant to Section 280G of the Internal Revenue Code of 1986, as amended. If
treated as excess parachute payments, the bonuses would not be deductible and
Messrs. Smith and Rickard and each would be subject to a 20% excise tax on a
portion of such payments. Finally, you will be asked to consider and act upon a
proposal to ratify the appointment of H. John Smith, Ray Rickard and Roger Smith
as the initial stockholders' representatives as described in the Merger
Agreement ("Stockholders' Representatives"). The Stockholders' Representatives
will act on behalf of the Exmark stockholders who participate in the Merger and
as such will assist in the calculation of the amount of merger consideration to
be paid by Toro in connection with the Merger, including the calculation of the
amount to be paid with respect to the Common/Preferred Contingent Payment Rights
and Class B
Contingent Payment Rights, and may sign and deliver certificates and notices on
behalf of such Exmark stockholders, among other things described in the Merger
Agreement.
The New Articles of Incorporation are required to be approved by the
affirmative vote of the holders of a majority of each of the outstanding shares
of Exmark Common Stock and Exmark Preferred Stock, voting as a separate class.
For tax purposes, such that the Signing Bonuses will not be "excess parachute
payments," the approval of the Signing Bonuses will require the affirmative vote
of the holders of 75% of the voting power of all disinterested Exmark
stockholders. Consequently, such approval will require the affirmative vote of
the holders of at least 75% of the number of outstanding shares of Exmark Common
Stock and Exmark Preferred Stock (excluding such shares held by H. John Smith
and Ray Rickard), voting together as one class. The ratification of the
appointment of the Stockholders' Representatives will require the affirmative
vote of the holders of a majority of the shares of Exmark Common Stock and
Exmark Preferred Stock, voting together as one class, present in person or by
proxy at the Special Meeting, providing a quorum for the transaction of business
is present at the meeting.
Your Board of Directors has carefully reviewed and considered the foregoing
proposals. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THESE PROPOSALS AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THEM. The approval by Exmark's
stockholders of each proposal described above (except for the proposal regarding
the ratification of the Stockholders' Representatives) is a condition to
consummation of the Merger.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may revoke such proxy and vote
in person if you wish, even if you have previously returned your proxy card. If
you do not attend the Special Meeting, you may still revoke such proxy at any
time prior to the Special Meeting by providing written notice of such revocation
to Roger Smith, Secretary of Exmark.
Very truly yours,
H. John Smith
PRESIDENT
EXMARK MANUFACTURING COMPANY INCORPORATED
2101 ASHLAND AVENUE
P.O. BOX 808
BEATRICE, NEBRASKA 68310
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
AT 9:00 A.M. LOCAL TIME
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NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Exmark
Manufacturing Company Incorporated, a Nebraska corporation ("Exmark"), will be
held at Exmark's corporate offices, 2101 Ashland Avenue, P.O. Box 808, Beatrice,
Nebraska 68310, on , 1997, at 9:00 a.m. local time, for the following
purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Merger (as it may be amended, supplemented or modified from time to time,
the "Merger Agreement"), dated as of October 23, 1997, by and among
Exmark, The Toro Company, a Delaware corporation ("Toro"), and EMCI
Acquisition Corp., a Nebraska corporation and wholly owned subsidiary of
Toro ("Merger Subsidiary"), pursuant to which, among other things, Merger
Subsidiary will merge with and into Exmark (the "Merger"), with Exmark
continuing as the surviving corporation (the "Surviving Corporation"). If
the Merger Agreement is approved and the Merger becomes effective, then,
except for shares of Exmark capital stock with respect to which
dissenters' rights have been properly exercised and shares of Exmark
capital stock issued and outstanding prior to the effective time of the
Merger that are owned by Toro, Exmark or Merger Subsidiary, (1) each
issued and outstanding share of common stock, $10.00 par value, of Exmark
("Exmark Common Stock") will be converted into and become a right to
receive (a) cash and shares of common stock, $1.00 par value, of Toro
("Toro Common Stock") representing the Initial Per Share Payment
Consideration (as defined in the Merger Agreement) and (b) one
Common/Preferred Contingent Payment Right (as defined in the Merger
Agreement), (2) each issued and outstanding share of preferred stock,
$40.00 par value, of Exmark ("Exmark Preferred Stock") will be converted
into and become a right to receive (a) four times the Initial Per Share
Payment Consideration and (b) four Common/Preferred Contingent Payment
Rights, (3) each issued and outstanding share of Class B preferred stock,
$.01 par value, of Exmark ("Exmark Class B Stock") will be converted into
and become a right to receive (a) one-tenth of a share of Toro Common
Stock and (b) one Class B Contingent Payment Right (as defined in the
Merger Agreement), and (4) each issued and outstanding share of Class C
preferred stock, $.01 par value, of Exmark ("Exmark Class C Stock") will
be converted into and become a right to receive the Initial Per Share
Payment Consideration. The terms of the Merger Agreement are described in
more detail in the attached Proxy Statement/Prospectus.
2. To consider and vote upon a proposal to adopt amended and restated
articles of incorporation (the "New Articles of Incorporation"), which
authorize the issuance of the Exmark Class B Stock and the Exmark Class C
Stock and clarify the four-to-one distribution preference associated with
the Exmark Preferred Stock.
3. To consider and vote upon a proposal to approve the payment in
connection with the Merger of signing bonuses ("Signing Bonuses") to H.
John Smith and Ray Rickard. Such bonuses will be paid by Toro in cash in
the aggregate amount of $2,075,000 pursuant to new employment agreements,
which employment agreements also include noncompete covenants.
4. To consider and vote upon a proposal to ratify the appointment of H.
John Smith, Ray Rickard and Roger Smith as the initial stockholders'
representatives as described in the Merger Agreement ("Stockholders'
Representatives").
5. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The close of business on , 1997, has been fixed as the record
date (the "Record Date") for the determination of the stockholders of Exmark
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof. Accordingly, only holders of record of issued and
outstanding shares of Exmark Common Stock and Exmark Preferred Stock at the
close of business on the Record Date shall be entitled to notice of and to vote
at the Special Meeting and any adjournment or postponement thereof.
The Merger Agreement is required to be approved by the affirmative vote of
the holders of two-thirds of the outstanding shares of Exmark Common Stock and
Exmark Preferred Stock, voting together as one class. The New Articles of
Incorporation are required to be approved by the affirmative vote of the holders
of a majority of each of the outstanding shares of Exmark Common Stock and
Exmark Preferred Stock, voting as a separate class. For tax purposes, such that
the Signing Bonuses will not be "excess parachute payments," the approval of the
Signing Bonuses will require the affirmative vote of the holders of 75% of the
voting power of all disinterested Exmark stockholders. Consequently, such
approval will require the affirmative vote of the holders of at least 75% of the
number of outstanding shares of Exmark Common Stock and Exmark Preferred Stock
(excluding such shares held by H. John Smith and Ray Rickard), voting together
as one class. The ratification of the appointment of the Stockholders'
Representatives will require the affirmative vote of the holders of a majority
of the number of outstanding shares of Exmark Common Stock and Exmark Preferred
Stock, voting together as one class. The meeting may be postponed or adjourned
from time to time without notice other than such notice as may be given at the
meeting or any postponement or adjournment thereof, and any business for which
notice is hereby given may be transacted at any such postponed or adjourned
meeting.
Pursuant to agreements with Toro dated October 23, 1997, certain directors
and officers of Exmark, in their individual capacities as stockholders, have
agreed to vote all of their shares of Exmark Common Stock and Exmark Preferred
Stock (approximately 63.8% of the combined voting power of the outstanding
shares of Exmark Common Stock and Exmark Preferred Stock of record as of the
Record Date) in favor of approval of the Merger Agreement and the Merger and
have granted an irrevocable proxy to Toro to vote their respective shares.
A summary of certain provisions of Sections 21-20,137 to 21-20,150 of the
Nebraska Business Corporation Act pertaining to the rights of dissenting
stockholders if the Merger is consummated is included in the accompanying Proxy
Statement/Prospectus under the heading THE "MERGER--Dissenters' Rights." A copy
of Sections 21-20,137 to 21-20,150 of the Nebraska Business Corporation Act is
set forth in Exhibit B to the attached Proxy Statement/Prospectus.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it promptly in the enclosed
prepaid envelope. If you attend the Special Meeting, you may revoke such proxy
and vote in person if you wish, even if you have previously returned your proxy
card. If you do not attend the Special Meeting, you may still revoke such proxy
at any time prior to the Special Meeting by providing written notice of such
revocation to Roger Smith, Secretary of Exmark.
Beatrice, Nebraska
, 1997
By Order of the Board of Directors,
Roger Smith
SECRETARY
TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE,WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. DO NOT SEND ANY STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD. THE PROCEDURE FOR THE EXCHANGE OF
YOUR SHARES AFTER THE MERGER IS CONSUMMATED IS SET FORTH IN THE ATTACHED PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF DIRECTORS OF EXMARK MANUFACTURING COMPANY INCORPORATED
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT
AND THE MERGER AND EACH OF THE OTHER PROPOSALS TO BE PRESENTED AT THE SPECIAL
MEETING.
PROXY STATEMENT
OF
EXMARK MANUFACTURING COMPANY INCORPORATED
----------------
PROSPECTUS
OF
THE TORO COMPANY
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This Proxy Statement/Prospectus is being furnished by Exmark Manufacturing
Company Incorporated, a Nebraska corporation ("Exmark"), to holders of its
common stock and preferred stock in connection with the solicitation of proxies
by the board of directors of Exmark for use for a Special Meeting of
Stockholders of Exmark to be held on , 1997, at Exmark's corporate offices
at 2101 Ashland Avenue, P.O. Box 808, Beatrice, Nebraska 68310, commencing at
9:00 a.m. local time, and at any adjournment or postponement thereof (the
"Special Meeting").
The Special Meeting has been called (1) to consider and vote upon a proposal
to approve an Agreement and Plan of Merger (as it may be amended, the "Merger
Agreement"), dated as of October 23, 1997, by and among Exmark, The Toro
Company, a Delaware Corporation ("Toro"), and EMCI Acquisition Corp., a Nebraska
corporation and wholly owned subsidiary of Toro ("Merger Subsidiary"), pursuant
to which, among other things, Merger Subsidiary will merge (the "Merger") with
and into Exmark, with Exmark continuing as the surviving corporation (the
"Surviving Corporation"), (2) to consider and vote upon a proposal to adopt
amended and restated articles of incorporation (the "New Articles of
Incorporation"), which authorize the issuance of two new classes of preferred
stock of Exmark and clarify the four-to-one distribution preference associated
with the Exmark Preferred Stock, (3) to consider and vote upon a proposal to
approve the payment in connection with the Merger of signing bonuses ("Signing
Bonuses") to H. John Smith and Ray Rickard, which bonuses shall be paid by Toro
pursuant to new employment agreements, which employment agreements also will
include noncompete covenants, (4) to consider and vote upon a proposal to ratify
the appointment of H. John Smith, Ray Rickard and Roger Smith as the initial
stockholders' representatives as described in the Merger Agreement (the
"Stockholders' Representatives") and (5) to transact such other business as may
properly come before the Special Meeting. A copy of the Merger Agreement is
attached hereto as Exhibit A and constitutes a part of this Proxy Statement/
Prospectus.
If the Merger Agreement is approved and the Merger becomes effective, then,
except for shares of Exmark capital stock with respect to which dissenters'
rights have been properly exercised ("Dissenting Shares") and shares of Exmark
capital stock issued and outstanding prior to the effective time of the Merger
that are owned by Toro, Exmark or Merger Subsidiary ("Canceled Shares"), (1)
each issued and outstanding share of common stock, $10.00 par value, of Exmark
("Exmark Common Stock") will be converted into and become a right to receive (a)
cash and shares of common stock, $1.00 par value, of Toro ("Toro Common Stock")
representing the Initial Per Share Payment Consideration (as defined in the
Merger Agreement) and (b) one Common/Preferred Contingent Payment Right (as
defined in the Merger Agreement), (2) each issued and outstanding share of
preferred stock, $40.00 par value, of Exmark
(CONTINUED ON NEXT PAGE)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is , 1997
("Exmark Preferred Stock") will be converted into and become a right to receive
(a) four times the Initial Per Share Payment Consideration and (b) four
Common/Preferred Contingent Payment Rights, (3) each issued and outstanding
share of Class B preferred stock, $.01 par value, of Exmark ("Exmark Class B
Stock") will be converted into and become a right to receive (a) one-tenth of a
share of Toro Common Stock and (b) one Class B Contingent Payment Right (as
defined in the Merger Agreement), and (4) each issued and outstanding share of
Class C preferred stock, $.01 par value, of Exmark ("Exmark Class C Stock") will
be converted into and become a right to receive the Initial Per Share Payment
Consideration. For a more complete description of the Merger Agreement and the
terms and conditions of the Merger, see "THE MERGER AGREEMENT" and "THE MERGER."
Notwithstanding the foregoing, 15% of the aggregate amount of cash and
shares of Toro Common Stock representing the Initial Per Share Payment
Consideration (in the aggregate, the "Initial Payment") will be held in escrow
in order to satisfy (1) any right of offset Toro and certain other related
parties may have with respect to certain losses, liabilities and other costs
that Toro or any of such other related parties may suffer as a result of certain
matters described in the Merger Agreement and (2) a "net worth" adjustment based
on the difference between a pre-closing estimated net worth of Exmark and the
actual net worth of Exmark at the Effective Time. Further, an additional
$100,000 will be withheld from the Initial Payment in order to reimburse the
Stockholders' Representatives for certain out-of-pocket expenses they may incur
while acting on behalf of Exmark's stockholders in connection with the Merger.
See "THE MERGER--Holdback Amount; Actual Net Worth Adjustment," "--Stockholders'
Representatives Expense Fund," "THE MERGER AGREEMENT--Stockholders'
Representatives" and "--Offset Right." For a more complete description of the
Merger Agreement and the terms and conditions of the Merger, see "THE MERGER
AGREEMENT" and "THE MERGER."
The aggregate amount of cash and shares of Toro Common Stock to be delivered
by Toro with respect to the Initial Payment to be exchanged for the Exmark
Common Stock, Exmark Preferred Stock and Exmark Class C Stock will be equal to
$28,100,000 (subject to the holdback of 15% of such amount plus an additional
$100,000 of such amount, certain offsets and other adjustments described in this
Proxy Statement/Prospectus). Based on the Initial Toro Share Price (as defined
in the Merger Agreement) as of October 31, 1997 the Initial Per Share
Consideration would be 12.239 shares of Toro Common Stock and cash equal to
$69.12 (10.39 shares of Toro Common Stock and cash equal to $58.51 after such
holdback and adjustments), in the absence any election to receive more or less
of the Merger Consideration in cash. However, in the event the Merger is not
consummated prior to November 30, the Initial Toro Share Price may be a
different amount and may result in the payment of more or less shares of Toro
Common Stock as part of the Initial Per Share Consideration.
Each Common/Preferred Contingent Payment Right and Class B Contingent
Payment Right entitles the holder thereof to receive cash and shares of Toro
Common Stock based on the performance of the Surviving Corporation from November
1, 1997 until October 31, 1999, subject to certain limitations and offsets. The
maximum amount of cash and shares of Toro Common Stock that may be paid by Toro
with respect to the Common/Preferred Contingent Payment Rights will not exceed
$14,000,000 (subject to certain offsets and other adjustments described in the
enclosed Proxy Statement/Prospectus). Similarly, the maximum amount of cash and
shares of Toro Common Stock that may be paid by Toro with respect to the Class B
Contingent Payment Rights will not exceed $14,000,000 (subject to certain
offsets and other adjustments described in the enclosed Proxy
Statement/Prospectus).
This Proxy Statement/Prospectus also constitutes a Prospectus of Toro with
respect to the shares of Toro Common Stock, the Common/Preferred Contingent
Payment Rights and the Class B Contingent Payment Rights issuable to the
stockholders of Exmark in connection with consummation of the Merger. Toro has
supplied all information in this Proxy Statement/Prospectus relating to Toro and
its subsidiaries, and Exmark has supplied all information contained in this
Proxy Statement/Prospectus relating to Exmark.
2
This Proxy Statement/Prospectus is included as part of a Registration
Statement on Form S-4 filed with the Securities and Exchange Commission by Toro,
relating to the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of 22,847 Common/Preferred Contingent Payment Rights, 10,000
Class B Contingent Payment Rights and up to 1,646,600 shares of Toro Common
Stock that may be issued in connection with the Merger.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Exmark on or about , 1997.
AVAILABLE INFORMATION
Toro is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). The reports, proxy statements and other information
filed by Toro with the SEC may be inspected and copied, at prescribed rates, at
the public reference facilities maintained by the SEC at Judiciary Plaza, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the SEC at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. The SEC maintains a web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov.com. Toro Common Stock is
listed on the New York Stock Exchange (the "NYSE") and materials filed by Toro
may be inspected at the offices of the NYSE, Inc., 20 Broad Street, New York,
New York 10005.
Toro has filed with the SEC a Registration Statement on Form S-4 (together
with any amendments thereto, the "Registration Statement") under the Securities
Act with respect to the shares of Toro Common Stock to be issued in the Merger.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement, as certain portions have been omitted as
permitted by the rules and regulations of the SEC. Such additional information
may be obtained from the SEC's principal office in Washington, D.C. Statements
contained in this Proxy Statement/Prospectus as to the contents of any contract
or other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
DOCUMENTS INCLUDED IN EXHIBIT D
The following documents filed with the SEC by Toro are included in Exhibit D
to this Proxy Statement/Prospectus and constitute a part hereof: (1) Toro's
Quarterly Report on Form 10-Q for the quarter ended August 1, 1997, filed with
the SEC on September 10, 1997; (2) Toro's Quarterly Report on Form 10-Q for the
quarter ended May 2, 1997, filed with the SEC on June 16, 1997; (3) Toro's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1997, filed with
the SEC on March 17, 1997; (4) Toro's Annual Report on Form 10-K for the year
ended October 31, 1996, filed with the SEC on January 29, 1997, including Toro's
Annual Report to Stockholders for the fiscal year ended October 31, 1996, filed
with the SEC on June 30, 1997 as exhibit 13 thereto; (5) Toro's Current Report
on Form 8-K, filed with the SEC on June 27, 1997; (6) Toro's Current Report on
Form 8-K, filed with the SEC on December 16, 1996 (as amended by Amendment No. 2
on Form 8-K/A, filed with the SEC on June 6, 1997); (7) Toro's Annual Report on
Form 11-K, filed with the SEC on June 30, 1997; (8) Toro's definitive proxy
statement included in Schedule 14A, filed with the SEC on February 11, 1997; and
(9) the description of the Toro Common Stock contained in Toro's Registration
Statement on Form 8-A, filed with the SEC on August 18, 1978 and the description
of Toro's preferred share purchase rights associated with each share of Toro
Common Stock in Toro's Registration Statement on Form 8-A, filed with the SEC on
April 11, 1986 (as amended by Amendment No. 1 on Form 8-A, filed May 15, 1987),
and Toro's Registration Statement on Form 8-A, filed with the SEC on June 17,
1988 (as amended by Amendment No. 1 on Form 8-A, filed August 30, 1990).
3
The foregoing documents contain financial and other information concerning
Toro, the Toro Common Stock and the related preferred share purchase rights. See
"DESCRIPTION OF TORO CAPITAL STOCK." Such documents constitute a part of this
Proxy Statement/Prospectus, and the information contained therein should be
reviewed together with all of the other information contained herein.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY TORO, EXMARK OR ANY OTHER PERSON. THIS
PROXY STATEMENT/ PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT COVER ANY RESALES OF THE TORO COMMON STOCK OFFERED HEREBY TO BE
RECEIVED BY STOCKHOLDERS OF EXMARK DEEMED TO BE "AFFILIATES" OF EXMARK OR TORO
UPON THE CONSUMMATION OF THE MERGER. NO PERSON IS AUTHORIZED TO MAKE USE OF THIS
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH SUCH RESALES. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF TORO OR EXMARK SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THIS PROXY STATEMENT/PROSPECTUS AND THE DOCUMENTS INCLUDED IN EXHIBIT D
HERETO CONTAIN VARIOUS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. STATEMENTS THAT
ARE NOT HISTORICAL ARE FORWARD-LOOKING. WHEN USED IN THESE DOCUMENTS, THE WORDS
"EXPECT," "ANTICIPATE," "ESTIMATE," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS MAY
BE MADE ORALLY IN THE FUTURE BY OR ON BEHALF OF TORO.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT
NOT LIMITED TO, CHANGES IN BUSINESS CONDITIONS AND THE ECONOMY IN GENERAL IN
BOTH FOREIGN AND DOMESTIC MARKETS; WEATHER CONDITIONS AFFECTING DEMAND; SEASONAL
FACTORS AFFECTING TORO'S INDUSTRY; LACK OF GROWTH IN TORO'S MARKETS; LITIGATION;
FINANCIAL MARKET CHANGES, INCLUDING INTEREST RATES AND FOREIGN EXCHANGE RATES;
TREND FACTORS, INCLUDING HOUSING STARTS, NEW GOLF COURSE STARTS AND MARKET
DEMOGRAPHICS; GOVERNMENT ACTIONS, INCLUDING BUDGET LEVELS, REGULATION, AND
LEGISLATION, PRIMARILY LEGISLATION RELATING TO THE ENVIRONMENT, COMMERCE AND
INFRASTRUCTURE, AND HEALTH AND SAFETY; LABOR RELATIONS; AVAILABILITY OF
MATERIALS; ACTIONS OF COMPETITORS; ABILITY TO INTEGRATE ACQUISITIONS; AND TORO'S
ABILITY TO PROFITABLY DEVELOP, MANUFACTURE AND SELL BOTH NEW AND EXISTING
PRODUCTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THESE RISK FACTORS AND SHOULD NOT BE
RELIED UPON AS A PREDICTION OF ACTUAL FUTURE RESULTS. TORO UNDERTAKES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE ON WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
4
TABLE OF CONTENTS
AVAILABLE INFORMATION................................................................. 3
DOCUMENTS INCLUDED IN EXHIBIT D....................................................... 3
TABLE OF CONTENTS..................................................................... 5
SUMMARY............................................................................... 9
General............................................................................. 9
The Special Meeting................................................................. 11
Date, Time and Place.............................................................. 11
Purposes of the Special Meeting................................................... 11
Record Date; Shares Entitled to Vote.............................................. 12
Required Vote; Quorum............................................................. 12
Recommendation of Exmark's Board of Directors..................................... 12
Opinion of Exmark's Financial Advisor............................................. 13
The Parties to the Merger........................................................... 13
The Toro Company.................................................................. 13
Exmark Manufacturing Company Incorporated......................................... 13
EMCI Acquisition Corp............................................................. 14
The Merger.......................................................................... 14
Effective Time.................................................................... 14
Effects of the Merger............................................................. 14
Management of Exmark After the Merger............................................. 14
Contingent Payment Rights......................................................... 15
Toro Control...................................................................... 15
Holdback Amount; Actual Net Worth Adjustment; Stockholders' Representatives
Expense Fund..................................................................... 15
Payment of Merger Consideration................................................... 16
Cash Election..................................................................... 17
Interests of Certain Persons in the Merger........................................ 18
Stockholder Agreements............................................................ 19
Acquisition of Holiman............................................................ 19
Accounting Treatment.............................................................. 19
Certain Federal Income Tax Consequences........................................... 19
Dissenters' Rights................................................................ 19
Regulatory Approvals.............................................................. 20
The Merger Agreement................................................................ 20
Limitations on Negotiations by Exmark............................................. 20
Conditions to the Merger.......................................................... 20
Offset Right...................................................................... 20
Termination of the Merger Agreement; Termination Fees............................. 21
Summary Consolidated Financial Data of Toro......................................... 22
Summary Financial Data of Exmark.................................................... 23
Market Price Data................................................................... 24
Comparative Unaudited Per Common Share Data......................................... 25
THE SPECIAL MEETING................................................................... 26
General; Date, Time and Place....................................................... 26
Purposes of the Special Meeting..................................................... 26
Exmark Board of Directors' Recommendations.......................................... 26
Record Date; Shares Entitled to Vote; Required Vote; Quorum......................... 26
5
Proxies............................................................................. 27
Security Ownership of Certain Beneficial Owners and Management of Exmark............ 28
THE MERGER............................................................................ 30
Effective Time...................................................................... 30
Effects of the Merger............................................................... 30
Management of Exmark After the Merger............................................... 30
Synergies Council................................................................... 31
Stockholders' Representatives....................................................... 31
Toro Control........................................................................ 31
Holdback Amount; Actual Net Worth Adjustment........................................ 32
Stockholders' Representatives Expense Fund.......................................... 32
Payment of Merger Consideration..................................................... 33
Contingent Payment Rights........................................................... 34
Valuation Formula................................................................. 35
Procedure for Determining Contingent Payments..................................... 37
Cash Election....................................................................... 37
Conversion of Exmark Stock.......................................................... 37
Fractional Shares................................................................... 39
Interests of Certain Persons in the Merger.......................................... 39
Voting Agreements................................................................. 39
Employment and Noncompete Agreements.............................................. 39
Issuance of Class B Stock to Insiders............................................. 39
Holiman Acquisition............................................................... 40
Manufacturer's Representatives and Distributors................................... 40
Stockholder Agreements.............................................................. 40
Acquisition of Holiman.............................................................. 41
Excess Parachute Payments........................................................... 41
Certain Federal Income Tax Consequences............................................. 42
Accounting Treatment................................................................ 44
Background of the Merger............................................................ 44
Exmark's Reasons for the Merger; Recommendation of Exmark's Board of Directors...... 45
Financial Resources............................................................... 45
Market Position................................................................... 45
Engineering and Product Development............................................... 45
Manufacturing and Facilities...................................................... 46
Working Relationship.............................................................. 46
Fairness of the Transaction....................................................... 46
Toro's Reasons for the Merger....................................................... 46
Opinion of McCarthy as Exmark's Financial Advisor................................... 46
Discounted Cash Flow Analysis..................................................... 48
Weighted Average of Historical Earnings........................................... 48
Book Value Multiple Analysis...................................................... 48
Other Factors and Analyses........................................................ 48
Dissenters' Rights.................................................................. 49
General........................................................................... 49
Procedure......................................................................... 49
Stock Exchange Listing.............................................................. 50
Regulatory Approvals................................................................ 51
Resales of Toro Common Stock Issued in the Merger................................... 51
Affiliate Agreements................................................................ 52
6
THE MERGER AGREEMENT.................................................................. 52
General............................................................................. 52
Representations and Warranties...................................................... 52
Covenants........................................................................... 53
Limitations on Negotiations by Exmark............................................... 54
Conditions.......................................................................... 54
Survival............................................................................ 56
Offset Right........................................................................ 56
Termination......................................................................... 58
Termination Fees.................................................................... 59
Fees and Expenses................................................................... 59
CERTAIN INFORMATION CONCERNING TORO................................................... 60
General............................................................................. 60
Recent Developments................................................................. 60
Selected Summary Consolidated Financial Data Of Toro................................ 61
CERTAIN INFORMATION CONCERNING EXMARK................................................. 62
SELECTED FINANCIAL DATA OF EXMARK..................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXMARK........................................ 64
Results of Operations............................................................... 64
Financial Position at August 31, 1997............................................... 64
Liquidity and Capital Resources..................................................... 65
Inflation........................................................................... 65
DESCRIPTION OF TORO CAPITAL STOCK..................................................... 65
General............................................................................. 65
Common Stock........................................................................ 65
Preferred Stock..................................................................... 66
Rights Plan......................................................................... 66
DESCRIPTION OF EXMARK CAPITAL STOCK................................................... 68
General............................................................................. 68
Common Stock........................................................................ 68
Preferred Stock..................................................................... 68
Exmark Preferred Stock if the New Articles of Incorporation are Approved............ 69
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 70
Stockholders' Dissenters' Rights.................................................... 70
Board of Directors.................................................................. 70
Removal of Directors................................................................ 71
Amendments to Bylaws................................................................ 71
Amendments to Certificate or Articles............................................... 71
Indemnification..................................................................... 72
Liability of Directors.............................................................. 72
Stockholder Meetings................................................................ 73
Preemptive Rights................................................................... 73
Mergers, Consolidations and Other Business Combinations............................. 73
Other Anti-takeover Provisions...................................................... 74
LEGAL MATTERS......................................................................... 75
EXPERTS............................................................................... 75
OTHER MATTERS......................................................................... 75
7
FINANCIAL STATEMENTS.................................................................. F-1
Exhibit A Agreement and Plan of Merger, dated as of October 23, 1997, among Toro, Merger
Subsidiary and Exmark
--Exhibit 2.01(a)
Exhibit B Sections 21-20,137 to 21-20,150 of the Nebraska Business Corporation Act
(Dissenters' Rights)
Exhibit C Opinion of McCarthy & Co.
Exhibit D Additional Toro Documents
-- Toro's Quarterly Report on Form 10-Q for the quarter ended August 1, 1997,
filed with the SEC on September 10, 1997
-- Toro's Quarterly Report on Form 10-Q for the quarter ended May 2, 1997, filed
with the SEC on June 16, 1997
-- Toro's Quarterly Report on Form 10-Q for the quarter ended January 31, 1997,
filed with the SEC on March 17, 1997
-- Toro's Annual Report on Form 10-K for the year ended October 31, 1996, filed
with the SEC on January 29, 1997, including Toro's Annual Report to Stockholders
for the fiscal year ended October 31, 1996, filed with the SEC on June 30, 1997
as exhibit 13 thereto
-- Toro's Current Report on Form 8-K, filed with the SEC on June 27, 1997
-- Toro's Current Report on Form 8-K, filed with the SEC on December 16, 1996, as
amended by Amendment No. 2 on Form 8-K/A, filed with the SEC on June 6, 1997
-- Toro's Annual Report on Form 11-K, filed with the SEC on June 30, 1997
-- Toro's definitive proxy statement included in Schedule 14A, filed with the SEC
on February 11, 1997
-- Toro's Registration Statement on Form 8-A, filed with the SEC on August 18,
1978
-- Toro's Registration Statement on Form 8-A, filed with the SEC on April 11,
1986, as amended by Amendment No. 1 on Form 8-A, filed May 15, 1987
-- Toro's Registration Statement on Form 8-A, filed with the SEC on June 17,
1988, as amended by Amendment No. 1 on Form 8-A, filed with the SEC on August 30,
1990
8
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS
QUALIFIED IN ALL RESPECTS BY THE MORE DETAILED INFORMATION INCLUDED IN THIS
PROXY STATEMENT/PROSPECTUS AND ITS EXHIBITS. STOCKHOLDERS ARE URGED TO READ
CAREFULLY THE ENTIRE PROXY STATEMENT/PROSPECTUS, INCLUDING THE EXHIBITS. TORO
HAS SUPPLIED ALL INFORMATION CONCERNING TORO AND ITS SUBSIDIARIES INCLUDED
HEREIN, AND EXMARK HAS SUPPLIED ALL INFORMATION CONCERNING EXMARK AND ITS
SUBSIDIARIES INCLUDED HEREIN.
GENERAL
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of EMCI Acquisition Corp., a Nebraska corporation ("Merger
Subsidiary") and wholly owned subsidiary of The Toro Company, a Delaware
corporation ("Toro"), with and into Exmark Manufacturing Company Incorporated, a
Nebraska corporation ("Exmark"), pursuant to an Agreement and Plan of Merger,
dated as of October 23, 1997 (as it may be amended, the "Merger Agreement"), by
and among Exmark, Toro and Merger Subsidiary, a copy of which is attached to
this Proxy Statement/Prospectus as Exhibit A. Pursuant to the Merger Agreement,
Exmark will continue as the surviving corporation (the "Surviving Corporation").
If the Merger Agreement is approved and the Merger becomes effective, then
except for shares of Exmark capital stock with respect to which dissenters'
rights have been properly exercised ("Dissenting Shares") and shares of Exmark
capital stock issued and outstanding prior to the effective time of the Merger
that are owned by Toro, Exmark or Merger Subsidiary ("Canceled Shares"), (1)
each issued and outstanding share of Exmark Common Stock will be converted into
and become a right to receive (a) cash and shares of common stock, $1.00 par
value, of Toro ("Toro Common Stock") representing the Initial Per Share Payment
Consideration (as defined in the Merger Agreement) and (b) one Common/Preferred
Contingent Payment Right (as defined in the Merger Agreement), (2) each issued
and outstanding share of Exmark Preferred Stock will be converted into and
become a right to receive (a) four times the Initial Per Share Payment
Consideration and (b) four Common/Preferred Contingent Payment Rights, (3) each
issued and outstanding share of Class B preferred stock, $.01 par value, of
Exmark ("Exmark Class B Stock") will be converted into and become a right to
receive (a) one-tenth of a share of Toro Common Stock (the "Class B Initial Per
Share Payment Consideration") and (b) one Class B Contingent Payment Right (as
defined in the Merger Agreement), and (4) each issued and outstanding share of
Class C preferred stock, $.01 par value, of Exmark ("Exmark Class C Stock") will
be converted into and become a right to receive the Initial Per Share Payment
Consideration. See "THE MERGER AGREEMENT" and "THE MERGER."
The aggregate amount of cash and shares of Toro Common Stock to be paid by
Toro with respect to the total Initial Per Share Payment Consideration to be
exchanged for the Exmark Common Stock, Exmark Preferred Stock and Exmark Class C
Stock will be equal to $28,100,000 (subject to the holdback of 15% of such
amount plus an additional $100,000 of such amount, certain offsets and other
adjustments described herein). Based on the Initial Toro Share Price (as defined
in the Merger Agreement) as of October 31, 1997 and assuming there are no
Dissenting Shares nor Canceled Shares, the Initial Per Share Consideration would
be $576.01, consisting of 12.239 shares of Toro Common Stock and cash equal to
$79.01 (I.E., $487.56, consisting of 10.359 shares of Toro Common Stock and cash
equal to $58.51, after such holdbacks and adjustments), in the absence any
election to receive more or less of the Merger Consideration in cash. However,
in the event the Merger is not consummated prior to November 30, the Initial
Toro Share Price may be a different amount and may result in the payment of more
or less cash and shares of Toro Common Stock pursuant to the Initial Per Share
Consideration. See "THE MERGER-- Payment of Merger Consideration," "--Holdback
Amount; Actual Net Worth Adjustment," "--Stockholders' Representatives Expense
Fund" and "THE MERGER AGREEMENT--Offset Right."
9
Each Common/Preferred Contingent Payment Right and Class B Contingent
Payment Right entitles the holder thereof to receive cash and shares of Toro
Common Stock based on the performance of the Surviving Corporation from November
1, 1997 until October 31, 1999, subject to certain limitations and offsets. The
maximum amount of cash and shares of Toro Common Stock that may be paid by Toro
with respect to the Common/Preferred Contingent Payment Rights will not exceed
$14,000,000 (subject to certain offsets and other adjustments described in the
enclosed Proxy Statement/Prospectus). Similarly, the maximum amount of cash and
shares of Toro Common Stock that may be paid by Toro with respect to the Class B
Contingent Payment Rights will not exceed $14,000,000 (subject to certain
offsets and other adjustments described in the enclosed Proxy
Statement/Prospectus). See "THE MERGER--Effects of the Merger," "--Holdback
Amount; Actual Net Worth Adjustment," "--Stockholders' Representatives Expense
Fund," "THE MERGER AGREEMENT--Offset Right" and "--Contingent Payments."
The Common/Preferred Contingent Payment Rights and the Class B Contingent
Payment Rights are collectively referred to herein as the "Contingent Payment
Rights." The aggregate amount of the cash and shares of Toro Common Stock to be
paid by Toro with respect to the Contingent Payment Rights, the Class B Initial
Per Share Payment Consideration and the Initial Per Share Payment Consideration
is referred to herein as the "Merger Consideration." The shares of Exmark Common
Stock, Exmark Preferred Stock, Exmark Class B Stock and Exmark Class C Stock
that are issued and outstanding immediately prior to the Effective Time, other
than Dissenting Shares and Canceled Shares, are collectively referred to herein
as the "Shares," and the holders thereof are referred to herein as the
"Holders." Other capitalized terms not defined herein shall have the meanings
ascribed to them in the Merger Agreement.
On , 1997, the latest practicable date before the date of this
Proxy Statement/Prospectus, the closing price per share of Toro Common Stock was
$ . Stockholders of Exmark are advised to obtain current market
quotations for Toro Common Stock. No assurance can be given as to the market
price of Toro Common Stock at any time before the Effective Time or as to the
market price of Toro Common Stock at any time thereafter.
The close of business on , 1997 has been fixed as the record date
(the "Record Date") for the determination of the stockholders of Exmark entitled
to notice of and to vote at the Special Meeting of Stockholders of Exmark to be
held on , 1997 (the "Special Meeting"). Accordingly, only holders of
record of outstanding shares of Exmark Common Stock and Exmark Preferred Stock
at the close of business on the Record Date shall be entitled to notice of and
to vote at the Special Meeting and any business for which notice is hereby given
may be transacted at any postponed or adjourned meeting thereof.
In addition to voting on the Merger Agreement and the Merger, Exmark
stockholders will be asked to consider and act upon three other proposals
relating to the Merger Agreement and the Merger. First, Exmark stockholders will
be asked to consider and act upon a proposal to adopt amended and restated
articles of incorporation (the "New Articles of Incorporation"), which authorize
the issuance of the Exmark Class B Stock and the Exmark Class C Stock and
clarify the four-to-one distribution preference associated with the Exmark
Preferred Stock. The Exmark Class B Stock will be issued to certain officers,
directors and employees of Exmark pursuant to the exercise of certain previously
issued stock purchase rights. The Exmark Class C Stock will be issued in
exchange for all of the outstanding shares of capital stock of the Holiman Co.,
Inc., all of which shares are owned by Roger Smith. Second, Exmark stockholders
will be asked to consider and act upon a proposal to approve the payment in
connection with the Merger of signing bonuses (the "Signing Bonuses") to H. John
Smith and Ray Rickard, each of whom is an officer of Exmark, to be paid by Toro
in cash in the aggregate amount of $2,075,000 pursuant to new employment
agreements between each of Messrs. Smith and Rickard, respectively, and Exmark
and Toro, which employment agreements also include noncompete covenants.
Stockholder approval of such signing bonuses is being requested so that such
bonuses will not constitute "excess parachute payments" pursuant to Section 280G
of the Internal Revenue Code of 1986, as amended. If treated as excess parachute
10
payments, the bonuses would not be deductible and Messrs. Smith and Rickard and
each would be subject to a 20% excise tax on that portion of such payments that
is greater than his respective average income during the past five years.
Finally, Exmark stockholders will be asked to consider and act upon a proposal
to ratify the appointment of H. John Smith, Ray Rickard and Roger Smith as the
initial stockholders' representatives as described in the Merger Agreement
("Stockholders' Representatives"). The Stockholders' Representatives will act on
behalf of the Exmark stockholders who participate in the Merger and as such will
assist in the calculation of the amount of merger consideration to be paid by
Toro in connection with the Merger, including the calculation of the amount to
be paid with respect to the Common/Preferred Contingent Payment Rights and Class
B Contingent Payment Rights, and may sign and deliver certificates and notices
on behalf of such Exmark stockholders, among other things described in the
Merger Agreement.
The Merger Agreement and the Merger are required to be approved by the
affirmative vote of the holders of two-thirds of the outstanding shares of
Exmark Common Stock and Exmark Preferred Stock, voting together as one class.
The New Articles of Incorporation are required to be approved by the affirmative
vote of the holders of a majority of each of the outstanding shares of Exmark
Common Stock and Exmark Preferred Stock, voting as a separate class. For tax
purposes, such that the Signing Bonuses will not be "excess parachute payments,"
the approval of the Signing Bonuses will require the affirmative vote of the
holders of 75% of the voting power of all disinterested Exmark stockholders.
Consequently, such approval will require the affirmative vote of the holders of
at least 75% of the number of outstanding shares of Exmark Common Stock and
Exmark Preferred Stock (excluding such shares held by H. John Smith and Ray
Rickard), voting together as one class. The ratification of the appointment of
the Stockholders' Representatives will require the affirmative vote of the
holders of a majority of the number of outstanding shares of Exmark Common Stock
and Exmark Preferred Stock, voting together as one class. The meeting may be
postponed or adjourned from time to time without notice other than such notice
as may be given at the meeting or any postponement or adjournment thereof, and
any business for which notice is hereby given may be transacted at any such
postponed or adjourned meeting. It is a condition to the consummation of the
Merger that all of the foregoing proposals, other than the proposal to ratify
the appointment of the Stockholders' Representatives, be approved by Exmark's
stockholders.
Pursuant to agreements with Toro dated October 23, 1997 (the "Stockholder
Agreements"), certain stockholders of Exmark, in their individual capacities as
stockholders, have agreed to vote all of their shares of Exmark Common Stock and
Exmark Preferred Stock (approximately 63.8% of the combined voting power of the
outstanding shares of Exmark Common Stock and Exmark Preferred Stock of record
as of the Record Date) in favor of approval of the Merger Agreement, the Merger
and the other proposals described herein and have granted an irrevocable proxy
to Toro to vote their respective shares. See "THE MERGER--Stockholder
Agreements."
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held at 9:00 a.m., local time, on ,
1997, at Exmark's executive offices, 2102 Ashland Avenue, Beatrice, Nebraska,
68310. See "THE SPECIAL MEETING-- General; Date, Time and Place."
PURPOSES OF THE SPECIAL MEETING
The Special Meeting has been called (1) to consider and vote upon a proposal
to approve the Merger Agreement by and among Exmark, Toro and Merger Subsidiary,
pursuant to which, among other things, Merger Subsidiary will merge with and
into Exmark, with Exmark continuing as the Surviving Corporation, (2) to
consider and vote upon a proposal to adopt the New Articles of Incorporation,
which authorize the issuance of two new classes of preferred stock of Exmark and
clarify the four-to-one distribution
11
preference associated with the Exmark Preferred Stock, (3) to consider and vote
upon a proposal to approve the payment in connection with the Merger of the
Signing Bonuses to H. John Smith and Ray Rickard, which bonuses shall be paid by
Toro pursuant to new employment agreements, which employment agreements also
include noncompete covenants, (4) to consider and vote upon a proposal to ratify
the appointment of H. John Smith, Ray Rickard and Roger Smith as the initial
Stockholders' Representatives and (5) to transact such other business as may
properly come before the Special Meeting. See "THE SPECIAL MEETING--Purposes of
the Special Meeting."
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of shares of Exmark Common Stock and Exmark Preferred
Stock on the close of business on , 1997 (the "Record Date") are
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
there were 15,431 shares of Exmark Common Stock outstanding and 7,416 shares of
Exmark Preferred Stock outstanding, each of which will be entitled to one vote
on each matter which may properly come before the Special Meeting. See "THE
SPECIAL MEETING--Record Date; Shares Entitled to Vote; Required Vote; Quorum."
REQUIRED VOTE; QUORUM
The Merger Agreement and the Merger are required to be approved by the
affirmative vote of the holders of two-thirds of the outstanding shares of
Exmark Common Stock and Exmark Preferred Stock, voting together as one class.
The New Articles of Incorporation are required to be approved by the affirmative
vote of the holders of a majority of each of the outstanding shares of Exmark
Common Stock and Exmark Preferred Stock, voting as a separate class. For tax
purposes, such that the Signing Bonuses will not be "excess parachute payments,"
the approval of the Signing Bonuses will require the affirmative vote of the
holders of 75% of the voting power of all disinterested Exmark stockholders.
Consequently, such approval will require the affirmative vote of the holders of
at least 75% of the number of outstanding shares of Exmark Common Stock and
Exmark Preferred Stock (excluding such shares held by H. John Smith and Ray
Rickard), voting together as one class. The ratification of the appointment of
the Stockholders' Representatives will require the affirmative vote of the
holders of a majority of the number of outstanding shares of Exmark Common Stock
and Exmark Preferred Stock, voting together as one class.
The presence, in person or by properly executed proxy, of the record holders
of a majority of the voting power of the outstanding shares of Exmark Common
Stock and Exmark Preferred Stock, considered as one class, is necessary to
constitute a quorum at the Special Meeting. As of the Record Date, approximately
15,086 shares of Exmark Common Stock and Exmark Preferred Stock (approximately
66.0% of the voting power of the outstanding shares of record as of the Record
Date) were held by directors, executive officers and their affiliates. Pursuant
to the Stockholder Agreements, certain officers and directors of Exmark, in
their individual capacities as stockholders, have agreed to vote all of their
shares of Exmark Common Stock and Exmark Preferred Stock (approximately 63.8% of
the combined voting power of the outstanding shares of Exmark Common Stock and
Exmark Preferred Stock of record as of the Record Date) in favor of approval of
the Merger Agreement, the Merger and the other proposals described herein and
have granted an irrevocable proxy to Toro to vote their respective shares. As of
the Record Date, neither Toro, its officers, its directors nor any of their
respective affiliates owned any shares of Exmark capital stock. See "THE SPECIAL
MEETING--Record Date; Shares Entitled to Vote; Required Vote; Quorum."
RECOMMENDATION OF EXMARK'S BOARD OF DIRECTORS
The Board of Directors of Exmark believes that the Merger is in the best
interests of Exmark and its stockholders and has unanimously approved the Merger
Agreement and the Merger. THE BOARD OF DIRECTORS OF EXMARK UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT. FURTHERMORE,
THE BOARD OF DIRECTORS OF EXMARK UNANIMOUSLY RECOMMENDS TO ITS STOCKHOLDERS
APPROVAL OF
12
(1) THE PROPOSED NEW ARTICLES OF INCORPORATION (2) THE PAYMENT OF SIGNING
BONUSES TO H. JOHN SMITH AND RAY RICKARD AND (3) THE RATIFICATION OF THE
APPOINTMENT OF H. JOHN SMITH, RAY RICKARD AND ROGER SMITH AS THE INITIAL
STOCKHOLDERS' REPRESENTATIVES. This recommendation is based on a number of
factors discussed in this Proxy Statement/Prospectus. See "THE MERGER--Exmark's
Reasons for the Merger; Recommendation of Exmark's Board of Directors."
OPINION OF EXMARK'S FINANCIAL ADVISOR
McCarthy & Co. ("McCarthy") has delivered its written opinion to the Board
of Directors of Exmark to the effect that as of the date hereof, the
consideration to be received by the holders of Exmark capital stock pursuant to
the Merger is fair to such holders from a financial point of view. A copy of the
opinion, which sets forth the assumptions made, matters considered and limits on
the review undertaken, is attached as Exhibit C to this Proxy
Statement/Prospectus and is incorporated herein by reference. Exmark
stockholders are urged to read carefully the opinion in its entirety. See "THE
MERGER--Opinion of McCarthy as Exmark's Financial Advisor."
THE PARTIES TO THE MERGER
THE TORO COMPANY
Toro is a leading manufacturer of consumer lawn mowers, snowthrowers,
trimmers, commercial mowing and turf maintenance equipment and underground
automatic irrigation systems. These products are sold under the
Toro-Registered Trademark-, Wheel Horse-Registered Trademark-,
Lawn-Boy-Registered Trademark- and other brand names to the consumer and
professional markets, which includes entities that manage or construct golf
courses, parks and other large turf areas. The consumer product line includes
walk-behind mowers; riding mowers and lawn and garden tractors; electrical home
improvement products, such as low voltage lighting, electric trimmers and leaf
blowers; and snow removal products. The professional product line includes
commercial products for professional turf and golf course maintenance, such as
precision cutting mowers and turf aeration equipment, and irrigation products
such as sprinkler heads and control devices for underground irrigation systems.
Toro sells most of its products through domestic and foreign distributors and
mass merchandisers.
Toro was incorporated in Minnesota in 1935 as the successor to a business
founded in 1914. It was reincorporated in Delaware in 1983. The principal
executive offices of Toro are located at 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420, telephone number (612) 888-8801. For further information
concerning Toro, see "CERTAIN INFORMATION CONCERNING TORO" and the Toro
documents included in Exhibit D.
EXMARK MANUFACTURING COMPANY INCORPORATED
Exmark is a leading manufacturer of commercial turf care equipment. It is
principally engaged in the design and manufacturing of mid-size commercial walk
behind and riding lawn mowers, which are sold to distributors for sale
throughout the continental United States and Europe.
Exmark's product line consists of mid-size commercial walk behind and riding
mowers (E.G., 32", 36", 44", 48" and 60" cutting widths), and various
accessories such as grass catchers and riding sulkies. Management has placed
emphasis on new product generation because of the belief that in order to retain
current dealers, attract new dealers and increase market share, new product
offerings are critical. Examples of recent new product introductions are the
Turf Tracer Hydro introduced in 1991, the Exmark Viking Hydro in 1992, Exmark
Explorer Two in 1992, the Exmark Metro in 1993, the Exmark Lazer Z introduced in
the Spring of 1995, the Turf Tracer HP introduced in the Fall of 1996 and the
Metro HP introduced in the fall of 1997.
Exmark sells its products throughout the United States and Canada. Sales
volume is generated primarily through Exmark's manufacturer's representative,
Holiman. It is a condition to the Merger that Exmark acquire Holiman prior to
Toro's acquisition of Exmark.
13
Exmark was incorporated in Nebraska in 1982. The principal executive offices
of Exmark are located at 2102 Ashland Avenue, Beatrice, Nebraska 68310,
telephone number (402) 223-4010. For further information concerning Exmark, see
"CERTAIN INFORMATION CONCERNING EXMARK," "SELECTED FINANCIAL DATA OF EXMARK,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXMARK," and "FINANCIAL STATEMENTS OF
EXMARK."
EMCI ACQUISITION CORP.
EMCI Acquisition Corp., a Nebraska corporation and wholly owned subsidiary
of Toro ("Merger Subsidiary"), was incorporated on September 29, 1997, solely
for purposes of the transactions contemplated by the Merger Agreement. Merger
Subsidiary engages in no other business. The principal executive offices of
Merger Subsidiary are located at 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420, telephone number (612) 888-8801.
THE MERGER
EFFECTIVE TIME
The Merger will become effective upon the filing of the Articles of Merger
with the Secretary of State of the State of Nebraska (the "Effective Time").
Such filing is required by the Nebraska Business Corporation Act (the "NBCA") in
connection with the Merger and will be made as soon as practicable after the
approval by the stockholders of Exmark of the Merger Agreement and the
satisfaction or waiver of all other conditions to the Merger. See "THE
MERGER--Effective Time" and "--Effects of the Merger."
EFFECTS OF THE MERGER
At the Effective Time, pursuant to the Merger Agreement, (1) Merger
Subsidiary will be merged with and into Exmark, which will be the Surviving
Corporation, (2) Exmark will become a wholly owned subsidiary of Toro, (3) each
issued and outstanding share of Exmark Common Stock will be converted into and
become a right to receive (a) the Initial Per Share Payment Consideration and
(b) one Common/ Preferred Contingent Payment Right, (4) each issued and
outstanding share of Exmark Preferred Stock will be converted into and become a
right to receive (a) the Initial Per Share Payment Consideration and (b) four
Common/Preferred Contingent Payment Rights, (5) each issued and outstanding
share of Exmark Class B Stock will be converted into and become a right to
receive (a) the Class B Initial Per Share Payment Consideration and (b) one
Class B Contingent Payment Right, and (6) each issued and outstanding share of
Exmark Class C Stock will be converted into and become a right to receive the
Initial Per Share Payment Consideration. See "THE MERGER--Effects of the
Merger."
MANAGEMENT OF EXMARK AFTER THE MERGER
Exmark, as the Surviving Corporation, will become a direct, wholly owned
subsidiary of Toro upon consummation of the Merger. Notwithstanding the
foregoing, Exmark will be operated as a stand-alone entity during the Contingent
Payment Period (as defined in "THE MERGER--Management of Exmark After the
Merger") and will be overseen by Exmark's existing management and their
successors, subject to certain limitations described in the Merger Agreement.
See "THE MERGER--Toro Control." The directors of Merger Subsidiary immediately
prior to the Effective Time will be the initial directors of the Surviving
Corporation. See "THE MERGER--Management of Exmark After the Merger." In
addition, the parties have agreed to form a committee to act as an inter-company
management team and as a dispute resolution panel for a period following the
Merger (the "Synergies Council"). See "THE MERGER--Synergies Council."
14
CONTINGENT PAYMENT RIGHTS
The Contingent Payment Rights qualify Holders to receive up to two separate
payments (the 1998 Contingent Payment and the 1999 Contingent Payment) based on
the financial performance of the Surviving Corporation on a stand-alone basis
during each of the twelve-month periods ending October 31, 1998 and 1999,
respectively. Only Holders of Exmark Common Stock, Exmark Preferred Stock and
Exmark Class B Stock are entitled to receive Contingent Payment Rights in
exchange for the surrender of their Shares. Holders of Exmark Class C Stock are
not entitled to receive Contingent Payment Rights. See "THE MERGER--Effects of
the Merger." Holders of Exmark Class B Stock will receive one-half of any
Contingent Payment; Holders of Exmark Common Stock and Exmark Preferred Stock
collectively will receive the other half of any Contingent Payment.
The Contingent Payment Rights are based on Exmark's financial performance
during the Contingent Payment Period, and no Contingent Payments will be made
unless Exmark obtains certain financial results during the Contingent Payment
Period. In addition, Contingent Payments are subject to Toro's Offset Right. See
"THE MERGER AGREEMENT--Offset Right." Moreover, the maximum amount of Contingent
Payments may not exceed $14,000,000 for Holders of Exmark Class B Stock and
$14,000,000 for Holders of Exmark Common Stock and Exmark Preferred Stock
(provided further that the number of shares of Toro Common Stock issued for all
Contingent Payments may not exceed 821,334 shares). Furthermore, if Exmark fails
to meet certain financial goals outlined in the Merger Agreement, then Toro
shall have the option to take full control of Exmark's operations, in which case
Contingent Payments would be extremely unlikely. See "THE MERGER--Toro Control."
The amount of each Contingent Payment will be determined using a valuation
formula that compares a multiple of Exmark's recast earnings before interest and
taxes ("REBIT") for the appropriate twelve-month period ending October 31, 1998
or 1999, subject to numerous adjustments, with a base amount of $30,000,000 plus
the amount of any prior Contingent Payment, subject to certain adjustments. The
multiplier is 3.5 times the compound annual growth rate ("CAGR") of Exmark's
revenues, subject to certain adjustments, in each of 1998 and 1999 compared to
$40,808,850, which is the amount of Exmark's gross sales for the twelve-month
period ended October 31, 1996. See "THE MERGER--Contingent Payment Rights." By
way of example, and assuming a compound annual growth rate of zero and no
working capital adjustment, REBIT for the twelve-month period ending October 31,
1998 would have to exceed $8,571,429 before there would be a 1998 Contingent
Payment.
THERE CAN BE NO ASSURANCE THAT ANY CONTINGENT PAYMENTS WILL BE MADE.
TORO CONTROL
If Exmark fails to obtain financial results equal to or greater than certain
predetermined financial results for two successive fiscal quarters (as set forth
in the Merger Agreement), Toro shall have the option to take full control of
Exmark's operations. In the event Toro takes control of Exmark's operations, the
financial results of Exmark accruing after such date will not be taken into
account in computing the amount of any Contingent Payments to be made after such
date. See "THE MERGER--Toro Control."
HOLDBACK AMOUNT; ACTUAL NET WORTH ADJUSTMENT; STOCKHOLDERS' REPRESENTATIVES
EXPENSE FUND
An amount equal to 15% of the Initial Payment Fund (as defined in the Merger
Agreement) will be placed in escrow (the "Holdback Amount") with Norwest Bank
Minnesota, National Association (the "Escrow Agent" and "Paying Agent") and used
to pay any claims Toro may have pursuant to its Offset Right with respect to
breaches of Exmark's representations and warranties and covenants contained in
the Merger Agreement and certain other losses and costs Toro and its affiliates
may incur or suffer in connection with the Merger. In addition, $100,000 of the
Initial Payment Fund will be held in escrow by the Escrow Agent and used to fund
the expenses of the Stockholders' Representatives (the "Stockholders'
Representatives Expense Fund").
15
Additionally, prior to the Effective Time, Toro and Exmark will estimate the
net worth (total assets minus total liabilities) of Exmark as of the Effective
Time. In the event that such estimate is less than $8,243,000, the difference
will, in effect, further reduce the Initial Payment Fund and increase the
Holdback Amount. Within 90 days after the Effective Time, Toro and Exmark will
determine the actual net worth of Exmark as of the Effective Time. In the event
that such amount is less than $8,243,000, the difference will be subtracted from
the Holdback Amount and subsequently paid to Toro (the "Actual Net Worth
Adjustment"). Exmark and Toro currently do not anticipate that there will be an
Actual Net Worth Adjustment. Such estimate and the Actual Net Worth Adjustment
will be determined without giving effect to the acquisition of Holiman by
Exmark. The Holdback Amount also will be used to satisfy Toro's Offset Right, if
any. Subject to Toro's Offset Right and the Actual Net Worth Adjustment, if any,
two-thirds of the Holdback Amount will be paid to the Holders on approximately
December 31, 1999 and the remainder will be paid to the Holders on December 31,
2000. Subject to any deduction for Stockholders' Representatives' expenses, the
Stockholders' Representatives Expense Fund will be paid to the Holders on
December 31, 2000 (the "Expense Fund Payment"). See "THE MERGER--Holdback
Amount; Actual Net Worth Adjustment," "--Stockholders' Representatives Expense
Fund" and "THE MERGER AGREEMENT-- Offset Right."
PAYMENT OF MERGER CONSIDERATION
Subject to Toro's Offset Right and the escrow of the Holdback Amount and the
Stockholder's Representatives Expense Fund, the Merger Consideration will be
paid in the form of cash and shares of Toro Common Stock to the Holders as
follows: the Initial Payment, the Class B Initial Payment, the 1998 Contingent
Payment, the 1999 Contingent Payment, the Holdback Payments and the payment of
any remainder of the Stockholders' Representatives Expense Fund. The Initial
Payment, consisting of the Initial Per Share Payment Consideration, will be made
as promptly as practicable after the Effective Time and following surrender of
shares of Exmark Common Stock, Exmark Preferred Stock or Exmark Class C Stock.
The Class B Initial Payment, consisting of the Class B Initial Per Share Payment
Consideration, will be made as promptly as practicable after the Effective Time
and following surrender of shares of Exmark Class B Stock. The 1998 Contingent
Payment, consisting of cash and shares of Toro Common Stock payable by Toro
pursuant to the Contingent Payment Rights, will be paid as promptly as
practicable following the later to occur of (1) December 31, 1998 or (2) 10 days
after the amount of the 1998 Contingent Payment has been determined by Toro and
the Stockholders' Representatives. The 1999 Contingent Payment, consisting of
cash and shares of Toro Common Stock payable by Toro pursuant to the Contingent
Payment Rights, will be paid as promptly as practicable following the later to
occur of (1) December 31, 1999 or (2) 10 days after the amount of the 1999
Contingent Payment has been determined by Toro and the Stockholders'
Representatives. Subject to any offset pursuant to Toro's Offset Right,
two-thirds of the cash and shares of Toro Common Stock initially included in the
Holdback Amount shall be paid concurrently with the 1999 Contingent Payment and
the remainder will be paid on or before December 31, 2000. Subject to claims for
payment of the expenses of the Stockholders' Representatives, the remainder of
the Stockholders' Representatives Expense Fund will be paid on or before
December 31, 2000. The cash portion of the Merger Consideration will be
approximately 12% of the aggregate amount of each payment and the remainder of
the Merger Consideration will be paid in shares of Toro Common Stock.
The aggregate amount of cash and shares of Toro Common Stock to be paid by
Toro with respect to the total Initial Per Share Payment Consideration to be
exchanged for the Exmark Common Stock, Exmark Preferred Stock and Exmark Class C
Stock will be equal to $28,100,000 (subject to the holdback of 15% of such
amount plus $100,000 of such amount, certain offsets and other adjustments
described herein). The Initial Per Share Payment Consideration shall be cash and
Toro Common Stock in an amount equal to a quotient, the numerator of which is
$28,100,000 and the denominator of which is the sum of (1) the number of shares
of Exmark Common Stock, (2) the number of shares of Exmark Class C Stock and (3)
four times the number of shares of Exmark Preferred Stock, which in all cases
are issued and
16
outstanding immediately prior to the Effective Time, other than Canceled Shares.
For purposes of calculating the number of shares of Toro Common Stock included
in the Initial Payment Consideration, the value per share of Toro Common Stock
shall be the Initial Toro Share Price. Therefore, if the Merger is consummated
on or prior to November 30, 1997, the Initial Toro Share Price would be $41.4167
(I.E., the average closing price per share of Toro Common Stock as reported on
the NYSE for the 30 trading days ending on October 31, 1997) and the Initial Per
Share Consideration would be 12.239 shares of Toro Common Stock and cash equal
to $69.12 (10.39 shares of Toro Common Stock and $58.51 after the Holdback
Amount and the Stockholder Representatives Expense Fund are placed in escrow),
in the absence of a Cash Election to receive more or less of the Merger
Consideration in cash. However, in the event the Merger is not consummated prior
to November 30, the Initial Toro Share Price would be calculated differently
(I.E., the average closing price per share of Toro Common Stock as reported on
the NYSE for the 30 trading days ending on the third trading day immediately
preceding the Effective Date of the Merger) and, consequently, may be a
different amount and may result in the payment of more or less cash and shares
of Toro Common Stock pursuant to the Initial Per Share Consideration. See "THE
MERGER--Payment of Merger Consideration" "--Holdback Amount; Actual Net Worth
Adjustment," "--Stockholders' Representatives Expense Fund" and "THE MERGER
AGREEMENT--Offset Right."
Each Common/Preferred Contingent Payment Right and Class B Contingent
Payment Right entitles the holder thereof to receive cash and shares of Toro
Common Stock based on the performance of the Surviving Corporation from November
1, 1997 until October 31, 1999, subject to certain limitations and offsets. The
maximum amount of cash and shares of Toro Common Stock to be paid by Toro with
respect to the Common/Preferred Contingent Payment Rights will not exceed
$14,000,000 (subject to certain offsets and other adjustments described in the
enclosed Proxy Statement/Prospectus). Similarly, the maximum amount of cash and
shares of Toro Common Stock to be paid by Toro with respect to the Class B
Contingent Payment Rights may not exceed $14,000,000 (subject to certain offsets
and other adjustments described in the enclosed Proxy Statement/Prospectus). For
purposes of calculating the number of shares of Toro Common Stock included in
the 1998 Contingent Payment, the value per share of Toro Common Stock will be
the average closing price per share of Toro Common Stock as reported on the NYSE
for the 30 trading days ending on the third day immediately preceeing December
31, 1998 (the "1998 Toro Share Price"). For purposes of calculating the number
of shares of Toro Common Stock included in the 1999 Contingent Payment, the
value per share of Toro Common Stock will be the average closing price per share
of Toro Common Stock as reported on the NYSE for the 30 trading days ending on
the third day immediately preceding December 31, 1999 (the "1999 Toro Share
Price"). See "THE MERGER--Effects of the Merger," "--Holdback Amount; Actual Net
Worth Adjustment," "--Stockholders' Representatives Expense Fund," "THE MERGER
AGREEMENT--Offset Right" and "--Contingent Payments."
Fractional shares of Toro Common Stock will not be issued in connection with
the Merger. Stockholders of Exmark otherwise entitled to fractional shares of
Toro Common Stock will be paid cash in lieu of such factional shares. See "THE
MERGER--Fractional Shares."
CASH ELECTION
The cash portion of the Merger Consideration will be approximately 12% of
the aggregate amount of each payment and the remainder of the Merger
Consideration will be paid in shares of Toro Common Stock. Each Exmark
stockholder, however, will be allowed to elect to receive more or less than 12%
of his or her portion of the Merger Consideration in Cash (subject to certain
adjustments), with the remainder to be paid in the form of Toro Common Stock. In
the event that the aggregate of all cash elections exceed 12%, then all
percentages elected will be adjusted downward proportionately. The percentage of
the Holder's Merger Consideration each Exmark stockholder elects, or is deemed
to have elected, to receive in cash shall be referred to herein as the "Cash
Election." Exmark stockholders will receive a cash election form to indicate
their desired percentage cash. See "THE MERGER--Cash Election."
17
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EMPLOYMENT AGREEMENTS. In connection with the Merger Agreement, Toro has
entered into employment and noncompete agreements with certain employees and
officers of Exmark. In connection therewith, H. John Smith and Ray Rickard will
receive cash Signing Bonuses from Toro in the aggregate amount of $2,075,000
pursuant to new employment agreements, which contain noncompete covenants. H.
John Smith is a director and the President of Exmark. Ray Rickard is a director
and the Executive Vice President of Exmark. In approving the Signing Bonuses,
Exmark's Board of Directors considered Exmark's financial performance during the
tenure of Messrs. Smith and Rickard and the anticipated reduction to their
overall compensation that will occur as a result of the Merger. Stockholder
approval of such signing bonuses is being requested so that such bonuses will
not constitute "excess parachute payments" pursuant to Section 280G of the
Internal Revenue Code of 1986, as amended. If treated as excess parachute
payments, the bonuses would not be deductible and Messrs. Smith and Rickard and
each would be subject to a 20% excise tax on that portion of such payments that
is greater than his respective average income during the past five years.
Stockholder approval of the Signing Bonuses is a condition to consummation of
the Merger. See "THE MERGER--Interests of Certain Persons in the Merger" and
"--Excess Parachute Payments."
STOCKHOLDER AGREEMENTS. Pursuant to the Stockholder Agreements, certain
officers and directors of Exmark, in their individual capacities as
stockholders, have agreed to vote all shares of Exmark Common Stock and Exmark
Preferred Stock owned by them for approval and adoption of the Merger Agreement
and have granted to Toro irrevocable proxies so to vote their respective shares.
See "THE MERGER-- Stockholder Agreements" and "--Interests of Certain Persons in
the Merger."
ISSUANCE OF CLASS B STOCK TO INSIDERS. Prior to the Effective Time and
subject to approval of the New Articles of Incorporation by the requisite vote
of the Holders, Exmark will issue 10,000 shares of Exmark Class B Stock to
certain officers, directors and employees of Exmark pursuant to the exercise of
certain previously issued stock purchase rights, including (1) 2,000 shares to
each of H. John Smith, Ray Rickard and Roger Smith, (2) 210 shares to each of
Merrell Clark and Robert Martin and (3) 120 shares to each of Gary Kuck and
Keith Dietzen. Roger Smith is a director and the Secretary of Exmark and a
Director and the President of Holiman. Merrell Clark is a director and the
Treasurer of Exmark. Robert Martin, Gary Kuck and Keith Dietzen are directors of
Exmark. Each share of Exmark Class B Stock will receive the Class B Initial Per
Share Payment Consideration (I.E., one-tenth of a share of Toro Common Stock)
and one Class B Contingent Payment Right. If the Class B Contingent is maximized
and subject to Toro's Offset Right, each Class B Contingent Payment Right would
entitle the holder thereof to receive cash and Toro Common Stock with a face
value of $1,400. As a result, Messrs. Smith, Rickard and Smith each may receive
up to approximately $2,810,000 in exchange for their respective shares of Exmark
Class B Stock. Messrs. Clark and Martin each may receive up to approximately
$295,000 in exchange for their respective shares of Exmark Class B Stock.
Messrs. Kuck and Dietzen each may receive up to approximately $175,000 in
exchange for their respective shares of Exmark Class B Stock. See "THE
MERGER--Interests of Certain Persons in the Merger."
ROGER SMITH; HOLIMAN ACQUISITION. As a condition to the Merger, Exmark must
first acquire all of the outstanding capital stock of Holiman. Roger Smith, a
Director of Exmark and a major stockholder of Exmark, is the owner of all of the
outstanding shares of Holiman. As a result of Exmark's acquisition of Holiman,
Roger Smith will receive 3,689 shares of Exmark Class C Stock, which represents
approximately $2,125,000 of the total Initial Payment Consideration. See "THE
MERGER--Acquisition of Holiman" and "--Interests of Certain Persons in the
Merger."
The Board of Directors of Exmark was aware of the interests of each of the
above described persons in the Merger and considered them, among other matters,
in approving the Merger Agreement and the transactions contemplated thereby.
18
STOCKHOLDER AGREEMENTS
Concurrently with the execution of the Merger Agreement, H. John Smith, Ray
Rickard, Roger T. Smith, Merrell F. Clark and Robert F. Martin, who collectively
had record ownership of approximately 14,015 shares of Exmark Common Stock and
550 shares of Exmark Preferred Stock as of the Record Date (representing
approximately 63.8% of the total voting power of the outstanding shares of
Exmark Common Stock and Exmark Preferred Stock on such date), entered into
separate Stockholder Agreements with Toro. Pursuant to the Stockholder
Agreements, such stockholders have agreed to vote, and have granted to Toro an
irrevocable proxy to vote, such shares in favor of approval of the Merger
Agreement, the Merger, the New Articles of Incorporation and the Signing
Bonuses. In addition, under the Stockholder Agreements, such stockholders have
agreed to vote, and have granted to Toro an irrevocable proxy to vote, such
shares against approval of any proposal made in opposition to or competition
with consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization, with any party other than Toro and
against any liquidation or winding up of Exmark. The Stockholder Agreements,
other than the provisions relating to the grant of an irrevocable proxy,
terminate on the earlier to occur of (1) the Effective Time or (2) such date and
time as the Merger Agreement shall be terminated pursuant to Article IX of the
Merger Agreement. See "THE MERGER--Stockholder Agreements."
ACQUISITION OF HOLIMAN
As a condition to the Merger, Exmark has entered into a stock-for-stock
exchange agreement (the "Holiman Agreement") with Roger Smith to acquire
Holiman, the primary manufacturer's representative of Exmark. Roger Smith is the
sole owner of all of the issued and outstanding capital stock of Holiman. Under
the terms of the Holiman Agreement, Roger Smith will receive 3,689 shares of
Exmark Class C Stock, which represents approximately $2,125,000 of the total
Initial Payment Consideration. See "THE MERGER--Effects of the Merger" and
"--Payment of Merger Consideration." Mr. Smith, as the sole holder of Exmark
Class C Stock is not entitled to receive Contingent Payment Rights. Under the
terms of the Holiman Agreement, the net book value of Holiman must be not less
than $200,000. During Exmark's fiscal year ended August 31, 1997, Exmark paid
Holiman $2,217,402 in commissions. See "THE MERGER--Contingent Payment Rights."
See "THE MERGER--Acquisition of Holiman" and "--Interests of Certain Persons in
the Merger."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting.
See "THE MERGER-- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will qualify as a reorganization under the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
If the Merger qualifies as a reorganization under the Code, (1) no gain or loss
will be recognized by the stockholders of Exmark with respect to the shares of
Toro Common Stock received in the Merger, and (2) gain, if any, but not loss,
will be recognized by any Exmark stockholder upon the exchange of Exmark capital
stock for cash in the Merger. See "THE MERGER--Certain Federal Income Tax
Consequences."
DISSENTERS' RIGHTS
All record holders of Exmark securities as of the Record Date have the right
to dissent from approval and adoption of the Merger Agreement and, if the Merger
is consummated, to receive payment of the fair value of their shares (determined
in accordance with Nebraska law) upon compliance with the provisions of Sections
21-20,137 to 21-20,150 of the Nebraska Business Corporation Act, a summary of
which is
19
provided in "THE MERGER--Dissenters' Rights" and the full text of which is
attached to this Proxy Statement/Prospectus as Exhibit B. All holders of Exmark
securities are urged to read Sections 21-20,137 to 21-20,150 carefully. The
value determined for such dissenters' rights could be more than, the same as, or
less than the value of the consideration to be received under the Merger
Agreement by Exmark stockholders who do not dissent from the Merger.
REGULATORY APPROVALS
Consummation of the Merger was conditioned upon, among other things, the
expiration or termination of all applicable waiting periods pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). The HSR Act requires that parties to certain acquisitions file
notifications with the federal antitrust authorities and observe a waiting
period prior to consummation. The waiting period under the HSR Act expired on
August 13, 1997. See "THE MERGER--Regulatory Approvals."
THE MERGER AGREEMENT
The following is a summary of certain other material provisions of the
Merger Agreement. The following descriptions do not purport to be complete and
are qualified in their entirety by reference to the Merger Agreement included as
Exhibit A to this Proxy Statement/Prospectus. All stockholders are urged to read
the Merger Agreement in its entirety. See also "THE MERGER" and "THE MERGER
AGREEMENT."
LIMITATIONS ON NEGOTIATIONS BY EXMARK
Prior to the termination of the Merger Agreement, Exmark is prohibited from
soliciting, initiating or encouraging submission of any proposal or offer from
any person, group or entity relating to any acquisition of the capital stock or
business of Exmark, or all or a material portion of the assets of Exmark or
other similar transaction or business combination involving the business of
Exmark. Likewise, Exmark may not participate in any negotiations regarding, or
furnish to any other person any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage,
any effort or attempt by any other person or entity to do or seek any of the
above actions. Notwithstanding the foregoing, Exmark and its board of directors
may, pursuant to their fiduciary duties and subject to certain limitations,
engage in negotiations with a third party in response to a bona fide proposal
regarding such transactions and combinations. See "THE MERGER
AGREEMENT--Limitations on Negotiations by Exmark."
CONDITIONS TO THE MERGER
The obligations of Toro and Exmark to effect the Merger are subject to the
satisfaction of certain conditions, including among others: effectiveness of the
Registration Statement, stockholder approval of the Merger Agreement and the
Merger, the absence of any action, proceeding or injunction prohibiting
consummation of the Merger, the receipt of necessary regulatory and other
approvals and consents, continuing accuracy of representations and warranties in
the Merger Agreement, performance or compliance with the agreements and
covenants in the Merger Agreement and receipt by Toro and Exmark of various
agreements. See "THE MERGER AGREEMENT--Conditions."
OFFSET RIGHT
Pursuant to the Merger Agreement, Toro will have the right to offset certain
losses, liabilities, deficiencies, damages, penalties, expenses or costs against
the Holdback Amount and the Contingent Payments, if any, that Toro or the
Surviving Corporation or their affiliates, officers, directors, employees or
agents may incur as a result of certain misrepresentations of Exmark contained
in, or for breaches by
20
Exmark of certain provisions of, the Merger Agreement or certain related
agreements. The Offset Right for any breach of a representation of Exmark in the
Merger Agreement or for certain environmental losses is subject to a one-time
deductible of at least $50,000 and expires on the later to occur of (1) the date
on which the 1999 Contingent Payment, if any, is fully paid and (2) the date on
which the last payment of the Holdback Amount is made, subject to extension for
any pending claims. An individual loss shall not give rise to an Offset Right
unless such loss equals or exceeds $10,000. Notwithstanding anything to the
contrary in the preceding sentence, the limitation set forth in such sentence
shall not apply to any loss that relates to a claim or action that arises from
the same or substantially the same facts as one or more other claims or actions
and the aggregate amount of losses so arising is at least $10,000. See "THE
MERGER AGREEMENT--Offset Right."
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES
The Merger Agreement may be terminated at any time prior to the Effective
Time: (1) by mutual consent of Toro, Merger Subsidiary and Exmark; (2) by Toro
or Exmark in the event that, among other things, (a) there has been a material
misrepresentation, breach of warranty or breach of covenant on the part of the
other in the representations, warranties and covenants set forth in the Merger
Agreement; (b) there shall be a final nonappealable order of a federal or state
court in effect preventing the consummation of the Merger, or there shall be any
action taken, or any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental authority or
agency, which would make the consummation of the Merger illegal; (c) there shall
be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
authority or agency which would prohibit Exmark's or Toro's ownership or
operation of all or a portion of Exmark's business or compel Toro or Exmark to
dispose of or hold separate all or a portion of the business or assets of Exmark
or Toro as a result of the Merger; (d) the transactions contemplated by the
Merger Agreement or the Articles of Merger have not been consummated on or
before January 31, 1998; or (e) if the stockholders of Exmark shall have failed
to approve the Merger Agreement, the Merger, the New Articles of Incorporation
and the Signing Bonus; or (3) by Toro, if (a) more than 8% of the outstanding
shares of Exmark Common Stock and Exmark Preferred Stock shall be qualified to
be Dissenting Shares or (b) after the date of the Merger Agreement, there shall
have been a material adverse change in the assets, properties, financial
condition, operating results or business condition of Exmark which shall
continue to constitute such a material adverse change. In addition, the Merger
Agreement may be terminated by Toro if the Initial Toro Share Price is less than
$30 per share or terminated by Exmark if the Initial Toro Share Price exceeds
$44 per share. See "THE MERGER AGREEMENT--Termination."
In the event of termination of the Merger Agreement by either Toro or
Exmark, under certain circumstances, Exmark could be required to pay to Toro a
termination fee of $1,500,000. See "THE MERGER AGREEMENT--Termination Fees."
21
SUMMARY CONSOLIDATED FINANCIAL DATA OF TORO
Set forth below is selected consolidated historical financial information of
Toro derived from the unaudited consolidated financial statements of Toro for
the nine months ended August 1, 1997 and August 2, 1996, the audited
consolidated financial statements of Toro for the fiscal year ended October 31,
1996, the three months ended October 31, 1995 and the years ended July 31, 1995,
1994, 1993 and 1992. In November 1995, Toro changed its fiscal year from July 31
to October 31. The information should be read in conjunction with the
consolidated financial statements of Toro and related notes thereto, included in
Exhibit D or included elsewhere in this Proxy Statement/Prospectus. In the
opinion of Toro's management, the operating results for the nine months ended
August 1, 1997 and August 2, 1996 reflect all adjustments (consisting of normal
recurring accruals) necessary to present fairly the information contained
therein. Results for the nine months ended August 1, 1997 are not necessarily
indicative of the results for the full year. See "CERTAIN INFORMATION CONCERNING
TORO" and the documents included in Exhibit D.
NINE MONTHS ENDED THREE
YEAR MONTHS YEARS ENDED
---------------------- ENDED ENDED ------------------------------------------
8/1/97(1) 8/2/96 10/31/96 10/31/95 7/31/95 7/31/94 7/31/93 7/31/92
----------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $ 810,434 $ 732,712 $ 930,909 $ 192,278 $ 932,853 $ 794,341 $ 684,324 $ 643,748
Cost of sales.......... 517,695 466,689 589,186 120,575 598,275 506,816 445,495 419,138
----------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......... 292,739 266,023 341,723 71,703 334,578 287,525 238,829 224,610
Selling, general and
administrative
expense.............. 231,255 210,273 278,284 65,048 269,757 244,943 203,377 223,166
Restructuring
expense.............. -- -- -- -- -- -- -- 24,900
----------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
operations........... 61,484 55,750 63,439 6,655 64,821 42,582 35,452 (23,456)
Interest expense....... 15,408 10,858 13,590 2,532 11,902 13,562 17,150 18,726
Other (income)
expense.............. (5,957) (7,642) (10,331) (2,483) (8,193) (8,030) (3,053) (7,279)
----------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss)
before income taxes
and extraordinary
loss............... 52,033 52,534 60,180 6,606 61,112 37,050 21,355 (34,903)
Provision for income
taxes................ 20,553 20,751 23,771 2,609 24,445 14,820 8,315 (11,150)
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)
before
extraordinary
loss............... 31,480 31,783 36,409 3,997 36,667 22,230 13,040 (23,753)
Extraordinary loss, net
of income tax benefit
of $1,087............ (1,663) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings
(loss)............. $ 29,817 $ 31,783 $ 36,409 $ 3,997 $ 36,667 $ 22,230 $ 13,040 $ (23,753)
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)
per common and
common equivalent
share before
extraordinary
loss............... $ 2.53 $ 2.52 $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05 $ (1.98)
Extraordinary loss,
net of income tax
benefit............ (0.13) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per
common and common
equivalent share..... $ 2.40 $ 2.52 $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05 $ (1.98)
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital........ $ 221,094 $ 197,896 $ 197,144 $ 165,086 $ 168,951 $ 175,783 $ 193,870 $ 210,430
Total assets........... 704,970 531,930 496,877 472,653 468,315 443,639 419,203 421,310
Short-term debt
(including current
portion of long-term
debt)................ 95,365 83,973 41,375 56,909 38,625 20,300 15,000 --
Long-term debt (less
current portion)..... 177,650 53,046 53,015 53,365 64,935 81,025 122,970 164,100
Common shareholders'
equity............... 233,667 209,562 213,567 190,892 185,471 168,652 144,601 132,614
OTHER DATA:
Dividends per common
share................ $ 0.36 $ 0.36 $ 0.48 $ 0.12 $ 0.48 $ 0.48 $ 0.48 $ 0.48
- ------------------------
Notes:
(1) Toro's consolidated financial statements include the results of operations
of the James Hardie Irrigation Group from the date of acquisition, December
2, 1996.
22
SUMMARY FINANCIAL DATA OF EXMARK
Set forth below is selected historical financial information of Exmark
derived from the audited financial statements of Exmark for the fiscal years
ended August 31, 1997, 1996, 1995, 1994 and 1993. The information should be read
in conjunction with the Management's Discussion and Analysis of Exmark, the
financial statements of Exmark and related notes thereto included elsewhere
herein. See "CERTAIN INFORMATION CONCERNING EXMARK," "SELECTED FINANCIAL DATA OF
EXMARK," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXMARK," and "FINANCIAL
STATEMENTS OF EXMARK."
YEARS ENDED
-----------------------------------------------------
8/31/97 8/31/96 8/31/95 8/31/94 8/31/93
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.................................................... $ 53,420 $ 38,372 $ 25,265 $ 19,375 $ 14,680
Cost of goods sold....................................... 35,687 25,217 16,535 12,372 9,585
--------- --------- --------- --------- ---------
Gross profit......................................... 17,733 13,155 8,730 7,003 5,095
Operating expenses....................................... 12,614 9,819 6,518 5,317 4,022
--------- --------- --------- --------- ---------
Earnings from operations............................. 5,119 3,336 2,212 1,686 1,073
Interest expense......................................... 1,155 1,057 776 553 440
Other income, net........................................ (324) (232) (177) (113) (82)
--------- --------- --------- --------- ---------
Earnings before income taxes......................... 4,288 2,511 1,613 1,246 715
Provision for income taxes............................... 1,492 846 550 488 252
--------- --------- --------- --------- ---------
Net earnings........................................... $ 2,796 $ 1,665 $ 1,063 $ 758 $ 463
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net earnings per common and common equivalent
share.............................................. $ 62.01 $ 36.95 $ 24.47 $ 17.36 $ 10.61
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital.......................................... $ 4,380 $ 3,795 $ 2,440 $ 2,842 $ 2,489
Total assets............................................. 15,667 9,966 8,466 6,919 6,156
Short-term debt (including current portion of long-term
debt).................................................. 1,712 371 963 356 276
Long-term debt (less current portion).................... 415 934 1,308 1,690 2,052
Stockholders' equity..................................... 9,167 5,742 4,117 3,071 2,332
OTHER DATA:
Dividends per common share............................... $ 1.50 $ 1.00 $ 0.75 $ 0.50 $ --
23
MARKET PRICE DATA
Toro Common Stock is listed on the NYSE under the symbol "TTC." There is no
public market for shares of Exmark capital stock. On June 3, 1997, the last full
trading day before Toro and Exmark announced the execution of the letter of
intent relating to the Merger, the closing price per share of Toro Common Stock
was $37.25, and on October 22, 1997, the closing price per share of Toro Common
Stock was $43.125. Stockholders of Exmark are advised to obtain current market
quotations for Toro Common Stock. No assurance can be given as to the market
price of Toro Common Stock at any time before the Effective Time or as to the
market price of Toro Common Stock at any time thereafter.
The following table sets forth the Toro Initial Share Price of $41.4167,
which is based upon the average closing price per share of Toro Common Stock as
reported on the NYSE for the 30 trading days ending on October 31, 1997. This
amount is subject to change if the Merger is not consummated on or prior to
November 30, 1997. In the event the Merger is not consummated prior to November
30, the Initial Toro Share Price would be equal to the average closing price per
share of Toro Common Stock as reported on the NYSE for the 30 trading days
ending on the third trading day immediately preceding the Effective Date of the
Merger. The following table also sets forth the "equivalent per share price" for
shares of Exmark capital stock (as defined below). The "equivalent per share
price" of the Exmark capital stock shown below equals the sum of (a) the Toro
Initial Share Price of $41.4167 (which price is subject to change if the Merger
is not consummated prior to November 30, 1997) multiplied by the number derived
by dividing $23,785,000 (I.E., the Initial Payment Fund, which is equal to
$28,100,000 less the Holdback Amount and the Stockholders' Representatives
Expense Fund) by the sum of the number of shares of Exmark Common Stock, the
number of shares of Exmark Class B Stock, and four times the number of shares of
Exmark Preferred Stock, which in each case are issued and outstanding
immediately prior to the Effective Time, other than Canceled Shares. The effects
of any Contingent Payments have not been included. See "THE MERGER--Effect of
the Merger."
EQUIVALENT
EQUIVALENT EQUIVALENT PER SHARE
PER SHARE PER SHARE PRICE FOR
PRICE PRICE FOR EXMARK
FOR EXMARK EXMARK PREFERRED
MARKET PRICE PER SHARE COMMON STOCK CLASS C STOCK STOCK
- -------------------------------------------- -------------- -------------- --------------
$41.416 (Initial Toro Share Price).......... $ 487.56 $ 487.56 $ 1,950.24
$37.25 (at June 3, 1997).................... $ 487.56 $ 487.56 $ 1,950.24
The following table sets forth the market price per share of Toro Common
Stock on each of June 3, 1997 and October 22, 1997 and the equivalent per share
price of the Exmark Class C Stock, which equals one-tenth of the price per share
of Toro Common Stock.
EQUIVALENT
PER SHARE
PRICE
TORO FOR EXMARK
MARKET PRICE PER SHARE AT: COMMON STOCK CLASS B STOCK
- ------------------------------------------------------------- -------------- --------------
June 3, 1997................................................. $ 37.25 $ 3.725
October 22, 1997............................................. $ 43.125 $ 4.3125
Apart from the publicly disclosed information concerning Toro, Toro does not
know what factors account for changes in the market price of its stock. Exmark
stockholders are advised to obtain current market quotations for Toro Common
Stock. As a result, in the event the market price of Toro Common Stock decreases
compared to the Initial Toro Share Price, the value of the Toro Common Stock to
be received in the Merger in exchange for Exmark capital stock would decrease.
On the other hand, in the event the market price of Toro Common Stock increases
compared to the Initial Toro Share Price, the value of the Toro Common Stock to
be received in the Merger in exchange for Exmark capital stock would increase.
See "THE MERGER--Effect of the Merger" and "--Payment of Merger Consideration."
24
COMPARATIVE UNAUDITED PER COMMON SHARE DATA
The following table presents selected comparative unaudited per common share
data with respect to Toro Common Stock and Exmark Common Stock on a historical
basis and a pro forma combined basis, giving effect to the Merger using the
purchase method of accounting. This information is derived from the historical
financial statements and the related notes thereto included in Exhibit D or
included elsewhere in this Proxy Statement/Prospectus. The per share data set
forth below are presented for informational purposes only and are not
necessarily indicative of the results of the future operations of the combined
entity or the actual results that would have been achieved had the Merger been
consummated at the dates assumed in preparing such data.
The pro forma information that follows was prepared assuming that the
Initial Payment of an estimated $28,100,000 will be comprised of cash of
approximately $3,372,000 (I.E., 12% of the aggregate amount of the cash and
shares of Toro Common Stock to be paid by Toro that represent the total Initial
Per Share Payment Consideration) and approximately 597,054 shares of Toro Common
Stock, based upon a Toro Initial Share Price of $41.4167 per share, calculated
assuming the Merger is consummated on or before November 30, 1997 (I.E., the
average closing sale price of Toro Common Stock for the 30 trading days ending
October 31, 1997). The effects of any Contingent Payments have not been
included.
EXMARK TORO EXMARK
TORO COMMON STOCK COMMON STOCK COMMON STOCK
COMMON STOCK (HISTORICAL AT (HISTORICAL AT (HISTORICAL AT
(HISTORICAL AT AUGUST 31, PRO FORMA OCTOBER 31 AUGUST 31, PRO FORMA
AUGUST 1, 1997) 1997)(4) COMBINED(1) 1996) 1996)(4) COMBINED(2)
--------------- -------------- ------------- --------------- -------------- -------------
Book value per share: $ 19.29 $ 203.28 $ 20.67 $ 17.75 $ 142.65 $ 18.94
Cash dividends per share (3): 0.48 1.50 0.48 0.48 1.00 0.48
Earnings per share before
extraordinary loss: 2.90 62.01 2.88 2.90 36.95 2.79
Net earnings per share: 2.77 62.01 2.75 2.90 36.95 2.79
- ------------------------
(1) The pro forma combined book value per share was derived from the combined
historical book value of Toro at August 1, 1997 and Exmark at August 31,
1997, giving effect to the Merger using the purchase method of accounting.
The pro forma combined net income per share of Toro Common Stock is derived
from the combined historical net income of Toro for the year ended August 1,
1997 and the historical net income of Exmark for the fiscal year ended
August 31, 1997, including those pro forma adjustments appropriate to
reflect the Merger as though it had occurred at the beginning of the period
using the purchase method of accounting.
(2) The pro forma combined book value per share was derived from the combined
historical book value of Toro at October 31, 1996 and Exmark at August 31,
1996, giving effect to the Merger using the purchase method of accounting.
The pro forma combined net income per share of Toro Common Stock is derived
from the combined historical net income of Toro for the fiscal year ended
October 31, 1997 and the historical net income of Exmark for the fiscal year
ended August 31, 1996, including those pro forma adjustments appropriate to
reflect the Merger as though it had occurred at the beginning of the period
using the purchase method of accounting.
(3) Assumes no changes in cash dividends per share by Toro after the completion
of the Merger.
(4) Historical book value per common share is computed by dividing total
stockholders' equity by the total common shares outstanding assuming that
the participating preferred shares have been converted to common shares at a
ratio of 4 common shares for each preferred share.
25
THE SPECIAL MEETING
GENERAL; DATE, TIME AND PLACE
This Proxy Statement/Prospectus is being furnished to holders of Exmark
Common Stock and Exmark Preferred Stock in connection with the solicitation of
proxies by the Board of Directors of Exmark for use at a Special Meeting to be
held on , 1997 at Exmark's corporate offices, 2101 Ashland Avenue,
P.O. Box 808, Beatrice, Nebraska 68310, commencing at 9:00 A.M. local time, and
at any adjournment or postponement thereof.
This Proxy Statement/Prospectus and accompanying forms of proxy are first
being mailed to stockholders of Exmark on or about , 1997.
PURPOSES OF THE SPECIAL MEETING
At the Special Meeting, holders of Exmark Common Stock and Exmark Preferred
Stock will (1) consider and vote upon a proposal to approve the Merger Agreement
by and among Exmark, Toro and Merger Subsidiary, pursuant to which, among other
things, Merger Subsidiary will merge with and into Exmark, with Exmark
continuing as the Surviving Corporation, (2) consider and vote upon a proposal
to adopt the New Articles of Incorporation, which authorize the issuance of two
new classes of preferred stock of Exmark and clarify the four-to-one
distribution preference associated with the Exmark Preferred Stock, (3) consider
and vote upon a proposal to approve the payment in connection with the Merger of
the Signing Bonuses to H. John Smith and Ray Rickard, which bonuses shall be
paid by Toro pursuant to new employment agreements, which employment agreements
also include noncompete covenants, (4) consider and vote upon a proposal to
ratify the appointment of H. John Smith, Ray Rickard and Roger Smith as the
initial Stockholders' Representatives and (5) transact such other business as
may properly come before the Special Meeting. A copy of the Merger Agreement is
attached hereto as Exhibit A and is incorporated herein by reference.
EXMARK BOARD OF DIRECTORS' RECOMMENDATIONS
THE BOARD OF DIRECTORS OF EXMARK BELIEVES THAT THE MERGER IS IN THE BEST
INTEREST OF EXMARK AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS APPROVAL OF
THE MERGER AGREEMENT AND THE MERGER TO ITS STOCKHOLDERS.
FURTHERMORE, THE BOARD OF DIRECTORS OF EXMARK UNANIMOUSLY RECOMMENDS TO ITS
STOCKHOLDERS APPROVAL OF (1) THE PROPOSED NEW ARTICLES OF INCORPORATION, (2) THE
PAYMENT OF SIGNING BONUSES TO H. JOHN SMITH AND RAY RICKARD AND (3) THE
RATIFICATION OF THE APPOINTMENT OF H. JOHN SMITH, RAY RICKARD AND ROGER SMITH AS
THE INITIAL STOCKHOLDERS' REPRESENTATIVES.
RECORD DATE; SHARES ENTITLED TO VOTE; REQUIRED VOTE; QUORUM
Exmark has fixed , 1997 as the Record Date for the determination
of the holders of Exmark Common Stock and Exmark Preferred Stock entitled to
notice of and to vote at the Special Meeting. Only holders of record of Exmark
Common Stock and Exmark Preferred Stock on the Record Date will be entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there were
15,431 outstanding shares of Exmark Common Stock and 7,416 outstanding shares of
Exmark Preferred Stock entitled to vote, which shares were held in the aggregate
by approximately 52 holders of record. Each holder of record of Exmark Common
Stock and Exmark Preferred Stock on the Record Date is entitled to cast one vote
per share on all matters properly submitted for the vote of Exmark stockholders,
exercisable in person or by properly executed proxy, at the Special Meeting. The
presence, in person or by properly executed proxy, of the holders of a majority
of the voting power of the outstanding shares of Exmark
26
Common Stock and Exmark Preferred Stock entitled to vote at the Special Meeting,
considered as one class, is necessary to constitute a quorum at the Special
Meeting.
The Merger Agreement and the Merger are required to be approved by the
affirmative vote of the holders of two-thirds of the outstanding shares of
Exmark Common Stock and Exmark Preferred Stock, voting together as one class.
The New Articles of Incorporation are required to be approved by the affirmative
vote of the holders of a majority of each of the outstanding shares of Exmark
Common Stock and Exmark Preferred Stock, voting as a separate class. For tax
purposes, such that the Signing Bonuses will not be "excess parachute payments,"
the approval of the Signing Bonuses will require the affirmative vote of the
holders of 75% of the voting power of all disinterested Exmark stockholders.
Consequently, such approval will require the affirmative vote of the holders of
at least 75% of the number of outstanding shares of Exmark Common Stock and
Exmark Preferred Stock (excluding such shares held by H. John Smith and Ray
Rickard), voting together as one class. The ratification of the appointment of
the Stockholders' Representatives will require the affirmative vote of the
holders of a majority of the number of outstanding shares of Exmark Common Stock
and Exmark Preferred Stock, voting together as one class. If an executed proxy
card is returned and the stockholder has abstained from voting on any matter,
the shares represented by such proxy will be considered present at the meeting
for purposes of determining a quorum and for purposes of calculating the vote,
but will not be considered to have been voted in favor of such matter.
Accordingly, such abstentions will have the same effect as a vote against
adoption of such matter.
As of the Record Date, the executive officers and directors of Exmark
collectively owned, directly or indirectly, approximately 15,086 shares of
Exmark Common Stock and Exmark Preferred Stock combined (approximately 66.0% of
the voting power of outstanding Exmark Common Stock and Exmark Preferred Stock).
Pursuant to the Stockholder Agreements, certain stockholders, including certain
executive officers and directors, have agreed to vote, and have granted Toro an
irrevocable proxy to vote, all shares of Exmark Common Stock and Exmark
Preferred Stock collectively owned by them (approximately 14,015 shares of
Exmark Common Stock and 550 shares of Exmark Preferred Stock, representing
approximately 63.8% of the outstanding shares of Exmark Common Stock and Exmark
Preferred Stock as of the Record Date) for approval of the Merger Agreement, the
Merger and the other proposals described herein. See "THE MERGER--Stockholder
Agreements." As of the Record Date, neither Toro, its officers, its directors
nor any of their respective affiliates owned any shares of Exmark capital stock.
As of the Record Date, neither Toro nor any of its directors and executive
officers nor their affiliates beneficially owned any shares of Exmark Common
Stock or Exmark Preferred Stock.
PROXIES
All shares of Exmark Common Stock and Exmark Preferred Stock represented at
the Special Meeting by properly executed proxies received prior to or at the
Special Meeting, and not revoked, will be voted at the Special Meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such proxies will be voted for approval of the Merger Agreement
and the Merger and the other proposals described herein. If any other matters
are properly presented at the Special Meeting for consideration, including,
among other things, consideration of a motion to adjourn the Special Meeting to
another time or place, the persons named in the enclosed form of proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (1) filing
with the Secretary of Exmark, at or before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the proxy, (2)
duly executing a later-dated proxy relating to the same shares and delivering it
to the Secretary of Exmark before the taking of the vote at the Special Meeting
or (3) attending the Special Meeting and voting in person (although attendance
at the Special Meeting will not in and of itself constitute a revocation of a
27
proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Exmark Manufacturing Company Incorporated, 2101 Ashland
Avenue, P.O. Box 808, Beatrice, Nebraska 68310, Attention: Secretary, or hand
delivered to the Secretary of Exmark, at or before the taking of the vote at the
Special Meeting.
If a quorum is not obtained, or if fewer shares of Exmark Common Stock and
Exmark Preferred Stock are likely to be voted for approval of the Merger
Agreement and the Merger and the other proposals described herein than the
number required for approval, the Special Meeting may be adjourned for the
purpose of obtaining additional proxies or votes or for any other purpose, and,
at any subsequent reconvening of the Special Meeting, all proxies will be voted
in the same manner as such proxies would have been voted at the original
convening of the Special Meeting (except for any proxies which have theretofore
effectively been revoked or withdrawn), notwithstanding that they may have been
effectively voted on the same or any other matter at a previous meeting.
Pursuant to the Merger Agreement, all expenses of this solicitation,
including the cost of preparing and mailing this Proxy Statement/Prospectus,
will be borne by Toro, except that each party shall pay its own attorneys' and
accountants' fees. In addition to use of the mails, proxies may be solicited
personally or by telephone or facsimile by directors, officers and employees of
Exmark, who will not be specially compensated for such activities. See "THE
MERGER--Cash Election."
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF EXMARK
Set forth below are the names and addresses of and the number of shares held
as of the Record Date for the Special Meeting by (1) those persons who may be
deemed to own beneficially, whether directly or indirectly, 5% or more of the
outstanding shares of Exmark Common Stock and Exmark Preferred Stock, (2) each
executive officer or director of Exmark and (3) all directors and executive
officers of Exmark as a group. Each stockholder named below has sole voting and
investment power over the shares shown in the table, unless otherwise indicated.
TOTAL
COMMON AND
PREFERRED
EXMARK COMMON STOCK EXMARK PREFERRED STOCK STOCK
BENEFICIALLY
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1) OWNED
------------------------ ------------------------ -----------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF
NAME AND ADDRESS SHARES CLASS(1) SHARES CLASS(2) SHARES
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Virgil H. and Betty C. Greenley, ......................... -- --% 625 8.43% 625
Co-Trustees of the Virgil H. Greenley Trust
529 Cuesta Drive
Aptos, CA 95003
Mary Jane Holiman, ....................................... -- --% 625 8.43% 625
Trustee(4)
Francine Smith,
Trustee(5)
1720 Palm Street
Sebring, FL 33870
Francine Smith(5) ........................................ -- --% 500 6.74% 500
108 Valley View Road
New Cumberland, PA 17070
PERCENT OF
NAME AND ADDRESS CLASS(3)
- ---------------------------------------------------------- -----------
Virgil H. and Betty C. Greenley, ......................... 2.74%
Co-Trustees of the Virgil H. Greenley Trust
529 Cuesta Drive
Aptos, CA 95003
Mary Jane Holiman, ....................................... 2.74%
Trustee(4)
Francine Smith,
Trustee(5)
1720 Palm Street
Sebring, FL 33870
Francine Smith(5) ........................................ 2.19%
108 Valley View Road
New Cumberland, PA 17070
28
TOTAL
COMMON AND
PREFERRED
EXMARK COMMON STOCK EXMARK PREFERRED STOCK STOCK
BENEFICIALLY
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1) OWNED
------------------------ ------------------------ -----------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF
NAME AND ADDRESS SHARES CLASS(1) SHARES CLASS(2) SHARES
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
W.H. and Rosalie Tegtmeier ............................... -- --% 550 7.42% 550
1408 Oak
Beatrice, NE 68310
Robert Louis Zucker, Sr. ................................. -- --% 625 8.43% 625
6829 Greystone Drive
Raleigh, NC 27615
Doris J. (Lewis) Mehlig .................................. -- --% 400 5.39% 400
5507 Osage Drive
St. Joseph, MO 64503
H. John Smith,(6) ........................................ 2,044 13.25% 150 2.02% 2,194
Director and President
Ray Rickard,(6) .......................................... 1,914 12.40% 175 2.36% 2,089
Director and Executive
Vice President
Roger T. Smith,(6) ....................................... 4,225 27.38% -- --% 4,225
Director and Secretary
Merrell F. Clark,(6) ..................................... 2,935 19.02% -- --% 2,935
Director and Treasurer
Robert A. Martin,(6) ..................................... 2,897 18.77% 225 3.03% 3,122
Director
Keith Dietzen,(6) ........................................ 14 0.09% -- --% 14
Director
Gary Kuck,(6) ............................................ 24 0.16% 25 0.33% 49
Director
All Directors and Officers as a group (7 persons)......... 14,053 91.07% 575 7.75% 14,628
PERCENT OF
NAME AND ADDRESS CLASS(3)
- ---------------------------------------------------------- -----------
W.H. and Rosalie Tegtmeier ............................... 2.41%
1408 Oak
Beatrice, NE 68310
Robert Louis Zucker, Sr. ................................. 2.74%
6829 Greystone Drive
Raleigh, NC 27615
Doris J. (Lewis) Mehlig .................................. 1.75%
5507 Osage Drive
St. Joseph, MO 64503
H. John Smith,(6) ........................................ 9.60%
Director and President
Ray Rickard,(6) .......................................... 9.14%
Director and Executive
Vice President
Roger T. Smith,(6) ....................................... 18.49%
Director and Secretary
Merrell F. Clark,(6) ..................................... 12.85%
Director and Treasurer
Robert A. Martin,(6) ..................................... 13.66%
Director
Keith Dietzen,(6) ........................................ 0.06%
Director
Gary Kuck,(6) ............................................ 0.02%
Director
All Directors and Officers as a group (7 persons)......... 64.03%
- ------------------------
(1) Applicable percentage ownership is based on 15,431 shares of Exmark Common
Stock outstanding.
(2) Applicable percentage ownership is based on 7,416 shares of Exmark Preferred
Stock outstanding.
(3) Applicable percentage ownership is based on a combined total of 22,847
shares of Exmark Common Stock and Exmark Preferred Stock outstanding.
(4) Mary Jane Holiman is the mother-in-law of Roger Smith.
(5) Francine Smith is the wife of Roger Smith.
(6) Unless otherwise indicated, each officer's and director's mailing address is
2101 Ashland Avenue, P.O. Box 808, Beatrice, Nebraska 68310.
29
THE MERGER
THE FOLLOWING INFORMATION SUMMARIZES CERTAIN ASPECTS OF THE MERGER. THIS
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE EXHIBITS HERETO, INCLUDING THE MERGER AGREEMENT, WHICH IS
ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS EXHIBIT A AND IS INCORPORATED
HEREIN BY REFERENCE. ALL STOCKHOLDERS ARE URGED TO READ EXHIBIT A IN ITS
ENTIRETY. SEE ALSO "THE MERGER AGREEMENT."
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the
stockholders of Exmark and the other conditions to the Merger are satisfied (or
waived to the extent permitted), the Merger will be effected at the time and
date the Articles of Merger are filed with the Secretary of State of the State
of Nebraska. The Merger Agreement may be terminated prior to the Effective Time
by either Toro or Exmark in certain circumstances. See "THE MERGER
AGREEMENT--Termination" and "--Termination Fees."
EFFECTS OF THE MERGER
At the Effective Time, pursuant to the Merger Agreement, Merger Subsidiary
will be merged with and into Exmark, which will be the Surviving Corporation and
a wholly owned subsidiary of Toro. Upon consummation of the Merger, then, except
for Dissenting Shares and Canceled Shares, (1) each issued and outstanding share
of Exmark Common Stock will be converted into and become a right to receive (a)
the Initial Per Share Payment Consideration and (b) one Common/Preferred
Contingent Payment Right, (2) each issued and outstanding share of Exmark
Preferred Stock will be converted into and become a right to receive (a) four
times the Initial Per Share Payment Consideration and (b) four Common/Preferred
Contingent Payment Rights, (3) each issued and outstanding share of Exmark Class
B Stock will be converted into and become a right to receive (a) the Class B
Initial Per Share Payment Consideration and (b) one Class B Contingent Payment
Right, and (4) each issued and outstanding share of Exmark Class C preferred
stock will be converted into and become a right to receive the Initial Per Share
Payment Consideration. See "--Contingent Payment Rights."
As of the Record Date, there were 15,431 outstanding shares of Exmark Common
Stock and 7,416, outstanding shares of Exmark Preferred Stock. Immediately prior
to the Effective Time, there will be 15,431 outstanding shares of Exmark Common
Stock, 7,416 outstanding shares of Exmark Preferred Stock, 10,000 outstanding
shares of Exmark Class B Stock and 3,689 outstanding shares of Exmark Class C
Stock. The aggregate amount of cash and shares of Toro Common Stock to be
delivered by Toro with respect to all of such shares of Exmark Common Stock,
Exmark Preferred Stock, Exmark Class B Stock and Exmark Class C Stock in the
Merger will be approximately $28,100,000 with respect to the Initial Payment,
1,000 shares of Toro Common Stock with respect to the Class B Initial Payment
and, in addition, up to $28,000,000 if the Contingent Payments are maximized,
subject to Toro's Offset Right and any Actual Net Worth Adjustment (as defined
below). See "--Holdback Amount; Actual Net Worth Adjustment," "--Stockholders'
Representatives Expense Fund" and "THE MERGER AGREEMENT--Offset Right."
MANAGEMENT OF EXMARK AFTER THE MERGER
Exmark will be the Surviving Corporation in the Merger and will become a
wholly owned subsidiary of Toro upon consummation of the Merger. The directors
of Merger Subsidiary immediately prior to the Effective Time will be the initial
directors of the Surviving Corporation, and the officers of Exmark immediately
prior to the Effective Time will be the initial officers of the Surviving
Corporation. Notwithstanding the foregoing, the Stockholders' Representatives
may designate one Stockholders' Representative to serve as a director of the
Surviving Corporation until the end of the period from the Effective Time until
the earlier of the date on which Toro takes control of Exmark's operations
pursuant to Section 7.03 of the Merger Agreement or October 31, 1999 (the
"Contingent Payment Period"). See "--Toro Control." Furthermore, during the
Contingent Payment Period, Exmark will operate as a stand-alone entity.
30
During the Contingent Payment Period, Toro and Exmark intend to continue to
produce their products under separate brand names and to sell their products
through dual distribution channels. Based on this intention, each of Toro and
Exmark will have its own distinct distributor and dealer organizations and its
own marketing and pricing strategy. Further, each of Toro and Exmark intent to
continue to produce new but differentiated products, allowing each of their
respective product lines to adapt to the changing needs of the commercial
landscape segment of the industry. There will be similar products in both lines;
however, Toro's products will have distinctive Toro features and the Exmark
products will have distinctive Exmark features. The focus of this strategy is to
enhance the value of both brand names in the commercial landscape segment of the
industry.
SYNERGIES COUNCIL
In order to effectuate the transition of Exmark from a separate company to a
subsidiary of Toro following the Merger, the parties have agreed to form the
Synergies Council following the Effective Time, to be maintained until the end
of the Contingent Payment Period. The Synergies Council will consist of the
Stockholders' Representatives, who will represent the interests of the Holders,
and three executives of Toro who will represent the interests of Toro. The
Synergies Council will, among other things, approve proposed actions that Toro
and Exmark may want to take that would be inconsistent with certain covenants
contained in the Merger Agreement relating to the conduct of Exmark following
the acquisition or which materially affect Exmark as a stand-alone entity prior
to the end of the Contingent Payment Period. Further, the Synergies Council will
act as an inter-company management team and as a dispute resolution panel during
the Contingent Payment Period.
STOCKHOLDERS' REPRESENTATIVES
Pursuant to the terms of the Merger Agreement, the Holders of Shares will
ratify the appointment of H. John Smith, Ray Rickard and Roger Smith as the
initial Stockholders' Representatives. The Stockholders' Representatives will
act on behalf of the Holders with respect to the Merger after the Effective Time
and as such will assist in the calculation of the amount of Merger Consideration
to be paid by Toro in connection with the Merger, including the calculation of
the amount to be paid with respect to the Contingent Payments, and may sign and
deliver certificates and notices on behalf of such Exmark stockholders, among
other things described in the Merger Agreement. The Stockholders'
Representatives will be members of the Synergies Council. The number of
Stockholders' Representatives cannot exceed more than three persons. A majority
of the voting power of the Shares may remove existing Stockholders'
Representatives and elect Stockholders' Representatives to fill vacancies,
subject to the terms of the Merger Agreement. The Stockholders' Representatives
are authorized to take action by majority vote and to make and deliver any
certificate, notice, consent or instrument required or permitted to be made or
delivered under the Merger Agreement, including without limitation any such
actions with respect to the Initial Per Share Payment Consideration and the
Contingent Payment Rights. The Stockholders' Representatives also will act as
members of the Synergies Council.
TORO CONTROL
Upon consummation of the Merger, Exmark will become a wholly owned
subsidiary of Toro. Notwithstanding the foregoing, Exmark will be operated as a
stand-alone entity and the day-to-day management of the business of Exmark
during the Contingent Payment Period will be overseen by Exmark's existing
management and their successors, subject to certain limitations described in the
Merger Agreement. See "--Management of Exmark After the Merger." However, if
Exmark fails to earn REBIT equal to or greater than the REBIT shown below for
two successive fiscal quarters, Toro shall have the
31
option to give notice to the Stockholders' Representatives of Toro's intent to
take full control of Exmark's operations and, immediately thereafter, to take
full control of Exmark's operations:
QUARTER ENDING QUARTER ENDING QUARTER ENDING QUARTER ENDING
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
-------------- -------------- -------------- --------------
Fiscal 1998................ $ 1,200,000 $ 1,740,000 $ 700,000 $ 500,000
Fiscal 1999................ $ 1,500,000 $ 2,160,000 $ 875,000 $ 620,000
For purposes of determining the REBIT, REBIT for each immediately preceding
fiscal quarter earned in excess of the applicable threshold amount may be added
to the next succeeding fiscal quarter's REBIT. In the event Toro takes control
of Exmark's operations, REBIT and CAGR (as defined in "--Contingent Payment
Rights.") accruing after such date will not be taken into account in computing
the amount of any Contingent Payments to be made after such date.
HOLDBACK AMOUNT; ACTUAL NET WORTH ADJUSTMENT
The Escrow Agent shall place the Holdback Amount (I.E., 15% of the Initial
Payment Fund) in escrow. The Holdback Amount will be held for purposes of, among
other things, satisfying Toro's Offset Right, under which Toro is entitled to
recoveries for certain losses, liabilities, deficiencies, damages, penalties,
expenses or costs Toro or its affiliates officers, directors, employees or
agents may suffer in connection with the Merger. See "THE MERGER
AGREEMENT--Offset Right." Subject to Toro's Offset Right and the Actual Net
Worth Adjustment, if any, two-thirds of the cash and two-thirds of the shares of
Toro Common Stock included in the Holdback Amount shall be delivered by the
Paying Agent to the Holders of Exmark Common Stock, Exmark Preferred Stock and
Exmark Class C Stock, as part of their respective Initial Payment Consideration
and based on their Cash Elections, concurrently with the payment of the 1999
Contingent Payment (approximately December 31, 1999) and the remainder will be
delivered by the Paying Agent to such Holders on or before December 31, 2000,
subject to delay pending the outcome of any then-pending dispute regarding any
such offset amount.
The Holdback Amount also is subject to a net worth adjustment. Prior to the
Effective Time, Toro and Exmark will estimate the net worth (total assets minus
total liabilities) of Exmark as of the Effective Time. In the event that such
estimate is less than $8,243,000, the difference will, in effect, be subtracted
from the Initial Payment Fund and added to the Holdback Amount. As a result, the
Holdback Amount may be greater than 15% of the Initial Payment Fund. Within 90
days after the Effective Time, the parties will prepare a statement of the book
value of Exmark's total assets as of the Effective Time, minus Exmark's total
liabilities as of the Effective Time (the "Actual Net Worth"). The Actual Net
Worth Adjustment means the amount, determined on a dollar-for-dollar basis, by
which the Actual Net Worth of Exmark is less than $8,243,000. If the Actual Net
Worth is equal to or greater than $8,243,000, then the Actual Net Worth
Adjustment shall be zero. If the Actual Net Worth is less than $8,243,000, then
the Actual Net Worth Adjustment shall equal the difference, and Toro shall be
paid from the Holdback Amount cash and shares of Toro Common Stock in an amount
equal to such difference, plus interest and dividends thereon. Such estimate and
the Actual Net Worth Adjustment will be determined without giving effect to the
acquisition of Holiman by Exmark.
STOCKHOLDERS' REPRESENTATIVES EXPENSE FUND
The Escrow Agent also will deduct $100,000, in the form of $12,000 in cash
and $88,000 worth of shares of Toro Common Stock (based on the Initial Toro
Share Price), from the Initial Payment Fund and will hold such cash and shares
in escrow as the Stockholders' Representatives Expense Fund. This fund will be
used to pay the expenses of the Stockholders' Representatives that they may
incur in connection with their actions as Stockholders' Representatives,
including legal, banking and accounting fees. Subject to any deduction for
Stockholders' Representatives expenses, the Stockholders' Representatives
Expenses Fund will be paid to the Holders of Exmark Common Stock, Exmark
Preferred Stock and Exmark Class C Stock,
32
as part of their respective Initial Payment Consideration and based on their
Cash Elections, on or before December 31, 2000.
PAYMENT OF MERGER CONSIDERATION
Subject to Toro's Offset Right and the escrow of the Holdback Amount and the
Stockholder's Representatives Expense Fund, the Merger Consideration will be
paid in the form of cash and shares of Toro Common Stock to the Holders as
follows: the Initial Payment, the Class B Initial Payment, the 1998 Contingent
Payment, the 1999 Contingent Payment, the Holdback Payment and the payment of
any remainder of the Stockholders' Representatives Expense Fund. The Initial
Payment, consisting of the Initial Per Share Payment Consideration, will be made
as promptly as practicable after the Effective Time and following surrender of
shares of Exmark Common Stock, Exmark Preferred Stock or Exmark Class C Stock.
The Class B Initial Payment, consisting of the Class B Initial Per Share Payment
Consideration, will be made as promptly as practicable after the Effective Time
and following surrender of shares of Exmark Class B Stock. The 1998 Contingent
Payment, consisting of cash and shares of Toro Common Stock payable by Toro
pursuant to the Contingent Payment Rights, will be paid as promptly as
practicable following the later to occur of (1) December 31, 1998 or (2) 10 days
after the amount of the 1999 Contingent Payment has been determined by Toro and
the Stockholders' Representatives. The 1999 Contingent Payment, consisting of
cash and shares of Toro Common Stock payable by Toro pursuant to the Contingent
Payment Rights, will be paid as promptly as practicable following the later to
occur of (1) December 31, 1999 or (2) 10 days after the amount of the 1999
Contingent Payment has been determined by Toro and the Stockholders'
Representatives. Subject to any offset pursuant to Toro's Offset Right,
two-thirds of the cash and shares of Toro Common Stock initially included in the
Holdback Amount shall be paid concurrently with the 1999 Contingent Payment and
the remainder will be paid on or before December 31, 2000. Subject to claims for
payment of the expenses of the Stockholders' Representatives, the remainder of
the Stockholders' Representatives Expense Fund will be paid on or before
December 31, 2000. The cash portion of the Merger Consideration will be
approximately 12% of the aggregate amount of each payment and the remainder of
the Merger Consideration will be paid in shares of Toro Common Stock. See
"--Holdback Amount; Actual Net Worth Adjustment," "--Stockholders'
Representatives Expense Fund," "Cash Election" and "--Contingent Payment
Rights."
The aggregate amount of cash and shares of Toro Common Stock to be delivered
by Toro with respect to the total Initial Per Share Payment Consideration to be
exchanged for the Exmark Common Stock, Exmark Preferred Stock and Exmark Class C
Stock will be equal to $28,100,000 (I.E., $23,785,000 after deducting the amount
to be held in escrow for the Holdback Amount and the Stockholders'
Representatives Expense Fund), certain offsets and other adjustments described
herein). The Initial Per Share Payment Consideration shall be cash and Toro
Common Stock in an amount equal to a quotient, the numerator of which is
$28,100,000 and the denominator of which is the sum of (1) the number of shares
of Exmark Common Stock, (2) the number of shares of Exmark Class C Stock and (3)
four times the number of shares of Exmark Preferred Stock, which in all cases
are issued and outstanding immediately prior to the Effective Time, other than
Canceled Shares. For purposes of calculating the number of shares of Toro Common
Stock included in the Initial Payment Consideration, the value per share of Toro
Common Stock shall be the Initial Toro Share Price. Therefore, if the Merger is
consummated on or prior to November 30, 1997, the Initial Toro Share Price would
be $41.4167 (I.E., the average closing price per share of Toro Common Stock as
reported on the NYSE for the 30 trading days ending on October 31, 1997) and, if
there are no Dissenting Shares nor Canceled Shares, the Initial Per Share
Consideration would be $506.89, consisting of 12.239 shares of Toro Common Stock
and cash equal to $69.12, in the absence of a Cash Election to receive more or
less of the Merger Consideration in cash. Based on this example, after
subtracting the Holdback Amount and the Stockholders' Representatives Expense
Fund, each share of Exmark Common Stock and each share of Exmark Class C Stock
exchanged in the Merger would receive 10.359 shares of Toro Common Stock and
cash equal to $58.51 pursuant to the Initial Payment and each share of Exmark
Preferred Stock exchanged in the Merger would receive 41.436 shares of Toro
Common
33
Stock and cash equal to $234.04 pursuant to the Initial Payment. However, in the
event the Merger is not consummated prior to November 30, the Initial Toro Share
Price would be calculated differently (I.E., the average closing price per share
of Toro Common Stock as reported on the NYSE for the 30 trading days ending on
the third trading day immediately preceding the Effective Date of the Merger)
and, consequently, may be a different amount and may result in the payment of
more or less shares of Toro Common Stock pursuant to the Initial Per Share
Consideration. See "--Payment of Merger Consideration" "--Holdback Amount;
Actual Net Worth Adjustment," "--Stockholders' Representatives Expense Fund" and
"THE MERGER AGREEMENT--Offset Right."
Each Common/Preferred Contingent Payment Right and Class B Contingent
Payment Right entitles the holder thereof to receive cash and shares of Toro
Common Stock based on the performance of the Surviving Corporation from November
1, 1997 until October 31, 1999, subject to certain limitations and offsets. The
maximum amount of cash and shares of Toro Common Stock that may be paid by Toro
with respect to the Common/Preferred Contingent Payment Rights may not exceed
$14,000,000 (subject to certain offsets and other adjustments described in the
enclosed Proxy Statement/Prospectus). Similarly, the maximum amount of cash and
shares of Toro Common Stock that may be paid by Toro with respect to the Class B
Contingent Payment Rights may not exceed $14,000,000 (subject to certain offsets
and other adjustments described in the enclosed Proxy Statement/Prospectus). For
purposes of calculating the number of shares of Toro Common Stock included in
the 1998 Contingent Payment, the value per share of Toro Common Stock will be
the average closing price per share of Toro Common Stock as reported on the NYSE
for the 30 trading days ending on the third trading day immediately preceding
December 31, 1998 (the "1998 Toro Share Price"). For purposes of calculating the
number of shares of Toro Common Stock included in the 1999 Contingent Payment,
the value per share of Toro Common Stock will be the average closing price per
share of Toro Common Stock as reported on the NYSE for the 30 trading days
ending on the third trading day immediately preceding December 31, 1999 (the
"1999 Toro Share Price"). See "--Effects of the Merger," "--Holdback Amount;
Actual Net Worth Adjustment," "--Stockholders' Representatives Expense Fund,"
"THE MERGER AGREEMENT--Offset Right" and "--Contingent Payments."
Fractional shares of Toro Common Stock will not be issued in connection with
the Merger. Stockholders of Exmark otherwise entitled to fractional shares of
Toro Common Stock will be paid cash in lieu of such factional shares. See
"--Fractional Shares."
CONTINGENT PAYMENT RIGHTS
The Contingent Payment Rights qualify the Holders to receive up to two
separate payments (the 1998 Contingent Payment and the 1999 Contingent Payment)
based on the financial performance of the Surviving Corporation during each of
the twelve-month periods ending October 31, 1998 and 1999, respectively. During
these periods, existing management will continue to operate Exmark on a
stand-alone basis, subject to Toro's right to take control of the day-to-day
management of Exmark if certain financial requirements are not satisfied.
Only Holders of Exmark Common Stock, Exmark Preferred Stock and Exmark Class
B Stock are entitled to receive Contingent Payment Rights in exchange for the
surrender of their Shares. Holders of Exmark Class C Stock are not entitled to
receive Contingent Payment Rights. See "--Effects of the Merger." Holders of
Exmark Class B Stock will receive one-half of any Contingent Payment; Holders of
Exmark Common Stock and Exmark Preferred Stock will receive the other half of
any Contingent Payment. The cash portion of any Contingent Payment will equal
12% of the total amount of such payment, with the remainder to be paid in shares
of Toro Common Stock, valued at either the 1998 Toro Share Price or the 1999
Toro Share Price, as appropriate.
The Contingent Payment Rights are based on Exmark's financial performance
during the Contingent Payment Period, and no Contingent Payments will be made
unless Exmark obtains certain financial results during the Contingent Payment
Period. In addition, Contingent Payments are subject to Toro's Offset
34
Right. See "THE MERGER AGREEMENT--Offset Right." Moreover, the total aggregate
amount of Contingent Payments may not exceed $14,000,000 for Holders of Exmark
Class B Stock and $14,000,000 for Holders of Exmark Common Stock and Exmark
Preferred Stock (provided further that the number of shares of Toro Common Stock
issued for all Contingent Payments may not exceed 821,334 shares) (the
"Contingent Payment Cap").
Furthermore, if Exmark fails to meet certain financial goals outlined in the
Merger Agreement, then Toro shall have the option to take full control of
Exmark's operations. In the event Toro takes control of Exmark, the amount of
any REBIT and CAGR following the date of such control will not be taken into
account in computing the Contingent Payments, thus making any Contingent Payment
extremely unlikely. See "--Toro Control."
VALUATION FORMULA
The amount of each Contingent Payment will be determined using the following
valuation formula (the "Valuation Formula"):
Contingent Payment = [(3.5) * REBIT * (1 + CAGR)] - [$30,000,000 +
the amount of any prior Contingent Payment]
- [Working Capital Adjustment]
Under the Valuation Formula, the 1998 Contingent Payment will be based on
Exmark's recast earnings before interest and Taxes (as such term is defined in
the Merger Agreement) ("REBIT") for the twelve-month period ending October 31,
1998, and its compound annual growth rate ("CAGR") in Adjusted Revenue (as
defined below) for the twelve-month period ending October 31, 1998, compared to
$40,808,850 ("Base Year Revenue"). Under the Valuation Formula, the 1999
Contingent Payment will be based on Exmark's REBIT for the twelve-month period
ending October 31, 1999 and its CAGR in Adjusted Revenue for the twelve-month
period ending October 31, 1999, compared to the Base Year Revenue. The amount of
the Contingent Payments, either individually or collectively, cannot exceed the
Contingent Payment Cap.
To determine REBIT for any period, the net earnings before interest and
Taxes (as such term is defined in the Merger Agreement) ("EBIT") of Exmark for
such period must be determined. EBIT will be calculated based on the actual EBIT
of Exmark for such period, determined in conformity with generally accepted
accounting principles ("GAAP"), subject to certain clarifications and
adjustments, if necessary, including the following: (1) only interest paid by
Exmark with respect to bank debt, intercompany debt and long-term debt will be
added back to net earnings; (2) no costs or expenses incurred during such period
that are related to or that result from the Merger will be included as either a
cost or expense to Exmark; (3) if and to the extent that Toro transfers to
Exmark Toro manufactured products (including parts) that are branded for Exmark
for sale by Exmark through its distribution system ("Toro Supplied Products"),
the transfer price for such Toro Supplied Products will be Toro's distributor
net price minus Exmark's per unit sales, marketing, distribution and warranty
costs related to the sale thereof and minus an amount equal to 1.5% of Toro's
distributor net price; (4) Exmark's gross sales from Exmark manufactured
products (including parts) that are branded for Toro, transferred to Toro and
sold by Toro ("Exmark Cross-Branded Products") will only include an amount equal
to the standard cost of such Exmark Cross-Branded Products plus, for products
sold in the United States and Canada, a management fee equal to 3% of such
amount; (5) Exmark will receive, and its EBIT will include, a sales commission
equal to 1% of the gross sales of Exmark Cross-Branded Products that are sold by
Toro outside of the United States and Canada; and (6) EBIT will be reduced by
the amount of all compensation and benefits paid by Toro or the Toro Sales
Company to former employees of Exmark or Holiman after the Effective Time,
except for the Signing Bonuses.
After the adjusted EBIT of Exmark has been calculated for any period, the
REBIT for such period will be determined. REBIT equals the EBIT of Exmark for
such period, (1) plus the amount of the Cross-
35
Branding REBIT Factor (as defined below) for such period; (2) minus 100% of all
cost savings realized during such period by Exmark, (a) resulting from Exmark
being a subsidiary of Toro and (b) relating to insurance and risk management
expenses, and legal, human resources, administration and floor plan expenses;
(3) minus 50% of all operating cost savings realized during such period by
Exmark directly or indirectly resulting from Exmark being a subsidiary of Toro,
other than certain cost savings resulting from, among other things, reduced
purchasing costs related to Exmark becoming a part of Toro's purchasing group or
changes in the senior management compensation structure following the Merger;
(4) minus 50% of all cost savings realized during such period by Exmark
resulting from changes in the stand-alone status of Exmark; (5) plus 100% of any
additional costs incurred during such period by Exmark resulting from changes in
the stand-alone status of Exmark; (6) minus all management fees paid by Toro to
Exmark during such period with respect to Exmark Cross-Branded Products; and (7)
in the event Exmark does not maintain certain minimum marketing and engineering
expenditure levels, minus the difference between such minimum amount(s) and
Exmark's actual respective expenditure levels.
For purposes of determining CAGR, the "Adjusted Revenue" of Exmark for any
period will be calculated based on the actual gross sales of Exmark for such
period determined in accordance with GAAP, but subject to certain adjustments,
including the following: (1) no gross sales of any Exmark Cross-Branded Products
(including parts) supplied to Toro during such period will be included in the
gross sales of Exmark; (2) an amount equal to the Cross-Branding Revenue Factor
(as defined below) for such period will be added to the gross sales of Exmark
for such period; and (3) no gross sales from the sale by Exmark of any Toro
Supplied Products will be included in the gross sales of Exmark.
The "Cross-Branding REBIT Factor" for determining the 1998 Contingent
Payment will equal 12.5% of the Cross-Branding Revenue Factor used to determine
the 1998 Contingent Payment. The "Cross-Branding REBIT Factor" for determining
the 1999 Contingent Payment will equal 10% of the Cross-Branding Revenue Factor
used to determine the 1999 Contingent Payment. The "Cross-Branding Revenue
Factor" for determining the 1998 Contingent Payment will equal (1) the aggregate
sum of the number of Toro-branded Exmark products sold by Toro in the United
States or Canada (whether manufactured by Toro or by Exmark) during the period
from the Effective Time to October 31, 1998, multiplied by (2) the applicable
"Cross-Branding Revenue Per Unit" for each such product. The "Cross-Branding
Revenue Factor" for determining the 1999 Contingent Payment will equal (1) the
aggregate sum of the number of different Toro-branded Exmark products sold by
Toro in the United States or Canada (whether manufactured by Toro or by Exmark)
during the twelve-month period ending October 31, 1999, multiplied by (2) the
applicable "Cross-Branding Revenue Per Unit" for each such product.
The "Working Capital Adjustment" will be the greater of (1) 10% of the
excess, if any, of (a) the Average Working Capital (as defined below) of Exmark
during such period over (b) 22% of the actual cost of goods sold of Exmark
during such period determined in conformity with GAAP and (2) zero. The "Average
Working Capital" of Exmark for any period will be the average of the month-end
differences between the current assets, excluding cash, of Exmark and the
current liabilities, excluding intercompany debt and the current portion of
long-term debt, of Exmark during such period, in each case, determined in
accordance with GAAP.
As an example of calculating the 1998 Contingent Payment, and assuming a
CAGR equal to zero and no Working Capital Adjustment, REBIT for the twelve-month
period ending October 31, 1998 would have to exceed $8,571,429 for there to be a
1998 Contingent Payment. In this example, the aggregate amount of the 1998
Contingent Payment would be $3.50 for each dollar of REBIT for the period in
excess of $8,571,429. As an example of calculating the 1999 Contingent Payment,
and assuming a CAGR equal to zero, no Working Capital Adjustment and, for
illustrative purposes only, an aggregate 1998 Contingent Payment of $500,000,
REBIT for the twelve-month period ending October 31, 1999 would have to exceed
$8,714,286 for there to be a 1999 Contingent Payment. In this example, the
aggregate amount of the 1999 Contingent Payment would be $3.50 for each dollar
of REBIT for the period in excess of $8,714,286. By way of example and for
illustrative purposes only, EBIT for Exmark for the years ended August 31, 1995,
1996 and 1997 was $1,438,653, $2,691,931, and $4,354,959, respectively.
36
PROCEDURE FOR DETERMINING CONTINGENT PAYMENTS
Within 60 days after the end of each fiscal year during the Contingent
Payment Period, the parties shall prepare and deliver to the Synergies Council a
statement (a "Contingent Payment Statement"), which shall identify the gross
sales, EBIT, REBIT, CAGR and Working Capital Adjustment of Exmark for such
fiscal year (including the manner of determination) in reasonable detail and the
amount of the Contingent Payment to be made with respect to such fiscal year.
All amounts used in a Contingent Payment Statement to determine a Contingent
Payment will be based on the final audited financial statements of Toro, subject
to adjustment by the Synergies Council to reflect differences between Toro's
accounting practices and those used by Exmark in its audited financial
statements for the two year period ended August 31, 1996. The Contingent Payment
Statement shall be subject to review and verification by the Stockholders'
Representatives. In the event there is a dispute concerning the amount of the
Contingent Payment, dispute resolutions specified in the Merger Agreement must
be followed.
CASH ELECTION
The cash portion of the Merger Consideration will be approximately 12% of
the aggregate amount of each payment and the remainder of the Merger
Consideration will be paid in shares of Toro Common Stock. Each Holder, however,
will be allowed to elect to receive more or less than 12% of his or her portion
of the Merger Consideration in Cash, with the remainder to be paid in the form
of Toro Common Stock. Prior to the Special Meeting, each record stockholder will
receive a cash election form to be used to indicate if such stockholder desires
to receive more or less than 12% of such stockholder's Merger Consideration in
cash. Any Holder who wants to receive more or less than 12% of such Holder's
Merger Consideration in the form of cash must properly complete the form, sign
it and return it to the Escrow Agent prior to the Special Meeting. Any Holder
that does not return such form, properly completed and signed, to the Escrow
Agent prior to the Special Meeting, will be deemed to have elected to receive
12% of such Holder's Merger Consideration in the form of cash. The percentage of
the Holder's Merger Consideration each Holder elects, or is deemed to have
elected, to receive in cash is referred to herein as the "Cash Election." In the
event that the weighted average of all of the Cash Elections does not equal 12%,
the portion of the Holder's Merger Consideration that each Holder will be
entitled to receive in cash will be proportionately adjusted (either increased
or decreased), so that the aggregate cash consideration to be paid pursuant to
the Initial Payment, the 1998 Contingent Payment, the 1999 Contingent Payment or
any payment made upon release of the Holdback Amount, will be 12% of the Merger
Consideration, subject only to the payment of additional cash in lieu of
fractional shares. (For the mechanics of how these adjustments may be made, see
the Merger Agreement attached hereto as Exhibit A.) The remaining portion of
each Holder's Merger Consideration will be in the form of shares of Toro Common
Stock as described below. Based on the Cash Elections of record Holders of
Exmark Class B Stock and Exmark Class C Stock, the cash that record Holders of
Exmark Common Stock and Exmark Preferred Stock receive in connection with the
Initial Payment, expressed as a percentage of such payment, may be different
than the cash that such Holders receive in connection with the Contingent
Payment Rights, expressed as a percentage of each such payment.
CONVERSION OF EXMARK STOCK
At or prior to the Effective Time, Toro will deposit, or will cause to be
deposited, cash and shares of Toro Common Stock representing the Initial Payment
Fund with the Escrow Agent, to be exchanged for shares of Exmark Common Stock,
Exmark Preferred Stock, and Exmark Class C Stock , and will deposit, or will
cause to be deposited, cash and shares of Toro Common Stock representing the
Class B Initial Payment Fund with the Escrow Agent, to be exchanged for shares
of Exmark Class B Stock. On or before the later to occur of December 31, 1998,
or 10 days after the amount of the 1998 Contingent Payment has been determined,
Toro shall deposit, or shall cause to be deposited, cash and shares of Toro
Common Stock representing the 1998 Contingent Payment with the Escrow Agent.
Similarly, on or before the later
37
to occur of December 31, 1999, or 10 days after the amount of the 1999
Contingent Payment has been determined, Toro shall deposit, or shall cause to be
deposited, cash and shares of Toro Common Stock representing the 1999 Contingent
Payment with the Escrow Agent. The Escrow Agent shall hold these funds,
including any interest earned thereon and any dividends paid in respect thereof,
for the benefit of the Holders, subject to Toro's Offset Right and any Actual
Net Worth Adjustment (as defined below). See "--Holdback Amount; Actual Net
Worth Adjustment," "--Stockholders' Representatives Expense Fund" and "THE
MERGER AGREEMENT--Offset Rights."
As soon as reasonably practicable after the Effective Time, the Paying Agent
will mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented shares of Exmark capital
stock (the "Certificates") (1) a letter of transmittal in customary form (which
will specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon proper delivery of the Certificates to the
Paying Agent), and (2) instructions for use in effecting the surrender of the
Certificates in exchange for such holder's portion of the Merger Consideration.
Upon surrender of a Certificate that immediately prior to the Effective Time
represented outstanding shares of Exmark Common Stock, Exmark Preferred Stock or
Exmark Class C Stock, for cancellation to the Paying Agent, together with such
letter of transmittal, duly executed, and such other documents as may be
required pursuant to such instructions, the Paying Agent shall distribute in
exchange therefor, subject to escrow of the appropriate portion thereof included
in the Holdback Amount, (1) a certificate or certificates representing the
number of whole shares of Toro Common Stock issuable to such Holder pursuant to
the Initial Payment and based on such Holder's Cash Election, (2) cash
representing the amount payable to such Holder pursuant to the Initial Payment
and based on such Holder's Cash Election, (3) cash in lieu of any fractional
share thereof, (4) any interest earned or dividends paid with respect to such
Holder's Merger Consideration and (5) except for holders of Exmark Class C
Stock, the right to receive such Holder's portion of the Contingent Payment
Rights, which right shall be uncertificated. Upon surrender of a Certificate
that immediately prior to the Effective Time represented outstanding shares of
Exmark Class B Stock, for cancellation to the Paying Agent, together with such
letter of transmittal, duly executed, and such other documents as may be
required pursuant to such instructions, the Paying Agent shall distribute in
exchange therefor (1) a certificate or certificates representing the number of
whole shares of Toro Common Stock issuable to such Holder pursuant to the Class
B Initial Payment, (2) cash in lieu of any fractional share thereof, (3) any
interest earned or dividends paid with respect to such Holder's Merger
Consideration and (4) the right to receive such Holder's portion of the
Contingent Payment Rights, which right shall be uncertificated. All Certificates
so surrendered will forthwith be canceled. Until surrendered, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive the appropriate Merger Consideration with respect to the shares of
Exmark securities formerly represented by such Certificate.
If there is a transfer of Share ownership that is not registered in the
transfer records of Exmark, that portion of the Merger Consideration to be
issued in exchange for any such transferred Shares in connection with the Merger
may be issued to a person other than the person in whose name such Shares are
registered, if, upon presentation to the Paying Agent, the Certificate
representing such Shares shall be properly endorsed or otherwise be in proper
form for transfer and the person requesting such payment shall pay any transfer
or other taxes required by reason of the issuance of such portion of the Merger
Consideration to a person other than the registered holder of such Certificate
or establish to the reasonable satisfaction of Toro that such tax has been paid
or is not applicable.
Subject to Toro's Offset Right, as promptly as practicable following the
deposit by Toro of each of the 1998 Contingent Payment and the 1999 Contingent
Payment, the Paying Agent shall distribute to the holders of Exmark Common
Stock, Exmark Preferred Stock and Exmark Class B Stock cash and shares of Toro
Common Stock in an amount equal to their respective portions of such Contingent
Payment. See "--Contingent Payment Rights" and "THE MERGER AGREEMENT--Offset
Rights."
38
STOCKHOLDERS OF EXMARK SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO THE
PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL AND SHOULD NOT RETURN THEIR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Toro Common Stock
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of Toro. Holders otherwise entitled to fractional shares
of Toro Common Stock will be paid cash by the Paying Agent in lieu of such
factional shares.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
VOTING AGREEMENTS
Pursuant to the Stockholder Agreements, H. John Smith, Ray Rickard, Roger T.
Smith, Merrell F. Clark and Robert F. Martin, in their individual capacities as
stockholders, have agreed to vote all shares of Exmark Common Stock and Exmark
Preferred Stock owned by them for approval and adoption of the Merger Agreement
and have granted to Toro an irrevocable proxy so to vote their respective
shares. H. John Smith is a director and the President of Exmark. Ray Rickard is
a director and the Executive Vice President of Exmark. Roger Smith is a director
and the Secretary of Exmark and a director and the President of Holiman. Merrell
Clark is a director and the Treasurer of Exmark. Robert Martin is a director of
Exmark. Such officers and directors collectively own approximately 14,015 shares
of Exmark Common Stock and 550 shares of Exmark Preferred Stock as of the Record
Date (representing approximately 63.8% of the total voting power of the
outstanding shares of Exmark Common Stock and Exmark Preferred Stock on such
date). See "--Stockholder Agreements."
EMPLOYMENT AND NONCOMPETE AGREEMENTS
In connection with the Merger Agreement, Toro has entered into employment
and noncompete agreements with certain employees or officers of Exmark. In
connection therewith, H. John Smith and Ray Rickard will receive cash Signing
Bonuses from Toro in the aggregate amount of $2,075,000 pursuant to new
employment agreements, which contain noncompete covenants. In approving the
Signing Bonuses, Exmark's Board of Directors considered Exmark's financial
performance during the tenure of Messrs. Smith and Rickard and the reduction to
their overall compensation that will occur as a result of the Merger. Exmark's
stockholders are being asked to approve the payment of the Signing Bonuses.
Stockholder approval of the Signing Bonuses is a condition to consummation of
the Merger. See "--Excess Parachute Payments."
ISSUANCE OF CLASS B STOCK TO INSIDERS
Prior to the Effective Time and subject to approval of the New Articles of
Incorporation by the requisite vote of the Holders, Exmark will issue 10,000
shares of Exmark Class B Stock to certain officers, directors and employees of
Exmark pursuant to the exercise of certain previously issued stock purchase
rights, including (1) 2,000 shares to each of H. John Smith, Ray Rickard and
Roger Smith, (2) 210 shares to each of Merrell Clark and Robert Martin and (3)
120 shares to each of Gary Kuck and Keith Dietzen. Gary Kuck and Keith Dietzen
are directors of Exmark. Each share of Exmark Class B Stock will receive the
Class B Initial Per Share Payment Consideration (I.E., one-tenth of a share of
Toro Common Stock) and one Class B Contingent Payment Right. If the Class B
Contingent is maximized and subject to Toro's Offset Right, each Class B
Contingent Payment Right would entitle the holder thereof to receive cash and
Toro Common Stock with a face value of $1,400. As a result, Messrs. Smith,
Rickard and Smith each may receive up to approximately $2,810,000 in exchange
for their respective shares of Exmark Class B Stock. Messrs. Clark and Martin
each may receive up to approximately $295,000 in exchange for their respective
39
shares of Exmark Class B Stock. Messrs. Kuck and Dietzen each may receive up to
approximately $175,000 in exchange for their respective shares of Exmark Class B
Stock. Stockholder approval of the New Articles of Incorporation is a condition
to consummation of the Merger.
HOLIMAN ACQUISITION
As a condition to the Merger, Exmark must first acquire all of the issued
and outstanding capital stock of Holiman. Roger Smith, the Secretary of Exmark,
a director of Exmark and a major stockholder of Exmark, is the sole stockholder
of Holiman. Under the terms of the Holiman Agreement, Roger Smith will receive
3,689 shares of Exmark Class C Stock which represents approximately $2,125,000
of the total Initial Payment Consideration. See "THE MERGER--Effects of the
Merger" and "--Payment of Merger Consideration." In addition, prior to the
Effective Time, Holiman may pay to Roger Smith a one-time bonus or dividend in
the amount by which the book value of Holiman exceeds $200,000, which, based on
a current book value of approximately $900,000, would be approximately $700,000.
See "--Acquisition of Holiman."
MANUFACTURER'S REPRESENTATIVES AND DISTRIBUTORS
Exmark is highly dependent upon Holiman, which is Exmark's primary
manufacturer's representative. Exmark is also highly dependent upon a select few
distributors. One of these distributors is Lawn Equipment Part Co. ("Lawn
Equipment"). Merrell Clark, who is the majority stockholder of Lawn Equipment,
is a major stockholder of Exmark. Merrell Clark is also Treasurer and a director
of Exmark.
The Board of Directors of Exmark was aware of the interests of certain
persons in the Merger described above and considered them, among other matters,
in approving the Merger Agreement and the transactions contemplated thereby.
STOCKHOLDER AGREEMENTS
As a condition to the willingness of Toro to execute the Merger Agreement,
and concurrently with the execution of the Merger Agreement, H. John Smith, Ray
Rickard, Roger T. Smith, Merrell F. Clark and Robert F. Martin, who collectively
had record ownership of approximately 14,015 shares of Exmark Common Stock and
550 shares of Exmark Preferred Stock as of the Record Date (representing
approximately 63.8% of the total voting power of the outstanding shares of
Exmark Common Stock and Exmark Preferred Stock on such date), entered into
separate Stockholder Agreements with Toro, pursuant to which such stockholders,
in such capacity, have agreed to vote, and have granted to Toro an irrevocable
proxy to vote, such shares (and any other shares of Exmark Common Stock and
Exmark Preferred Stock acquired by them after the date of the Merger Agreement)
in favor of approval of the Merger Agreement, the Merger, the New Articles of
Incorporation and the Signing Bonuses and any other matter reasonably necessary
to facilitate the Merger. In addition, under the Stockholder Agreements, such
stockholders have agreed to vote, and have granted to Toro an irrevocable proxy
to vote, such shares against approval of any proposal made in opposition to or
competition with consummation of the Merger and against any merger,
consolidation, sale of assets, reorganization or recapitalization, with any
party other than Toro, the Merger Subsidiary and their affiliates and against
any liquidation or winding up of Exmark. Also, under the Stockholder Agreements,
such stockholders have agreed (1) not to solicit, initiate or encourage
submission of any proposal or offer from any person, group or entity relating to
any acquisition of the assets, business or capital stock of Exmark, or other
similar transaction or business combination involving the business of Exmark,
(2) not to participate in any negotiations or discussions regarding or furnish
to any other person or entity any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage
any effort or attempt by any other person or entity to do or seek such
acquisition or transaction and (3) to inform Toro of any inquiry. The
Stockholder Agreements, other than the provisions relating to the grant of an
irrevocable proxy, terminate on the earlier to occur of (1) the Effective Time
or
40
(2) such date and time as the Merger Agreement shall be terminated pursuant to
Article IX of the Merger Agreement.
ACQUISITION OF HOLIMAN
As a condition to the Merger, Exmark has entered into the Holiman Agreement
whereby Exmark will acquire all of the issued and outstanding capital stock of
Holiman from Roger Smith. Prior to the Merger, Holiman will thus become a wholly
owned subsidiary of Exmark.
Under the terms of the Holiman Agreement, Roger Smith will receive 3,689
shares of Exmark Class C Stock, which represents approximately $2,125,000 of the
total Initial Payment. See "THE MERGER-- Effects of the Merger" and "--Payment
of Merger Consideration." Mr. Smith, as the sole holder of Exmark Class C Stock,
is not entitled to receive Contingent Payment Rights for such shares. See "THE
MERGER--Contingent Payment Rights."
The Holiman Agreement requires that, at the Effective Time, the book value
of Holiman (equal to total assets minus total liabilities) must not be less than
$200,000. Consequently, prior the Effective Time, Holiman may pay to Smith a
one-time bonus or dividend in the amount by which the book value of Holiman
exceeds $200,000. Based on the book value of Holiman as of October 31, 1997,
which was approximately $970,000, the bonus or dividend could be up to
approximately $770,000.
Presently, Exmark pays a commission of 5.0% to Holiman for all sales by
Holiman of Exmark's products, and the total amounts of the commissions paid to
Holiman for 1995, 1996 and 1997 have been $1,071,225, $1,651,063 and $2,217,402,
respectively. Following the acquisition of the capital stock of Holiman, Exmark
will cease paying commissions to Holiman.
In the Holiman Agreement, Roger Smith has made certain representations and
warranties to Exmark and has agreed to indemnify Exmark for certain breaches of
the representations and warranties contained therein, subject to a maximum
aggregate amount of $318,000 (excluding matters relating to taxes). Similarly,
Exmark has made certain representations and warranties to Roger Smith. Toro is
expressly named as a third party beneficiary to the Holiman Agreement. See
"--Effects of the Merger."
EXCESS PARACHUTE PAYMENTS
It is a condition to the consummation of the Merger that the Singing Bonuses
be approved by Exmark's stockholders. For tax purposes, such that the Signing
Bonuses will not be "excess parachute payments" within the meaning of Section
280G of the Code, the approval of the Signing Bonuses will require the
affirmative vote of the holders of 75% of the voting power of all disinterested
Exmark stockholders. Generally speaking, excess parachute payments result when
there is a change in control of an employer, such as contemplated by the Merger,
and as a result, certain employee/officers receive compensation equal to or in
excess of three times their average annual compensation for the five years
preceding the taxable year in which the change in control occurs (the "base
amount"). The amount of any such "parachute payment" in excess of the base
amount (1) will not be deductible by the payor and (2) will be subject to an
excise tax payable by the recipient of such payment. It is probable that the
Signing Bonuses would constitute excess parachute payments. Section 280G of the
Code contains an exemption for such payments by a corporation if (1) such
corporation's stock is not publicly traded on an established securities market
and (2) the holders of at least 75% of the voting power of such corporation's
stock that is held by disinterested stockholders approve the payment. In order
to avoid the denial of deductibility and the imposition of the excise tax with
respect to the Signing Bonuses, Exmark's stockholders are being asked to approve
the payment of the Signing Bonuses. Approval of the Signing Bonuses by Exmark's
stockholders is a condition to consummation of the Merger, but will not affect
the amount of the Merger Consideration to be received by Holders of Exmark's
Shares. For a discussion of the compensation to be received by H. John Smith and
Ray Rickard in connection with the Merger, see "--Interests of Certain Persons
in the Merger."
41
FOR TAX PURPOSES, APPROVAL OF THE SIGNING BONUSES REQUIRES THE AFFIRMATIVE
VOTE OF MORE THAN 75% OF THE VOTING POWER OF ALL OUTSTANDING SHARES OF EXMARK
COMMON STOCK AND EXMARK PREFERRED STOCK, EXCLUDING THOSE SHARES HELD OR
CONSTRUCTIVELY OWNED BY H. JOHN SMITH AND RAY RICKARD. THE BOARD OF DIRECTORS OF
EXMARK RECOMMENDS THAT EXMARK'S STOCKHOLDERS VOTE FOR APPROVAL OF THE SIGNING
BONUSES.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discusses only the federal income tax consequences of the
Merger to United States persons who hold shares of Exmark capital stock and its
capital assets. It does not discuss all of the tax consequences that might be
relevant to Exmark stockholders entitled to special treatment under the federal
income tax law or to Exmark stockholders who acquired their shares of Exmark's
capital stock or Toro capital stock through the exercise or cancellation of
employee stock options, pursuant to a separate merger or acquisition or
otherwise as compensation, specifically including but not limited to
stockholders who have or will acquire Exmark Class B Stock or Exmark Class C
Stock.
It is a condition to the consummation of the Merger that Exmark receive an
opinion (the "Tax Opinion") from its counsel, Croker, Huck, Kasher, DeWitt,
Anderson & Gonderinger, P.C., substantially to the effect that, if the Merger is
consummated in accordance with the terms of the Merger Agreement and as
described in this Proxy Statement/Prospectus, under current law, for federal
income tax purposes, the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. The opinion is conditioned upon the
receipt and accuracy of certain representations made to Croker, Huck, Kasher,
DeWitt, Anderson & Gonderinger, P.C. with respect to certain factual matters
required to qualify the Merger as a reorganization under the Code. Moreover, the
opinion is based on the Code, regulations and rulings in effect as of the date
of such opinion, current administrative rulings and practice and judicial
precedent, all of which are subject to change. Any change, which may or may not
be retroactive, could alter the tax consequences discussed herein. Such opinion
is neither binding to the Internal Revenue Service (the "Service") nor precludes
the Service from adopting a contrary position. The parties will not request and
the Merger is not conditioned upon a ruling from the Service with respect to any
of the federal income tax consequences of the Merger.
Accordingly, if the Merger qualifies as a reorganization under the Code, (1)
no gain or loss will be recognized by the stockholders of Exmark with respect to
the shares of Toro received in the Merger, (2) the basis of the Toro Common
Stock received by an Exmark stockholder who exchanges Exmark capital stock for
Toro Common Stock and cash will be the same as the basis of the Exmark capital
stock surrendered in exchange therefor, decreased by the amount of cash received
by such stockholder, and increased by the amount of capital gain, but not
dividend income, recognized by such stockholder (subject to any adjustments
required as the result of receipt of cash in lieu of a fractional share of Toro
Common Stock), (3) for purposes of determining whether a gain or loss on a
disposition of shares of Toro capital stock is long term or short term, the
holding period of the shares of Toro capital stock received pursuant to the
merger by the Exmark stockholders will include the holding period of the Exmark
capital stock exchanged therefor, provided the shares of Exmark capital stock
were held as a capital asset on the date of the Merger, and (4) gain, if any,
but not loss, will be recognized by any Exmark stockholder upon the exchange of
Exmark capital stock for cash in the Merger.
The gain described in (4) above will be recognized, but not in excess of the
amount of cash received, in an amount equal to the difference, if any, between
the fair market value of the Toro Common Stock and cash received and the Exmark
stockholder's adjusted tax basis in the Exmark Capital Stock surrendered in
exchange therefor pursuant to the Merger. If, as described below, the exchange
has the effect of a distribution of a dividend, some or all of the gain
recognized will be treated as a dividend. If the exchange does not have the
effect of a distribution of a dividend, all of the gain recognized would be a
capital gain
42
(provided that the Exmark capital stock of such Exmark stockholder was held as a
capital asset at the Effective Time).
The determination of whether the exchange of Exmark capital stock for cash
pursuant to the Merger has the effect of a distribution of a dividend will be
made, on a stockholder by stockholder basis, by applying the rules of Section
302 of the Code and by comparing the proportionate, percentage interest of a
former Exmark stockholder in Toro after the Merger with the proportionate,
percentage interest such stockholder would have had if such stockholder had
received solely Toro Common Stock pursuant to the Merger. This comparison is
made as though Toro had issued in the Merger to such stockholder solely its Toro
Common Stock and in a hypothetical redemption Toro had then redeemed such
portion of its Toro Common Stock at the time of the Merger for the amount of
cash the stockholder actually received pursuant thereto. In making this
comparison, there must be taken into account (1) any other shares of Toro Common
Stock or other shares of capital stock of Toro actually owned by such Exmark
stockholder, and (2) any such shares considered to be owned by such holder by
reason of the constructive ownership rules set forth in Section 318 of the Code.
These constructive ownership rules apply in certain specified circumstances to
attribute ownership of shares of a corporation from the stockholder actually
owning the shares, whether an individual, trust, partnership or corporation, to
certain members of such individual's family or to certain other individuals,
trusts, partnerships or corporations. Under these rules, a stockholder is also
considered to own any shares with respect to which a stockholder holds
exercisable stock options.
Under applicable Internal Revenue Service guidelines, generally such a
hypothetical redemption, as described above, involving a holder of a minority
interest in Toro whose relative stock interest in Toro is minimal, who exercises
no control over the affairs of Toro and who experiences a reduction in the
stockholder's proportionate interest in Toro, both directly and by application
of the foregoing constructive ownership rules, will not be deemed to have
resulted in a distribution of a dividend under the rules set forth in Section
302(b)(1) of the Code. Because the determination of whether cash received
pursuant to the Merger will be treated as the distribution of a dividend
generally will depend upon the facts and circumstances peculiar to each Exmark
stockholder, such stockholders are strongly advised to consult with their own
tax advisers regarding the tax treatment of cash received pursuant to the
Merger.
The opinion described above will be based upon certain assumptions,
including the assumption that the stockholders of Exmark do not have any plan or
intention to dispose, sell, exchange or otherwise dispose of a number of shares
of Toro Common Stock received pursuant to the Merger that would reduce the
ownership by such stockholders of Exmark of Toro Common Stock to a number of
shares having a value, as of the date of the Merger, which is less than 50% of
the value of all of the formerly outstanding Exmark capital stock held by such
Exmark stockholders as of the same date.
No information is provided herein with respect to the tax consequences, if
any, of the Merger under applicable foreign, state, local and other tax laws.
The foregoing discussion is based upon the provisions of the Code, applicable
treasury regulations thereunder, Internal Revenue Service rulings and judicial
decisions, as in effect as of the date hereof. There can be no assurance that
future legislative, administrative or judicial changes or interpretations will
not affect the accuracy of the statements or conclusions set forth herein. Any
such change could apply retroactively and could affect the accuracy of such
discussion. No rulings have or will be sought from the Service concerning the
tax consequences of the Merger. Because of the complexity of the tax laws, and
because the tax consequences of any particular Exmark stockholder may be
affected by matters not discussed herein, it is recommended that each Exmark
stockholder consult his or her personal tax advisor concerning the applicability
of any foreign laws as well as other federal, state and local income tax
consequences of the Merger.
43
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under which the total consideration paid in the Merger by Toro will be allocated
among the Surviving Corporation's consolidated assets and liabilities based on
the fair values of the assets acquired and liabilities assumed as provided for
under generally accepted accounting principles.
BACKGROUND OF THE MERGER
Toro first became interested in acquiring Exmark, including Holiman, its
primary manufacturers' representative, in May 1996 after learning, from industry
conferences, trade journals and Toro's distributor network, of Exmark's focused
product line and excellent reputation. Shortly thereafter, The Geneva Companies,
acting on Toro's behalf, made an informal inquiry of Exmark's interest in being
acquired by Toro. In July 1996, Dennis Himan, Toro's Vice President of
Distributor Development and Mergers/ Acquisitions, met with H. John Smith and
Ray Rickard, Exmark's Chief Executive Officer and Executive Vice President,
respectively, to discuss a business combination of the two companies. In August
1996, Toro and Exmark entered into a confidentiality agreement pertaining to the
sharing of certain non-public information about Exmark. Between August 1996 and
May 1997, Exmark internally explored and considered a variety of strategic
financial alternatives, including a public sale of common stock and potential
business combinations with several larger turf care equipment manufacturers,
including Toro.
From August 1996 until May 1997, Messrs. Himan, H. John Smith and Rickard
met on several occasions to discuss in a general way whether there existed a
basis for considering a possible business combination between the two companies.
Beginning in October 1996, Roger Smith also joined these discussions regarding
Toro's potential acquisition of Holiman, as part of Toro's acquisition of
Exmark. Following several telephone conversations and meetings, members of
Toro's management and Exmark's management and their respective legal advisors
met in May 1997 to hold detailed discussions regarding the possible terms of a
merger of the two companies, including the structure, valuation alternatives and
documentation of such a transaction. On June 3, 1997, Toro, Exmark and Holiman
entered into a letter of intent regarding Exmark's acquisition of Holiman and
Toro's subsequent acquisition of Exmark, including Holiman. From June until
October 1997, Toro's management and Exmark's management and their respective
legal advisors negotiated the terms of the Merger Agreement. At various times
during this period, officials of Toro, Exmark and Holiman and their respective
legal advisors met to perform due diligence activities in anticipation of the
proposed Merger.
Toro's Board of Directors discussed Exmark and Holiman as possible
acquisition candidates at Toro's March 13, 1997 directors' meeting and reviewed
certain information concerning Exmark and Holiman at that time. On July 16,
1997, Toro's Board of Directors held a meeting to consider the terms of Toro's
offer and, after reviewing information about Exmark and Holiman with Toro's
management and financial and legal advisors, unanimously authorized and approved
Toro's officers to proceed with the acquisition of Exmark and Holiman. Exmark's
Board of Directors held a meeting on October 1, 1997 to discuss the terms of the
proposed Merger and to review a draft of the Merger Agreement. At this meeting,
Exmark's senior management and Exmark's legal advisor made detailed
presentations concerning material aspects of the proposed Merger, the draft of
the Merger Agreement and related transactions. Afterwards, Exmark's Board of
Directors discussed (1) the draft of the Merger Agreement, (2) the Merger, (3)
the related transactions and agreements and (4) the interests of certain persons
in the Merger, and then Exmark's Board of Directors unanimously authorized and
approved the Merger Agreement and the Merger. On October 22, 1997, Toro's Board
of Directors, pursuant to a written action, unanimously authorized and approved
the Merger Agreement and the Merger. On October 23, 1997, Exmark and Holiman
executed the Holiman Agreement and Toro, Exmark and Merger Subsidiary executed
the definitive Merger Agreement.
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EXMARK'S REASONS FOR THE MERGER; RECOMMENDATION OF EXMARK'S BOARD OF DIRECTORS
By the unanimous vote of Exmark's entire Board of Directors at a special
meeting held on October 1, 1997, the Exmark Board of Directors determined that
the proposed Merger and the terms and conditions of the Merger Agreement were in
the best interests of Exmark and its stockholders. The Merger, the Merger
Agreement, the New Articles of Incorporation, the Signing Bonuses and the
stock-for-stock exchange with Holiman pursuant to the Holiman Agreement were
approved unanimously by the entire Board of Directors of Exmark, who also
unanimously resolved to recommend that the stockholders of Exmark vote FOR
approval of the Merger Agreement, the Merger, the New Articles of Incorporation,
the Signing Bonuses. See "--Background of the Merger." In reaching its
conclusion to enter into the Merger Agreement and to recommend that the
stockholders of Exmark vote for the approval of Merger and the Merger Agreement,
the Board of Directors of Exmark considered a number of factors, including,
without limitation and without assigning relative weights thereto, the
following:
FINANCIAL RESOURCES
Exmark's ability to successfully meet its debt obligations and its present
level of operations is directly connected to the success of Exmark's new
products and its ability to maintain adequate levels of working capital.
However, the absence of a public market for the Exmark stock makes raising
capital very difficult and limits Exmark's marketing abilities and growth
potential. Moreover, since there is no established public market for the stock,
stockholders may have considerable difficulty in selling their shares, and there
is no assurance that the shares can be sold at a fair value. After the Merger,
Exmark will have access to Toro's capital and capital markets and Exmark
stockholders will enjoy much greater liquidity.
MARKET POSITION
The commercial lawn and turf maintenance equipment market is very
competitive. It is served by a large number of manufacturers, including large
companies such as Toro and companies the size of Exmark and smaller.
The larger companies have three major advantages when competing with smaller
companies: (1) an ability to spend more on advertising and promotion resulting
in greater brand name recognition; (2) an ability to spend more on research and
development for new product innovation; and (3) greater financial strength which
allows them to overcome mistakes and setbacks.
Competitors such as Toro and Deere & Company ("John Deere") have achieved
widespread brand recognition as a result of many years of advertising and
promotional campaigns directed to consumer markets. Exmark has not been able to
allocate nearly as much capital for advertising and promotion. After the Merger,
Exmark will benefit from utilization of Toro's internal marketing resources and
advertising discounts, thereby allowing expansion of Exmark's advertising and
promotion programs.
ENGINEERING AND PRODUCT DEVELOPMENT
Exmark's engineering has been responsible for quality assurance, production
engineering, product maintenance and upgrades and at least one new product
introduction each year. This has been done with limited testing facilities and
equipment, thereby slowing the process while outside testing is completed.
Exmark's continued growth is dependent upon the continued design and development
of new products. Additional resources are required to accelerate new product
development and the number of new products introduced to remain competitive in a
rapidly growing and increasingly competitive environment. After the merger,
Exmark will benefit from utilization of Toro's engineering group and facilities
to assist in testing and increase the number of new product introductions
through joint product development.
45
MANUFACTURING AND FACILITIES
Exmark has expanded its manufacturing facilities to meet production
requirements during recent years due to rapid growth. There is no additional
space left for facilities expansion at Exmark's current location. After the
merger Exmark would benefit from the potential utilization of Toro's resources
to accommodate future increased product demand.
WORKING RELATIONSHIP
After the Merger, Exmark will be a wholly owned subsidiary of Toro. However,
Exmark's current officers will remain as the officers of Exmark after the Merger
and Exmark will be operated as a "stand alone" company with respect to its
products, distributors and dealers. In addition, the parties have agreed to form
a committee to act as an inter-company team and as a dispute resolution panel
for a period following the Merger. The Synergies Counsel will consist of three
representatives of Exmark and three representatives of Toro. In addition, Exmark
expects to benefit from increased purchasing power, volume discounts, reduced
insurance rates and higher levels of insurance coverage. Exmark will also
benefit from having the expertise of Toro's legal, tax and accounting
departments.
FAIRNESS OF THE TRANSACTION
Exmark's Board of Directors have been actively involved in the negotiation
of the Merger Agreement and have unanimously approved the Merger. Not only does
the Merger provide Exmark stockholders with a much greater degree of liquidity,
Exmark has received an opinion from McCarthy & Co. that the Merger Consideration
is fair, from a financial point of view, to the stockholders of Exmark as of the
date of this Proxy Statement/Prospectus. See "THE MERGER--Opinion of McCarthy as
Exmark's Financial Advisor."
FOR THE FOREGOING REASONS, THE BOARD OF DIRECTORS OF EXMARK RECOMMENDS THAT
THE STOCKHOLDERS OF EXMARK VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE
MERGER.
TORO'S REASONS FOR THE MERGER
Toro has made several strategic acquisitions over the last few years. A
primary objective of these acquisitions has been to expand the scope of Toro's
product offerings by acquiring companies with significant market positions and
good growth opportunities. Toro believes that Exmark's current product
offerings, its significant expertise in manufacturing and marketing turf care
equipment, its product development skills and its customer focus will allow Toro
to offer a more complete product line and will complement Toro's growth
strategy. Toro also believes that Exmark has an outstanding management team.
OPINION OF MCCARTHY AS EXMARK'S FINANCIAL ADVISOR
The Board of Directors of Exmark retained McCarthy to act as its financial
advisor and to render an opinion to the Board of Directors of Exmark as to the
fairness of the Merger Consideration, from a financial point of view, to the
stockholders of Exmark. McCarthy is an investment banking firm based in Omaha,
Nebraska. McCarthy was founded in 1986, and provides a variety of corporate
finance services, including those relating to debt and equity placements,
mergers and acquisitions, capital planning and business valuation. McCarthy has
been involved in numerous mergers and acquisitions involving both privately- and
publicly-owned companies. McCarthy has provided financial advisory services to
Exmark in the past on various matters, including financial advisory services in
connection with a potential acquiring company. McCarthy was selected based upon
its prior experience with Exmark and the experience and qualifications described
above. McCarthy did not recommend the amount of consideration to be received in
connection with the Merger.
46
On May 29, 1997, McCarthy rendered its written opinion to the Board of
Directors of Exmark that, based upon the terms contained in the Letter of
Intent, the consideration proposed to be paid was fair, from a financial point
of view, to the stockholders of Exmark as of the date thereof. McCarthy
subsequently issued its written opinion dated October 23, 1997 to the Board of
Directors of Exmark that, based upon the Merger Agreement, the Merger
Consideration was fair, from a financial point of view, to the stockholders of
Exmark as of such date (the "McCarthy Opinion"). McCarthy updated this opinion
as of the date of this Proxy Statement/Prospectus.
THE FULL TEXT OF THE MCCARTHY OPINION IS ATTACHED AS EXHIBIT C TO THIS PROXY
STATEMENT/PROSPECTUS. EXMARK STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
MCCARTHY OPINION CAREFULLY IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY
STATEMENT/PROSPECTUS FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE
REVIEW BY MCCARTHY.
The McCarthy Opinion addresses only the fairness of the Merger
Consideration, from a financial point of view, to the stockholders of Exmark and
does not constitute a recommendation to any stockholder of Exmark as to how such
stockholder should vote with respect to the approval of the Merger Agreement.
The summary of the McCarthy Opinion set forth in this Proxy Statement/Prospectus
is qualified in its entirety by reference to the full text of such opinion.
Although McCarthy evaluated the financial terms of the Merger and
participated in discussions concerning the consideration to be paid, McCarthy
did not recommend the specific consideration to be paid in the Merger. The
consideration to be received by Exmark's stockholders as a result of the Merger
was determined by negotiations between Exmark and Toro after consultation by
Exmark with its financial advisor. In connection with rendering its opinion,
McCarthy, among other things: (1) reviewed the Merger Agreement; (2) reviewed
Exmark's annual audited financial statements for the fiscal years ended August
31, 1993 through 1996, and its internal financial statements for the fiscal year
ended August 31, 1997; (3) reviewed publicly available financial data and other
information regarding Toro; (4) reviewed certain operating and financial
information, including financial projections, provided to McCarthy by the
management of Exmark relating to its businesses and prospects; (5) met with
certain members of the senior management of Exmark to discuss Exmark's
operations, historical financial statements and future prospects; (6) reviewed
the historical prices and trading volume of the common stock of Toro; and (7)
conducted such other studies, analyses, inquiries and investigations as McCarthy
deemed appropriate.
McCarthy relied upon and assumed without independent verification (1) the
accuracy and completeness of all of the financial and other information reviewed
by it for purposes of its opinion and (2) the reasonableness of the assumptions
made by the management of Exmark with respect to its projected financial
results. In addition, McCarthy did not make or seek to obtain appraisals of
Exmark's or Toro's assets and liabilities in rendering its opinion. The McCarthy
Opinion is also necessarily based upon the market, economic and other conditions
as in effect on, and the information made available to it, as of the date
thereof.
The McCarthy Opinion did not imply any conclusion as to the likely trading
range for the Toro Common Stock following the consummation of the Merger, which
may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other factors
that generally influence the price of securities. In rendering its opinion,
McCarthy did not anticipate whether any Contingent Payments or any of the
Holdback Amount will ultimately be paid to the Exmark stockholders. The forecast
projections furnished to McCarthy for Exmark were prepared by the management of
Exmark. These forecasts, projections and estimates were based on numerous
variables and assumptions which are inherently uncertain and which may not be
within the control of management, including, without limitation, factors related
to the integration of Exmark with Toro and general economic, regulatory and
competitive conditions. Accordingly, actual results could vary materially from
those set forth in such forecasts, projections and estimates.
47
The following is a brief summary of certain of the financial analyses used
by McCarthy in connection with providing its opinion to the board of directors
of Exmark.
DISCOUNTED CASH FLOW ANALYSIS
Using a discounted cash flow ("DCF") analysis, McCarthy calculated the
present value of the estimated unleveraged cash flows of Exmark (on a
stand-alone basis, without giving effect to any operating or other efficiencies
arising from the Merger) based on forecasts developed by Exmark management.
McCarthy determined certain equity market value reference ranges for Exmark
based upon various discount rates and various terminal value multiples.
WEIGHTED AVERAGE OF HISTORICAL EARNINGS
McCarthy also performed an analysis based upon the weighted average of
Exmark's historical earnings, and determined certain equity market value
reference ranges for Exmark based upon various multipliers.
BOOK VALUE MULTIPLE ANALYSIS
McCarthy also performed an analysis of the historical and projected book
value of Exmark and determined certain equity market value reference ranges for
Exmark based upon various multipliers.
OTHER FACTORS AND ANALYSES
In rendering its opinion, McCarthy also reviewed the historical financial
results of Toro, the historical trading prices and volumes for the Toro common
stock, and the performance of the Toro common stock.
In arriving at its opinion, McCarthy performed a variety of financial
analyses, portions of which are summarized above. The summary set forth above
does not purport to be a complete description of the analyses performed by
McCarthy or of McCarthy's presentation to the Exmark board of directors. In
addition, McCarthy's analyses must be considered as a whole. Selecting portions
of such analyses and the factors considered by McCarthy, without considering all
such analyses and factors, could create an incomplete view of the process
underlying its analyses. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial analysis or summary
description.
In performing its analyses, McCarthy made numerous assumptions with respect
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Toro or
Exmark. Any estimates contained in such analyses are not necessarily indicative
of actual past or future results or values, which may be significantly more or
less than such estimates. Actual values will depend upon several factors,
including events affecting the general economic, market and interest rate
conditions and other factors which generally influence the price of securities.
The analyses were prepared solely for purposes of providing McCarthy's opinion
to the stockholders of Exmark and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. McCarthy's opinion and presentation on June 3, 1997
to the board of directors of Exmark was one of many factors taken into
consideration by the board of directors of Exmark in making its determination to
approve the Merger Agreement. The foregoing summary does not purport to be a
complete description of the analyses performed by McCarthy.
Pursuant to a Letter Agreement dated as of May 13, 1997, Exmark agreed to
pay McCarthy a total fee of $100,000, $50,000 payable upon the rendering of its
fairness opinion relating to the Merger and the remaining $50,000 payable upon
closing of the Merger. Exmark also agreed to reimburse McCarthy for its
48
reasonable out of pocket expenses and to indemnify McCarthy and certain related
persons against certain liabilities in connection with the engagement of
McCarthy.
DISSENTERS' RIGHTS
GENERAL
Under the Nebraska Business Corporation Act ("NBCA"), holders of Exmark
capital stock on the date of the Demand (as defined below) who hold such shares
continually through the Effective Time and follow the procedures set forth in
Sections 21-20,137 to 21-20,150 of the NBCA (the "Dissenters' Rights Statute")
will be entitled to receive payment in cash of the "fair value" of such Exmark
capital stock. The value determined for such dissenters' rights could be more
than, the same as, or less than the value of the consideration to be received
under the Merger Agreement by Exmark stockholders who do not dissent from the
Merger.
The Dissenters' Rights Statute is set forth in its entirety as Exhibit B to
this Proxy Statement/ Prospectus. The following discussion is not a complete
statement of the law relating to dissenters' rights and is qualified in its
entirety by reference to Exhibit B. This discussion and Exhibit B should be
reviewed carefully by any holder who wishes to exercise statutory dissenters'
rights or wishes to preserve the right to do so, since failure to comply with
the procedures set forth herein or therein may result in a loss of such
dissenters' rights.
PROCEDURE
The Dissenters' Rights Statute permits a stockholder to dissent from the
consummation of a plan of merger to which the corporation is a party, provided
that stockholder approval is required and that the particular stockholder is
entitled to vote. Stockholders who properly exercise their right to dissent are
entitled to obtain payment of the fair value of their shares of Exmark capital
stock.
Under the Dissenters' Rights Statute, where a proposed merger for which
dissenters' rights exist is submitted to a vote at a stockholders' meeting, the
meeting notice must state that stockholders are or may be entitled to assert
dissenters' rights, and a copy of the Dissenters' Rights Statute must accompany
the notice. This Proxy Statement/Prospectus constitutes such notice to the
holders of Exmark capital stock, and the Dissenters' Rights Statute is attached
to this Proxy Statement/Prospectus as Exhibit B.
Any holder of Exmark capital stock wishing to assert his or her dissenters'
rights (1) must deliver to Exmark, before the vote is taken on the proposal to
approve the Merger, a written notice of his or her intent to demand payment of
his or her shares if the proposed action is effectuated (the "Demand") and (2)
must not vote in favor of the Merger. Stockholders who do not satisfy these
requirements will not be entitled to exercise their dissenters' right.
A holder of Exmark capital stock is entitled to assert dissenters' rights
only for the Exmark capital stock registered in that holder's name. A beneficial
stockholder may assert dissenters' rights as to shares held on his or her behalf
only if (1) he or she submits to Exmark the record stockholder's written consent
to dissent not later than the time the beneficial stockholder asserts
dissenters' rights, and (2) he or she does so with respect to all shares of
which he or she is the beneficial stockholder or over which he or she has power
to vote.
Stockholders who elect to exercise dissenters' rights must mail or deliver
their written demands to: Exmark Manufacturing Company Incorporated, 2101
Ashland Avenue, P.O. Box 808, Beatrice, Nebraska 68310, Attention: Secretary.
The written demand for dissenters' rights should specify that the holder is
thereby demanding dissenters' rights for his or her shares.
Within 10 days after the Effective Time, Exmark, as the surviving
corporation in the Merger, must send a notice to each holder of Exmark capital
stock who properly exercised their dissenters' rights. The
49
notice must (1) state where the payment demand must be sent and where and when
certificates must be deposited, (2) supply a form for demanding payment, (3) set
a date by which Exmark must receive the payment demand, which may not be fewer
than 30 nor more than 60 days after the date the notice is delivered, and (4)
include a copy of the Dissenters' Rights Statute.
A stockholder who was sent such a dissenters' notice must, among other
actions, demand payment and deposit his or her certificates in accordance with
the terms of the notice. A stockholder who does not demand payment or does not
deposit his or her share certificates where required, each by the date set in
the dissenters' notice, will not be entitled to payment for his or her shares
under the Dissenters' Rights Statute.
Upon receipt of a proper and timely demand for payment, Exmark will pay each
dissenter who complied with the Dissenters' Rights Statute the amount estimated
by Exmark to be the fair value of his or her shares, plus accrued interest. The
payment will be accompanied by certain financial statements, information
concerning Exmark's estimate of the fair value of the shares, an explanation of
how the interest was calculated, a statement regarding the right to protest the
calculated fair value and a copy of the Dissenters' Rights Statute.
A dissenter may notify Exmark in writing of his or her own estimate of the
fair value of his or her shares and the amount of interest due and demand
payment of his or her estimate, less any amount already paid for such shares, if
(1) the dissenter believes that the amount paid is less than the fair value of
his or her shares or that the interest due is incorrectly calculated, or (2)
Exmark fails to make payment within 60 days after the date set for demanding
payment. A dissenter waives his or her right to protest the payment unless he or
she notifies Exmark of his or her demand in writing within 30 days after Exmark
made or offered payment for his or her shares. If a demand for payment remains
unsettled, Exmark shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If Exmark does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
If any holder of Exmark capital stock who demands dissenters' rights fails
to perfect, or effectively withdraws or loses his or her right to dissent, then
the shares of Exmark capital stock of such holder will be converted into and
become the right to receive the Merger Consideration in accordance with the
Merger Agreement.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "--Certain Federal Income Tax Consequences."
The foregoing summary of the applicable provisions of Sections 21-20,137 to
21-20,150 of the NBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such Sections, the
full text of which is attached as Exhibit B to this Proxy Statement/Prospectus.
STOCK EXCHANGE LISTING
Toro has agreed that the Toro Common Stock to be issued pursuant to the
Merger will be approved for listing on the NYSE, subject to official notice of
issuance. An application has been made for listing such Toro Common Stock on the
NYSE promptly following the Effective Time.
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REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), certain acquisition transactions may not be consummated unless notice
has been given and certain information has been furnished to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the FTC and certain waiting period requirements have been satisfied. The
Merger was subject to these requirements. The applicable waiting period expired
on August 13, 1997.
The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before or
after the Effective Time, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Merger or seeking the divestiture of
Exmark by Toro, in whole or in part, or the divestiture of substantial assets of
Toro, Exmark or their respective subsidiaries. State Attorneys General and
private parties may also bring legal actions under the federal or state
antitrust laws under certain circumstances. Based upon an examination of
information available to Toro and Exmark relating to the businesses in which
Toro, Exmark and their respective subsidiaries are engaged, Toro and Exmark
believe that the consummation of the Merger will not violate the antitrust laws.
Nevertheless, there can be no assurance that a challenge to the proposed Merger
on antitrust grounds will not be made or, if such a challenge is made, that Toro
and Exmark will prevail.
Neither Toro nor Exmark is aware of any other material governmental
approvals or actions that may be required for consummation of the Merger except
as described above. Should any such approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance, however, that any such approval or action, if needed, could be
obtained and would not be conditioned in a manner that would cause the parties
to abandon the Merger.
RESALES OF TORO COMMON STOCK ISSUED IN THE MERGER
Toro Common Stock to be issued to stockholders of Exmark in connection with
the Merger has been registered under the Securities Act. Toro Common Stock
received by stockholders of Exmark upon consummation of the Merger will be
freely transferable under the Securities Act except for shares issued to any
person who may be deemed to be an "Affiliate" (as defined below) of Exmark or
Toro within the meaning of Rule 145 under the Securities Act. "Affiliate" is
generally defined as a person who controls, is controlled by, or is under common
control with Exmark or Toro at the time of the Special Meeting (generally,
directors, certain executive officers and major stockholders). Affiliates of
Exmark or Toro may not sell their shares of Toro Common Stock acquired in
connection with the Merger, except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 or another applicable exemption from the registration requirements of
the Securities Act. In general, under Rule 145, for one year following the
Effective Time, an Affiliate (together with certain related persons) would be
entitled to sell shares of Toro Common Stock acquired in connection with the
Merger only through "unsolicited broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares to be sold by an Affiliate
(together with certain related persons and certain persons acting in concert)
during such one-year period within any three-month period for purposes of Rule
145 may not exceed the greater of 1% of the outstanding shares of Toro Common
Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would remain available to
Affiliates only if Toro remained current with its informational filings with the
SEC under the Exchange Act. One year after the Effective Time, an Affiliate
would be able to sell such Toro Common Stock without such manner of sale or
volume limitations, provided that Toro was current with its Exchange Act
informational filings and such Affiliate was not then an affiliate of Toro. Two
years after the Effective Time, an Affiliate would be able to sell such shares
of Toro Common Stock without any restrictions so long as such Affiliate had not
been an affiliate of Toro for at least three months prior thereto. Certain
Affiliates have entered
51
into separate Affiliate Agreements concerning the resales of Toro Common Stock
issue in the Merger. See "--Affiliate Agreements."
AFFILIATE AGREEMENTS
In connection with the execution of the Merger Agreement, certain persons
deemed by Exmark as potential "Affiliates" of Exmark for purposes of the federal
securities laws entered into Affiliate Agreements with Toro pursuant to which
such Affiliates agreed (1) not to make any sale, transfer or other disposition
of Toro Common Stock in violation of the Securities Act or Rule 145 thereunder
and (2) not to sell, transfer or otherwise dispose of Toro Common Stock issued
to such Affiliate upon payment of the Contingent Payment Rights unless such
sale, transfer or other disposition is made in conformity with the requirements
of Rule 145 under the Securities Act.
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT INCLUDED AS EXHIBIT A TO THIS
PROXY STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. ALL
STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY. SEE ALSO
"THE MERGER."
GENERAL
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Subsidiary will be merged with and into Exmark,
Exmark will continue as the Surviving Corporation, and the separate existence of
Merger Subsidiary will cease. Following the Merger, the Surviving Corporation
will be a wholly owned subsidiary of Toro.
Pursuant to the Merger Agreement, at the Effective Time and except for
Dissenting Shares and Canceled Shares, (1) each issued and outstanding share of
Exmark Common Stock will be converted into and become a right to receive (a)
four times the Initial Per Share Payment Consideration and (b) one
Common/Preferred Contingent Payment Right, (2) each issued and outstanding share
of Exmark Preferred Stock shall be converted into and become a right to receive
(a) the Initial Per Share Payment Consideration and (b) four Common/Preferred
Contingent Payment Rights, (3) each issued and outstanding share of Exmark Class
B Stock shall be converted into and become a right to receive (a) the Class B
Initial Per Share Payment Consideration and (b) one Class B Contingent Payment
Right, and (4) each issued and outstanding share of Exmark Class C Stock shall
be converted into and become a right to receive the Initial Per Share Payment
Consideration. See "THE MERGER--Effects of the Merger."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Toro, Merger Subsidiary and Exmark. Such representations and warranties are
subject, in certain cases, to specified exceptions.
Exmark has made certain representations and warranties to Toro relating to,
among other things, the following matters (which representations and warranties
are subject, in certain cases, to specified exceptions): (1) the due
organization, authority, power and standing of Exmark, and the accuracy of the
articles of incorporation and bylaws of Exmark; (2) the authorization,
execution, delivery and performance by, and enforceability of, the Merger
Agreement, the Articles of Merger and the Exmark Ancillary Agreements; (3) due
authorization by Exmark's board of directors of the Merger Agreement, the
Merger, the Articles of Merger, the Exmark Ancillary Agreements, the Signing
Bonuses and other matters; (4) the absence of any breach or violation of other
agreements, laws or orders; (5) except as set forth in the Merger Agreement,
absence of any governmental or regulatory authorization, consent or approval
required to consummate the Merger; (6) except as set forth in the Merger
Agreement, the absence of subsidiaries; (7) capital stock; (8) financial
statements; (9) the absence of undisclosed liabilities; (10) the absence of
certain material
52
adverse changes; (11) the absence of certain developments; (12) title to
properties; (13) accounts receivable; (14) inventory; (15) tax matters; (16)
Exmark's performance of material obligations in connection with disclosed
contracts and commitments; (17) intellectual property rights; (18) the absence
of material pending or threatened litigation; (19) warranties and products; (20)
employees; (21) employee benefit plans; (22) insurance; (23) the absence of
certain affiliate transactions; (24) customers and suppliers; (25)
distributions; (26) officers and directors and the existence of bank accounts;
(27) compliance with applicable laws and the possession of all licenses, permits
and certificates necessary to operate the business of Exmark; (28) environmental
matters; (29) brokerage fees; (30) opinion of financial advisor; (31)
stockholder agreements; (32) registration statement; and (33) disclosures.
Toro and Merger Subsidiary, jointly and severally, have made certain
representations and warranties to Exmark related to, among other things, the
following matters (which representations and warranties are subject, in certain
cases, to specified exceptions): (1) the due organization, authority, power and
standing of Toro; (2) the authorization, execution, delivery and performance by,
and enforceability of, the Merger Agreement and the Toro Ancillary Agreements;
(3) the absence of any breach or violation of other agreements, laws or orders;
(4) the capital stock of the Merger Subsidiary; (5) except as set forth in the
Merger Agreement, absence of any governmental or regulatory authorization,
consent or approval required to consummate the Merger; (6) brokerage fees; (7)
SEC documents; (8) capital stock of Toro; (9) absence of certain current plans
or intentions relating to Exmark; and (10) the due authorization and validity of
the stock issued in the Merger.
COVENANTS
Pursuant to the Merger Agreement, Exmark has agreed that, prior to the
Effective Time, except as expressly permitted by the Merger Agreement or as
otherwise consented to by Toro in writing, Exmark, among other things, (1) will
conduct its business in the ordinary course of its business; (2) will not issue
or sell any additional shares of its capital stock, or sell, pledge, dispose of
or encumber any of its assets, except in the ordinary course of business; (3)
will not grant any bonuses, salary increases, severance or termination pay to
any officers, directors or consultants or certain employees; (4) will not adopt
or amend any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
trust, fund or group arrangement for the benefit or welfare of any employees or
of any director; (5) will use its best efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees as a group and maintain satisfactory relationships with suppliers,
distributors, customers and others with which it has business relationships; and
(6) will not perform any act referenced by (or omit to perform any act which
omission is referenced by) the terms of Section 3.11 of the Merger Agreement.
In addition, pursuant to the Merger Agreement, prior to the Effective Time,
and except as expressly permitted by the Merger Agreement, Exmark will, among
other things, (1) provide to Toro full access at all reasonable times and upon
reasonable notice access to Exmark's books and records; (2) cause to be duly
called and held a meeting the Exmark stockholders; (3) furnish or cause to be
furnished to Toro all information concerning Exmark required to be included in
the Registration Statement and any other applicable documents, including the
Proxy Statement/Prospectus; (4) prepare and deliver to Toro all quarterly and
monthly financial statements for any periods ending at least 15 days prior to
the Effective Time; (5) take all commercially reasonable actions necessary or
desirable to cause the conditions set forth in the Merger Agreement to be
satisfied and to consummate the transactions contemplated by the Merger
Agreement and obtain all consents and waivers contemplated by the Merger
Agreement; (6) refrain from soliciting, initiating and encouraging submission of
any proposal or offer from any person or entity relating to any liquidation,
dissolution, recapitalization, merger, consolidation or acquisition or purchase
of all or a material portion of the assets of, or any equity interest in, Exmark
or other similar transaction or business combination involving Exmark or
participate in any negotiations regarding the foregoing; and (7) amend
53
and restate its articles of incorporation in order to authorize the issuance of
Exmark Class B Stock and Exmark Class C Stock.
Pursuant to the Merger Agreement, Toro and Merger Subsidiary have agreed
that Toro will, subject to certain exceptions, (1) promptly as practicable after
the execution of the Merger Agreement, make or cause to be made all filings and
submissions under the HSR Act and any other applicable laws or regulations; (2)
take all commercially reasonable actions necessary to consummate the
transactions contemplated by the Merger Agreement; (3) file the Registration
Statement and any applicable documents, which will include the Proxy
Statement/Prospectus with the SEC; (4) file all documents required to be filed
to list the Toro Common Stock to be issued pursuant to the Merger Agreement on
the NYSE; (5) take all corporate action necessary to ensure that any shares of
Toro Common Stock issued by Toro to the Exmark stockholders pursuant to the
Initial Payment and the Contingent Payment Rights will, upon such issuance and
delivery, be duly authorized, validly issued, fully paid and nonassessable and
free of any preemptive rights; and (6) file all documents required to obtain,
prior to the Effective Time, all necessary approvals under state securities
laws, if any.
LIMITATIONS ON NEGOTIATIONS BY EXMARK
Except as set forth in the Merger Agreement, Exmark will not, directly or
indirectly, through any officer, director, agent, affiliate, employee or
otherwise, solicit, initiate or encourage submission of any proposal or offer
from any person or entity relating to any liquidation, dissolution,
recapitalization, merger, consolidation or acquisition of the capital stock or
business of Exmark, or all or a material portion of the assets of Exmark, or
other similar transaction or business combination involving Exmark, and shall
not participate in any negotiations or discussions regarding, or furnish to any
other person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by any other person or entity to do or seek any of the foregoing. Exmark
will promptly notify Toro of any such inquiry and will keep Toro informed, on a
current basis, of the status and terms of any such proposals, offers,
discussions and negotiations.
Notwithstanding the foregoing, nothing contained in the Merger Agreement
shall prevent Exmark or its board of directors from engaging in discussions or
negotiations with, or providing any information to, a third party in response to
an unsolicited bona fide acquisition proposal from such person, or from
recommending an unsolicited bona fide acquisition proposal to the stockholders
of Exmark, if and to the extent that the Board of Directors of Exmark: (1)
concludes in good faith (after consultation with its financial and legal
advisors) that such acquisition proposal is reasonably capable of being
completed, taking into account all legal, financial, regulatory and other
aspects of the proposal, including the identity of the person making the
proposal, and would, if consummated, result in a transaction more favorable to
Exmark's stockholders from a financial and strategic point of view than the
Merger (such more favorable acquisition proposal being referred to herein as
"Superior Proposal"); and (2) is advised by its legal counsel that such action
is necessary in order for Exmark's Board of Directors to satisfy its fiduciary
duties under Nebraska law; provided, however, that Exmark's legal counsel
provide reasonably satisfactory written evidence of such advice to Toro prior to
Exmark's Board of Directors taking any such action. Prior to providing
information or data to any third party or entering into discussions or
negotiations with any third party, Exmark shall receive from such third party an
executed confidentiality agreement. Exmark shall notify Toro immediately of any
inquiries, proposals or offers, including the name of such third party and the
terms and conditions of any proposals or offers.
CONDITIONS
The Merger will occur only if the Merger Agreement is approved and adopted
by the requisite vote of the stockholders of Exmark. Consummation of the Merger
is also subject to the satisfaction of certain other conditions specified in the
Merger Agreement, unless such conditions are waived (to the extent such waiver
is permitted by law).
54
Each party's respective obligations to effect the Merger are subject to
various conditions, including the following: (1) the applicable waiting periods
under the HSR Act shall have expired or been terminated and all other material
governmental filings, authorizations and approval that are required for the
consummation transactions contemplated by the Merger Agreement or the Articles
of Merger will have been duly made and obtained; (2) there shall not be
threatened, instituted or pending any action or proceeding, before any court or
governmental authority or agency, challenging or otherwise seeking to restrain
consummation of the transactions contemplated in the Merger Agreement, seeking
to invalidate or render unenforceable any material provision of the Merger
Agreement, the Articles of Merger or any of the Exmark Ancillary Agreements or
Toro Ancillary Agreements, or otherwise relating to and materially adversely
affecting the transactions contemplated thereby; (3) there shall not be any
action taken, nor any statute, rule, regulation, judgment, order or injunction
enacted, entered, enforced, promulgated, issued or deemed applicable to the
transactions contemplated by the Merger Agreement that would reasonably be
expected to result in any of the consequences referred to in item (2) above; and
(4) the Registration Statement shall have become effective and shall not be
subject to any stop order, and no action suit, proceeding or investigation by
the SEC to suspend the effectiveness of the Registration Statement shall have
been initiated and be continuing, or have been threatened or be unresolved, and
Toro shall have received all necessary state securities law authorizations.
The obligations of Toro and Merger Subsidiary to consummate the Merger are
subject to the satisfaction at or before the Effective Time of the following
conditions: (1) the representations and warranties of Exmark set forth in the
Merger Agreement shall be true and correct in all material respects at and as of
the Effective Time of the Merger as though made on and as of such date; (2)
Exmark shall have performed in all material respects all the covenants and
agreements required to be performed by it under the Merger Agreement prior to
the Effective Time; (3) Exmark shall have obtained all necessary consents and
approvals; (4) the Merger Agreement, the Articles of Merger, the Merger, the
Signing Bonuses and the New Articles of Incorporation shall have been duly and
validly approved by Exmark's Board of Directors, and the Merger Agreement, the
Merger, the Signing Bonuses and the New Articles of Incorporation shall have
been duly and validly approved by the Stockholders of Exmark; (5) Toro shall not
have discovered any fact or circumstances existing as of the Effective Time,
which previously had not been disclosed to Toro regarding the business, assets,
properties, condition, results of operations or prospects of Exmark, which is,
individually or in the aggregate with other such facts and circumstances,
materially adverse to Exmark or to the value of the shares of Exmark's capital
stock; (6) there shall have been no damage, destruction or loss of or to any
property or properties owned or used by Exmark, whether or not covered by
insurance, which, in the aggregate, has, or would be reasonably likely to have,
a material adverse effect on the business or result of Exmark; (7) Toro shall
have received from Exmark's legal counsel a written opinion, dated the Effective
Time, addressed to Toro and satisfactory to Toro's legal counsel; (8) not more
than 8% of the outstanding shares of Exmark Common Stock and Exmark Preferred
Stock shall be qualified to be Dissenting Shares as of the Effective Time; (9)
Toro shall have received from Grant Thornton LLP, Exmark's accountant, a
"comfort" letter, dated as of the effective date of the Registration Statement
and updated through the Effective Time; (10) Exmark shall have delivered to Toro
all of the following: (a) certificates executed by certain officers of Exmark
concerning certain conditions precedent, (b) copies of third party and
governmental consents and approvals and certain authorizations, (c) the minute
books, stock transfer records, corporate seal and other materials related to the
corporate administration of Exmark, (d) resignations from certain of Exmark's
directors, (e) a copy of the certified Articles of Incorporation of Exmark and a
Certificate of Good Standing of Exmark from the Nebraska Secretary of State, (f)
a copy of each of (i) the text of resolutions adopted by Exmark's Board of
Directors authorizing and approving the Merger and authorizing the execution,
delivery and performance of the Merger Agreement, the Articles of Merger and the
New Articles of Incorporation, the payments of the Signing Bonuses and the
consummation of transactions contemplated by the Merger Agreement, and (ii) the
current bylaws of Exmark certified by its corporate secretary, (g) incumbency
certificates executed on behalf of Exmark by its corporate secretary certifying
the signatures and offices of certain officers,
55
(h) an executed copy of each of the Exmark Ancillary Agreements and (i) such
other certificates, documents and instruments as Toro reasonably requests
related to the transactions contemplated by the Merger Agreement; (11) H. John
Smith, Ray Rickard, Roger Smith, Garry Busboom and Mike Hirschman shall have
entered into Employment Agreements acceptable to Toro; and (12) all compensation
plans and similar agreements between Exmark and each of H. John Smith, Ray
Rickard, Holiman and Roger Smith shall have been terminated, except that Exmark
may continue to pay, consistent with past practice, (a) bonuses to H. John Smith
and Ray Rickard pursuant to Exmark's incentive bonus program for executives for
services performed prior to October 31, 1997, and (b) commissions to Holiman's
sales personnel; (13) Exmark shall have terminated its 1990 Stock Option Plan
and its 1992 Restricted Stock Plan and all Outstanding Purchase Rights shall
have been fully exercised or canceled; and (14) Exmark shall have acquired
Holiman on terms acceptable to Toro pursuant to a purchase agreement and, at the
Effective Time, Holiman's net worth shall equal or exceed $200,000.
The obligation of Exmark to consummate the Merger is subject to the
satisfaction at or before the Effective Date of the following conditions: (1)
the representations and warranties of Toro set forth in the Merger Agreement
shall be true and correct in all material respects at and as of the Effective
Time as though made on and as of such date; (2) Toro and Merger Subsidiary shall
have performed in all material respects all the covenants and agreements
required to be performed by them under the Merger Agreement and the Articles of
Merger prior to the Effective Time, and Merger Subsidiary shall have executed
the Articles of Merger; (3) Toro and Merger Subsidiary shall have delivered to
Exmark (a) a certificate executed by the appropriate officer(s) of Toro dated as
of the Effective Date, stating that to the knowledge of such officer(s) certain
conditions precedent set forth in the Merger Agreement have been satisfied, and
(b) an executed copy of each of the Toro Ancillary Agreements; (4) the Signing
Bonuses to H. John Smith and Ray Rickard, as appropriate, shall have been paid;
(5) Exmark shall have received an opinion dated as of the Effective Time in form
and substance satisfactory to Exmark of Croker, Huck, Kasher, DeWitt, Anderson &
Gonderinger, P.C., to the effect that (a) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code, (b) Toro, Merger Subsidiary and Exmark will each be a party to that
reorganization within the meaning of Section 368(b) of the Code, (c) no income,
gain or loss will be recognized for federal income tax purposes by either Exmark
or Toro as a result of the consummation of the Merger, and (d) no income, gain
or loss will be recognized for federal income tax purposes by the stockholders
of Exmark upon the exchange in the Merger of Shares solely for the Merger
Consideration (other than the cash portion thereof and any cash received in lieu
of fractional shares); (6) Exmark shall have received an updated opinion of
McCarthy & Co., addressed to the board of directors of Exmark and dated not more
than two business days prior to the date the Prospectus-Proxy Statement is first
mailed to Exmark's stockholders, to the effect that, as of the date of such
opinion, the Merger is fair to Exmark's stockholders from a financial point of
view; (7) Exmark shall have received the opinion of J. Lawrence McIntyre, Toro's
General Counsel; and (8) the shares of Toro Common Stock to be issued as Merger
Consideration shall have been approved for listing on the NYSE.
SURVIVAL
The Merger Agreement provides that all of Toro's and Merger Subsidiary's
representations and warranties and all of Exmark's representations and
warranties contained therein will survive the Closing of the Merger until the
date on which the last payment of the Holdback Amount is made (the "Last Payment
Date") and will have no further force or effect thereafter.
OFFSET RIGHT
Pursuant to the Merger Agreement, Toro will have the right to offset (the
"Offset Right"), from time to time, any loss, liability, deficiency, damage,
penalty, expense or cost (including reasonable legal expenses), whether or not
actually incurred or paid, until the Last Payment Date (the "Offset Period") and
after taking into effect the tax effects of such items and any use of the Offset
Right thereunder
56
(collectively, "the Losses"), against both the Holdback Amount and the
Contingent Payment Rights, which Toro or the Surviving Corporation or any of
their respective affiliates, officers, directors, employees or agents (the
"Protected Parties") may suffer or become subject to, as a result of: (1) any
misrepresentation (a "Misrepresentation") in any of the representations and
warranties of Exmark contained in the Merger Agreement or in any of the
exhibits, schedules, certificates and other documents delivered or to be
delivered by or on behalf of Exmark pursuant to the Merger Agreement or
otherwise referenced or incorporated in the Merger Agreement (collectively, the
"Related Documents"); (2) any breach (a "Breach") of, or failure to perform, any
agreement or covenant of Exmark contained in the Merger Agreement or any of the
Related Documents; (3) any and all Losses suffered by any of the Protected
Parties and any and all Claims (as defined below) or threatened Claims against
the Protected Parties arising out of actions or inactions of Exmark (regardless
of whether there may also be a Misrepresentation arising out of such actions or
inactions) prior to the Effective Time with respect to (a) any Release (as
defined in the Merger Agreement) of any Hazardous Materials (as defined in the
Merger Agreement) on, under or from the Real Property (as defined in the Merger
Agreement); (b) any environmental contamination of the Real Property, including
without limitation the presence of any Hazardous Materials that have come to be
located on or under the Real Property from another location; (c) any injury to
the environment, or to human health or safety associated with the environment,
by reason of the condition of, or activities past or present on or under, the
Real Property; or (d) any violation, or alleged violation, of any Environmental
Law (as defined in the Merger Agreement) with respect to the Real Property or
Exmark's operations at the Real Property, specifically including any and all
costs and expenses required to cause Exmark to comply with any such
Environmental Law (all such Losses, Claims and threatened Claims are
collectively referred to as "Environmental Losses"); and (4) any amounts paid to
Exmark's dissenting stockholders in excess of the aggregate amount of the value
of the Merger Consideration that such stockholders otherwise would have received
in the Merger.
Notwithstanding the foregoing, the amount of any Losses shall be offset by
any insurance proceeds received by Exmark with respect to insurance policies
paid for by Exmark.
In the event Toro exercises its Offset Right, such offset will be applied
first against any payment to be made from the Holdback Amount, and any remainder
of such offset shall be applied against any payment due or to become due with
respect to the 1998 Contingent Payment, and any remainder of such offset shall
be applied against any payment or payments due or to become due with respect to
the 1999 Contingent Payment.
In the event any of the Protected Parties becomes involved in any legal,
governmental or administrative proceeding which may result in Losses subject to
Toro's Offset Right thereunder, or if any such proceeding is threatened or
asserted (any such third party action or proceeding being referred to therein as
a "Claim"), Toro is required to promptly notify the Stockholders'
Representatives in writing of the nature of any such Claim and Toro's estimate
of the Losses arising therefrom.
The Stockholders' Representatives shall be entitled to contest and defend
such Claim under the procedures and conditions set forth in the Merger
Agreement. The Stockholders' Representatives must provide Toro with notice of
the intention to contest and defend within 20 days after Toro provides notice of
such Claim. Toro is entitled at any time, at its own cost and expense, to
participate in such contest and defense and to be represented by its own
attorneys. Neither Toro nor the Stockholders' Representatives may concede,
settle or compromise any Claim without the consent of the other, which consent
may not be unreasonably withheld. The Stockholders' Representatives may have the
cost of defense, including reasonable legal expenses, paid or reimbursed by the
Surviving Corporation.
The Merger Agreement provides, subject to certain exceptions for specified
matters, that the right of Toro to exercise its Offset Right thereunder will be
subject to the following limitations: (1) Toro will not be entitled to exercise
its Offset Right with respect to any Losses, until the aggregate amount of all
Losses thereunder exceeds the greater of $50,000 or an amount equal to 50% of
the difference of the Actual Net
57
Worth and $8,243,000; (2) an individual Loss will not give rise to an Offset
Right unless such Loss equals or exceeds $10,000 (however, this limitation does
not apply to any Loss that relates to a claim or action that arises from the
same or substantially the same facts as one or more other claims or actions and
the aggregate amount of Losses so arising is at least $10,000); (3) Toro will
not be entitled to exercise its Offset Right with respect to any Losses unless
Toro delivers to the Stockholders' Representatives an Offset Notice or notice of
a Claim prior to the end of the Offset Period; (4) Toro will not be entitled to
exercise its Offset Right with respect to any Losses to the extent that such
Losses result from or arise out of the gross negligence or willful misconduct of
Toro, any director, officer or employee of Toro or any Toro subsidiary; (5) Toro
will be entitled to exercise its Offset Right only for Losses in an aggregate
amount not exceeding the Holdback Amount and the total amount of the Contingent
Payment Rights and (6) the Offset Right will be Toro's sole and exclusive remedy
with respect to any Losses that any Protected Party may suffer, sustain or
become subject to pursuant to the terms of the Merger Agreement, and Toro has
agreed that it will not, and waives all rights to, institute or maintain any
suit, proceeding or action against the Holders or utilize or exercise any other
legal or equitable remedy for the purpose of recovering damages or other relief
with respect to any Losses (including, without limitation, an action seeking to
recover any portion of the purchase price previously paid to Exmark's
stockholders) except for suits, proceedings or actions necessary to enforce or
implement the Offset Right; provided that, (a) nothing contained in the Merger
Agreement shall prevent a party from bringing an action based upon allegations
of fraud or other intentional misconduct with respect to another party hereto in
connection with the Merger Agreement, and (b) nothing contained in the Merger
Agreement shall limit in any manner any other legal rights or remedies which any
Protected Party which is a party to an agreement identified under Article XII of
the Merger Agreement has against another party to such agreement in accordance
with the terms and conditions provided therein.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time: (1) by the mutual consent of Toro, Merger Subsidiary and Exmark; (2) by
Toro or Exmark, if there has been a material misrepresentation, a material
breach of warranty or a material breach of covenant on the part of the other in
the representations, warranties and covenants set forth in the Merger Agreement;
(3) by Toro or Exmark, if there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger, or there
shall be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
authority or agency, foreign or domestic, which would make the consummation of
the Merger illegal and such action, statute, rule, regulation or order shall
have become final and unappealable; (4) by Toro or Exmark, if there shall be any
action taken, or any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental authority or
agency, which would (a) prohibit Exmark's or Toro's ownership or operation of
all or a portion of Exmark's business, or (b) compel Toro or Exmark to dispose
of or hold separate all or a portion of the business or assets of Exmark or Toro
as a result of the Merger; (5) by Toro or Exmark, if the transactions
contemplated herein have not been consummated on or before January 31, 1998;
provided that, neither will be entitled to terminate the Merger Agreement if
such party's willful breach of the Merger Agreement has prevented the
consummation of the transactions contemplated by the Merger Agreement; (6) by
Toro or Exmark, if certain conditions precedent to such party's obligations to
consummate the Merger become impossible to satisfy; (7) by Toro or Exmark, if
the board of directors of Exmark withdraws, modifies or changes its
recommendation of the Merger Agreement or the Merger in a manner adverse to Toro
or Merger Subsidiary or shall have resolved to do any of the foregoing or the
board of directors of Exmark shall have recommended to the stockholders of
Exmark any superior proposal or resolved to do so; (8) by Toro or Exmark, if the
Stockholders' Meeting shall have been held and the stockholders of Exmark shall
have failed to approve the Merger Agreement, the Merger, the New Articles of
Incorporation and the Signing Bonuses at such meeting (including any adjournment
or postponement thereof); (9) by Toro, if (a) Exmark receives an
58
unsolicited proposal that constitutes a superior proposal and the board of
directors of Exmark, within 30 calendar days after such proposal is received by
Exmark (which thirty-day period may be extended by Exmark for such additional
period not exceeding 30 days as Exmark reasonably determines, based on
consultations with independent counsel, to be required in order to satisfy its
fiduciary obligations under law), either fails to terminate discussions with the
maker of such proposal and its agents, or determines to accept, or takes no
position with respect to, such proposal, (b) a tender offer or exchange offer
for 20% or more of the outstanding shares of Exmark's capital stock is
commenced, and the board of directors of Exmark, within 10 business days after
such tender offer or exchange offer is so commenced, either fails to recommend
against acceptance of such tender offer or exchange offer by its stockholders or
takes no position with respect to the acceptance of such tender offer or
exchange offer by its stockholders, or (c) any person (other than Toro or its
affiliates) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 20% or more of the then outstanding shares of Exmark's
Capital Stock; (10) by Toro, if the number of Dissenting Shares (counting each
such share of Exmark Preferred Stock as four shares of Exmark Common Stock)
exceeds 8% of the total number of shares of Exmark Common Stock and Exmark
Preferred Stock that are issued and outstanding as of the Record Date of the
Stockholders' Meeting (counting each such share of Exmark Preferred Stock as
four shares of Exmark Common Stock); (11) if after the date the Merger Agreement
is signed there shall have been a material adverse change in the business,
assets, properties, condition (financial or otherwise), results of operations or
prospects of Exmark, or if an event (other than a general industry or economic
downturn) shall have occurred which, so far as reasonably can be foreseen, would
result in any such change; (12) by Toro, if the Initial Toro Share Price is less
than $30 per share; or (13) by Exmark, if the Initial Toro Share Price exceeds
$44 per share.
In the event of termination of the Merger Agreement by Toro, Merger
Subsidiary or Exmark, all provisions of the Merger Agreement will terminate
except such provisions set forth in the Merger Agreement relating to termination
fees, press releases and announcements, expenses, governing law and
confidentiality, all of which shall survive indefinitely.
TERMINATION FEES
Toro and Exmark have agreed that Exmark shall pay Toro a fee of $1,500,000
(a) if the Merger Agreement is terminated pursuant to Item (7) above; (b) if the
Merger Agreement is terminated pursuant to Item (9) above, and the transaction
contemplated by such superior proposal ultimately is consummated (or any similar
transaction is consummated with a party other than Toro or Merger Subsidiary),
or (c) if the Merger Agreement is terminated pursuant to Item (8) above and a
Superior Proposal exists on the date of the Stockholders' Meeting.
FEES AND EXPENSES
Except as otherwise expressly provided in the Merger Agreement, Exmark, the
Stockholders' Representatives, Toro and Merger Subsidiary will each pay all of
their own expenses (including attorneys', financial advisors' and accountants'
fees) in connection with the negotiation of the Merger Agreement, the
performance of their respective obligations under the Merger Agreement and the
Articles of Merger and the consummation of the transactions contemplated hereby
and thereby. Toro shall pay for any environmental audit that it may cause to be
performed and real estate title insurance purchased in connection with the
Merger. Exmark shall pay any loan prepayment and other related fees incurred by
it or Toro in connection with the Merger. Exmark and Toro shall each pay
one-half of the HSR Act filing fee applicable to the Merger.
59
CERTAIN INFORMATION CONCERNING TORO
GENERAL
Toro designs, manufactures and markets consumer and professional turf
maintenance equipment, snow removal products and irrigation systems. Toro
produced its first lawn mower for golf course fairways in 1922 and its first
lawn mower for home use in 1939 and has continued to enhance its product lines
ever since.
Toro emphasizes quality and innovation in its products, manufacturing and
marketing. Toro strives to provide well built, dependable products supported by
an extensive service network. Innovation is emphasized through the introduction
of new and enhanced products. Toro's substantial funding of research and
development, as well as its acquisition strategy and its licensing and related
agreements, all contribute to its new product development efforts. Through these
efforts Toro also attempts to be responsive to trends which may affect its
target markets, now and in the future. Toro believes that a significant portion
of its revenues in recent years have been attributable to its new and enhanced
products. Examples of recently introduced products include the
Recycler-Registered Trademark- lawn mower which reduces the need for disposal of
grass clippings, a high pressure water jet turf aerator for maintenance of golf
course putting greens and an enhanced electronic controller for residential
irrigation systems which features programmable timing and zone control
functions.
Toro was incorporated in Minnesota in 1935 as a successor to a business
founded in 1914. It was reincorporated in Delaware in 1983. Toro's executive
offices are located at 8111 Lyndale Avenue South, Bloomington, Minnesota
55420-1196, telephone number (612) 888-8801. Toro finances a significant portion
of its receivables through Toro Credit Company ("Toro Credit"), its wholly-owned
finance subsidiary. For further information concerning Toro, see the Toro
documents included herein as Exhibit D.
RECENT DEVELOPMENTS
No material changes to Toro's business have occurred since October 31, 1996,
the end of Toro's latest fiscal year, that have not been described in a
Quarterly Report on Form 10-Q filed by Toro under the Exchange Act.
60
SELECTED SUMMARY CONSOLIDATED FINANCIAL DATA OF TORO
Set forth below is selected consolidated historical financial information of
Toro derived from the unaudited consolidated financial statements of Toro for
the nine months ended August 1, 1997 and August 2, 1996, the audited
consolidated financial statements of Toro for the fiscal year ended October 31,
1996, the three months ended October 31, 1995 and the years ended July 31, 1995,
1994, 1993, and 1992. In November 1995, Toro changed its fiscal year ended July
31 to a fiscal year ended October 31. The information should be read in
conjunction with the consolidated financial statements of Toro and related notes
thereto, included in Exhibit D to this Proxy Statement/Prospectus or included
elsewhere in this Proxy Statement/Prospectus. In the opinion of Toro's
management, the operating results for the nine months ended August 1, 1997 and
August 2, 1996 reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the information contained therein. Results for the
nine months ended August 1, 1997 are not necessarily indicative of the results
for the full year. See "CERTAIN INFORMATION CONCERNING TORO" and the documents
included in Exhibit D to this Proxy Statement/Prospectus.
THREE
NINE MONTHS ENDED YEAR MONTHS YEARS ENDED
---------------------- ENDED ENDED ------------------------------------------
8/1/97(1) 8/2/96 10/31/96 10/31/95 7/31/95 7/31/94 7/31/93 7/31/92
----------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................... $ 810,434 $ 732,712 $ 930,909 $ 192,278 $ 932,853 $ 794,341 $ 684,324 $ 643,748
Cost of sales............... 517,695 466,689 589,186 120,575 598,275 506,816 445,495 419,138
----------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.............. 292,739 266,023 341,723 71,703 334,578 287,525 238,829 224,610
Selling, general and
administrative expense.... 231,255 210,273 278,284 65,048 269,757 244,943 203,377 223,166
Restructuring expense....... -- -- -- -- -- -- -- 24,900
----------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
operations................ 61,484 55,750 63,439 6,655 64,821 42,582 35,452 (23,456)
Interest expense............ 15,408 10,858 13,590 2,532 11,902 13,562 17,150 18,726
Other (income) expense...... (5,957) (7,642) (10,331) (2,483) (8,193) (8,030) (3,053) (7,279)
----------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before
income taxes and
extraordinary loss...... 52,033 52,534 60,180 6,606 61,112 37,050 21,355 (34,903)
Provision for income
taxes..................... 20,553 20,751 23,771 2,609 24,445 14,820 8,315 (11,150)
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) before
extraordinary loss...... 31,480 31,783 36,409 3,997 36,667 22,230 13,040 (23,753)
Extraordinary loss, net of
income tax benefit of
$1,087.................... (1,663) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)....... $ 29,817 $ 31,783 $ 36,409 $ 3,997 $ 36,667 $ 22,230 $ 13,040 $ (23,753)
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per
common and common
equivalent share before
extraordinary loss...... $ 2.53 $ 2.52 $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05 $ (1.98)
Extraordinary loss, net of
income tax benefit...... (0.13) -- -- -- -- -- -- --
----------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per
common and common
equivalent share........ $ 2.40 $ 2.52 $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05 $ (1.98)
----------- --------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital............. $ 221,094 $ 197,896 $ 197,144 $ 165,086 $ 168,951 $ 175,783 $ 193,870 $ 210,430
Total assets................ 704,970 531,930 496,877 472,653 468,315 443,639 419,203 421,310
Short-term debt (including
current portion of
long-term debt)........... 95,365 83,973 41,375 56,909 38,625 20,300 15,000 --
Long-term debt (less current
portion).................. 177,650 53,046 53,015 53,365 64,935 81,025 122,970 164,100
Common shareholders'
equity.................... 233,667 209,562 213,567 190,892 185,471 168,652 144,601 132,614
OTHER DATA:
Dividends per common share.. $ 0.36 $ 0.36 $ 0.48 $ 0.12 $ 0.48 $ 0.48 $ 0.48 $ 0.48
- ------------------------
Notes:
(1) Toro's consolidated financial statements include the results of operations
of the James Hardie Irrigation Group from the date of acquisition, December
2, 1996.
61
CERTAIN INFORMATION CONCERNING EXMARK
Exmark is engaged in the manufacturing/assembly of outdoor power equipment
products, principally mid-size walk behind and riding commercial lawn mowers.
Its competitors include Toro, Deere & Co.-TM-, Snapper-TM- (a business segment
of Metromedia Communications), Ransomes and Jacobsen (a division of Textron).
Exmark's product line consists of mid-size commercial walk behind and riding
mowers (E.G. 32", 36", 44", 48" and 60" cutting widths), and various accessories
such as grass catchers and riding sulkies. Exmark has placed emphasis on new
product generation because of the belief that in order to retain current
dealers, attract new dealers and increase market share, new product offerings
are critical. Examples of the most recent new product introductions are the Turf
Tracer Hydro introduced in 1991, the Exmark Viking Hydro in 1992, Exmark
Explorer Two in 1992, the Exmark Metro in 1993, the Exmark Lazer Z introduced in
the Spring of 1995, the Turf Tracer HP introduced in the Fall of 1996 and the
Metro HP introduced in the Fall of 1997.
Exmark sells its products throughout the United States and Canada. Sales
volume is generated primarily through Exmark's manufacturers' representative,
Holiman. Less than 10% of the overall sales volume comes from direct sales or
"in-house" accounts. Holiman, Exmark's manufacturers' representative, is
responsible for seeking, establishing, developing, and servicing a network of
wholesale distributors within their assigned territory. Holiman represents
Exmark products exclusively. The distributor base upon which Exmark depends for
its overall sales volume is comprised of 20 U.S. distributors and four Canadian
distributors which in turn market Exmark products to approximately 1,007
dealers.
Exmark's customers are mainly commercial lawn and turf maintenance
companies. The commercial lawn and turf maintenance equipment market is very
competitive. It is served by a large number of manufacturers, including large
companies such as Toro and companies the size of Exmark and smaller.
The majority of various component parts required to construct Exmark
products are acquired from outside vendors. These vendors include Briggs &
Stratton Co., Kawasaki Motor Co., Kohler Co., Sunstrand-Hydro Gear, and Peerless
Division of Tecumseh Products Co. There are no contractual arrangements
obligating Exmark to purchase component parts from any specific supplier.
Patents have been granted or are pending for designs on several of the most
recent product introductions. Exmark has a federal trademark registration for
Exmark Explorer, Exmark Turf Ranger, Trivantage, Smart Step and Turf Tracer. In
addition, Exmark has applied for and received federal trademark registration of
the trademarks Exmark, Exmark Ranger, Exmark Parts Plus, and Advanta Lease.
The outdoor power equipment industry is one which is highly subject to
product liability suits due to the nature of injuries which could potentially
arise. While Exmark has not experienced any uninsured or underinsured losses in
this area, there can be no assurance that such actions will not occur in the
future. In the event Exmark became subject to sizeable products liability
claims, the ability of Exmark to continue operations could be threatened. Exmark
has sought to protect itself by the use of insurance. To the extent insurance in
this area should become unavailable or should dramatically rise in cost, or in
the event of claim(s) in excess of policy limits, the operations of Exmark could
be adversely affected. In some jurisdictions, injured claimants are permitted to
seek punitive damages. Punitive damage awards are generally not covered by
insurance. There have been a number of reported instances of enormous punitive
damage awards. Punitive damage awards could potentially threaten Exmark's
ability to continue operations.
62
SELECTED FINANCIAL DATA OF EXMARK
Set forth below is selected historical financial information of Exmark
derived from the audited financial statements of Exmark for the fiscal years
ended August 31, 1997, 1996, 1995, 1994 and 1993. The information should be read
in conjunction with the Management's Discussion and Analysis of Exmark, the
financial statements of Exmark and related notes thereto included elsewhere
herein. See "FINANCIAL STATEMENTS OF EXMARK."
YEARS ENDED
-----------------------------------------------------
8/31/97 8/31/96 8/31/95 8/31/94 8/31/93
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.................................................... $ 53,420 $ 38,372 $ 25,265 $ 19,375 $ 14,680
Cost of goods sold....................................... 35,687 25,217 16,535 12,372 9,585
--------- --------- --------- --------- ---------
Gross profit......................................... 17,733 13,155 8,730 7,003 5,095
Operating expenses....................................... 12,614 9,819 6,518 5,317 4,022
--------- --------- --------- --------- ---------
Earnings from operations............................. 5,119 3,336 2,212 1,686 1,073
Interest expense......................................... 1,155 1,057 776 553 440
Other income, net........................................ (324) (232) (177) (113) (82)
--------- --------- --------- --------- ---------
Earnings before income taxes......................... 4,288 2,511 1,613 1,246 715
Provision for income taxes............................... 1,492 846 550 488 252
--------- --------- --------- --------- ---------
Net earnings........................................... $ 2,796 $ 1,665 $ 1,063 $ 758 $ 463
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net earnings per common and common equivalent
share.............................................. $ 62.01 $ 36.95 $ 24.47 $ 17.36 $ 10.61
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital.......................................... $ 4,380 $ 3,795 $ 2,440 $ 2,842 $ 2,489
Total assets............................................. 15,667 9,966 8,466 6,919 6,156
Short-term debt (including current portion of long-term
debt).................................................. 1,712 371 963 356 276
Long-term debt (less current portion).................... 415 934 1,308 1,690 2,052
Stockholders' equity..................................... 9,167 5,742 4,117 3,071 2,332
OTHER DATA:
Dividends per common share............................... $ 1.50 $ 1.00 $ 0.75 $ 0.50 $ --
63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXMARK
The following is Exmark's management's discussion and analysis of the
significant factors affecting Exmark's results of operations and financial
condition. This should be read in conjunction with Exmark's audited financial
statements and the accompanying footnotes and other selected financial data
presented elsewhere herein.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 AND 1996.
On October 23, 1997, Exmark entered into an agreement to be purchased by The
Toro Company, subject to approval by Exmark's stockholders. The Toro Company is
headquartered in Bloomington, Minnesota and manufactured and markets consumer
and commercial turf maintenance equipment, snow removal products and irrigation
systems.
RESULTS OF OPERATIONS
Net sales increased $15.0 million or 39.2% from fiscal 1996 to 1997, and
$13.1 million or 51.9% from fiscal 1995 to 1996. Net earnings were $2.8 million
in fiscal 1997 and $1.7 million in fiscal 1996, an increase of 67.9% from 1996
to 1997 and 56.5% from 1995 to 1996. The majority of the increase in sales over
the two year period is attributable to sales growth in Exmark's zero-turn riding
mower, the Lazer Z, which was introduced in April 1995, and a new mid-sized
mower introduced in October 1994. In addition, the introduction of a new
walk-behind mower in July 1996 contributed to the sales increase in fiscal 1997
over 1996. Overall sales growth in Exmark's products has exceeded that of others
in the industry.
Gross profit was 33.2%, 34.3% and 34.6% in fiscal 1997, 1996 and 1995,
respectively. The decline in gross profit is primarily due to a change in
product mix as well as higher production costs as a result of using of outside
vendors to meet peak production demands for certain production processes.
Material costs were relatively consistent from 1995 to 1997.
Operating expenses, as a percent of sales, were 23.6%, 25.6% and 25.8% in
fiscal 1997, 1996 and 1995, respectively. Operating expenses increased by $2.8
million from fiscal 1996 to 1997, but declined as a percent of sales as the
result of efficiencies from higher production levels. Exmark completed an
expansion of its existing facilities in fiscal 1997 to meet the higher
anticipated production demand and, as a result, associated operating expenses
are expected to increase. Exmark continues to make improvements and evaluate and
use alternative resources in order to reduce operating expenses, improve quality
and reduce the cost of existing products.
Interest expense increased by 9.3% from fiscal 1996 to 1997 and 36.2% from
fiscal 1995 to 1996, primarily as a result of interest incurred for dealer and
distributor financing programs, which increases with sales. As a percent of
sales, interest related to financing programs was 2.0%, 2.2% and 2.4% in fiscal
1997, 1996, and 1995, respectively.
Income tax expense, as a percent of net earning before income taxes, was
approximately 34.0% in fiscal 1995 through 1997. Exmark earned tax credits which
offset its state income tax liability for fiscal 1995 through 1997.
FINANCIAL POSITION AT AUGUST 31, 1997
Total assets increased by $5.7 million from $10.0 million to $15.7 million.
This increase is the result of growth in both accounts receivable as a result of
the higher sales level in fiscal 1997 and increases in inventory to meet the
anticipated higher demand into fiscal 1998. In addition, property and equipment
increased by $2.3 million as a result of the expansion of its facilities and
replacement of certain equipment during fiscal 1997. Total current liabilities
increased from $3.3 million to $6.1 million, as a result of an increase in
accounts payable and accrued compensation and similar liabilities associated
with the higher
64
production level in fiscal 1997 as compared to fiscal 1996. In addition, at
August 31, 1997, Exmark had short-term borrowings of $1.4 million outstanding
under its line of credit agreement.
Long-term debt, including the current portion, declined by $0.6 million to
$0.7 million from fiscal 1996 to 1997, as Exmark made scheduled debt repayments
under existing debt agreements.
LIQUIDITY AND CAPITAL RESOURCES
Exmark's principal sources of cash in fiscal 1997 were cash generated from
operations and proceeds from short-term borrowings. The primary uses of cash
were increases in working capital associated with higher sales and production
levels, and investment in property and equipment to support future growth
through a plant expansion and investment in a new paint system. These capital
projects were substantially complete at August 31, 1997.
Exmark's seasonal working capital needs are provided by cash generated from
operations and, to the extent necessary, short-term borrowings. At August 31,
1997, Exmark had $5.6 million available under an existing line of credit
agreement with a bank, expiring in November 1997. Upon completion of the
purchase of Exmark by Toro, Exmark's working capital needs will be funded
through Toro.
INFLATION
Exmark is subject to the effects of changing prices. Exmark has historically
been able to pass along these inflationary increases through increases in the
prices of its products.
DESCRIPTION OF TORO CAPITAL STOCK
The following description of the capital stock of Toro does not purport to
be complete and is subject, in all respects, to applicable Delaware law and to
the provisions of the Toro's certificate of incorporation ("Toro's
Certificate").
GENERAL
Toro's authorized capital stock consists of 35,000,000 shares of Toro Common
Stock; 1,000,000 shares of Voting Preferred Stock, par value $1.00 per share;
and 1,000,000 shares of Non-Voting Preferred Stock, par value $1.00 per share,
of which 150,000 shares are designated as Series A $11.28 Cumulative Non-Voting
Preferred Stock (the "Series A Preferred Stock"). Toro's Board of Directors has
adopted a certificate of designation with respect to a series of 150,000 shares
of Voting Preferred Stock, the Series B Junior Participating Voting Preferred
Stock, $1.00 par value (the "Series B Preferred Stock"), in connection with
Toro's Rights Agreement dated June 14, 1988 (the "Rights Agreement"). See
"--Rights Plan."
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the Delaware General Corporation Law
and Toro's Certificate of Incorporation, as amended.
COMMON STOCK
At August 1, 1997, there were 11,990,873 shares of Toro Common Stock
outstanding. All outstanding shares of Toro Common Stock are, and the shares
offered hereby, when issued, will be fully paid and nonassessable. All holders
of Toro Common Stock have voting rights and are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders.
Holders of Toro Common Stock do not have the right to cumulate votes in the
election of directors and do not have a right of redemption or any preferential
right of subscription for any securities of Toro, except as described below
under "Rights Plan."
Subject to preferences that may be applicable to any shares of preferred
stock outstanding at the time, holders of Toro Common Stock are entitled to
dividends when and as declared by Toro's Board of
65
Directors from funds legally available therefor and are entitled, in the event
of liquidation, to share ratably in all assets remaining after payment of
liabilities.
PREFERRED STOCK
As of the date of this Proxy Statement/Prospectus, there were no shares of
Series A Preferred Stock or Series B Preferred Stock outstanding. Previously
outstanding shares of Series A Preferred Stock have been redeemed and may not be
reissued as Series A Preferred Stock; however, Toro's Board of Directors is
authorized to retire such series in which case the shares previously designated
as such series shall assume the status of authorized but unissued shares of
Preferred Stock. The Series B Preferred Stock is issuable in accordance with the
terms of Toro's Rights Agreement. See "--Rights Plan."
Toro's Board of Directors has the authority, in most instances without
further stockholder action, to issue from time to time all or any part of the
authorized Preferred Stock. Additional Preferred Stock is issuable in one or
more series, and Toro's Board of Directors is authorized to determine the
designation of and number of shares in each series and to fix the dividend,
redemption, liquidation, retirement, conversion and voting rights, if any, of
such series, and any other rights and preferences thereof. Any shares of
Preferred Stock which may be issued may have disproportionately high voting
rights or class voting rights may be convertible into shares of Toro Common
Stock and may rank prior in right to shares of Toro Common Stock as to payment
of dividends and upon liquidation. Although the issuance of additional Preferred
Stock may have an adverse effect on the rights (including voting rights) of
holders of Toro Common Stock, the consent of the holders of Toro Common Stock
would not be required for any such issuance of Preferred Stock. In addition, the
issuance of additional Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Toro. Toro has no current plans
to issue any Preferred Stock, except as provided for in the Rights Agreement.
See "--Rights Plan."
RIGHTS PLAN
On June 14, 1988, Toro's Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of Toro
Common Stock to holders of record on June 24, 1988. Each Right entitles the
registered holder to purchase from Toro, at a price of $85, one one-hundredth of
a share of Series B Preferred Stock subject to adjustment as provided in the
Rights Agreement. Pursuant to the Rights Agreement, one Right attaches to and
trades together with each share of Toro Common Stock issued by Toro, including
any shares of Toro Common Stock issued in connection with the Merger.
Until the earlier to occur of (1) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
Toro Common Stock or (2) 10 business days (or such later date as may be
determined by action of Toro's Board of Directors prior to such time as any
Person becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of such outstanding Toro Common Stock (the earlier of such
dates being called the "Distribution Date"), the Rights will be attached to the
Toro Common Stock and will be evidenced by the Toro Common Stock certificate.
Until the Distribution Date, the Rights will be transferred with and only
with the Toro Common Stock. As soon as practicable following the Distribution
Date, separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Toro Common Stock as of the close of business
on the Distribution Date. The Rights are not exercisable until the Distribution
Date. The Rights will expire on June 14, 1998 (the "Final Expiration Date"),
unless the Final Expiration Date is extended or unless the Rights are earlier
redeemed by Toro.
In the event that Toro is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
each holder of a Right will thereafter have the
66
right to receive, upon the exercise at the then current exercise price of the
Right, shares of Toro Common Stock of the acquiring company which at the time of
such transaction have a market value of two times the exercise price of the
Right. In the event that (1) any person becomes an Acquiring Person (unless such
person first acquires 20% or more of the outstanding Toro Common Stock by a
purchase pursuant to a tender offer for all of the Toro Common Stock for cash,
which purchase increases such person's beneficial ownership to 80% or more of
the outstanding Toro Common Stock) or (2) during such time as there is an
Acquiring Person, there shall be any reclassification of securities or
recapitalization or reorganization of Toro which has the effect of increasing by
more than 1% the proportionate share of the outstanding shares of any class of
equity securities of Toro or any of its subsidiaries beneficially owned by the
Acquiring Person, each holder of a Right, other than Rights beneficially owned
by the Acquiring Person (which will thereafter be void), will thereafter have
the right to receive upon exercise Toro Common Stock having a market value of
two times the exercise price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Toro Common Stock and prior to the acquisition by such person or group of 50% or
more of the outstanding Toro Common Stock, Toro's Board of Directors may
exchange the Rights (other than Rights owned by such person or group which have
become void), in whole or in part, at an exchange ratio of one share of Toro
Common Stock, or one one-hundredth of a share of Series B Preferred Stock (or of
a share of a class or series of Toro's Preferred Stock having equivalent rights,
preferences and privileges), per Right.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Toro Common Stock, Toro's Board of Directors of Toro may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price").
In addition, if a bidder who does not beneficially own more than 1% of the Toro
Common Stock (and who has not within the past year owned in excess of 1% of the
Toro Common Stock and, at a time he held such greater than 1% stake, disclosed,
or caused the disclosure of, an intention which relates to or would result in
the acquisition or influence of control of Toro) proposes to acquire all of the
Toro Common Stock (and all other shares of capital stock of Toro entitled to
vote with the Toro Common Stock in the election of directors or on mergers,
consolidations, sales of all or substantially all of Toro's assets,
liquidations, dissolutions or windings up) for cash at a price which a
nationally recognized investment banker selected by such bidder states in
writing is fair, and such bidder has obtained written financing commitments (or
otherwise has financing) and complies with certain procedural requirements, then
Toro, upon the request of the bidder, will hold a special stockholders' meeting
to vote on a resolution requesting Toro's Board of Directors to accept the
bidder's proposal. If a majority of the outstanding shares entitled to vote on
the proposal vote in favor of such resolution, then for a period of 60 days
after such meeting the Rights will be automatically redeemed at the Redemption
Price immediately prior to the consummation of any tender offer for all of such
shares at a price per share in cash equal to or greater than the price offered
by such bidder. No redemption will be permitted or required after the
acquisition by any person or group of affiliated or associated persons of
beneficial ownership of 20% or more of the outstanding Toro Common Stock.
Immediately upon redemption, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of Toro, including without limitation, the right to vote or to
receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Toro unless
the offer is conditional on a substantial number of Rights being acquired. The
Rights, however, should not affect any prospective offeror willing to make an
offer at an equitable price and which is otherwise in the best interests of Toro
and its stockholders, as determined by Toro's Board of Directors. The Rights
should not interfere with any merger or other business combination approved by
Toro's Board of Directors since Toro's Board of Directors may, at its option,
redeem the Rights at any time until there is an Acquiring Person.
67
The foregoing summary of certain terms of the Rights is qualified in its
entirety by reference to the Rights Agreement, a copy of which is included in
Exhibit D to this Proxy Statement/Prospectus.
DESCRIPTION OF EXMARK CAPITAL STOCK
The following description of capital stock of Exmark does not purport to be
complete and is subject, in all respects, to applicable Nebraska law and to the
provisions of Exmark's Articles of Incorporation ("Exmark Articles").
GENERAL
The authorized capital stock of Exmark consists of (1) 24,000 shares of
Exmark Common Stock, par value $10.00 per share, and (2) 21,000 shares of Exmark
voting participating preferred stock, par value $40.00 per share ("Preferred
Stock"). As of the date of this proxy statement/prospectus, 15,431 shares of
Exmark Common Stock were issued and outstanding, and 7,416 shares of Exmark
Preferred Stock were issued and outstanding. Presently, no shares are held in
treasury.
COMMON STOCK
Exmark Common Stock has the right to vote for the election of directors and
for all other purposes, and each holder of Exmark Common Stock is entitled to
one vote for each share held. Holders of Exmark Common Stock have the right to
cumulate votes in the election of directors and do not have a right of
redemption or any preferential right of subscription for any securities of
Exmark.
Holders of Exmark Common Stock are entitled to dividends when and as
declared by Exmark's Board of Directors from funds legally available therefore
in an amount per share equal to one-fourth of the dividends per share of
Preferred Stock concurrently declared. In the event of liquidation, the Exmark
Common Stock is subject to a liquidation preference of $40.00 per share of
Exmark Preferred Stock. After each outstanding share of Exmark Preferred Stock
has been allocated $40.00 of liquidation proceeds, each share of Exmark Common
Stock is then entitled to receive an allocation of liquidation proceeds of
$10.00 per share. Thereafter, each share of Exmark Common Stock will participate
in liquidation proceeds on a one-to-four ratio with each share of Exmark
Preferred Stock.
PREFERRED STOCK
Exmark has one class of Preferred Stock authorized with 7,416 shares issued
and outstanding as of the date hereof. The Exmark Preferred Stock has the right
to vote for the election of directors and for all other purposes, and each
holder of Exmark Preferred Stock is entitled to one vote for each share held.
Holders of Exmark Preferred Stock have the right to cumulate votes in the
election of directors and do not have a right of redemption or any preferential
right of subscription for any securities of Exmark.
Holders of Exmark Preferred Stock are entitled to dividends when and as
declared by Exmark's Board of Directors from funds legally available therefor in
an amount per share equal to four times the amount of dividends declared
concurrently with respect to each share of Exmark Common Stock. The Exmark
Preferred Stock has a liquidation preference in the amount of $40.00 per share
in the event Exmark is the subject of a voluntary or involuntary liquidation.
After holders of Exmark Preferred Stock have been allocated $40.00 per share of
liquidation proceeds, holders of Exmark Common Stock are then entitled to
allocation of liquidation proceeds of $10.00 per share of Exmark Common Stock.
Thereafter, any remaining liquidation proceeds are allocable to Exmark Preferred
Stock and Exmark Common Stock on a four-to-one ratio. That is, each share of
Exmark Preferred Stock will be entitled to receive four times the amount of
liquidation proceeds as the amount of liquidation proceeds allocable to each
share of Exmark Common Stock.
68
EXMARK PREFERRED STOCK IF THE NEW ARTICLES OF INCORPORATION ARE APPROVED
If the New Articles of Incorporation are approved by the requisite vote of
Exmark's Stockholders, Exmark will have three classes of preferred stock: Exmark
Preferred Stock, Exmark Class B Stock and Exmark Class C Stock.
The New Articles of Incorporation clarify the distribution preference of the
Exmark Preferred Stock. Under Exmark's existing articles of incorporation, the
Exmark Preferred Stock is entitled to the liquidation preference described
above. In order to confirm that this preference applies to the Merger
Consideration to be received by holders of Exmark Preferred Stock in connection
with the Merger, the New Articles of Incorporation were drafted to explicitly
state that such holders would receive the same liquidation preference (I.E., a
distribution preference) in the event of the acquisition of all or substantially
all of the shares of Exmark by merger, purchase or otherwise.
The New Articles of Incorporation also create two new classes of preferred
stock. The Exmark Class B Stock and Exmark Class C Stock have the right to vote
for the election of directors and for all other purposes, and each holder of
Class B Stock and Exmark Class C Stock is entitled to one vote for each share
held. Holders of Class B Stock and Exmark Class C Stock have the right to
cumulate votes in the election of directors and do not have a right of
redemption or any preferential right of subscription for any securities of
Exmark.
Holders of Exmark Class B Stock and Exmark Class C Stock are entitled to
dividends when and as declared by Exmark's Board of Directors from funds legally
available therefor and shall participate therein on a pro rata basis with each
share of Exmark Common Stock. In the event of the liquidation of Exmark, each
share of Exmark Class B Stock shall be entitled to a liquidation preference
equal to the par value thereof ($.01), subject to the prior liquidation
preference of Exmark Preferred Stock in the amount of the par value thereof. In
the event of the liquidation of Exmark, each share of Exmark Class C Stock shall
be entitled to a liquidation preference equal to the par value thereof ($.01),
subject to the prior liquidation preference of the original Preferred Stock and
the Class B Preferred Stock in the amount of the par values thereof.
69
COMPARISON OF STOCKHOLDER RIGHTS
The rights of Toro stockholders are governed by the Delaware General
Corporation Law (the "DGCL"), Toro's Certificate and Toro's Bylaws (the "Toro
Bylaws"). The rights of Exmark stockholders are governed by the Nebraska
Business Corporation Act (the "NBCA"), the Articles of Incorporation of Exmark,
as amended ("Exmark Articles"), and the bylaws of Exmark ("Exmark Bylaws"). The
following is a summary of certain material differences between the rights of
stockholders of Toro and the rights of stockholders of Exmark, as contained in
provisions of the DGCL and the NBCA, the Toro Certificate and Toro Bylaws, and
the Exmark Articles and Exmark Bylaws. It does not purport to be a complete
statement of the rights of Toro's stockholders as compared with the rights of
Exmark stockholders, and the identification of certain specific differences is
not meant to indicate that other equally or more significant differences do not
exist.
STOCKHOLDERS' DISSENTERS' RIGHTS
Under both the DGCL and the NBCA, stockholders may exercise a right to
dissent from certain corporate actions and obtain payment of the fair value of
their shares. This remedy is an exclusive remedy, except where the corporate
action involves fraud or illegality.
Under the DGCL, dissenters' rights are limited. Appraisal rights are
available only in connection with certain statutory mergers or consolidations,
amendments to the certificate of incorporation (if so provided in the
certificate of incorporation), any merger or consolidation in which the
corporation is a constituent corporation, or sales of all or substantially all
of the assets of a corporation. The Toro Certificate does not grant such rights.
Under the NBCA, the categories of transactions subject to dissenters' rights
are broader than those in the DGCL. A stockholder of a Nebraska corporation may
exercise dissenter's rights in connection with an amendment to the articles of
incorporation which materially and adversely affects the rights or preferences
of shares held by the dissenting stockholder, a sale or exchange of all or
substantially all of the corporation's property not in the usual course of
business if the stockholder is entitled to vote on the sale or exchange, a plan
of merger for which stockholder approval is required, a plan of exchange
involving the acquisition of the corporation's shares if the stockholder is
entitled to vote on the plan, and any corporate action taken pursuant to a
stockholder vote to the extent the articles, bylaws or board resolutions provide
for such rights. See "THE MERGER--Dissenters' Rights." Neither the Exmark
Articles nor the Exmark Bylaws grant such rights.
BOARD OF DIRECTORS
The DGCL provides that the board of directors of a Delaware corporation
shall consist of one or more directors as fixed by the certificate of
incorporation or bylaws. The Toro Articles and the Toro Bylaws presently require
a board comprised of not less than eight nor more than eleven directors, with
the exact number to be fixed by the board. Toro's board of directors is divided
into three classes, as nearly equal in number as possible. Directors in each
class serve for three years, and elections are staggered such that one class is
elected each year.
The NBCA provides that the board of directors of a Nebraska corporation
shall consist of one or more directors as fixed by the articles of incorporation
or bylaws. The Exmark Bylaws provide that the board shall consist of seven
directors. Exmark's board of directors is divided into two classes, consisting
of three and four directors, respectively. Directors in each class serve for two
years, and elections are staggered such that one class is elected each year.
70
REMOVAL OF DIRECTORS
The DGCL provides that a director or the entire board of directors may be
removed, with or without cause, by the holders of at least a majority of the
shares then entitled to vote at an election of directors, unless the certificate
of incorporation provides in the case of a corporation whose board is
classified, that directors may be removed only for cause, or unless the
Corporation has cumulative voting, in which event if less than the entire board
is to be removed, no director may be removed without cause if the votes cast
against the director's removal would be sufficient to elect that director if
voted cumulatively either at an election of the entire board of directors or for
classes of the board. The Toro Certificate provides that, subject to the rights
of the holders of any series of preferred stock then outstanding, any director
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the voting power of the then
outstanding shares of the voting stock of Toro, voting together as a single
class. Toro does not have cumulative voting.
The NBCA provides that stockholders may remove one or more directors with or
without cause, unless the articles of incorporation provide that directors may
be removed only for cause; provided, however, that if cumulative voting is
authorized, a director may not be removed if the number of votes sufficient to
elect that director under cumulative voting is voted against the director's
removal. Neither the Exmark Bylaws nor the Exmark Articles contain provisions
with respect to removal of directors. The Exmark Bylaws provide for cumulative
voting.
AMENDMENTS TO BYLAWS
Under the DGCL, the Toro Bylaws may be altered, amended, supplemented or
repealed, or new bylaws adopted, by the stockholders entitled to vote or by any
other manner as may be authorized by the Toro Certificate. The Toro Certificate
provides that the Board of Directors is expressly authorized and empowered to
adopt, amend or repeal the Toro Bylaws by a majority vote; provided, however,
that the affirmative vote of the holders of at least 80% of the voting power of
the then outstanding shares of voting stock, voting together as a single class,
is required to alter, amend or repeal certain Bylaws, including those involving
the board of directors, actions by stockholders and certain business
combinations.
The NBCA and the Exmark Articles provide that either the stockholder or the
directors may adopt, amend or repeal bylaws. However, under the NBCA, directors
may not amend or repeal any bylaw if the bylaw expressly prohibits such action.
Similarly, while stockholders may, if authorized by the articles of
incorporation, adopt bylaws providing for a supermajority quorum or voting, the
board of directors may not. The Exmark Articles do not authorize adoption of
supermajority quorum or voting requirement. The Exmark Bylaws provide that the
bylaws may be altered, amended or repealed and new bylaws may be adopted,
amended or repealed by the stockholders at any regular or special meeting or,
except to the extent prohibited by law, by the board of directors at any regular
or special meeting or, in certain circumstances, by informal action.
AMENDMENTS TO CERTIFICATE OR ARTICLES
Under the DGCL, a corporation's certificate of incorporation may be amended
by resolution of the board of directors and the affirmative vote of the holders
of a majority of the outstanding shares entitled to vote. In addition, if an
amendment would increase or decrease the number of authorized shares in a
particular class, increase or decrease the par value of the shares of such class
or alter or change the powers, preferences or other special rights of such class
so as to affect the class adversely, then a majority of shares of that class
must approve the amendment. The DGCL permits a corporation to require a greater
proportion of voting power to approve amendments to specified provisions. The
Toro certificate provides that certain provisions of the certificate of
incorporation, including those involving the board of directors, actions by
stockholders and certain business combinations, cannot be altered, amended or
repealed unless such modification complies with the supermajority voting
provisions.
71
The NBCA provides that a corporation's articles of incorporation may be
amended by resolution of the board of directors and the affirmative vote of at
least two-thirds of the shares entitled to vote, unless the articles of
incorporation require a greater vote. Under the NBCA, holders of the outstanding
shares of a class are entitled to vote as a separate voting group if, among
other things, the amendment would alter the number of authorized shares of the
class, effect an exchange or reclassification of all or part of the shares into
another class, or otherwise change the rights, preferences or limitations of the
shares in the class. The Exmark Articles do not alter these provisions.
INDEMNIFICATION
The DGCL contains provisions setting forth conditions under which a
corporation may indemnify its directors, officers, employees or agents. The DGCL
provides for indemnification if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. Such indemnification is
merely permissive, except that a corporation must indemnify a person who is
successful on the merits or otherwise in the defense of certain specified
actions, suits or proceedings for expenses and attorneys' fees actually and
reasonably incurred in connection therewith. The DGCL allows a corporation,
through its certificate of incorporation, bylaws, or other intracorporate
agreements, to make indemnification mandatory.
The Toro Certificate provides that Toro shall indemnify its directors and
officers to the fullest extent permitted by law. The Toro Certificate
specifically requires indemnification of all expense, liability and loss
reasonably incurred by such director or officer by reason of the fact that such
person was or is a director or officer of Toro or was or is serving at the
request of Toro any other legal entity in any capacity while a director or
officer of Toro. The Toro Certificate permits the board of directors to
indemnify employees and agents.
Under Nebraska law, a corporation is required to indemnify a director or
officer of a corporation against expenses actually and reasonably incurred in
connection with the successful defense of certain proceedings, provided that
such person is wholly successful in the defense. The NBCA permits a corporation
to indemnify employees and agents.
The Exmark Articles provide for the indemnification of any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil or criminal, by reason of
the fact that such person was or is a director, officer, employee or agent of
the corporation or was or is serving at the request of Exmark any other legal
entity in any capacity. Such indemnification applies to all expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such proceeding, provided the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful.
LIABILITY OF DIRECTORS
Under the DGCL, a corporation's certificate of incorporation may contain a
provision limiting or eliminating a director's personal liability to the
corporation or its stockholders for monetary damages for a director's breach of
fiduciary duty, subject to certain limitations. The Toro Certificate provides
that a director shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for any breach of the director's duty of loyalty to the
corporation or its stockholders, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, for any
transaction from which the director derived an improper personal benefit, or as
provided in the DGCL for liability for an unlawful payment of dividend, stock
purchase or redemption.
72
The NBCA similarly permits the articles of incorporation to eliminate or
limit the liability of a director to the corporation or its stockholders from
monetary damages for any action taken as a director except liability for the
amount of a financial benefit the director received to which the director was
not entitled; an intentional infliction of harm on the corporation or the
stockholders; an intentional authorization of unlawful distribution; or an
intentional violation of criminal law. The present Exmark articles of
incorporation do not provide for the limitation or elimination of directors'
liability in any manner. However, prior to the Merger, the Exmark stockholders
will be asked to approve the New Articles of Incorporation, which will provide
for the elimination and limitation of the directors' liability to the fullest
extent allowed by the NBCA.
STOCKHOLDER MEETINGS
The DGCL requires a corporation to hold an annual meeting of stockholders
for the election of directors. In accordance with the DGCL and the Toro
Certificate, special meetings of the stockholders of Toro may be called only by
the board of directors pursuant to a resolution approved by a majority of the
entire board. Under the DGCL and the Toro Bylaws, whenever stockholders are
required or permitted to take action at a meeting, a written notice regarding
the meeting, which in the case of a special meeting, must indicate the purpose
or purposes for which the meeting is called, must be sent to all stockholders of
record entitled to vote at the meeting not less than 10 nor more than 60 days
before the meeting. Under the DGCL, notice of a meeting to consider an agreement
of merger must be sent at least 20 days prior to the date of the meeting.
The NBCA provides for annual meetings of stockholders. Special meetings are
held if called by the board of directors or others authorized by the articles of
incorporation or bylaws or upon the demand for such a meeting by holders of at
least 10% of the votes entitled to be cast on any issue proposed to be
considered at the proposed special meeting. The Exmark Bylaws provide that the
president or the board of directors may call a special meeting of stockholders
and that, at the request of holders of not less than 10% of all the outstanding
shares of the Exmark entitled to vote at the meeting, the President must call a
special meeting. The Exmark Bylaws require written notice stating the place,
time and date of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, to be sent to all stockholders of
record entitled to vote thereon not less than 10 nor more than 50 days before
the meeting.
PREEMPTIVE RIGHTS
Under Delaware law, stockholders of a corporation have no preemptive rights
unless such rights are expressly granted in the certificate of incorporation.
The Toro Certificate expressly provides that stockholders do not have preemptive
rights to subscribe for any shares of Toro capital stock. Under Nebraska law,
preemptive rights are presumed unless denied in the articles of incorporation.
The Exmark Bylaws deny preemptive rights to stockholders.
MERGERS, CONSOLIDATIONS AND OTHER BUSINESS COMBINATIONS
In order to merge or consolidate under the DGCL, a corporation's board of
directors must adopt a resolution approving an agreement of merger and, if
stockholder approval is required, recommend it to the stockholders, who must
adopt it by a majority vote. The DGCL allows a corporation, through its
certificate of incorporation, to adopt super majority voting requirements.
The DGCL bars a corporation which has securities traded on an exchange,
designated on the Nasdaq National Market or held of record by more than 2,000
stockholders from engaging in certain business combinations, including a merger,
sale of substantial assets, loan or substantial issuance of stock, with an
interested stockholder, or an interested stockholder's affiliates and
associates, for a three-year period beginning on the date the interested
stockholder acquires 15% or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if (1) the
board of directors gives
73
prior approval to the transaction in which the 15% ownership level is exceeded,
(2) the interested stockholder acquires at one time at least 85% of the
corporation's stock (excluding those shares owned by persons who are directors
and also officers as well as employee stock plans in which employees do not have
a confidential right to vote), or (3) the business combination is approved by
the board of directors and authorized at a meeting of stockholders by the
holders of at least two-thirds of the outstanding voting stock, excluding shares
owned by the interested stockholder.
The Toro Certificate contains provisions that provide for supermajority
voting requirements in connection with certain "Business Combinations" (as
defined) involving "Affiliates" (as defined) or an "Interested Shareholder" (as
defined), unless specifically exempted pursuant to the Toro Certificate. The
affirmative vote of at least 80% of the voting power of the then outstanding
shares of voting stock, voting as a single class, is required to approve such
transactions. The super majority voting requirement is mandatory and applies
even if no vote would have otherwise been required.
The NBCA provides that a resolution containing a plan of merger or exchange
must be approved by the affirmative vote of a majority of the directors present
at a meeting and, if stockholder approval is required, submitted to the
stockholders and approved by the affirmative vote of the holders of two-thirds
of the voting power of all shares entitled to vote.
Neither the Exmark Articles nor the Exmark Bylaws contain a supermajority
voting requirement for business combinations. The Nebraska Shareholders'
Protection Act contains provisions governing the rights of stockholders in the
case of certain share acquisitions and business combinations involving public
corporations incorporated in (or having certain other significant ties to)
Nebraska. Exmark is not a public corporation as defined in that act and,
accordingly, is not governed by that act's provisions.
OTHER ANTI-TAKEOVER PROVISIONS
Certain provisions of Toro's Certificate of Incorporation may have the
effect of preventing, discouraging or delaying any change in the control of
Toro. The following provisions may have anti-takeover effects: (1) Toro's Board
of Directors is classified into three classes, each of which serves for three
years, with one class being elected each year; (2) directors may be removed only
for cause and only with the approval of holders of at least 80% of the then
outstanding shares of the capital stock entitled to vote generally in the
election of directors ("Voting Stock"); (3) any vacancy on Toro's Board may be
filled only by the remaining directors then in office; (4) stockholder action
must be taken at a meeting of stockholders and stockholders may not act by
written consent; (5) special meetings of stockholders of Toro may be called only
by Toro's Board of Directors pursuant to a resolution adopted by a majority of
Toro's entire Board; (6) a fair price" provision requires the approval by the
holders of 80% of the then outstanding Voting Stock as a condition for mergers
and certain other business combinations of Toro with any holder of more than 10%
of such voting power (an "Interested Stockholder") unless either (a) the
transaction is approved by a majority of the members of Toro's Board of
Directors who are unaffiliated with the Interested Stockholder and were members
of Toro's Board of Directors prior to the time the Interested Stockholder became
an Interested Stockholder or (b) certain minimum price and procedural
requirements are met; and (7) the stockholder vote required to alter, amend or
repeal the foregoing provisions is 80% of the then outstanding Voting Stock.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the stockholders, and may delay
or frustrate the assumption of control by a holder of a large block of Toro
Common Stock and the removal of incumbent management. Furthermore, these
provisions may deter or could be utilized to frustrate a future takeover attempt
which is not approved by the incumbent Board of Directors of Toro, but which the
holders of a majority of the shares may deem to be in their best interests or in
which Toro's stockholders may receive a substantial premium for their stock over
prevailing market prices of such stock. By discouraging takeover attempts, these
provisions might have the incidental effect
74
of inhibiting certain changes in management (some or all of the members of which
might be replaced in the course of a change of control) and also the temporary
fluctuations in the market price of the stock which often result from actual or
rumored takeover attempts.
LEGAL MATTERS
The validity of the Toro Common Stock to be issued in connection with the
Merger will be passed upon for Toro by J. Lawrence McIntyre, General Counsel of
Toro. An opinion concerning the tax consequence of the Merger and an opinion
concerning Exmark will be given by Croker, Huck, Kasher, DeWitt, Anderson &
Gonderinger, P.C.
EXPERTS
The consolidated financial statements of Toro appearing in Toro's Annual
Report on Form 10-K for the year ended October 31, 1996, filed with the SEC on
January 29, 1997, have been audited by KPMG Peat Marwick LLP, independent
auditors, as set forth in their report thereon included therein. Such
consolidated financial statements are included in Exhibit D herein in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The combined financial statements of James Hardie Irrigation, Inc., James
Hardie Irrigation Pty Limited and James Hardie Irrigation Europe S.p.A. as of
December 1, 1996 and for the year then ended, have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their report thereon. Such
combined financial statements are included in Exhibit D herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Exmark included herein have been audited by
Grant Thornton LLP, independent certified public accountants, as set forth in
their report appearing elsewhere herein. Such financial statements are included
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
OTHER MATTERS
The management of Exmark is not aware of any other business that may come
before the Special Meeting. However, if additional matters properly come before
the Special Meeting, proxies will be voted at the discretion of the proxy
holders.
75
FINANCIAL STATEMENTS OF
EXMARK MANUFACTURING COMPANY INCORPORATED
INDEX
PAGE
-------------
Audited Financial Statements as of August 31, 1997 and 1996 and for the years ended August 31,
1997, 1996 and 1995:
Report of Independent Certified Public Accountants............................................... F-2
Balance Sheets................................................................................... F-3
Statements of Earnings........................................................................... F-4
Statement of Stockholders' Equity................................................................ F-5
Statements of Cash Flows......................................................................... F-6
Notes to Financial Statements.................................................................... F-8 to F-14
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Exmark Manufacturing Company Incorporated
We have audited the accompanying balance sheets of Exmark Manufacturing
Company Incorporated as of August 31, 1997 and 1996, and the related statements
of earnings, stockholders' equity, and cash flows for each of the three years in
the period ended August 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Exmark Manufacturing Company
Incorporated as of August 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended August 31,
1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Lincoln, Nebraska
October 6, 1997
F-2
EXMARK MANUFACTURING COMPANY INCORPORATED
BALANCE SHEETS
AUGUST 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash............................................................................... $ 30,416 $ 32,064
Accounts receivable................................................................ 3,062,925 1,736,175
Inventories........................................................................ 6,732,680 4,917,895
Prepaid expenses and deposits...................................................... 212,192 205,132
Refundable income taxes............................................................ 284,183 3,229
Deferred income taxes.............................................................. 142,000 190,500
------------- ------------
Total current assets............................................................. 10,464,396 7,084,995
Property and equipment-at cost
Land............................................................................... 62,737 62,737
Buildings and improvements......................................................... 3,625,987 2,404,356
Office equipment................................................................... 1,002,811 784,702
Plant equipment.................................................................... 2,241,725 1,795,126
Vehicles........................................................................... 84,344 84,331
Construction in progress........................................................... 1,235,517 227,163
------------- ------------
8,253,121 5,358,415
Less accumulated depreciation...................................................... 3,063,379 2,497,117
------------- ------------
5,189,742 2,861,298
Other assets....................................................................... 12,655 19,339
------------- ------------
Total assets..................................................................... $ 15,666,793 $ 9,965,632
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.............................................................. $ 1,413,260 $ --
Current maturities of long-term obligations........................................ 298,779 370,802
Accounts payable................................................................... 1,225,720 595,203
Accrued compensation............................................................... 1,083,832 805,377
Accrued warranty................................................................... 490,000 365,000
Accrued interest................................................................... 126,614 113,389
Other accrued liabilities.......................................................... 1,446,193 1,040,337
------------- ------------
Total current liabilities........................................................ 6,084,398 3,290,108
Long-term obligations, less current maturities....................................... 415,274 928,905
Subordinated debentures.............................................................. -- 5,000
Commitments and contingencies........................................................ -- --
Stockholders' Equity
Voting and participating preferred stock--authorized 21,000 shares of $40 par
value; issued and outstanding 7,416 shares....................................... 296,640 296,640
Common stock--authorized, 24,000 shares of $10 par value; issued and outstanding
15,431 shares at August 31, 1997 and 10,587 shares at August 31, 1996............ 154,310 105,870
Additional paid-in capital......................................................... 941,140 202,025
Retained earnings.................................................................. 7,872,676 5,137,084
Less stock subscriptions receivable................................................ (97,645) --
------------- ------------
Total stockholders' equity....................................................... 9,167,121 5,741,619
------------- ------------
Total liabilities and stockholders' equity....................................... $ 15,666,793 $ 9,965,632
------------- ------------
------------- ------------
The accompanying notes are an integral part of these statements.
F-3
EXMARK MANUFACTURING COMPANY INCORPORATED
STATEMENTS OF EARNINGS
YEAR ENDED AUGUST 31,
1997 1996 1995
------------- ------------- -------------
Sales............................................................... $ 53,420,489 $ 38,371,719 $ 25,265,298
Cost of goods sold.................................................. 35,687,200 25,216,988 16,534,938
------------- ------------- -------------
Gross profit...................................................... 17,733,289 13,154,731 8,730,360
Operating expenses.................................................. 12,613,756 9,819,437 6,517,920
------------- ------------- -------------
Operating profit.................................................. 5,119,533 3,335,294 2,212,440
Other (income) expense
Interest expense.................................................. 1,155,018 1,057,013 775,831
Interest income................................................... (21,797) (16,510) (20,736)
Other, net........................................................ (302,156) (215,958) (156,326)
------------- ------------- -------------
831,065 824,545 598,769
------------- ------------- -------------
Earnings before income taxes.................................... 4,288,468 2,510,749 1,613,671
Income tax expense.................................................. 1,492,500 845,800 550,000
------------- ------------- -------------
Net earnings.................................................... $ 2,795,968 $ 1,664,949 $ 1,063,671
------------- ------------- -------------
------------- ------------- -------------
Net earnings per share of common stock and common stock
equivalent........................................................ $ 62.01 $ 36.95 $ 24.47
------------- ------------- -------------
------------- ------------- -------------
Net earnings per share of common stock and common stock
equivalent--assuming full dilution................................ $ 62.01 $ 36.95 $ 24.38
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these statements.
F-4
EXMARK MANUFACTURING COMPANY INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK SUB-
---------------------- -------------------- PAID-IN RETAINED SCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE
----------- --------- --------- --------- ----------- ----------- -----------
Balance at September 1, 1994........ 7,416 $ 296,640 10,420 $ 104,200 $ 191,170 $ 2,478,778 $ --
Conversion of convertible
subordinated debentures into
common stock...................... -- -- 167 1,670 10,855 -- --
Common dividends ($0.75 share)...... -- -- -- -- -- (7,815) --
Preferred dividends ($3.00 share)... -- -- -- -- -- (22,248) --
Net earnings........................ -- -- -- -- -- 1,063,671 --
----- --------- --------- --------- ----------- ----------- -----------
Balance at August 31, 1995.......... 7,416 296,640 10,587 105,870 202,025 3,512,386 --
Common dividends ($1.00 share)...... -- -- -- -- -- (10,587) --
Preferred dividends ($4.00 share)... -- -- -- -- -- (29,664) --
Net earnings........................ -- -- -- -- -- 1,664,949 --
----- --------- --------- --------- ----------- ----------- -----------
Balance at August 31, 1996.......... 7,416 296,640 10,587 105,870 202,025 5,137,084 --
Common dividends ($1.50 share)...... -- -- -- -- -- (15,880) --
Preferred dividends ($6.00 share)... -- -- -- -- -- (44,496) --
Issuance of common shares under
stock option plan................. -- -- 3,140 31,400 115,301 -- (97,645)
Issuance of common shares under
stock bonus plan.................. -- -- 1,704 17,040 105,814 -- --
Tax benefits relating to stock
option and bonus transactions..... -- -- -- -- 518,000 -- --
Net earnings........................ -- -- -- -- -- 2,795,968 --
----- --------- --------- --------- ----------- ----------- -----------
Balance at August 31, 1997.......... 7,416 $ 296,640 15,431 $ 154,310 $ 941,140 $ 7,872,676 $ (97,645)
----- --------- --------- --------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- -----------
TOTAL
-----------
Balance at September 1, 1994........ $ 3,070,788
Conversion of convertible
subordinated debentures into
common stock...................... 12,525
Common dividends ($0.75 share)...... (7,815)
Preferred dividends ($3.00 share)... (22,248)
Net earnings........................ 1,063,671
-----------
Balance at August 31, 1995.......... 4,116,921
Common dividends ($1.00 share)...... (10,587)
Preferred dividends ($4.00 share)... (29,664)
Net earnings........................ 1,664,949
-----------
Balance at August 31, 1996.......... 5,741,619
Common dividends ($1.50 share)...... (15,880)
Preferred dividends ($6.00 share)... (44,496)
Issuance of common shares under
stock option plan................. 49,056
Issuance of common shares under
stock bonus plan.................. 122,854
Tax benefits relating to stock
option and bonus transactions..... 518,000
Net earnings........................ 2,795,968
-----------
Balance at August 31, 1997.......... $ 9,167,121
-----------
-----------
The accompanying notes are an integral part of this statement.
F-5
EXMARK MANUFACTURING COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31,
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................................... $ 2,795,968 $ 1,664,949 $ 1,063,671
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization.................................... 621,987 568,257 364,716
Loss on disposal of property and equipment....................... -- 14,900 --
Change in deferred income taxes.................................. 48,500 (138,200) (12,700)
Tax benefit relating to stock option transactions................ 518,000 -- --
Changes in operating assets and liabilities
Increase in accounts receivable................................ (1,326,750) (586,364) (336,366)
Increase in inventories........................................ (1,814,785) (885,304) (972,219)
Decrease (increase) in prepaid expenses and deposits........... (7,060) 7,997 (25,713)
Decrease (increase) in refundable income taxes................. (280,954) 30,095 (33,324)
Increase (decrease) in accounts payable........................ 630,517 (94,013) 261,134
Increase in accrued liabilities................................ 822,536 934,879 239,552
Decrease in income taxes payable............................... -- -- (224,306)
------------- ------------- -------------
Net cash provided by operating activities.................... 2,007,959 1,517,196 324,445
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of marketable securities.................... -- -- 493,740
Proceeds from maturity of certificate of deposit................... -- -- 99,000
Purchase of property and equipment................................. (2,943,747) (479,709) (1,430,805)
------------- ------------- -------------
Net cash used in investing activities........................ (2,943,747) (479,709) (838,065)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term obligations........................ (585,654) (365,455) (358,939)
Payments on subordinated debentures................................ (5,000) -- (1,000)
Payments on convertible subordinated debentures.................... -- -- (3,600)
Proceeds from exercise of stock options............................ 49,056 -- --
Proceeds from issuance of stock.................................... 122,854 -- --
Net proceeds (payments) on short-term borrowings................... 1,413,260 (600,806) 600,806
Payment of dividends............................................... (60,376) (40,251) (30,063)
------------- ------------- -------------
Net cash provided by (used in) financing activities.......... 934,140 (1,006,512) 207,204
------------- ------------- -------------
Net increase (decrease) in cash.................................... (1,648) 30,975 (306,416)
Cash, beginning of year............................................ 32,064 1,089 307,505
------------- ------------- -------------
Cash, end of year.................................................. $ 30,416 $ 32,064 $ 1,089
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these statements.
F-6
EXMARK MANUFACTURING COMPANY INCORPORATED
STATEMENTS OF CASH FLOWS--CONTINUED
YEAR ENDED AUGUST 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1996 1995
------------- ------------- -------------
Cash paid during the year for:
Interest........................................................... $ 1,141,793 $ 1,061,991 $ 705,692
Income taxes....................................................... 1,206,954 953,905 820,330
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
During 1997, notes receivable of $97,645 were received by the Company upon
the exercise of stock options under the restricted stock bonus plan.
During 1995, $12,000 of the convertible subordinated debentures and $525 of
accrued interest were converted into 167 shares of common stock.
The accompanying notes are an integral part of these statements.
F-7
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. BUSINESS ACTIVITY
The Company's sales are derived principally from the manufacturing of
various types of walk-behind and riding lawnmowers used for commercial and
industrial purposes.
2. CONCENTRATIONS OF CREDIT RISK
The Company sells its products to distributors in the lawn and turf care
industry and extends credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses.
3. INVENTORIES
Inventories are stated as lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.
4. PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided for in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives on straight-line and accelerated methods. Buildings are generally
depreciated over 15 to 40 years, equipment including purchased computer software
and tooling over 3 to 10 years, and vehicles over 3 to 5 years.
Maintenance, repairs and renewals which neither materially add to the value
of the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in earnings.
5. WARRANTY
The Company provides for estimated future warranty costs based upon the
historical relationship of warranty costs to sales.
6. INCOME TAXES
Deferred income taxes result from the differences between the tax bases of
assets and liabilities and their financial reporting amount.
7. NET EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENT
Net earnings per share of common stock and common stock equivalent is
computed by dividing net earnings by the weighted average number of common
shares and common equivalent shares outstanding during the respective periods.
Common stock equivalents include the potentially dilutive effect of
participating preferred stock and stock options. Fully diluted net earnings per
share also includes the potential dilutive effect of the subordinated debentures
as if they had been converted to common stock at the beginning of the period.
F-8
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
8. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
9. RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform
with the current year presentation.
NOTE B--INVENTORIES
Inventories consist of the following at August 31:
1997 1996
------------ ------------
Raw Materials..................................................... $ 4,811,592 $ 3,830,675
Finished Goods.................................................... 1,921,088 1,087,220
------------ ------------
$ 6,732,680 $ 4,917,895
------------ ------------
------------ ------------
NOTE C--LONG-TERM OBLIGATIONS
1997 1996
---------- ------------
5% note payable to the City of Beatrice, due in monthly principal
and interest installments of $7,067 through December, 2000. The
note is collateralized by a second collateral position on accounts
receivable, inventories, and property and equipment............... $ 259,880 $ 329,782
Nebraska Industrial Development Revenue Bonds, due in semi-annual
installments of $90,817, plus interest at 87% of the national
prime rate (7.395% at August 31, 1997) to April 25, 1999. The
prime rate is adjusted on the 25th day of January, April, July and
October. The bonds are collateralized by a deed of trust and
assignment of rents............................................... 363,266 544,899
Nebraska Investment Finance Authority Industrial Development Revenue
Bond, due in monthly installments (currently $1,452) of principal
and interest, to October 1, 2000. Interest is adjusted each
October 1, provided that in no event will the Bond rate exceed
12.75% or be less than 8.25%. The current interest rate at August
31, 1997 is 8.25%. The bond is collateralized by a deed of trust
and assignment of rents........................................... 47,490 60,432
F-9
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C--LONG-TERM OBLIGATIONS (CONTINUED)
1997 1996
---------- ------------
Nebraska Development Finance Authority Bond, due in monthly
installments (currently $1,568) of principal and interest, to June
1, 1999. Interest is adjusted each June 1 to equal 70% of the
preferred rate announced by First National Bank, Beatrice,
Nebraska, but in no event will the interest rate charged exceed
11.9% or be less than 7.7%. The current interest rate at August
31, 1997 is 7.7%. The bond is collateralized by a deed of trust
and assignment of rents........................................... 30,803 46,602
Nebraska Development Finance Fund Revenue Bond, due in monthly
installments (currently $1,743) of principal and interest, to June
1, 1998. Interest is adjusted each May 1 to equal 70% of the
preferred rate announced by First National Bank, Beatrice,
Nebraska, but in no event will the interest charged exceed 11.9%
or be less than 7.7%. The current interest rate at August 31, 1997
is 7.7%. The bond is collateralized by a deed of trust and
assignment of rents............................................... 12,614 31,764
Note payable to a bank, due in monthly principal installments of
$5,952 plus interest through October 2000. Interest was due at a
variable rate based on the National Reference Rate. The note was
collateralized by accounts receivable, inventories, and property
and equipment. The note was retired in September 1996............. -- 286,228
---------- ------------
714,053 1,299,707
Less current maturities............................................. 298,779 370,802
---------- ------------
$ 415,274 $ 928,905
---------- ------------
---------- ------------
Annual maturities of long-term obligations for the years following August
31, 1997 are as follows:
AUGUST 31 TOTAL
- ---------------------------------------------------------------------------------- ----------
1998.............................................................................. $ 298,779
1999.............................................................................. 287,846
2000.............................................................................. 97,733
2001.............................................................................. 29,695
The estimated fair value of long-term debt is the same as its carrying value
based on the borrowing rates currently available to the company for loans of
similar terms and maturities.
F-10
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan with a 401(k) cash or deferred
arrangement covering substantially all employees. Employees can contribute up to
15% of their annual compensation. Effective November 1, 1996, the plan was
changed to provide for Company matching contributions on a monthly basis not to
exceed 6% of an employee's compensation. The Board of Directors approved a 50%
match, up to 3% of employee compensation for the year ended August 31, 1997. The
plan also permits additional discretionary contributions. To be eligible,
participants must be 19 years of age, have completed one year of service and
work a minimum of 1,000 hours. Matching and discretionary contributions charged
to expense by the Company totaled $244,692, $210,228 and $135,331 in 1997, 1996
and 1995, respectively.
NOTE E--VOTING AND PARTICIPATING PREFERRED STOCK
Each share of preferred stock is entitled to one vote. Preferred stock shall
participate in dividends on a prorata basis with the common stock, such that
each share of preferred stock will be entitled to $4 of dividends for each $1 of
dividends declared with respect to each share of common stock. Each share of
preferred stock has a liquidation value of $40 per share and then after each
share of common has received $10, any excess is apportioned in a 4 to 1 ratio,
such that each share of preferred stock will be entitled to a liquidating
distribution of $4 for each $1 liquidating distribution distributable to each
share of common stock.
NOTE F--RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, the Company engaged in various transactions with
certain stockholders or stockholder related enterprises. Amounts affecting the
balance sheets are not significant. Sales to related parties were $5,844,066,
$4,138,728 and $2,652,691 in 1997, 1996 and 1995, respectively.
NOTE G--SUBORDINATED DEBENTURES
The subordinated debentures were due June 2, 1998 and were retired in June
1997.
NOTE H--SHORT-TERM BORROWINGS
The Company has a short-term revolving line of credit with a bank which
renews each November 30. The loan agreement provides for an operating loan of up
to $7,000,000. This arrangement provides for borrowing amounts for short-term
use at the National Reference Rate (as defined) which was 8.50% at August 31,
1997. Available credit at August 31, 1997 was $5,586,740.
Interest is payable quarterly and the principal is due on demand. A cash
management agreement exists, but there are no commitment fee arrangements
relating to this line. The loan agreement is collateralized by accounts
receivable, inventories, and property and equipment.
F-11
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended August 31:
1997 1996 1995
------------ ------------ -----------
Current taxes:
Federal............................................ $ 1,444,000 $ 984,000 $ 562,700
State.............................................. 193,000 220,000 123,000
------------ ------------ -----------
1,637,000 1,204,000 685,700
------------ ------------ -----------
Deferred taxes:
Federal............................................ 48,500 (138,200) (12,700)
State--benefit of utilizing compensation and
investment tax credit carry forwards............. (193,000) (220,000) (123,000)
------------ ------------ -----------
(144,500) (358,200) (135,700)
------------ ------------ -----------
Provision for income taxes........................... $ 1,492,500 $ 845,800 $ 550,000
------------ ------------ -----------
------------ ------------ -----------
Deferred tax assets consist of the following at August 31:
1997 1996
---------- -----------
Employees' compensation for future absences.......................... $ 65,400 $ 60,800
Reserve for dental claims............................................ 3,600 2,100
Deferred bonus accruals.............................................. -- 40,700
Reserve for warranty claims.......................................... 73,000 86,900
State compensation and investment tax credit carryforwards........... 419,000 204,000
---------- -----------
561,000 394,500
Valuation allowance for deferred tax assets.......................... (419,000) (204,000)
---------- -----------
$ 142,000 $ 190,500
---------- -----------
---------- -----------
The valuation allowance increased (decreased) $215,000, ($113,000) and
$317,000 at August 31, 1997, 1996 and 1995, respectively.
In 1989, the Company entered into an agreement with the State of Nebraska
entitled "Employment and Investment Growth Act Project Agreement." Under the
terms of the Agreement the Company is required to meet certain investment and
employment guidelines within Nebraska in order to qualify for certain financial
incentives. The State determined that the Company had met all required
guidelines as of August 31, 1995. Incentives that the Company qualified for
include a refund of all sales and use tax paid on certain capital expenditures
and leases and compensation and investment credits associated with increased
employment levels and capital expenditures. At August 31, 1997, outstanding
sales and use tax refunds receivable amounted to approximately $122,500. An
estimated $406,000, $172,000 and $431,000 of compensation and investment credits
were earned for the years ended August 31, 1997, 1996 and 1995, respectively.
Approximately $193,000, $220,000 and $123,000 of the credits were used to offset
Nebraska income taxes for the years ended August 31, 1997, 1996 and 1995,
respectively. Tax credits earned and available to offset future state income
taxes amounted to approximately $419,000 at August 31, 1997. The credits may be
used to reduce the Nebraska income tax liabilities and to obtain a refund of
Nebraska sales
F-12
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (CONTINUED)
and use tax on consumables which is not otherwise refundable through August 31,
2010. Consumables sales tax refunds totaled $37,851 and $16,557 in the years
ended August 31, 1997 and 1996, respectively. The refunds on additional capital
expenditures are available until August 31, 2002 assuming the Company continues
to meet certain required minimum levels of employment and investment.
NOTE J--COMMITMENTS AND CONTINGENCIES
The Company has an agreement with Dealers Credit Incorporated ("DCI")
whereby DCI is to provide credit arrangements to the Company's dealers and
distributors to enable them to finance the sale of products manufactured and/or
sold by the Company. The Company has assumed limited responsibility in any loss
incurred when an item is sold under special promotions with decreasing
responsibilities based upon number of payments made. The Company does not
believe, based upon information available at this time, that the contingent
liabilities of the agreement will have a material adverse effect on its
financial position.
The Company is engaged in various legal actions arising in the ordinary
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that the ultimate outcomes will
not have a material adverse effect on the Company's financial position.
NOTE K--STOCK OPTION PLAN
On November 19, 1990, the board of directors of the Company approved a
non-qualified stock option plan, pursuant to which 4,000 shares had been
reserved for granting to key personnel. Options for 3,600 shares were granted on
that date. The option price may not be less than the fair market value (as
defined) of the common stock at the date of the grant or less than $46.72 per
share. The options granted are exercisable on the first anniversary of the date
of grant and may be purchased in installments of 25% on each anniversary date
thereafter. The options were to expire five years after the date of grant. The
options were extended an additional four years and were now to expire in
November 1999 or three months after termination of employment. During 1997, the
3,140 outstanding options which remained were exercised. No options are
outstanding at August 31, 1997.
NOTE L--RESTRICTED STOCK BONUS PLAN
Effective January 1, 1996, the Company adopted a restricted stock bonus plan
for the fiscal year ending August 31, 1996 and subsequent years. Under the plan,
certain employees can elect to have a portion (not to exceed 50%) of their
profit-based bonus paid to them in the form of restricted common stock. The
common stock is valued at fair value which is set forth in the plan. All shares
issued pursuant to the plan will be subject to restrictions on transfer and will
be subject to forfeiture for a period of five years following issuance of the
stock in the event employment is terminated for any reason other than
involuntary termination without cause, by reason of the employee's death, total
disability, retirement upon or after attaining age 60 or a change of control of
the Company (as defined). At August 31, 1996, $119,788 of bonuses were
designated for stock to be issued at $71.60 per share (70% of net book value at
August 31, 1995). During the year end August 31, 1997, the Board of Directors
waived all restrictions on all stock issued under the restricted stock bonus
plan. At August 31, 1997, no bonuses were designated for stock under the plan.
F-13
EXMARK MANUFACTURING COMPANY INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M--STOCK SUBSCRIPTIONS RECEIVABLE
Stock subscriptions consist of 7% promissory notes due December 1, 1997.
NOTE N--ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES
Engineering, research and development expenses were $594,000 in 1997,
$571,000 in 1996 and $329,000 in 1995. The majority of expenses in 1997, 1996
and 1995 were related to new products and product enhancements. All research and
development costs are charged to expense as incurred.
NOTE O--SIGNIFICANT CUSTOMERS
The Company had sales to three customers which totaled 39%, 40% and 39% of
total sales during the years ended August 31, 1997, 1996 and 1995, respectively.
Sales to a related party represented 10.9%, 10.8% and 10.5% of sales during the
years ended August 31, 1997, 1996 and 1995, respectively. (See also Note F.)
NOTE P--PROPOSED MERGER
In June 1997, the Company's board of directors approved a merger agreement
with The Toro Company under which the Company will become a wholly-owned
subsidiary of The Toro Company. Under the terms of the agreement, stockholders
of the Company will receive Toro stock and cash in exchange for shares of
Company stock. The merger is expected to be accounted for using the purchase
method of accounting. The merger must be approved by the Company's stockholders
and is expected to be completed during 1997. Prior to the closing, the Company
must first acquire all of the outstanding stock of Holiman Co., Inc., the
primary manufacturer's representative for the Company. Holiman is owned by a
stockholder of the Company.
F-14
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the DGCL provides, in summary, that the directors and
officers of the registrant may, under certain circumstances, be indemnified by
the registrant against all expenses incurred by or imposed upon them as a result
of actions, suits or proceedings brought against them as such directors and
officers, or as directors or officers of any other organization at the request
of the registrant, if they act in good faith and in a manner they reasonably
believe to be in or not opposed to the best interests of the registrant, and
with respect to any criminal action or proceeding, have no reasonable cause to
believe their conduct was unlawful, except that no indemnification shall be made
against expenses in respect of any claim, issue or matters to which they shall
have been adjudged to be liable to the registrant unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, they are fairly and reasonably entitled to indemnity
for such expenses which such court shall deem proper. Section 145 of the DGCL
also provides that directors and officers of the registrant are entitled to such
indemnification by the registrant to the extent that such persons are successful
on the merits or otherwise in defending any such action, suit or proceeding.
Article XI of Toro's Certificate of Incorporation provides that the
liability of a director or officer to Toro or its stockholders for monetary
damages for a breach of fiduciary duty as a director shall be indemnified to the
fullest extent permitted under the DGCL, as amended from time to time.
Toro maintains a standard policy of officers' and directors' liability
insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of October 23, 1997 by and among Exmark, Merger
Subsidiary and Toro, as amended (included as Exhibit A to the Proxy Statement/Prospectus that
forms a part of this Registration Statement on Form S-4 (certain exhibits and schedules
omitted--the Registrant agrees to furnish a copy of any exhibit or schedule to the Commission
upon request)).
3.1 and 4.1 Certificate of Incorporation of the Registrant as amended and corrected through May 18, 1987
(incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form
S-3, Registration No. 33-16125).
3.2 and 4.2 Certificate of Amendment to Certificate of Incorporation of the Registrant dated December 8,
1987 (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 29, 1988, Commission File No. 1-8649).
3.3 and 4.3 Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the year ended July 31, 1991, Commission File No. 1-8649).
4.4 Specimen form of Common Stock certificate (incorporated by reference to Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8, Registration No. 2-94417).
II-1
4.5 Rights Agreement dated as of June 14, 1988, between the Registrant and Norwest Bank Minnesota,
National Association relating to rights to purchase Series B Junior Participating Voting
Preferred Stock, as amended (incorporated by reference to Exhibit 1 to Registrant's
Registration Statement on Form 8-A dated June 17, 1988, Commission File No. 1-8649, as
amended).
4.6 Amendment to Rights Agreement dated as of August 14, 1990, between the Registrant and Norwest
Bank Minnesota National Association (incorporated by reference to Exhibit 1 to the
Registrant's Report on Form 8-A dated August 14, 1990, Commission File No. 1-8649).
4.7 Indenture dated as of July 15, 1987, between the Registrant and Manufacturers Hanover Trust
Company, Trustee, relating to the Registrant's 11% Sinking Fund Debentures Due August 1, 2017
(incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form
S-3, Registration No. 33-15385).
4.8 Debt Securities (included on Exhibit 4.7).
5.1 Opinion of J. Lawrence McIntyre, General Counsel of Toro, regarding validity of securities.
8.1 Opinion of Croker, Huck, Kasher, DeWitt, Anderson & Gonderinger, P.C. regarding tax treatment.
10.1 Form of Stockholder Agreements, dated as of October 23, 1997 by and among Exmark, Merger
Subsidiary, Toro and certain stockholders of Exmark.
10.2 Form of Affiliate Agreements, dated as of October 23, 1997 by and among Toro and certain
stockholders of Exmark.
10.3 Form of Employment Agreement and Covenant Not to Compete, dated as of October 23, 1997 by and
among Toro, Exmark and certain employees of Exmark.
10.4 Form of Employee Agreements, dated as of October 23, 1997 by and among Toro, Exmark and certain
employees of Exmark.
10.5 Stock for Stock Exchange Agreement, dated October 23, 1997, by and among Exmark Manufacturing
Company Incorporated, The Holiman Co., Inc. and Roger Smith
23.1 Consent of KPMG Peat Marwick LLP with respect to consolidated financial statements of Toro and
the combined financial statements of James Hardie Irrigation, Inc., James Hardie Irrigation
Pty Limited and James Hardie Irrigation Europe S.p.A.
23.2 Consent of Grant Thornton LLP with respect to financial statements of Exmark.
23.3 Consent of J. Lawrence McIntyre, General Counsel of Toro (included on Exhibit 5).
23.4 Consent of McCarthy & Co. with respect to the fairness of the Merger.
24.1 Power of Attorney.
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of First Trust National
Association as Trustee (incorporated by reference to the Registrant's Registration Statement
on Form S-3, Registration No. 33-15385).
99.1 Form of Proxy Card for the Special Meeting.
99.2 Cash Election Form.
(b) Financial Statement Schedules.
Not Applicable.
(c) Opinions or Appraisals.
Not Applicable.
II-2
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective
II-3
amendment shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) To respond to requests for information that is incorporated by reference
into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(f) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on November 7, 1997.
THE TORO COMPANY
By /s/ KENDRICK B. MELROSE
-----------------------------------------
Kendrick B. Melrose
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 7, 1997.
NAME TITLE
- ------------------------------ --------------------------
Chairman, Chief Executive
/s/ KENDRICK B. MELROSE Officer and Director
- ------------------------------ (principal executive
Kendrick B. Melrose officer)
Vice President and Chief
/s/ STEPHEN P. WOLFE Financial Officer
- ------------------------------ (principal financial
Stephen P. Wolfe officer)
Vice President and
/s/ RANDY B. JAMES Controller
- ------------------------------ (principal accounting
Randy B. James officer)
*
- ------------------------------ Director
Ronald O. Baukol
*
- ------------------------------ Director
Robert C. Buhrmaster
*
- ------------------------------ Director
Janet K. Cooper
*
- ------------------------------ Director
Alex A. Meyer
*
- ------------------------------ Director
Robert H. Nassau
II-5
NAME TITLE
- ------------------------------ --------------------------
*
- ------------------------------ Director
Dale R. Olseth
*
- ------------------------------ Director
Edwin H. Wingate
/s/ KENDRICK B. MELROSE
- ------------------------------
Kendrick B. Melrose
ATTORNEY-IN-FACT
II-6
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- --------------- ------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of October 23, 1997 by and among Exmark,
Merger Subsidiary and Toro, as amended (included as Exhibit A to the Proxy
Statement/Prospectus that forms a part of this Registration Statement on Form S-4
(certain exhibits and schedules omitted--the Registrant agrees to furnish a copy
of any exhibit or schedule to the Commission upon request)).
3.1 and 4.1 Certificate of Incorporation of the Registrant as amended and corrected through May
18, 1987 (incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-3, Registration No. 33-16125).
3.2 and 4.2 Certificate of Amendment to Certificate of Incorporation of the Registrant dated
December 8, 1987 (incorporated by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 29, 1988, Commission
File No. 1-8649).
3.3 and 4.3 Bylaws of the Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K for the year ended July 31, 1991,
Commission File No. 1-8649).
4.4 Specimen form of Common Stock certificate (incorporated by reference to Exhibit 4(c)
to the Registrant's Registration Statement on Form S-8, Registration No. 2-94417).
4.5 Rights Agreement dated as of June 14, 1988, between the Registrant and Norwest Bank
Minnesota, National Association relating to rights to purchase Series B Junior
Participating Voting Preferred Stock, as amended (incorporated by reference to
Exhibit 1 to Registrant's Registration Statement on Form 8-A dated June 17, 1988,
Commission File No. 1-8649, as amended).
4.6 Amendment to Rights Agreement dated as of August 14, 1990, between the Registrant
and Norwest Bank Minnesota National Association (incorporated by reference to
Exhibit 1 to the Registrant's Report on Form 8-A dated August 14, 1990, Commission
File No. 1-8649).
4.7 Indenture dated as of July 15, 1987, between the Registrant and Manufacturers
Hanover Trust Company, Trustee, relating to the Registrant's 11% Sinking Fund
Debentures Due August 1, 2017 (incorporated by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-3, Registration No. 33-15385).
4.8 Debt Securities (included on Exhibit 4.7).
5.1 Opinion of J. Lawrence McIntyre, General Counsel of Toro, regarding validity of
securities.
8.1 Opinion of Croker, Huck, Kasher, DeWitt, Anderson & Gonderinger, P.C. regarding tax
treatment.
10.1 Form of Stockholder Agreements, dated as of October 23, 1997 by and among Exmark,
Merger Subsidiary, Toro and certain stockholders of Exmark.
10.2 Form of Affiliate Agreements, dated as of October 23, 1997 by and among Toro and
certain stockholders of Exmark.
EXHIBIT NUMBER DESCRIPTION
- --------------- ------------------------------------------------------------------------------------
10.3 Form of Employment Agreement and Covenant Not to Compete, dated as of October 23,
1997 by and among Toro, Exmark and certain employees of Exmark.
10.4 Form of Employee Agreements, dated as of October 23, 1997 by and among Toro, Exmark
and certain employees of Exmark.
10.5 Stock for Stock Exchange Agreement, dated October 23, 1997, by and among Exmark
Manufacturing Company Incorporated, The Holiman Co., Inc. and Roger Smith
23.1 Consent of KPMG Peat Marwick LLP with respect to consolidated financial statements
of Toro and the combined financial statements of James Hardie Irrigation, Inc.,
James Hardie Irrigation Pty Limited and James Hardie Irrigation Europe S.p.A.
23.2 Consent of Grant Thornton LLP with respect to financial statements of Exmark.
23.3 Consent of J. Lawrence McIntyre, General Counsel of Toro (included on Exhibit 5).
23.4 Consent of McCarthy & Co. with respect to the fairness of the Merger.
24.1 Power of Attorney.
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of First
Trust National Association as Trustee (incorporated by reference to the
Registrant's Registration Statement on Form S-3, Registration No. 33-15385).
99.1 Form of Proxy Card for the Special Meeting.
99.2 Cash Election Form.
Exhibit A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
THE TORO COMPANY,
EMCI ACQUISITION CORP.
AND
EXMARK MANUFACTURING COMPANY INCORPORATED
October 23, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER ............................................................ 1
1.01 The Merger .................................................. 1
1.02 Effect of Merger ............................................ 2
1.03 Effective Time .............................................. 2
1.04 Directors and Officers ...................................... 2
1.05 Articles of Incorporation; Bylaws ........................... 2
1.06 Taking of Necessary Action; Further Action .................. 2
1.07 The Closing ................................................. 3
ARTICLE II
MERGER CONSIDERATION/EFFECT ON CAPITAL STOCK .......................... 3
2.01 Effect on Exmark Capital Stock .............................. 3
2.02 Determination of Merger Consideration ....................... 4
2.03 Determination of Initial Payment Fund, Class B Initial Payment
Fund and Contingent Payment Funds; Deposit Procedures ....... 9
2.04 Exchange/Payment Procedures ................................. 11
2.05 Dissenting Shares ........................................... 14
2.06 No Fractional Shares ........................................ 14
2.07 Other Exchange Matters ...................................... 15
-i-
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EXMARK .............................. 18
3.01 Incorporation and Corporate Power ........................... 18
3.02 Execution, Delivery and Performance; Valid and
Binding Agreement ........................................... 18
3.03 Approval of Agreement; Stockholders' Meeting ................ 19
3.04 No Breach ................................................... 19
3.05 Governmental Authorities; Consents .......................... 19
3.06 Subsidiaries; Predecessors .................................. 20
3.07 Capital Stock ............................................... 20
3.08 Financial Statements ........................................ 21
3.09 Absence of Undisclosed Liabilities .......................... 21
3.10 No Material Adverse Changes ................................. 22
3.11 Absence of Certain Developments ............................. 22
3.12 Title to Properties ......................................... 24
3.13 Accounts Receivable ......................................... 26
3.14 Inventory ................................................... 26
3.15 Tax Matters ................................................. 27
3.16 Contracts and Commitments ................................... 29
3.17 Intellectual Property Rights ................................ 30
3.18 Litigation .................................................. 32
3.19 Warranties; Products ........................................ 32
3.20 Employees ................................................... 33
-ii-
3.21 Employee Benefit Plans ...................................... 33
3.22 Insurance ................................................... 37
3.23 Affiliate Transactions ...................................... 37
3.24 Customers and Suppliers ..................................... 38
3.25 Distributors ................................................ 38
3.26 Officers and Directors; Bank Accounts ....................... 38
3.27 Compliance with Laws; Permits ............................... 39
3.28 Environmental Matters ....................................... 39
3.29 Brokerage ................................................... 42
3.30 Opinion of Financial Advisor ................................ 42
3.31 Stockholder Agreements ...................................... 42
3.32 Registration Statement ...................................... 42
3.33 Disclosure .................................................. 43
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TORO
AND MERGER SUBSIDIARY ................................................. 43
4.01 Incorporation and Corporate Power ........................... 43
4.02 Execution, Delivery and Performance; Valid and
Binding Agreement ........................................... 43
4.03 No Breach ................................................... 44
4.04 Merger Subsidiary ........................................... 44
4.05 Governmental Authorities; Consents .......................... 44
-iii-
4.06 Brokerage ................................................... 44
4.07 SEC Documents ............................................... 45
4.08 Capital Stock ............................................... 45
4.09 Current Plans or Intentions ................................. 46
4.10 Due Authorization of Stock Issued in Merger ................. 46
ARTICLE V
COVENANTS OF EXMARK ................................................... 47
5.01 Conduct of the Business ..................................... 47
5.02 Access to Books and Records ................................. 49
5.03 Stockholders' Meeting ....................................... 50
5.04 Regulatory Filings .......................................... 50
5.05 Registration Statement ...................................... 50
5.06 Financial Statements ........................................ 50
5.07 Conditions .................................................. 51
5.08 No Negotiations ............................................. 51
5.09 Exercise or Cancellation of Outstanding Purchase Rights ..... 52
5.10 Exmark Class B and Class C Stock ............................ 52
5.11 Notification; Amendment to Disclosure Schedule .............. 52
5.12 Employee Agreements ......................................... 53
ARTICLE VI
COVENANTS OF TORO AND MERGER SUBSIDIARY ............................... 53
-iv-
6.01 Regulatory Filings .......................................... 53
6.02 Conditions .................................................. 53
6.03 Registration Statement ...................................... 54
6.04 Stock Exchange Listings ..................................... 54
6.05 Due Authorization of Stock Issued in Merger ................. 54
6.06 Blue Sky Approvals .......................................... 54
ARTICLE VII
CONDUCT OF EXMARK AFTER THE ACQUISITION ............................... 55
7.01 Stand-alone Status .......................................... 55
7.02 Synergies Council ........................................... 57
7.03 REBIT Thresholds; Toro Control .............................. 58
ARTICLE VIII
CONDITIONS TO CLOSING ................................................. 58
8.01 Conditions to Toro's and Merger Subsidiary's Obligations .... 58
8.02 Conditions to Exmark's Obligations .......................... 62
ARTICLE IX
TERMINATION ........................................................... 64
9.01 Termination ................................................. 64
9.02 Effect of Termination ....................................... 66
9.03 Termination Fee ............................................. 66
-v-
ARTICLE X
THE STOCKHOLDERS' REPRESENTATIVE ...................................... 67
10.01 Appointment ................................................. 67
10.02 Election and Replacement .................................... 67
10.03 Authority ................................................... 67
10.04 No Liability of Toro ........................................ 68
ARTICLE XI
SURVIVAL AND OFFSET ................................................... 68
11.01 Survival of Representations and Warranties .................. 68
11.02 Right of Offset ............................................. 68
ARTICLE XII
ANCILLARY AGREEMENTS .................................................. 73
12.01 Stockholder Agreements ...................................... 73
12.02 Affiliate Agreements ........................................ 73
12.03 Employment Agreements ....................................... 73
12.04 Escrow Agreement ............................................ 73
12.05 Paying Agent Agreement ...................................... 74
12.06 Stock for Stock Exchange Agreement. ......................... 74
ARTICLE XIII
MISCELLANEOUS ......................................................... 74
-vi-
13.01 Press Releases and Announcements ............................ 74
13.02 Expenses .................................................... 74
13.03 Amendment and Waiver ........................................ 74
13.04 Notices ..................................................... 75
13.05 Arbitration ................................................. 76
13.06 Assignment .................................................. 76
13.07 Severability ................................................ 77
13.08 Complete Agreement .......................................... 77
13.09 Counterparts ................................................ 77
13.10 Governing Law ............................................... 77
13.11 Exmark Stockholders as Third Party Beneficiaries ............ 77
-vii-
EXHIBIT INDEX
Exhibit 2.01(a) Terms of Contingent Payment Rights
Exhibit 5.10 Amended and Restated Articles of
Incorporation
Exhibit 7.02 Synergies Council Charter and Bylaws
Exhibit 8.01(j) Opinion of Exmark
Exhibit 8.02(k) Opinion of Toro
Exhibit 12.01 Stockholder Agreements
Exhibit 12.02 Affiliate Agreements
Exhibit 12.03(a) - (e) Employment Agreements
Exhibit 12.04 Escrow Agreement
Exhibit 12.05 Paying Agent Agreement
Exhibit 12.06 Stock for Stock Exchange Agreement
-viii-
INDEX
Defined Term Page
------------ ----
1998 Contingent Payment . . . . . . . . . . . . . . . . . . . . . . . 6
1998 Contingent Payment Amount . . . . . . . . . . . . . . . . . . . . 5
1998 Contingent Payment Fund . . . . . . . . . . . . . . . . . . . . . 11
1998 Contingent Payment Fund Amount . . . . . . . . . . . . . . . . . 10
1998 Funding Date . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1998 Toro Share Price . . . . . . . . . . . . . . . . . . . . . . . . 7
1999 Contingent Payment . . . . . . . . . . . . . . . . . . . . . . . 6
1999 Contingent Payment Amount . . . . . . . . . . . . . . . . . . . . 5
1999 Contingent Payment Fund . . . . . . . . . . . . . . . . . . . . . 11
1999 Contingent Payment Fund Amount . . . . . . . . . . . . . . . . . 11
1999 Funding Date . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1999 Toro Share Price . . . . . . . . . . . . . . . . . . . . . . . . 7
Actual Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Actual Net Worth Adjustment . . . . . . . . . . . . . . . . . . . . . 9
Adjusted Revenue . . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-4
Affiliate Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 73
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . 21
Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Average Working Capital . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-5
-ix-
Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Base Year Revenue . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-1
Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
CAGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-1
Canceled Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cash Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Class B 1998 Contingent Consideration . . . . . . . . . . . . . . . . 5
Class B 1999 Contingent Consideration . . . . . . . . . . . . . . . . 5
Class B Contingent Payment Right . . . . . . . . . . . . . . . . . . . 4
Class B Initial Payment Fund . . . . . . . . . . . . . . . . . . . . . 10
Class B Initial Per Share Payment Consideration . . . . . . . . . . . 4
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Common/Preferred 1998 Contingent Consideration . . . . . . . . . . . . 5
Common/Preferred 1999 Contingent Consideration . . . . . . . . . . . . 5
Common/Preferred Contingent Payment Right . . . . . . . . . . . . . . 3
Confidentiality Agreement . . . . . . . . . . . . . . . . . . . . . . 76
Constituent Corporations . . . . . . . . . . . . . . . . . . . . . . . 1
Contingent Class B Options . . . . . . . . . . . . . . . . . . . . . . 52
-x-
Contingent Class B Rights . . . . . . . . . . . . . . . . . . . . . . 52
Contingent Payment Period . . . . . . . . . . . . . . . . . . . . . . 55
Contingent Payment Rights . . . . . . . . . . . . . . . . . . . . . . 4
Contingent Payment Statement . . . . . . . . . . . . . . . . . Ex 2.01(a)-5
Contingent Payments . . . . . . . . . . . . . . . . . . . . . . . . . 6
Contingent Payments Dissenters' Fraction . . . . . . . . . . . . . . . 10
Cross-Branding REBIT Factor . . . . . . . . . . . . . . . . . Ex 2.01(a)-5
Cross-Branding Revenue Factor . . . . . . . . . . . . . . . . Ex 2.01(a)-4
Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . 18
Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 14
EBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-2
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . 73
Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Environmental Permits . . . . . . . . . . . . . . . . . . . . . . . . 40
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Escrow Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Estimated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 8
Estimated Net Worth Adjustment . . . . . . . . . . . . . . . . . . . . 8
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Exchange Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-xi-
Exmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Exmark Ancillary Agreements . . . . . . . . . . . . . . . . . . . . . 18
Exmark Class B Stock . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exmark Class C Stock . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exmark Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 3
Exmark Cross-Branded Products . . . . . . . . . . . . . . . . Ex 2.01(a)-2
Exmark Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 3
Exmark's Accountant . . . . . . . . . . . . . . . . . . . . . . . . . 49
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . 39
Holdback Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Holder's Merger Consideration . . . . . . . . . . . . . . . . . . . . 6
Holiman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Initial Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Initial Payment Fund . . . . . . . . . . . . . . . . . . . . . . . . . 10
Initial Payment Fund Amount . . . . . . . . . . . . . . . . . . . . . 9
Initial Per Share Payment Consideration . . . . . . . . . . . . . . . 3
Initial Toro Share Price . . . . . . . . . . . . . . . . . . . . . . . 7
Insiders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
-xii-
Inventory Statement . . . . . . . . . . . . . . . . . . . . . . . . . 8
Last Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Latest Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . 21
Latest Financial Statements . . . . . . . . . . . . . . . . . . . . . 21
Leased Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Licensed-In Intellectual Property Rights . . . . . . . . . . . . . . . 31
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Management Fee . . . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-2
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . 60
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . 4
Merger Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Subsidiary Stock . . . . . . . . . . . . . . . . . . . . . . . 4
Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . 69
National Priorities List . . . . . . . . . . . . . . . . . . . . . . . 41
Nebraska Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Net Worth Statement . . . . . . . . . . . . . . . . . . . . . . . . . 9
New Articles of Incorporation . . . . . . . . . . . . . . . . . . . . 52
Offset Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Offset Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Offset Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
-xiii-
Outstanding Class B Shares . . . . . . . . . . . . . . . . . . . . . . 5
Outstanding Purchase Rights . . . . . . . . . . . . . . . . . . . . . 20
Owned Intellectual Property Rights . . . . . . . . . . . . . . . . . . 30
Owned Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Paying Agent Agreement . . . . . . . . . . . . . . . . . . . . . . . . 74
PCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Prospectus-Proxy Statement . . . . . . . . . . . . . . . . . . . . . . 54
Protected Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 42
REBIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-1
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . 54
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Signing Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
-xiv-
Stockholder Agreements . . . . . . . . . . . . . . . . . . . . . . . . 73
Stockholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . 50
Stockholders' Representatives . . . . . . . . . . . . . . . . . . . . 67
Stockholders' Representatives Expense Fund . . . . . . . . . . . . . . 7
Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . 1
Surviving Corporation Stock . . . . . . . . . . . . . . . . . . . . . 4
Synergies Council . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Tax Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Toro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Toro Ancillary Agreements . . . . . . . . . . . . . . . . . . . . . . 43
Toro Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Toro Control Date . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Toro SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Toro Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Toro Supplied Products . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-2
Toro's Representatives . . . . . . . . . . . . . . . . . . . . . . . . 57
Valuation Formula . . . . . . . . . . . . . . . . . . . . . . Ex 2.01(a)-1
Working Capital Adjustment . . . . . . . . . . . . . . . . . . Ex 2.01(a)-5
-xv-
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT"), dated as of
October 23, 1997, is made and entered into by and among The Toro Company, a
Delaware corporation ("TORO"), EMCI Acquisition Corp., a Nebraska corporation
and wholly owned subsidiary of Toro ("MERGER SUBSIDIARY"), and Exmark
Manufacturing Company Incorporated, a Nebraska corporation ("EXMARK"). Merger
Subsidiary and Exmark are hereinafter sometimes collectively referred to as the
"CONSTITUENT CORPORATIONS."
WHEREAS, the respective Boards of Directors of Toro, Merger Subsidiary and
Exmark have determined that it is advisable and in the best interests of the
respective corporations and their stockholders that Merger Subsidiary be merged
with and into Exmark in accordance with the Nebraska Business Corporation Act
(the "NEBRASKA ACT") and the terms of this Agreement, pursuant to which Exmark
will be the surviving corporation as a wholly owned subsidiary of Toro (the
"MERGER");
WHEREAS, for federal income tax purposes, it is intended that the Merger qualify
as a reorganization under the provisions of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "CODE"); and
WHEREAS, Toro, Merger Subsidiary and Exmark desire to make certain
representations, warranties, covenants, indemnities and agreements in connection
with, and establish various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants, indemnities and agreements set forth in this Agreement,
and other good and valuable consideration, the adequacy and receipt of which is
hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. At the Effective Time (as defined in SECTION 1.03
hereof), and subject to the terms and conditions of this Agreement and the
Articles of Merger (as defined in SECTION 1.03 hereof), Merger Subsidiary shall
be merged with and into Exmark,
the separate existence of Merger Subsidiary shall cease, and Exmark shall
continue as the surviving corporation under the corporate name of Exmark
Manufacturing Company Incorporated. In its capacity as the corporation
surviving the Merger, Exmark is hereinafter sometimes referred to as the
"SURVIVING CORPORATION."
1.02 EFFECT OF MERGER. The effect of the Merger shall be as set forth in
Section 21-20,133 of the Nebraska Act, and the Surviving Corporation shall
succeed to and possess all the properties, rights, privileges, immunities,
powers, franchises and purposes, and be subject to all the duties, liabilities,
debts, obligations, restrictions and disabilities, of the Constituent
Corporations, all without further act or deed.
1.03 EFFECTIVE TIME. The consummation of the Merger shall be effected as
promptly as practicable, but in no event more than three business days, after
the satisfaction or waiver of the conditions set forth in ARTICLE VIII of this
Agreement, and the parties hereto will cause articles of merger with respect to
the Merger (the "ARTICLES OF MERGER") to be executed, delivered and filed with
the Secretary of State of the State of Nebraska in accordance with the Nebraska
Act and will make all other filings or recordings required by Nebraska law in
connection with the Merger and the transactions contemplated by this Agreement.
The Merger shall become effective at the time and date of the filing of the
Articles of Merger with the Secretary of State of the State of Nebraska, subject
to SECTION 1.07 with respect to Toro's financial reporting for the Merger. The
time at which the Merger shall become effective is referred to herein as the
"EFFECTIVE TIME." The day during which the Effective Time shall occur is
referred to herein as the "EFFECTIVE DATE."
1.04 DIRECTORS AND OFFICERS. From and after the Effective Time, the
directors of the Surviving Corporation shall be the persons who were the
directors of Merger Subsidiary immediately prior to the Effective Time. After
the Effective Time, the Stockholders' Representatives (as defined in
SECTION 10.01 hereof) shall have the right to designate one Stockholders'
Representative to serve as a representative on the board of directors of the
Surviving Corporation until expiration of the Contingent Payment Period (as
defined in SECTION 7.01 hereof). From and after the Effective Time, the
officers of the Surviving Corporation shall be the persons who were the officers
of the Surviving Corporation immediately prior to the Effective Time. Such
directors and officers of the Surviving Corporation shall hold office for the
term specified in, and subject to the provisions contained in, the articles of
incorporation and bylaws of the Surviving Corporation and applicable law. If,
at or after the Effective Time, a vacancy shall exist on the board of directors
or in any of the offices of the Surviving Corporation, such vacancy shall be
filled in the manner provided in the articles of incorporation and bylaws of the
Surviving Corporation.
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1.05 ARTICLES OF INCORPORATION; BYLAWS. At and after the Effective Time
and until further amended in accordance with applicable law, the articles of
incorporation and bylaws of Merger Subsidiary as in effect immediately prior to
the Effective Time shall be the articles of incorporation and bylaws of the
Surviving Corporation.
1.06 TAKING OF NECESSARY ACTION; FURTHER ACTION. Toro, Merger Subsidiary
and Exmark, respectively, shall each use its reasonable best efforts to take all
such action as may be necessary or appropriate to effectuate the Merger under
the Nebraska Act at the time specified in SECTION 1.03. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all properties, rights, privileges, immunities,
powers and franchises of either of the Constituent Corporations, the officers of
the Surviving Corporation are fully authorized in the name of each Constituent
Corporation or otherwise to take, and shall take, all such lawful and necessary
action.
1.07 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") will take place at the offices of Dorsey & Whitney
LLP, 220 South Sixth Street, Minneapolis, Minnesota, 55402 on a date to be
specified by the parties, which shall be no later than the third business day
after satisfaction or waiver of the conditions set forth in ARTICLE VIII hereof.
Solely for Toro's financial reporting purposes, the parties hereto covenant and
agree that the Closing will be deemed to be effective as of November 1, 1997.
At the Closing, the parties shall deliver to each other the documents required
to be delivered pursuant to ARTICLE VIII hereof.
ARTICLE II
MERGER CONSIDERATION/EFFECT ON CAPITAL STOCK
2.01 EFFECT ON EXMARK CAPITAL STOCK.
(a) CONVERSION OF EXMARK CAPITAL STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of Toro, Merger Subsidiary,
Exmark, the Surviving Corporation or the holder of any of the following shares
of Exmark capital stock:
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(i) each share of Common Stock, par value $10.00 per share, of Exmark
("EXMARK COMMON STOCK"), issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares (as defined in SECTION 2.05 hereof)
and Canceled Shares (as defined in SECTION 2.01(a)(VI) hereof), shall be
converted into and become a right to receive (a) cash and shares of Common
Stock, par value $1.00 per share, of Toro (together with the preferred stock
purchase rights associated with each such share of common stock, "TORO COMMON
STOCK") representing the initial payment consideration, determined in accordance
with SECTION 2.02 (the "INITIAL PER SHARE PAYMENT CONSIDERATION"), and (B) one
common/preferred contingent payment right, as described in SECTION 2.02 (a
"COMMON/PREFERRED CONTINGENT PAYMENT RIGHT");
(ii) each share of Preferred Stock, par value $40.00 per share, of Exmark
("EXMARK PREFERRED STOCK"), issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares and Canceled Shares, shall be
converted into and become the right to receive (A) four times the Initial Per
Share Payment Consideration, determined in accordance with SECTION 2.02, and
(B) four Common/Preferred Contingent Payment Rights, as described in
SECTION 2.02;
(iii) each share of Class B Preferred Stock, par value $.01 per share, of
Exmark ("EXMARK CLASS B STOCK"), issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares and Canceled Shares, shall be
converted into and become a right to receive (A) one-tenth of a share of Toro
Common Stock (the "CLASS B INITIAL PER SHARE PAYMENT CONSIDERATION") and (B) one
Class B contingent payment right, as described in SECTION 2.02 (a "CLASS B
CONTINGENT PAYMENT RIGHT");
(iv) each share of Class C Preferred Stock, par value $.01 per share, of
Exmark ("EXMARK CLASS C STOCK"), issued and outstanding immediately prior to the
Effective Time, other than Dissenting Shares and Canceled Shares, shall be
converted into and become a right to receive the Initial Per Share Payment
Consideration, determined in accordance with SECTION 2.02;
(v) each share of Common Stock, par value $0.01 per share, of Merger
Subsidiary ("MERGER SUBSIDIARY STOCK"), issued and outstanding immediately prior
to the Effective Time shall be converted into and become a right to receive one
share of Common Stock, par value $0.01 per share, of the Surviving Corporation
("SURVIVING CORPORATION STOCK"); and
(vi) each share of Exmark's capital stock issued and outstanding
immediately prior to the Effective Time and owned by Toro, Merger Subsidiary or
Exmark ("CANCELED SHARES")
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shall be canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
The Common/Preferred Contingent Payment Rights and the Class B Contingent
Payment Rights are collectively referred to herein as the "CONTINGENT PAYMENT
RIGHTS." The aggregate amount of the cash and shares of Toro Common Stock to be
paid by Toro with respect to the Contingent Payment Rights, the Class B Initial
Per Share Payment Consideration and the Initial Per Share Payment Consideration
is referred to herein as the "MERGER CONSIDERATION." The shares of Exmark
Common Stock, Exmark Preferred Stock, Exmark Class B Stock and Exmark Class C
Stock that are issued and outstanding immediately prior to the Effective Time,
other than Dissenting Shares and Canceled Shares, are collectively referred to
herein as the "SHARES," and the holders thereof are referred to herein as the
"HOLDERS."
2.02 DETERMINATION OF MERGER CONSIDERATION.
(a) INITIAL PAYMENT. For purposes of apportioning the Initial Payment (as
defined in this Section 2.02(a)) among the Holders of Exmark Common Stock,
Exmark Preferred Stock and Exmark Class C Stock, each share of Exmark Preferred
Stock shall receive four times the amount of each such payment as does each
share of Exmark Common Stock. The "Initial Per Share Payment Consideration"
shall be cash and Toro Common Stock in an amount equal to a quotient, the
numerator of which is $28,100,000 and the denominator of which is the sum of (i)
the number of shares of Exmark Common Stock, (ii) the number of shares of Exmark
Class C Stock and (iii) four times the number of shares of Exmark Preferred
Stock, which in all cases are issued and outstanding immediately prior to the
Effective Time, other than Canceled Shares. For purposes of calculating the
number of shares of Toro Common Stock included in the Initial Payment
Consideration, the value per share of Toro Common Stock shall be the Initial
Toro Share Price (as defined in SECTION 2.02(c) hereof). In the aggregate, the
total Initial Per Share Payment Consideration paid to the Holders of Shares is
referred to herein as the "INITIAL PAYMENT."
(b) CONTINGENT PAYMENTS. A "Common/Preferred Contingent Payment Right,"
as referred to herein, shall mean the right to receive cash and Toro Common
Stock in an amount equal to a quotient, the numerator of which is one-half of
the 1998 Contingent Payment Amount (as defined in this SECTION 2.02(b) hereof)
and the denominator of which is the sum of (i) the number of shares of Exmark
Common Stock and (ii) four times the number of shares of Exmark Preferred Stock,
which in all cases are
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issued and outstanding immediately prior to the Effective Time, other than
Canceled Shares (the "COMMON/PREFERRED 1998 CONTINGENT CONSIDERATION"), plus an
amount equal to a quotient, the numerator of which is one-half of the 1999
Contingent Payment Amount and the denominator of which is the sum (i) of the
number of shares of Exmark Common Stock and (ii) four times the number of shares
of Exmark Preferred Stock, which in all cases are issued and outstanding
immediately prior to the Effective Time, other than Canceled Shares (the
"COMMON/PREFERRED 1999 CONTINGENT CONSIDERATION"). A "Class B Contingent
Payment Right," as referred to herein, shall mean the right to receive cash and
Toro Common Stock in an amount equal to a quotient, the numerator of which is
one-half of the 1998 Contingent Payment Amount and the denominator of which is
the number of shares of Exmark Class B Stock issued and outstanding immediately
prior to the Effective Time, other than Canceled Shares (such Class B shares are
referred to as the "OUTSTANDING CLASS B SHARES" and such consideration is
referred to as the "CLASS B 1998 CONTINGENT CONSIDERATION"), plus an amount
equal to a quotient, the numerator of which is one-half of the 1999 Contingent
Payment Amount and the denominator of which is the number of Outstanding Class B
Shares (the "CLASS B 1999 CONTINGENT CONSIDERATION"). The "1998 CONTINGENT
PAYMENT AMOUNT" shall mean a dollar amount determined in accordance with the
calculations set forth in EXHIBIT 2.01(a). The "1999 CONTINGENT PAYMENT AMOUNT"
shall mean a dollar amount determined in accordance with the calculations set
forth in EXHIBIT 2.01(a). For purposes of calculating the number of shares of
Toro Common Stock included in the Common/Preferred 1998 Contingent Consideration
and the Class B 1998 Contingent Consideration, the value per share of Toro
Common Stock shall be the 1998 Toro Share Price (as defined in SECTION 2.02(c)
hereof). For purposes of calculating the number of shares of Toro Common Stock
included in the Common/Preferred 1999 Contingent Consideration and the Class B
1999 Contingent Consideration, the value per share of Toro Common Stock shall be
the 1999 Toro Share Price (as defined in SECTION 2.02(c) hereof). In the
aggregate, the total Common/Preferred 1998 Contingent Consideration plus the
total Class B 1998 Contingent Consideration to be paid to the Holders of Shares
is referred to as the "1998 CONTINGENT PAYMENT." In the aggregate, the total
Common/Preferred 1999 Contingent Consideration plus the total Class B 1999
Consideration to be paid to the Holders of Shares is referred to as the "1999
CONTINGENT PAYMENT." The 1998 Contingent Payment and the 1999 Contingent
Payment are collectively referred to as the "CONTINGENT PAYMENTS." Exmark Class
C Stock will not receive any of the Contingent Payments.
(c) FORM OF MERGER CONSIDERATION AND HOLDBACK AMOUNT. The cash portion of
the Initial Payment, the 1998 Contingent Payment and the 1999 Contingent Payment
will be 12% of the aggregate amount of each such payment as calculated pursuant
to this SECTION 2.02, subject only to SECTION 2.06. Each Holder, however, will
be allowed to elect to receive more or less cash consideration in exchange for
such Holder's Shares up to, but not to exceed, such Holder's portion of the
Merger Consideration. Prior to the Stockholders' Meeting (as defined in
SECTION 5.03), each record holder of Exmark's capital stock will receive a form
to be used to indicate if such record holder desires to receive more or less
than 12% of such holder's proportionate part of the Merger Consideration in cash
(each Holder's proportionate part of the Merger Consideration is referred to
herein as the "HOLDER'S MERGER CONSIDERATION"). Any Holder who wants to receive
more or less than 12% of such Holder's Merger Consideration in the form of cash
must properly complete the form, sign it and return it to the Escrow Agent (as
defined in SECTION 2.03(a) hereof) prior to the date of the Stockholders'
Meeting. Any Holder that does not return such form,
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properly completed and signed, to the Escrow Agent prior to the Stockholders'
Meeting, will be deemed to have elected to receive 12% of such Holder's Merger
Consideration in the form of cash. The percentage of the Holder's Merger
Consideration each Holder elects, or is deemed to have elected, to receive in
cash shall be referred to herein as the "CASH ELECTION." In the event that the
weighted average of all of the Cash Elections does not equal 12%, the portion of
the Holder's Merger Consideration that each Holder will be entitled to receive
in cash will be proportionately adjusted (either increased or decreased), so
that the aggregate cash consideration to be paid, other than for fractional
shares, will be 12% of the Merger Consideration. In the event that the
aggregate effect of all of the Cash Elections would result in the cash portion
of the Initial Payment or the Contingent Payments, as applicable, being greater
than 12% of any such payment, each Cash Election with respect to such payment
shall be multiplied by a quotient, the numerator of which is 12% and the
denominator of which is the aggregate effect of all of the Cash Elections
(expressed as a percentage of the aggregate consideration to be paid to the
Holders with respect to the Initial Payment or the Contingent Payments, as
applicable) prior to being adjusted. In the event that the aggregate effect of
all of the Cash Elections would result in the cash portion of the Initial
Payment or the Contingent Payments, as applicable, being less than 12% of any
such payment, each Cash Election with respect to such payment (including Cash
Elections of 0%) shall be increased by adding an equal percentage amount to each
Cash Election (but not beyond 100%) until the weighted average of the Cash
Elections, as so adjusted, equals 12% (E.G., each Cash Election would be
increased by adding 1% (or some other percentage amount) to each Cash Election
so that initial Cash Elections of 0% and 30% would become 1% and 31%, but an
initial Cash Election of 100% would remain 100%). The remaining portion of each
Holder's Merger Consideration will be in the form of shares of Toro Common Stock
as described below. Based on the Cash Elections of record Holders of Exmark
Class B Stock and Exmark Class C Stock, the cash that record Holders of Exmark
Common Stock and Exmark Preferred Stock receive in connection with the Initial
Payment, expressed as a percentage of such payment, may be different than the
cash that such Holders receive in connection with the Contingent Payments,
expressed as a percentage of each such payment.
The Toro Common Stock portion of the Initial Payment and each of the Contingent
Payments will be 88% of the aggregate amount of such payment as calculated
pursuant to SECTION 2.03, subject only to SECTION 2.06. The "INITIAL TORO SHARE
PRICE" shall mean the average closing sale price per share of the Toro Common
Stock as reported on the consolidated tape of the New York Stock Exchange during
the 30 trading days ending on October 31, 1997; provided that the Effective Date
is on or prior to November 30, 1997. In the event that the Effective Date is
after November 30, 1997, the "Initial Toro Share Price shall mean the average
closing sales price per share of Toro Common Stock reported on the consolidated
tape of the New York Stock Exchange during the 30 trading days ending on the
third trading day immediately preceding the Effective Date. The "1998 TORO
SHARE PRICE" shall mean the average closing sales price per share of Toro Common
Stock reported on the consolidated tape of the New York Stock Exchange during
the 30 trading days ending on the third trading day immediately preceding
December 31, 1998. The "1999 TORO
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SHARE PRICE" shall mean the average closing sales price per share of Toro Common
Stock reported on the consolidated tape of the New York Stock Exchange during
the 30 trading days ending on the third trading day immediately preceding
December 31, 1999. Each of the Initial Toro Share Price, the 1998 Toro Share
Price and the 1999 Toro Share Price shall be appropriately and proportionately
adjusted in the event that, at any time during such applicable thirty trading
day period, shares of Toro Common Stock shall be changed into a different number
of shares or a different class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment or
stock dividend.
Notwithstanding the foregoing, 15% of that part of the Initial Payment Fund (as
defined in SECTION 2.03(a)) that would otherwise be payable to the Holders of
Exmark Common Stock and Exmark Preferred Stock (the "HOLDBACK AMOUNT") shall be
subject to Toro's Offset Right (as defined in SECTION 11.02 hereof) and, as such
shall be held in escrow by the Escrow Agent in accordance with this
SECTION 2.02(c) and EXHIBIT 12.04 and subject to SECTION 11.02. In addition,
$100,000 of the Initial Payment Fund will be held in escrow by the Escrow Agent
to Fund the expenses of the Stockholders' Representatives as provided in
SECTION 10.03 (the "STOCKHOLDERS' REPRESENTATIVES EXPENSE FUND"). The
Stockholders' Representatives Expense Fund shall not be subject to Toro's Offset
Rights. In the event there is an Estimated Net Worth Adjustment (as defined in
SECTION 2.02(d) hereof), cash in an amount equal to 12% of the Estimated Net
Worth Adjustment and that number of shares of Toro Common Stock equal to a
quotient, the numerator of which is 88% of the Estimated Net Worth Adjustment
and the denominator of which is the Initial Toro Share Price, shall also be (i)
held in escrow, (ii) included as part of the Holdback Amount and (iii) subject
to Toro's Offset Right. Subject to the provisions of SECTION 11.02, as it
relates to any claims by Toro under its Offset Right, two-thirds of the cash and
two-thirds of the shares of Toro Common Stock included in the Holdback Amount
that otherwise would have been payable to the Holders of Exmark Common Stock and
Exmark Preferred Stock shall be delivered by the Paying Agent (as defined in
SECTION 2.04) to such Holders concurrently with the payment of the 1999
Contingent Payment and the remainder will be delivered by the Paying Agent to
such Holders on or before December 31, 2000 in each case in an amount based on
the amount of cash and Toro Common Stock that such Holder would have received if
such cash and Toro Common Stock had not originally been held in escrow pursuant
to this SECTION 2.02(c). None of the Initial Payment Fund that is payable in
exchange for the Exmark Class C Preferred Stock shall be held in escrow and
included in the Holdback Amount pursuant to this SECTION 2.02(c). Toro's Offset
Right shall be applied first against that portion of the Holdback Amount to be
paid concurrently with the 1999 Contingent Payment, then against that portion of
the Holdback Amount to be paid on or before December 31, 2000, then against the
1998 Contingent Payment, and any remainder shall be applied against the 1999
Contingent Payment.
(d) NET WORTH ADJUSTMENT TO INITIAL PAYMENT. Within five business days
prior to the Effective Time, the parties shall mutually agree upon an estimate
of the book value,
-8-
determined in accordance with GAAP (as defined below in this SECTION 2.02(d)),
of (i) Exmark's total assets as of the Effective Time, minus (ii) Exmark's total
liabilities as of the Effective Time (the "ESTIMATED NET WORTH"). The amount,
determined on a dollar-for-dollar basis, by which the Estimated Net Worth is
less than $8,243,000 shall be the "ESTIMATED NET WORTH ADJUSTMENT." If the
Estimated Net Worth is greater than $8,243,000, then the Estimated Net Worth
Adjustment shall be zero. "GAAP," as referred to herein, shall mean generally
accepted accounting principles. The parties intend that the application of GAAP
be on a basis consistent with the method used by Exmark in preparing the audited
financial statements of Exmark for the three-year period from September 1, 1994
to August 31, 1997, which financial statements are presented in accordance with
GAAP.
At the Effective Time and at Toro's option, Toro and Exmark shall jointly
perform a physical inventory of all inventory of Exmark. As soon thereafter as
is practical, Exmark shall prepare a statement (the "INVENTORY STATEMENT"),
which shall list the number and value of each inventory item (by product
category or as is otherwise customary) of Exmark as of the Effective Time. The
value of each such item shall be determined in accordance with GAAP and shall be
used in the Net Worth Statement (as defined below in this SECTION 2.02(d)).
Within 90 days after the Effective Time, the parties shall prepare and deliver
to the Synergies Council (as defined in SECTION 7.02 hereof) a statement (the
"NET WORTH STATEMENT") that sets forth the book value, determined in accordance
with GAAP, of (i) Exmark's total assets as of the Effective Time, minus
(ii) Exmark's total liabilities as of the Effective Time. Representatives of
Toro and of Exmark on the Synergies Council shall review the Net Worth Statement
and shall agree upon adjustments, if any, to be made thereto within 30 days of
the date of delivery of the Net Worth Statement. In the event there is a
dispute regarding any such adjustment, such dispute shall be resolved in
accordance with the dispute resolution procedures for the Synergies Council set
forth in SECTION 7.02. The net worth of Exmark as set forth in the Net Worth
Statement after any such adjustment (the "ACTUAL NET WORTH") shall be used to
determine the Actual Net Worth Adjustment (as defined below in this
SECTION 2.02(d)). The "ACTUAL NET WORTH ADJUSTMENT," as referred to herein,
shall mean the amount, determined on a dollar-for-dollar basis, by which the
Actual Net Worth is less than $8,243,000. If the Actual Net Worth is equal to
or greater than $8,243,000, then the Actual Net Worth Adjustment shall be zero.
Upon the determination of the Actual Net Worth Adjustment, Toro shall promptly
notify the Escrow Agent and the Paying Agent of the amount of the Actual Net
Worth Adjustment and that the Actual Net Worth has been approved by a majority
of the Synergies Council. Not later than 10 business days following receipt of
such notice from Toro, the Escrow Agent shall deduct the amount of the Actual
Net Worth Adjustment from the Holdback Amount and transfer to the Paying Agent
cash in an amount equal to 12% of the Actual Net Worth Adjustment and a number
of shares of Toro Common Stock equal
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to a quotient, the numerator of which is 88% of the Actual Net Worth Adjustment
and the denominator of which is the Initial Toro Share Price, plus all interest
earned with respect to such cash and any and all dividends paid with respect to
such shares of Toro Common Stock since the date on which Toro deposited such
cash and Toro Common Stock with the Escrow Agent. The Paying Agent promptly
shall pay such cash and shares to Toro. The shares of Toro Common Stock
returned to Toro shall be canceled and cease to be outstanding. The Estimated
Net Worth, the Net Worth Statement and the Actual Net Worth shall in each case
be determined without giving effect to the Merger, the acquisition of Holiman
(as defined in SECTION 5.01(b) hereof) by Exmark or the Signing Bonuses (as
defined in SECTION 12.03 hereof).
2.03 DETERMINATION OF INITIAL PAYMENT FUND, CLASS B INITIAL PAYMENT FUND
AND CONTINGENT PAYMENT FUNDS; DEPOSIT PROCEDURES.
(a) At or prior to the Effective Time, Toro shall deposit, or shall cause
to be deposited, the Initial Payment Fund (as defined in this SECTION 2.03(a))
with Norwest Bank Minnesota, National Association, or such other bank or trust
company designated by Toro and acceptable to Exmark's management (the "ESCROW
AGENT"), for the benefit of the Holders and as part of the Merger Consideration
in exchange for the Shares. The "INITIAL PAYMENT FUND AMOUNT" shall be a dollar
amount equal to the product of the Initial Per Share Payment Consideration and
the sum of (i) the number of shares of Exmark Common Stock, (ii) the number of
shares of Exmark Class C Stock and (iii) four times the number of shares of
Exmark Preferred Stock, which in all cases are issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares and
Canceled Shares. The amount of cash that Toro shall deposit with the Escrow
Agent as part of the Initial Payment Fund shall be an amount equal to 12% of the
Initial Payment Fund Amount. The number of shares of Toro Common Stock that
Toro shall deposit with the Escrow Agent as part of the Initial Payment Fund,
shall be equal to a quotient, the numerator of which shall be equal to 88% of
the Initial Payment Fund Amount and the denominator of which shall be equal to
the Initial Toro Share Price. The total cash and Toro Common Stock deposited
with the Escrow Agent pursuant to this SECTION 2.03(a) is referred to herein as
the "INITIAL PAYMENT FUND."
(b) At or prior to the Effective Time, Toro shall deposit, or shall cause to
be deposited, such number of shares of Toro Common Stock as is equal to the
product of (i) the Class B Initial Per Share Payment Consideration and (ii) the
number of shares of Exmark Class B Stock, which are issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares and
Canceled Shares (the "CLASS B INITIAL PAYMENT FUND"), with the Escrow Agent for
the benefit of the Holders of Exmark Class B Stock and as part of the Merger
Consideration in exchange for such Shares.
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(c) On or before the later to occur of (i) December 31, 1998, or (ii) 10
days after the 1998 Contingent Payment Amount has become final in accordance
with the procedures set forth in EXHIBIT 2.01(a) hereto (the "1998 FUNDING
DATE"), Toro shall deposit, or shall cause to be deposited, the 1998 Contingent
Payment Fund (as defined in this SECTION 2.03(c)) with the Escrow Agent for the
benefit of the Holders and as part of the Merger Consideration in exchange for
the Shares. The "1998 CONTINGENT PAYMENT FUND AMOUNT" shall be a dollar amount
equal to the 1998 Contingent Payment Amount multiplied by a quotient, the
numerator of which is the sum of the number of shares of Exmark Common Stock,
Exmark Class B Stock and (iii) four times the number of shares of Exmark
Preferred Stock, which in all cases are issued and outstanding immediately prior
to the Effective Time, other than Dissenting Shares and Canceled Shares, and the
denominator of which is the sum of (i) the number of shares of Exmark Common
Stock, Exmark Class B Stock and four times the number of shares of Exmark
Preferred Stock, which in all cases are issued and outstanding immediately prior
to the Effective Time, other than Canceled Shares (the "CONTINGENT PAYMENTS
DISSENTERS' FRACTION"). The amount of cash that Toro shall deposit with the
Escrow Agent as part of the 1998 Contingent Payment Fund shall be an amount
equal to 12% of the 1998 Contingent Payment Fund Amount. The number of shares
of Toro Common Stock that Toro shall deposit with the Escrow Agent as part of
the 1998 Contingent Payment Fund, shall be equal to a quotient, the numerator of
which shall be equal to 88% of the 1998 Contingent Payment Fund Amount and the
denominator of which shall be equal to the 1998 Toro Share Price. The total
cash and Toro Common Stock deposited with the Escrow Agent pursuant to this
SECTION 2.03(c) is referred to herein as the "1998 CONTINGENT PAYMENT FUND."
(d) On or before the later to occur of (i) December 31, 1999 or (ii) 10
days after the 1999 Contingent Payment Amount shall become final in accordance
with the procedures set forth in EXHIBIT 2.01(a) hereto (the "1999 FUNDING
DATE"), Toro shall deposit, or shall cause to be deposited, the 1999 Contingent
Payment Fund (as defined in this SECTION 2.03(d)) with the Escrow Agent for the
benefit of the Holders and as part of the Merger Consideration in exchange for
the Shares. The "1999 CONTINGENT PAYMENT FUND AMOUNT" shall be a dollar amount
equal to the 1999 Contingent Payment Amount multiplied by the Contingent
Payments Dissenters' Fraction. The amount of cash that Toro shall deposit with
the Escrow Agent as part of the 1999 Contingent Payment Fund shall be an amount
equal to 12% of the 1999 Contingent Payment Fund Amount. The number of shares
of Toro Common Stock that Toro shall deposit with the Escrow Agent as part of
the 1999 Contingent Payment Fund, shall be equal to a quotient, the numerator of
which shall be equal to 88% of the 1999 Contingent Payment Fund Amount and the
denominator of which shall be equal to the 1999 Toro Share Price. The total
cash and Toro Common Stock deposited with the Escrow Agent pursuant to this
SECTION 2.03(d) is referred to herein as the "1999 CONTINGENT PAYMENT FUND."
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2.04 EXCHANGE/PAYMENT PROCEDURES.
(a) The Escrow Agent shall hold the Initial Payment Fund, the 1998
Contingent Payment Fund and the 1999 Contingent Payment Fund, including any
interest earned thereon and any dividends or distributions paid in respect
thereof (collectively, the "EXCHANGE FUND"), for the benefit of the Holders of
Shares, subject to the escrow of the Holdback Amount pursuant to SECTION
2.02(c), and shall hold the Class B Initial Payment Fund, including any interest
earned thereon and any dividends paid in respect thereof, for the benefit of the
Holders of Exmark Class B Stock. The Escrow Agent shall also act as the "PAYING
AGENT"and shall distribute the Exchange Fund and the Class B Initial Payment
Fund in exchange for Shares pursuant to the terms of this Agreement. Except as
contemplated by SECTION 2.02(c), this SECTION 2.04, SECTION 2.07(d) and
SECTION 11.02, the Exchange Fund and the Class B Initial Payment Fund shall not
be used for any other purpose. Toro shall make available to the Escrow Agent
from time to time as needed, cash sufficient to pay cash in lieu of fractional
shares as described in this SECTION 2.04 and in SECTION 2.06.
(b) As soon as reasonably practicable after the Effective Time, the Paying
Agent shall mail to each record holder of a certificate or certificates that
immediately prior to the Effective Time represented Shares (the "CERTIFICATES"),
(i) a letter of transmittal (which shall be in customary form) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for such Holder's Merger Consideration. The letter of transmittal
shall specify that delivery of Certificates shall be effected, and risk of loss
and title to the Certificates shall pass, only upon delivery of the Certificates
to the Paying Agent. Upon surrender of a Certificate that immediately prior to
the Effective Time represented outstanding shares of Exmark Common Stock, Exmark
Preferred Stock or Exmark Class C Stock, for cancellation to the Paying Agent,
together with such letter of transmittal, duly executed, and such other
documents as may be required pursuant to such instructions, the Paying Agent
shall distribute in exchange therefor, subject in the case of Certificates
evidencing Exmark Common Stock and Exmark Preferred Stock to escrow of the
Holdback Amount, (i) a certificate or certificates representing the number of
whole shares of Toro Common Stock issuable to such Holder pursuant to SECTION
2.01 and SECTION 2.02 and based on such Holder's Cash Election, (ii) cash
representing the amount payable to such Holder pursuant to SECTION 2.01 and
SECTION 2.02 and based on such Holder's Cash Election, (iii) cash in lieu of
any fractional share thereof in accordance with SECTION 2.06, (iv) any
interest earned or dividends paid with respect to such Holder's Merger
Consideration and (v) except for holders of Exmark Class C Stock, the right to
receive such Holders' portion (based on the number of shares evidenced by such
Certificate) of the Contingent Payments, which right shall be uncertificated,
and the Certificate so surrendered shall forthwith be canceled. Upon
surrender of a Certificate that immediately prior to the Effective Time
represented outstanding shares of Exmark Class B Stock, for cancellation to
the Paying Agent, together with such letter of transmittal, duly executed, and
such other documents as may be required pursuant to such instructions, the
Paying Agent shall distribute in exchange therefor (i) a certificate or
certificates representing the number of whole shares
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of Toro Common Stock issuable to such Holder pursuant to SECTION 2.01, (ii)
cash in lieu of any fractional share thereof in accordance with SECTION 2.06,
(iii) any interest earned or dividends paid with respect to such Holder's
Merger Consideration and (iv) the right to receive such Holders portion
(based on the number of shares evidenced by such Certificate) of the
Contingent Payments, which right shall be uncertificated, and the Certificate
so surrendered shall forthwith be canceled. Until surrendered as
contemplated by this SECTION 2.04, each Certificate shall be deemed at any
time after the Effective Time to represent solely the right to receive that
portion of the Merger Consideration to be issued in exchange for such
Certificate in connection with the Merger.
(c) If there is a transfer of Share ownership that is not registered in
the transfer records of Exmark, that portion of the Merger Consideration to be
issued in exchange for any such transferred Shares in connection with the Merger
may be issued to a person other than the person in whose name such Shares are
registered, if, upon presentation to the Paying Agent, the Certificate
representing such Shares shall be properly endorsed or otherwise be in proper
form for transfer and the person requesting such payment shall pay any transfer
or other Taxes (as defined in SECTION 3.15(k) hereof) required by reason of the
issuance of such portion of the Merger Consideration to a person other than the
registered holder of such Certificate or establish to the reasonable
satisfaction of Toro that such tax has been paid or is not applicable.
(d) Subject to Toro's Offset Right and the procedures described in this
SECTION 2.04 and in SECTION 11.02, as promptly as practicable following the
deposit by Toro of each of the 1998 Contingent Payment Fund and the 1999
Contingent Payment Fund, after taking such action as is necessary to assure that
all applicable federal or state payroll, income withholding and any other Taxes
are withheld, the Paying Agent shall distribute to the Holders from the
applicable fund (i) a certificate or certificates representing the number of
whole shares of Toro Common Stock issuable to each such Holder pursuant to
SECTION 2.01 and SECTION 2.02, based on such Holder's Cash Election, (ii) cash
representing the amount payable to each such Holder pursuant to SECTION 2.01 and
SECTION 2.02, based on such Holder's Cash Election, and (iii) cash in lieu of
any fractional share thereof in accordance with SECTION 2.06.
(e) In the event Toro exercises its Offset Right against all or a portion
of the Holdback Amount, the Paying Agent promptly shall distribute to Toro from
the Holdback Amount cash and Toro Common Stock equal in value to such offset
amount and the value of each share of Toro Common Stock so distributed shall be
deemed to be the Initial Toro Share Price. In the event Toro exercises its
Offset Right against all or a portion of the 1998 Contingent Payment and Toro
has delivered the 1998 Contingent Payment Fund to the Escrow Agent and such Fund
has not been distributed to the Holders by the Paying Agent, then the Paying
Agent promptly shall distribute to Toro from the 1998 Contingent Payment Fund
cash and Toro Common Stock equal in value to such offset amount and the value of
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each share of Toro Common Stock so distributed shall be deemed to be the 1998
Toro Share Price. In the event Toro exercises its Offset Right against all or
a portion of the 1998 Contingent Payment and Toro has not delivered the 1998
Contingent Payment Fund to the Escrow Agent, then the 1998 Contingent Payment
Amount automatically shall be reduced by such amount. In the event Toro
exercises its Offset Right against all or a portion of the 1999 Contingent
Payment and Toro has delivered the 1999 Contingent Payment Fund to the Escrow
Agent and such Fund has not been distributed to the Holders by the Paying Agent,
then the Paying Agent promptly shall distribute to Toro from the 1999 Contingent
Payment Fund cash and Toro Common Stock equal in value to such offset amount and
the value of each share of Toro Common Stock so distributed shall be deemed to
be the 1999 Toro Share Price. In the event Toro exercises its Offset Right
against all or a portion of the 1999 Contingent Payment and Toro has not
delivered the 1999 Contingent Payment Fund to the Escrow Agent, then the 1999
Contingent Payment Amount automatically shall be reduced by such amount. The
Toro Common Stock portion of the offset amounts distributed by the Paying Agent
to Toro pursuant to this SECTION 2.04(e) will be 88% of the aggregate amount of
each such distribution, determined based on the value attributed thereto
pursuant to this SECTION 2.04(e), subject only to SECTION 2.06. Cash and Toro
Common Stock delivered to Toro to fund Offset Rights shall constitute a
post-closing reduction of the Merger Consideration rather than a payment of a
liability by Holders of Shares.
2.05 DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the contrary, if
Sections 21-20,137 to 21-20,150 of the Nebraska Act are applicable to the
Merger, shares of Exmark's capital stock that are issued and outstanding as of
the Record Date for the Stockholders' Meeting and which are held by stockholders
who have not voted such shares in favor of the Merger, who shall have delivered,
prior to any vote on the Merger, a written demand for the fair value of such
shares in the manner provided in Section 21-20,143 of the Nebraska Act and who,
as of the Effective Time, shall not have effectively withdrawn or lost such
right to appraisal rights ("DISSENTING SHARES"), shall not be converted into or
represent a right to receive any of the Merger Consideration that would
otherwise be paid therefor pursuant to SECTION 2.01 hereof, but the holders
thereof shall be entitled only to such rights as are granted by Sections
21-20,145 to 21-20,150 of the Nebraska Act. Each holder of Dissenting Shares
who becomes entitled to payment for such shares pursuant to Sections 21-20,145
to 21-20,150 of the Nebraska Act shall receive payment therefor from the
Surviving Corporation in accordance with the Nebraska Act; provided, however,
that if, prior to the Effective Time, any such holder of Dissenting Shares shall
have effectively withdrawn such holder's demand for appraisal of such shares or
lost such holder's right to appraisal of such shares under Sections 21-20,141
and 21-20,143 of the Nebraska Act, such holder or holders (as the case may be)
shall forfeit the right to appraisal of such shares and each such share shall
thereupon be deemed to have been canceled, extinguished and converted, as of the
Effective Time, into and represent the right to receive payment of that portion
of the
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Merger Consideration to be paid therefor pursuant to SECTION 2.01 and
SECTION 2.02 and such shares shall not be deemed to be "Dissenting Shares."
(b) Exmark shall give Toro (i) prompt notice of any written demand for
fair value, any withdrawal of a demand for fair value and any other instrument
served pursuant to Sections 21-20,137 to 21-20,150 of the Nebraska Act received
by Exmark, and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for fair value under such sections of the Nebraska Act.
Exmark shall not, except with the prior written consent of Toro, voluntarily
make any payment with respect to any demand for fair value or offer to settle or
settle any such demand.
2.06 NO FRACTIONAL SHARES.
(a) No certificates or scrip representing fractional shares of Toro Common
Stock shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of Toro. Notwithstanding any other provision of this
Agreement, no certificates or scrip representing fractional shares of Toro
Common Stock shall be deposited by Toro pursuant to the deposit procedures
described in SECTION 2.03, but rather Toro shall deposit, in lieu thereof, cash
in an amount equal to such fractional part of a share of Toro Common Stock
multiplied by the Initial Toro Share Price, the 1998 Toro Share Price or the
1999 Toro Share Price, as applicable.
(b) Notwithstanding any other provision of this Agreement, each Holder of
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a share of Toro Common Stock (after taking into account
all Certificates delivered by such Holder) with respect to the Initial Payment,
the Class B Initial Payment Consideration, the 1998 Contingent Payment, the 1999
Contingent Payment or the release of any portion of the Holdback Amount shall
receive, in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of Toro Common Stock multiplied by the Initial Toro
Share Price, the Initial Toro Share Price, the 1998 Toro Share Price, the 1999
Toro Share Price or the 1999 Toro Share Price, respectively.
(c) No certificates or scrip representing fractional shares of Toro Common
Stock shall be issued to Toro in connection with the exercise of its Offset
Right or the Actual Net Worth Adjustment, but rather the Paying Agent shall
deliver to Toro, in lieu thereof, cash in an amount equal to any such fractional
part of a share of Toro Common Stock multiplied by the value attributed thereto
pursuant to SECTION 2.04(e) or the Initial Toro Share Price, respectively.
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2.07 OTHER EXCHANGE MATTERS.
(a) RIGHTS OF HOLDERS OF EXMARK CAPITAL STOCK. On and after the Effective
Time and until surrendered for exchange, each Certificate representing Shares
shall be deemed for all purposes, except as provided in SECTION 2.06, to
evidence ownership of and to represent the right to receive such Holder's Merger
Consideration to be paid therefor pursuant to SECTION 2.01 and SECTION 2.02.
The record Holder of such Certificate shall, after the Effective Time, be
entitled to vote the shares of Toro Common Stock included in the Initial Payment
into which such Shares shall have been converted (including any Shares of Toro
Common Stock then outstanding and included in the Holdback Amount) on any
matters on which the holders of record of Toro Common Stock, as of any date
subsequent to the Effective Time, shall be entitled to vote. After the
Effective Date, there shall be no further registration of transfers on the
records of the Surviving Corporation of outstanding certificates formerly
representing Shares of Exmark Common Stock, Exmark Preferred Stock, Exmark Class
B Stock or Exmark Class C Stock and, if a certificate formerly representing such
Shares is presented to the Paying Agent, it shall be canceled and exchanged for
such Holder's Merger Consideration as provided in SECTION 2.04. In any matters
relating to such Certificates, Toro may rely conclusively upon the record of
stockholders maintained by Exmark containing the names and addresses of the
Holders of record of Shares at the Effective Time.
(b) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Toro will pay no
dividends and make no other distributions with respect to Toro Common Stock with
a record date after the Effective Time to any Holder of any unsurrendered
Certificate evidencing Shares of Exmark Common Stock, Exmark Preferred Stock,
Exmark Class B Stock or Exmark Class C Stock with respect to the shares of Toro
Common Stock included in such Holder's Merger Consideration with respect thereto
and Toro will make no cash payment with respect to the cash portion included in
such Holder's Merger Consideration or in lieu of fractional shares to any such
Holder pursuant to SECTION 2.06 until the Holder of such Certificate surrenders
such Certificate. Following surrender of any such Certificate, the Paying
Agent, on behalf of Toro, shall subject to the other provisions of this
Agreement (i) pay to the record holder of the certificate representing whole
shares of Toro Common Stock issued in exchange for such Certificate, without
interest, (A) at the time of such surrender, the amount of cash payable in lieu
of a fractional share of Toro Common Stock to which such holder is entitled
pursuant to SECTION 2.06 and the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of Toro Common Stock and (B) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to such surrender and a payment date subsequent to such
surrender payable with respect to such whole shares of Toro Common Stock and
(ii) pay to the Holder, without interest from the Effective Time to the date of
the surrender of such Certificates, the cash portion of such Merger
Consideration then payable to such Holder.
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(c) NO FURTHER OWNERSHIP RIGHTS IN EXMARK CAPITAL STOCK. The Merger
Consideration delivered to the Escrow Agent in exchange for the Shares in
accordance with the terms hereof (including any cash paid pursuant to
SECTION 2.06 or SECTION 2.07(b)) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Shares.
(d) TERMINATION OF FUNDS. The Paying Agent shall deliver any portion of
the Exchange Fund and the Class B Initial Payment Fund that remains
undistributed to the Holders of the Certificates for two years after the
Effective Time to Toro, upon demand. Holders of Certificates who have not
theretofore complied with this ARTICLE II shall thereafter look only to Toro for
payment of their claims for their respective portions of the Merger
Consideration as to which they may be entitled under SECTION 2.01 and
SECTION 2.02, including any dividends or distributions with respect to Toro
Common Stock.
(e) NO LIABILITY. None of Toro, Merger Subsidiary, Exmark, the Escrow
Agent or the Paying Agent shall be liable to any person in respect of any shares
of Toro Common Stock (or dividends or distributions with respect thereto) or
cash in the Exchange Fund or the Class B Initial Payment Fund delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(f) INVESTMENT OF MERGER CONSIDERATION. The Escrow Agent shall invest any
cash included in the Exchange Fund or the Class B Initial Payment Fund in
interest bearing accounts guaranteed, directly or indirectly, by the federal
government. Any interest and other income resulting from such investments shall
become part of the Exchange Fund or the Class B Initial Payment Fund, as
applicable, and shall be taxable to the Holders.
(g) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed, and, if required by the
Surviving Corporation, upon the delivery to the Paying Agent of a bond in such
sum as the Surviving Corporation may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Paying Agent will
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration and any cash in lieu of fractional shares, and unpaid dividends
and distributions on shares of Toro Common Stock deliverable in respect thereof,
pursuant to this Agreement.
(h) STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of Exmark shall be closed and there shall be no further registration of
transfers of shares of Exmark's capital stock thereafter on the records of
Exmark. From and after the Effective
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Time, the holders of certificates representing shares of Exmark's capital stock
immediately prior to the Effective Time shall cease to have any rights with
respect to such shares of Exmark's capital stock except as otherwise provided in
this Agreement or by law.
(i) ADJUSTMENTS.
(i) If, between the date hereof and the later to occur of (A) the date on
which the 1999 Contingent Payment, if any, is fully paid and (B) the date on
which the last payment of the Holdback Amount is made (the "LAST PAYMENT DATE"),
shares of Toro Common Stock shall be changed into a security of a different
issuer or a different class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment then
the term Toro Common Stock, for purposes of this Agreement shall thereafter be
deemed to refer to such different shares.
(ii) If, between the date hereof and the Last Payment Date, the Toro Common
Stock ceases to be listed on a national securities exchange or approved for
quotation on an inter-dealer quotation system of a registered national
securities association in connection with an acquisition of Toro or otherwise,
then the full amount of all future Merger Consideration to be paid in exchange
for the Shares shall be paid in cash after such date.
(j) INTEREST ON CONTINGENT PAYMENTS. The Contingent Payments, if any,
shall be deemed, for income tax purposes, to include interest at the short-term
Adjusted Federal Rate (in effect as of the Effective Time) computed from the
Effective Time to the date of each such payment.
(k) CONTINGENT PAYMENTS ARE NONTRANSFERABLE. The Contingent Payment
Rights are personal to each initial holder thereof and are and shall remain
nontransferable for all purposes other than by operation of law or by will or
the laws of descent and distribution. Any attempted transfer of a Contingent
Payment Right by any holder thereof (other than as set forth in the preceding
sentence) shall be null and void.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EXMARK
Exmark hereby represents and warrants to Toro as follows, except as set forth in
the Disclosure Schedule delivered by Exmark to Toro on the date hereof,
including any
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amendments thereto made by Exmark pursuant to SECTION 5.11 (the "DISCLOSURE
SCHEDULE") (The Disclosure Schedule sets forth certain exhibits referenced
herein and exceptions to the representations and warranties contained in this
Agreement under captions referencing each and every Section to which such
exhibits or exceptions apply. Further, the disclosure in the Disclosure
Schedule of any item that may not be material shall not be deemed to infer that
any lesser standard of materiality shall apply in interpreting this Agreement.):
3.01 INCORPORATION AND CORPORATE POWER. Exmark is a corporation duly
incorporated, validly existing and in good standing under the laws of the state
of Nebraska and, subject to approval of this Agreement, the Merger, the New
Articles of Incorporation (as defined in SECTION 5.10 hereof) and the Signing
Bonuses by Exmark's stockholders, Exmark has the requisite corporate power and
authority to execute and deliver this Agreement, the Articles of Merger and the
agreements identified in ARTICLE XII to which Exmark is a party (the "EXMARK
ANCILLARY AGREEMENTS") and to perform its obligations hereunder and thereunder.
Exmark has the corporate power and authority and all authorizations, licenses,
permits and certifications necessary to own and operate its properties and to
carry on its business as now conducted and presently proposed to be conducted.
The copies of the articles of incorporation and bylaws of Exmark are set forth
in the Disclosure Schedule and reflect all amendments made thereto (except the
amendment to the articles of incorporation contemplated in SECTION 5.10 hereof)
and are correct and complete as of the date hereof. Exmark is qualified to do
business as a foreign corporation in every jurisdiction in which the nature of
its business or its ownership of property requires it to be so qualified.
3.02 EXECUTION, DELIVERY AND PERFORMANCE; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement, the Articles of Merger
and Exmark Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
requisite corporate action, and no other corporate proceedings on its part are
necessary to authorize the execution, delivery and performance of this
Agreement, the Articles of Merger and the Exmark Ancillary Agreements, other
than the approval of this Agreement by Exmark's stockholders. This Agreement
and the Exmark Ancillary Agreements have been duly executed and delivered by
Exmark and constitute the valid and binding obligations of Exmark, enforceable
in accordance with their terms, and the Articles of Merger, when executed and
delivered by Exmark, will constitute the valid and binding obligation of Exmark,
enforceable in accordance with its terms.
3.03 APPROVAL OF AGREEMENT; STOCKHOLDERS' MEETING. Exmark hereby
represents that its board of directors has, by resolutions duly adopted at
meetings held on June 3, 1997 and October 1, 1997, authorized and approved this
Agreement, the Merger,
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the Articles of Merger, the Exmark Ancillary Agreements (and the transactions
contemplated hereby and thereby), the Signing Bonuses, the New Articles of
Incorporation, the issuance of the Contingent Class B Rights (as defined in
SECTION 5.10 hereof), the issuance of the Exmark Class B Stock and the
acquisition of Holiman (including the issuance of the Exmark Class C Stock in
exchange for all of the outstanding shares of Holiman capital stock) and
resolved to recommend approval of this Agreement by Exmark's stockholders. None
of the resolutions described in this SECTION 3.03 has been rescinded, amended or
otherwise modified in any respect since the date of adoption thereof and all
such resolutions remain in full force and effect.
3.04 NO BREACH. The execution, delivery and performance of this Agreement,
the Articles of Merger and Exmark Ancillary Agreements by Exmark and the
consummation by Exmark of the transactions contemplated hereby and thereby do
not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of Exmark, or require any authorization, consent,
approval, exemption or other action by or notice to any court, other
governmental body or other "PERSON" (such term shall mean an individual,
corporation, partnership, association, joint-stock company, trust,
unincorporated organization, or government or political subdivision thereof)
under the provisions of the articles of incorporation or bylaws of Exmark or any
contract, indenture, mortgage, lease, loan agreement or other agreement,
relationship, commitment, arrangement or instrument, written or oral, by which
Exmark is bound or affected, or any law, statute, rule or regulation or order,
judgment or decree to which Exmark is subject.
3.05 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for the applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the "HSR ACT"),
and except for the filing of the Articles of Merger with the Secretary of State
of the State of Nebraska, Exmark is not required to submit any notice, report or
other filing with any governmental authority in connection with the execution or
delivery by it of this Agreement, the Articles of Merger or Exmark Ancillary
Agreements or the consummation of the transactions contemplated hereby or
thereby. No consent, approval or authorization of any governmental or
regulatory authority or any other party or person (except the approval of this
Agreement, the Merger, the New Articles of Incorporation and the Signing Bonuses
by the stockholders of Exmark) is required to be obtained by Exmark in
connection with its execution, delivery and performance of this Agreement, the
Articles of Merger or Exmark Ancillary Agreements or the transactions
contemplated hereby or thereby.
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3.06 SUBSIDIARIES; PREDECESSORS. Except for all of the outstanding capital
stock of Holiman, Exmark does not own any stock, partnership interest, joint
venture interest or any other security or ownership interest issued by any other
corporation, organization, joint venture, partnership, limited liability company
or entity.
3.07 CAPITAL STOCK.
(a) On the date hereof, the authorized capital stock of Exmark consists of
24,000 shares of Exmark Common Stock of which, as of the date hereof, 15,431
shares are issued and outstanding; and 21,000 shares of Exmark Preferred Stock
of which, as of the date hereof, 7,416 shares are issued and outstanding. On
the date hereof, Exmark's capital stock is held of record by the persons and in
the amounts set forth in the Disclosure Schedule. Prior to the Effective Time,
Exmark's articles of incorporation shall have been amended to authorize 10,000
shares of Exmark Class B Stock and 10,000 shares of Exmark Class C Stock in the
manner described in SECTION 5.10 and, as of the Effective Time, 10,000 shares of
Exmark Class B Stock and 3,689 shares of Exmark Class C Stock will be issued and
outstanding. On the Effective Date, Exmark's capital stock will be held of
record by the persons and in the amounts set forth in a disclosure schedule to
be provided to Toro on the Effective Date. All such outstanding shares of
Exmark's capital stock (i) have been duly authorized and are validly issued,
fully paid and nonassessable, (ii) are not subject to preemptive rights created
by statute, Exmark's articles of incorporation or bylaws, or any other agreement
to which either Exmark or, to the knowledge of Exmark, Exmark's stockholders are
bound and (iii) were not issued in violation of any applicable securities laws
that would subject the Surviving Corporation to fines, penalties, or rescission
or civil damages that are material in amount. As used in this Agreement,
"knowledge" of Exmark and similar words to that effect shall mean the actual
knowledge of Exmark's officers after due inquiry.
(b) There are no rights, subscriptions, warrants, options, conversion
rights or agreements of any kind outstanding to purchase or otherwise acquire
from Exmark any shares of Exmark's capital stock or other securities of Exmark
of any kind (and there are no agreements or other obligations of Exmark to grant
any of the foregoing) and there are no agreements or other obligations
(contingent or otherwise) that may require Exmark to repurchase or otherwise
acquire any shares of Exmark's capital stock. The holders of all options,
warrants or other rights to purchase Exmark's securities, which were outstanding
prior to the Effective Time ("OUTSTANDING PURCHASE RIGHTS") have been or will be
given, or shall have properly waived, any required notice prior to the Merger.
(c) The Disclosure Schedule sets forth those persons who are, in Exmark's
reasonable judgment, "affiliates" of Exmark within the meaning of Rule 145
promulgated
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by the Securities Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "SECURITIES ACT").
3.08 FINANCIAL STATEMENTS. The Disclosure Schedule sets forth copies of
(i) the unaudited balance sheets, as of August 31, 1997, of Exmark (the "LATEST
BALANCE SHEET") and the unaudited statements of earnings, stockholders' equity
and cash flows of Exmark for the year ended August 31, 1997 (such statements and
the Latest Balance Sheet being herein referred to as the "LATEST FINANCIAL
STATEMENTS"), and (ii) the audited balance sheets, as of August 31, 1996, August
31, 1995 and August 31, 1994, of Exmark and the audited statements of earnings,
stockholders' equity and cash flows of Exmark for each of the years ended August
31, 1996, August 31, 1995 and August 31, 1994 (collectively, the "ANNUAL
FINANCIAL STATEMENTS"). Prior to the Effective Time, Exmark shall have
delivered audited financial statements for the year ended August 31, 1997,
including a balance sheet as of August 31, 1997 and statements of earnings,
stockholders' equity and cash flows of Exmark, which upon delivery shall be
deemed to be for all purposes the Latest Balance Sheet and the Latest Financial
Statements, as applicable. Any material adverse changes in the financial
condition of Exmark as reflected in the audited Latest Financial Statements
compared to the previously delivered unaudited Latest Financial Statements shall
constitute a material breach of the representations set forth in this SECTION
3.08. The Latest Financial Statements and the Annual Financial Statements are
based upon the information contained in the books and records of Exmark and
fairly present the financial condition of Exmark as of the dates thereof and
respective results of operations for the periods referred to therein. The
Annual Financial Statements (including the notes thereto) have been prepared in
accordance with GAAP, consistently applied through the periods indicated (except
as indicated in the notes thereto), and the Latest Financial Statements have
been prepared in accordance with GAAP (as such term applies to unaudited
financial statements and thus such statements may not contain all notes and may
not contain prior period comparative data which are required to be prepared in
accordance with generally accepted accounting principles in general and subject
to normal year-end audit adjustments), are consistent with the Annual Financial
Statements.
3.09 ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the Latest
Balance Sheet, Exmark has no liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due, whether known or
unknown, and regardless of when asserted) arising out of transactions or events
heretofore entered into, or any action or inaction, or any state of facts
existing, with respect to or based upon transactions or events heretofore
occurring, except liabilities in the ordinary course of business (none of which
is an uninsured liability in excess of $50,000 for breach of contract, breach of
warranty, tort, infringement, claim or lawsuit).
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3.10 NO MATERIAL ADVERSE CHANGES. Since the date of the Latest Balance
Sheet (the "BALANCE SHEET DATE"), there has been no material adverse change in
the assets, financial condition, operating results, distributor, customer,
employee or supplier relations, business condition or prospects of Exmark (other
than as a direct result of general economic conditions or an industry downturn).
3.11 ABSENCE OF CERTAIN DEVELOPMENTS. Since May 1, 1997, Exmark has not
(except as described in the Disclosure Schedule):
(a) borrowed any amount or incurred or become subject to any liability in
excess of $100,000, except (i) current liabilities incurred in the ordinary
course of business and (ii) liabilities under contracts entered into in the
ordinary course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of $100,000,
except (i) liens for current property Taxes not yet delinquent, (ii) liens
imposed by law and incurred in the ordinary course of business for obligations
not yet delinquent with respect to claims by carriers, warehousemen, laborers,
materialmen and the like, (iii) liens in respect of pledges or deposits under
workers' compensation laws, or (iv) liens voluntarily created in the ordinary
course of business, all of which liens aggregate less than $100,000;
(c) discharged or satisfied any lien or encumbrance or paid any liability,
in each case with a value in excess of $100,000, other than current liabilities
(including the current portion of long-term liabilities) paid in the ordinary
course of business;
(d) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or stockholders) any tangible assets with
a fair market value in excess of $100,000, or canceled any debts or claims, in
each case, except in the ordinary course of business;
(e) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or stockholders) any patents, trademarks,
trade names, copyrights, trade secrets or other intangible assets;
(f) disclosed, to any person other than Toro or Merger Subsidiary and
authorized representatives of Toro or Merger Subsidiary, any proprietary
confidential information, other than pursuant to a confidentiality agreement
prohibiting the use or
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further disclosure of such information, which agreement is identified in the
Disclosure Schedule and is in full force and effect on the date hereof;
(g) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
(h) declared or paid any dividends or other distributions with respect to
any shares of Exmark's capital stock or redeemed or purchased, directly or
indirectly, any shares of Exmark's capital stock or any options, warrants or
other rights to purchase the same, except for the payment of a one-time cash
dividend to be paid between the date hereof and the Effective Time, which
dividend shall not exceed $100,000;
(i) issued, sold or transferred any of its equity securities, securities
convertible into or exchangeable for its equity securities or options, warrants
or other rights to acquire its equity securities, or any bonds or debt
securities, other than the issuance of Exmark Common Stock pursuant to the
exercise of previously outstanding options and other than the issuance of the
Contingent Class B Rights, the Exmark Class B Stock and the Exmark Class C Stock
as expressly contemplated herein;
(j) taken any other action or entered into any other transaction other
than in the ordinary course of business and in accordance with past custom and
practice, or entered into any transaction with any Insider (as defined in
SECTION 3.23 hereof) other than employment arrangements otherwise disclosed in
this Agreement and the Disclosure Schedule, or the transactions expressly
contemplated by this Agreement;
(k) suffered any material theft, damage, destruction or loss of or to any
property or properties owned or used by it, whether or not covered by insurance;
(l) made or granted any bonus, or any wage, salary or compensation
increase to any director, officer, employee or consultant whose annual
compensation from Exmark in the preceding fiscal year exceeded $45,000, or made
or granted any increase in any employee benefit plan or arrangement, or amended
or terminated any existing employee benefit plan or arrangement, or adopted any
new employee benefit plan or arrangement or made any commitment or incurred any
liability to any labor organization;
(m) made any single capital expenditure or commitment therefor in excess
of $100,000;
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(n) made any loans or advances to, or guarantees for the benefit of, any
persons in excess of $10,000;
(o) made any charitable contributions or pledges in excess of $10,000;
(p) made any change in accounting principles or practices from those
utilized in the preparation of the Latest Financial Statements;
(q) experienced any amendment, modification or termination of any
existing, or entered into any new, contract, agreement, plan, lease, license,
permit or franchise which is, either individually or in the aggregate, material
to the business, operations, financial position or prospects of Exmark other
than in the ordinary course of business;
(r) experienced any labor dispute material to the business, operations,
financial position or prospects of Exmark;
(s) experienced any change in any assumption underlying or method of
calculating, any bad debt, inventory, contingency or other reserve;
(t) written off as uncollectible any note or account receivable, or
canceled any debts, other than in the ordinary course of business and consistent
with past practice;
(u) failed to replace or replenish inventory or supplies as such inventory
or supplies may have been depleted from time to time, collect accounts
receivable, pay accounts payable and has not shortened or lengthened the
customary payment cycles for any of its payables or receivables or otherwise
managed its working capital accounts other than in the ordinary course of
business and in a manner consistent with past practice;
(v) experienced any writedown or writeup of (or failed to writedown or
writeup in accordance with GAAP) the value of any inventories, receivables or
other assets, or revalued any assets of Exmark;
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(w) failed to maintain all material assets in accordance with good
business practice and in good operating condition and repair, ordinary wear and
tear excepted;
(x) experienced any lapse or termination of any material permit that was
issued or relates to Exmark or its business, including any failure to renew any
such permit; or
(y) discontinued or altered, in any material respect, its advertising or
promotional activities or its pricing and purchasing policies.
3.12 TITLE TO PROPERTIES.
(a) The real property listed as owned ("OWNED PROPERTY") or leased
("LEASED PROPERTY") in the Disclosure Schedule constitutes all of the real
property owned, used or occupied by Exmark (the "REAL PROPERTY"). Such
Disclosure Schedule includes the record title holder, location, uses thereof and
Exmark indebtedness thereon, if any, for all Real Property. Exmark has good and
marketable fee simple title to all Owned Property, except for recorded
easements, covenants and other restrictions; utility easements; building
restrictions; zoning restrictions; and other easements, covenants and
restrictions existing generally with respect to properties of a similar
character, all of which are shown on such Disclosure Schedule and there are no
outstanding options to purchase the Owned Real Property. The Real Property has
access, sufficient for the conduct of the business of Exmark as now conducted or
as presently proposed to be conducted, to public roads and to all utilities,
including electricity, sanitary and storm sewer, potable water, natural gas and
other utilities, used in the operation of the business of Exmark at that
location. All structures, fixtures and other improvements on all Owned Property
of Exmark are within the lot lines and do not encroach on the properties of any
other Person, and the use and operation of all Owned Property are not in
violation of any applicable building, zoning, safety, environmental, subdivision
and other laws, ordinances, regulations, codes, permits, licenses and
certificates and all restrictions and conditions affecting title. Except as
described in the Disclosure Schedule, no portion of any Owned Property is
located in a flood plain, flood hazard area or designated wetlands area. Since
January 1, 1992, Exmark has not received any written or oral notice of
assessments for public improvements against any Owned Property or any written or
oral notice or order by any governmental body, any insurance company that has
issued a policy with respect to any of such properties or any board of fire
underwriters or other body exercising similar functions (other than as disclosed
in the insurance reports disclosed hereunder) that (i) relates to material
violations of building, safety or fire ordinances or regulations, (ii) claims
any material defect or deficiency with respect to any of such properties or
(iii) requests that performance of any material repairs, alterations or other
work to or in any of such properties or in the streets bounding the same.
Complete and correct copies of all material written reports on such
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matters from any insurance company that has issued a policy with respect to any
of such properties since January 1, 1992, have been delivered to Toro. To
Exmark's knowledge, there is no pending condemnation, expropriation, eminent
domain or similar proceeding affecting all or any portion of the Owned Property.
(b) The leases for the Leased Property (the "LEASES") are in full force
and effect, and Exmark holds a valid and existing leasehold interest under each
of the Leases for the term set forth in the Disclosure Schedule. Exmark has
delivered to Toro complete and accurate copies of each of the Leases, and none
of the Leases has been modified in any respect, except to the extent that such
modifications are disclosed by the copies delivered to Toro. Exmark is not in
default, and to the knowledge of Exmark no circumstances exist which, if
unremedied, would, either with or without notice or the passage of time or both,
result in such default under any of the Leases; nor to the knowledge of Exmark
is any other party to any of the Leases in default.
(c) Exmark owns good and marketable title to each of the tangible
properties and tangible assets reflected on the Latest Balance Sheet or acquired
since the date thereof, free and clear of all liens and encumbrances, except for
(i) liens for current Taxes not yet delinquent, (ii) liens set forth in the
Disclosure Schedule, (iii) the properties subject to the Leases, (iv) assets
disposed of since the date of the Latest Balance Sheet in the ordinary course of
business, (v) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers and
materialmen and (vi) liens in respect of pledges or deposits under workers'
compensation laws, all of which liens aggregate less than $25,000.
(d) All of the buildings, machinery, equipment, tools, jigs, fixtures,
vehicles and other tangible assets necessary for the conduct of the business of
Exmark are in good condition and repair, ordinary wear and tear excepted, and
are usable in the ordinary course of business. There are no defects in such
assets or other conditions relating thereto which adversely affect the operation
or value of such assets. Exmark owns or leases under valid leases, all
buildings, machinery, equipment and other tangible assets necessary for the
conduct of its business as presently conducted, except for defects of title that
do not materially affect the use of such assets by Exmark and except for such
assets that can be purchased or leased for nominal expenditures.
3.13 ACCOUNTS RECEIVABLE. The accounts receivable reflected on the Latest
Balance Sheet and those arising thereafter are valid receivables, are not
subject to valid counterclaims or set-offs, and are collectible in accordance
with their terms, except to the extent of the bad debt reserve reflected on the
Latest Balance Sheet. The Disclosure Schedule contains a complete and accurate
accounts receivables aging report as of August 31, 1997.
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3.14 INVENTORY. The inventory of raw materials, work in process and
finished goods of Exmark consists of items of a cost, quality and quantity
usable and, with respect to finished goods only, salable at the normal profit
levels of Exmark in the ordinary course of the business of Exmark. The
inventory of finished goods of Exmark is not slow-moving as determined in
accordance with past practices, obsolete or damaged and is merchantable and fit
for its particular use. Exmark has on hand or has ordered and expects timely
delivery of such quantities of raw materials, and has on hand such quantities of
work in process and finished goods, in each case as are reasonably required to
timely fill current orders on hand which require delivery within 60 days and to
maintain the manufacture and shipment of products at its normal level of
operations. As of the date of the Latest Balance Sheet, the values at which
such inventory is carried on the Latest Balance Sheet are in accordance with
GAAP. The Disclosure Schedule contains a materially complete and accurate
summary of Exmark's inventory of raw materials, work in progress, finished goods
and reserve for obsolete and other inventory allowance or accrual calculation
schedules as of August 31, 1997.
3.15 TAX MATTERS.
(a) Each of Exmark and any affiliated, combined or unitary group of which
Exmark is or was a member, any predecessor of Exmark and any Plans (as defined
in SECTION 3.21 hereof), as the case may be (each, a "TAX AFFILIATE" and,
collectively, the "TAX AFFILIATES"), has: (i) timely filed (or has had timely
filed on its behalf) all returns, declarations, reports, estimates, information
returns, and statements ("RETURNS") required to be filed or sent by it in
respect of any Taxes or required to be filed or sent by it by any taxing
authority having jurisdiction and all such Returns are true and correct in all
material respects, except for timing and categorization issues that would not
have a material adverse effect on the financial condition of Exmark; (ii) timely
and properly paid (or has had paid on its behalf) all Taxes due and payable with
respect to the periods covered by such Returns; (iii) established on its Latest
Balance Sheet, in accordance with GAAP, reserves that are adequate for the
payment of any Taxes not yet due and payable for all Tax periods or portions
thereof ending on or prior to the Balance Sheet Date; and (iv) complied with all
applicable laws, rules, and regulations relating to the withholding of Taxes and
the payment thereof (including, without limitation, withholding of Taxes under
Sections 1441 and 1442 of the Code, or similar provisions under any foreign
laws), and timely and properly withheld from individual employee wages or other
payments to employees and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over under all applicable laws.
True and correct copies of any and all Returns filed by any Tax Affiliate have
been provided to Toro.
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(b) There are no liens for Taxes upon any assets of Exmark or of any Tax
Affiliate, except liens for Taxes not yet due. Exmark is not a party to any tax
sharing agreement or similar arrangement for the payment or reimbursement of
Taxes.
(c) No deficiency for any Taxes has been asserted, assessed or, to
Exmark's knowledge, proposed against Exmark or the Tax Affiliates that has not
been resolved and paid in full. No waiver, extension or comparable consent
given by Exmark or the Tax Affiliates regarding the application of the statute
of limitations with respect to any Taxes or Returns is outstanding, nor is any
request for any such waiver or consent pending. There has been no Tax audit or
other administrative proceeding or court proceeding with regard to any Taxes or
Returns, nor is any such Tax audit or other proceeding pending, nor has there
been any notice to Exmark by any Taxing authority regarding any such Tax, audit
or other proceeding, nor, to the best knowledge of Exmark, is any such Tax audit
or other proceeding threatened with regard to any Taxes or Returns. Exmark does
not expect the assessment of any additional Taxes of Exmark or the Tax
Affiliates and is not aware of any unresolved questions, claims or disputes
concerning the liability for Taxes of Exmark or the Tax Affiliates which would
exceed the estimated reserves established on its books and records.
(d) Neither Exmark nor any Tax Affiliate is a party to any agreement,
contract or arrangement that would result, separately or in the aggregate, in
the payment of any "excess parachute payments" within the meaning of
Section 280G of the Code and, assuming the Signing Bonuses are duly and validly
approved by Exmark's stockholders, the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be made
by Exmark or any Tax Affiliate that are not deductible (in whole or in part)
under Section 280G of the Code.
(e) Neither Exmark nor any Tax Affiliate has requested any extension of
time within which to file any Return, which Return has not since been filed.
(f) No property of Exmark or any Tax Affiliate is property that Exmark or
any Tax Affiliates is or will be required to treat as being owned by another
person under the provisions of Section 168(f)(8) of the Code (as in effect prior
to amendment by the Tax Reform Act of 1986) or is "tax-exempt use property"
within the meaning of Section 168 of the Code.
(g) Neither Exmark nor any Tax Affiliate is required to include in income
any adjustment under Section 481(a) of the Code by reason of a voluntary change
in accounting method initiated by Exmark or any Tax Affiliate as a result of the
Tax Reform
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Act of 1986 and neither Exmark nor any Tax Affiliate has knowledge that the
Internal Revenue Service has proposed any such adjustment or change in
accounting method.
(h) All transactions that could give rise to an understatement of federal
income tax (within the meaning of Section 6661 of the Code as it applied prior
to repeal) or an underpayment of tax (within the meaning of Section 6662 of the
Code) were reported in a manner for which there is substantial authority or were
adequately disclosed (or, with respect to Returns filed before the Effective
Time, will be reported in such a manner or adequately disclosed) on the Returns
required in accordance with Sections 6661(b)(2)(B) and 6662(d)(2)(B) of the
Code.
(i) Neither Exmark nor any Tax Affiliate has engaged in any transaction
that would result in a deemed election under Section 338(e) of the Code, and
neither Exmark nor any Tax Affiliate will engage in any such transaction within
any applicable "consistency period" (as such term is defined in Section 338 of
the Code).
(j) Neither Exmark nor any Tax Affiliate has filed any consent under
Section 341(f) of the Code.
(k) For purposes of this Agreement, the term "TAXES" means all taxes,
charges, fees, levies, or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, social security,
unemployment, excise, estimated, severance, stamp, occupation, property, or
other taxes, customs duties, fees, assessments, or charges of any kind
whatsoever, including, without limitation, all interest and penalties thereon,
and additions to tax or additional amounts imposed by any taxing authority,
domestic or foreign, upon Exmark or any Tax Affiliate.
3.16 CONTRACTS AND COMMITMENTS.
(a) The Disclosure Schedule lists the following agreements, whether
written or, to Exmark's knowledge, oral, to which Exmark is a party (or by which
Exmark or its assets are bound): (i) collective bargaining agreement or
contract with any labor union; (ii) bonus, pension, profit sharing, retirement
or other form of deferred compensation plan; (iii) hospitalization insurance or
other welfare benefit plan or practice, whether formal or informal; (iv) stock
purchase or stock option plan; (v) contract for the employment of any officer,
individual employee or other person on a full-time or consulting basis or
relating to severance pay for any such person, other than Exmark's normal
employment practices generally affecting all employees or classes of employees
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(such as hourly or salaried classes of employees); (vi) agreement with employees
and with consultants, vendors, customers or other third parties requiring
confidential treatment of Exmark confidential information and/or transfer to
Exmark of intellectual property rights created by employees and with
consultants, vendors, customers or other third parties; (vii) contract,
agreement or understanding relating to the voting of Exmark's capital stock or
the election of directors of Exmark; (viii) agreement or indenture relating to
the borrowing of money, to letters of credit or to mortgaging, pledging or
otherwise placing a lien on any of the assets of Exmark; (ix) guaranty of any
obligation for borrowed money or otherwise; (x) lease or agreement under which
it is lessee of, or holds or operates any property, real or personal, owned by
any other party; (xi) lease or agreement under which it is lessor of, or permits
any third party to hold or operate, any property, real or personal, for which
the annual rental exceeds $25,000; (xii) contract or group of related contracts
with the same party (other than any contract or group of related contracts for
the purchase or sale of products or services) continuing over a period of more
than six months from the date or dates thereof, not terminable by it on 30 days'
or less notice without penalty and involving more than $50,000; (xiii) contract
which prohibits Exmark from freely engaging in business anywhere in the world;
(xiv) contract for the distribution of the products of Exmark (including any
distributor, sales and original equipment manufacturer contract); (xv) franchise
agreement; (xvi) license agreement or agreement providing for the payment of
royalties or other compensation by Exmark in connection with intellectual
property rights licensed from third parties; (xvii) license agreement or
agreement providing for the receipt of royalties or other compensation by Exmark
in connection with intellectual property rights owned, controlled or otherwise
licensable by Exmark; (xviii) contract or commitment for capital expenditures in
excess of $100,000, (xix) agreement for the sale of any capital asset in excess
of $25,000; (xx) contract with any affiliate which in any way relates to Exmark
(other than for employment on customary terms); or (xxi) agreement with vendors,
customers or other third parties requiring confidential treatment of
confidential information of such vendors, customers or other third parties;
(xxii) other agreement which is either material to the business of Exmark or was
not entered into in the ordinary course of business (other than agreements
required to be listed in the Disclosure Schedule).
(b) The Disclosure Schedule lists the following agreements, whether oral
or written, to which Exmark is a party or by which the Exmark or its assets are
bound: (i) contract or group of related contracts with the same party for the
purchase of products or services by Exmark under which the undelivered balance
of such products or services is in excess of $10,000; (ii) contract or group of
related contracts with the same party for the sale of products or services by
Exmark under which the undelivered balance of such products or services
(including, without limitation, any free upgrades or ongoing services) has a
sales price in excess of $10,000; and (iii) sales agreement or other customer
commitment (other than the standard form of purchase order) which entitles any
purchaser to a rebate or right of set-off, to return any product of Exmark after
acceptance thereof or to delay the acceptance thereof, to receive future
services, upgrades or enhancements, or which varies in any material respect from
Exmark's standard form agreements for sales.
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(c) Exmark has performed all material obligations required to be performed
through the date hereof by it in connection with the contracts or commitments
required to be disclosed in the Disclosure Schedule and has not been notified of
any claim of material default under any contract or commitment required to be
disclosed in the Disclosure Schedule; Exmark has no present expectation or
intention of not fully performing any material obligation pursuant to any
contract or commitment required to be disclosed in the Disclosure Schedule; and
Exmark has no knowledge of any material breach or anticipated material breach by
any other party to any contract or commitment required to be disclosed in the
Disclosure Schedule.
(d) Prior to the date of this Agreement, Toro has been supplied with a
correct and complete copy of each written contract or commitment referred to in
the Disclosure Schedule, together with all known amendments, waivers or other
changes thereto.
3.17 INTELLECTUAL PROPERTY RIGHTS.
(a) The Disclosure Schedule describes: (i) all patents and all
registrations for trademarks, service marks, trade names, corporate names,
copyrights and mask works that have been issued to Exmark; and (ii) each pending
patent application or application for registration for trademarks, service
marks, trade names, corporate names, copyrights and mask works that Exmark has
made with respect to intellectual property owned by, or otherwise controlled by,
Exmark and used in, developed for use in or necessary to the conduct of the
business of Exmark as now conducted or as planned to be conducted as described
herein (the "OWNED INTELLECTUAL PROPERTY RIGHTS"). Except as set forth in the
Disclosure Schedule, Exmark owns and possesses all right, title and interest, or
holds such other interest as is identified in the Disclosure Schedule, in and to
the rights set forth under such caption free and clear of all liens, security
interests or other encumbrances and has the full right to exploit such Owned
Intellectual Property Rights without payment of compensation to any other party.
(b) The Disclosure Schedule describes all agreements granting to Exmark
rights in patents, patent applications, trademarks, service marks, trade names,
corporate names, copyrights, mask works, trade secrets or other intellectual
property rights used in or necessary to the conduct of the business of Exmark as
now conducted or as planned to be conducted as described herein (the
"LICENSED-IN INTELLECTUAL PROPERTY RIGHTS"). All such agreements are in force
and Exmark is not in breach of any such agreement.
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(c) The Disclosure Schedule describes all products marketed or that have
been marketed by Exmark within the past two years, identifies the method(s) of
intellectual property protection utilized by Exmark with respect to such
products and sets forth the amount of gross sales for such products for the
years ended August 31, 1996 and 1997.
(d) The Disclosure Schedule describes all agreements granting to third
parties any rights in Owned Intellectual Property Rights and any agreements to
grant intellectual property rights that Exmark may acquire in the future.
(e) Except as disclosed in the Disclosure Schedule, all of the Owned
Intellectual Property Rights will be assumed by, and will become intellectual
property rights of, the Surviving Corporation in the Merger, without the
requirement that any consent to assignment be obtained or any payment (other
than government filing or registration fees) be made. Except as disclosed in
the Disclosure Schedule, all licenses of the Licensed-In Intellectual Property
Rights will be assumed by, and will become valid agreements of, the Surviving
Corporation in the Merger, without the requirement that any consent to
assignment be obtained or any payment be made (other than future royalties as
provided in such agreements).
(f) Except as disclosed in the Disclosure Schedule, Exmark, to its
knowledge, has taken all commercially reasonable steps to acquire, protect and
maintain the Owned Intellectual Property Rights. Without limiting the
generality of the foregoing, (i) all maintenance, annuity, renewal and other
such fees and filings due on Owned Intellectual Property Rights have been paid
or made; and (ii) Exmark has no knowledge of any defects in the Owned
Intellectual Property Rights that would lead to any of them becoming invalid or
unenforceable.
(g) Except as disclosed in the Disclosure Schedule, Exmark has not
received any notice of, nor are there any facts known to Exmark which indicate a
likelihood of, any infringement or misappropriation by, or conflict from, any
third party with respect to the Owned Intellectual Property Rights or any
Licensed-In Intellectual Property Rights that are exclusively licensed to
Exmark; and no claim by any third party contesting the validity of any Owned
Intellectual Property Rights has been made, is currently outstanding or, to the
best knowledge of Exmark, is threatened.
(h) Except as disclosed in the Disclosure Schedule, Exmark has not
received any notice of any infringement, misappropriation or violation by Exmark
of any intellectual property rights of any third parties and Exmark, to its
knowledge, has not infringed, misappropriated or otherwise violated any such
intellectual property rights; and to the knowledge of Exmark, no infringement,
misappropriation or violation of any
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intellectual property rights of any third parties has occurred or will occur
with respect to products currently being sold by Exmark or with respect to the
products currently under development (in their present state of development) or
with respect to the conduct of the business of Exmark as now conducted.
(i) Except as disclosed in the Disclosure Schedule, Exmark has not entered
into any agreement restricting Exmark from selling, leasing or otherwise
distributing any of its current products or products under development to any
class of customers, in any geographic area, during any time period or in any
segment of the market.
(j) To Exmark's knowledge, Exmark has the right to make available to the
Surviving Corporation all trade secrets and other confidential information
entrusted to Exmark by third parties.
(k) There are no known quality defects in the designs contained in the
Owned Intellectual Property Rights and, except as disclosed in the Disclosure
Schedule, such designs comply with all applicable laws.
(l) Notwithstanding anything to the contrary set forth above, Exmark makes
no warranty or representation regarding the effectiveness of any patents or
patents pending included in the Intellectual Property Rights in preventing the
use or infringement thereof by third parties.
3.18 LITIGATION. There are no actions, suits, proceedings, orders or
investigations pending or, to the best knowledge of Exmark, threatened against
Exmark, at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, nor is there any known basis therefor.
3.19 WARRANTIES; PRODUCTS.
(a) The Disclosure Schedule describes Exmark's system for monitoring the
intake and processing of all warranty claims relating to any products sold by
Exmark prior to the date hereof. The description of the product warranties and
other material terms of sale of Exmark set forth in the Disclosure Schedule are
correct and complete. The reserves for warranty claims on the Latest Balance
Sheet are consistent with Exmark's prior practices and an amount equal to 150%
of the amount of such reserves is fully adequate to
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cover all warranty claims made or to be made against any products of Exmark sold
prior to the date thereof.
(b) Exmark's current products and replacement parts have performed, and
shall perform after the Effective Time, substantially in accordance with
Exmark's technical specifications applicable to such products and parts, subject
to repair and replacement claims consistent with Exmark's past experience. The
foregoing representation and warranty:
(i) is contingent upon proper use of the products and parts in the
applications for which they were intended as indicated in Exmark's accompanying
user manual or similar documentation for the products and parts; and
(ii) does not apply to any product or part which (A) has been altered,
except by Exmark or at Exmark's direction, (B) has not been installed, operated,
repaired or maintained in accordance with any installation, handling,
maintenance or operating instructions supplied by Exmark, or (C) has been
damaged by acts of nature, vandalism, burglary, neglect, misuse or accident.
3.20 EMPLOYEES. (a) To the knowledge of Exmark after due inquiry, no
executive employee of Exmark and no group of the employees of Exmark has any
plans to terminate his, her or their employment; (b) Exmark has complied with
all laws relating to the employment of labor, including provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other Taxes; (c) Exmark has no labor relations
problem pending and Exmark's labor relations are satisfactory; (d) there are no
workers' compensation claims pending against Exmark nor is Exmark aware of any
facts that would give rise to such a claim; (e) no employee of Exmark is subject
to any secrecy or noncompetition agreement or any other agreement or restriction
of any kind that would impede in any way the ability of such employee to carry
out fully all activities of such employee in furtherance of the business of
Exmark; and (f) no employee or former employee of Exmark, or any predecessor has
any claim with respect to any Owned Intellectual Property Rights. The
Disclosure Schedule lists, as of the date set forth in the Disclosure Schedule,
each employee of Exmark. The Disclosure Schedule also states the position,
title, remuneration (including any scheduled salary or remuneration increases),
date of employment and accrued vacation pay of each such employee as of such
date.
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3.21 EMPLOYEE BENEFIT PLANS.
(a) For the purpose of this Agreement, "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended, and the term "PLAN" means
every employee benefit plan (whether or not covered by ERISA) which is
maintained or contributed to by Exmark for the benefit of present or former
employees, including those intended to provide: (i) medical, surgical, health
care, hospitalization, dental, vision, workers' compensation, life insurance,
death, disability, legal services, severance, sickness or accident benefits,
(ii) pension, profit sharing, stock bonus, retirement, supplemental retirement
or deferred compensation benefits (whether or not tax qualified), (iii) bonus,
incentive compensation, stock option, stock appreciation right, phantom stock or
stock purchase benefits, or (iv) salary continuation, unemployment, supplemental
unemployment, termination pay, vacation or holiday benefits.
(b) The term "PLAN" shall also include every such plan: (i) which Exmark
has committed to implement, establish, adopt or contribute to in the future,
(ii) for which Exmark is or may be financially liable as a result of the direct
sponsor's affiliation to Exmark or its owners (whether or not such affiliation
exists at the date of this Agreement and notwithstanding that the plan is not
maintained by Exmark for the benefit of its employees or former employees),
(iii) which is in the process of terminating (but such term does not include any
plan that has been terminated and completely wound up prior to the date of this
Agreement such that Exmark has no present or potential liability with respect
to such arrangement), or (iv) for or with respect to which Exmark is liable
under any common law successor doctrine, express successor liability provisions
of law, provisions of a collective bargaining agreement, labor or employment law
or agreement with a predecessor employer.
(c) The Disclosure Schedule sets forth all Plans by name and brief
description identifying: (i) the type of Plan, (ii) the funding arrangements
for the Plan, (iii) the sponsorship of the Plan, and (iv) the participating
employers in the Plan.
(d) Each Plan identified in the Disclosure Schedule is further identified
on such Disclosure Schedule by reference to such one or more of the following
characteristics as may apply to such Plan: (i) defined contribution plan as
defined in Section 3(34) of ERISA or Section 414(i) of the Code, (ii) defined
benefit plan as defined in Section 3(35) of ERISA or Section 414(j) of the Code,
(iii) plan which is or is intended to be tax qualified under Section 401(a) or
403(a) of the Code, (iv) plan which is or is intended to be an employee stock
ownership plan as defined in Section 4975(e)(7) of the Code (and whether or not
such plan has entered into an exempt loan), (v) nonqualified deferred
compensation arrangement, (vi) employee welfare benefit plan as defined in
Section 3(1) of ERISA, (vii) multiemployer plan as defined in Section 3(37) of
ERISA or Section 414(f) of the Code, (viii) plan maintained by more than one
employer as defined in Section 413(c) of the Code
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(a "multiple employer plan"), (ix) plan providing benefits after separation from
service or termination of employment, (x) plan maintained or contributed to by
Exmark which owns any Exmark or other employer securities as an investment,
(xi) plan which provides benefits (or provides increased benefits or vesting) as
a result of a change in control of Exmark , (xii) plan which is maintained
pursuant to collective bargaining, and (xiii) a plan funded, in whole or in
part, through a voluntary employees' beneficiary association exempt from tax
under Section 501(c)(9) of the Code.
(e) The Disclosure Schedule sets forth the identity of each corporation,
trade or business (separately for each category below that applies): (i) which
is (or was during the preceding five years) under common control with Exmark
within the meaning of Section 414(b) or (c) of the Code, (ii) which is (or was
during the preceding five years) in an affiliated service group with Exmark
within the meaning of Section 414(m) of the Code, (iii) which is (or was during
the preceding five years) the legal employer of persons providing services to
Exmark as leased employees within the meaning of Section 414(n) of the Code, and
(iv) with respect to which Exmark is a successor employer for purposes of group
health or other welfare plan continuation rights (including Section 601 et. seq.
of ERISA) or the Family and Medical Leave Act.
(f) To the extent that they exist, Exmark has furnished Toro with true and
complete copies of: (i) the most recent determination letter, if any, received
by Exmark from the Internal Revenue Service regarding each Plan, (ii) the most
recent determination or opinion letter ruling from the Internal Revenue Service
that each trust established in connection with Plans which are intended to be
tax exempt under Section 501(a) or (c) of the Code are so tax exempt, (iii) all
pending applications for rulings, determinations, opinions, no action letters
and the like filed with any governmental agency (including but not limited to
the Department of Labor, Internal Revenue Service, Pension Benefit Guaranty
Corporation and the SEC), (iv) the financial statements for each Plan for the
three most recent fiscal or Plan years (in audited form if required by ERISA)
and, where applicable, Annual Report/Return (Form 5500) with disclosure
schedules, if any, and attachments for each Plan, (v) the most recently prepared
actuarial valuation report for each Plan (including but not limited to reports
prepared for funding, deduction and financial accounting purposes), (vi) Plan
documents, trust agreements, insurance contracts, service agreements and all
related contracts and documents (including any employee summaries and material
employee communications) with respect to each Plan, and (vii) collective
bargaining agreements (including side agreements and letter agreements) relating
to the establishment, maintenance, funding and operation of any Plan.
(g) The Disclosure Schedule identifies each employee of Exmark who is:
(i) absent from active employment due to short or long term disability,
(ii) absent from active employment on a leave pursuant to the Family and Medical
Leave Act or a comparable state law, (iii) absent from active employment on any
other leave or approved
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absence (together with the reason for such leave or absence), (iv) absent from
active employment due to military service (under conditions that give the
employee rights to re-employment), or (v) not an "at will" employee, except as
"at will" status may be modified by employee handbooks or employment practices
applicable generally to all employees or categories of employees (such as hourly
and salaried categories).
(h) With respect to continuation rights arising under federal or state law
as applied to plans that are group health plans (as defined in Section 601 et.
seq. of ERISA), the Disclosure Schedule identifies: (i) each employee, former
employee or qualifying beneficiary who has elected continuation, and (ii) each
employee, former employee or qualifying beneficiary who has not elected
continuation coverage but is still within the period in which such election may
be made.
(i) Except as set forth in the Disclosure Schedule: (i) all Plans
intended to be tax qualified under Section 401(a) or Section 403(a) of the Code
are so qualified; (ii) all trusts established in connection with Plans which are
intended to be generally tax exempt under Section 501(a) or (c) of the Code are
generally tax exempt; (iii) to the extent required either as a matter of law or
to obtain the intended tax treatment and tax benefits, all Plans comply in all
material respects with the requirements of ERISA and the Code; (iv) all Plans
have been administered in all material respects in accordance with the documents
and instruments governing the Plans; (v) all reports and filings with
governmental agencies (including but not limited to the Department of Labor,
Internal Revenue Service, Pension Benefit Guaranty Corporation and the SEC)
required in connection with each Plan have been timely made; (vi) all
disclosures and notices required by law or Plan provisions to be given to
participants and beneficiaries in connection with each Plan have been properly
and timely made; (vii) to Exmark's knowledge, no Plan, separately or in the
aggregate, requires or would result in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code, and the consummation
of the transactions contemplated by this Agreement will not be a factor in
causing payments to be made by Toro or Exmark that are not deductible (in whole
or in part) because of the application of Section 280G of the Code; (viii) and
Exmark has made a good faith effort to comply with the reporting and taxation
requirements for FICA Taxes with respect to any deferred compensation
arrangements under Section 3121(v) of the Code.
(j) Except as set forth in the Disclosure Schedule: (i) all
contributions, premium payments and other payments required to be made in
connection with the Plans as of the date of this Agreement have been made; (ii)
all contributions, premium payments and other payments due from Exmark in
connection with the Plans but not made as of the date of this Agreement have
been accounted for in accordance with GAAP on the Latest Balance Sheet; (iii) no
contribution, premium payment or other payment has been made in support of any
Plan that is in excess of the allowable deduction for federal income tax
purposes for the year with respect to which the contribution was made (whether
under
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Section 162, Section 280G, Section 404, Section 419, Section 419A of the Code or
otherwise); and (iv) with respect to each Plan that is subject to Section 301
et. seq. of ERISA or Section 412 of the Code, Exmark is not liable for any
accumulated funding deficiency as that terms is defined in Section 412 of the
Code and the projected benefit obligations determined as of the date of this
Agreement do not exceed the assets of the Plan.
(k) Except as set forth in the Disclosure Schedule: (i) no action, suit,
charge, complaint, proceeding, hearing, investigation or claim is pending with
regard to any Plan other than routine uncontested claims for benefits; (ii)
except as based upon plans maintained by Toro or its affiliates, the
consummation of the transactions contemplated by this Agreement will not cause
any Plan to increase benefits payable to any participant or beneficiary;
(iii) except as based upon plans maintained by Toro or its affiliates, the
consummation of the transactions contemplated by this Agreement will not:
(A) entitle any current or former employee of Exmark to severance pay,
unemployment compensation or any other payment, benefit or award, or
(B) accelerate or modify the time of payment or vesting, or increase the amount
of any benefit, award or compensation due any such employee; (iv) to Exmark's
knowledge, no Plan is currently under examination or audit by the Department of
Labor, the Internal Revenue Service or the Pension Benefit Guaranty Corporation;
(v) Exmark has no actual or potential liability arising under Title IV of ERISA
as a result of any Plan that has terminated or is in the process of terminating;
(vi) Exmark has no actual or potential liability under section 4201 et. seq. of
ERISA for either a complete withdrawal or a partial withdrawal from a
multiemployer Plan; and (vii) with respect to the Plans, Exmark has no liability
(either directly or as a result of indemnification) for (and the transaction
contemplated by this Agreement will not cause any liability for): (A) any
excise Taxes under section 4971 through section 4980B, section 4999, section
5000 or any other section of the Code, (B) any penalty under section 502(i),
section 502(l), Part 6 of Title I or any other provision of ERISA, or (C) any
excise Taxes, penalties, damages or equitable relief as a result of any
prohibited transaction, breach of fiduciary duty or other violation under ERISA
or any other applicable law.
(l) Except as set forth in the Disclosure Schedule: (i) all accruals
required under FAS 106 have been properly accrued on the financial statements of
Exmark; (ii) no condition, agreement or Plan provision limits the right of
Exmark to amend, cut back or terminate any Plan (except to the extent such
limitation arises under ERISA); (iii) Exmark has no liability for life
insurance, death or medical benefits after separation from employment other
than: (A) death benefits under the Plans set forth in the Disclosure Schedule
or (B) health care continuation benefits described in section 4980B of the Code.
3.22 INSURANCE. The Disclosure Schedule lists and briefly describes each
insurance policy maintained by Exmark with respect to the properties, assets and
operations of Exmark and sets forth the date of expiration of each such
insurance policy.
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All of such insurance policies are in full force and effect. Exmark is not in
default with respect to its obligations under any of such insurance policies.
3.23 AFFILIATE TRANSACTIONS. Other than pursuant to this Agreement, no
officer, director or employee of Exmark or any member of the immediate family of
any such officer, director or employee, or any entity in which any of such
persons owns any beneficial interest (other than any publicly held corporation
whose stock is traded on a national securities exchange or in the
over-the-counter market and less than one percent of the stock of which is
beneficially owned by any of such persons) (collectively "INSIDERS"), has any
agreement with Exmark (other than normal employment arrangements) or any
interest in any property, real, personal or mixed, tangible or intangible, used
in or pertaining to the business of Exmark (other than ownership of capital
stock of Exmark). None of the Insiders has any direct or indirect interest
(other than beneficial ownership of less than one percent of the stock of a
publicly held corporation whose stock is traded on a national securities
exchange or in the over-the-counter market) in any competitor, supplier or
customer of Exmark or in any person, firm or entity from whom or to whom Exmark
leases any property. For purposes of this SECTION 3.23, the members of the
immediate family of an officer, director or employee shall consist of the
spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law of such officer, director or
employee. All agreements and transactions between Exmark and any Insider
identified in the Disclosure Schedule were made for bona fide business purposes
on terms comparable to what could be obtained from an unaffiliated third party.
3.24 CUSTOMERS AND SUPPLIERS. The Disclosure Schedule lists the 10 largest
distributors and the 10 largest suppliers of Exmark for the year ended August
31, 1997, and sets forth opposite the name of each such distributor or supplier
the approximate amount of gross sales or purchases by Exmark attributable to
such distributor or supplier for such period. No distributor or supplier listed
in the Disclosure Schedule has informed Exmark that it will stop or materially
decrease the rate of business done with Exmark.
3.25 DISTRIBUTORS. The Disclosure Schedule lists (a) all former
distributors of Exmark that have been terminated since January 1, 1992 and the
circumstances surrounding such termination; (b) all litigation and disputes
between Exmark and any of its past or present distributors, including any claims
initiated by any distributor against Exmark, whether such litigation dispute
resulted in a settlement, financial payment or not; (c) to Exmark's knowledge,
all buying consortium arrangements by which any distributor of Exmark purchases
goods (including wholegoods, parts, supplies or other goods) or services from
Exmark; and (d) all distributors of Exmark that, to Exmark's knowledge, sell or
distribute goods or services other than those of Exmark. There are no
enforceable agreements with any distributor except as set forth in the
Disclosure Schedule. Each distributor of Exmark may be terminated without
penalty or other liability other than the
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repurchase of inventory and potential liability for floor plan exposure upon at
least 30 days' prior written notice, except as otherwise provided by distributor
protection laws in some states.
3.26 OFFICERS AND DIRECTORS; BANK ACCOUNTS. The Disclosure Schedule lists
all officers and directors of Exmark and all of the bank accounts of Exmark
(designating each authorized signer).
3.27 COMPLIANCE WITH LAWS; PERMITS.
(a) Exmark, its predecessors and their respective officers, directors,
agents and employees have complied in all material respects with all applicable
laws, regulations and other requirements, including, but not limited to,
federal, state, local and foreign laws, ordinances, rules, regulations and other
requirements pertaining to product labeling, consumer products safety, equal
employment opportunity, employee retirement, affirmative action and other hiring
practices, occupational safety and health, workers' compensation, unemployment
and building and zoning codes to which Exmark (including any product of Exmark)
may be subject, and, since January 1, 1992, Exmark has received no notice of any
allegation or claim of any noncompliance and no claims have been filed against
Exmark alleging a violation of any such laws, regulations or other requirements.
Exmark has no knowledge of any action, pending or threatened, to change the
zoning or building ordinances or any other laws, rules, regulations or
ordinances affecting the Real Property. Exmark is not relying on any exemption
from or deferral of any such applicable law, regulation or other requirement
that would not be available to the Surviving Corporation after the Effective
Time.
(b) Exmark has, in full force and effect, all material licenses, permits
and certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its business and own and operate its properties
(other than Environmental Permits, as such term is defined in SECTION 3.28(c)
hereof) (collectively, the "PERMITS"). Exmark has conducted its business in
substantial compliance with all material terms and conditions of the Permits.
(c) Exmark has not made or agreed to make gifts of money, other property
or similar benefits (other than incidental gifts of articles or general
promotion and entertainment expenditures of nominal value) to any actual or
potential customer, supplier, governmental employee or any other person in a
position to assist or hinder Exmark in connection with any actual or proposed
transaction.
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3.28 ENVIRONMENTAL MATTERS.
(a) As used in this SECTION 3.28, the following terms shall have the
following meanings:
(i) "HAZARDOUS MATERIALS" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined in or
governed by any federal, state or local law, statute, code, ordinance,
regulation, rule or other requirement relating to such substance or otherwise
relating to the environment or human health or safety, including without
limitation any waste, material, substance, pollutant or contaminant that might
cause any injury to human health or safety or to the environment or might
subject Exmark to any imposition of costs or liability under any Environmental
Law (as defined in SECTION 3.28(a)(ii) hereof).
(ii) "ENVIRONMENTAL LAWS" means all applicable federal, state and local
laws, rules, regulations, codes, ordinances, orders, decrees, directives,
permits, licenses and judgments relating to pollution, contamination or
protection of the environment (including, without limitation, all applicable
federal, state and local laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to Hazardous
Materials) in effect as of the date of this Agreement.
(iii) "RELEASE" shall mean the spilling, leaking, disposing, discharging,
emitting, depositing, ejecting, leaching, escaping or any other release or
threatened release, however defined, whether intentional or unintentional, of
any Hazardous Material.
(b) Exmark and the Real Property are in compliance with all applicable
Environmental Laws.
(c) Exmark has obtained, and maintained in full force and effect, all
environmental permits, licenses, certificates of compliance, approvals and other
authorizations necessary to conduct its business and operate the Real Property
(collectively, the "ENVIRONMENTAL PERMITS"). A correct and complete copy of
each such Environmental Permit shall be provided by Exmark to Toro at least 14
days prior to the Effective Time. Exmark has conducted its business in
compliance with all terms and conditions of the Environmental Permits. Exmark
has filed all reports and notifications required to be filed under and pursuant
to all applicable Environmental Laws.
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(d) (i) No Hazardous Materials have been generated, treated, contained,
handled, located, used, manufactured, processed, buried, incinerated, deposited,
stored, or released on, under or about any part of the Real Property during the
period Exmark was in possession thereof that would cause the Surviving
Corporation or Toro to incur response or remediation costs in order to comply
with applicable Environmental Laws or that would subject the Surviving
Corporation or Toro to fines or penalties, (ii) the Real Property and any
improvements thereon, contain no asbestos, urea, formaldehyde, radon at levels
above natural background, polychlorinated biphenyls ("PCB"s) or pesticides that
would cause the Surviving Corporation or Toro to incur response or remediation
costs in order to comply with applicable Environmental Laws or that would
subject the Surviving Corporation or Toro to fines or penalties, and (iii) no
aboveground or underground storage tanks are located on, under or about the Real
Property.
(e) Exmark has not received any notice alleging in any manner that it is,
or might be potentially responsible for any Release of Hazardous Materials, or
any costs arising under or for violation of Environmental Laws.
(f) No expenditure, including penalties, fines or cleanup costs arising
under applicable Environmental Laws, will be required in order for Toro, Merger
Subsidiary or the Surviving Corporation to comply with any Environmental Laws in
effect at the time of the Effective Time in connection with the operation or
continued operation of the business of Exmark or the Real Property in a manner
consistent with the current operation thereof by Exmark, other than expenditures
comparable to Exmark's historical level of expenditures for compliance with
Environmental Laws.
(g) Exmark and the Real Property are not and have not been listed on the
United States Environmental Protection Agency National Priorities List of
Hazardous Waste Sites (the "NATIONAL PRIORITIES LIST"), or any other list,
schedule, law, inventory or record of hazardous or solid waste sites maintained
by any federal, state or local agency.
(h) Exmark has disclosed and delivered to Toro all environmental reports
and investigations which Exmark has obtained or ordered with respect to the
business of Exmark and the Real Property.
(i) To the knowledge of Exmark, no part of the business of Exmark, or the
Real Property has been used as a landfill, dump or other disposal, storage,
transfer, handling or treatment area for Hazardous Materials, or as a gasoline
service station or a facility for selling, dispensing, storing, transferring,
disposing or handling petroleum and/or petroleum products.
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(j) No lien has been attached or filed against Exmark or the Real Property
in favor of any governmental or private entity for (i) any liability or
imposition of costs under or violation of any applicable Environmental Law; or
(ii) any Release of Hazardous Materials.
(k) Exmark, on behalf of itself and its successors and assigns, hereby
waives, releases and agrees not to bring any claim, demand, cause of action or
proceeding, including without limitation any cost recovery action, against Toro,
Merger Subsidiary or the Surviving Corporation under any Environmental Law for
any condition existing prior to the Effective Time, except for proportionate
contribution with respect to any continuation or worsening of any such condition
after the Effective Time.
(l) The storage, transportation, handling, use or disposal, if any, by
Exmark of Hazardous Materials on or under the Real Property and/or disposal
elsewhere, if any, of Hazardous Materials generated on or from the Real Property
is currently, and at all times has been, in compliance in all material respects
with all applicable Environmental Laws. Exmark has not transported or arranged
for the transportation or any Hazardous Materials or other material or
substances to any location which is: (i) listed on the National Priorities
List, or (ii) listed for possible inclusion on the National Priorities List, in
the Comprehensive Environmental Response, Compensation and Liabilities Act of
1980 ("CERCLA") or on any similar state list.
(m) For purposes of the representations and warranties provided in this
SECTION 3.28 only, the term "REAL PROPERTY" shall include all real property,
owned, used or occupied by Exmark currently or previously owned, used or
occupied by Exmark and its predecessors.
3.29 BROKERAGE. No third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of Exmark, other than
fees for financial advisory services that have been paid or accrued at or prior
to the Effective Date.
3.30 OPINION OF FINANCIAL ADVISOR. Exmark has received the opinion of
McCarthy & Co., dated June 2, 1997 and verbally updated as of October 1, 1997,
to the effect that, as of such date, the Merger Consideration to be received in
the Merger by Exmark's stockholders is fair to such stockholders from a
financial point of view, and a signed copy of such opinion has been delivered to
Toro.
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3.31 STOCKHOLDER AGREEMENTS. On or prior to the date hereof, Exmark has
delivered to Toro executed copies of the Stockholder Agreements as described in
SECTION 12.01 hereof.
3.32 REGISTRATION STATEMENT. None of the information regarding Exmark
supplied or to be supplied by Exmark to Toro for inclusion in the Registration
Statement (as defined in SECTION 6.03 hereof) and any other documents regarding
Exmark supplied or to be supplied by Exmark to be filed with the SEC or any
regulatory authority in connection with the transactions contemplated herein
will, at the respective times the Registration Statement, Prospectus-Proxy
Statement (as defined in SECTION 6.03 hereof) and other documents are filed with
the SEC or any regulatory authority and, in the case of the Registration
Statement, when it becomes effective and, with respect to the Prospectus-Proxy
Statement, when mailed, and, in the case of the Prospectus-Proxy Statement or
any amendment thereof or supplement thereto, at the time of the Stockholders'
Meeting and at the Effective Time, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading. All documents which Exmark is responsible
for filing with the SEC and any other regulatory authority in connection with
the Merger will comply as to form in all material respects with the provisions
of applicable law, including the applicable provisions of the Securities Act and
the Exchange Act of 1934, as amended (the "EXCHANGE ACT").
3.33 DISCLOSURE. Neither this Agreement nor any of the exhibits hereto nor
any of the documents delivered by or on behalf of Exmark pursuant to
ARTICLE VIII hereof, the Disclosure Schedule or any of the financial statements
referred to in SECTION 3.08 hereof contains any untrue statement of a material
fact regarding Exmark or any of the other matters dealt with in this ARTICLE III
relating to Exmark or the transactions contemplated by this Agreement. This
Agreement, the exhibits hereto, the documents delivered to Toro by or on behalf
of Exmark pursuant to ARTICLE VIII hereof, the Disclosure Schedule and the
financial statements referred to in SECTION 3.08 hereof do not omit any material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they were made, not misleading, and there is no fact
which has not been disclosed to Toro of which Exmark or any officer or director
of Exmark is aware which materially affects adversely or could reasonably be
anticipated to materially affect adversely the business, including the operating
results, assets, customer relations, employee relations and business prospects,
of Exmark.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TORO
AND MERGER SUBSIDIARY
Toro and Merger Subsidiary, jointly and severally, hereby represent and warrant
to Exmark that:
4.01 INCORPORATION AND CORPORATE POWER. Each of Toro and Merger Subsidiary
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and the State of Nebraska, respectively, with
the requisite corporate power and authority to execute and deliver this
Agreement and the agreements identified in ARTICLE XII to which it is a party
(the "TORO ANCILLARY AGREEMENTS") and perform its obligations hereunder and
thereunder. The Merger Subsidiary has the requisite corporate power and
authority to execute and deliver the Articles of Merger and perform its
obligations thereunder.
4.02 EXECUTION, DELIVERY AND PERFORMANCE; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement and the Toro Ancillary
Agreements by Toro and Merger Subsidiary, and the Articles of Merger by Merger
Subsidiary, and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite corporate action,
and no other corporate proceedings on their part are necessary to authorize the
execution, delivery or performance of this Agreement, the Articles of Merger or
the Toro Ancillary Agreements. This Agreement and the Toro Ancillary Agreements
have been duly executed and delivered by Toro and Merger Subsidiary and
constitute the valid and binding obligation of Toro and Merger Subsidiary,
enforceable in accordance with their terms, and the Articles of Merger, when
executed and delivered by Merger Subsidiary, will constitute the valid and
binding obligation of Merger Subsidiary, enforceable in accordance with its
terms.
4.03 NO BREACH. The execution, delivery and performance of this Agreement
and the Toro Ancillary Agreements by Toro and Merger Subsidiary, and the
Articles of Merger by Merger Subsidiary, and the consummation by Toro and Merger
Subsidiary of the transactions contemplated hereby and thereby do not conflict
with or result in any breach of any of the provisions of, constitute a default
under, result in a violation of, result in the creation of a right of
termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of Toro or Merger Subsidiary, or require any
authorization, consent, approval, exemption or other action by or notice to any
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court or other governmental body, under the provisions of the articles of
incorporation or bylaws of either Toro or Merger Subsidiary or any contract,
indenture, mortgage, lease, loan agreement or other agreement, relationship,
commitment, arrangement or instrument, written or oral, by which either Toro or
Merger Subsidiary is bound or affected, or any law, statute, rule or regulation
or order, judgment or decree to which either Toro or Merger Subsidiary is
subject.
4.04 MERGER SUBSIDIARY. All of the outstanding capital stock of Merger
Subsidiary is owned by Toro free and clear of any lien, claim or encumbrance or
any agreement with respect thereto. Since the date of its incorporation, Merger
Subsidiary has not engaged in any activity of any nature except in connection
with or as contemplated by this Agreement, the Articles of Merger or the Toro
Ancillary Agreements.
4.05 GOVERNMENTAL AUTHORITIES; CONSENTS. Except for the applicable
requirements of the HSR Act, the filing of the Articles of Merger with the
Secretary of State of the State of Nebraska, and any consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state and federal securities laws, the rules of
the New York Stock Exchange (on which the shares of Toro Common Stock are
listed) and the laws of any foreign country, (a) neither Toro nor Merger
Subsidiary is required to submit any notice, report or other filing with any
governmental authority in connection with the execution or delivery by it of
this Agreement, the Articles of Merger or the Employment Agreements (as defined
in SECTION 12.03 hereof) or the consummation of the transactions contemplated
hereby or thereby, and (b) no consent, approval or authorization of any
governmental or regulatory authority or any other party or person is required to
be obtained by either Toro or Merger Subsidiary in connection with its
execution, delivery and performance of this Agreement, the Articles of Merger or
the Toro Ancillary Agreements or the transactions contemplated hereby or
thereby.
4.06 BROKERAGE. Except for fees and compensation to the Geneva Companies,
which are the sole responsibility of Toro, no third party shall be entitled to
receive any brokerage commissions, finder's fees, fees for financial advisory
services or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Toro or Merger Subsidiary.
4.07 SEC DOCUMENTS. Toro has filed all required reports, schedules, forms,
statements, and other documents with the SEC since August 31, 1993 (together
with later filed documents that revise or supersede earlier filed documents, the
"TORO SEC DOCUMENTS"). As of their respective dates, the Toro SEC Documents
complied as to form in all material respects with the requirements of the
Securities Act, or the Exchange Act, as
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the case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Toro SEC Documents. None of the Toro SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that Toro makes no representation or warranty
herein with respect to any information provided by Exmark or Holiman and
included in the Registration Statement or the Prospectus-Proxy Statement (as
such terms are defined in SECTION 6.03 hereof). The financial statements of
Toro included in the Toro SEC Documents complied as of their respective dates of
filing with the SEC as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited statements, as permitted
by Form 10-Q of the Exchange Act) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto), and fairly
present the consolidated financial position of Toro and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except as set
forth in the Toro SEC Documents, and except for liabilities and obligations
incurred in the ordinary course of business consistent with past practice,
neither Toro nor any of its subsidiaries has any liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise) required by
generally accepted accounting principles to be set forth in a consolidated
balance sheet of Toro and its consolidated subsidiaries or in the notes thereto
which, individually or in the aggregate, would have, a material adverse effect
on the business or results of operations of Toro.
4.08 CAPITAL STOCK.
(a) The outstanding capital stock of Toro consists only of Toro Common
Stock (including the preferred stock purchase right associated with each share
of Toro Common Stock) and the Toro SEC Documents set forth Toro's capitalization
in all material respects. All outstanding shares of Toro Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable. None
of such shares were issued in violation of any applicable securities laws that
would subject Toro to fines, penalties or rescission or civil damages that are
material in amount. Toro Common Stock is registered pursuant to Section 12(b)
of the Exchange Act and is listed on the New York Stock Exchange, and all Toro
Common Stock issued as part of the Merger Consideration will, upon issuance, be
so registered and listed.
(b) Toro owns, beneficially and of record, all of the issued and
outstanding shares of Merger Subsidiary Stock, which shares are validly issued,
fully paid, and non-assessable, and free and clear of all liens.
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(c) Except as set forth in this SECTION 4.08 and except for
changes since the date hereof resulting from the exercise of employee and
director options outstanding on such date, (i) no shares of Toro Common Stock
or other voting securities of Toro are outstanding, (ii) no securities of
Toro convertible into or exchangeable for shares of capital stock or voting
securities of Toro are outstanding, and (iii) no options or other rights to
acquire from Toro, and no obligation of Toro to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of Toro are outstanding (the items in clauses (i),
(ii) and (iii) being referred to collectively as the "TORO SECURITIES." No
obligations of Toro to repurchase, redeem or otherwise acquire any Toro
Securities are outstanding.
4.09 CURRENT PLANS OR INTENTIONS. Toro does not have any current plan or
intention to take any of the following actions within the twelve-month period
immediately following the Effective Date:
(a) Liquidate Exmark;
(b) Merge Exmark with or into another corporation, except if Exmark is the
surviving corporation; or
(c) Cause Exmark to sell or otherwise dispose of any of its assets to any
entity other than an Exmark subsidiary, with the following exceptions (i) sales
or dispositions in the ordinary course of business or (ii) sales or dispositions
which would not violate the "substantially all" test as defined in Rev. Proc.
77-37, 1977-2 C.B. 568 Section 3.01.
Except as expressly contemplated herein, it is the present intention of Toro to
continue the line of business presently conducted by Exmark.
4.10 DUE AUTHORIZATION OF STOCK ISSUED IN MERGER. All shares of Toro
Common Stock issued by Toro to Exmark's stockholders as part of the Merger
Consideration will, upon such issuance and delivery in accordance with the terms
of this Agreement, be duly authorized, validly issued, fully paid and
nonassessable and free of any preemptive rights of Toro's stockholders.
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ARTICLE V
COVENANTS OF EXMARK
5.01 CONDUCT OF THE BUSINESS. Exmark shall observe each term set forth in
this SECTION 5.01 and agrees that, from the date hereof until the Effective
Time, unless otherwise consented to by Toro in writing:
(a) The business of Exmark shall be conducted only in, and Exmark shall
not take any action except in, the ordinary course of Exmark's business, on an
arm's-length basis and in accordance in all material respects with all
applicable laws, rules and regulations and Exmark's past custom and practice;
(b) Exmark shall not, directly or indirectly, do or permit to occur any of
the following: (i) issue or sell any additional shares of capital stock (except
Exmark Class B Stock and Exmark, Class C Stock as contemplated herein and Exmark
Common Stock pursuant to the exercise of previously granted stock options,
warrants or purchase rights and issuances in the ordinary course of business and
consistent with past practice), or any options, warrants, conversion privileges
or rights of any kind to acquire any shares of, any of its capital stock (except
purchase rights to purchase Exmark Class B Stock as contemplated herein),
(ii) sell, pledge, dispose of or encumber any of its assets, except in the
ordinary course of business; (iii) amend or propose to amend its articles of
incorporation or bylaws (except to provide for the creation of Exmark Class B
Stock and Exmark Class C Stock as contemplated herein); (iv) split, combine or
reclassify any outstanding shares of capital stock, or declare, set aside or pay
any dividend or other distribution payable in cash, stock, property or otherwise
with respect to shares of capital stock (other than the one-time dividend
expressly contemplated in SECTION 3.11 hereof); (v) redeem, purchase or acquire
or offer to acquire any shares of capital stock or other securities (except
Outstanding Purchase Rights); (vi) acquire (by merger, exchange, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership, joint
venture or other business organization or division or material assets thereof
other than The Holiman Co., Inc., a Pennsylvania Corporation ("HOLIMAN"), as
contemplated herein; (vii) incur any indebtedness for borrowed money or issue
any debt securities except the borrowing of working capital in the ordinary
course of business and consistent with past practice and the borrowing of money
for facility expansion, the upgrading of computer and paint systems, telephone
system, production equipment and tooling, in accordance with the capital
spending plan previously provided to Toro; (viii) accelerate or defer the
payment of undisputed accounts payable or other accrued expenses owed to trade
creditors or other third parties having business relationships with Exmark other
than in the ordinary course of business and consistent with past practice;
(ix) accelerate or defer, beyond the normal collection cycle, or defer
collection of manufacturers' rebates, promotional allowances and other accounts
receivable; (x) enter into or propose to enter into, or modify or propose to
modify, any Lease or exercise or waive any option, or consent
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to any modification, act or omission by any landlord requiring tenant's consent
under any Lease; (xi) enter into or propose to enter into or modify or propose
to modify any agreement, arrangement or understanding with respect to any of the
matters set forth in this SECTION 5.01(b); (xii) purchase inventories or
supplies for its business other than in the ordinary course of business, except
for accelerated purchases to accommodate production schedules for "Exmark
Cross-Branded Products" as defined in Exhibit 2.01(a); (xiii) engage in any
"field loading" inventory plan (E.G., Exmark will not provide sales or other
incentives to its distributors to encourage them to order Exmark's products in
order to artificially inflate or accelerate Exmark's sales of such products,
except those incentives consistent with past practice); (xiv) sell, lease,
license or otherwise dispose of any assets or properties, other than in the
ordinary course of business; (xv) accelerate or defer the construction of
improvements at any of the locations of its business (except for the expansion
of Exmark's facility in Beatrice, Nebraska, consistent with plans previously
disclosed to Toro); or (xvi) accelerate or defer the purchase of fixtures,
equipment, leasehold improvements, vehicles, other items of machinery and
equipment and other capital expenditures (except for the upgrading of computer
and paint systems, telephone system, production equipment and tooling, in
accordance with the capital spending plan previously provided to Toro);
(c) Except as contemplated herein, Exmark shall not, directly or
indirectly, (i) enter into or modify any employment, severance or similar
agreements or arrangements with, or grant any bonuses, salary increases,
severance or termination pay to, any officers or directors or consultants; or
(ii) in the case of employees, officers or consultants who earn in excess of
$45,000 per year, take any action with respect to the grant of any bonuses,
salary increases, severance or termination pay or with respect to any increase
of benefits payable in effect on the date hereof;
(d) Except as contemplated herein, Exmark shall not adopt or amend any
bonus, profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, trust, fund or group
arrangement for the benefit or welfare of any employees or any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or
arrangements for the benefit or welfare of any director;
(e) Exmark shall not cancel or terminate its current insurance policies or
cause any of the coverage thereunder to lapse, unless simultaneously with such
termination, cancellation or lapse, replacement policies providing coverage
equal to or greater than the coverage under the canceled, terminated or lapsed
policies for substantially similar premiums are in full force and effect;
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(f) Exmark shall (i) use its best efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees as a group and maintain satisfactory relationships with suppliers,
distributors, customers and others with which it has business relationships;
(ii) confer on a regular and frequent basis with representatives of Toro to
report operational matters and the general status of ongoing operations;
(iii) not intentionally take any action which would render, or which reasonably
may be expected to render, any representation or warranty made by it in this
Agreement untrue at the Effective Time; (iv) notify Toro of any emergency or
other change in the normal course of its business or in the operation of its
properties and of any governmental or third party complaints, investigations or
hearings (or communications indicating that the same may be contemplated) if
such emergency, change, complaint, investigation or hearing would be material,
individually or in the aggregate, to the business, operations or financial
condition of Exmark or to Exmark's, Toro's or Merger Subsidiary's ability to
consummate the transactions contemplated by this Agreement; and (v) promptly
notify Toro in writing if Exmark shall discover that any representation or
warranty made by it in this Agreement was when made, or has subsequently become,
untrue in any respect;
(g) Except as set forth in the Disclosure Schedule, Exmark shall (i) file
any Tax returns, elections or information statements with respect to any
liabilities for Taxes of Exmark or other matters relating to Taxes of Exmark
which pursuant to applicable law must be filed (after taking into account any
properly applicable extensions of the due date of such returns, elections or
information statements) prior to the Closing Date; provided, however, that
Exmark shall not file any such Tax returns, or other returns, elections, claims
for refund or information statements with respect to any liabilities for Taxes
(other than federal, state or local sales, use, withholding or employment tax
returns or statements) for any Tax period, or consent to any adjustment or
otherwise compromise or settle any matters with respect to Taxes, without prior
consultation with and consent of Toro (which consent shall not be unreasonably
withheld); (ii) promptly upon filing provide copies of any such Tax returns,
elections or information statements to Toro; (iii) make or rescind any such Tax
elections or other discretionary positions with respect to Taxes taken by or
affecting Exmark only upon prior consultation with and consent of Toro (which
consent shall not be unreasonably withheld); (iv) not amend any Return; (v) not
change the rate or policy for any accrual or reserve for Taxes or otherwise
accrue therefor in a manner inconsistent with its practices for previous periods
as reflected in the Latest Financial Statements; and (vi) not change any of its
methods of reporting income or deductions for federal income Tax purposes from
those employed in the preparation of the federal income Tax returns for the
taxable year ended August 31, 1996, except for changes required by changes in
law; and
(h) Exmark shall not perform any act referenced by (or omit to perform any
act which omission is referenced by) the terms of SECTION 3.11, except as stated
in the Disclosure Schedule under the caption referencing such Section.
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5.02 ACCESS TO BOOKS AND RECORDS. Between the date hereof and the
Effective Time, Exmark shall afford to Toro and its authorized representatives
full access at all reasonable times and upon reasonable notice to the offices,
properties, books, records, officers, employees and other items of Exmark, and
the work papers of Grant Thornton LLP, Exmark's independent accountants (the
"EXMARK'S ACCOUNTANT"), relating to work done by Exmark's Accountant and
otherwise provide such assistance as is reasonably requested by Toro in order
that Toro may have a full opportunity to make such investigation and evaluation
as it shall reasonably desire to make of the business and affairs of Exmark. In
addition, Exmark, and its officers and directors shall cooperate fully
(including providing introductions, where necessary) with Toro and to enable
Toro to contact such third parties, including customers, prospective customers,
specifying agencies, vendors or suppliers of Exmark as Toro deems reasonably
necessary to complete its due diligence.
5.03 STOCKHOLDERS' MEETING. Exmark shall cause to be duly called and held,
not later than 40 days following the effective date of the Registration
Statement, a meeting of its stockholders (the "STOCKHOLDERS' MEETING") and will
direct that this Agreement, the Merger, the New Articles of Incorporation and
the Signing Bonuses be submitted to a vote at such meeting. Exmark will
(a) cause proper notice of such meeting to be given to its stockholders in
compliance with the Nebraska Act, other applicable laws and regulations and
Exmark's articles of incorporation and bylaws; (b) recommend by the affirmative
vote of all members of its board of directors that Exmark's stockholders vote in
favor of approval of this Agreement, the New Articles of Incorporation and the
Signing Bonuses; and (c) use its best efforts to solicit from its stockholders
proxies in favor thereof (subsections (b) and (c) hereof shall be subject,
however, to the fiduciary duties of the Exmark board of directors as described
in SECTION 5.08).
5.04 REGULATORY FILINGS. Exmark shall make, or cause to be made all
filings and submissions under the HSR Act and any other laws or regulations
applicable to Exmark for the consummation of the transactions contemplated
herein. Exmark will coordinate and cooperate with Toro in exchanging such
information, will not make any such filing without providing to Toro a final
copy thereof for its review and consent at least two full business days in
advance of the proposed filing date and will provide such reasonable assistance
as Toro may request in connection with all of the foregoing.
5.05 REGISTRATION STATEMENT. Exmark will furnish, or cause to be
furnished, to Toro all the information concerning Exmark and its subsidiaries
required for inclusion in the Registration Statement and the Prospectus-Proxy
Statement or any statement or application made by Toro to any governmental body
in connection with the transactions
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contemplated by this Agreement. Any financial statement for any fiscal year
provided under this paragraph must include the audit opinion and the consent of
Exmark's Accountant, to use such opinion in such Registration Statement.
5.06 FINANCIAL STATEMENTS. Exmark shall have prepared and delivered to
Toro all quarterly and monthly financial statements for any periods ending at
least 15 days prior to the Effective Time.
5.07 CONDITIONS. Exmark shall take all commercially reasonable actions
necessary or desirable to cause the conditions set forth in SECTION 8.01 to be
satisfied and to consummate the transactions contemplated herein as soon as
reasonably possible after the satisfaction thereof. Without limiting the
generality of the foregoing, Exmark shall obtain, prior to the Effective Time,
all consents or waivers to the transactions contemplated herein that may be
required under any of the agreements or commitments of Exmark that are material
to Exmark's business.
5.08 NO NEGOTIATIONS. Except as consented to in writing by Toro, from the
date hereof until the Effective Time, Exmark shall not, directly or indirectly,
through any officer, director, agent, affiliate, employee or otherwise, solicit,
initiate or encourage submission of any proposal or offer from any person, group
or entity relating to any acquisition of the capital stock or business of
Exmark, or all or a material portion of the assets of Exmark, or other similar
transaction or business combination involving the business of Exmark, and shall
not participate in any negotiations or discussions regarding or furnish to any
other person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage any effort or attempt
by any other person or entity to do or seek such acquisition or other
transaction. Exmark agrees that it shall take the necessary steps to promptly
inform any such third party of the obligations undertaken in this Agreement and
this SECTION 5.08. Exmark agrees that it immediately shall inform Toro in
writing of any such inquiry and shall keep Toro informed, on a current basis, of
the status and terms of any such proposals or offers and the status of any such
discussions or negotiations.
Notwithstanding the foregoing, nothing contained in this Agreement shall prevent
Exmark or its board of directors from engaging in discussions or negotiations
with, or providing any information to, a third party in response to an
unsolicited bona fide acquisition proposal from such person, or from
recommending an unsolicited bona fide acquisition proposal to the stockholders
of Exmark, if and to the extent that the board of directors of Exmark:
(a) concludes in good faith (after consultation with its financial and legal
advisors) that such acquisition proposal is reasonably capable of being
completed, taking into account all legal, financial, regulatory and other
aspects of the proposal, including the identity of the person making the
proposal, and would, if consummated, result in a
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transaction more favorable to Exmark's stockholders from a financial and
strategic point of view than the Merger (such more favorable acquisition
proposal being referred to herein as "Superior Proposal"); and (b) is advised by
its legal counsel that such action is necessary in order for Exmark's board of
directors to satisfy its fiduciary duties under Nebraska law; provided, however,
that Exmark's legal counsel provide reasonably satisfactory written evidence of
such advice to Toro prior to Exmark's board of directors taking any such action.
Prior to providing information or data to any third party or entering into
discussions or negotiations with any third party, Exmark shall receive from such
third party an executed confidentiality agreement. Exmark shall notify Toro
immediately of any inquiries, proposals or offers, including the name of such
third party and the terms and conditions of any proposals or offers.
5.09 EXERCISE OR CANCELLATION OF OUTSTANDING PURCHASE RIGHTS. At the time
of the distribution of the Prospectus-Proxy Statement, Exmark will distribute
the Prospectus-Proxy Statement to each holder of an Outstanding Purchase Right.
The Prospectus-Proxy Statement will indicate that (a) each holder of an
Outstanding Purchase Right has the right to exercise such Outstanding Purchase
Right to the extent of the full number of shares subject thereto until the
Effective Time, and (b) it is a condition to Toro's obligation to consummate the
Merger that all Outstanding Purchase Rights be canceled prior to the Effective
Time.
5.10 EXMARK CLASS B AND CLASS C STOCK. Prior to the Effective Date, Exmark
shall amend and restate its articles of incorporation to read as provided in
EXHIBIT 5.10 to this Agreement in order to authorize the issuance of Exmark
Class B Stock and Exmark Class C Stock (such amended and restated articles of
incorporation are referred to herein as the "NEW ARTICLES OF INCORPORATION") and
shall issue options or warrants to purchase Exmark Class B Stock or "when
issued" certificates therefor, the issuance of such Class B Stock to be
contingent upon approval of the New Articles of Incorporation by Exmark's
stockholders (the "CONTINGENT CLASS B RIGHTS"). Promptly after stockholder
approval of the New Articles of Incorporation, Exmark's board of directors shall
cause there to be filed articles of amendment reflecting the New Articles of
Incorporation with the Secretary of State of the State of Nebraska and take such
other action as is necessary to give effect to the New Articles of
Incorporation. On or prior to the Effective Time, all such Contingent Class B
Rights shall have been exchanged for shares of Exmark Class B Stock by such
persons or shall have been canceled. The Exmark Class C Stock shall have been
issued solely as consideration for the acquisition of Holiman as contemplated
herein.
5.11 NOTIFICATION; AMENDMENT TO DISCLOSURE SCHEDULE.
(a) Exmark shall give prompt notice to Toro of (i) the occurrence or
failure to occur of any event or the discovery of any information, which
occurrence, failure or discovery
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would be likely to cause any representation or warranty by Exmark contained in
this Agreement to be untrue, inaccurate or incomplete after the date hereof in
any material respect or, in the case of any representation or warranty given as
of a specific date, would be likely to cause any such representation or warranty
on its part contained in this Agreement to be untrue, inaccurate or incomplete
in any material respect as of such specific date, and (ii) any material failure
of Exmark to comply with or satisfy any covenant or agreement to be complied
with or satisfied by it hereunder.
(b) From time to time after the date hereof and prior to the Effective
Time, Exmark shall promptly supplement or amend any of its representations and
warranties which apply to the period after the date hereof by delivering an
updated Disclosure Schedule to Toro pursuant to this SECTION 5.11(b) with
respect to any matter hereafter arising which would render any such
representation or warranty after the date of this Agreement materially untrue,
inaccurate or incomplete as a result of such matter. Such supplement or
amendment to Exmark's representations and warranties contained in an updated
Disclosure Schedule delivered pursuant to this SECTION 5.11(b) shall be deemed
to have modified the representations and warranties of Exmark, and no such
supplement or amendment, or the information contained in such updated Disclosure
Schedule, shall constitute a breach of a representation or warranty of Exmark;
provided that no such supplement or amendment may cure any breach of a covenant
or agreement of Exmark under ARTICLE 5. Within 15 days after receipt of such
supplement or amendment, Toro may terminate this Agreement pursuant to
SECTION 9.01(k) hereof if the information in such supplement or amendment
together with the information in any and all of the supplements or amendments
previously provided by Exmark indicate that Exmark has suffered or is reasonably
likely to suffer a material adverse change (as described in SECTION 9.01(k).
5.12 EMPLOYEE AGREEMENTS. Prior to the Effective Date, Exmark shall use
its best efforts (including the payment of nominal consideration to such
persons) to obtain executed agreements from its employees (other than the
persons described in SECTION 12.03 hereof), contract workers, consultants and
other agents of Exmark sufficient to vest in Exmark ownership or the right to
use the Owned Intellectual Property Rights. Such agreements shall be in a form
satisfactory to Toro.
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ARTICLE VI
COVENANTS OF TORO AND MERGER SUBSIDIARY
Toro and Merger Subsidiary covenant and agree with Exmark as follows:
6.01 REGULATORY FILINGS. Toro or Merger Subsidiary shall, as promptly as
practicable after the execution of the Agreement, make or cause to be made all
filings and submissions under the HSR Act and any other laws or regulations
applicable to Toro and Merger Subsidiary for the consummation of the
transactions contemplated herein. Toro and Merger Subsidiary will coordinate
and cooperate with Exmark in exchanging such information, will not make any such
filing without providing to Exmark a final copy thereof for its review and
consent at least two full business days in advance of the proposed filing and
will provide such reasonable assistance as Exmark may request in connection with
all of the foregoing.
6.02 CONDITIONS. Toro or Merger Subsidiary shall take all commercially
reasonable actions necessary or desirable to cause the conditions set forth in
SECTION 8.02 to be satisfied and to consummate the transactions contemplated
herein as soon as reasonably possible after the satisfaction thereof (but in any
event within three business days after such date).
6.03 REGISTRATION STATEMENT. As promptly as practicable after the
execution of this Agreement, Toro will file with the SEC a registration
statement on Form S-4 under the Securities Act relating to the Merger
Consideration, including the Contingent Payment Rights, if necessary, and the
shares of Toro Common Stock which may be delivered to Exmark's stockholders
pursuant to such rights (the "REGISTRATION STATEMENT"), and any other applicable
documents, which will include a prospectus and proxy statement (as amended or
supplemented by any amendment or supplement filed by Toro, the "PROSPECTUS-PROXY
STATEMENT"), and will use its best efforts to cause the Registration Statement
to become effective. At the time the Registration Statement becomes effective,
the Registration Statement shall comply in all material respects with the
provisions of the Securities Act, and shall not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not false or misleading, and at the
time of mailing thereof to Exmark's stockholders, at the time of the
Stockholders' Meeting referred to in SECTION 5.03 hereof and at the Effective
Time, the Prospectus-Proxy Statement shall not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; PROVIDED, HOWEVER, that none of the provisions of this
Section shall apply to statements in or omissions from the Registration
Statement or the Prospectus-Proxy Statement made in reliance upon and in
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conformity with information furnished by Exmark for use in the Registration
Statement or the Prospectus-Proxy Statement. Toro shall bear the costs of SEC
filing fees with respect to the Registration Statement, the costs of printing
the Prospectus-Proxy Statement and the costs of qualifying the shares of Toro
Common Stock under state securities laws as necessary.
6.04 STOCK EXCHANGE LISTINGS. Prior to issuance, Toro will file all
documents required to be filed to list the Toro Common Stock to be issued as
part of the Initial Payment and the Contingent Payments on the New York Stock
Exchange and use its best efforts to effect said listings.
6.05 DUE AUTHORIZATION OF STOCK ISSUED IN MERGER. Any shares of Toro
Common Stock issued by Toro to Exmark's stockholders pursuant to the Initial
Payment and the Contingent Payments will, upon such issuance and delivery in
accordance with the terms of this Agreement, be duly authorized, validly issued,
fully paid and nonassessable and free of any preemptive rights of Toro's
stockholders.
6.06 BLUE SKY APPROVALS. Toro will file all documents required to obtain,
prior to the Effective Time, all necessary approvals under state securities
laws, if any, required to carry out the transactions contemplated by this
Agreement, will pay all expenses incident thereto and will use its best efforts
to obtain such approvals.
ARTICLE VII
CONDUCT OF EXMARK AFTER THE ACQUISITION
7.01 STAND-ALONE STATUS. During the period from the Effective Time until
the earlier of the Toro Control Date (as defined in SECTION 7.03 hereof) or
October 31, 1999 (the "CONTINGENT PAYMENT PERIOD") Toro, Merger Subsidiary and
Exmark agree as follows, except with the prior consent of the Synergies Council
(all references in this SECTION 7.01 to Exmark shall be deemed to refer to the
Surviving Corporation after the Effective Time):
(a) Exmark shall continue its operations in Beatrice, Nebraska.
(b) Except as provided herein, Exmark shall operate as a stand-alone
entity and the day-to-day management of Exmark will be overseen by the Surviving
Corporation's officers,
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subject to the direction of its board of directors as described in SECTION 1.04.
Exmark's management and employees shall participate in Toro corporate functions,
activities and meetings, and shall prepare reports, maintain records and
cooperate with Toro management to the same general extent as management and
employees of Toro's other operating units. Further, nothing herein shall be
deemed to abrogate the duty of loyalty of such persons to Toro.
(c) Exmark's administrative, engineering, finance and sales and marketing
staffs and functions shall remain separate from Toro; however, Exmark's
management shall cause strategic planning and product management to be
coordinated jointly.
(d) Exmark shall not sell its products in countries in the European
Community or in any other countries except where it sold its wholegoods during
the fiscal year ending August 31, 1997; provided, however, Exmark may sell
replacement parts and accessories in any country in which it sold its products
prior to the Effective Time in order to service existing accounts.
(e) Except as contemplated herein, Exmark and Toro shall continue to have
distinct and separate product lines with separate channels to the market.
(f) Cross-branding of differentiated versions of both companies' products
during the Contingent Payment Period is an objective desired by both Toro and
Exmark, and cross-branding shall occur as promptly as reasonably practical after
the Effective Time.
(g) Exmark and Toro shall work together in good faith (particularly with
respect to sharing engineering resources) in order to bring to market as
promptly as reasonably practicable differentiated Toro-branded products that are
manufactured by Exmark and based on Exmark's "Lazer," "Metro," "Lazer HP" and
such other products of Toro as Toro may determine, with the advice of Exmark's
management and with due regard for Exmark's technical resource constraints. It
is the current intent of the parties that such differentiation will include
distinctive Toro features such as Toro cutter decks and Toro "T-handles."
(h) Exmark shall continue to maintain its current executive compensation
structure, including its incentive bonus program for executives and employees,
and may make bonus payments, consistent with past practice, to such persons
under such program; provided, however, that all such payments have been and
continue to be accrued monthly during each fiscal year and that Exmark provide
the amount and the name of the recipient of such bonus to Toro 15 days prior to
payment thereof. No bonuses shall be accrued for or paid
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to H. John Smith, Roger Smith or Ray Rickard for services performed after
October 31, 1997, except as provided in their Employment Agreements, and from
and after November 1, 1997, their compensation shall be as set forth in each of
their respective Employment Agreements.
(i) All employee compensation, benefit and welfare Plans of Exmark (other
than Exmark's 1990 Stock Option Plan and its 1992 Restricted Stock Plan) shall
continue as stand-alone Plans, separate from those of Toro, except as such
compensation arrangements may be modified pursuant to the Employment Agreements
and SECTION 7.02 hereof and except for minor adjustments by Exmark that do not,
in the aggregate, increase the rate of compensation and benefits in excess of
the rate of inflation.
(j) Exmark shall not engage in any "field loading" inventory plan
(E.G., Exmark will not provide sales or other incentives to its distributors to
encourage them to order Exmark products in order to artificially inflate or
accelerate Exmark's sales of such products, except those in keeping with past
practice).
(k) Effective November 1, 1997, in lieu of the sales commission paid
historically by Exmark to Holiman, Exmark shall pay the compensation and
reimbursable expenses of all sales personnel (excluding Roger Smith) employed by
Toro, Exmark or Holiman or any of their subsidiaries, who were employed as such
by Holiman immediately prior to November 1, 1997, and Exmark shall pay
Roger Smith's compensation payable pursuant to his Employment Agreement, which
is attached hereto as EXHIBIT 12.03(d).
(l) Exmark shall maintain its marketing expenditures at a level at least
equal to 1.20% of its gross sales in fiscal year 1998 and 1.16% of its gross
sales in fiscal year 1999, and shall maintain its engineering expenditures at a
level at least equal to the lesser of (i) $1,603,140 and $1,923,768 in fiscal
years 1998 and 1999, respectively, and (ii) 2.4% of its gross sales for each
such year. For the purpose hereof, "marketing expenditures" will include
payroll, employee benefits, office expenses, travel, meals and training for
marketing staff; expenses for dealer and distributor meetings sponsored by
Exmark; production and development costs for media advertising and literature;
cost of media space and printing of literature; promotional (cost of product or
promotional material giveaways) advertising; cost of annual marketing planning
sessions; customer contact programs; Internet maintenance; point of purchase
materials development and production costs (net of related income); and trade
show expense.
(m) In the event that Exmark's production capacity shall at any time from
the Effective Time until August 31, 1998 be inadequate to meet the demands of
its own dealers, other customers and Toro, Exmark will allocate to Toro
available production capacity based
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upon the ratio that Toro's then current firm commitments and planning estimates
for wholegoods bears to the total of such commitments and estimates of Exmark's
dealers and other customers (including Toro) during the same period. In the
event that Exmark's production capacity shall at any time from September 1, 1998
until the earlier to occur of the Toro Control Date or October 31, 1999 be
inadequate to meet the demands of its own dealers, other customers and Toro,
Exmark will allocate to Toro available production capacity based upon a
comprehensive plan to be developed by the Synergies Council. In the event no
such plan is timely developed, the allocation method described above for the
period from the Effective Time until August 31, 1998 shall continue to be used.
(n) Exmark shall prepare and file, subject to Toro's review and consent
(which shall not unreasonably be withheld), all Returns required to be filed by
it with respect to its tax year ended August 31, 1997.
Notwithstanding SECTION 7.03 below and recognizing that the day-to-day
management of the business of Exmark during the Contingent Payment Period will
be overseen by Exmark's existing management, Toro may take, or cause to be
taken, any act or action, either directly or through the board of directors of
Exmark, to cause Exmark to comply with the covenants and agreements of Exmark
set forth in this SECTION 7.01, including directing one or more members of
Exmark's management to cause Exmark to comply with such covenants and agreements
and, if such member or members of management do not follow such direction, then
Toro may have one or more of its employees take control of such function or
replace such member or members of Exmark's management. Disputes arising under
this paragraph will be referred to the Synergies Council for resolution. Except
in the case of actual or potential harm, which is imminent and material in
nature, to the business or reputation of Toro or any of its subsidiaries, no
permanent changes will be made by Toro pursuant to this paragraph while such a
dispute is pending resolution.
7.02 SYNERGIES COUNCIL. Each of Toro, Merger Subsidiary, Exmark and
Surviving Corporation Covenant and agree that a committee shall be established
and maintained during the Contingent Payment Period (The "SYNERGIES COUNCIL"),
which shall consist of the three Stockholders' Representatives (as defined in
SECTION 10.01 hereof), who will represent the interests of the former holders of
Shares and three executives of Toro ("TORO'S REPRESENTATIVES"), who will
represent the interests of Toro. The purpose of the Synergies Council will be
to act as an inter-company management team and dispute resolution panel during
the Contingent Payment Period. The Synergies Council will approve proposed
actions that Toro and Exmark may want to take, but which may be inconsistent
with the covenants contained in SECTION 7.01 or which materially affect Exmark
as a "stand-alone" entity during the Contingent Payment Period (E.G., material
capital expenditures, relocation of a production line, distribution of products,
allocation of revenue and costs (including those of hybrid products),
compensation and employee benefits). The affirmative vote of a majority of the
members of the Synergies Council, will be necessary
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to act. In the event the Synergies Council becomes deadlocked, either the
Stockholders' Representatives or the Toro Representatives may request the matter
to be reviewed by Toro's Office of the President, which shall function in an
advisory capacity only, and if the matter is not resolved upon such review, it
may, upon the request of either group of representatives, be referred to
mediation and the cost thereof will be shared equally by both Exmark and Toro.
The Synergies Council also shall be governed by the Synergies Council Charter
and the Synergies Council Bylaws attached hereto as EXHIBIT 7.02.
7.03 REBIT THRESHOLDS; TORO CONTROL. If Exmark fails to earn REBIT (as
defined in EXHIBIT 2.01(a)(i) to this agreement) equal to or greater than the
projected REBIT shown below for two successive fiscal quarters, Toro shall have
the option to give notice to the Stockholders' Representatives of Toro's intent
to take full control of Exmark's operations and, immediately thereafter, to take
full control of Exmark's operations:
Quarter Ending Quarter Ending Quarter Ending Quarter Ending
January 31 April 30 July 31 October 31
-------------- -------------- -------------- --------------
Fiscal 1998 $1,200,000 $1,740,000 $700,000 $500,000
Fiscal 1999 $1,500,000 $2,160,000 $875,000 $620,000
Solely for the purposes of this SECTION 7.03, REBIT for each immediately
preceding fiscal quarter earned in excess of the applicable threshold amount may
be added to the next succeeding fiscal quarter's REBIT. Notwithstanding
anything herein to the contrary, in the event Toro takes control of Exmark's
operations (the date on which such event occurs is referred to as the "TORO
CONTROL DATE"), REBIT and CAGR accruing after such date will not be taken into
account in computing the amount of any Contingent Payments to be made after such
date.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01 CONDITIONS TO TORO'S AND MERGER SUBSIDIARY'S OBLIGATIONS. The
obligation of Toro and Merger Subsidiary to consummate the transactions
contemplated by this Agreement is subject to the satisfaction of the following
conditions at or before the Effective Time:
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(a) The representations and warranties set forth in ARTICLE III hereof
shall be true and correct in all material respects at and as of the Effective
Time as though then made and as though the Effective Time had been substituted
for the date hereof throughout such representations and warranties (without
taking into account any disclosures by Exmark of discoveries, events or
occurrences arising on or after the date hereof, except for amendments or
supplements to the Disclosure Schedule as provided in SECTION 5.11(b));
(b) Exmark shall have performed in all material respects all of the
covenants and agreements required to be performed and complied with by it under
this Agreement prior to the Effective Time;
(c) Exmark shall have obtained, or caused to be obtained, each consent
(including, without limitation, any consent to assignment of any Owned
Intellectual Property Right) and approval necessary in order that the
transactions contemplated herein not constitute a breach or violation of, or
result in a right of termination or acceleration of, or creation of any
encumbrance on any of Exmark's assets pursuant to the provisions of, any
agreement, arrangement or undertaking of or affecting Exmark or any license,
franchise or permit of or affecting Exmark;
(d) This Agreement, the Articles of Merger, the Merger, the Signing
Bonuses and the New Articles of Incorporation shall have been duly and validly
authorized by Exmark's board of directors and this Agreement, the Merger, the
Signing Bonuses and the New Articles of Incorporation shall have been duly and
validly approved by Exmark's stockholders, and Exmark shall have delivered to
Toro evidence, in form satisfactory to Toro's legal counsel, of such
authorization and approval, and Exmark shall have duly executed the Articles of
Merger;
(e) The applicable waiting periods under the HSR Act shall have expired or
been terminated and all other material governmental filings, authorizations and
approvals that are required for the consummation of the transactions
contemplated herein or by the Articles of Merger will have been duly made and
obtained;
(f) There shall not be threatened, instituted or pending any action or
proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated herein or seeking to obtain material damages in
connection with such transactions, (ii) seeking to prohibit direct or indirect
ownership or operation by Toro or Merger Subsidiary of all or a material portion
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of the business or assets of Exmark, or to cause Toro or Merger Subsidiary or
any of their subsidiaries or Exmark to dispose of or to hold separately all or a
material portion of the business or assets of Toro or Merger Subsidiary and
their subsidiaries or of Exmark, as a result of the transactions contemplated
hereby, (iii) seeking to require direct or indirect transfer or sale by Toro or
Merger Subsidiary of any of the shares of Exmark Stock, (iv) seeking to
invalidate or render unenforceable any material provision of this Agreement or
the Articles of Merger or any of the Exmark Ancillary Agreements, or
(v) otherwise relating to and materially adversely affecting the transactions
contemplated hereby;
(g) There shall not be any action taken, nor any statute, rule,
regulation, judgment, order or injunction enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated herein
by any federal, state or foreign court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly, in
any of the consequences referred to in SECTION 8.01(f) hereof;
(h) Toro shall not have discovered any fact or circumstance existing as of
the Effective Time which previously had not been disclosed to Toro regarding the
business, assets, properties, condition (financial or otherwise), results of
operations or prospects of Exmark which is, individually or in the aggregate
with other such facts and circumstances, materially adverse to Exmark or to the
value of the shares of Exmark's capital stock;
(i) There shall have been no damage, destruction or loss of or to any
property or properties owned or used by Exmark, whether or not covered by
insurance, which, in the aggregate, has, or would be reasonably likely to have,
individually or in the aggregate, a material adverse effect on the business or
results of operations of Exmark (a "MATERIAL ADVERSE EFFECT");
(j) Toro shall have received from Exmark's legal counsel a written
opinion, dated the date of the Effective Time, addressed to Toro and
satisfactory to Toro's legal counsel, in form and substance substantially as set
forth in EXHIBIT 8.01(j);
(k) The number of Dissenting Shares (counting each such share of Exmark
Preferred Stock as four shares of Exmark Common Stock) shall not exceed 8% of
the total number of shares of Exmark Common Stock and Exmark Preferred Stock
that are issued and outstanding as of the Record Date of the Stockholders'
Meeting (counting each such share of Exmark Preferred Stock as four shares of
Exmark Common Stock).
(l) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action,
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suit, proceeding or investigation by the SEC to suspend the effectiveness of the
Registration Statement shall have been initiated and be continuing, or have been
threatened or be unresolved. Toro shall have received all state securities law
authorizations necessary to carry out the transactions contemplated by this
Agreement;
(m) Toro shall have received from Exmark's Accountant, acting in its
capacity as independent public accountants to Exmark, a "comfort" letter, dated
as of the effective date of the Registration Statement and updated through the
Effective Time, in form and substance satisfactory to Toro and reasonably
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement and transactions such as those contemplated herein;
(n) Prior to the Effective Time, Exmark shall have delivered to Toro all
of the following:
(i) certificates of each of the chief executive officer and the chief
financial officer of Exmark dated as of the date of the Effective Time, stating
that to the knowledge of such officers that the conditions precedent set forth
in subsections (a) and (b) above have been satisfied;
(ii) copies of the third party and governmental consents and approvals and
of the authorizations referred to in subsections (c), (d) and (e) above;
(iii) the minute books, stock transfer records, corporate seal and other
materials related to the corporate administration of Exmark;
(iv) resignations (effective as of the Effective Time) from such of
Exmark's directors as Toro shall have requested prior to the Effective Time,
other than the individual designated by the Stockholders' Representatives to
serve as a director of the Surviving Corporation pursuant to SECTION 1.04;
(v) a copy of the articles of incorporation of Exmark, as then in effect
and as amended as described in SECTION 5.10 hereof and certified by the
Secretary of State of the State of Nebraska, and a Certificate of Good Standing
from the Secretary of State of the State of Nebraska evidencing the good
standing of Exmark in such state;
(vi) a copy of each of (A) the text of the resolutions adopted by Exmark's
board of directors authorizing and approving the Merger and authorizing the
execution, delivery
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and performance of this Agreement, the Articles of Merger and the New Articles
of Incorporation and the payment of the Signing Bonuses and the consummation of
all of the transactions contemplated herein and (B) the bylaws of Exmark as then
in effect; along with certificates executed on behalf of Exmark by its corporate
secretary certifying to Toro that such copies are correct and complete copies of
such resolutions and bylaws, respectively, and that such resolutions and bylaws
were duly adopted and have not been amended or rescinded;
(vii) incumbency certificates executed on behalf of Exmark by its corporate
secretary certifying the signature and office of each officer executing this
Agreement, the Articles of Merger and the Exmark Ancillary Agreements executed
by Exmark;
(viii) an executed copy of each of the Exmark Ancillary Agreements; and
(ix) such other certificates, documents and instruments as Toro reasonably
requests related to the transactions contemplated herein.
(o) H. John Smith, Ray Rickard, Roger Smith, Garry Busboom and
Mike Hirschman shall have entered into Employment Agreements or similar
agreements acceptable to Toro with Exmark and Toro;
(p) Except as expressly contemplated herein, all compensation plans and
similar agreements between Exmark and each of H. John Smith, Ray Rickard,
Holiman and Roger Smith shall have been terminated, except that Exmark may
continue to pay, consistent with past practice, (i) bonuses to H. John Smith and
Ray Rickard pursuant to Exmark's incentive bonus program for executives for
services performed prior to October 31, 1997 and (ii) commissions to Holiman's
sales personnel;
(q) Exmark shall have terminated its 1990 Stock Option Plan and its 1992
Restricted Stock Plan and all Outstanding Purchase Rights shall have been fully
exercised or canceled; and
(r) Exmark shall have acquired Holiman on terms acceptable to Toro
pursuant to a purchase agreement substantially in the form of the Stock Exchange
Agreement attached hereto as EXHIBIT 12.06 and, at the Effective Time, Holiman's
net worth (i.e., total assets minus total liabilities) shall equal or exceed
$200,000.
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8.02 CONDITIONS TO EXMARK'S OBLIGATIONS. The obligations of Exmark to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions at or before the Effective Time:
(a) The representations and warranties set forth in ARTICLE IV hereof will
be true and correct in all material respects at and as of the Effective Time as
though then made and as though the Effective Time had been substituted for the
date hereof throughout such representations and warranties;
(b) Toro and Merger Subsidiary shall have performed in all material
respects all the covenants and agreements required to be performed by them under
this Agreement and the Articles of Merger prior to the Effective Time, and
Merger Subsidiary shall have executed the Articles of Merger;
(c) The applicable waiting periods under the HSR Act shall have expired or
been terminated and all other material governmental filings, authorizations and
approvals that are required for the consummation of the transactions
contemplated herein will have been duly made and obtained;
(d) There shall not be threatened, instituted or pending any action or
proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated herein or seeking to obtain material damages in
connection with such transactions, (ii) seeking to invalidate or render
unenforceable any material provision of this Agreement, the Articles of Merger
or any of the Exmark Ancillary Agreements, or (iii) otherwise relating to and
materially adversely affecting the transactions contemplated hereby or thereby;
(e) There shall not be any action taken, nor any statute, rule,
regulation, judgment, order or injunction, enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated herein
by any federal, state or foreign court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly, in
any of the consequences referred to in SECTION 8.02(d) hereof;
(f) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any order,
and no action, suit, proceeding or investigation by the SEC to suspend the
effectiveness of the Registration Statement shall have been initiated and be
continuing, or have been threatened and be
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unresolved. Toro shall have received all state securities law authorizations
necessary to carry out the transactions contemplated by this Agreement;
(g) At or prior to the Effective Time, Toro shall have delivered to Exmark
(i) a certificate of appropriate officer(s) of Toro dated as of the Effective
Date, stating that to the knowledge of such officer(s) the conditions precedent
set forth in subsections (a) and (b) above have been satisfied, and (ii) an
executed copy of each of the Toro Ancillary Agreements;
(h) The Signing Bonuses to H. John Smith and Ray Rickard, as appropriate,
shall have been paid;
(i) Exmark shall have received an opinion dated as of the Effective Time
in form and substance satisfactory to Exmark of Croker, Huck, Kasher, DeWitt,
Anderson & Gonderinger, P.C., to the effect that (i) the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, (ii) Toro, Merger Subsidiary and Exmark will each be
a party to that reorganization within the meaning of Section 368(b) of the Code,
(iii) no income, gain or loss will be recognized for federal income tax purposes
by either Exmark or Toro as a result of the consummation of the Merger, and
(iv) no income, gain or loss will be recognized for federal income tax purposes
by the stockholders of Exmark upon the exchange in the Merger of Shares solely
for the Merger Consideration (other than the cash portion thereof and any cash
received in lieu of fractional shares). In connection with such opinion,
counsel shall be entitled to rely upon certain representations and covenants of
Exmark, Toro, Merger Subsidiary and such other persons as such counsel deems
appropriate;
(j) Exmark shall have received an updated written opinion of McCarthy &
Co., addressed to the board of directors of Exmark and dated not more than two
business days prior to the date the Prospectus-Proxy Statement is first mailed
to Exmark's stockholders, to the effect that, as of the date of such opinion,
the Merger is fair to Exmark's stockholders from a financial point of view;
(k) Exmark shall have received the opinion of J. Lawrence McIntyre, Toro's
General Counsel, in form and substance substantially as set forth in
EXHIBIT 8.02(k); and
(l) The shares of Toro Common Stock to be issued as Merger Consideration
shall have been approved for listing on the New York Stock Exchange.
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ARTICLE IX
TERMINATION
9.01 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by the mutual consent of Toro, Merger Subsidiary and Exmark;
(b) by Toro or Exmark, if there has been a material misrepresentation, a
material breach of warranty or a material breach of covenant on the part of the
other in the representations, warranties and covenants set forth in this
Agreement;
(c) by Toro or Exmark, if there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger, or there
shall be any action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
authority or agency, foreign or domestic, which would make the consummation of
the Merger illegal and such action, statute, rule, regulation or order shall
have become final and unappealable;
(d) by Toro or Exmark, if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental authority or agency, which would (i) prohibit
Exmark's or Toro's ownership or operation of all or a portion of Exmark's
business, or (ii) compel Toro or Exmark to dispose of or hold separate all or a
portion of the business or assets of Exmark or Toro as a result of the Merger;
(e) by Toro or Exmark, if the transactions contemplated herein have not
been consummated on or before January 31, 1998 provided that, neither will be
entitled to terminate this Agreement pursuant to this SECTION 9.01(e) if such
party's willful breach of this Agreement has prevented the consummation of the
transactions contemplated herein;
(f) by Toro or Exmark, if any of the conditions to such party's
obligations to consummate the Merger described in ARTICLE VIII become impossible
to satisfy;
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(g) by Toro or Exmark, if the board of directors of Exmark withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Toro or Merger Subsidiary or shall have resolved to do any of
the foregoing or the board of directors of Exmark shall have recommended to the
stockholders of Exmark any Superior Proposal or resolved to do so;
(h) by Toro or Exmark, if the Stockholders' Meeting shall have been held
and the stockholders of Exmark shall have failed to approve this Agreement, the
Merger, the New Articles of Incorporation and the Signing Bonuses at such
meeting (including any adjournment or postponement thereof);
(i) by Toro, if (i) Exmark receives an unsolicited proposal that
constitutes a Superior Proposal and the board of directors of Exmark, within 30
calendar days after such proposal is received by Exmark (which thirty-day period
may be extended by Exmark for such additional period not exceeding 30 days as
Exmark reasonably determines, based on consultations with independent counsel,
to be required in order to satisfy its fiduciary obligations under law), either
fails to terminate discussions with the maker of such proposal and its agents,
or determines to accept, or takes no position with respect to, such proposal,
(ii) a tender offer or exchange offer for 20% or more of the outstanding shares
of Exmark's capital stock is commenced, and the board of directors of Exmark,
within 10 business days after such tender offer or exchange offer is so
commenced, either fails to recommend against acceptance of such tender offer or
exchange offer by its stockholders or takes no position with respect to the
acceptance of such tender offer or exchange offer by its stockholders, or
(iii) any person (other than Toro or its affiliates) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act) shall
have been formed which beneficially owns, or has the right to acquire beneficial
ownership of, 20% or more of the then outstanding shares of Exmark's Capital
Stock (excluding for this purpose holdings of shares by persons or groups as
currently reflected in the stock records of Exmark as of the date of this
Agreement);
(j) by Toro, if the number of Dissenting Shares (counting each such share
of Exmark Preferred Stock as four shares of Exmark Common Stock) exceeds 8% of
the total number of shares of Exmark Common Stock and Exmark Preferred Stock
that are issued and outstanding as of the Record Date of the Stockholders'
Meeting (counting each such share of Exmark Preferred Stock as four shares of
Exmark Common Stock);
(k) if after the date hereof there shall have been a material adverse
change in the business, assets, properties, condition (financial or otherwise),
results of operations or prospects of Exmark, or if an event (other than a
general industry or economic downturn)
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shall have occurred which, so far as reasonably can be foreseen, would result in
any such change;
(l) by Toro, if the Initial Toro Share Price is less than $30 per share;
or
(m) by Exmark, if the Initial Toro Share Price exceeds $44 per share.
9.02 EFFECT OF TERMINATION. In the event of termination of this Agreement
by Toro or Exmark, as provided in SECTION 9.01, all provisions of this Agreement
shall terminate and there shall be no liability on the part of any of Toro,
Merger Subsidiary or Exmark, or their respective stockholders, officers or
directors, except (a) SECTIONS 13.01 (press releases and announcements), 13.02
(expenses), 13.09 (governing law) and 13.10 (confidentiality) hereof shall
survive indefinitely, (b) the parties shall remain liable for willful breaches
of this Agreement prior to the time of such termination and (c) as provided in
SECTION 9.03.
9.03 TERMINATION FEE. Exmark shall pay Toro a fee of $1,500,000 (a) if
this Agreement is terminated pursuant to SECTION 9.01(g), (b) if this Agreement
is terminated pursuant to SECTION 9.01(i) and the transaction contemplated by
such Superior Proposal ultimately is consummated (or any similar transaction is
consummated with a party other than Toro or Merger Subsidiary), or (c) if this
Agreement is terminated pursuant to SECTION 9.01(h) and a Superior Proposal
exists on the date of the Stockholders' Meeting. In the event Exmark shall fail
to immediately pay any fee to Toro when due, Exmark shall also pay the costs and
expenses actually incurred or accrued by Toro or Merger Subsidiary (including,
without limitation, fees and expenses of legal counsel) in connection with the
collection under and enforcement of this SECTION 9.03, together with interest on
such unpaid fee, commencing on the date that such fee becomes due, at a rate
equal to the rate of interest publicly announced by First Bank National
Association, from time to time, in the City of Minneapolis, Minnesota, as such
bank's "base rate" plus 2%.
In the event this Agreement is terminated pursuant to SECTION 9.01(h) and a
Superior Proposal exists on the date of the Stockholders' Meeting, such fee
shall constitute liquidated damages for a breach of SECTION 5.08. However,
nothing in this SECTION 9.03 precludes a party from seeking such other remedies
at law or equity as it deems appropriate.
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ARTICLE X
THE STOCKHOLDERS' REPRESENTATIVE
10.01 APPOINTMENT. As used in this Agreement, the "STOCKHOLDERS'
REPRESENTATIVES" shall mean H. John Smith, Ray Rickard and Roger Smith, or any
person appointed as a successor Stockholders' Representative pursuant to
SECTION 10.02 hereof. The number of Stockholders' Representatives shall not be
more than three persons.
10.02 ELECTION AND REPLACEMENT. During the period ending upon the date when
all obligations under this Agreement have been discharged (including all
obligations pursuant to SECTION 11.02 hereof), Exmark's Holders, who immediately
prior to the Effective Time, held a majority of the aggregate voting power of
the Shares (a "MAJORITY"), may, from time to time upon written notice to the
Stockholders' Representatives and Toro, remove any of the Stockholders'
Representatives or appoint one or more new Stockholders' Representatives to fill
any vacancy created by the death, incapacitation, resignation or removal of one
or more Stockholders' Representatives. Furthermore, if a Stockholders'
Representative dies, becomes incapacitated, resigns or is removed by a Majority,
the Majority shall appoint a successor Stockholders' Representative to fill the
vacancy so created. If the Majority fails to appoint such successor within 10
business days after a request by Toro to appoint such successor, the remaining
Stockholders' Representatives shall appoint such successor. If the
Stockholders' Representatives do not appoint such successor within 10 business
days after Toro's initial request to the Majority to appoint such successor,
then Toro shall appoint such successor, and shall advise Holders who held Shares
of such appointment by written notice. A copy of any appointment by the
Majority of the Stockholders' Representatives of any successor Stockholders'
Representative shall be provided to Toro promptly after it shall have been
effected.
10.03 AUTHORITY. On behalf of the Holders, the Stockholders'
Representatives shall be authorized to take action by majority vote of the
number of the then appointed Stockholders' Representatives (without taking into
account any vacancies) and to make and deliver any certificate, notice, consent
or instrument required or permitted to be made or delivered under this Agreement
or under the documents referred to in this Agreement, including, without
limitation, any such actions with respect to the Initial Payment Consideration
and the Contingent Payment Rights (an "INSTRUMENT"), which the Stockholders'
Representatives determine in their discretion to be necessary, appropriate or
desirable, and, in connection therewith, to hire or retain, at the sole expense
of the Holders (up to a maximum aggregate amount of $100,000 to be paid out of
the Stockholders' Representatives Expense Fund), such counsel, investment
bankers, accountants, representatives and other professional advisors as they
determine in their sole and absolute discretion to be necessary, advisable or
appropriate in order to carry out and perform their rights and obligations
hereunder. Any party receiving an Instrument from
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the Stockholders' Representatives shall have the right to rely in good faith
upon such Instrument, and to act in accordance with the Instrument without
independent investigation.
10.04 NO LIABILITY OF TORO. Toro and the Surviving Corporation shall have
no liability to any stockholder of Exmark or otherwise arising out of the acts
or omissions of the Synergies Council, the Stockholders' Representatives or any
disputes among Exmark's stockholders or among the Stockholders' Representatives.
Toro and the Surviving Corporation shall have no direct liability to Exmark's
stockholders under this Agreement or the other agreements referred to herein and
may rely entirely on their dealings with, and notices to and from, the
Stockholders' Representatives to satisfy any obligations Toro and the Surviving
Corporation might have under this Agreement, any agreement referred to herein or
otherwise to Exmark's stockholders. Without limiting the foregoing, delivery to
the Escrow Agent of the Merger Consideration shall extinguish any obligations of
Toro to Exmark's stockholders with respect to such Initial Payment Consideration
and such Contingent Payment Rights, and Toro shall have no liability for
subsequent misdelivery to any stockholder of Exmark by the Paying Agent or any
act or omission of the Stockholders' Representatives with respect to such cash
or certificates. Notwithstanding the foregoing, all rights to indemnification
for acts or omissions occurring prior to the Effective Time now existing in
favor of the current or former directors or officers of Exmark as provided in
the New Articles of Incorporation, the bylaws or Nebraska law shall survive the
Closing and shall continue in full force and effect in accordance with their
terms.
ARTICLE XI
SURVIVAL AND OFFSET
11.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties of Toro and Merger Subsidiary,
and the representations and warranties of Exmark, contained in, or attached to,
this Agreement shall survive the Closing until the Last Payment Date (the
"OFFSET PERIOD") and shall have no further force or effect thereafter.
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11.02 RIGHT OF OFFSET.
(a) Subject to SECTION 11.02(f) hereof, Toro shall have a right to offset
(the "OFFSET RIGHT"), from time to time, against the Holdback Amount and the
Contingent Payments any loss, liability, deficiency, damage, penalty, expense or
cost (including reasonable legal expenses), whether or not actually incurred or
paid during the Offset Period (collectively, the "LOSSES"), which Toro, the
Surviving Corporation or any of their respective affiliates, officers,
directors, employees or agents (the "PROTECTED PARTIES") suffers, sustains or
becomes subject to, as a result of:
(i) Any misrepresentation (a "MISREPRESENTATION") in any of the
representations and warranties of Exmark contained in this Agreement or in any
of the exhibits, schedules, agreements, certificates and other documents
delivered or to be delivered by or on behalf of Exmark pursuant to this
Agreement or otherwise attached to, or referenced or incorporated in, this
Agreement (collectively, the "RELATED DOCUMENTS");
(ii) Any breach (a "BREACH") of, violation of, or failure to perform, any
agreement or covenant of Exmark contained in this Agreement or any of the
Related Documents prior to the Effective Time;
(iii) Any and all Losses suffered by any of the Protected Parties and any
and all Claims (as defined in SECTION 11.02(c) hereof) or threatened Claims
against the Protected Parties arising out of actions or inactions of Exmark
(regardless of whether there may also be a Misrepresentation arising out of such
actions or inactions) prior to the Effective Time with respect to (a) any
Release of any Hazardous Materials on, under or from the Real Property; (b) any
environmental contamination of the Real Property, including without limitation
the presence of any Hazardous Materials that have come to be located on or under
the Real Property from another location; (c) any injury to the environment, or
to human health or safety associated with the environment, by reason of the
condition of, or activities past or present on or under, the Real Property; or
(d) any violation, or alleged violation, of any Environmental Law with respect
to the Real Property or Exmark's operations at the Real Property (for purposes
of this SECTION 11.02(a)(iii), the term Real Property shall include all property
previously owned, used or occupied by Exmark or its predecessors), specifically
including any and all costs and expenses required to cause Exmark to comply with
any such Environmental Law (all such Losses, Claims and threatened Claims
described in this SECTION 11.02(a)(iii) are collectively referred to as
"ENVIRONMENTAL LOSSES");
(iv) Any amounts paid in respect of the Dissenting Shares in excess of the
aggregate amount of the value of the Merger Consideration that the holders of
such Dissenting Shares would have received in the Merger.
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Notwithstanding the foregoing, the amount of any Losses shall be offset by any
insurance proceeds received by Exmark with respect to insurance policies paid
for by Exmark.
(b) Toro may exercise its Offset Right, from time to time, in accordance
with the procedures set forth in paragraphs (c) and (d) of this SECTION 11.02,
against any payment or payments to be made out of the Holdback Amount or due or
to become due under the Contingent Payment Rights. Each time, if any, that Toro
exercises its Offset Right, Toro shall promptly deliver to the Stockholders'
Representatives a schedule signed by an officer of Toro reflecting the revised
payments, after giving effect to such exercise of its Offset Right, to be made
to the Holders out of the Holdback Amount and/or with respect to the Contingent
Payments. In the event Toro exercises its Offset Right with respect to Losses
as a result of, in connection with or related to, any of the matters described
in SECTION 11.02(a) above, such offset shall be applied against any payment or
payments to be made out of the Holdback Amount, and any remainder of such offset
shall be applied against any payment or payments due or to become due with
respect to the 1998 Contingent Payment, and any remainder of such offset shall
be applied against any payment or payments due or to become due with respect to
the 1999 Contingent Payment. Further, if the Actual Net Worth of Exmark exceeds
$8,243,000, then Toro's Offset Rights resulting from any Misrepresentation (as
described in SECTION 11.02(a)(i)) or any Environmental Loss (as described in
SECTION 11.02(a)(iii)) will be subject to a one-time aggregate deductible equal
to the greater of $50,000 or an amount equal to 50% of the difference of the
Actual Net Worth and $8,243,000. An individual Loss shall not give rise to an
Offset Right unless such Loss equals or exceeds $10,000. Notwithstanding
anything to the contrary in the preceding sentence, the limitation set forth in
such sentence shall not apply to any Loss that relates to a claim or action that
arises from the same or substantially the same facts as one or more other claims
or actions and the aggregate amount of Losses so arising is at least $10,000.
(c) In the event any of the Protected Parties becomes involved in any
legal, governmental or administrative proceeding which may result in Losses, or
if any such proceeding is threatened or asserted (any such third party action or
proceeding being referred to herein as a "CLAIM"), Toro shall promptly notify
the Stockholders' Representatives in writing of the nature of any such Claim and
Toro's estimate of the Losses arising therefrom.
(i) The Stockholders' Representatives shall be entitled to contest and
defend such Claim; provided, that the Stockholders' Representatives have a
reasonable basis for concluding such defense may be successful and diligently
contest and defend such Claim; provided, further, that, Toro in its sole and
absolute discretion, may notify the Stockholders' Representatives at any time
that any such contest or defense must be immediately terminated, in which case
Toro's Offset Right with respect to such Claim shall thereupon terminate.
Notice of the intention so to contest and defend shall be given by the
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Stockholders' Representatives to Toro within 20 days after Toro provides notice
of such Claim (but, in all events, at least five business days prior to the date
that an answer to such Claim is due to be filed). Such contest and defense
shall be conducted by reputable attorneys employed by the Stockholders'
Representatives. Toro shall be entitled at any time, at its own cost and
expense (which expense shall not constitute a Loss unless the Stockholders'
Representatives are not adequately representing or, because of a conflict of
interest between, may not adequately represent, any interests of the Protected
Parties, and only to the extent that such expenses are reasonable), to
participate in such contest and defense and to be represented by attorneys of
its own choosing. If Toro elects to participate in such defense, Toro shall
cooperate with the Stockholders' Representatives in the conduct of such defense.
Neither Toro nor the Stockholders' Representatives may concede, settle or
compromise any Claim without the consent of the other, which consent shall not
be unreasonably withheld; provided, that the Stockholders' Representatives may,
without the consent of Toro, settle any Claim which is solely for money damages
if the Stockholders' Representatives acknowledge that such Claim gives rise to a
Loss that is subject to Toro's Offset Right hereunder and if the entire amount
of the settlement amount may be recovered by Toro by means of Toro's Offset
Rights hereunder. The Stockholders' Representatives shall have the right to
have the cost of defense, including reasonable legal expenses, paid or
reimbursed by the Surviving Corporation (such expenses to be included in
calculating all Losses).
(ii) Notwithstanding the foregoing, if: (A) a Claim seeks equitable relief
against any of the Protected Parties, (B) the subject matter of a Claim relates
to the ongoing business of any of the Protected Parties, which Claim, if decided
against such Protected Party, could materially adversely affect the ongoing
business or reputation of such Protected Party, or (C) the estimated Losses of
the Protected Parties related to the Claim exceed the amount Toro may recover
using its Offset Right hereunder, then, in each such case, Toro alone shall be
entitled to contest, defend and settle such Claim in the first instance and, if
Toro does not contest, defend or settle such Claim, Stockholders'
Representatives shall have the right to contest and defend (but not settle) such
Claim.
(d) In the event Toro (on behalf of itself or any Protected Party) should
have a claim giving rise to an Offset Right that does not involve a Claim, Toro
shall deliver a notice (the "OFFSET NOTICE") of such claim with reasonable
promptness to the Stockholders' Representatives, the Escrow Agent and the Paying
Agent. The Offset Notice shall include an estimate of Toro's Losses relating to
such claim. If the Stockholders' Representatives notify Toro that the
Stockholders' Representatives do not dispute the claim described in the Offset
Notice, or if the Stockholders' Representatives fail to notify Toro within 20
days after delivery of the Offset Notice of any such dispute with respect to
such claim, the Losses in the amount specified in the Offset Notice will be
conclusively deemed Losses and Toro may exercise its Offset Right with respect
to such amount in accordance with the Offset Notice. If the Stockholders'
Representatives have timely disputed such claim, Toro's
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Representatives and the Stockholders' Representatives will proceed in good faith
to negotiate a resolution of such dispute, and if not resolved through the
negotiations of such representatives within 60 days after the date of the Offset
Notice of such claim, the parties agree to resolve such dispute through binding
arbitration in accordance with SECTION 13.05. In addition, Toro shall make a
good faith effort to deliver a report of all claims that may give rise to an
Offset Right (whether or not such claims are subject to the deductible described
in SECTION 11.02(b)) on a quarterly basis to the Stockholders' Representatives,
the Escrow Agent and the Paying Agent. Failure on the part of Toro to provide
any such report shall not prejudice in any way Toro's rights under this
Agreement. Notwithstanding the foregoing, in the event that a claim is not
timely reported and the Stockholder's Representatives are able to prove to the
Synergies Council that, had the Stockholder's Representatives been notified of a
claim within 90 days after such claim should have been reported, the
Stockholder's Representatives would have contested and defended such claim and,
as a result, the amount of such claim would have been less than the amount
reported, then the amount of such claim for purposes of this SECTION 11.02 shall
be such lesser amount.
(e) In the event of a Claim under SECTION 11.02(c) or a dispute relating
to an Offset Notice under SECTION 11.02(d), the Escrow Agent will retain
property then held by it in escrow under this Agreement in an amount sufficient
to satisfy the estimated value of such Claim or disputed Offset Notice until the
resolution of such Claim or dispute.
(f) Notwithstanding anything contained in this Agreement to the contrary,
the right of Toro to exercise its Offset Right hereunder shall be subject to the
following limitations:
(i) Toro shall not be entitled to exercise its Offset Right with respect
to any Losses unless Toro delivers to the Stockholders' Representatives an
Offset Notice under SECTION 11.02(d) or notice of a Claim under SECTION 11.02(c)
relating to such Losses prior to the end of the Offset Period.
(ii) Toro shall not be entitled to exercise its Offset Right with respect
to any Losses to the extent that such Losses result from or arise out of the
gross negligence or willful misconduct of Toro, any director, officer or
employee of Toro or any Toro subsidiary other than Exmark prior to the Effective
Time.
(iii) The Offset Right shall be Toro's sole and exclusive remedy with
respect to any Losses that any Protected Party may suffer, sustain or become
subject to pursuant to the terms of this Agreement, and Toro agrees that it
shall not, and hereby waives all rights to, institute or maintain any suit,
proceeding or action against the Holders or utilize or exercise any other legal
or equitable remedy for the purpose of recovering damages or
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other relief with respect to any Losses (including, without limitation, an
action seeking to recover any portion of the purchase price previously paid to
Exmark's stockholders) except for suits, proceedings or actions necessary to
enforce or implement the Offset Right; provided that, (A) nothing herein shall
prevent a party from bringing an action based upon allegations of fraud or other
intentional misconduct with respect to another party hereto in connection with
this Agreement, and (B) nothing herein shall limit in any manner any other legal
rights or remedies which any Protected Party which is a party to an agreement
identified under ARTICLE XII has against another party to such agreement in
accordance with the terms and conditions provided therein.
ARTICLE XII
ANCILLARY AGREEMENTS
12.01 STOCKHOLDER AGREEMENTS. Simultaneous with the execution and delivery
of this Agreement, Toro, Merger Subsidiary, Exmark and each stockholder of
Exmark identified on SCHEDULE 12.01 will enter into a stockholder agreement
identical in form to EXHIBIT 12.01 which provides that such stockholder will
vote in favor of this Agreement, the Merger, the Signing Bonuses and the New
Articles of Incorporation (the "STOCKHOLDER AGREEMENTS").
12.02 AFFILIATE AGREEMENTS. Simultaneous with the execution and delivery of
this Agreement, Toro and each stockholder of Exmark identified on SCHEDULE 12.02
will enter into an affiliate agreement identical in form to EXHIBIT 12.02 (the
"AFFILIATE AGREEMENTS").
12.03 EMPLOYMENT AGREEMENTS. Simultaneous with the execution and delivery
of this Agreement, Exmark and Toro (as provided below) and each of
H. John Smith, Ray Rickard, Roger Smith, Garry Busboom and Mike Hirschman will
enter into an employment agreement in the form attached hereto as
EXHIBIT 12.03(a), EXHIBIT 12.03(b), EXHIBIT 12.03(c), EXHIBIT 12.03(d) and
EXHIBIT 12.03(e), respectively (collectively, the "EMPLOYMENT AGREEMENTS").
H. John Smith and Ray Rickard will, at the Effective Time, collectively receive
cash payments totalling $2,075,000 as signing bonuses and other consideration
(the "SIGNING BONUSES") in connection with the execution of their respective
Employment Agreements with Toro. In return for aggregate cash payments to be
paid by Exmark prior to the Closing not to exceed $160,000 and nominal
consideration from Toro, Garry Busboom and Mike Hirschman also will execute
their respective Employment Agreements with Exmark and Toro. In return for
nominal cash payments to be paid by Toro prior to Closing, any other person Toro
may reasonably request also will execute an employment agreement similar in form
to the agreement attached hereto as EXHIBIT 12.03(d), but such other person's
execution of such an employment agreement shall not be a condition to Closing as
described in ARTICLE VIII. During the Contingent Payment Period, H. John Smith,
Roger Smith and Ray Rickard will not be eligible to receive a
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mance bonus (except as expressly contemplated by SECTION 8.02(p) hereof), nor
will they be eligible to participate in any stock option plan of Toro during
such period.
12.04 ESCROW AGREEMENT. Simultaneous with the execution and delivery of
this Agreement, Toro, Exmark and Escrow Agent will enter into an escrow
agreement in the form of EXHIBIT 12.04 (the "ESCROW AGREEMENT").
12.05 PAYING AGENT AGREEMENT. Simultaneous with the execution and delivery
of this Agreement, Toro, the Stockholders' Representatives and Paying Agent will
enter into a paying agent agreement in the form of EXHIBIT 12.05 (the "PAYING
AGENT AGREEMENT").
12.06 STOCK FOR STOCK EXCHANGE AGREEMENT. Simultaneous with the execution
and delivery of this Agreement, Exmark and Holiman will enter into a Stock for
Stock Exchange Agreement in the form of EXHIBIT 12.06.
ARTICLE XIII
MISCELLANEOUS
13.01 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Effective Time, no
party hereto shall issue any press release (or make any other public
announcement) related to this Agreement or the transactions contemplated hereby
or make any announcement to the employees, customers or suppliers of Exmark
without prior written approval of the other party hereto, except that Toro may
issue any such release (or other announcement) as it determines, in its sole
discretion, as may be necessary to comply with the requirements of this
Agreement or applicable law or by obligations pursuant to any listing agreement
with any national securities exchange. If Toro determines any such press
release or public announcement is so required, Toro shall use reasonable efforts
to consult in good faith with Exmark (but shall not be required to obtain
Exmark's consent) prior to issuing such press release or making such
announcement.
13.02 EXPENSES. Except as otherwise expressly provided for herein, Exmark,
the Stockholders' Representatives, Toro and Merger Subsidiary will each pay all
of their own expenses (including attorneys', financial advisors' and
accountants' fees) in connection with the negotiation of this Agreement, the
performance of their respective obligations under this Agreement and the
Articles of Merger and the consummation of the transactions contemplated hereby
and thereby (whether consummated or not). Toro shall pay for any
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environmental audit that it may cause to be performed and real estate title
insurance purchased in connection with the Merger. Exmark shall pay any loan
prepayment and other related fees incurred by it or Toro in connection with the
Merger. Exmark and Toro shall each pay one-half of the HSR Act filing fee
applicable to the Merger. Each party will indemnify and hold harmless the other
against the claims of any brokers or finders in respect of the Merger.
13.03 AMENDMENT AND WAIVER. This Agreement may not be amended or waived
except in a writing executed by the party against which such amendment or waiver
is sought to be enforced; provided, however, that after the approval of this
Agreement by Exmark's stockholders, no amendment may be made which reduces the
Merger Consideration or which effects any changes which would materially
adversely affect Exmark's stockholders without the further approval of Exmark's
stockholders provided, however, the Stockholders' Representatives, acting
through the Synergies Council, may approve waivers of and amendments to the
covenants of Toro and Exmark described in ARTICLE VII, which changes may affect
the Contingent Payments following the Effective Time. No course of dealing
between or among any persons having any interest in this Agreement will be
deemed effective to modify or amend any part of this Agreement or any rights or
obligations of any person under or by reason of this Agreement.
13.04 NOTICES. All notices, demands and other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when personally delivered or three
days after being mailed, if mailed by first class mail, return receipt
requested, or when receipt is acknowledged, if sent by facsimile, telecopy or
other electronic transmission device. Notices, demands and communications to
Toro, Merger Subsidiary, Exmark and the Stockholders' Representatives will,
unless another address is specified in writing, be sent to the address indicated
below:
NOTICES TO TORO OR MERGER SUBSIDIARY: WITH A COPY TO:
- ------------------------------------ --------------
The Toro Company Dorsey & Whitney LLP
8111 Lyndale Avenue South 220 South Sixth Street
Bloomington, Minnesota 55420-1196 Minneapolis, MN 55402
Attn: J. Lawrence McIntyre, Attn: J. Andrew Herring
Vice President, Secretary and Facsimile: (612) 340-8738
General Counsel
Facsimile: (612) 887-8920
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NOTICES TO EXMARK: WITH A COPY TO:
- ----------------- --------------
Exmark Manufacturing Company Incorporated Croker, Huck, Kasher, DeWitt,
2101 Ashland Avenue Anderson & Gonderinger, P.C.
Beatrice, Nebraska 68310 Suite 1250
Attn: H. John Smith, Commercial Federal Tower
President and Chief Executive Officer 2120 South 72nd Street
Facsimile: (402) 223-5489 Omaha, Nebraska 68124
Attn: Richard A. DeWitt
Facsimile: (402) 390-9221
NOTICES TO STOCKHOLDERS' REPRESENTATIVES: WITH A COPY TO:
- ---------------------------------------- --------------
H. John Smith, Roger Smith and Ray Rickard Croker, Huck, Kasher, DeWitt,
c/o Exmark Manufacturing Company Incorporated Anderson & Gonderinger, P.C.
2101 Ashland Avenue Suite 1250
Beatrice, Nebraska 68310 Commercial Federal Tower
Omaha, Nebraska 68124
Attn: H. John Smith, 2120 South 72nd Street
President and Chief Executive Officer Attn: Richard A. DeWitt
Facsimile: (402) 223-5489 Facsimile: (402) 390-9221
13.05 ARBITRATION. Subject to the procedures described in SECTION 7.02
relating to certain matters concerning the Synergies Council, in the event of
any claim or dispute between the parties, the parties agree to resolve such
dispute through binding arbitration by a single arbitrator pursuant to the
Commercial Arbitration Rules of the
-81-
American Arbitration Association. The arbitration shall be conducted in
Minneapolis, Minnesota. Any award rendered shall be final and conclusive upon
the parties and a judgment thereon may be entered in any court of competent
jurisdiction. All costs and expenses, including reasonable attorneys' fees and
experts' fees, of all parties incurred in any dispute which is determined by
arbitration pursuant to this SECTION 13.05 shall be borne by the party
determined to be liable in respect of such dispute; provided, however, that if
complete liability is not assessed against only one party, the parties shall
share the total costs in proportion to their respective amounts of liability so
determined. Except where clearly prevented by the area in dispute, the parties
agree to continue performing their respective obligations under this Agreement
while the dispute is being resolved. All negotiation and arbitration
proceedings under this SECTION 13.05 shall be treated as confidential
information in accordance with the provisions of the confidentiality agreement
between Toro and Exmark, dated August 8, 1996 (the "CONFIDENTIALITY AGREEMENT").
Any arbitrator shall be bound by an agreement containing confidentiality
provisions at least as restrictive as those contained in the Confidentiality
Agreement. Nothing herein shall preclude a party hereto from seeking equitable
relief to prevent any immediate, irreparable harm to its interest, including
multiple breaches of this Agreement or the Related Documents. Otherwise, these
procedures are exclusive and shall be fully exhausted prior to the initiation of
any litigation. Either party may seek specific enforcement of any arbitrator's
decision under this SECTION 13.05. The other party's only defense to such a
request for specific enforcement shall be fraud by or on the arbitrator. No
party to this Agreement shall be liable to any other party under this Agreement
for any punitive, extraordinary or exemplary damages.
13.06 ASSIGNMENT. This Agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, except that neither this Agreement nor any of
the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties hereto.
13.07 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
13.08 COMPLETE AGREEMENT. This Agreement, the Articles of Merger and the
Related Agreements and other exhibits hereto, the Disclosure Schedule and the
other documents referred to herein contain the complete agreement between the
parties and supersede any prior understandings, agreements or representations by
or between the parties, written or oral, which may have related to the subject
matter hereof in any way;
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provided, that the Confidentiality Agreement shall remain in force and effect
without modification thereof.
13.09 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument. Any such counterpart may be delivered by facsimile. Any party
delivering a counterpart by facsimile shall deliver an original copy within 48
hours, provided that the failure to so deliver an original shall not effect the
enforceability of this agreement against such party.
13.10 GOVERNING LAW. The internal law, without regard for conflicts of laws
principles, of the State of Minnesota will govern all questions concerning the
construction, validity and interpretation of this Agreement and the performance
of the obligations imposed by this Agreement.
13.11 EXMARK STOCKHOLDERS AS THIRD PARTY BENEFICIARIES. No third party is
entitled to rely on any of the representations, warranties, covenants or
agreements of Toro, Merger Subsidiary or Exmark contained in this Agreement.
Toro, Merger Subsidiary and Exmark assume no liability to any third party
because of any reliance on such representations, warranties, covenants and
agreements. Notwithstanding the foregoing, the parties hereto agree that,
following the Effective Time, the representations and warranties of Toro
described in Article IV hereof shall inure to the benefit of the Holders, as if
the Holders replaced Exmark as a party hereto; provided, however, that any and
all actions by or on behalf of the Holders shall be effected through the
Stockholders' Representatives and nothing set forth in this SECTION 13.11 shall
affect the application of SECTION 13.05 as it relates to any claims or disputes
under this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
THE TORO COMPANY
By /s/ J. Lawrence McIntyre
-------------------------------------
Its Vice President and Secretary
EMCI ACQUISITION CORP.
By /s/ Dennis P. Himan
-------------------------------------
Its President
EXMARK MANUFACTURING COMPANY
INCORPORATED
By /s/ H. John Smith
-------------------------------------
Its President
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Exhibit 2.01
TERMS OF CONTINGENT PAYMENT RIGHTS
All capitalized terms not otherwise defined in this Exhibit 2.01(a)
shall have the respective meanings ascribed thereto in the Agreement to which
this Exhibit 2.01(a) is attached. Further, the parties to the Agreement
acknowledge and agree that the determination of EBIT and other financial
measurements described in this Exhibit 2.01(a) are defined herein solely for the
purpose of determining the amount of the Contingent Payments. The actual
accounting approach taken for purposes of preparing Toro's and Exmark's
financial statements for financial and tax reporting purposes may differ from
that described herein inasmuch as the actual accounting approach contemplates
the transfer of inventory at standard costs and the allocation of other costs
and revenues of Exmark and Toro on an analytical basis only.
1. DETERMINING THE AMOUNT OF EACH CONTINGENT PAYMENT: For purposes
of this Exhibit 2.01(a), references to any of Exmark's actual financial results
shall be determined on a consolidated basis. The value of each Contingent
Payment will be determined using the valuation formula ("VALUATION FORMULA")
shown below:
Contingent Payment = [(3.5) * REBIT * (1 + CAGR)] - [$30,000,000 +
the amount of any prior Contingent Payment]-
[Working Capital Adjustment]
The 1998 Contingent Payment Amount will be determined using the Valuation
Formula and will be based on Exmark's recast earnings before interest and Taxes
("REBIT") for the twelve-month period ending October 31, 1998, and its compound
annual growth rate ("CAGR") in Adjusted Revenue (as defined in SECTION 4 hereof)
for the twelve-month period ending October 31, 1998, compared to $40,808,850
("BASE YEAR REVENUE"), which is the amount of Exmark's actual gross sales during
the twelve-month period ending October 31, 1996. For examples of how the CAGR
shall be calculated, please see Appendix A.
The 1999 Contingent Payment Amount will be determined using the Valuation
Formula and will be based on Exmark's REBIT for the twelve-month period ending
October 31, 1999 and its CAGR in Adjusted Revenue for the twelve-month period
ending October 31, 1999, compared to the Base Year Revenue.
Notwithstanding the foregoing, if the total value of the Contingent
Payments would otherwise exceed $28,000,000 or if the total number of shares of
Toro Common Stock to be issued in connection with the Contingent Payments would
otherwise exceed 821,334 shares (I.E., 88% of $28,000,000 divided by $30 per
share), then the value of the 1998 Contingent Payment and/or of the 1999
Contingent Payment shall be automatically reduced by the
1
minimum amount necessary so that such total value will not exceed $28,000,000 or
will not require the issuance of more than 821,334 shares of Toro Common Stock,
respectively. In no event will the cash consideration included in each of the
Contingent Payments be increased beyond 12% of each such Contingent Payment.
2. CALCULATING EBIT: Solely for purposes of calculating REBIT for any
period, the net earnings before interest and Taxes ("EBIT") of Exmark for such
period will be calculated based on the actual EBIT of Exmark for such period,
determined in conformity with GAAP, but subject to the following clarifications
and adjustments, if required:
(a) For purposes of determining EBIT, only interest paid by Exmark with
respect to bank debt, intercompany debt and long-term debt (including the
current portion thereof) will be added back to net earnings.
(b) No costs or expenses incurred during such period that are related to
or that result from the Merger will be included as either a cost or expense to
Exmark in determining EBIT (I.E., no amortization of goodwill, covenants not to
compete, the Signing Bonuses or other intangibles arising out of the Merger will
be included in calculating EBIT).
(c) If and to the extent that Toro transfers to Exmark Toro manufactured
products (including parts) that are branded for Exmark for sale by Exmark
through its distribution system ("TORO SUPPLIED PRODUCTS"), for purposes of
calculating EBIT, the transfer price for such Toro Supplied Products will be
Toro's distributor net price minus Exmark's per unit sales, marketing,
distribution and warranty costs related to the sale thereof (which will be
different for wholegoods and parts) and minus an amount equal to 1.5% of Toro's
distributor net price. Toro's distributor net price shall mean the price of
such products published from time to time by Toro as then being in effect. At
the time such Toro Supplied Products are sold, the difference between the
applicable distributor net price at which such product is sold by Exmark to its
distributors and the applicable transfer price will be included in determining
EBIT. The amount of the gross sales determined in accordance with GAAP from the
sale by Exmark of Toro Supplied Products, however, will not be included in
Exmark's gross sales for purposes of determining CAGR.
(d) Exmark's gross sales from Exmark manufactured products (including
parts) that are branded for Toro, transferred to Toro and sold by Toro ("EXMARK
CROSS-BRANDED PRODUCTS") will only include an amount equal to the standard cost
of such Exmark Cross-Branded Products plus, for products sold in the United
States and Canada, a management fee ("MANAGEMENT FEE") equal to 3% of such
amount. Standard cost shall mean the cost of such products determined in
accordance with the procedure used to determine Exmark's inventory value and in
accordance with GAAP.
2
(e) Exmark will receive, and its EBIT will include, a sales commission
equal to 1% of the gross sales of Exmark Cross-Branded Products that are sold by
Toro outside of the United States and Canada.
(f) If Toro exercises its Offset Right with respect to any Losses
described in SECTION 11.02(a) and such Losses have been included in determining
net earnings for such period, EBIT will be increased by such amount.
(g) No allocation of any of Toro's corporate or administrative burden or
overhead that may be allocated to Exmark will be included in calculating EBIT.
(h) Incidental costs related to the participation by Exmark's management
in Toro's corporate functions, activities and meetings will not be an adjustment
to EBIT.
(i) EBIT will be reduced by the amount of all compensation and benefits
paid by Toro or the Toro Sales Company to former employees of Exmark or Holiman
after the Effective Time, except for the Signing Bonuses.
(j) Exmark and Toro agree that no actual cash payments may be made with
respect to the inter-company transfers and adjustments described herein, but
rather such transfers and adjustments are expected to be made only in the form
of accounting adjustments to an inter-company account or accounts.
3. CALCULATING REBIT: REBIT for any period will mean the EBIT of Exmark
for such period (determined in the manner described above) subject to the
following adjustments:
(a) Plus the amount of the Cross-Branding REBIT Factor (as defined in
SECTION 5 hereof) for such period;
(b) Minus 100% of all cost savings realized during such period by Exmark,
determined based on Exmark's 2001 Plan, a true and complete copy of which has
been provided to Toro in the Disclosure Schedule, (i) resulting from Exmark
being a subsidiary of Toro and (ii) relating to insurance and risk management
expenses (including product liability, general liability and workers
compensation expenses), and legal, human resources, administration and floor
plan expenses (including reduced interest costs);
(c) Minus 50% of all operating cost savings realized during such period by
Exmark, determined based on Exmark's 2001 Plan (I.E., those savings affecting
Exmark's on-going operations, such as printing and transportation costs),
directly or indirectly resulting from Exmark being a subsidiary of Toro, other
than cost savings resulting from (i) reduced purchasing costs related to Exmark
becoming a part of Toro's purchasing group, (ii) changes in the senior
management compensation structure following the Merger and (iii) the cost
savings included in SECTION 3(b) hereof;
3
(d) Minus 50% of all cost savings realized during such period by Exmark,
determined based on Exmark's 2001 Plan, resulting from changes in the
stand-alone status of Exmark contemplated by this Agreement; provided that,
prior to making each such change, the Synergies Council approves such change
(the parties acknowledge that only matters involving more than $10,000 will be
presented to the Synergies Council);
(e) Plus 100% of any additional costs incurred during such period by
Exmark, determined based on Exmark's 2001 Plan, resulting from changes in the
stand-alone status of Exmark contemplated by the this Agreement (E.G., an
additional cost incurred by Exmark at Toro's request for Toro's benefit);
provided that, prior to making each such change, the Synergies Council approves
such change (the parties acknowledge that only matters involving more than
$10,000 will be presented to the Synergies Council);
(f) Minus all Management Fees paid by Toro to Exmark during such period
with respect to Exmark Cross-Branded Products; and
(g) In the event Exmark does not maintain the minimum marketing and
engineering expenditure levels specified in SECTION 7.01(l) of the Agreement,
minus the difference between such minimum amount(s) and Exmark's actual
respective expenditure levels (I.E., such cost savings will not increase the
amount of either Contingent Payment).
4. CALCULATING CAGR; ADJUSTED REVENUE: For purposes of determining CAGR,
the "ADJUSTED REVENUE" of Exmark for any period will be calculated based on the
actual gross sales of Exmark for such period determined in accordance with GAAP,
but subject to the following adjustments:
(a) No gross sales of any Exmark Cross-Branded Products (including parts)
supplied to Toro during such period will be included in the gross sales of
Exmark;
(b) An amount equal to the Cross-Branding Revenue Factor (as defined in
SECTION 5 hereof) for such period will be added to the gross sales of Exmark for
such period; and
(c) No gross sales from the sale by Exmark of any Toro Supplied Products
will be included in the gross sales of Exmark.
5. CROSS-BRANDING:
(a) The "CROSS-BRANDING REVENUE FACTOR" for determining the 1998
Contingent Payment is an amount equal to (a) the aggregate sum of the number of
Toro-branded Exmark products sold by Toro in the United States or Canada
(whether manufactured by Toro or by Exmark) during the period from the Effective
Time to October 31, 1998, multiplied by (b) the applicable "Cross-Branding
Revenue Per Unit" for each such product as determined based upon Exmark's
published distributor net price for such period in the
4
manner shown in APPENDIX B. The Cross-Branding Revenue Factor for determining
the 1999 Contingent Payment is an amount equal to (a) the aggregate sum of the
number of different Toro-branded Exmark products sold by Toro in the United
States or Canada (whether manufactured by Toro or by Exmark) during the
twelve-month period ending October 31, 1999, multiplied by (b) the applicable
"Cross-Branding Revenue Per Unit" for each such product as determined based upon
Exmark's published distributor net price for such period in the manner shown in
APPENDIX C. For purposes of computing the Cross-Branding Revenue Factor and the
Cross-Branding REBIT Factor, product manufactured by Exmark for Toro will be
regarded as "sold" upon shipment by Exmark to Toro.
(b) The "CROSS-BRANDING REBIT FACTOR" for determining the 1998 Contingent
Payment is an amount equal to 12.5% of the Cross-Branding Revenue Factor used to
determine the 1998 Contingent Payment as described in SECTION 5(a). The
Cross-Branding REBIT Factor for determining the 1999 Contingent Payment is an
amount equal to 10% of the Cross-Branding Revenue Factor used to determine the
1999 Contingent Payment as described in SECTION 5(a).
6. WORKING CAPITAL ADJUSTMENT: The "WORKING CAPITAL ADJUSTMENT" will be
the greater of (a) 10% of the excess, if any, of (i) the Average Working Capital
(as defined below in this SECTION 6) of Exmark during such period over (ii) 22%
of the actual cost of goods sold of Exmark during such period determined in
conformity with GAAP and (b) zero. "AVERAGE WORKING CAPITAL" of Exmark for any
period will be the average of the month-end differences between the current
assets, excluding cash, of Exmark and the current liabilities, excluding
intercompany debt and the current portion of long-term debt, of Exmark during
such period, in each case, determined in accordance with GAAP.
7. CALCULATION: Within 60 days after the end of each fiscal year during
the Contingent Payment Period, the parties shall prepare and deliver to the
Synergies Council a statement (a "CONTINGENT PAYMENT STATEMENT"), which shall
identify the gross sales, EBIT, REBIT, CAGR and Working Capital Adjustment of
Exmark for such fiscal year (including the manner of determination) in
reasonable detail and the amount of the Contingent Payment to be made with
respect to such fiscal year. All amounts used in a Contingent Payment Statement
to determine a Contingent Payment will be based on the final audited financial
statements of Toro, subject to adjustment by the Synergies Council to reflect
differences between Toro's accounting practices and those used by Exmark in its
audited financial statements for the two year period ended August 31, 1996. In
addition, upon the reasonable request of the Stockholders' Representatives, Toro
will provide quarterly or other periodic reports to the Stockholders'
Representatives, which will include estimates of the various factors included in
the Valuation Formula.
The Contingent Payment Statement shall be subject to review and
verification by the Stockholders' Representatives. Toro shall permit the
Stockholders' Representatives and their representatives to have reasonable
access to the data and information on which the
5
Contingent Payment Statement was prepared and to Toro's employees and/or
representatives who assisted in its preparation.
The Stockholders' Representatives shall be deemed to have accepted the
Contingent Payment Statement and the Contingent Payment indicated therein, on
behalf of the Holders, unless within 20 days after the date of delivery of the
Contingent Payment Statement, the Stockholders' Representatives give written
notice to Toro of objection to any item thereon, which notice shall specify in
reasonable detail the basis for such objection. If the Stockholders'
Representatives give such notice of objection, Toro's Representatives and the
Stockholders' Representatives shall attempt in good faith to resolve the dispute
as promptly as possible.
If Toro's Representatives and the Stockholders' Representatives have not
been able to agree upon a resolution of the dispute within 30 days after the
date the Stockholders' Representatives gave such notice of objection, either
group of representatives shall request that the matter be reviewed by Toro's
Office of the President and if the matter is not resolved upon such review, such
dispute shall be resolved by nonbinding mediation in the jurisdiction of the
principal office of Toro within 90 days after such date. In the event such
dispute is not resolved by such mediation, such dispute shall be fully and
finally resolved by binding arbitration in the manner described in
SECTION 13.05. All negotiations pursuant to this section shall be treated as
compromise and settlement negotiations for purposes of Rule 408 of the Federal
Rules of Evidence and comparable state rules of evidence. All negotiation,
mediation and arbitration proceedings under this section shall be treated as
confidential information in accordance with the provisions of the
Confidentiality Agreement. Any mediator or arbitrator shall be bound by an
agreement containing confidentiality provisions at least as restrictive as those
contained in the Confidentiality Agreement.
6
APPENDIX A
COMPOUND ANNUAL GROWTH RATE FORMULA
CAGR = [(FV/PV) 1/n - 1] * 100
Where:
FV (future value) = 1998 Sales or 1999 Sales, as applicable
PV (present value) = 1996 Sales (Base Year)
n = either 2 or 3 periods from the Base Year, as applicable
EXAMPLE OF COMPOUND ANNUAL GROWTH RATE CALCULATION
EXAMPLE 1 EXAMPLE 2
1996 Sales (Base Year) $ 40,000 $ 40,000
1997 Sales $ 45,000 $ 55,000
Annual Growth Rate 12.5% 37.5%
1998 Sales $ 60,000 $ 60,000
Annual Growth Rate 33.3% 9.1%
AVERAGE ANNUAL GROWTH RATE 22.9% 23.3%
COMPOUND ANNUAL GROWTH RATE 22.5% 22.5%
PLEASE NOTE:
In comparing Examples 1 and 2, note that Average Annual Growth Rate fluctuates
as 1997 sales fluctuate.
In calculating Compound Annual Growth Rate, the parties will consider only the
first and last relevant years' data. In the above examples, although 1997 sales
fluctuate, the Compound Annual Growth Rate does not. Another way to understand
Compound Annual Growth Rate is to determine "By what consistent percentage would
sales have to grow each year in order to attain the same dollar amount of
Sales?" In this example the answer is 22.5% ($40,000 * 1.225 = $49,000 * 1.225
= $60,025).
7
APPENDIX B
1998 Cannibalization Calculations
---------------------------------
Cannibalization factor 0.25 Earnings factor 0.125
Published Dist. Cross-Branding Cross-Branding
Net Price Parts % Total DN Revenue Per Unit REBIT Per Unit
--------- ------- -------- ---------------- --------------
WAM Gear 13/36 Koh 1320 3.5% 1386 346.50 43.31
13/36 Kaw 1320 3.5% 1386 346.50 43.31
15/48 Koh 1500 3.5% 1575 393.75 49.22
15/48 Kaw 1500 3.5% 1575 393.75 49.22
WAM Hydro 13/36 Koh 1820 3.5% 1947.4 486.85 60.86
13/36 Kaw 1820 3.5% 1947.4 486.85 60.86
15/48 Koh 2020 3.5% 2161.4 540.35 67.54
15/48 Kaw 2020 3.5% 2161.4 540.35 67.54
16/52 Van 2200 3.5% 2354 588.50 73.56
ZRT - Lazer 20/52 3900 3.5% 4212 1,053.00 131.63
25/60 4200 3.5% 4536 1,134.00 141.75
ZRT - HP 16/42 1000 3.5% 1080 270.00 33.75
18/48 2000 3.5% 2160 540.00 67.50
8
APPENDIX C
1999 Cannibalization Calculations
---------------------------------
Cannibalization factor 0.25 Earnings factor 0.1
Published Cross-Branding Cross-Branding
Dist. Net Parts % Total DN Revenue Per Unit REBIT Per Unit
--------- ------- -------- ---------------- --------------
- WAM Gear 13/36 Koh 1320 5% 1386 346.50 34.65
13/36 Kaw 1320 5% 1386 346.50 34.65
15/48 Koh 1500 5% 1575 393.75 39.38
15/48 Kaw 1500 5% 1575 393.75 39.38
WAM Hydro 13/36 Koh 1820 3.5% 1947.4 486.85 48.69
13/36 Kaw 1820 3.5% 1947.4 486.85 48.69
15/48 Koh 2020 3.5% 2161.4 540.35 54.04
15/48 Kaw 2020 3.5% 2161.4 540.35 54.04
16/52 Vang 2200 3.5% 2354 588.50 58.85
ZRT - Lazer 20/52 3900 5% 4212 1,053.00 105.30
25/60 4200 5% 4536 1,134.00 113.40
ZRT - HP 16/42 1000 5% 1080 270.00 27.00
18/48 2000 5% 2160 540.00 54.00
9
EXHIBIT B
DISSENTERS' RIGHTS STATUTE
SECTION 21-20,137. Dissenters' rights; terms, defined.
For purposes of sections 21-20,137 to 21-20,150:
(1) Beneficial shareholder shall mean the person who is a
beneficial owner of shares held in a voting trust or by a nominee as
the record shareholder;
(2) Corporation shall mean the issuer of the shares held by a
dissenter before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer;
(3) Dissenter shall mean a shareholder who is entitled to
dissent from corporate action under section 21-20,138 and who
exercises that right when and in the manner required by sections
21-20,140 to 21-20,148;
(4) Fair value, with respect to a dissenter's shares, shall mean
the value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate action
unless exclusion would be inequitable;
(5) Interest shall mean interest from the effective date of the
corporate action until the date of payment at the rate specified in
section 45-104, as such rate may from time to time be adjusted by the
Legislature;
(6) Record shareholder shall mean the person in whose name
shares are registered in the records of a corporation or the
beneficial shareholder to the extent of the rights granted by a
nominee certificate on file with a corporation; and
(7) Shareholder shall mean the record shareholder or the
beneficial shareholder.
Source: Laws 1995, LB 109, Section 137.
SECTION 21-20,138. Right to dissent.
(1) A shareholder shall be entitled to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the
corporation is a party:
(i) If shareholder approval is required for the
merger by section 21-20,130 or the articles of incorporation
and the shareholder is entitled to vote on the merger; or
B-1
(ii) If the corporation is a subsidiary that is
merged with its parent under section 21-20,131;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than
in the usual and regular course of business if the shareholder is
entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order or
a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it:
(i) Alters or abolishes a preferential right of the
shares;
(ii) Creates, alters, or abolishes a right in
respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase of the shares;
(iii) Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other securities;
(iv) Excludes or limits the right of the shares to
vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other
securities with similar voting rights; or
(v) Reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share
so created is to be acquired for cash under section 21-2038;
or
(e) Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation, the bylaws, or
a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(2) A shareholder entitled to dissent and obtain payment for his
or her shares under sections 21-20,137 to 21-20,150 may not challenge
the corporate action creating his or her entitlement unless the action
is unlawful or fraudulent with respect to the shareholder or the
corporation.
(3) The right to dissent and obtain payment under sections
21-20,137 to 21-20,150 shall not apply to the shareholders of a bank,
trust company, stock-owned savings and loan association, industrial
loan and investment company, or the holding company of any such bank,
trust company, stock-owned savings and loan association, or industrial
loan and investment company.
Source: Laws 1995, LB 109, Section 138.
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SECTION 21-20,139. Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his or her name only if he or
she dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address
of each person on whose behalf he or she asserts dissenters' rights.
The rights of a partial dissenter under this subsection shall be
determined as if the shares as to which he or she dissents and his or
her other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his or her behalf only if:
(a) He or she submits to the corporation the record
shareholder's written consent to the dissent not later than the
time the beneficial shareholder asserts dissenters' rights; and
(b) He or she does so with respect to all shares of which
he or she is the beneficial shareholder or over which he or she
has power to direct the vote.
Source: Laws 1995, LB 109, Section 139.
SECTION 21-20,140. Notice of dissenters' rights.
(1) If proposed corporate action creating dissenters' rights
under section 21-20,138 is submitted to a vote at a shareholders'
meeting, the meeting notice shall state that shareholders are or may
be entitled to assert dissenters' rights under sections 21-20,137 to
21-20,150 and be accompanied by a copy of such sections.
(2) If corporate action creating dissenters' rights under
section 21-20,138 is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders entitled to
assert dissenters' rights that the action was taken and send those
shareholders the dissenters' notice described in section 21-20,142.
Source: Laws 1995, LB 109, Section 140.
SECTION 21-20,141. Dissenters' rights; notice of intent to demand payment.
(1) If proposed corporate action creating dissenters' rights
under section 21-20,138 is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters' rights (a)
shall deliver to the corporation before the vote is taken written
notice of his or her intent to demand payment for his or her shares if
the proposed action is effectuated and (b) shall not vote his or her
shares in favor of the proposed action.
B-3
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section shall not be entitled to payment for
his or her shares under sections 21-20,137 to 21-20,150.
Source: Laws 1995, LB 109, Section 141.
SECTION 21-20,142. Dissenters' notice.
(1) If proposed corporate action creating dissenters' rights
under section 21-20,138 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of section 21-20,141.
(2) The dissenters' notice shall be sent no later than ten days
after the corporate action was taken and shall:
(a) State where the payment demand shall be sent and where
and when certificates for certificated shares shall be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
(c) Supply a form for demanding payment that includes the
date of the first announcement to news media or to shareholders
of the terms of the proposed corporate action and requires that
the person asserting dissenters' rights certify whether or not he
or she acquired beneficial ownership of the shares before that
date;
(d) Set a date by which the corporation shall receive the
payment demand which date may not be fewer than thirty nor more
than sixty days after the date the notice required by subsection
(1) of this section is delivered; and
(e) Be accompanied by a copy of sections 21-20,137 to
21-20,150.
Source: Laws 1995, LB 109, Section 142.
SECTION 21-20,143. Dissenters' rights; duty to demand payment.
(1) A shareholder who was sent a dissenters' notice described in
section 21-20,142 shall demand payment, certify whether he or she
acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to subdivision
(2)(c) of section 21-20,142, and deposit his or her certificates in
accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her
shares under subsection (1) of this section shall retain all other
rights of a shareholder until such rights are canceled or modified by
the taking of the proposed corporate action.
B-4
(3) A shareholder who does not demand payment or does not
deposit his or her share certificates where required, each by the date
set in the dissenters' notice, shall not be entitled to payment for
his or her shares under sections 21-20,137 to 21-20,150.
Source: Laws 1995, LB 109, Section 143.
SECTION 21-20,144. Dissenters' rights; share restrictions.
(1) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received until
the proposed corporate action is taken or the restrictions are
released under section 21-20,146.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a shareholder
until such rights are canceled or modified by the taking of the
proposed corporate action.
Source: Laws 1995, LB 109, Section 144.
SECTION 21-20,145. Dissenters' rights; payment.
(1) Except as provided in section 21-20,147, as soon as the
proposed corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with
section 21-20,143 the amount the corporation estimates to be the fair
value of his or her shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen months before the date
of payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment
under section 21-20,148; and
(e) A copy of sections 21-20,137 to 21-20,150.
Source: Laws 1995, LB 109, Section 145.
SECTION 21-20,146. Dissenters' rights; failure to take action.
B-5
(1) If the corporation does not take the proposed action within
sixty days after the date set for demanding payment and depositing
share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on
uncertificated shares.
(2) If, after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed action, it
shall send a new dissenters' notice under section 21-20,142 and repeat
the payment demand procedure.
Source: Laws 1995, LB 109, Section 146.
SECTION 21-20,147. Dissenters' rights; after-acquired shares.
(1) A corporation may elect to withhold payment required by
section 21-20,145 from a dissenter unless he or she was the beneficial
shareholder before the date set forth in the dissenters' notice as the
date of the first announcement to news media or to shareholders of the
terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment
under subsection (1) of this section after taking the proposed
corporate action, it shall estimate the fair value of the shares, plus
accrued interest, and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of his or her demand. The
corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment
under section 21-20,148.
Source: Laws 1995, LB 109, Section 147.
SECTION 21-20,148. Dissenters' rights; procedure if shareholder dissatisfied
with payment or offer.
(1) A dissenter may notify the corporation in writing of his or
her own estimate of the fair value of his or her shares and amount of
interest due, and demand payment of his or her estimate, less any
payment under section 21-20,145, or reject the corporation's offer
under section 21-20,147 and demand payment of the fair value of his or
her shares and interest due if:
(a) The dissenter believes that the amount paid under
section 21-20,145 or offered under section 21-20,147 is less than
the fair value of his or her shares or that the interest due is
incorrectly calculated;
(b) The corporation fails to make payment under section
21-20,145 within sixty days after the date set for demanding
payment; or
(c) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within
sixty days after the date set for demanding payment.
B-6
(2) A dissenter waives his or her right to demand payment under
this section unless he or she notifies the corporation of his or her
demand in writing under subsection (1) of this section within thirty
days after the corporation made or offered payment for his or her
shares.
Source: Laws 1995, LB 109, Section 148.
SECTION 21-20,149. Dissenters' rights; court action.
(1) If a demand for payment under section 21-20,148 remains
unsettled, the corporation shall commence a proceeding within sixty
days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty-day
period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the
district court of the county where a corporation's principal office,
or, if none in this state, its registered office, is located. If the
corporation is a foreign corporation without a registered office in
this state, it shall commence the proceeding in the district court of
the county in this state where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled, parties to
the proceeding as in an action against their shares and all parties
shall be served with a copy of the petition. Nonresidents may be
served by registered or certified mail or by publication as provided
by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section shall be plenary and
exclusive. The court may appoint one or more persons as appraisers to
receive evidence and recommend decision on the question of fair value.
Appraisers shall have the powers described in the order appointing
them or in any amendment to such order. The dissenters shall be
entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding shall be
entitled to judgment (a) for the amount, if any, by which the court
finds the fair value of his or her shares, plus interest, exceeds the
amount paid by the corporation or (b) for the fair value, plus accrued
interest, of his or her after-acquired shares for which the
corporation elected to withhold payment under section 21-20,147.
Source: Laws 1995, LB 109, Section 149.
SECTION 21-20,150. Dissenters' rights; court costs and attorney's fees.
(1) The court in an appraisal proceeding commenced under section
21-20,149 shall determine all costs of the proceeding, including the
reasonable compensation and
B-7
expenses of appraisers appointed by the court. The court shall assess
the costs against the corporation, except that the court may assess
costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment
under section 21-20,148.
(2) The court may also assess the attorney's fees and expenses
and the fees and expenses of experts for the respective parties in
amounts the court finds equitable:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not
substantially comply with the requirements of sections 21-20,140
to 21-20,148; or
(b) Against either the corporation or a dissenter, in favor
of any other party, if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the rights
provided by sections 21-20,137 to 21-20,150.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated and
that the fees for those services should not be assessed against the
corporation, the court may award to counsel reasonable fees to be paid
out of the amounts awarded to the dissenters who were benefitted.
Source: Laws 1995, LB 109, Section 150.
B-8
EXHIBIT C
[MCCARTHY & CO. LETTERHEAD]
October 23, 1997
Board of Directors
Exmark Manufacturing Co., Inc.
Industrial Park Box 748
Beatrice, NE 68310
Members of the Board:
We understand that Exmark Manufacturing Co., Inc.
("Exmark" or the "Company") and The Toro Company through EMCI Acquisition
Corp. ("Toro") intend to execute and complete an Agreement and Plan of Merger
dated as of October 23, 1997 (the "Agreement"), furnished to us on October
21, 1997 and draft dated as of October 13, 1997 which provides, among other
things, for the acquisition of Exmark by Toro. Pursuant to the Agreement,
the outstanding shares of common and preferred stock of Exmark (the "Exmark
Stock") will be acquired by Toro. The Agreement provides for total initial
consideration of $28,100,000 comprised of a combination of cash and Toro
common stock (the "Initial Payment"). The Initial Payment of $28,100,000
includes acquisition of the Holiman Company. The terms and conditions of the
Merger are more fully set out in the Agreement.
You have asked for our opinion as to whether the Merger
Consideration pursuant to the Agreement is fair from a financial point of
view to the Exmark Shareholders. The opinion expressed below does not
anticipate whether any Contingent Consideration or any of the Holdback
Amount, as those terms are defined in the Agreement, are ultimately paid to
the holders of Exmark Stock (the "Exmark Shareholders").
For purposes of the opinion set forth herein, we have:
(i) analyzed certain available financial statements and other
information of Toro and Exmark, respectively;
(ii) analyzed certain internal financial statements and other
financial and operating data concerning Exmark prepared by
the management of Exmark;
(iii) analyzed certain financial projections prepared by the
management of Exmark;
(iv) discussed the past and current operations and financial
conditions and the prospects of Exmark with senior executives
of Exmark;
(v) reviewed the reported prices and trading activity for the
Toro Common Stock;
(vi) compared the financial performance of Exmark and Toro;
(vii) reviewed the Agreement; and
(viii) performed such other analyses as we have deemed appropriate.
C-1
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Exmark.
We have not made any independent valuation or appraisal of the assets
or liabilities of Exmark, nor have we been furnished with any such appraisals.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
It is understood that this letter is for the information of the Board
of Directors of Exmark and does not constitute a recommendation to the Exmark
Stockholders as to the voting of their shares on the proposed merger or any
other transaction.
Based on the foregoing, we are of the opinion on the date hereof
that the Merger Consideration, even if any Contingent Payment Consideration
or any of the Holdback Amount is not received, is fair from a financial point
of view to the Exmark Stockholders.
Very truly yours,
McCarthy & Co.
By: /s/ Mark D. Hasebroock
-----------------------------
Mark D. Hasebroock
Managing Director
C-2
EXHIBIT D
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended August 1, 1997 Commission File Number 1-8649
--------------- --------
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ -------
The number of shares of Common Stock outstanding as of August 29, 1997 was
12,115,415.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Statements of Earnings and
Retained Earnings -
Three and Nine Months Ended
August 1, 1997 and August 2, 1996. . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets -
August 1, 1997, August 2, 1996 and October 31, 1996. . . . . .4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 1, 1997 and August 2, 1996. . . . . .5
Notes to Condensed Consolidated Financial Statements. . . . . .6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .10-14
PART II. OTHER INFORMATION:
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . 15
Exhibit 11 Computation of Earnings Per Common Share. . . . . . 16
2
PART I. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 249,274 $ 232,565 $ 810,434 $ 732,712
Cost of sales. . . . . . . . . . . . . . . . . . . . . 156,879 146,681 517,695 466,689
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . 92,395 85,884 292,739 266,023
Selling, general and administrative
expense. . . . . . . . . . . . . . . . . . . . . . . 73,626 72,909 231,255 210,273
--------- --------- --------- ---------
Earnings from operations . . . . . . . . . . . . . . 18,769 12,975 61,484 55,750
Interest expense . . . . . . . . . . . . . . . . . . . 5,476 3,755 15,408 10,858
Other income, net. . . . . . . . . . . . . . . . . . . (3,151) (1,489) (5,957) (7,642)
--------- --------- --------- ---------
Earnings before income taxes . . . . . . . . . . . . 16,444 10,709 52,033 52,534
Provision for income taxes . . . . . . . . . . . . . . 6,495 4,244 20,553 20,751
--------- --------- --------- ---------
Net earnings before extraordinary loss . . . . . . . 9,949 6,465 31,480 31,783
Extraordinary loss, net of income tax benefit of
$1,087 . . . . . . . . . . . . . . . . . . . . . . . (1,663) - (1,663) -
--------- --------- --------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . . $ 8,286 $ 6,465 $ 29,817 $ 31,783
--------- --------- --------- ---------
--------- --------- --------- ---------
Retained earnings at beginning of period . . . . . . . 192,276 165,274 173,630 142,891
Other . . . . . . . . . . . . . . . . . . . . . . . . - 164 - 164
Dividends on common stock of $0.12, $0.12,
$0.36 and $0.36 per share, respectively. . . . . . . (1,452) (1,458) (4,337) (4,393)
--------- --------- --------- ---------
Retained earnings at end of period . . . . . . . . . . $ 199,110 $ 170,445 $ 199,110 $ 170,445
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent before extraordinary
loss . . . . . . . . . . . . . . . . . . . . . . . . .80 .52 2.53 2.52
Extraordinary loss, net of income tax benefit. . . . . (.13) - (.13) -
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent. . . . . . . . . . . . . . . $ .67 $ .52 $ 2.40 $ 2.52
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent -
assuming full dilution before extraordinary
loss . . . . . . . . . . . . . . . . . . . . . . . . .80 .52 2.52 2.52
Extraordinary loss, net of income tax benefit. . . . . (.13) - (.13) -
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent -
assuming full dilution . . . . . . . . . . . . . . . $ .67 $ .52 $ 2.39 $ 2.52
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
August 1, August 2, October 31,
1997 1996 1996
---------- ----------- ------------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 4 $ 1,151 $ 66
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . 308,234 265,772 239,637
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 161,825 143,339 130,288
Other current assets . . . . . . . . . . . . . . . . . . . . . . 39,285 34,370 35,010
-------- -------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . 509,348 444,632 405,001
-------- -------- --------
Property, plant and equipment. . . . . . . . . . . . . . . . . . 322,708 220,443 229,080
Less accumulated depreciation and amortization. . . . . . . 206,105 151,626 155,270
-------- -------- --------
116,603 68,817 73,810
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 79,019 18,481 18,066
-------- -------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $704,970 $531,930 $496,877
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt. . . . . . . . . . . . . . . . $ 365 $ 373 $ 350
Short-term borrowing . . . . . . . . . . . . . . . . . . . . . . 95,000 83,600 41,025
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 46,531 26,160 43,524
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . 146,358 136,603 122,958
-------- -------- --------
Total current liabilities . . . . . . . . . . . . . . . . . 288,254 246,736 207,857
-------- -------- --------
Long-term debt, less current portion . . . . . . . . . . . . . . 177,650 53,046 53,015
Other long-term liabilities. . . . . . . . . . . . . . . . . . . 5,399 22,586 22,438
Common stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 12,112,310 shares at August 1,
1997 (net of 797,694 treasury shares),
11,990,873 shares at August 2, 1996
(net of 919,131 treasury shares), and
12,032,143 shares at October 31, 1996 (net
of 877,861 treasury shares) . . . . . . . . . . . . . . . . 12,112 11,991 12,032
Additional paid-in capital. . . . . . . . . . . . . . . . . . 28,241 27,817 28,462
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 199,110 170,445 173,630
Foreign currency translation adjustment . . . . . . . . . . . (5,796) (691) (557)
-------- -------- --------
Total common stockholders' equity . . . . . . . . . . . . . . 233,667 209,562 213,567
-------- -------- --------
Total liabilities and common stockholders' equity . . . . . $704,970 $531,930 $496,877
-------- -------- --------
-------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
-------------------------
August 1, August 2,
1997 1996
----------- ----------
Cash flows from operating activities:
Net earnings. . .. . . . . . . . . . . . . . . . . . . . . . . . $ 29,817 $ 31,783
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt . . . . . . 1,663 -
Provision for depreciation and amortization. . . . . . . . . . 16,675 13,228
Gain on disposal of property, plant and equipment. . . . . . . (70) (176)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 1,528 -
Tax benefits related to employee stock option
transactions . . . . . . . . . . . . . . . . . . . . . . . . 1,224 1,490
Changes in operating assets and liabilities:
Receivables, net. . . . . . . . . . . . . . . . . . . . . . (43,488) (66,956)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (747) 2,523
Other current assets. . . . . . . . . . . . . . . . . . . . (3,606) (491)
Accounts payable and accrued expenses . . . . . . . . . . . 7,601 (1,502)
--------- ---------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . 10,597 (20,101)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . . . . . . (24,729) (11,655)
Proceeds from asset disposals. . . . . . . . . . . . . . . . . 1,160 439
Change in other assets/liabilities . . . . . . . . . . . . . . (7,877) (2,740)
Acquisition of James Hardie Irrigation, net of
cash acquired . . . . . . . . . . . . . . . . . . . . . . . (117,622) -
--------- ---------
Net cash used in investing activities . . . . . . . . . . (149,068) (13,956)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowing . . . . . . . . . . . . . . . 53,975 42,025
Proceeds from issuance of long-term debt . . . . . . . . . . . 175,000 -
Repayments of long-term debt . . . . . . . . . . . . . . . . . (50,350) (15,280)
Payment of debt issue costs and prepayment penalty . . . . . . (5,625) -
Payments for termination of interest rate swaps. . . . . . . . (23,650) -
Proceeds from forward-starting interest rate swap. . . . . . . - 15,363
Proceeds from sale of common stock . . . . . . . . . . . . . . 6,587 3,673
Purchases of common stock. . . . . . . . . . . . . . . . . . . (7,952) (13,071)
Dividends on common stock. . . . . . . . . . . . . . . . . . . (4,337) (4,393)
--------- ---------
Net cash provided by financing activities . . . . . . . . 143,648 28,317
--------- ---------
Foreign currency translation adjustment. . . . . . . . . . . . . (5,239) (811)
--------- ---------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (62) (6,551)
Cash and cash equivalents at beginning of period . . . . . . . . 66 7,702
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 4 $ 1,151
--------- ---------
--------- ---------
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 1, 1997
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by generally accepted
accounting principles for complete financial statements. Unless the
context indicates otherwise, the terms "company" and "Toro" refer to The
Toro Company and its subsidiaries. In the opinion of management, the
unaudited condensed consolidated financial statements include all
adjustments, consisting primarily of recurring accruals, considered
necessary for a fair presentation of the financial position and the results
of operations. Since the company's business is seasonal, operating results
for the nine months ended August 1, 1997 are not necessarily indicative of
the results that may be expected for the year ended October 31, 1997.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the year
ended October 31, 1996. The policies described in that report are used for
preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of net realizable value
or cost with cost determined by the last-in, first-out (LIFO) method. Had
the first-in, first-out (FIFO) method of cost determination been used,
inventories would have been $25,642,000 and $24,841,000 higher than
reported at August 1, 1997, and August 2, 1996, respectively. Under the
FIFO method, work-in-process inventories were $72,008,000 and $68,952,000
and finished goods inventories were $115,459,000 and $99,228,000 at
August 1, 1997, and August 2, 1996, respectively.
LONG-TERM DEBT
In June 1997, the company issued $175.0 million of debt securities
consisting of $75.0 million of 7.125 % coupon 10-year Notes and $100.0
million of 7.80 % 30-year Debentures. The proceeds from the debt
securities issued were used in part to repay short-term indebtedness, which
was primarily related to the acquisition of the James Hardie Irrigation
Group, and to redeem on August 1, 1997, the company's $50.0 million
principal amount of 11 % Sinking Fund Debentures. The company paid a
prepayment penalty of approximately $2.8 million for the early retirement
of the Debentures. This penalty is reported in the condensed consolidated
statement of earnings as an extraordinary loss, net of the related income
tax benefit.
In connection with the issuance of the $175.0 million in long-term debt
securities, the company paid $23.7 million to terminate three
forward-starting interest rate swap agreements with notational amounts
totaling $125.0 million. These swap agreements had been entered into to
reduce exposure to interest rate risk prior to the issuance of the new
long-term debt securities. At the inception of one of the swap agreements,
the company had received payments which were recorded as deferred income to
be recognized as an adjustment to interest expense over the term of the new
debt securities. At the date the swaps were terminated, this deferred
income totaled $18.7 million. The excess of the termination fees over the
deferred income recorded has been deferred and is being recognized as an
adjustment to interest expense over the term of the new debt securities
issued.
6
DERIVATIVE FINANCIAL INSTRUMENTS
A portion of the company's sales and purchases are denominated in foreign
currencies. The company enters into forward exchange and range forward
option contracts to reduce exposure to foreign currency exchange risk.
These contracts are designated to hedge firm anticipated foreign currency
transactions. Gains and losses on foreign currency contracts are deferred
and recognized upon settlement of the underlying hedged transaction.
As discussed under the "Long-term Debt" caption in these notes to the
condensed consolidated financial statements, the company entered into
interest rate exchange or swap agreements to hedge interest rate exposure
on the anticipated issuance of new long-term debt securities. The net loss
on these swap agreements has been deferred and is being amortized as an
adjustment to interest expense over the term of the debt securities. In
June 1997, the company terminated all of its outstanding interest rate
exchange agreements upon the issuance of the new long-term debt
securities.
BUSINESS ACQUISITIONS
Effective December 1, 1996, The Toro Company acquired the James Hardie
Irrigation Group ("Hardie") from James Hardie Industries Limited under an
agreement dated September 18, 1996. The initial purchase price pursuant to
the agreement was estimated to be $131,500,000. The purchase price was
subsequently adjusted to $119,125,000 based on estimated, unaudited
aggregate shareholders' equity of Hardie on December 1, 1996, subject to
further adjustment based on final audit results.
Based on the financial statements of Hardie as of the acquisition date,
shareholders' equity at the acquisition date was approximately $10,545,000
less than the estimated equity used as the closing date purchase price, and
this $10,545,000 is to be returned from James Hardie Industries Limited to
Toro. In addition, under the procedures established in the purchase
agreement, Toro has delivered a letter of objections to James Hardie
Industries Limited related to the valuation of assets, accounting methods
applied, estimates used and other items. The resolution of these
objections may result in an additional reduction of the purchase price.
The acquisition is accounted for using the purchase accounting method and,
accordingly, the adjusted purchase price of $108,580,000 has initially been
allocated based on the estimated fair values of assets acquired and
liabilities assumed on the date of acquisition. The excess of the purchase
price over the estimated fair value of net tangible assets acquired has
been recorded as goodwill and is being amortized on a straight-line basis
over 20 years. Any additional reductions in the purchase price as a result
of resolution of the objections discussed in the preceding paragraph will
result in a reduction of goodwill and/or other net assets. The related
effect of these adjustments on the Consolidated Statement of Earnings of
The Toro Company is not expected to be material.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and Hardie as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with the related
income tax effects.
Three Months Ended Nine Months Ended
------------------ -----------------
Aug 1, Aug 2, Aug 1, Aug 2,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
---------------------------------------------------------
Net sales $ 249,274 $ 267,774 $ 824,600 $ 842,793
Net earnings before extraordinary loss 9,949 5,634 29,783 28,283
Extraordinary loss, net of income tax benefit (1,663) - (1,663) -
----------- ---------- ----------- ----------
Net earnings $ 8,286 $ 5,634 $ 28,120 $ 28,283
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Primary earnings per share before extraordinary loss $ 0.80 $ 0.45 $ 2.39 $ 2.24
Extraordinary loss, net of income tax benefit (0.13) - (0.13) -
----------- ---------- ----------- ----------
Primary earnings per share $ 0.67 $ 0.45 $ 2.26 $ 2.24
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
7
BUSINESS ACQUISITIONS (CONTINUED)
On June 4, 1997, the company announced that it had signed a letter of
intent to acquire Exmark Manufacturing Company, Inc., a leading
manufacturer of equipment for the professional landscape contractor
industry. Exmark is headquartered in Beatrice, Nebraska, and produces
mid-sized walk-behind mowers and zero-turning-radius riding mowers for
professional contractors. Exmark employs approximately 190 people in a
164,000 square foot facility and had sales of $38.4 million for the fiscal
year ended August 31, 1996. Consummation of the acquisition is subject to
preparation and execution of a definitive agreement, approval by Exmark's
shareholders and regulatory approvals. Management believes that the
consideration to be paid by the company will not have a material impact on
the financial condition of the company.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting
earnings per share information. The company will be required to adopt the
new standard beginning in the first quarter of fiscal 1998; earlier
application is not permitted. Prior period information is required to be
restated to conform with the requirements of the new standard. Pro forma
earnings per share for the three and nine month periods ended August 1,
1997 and August 2, 1996 as computed under SFAS No. 128 are as follows:
Pro forma EPS Pro forma EPS
Three months ended Nine months ended
-----------------------------------------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
-----------------------------------------------------
Basic earnings per share, before extraordinary loss $ 0.83 $ 0.53 $ 2.61 $ 2.61
Extraordinary loss, net of income tax benefit (0.14) - (0.14) -
------ ------ ------ ------
Basic earnings per share $ 0.69 $ 0.53 $ 2.47 $ 2.61
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per share, before extraordinary loss $ 0.80 $ 0.52 $ 2.53 $ 2.52
Extraordinary loss, net of income tax benefit (0.13) - (0.13) -
------ ------ ------ ------
Diluted earnings per share $ 0.67 $ 0.52 $ 2.40 $ 2.52
------ ------ ------ ------
------ ------ ------ ------
8
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Also in February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure,"
(SFAS 129) which consolidates existing requirements regarding capital
structure. SFAS 129 will be required to be adopted in the first quarter of
fiscal 1998, and is not expected to have a material impact on the company's
current capital structure disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, " Reporting Comprehensive Income," (SFAS 130) and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131).
SFAS 130 establishes standards for reporting and displaying the components
of comprehensive income and the accumulated balance of other comprehensive
income within total stockholders' equity. The company is required to adopt
SFAS 130 beginning in the second quarter of fiscal 1998, with
reclassification of prior period information for comparative purposes
required. The adoption of SFAS 130 will require additional disclosures,
but is not expected to have a material impact on the company's consolidated
financial statements.
SFAS 131 requires disclosure of selected information about operating
segments including segment income, revenues and asset data, as well as
descriptive information about how operating segments are determined and the
products and services provided by the segments. Generally, financial
information will be required to be reported on the same basis that it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The company will be required to adopt SFAS
131 beginning with its 1999 fiscal year end annual report. The adoption of
SFAS 131 will require additional disclosures but is not expected to have a
material impact on the company's consolidated financial statements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made
orally in the future by or on behalf of the company.
Forward-looking statements involve risks and uncertainties, including, but
not limited to, changes in business conditions and the economy in general in
both foreign and domestic markets; weather conditions affecting demand;
seasonal factors affecting the company's industry; lack of growth in the
company's markets; litigation; financial market changes including interest
rates and foreign exchange rates; trend factors including housing starts, new
golf course starts and market demographics; government actions including
budget levels, regulation, and legislation, primarily legislation relating to
the environment, commerce and infrastructure, and health and safety; labor
relations; availability of materials; actions of competitors; ability to
integrate acquisitions; and the company's ability to profitably develop,
manufacture and sell both new and existing products. Actual results could
differ materially from those projected in the forward-looking statements as a
result of these risk factors, and should not be relied upon as a prediction
of actual future results. Further, Toro undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the
date on which such statement is made, or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Third quarter net earnings before the effect of an extraordinary loss rose
53.9% to $9.9 million from the net earnings of $6.5 million for the same
period in the previous year. Earnings per share before the effect of an
extraordinary loss for the third quarter improved 53.8% to $0.80 from $0.52
in the previous period. An extraordinary loss on the prepayment of $50.0
million of 11% Debentures was recognized in the third quarter of fiscal 1997,
reducing net earnings for the third quarter to $8.3 million or $0.67 per
share. The prepayment was part of an overall debt restructuring (See
"Liquidity and Capital Resources"). Net sales increased from $232.6 million
in the third quarter of 1996 to $249.3 million in the third quarter of 1997,
as a result of factors discussed in the following paragraphs.
For the nine months ended August 1, 1997 net sales increased from the same
period in 1996 by $77.7 million or 10.6%. Net earnings before the extraordinary
loss for the nine months ended August 1, 1997 were $31.5 million as compared to
$31.8 million for the same period last year.
In both fiscal 1996 and 1997 the spring mowing season was late and wet in many
key markets. In fiscal 1997 these unpredictable weather patterns heightened a
conservative buying attitude among dealers and distributors. The company
continues to focus on more efficient asset management, the integration of the
Hardie acquisition, and other new strategic alliances and acquisitions to
promote further diversification and growth.
The following table sets forth net sales by product line.
Three Months Ended
-------------------------------------
(Dollars in thousands) August 1, August 2,
1997 1996 $ CHANGE % CHANGE
--------- ---------- -------- --------
Consumer products. . . . . . . . . . $ 81,888 $102,290 $(20,402) (19.9)%
Commercial products. . . . . . . . . 89,832 84,828 5,004 5.9
Irrigation products. . . . . . . . . 77,554 45,447 32,107 70.6
-------- -------- --------
Total *. . . . . . . . . . . . . $249,274 $232,565 $ 16,709 7.2%
-------- -------- --------
-------- -------- --------
* Includes international sales of: . $ 48,972 $ 43,238 $ 5,734 13.3%
10
Nine Months Ended
-------------------------------------
(Dollars in thousands) August 1, August 2,
1997 1996 $ Change % Change
--------- ---------- -------- --------
Consumer products. . . . . . . . . . $303,443 $342,722 $(39,279) (11.5)%
Commercial products. . . . . . . . . 289,819 271,684 18,135 6.7
Irrigation products. . . . . . . . . 217,172 118,306 98,866 83.6
-------- -------- --------
Total *. . . . . . . . . . . . $810,434 $732,712 $ 77,722 10.6%
-------- -------- --------
-------- -------- --------
* Includes international sales of: $184,952 $146,996 $ 37,956 25.8%
CONSUMER PRODUCT SALES
Worldwide net sales of consumer products for the three and nine months ended
August 1, 1997 declined by $20.4 million and $39.3 million, respectively,
compared to the same periods in the previous year. Early season snowthrower
sales in the third quarter of fiscal 1996 were unusually high as dealers
replenished abnormally low inventory levels. This, combined with lower than
expected sales of mowing products due to poor weather conditions and
conservative buying patterns among dealers caused a decline in consumer product
sales for the three and nine month periods as compared to the previous year.
International consumer product net sales for the three months ended August 1,
1997 increased from $11.5 million to $12.6 million and from $45.8 million to
$49.4 million for the nine months ended August 1, 1997 as new products were
introduced in both Europe and Canada.
COMMERCIAL PRODUCT SALES
Worldwide commercial product net sales for the three months ended August 1,
1997 were $89.8 million compared to $84.8 million in the same period in the
prior year. Net sales for the nine months ended August 1, 1997 increased by
6.7% to $289.8 million compared to $271.7 million in the same period in the
prior year. Despite strong competition, sales of equipment to golf courses
did well, reflecting the continued growth of the golf market. Several new
product introductions in the second quarter also reinforced sales.
International commercial product net sales decreased to $17.6 million for the
three months ended August 1, 1997 from $23.9 million in the prior year due to
continued inclement weather in Europe. Net sales were flat at $79.8 million
for the nine months ended August 1, 1997. Sales weakened due to generally
weak economic conditions in Europe.
IRRIGATION PRODUCT SALES
Worldwide irrigation product net sales rose 70.6% from $45.4 million in the
same three month period last year to $77.6 million in the current year. Net
sales for the nine months ended August 1, 1997 were $217.2 million compared
to $118.3 million in the same period in the prior year. This increase is
almost entirely attributable to the acquisition of Hardie.
International irrigation product net sales, excluding Hardie sales, increased
by 8.4% for the third quarter and 4.1% for the first nine months of fiscal
1997, as compared to the corresponding period in the prior year.
11
GROSS PROFIT
Gross profit was $92.4 million and $292.7 million for the three and nine months
ended August 1, 1997, respectively, an increase of $6.5 million and $26.7
million from the three and nine months ended August 2, 1996, respectively. As a
percent of sales, gross profit for the three month period ended August 1, 1997
was 37.1% compared with 36.9% for the same period in 1996 and 36.1% for the nine
months ended August 1, 1997 versus 36.3% for the same period in 1996. The lower
gross margin for the nine month period was primarily due to the effect of lower
margins contributed by Hardie product sales. For the three month period, the
impact of lower Hardie gross margins was offset by production efficiencies.
Selling, General and Administrative Expense
(Dollars in millions)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
- ------------------------------------------------------------------------------------------------------------------------------
Aug 1, % of Net Aug 2, % of Net Aug 1, % of Net Aug 2, % of Net
S G & A 1997 Sales 1996 Sales 1997 Sales 1996 Sales
- ------------------------------------------------------------------------------------------------------------------------------
Administrative $ 23.8 9.5% $ 25.6 11.0% $ 74.4 9.2% $69.7 9.5%
Sales and Marketing 22.4 9.0 22.8 9.8 78.7 9.7 67.5 9.2
Warranty 9.0 3.6 7.3 3.1 23.6 2.9 24.7 3.4
Distributor/Dealer
Financing 2.8 1.1 2.7 1.2 8.2 1.0 7.9 1.1
Research and
Development 8.8 3.5 8.3 3.6 25.7 3.2 22.9 3.1
Warehousing 4.7 1.9 3.9 1.7 13.7 1.7 11.6 1.6
Service/Quality
Assurance 2.1 0.9 2.3 0.9 7.0 0.8 6.0 0.8
--- --- --- --- --- --- --- ---
Total $ 73.6 29.5% $ 72.9 31.3% $231.3 28.5% $ 210.3 28.7%
Selling, general and administrative expense (SG&A) for the three months ended
August 1, 1997 increased $0.7 million from the prior year, and as a percent of
sales decreased to 29.5% from 31.3% for the same period in fiscal 1996. Hardie
added $8.3 million in SG&A expense during the third quarter of fiscal 1997.
SG&A expense for the nine months ended August 1, 1997 increased $21.0 million
from the prior year, including Hardie's SG&A expense of $24.3 million, and as a
percent of sales decreased to 28.5% from 28.7% for the same period in fiscal
1996. Administrative expenses, net of Hardie, decreased $4.8 million for the
quarter and $3.0 million for the nine months ended August 1, 1997 due mainly to
cost containment efforts. Sales and marketing expenses, net of Hardie,
decreased by $3.4 million for the quarter due to both reduced sales and
reductions in spending for marketing programs and increased $1.7 million for the
nine months ended August 1, 1997 due primarily to increased promotional costs of
new products for the landscape contractor group. Warranty expense, net of
Hardie, increased $1.4 million for the quarter due to an adjustment to the
warranty accrual rate based upon higher than anticipated claims and decreased
$2.3 million for the nine months ended August 1, 1997 due primarily to reduced
consumer product sales. Research and development, net of Hardie, was flat for
both the three month and the nine month periods ended August 1, 1997.
Service/quality assurance, net of Hardie, declined due to lower sales volume in
this three month period in fiscal 1997 versus the same period in fiscal 1996.
Warehousing expenses, net of Hardie, were flat for the three month period and
down slightly for the nine month period. Distributor/dealer financing was flat
as compared to the same period in fiscal 1996.
12
FINANCIAL POSITION AS OF AUGUST 1, 1997
August 1, 1997 COMPARED TO OCTOBER 31, 1996
Total assets at August 1, 1997 were $705.0 million, up $208.1 million from
October 31, 1996. Hardie accounted for approximately $149.1 million of this
increase. Net accounts receivable, net of Hardie, increased by $22.4 million
from October 31, 1996. Historically, the highest sales volumes and receivables
occur starting in March and ending in May. The accounts receivable balance
declines over the following months as payments under the company's extended
payment plans become due. Inventory, net of Hardie, increased by $6.1 million
primarily as a result of the normal buildup of consumer snow products
manufactured in the third quarter of the year. Net property, plant and
equipment increased from $73.8 million to $116.6 million due to the addition of
Hardie net property, plant and equipment of $29.5 million, the expansion of the
corporate headquarters and various tooling projects. Other assets, net of the
effect of the Hardie acquisition, increased due to the acquisition of marketing
rights to a central irrigation system for the large turf irrigation market, and
capitalized costs related to the issuance of public debt securities(See
"Liquidity and Capital Resources").
Total current liabilities of $288.3 million at August 1, 1997 increased $80.4
million compared with current liabilities at October 31, 1996. The majority of
this increase was the result of additional short-term borrowings of $54.0
million reflecting the company's strategy of utilizing short-term borrowing to
fund the company's seasonal working capital needs. Long-term debt increased
from October 31, 1996 to August 1, 1997 as a result of the issuance of $175.0
million of debt securities which were used to redeem $50.0 million of 11%
Debentures and as long-term funding for the purchase of Hardie. Other accrued
liabilities increased primarily as a result of expenses related to the
acquisition of Hardie. Other long-term liabilities decreased by approximately
$17.0 million due primarily to the termination of a forward-starting interest
rate contract initiated as a hedge against interest rate fluctuations prior to
the issuance of $175.0 million in public debt securities during the third
quarter of fiscal 1997.
AUGUST 1, 1997 COMPARED TO AUGUST 2, 1996
Total assets at August 1, 1997 were $705.0 million, up $173.0 million from
August 2, 1996. Of this increase, Hardie accounted for $149.1 million. Cash,
net of Hardie, decreased from the prior period as the result of improved asset
management policies. Accounts receivable, net, increased by $42.5 million, with
$46.2 million in net receivables attributable to Hardie. Inventory balances,
net of Hardie inventories of approximately $25.5 million, declined by $7.0
million due to asset management strategies which match production more closely
with retail demand and result in lower overall inventory levels. Both accounts
receivable and inventory were also impacted by reduced sales in this current
quarter as compared to the prior quarter, net of Hardie. Net property, plant
and equipment, increased by approximately $47.8 million, with $29.5 million of
this increase related to Hardie and the remaining increase related to the
corporate headquarters expansion and tooling projects. Other assets increased
by $60.5 million with Hardie accounting for $45.9 million. The remainder of the
increase was the result of the purchase of patents, the purchase of property for
possible future corporate expansion, and those additions in the current fiscal
year identified above.
Total current liabilities of $288.3 million at August 1, 1997 increased $41.5
million compared with current liabilities at August 2, 1996. Short-term
borrowing increased by $11.4 million over the prior year due primarily to the
financing of working capital needs of Hardie and payables and accruals of
Hardie. Other accrued liabilities increased by $9.8 million, primarily as a
result of expenses related to the Hardie acquisition and Hardie accrued
liabilities acquired. Long-term debt and other long-term liabilities increased
over the prior period as identified above.
13
LIQUIDITY AND CAPITAL RESOURCES
The primary use of cash during the first nine months of fiscal 1997 was
$117.6 million used for the acquisition of Hardie. The purchase price was
initially funded with temporary bank debt. The company issued $175.0 million
of long-term debt securities in June 1997 and used a portion of the net
proceeds received from the sale of the securities to repay short-term
indebtedness to banks. The balance of the net proceeds was used to redeem
the company's $50.0 million principal amount of outstanding 11% Sinking Fund
Debentures. In connection with the issuance of the $175.0 million in
long-term debt securities, the company paid $23.7 million to terminate three
forward-starting interest rate swap agreements with notational amounts
totaling $125.0 million. These swap agreements had been entered into to
reduce interest rate risk prior to the issuance of the new long-term debt
securities. At the inception of one of the swap agreements, the company had
received payments which were recorded as deferred income to be recognized as
an adjustment to interest expense over the term of the new debt securities.
At the date the swaps were terminated, this deferred income totaled $18.7
million. The excess of the termination fees over the deferred income
recorded has been deferred and is being recognized as an adjustment to
interest expense over the term of the new debt securities issued.
Cash used in operating activities for the first nine months of fiscal 1997
was primarily for the seasonal increase in accounts receivable. The
company's working capital needs are funded with $190.0 million of unsecured
bank credit lines. The company also has banker's acceptance financing
agreements under which an additional $40.0 million is available. The
company's business is seasonal, with peak borrowing under these working
capital lines generally occurring between February and May each year.
Management believes that the combination of funds available through its
existing financing arrangements, coupled with forecasted cash flows, will
provide the capital resources for its anticipated needs.
INFLATION
The company is subject to the effects of changing prices. The company has,
however, generally been able to pass along inflationary increases in its
costs by increasing the prices of its products.
14
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 11 Computation of Earnings per Common Share
(b) Exhibit 27 Financial Data Schedule
Summarized financial data; electronic filing only.
(c) Reports on Form 8-K
On February 18, 1997, the company filed Amendment No. 1 to its Current
Report on Form 8-K dated December 16, 1996 on Form 8-K/A providing
financial information for the business acquired and pro forma
financial information related to the acquisition of the James Hardie
Irrigation Group.
On June 6, 1997, the company filed Amendment No. 2 to its Current
Report on Form 8-K dated December 16, 1996 on Form 8-K/A providing
financial information for the business acquired and pro forma
financial information related to the acquisition of the James Hardie
Irrigation Group which supersedes the information provided in
Amendment No. 1 referenced in the previous paragraph.
On June 27, 1997, the company filed its Current Report on Form 8-K
dated June 24, 1997 reporting the closing of its public offering of
$175.0 million of Notes and Debentures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
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Stephen P. Wolfe
Vice President, Finance
Chief Financial Officer
(principal financial officer)
Date: September 10, 1997
15
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended May 2, 1997 Commission File Number 1-8649
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THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of May 30, 1997 was
12,076,474.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
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PART I. FINANCIAL INFORMATION:
Condensed Consolidated Statements of Earnings and
Retained Earnings -
Three and Six Months Ended
May 2, 1997 and May 3, 1996 . . . . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets -
May 2, 1997, May 3, 1996 and October 31, 1996 . . . . . . . .4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 2, 1997 and May 3, 1996. . . . . . . . .5
Notes to Condensed Consolidated Financial Statements . . . . .6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 8-12
PART II. OTHER INFORMATION:
Item 4 Results of Votes of Security Holders . . . . . . . . . 13
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibit 11 Computation of Earnings Per Common Share . . . . . 15
2
PART I. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Six Months Ended
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May 2, May 3, May 2, May 3,
1997 1996 1997 1996
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Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ 352,203 $ 288,646 $ 561,160 $ 500,147
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 227,086 184,836 360,816 320,008
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Gross profit. . . . . . . . . . . . . . . . . . . . . . 125,117 103,810 200,344 180,139
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . 89,160 73,540 157,629 137,364
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Earnings from operations. . . . . . . . . . . . . . . . 35,957 30,270 42,715 42,775
Interest expense . . . . . . . . . . . . . . . . . . . . . . 6,085 4,134 9,932 7,103
Other income, net. . . . . . . . . . . . . . . . . . . . . . (1,600) (1,640) (2,806) (6,153)
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Earnings before income taxes. . . . . . . . . . . . . . 31,472 27,776 35,589 41,825
Provision for income taxes . . . . . . . . . . . . . . . . . 12,432 10,956 14,058 16,507
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Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 19,040 $ 16,820 $ 21,531 $ 25,318
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Retained earnings at beginning of period . . . . . . . . . . 174,671 149,924 173,630 142,891
Dividends on common stock of $0.12, $0.12,
$0.24 and $0.24 per share, respectively . . . . . . . . (1,435) (1,470) (2,885) (2,935)
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Retained earnings at end of period . . . . . . . . . . . . . $ 192,276 $ 165,274 $ 192,276 $ 165,274
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Net earnings per share of common stock and
common stock equivalent . . . . . . . . . . . . . . . . $ 1.53 $ 1.33 $ 1.73 $ 2.00
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Net earnings per share of common stock and
common stock equivalent -
assuming full dilution. . . . . . . . . . . . . . . . . $ 1.52 $ 1.33 $ 1.72 $ 2.00
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See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
May 2, May 3, October 31,
1997 1996 1996
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ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 5,593 $ 4,238 $ 66
Receivables, net . . . . . . . . . . . . . . . . . . . . . . 412,725 343,344 239,637
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 159,014 158,841 130,288
Other current assets . . . . . . . . . . . . . . . . . . . . 34,429 32,270 35,010
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Total current assets. . . . . . . . . . . . . . . . . . 611,761 538,693 405,001
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Property, plant and equipment. . . . . . . . . . . . . . . . 319,010 216,806 229,080
Less accumulated depreciation and amortization. . . . . 203,859 148,100 155,270
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115,151 68,706 73,810
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 73,102 17,676 18,066
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Total assets. . . . . . . . . . . . . . . . . . . . . . $ 800,014 $ 625,075 $ 496,877
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt. . . . . . . . . . . . . . $ 350 $ 10,353 $ 350
Short-term borrowing . . . . . . . . . . . . . . . . . . . . 278,000 148,585 41,025
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 57,064 39,565 43,524
Other accrued liabilities. . . . . . . . . . . . . . . . . . 160,252 142,853 122,958
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Total current liabilities . . . . . . . . . . . . . . . 495,666 341,356 207,857
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Long-term debt, less current portion . . . . . . . . . . . . 53,015 53,339 53,015
Other long-term liabilities. . . . . . . . . . . . . . . . . 23,591 20,201 22,438
Common stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 11,979,539 shares at May 2,
1997 (net of 930,465 treasury shares),
12,099,223 shares at May 3, 1996
(net of 743,102 treasury shares), and
12,032,143 shares at October 31, 1996 (net
of 877,861 treasury shares) . . . . . . . . . . . . . . 11,980 12,099 12,032
Additional paid-in capital . . . . . . . . . . . . . . . . . 26,309 33,359 28,462
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 192,276 165,274 173,630
Foreign currency translation adjustment. . . . . . . . . . . (2,823) (553) (557)
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Total common stockholders' equity. . . . . . . . . . . . . . 227,742 210,179 213,567
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Total liabilities and common stockholders' equity . . . $ 800,014 $ 625,075 $ 496,877
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See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
May 2, May 3,
1997 1996
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Cash flows from operating activities:
Net earnings. . .. . . . . . . . . . . . . . . . . . . . . . $ 21,531 $ 25,318
Adjustments to reconcile net earnings to net cash
used in operating activities:
Provision for depreciation and amortization . . . . . . . 10,521 8,831
Gain on disposal of property, plant and equipment . . . . (65) (115)
Deferred income taxes . . . . . . . . . . . . . . . . . . 1,529 -
Tax benefits related to employee stock
option transactions. . . . . . . . . . . . . . . . . . 1,766 1,490
Changes in operating assets and liabilities:
Receivables, net . . . . . . . . . . . . . . . . . . . (147,979) (144,528)
Inventories. . . . . . . . . . . . . . . . . . . . . . 2,063 (12,979)
Other current assets . . . . . . . . . . . . . . . . . 1,250 1,609
Accounts payable and accrued expenses. . . . . . . . . 26,634 14,597
Accrued income taxes . . . . . . . . . . . . . . . . . 4,308 3,557
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Net cash used in operating activities . . . . . . . (78,442) (102,220)
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Cash flows from investing activities:
Purchases of property, plant and equipment. . . . . . . . (17,551) (7,236)
Proceeds from asset disposals . . . . . . . . . . . . . . 227 184
Increase in other assets. . . . . . . . . . . . . . . . . (9,685) (1,652)
Acquisition of James Hardie Irrigation,
net of cash acquired . . . . . . . . . . . . . . . . . (117,622) -
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Net cash used in investing activities . . . . . . . (144,631) (8,704)
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Cash flows from financing activities:
Increase in short-term borrowing. . . . . . . . . . . . . 236,975 107,010
Repayments of long-term debt. . . . . . . . . . . . . . . (243) (5,007)
Change in other long-term liabilities . . . . . . . . . . 990 12,978
Proceeds from sale of common stock. . . . . . . . . . . . 3,981 3,238
Purchases of common stock . . . . . . . . . . . . . . . . (7,952) (7,150)
Dividends on common stock . . . . . . . . . . . . . . . . (2,885) (2,935)
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Net cash provided by financing activities . . . . . 230,866 108,134
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Foreign currency translation adjustment. . . . . . . . . . . (2,266) (674)
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Net increase (decrease) in cash and cash equivalents . . . . 5,527 (3,464)
Cash and cash equivalents at beginning of period . . . . . . 66 7,702
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Cash and cash equivalents at end of period . . . . . . . . . $ 5,593 $ 4,238
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See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 2, 1997
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
and do not include all the information and notes required by generally
accepted accounting principles for complete financial statements.
Unless the context indicates otherwise, the terms "company" and "Toro"
refer to The Toro Company and its subsidiaries. In the opinion of
management, the unaudited condensed consolidated financial statements
include all adjustments, consisting primarily of recurring accruals,
considered necessary for a fair presentation of the financial position
and the results of operations. Since the company's business is
seasonal operating results for the six months ended May 2, 1997 are
not necessarily indicative of the results that may be expected for the
year ended October 31, 1997.
For further information, refer to the consolidated financial
statements and notes included in the company's Annual Report on Form
10-K for the year ended October 31, 1996. The policies described in
that report are used for preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO)
method. Had the first-in, first-out (FIFO) method of cost
determination been used, inventories would have been $25,642,000 and
$24,841,000 higher than reported at May 2, 1997, and May 3, 1996,
respectively. Under the FIFO method, work-in-process inventories were
$79,736,000 and $78,977,000 and finished goods inventories were
$104,920,000 and $104,705,000 at May 2, 1997, and May 3, 1996,
respectively.
BUSINESS ACQUISITIONS
Effective December 1, 1996, The Toro Company acquired the James Hardie
Irrigation Group ("Hardie") from James Hardie Industries Limited under an
agreement dated September 18, 1996. The initial purchase price pursuant to
the agreement was estimated to be $131,500,000. The purchase price was
subsequently adjusted to $119,125,000 based on estimated, unaudited
aggregate shareholders' equity of Hardie on December 1, 1996, subject to
further adjustment based on final audit results.
Based on the financial statements of Hardie as of the acquisition date,
shareholders' equity at the acquisition date was approximately $10,545,000
less than the estimated equity used as the closing date purchase price, and
this $10,545,000 is to be returned from James Hardie Industries Limited to
Toro. In addition, under the procedures established in the purchase
agreement, Toro has delivered a letter of objections to James Hardie
Industries Limited related to the valuation of assets, accounting methods
applied, estimates used and other items. The resolution of these
objections may result in an additional reduction of the purchase price.
6
BUSINESS ACQUISITIONS (CONTINUED)
The acquisition is accounted for using the purchase accounting method and,
accordingly, the adjusted purchase price of $108,580,000 has initially been
allocated based on the estimated fair values of assets acquired and
liabilities assumed on the date of acquisition. The excess of the purchase
price over the estimated fair value of net tangible assets acquired has
been recorded as goodwill and is being amortized on a straight-line basis
over 20 years. Any additional reductions in the purchase price as a result
of resolution of the objections discussed in the preceding paragraph will
result in a reduction of goodwill and/or other net assets. The related
effect of these adjustments on the Consolidated Statement of Earnings of
The Toro Company is not expected to be material.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and Hardie as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with the related
income tax effects.
Three Months Ended Six Months Ended
May 2, May 3, May 2, May 3,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
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