UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________
AMENDMENT NO. 2
TO CURRENT REPORT ON FORM 8-K
ON
FORM 8-K/A
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: ( Date of earliest event reported) December 2, 1996
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 1-8469 41-0580470
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
8111 LYNDALE AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420-1196
(Address of principal executive office) (zip code)
612/888-8801
(Registrant's telephone number, including area code)
Effective December 1, 1996, The Toro Company acquired James Hardie Irrigation
Group ("Hardie") from James Hardie, Ltd. 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, Ltd. to Toro. In addition,
under the procedures established in the purchase agreement, Toro has delivered a
letter of objections to James Hardie, Ltd. 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.
Included in this Amendment No. 2 to Form 8-K are the audited combined
financial statements of the James Hardie Irrigation Group as of and for the
year ended December 1, 1996, and the unaudited pro forma condensed combined
financial statements of The Toro Company as of and for the year ended October
31, 1996, which supercede the audited combined financial statements of the
James Hardie Irrigation Group as of and for the year ended March 31, 1996,
the unaudited condensed combined financial statements of the James Hardie
Irrigation Group as of and for the seven months ended October 31, 1996 and
the unaudited pro forma condensed combined financial statements of The Toro
Company as of and for the year ended October 31, 1996, previously filed in
Amendment No. 1 to Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
THE FOLLOWING DOCUMENTS ARE INCLUDED AS PART OF THIS REPORT:
(a) Financial Statements of Business Acquired: Page No.
--------
James Hardie Irrigation Group Financial Statements
for the year ended December 1, 1996
Independent Auditors' Report A-1
Combined Balance Sheet as of December 1, 1996 A-2
Combined Statement of Operations for the year
ended December 1, 1996 A-3
Combined Statement of Divisional/Shareholders'
Equity for the year ended December 1, 1996 A-4
Combined Statement of Cash Flows for the year
ended December 1, 1996 A-5
Notes to the Combined Financial Statements A-6 to A-16
(b) Pro forma Financial Information:
Pro forma Information B-1
Pro forma Condensed Combined Balance Sheet
as of October 31, 1996 B-2
Pro forma Condensed Combined Statement of
Operations for the year ended
October 31, 1996 B-3
Notes to Pro forma Condensed Combined
Financial Statements B-4
(c) Exhibits:
Exhibit 23 - Consent of KPMG Peat Marwick LLP
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)
Date: June 6, 1997 By /s/ J. Lawrence McIntyre
------------------------
J. Lawrence McIntyre
Vice President, Secretary and
General Counsel
INDEPENDENT AUDITORS' REPORT
_______________
To the Board of Directors of
The Toro Company:
We have audited the accompanying combined balance sheet of James Hardie
Irrigation (a division of James Hardie Irrigation, Inc.), James Hardie
Irrigation Pty Limited and James Hardie Irrigation Europe S.p.A. (collectively,
"the James Hardie Irrigation Group") as of December 1, 1996 and the related
combined statements of operations, divisional/shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the James Hardie Irrigation Group management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in Note 12 to the combined financial statements, effective December
1, 1996, the James Hardie Irrigation Group was acquired by The Toro Company.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the James
Hardie Irrigation Group as of December 1, 1996 and the results of their combined
operations and their combined cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 5, 1997
A-1
JAMES HARDIE IRRIGATION GROUP
COMBINED BALANCE SHEET
December 1, 1996
________
ASSETS:
Current assets:
Cash and cash equivalents $ 971,435
Trade accounts receivable, less allowances of $4,515,780 24,067,044
Inventories 31,049,363
Prepaid and other current assets 812,690
Deferred income taxes 6,604,735
-----------
Total current assets 63,505,267
Property, plant and equipment, net 28,726,283
Intangible assets, net 2,978,390
Other assets 3,045,283
Deferred income taxes 475,202
-----------
Total assets $ 98,730,425
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank overdrafts $ 2,602,051
Trade accounts payable 9,707,770
Accrued expenses and other liabilities 9,716,496
Payable to affiliates 412,285
Loans due to the U.S. Parent and affiliates 48,812,721
-----------
Total current liabilities 71,251,323
Severance liability 249,154
-----------
Total liabilities 71,500,477
-----------
Commitments and contingencies (Note 8)
Shareholders' equity:
Share capital 10,288,675
Additional paid-in capital 48,108,308
Accumulated deficit (30,308,914)
Foreign currency translation adjustment (858,121)
-----------
Total shareholders' equity 27,229,948
-----------
Total liabilities and shareholders' equity $ 98,730,425
-----------
-----------
The accompanying notes are an integral part of the combined financial statements
A-2
JAMES HARDIE IRRIGATION GROUP
COMBINED STATEMENT OF OPERATIONS
Year ended December 1, 1996
________
Net sales $142,861,091
Other revenues 1,013,254
------------
Total revenues 143,874,345
Cost of sales 101,071,541
------------
Gross profit 42,802,804
Selling, general and administrative expenses 40,612,641
Research and development expenses 1,184,738
------------
Operating income 1,005,425
Interest expense to third parties 82,914
Management fees and other expenses to the U.S. Parent
and affiliates 791,379
Interest expense to the U.S. Parent and affiliates 3,348,899
Interest income from the U.S. Parent and affiliates (1,363,510)
Other income, net (6,604,573)
------------
Income before income taxes 4,750,316
Income tax benefit (513,433)
------------
Net income $ 5,263,749
------------
------------
The accompanying notes are an integral part of the combined financial
statements.
A-3
JAMES HARDIE IRRIGATION GROUP
COMBINED STATEMENT OF DIVISIONAL/SHAREHOLDERS' EQUITY
Year ended December 1, 1996
________
Accumulated Foreign Total
Number of Additional Deficit/ Currency Divisional/
Shares Share Paid-In Divisional Translation Shareholders'
Outstanding Capital Capital Equity Adjustment Equity
------------ --------- ------------ ------------ ------------ ---------------
James Hardie Irrigation
at December 1, 1995 - $ - $ - $7,464,315 $ - $ 7,464,315
James Hardie Irrigation Pty
Limited at December 1, 1995 12,000,000 8,951,884 - (21,523,466) - (12,571,582)
James Hardie Irrigation
Europe S.p.A. at
December 1, 1995 2,090 1,308,786 632,475 (2,005,135) - (63,874)
---------- ----------- ----------- ------------ --------- ------------
Combined balances,
December 1, 1995 12,002,090 10,260,670 632,475 (16,064,286) - (5,171,141)
Net income - - - 5,263,749 - 5,263,749
Issuance of common stock
by James Hardie Irrigation
(Hardie U.S.) 1,000 10 19,508,367 (19,508,377) - -
Issuance of preference
shares by James Hardie
Irrigation Pty Limited
(Hardie Australia) 34,538 27,995 27,967,466 - - 27,995,461
Foreign currency translation
adjustment - - - - (858,121) (858,121)
----------- ----------- ----------- ------------ --------- ------------
Balance, December 1, 1996 12,037,628 $10,288,675 $48,108,308 ($30,308,914) ($858,121) $27,229,948
----------- ----------- ----------- ------------ --------- ------------
----------- ----------- ----------- ------------ --------- ------------
The accompanying notes are an integral part of the combined financial statements
A-4
JAMES HARDIE IRRIGATION GROUP
COMBINED STATEMENT OF CASH FLOWS
Year ended December 1, 1996
_______________
Cash flows from operating activities:
Net income $5,263,749
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,670,701
Loss on writedown and disposal of assets 795,370
Gain on sale of investment (7,065,294)
Deferred income taxes (137,767)
Changes in operating assets and liabilities:
Trade accounts receivable 1,366,199
Inventories 9,382,667
Prepaid and other current assets 438,178
Receivable from the U.S. Parent and affiliates (1,792,445)
Trade accounts payable 1,838,819
Accrued expenses and other liabilities 1,709,905
Increase in severance liability 41,457
----------
Net cash provided by operating activities 17,511,539
----------
Cash flows from investing activities:
Capital expenditures (5,022,051)
Increase in purchased software (859,873)
Decrease in other assets 281,780
----------
Net cash used in investing activities (5,600,144)
----------
Cash flows from financing activities:
Decrease in loans due to the U.S. Parent and affiliates (10,333,314)
Decrease in bank overdrafts (4,034,936)
----------
Net cash used in financing activities (14,368,250)
Effect of exchange rate changes on cash (43,802)
----------
Net decrease in cash and cash equivalents (2,500,657)
Cash and cash equivalents at beginning of year 3,472,092
----------
Cash and cash equivalents at end of year $971,435
----------
----------
Supplemental disclosure of cash flow information:
Interest paid to third parties $82,900
Interest paid to affiliates $3,628,000
The accompanying notes are an integral part of the combined financial statements
A-5
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
1. Basis of Presentation and Summary of Significant Accounting Policies:
THE COMPANIES
The combined financial statements of the James Hardie Irrigation Group (the
"Companies") have been prepared by combining the assets, liabilities,
divisional and shareholders' equity, results of operations and cash flows
of James Hardie Irrigation, a division of James Hardie Irrigation, Inc.
("Hardie U.S."), (a wholly owned subsidiary of J.H. Industries (USA), Inc.
(the "U.S. Parent")), James Hardie Irrigation Pty Limited ("Hardie
Australia"), a corporation organized under the laws of South Australia, and
James Hardie Irrigation Europe S.p.A. ("Hardie Europe"), a corporation
organized under the laws of Italy. The effects of all transactions between
the Companies have been eliminated in the combined financial statements.
Prior to the sale discussed in Note 12, the Companies were owned directly
or indirectly by an Australian company, James Hardie Industries Limited,
the ultimate parent company (the "Parent").
The Companies manufacture and distribute products for the landscape and
agricultural irrigation industries and market a wide selection of products
for residential and commercial irrigation applications. The Companies are
headquartered in Laguna Niguel, California; Beverly, South Australia; and
Fiano Romano, near Rome, Italy. The Companies also have production and
distribution facilities in various locations in the United States and
Australia.
Effective December 1, 1996 all of the issued and outstanding
shares of the Companies were acquired by The Toro Company ("Toro"). See
Note 12 to these combined financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash balances and all highly liquid
investments with original maturities of three months or less at the date of
purchase. The Companies maintain cash accounts with established commercial
banks.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximate actual cost utilizing the first-in,
first-out ("FIFO") method. The Companies maintain inventory allowances for
slow-moving and obsolete inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation of buildings, plant and
equipment is computed using the straight-line method based on the estimated
useful lives ranging from 3 to 40 years.
Continued
A-6
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
1. Basis of Presentation and Summary of Significant Accounting Policies,
Continued:
PROPERTY, PLANT AND EQUIPMENT, CONTINUED
Leasehold improvements are amortized on the straight-line basis over their
estimated economic useful lives or the life of the lease, whichever is
shorter.
Expenditures for maintenance and repairs are expensed as incurred. Costs
of major replacements and betterments are capitalized.
TOOLING COSTS
Perishable tooling costs are charged to expense in the year incurred.
Certain non-perishable tooling costs are capitalized in machinery and
equipment and depreciated over estimated useful lives which range from 3 to
8 years.
INTANGIBLE ASSETS
Intangible assets are stated at cost or at fair value as of the date
acquired in a business combination accounted for as a purchase, less
accumulated amortization. Amortization of intangible assets is computed on
a straight-line basis over their estimated useful lives of 17 years for
patents and 20 years for goodwill.
Goodwill is comprised of the excess of cost over the fair value of the net
assets of businesses acquired in purchase transactions. The Companies'
management periodically evaluates the realizability of goodwill, and
impairment losses, if any, are recognized when the expected nondiscounted
future operating cash flows derived from such assets are less than their
carrying value. During the year ended December 1, 1996, the
Companies adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 requires that long-lived assets
and certain identifiable intangible assets to be held and used be reviewed
for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable. The adoption of
SFAS No. 121 did not have any impact on the financial position, results of
operations, or cash flows of the Companies.
INCOME TAXES
The Companies are subject to taxation under applicable tax laws in the
United States, Australia, Italy and Greece. Hardie U.S. is included in
the consolidated tax return filed by the U.S. Parent, which is responsible
for making tax payments on behalf of the subsidiaries included in the
consolidated group. These tax payments are allocated to the various
members of the consolidated group through the intercompany accounts.
Hardie Australia and Hardie Europe file income tax returns and pay income
taxes on their own behalf. In the event of a taxable loss incurred by
Hardie Australia, the tax loss is transferred to the Parent or an affiliate
and the tax benefit is allocated to Hardie Australia.
Continued
A-7
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
1. Basis of Presentation and Summary of Significant Accounting Policies,
Continued:
INCOME TAXES, CONTINUED
The Companies account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which prescribes an asset and liability
approach. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
The provision for income taxes includes federal, state and foreign income
taxes currently payable as if each of the Companies had filed a separate
tax return, and those taxes deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
Such temporary differences primarily result from the use of accelerated
methods of depreciation for tax purposes, allowances for accounts
receivable, differences between book and tax inventory, and accrued
expenses.
REVENUE RECOGNITION
The Companies recognize revenue when product is shipped to customers. The
Companies provide an allowance for potential sales returns when the product
is shipped.
WARRANTY COSTS
The Companies provide for estimated warranty costs as products are shipped.
ADVERTISING EXPENSES
Advertising expenses are charged to operations in the year incurred and
totalled $1,291,465 for the year ended December 1, 1996.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense in the year incurred
in accordance with SFAS No. 2, "Accounting for Research and Development
Costs."
SELF-INSURANCE
Hardie U.S. is self-insured through the U.S. Parent for health-related
costs for each employee working in the United States, up to a maximum of
$75,000 per covered person per policy year or an aggregate stop loss of
125% of Expected Paid Claims, as defined in the insurance contract. Any
amounts in excess of this maximum are subject to reimbursement by the
insurance carrier. Provisions for claims expected under this program are
recorded by the U.S. Parent (and allocated to Hardie U.S.), including the
U.S. Parent's estimate of the aggregate liability for claims incurred but
not reported through the year ended December 1, 1996 based on historical
information.
Continued
A-8
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
1. Basis of Presentation and Summary of Significant Accounting Policies,
Continued:
SEVERANCE COSTS
Under Italian and Greek law, Hardie Europe accrues deferred compensation
which is payable to employees when employment is terminated for any reason.
The severance liability included in the combined financial statements
represents the estimated amount payable to employees, based upon their
compensation and an inflation index as of December 1, 1996.
CONCENTRATION OF CREDIT RISK
The Companies are engaged in the business of manufacturing and distributing
products for the landscape and agricultural irrigation industries primarily
throughout the United States and Australia to various retailers,
wholesalers and installation contractors. Concentration of credit risk
with respect to trade receivables for the Companies is limited due to the
large number of customers comprising the Companies' customer base, and
their dispersion across several geographical regions. The Companies
maintain allowances for potential credit losses. In general, the Companies
do not require collateral in relation to these trade receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial
instruments. Cash and cash equivalents, trade accounts receivable, trade
accounts payable, accrued expenses and other liabilities and amounts
currently due to and from affiliates approximate fair value because of the
short-term maturity of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities, and the
reported amounts of revenues and expenses. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of each of the Companies is the applicable local
currency. The functional currency is translated into U.S. dollars in
accordance with SFAS No. 52, "Foreign Currency Translation," which is
performed for the balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using
a weighted average exchange rate during the year ended December 1, 1996.
The gains or losses resulting from such translations are included in
equity. Gains and losses from foreign currency transactions are included
in income currently.
Continued
A-9
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
2. Inventories:
Inventories consist of the following components as of December 1, 1996:
Finished goods $24,941,786
Raw materials 6,259,933
Work-in-process 3,974,316
-----------
35,176,035
Less: Inventory valuation allowance (4,126,672)
-----------
$31,049,363
-----------
-----------
3. Property, Plant and Equipment:
Property, plant and equipment consists of the following components as of
December 1, 1996:
Machinery and equipment $62,151,772
Buildings and improvements 11,885,333
Furniture and fixtures 1,364,615
Leasehold improvements 1,097,888
Land 1,391,522
Automobiles 1,011,927
Construction-in-progress 2,131,631
-----------
81,034,688
Less: Accumulated depreciation an
amortization (52,308,405)
-----------
$28,726,283
-----------
-----------
Construction-in-progress is primarily comprised of tooling and molds,
production machinery and equipment and certain computer equipment which has
not yet been placed in service.
Continued
A-10
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
4. Intangible Assets:
Intangible assets consist of the following components as of December 1,
1996:
Costs in excess of fair value of net assets of $7,642,904
businesses acquired
Patents and trade names 800,642
----------
8,443,546
Less: Accumulated amortization (5,465,156)
----------
$2,978,390
----------
----------
5. Other Assets:
Other assets consist of the following components as of December 1, 1996:
Purchased software $2,853,867
Deposits 191,416
----------
$3,045,283
----------
----------
In March 1994, Hardie U.S. suspended operations at its Carson City, Nevada
manufacturing facility and transferred the majority of the machinery and
equipment, inventory and personnel to other facilities of Hardie U.S. In
1995, the Carson City facility was held for sale and written down to its
net realizable value. Effective December 1, 1996, the Carson City land and
building were transferred to a subsidiary of the U.S. Parent.
In 1995, Hardie U.S. purchased satellite technology and computer software
from Sovran (PTY) Ltd. The acquired technology enables the operator to
control large irrigation systems from remote locations via computer.
Hardie U.S. is currently adapting the acquired technology to enhance its
line of irrigation products. As of December 1, 1996, Hardie U.S. has
capitalized $2,853,867 associated with the initial acquisition and
subsequent costs incurred to modify the then existing technology.
Amortization of these costs will commence upon the release of the new
product line to the market.
Continued
A-11
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
6. Income Taxes:
The following are the components of the income tax benefit income taxes
included in the combined statement of operations for the year ended
December 1, 1996. There was no provision for income taxes for Hardie Europe
for the year ended December 1, 1996.
Deferred:
U.S. Federal $10,800
Australian 499,433
U.S. State 3,200
-------
Income tax benefit $513,433
-------
-------
Deferred tax assets consist of the following components as of
December 1, 1996:
Gross deferred tax assets:
Inventory $1,885,744
Fixed assets 1,741,263
Allowance for doubtful accounts 786,724
Accrued expenses 3,122,513
Net operating loss carryforwards 937,137
Other 90,245
----------
Total deferred tax assets 8,563,626
Valuation allowance (1,483,689)
----------
Net deferred tax assets $7,079,937
----------
----------
Management has provided a valuation allowance against those net operating
loss carryforwards and temporary differences which will more likely than
not expire prior to utilization. This valuation allowance relates entirely
to the deferred tax assets of Hardie Europe. Management has not provided a
valuation allowance against deferred tax assets related to Hardie U.S. or
Hardie Australia, as management believes it is more likely than not that
sufficient taxable income will be generated in the foreseeable future to
realize these deferred tax assets. At December 1, 1996, net operating loss
carryforwards available to offset future taxable income of Hardie Europe
expire as follows:
March 1998 to March 1999 $2,033,000
March 1999 to March 2000 133,000
March 2000 to March 2001 368,000
----------
$2,534,000
----------
----------
Continued
A-12
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
6. Income Taxes, Continued:
The following is a reconciliation of the statutory U.S. federal tax rate
with the income tax rate effective for the Companies for the fiscal year
ended December 1, 1996:
U.S. statutory federal income rate 34.0%
State income rate, net of U.S. federal income tax benefit 5.3
Effect of U.S. permanent differences, net 4.0
Effect of foreign operations on income tax rate (54.1)
-----
Effective income tax rate (benefit) (10.8)%
-----
7. Accrued Expenses and Other Liabilities:
Accrued expenses and other liabilities consist of the following components
as of December 1, 1996:
Warranty $3,280,289
Advertising and promotion 639,906
Cooperative advertising 635,581
Vacation 1,869,472
Sales commissions 210,580
Accrued payroll 1,185,436
Deferred income 194,537
Other liabilities 1,700,695
----------
$9,716,496
----------
----------
8. Commitments and Contingencies:
The Companies conduct their operations from certain facilities that are
leased under operating leases over the next 3 to 7 years. There are
options to renew certain leases for additional periods of 2 to 5 years at
renegotiated rental amounts. Certain of these leases contain escalation
clauses and/or require the Companies to pay property taxes, insurance, and
maintenance costs. The Companies also lease certain vehicles and equipment
under operating lease agreements from various third parties with terms up
to 5 years.
Continued
A-13
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
8. Commitments and Contingencies, Continued:
The following are the remaining future minimum rental payments required
under the above operating leases for each of the next five years
ending December 1 and in total thereafter:
1997 $1,159,613
1998 586,455
1999 178,324
2000 17,010
2001 16,020
Thereafter 12,015
----------
$1,969,437
----------
----------
Rent expense was $1,117,494 for the year ended December 1, 1996.
Letters of credit are issued by the Companies during the ordinary course of
business, as required by certain vendor contracts. The Companies have
commitments for letters of credit totaling $3,097,981 at December 1, 1996.
The Companies are involved in certain asserted and unasserted potential
claims which have not been finally adjudicated. In the opinion of
management, the resolution of these matters will not have a material
adverse effect on the Companies' financial position or results of
operations.
9. Shareholders' and Divisional Equity:
At December 1, 1996, Hardie Australia had 100,000,000 authorized
ordinary shares and 34,538 authorized preference shares. All
authorized and issued shares have a par value of A$1 each. There were
12,000,000 ordinary shares and 34,538 preference shares issued and
outstanding at December 1, 1996. During 1996, certain loans due to
affiliates of Hardie Australia were repaid through the issuance of the
preference shares.
At December 1, 1996, Hardie U.S. had 25,000 shares of $.01 par value
common stock authorized, of which 1,000 shares were issued and
outstanding. During the year ended December 1, 1996, Hardie U.S.
recapitalized its divisional equity through the issuance of common
stock.
At December 1, 1996, Hardie Europe had 2,090 issued and outstanding shares
of stock with a par value of 1 Lit/million each.
10. Employee Benefit Plans:
The U.S. Parent sponsors a 401(k) defined contribution plan for Hardie U.S.
employees who have completed one year of service and are at least 21 years
of age. Employees may contribute up to 14% of their compensation on a
before-tax basis, subject to the maximum dollar amount allowed under
Section 404(a) of the Internal Revenue Code, as amended. The Company
matches 100% of each employee's contribution, limited to 6% of the
employee's compensation. Participants become immediately 100% vested in
their contributions and earnings thereon. All Company contributions vest
over a five-year period. The expense for Hardie U.S. related to this plan
was $360,487 for the year ended December 1, 1996.
Continued
A-14
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
10. Employee Benefit Plans, Continued:
The Parent also sponsors a defined contribution plan for employees of
Hardie Australia. Employees are eligible immediately upon commencement of
permanent employment, and may contribute up to 10% of their salary on a
before-tax basis. Hardie Australia provides a minimum benefit of at least
the superannuation guarantee amount determined by the Federal Government in
Australia (currently 6% of salary). Vesting is based on years of credited
service. Participants become immediately 100% vested in employee
contributions and earnings thereon. The expense for Hardie Australia
related to this plan was approximately $560,000 for the year ended December
1, 1996.
11. Related Party Transactions:
The Companies have short-term amounts receivable and payable to James
Hardie Industries Limited, the U.S. Parent and affiliates which are shown
net in the accompanying combined financial statements. These amounts are
related to various intercompany transactions including, among others, sales
of products to affiliates, purchases of product from affiliates, current
income taxes, and the allocation of certain operating expenses to the
Companies by James Hardie Industries Limited, the U.S. Parent and
affiliates. These amounts are due and payable on demand and do not bear
interest.
Sales of products to affiliates totaled approximately $1,600,000 for the
year ended December 1, 1996. Purchases of product from affiliates were
approximately $300,000 for the year ended December 1, 1996.
On June 12, 1996, Hardie Australia sold its investment interest in certain
depositary receipts issued by the Stichting Administration RIS
International Finance N.V. to an affiliate. This investment was acquired
in fiscal year 1988 at an initial cost of A$15,235,000 and was written down
to zero prior to the fiscal year ended December 1, 1996. Hardie Australia
did not receive cash in connection with this transaction but reduced an
intercompany payable account and recognized a gain of $7,065,294
(A$9,057,000) for the full amount of the sales price. This gain is
included in "other income, net" in the combined statement of operations.
Hardie U.S. has a loan payable to the U.S. Parent which bears interest at
the average six month LIBOR rate plus 0.4%. The effective interest rate on
this loan was 5.9% at December 1, 1996. The outstanding balance of this
loan was effectively repaid on December 2, 1996 when the companies were
acquired by The Toro Company. See Note 12 to these combined financial
statements.
Hardie Europe has a loan due to James Hardie Holdings Ltd., which bears
interest at the one-month LIBOR plus 0.75%. The effective interest rate on
this loan was 6.102% at December 1, 1996. The principal amount of this
loan is $5,000,000. In addition, Hardie Europe has a non-interest bearing
loan totaling $2,133,375 due to RIS International Finance N.V.. This loan
is denominated in Italian Lira. This loan was effectively repaid on
December 2, 1996 when the companies were acquired by The Toro Company. See
Note 12 to these combined financial statements.
Continued
A-15
JAMES HARDIE IRRIGATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 1, 1996
_______________
11. Related Party Transactions, Continued:
Hardie U.S. receives interest income from or pays interest expense to the
U.S. Parent based upon the level of working capital employed. Hardie U.S.
also pays a management fee to the U.S. Parent and is allocated certain
general and administrative expenses.
12. Sale of the Company:
On September 18, 1996, the Parent entered into an agreement to sell
all of the issued and outstanding shares of the Companies to The Toro
Company for an initially estimated purchase price of $131,500,000.
The closing date purchase price was subsequently adjusted to
$119,125,000 based on the estimated unaudited aggregate shareholders'
equity on December 1, 1996. Based upon the shareholder's equity of
the Companies as of the closing date, the purchase price has been
reduced by approximately $10,545,000. In addition, under the
procedures established in the purchase agreement, Toro has delivered
a letter of objections to James Hardie, Ltd. 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.
A-16
The Toro Company
Unaudited Pro Forma Condensed Combined Financial Statements
Effective December 1, 1996, The Toro Company acquired the James Hardie
Irrigation Group ("Hardie") from James Hardie, Ltd. 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, Ltd. to Toro. In addition,
under the procedures established in the purchase agreement, Toro has delivered a
letter of objections to James Hardie, Ltd. 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 method of accounting 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 unaudited pro forma condensed combined balance sheet and results of
operations are based on available information and certain assumptions regarding
the allocation of the purchase price, which could change significantly based on
the results of appraisals and finalization of the purchase price as a result of
the resolution of the objections discussed in the preceeding paragraph and other
analysis.
The accompanying pro forma condensed combined financial statements present the
effect of the acquisition on The Toro Company's financial position at October
31, 1996 and results of operations for the year then ended as if the acquisition
had taken place on October 31, 1996 with respect to the balance sheet and
November 1, 1995 with respect to the statement of operations. These pro forma
condensed combined financial statements were prepared utilizing The Toro
Company's October 31, 1996 balance sheet and results of operations for the year
then ended and Hardie Irrigation Group's December 1, 1996 balance sheet and
results of operations for the year then ended.
The pro forma condensed combined results of operations may not be indicative of
actual results which would have been obtained if the acquisition had occurred on
November 1, 1995.
B-1
The Toro Company
Unaudited Pro Forma Condensed Combined Balance Sheet
October 31, 1996
(Dollars in thousands)
Hardie
The Toro Irrigation The Toro
Company Group Pro forma Company
(Historical) (Historical) adjustments (Pro forma)
---------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 66 971 1,037
Receivables, net 239,637 24,067 263,704
Inventories 130,288 31,049 161,337
Other current assets 35,010 7,418 42,428
---------- ---------- ----------
Total current assets 405,001 63,505 468,506
---------- ---------- ----------
Property, plant and equipment,
net 73,810 28,727 102,537
Other assets 18,066 6,498 43,625 (1) 68,189
---------- ---------- ---------- ----------
Total assets $ 496,877 98,730 43,625 639,232
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES AND EQUITY
Bank overdrafts $ - 2,602 2,602
Current portion of long-term
debt 350 - 350
Short-term borrowing 41,025 - 119,667 (2) 160,692
Accounts payable and accrued
liabilites 166,482 19,837 186,319
Payable to affiliates - 48,813 (48,813) (1) -
---------- ---------- ---------- ----------
Total current liabilities 207,857 71,252 70,854 349,963
---------- ---------- ---------- ----------
Long-term debt, less current
portion 53,015 - 53,015
Other long term liabilities 22,438 249 22,687
---------- ---------- ---------- ----------
Total liabilities 283,310 71,501 70,854 425,665
Common shareholders' equity 213,567 27,229 (27,229) (1) 213,567
---------- ---------- ---------- ----------
Total liabilities and
common stockholders'
equity $ 496,877 98,730 43,625 639,232
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
B-2
The Toro Company
Unaudited Pro Forma Condensed Combined Statement of Operations
Year ended October 31, 1996
(in thousands, except per share amounts)
Hardie
The Toro Irrigation The Toro
Company Group Pro forma Company
(Historical) (Historical) adjustments (Pro forma)
--------------------------------------------------------------------
Net sales $ 930,909 143,874 $ 1,074,783
Cost of goods sold 589,186 101,072 690,258
----------- ---------- -----------
Gross profit 341,723 42,802 384,525
Selling, general and
administrative expenses 278,284 41,798 2,181 (3) 321,881
(382) (5)
----------- ---------- ---------- -----------
Earnings from operations 63,439 1,004 (1,799) 62,644
Interest expense to third parties 13,590 82 9,063 (4) 22,735
Management fees to affiliates - 791 (791) (5) -
Interest expense to affiliates - 3,349 (3,349) (5) -
Interest income from affiliates - (1,364) 1,364 (5) -
Other income, net (10,331) (6,605) 7,065 (6) (10,377)
(506) (5)
----------- ---------- ---------- -----------
Earnings before income
taxes 60,180 4,751 (14,645) 50,286
Income tax provision (benefit) 23,771 (513) (3,395) (7) 19,863
----------- ---------- ---------- -----------
Net earnings $ 36,409 5,264 (11,250) $ 30,423
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Net earnings per share of
common stock and
common stock equivalent $ 2.90 $ 2.42
----------- -----------
----------- -----------
Weighted average shares of
common stock and common
stock equivalents outstanding
for the year (primary and fully 12,554,715 12,554,715
diluted) ----------- -----------
----------- -----------
B-3
The Toro Company
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
and Statement of Operations
1. Adjustments to reflect the acquisition of James Hardie Irrigation Group
and the allocation of the estimated purchase price and related capitalized
acquisition costs on the basis of estimated fair values of assets acquired
and liabilities assumed. The actual purchase price is based on the assets
acquired and liabilities assumed as of December 1, 1996, and is subject to
adjustment based on final audit results.
Hardie shareholder's equity at December 1, 1996 $ 27,229
Plus liabilities not assumed 48,813
Excess of purchase price over net book value of
assets acquired, including $16,725 of
estimated capitalized acquisition costs 43,625
-----------
$ 119,667
-----------
-----------
2. The acquisition has initially been financed with temporary short-term bank
debt; however, the Company has filed a shelf registration for issuance of
public debt which would replace all or a portion of the short-term debt
with long-term debt.
3. Represents amortization of the excess purchase price on a straight-line
basis over 20 years.
4. Additional interest expense related to the acquisition, assuming average
borrowings for acquisition debt and Hardie working capital of $125 million
at an annual interest rate of 7.25% representing the approximate average of
the long and short-term rates for the year. See Note 2 above regarding the
acquisition debt.
5. Represents intercompany interest income, interest expense, management fees
and other expenses to affiliates of Hardie which will not be recurring after
the acquisition.
6. In June 1996, Hardie sold a depositary receipt and realized a gain of
$7,065. This gain is not expected to be a recurring item subsequent to the
acquisition.
7. Represents the adjustment to tax expense required to arrive at a
combined pro forma tax rate of 39.5%. The income tax rate is based on
The Toro Company's tax structure.
B-4
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
The Toro Company:
We consent to the incorporation by reference in the registration statements of
The Toro Company on Forms S-3 and S-8 (File Nos. 33-26268, 33-31586, 33-38308,
33-44668, 33-51563, 33-55550, 33-59563, 333-4521, and 333-20901) of our report
dated June 5 , 1997, relating to our audit of the combined balance sheet of the
James Hardie Irrigation Group as of December 1, 1996, and the related combined
statements of operations, divisional/shareholders' equity and cash flows for the
year then ended, which report appears elsewhere in this Form 8-K/A.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 6, 1997
