- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended July 31, 1995
--------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------------- --------
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)
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
par value $1.00 per share
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the close price of the Common Stock on October 31, 1995
as reported on the New York Stock Exchange, was approximately $300,141,881.
The number of shares of Common Stock outstanding as of October 31, 1995 was
12,167,835.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended July 31, 1995, are incorporated by reference into Parts I, II and IV.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
IDENTIFICATION OF DIRECTORS. Following is a list of directors of the
Registrant at the date hereof. No director was or is to be selected as a
director or nominee pursuant to any arrangement or understanding between him
or her and any other person.
Janet K. Cooper, age 42. Vice President and Treasurer since July 1992, The
Quaker Oats Company, Chicago, Illinois (foods and beverages). She previously
served as Assistant Treasurer from March 1990 to July 1992, as
Director-Planning of North American Foods from September 1989 to March 1990
and as Director-Planning of Grocery Specialties and Market Development for
The Quaker Oats Company. First elected to the Toro Board in 1993, she is
also a member of the Audit Committee and the Nominating Committee. Ms.
Cooper is a director of Midwest Region Advisory Board of Arkwright Insurance
Company.
William W. George, age 53. President and Chief Executive Officer since May
1991, Medtronic, Inc., Minneapolis, Minnesota (therapeutic medical devices
manufacturing and marketing). He also served as President and Chief
Operating Officer from March 1989 to May 1991. First elected to the Toro
Board in 1989, he is also a member of the Audit Committee, the Nominating
Committee and the Executive Committee. Mr. George is a director of The
Valspar Corporation, Medtronic, Inc. and Dayton Hudson Corporation,
Minneapolis, Minnesota.
Kendrick B. Melrose, age 55. Chairman of Toro since December 1987 and Chief
Executive Officer of Toro since December 1983. Employed by The Toro Company
since 1970. Mr. Melrose is also Chairman of the Executive Committee and an
ex-officio member of the Nominating Committee. First elected to the Toro
Board in February 1981.
Mr. Melrose has served in various executive capacities during his employment
with the Registrant. He was named Chairman in December 1987, served as
President from February 1981 through December 1988 and has been Chief
Executive Officer since December 1983. Mr. Melrose is a director of The
Valspar Corporation, Donaldson Company, Inc. and BSI Corporation,
Minneapolis, Minnesota.
Alex A. Meyer, age 64. Retired. From January 1986 through April 1992 was
Senior Vice President of Amana Refrigeration, Inc., a subsidiary of Raytheon,
Inc., Amana, Iowa (manufacturing). First elected to the Toro Board in 1986,
he is also a member of the Audit Committee and the Compensation Committee.
Mr. Meyer is a director of Cedar Income Fund, Ltd., Cedar Rapids, Iowa.
Robert H. Nassau, age 53. Since September 1994, Senior Vice President Ply
Gem Industries, Inc., New York, New York and President and CEO of the
Goldenberg Group, its wholly-owned subsidiary. President and Chief Executive
Officer, Allied Plywood Corporation, Concord, Massachusetts, a wholly-owned
subsidiary of Ply-Gem Industries, Inc. (wood distribution and manufacturing)
from July 1991 to present. From 1989 to 1991, he was a private investor.
First elected to the Toro Board in 1988, he is also a member of the
Compensation Committee and the Nominating Committee.
Dale R. Olseth, age 65. President and Chief Executive Officer since November
1986, BSI Corporation (formerly Bio-Metric Systems, Inc.), Eden Prairie,
Minnesota (biotechnology). First elected to the Toro Board of Directors in
1980, he is also Chairman of the Compensation Committee and a member of the
2
Audit Committee and the Executive Committee. Mr. Olseth is a director of
Graco, Inc.
Edwin H. Wingate, age 63. Senior Vice President-Personnel since June 1980,
Dayton Hudson Corporation, Minneapolis, Minnesota (retailing). First elected
to the Toro Board in 1989, he is also a member of the Nominating Committee
and the Executive Committee.
IDENTIFICATION OF EXECUTIVE OFFICERS: Information regarding executive
officers as of July 31, 1995 has previously been reported. David H. Morris
retired from his position as President and Chief Operating Officer of
Registrant on November 1, 1995.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The rules of the
Securities and Exchange Commission require disclosure of late Section 16
filings by directors and executive officers of Registrant. Based solely on
review of copies of those filings received by the Company, or written
representations from certain persons that no Form 5 filings were required for
those persons, all Section 16(a) filing requirements applicable to directors
and executive officers have been met, except that one filing was made four
days late on behalf of Calvin R. Hendrix, an executive officer of Registrant.
3
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation paid for
services in all capacities to the Registrant for the Chief Executive Officer
and each of its four highest paid executive officers other than the Chief
Executive Officer for each of the past three fiscal years.
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Annual LTIP All Other
------------ ---- ---------
Salary Bonus Compensation Restricted Options Payouts Compensation
Name and ------ ----- ------------ ---------- ------- ------- ------------
Principal Position Year ($) ($)(1) ($)(2) Stock($)(3) (#)(4) ($)(5) ($)(6)
------------------ ---- --- ------ ------ ----------- ------ ------ ------
Kendrick B. Melrose 1995 380,000(7) 420,000 1,204,329 499,993 50,255 427,964 139,146
Chairman of the 1994 355,304(7) 227,652 123,628 -0- 44,921 317,529 100,029
Board, Chief 1993 337,760(7) 218,880 -0- -0- 67,208 245,102 45,443
Executive Officer & 28,835
Director
David H. Morris 1995 297,472 234,259 583,617 -0- 26,044 198,918 73,369
President, Chief 1994 293,556 132,100 53,388 -0- 23,710 153,544 59,242
Operating Officer & 1993 287,852 129,533 314,154 -0- 36,597 120,876 38,696
Director 18,388
Gerald T. Knight 1995 227,370 159,159 34,174 -0- 13,222 50,680 43,350
Vice President 1994 218,463 87,385 22,176 -0- 37,685 38,089 15,678
Finance & Chief 1993 211,575 64,245(8)(9) -0- -0- 24,788 See note(9) 2,950
Financial Officer
Calvin R. Hendrix 1995 201,990 141,393 12,655 -0- 11,513 45,023 -0-
Vice President & 1994 166,251 59,829(10) -0- 210,000 14,030 28,976 -0-
General Manager, 1993 -0- -0- -0- -0- -0- -0- -0-
Irrigation Division
Charles B. 1995 205,752 128,904 12,710 -0- 11,802 45,862 37,786
Lounsbury 1994 133,344 53,338 -0- 49,250 13,911 23,249 16,292
Vice President, 1993 -0- -0- -0- -0- -0- -0- -0-
Parts, Distribution
& Recycling
Equipment
(1) Amounts indicated include payments made or deferred at the election of
the officer pursuant to the 1995 Annual Management Incentive Plan, the 1994
Management Recovery Incentive Plan and the 1993 Management Turnaround
Incentive Plan. See the Compensation Committee Report.
(2) Includes the dollar value of the difference between the fair market value
and the option exercise price (before payment of applicable income taxes) on
stock options exercised in Fiscal 1995. Fair market value is based on the
closing price on the New York Stock Exchange as reported in THE WALL STREET
JOURNAL on the date of exercise or actual sale price. The value of executive
perquisites otherwise includable as Other Annual Compensation did not exceed
$50,000 or 10% of the compensation reported in the table for any named
individual.
(3) Amounts in column reflect the value of shares awarded as of the date of
award. Award of restricted stock to Mr. Melrose is subject to
performance-based conditions on vesting which, if not met, will result in
forfeiture of shares. A total of 17,467 shares (having the value set forth
in the table) were awarded to Mr. Melrose on July 31, 1995, under the Chief
Executive Officer
4
Succession Incentive Plan which was approved by stockholders in 1994. Those
shares vest 15% not later than July 31, 1998, 15% not later than July 31,
1999 and 70% not later than July 31, 2000, but only if Mr. Melrose achieves
performance goals related to planning for and implementing a plan for his
succession. Under that plan, the Registrant also granted Mr. Melrose
performance units. See Compensation Committee Report below. Mr. Hendrix was
awarded 8,400 shares of Restricted Stock in Fiscal 1994 in connection with
his employment with the Registrant. Shares vest 10% per year over ten years
and shares not vested are subject to forfeiture if his employment terminates.
The shares had a value of $240,450 at July 31, 1995. Mr. Lounsbury was
awarded 2,000 shares of Restricted Stock in Fiscal 1994 in connection with
his employment with the Registrant. Shares vest in their entirety on
November 29, 1995. The shares had a value of $57,250 on July 31, 1995. All
shares of restricted stock are held by the Registrant until performance goals
have been achieved or other restrictions lapse. Dividends will be paid, if
declared, on all shares of restricted stock reported. Amounts shown in the
Summary Compensation Table and in this note are calculated by multiplying the
closing price of Common Stock on the New York Stock Exchange as reported in
THE WALL STREET JOURNAL on the date of award or July 31, 1995 (the last day
of Fiscal 1995), respectively, times the number of shares awarded.
(4) Includes options granted pursuant to the Registrant's Continuous
Performance Award Plan, which are subject to cancellation or reduction in the
number of shares covered in the event the Registrant does not achieve its
performance goals. The number of shares covered by each option was reduced
with respect to Fiscal 1993, 1994 and 1995. Also includes options granted
pursuant to the Registrant's key employee stock option plans.
(5) Amounts reflect payments made pursuant to the Continuous Performance
Award Plan. Based on the Registrant's return on beginning equity ("ROBE")
performance compared with its peer group of businesses, payments of 89.16% of
the maximum possible award amount were paid or deferred with respect to
Fiscal 1995. For a description of the plan, see the Compensation Committee
Report.
(6) Amounts include Registrant contributions to defined contribution
retirement plans and the Registrant's Matching Stock Plan (which terminated
on July 31, 1995 and was replaced by a similar feature in the Registrant's
new Investment and Savings Plan) and allocations to the Registrant's Employee
Stock Ownership Plan. Also includes amounts accrued pursuant to the
Registrant's Supplemental Management Retirement Plan for executive officers
who receive annual compensation of $150,000 or more. Participants' accounts
are credited with an amount equal to the difference between the aggregate
amount that would have been allocated to tax-qualified profit-sharing and
other defined contribution plans without regard to limitations imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), and the aggregate
amount of contributions actually allocated. Although deferred funds remain a
part of the general assets of the Registrant, upon occurrence of a threat of
or change of control of the Registrant (as defined in the plan), or upon
election by a qualified participant to direct investment of the account, the
Registrant will transfer to a trust an amount in cash equal to the total
amount of all accrued benefits for all participants (or for the electing
participant, as the case may be).
(7) Amount reflects the $100,000 salary reduction for each fiscal year shown,
as discussed in the Compensation Committee Report.
(8) Includes Continuous Performance Award Plan payment with respect to a one
year transition
5
performance award. Payment is not included under LTIP Payouts column.
(9) Mr. Knight was paid $80,000 at the time of his employment by the
Registrant in April 1992, with the understanding that if the Registrant
reached its financial performance goal for Fiscal 1992 and Fiscal 1993, any
bonus payment to which he would be entitled under the Registrant's Management
Turnaround Incentive Plan would be reduced by $30,000 and $50,000,
respectively, for those years.
(10) Mr. Hendrix was paid $59,829 as a condition of his employment by the
Registrant.
OPTION GRANTS TABLE
The following table summarizes options granted under the Company's stock
option plans during the last fiscal year.
OPTION GRANTS IN FISCAL 1995
INDIVIDUAL GRANTS
-----------------
POTENTIAL
REALIZABLE VALUE
PERCENT AT ASSUMED
OF TOTAL ANNUAL RATES OF
OPTIONS EXERCISE STOCK PRICE
GRANTED TO OR MARKET APPRECIATION
OPTIONS EMPLOYEES BASE PRICE ON FOR OPTION TERM
GRANTED IN PRICE ($ DATE OF EXPIRATION ---------------------
NAME (#) (1) FISCAL 1995 PER SHARE) GRANT (2) DATE 5%$(3) 10%$(3)
- --------------------------------------------------------------------------------------------------------------
Kendrick B. Melrose 21,891(4) 6.76 24.12 22.375 (4) $49,617 $147,972
28,364 8.76 23.625 23.625 08/16/99 185,136 409,102
David H. Morris 10,432(4) 3.22 24.12 22.375 (4) 23,645 70,515
15,612 4.82 23.625 23.625 08/16/99 101,902 225,177
Gerald T. Knight 2,588(4) 0.80 24.12 22.375 (4) 5,866 17,494
10,634 3.28 23.625 23.625 08/16/99 69,410 153,377
Calvin R. Hendrix 2,295(4) 0.70 24.12 22.375 (4) 5,202 15,513
9,218 2.84 23.625 23.625 08/16/99 60,167 132,954
Charles B. Lounsbury 2,347(4) 0.72 24.12 22.375 (4) 5,320 15,865
9,455 2.92 23.625 23.625 08/16/99 61,714 136,372
(1) Options are granted pursuant to the 1989 Stock Option Plan and the 1993
Stock Option Plan (the "plans"). The plans are administered by the
Compensation Committee which selects employees to whom options are granted.
The exercise price of each incentive stock option is equal to 100% of the
fair market value of the Common Stock on the date of grant. The exercise
price of each nonqualified stock option may be determined by the Committee.
The options are not transferable except by will or the laws of descent and
distribution. An option granted under any of the plans, except in connection
with the Continuous Performance Award Plan, may first be exercised six months
after the date of grant in whole or in part as specified in the option
agreement until the expiration of the option. Most options are subject to
cancellation upon termination of the option holder's employment; however,
some nonqualified stock options can be exercised for up to four years
following retirement at or after age 60, but not later than the expiration
date of the option.
6
(2) Based on the closing price on the New York Stock Exchange as reported in
THE WALL STREET JOURNAL.
(3) SEC rules require the information set forth in the 5% and 10% columns. The
actual gains, if any, on stock option exercises depend on the future performance
of the Registrant's Common Stock. Since there is no means of accurately
predicting the future price of the Registrant's Common Stock, no determination
can be made as to any future value of a stock option at the time of grant.
(4) Number of shares and exercisability subject to reduction if performance
goals are not achieved. Expected to become exercisable in September 1997, after
the Registrant first makes a public announcement of its earnings for Fiscal
1997. Expiration date will be 90 days later. For more information, see the
Compensation Committee Report.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUE TABLE
The following table summarizes stock options exercised by the named executive
officers during the last fiscal year and the total number of options held by
each listed individual as of the end of Fiscal 1995.
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JULY 31, 1995 (#) JULY 31, 1995 ($)(1)
SHARES --------------------------------------------------
ACQUIRED ON VALUE UNEXER- UNEXER-
NAME EXERCISE (#) REALIZED ($) EXERCISABLE CISABLE EXERCISABLE CISABLE
- -------------------------------------------------------------------------------------------------
Kendrick B. Melrose 85,115 1,204,329 215,052 282,132(2) 2,810,506 3,615,704(2)
David H. Morris 63,521 583,617 0 40,438(2) 0 417,338(2)
Gerald T. Knight 2,757 34,174 35,482 9,934(2) 364,220 102,384(2)
Calvin R. Hendrix 1,534 12,655 15,458 7,885(2) 77,416 65,540(2)
Charles B. Lounsbury 1,240 12,710 15,855 8,080(2) 77,998 67,186(2)
(1) Market value less option exercise price before payment of applicable
income taxes. Market value based on July 31,1995 closing price on the New
York Stock Exchange as reported in THE WALL STREET JOURNAL.
(2) Includes options subject to reduction under Continuous Performance Award
Plan based on level of achievement of performance goals.
7
LONG TERM INCENTIVE PLAN AWARDS TABLE
The following table summarizes all awards of long-term incentive compensation
made under the Registrant's Continuous Performance Award Plan to the named
individuals during Fiscal 1995 and to Mr. Melrose under the Chief Executive
Officer Succession Incentive Plan. Amounts paid pursuant to the Continuous
Performance Award Plan during Fiscal 1995 are set forth in the Summary
Compensation Table which appears elsewhere in this amended Form 10-K.
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
PRICE-BASED PLANS (3)
----------------------------------------
PERFORMANCE
NUMBER OF OR OTHER
SHARES, UNITS PERIOD UNTIL
OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ---------------------------------------------------------------------------------------------------------------------------
Kendrick B. Melrose 1 Award(1) 3 fiscal years(2) $12,794 $479,163 $537,424
21,891 shares
17,467 Performance Units(4) 5 fiscal years
David H. Morris(5) 1 Award(1) 3 fiscal years(2) -0- -0- -0-
10,432 shares
Gerald T. Knight 1 Award(1) 3 fiscal years(2) 1,560 58,419 65,522
2,588 shares
Calvin R. Hendrix 1 Award(1) 3 fiscal years(2) 1,329 49,772 55,824
2,295 shares
Charles B. Lounsbury 1 Award(1) 3 fiscal years(2) 1,354 50,705 56,871
2,347 shares
(1) An award is the right to receive designated target percentages of annual
salary at the end of the performance period if the Registrant achieves
financial performance objectives, based on return on beginning stockholders
equity compared with ROBE rankings of the Registrant's peer group of
competitors, as established by the Compensation Committee, pursuant to the
Continuous Performance Award Plan. The value of an award is based on a
participant's estimated base compensation (increased by $100,000 in the case
of Mr. Melrose to reflect the salary reduction plan) to be paid during the
last fiscal year of an award term (which is normally 3 years), multiplied by
an individual performance factor determined by the Committee, which is
intended to reflect the participant's ability to implement policy decisions
which influence the financial results of the Registrant or its divisions or
subsidiaries. Each award recipient also receives an option to purchase
shares of the Registrant's Common Stock if performance goals are achieved.
See the Compensation Committee Report for additional information on the
Continuous Performance Award Plan.
(2) The three year performance period under the Continuous Performance Award
Plan includes Fiscal 1995, 1996 and 1997.
(3) Calculated based on estimated Fiscal 1997 salaries pursuant to the
Continuous Performance Award Plan.
8
(4) The number of performance units granted under the Chief Executive Officer
Succession Incentive Plan on July 31, 1995 was based on the number of whole
shares of Common Stock having an aggregate fair market value of $500,000, and
is subject to reduction or forfeiture for failure to meet performance goals.
The value of the performance units will fluctuate with the value of the
Common Stock, but not below the July 31, 1995 value. The cash value
remaining at the time of Mr. Melrose's retirement is to be used to purchase a
retirement annuity for Mr. Melrose's benefit.
(5) Mr. Morris resigned as an officer of the Registrant effective November 1,
1995, and accordingly the award made will lapse and no payout will be made.
COMPENSATION OF DIRECTORS
Board compensation for outside directors includes an annual retainer, meeting
fees and an annual Common Stock grant having a $5,000 market value, pursuant
to The Toro Company 1992 Directors Stock Plan (the "Directors Plan"). During
Fiscal 1995, each outside director was paid an annual retainer of $12,000
plus a fee of $1,000 for each meeting of the Board or a committee attended,
except that no more than one committee meeting fee was paid for committee
meetings held in a single day. In addition, pursuant to the Directors Plan,
each outside director was granted shares of the Common Stock having a value
of $5,000 (valued at the average of the closing prices of the Common Stock
from May 1 through July 31). The Registrant also supplies directors with
certain products for their personal use.
On October 17, 1995, the Board took action to increase the annual retainer
from $12,000 to $15,000, to become effective January 1, 1996, and to amend
the Directors Plan to provide for an annual stock option award, effective
November 1, 1995, subject to stockholder approval.
An outside director may elect to receive the annual retainer fee and meeting
fees in cash or shares of Common Stock, or a combination of both. Shares
issued pursuant to this alternative may be authorized but unissued Common
Stock or shares of Common Stock held in the Registrant's treasury.
An outside director may elect to defer receipt of any portion of or all Board
compensation until a future date or until occurrence of specified events,
including disability or death, resignation, retirement or other termination
from the Board. Distribution of deferred amounts may be accelerated at the
discretion of the Board of Directors. Amounts deferred are not subject to
federal and state income tax until received by the participant, are
commingled with the Registrant's general operating funds and earn interest at
the average prime rate charged by First Bank National Association,
Minneapolis, Minnesota. Although deferred funds remain a part of the general
assets of the Registrant, upon occurrence of a threat of or change of control
of the Registrant (as defined in the plan), or upon election by a qualified
participant to direct investment of the participant's account, the Registrant
will transfer to a trust an amount in cash equal to the total amount of all
accrued compensation and interest for all participants or for the electing
participant, as the case may be. Amounts deferred will be paid to the
director at retirement or such other time as may be permitted by the plan.
Under a director retirement plan, an outside director who has completed five
years of service and ceases to be a member of the Board of Directors for any
reason is entitled to receive, for a period of years equal to the number of
full years the director served on the Board but not more than ten years, an
annual payment equal to the amount paid as an annual retainer not to exceed
$12,000 to outside directors at the date of termination. In the event of the
death of a director
9
who qualifies for the plan, the retirement benefit will be paid to the
director's beneficiary, in quarterly or annual installments or a lump sum
(discounted to then present value), as previously elected by the director.
Each director is also a party to an indemnification agreement which assures
the director of indemnification and advancement of expenses to the fullest
extent permitted by Delaware law and the Registrant's Certificate of
Incorporation (regardless of, among other things, any amendment to or
revocation of the Certificate of Incorporation, any change in the composition
of the Board of Directors or the occurrence of any acquisition of the
Registrant) and of continued coverage under the Registrant's directors and
officers liability insurance, to the extent it is maintained.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Each of the executive officers, including those named in the Summary
Compensation Table, have change in control agreements (the "Agreements") with
the Registrant. The Agreements are operative only upon the occurrence of a
"change in control", which includes substantially those events described
below. Absent a "change-in-control", the Agreements do not require the
Registrant to retain the executives or to pay them any specified level of
compensation or benefits.
Each Agreement provides that for three years after a "change in control"
there will be no adverse change in the executive's salary, bonus,
opportunity, benefits or location of employment. If during this three-year
period the executive's employment is terminated by the Registrant other than
for cause, or if the executive terminates his employment for good reason (as
defined in the Agreements, and including compensation reductions, demotions,
relocation and excess travel), or voluntarily during the 30-day period
following the first anniversary of the "change in control", the executive is
entitled to receive an accrued salary and annual incentive payment through
the date of termination and, except in the event of death or disability, a
lump sum severance payment ("Lump Sum Payment") equal to three times the sum
of his base salary and annual bonus (and certain insurance and other welfare
plan benefits). Further, an additional payment ("gross-up") is required in
an amount such that after the payment of all taxes, income and excise, the
executive will be in the same after-tax position as if no excise tax under
the Code had been imposed.
Generally, and subject to certain exceptions, a "change-in-control" is deemed
to have occurred if: (a) a majority of Toro's Board of Directors becomes
comprised of persons other than persons for whose election proxies have been
solicited by the Board, or who are then serving as directors appointed by the
Board to fill vacancies caused by death or resignation (but not removal) of a
director or to fill newly created directorships; (b) another party becomes
the beneficial owner of at least 20% of Toro's outstanding voting stock; or
(c) Toro's stockholders approve a definitive agreement or plan to merge or
consolidate Toro with another party (other than certain limited types of
mergers), exchange shares of voting stock of Toro for shares of another
corporation pursuant to a statutory exchange, sell or otherwise dispose of
all or substantially all of Toro's assets, or liquidate or dissolve Toro.
If a "change in control" of the Registrant had occurred at the commencement
of the 1995 calendar year (January 1, 1995) and had resulted in the
involuntary termination of the named executives at such time or the
termination by such executives for good reason, the Lump Sum Payment to be
made under such Agreements to those executive officers named in the Summary
Compensation Table above in the aggregate would have been approximately
$7,387,294. The
10
Registrant has also established a trust for the benefit of these officers
which, in the event of a threatened or actual change of control, will be
funded in an amount equal to the Registrant's accrued liability related to
such employment agreements.
The Registrant has a severance agreement in place for David H. Morris in
connection with his resignation as an officer and director of the Registrant,
effective November 1, 1995. Under the terms of the agreement, Mr. Morris
will remain a part-time employee until September 30, 1996, and will receive
compensation, including seven years of deferred compensation, of
approximately $640,000. As part of the agreement, Mr. Morris has agreed not
to become employed by certain competitors of the Registrant and otherwise not
to engage in certain competitive activity during the period of the agreement.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
For Fiscal 1995, the members of the Compensation Committee were all outside
members of the Board, and included Messrs. Olseth, Chairman, Meyer and
Nassau. Although Mr. Melrose is not a member of the Committee, he attends the
meetings for the purpose of providing continuity and specific information
about individuals and the Registrant's compensation plans. Mr. Melrose does
not participate in any option grant or award decisions or any decisions of
the Committee that might affect him personally. Mr. Melrose serves on the
Board of Directors and Compensation Committee of BSI Corporation of which Mr.
Olseth serves as president and chief executive officer. Mr. Olseth serves
on the Board of Directors and is Chairman of the Compensation Committee of
the Registrant.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for establishing compensation
policy and administering the compensation plan for executive officers of the
Registrant. The Registrant's compensation policies are intended to align
total compensation for its executive officers and employees with the
financial performance of the Registrant, as compared with the financial
results and compensation practices of companies with revenues in the $500
million to $1 billion range. While some of these companies are in the peer
group index (the Fortune 500 Industrial and Farm Equipment Group, excluding
companies for which data is unavailable), the Registrant relies on a broader
group of companies for comparative analysis of executive compensation because
the Committee believes that the Registrant's competitors for executive talent
are more varied than the peer group chosen for comparing stockholder returns
in the Performance Graphs set forth below.
The Registrant's compensation program for executive officers as well as other
key management is composed of cash compensation and equity-based
compensation. Cash compensation consists of base salary, an annual incentive
bonus and long-term incentive compensation under the Continuous Performance
Award Plan. Equity-based compensation in the form of stock option grants
under the 1989 Stock Option Plan and the 1993 Stock Option Plan constitutes
an additional component of long-term incentive compensation. While the
policies of the Registrant are designed to compensate executive officers for
personal performance, a substantial portion of annual compensation of each
executive officer, especially that of the Chief Executive Officer, is
contingent upon the financial performance of the Registrant.
Each of the named executive officers, including the Chief Executive Officer,
is a party to an employment agreement providing for employment until July 31,
1996 at his compensation rate
11
at the commencement of the agreement or as determined by the Compensation
Committee from time to time, subject to such reduction as may be imposed on
all management employees in order to meet economic conditions.
Base salaries for executive officers, including the Chief Executive Officer,
are reviewed annually. Based on independent evaluation by professional
compensation consulting firms, a base salary range for each executive
position is established, reflecting average base salaries for similar
positions in businesses with revenues comparable to that of the Registrant.
A base salary for each executive is set within that market range by
considering the experience and individual performance of the executive. For
Fiscal 1995, base salaries for executive officers were near the mid-point of
the market range.
In Fiscal 1992, the Committee and Mr. Melrose agreed to increase the "at
risk" portion of Mr. Melrose's total compensation by reducing his base salary
in a total amount of $500,000 (at a rate of $100,000 per year for each of the
five years through Fiscal 1997) and by granting a salary replacement option
to purchase 300,000 shares of the Registrant's Common Stock. The ten year
option becomes exercisable with respect to one-third of the shares at the end
of each of Fiscal 1994, 1995 and 1996, subject to acceleration under certain
circumstances. The purpose of this option is to encourage Mr. Melrose to
focus his attention on increasing stockholder value. Mr. Melrose's salary
with respect to Fiscal 1995, for the purpose of calculating incentive
compensation, was set at $480,000, based on the same method used in
establishing other executive officers' base salaries. After the $100,000
reduction, Mr. Melrose's base salary was $380,000.
The Committee conducts a performance evaluation of Mr. Melrose on an annual
basis. The other named executive officers receive evaluations by Mr.
Melrose, which are used by the Committee in establishing base salaries.
An executive of the Registrant will earn total compensation that is market
competitive only if incentive payments are earned. In order for an executive
to earn incentive compensation sufficient to bring total compensation to
average market levels, Registrant financial performance targets must be
achieved.
The incentive components of compensation are intended to encourage
achievement of both short-term and long-term objectives. Short-term
performance is evaluated in relation to the Registrant's earnings per share
("EPS") and return on average net assets ("ROANA") and, in certain cases, on
division performance. Long-term performance is evaluated by reference to the
Registrant's return on beginning equity ("ROBE") on a relative basis compared
with the performance of the peer group over a three year period.
For Fiscal 1995, 64% of Mr. Melrose's total cash compensation was comprised
of incentive payments under the Registrant's short-term and long-term plans.
If the Registrant had not met its performance targets and Mr. Melrose had
received no incentive payments, his total cash compensation would have
equalled only 36% of average market levels for chief executive officers in
businesses with revenues comparable to the Registrant's.
Under the Registrant's annual incentive compensation plans, executive
officers and other key employees are eligible to receive an annual cash bonus
component of compensation, based on a percentage of base salary. The size of
each award is determined by the executive officer's position, the
Registrant's achievement of performance goals and, for certain participants,
division performance. If performance goals are exceeded, award amounts
increase, but if goals
12
are not met, awards are reduced or not paid at all. For instance, no awards
were paid for Fiscal 1991 or 1992. Proposed participants in the plan are
recommended by management and reviewed and approved by the Committee.
Under the 1995 Annual Management Incentive Plan, the Compensation Committee
established an EPS performance target of $2.00 per share for Fiscal 1995 and
a threshold ROANA of at least 8.55%. If the Registrant's ROANA had not met
target, the bonus could not exceed targets. If earnings exceeded a threshold
of 80% of the performance target, a portion of the award would be earned, but
for payout to exceed target the earnings goal had to be met and ROANA had to
exceed goal. No payment would have been made if EPS had been below $1.60
per share. If both goals were met, performance awards could increase
proportionately to a maximum of 175% of targeted bonus. Because the
Registrant met the EPS target and exceeded the ROANA target, a bonus in the
amount of 175% of the executive's participation factor was paid. An
officer's participation factor, which is set by the Committee, is a
percentage of base salary ranging from a high of 50% for Mr. Melrose to a low
of 35% for certain other named executive officers. Levels of participation
are based on the executive's salary grade and not on individual factors. The
payment of annual incentive bonuses equal to 175% of the participation factor
for Fiscal 1995 contributed to an above average market level of total annual
compensation for executives.
A similar annual management incentive plan was approved by the Compensation
Committee for Fiscal 1996. Payment of performance awards will be contingent
upon achievement of an EPS performance goal, and award amounts may increase
if the Registrant also achieves pre-established goals for ROANA. Division
performance may affect award amounts paid to divisional participants.
Under the Continuous Performance Award Plan as in effect for Fiscal 1995, a
performance award could be earned by eligible executive officers if the
Registrant achieved a financial goal based on average ROBE for the three year
award term, as established by the Committee, and if the relative rank of the
Registrant's average ROBE achieved compared favorably with ROBE rankings of
all companies in the Registrant's peer group described above. The maximum
value of a performance award (100%) could be earned only if the Registrant
achieved a ROBE that ranked among the top 25% of companies in the peer group.
The amount of an award payment is reduced proportionately the lower the
Registrant's ROBE ranks compared with the peer group, and no award is paid if
the Registrant does not rank in the top 75%. While performance awards have a
term of three years, new participants may be granted one year and two year
transition awards in order to be integrated into the plan.
If the Registrant's performance goals are achieved, the amount of an
individual participant's award payment is determined based on the
individual's participation factor. Individual participation factors are
based on a percentage of base salary ranging from 25% to 100%, and are
established by the Committee based on the individual's position and level of
responsibility. Mr. Melrose participates in the Continuous Performance Award
Plan at a factor of 1.0 (one times base salary), which means that if the
Registrant's three year average ROBE ranks in the top 25% of companies in the
peer group, Mr. Melrose will receive a long-term incentive payment equal to
his base salary during the last fiscal year of the award. Mr. Melrose's
participation factor was set by the Committee at a relatively high level so
that a significant portion of Mr. Melrose's compensation is "at risk". In
Fiscal 1995, 32% of his cash compensation was comprised of payments pursuant
to the Continuous Performance Award Plan.
If the Registrant does not meet performance goals under this plan, Mr.
Melrose's total compensation would be substantially below the average paid to
chief executive officers of
13
manufacturing businesses with revenues comparable to the Registrant's. For
instance, no incentive compensation payments were made to Mr. Melrose or the
other executive officers with respect to Fiscal 1992 because the Registrant
did not meet the Committee's financial performance goals. The Registrant's
three year (Fiscal 1993, 1994 and 1995) average ROBE performance ranked at
the 67th percentile level among its peer group, so that the amount of awards
was only 89.16% of the potential maximum for each named executive officer,
including Mr. Melrose. This award is reflected in the Summary Compensation
Table.
Under the Continuous Performance Award Plan, the Committee also grants to
each participant a nonqualified stock option to purchase shares of the Common
Stock. If ROBE goals for the related performance award are not achieved, the
number of shares subject to the option is reduced in accordance with the
formula applicable to reduction of the Performance Award. These options are
exercisable for a limited period of 90 days commencing after the end of the
three year Performance Award term, and payment of the exercise price is
intended to be facilitated by the incentive compensation payments made near
the time the option becomes exercisable. One of the purposes of this option
is to encourage stock ownership by executive officers of the Registrant.
The number of shares with respect to which a three year option award is
granted is determined under a formula based on base salary, the participant's
performance factor fixed by the Committee and the average price of the Common
Stock on the New York Stock Exchange during the three months prior to the
grant. In Fiscal 1995, the Committee granted options in accordance with the
formula, in connection with three year performance awards granted to the
named executive officers. Mr. Melrose received an option grant covering
21,891 shares. These options become exercisable after the conclusion of
Fiscal 1997.
The Compensation Committee has approved an amendment to the Continuous
Performance Award Plan to add growth in net income to ROBE as a performance
goal for periods after August 1, 1995, subject to approval by stockholders
at the next Annual Meeting. If the amendment is not approved, the existing
plan will continue.
During Fiscal 1995, a special committee of the Compensation Committee
recommended, and the Board and stockholders approved, a special incentive
compensation plan for Mr. Melrose, to encourage him to remain with the
Registrant until his 60th birthday on July 31, 2000, while assuming the
timely development and election of his successor as chief executive officer
of the Registrant. Under the Chief Executive Officer Succession Incentive
Plan, on July 31, 1995, Mr. Melrose was awarded 17,467 shares of Common Stock
(the "Restricted Stock") having a value of $499,993, subject to forfeiture or
reduction in the event performance goals related to the development and
implementation of a senior management succession plan and chief executive
officer election plan are not met by various dates during the next five
years. As an additional incentive to Mr. Melrose to achieve the goals under
the plan, the Registrant granted Mr. Melrose performance units equal to the
amount of whole shares of Common Stock having a fair market value of $500,000
on July 31, 1995, subject to forfeiture or reduction in the event the
performance goals are not met by the target dates. The value of the
performance units will fluctuate with the value of the Common Stock (but not
below the July 31, 1995 value). The cash value of the performance units
remaining at the date of Mr. Melrose's retirement will be used to purchase a
retirement annuity for his benefit, provided that he enters into and complies
with a noncompetition agreement. For additional information on the plan, see
the Summary Compensation Table and Long-Term Compensation Table.
In addition to options granted in connection with the Continuous Performance
Award Plan, the
14
Committee makes stock option grants pursuant to the 1989 Stock Option Plan
and the 1993 Stock Option Plan. Options are granted to all key management
employees, including executive officers, in amounts determined based on
annual base salary, salary grade and the fair market value price of the
Common Stock on the date of grant. Except for performance based options
granted in connection with the Continuous Performance Award Plan, all options
granted under the stock option plans have exercise prices that are equal to
fair market value at the date of grant. In Fiscal 1995, Mr. Melrose was
granted options to purchase 28,364 shares pursuant to these plans.
All of the recommendations of the Compensation Committee with respect to
compensation attributable to Fiscal 1995 were approved and adopted by the
Board of Directors. In order to assure compliance with the requirements of
the rules under Section 16 of the Exchange Act, relating to plan
administration by disinterested persons, decisions regarding the grant of
stock options are made by the Compensation Committee and reported to the
Board.
Under new Section 162(m) of the Code, no deduction by a publicly held
corporation is allowed for remuneration paid to certain highly compensated
employees to the extent that the amount of such remuneration for a taxable
year for such individual exceeds $1,000,000. Section 162(m) provides for the
exclusion of performance based compensation from remuneration that is
otherwise subject to the deduction limitation. It is the policy of the
Registrant that the components of executive compensation that are inherently
performance based should qualify for the exclusion from the deduction
limitation under Section 162(m). Those components, as described above,
currently consist of annual incentive awards, stock options and long-term
incentive awards. Under proposed regulations, including transition rules,
promulgated by the Internal Revenue Service, it is not necessary that the
Registrant's stock option plans or the Continuous Performance Award Plan be
amended at this time to maintain deductibility of compensation payable
thereunder. However, the Registrant has elected to submit compensation plans
to stockholders for approval at the next Annual Meeting to qualify
compensation to be paid under the plans under Section 162(m) and to make
other changes. The Registrant anticipates that the remaining components of
individual executive compensation for each highly compensated employee of the
Registrant that do not qualify for any exclusion from the deduction
limitation of Section 162(m) should not exceed $1,000,000 in any year for
such employees, and should therefore qualify for deductibility.
Dale R. Olseth, Chairman
Alex A. Meyer
Robert H. Nassau
15
PERFORMANCE GRAPH
The following graph depicts total cumulative stockholder return (assuming
reinvestment of dividends) of the Registrant's Common Stock, the S&P 500 Index
and an industry peer index for the preceding five fiscal years commencing with
Fiscal 1991. The industry peer index is based on the Fortune 500 Industrial and
Farm Equipment Index, excluding companies for which data is unavailable, and is
comprised of the companies listed below.
COMPARISON OF FIVE YEAR TOTAL RETURN AMONG THE TORO COMPANY,
S&P 500, AND THE PEER GROUP
Fiscal Year Ending July 31,
---------------------------
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Dollars
The Toro Co 100 68 58 90 105 135
S&P 500 100 113 127 138 145 182
Peer Group 100 92 104 130 152 194
Peer Group consists of the Fortune 500 (Group 25), Industrial and Farm Equipment
- - This graph assumes $100 invested on August 1, 1990 in the Registrant's
Common Stock, the S&P 500 Index and the peer group index.
- - The peer group index includes: York International, Briggs & Stratton,
Stewart & Stevenson Services, Dover Corp., Pentair Corp., Cummins Engine,
Cincinnati Milacron Inc., Harnischfeger Industries Inc., Crane Co., Figgie
International, Tecumseh Products Co., Ingersoll-Rand Co., Nacco Industries,
Parker-Hannifin Corp., Terex Corp., Dresser Industries Inc., Trinova Corp.,
Deere & Co., Timken Co., Outboard Marine Corp., Baker-Hughes Inc.,
Caterpillar Inc., Black & Decker Corp., Clark Equipment Co., IMO Industries
Inc., Tenneco Inc., American Standard, Western Atlas Inc., Agco Corporation,
Actava Group Inc., and Kennametal Inc. as well as the Registrant. The peer
group index does not include Lincoln Electric Co., which is included in the
Fortune 500 Industrial and Farm Equipment Index, but for which data is not
available. Clark Equipment was removed from the index because it was
acquired by Ingersoll-Rand Co. Applied Materials and Nortek, Inc. were also
removed from the Industrial and Farm Group Index in 1995 and five new
companies were added.
16
The following graph depicts total stockholder return, assuming $100 invested on
August 1, 1994, of the Registrant's Common Stock and the same two indices
through July 31, 1995.
COMPARISON OF ONE YEAR TOTAL RETURN AMONG THE TORO COMPANY,
S&P 500, AND THE PEER GROUP
Quarter Ending
--------------
7/94 10/94 1/95 4/95 7/95
---- ----- ---- ---- ----
Dollars
The Toro Co 100 123 126 129 129
S&P 500 100 104 104 114 126
Peer Group 100 106 96 111 128
Peer Group consists of the Fortune 500 (Group 25), Industrial and Farm Equipment
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of November 13, 1995 regarding the
beneficial ownership of the Common Stock of the Registrant by each of the
directors and nominees, each of the named executive officers, holders of more
than 5% of the Common Stock and by all directors and executive officers as a
group.
NAME OF AMOUNT AND NATURE PERCENT
TITLE OF CLASS BENEFICIAL OWNER (1) OF BENEFICIAL OWNERSHIP OF CLASS
- ----------------------------------------------------------------------------------------------
Common Stock Fidelity Management & Research Company 1,479,500(2) 12.1%
82 Devonshire Street
Boston, MA 02109-3614
Common Stock David L.Babson & Co., Inc. 1,044,400(3) 8.6%
One Memorial Drive
Cambridge, MA 02142
Common Stock Janet K. Cooper 785 *
William W. George 6,181 *
Calvin R. Hendrix 23,019(4) *
Gerald T. Knight 41,893(4) *
Charles B. Lounsbury 22,201(4) *
Kendrick B. Melrose 461,501(4) 3.8%
Alex A. Meyer 2,650 *
David H. Morris 19,464(4) *
Robert H. Nassau 1,533 *
Dale R. Olseth 6,042 *
Edwin H. Wingate 1,999 *
Common Stock All directors & executive 785,638(4) 6.4%
officers as a group(18 persons)
* Less than 1% of the outstanding shares of Common Stock.
(1) Shares are deemed to be "beneficially owned" by a person if such person,
directly or indirectly, has or shares (i) the power to vote or to direct the
voting of such shares or (ii) the power to dispose or direct the disposition
of such shares. In addition, beneficial ownership includes shares which
such person has the right to acquire within 60 days.
(2) According to a Form 13G filed by FMR Corp., Fidelity Management & Research
Company ("Fidelity"), a subsidiary of FMR Corp. and registered investment
advisor, is the beneficial owner of all of these shares. Edward C. Johnson
3d, FMR Corp., through its control of Fidelity, and Fidelity Funds each has
sole power to dispose of the 1,479,500 shares owned by the Funds. Neither
FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole
power to vote or direct the voting of the shares owned directly by the
Fidelity Funds, which power resides with the Funds' Boards of Trustees.
Fidelity carries out the voting of the shares under written guidelines
established by the Funds' Boards of Trustees. This information is as of
January 31, 1995, the date of the most recent report on Form 13G
18
received by the Registrant. Other reports the Registrant receives indicate
that Fidelity may hold a slightly higher number of shares as of March 31,
1995.
(3) David L. Babson & Company, Inc. ("Babson") is a registered investment
advisor and has filed a Form 13G reflecting beneficial ownership of all of
these shares. Babson has the sole power to dispose of the entire holdings,
sole voting power with respect to 583,000 shares and shared voting power
with respect to 461,400 shares. This information is as of February 10,
1995, the date of the most recent report on Form 13G received by the
Registrant. Other reports the Registrant receives indicate that Babson no
longer holds 5% of the Common Stock.
(4) Includes shares that may be acquired by executive officers upon exercise of
stock options within 60 days and shares allocated under employee stock
plans. Also includes shares reported as being held of record by Putnam
Fiduciary Trust Company, but which are allocated to executive officers under
employee benefit plans. Stock options exercisable in 60 days for each of
the named executive officers are as follows: Kendrick B. Melrose 309,562
shares, David H. Morris zero shares, Gerald T. Knight 35,482 shares, Calvin
R. Hendrix 15,458 shares, Charles B. Lounsbury 15,855 shares, and all other
executive officers and directors as a group 115,470 shares.
19
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Gerald T. Knight
---------------------------------------------
Gerald T. Knight
Vice President, Finance
Chief Financial Officer
(principal financial officer)
Date: November 28, 1995
20
