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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR FISCAL YEAR ENDED OCTOBER 31, 1996.
/ / 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
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THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420-1196
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value
$1.00 per share New York Stock Exchange
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 closing price of the Common Stock on December 27,
1996 as reported by the New York Stock Exchange, was approximately $423,922,000.
The number of shares of Common Stock outstanding as of December 27, 1996 was
12,116,732.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended October 31, 1996, are incorporated by reference into Parts I, II and IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held March 13, 1997 are incorporated by reference into Part
III.
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Part I
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ITEM 1. BUSINESS
INTRODUCTION
The company designs, manufactures and markets consumer and professional turf
maintenance equipment, snow removal products and irrigation systems. The
company produced its first lawn mower for golf course fairways in 1922 and its
first lawn mower for home use in 1939 and has continued to enhance its product
lines ever since.
The company emphasizes quality and innovation in its products, manufacturing and
marketing. The company strives to provide well built, dependable products
supported by an extensive service network. Innovation is emphasized through the
introduction of new and enhanced products. The company's substantial funding of
research and development, as well as its acquisition strategy and its licensing
and related agreements, all contribute to its new product development efforts.
Through these efforts the company also attempts to be responsive to trends which
may affect its target markets, now and in the future. The company believes that
a significant portion of its revenues in recent years have been attributable to
its new and enhanced products. Examples of recently introduced products include
the Recycler-Registered Trademark- lawn mower which reduces the need for
disposal of grass clippings, a high pressure water jet turf aerator for
maintenance of golf course putting greens and an enhanced electronic controller
for residential irrigation systems which features programmable timing and zone
control functions.
The company was incorporated in Minnesota in 1935 as a successor to a business
founded in 1914. It was reincorporated in Delaware in 1983. The company's
executive offices are located at 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420-1196, telephone number (612) 888-8801. Unless the context
indicates otherwise, the terms "company" and "Toro" refer to The Toro Company
and its subsidiaries. The company finances a significant portion of its
receivables through Toro Credit Company ("Toro Credit"), its wholly-owned
finance subsidiary.
OUTDOOR MAINTENANCE EQUIPMENT
The company classifies its operations into one industry segment, outdoor
maintenance equipment. The company continues to be a leader in transforming
advanced technologies into products and services that provide solutions for
landscape and turf care maintenance and beautification demands. Following is a
summary of Toro's product lines:
CONSUMER PRODUCTS
WALK-BEHIND MOWERS. The company has manufactured walk-behind mowers for
residential use since 1939. Its walk-behind lawn mowers are gasoline and
electric powered. The company manufactures numerous models of walk-behind
mowers under its brand names Toro-Registered Trademark- and Lawn-
Boy-Registered Trademark-, including both four-cycle and two-cycle engine
models, and new battery and electric models. Models differ as to cutting
width, type of starter mechanism, type of bagging, controls and power
sources, and are either self-propelled or push mowers. Certain of the
company's lawn mowers are backed by the company's "Guaranteed To Start"
program and some Lawn-Boy-Registered Trademark- models are equipped
with a two-cycle, oil injected engine manufactured by the company.
RIDING MOWERS AND LAWN AND GARDEN TRACTORS. The company manufactures
riding lawn mowers and lawn and garden tractors under its brand name
Toro-Registered Trademark-Wheel Horse-Registered Trademark- which range
from an eight horsepower, 25 inch deck, rear engine model to a 20
horsepower, front engine model. The front engine model is available with a
variety of decks and accessories (Recycler technology is available in
select models). Some recently introduced models are equipped with
hydrostatic transmissions and/or low emission engines.
2
HOME SOLUTIONS PRODUCTS. The company designs and markets electrical and
gas products under the Toro-Registered Trademark- brand name for mass
merchandisers and "do-it-yourself" home improvement markets. These
products, which include homeowner-installed low voltage lighting, flexible
line trimmers and electric blowers, are intended to require little or no
after sales service. Among recently introduced products are a complete
line of handheld products which include a cordless trimmer, hedge
trimmers, gas edgers, gas trimmers, and a gas blower.
SNOW REMOVAL PRODUCTS. The company manufactures and markets lightweight
and larger self-propelled walk-behind snowthrowers and electric Power
Shovel snowthrowers under the Toro-Registered Trademark- and Lawn-
Boy-Registered Trademark- brand names. Single-stage snowthrowers,
developed by the company and first introduced in 1965, are walk-behind
units with a lightweight gasoline engine or electric motor and the Power
Curve-Registered Trademark- snowthrower technology for general residential
use. Two-stage snowthrowers are designed for relatively large areas with
engines ranging from 5 to 12 horsepower. Units with 8 horsepower and above
are equipped with the Power Shift-Registered Trademark- snowthrower
technology.
PROFESSIONAL TURF PRODUCTS
COMMERCIAL PRODUCTS. Professional turf maintenance equipment marketed
under the Toro-Registered Trademark- brand name is the company's oldest
product line, which began in 1922 with the sale of tractor-pulled reel
mowers to golf courses. Today the company's expanded product line includes
products designed for the large turf areas of schools, parks, cemeteries,
sports fields, plant sites, apartment buildings and townhouse complexes, as
well as golf courses. Management believes that golf courses will continue
to be a significant market for turf maintenance equipment as new golf
course construction continues throughout the world. Increasing emphasis is
being placed on the sports field and landscape contractor markets.
Products for the golf course include turf sprayer equipment, riding and
walk-behind reel mowers for the putting green, and riding and pull-behind
large reel products for the fairway, rough and trim cutting, turf aeration,
and sandtrap/bunker maintenance.
Other products which service all commercial markets include riding rotary
units with out-front cutting decks ranging from 52 inches to 16 feet widths
of cut, turf sweepers, and multipurpose vehicles and attachments designed
for flexibility.
IRRIGATION PRODUCTS. Turf irrigation products marketed under the
Toro-Registered Trademark- brand name include sprinkler heads and electric
and hydraulic control devices designed to be used in turf irrigation
systems for residential, commercial and golf course use. These products
are installed in new systems and can also be used to replace or retrofit
existing systems. Most of the product line is designed for underground
irrigation systems. Sprinkler heads are buried underground and pop up when
in operation. Control valves activate the sprinkler heads and controllers
typically activate electric or hydraulic lines to control the valves and
sprinkler heads. Recently introduced products include more efficient
sprinkler heads and automatic electronic controllers for residential,
commercial and golf course irrigation systems. The acquisition of the
James Hardie Irrigation Group enhances Toro's product line for residential
and commercial irrigation systems and also provides products for the
agricultural micro-irrigation segment, including drip tape, hose, emitters
and other micro-irrigation products. See "Recent Developments" included
within Part I. The company's irrigation products are used in 75 of the
golf courses rated among the top 100 courses in the United States by GOLF
DIGEST.
See the tables entitled "Sales By Product Line" under the captions "Results of
Operations" in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 16 and 25 of the
company's Annual Report to Stockholders for the fiscal year ended October 31,
1996 for information regarding revenues in the consumer, commercial and
irrigation product lines, which information is incorporated herein by reference.
3
INTERNATIONAL OPERATIONS
The company currently distributes its products worldwide with sales and/or
distribution offices in Canada,Belgium, United Kingdom, Australia, Singapore,
Japan, Italy and Greece.
New product development is primarily pursued in the United States using a global
product platform strategy. Products marketed outside of North America are sold
in compliance with local safety standards. All products shipped to Europe
conform to the European Community Certification standards.
In addition to developing new market-specific products, the International
division is adding customers in new regions. Emerging markets in Eastern Europe
(such as the Czech Republic, Slovakia and Hungary) have been added to the
distribution base in the last year.
RECENT DEVELOPMENTS
On December 3, 1996, the company announced the completion of the acquisition of
James Hardie Irrigation Group (JHI) from James Hardie Limited of Australia. JHI
is a worldwide leader in the production of irrigation systems to the commercial
landscape market. JHI manufactures products for all major segments of the
irrigation market, except for the golf market, and sells to distributors and
retailers worldwide. JHI offers a broad range of irrigation products and has
leading positions in valves and controllers worldwide. In Australia, JHI has a
leading position in hose, hose-end and micro-irrigation products. Unless
otherwise indicated, the historical financial and statistical data included
herein does not reflect the completion of such acquisition.
The company also completed in fiscal 1996 the acquisition of Liquid Ag Systems
of Florida, a leader in fertigation systems, whereby an eco-product feeds turf
through existing irrigation systems resulting in less harmful runoff into ponds
and streams. Also acquired was National Service Network of Abilene, TX., which
provides technology and integrated services support to the company's customers.
The company teamed with Walt Disney World Sports to provide the turf expertise
to maintain the grounds for the new Wide World of Sports complex in Florida,
scheduled to open in the spring of 1997. A partnership with GeoFlow provided
the company with an important irrigation product for rootzone irrigation on
media strips, recreation areas and residential properties that can reduce water
consumption by up to 50%. The company also partnered with Ryobi Outdoor
Products, and Maruyama Manufacturing, Inc., in alliances that provide enhanced
visibility and expanded product lines in emerging markets such as the landscape
contractor business. This line includes cultivators, battery trimmers, hedge
trimmers and blower vacuums.
In 1996, the company continued to develop world class manufacturing processes
leading to more efficient plant operations through robotics, cellular
manufacturing, and just in time sourcing of products. Both the company's
Shakopee component manufacturing plant and the Bloomington headquarters'
commercial operations received ISO 9000 designations. Prior to 1996, both the
Riverside and Tomah manufacturing facilities achieved such designations.
The company continues to provide 2-cycle and 4-cycle gasoline walk-behind power
mowers that produce lower emissions. The company introduced electric mowers for
both the Toro-Registered Trademark- and Lawn-Boy-Registered Trademark- brands in
1996, including the Toro Carefree-TM- line which integrates Toro-Registered
Trademark- mulching technology in an electric mower. In addition, Lawn-
Boy-Registered Trademark- introduced a new line of snowthrowers and the E-
engine, a new low-emission 2-cycle engine for lawn mowers. Lawn-Boy-Registered
Trademark- also offers emission-free battery powered mowers. Consistent with
its long-term goal of expanding the professional turf maintenance market, the
company introduced an extensive line of new handheld, walk-behind and riding
products for the landscape contractor and has increased sales to this market.
The company improved truck fleet efficiency during the year using the QualComm
satellite tracking system to monitor and guide shipping and weather patterns.
The company also developed Consumer Gateway, an integrated hardware and software
computer system for outdoor power equipment dealers.
4
MANUFACTURING
The company's consumer spring and summer products are generally manufactured in
the winter and spring months and its consumer fall and winter products are
generally manufactured in the summer and fall months. The company's irrigation
and commercial products are manufactured throughout the year.
In some areas of its business the company is primarily an assembler while in
others it is a fully integrated manufacturer. Most of the components for the
company's products are commercially available from a number of sources and the
company is generally not dependent on any one supplier. The largest component
costs are generally engines, transmissions and electric motors. The company
purchases most of its engines and motors for consumer and commercial products
from several suppliers. In addition, the company manufactures three types of
two-cycle engines for its consumer products.
Management continues to seek greater efficiencies and improve work processes
throughout the company. Toro's total quality process is focused upon improving
product quality, customer response time and reducing overall product cost.
TRADEMARKS AND PATENTS
Products manufactured by the company are nationally advertised and sold at the
retail level under the trademarks Toro-Registered Trademark-, Wheel
Horse-Registered Trademark- and Lawn-Boy-Registered Trademark-, all of which are
registered in the United States and in the principal foreign countries in which
the company markets its products. The company holds patents in the United
States and foreign countries and applies for patents as applicable. Although
management believes patents have value to the company, patent protection does
not deter competitors from attempting to develop similar products. Although
patent protection is considered to be very beneficial, the company is not
dependent on any one or more of its patents.
In connection with the recent acquisition of James Hardie Irrigation Group, the
following brand names were acquired: Lawn Genie-Registered Trademark-,
Irritrol-Registered Trademark-, Richdel-Registered Trademark-, Hardie Pope,
Hardie, Blue Stripe, Hardie Tape and Aqua-Traxx. The company has agreed to
discontinue use of the term "Hardie" or any similar name within one year of the
acquisition. However, inventory manufactured prior to that one year may
continue to carry the term "Hardie" or similar name.
SEASONALITY
Sales of the company's consumer products, which accounted for approximately 50%
of total sales in fiscal 1996, are seasonal with greater sales of consumer
products, excluding snow removal equipment, occurring between February and April
and snow removal equipment between August and January. Opposite seasons in some
global markets somewhat moderate this seasonality in consumer product sales.
Seasonality in irrigation and commercial product sales also exists, but is
tempered because the selling season in west coast and southern states continues
for a longer portion of the year than in northern states. Overall, worldwide
sales levels are highest in the second quarter. Historically, accounts
receivable balances increase between January and March as a result of extended
payment terms made available to the company's customers. Accounts receivable
balances decrease between April and June when payments are made. The seasonal
requirements of the business are financed from operations and with short-term
bank lines of credit and off-balance sheet financing.
5
DISTRIBUTION AND MARKETING
The company markets the majority of its products principally through
approximately 40 domestic and 96 foreign distributors and a number of mass
merchandisers worldwide. Toro-Registered Trademark- and Lawn-Boy-Registered
Trademark- consumer products such as walk-behind power mowers, riding mowers and
snowthrowers are sold to distributors for resale to retail dealers throughout
the United States. Home solutions products and most Lawn-Boy-Registered
Trademark- products are sold directly to mass merchandisers and "do-it-yourself"
home improvement retailers. Commercial and irrigation products are sold to
distributors for resale to irrigation contractors and golf courses. Irrigation
products are also sold through distributors to irrigation dealers and direct to
irrigation dealers, mass merchandisers and "do-it-yourself" home improvement
retailers for resale to contractors, golf courses and end-users.
Internationally, consumer products are sold to distributors for resale to retail
dealers and mass merchandisers outside the United States, principally in Canada
and Western Europe. Some irrigation and consumer products are sold directly to
retail dealers in Canada, Australia and Western Europe.
The company's current marketing strategy is to maintain distinct and separate
brands and brand identification for Toro-Registered Trademark-, Toro-Registered
Trademark-Wheel Horse-Registered Trademark- and Lawn-Boy-Registered Trademark-
products. The company is currently evaluating its marketing strategies with
respect to the brand names acquired in connection with the acquisition of the
James Hardie Irrigation Group.
The company's distribution systems for the sale of its products are intended to
assure quality of sales and market presence as well as effective after-market
service. The company considers its distribution network to be a significant
competitive asset in marketing Toro-Registered Trademark-, Toro-Registered
Trademark-Wheel Horse-Registered Trademark- and Lawn-Boy-Registered Trademark-
products.
The company advertises its products during appropriate seasons throughout the
year on television, radio and in print. Most of the company's advertising
emphasizes its brand names. Advertising is directly paid by the company as well
as through cooperative programs with distributors, dealers and mass merchants.
BACKLOG OF ORDERS
The order backlog at October 31, 1996 and 1995 was as follows:
1996 1995
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Consumer $ 51,373,000 $ 46,087,000
Commercial 55,138,000 49,624,000
Irrigation 4,333,000 4,417,000
The increase in consumer product backlog reflects the sell-out of gas snow
products in fiscal 1996. This resulted in increased orders of gas snow products
at the end of fiscal 1996 in anticipation of another hard winter season. The
increase for commercial products reflects continued sales growth in most product
lines. The existing backlog is expected to be filled in the succeeding fiscal
year.
6
COMPETITION
The principal competitive factors in the company's markets are product
innovation, quality, service and pricing. Management believes the company
offers high quality products with the latest technology and design innovations.
Also, by selling Toro-Registered Trademark-, Toro-Registered Trademark-Wheel
Horse-Registered Trademark- and Lawn-Boy-Registered Trademark- brand products
through a network of distributors, dealers and mass merchants who provide
service, the company offers competitive service during and after the relevant
warranty period.
The company competes in all product lines with numerous manufacturers, many of
which have substantially greater financial resources than the company.
Management believes that its commitment to product innovation, its distribution
systems and its focus on target markets, position it well to compete in these
various markets.
CONSUMER
The company's principal competitors for mowing and snow equipment are
American Yard Products, Inc. (a subsidiary of Electrolux AB), Deere &
Company, Honda Motor Co., Ltd., MTD Products, Inc., Murray Ohio
Manufacturing Co., Inc. (a subsidiary of Tompkins Corp.), Sears, Roebuck
and Co., Snapper Power Equipment (a division of ACT), Ariens Company,
Bolens Corporation (a division of Garden Way, Incorporated), Noma Outdoor
Products, Simplicity Manufacturing Company and Yamaha Motor Corporation,
USA. The principal competitors in home solutions products are The Black
and Decker Corporation, K & S Industries, Inc., Malibu Lighting (a
registered trademark of Intermatic, Inc.) and Poulan/Weed Eater (a division
of Electrolux AB).
COMMERCIAL
The company's commercial products compete with products from numerous
manufacturers, but the principal competitors across most of the company's
commercial product lines are Deere & Company, American Honda Motor Co.,
Inc., Echo Inc., Stihl Inc., Scag Power Equipment, Shindaiwa Inc., Snapper
Inc., Gravely International, Exmark Manufacturing Co., Inc., Lesco Inc.,
Walker Manufacturing Co., Cub Cadet Power Equipment, American Yard
Products, Husqvarna Forest and Garden Co., The Ariens Co., MTD Products
Inc., Textron Jacobsen and Ransomes Sims & Jefferies PLC, (based in the
United Kingdom).
IRRIGATION
The company's principal competitors in irrigation products are Hunter
Industries and Rain Bird Sprinkler Manufacturing Corporation.
INTERNATIONAL
The international market is generally fragmented so that the degree of
competition varies among the different countries in which the company
markets its consumer, commercial and irrigation products. Most competitors
in the irrigation and commercial product lines are based in the United
States. Consumer product lines can face more competition where foreign
competitors manufacture and market competing products in their countries at
a lower cost. In addition, fluctuations in the value of the U.S. dollar
may affect the price of the company's products in such markets, thereby
affecting their competitiveness.
RESEARCH AND DEVELOPMENT
The company conducts research and development activities in an effort to improve
existing products and develop new products. Amounts expended on such
activities, including engineering costs, aggregated approximately $31.3 million,
or 3.4% of net sales for the year ended October 31, 1996, $6.9 million, or 3.6%
of net sales for the 3 months ended October 31, 1995, $26.5 million, or 2.8% of
net sales for the year ended July 31, 1995, and $24.6 million, or 3.1% of net
sales for the year ended July 31, 1994. Management believes that the company's
research and development efforts are important to the quality, mix and growth of
its businesses and plans to continue its strong commitment to such activities.
7
GOVERNMENTAL REGULATION
The company's products are subject to various federal statutes designed to
protect consumers and are subject to the administrative jurisdiction of the
federal Consumer Product Safety Commission. The company is also subject to
certain federal and state environmental, occupational safety and other
regulations, none of which has had a material adverse affect on its operations
or business. Management believes the company is in substantial compliance with
all such regulations. The Environmental Protection Agency (EPA) released Phase
I regulations for all gas engines under 25 horsepower in June of 1995. Toro's
four-cycle engine suppliers are required to comply with the EPA regulations on
or before September 1997. The company expects its own two-cycle walk-behind
power mower engines to be able to comply with Phase I regulations beginning in
September of 1997. This will allow the company to continue producing its two-
cycle walk-behind power mower engines at its Oxford, Mississippi plant through
the year 2002.
EMPLOYEES
During fiscal 1996 the company employed an average of 3,509 employees. The
total number of employees at October 31, 1996 was 3,280, reflecting the
company's normal seasonal fluctuation in employment. Approximately 20 % of
these employees are covered by four collective bargaining agreements, one
expiring in May 1997, two expiring in September 1997, and one expiring in
November 1999.
As a result of the acquisition of the James Hardie Irrigation Group, the company
added approximately 1,070 employees. JHI's Australian employees have three
local agreements with the National Union of Workers and the Australian Workers
Union which cover approximately 15% of all JHI employees. These agreements will
expire in June 1997. None of the JHI U.S. employees are represented by unions.
Management considers its overall relations with its employees to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
With the exception of the newly added JHI production facilities in Australia,
all of the company's production facilities are located within the United States.
Except for the sales of the company's foreign subsidiaries, which are not
significant when compared to total company sales, substantially all financial
transactions have been made in U.S. dollars. Consequently, the company did not
realize any significant impact to earnings due to fluctuations in foreign
currencies during the fiscal year ended October 31, 1996.
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into forward exchange and range forward option contracts. These
contracts are designed to hedge firm and anticipated foreign currency
transactions. With the acquisition of the James Hardie Irrigation Group, the
company expects an increase in transactions denominated in Australian dollars.
Export sales were $154,716,000 for the year ended October 31, 1996, $18,557,000
for the 3 months ended October 31, 1995, and $126,560,000 and $109,344,000 for
the years ended July 31 1995 and 1994, respectively. The identifiable assets
attributable to foreign operations were not significant as of October 31, 1996.
See Note 8 to the Consolidated Financial Statements of the company contained in
the company's Annual Report to Stockholders for the fiscal year ended October
31, 1996 for additional information relating to international and export sales,
which information is incorporated herein by reference.
8
ITEM 2. PROPERTIES
The company utilizes manufacturing and office facilities which total
approximately 4,437,000 square feet of space. The manufacturing facilities,
excluding JHI, operated at about 62% of total plant capacity in fiscal 1996.
Actual plant utilization varies during the year depending upon the production
cycle. Management believes that the current facilities are sufficient for
current production needs. The following schedule outlines the company's
facilities by location, plant size, ownership and function:
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Location Square Feet Ownership Products Manufactured / Use
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Plymouth, WI 420,000 Owned Parts distribution center, office
Windom, MN 305,000 Owned Consumer components and products
Lakeville, MN 304,000 Leased Finished Goods distribution center, office
Bloomington, MN 300,000 Owned Corporate headquarters
Tomah, WI 274,000 Owned Consumer and Commercial products
Sardis, MS 245,000 Owned Consumer products
Baraboo, WI 228,000 Leased Finished Goods distribution center, office
South Bend, IN 226,000 Owned Facility closed in 1993 and is being held for resale
Riverside, CA 217,000 Owned Irrigation products
Evansville, IN 178,000 Leased Consumer and Commercial products
Olathe, KS 176,000 Leased Commercial products
Mound, MN 162,000 Leased Consumer products
Shakopee, MN 146,000 Owned Components for consumer and commercial products
El Paso, TX 143,000 Owned JHI irrigation products and warehouse
Springvale, Australia 109,000 Leased JHI irrigation products and warehouse
Beverley, Australia 109,000 Owned JHI Corporate office and distribution center
Murray Bridge, Australia 101,000 Owned JHI irrigation products and warehouse
El Cajon, California 92,000 Owned JHI irrigation products and warehouse
Oxford, MS 67,000 Owned Components for consumer products
Oevel, Belgium 63,000 Owned Finished goods distribution center, office
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Total Square Feet 3,865,000
Other leased office and warehouse space located in various cities in the United
States, Australia, Canada, France, Singapore, Japan and the United Kingdom
totaled approximately 572,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The company is a party to litigation in the ordinary course of its business.
Ongoing litigation primarily involves claims for damages arising out of the use
of the company's products, some of which include claims for punitive as well as
compensatory damages. The company is also subject to administrative proceedings
in respect to certain claims involving the discharge of hazardous substances
into the environment. Certain of these claims assert damages and liability for
remedial investigations and clean up costs. Management is of the opinion that
the amounts which may be awarded or assessed in connection with these matters
will not have a material effect on the company's financial position. Further,
the company maintains insurance against product liability losses. Such
insurance presently covers claims in excess of $1,000,000 per claim or
$2,000,000 in the aggregate during any fiscal year. The company regularly
reviews these dollar limits.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The list below identifies those persons deemed to be executive officers of the
company, discloses their age and position with the company as of January 20,
1997, and positions held by them during the last five years. Officers are
elected or appointed annually. A complete list of all officers of the company
is found on the inside back cover of the Registrant's Annual Report for the year
ended October 31, 1996.
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Name, Age and Position with the Company Business Experience During the Last Five Years
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Randy B. James Appointed Vice President and Controller in December 1988.
53, Vice President and Controller
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Gerald T. Knight Elected Vice President-Finance and Chief Financial Officer in April 1992.
49, Vice President-Finance and From December 1990 to April 1992, was Executive Director - Finance and
Chief Financial Officer Corporate Controller of NeXT Computer, Inc.
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Charles B. Lounsbury Elected Group Vice President September 17, 1996. From November 1993 to
53, Group Vice President September 16, 1996 was appointed Vice President, Distribution Parts and
Office of the President Debris Management. From May 1991 to November 1993 was President and Chief
Operating Officer of Leaseway Transportation Corporation. While Mr. Lounsbury
served as President and a director of Leaseway, it filed for protection under
Chapter 11 and during that period it was discharged.
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J. David McIntosh Elected Group Vice President September 17, 1996. From February 1992 to
53, Group Vice President September 16, 1996 was appointed Vice President, Consumer Division.
Office of the President Appointed Vice President and General Manager, Home Improvement Division in
May 1986.
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J. Lawrence McIntyre Elected Vice President in July 1993. Elected Secretary and General Counsel
54, Vice President, Secretary and General Counsel in August 1993. Prior to July 1993, was a shareholder with Doherty, Rumble &
Butler Professional Association.
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Kendrick B. Melrose Elected Chairman of the Board in December 1987. Elected Chief Executive
56, Chairman and Chief Executive Officer Officer in December 1983.
Office of the President
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Karen M. Meyer Has served as Vice President, Human Resources/Administrative Services since
46, Vice President, December 1988.
Human Resources/Administrative Services
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Richard R. Pollick Appointed Vice President, International Division in March 1990.
57, Vice President and General Manager
International Division
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Stephen P. Wolfe Appointed Vice President in August 1994. Elected President, Toro Credit
48, Vice President, The Toro Company and President, Company in July 1990.
Toro Credit Company
- - - - -----------------------------------------------------------------------------------------------------------------------------------
There are no family relationships between any director, executive officer or
person nominated to become a director or executive officer. There are no
arrangements or understandings between any executive officer and any other
person pursuant to which he or she was selected as an officer.
10
Part II
- - - - --------------------------------------------------------------------------------
All information incorporated by reference in this Part II is from the
Registrant's Annual Report to Stockholders for the fiscal year ended October 31,
1996 ("Annual Report").
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Toro Common Stock (including related Preferred Share Purchase Rights) is listed
for trading on the New York Stock Exchange. As of October 31, 1996 there were
6,841 holders of record of the company's common stock.
See "Quarterly Financial Data" on page 44 of the Annual Report for dividends
paid on and range of high and low quotations for the company's common stock on
the New York Stock Exchange for the period from August 1, 1995 to October 31,
1996, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
See "Selected Financial Data" on page 24 of the Annual Report for financial data
for the year ended October 31, 1996, for the 3 month period ended October 31,
1995 and for the years ended July 31, 1995, 1994, 1993 and 1992 which
information for these periods is incorporated herein by reference.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See the sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Annual Report on pages 16 through 21
and pages 25 through 29 which sections are incorporated herein by reference.
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report on Form 10-K contains various forward-looking
statements, included under the captions entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Annual Report
which sections are incorporated herein by reference, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that are not historical are forward-looking.
When used in this document, the words "expect", "anticipate", "estimate", and
similar expressions are intended to identify forward-looking statements. In
addition, forward-looking statements are contained in Part I of this report and
may be made orally in the future by or on behalf of the company.
Forward-looking statements involve risks and uncertainties, including, but not
limited to, changes in business conditions and the economy in general in both
foreign and domestic markets; weather conditions affecting demand; seasonal
factors affecting the company's industry; lack of growth in the company's
markets; litigation; financial market changes including interest rates and
foreign exchange rates; trend factors including housing starts, new golf course
starts and market demographics; government actions including budget levels,
regulation, and legislation, primarily legislation relating to the environment,
commerce and infrastructure, and health and safety; labor relations;
availability of materials; actions of competitors; ability to integrate
acquisitions; and the company's ability to profitably develop, manufacture and
sell both new and existing products. Actual results could differ materially
from those projected in the forward-looking statements as a result of these risk
factors, and should not be relied upon as a prediction of actual future results.
The company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made,
or to reflect the occurrence of unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements described in Item 14(a)1 of this report are
incorporated herein by reference.
See "Quarterly Financial Data" appearing on page 44 of the Annual Report which
is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
12
Part III
- - - - -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this report for
information regarding the executive officers of the company, which information
is herein incorporated by reference.
Information regarding the directors of The Toro Company and additional
information regarding certain executive officers is incorporated by reference to
the information to be contained in the Proxy Statement to be filed with respect
to the next meeting of stockholders which involves the election of directors or,
if such Proxy Statement is not filed within 120 days after the end of the fiscal
year covered by this Form 10-K, such information will be filed as part of an
amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to the information to be contained in the Proxy Statement to be filed
with respect to the next meeting of stockholders which involves the election of
directors or, if such Proxy Statement is not filed within such 120 days after
the end of the fiscal year covered by this Form 10-K, such information will be
filed as part of an amendment to this Form 10-K not later than the end of the
120-day period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and
management of The Toro Company is incorporated herein by reference to the
information to be contained in the Proxy Statement to be filed with respect to
the next meeting of stockholders which involves the election of directors or, if
such Proxy Statement is not filed within such 120 days after the end of the
fiscal year covered by this Form 10-K, such information will be filed as part of
an amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
Part IV
- - - - --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Incorporated by reference into Part II, Item 8 of this report: Pages in Fiscal
1996
Annual Report
To Stockholders
---------------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Earnings for the year ended
October 31, 1996, the 3 months ended October 31, 1995 and
the years ended July 31, 1995 and 1994. . . . . . . . . . . . . . . 30
Consolidated Balance Sheets
as of October 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Cash Flows for the year ended
October 31, 1996, the 3 months ended October 31, 1995 and
the years ended July 31, 1995 and 1994. . . . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .33-44
(a) 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . 18
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . 19
All other schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes to the consolidated financial statements.
(a) 3. EXHIBITS
- - - - -----------------
2 and 10(iii)(j) Stock Purchase Agreement among The Toro Company,
James Hardie (USA) Inc., James Hardie Industries
Limited and RCI Pty. Ltd. (incorporated by reference
to the Exhibit to Registrant's Current Report on Form
8-K dated September 18, 1996).
3(i)(a) and 4(a) Certificate of Incorporation of the Registrant as
amended and corrected through May 18, 1987
(incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-3,
Registration No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of
Incorporation of the Registrant dated December 8,
1987 (incorporated by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 29, 1988, Commission File No.
1-8649).
3(ii) and 4(c) Bylaws of the Registrant (incorporated by reference
to Exhibit 3.3 to the Registrant's Annual Report on
Form 10-K for the year ended July 31, 1991,
Commission File No. 1-8649)
14
4(d) Specimen form of Common Stock certificate
(incorporated by reference to Exhibit 4(c) to the
Registrant's Registration Statement on Form S-8,
Registration No. 2-94417).
4(e) Rights Agreement dated as of June 14, 1988, between
the Registrant and Norwest Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as
amended (incorporated by reference to Exhibit 1 to
Registrant's Registration Statement on Form 8-A dated
June 17, 1988, Commission File No. 1-8649, as
amended).
4(f) Indenture dated as of July 15, 1987, between the
Registrant and Manufacturers Hanover Trust Company,
Trustee, relating to the Registrant's 11% Sinking
Fund Debentures Due August 1, 2017 (incorporated by
reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-3, Registration No.
33-15385).
10(iii)(a) * Form of Employment Agreement in effect for certain
officers of Registrant (incorporated by reference to
Exhibit 10(b) to Registrant's Annual Report on Form
10-K for the year ended July 31, 1995).
10(iii)(b) * 1992 Directors Stock Plan, as amended.
10(iii)(c) * Annual Management Incentive Plan for certain key
employees and officers of Registrant (incorporated by
reference to Exhibit A to Registrant's Proxy
Statement dated February 5, 1996).
10(iii)(d) * 1985 Incentive Stock Option Plan, as amended
(incorporated by reference Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1993).
10(iii)(e) * 1989 Stock Option Plan, as amended.
10(iii)(f) * 1993 Stock Option Plan, as amended.
10(iii)(g) * Continuous Performance Award Plan, as amended.
10(iii)(h) * The Toro Company Supplemental Management Retirement
Plan.
10(iii)(i) * Chief Executive Officer Succession Incentive
Agreement dated as of July 31, 1995.
11 Computation of Earnings per Share of Common Stock and
Common Stock Equivalents (page 19 of this report).
13 Registrant's Fiscal 1996 Annual Report to
Stockholders.
21 Subsidiaries of Registrant (page 20 of this report).
23 Independent Auditors' Consent (page 21 of this
report).
27 Supplemental Data Schedule; electronic filing only.
* Management contract or compensatory plan or arrangements required to be filed
as an exhibit to this form 10-K pursuant to Item 14(c).
15
(b) REPORTS ON FORM 8-K
Registrant filed its Current Report on Form 8-K dated October 17, 1996,
reporting the September 18, 1996 agreement entered into with James Hardie
Industries Limited of Australia and related companies, pursuant to which
Registrant agreed to purchase the stock of James Hardie Irrigation, Inc. and
certain related companies, all known as the James Hardie Irrigation Group,
subject to certain terms and conditions.
Registrant filed its Current Report on Form 8-K dated December 16, 1996,
reporting the completion of the acquisition of James Hardie Irrigation Group
from James Hardie Industries Limited of Australia on December 2, 1996 through
the acquisition of all of the outstanding stock of James Hardie Irrigation,
Inc., a Nevada corporation, James Hardie Irrigation Pty. Limited, a corporation
organized under the laws of South Australia, Australia, and James Hardie
Irrigation Europe S.p.A., a corporation organized under the laws of Italy.
- - - - --------------------------------------------------------------------------------
The company's Annual Report on Form 10-K for the fiscal year ended October 31,
1996, at the time of its filing with the Securities and Exchange Commission,
shall modify and supersede all prior documents filed pursuant to Sections 13, 14
and 15(d) of the 1934 Act for purposes of any offers or sales of any securities
after the date of such filing pursuant to any Registration Statement or
Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference such Annual Report on Form 10-K.
16
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)
Dated: January 20, 1997
/s/ Gerald T. Knight
---------------------
Gerald T. Knight
Vice President - Finance
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
- - - - --------------------------------------------------------------------------------
Signature Title Date
- - - - --------------------------------------------------------------------------------
/s/ Kendrick B. Melrose Chairman, Chief Executive January 20, 1997
- - - - ------------------------- Officer, and Director
Kendrick B. Melrose (principal executive officer)
/s/ Gerald T. Knight Vice President - Finance, January 20, 1997
- - - - ------------------------- Chief Financial Officer
Gerald T. Knight (principal financial officer)
/s/ Randy B. James Vice President, Controller January 20, 1997
- - - - ------------------------- (principal accounting officer)
Randy B. James
/s/ Ronald O. Baukol Director January 20, 1997
- - - - -------------------------
Ronald O. Baukol
/s/ Robert C. Buhrmaster Director January 20, 1997
- - - - -------------------------
Robert C. Buhrmaster
/s/ Janet K. Cooper Director January 20, 1997
- - - - -------------------------
Janet K. Cooper
/s/ Alex A. Meyer Director January 20, 1997
- - - - -------------------------
Alex A. Meyer
/s/ Robert H. Nassau Director January 20, 1997
- - - - -------------------------
Robert H. Nassau
/s/ Dale R. Olseth Director January 20, 1997
- - - - -------------------------
Dale R. Olseth
/s/ Edwin H. Wingate Director January 20, 1997
- - - - -------------------------
Edwin H. Wingate
17
[Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Toro Company:
Under date of December 16, 1996, we reported on the consolidated balance sheets
of The Toro Company and subsidiaries as of October 31, 1996 and 1995, and the
related consolidated statements of earnings and cash flows for the year ended
October 31, 1996, the three-month period ended October 31, 1995 and the years
ended July 31, 1995 and 1994, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the fiscal
year 1996. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related consolidated financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 16, 1996
18
THE TORO COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- - - - -------------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED TO
DESCRIPTION AT BEGINNING COSTS AND OTHER (a) DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (b) END OF YEAR
- - - - -------------------------------------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1996
Allowance for doubtful accounts $ 7,542,000 $ 3,358,000 $ 330,000 $ 1,225,000 $ 10,005,000
- - - - -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended October 31, 1995
Allowance for doubtful accounts $ 7,343,000 $ 720,000 $ 0 $ 521,000 $ 7,542,000
- - - - -------------------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1995
Allowance for doubtful accounts $ 7,702,000 $ 1,543,000 $ 20,000 $ 1,922,000 $ 7,343,000
- - - - -------------------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1994
Allowance for doubtful accounts $ 5,589,000 $ 3,032,000 $ 765,000 $ 1,684,000 $ 7,702,000
- - - - -------------------------------------------------------------------------------------------------------------------------------
(a) Additions to allowance for doubtful accounts due to
reclassification and acquisitions.
(b) Uncollectible accounts charged off, net of recoveries.
19
THE TORO COMPANY
1992 DIRECTORS STOCK PLAN
1. PURPOSE OF THE PLAN. The purpose of The Toro Company 1992 Directors Stock
Plan ("Plan") is to enable The Toro Company (the "Company") to attract and
retain experienced and knowledgeable independent directors to serve on the
Board of Directors of the Company or its subsidiaries, and to further align
their interests with those of the stockholders of the Company by providing
for or increasing their stock ownership interests in the Company. It is
intended that the Plan be interpreted to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the
extent applicable.
2. ELIGIBILITY. All members of the Company's Board of Directors who are not
current employees of the Company or any of its subsidiaries ("Nonemployee
Directors") are eligible to participate in the Plan.
3. PLAN AWARDS.
a. DIRECTORS SHARES. To carry out the purposes of the Plan, the Company
shall issue shares ("Directors Shares") of the Company's Common Stock,
$1.00 par value and related preferred share purchase rights (subject
to adjustment as provided in Section 4 hereof) (the "Common Stock"),
to each person who is then a Nonemployee Director, on the first day of
each fiscal year in an amount equal to $5,000 divided by the fair
market value of one share of Common Stock; provided, however, that the
first award of Directors Shares made under the Plan shall be made on
the date that the Plan is first approved by the Company's stockholders
to Nonemployee Directors then serving. The "fair market value of one
share of Common Stock" shall be the average of the closing prices of
the Common Stock on the New York Stock Exchange as reported in The
Wall Street Journal for each of the trading days in the three calendar
months immediately prior to the date of issue of the Directors Shares.
b. DIRECTORS OPTIONS.
i. ANNUAL GRANT. Subject to the terms and conditions of this Section
3.b., the Company shall grant a nonqualified option ("Directors
Options") to purchase 1,000 shares of the Common Stock, to each
person who is then a Nonemployee Director, on the first day of
each fiscal year at an exercise price per share equal to the fair
market value of one share of Common Stock on the date of grant;
provided, however, that the first award of Directors Options made
under the Plan shall be contingent on approval by the Company's
stockholders of the grant of Directors Options. The "fair market
value of one share of Common Stock" shall be the closing price of
the Common Stock on the New York Stock Exchange on the first day
of the Company's fiscal year with respect to which the grant is
made, as reported in The Wall Street Journal.
ii. OPTION TERMS.
(a) Directors Options shall be exercisable in whole or in part
commencing six months following the date of grant and shall
remain exercisable for a term of five years after the date
of grant, except that the first Directors Options awarded
contingent upon approval by the Company's stockholders of
the grant of Directors Options shall expire on October 31,
2000.
(b) No Directors Option shall be assigned or transferred, except
by will or the laws of descent and distribution. An option
so transferred may be exercised after the death of the
individual to whom it is granted only by such individual's
legal representatives, heirs or legatees, not later than the
earlier of the date the option expires or one year after the
date of death of such individual, and only with respect to
an option exercisable at the time of death.
(c) During the lifetime of a Nonemployee Director, options held
by such individual may be exercised only by the Nonemployee
Director and only while serving as a member of the Board of
Directors of the Company and only if the Nonemployee
Director has been continuously so serving since the date
such options were granted; provided, however, that in the
event of disability of a Nonemployee Director, options may
be exercised by such individual not later than the earlier
of the date the option expires or one year after the date
such service as a member of the Board of Directors ceases by
reason of disability, but only with respect to an option
exercisable at the time such service ceases.
(d) Payment of the exercise price may be made in cash, in shares
of Common Stock valued at fair market value on the date of
exercise or in a combination of cash and Common Stock.
c. SHARE PRORATION. If, on any date on which Directors Shares are to be
issued pursuant to Section 3.a. or Directors Options are to be granted
pursuant to Section 3.b., the number of shares of Common Stock is
insufficient for the issuance of the entire number of shares to be
issued or the grant of the entire number of options as calculated in
accordance with Section 3.a. or Section 3.b., then the number of
shares to be issued to each Nonemployee Director entitled to receive
Directors Shares or Directors Options on such date shall be such
Nonemployee Director's proportionate share of such available number of
shares or options (rounded down to the greatest number of whole
shares), provided that if a sufficient number of shares of Common
Stock is available to issue all of the Directors Shares, then the
entire number of Directors Shares shall be issued first and the number
of shares to be subjected to options shall be prorated in accordance
with this section.
d. SUPPLEMENTAL BENEFIT. Directors Shares and Directors Options are a
supplemental benefit and are not a component of the annual retainer
paid to Nonemployee Directors. The value of Directors Shares and
Directors Options shall not be included in the calculation by the
Company of the amount of compensation upon which a Nonemployee
Director's retirement benefit is calculated for purposes of the
Company's Director Retirement Plan or any similar plan.
4. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in this paragraph
and subject to increase by amendment of the Plan, the total number of
shares of Common Stock that is reserved and available for issuance as
Directors Shares or pursuant to Directors Options granted under the Plan
shall be 65,000 shares. If any Directors Option granted hereunder expires
unexercised or terminates, the shares of Common Stock reserved for issuance
pursuant to such option shall, to the extent of any such termination or to
the extent the shares covered by an option are not issued or used, again be
available for option grants under the Plan. Any shares issued by the
Company in connection with the assumption or substitution of outstanding
option grants from any acquired corporation shall not reduce the shares
available for stock awards or option grants under the Plan. Appropriate
adjustments in the number of shares of the Common Stock that may be
available for option grants under the Plan and adjustments in the option
price per share of outstanding options may be made by the Committee in its
discretion to give effect to adjustments made in the number of shares of
Common Stock of the Company through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or other similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
5. CHANGE OF CONTROL. In the event of a threatened or actual Change of Control
of the Company as hereinafter defined, whether or not approved by the Board
of Directors , all Directors Options shall fully vest, unless otherwise
limited by the Committee at the time of grant, and be exercisable in their
entirety immediately, and notwithstanding any other provisions of the Plan,
shall continue to be exercisable for three years following the later of the
threatened or actual Change of Control, but not later than ten years after
the date of grant. A Change of Control means the earliest to occur of (i) a
public announcement that a party shall have acquired or obtained the right
to acquire beneficial ownership of 20% or more of the outstanding shares of
Common Stock of the Company, (ii) the commencement or announcement of an
intention to make a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a party of 30% or more of
the outstanding shares of Common Stock of the Company or (iii) the
occurrence of a tender offer, exchange offer, merger, consolidation, sale
of assets or contested election or any combination thereof, that causes (or
would cause) the persons who were directors of the Company immediately
before such Change of Control to cease to constitute a majority of the
Board of Directors of the Company or any parent of or successor to the
Company.
6. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a committee
composed of those members of the Board of Directors of the Company who are
also employees of the Company (the "Committee"). The Committee shall have
the authority to carry out all provisions of the Plan; provided, however,
that it shall have no discretion to determine which Nonemployee Directors
may receive Directors Shares or Directors Options or to set the value of
such Directors Shares or Directors Options, other than to make the
calculations required by Section 3.a. and Section 3.b.
7. TERM OF PLAN. The Plan became effective on August 20, 1992 and shall
terminate ten (10) years thereafter, unless sooner terminated by action of
the Board of Directors.
8. AMENDMENT.
a. The effective date of any amendment to the Plan shall be the date of
its adoption by the Board of Directors; provided, however, that no
amendment shall be effective unless and until the same is approved by
the stockholders of the Company where the failure to obtain such
approval would adversely affect the compliance of the Plan with any
law or rule, including the Exchange Act and the Internal Revenue Code
of 1986, as amended. In the event the stockholders do not approve such
an amendment, the amendment shall be of no effect and the Plan shall
continue in effect as if such amendment had not been adopted by the
Board of Directors, unless the Board otherwise determines. No
amendment of the Plan shall adversely affect in a material manner any
right of any option
holder with respect to any option theretofore granted without such
option holder's written consent.
b. The provisions of Section 3.a. and Section 3.b. shall not be amended
more than once every six (6) months other than to comport with changes
in the Code, the Employee Retirement Income Security Act, or the rules
thereunder.
THE TORO COMPANY
1989 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1989 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the Company
and its subsidiaries and to certain other key individuals who perform
services for the Company and its subsidiaries, to contribute significantly
to the strategic and long-term performance objectives and growth of the
Company and its subsidiaries. This purpose is expected to be achieved by
granting options to acquire the Common Stock, $1.00 par value, and related
preferred share purchase rights of the Company (the "Common Stock").
Subject to the provisions of the Plan, options may contain such terms and
conditions as shall be required so as to be either nonqualified stock
options ("nonqualified options") or incentive stock options ("Incentive
Stock Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Subject to such limits as may be imposed by
the Plan, nonqualified options or Incentive Stock Options or both may be
granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 8, 1989.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule
and shall qualify to administer the Plan as contemplated by Section 162(m)
of the Code and the regulations thereunder ("Section 162(m)"). A majority
of the members of the Committee shall constitute a quorum for any meeting
of the Committee and the acts of a majority of the members present at any
meeting at which a quorum is present or the acts unanimously approved in
writing by all members of the Committee shall be the acts of the Committee.
The decision of the Committee on any matter affecting the Plan and
obligations arising under the Plan or any option granted thereunder shall
be deemed final and binding upon all persons. No member of the Board or of
the Committee shall be liable for any action or determination taken or made
in good faith with respect to the Plan or any option granted thereunder.
Committee members shall be reimbursed for out-of-pocket expenses reasonably
incurred in the administration of the Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the exercise price of each option to purchase Common Stock, the individuals
to whom and the time or times at which options shall be granted, the number
of shares to be subject to each option, when an option may be exercisable
and the other terms and provisions (and
amendments thereto) of the respective option agreements (which need not be
identical); to determine whether a particular option is to be an Incentive
Stock Option and the terms and provisions thereof that shall be required in
the judgment of the Committee to provide therefor or to conform to any
change in any law or regulation applicable thereto, or to any other law or
regulation that may hereafter become effective to provide similar or
related tax benefits to option holders; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in this
paragraph and subject to increase by amendment of the Plan, the total
number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,700,000
shares. If any option granted hereunder terminates, expires unexercised, is
exchanged for other options without the issuance of shares of Common Stock
or is exercised by the delivery or constructive delivery of shares of
Common Stock already owned by the option holder, the shares of Common Stock
reserved for issuance pursuant to such option shall, to the extent of any
such termination or to the extent shares covered by an option are not
issued or used, again be available for option grants under the Plan. Any
shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not
reduce the shares available for option grants under the Plan. Shares of
Common Stock that may be issued hereunder may be authorized but unissued
shares, reacquired or treasury shares, or outstanding shares acquired in
the market or from private sources, or a combination thereof. Appropriate
adjustments in the number of shares of the Common Stock that may be
available for option grants under the Plan and adjustments in the option
price per share of outstanding options may be made by the Committee in its
discretion to give effect to adjustments made in the number of shares of
Common Stock of the Company through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or other similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of the
Company and its subsidiaries. Options may be granted to directors of the
Company who are also employees of the Company. More than one option may be
granted to the same individual. No option may be granted to an individual
who owns, directly or indirectly, Common Stock or other capital stock of
the Company possessing more than 5% of the total combined voting power or
value of any class of capital stock of the Company or a subsidiary
immediately after such option is granted. Except
for the foregoing limitations, there is no minimum or maximum number of
shares of Common Stock with respect to which options may be granted to any
individual under the Plan. Individuals to whom options are granted are at
times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under the
Plan must be granted within ten years from the effective date of the Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the Committee
shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:
A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or any
later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number of
shares that may be covered by any option grant during any calendar
year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at fair market value, except for performance based stock
options, such as those granted in connection with the Continuous
Performance Award Plan, where the exercise price is an average and on
the date of grant could be higher or lower than fair market value.
Fair market value is generally determined to be the closing price for
the Common Stock on the New York Stock Exchange as reported by The
Wall Street Journal or other readily available quotation of composite
transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant
of an option during which the option or any portion thereof may
not yet be exercisable, including provisions applicable to
persons subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of
the Company or otherwise performing services for the Company or
a parent or subsidiary and only if the option holder has been
continuously so employed or engaged since the date such options
were granted; provided, however, that (a) in the event of
disability of an option holder, options may be exercised by
such individual not later than the earlier of the date the
option expires or one year after the date such employment or
performance of services ceases by reason of disability, but
only with respect to an option exercisable at the time such
employment or performance of services ceases and (b) an option
other than an Incentive Stock Option may be exercised (I) after
such individual ceases to be an employee by reason of
retirement, either at or after age 60 but not later than the
earlier of the date the option expires or four years after the
date of retirement, or, if approved by the Committee, after
retirement at an age less than age 60 but not later than the
earlier of the date the option expires or three years after the
date of retirement; and (II) in the event a salary replacement
option is granted by the Committee and the option holder is
involuntarily terminated during the option term or becomes
disabled or dies, the Committee shall have the right to grant
to the option holder or his personal representative, as the
case may be, the right to request either (1) that the option be
cancelled and the option holder or his estate be paid an amount
equal to the compensation the option holder has given up from
the date of grant to the date of such termination, disability
or death together with interest at the prime rate less the then
market gain on that portion of the shares covered by the option
which is then vested; or (2) that the stock option accelerates
such that the option be deemed to have vested at an appropriate
rate per month (as determined by the Committee) from the date
of grant to the last date of the month in which the date of
termination, disability or death occurs, such accelerated
option to be then exercisable for a period of three years
following such date but only with respect to an option
exercisable at the time such individual ceases to be an
employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if within
one year after the termination of employment with or
performance of services for the Company, an option holder is
employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by such individual and
demand return of the economic value of any
option which was realized or obtained (measured at the date of
exercise) by such individual at any time during the period
beginning on the date which is twelve months prior to the date
of termination.
(iv) Absence on leave or any other interruption in the performance
of services by an option holder with the Company shall, if
approved by the Committee, not be deemed a cessation or
interruption of employment or services for the purposes of the
Plan.
(v) No option shall be assignable or transferable by the individual
to whom it is granted except that it may be transferable by
will or the laws of descent and distribution. An option so
transferred may be exercised after the death of the individual
to whom it is granted only by such individual's legal
representatives, heirs or legatees, not later than the earlier
of the date the option expires or one year after the date of
death of such individual, and only with respect to an option
exercisable at the time of death.
(vi) In no event shall any option be exercisable at any time after
its expiration date unless extended by the Committee. When an
option is no longer exercisable, it shall be deemed to have
lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the Plan
and the terms and conditions of the option agreement, an option may be
exercised in whole at any time or in part from time to time, by
delivery to the Company at its principal office of a written notice of
exercise specifying the number of shares with respect to which the
option is being exercised, accompanied by payment in full of the
exercise price for shares to be purchased at that time. Payment may be
made (i) in cash, (ii) in shares of Common Stock valued at the fair
market value of the Common Stock on the date of exercise or (iii) in a
combination of cash and Common Stock. The Committee may also, in its
sole discretion, permit option holders to deliver a notice of exercise
of options and to simultaneously sell the shares of Common Stock
thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by proper officers of the Company, using the
proceeds from such sale as payment of the exercise price, or may
authorize such other methods as it deems appropriate and as comply
with requirements of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment therefor
has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of the
Committee, include the right to acquire an accelerated ownership
nonqualified stock option ("AO Option"). An option which provides for
the grant of an AO Option shall entitle the option holder, upon
exercise of that option and payment of the appropriate exercise price
in shares of Common Stock that have been owned by such option holder
for not less than six months prior to the date of exercise, to receive
an AO Option. An AO Option is an option to purchase, at fair market
value at the date of grant of the AO Option, a number of shares of
Common Stock equal to the sum of the number of whole shares delivered
by the option holder in payment of the exercise price of the original
option and the number of whole shares, if any, withheld by the Company
as payment for withholding taxes. An AO Option shall expire on the
same date that the original option would have expired had it not been
exercised. All AO Options shall be nonqualified options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not approved
by the Board of Directors, all options shall fully vest, unless
otherwise limited by the Committee at the time of the option grant,
and be exercisable in their entirety immediately, and notwithstanding
any other provisions of the Plan, shall continue to be exercisable for
three years following the later of the threatened or actual Change of
Control, but not later than ten years after the date of grant. A
Change of Control means the earliest to occur of (i) a public
announcement that a party shall have acquired or obtained the right to
acquire beneficial ownership of 20% or more of the outstanding shares
of Common Stock of the Company, (ii) the commencement or announcement
of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a
party of 30% or more of the outstanding shares of Common Stock of the
Company or (iii) the occurrence of a tender offer, exchange offer,
merger, consolidation, sale of assets or contested election or any
combination thereof, that causes (or would cause) the persons who were
directors of the Company immediately before such Change of Control to
cease to constitute a majority of the Board of Directors of the
Company or any parent of or successor to the Company.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of outstanding
options in the event of a merger, consolidation, reorganization or
liquidation of the Company or the acquisition of stock or assets of
the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as a
stockholder with respect to any Common Stock covered by an option
until exercise of such option and issuance of shares of Common Stock.
Except as otherwise expressly provided in the Plan, no adjustments
shall be made
for dividends or other rights for which the record date is prior to
issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the requirement
that, if at any time the Board shall determine in its discretion that
the listing, registration or qualification of the Common Stock subject
to such option on any securities exchange or under any state or
federal law, or the consent or approval of any government regulatory
body, is necessary or desirable as a condition of, or in connection
with, the granting of such option or the issue or purchase of Common
Stock thereunder, such option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not
acceptable to the Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be granted to
individuals who are foreign nationals or are employed or otherwise
performing services for the Company or any subsidiary outside the
United States or both, on such terms and conditions different from
those specified in the Plan as may, in the judgment of the Committee,
be necessary or desirable to further the purpose of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet the
applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the time
such options are granted; that other options shall not meet such
requirements and shall be nonqualified stock options; and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent. The Committee may grant one or more options of either type, or
of both types, to any one or more individuals either at different times or
concurrently. Such options shall be subject to the terms and conditions set
forth elsewhere in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option shall
meet the requirements of Section 422 of the Code. Any Incentive Stock
Option shall be treated as "outstanding" until it is exercised in full
or expires by reason of lapse of time. To the extent that the
aggregate fair market value of Common Stock (determined at the time of
grant of the Incentive Stock Option in accordance with paragraph 7.C
of the Plan) with respect to which Incentive Stock Options are
exercisable for the first time by an option holder during any calendar
year (under all such plans of the Company and its parent and
subsidiary corporations) exceeds $100,000 or such other limit as may
be imposed by the Code, such options to the extent they exceed such
limit shall be treated as options which are not Incentive
Stock Options. In applying the foregoing limitation, options shall be
taken into account in the order in which they were granted.
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount of
nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or the
sale of shares of Common Stock, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes. If Common Stock is
withheld or surrendered to satisfy tax withholding, such stock shall be
valued at its fair market value as of the date such Common Stock is
withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or discontinued
in whole or in part at any time and from time to time by the Board,
including an amendment to increase the number of shares of Common Stock
with respect to which options may be granted, provided however that no
amendment shall be effective unless and until the same is approved by
stockholders of the Company where the failure to obtain such approval would
adversely affect the availability of any exemption under Rule 16b-3 under
the Exchange Act or successor rule and with other applicable law, including
the Code. No amendment of the Plan shall adversely affect in a material
manner any right of any option holder with respect to any option
theretofore granted without such option holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
THE TORO COMPANY
1993 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1993 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the Company
and its subsidiaries and to certain other key individuals who perform
services for the Company and its subsidiaries, to contribute significantly
to the strategic and long-term performance objectives and growth of the
Company and its subsidiaries. This purpose is expected to be achieved by
granting options to acquire the Common Stock, $1.00 par value, and related
preferred share purchase rights of the Company (the "Common Stock").
Subject to the provisions of the Plan, options may contain such terms and
conditions as shall be required so as to be either nonqualified stock
options ("nonqualified options") or incentive stock options ("Incentive
Stock Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Subject to such limits as may be imposed by
the Plan, nonqualified options or Incentive Stock Options or both may be
granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 17, 1993.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule
and shall qualify to administer the Plan as contemplated by Section 162(m)
of the Code and the regulations thereunder ("Section 162(m)"). A majority
of the members of the Committee shall constitute a quorum for any meeting
of the Committee and the acts of a majority of the members present at any
meeting at which a quorum is present or the acts unanimously approved in
writing by all members of the Committee shall be the acts of the Committee.
The decision of the Committee on any matter affecting the Plan and
obligations arising under the Plan or any option granted thereunder shall
be deemed final and binding upon all persons. No member of the Board or of
the Committee shall be liable for any action or determination taken or made
in good faith with respect to the Plan or any option granted thereunder.
Committee members shall be reimbursed for out-of-pocket expenses reasonably
incurred in the administration of the Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the exercise price of each option to purchase Common Stock, the individuals
to whom and the time or times at which options shall be granted, the number
of shares to be subject to each
option, when an option may be exercisable and the other terms and
provisions (and amendments thereto) of the respective option agreements
(which need not be identical); to determine whether a particular option is
to be an Incentive Stock Option and the terms and provisions thereof that
shall be required in the judgment of the Committee to provide therefor or
to conform to any change in any law or regulation applicable thereto, or to
any other law or regulation that may hereafter become effective to provide
similar or related tax benefits to option holders; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in this
paragraph and subject to increase by amendment of the Plan, the total
number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,600,000
shares. If any option granted hereunder terminates, expires unexercised, is
exchanged for other options without the issuance of shares of Common Stock
or is exercised by the delivery or constructive delivery of shares of
Common Stock already owned by the option holder, the shares of Common Stock
reserved for issuance pursuant to such option shall, to the extent of any
such termination or to the extent shares covered by an option are not
issued or used, again be available for option grants under the Plan. Any
shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not
reduce the shares available for option grants under the Plan. Shares of
Common Stock that may be issued hereunder may be authorized but unissued
shares, reacquired or treasury shares, or outstanding shares acquired in
the market or from private sources, or a combination thereof. Appropriate
adjustments in the number of shares of the Common Stock that may be
available for option grants under the Plan and adjustments in the option
price per share of outstanding options may be made by the Committee in its
discretion to give effect to adjustments made in the number of shares of
Common Stock of the Company through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or other similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of the
Company and its subsidiaries. Options may be granted to directors of the
Company who are also employees of the Company. More than one option may be
granted to the same individual. No option may be granted to an individual
who owns, directly or indirectly, Common Stock or other capital stock of
the Company possessing more than 5% of the total combined voting power or
value of any class of capital stock
of the Company or a subsidiary immediately after such option is granted.
Except for the foregoing limitations, there is no minimum or maximum number
of shares of Common Stock with respect to which options may be granted to
any individual under the Plan. Individuals to whom options are granted are
at times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under the
Plan must be granted within ten years from the effective date of the Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the Committee
shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:
A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or any
later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number of
shares that may be covered by any option grant during any calendar
year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at fair market value, except for performance based stock
options, such as those granted in connection with the Continuous
Performance Award Plan, where the exercise price is an average and on
the date of grant could be higher or lower than fair market value.
Fair market value is generally determined to be the closing price for
the Common Stock on the New York Stock Exchange as reported by The
Wall Street Journal or other readily available quotation of composite
transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant
of an option during which the option or any portion thereof
may not yet be exercisable, including provisions applicable to
persons subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of
the Company or otherwise performing services for the Company
or a parent or subsidiary and only if the option holder has
been continuously so employed or engaged since the date such
options were granted; provided, however, that (a) in the event
of disability of an option holder, options may be exercised by
such individual not later than the earlier of the date the
option expires or one year after the date such employment or
performance of services ceases by reason of disability, but
only with respect to an option exercisable at the time such
employment or performance of services ceases and (b) an option
other than an Incentive Stock Option may be exercised (I)
after such individual ceases to be an employee by reason of
retirement, either at or after age 60 but not later than the
earlier of the date the option expires or four years after the
date of retirement, or, if approved by the Committee, after
retirement at an age less than age 60 but not later than the
earlier of the date the option expires or three years after
the date of retirement; and (II) in the event a salary
replacement option is granted by the Committee and the option
holder is involuntarily terminated during the option term or
becomes disabled or dies, the Committee shall have the right
to grant to the option holder or his personal representative,
as the case may be, the right to request either (1) that the
option be cancelled and the option holder or his estate be
paid an amount equal to the compensation the option holder has
given up from the date of grant to the date of such
termination, disability or death together with interest at the
prime rate less the then market gain on that portion of the
shares covered by the option which is then vested; or (2) that
the stock option accelerates such that the option be deemed to
have vested at an appropriate rate per month (as determined by
the Committee) from the date of grant to the last date of the
month in which the date of termination, disability or death
occurs, such accelerated option to be then exercisable for a
period of three years following such date but only with
respect to an option exercisable at the time such individual
ceases to be an employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if within
one year after the termination of employment with or
performance of services for the Company, an option holder is
employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by
such individual and demand return of the economic value of any
option which was realized or obtained (measured at the date of
exercise) by such individual at any time during the period
beginning on the date which is twelve months prior to the date
of termination.
(iv) Absence on leave or any other interruption in the performance
of services by an option holder with the Company shall, if
approved by the Committee, not be deemed a cessation or
interruption of employment or services for the purposes of the
Plan.
(v) No option shall be assignable or transferable by the
individual to whom it is granted except that it may be
transferable by will or the laws of descent and distribution.
An option so transferred may be exercised after the death of
the individual to whom it is granted only by such individual's
legal representatives, heirs or legatees, not later than the
earlier of the date the option expires or one year after the
date of death of such individual, and only with respect to an
option exercisable at the time of death.
(vi) In no event shall any option be exercisable at any time after
its expiration date unless extended by the Committee. When an
option is no longer exercisable, it shall be deemed to have
lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the Plan
and the terms and conditions of the option agreement, an option may be
exercised in whole at any time or in part from time to time, by
delivery to the Company at its principal office of a written notice of
exercise specifying the number of shares with respect to which the
option is being exercised, accompanied by payment in full of the
exercise price for shares to be purchased at that time. Payment may be
made (i) in cash, (ii) in shares of Common Stock valued at the fair
market value of the Common Stock on the date of exercise or (iii) in a
combination of cash and Common Stock. The Committee may also, in its
sole discretion, permit option holders to deliver a notice of exercise
of options and to simultaneously sell the shares of Common Stock
thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by proper officers of the Company, using the
proceeds from such sale as payment of the exercise price, or may
authorize such other methods as it deems appropriate and as comply
with requirements of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment therefor
has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of the
Committee, include the right to acquire an accelerated ownership
nonqualified stock option ("AO Option"). An option which provides for
the grant of an AO Option shall entitle the option holder, upon
exercise of that option and payment of the appropriate exercise price
in shares of Common Stock that have been owned by such option holder
for not less than six months prior to the date of exercise, to receive
an AO Option. An AO Option is an option to purchase, at fair market
value at the date of grant of the AO Option, a number of shares of
Common Stock equal to the sum of the number of whole shares delivered
by the option holder in payment of the exercise price of the original
option and the number of whole shares, if any, withheld by the Company
as payment for withholding taxes. An AO Option shall expire on the
same date that the original option would have expired had it not been
exercised. All AO Options shall be nonqualified options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not approved
by the Board of Directors, all options shall fully vest, unless
otherwise limited by the Committee at the time of the option grant,
and be exercisable in their entirety immediately, and notwithstanding
any other provisions of the Plan, shall continue to be exercisable for
three years following the later of the threatened or actual Change of
Control, but not later than ten years after the date of grant. A
Change of Control means the earliest to occur of (i) a public
announcement that a party shall have acquired or obtained the right to
acquire beneficial ownership of 20% or more of the outstanding shares
of Common Stock of the Company, (ii) the commencement or announcement
of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a
party of 30% or more of the outstanding shares of Common Stock of the
Company or (iii) the occurrence of a tender offer, exchange offer,
merger, consolidation, sale of assets or contested election or any
combination thereof, that causes (or would cause) the persons who were
directors of the Company immediately before such Change of Control to
cease to constitute a majority of the Board of Directors of the
Company or any parent of or successor to the Company.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of outstanding
options in the event of a merger, consolidation, reorganization or
liquidation of the Company or the acquisition of stock or assets of
the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as a
stockholder with respect to any Common Stock covered by an option
until exercise of such option and issuance of shares of Common Stock.
Except
as otherwise expressly provided in the Plan, no adjustments shall be
made for dividends or other rights for which the record date is prior
to issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the requirement
that, if at any time the Board shall determine in its discretion that
the listing, registration or qualification of the Common Stock subject
to such option on any securities exchange or under any state or
federal law, or the consent or approval of any government regulatory
body, is necessary or desirable as a condition of, or in connection
with, the granting of such option or the issue or purchase of Common
Stock thereunder, such option may not be exercised in whole or in part
unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not
acceptable to the Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be granted to
individuals who are foreign nationals or are employed or otherwise
performing services for the Company or any subsidiary outside the
United States or both, on such terms and conditions different from
those specified in the Plan as may, in the judgment of the Committee,
be necessary or desirable to further the purpose of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet the
applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the time
such options are granted; that other options shall not meet such
requirements and shall be nonqualified stock options; and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent. The Committee may grant one or more options of either type, or
of both types, to any one or more individuals either at different times or
concurrently. Such options shall be subject to the terms and conditions set
forth elsewhere in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option shall
meet the requirements of Section 422 of the Code. Any Incentive Stock
Option shall be treated as "outstanding" until it is exercised in full
or expires by reason of lapse of time. To the extent that the
aggregate fair market value of Common Stock (determined at the time of
grant of the Incentive Stock Option in accordance with paragraph 7.C
of the Plan) with respect to which Incentive Stock Options are
exercisable for the first time by an option holder during any calendar
year (under all such plans of the Company and its parent and
subsidiary corporations) exceeds $100,000 or such other limit as may
be imposed by the Code, such options to the extent they exceed such
limit shall be treated as options which are not Incentive
Stock Options. In applying the foregoing limitation, options shall be
taken into account in the order in which they were granted.
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount of
nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or the
sale of shares of Common Stock, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes. If Common Stock is
withheld or surrendered to satisfy tax withholding, such stock shall be
valued at its fair market value as of the date such Common Stock is
withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or discontinued
in whole or in part at any time and from time to time by the Board,
including an amendment to increase the number of shares of Common Stock
with respect to which options may be granted, provided however that no
amendment shall be effective unless and until the same is approved by
stockholders of the Company where the failure to obtain such approval would
adversely affect the availability of any exemption under Rule 16b-3 under
the Exchange Act or successor rule and with other applicable law, including
the Code. No amendment of the Plan shall adversely affect in a material
manner any right of any option holder with respect to any option
theretofore granted without such option holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
THE TORO COMPANY
CONTINUOUS PERFORMANCE AWARD PLAN
1. PURPOSE OF THE PLAN. The purpose of the Continuous Performance Award Plan
(the "Plan") is to provide an incentive to members of management of The
Toro Company (the "Company") who are primarily responsible for the
management, growth and sound development of the business of the Company to
achieve the Company's long-term financial objectives, by making awards
based on achievement of performance goals ("Performance Awards").
2. EFFECTIVE DATE. The Plan shall become effective as of August 1, 1991,
subject to the approval of the stockholders of the Company at its Annual
Meeting of Stockholders on December 10, 1991, and shall continue in effect
unless and until terminated by the Board of Directors of the Company.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company, or its successor
committee (the "Committee"), it being intended that members of the
Committee shall qualify to administer the Plan as contemplated by Rule
16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act") or any successor rule, and as contemplated by Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") and the rules and
regulations thereunder, and provided further that, if the stock options
granted pursuant to paragraph 6 hereof are authorized to be granted under
the Company's stock option plans, the members of the Committee shall also
have authority to act under those plans. The Committee shall have power to
select employees to whom Performance Awards are made, to determine the
terms of the Performance Awards consistent with the Plan, to prescribe
rules and regulations relating to the Plan and to construe and otherwise
implement the Plan.
4. ELIGIBILITY. Performance Awards may be made to any employee who has
primary responsibility for and directly influences achievement of long-term
financial results of the Company. Officers of the Company who are also
members of the Board of Directors shall be eligible to receive Performance
Awards. Members of the Committee shall not be eligible to receive
Performance Awards. Individuals to whom Performance Awards are made are
referred to as "Participants."
5. TERMS OF AWARDS. Performance Awards shall be evidenced by written
agreements in such form, not inconsistent with this Plan, as the Committee
shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:
a. "AWARD TERM". Unless otherwise provided herein, each Performance
Award shall have a term of three fiscal years and shall be payable
only at the conclusion of such term. Notwithstanding the foregoing,
and for the purpose of bringing a Participant who has not previously
participated in this Plan into the three year award cycle of the Plan,
the Committee shall grant, in addition to a three year Performance
Award, a
Performance Award having a term of one fiscal year and a Performance
Award having a term of two fiscal years, such that an award shall be
payable, if otherwise earned, at the conclusion of each of the first
two fiscal years after commencement of participation in the Plan. The
Committee may, in its discretion, grant additional, successive three
year Performance Awards to any Participant with respect to subsequent
three year periods. Notwithstanding the foregoing, the Committee may,
in its discretion, make Performance Awards having a duration of less
than the normal Award Term to an individual who is selected to first
become a Participant at a time other than the beginning of a fiscal
year of the Company or to reflect a fiscal transition period resulting
from a change in fiscal year end or similar significant event;
provided that such award shall otherwise be generally on the same
terms and conditions applicable to Performance Awards granted as of
the first day of the applicable fiscal year.
SPECIAL RULE FOR PERSONS REFERRED TO IN SECTION 162(M). If a
Performance Award is granted at a time other than the beginning of a
fiscal year, such award shall not be granted later than 90 days after
the commencement of the period of service to which the Performance
Award relates or after more than 25% of the period of service has
elapsed, in accordance with the provisions of paragraph 5.c.ii
hereof.
b. DATE OF GRANT. Except as otherwise permitted under this Plan,
Performance Awards, whether one year, two year or three year awards,
shall be granted as of the date which marks the first day of any Award
Term.
c. BASIS OF AWARD.
i. The maximum amount that may be paid with respect to any
Performance Award (the "Award Maximum") shall be determined by
multiplying (a) the base compensation actually paid to the
Participant during the period of any one-year Award Term or the
last fiscal year of any multiple-year Award Term, as the case may
be, exclusive of any bonus or other incentive compensation but
including deferred compensation, times (b) a performance factor
(such as .25, .50, 1.0, etc.) determined by the Committee, which
is intended to reflect the Participant's ability to influence the
financial results of the Company and the Participant's relative
seniority within management. The maximum dollar amount of the
Award Maximum of each Performance Award shall be set by the
Committee at the time of grant of such award.
SPECIAL RULE FOR PERSONS REFERRED TO IN SECTION 162(M): The
maximum amount that may be paid with respect to a Performance
Award granted to a person referred tp om Section 162(m) shall be
determined based on an estimate of such base compensation to be
paid during a one-year Award Term or the last fiscal year of a
multiple year Award Term, and the maximum dollar amount of the
Award Maximum shall be set by the Committee at the time of grant
of such award. Performance factors applicable to such persons
shall be as follows:
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Chief Executive Officer 1.00
President and Chief Operating Officer .75
Other Officers .25
ii. The Committee shall establish a financial performance goal based
on the Company's relative performance in achieving a return on
beginning stockholders equity (ROBE) and net income growth as
compared with other similarly classified Fortune 500 companies
(the "Performance Goal"), and the amount that shall be paid (the
"Award Payment") with respect to each Performance Award shall be
based on the achievement by the Company of such Performance Goal
during the applicable Award Term; provided that the Performance
Goal shall be established not later than 90 days after the
commencement of the period of service to which the Performance
Goal relates, provided that the outcome is substantially
uncertain at the time the Committee actually establishes the
Performance Goal; and provided further that in no event will a
Performance Goal be considered to be preestablished if it is
established after 25% of the period of service (as scheduled in
good faith at the time the Performance Goal is established) has
elapsed.
d. CALCULATION OF AWARD PAYMENT.
i. STANDARD CALCULATION. The Company's ROBE and net income growth
for each fiscal year shall be converted to a percentile score
(the Percentile Score) by comparing the ROBE and net income
growth to comparable data for all companies in the Industrial and
Farm Equipment Group of Fortune 500 (as reported for the calendar
year ended during such fiscal year). The one year Percentile
Score shall be used to determine the Award Payment with respect
to a one year Award Term and the average of the Percentile Scores
for a two or three year Award Term shall be used in determining
the Award Payment for any multiple year Performance Award. If
the Percentile Score (or average Percentile Score for a two or
three year Award Term) is: (a) at or above the 75th percentile,
each Participant shall be paid the Award Maximum; (b) between the
50th and 75th percentile, each Participant shall be paid an
amount equal to two-thirds of the Award Maximum at the 50th
percentile and ranging up on a straight line basis to 100% of the
Award Maximum at the 75th percentile; (c) between the 25th and
50th percentile, each Participant shall be paid two-thirds of the
Award Maximum at the 50th percentile and ranging down on a
straight line basis to zero at the 25th percentile; and (d) at or
below the 25th percentile, no Performance Award shall be paid.
The Award Payment with respect to a Performance Award covering
two or three fiscal years shall not be earned or paid until the
completion of the final fiscal year of the Award Term. However,
no award payment will be earned or paid to any participant during
the first six months of any Award Term.
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ii. Notwithstanding the provisions of subparagraph i of this
subparagraph 5.d., any individual who has participated in the
Plan for less than a full fiscal year during a one-year Award
Term shall receive a payment only for that portion of the fiscal
year during which the individual was a Participant (expressed as
a percentage and based on a 360 day year).
e. MAXIMUM AWARD. Notwithstanding any other provision of this Plan, the
Maximum Award Payment with respect to any Performance Award is
$1,100,000.
f. PAYMENT. Before any payment is made under the Plan, the Committee
must certify in writing that the Performance Goal justifying the
payment has been met. Subject to the provisions of subparagraph 5.g.
hereof, any amount earned with respect to a Performance Award shall be
paid in cash within a reasonable time after the last day of the Award
Term and after the Committee has certified in writing that the
applicable Performance Goal and any other material terms were
satisfied. A Participant shall have no control over the date of
payment; provided, however, that a Participant may elect to defer
receipt of the cash payment for investment in a deferred compensation
account in accordance with the Company's usual procedures, provided
that such deferred compensation account shall be maintained in cash or
cash equivalents and not in the equity securities of the Company. An
election to defer shall be made by the Participant not later than 61
days prior to the last day of an applicable Award Term, and if deemed
to be required by applicable securities laws or regulations, shall be
made during a period that qualifies as a "window period" for purposes
of rules and regulations under the Exchange Act.
g. CHANGE OF CONTROL. Each Performance Award shall provide that in the
event of a threatened or actual change of control of the Company after
one full year of any multiple year Award Term, or during the final six
months of a one-year Award Term, any such Performance Award shall
become immediately payable and the calculation of the amount payable
shall be based on the ROBE and net income growth of the Company for
the fiscal period most recently ended and the most recent Fortune 500
publication then available. A Change of Control means the earliest to
occur of (a) a public announcement that a party shall have acquired or
obtained the right to acquire beneficial ownership of 20% or more of
the outstanding shares of Common Stock of the Company, (b) the
commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the
beneficial ownership by a party of 30% or more of the outstanding
shares of Common Stock of the Company, or (c) the occurrence of a
tender offer, exchange offer, merger, consolidation, sale of assets or
contested election or any combination thereof, that causes the persons
who were directors of the Company immediately before such Change of
Control to cease to constitute a majority of the Board of Directors of
the Company or any parent of or successor to the Company."
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h. TRANSFERABILITY. No Performance Award granted hereunder may be
transferred by a Participant. A Participant may receive payment with
respect to a Performance Award only while an employee of the Company
or a parent or subsidiary of the Company and only if he or she has
been continuously employed since the date the Performance Award was
granted; provided, however, that:
i. In the event of the death, disability or retirement of a
Participant, an Award Payment shall be paid if otherwise earned
in accordance with subparagraph 5.d. hereof, with respect to the
portion of the applicable Award Term completed at the date of
such event (based on a 360 day year and expressed as a
percentage). The amount shall be calculated and paid in
accordance with the applicable provisions of subparagraphs 5.d.
and 5.e., notwithstanding the earlier occurrence of such event.
ii. In the event of involuntary termination of employment of a
Participant, during the Award Term, for reasons other than death,
disability or retirement, an Award Payment shall be paid, if
otherwise earned in accordance with subparagraph 5.d. hereof,
with respect to the portion of the applicable Award Term
completed at the date of such event (based on a 360 day year and
expressed as a percentage). Any payment made under this
subparagraph 5.g. shall be based on the ROBE of the Company for
the fiscal period then most recently ended and the most recent
Fortune 500 publication then available.
6. STOCK OPTIONS. At the time of granting any Performance Award, the
Committee shall grant to each Participant options to purchase shares of the
Common Stock, $1.00 par value, of the Company (the "Common Stock") under
the Company's then effective stock option plan or plans, on such terms and
conditions as may be required or permitted under such stock option plan,
provided, however, that the following terms shall be applicable unless
otherwise not permitted by such stock option plan:
a. Each Participant shall be granted one option with respect to each
Performance Award.
b. The number of shares to be subject to an option granted to a
Participant (the "Option Amount") shall be determined by: multiplying
(a) the estimated base compensation of the Participant during the
first fiscal year of the Award Term, as determined by the Human
Resources department of the Company, exclusive of any bonus or other
incentive compensation but including deferred compensation; times (b)
the performance factor described in subparagraph 5.c.i above; times
(c) 1.0 for a one-year Award Term, 1.05 for a two-year Award Term, and
1.1 for a three-year Award Term; and dividing that result by (d) the
Fair Market Value of one share of the Common Stock of the Company
determined in accordance with subparagraph 6.d. hereof.
5
c. Notwithstanding paragraph 6.b., the number of shares subject to an
option shall be subject to reduction as follows: If the Company's
Percentile Score (or average Percentile Score for a multiple year
Award Term) as calculated in accordance with subparagraph 5.d. above,
is not at or above the 75th percentile, but is at or above the 25th
percentile, a portion of the option related to the applicable
Performance Award shall be deemed to expire so that the number of
shares subject to the option shall be reduced pro rata on a
straight-line basis (full shares only) to two-thirds of the Option
Amount at a 50th Percentile Score and to zero at a 25th Percentile
Score, on the same basis as provided in subparagraph 5.d. above.
Thus, if the Company does not achieve a performance equal to at least
the 25th percentile as herein provided for the Award Term, the option
shall expire automatically. The calculation required by this
subparagraph shall be made by the Committee promptly after the end of
each fiscal year, and any option or portion of an option deemed to
expire shall expire automatically upon the making of such calculation.
The Committee shall promptly notify the Participants of the results of
the calculation.
d. The exercise price per share under any option shall be the Fair Market
Value of one share of the Common Stock of the Company. The Fair
Market Value of one share of the Common Stock, for the purpose of
determining the Option Amount and the exercise price per share, shall
be the average closing price of the Common Stock on the New York Stock
Exchange for the three month period immediately prior to the grant
date, provided that such result shall otherwise be in accordance with
the then effective stock option plan.
e. An option granted with respect to any Performance Award, or the
portion thereof which remains after application of subparagraph 6.c.
above, shall become exercisable on the date the Committee notifies the
Participants in accordance with subparagraph 6.c., and may be
exercised until 90 days following the Company's public year-end
earnings announcement. If permitted under the then effective stock
option plan or under applicable securities laws, each option shall
provide that in the event of a Change of Control of the Company during
the Award Term, the option shall become immediately exercisable in the
full Option Amount and the calculation pursuant to paragraph 6.c.
shall not be applicable.
f. An option shall, by its terms, expire upon the termination of
employment of a Participant, except that in the event of retirement by
a Participant after the end of an Award Term, such retired Participant
shall be entitled to exercise the option or options involved during
the period provided in subparagraph 6.e. above.
6
THE TORO COMPANY
SUPPLEMENTAL MANAGEMENT RETIREMENT PLAN
The Toro Company hereby amends and restates its Supplemental Management
Retirement Plan originally effective as of August 1, 1989, and amended and
restated on November 6, 1991. This amendment and restatement is effective as of
January 1, 1996. The Supplemental Management Retirement Plan is maintained by
The Toro Company for the purpose of providing benefits for certain of its
employees who participate in The Toro Company's Pension Plan or Profit Sharing
Plan or in both such plans in excess of the limitations on benefits and
contributions imposed by Section 401(a)(17) or Section 415 of the Internal
Revenue Code on plans to which those sections apply.
ARTICLE I
DEFINITIONS
Section 1.1 When used in this Plan document, the following terms have the
meanings indicated unless a different meaning is plainly required by the
context.
"Affiliate or Associate", for purposes of the definition of Change of
Control, shall have the respective meanings ascribed to such terms in Rule 12b-2
of the General Rules and Regulations under the Securities Exchange Act of 1934,
as amended (hereinafter referred to as the "Exchange Act").
"Beneficiary" means the person or persons selected by the Participant on a
form provided by the Company to receive the benefits provided under this Plan in
the event of the Participant's death.
"Beneficial Owner", for purposes of the definition of Change of Control, a
Person shall be deemed the "Beneficial Owner" of and shall be deemed to
"beneficially own" any securities:
(a) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(b) which such Person or any of such Person's Affiliates or
Associates has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise; provided, however, that
a Person shall not be deemed the Beneficial Owner of, or to beneficially
own, securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for purchase or exchange; or
(ii) the
right to vote pursuant to any agreement, arrangement or understanding,
provided, however, that a Person shall not be deemed the Beneficial Owner
of, or to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (A) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations of the Exchange Act and (B) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable
or successor report); or
(c) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting (except to the extent contemplated by the
proviso to subsection (b) herein) or disposing of any securities of the
Company.
"Change of Control" shall mean the earliest to occur of (a) a public
announcement that a Person and/or Affiliates and Associates of such Person have
acquired or obtained the right to acquire Beneficial Ownership of 20% or more of
the outstanding shares of common stock of the Company, (b) the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the Beneficial Ownership by a Person of
30% or more of the outstanding shares of common stock of the Company, or (c) the
occurrence of a tender offer, exchange offer, merger, consolidation, sale of
assets or contested election or any combination thereof, that causes the persons
who were directors of the Company immediately before such Change of Control to
cease to constitute a majority of the Board of Directors of the Company or of
any parent of or successor to the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board of Directors of
the Company, or any successor committee.
"Company" means The Toro Company.
"Compensation" means compensation as defined in the Profit Sharing Plan
plus any deferred compensation under The Toro Company Supplemental Retirement
Plan.
"Eligibility Service" means eligibility service as defined in the Profit
Sharing Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2
"Participant" means any key employee described in Article II of this Plan.
"Pension Plan" means The Toro Company Retirement Plan for Office and
Hourly Employees (the successor of The Toro Company Retirement Plan for Office
Employees) or any successor or replacement plan.
"Person" means, for purposes of the definition of Change of Control, any
individual, corporation, partnership, trust or other entity, and shall include
any successor (by merger or otherwise) of such entity. "Person" does not
include the Company, any Subsidiary of the Company or any employee benefit plan
of the Company or of any Subsidiary, or any entity holding shares of common
stock of the Company for or pursuant to the terms of any such plan.
"Plan" means The Toro Company Supplemental Management Retirement Plan, as
of its original effective date, including any subsequent amendments thereto.
"Plan Year" means the calendar year.
"Profit Sharing Plan" means The Toro Company Investment and Savings Plan
(prior to August 1, 1995, The Toro Company Profit-Sharing Plan for Office
Employees) or any successor or replacement plan.
"Subsidiary" shall mean, for purposes of the definition of Change of
Control, any corporation which is a component member of the controlled group of
corporations of which the Company is the common parent. Controlled group shall
be determined by reference to Section 1563 of the Code but including any
corporation described in Section 1563(b)(2) thereof.
"Surviving Spouse" means the person who is married to a Participant at the
date of his or her death and for at least one year prior thereto.
"Trust" means the trust established or maintained by the Company which is
used in connection with this Plan to assist the Company in meeting its
obligations under the Plan and which is hereby incorporated into the Plan by
this reference.
"Trustee" means the corporation or individual selected by the Company to
serve as Trustee for the Trust.
Section 1.2 The Company agrees to perform its obligations in accordance
with the Plan.
Section 1.3 Any term used in this Plan which is defined in the Plan shall
have the meaning set forth in the Plan for all purposes of this Plan. The
singular form of any word shall include
3
the plural and the masculine gender shall include the feminine wherever
necessary for the proper interpretation of this Plan.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
Section 2.1 An employee who satisfies Section 2.2 and who is eligible to
receive a benefit under the Company's Employee Stock Ownership Plan, the
Pension Plan or the Profit Sharing Plan, the total amount of which is reduced
by reason of the application of the limitations on contributions and benefits
imposed by Section 401(a)(17) or Section 415 of the Code, as in effect on the
date for either the allocation of contributions or the commencement of
benefits, or as in effect at any time thereafter, shall be a Participant in
the Plan.
Section 2.2 Prior to August 1, 1994, a Participant in the Plan must be an
executive at the level of Vice President or above or receiving annual
Compensation equal to or greater than $200,000. On and after August 1, 1994, a
Participant in the Plan must be an executive at the level of Vice President or
above or receiving annual Compensation equal or greater than $150,000.
ARTICLE III
SUPPLEMENTAL ACCOUNT
Section 3.1 The Company shall establish and maintain an account for each
Participant, or designated Beneficiary of the Participant upon the death of the
Participant, and shall credit such account each Plan Year with an amount equal
to the amount described in Section 3.2.
Section 3.2 The amount credited to each Participant's account pursuant to
Section 3.1 shall be an amount equal to the difference between:
(a) the aggregate amount of contributions and forfeitures which would
have been allocated or reallocated with respect to the Participant under
the Profit Sharing Plan and any other qualified plans that are defined
contribution plans (as defined in Section 414(i) of the Code) maintained by
the Company, based on the Participant's Compensation, and without regard to
the limitations imposed by Section 401(a)(17) or Section 415 of the Code on
the Profit Sharing Plan and such other qualified plans, and
(b) the aggregate amount of contributions and forfeitures actually
allocated or reallocated with respect to the Participant under such
qualified plans and any credits made under a nonqualified deferred
compensation plan maintained by the Company to replace amounts that would
have been credited under such qualified plans had the Participant
4
not deferred compensation under such a nonqualified deferred compensation
plan.
Section 3.3 For purposes of determining the amount which would have been
allocated with respect to a Participant under a qualified defined contribution
plan that contains a contribution formula, that formula will be used for
purposes of determining the amount to be credited to the Participant under
Section 3.2 above. For purposes of determining the amount which would have been
allocated with respect to a Participant under a qualified defined contribution
plan, other than the Company's Employee Stock Ownership Plan, pursuant to a plan
contribution and allocation feature which does not specify the amount to be
contributed on behalf of the Participant and under which allocations are made in
proportion to compensation, such amount shall be deemed to be proportionate to
the ratio of the actual contribution made to such plan over the compensation
taken into account under such plan, provided, however, if such plan is
integrated with social security, separate calculations should be made with
respect to compensation above and below the integration level. For purposes of
determining the amount which is to be credited with respect to the Company's
Employee Stock Ownership Plan (the "ESOP"), such amount, which shall be based on
the value of the Company's common stock and shall not require an allocation of
stock, shall be determined by multiplying the difference (which shall not be
less than zero) between the Participant's Compensation for the Plan Year and the
compensation limit under Section 401(a)(17) of the Code, indexed for cost of
living increases, by the actual rate of ESOP allocations calculated each year
for Participants.
Section 3.4 Amounts credited to a Participant's account for any Plan Year
pursuant to the terms of the Plan shall be credited as of the end of such Plan
Year to the account maintained under the Plan in the name of such Participant.
Section 3.5 Amounts credited under the terms of the Plan to an account
maintained for a Participant shall be credited with interest at a rate and in
the manner determined by the Company to be consistent with that credited under
the Company's deferred compensation agreements with its executive personnel and
as described in the Trust, and such interest shall be credited to the account of
each Participant as of the end of each calendar year quarter or at any other
time as determined by the Chief Financial Officer of the Company or other
officer authorized to act on behalf of the Company. However, at any time on or
after the date on which the sum of a Participant's age and the Participant's
years of Eligibility Service with the Company equals sixty (60), the Participant
may, by providing written instructions to the Company, request that the Trustee
invest a certain percentage of his or her account in one of the investment
vehicles made available by the Company under the Trust. The Participant may
change his or her investment preference on the first day of a calendar year and
on
5
the first day of the seventh month of a calendar year and more frequently as so
permitted by the Company. The investment vehicles which shall be made available
to the Participants shall be selected by the Chief Financial Officer or other
officer authorized to act on behalf of the Company. A Participant's investment
preference shall remain in effect until receipt by the Trust from the Company of
a Participant's request changing or revoking the investment preference then in
effect. Any expense incurred in connection with the investment option shall be
charged against the Participant's account. The investment vehicles made
available by the Company under the Trust shall be determined by the Company in
its sole discretion, except that the one such investment vehicle shall provide a
fixed rate of interest through investment in fixed income mutual funds or common
trust funds, U.S. Bonds, certificates of deposit, annuity contracts, or such
other similar investments.
Section 3.6 If a Participant participates in the investment of
amounts in his or her account under the Trust as permitted under the Plan and
the Trust, that portion of the Participant's accounts will be credited with
earnings or losses based entirely upon the earnings or losses attributable to
such investments. The Company shall not be required to credit that portion of
the account subject to such investment election with interest, as described in
Section 3.5, and the Company shall not be required to credit that portion of the
account subject to such investment election with an amount equal to the
difference obtained from subtracting the earnings or losses on such investments
from the interest rate described in Section 3.5. If a Participant does not
participate in the investment of the entire amount in his or her account, the
portion not subject to such Participant involvement shall be credited with
interest at a rate and in the manner determined by the Company to be consistent
with that credited under the Company's deferred compensation agreements as
described in Section 3.5, or with earnings or losses of investments made
pursuant to the terms of the Trust if the amounts credited to the Participant's
account under the Plan are credited to an account or accounts under the Trust
pursuant to Section 9.13.
ARTICLE IV
SUPPLEMENTAL RETIREMENT BENEFIT
Section 4.1 A supplemental retirement benefit shall be payable to a
Participant under this Article IV in the form of a straight life annuity over
the lifetime of the Participant, commencing on the Participant's normal
retirement date as defined under the Pension Plan. The monthly amount of that
benefit, which shall not be less than zero, shall be equal to the difference
between:
(a) the monthly amount which the Participant would have been entitled
to under the Pension Plan and any other qualified plants that are defined
benefit plans (as defined
6
under Section 414(j) of the Code) maintained by the Company if such amount
were determined without regard to the limitations on benefits imposed by
Section 401(a)(17) or Section 415 of the Code on such plan or plans and
taking into account the amounts credited under Article III as if such
amounts were part of the Company's Employee Stock Ownership Plan and the
Profit Sharing Plan and any credits made under any other nonqualified
deferred compensation plan maintained by the Company to replace amounts
that would have been credited under such qualified plans had the
Participant not deferred compensation under such a nonqualified deferred
compensation plan, and
(b) the monthly amount of the benefit actually payable to the
Participant under the Pension Plan and such other qualified defined benefit
plans.
Section 4.2 The amount described in Section 4.1 will be computed as of the
date of retirement or termination of employment of the Participant with the
Company in the form of a straight life annuity payable over the lifetime of the
Participant commencing on the Participant's normal retirement date, as defined
under the Pension Plan.
Section 4.3 If the Pension Plan is terminated by the Company, the benefit
payable to a Participant under this Article IV, if any, shall be determined as
of the termination date of the Pension Plan and no other benefit shall be
provided under this Article IV.
ARTICLE V
SUPPLEMENTAL SURVIVING SPOUSE BENEFIT
Section 5.1 If a Participant dies prior to commencement of payment of his
or her benefit under the Pension Plan under circumstances in which a benefit
payable to the Surviving Spouse of the Participant pursuant to the Pension Plan
is payable to such Surviving Spouse, then a supplemental benefit is payable to
the Surviving Spouse under this Plan. The monthly amount of such benefit
payable to the Surviving Spouse shall be an amount, not less than zero, equal to
the difference between:
(a) the monthly amount of the benefit payable to the Surviving Spouse
under the Pension Plan and any other qualified defined benefit plans
maintained by the Company to which the Surviving Spouse would have been
entitled under such plan or plans if such benefit were computed without
regard to the limitations on benefits imposed by Section 401(a)(17) or
Section 415 of the Code on such plan or plans and taking into account the
amounts credited under Article III as if such amounts were part of the
Company's Employee Stock Ownership Plan and the Profit Sharing Plan and any
credits made under any other nonqualified deferred compensation plan
maintained
7
by the Company to replace amounts that would have been credited under such
qualified plans had the Participant not deferred compensation under such a
nonqualified deferred compensation plan, and
(b) the monthly amount of the benefit actually payable to the
Surviving Spouse under the Pension Plan and such other plan or plans.
Section 5.2 Provided that a benefit is payable under this Article V to the
Surviving Spouse of a Participant and subject to Section 9.7, a benefit payable
under this Article V shall be payable over the lifetime of the Surviving Spouse
in monthly installments commencing on the date for commencement of payment of
the benefit payable to the Surviving Spouse under the Pension Plan and
terminating on the date of the last payment of the benefit payable to the
Surviving Spouse under the Pension Plan made before the Surviving Spouse's
death. However, a Participant may elect on an election form described in
Section 6.2 to have the actuarial equivalent of the benefit described herein
distributed in a lump sum. In the event the lump sum option is selected in the
election form, the benefit payable to the Surviving Spouse shall be made as of
the first day of the first month immediately following the month in which the
Participant's death occurred, or as soon thereafter as administratively
feasible. A Participant may also change the form of payment in the manner
described in Section 6.2. The actuarial equivalent of the benefit described in
this Section 5.2 shall be determined by the same actuarial adjustments as those
specified in the Pension Plan.
Section 5.3 If the Pension Plan is terminated by the Company, the benefit
payable to a Surviving Spouse under this Article V, if any, shall be determined
as of the termination date of the Pension Plan and no other benefit shall be
provided under this Article V.
ARTICLE VI
DISTRIBUTIONS
Section 6.1 All amounts credited to a Participant's account in accordance
with Article III, including gains or losses credited in accordance with Article
III, shall be distributed to or with respect to a Participant only upon
termination of the Participant's employment with the Company for any reason
including death. All such amounts shall be distributed in accordance with
Section 6.2.
8
Section 6.2
(a) Anything herein to the contrary notwithstanding, in the event of a
termination of employment described in Section 6.1, all amounts distributable
under the Plan that have been credited to a Participant's account in
accordance with Article III shall be distributed to the Participant in
accordance with one of the options selected by the Participant and available
under an election form used in connection with this Plan, which form shall be
provided to the Participant by the Company (hereinafter referred to as the
"Election Form"). Each Participant in the Plan can make his or her initial
elections during the calendar year in which this provision becomes effective
and thereafter a Participant can make his or her initial elections at the
time the Participant first becomes eligible to participate in the Plan.
However, a Participant may change the form of payment by electing another
option available in said Election Form, but such change in the form of
payment will not be effective until the calendar year following the calendar
year in which the change was elected. Further, in no event will any such
change in the form of payment be effective if such change is elected after
the Participant's employment with the Company is terminated for any reason.
Such distribution election shall apply to all amounts credited to a
Participant's account in accordance with Article III, except that any payment
required to be made in the year prior to the year any change in the form of
payment becomes effective must be made in accordance with the election in
effect for that year. In addition, the Committee may, in its sole
discretion, reduce the payment period over which payments would have been
made pursuant to the distribution option selected. Absent an effective
distribution election, the Company shall pay the amounts credited to a
Participant's account pursuant to Article III in accordance with the
distribution provision contained in the Participant's prior effective
Election Form or, if no such election has been made, then in accordance with
the selections made under The Toro Company Supplemental Retirement Plan or
The Toro Company Supplemental Retirement Plan II, whichever is applicable
with respect to the Participant, or if such elections have not been made or
are not in effect, then in a lump sum payment. In addition, the Committee
may, in its sole discretion, determine the method of distribution of the
amounts credited under Article III.
(b) Notwithstanding any provision in the Plan to the contrary, if an
amount credited to a Participant's account under Article III is payable to the
Participant, except in the event of the Participant's death or disability, such
benefit shall be distributed in accordance with the provisions of this Section
6.2 beginning as of the first day of the first month of the calendar year
immediately following the calendar year
9
in which the Participant's distributable event occurs. In the event of a
Participant's death or disability, such benefit shall be distributed in
accordance with the provisions of this Section 6.2 beginning as of the
first day of the first month immediately following the month in which the
Participant's death occurred or the determination of such disability is
made.
Section 6.3 If a Participant should die before distribution of the full
amount of the account described in Article III has been made to him or her, any
remaining amounts shall be distributed to the Participant's Beneficiary and by
a method designated by the Participant in his or her Election Form. If a
Participant has not designated a Beneficiary, or method of distribution, or if
no designated Beneficiary is living on the date of distribution, such amounts
shall be distributed to the Participant's beneficiary as described under the
Profit Sharing Plan in a lump sum distribution as soon as administratively
feasible following the Participant's death.
Section 6.4
(a) Anything herein to the contrary notwithstanding and subject to
Section 9.7, in the event the Participant incurs a termination of
employment with the Company as described in Section 6.5, the benefit
described in Article IV shall be distributed to the Participant in
accordance with one of the options available under the Participant's
Election Form as selected by the Participant in the manner described in
Section 6.2. However, a Participant may change the form of payment by
electing another option available under the Election Form, but such change
in the form of payment will not be effective until the calendar year in
which the change was elected. Further, in no event will any such change
in the form of payment be effective if such change is elected after the
Participant's employment with the Company is terminated for any reason.
Such distribution election shall apply to the benefit described in
Article IV, except that any payment required to be made in the year prior
to the year a change in the form of payment becomes effective must be made
in accordance with the election in effect for that year. In addition, the
Committee may, in its sole discretion, reduce the payment period over which
payments would have been made pursuant to the distribution option selected.
Absent an effective distribution election, the Company shall pay the
benefit described in Article IV in accordance with the distribution
provision contained in the Participant's prior effective Election Form or,
if no such distribution provision exists, in a life annuity on the life of
the Participant.
(b) Notwithstanding any provision in the Plan to the contrary, if a
benefit described in Article IV is payable to
10
a Participant, except in the event of the Participant's death or
disability, such benefit shall be distributed in accordance with the
provisions of this Section 6.4 beginning as of the first day of the first
month of the calendar year immediately following the calendar year in which
the Participant's distributable event occurs. In the event of a
Participant's disability, such benefit shall be distributed in
accordance with the provisions of this Section 6.4 beginning as of the
first day of the first month immediately following the month in which
the determination of such disability is made. If a Participant dies
before a benefit is payable to the Participant, then no benefit is
payable under Acticle IV, but a benefit may be payable under Article V.
Section 6.5 The benefit described in Article IV shall be distributed,
unless otherwise stated in the Plan, to or with respect to a Participant only
upon termination of the Participant's employment with the Company for any reason
other than death; if a Participant dies before such benefit is payable to the
Participant, no benefit is payable under Article IV (but a benefit may be
payable under Article V).
Section 6.6 A benefit under Article IV of this Plan which is payable in
any form other than a straight life annuity over the lifetime of the
Participant, or which commences at any time other than the Participant's normal
retirement date, as defined in the Pension Plan, shall be the actuarial
equivalent of the benefit described under Sections 4.1 and 4.2 as determined by
the same actuarial adjustments as those specified in the Pension Plan with
respect to the determination of the amount of the benefit payable under the
Pension Plan on the date for commencement of payment under this Plan.
Section 6.7 Anything herein to the contrary notwithstanding, if, at any
time, a court or the Internal Revenue Service determines that an amount in a
Participant's account under the Trust is includable in the gross income of the
Participant and subject to tax, the Committee may, in its sole discretion,
permit a lump sum distribution of an amount equal to the amount determined to be
includable in the Participant's gross income.
ARTICLE VII
ADMINISTRATION OF THE PLAN
Section 7.1 The Plan shall be administered by the Company, which shall
have the authority, duty and power to interpret and construe the provisions of
the Plan as it deems appropriate. The Company shall have the duty and
responsibility of maintaining records, making the requisite calculations and
disbursing the payment hereunder. The Company's interpretations,
determinations, regulations and calculations shall be final and binding on all
persons and parties concerned.
11
Section 7.2 All provisions set forth in the Profit Sharing Plan with
respect to the administrative powers and duties of the Company, and expenses of
administration shall be applicable with respect to the Plan; unless such
administrative powers and duties apply specifically with respect to the benefits
described in Article IV or Article V, then all provisions set forth in the
Pension Plan shall apply. The Company shall be entitled to rely conclusively
upon all tables, valuations, certificates, opinions and reports furnished by
any actuary, accountant, controller, counsel or other person employed or engaged
by the Company with respect to the Plan.
Section 7.3 The Company shall furnish individual annual statements of
accrued benefits to each Participant, or current Beneficiary or Surviving
Spouse, in such form as determined by the Company or as required by law.
Section 7.4 The employee benefit plan procedures in this section are
intended to comply with Section 503 of ERISA and Section 2560.503-1 of the
Department of Labor Regulations and pertain to claims by the Participants and
Beneficiaries ("claimants") for Plan benefits, consideration of such claims, and
review of claim denials. For purposes of these procedures, a "claim" is a
request for a benefit by a Participant or Beneficiary under the Plan or an
Agreement. A claim is filed when the requirements of these procedures have been
met.
(a) If a claim is wholly or partially denied, notice of the
decision, meeting the requirements of subsection (b) of these procedures,
shall be furnished to the claimant within a reasonable period of time after
the receipt of the claim by the Company. If notice of the denial of a claim
is not furnished in accordance with this subsection (a) within a reasonable
period of time, the claim shall be deemed denied and the claimant shall be
permitted to proceed to the review stage described in subsection (c) of these
procedures. For purposes of this subsection (a), the period of time for
notification to the claimant will not exceed 90 days after receipt of the
claim by the Company, unless special circumstances require an extension of
time for processing the claim. If such an extension of time for processing
is required, written notice of the extension shall be furnished to the
claimant prior to the termination of the initial 90-day period. In no event
shall such extension exceed a period of 90 days from the end of such initial
period. The extension notice shall indicate the special circumstances
requiring an extension of time and the date by which the Company expects to
render the final decision.
(b) The Company shall provide to every claimant who is denied a claim
for benefits written notice setting forth in a manner calculated to be
understood by the claimant:
12
(i) the specific reason or reasons for the denial;
(ii) specific reference to pertinent provisions of the Plan
or Agreement on which the denial is based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation
of why such material or information is necessary; and
(iv) appropriate information as to the steps to be taken if
the Participant or Beneficiary wishes to submit his or her claim
for review.
(c) If a claim is denied in whole or in part and if the claimant
is dissatisfied with the disposition of the claimant's claim, the
claimant or his or her duly authorized representative shall have a
reasonable opportunity to appeal the denied claim to the Company or to
a person designated by the Company, and shall have a full and fair
review of the claim and its denial. Under this review procedure, a
claimant or his or her duly authorized representative may:
(i) request a review upon written application to the Company;
(ii) review pertinent documents; and
(iii) submit issues and comments in writing.
A claimant must file such a request for review of a denied claim within
a reasonable period of time, not to exceed 60 days, after receipt by
the claimant of written notification of denial of a claim.
(d) A decision by the Company shall be made promptly and shall not
ordinarily be made later than 60 days after the receipt by the Company
of a request for review, unless special circumstances (such as the need
to hold a hearing) require an extension of time for processing, in which
case a decision shall be rendered as soon as possible, but not later
than 120 days after receipt of a request for review. If an extension of
time for review is required because of special circumstances, written
notice of the extension shall be furnished to the claimant prior to the
commencement of the extension. The decision on review shall be in
writing and shall include specific reasons for the decision, written in
a manner calculated to be understood by the claimant, as well as
specific references to the pertinent provisions of the Plan or Agreement
on which the decision is based. The decision on review shall be
furnished to the claimant within the period of time described in this
subsection (d). If the decision on
13
review is not furnished within such time, the claim shall be deemed denied
on review.
ARTICLE VIII
AMENDMENT OR TERMINATION
Section 8.1 The Company intends the Plan to be permanent but reserves
the right to amend or terminate the Plan at any time. Any such amendment or
termination shall be made in accordance with the amendment or termination
provision contained in the Profit Sharing Plan.
Section 8.2 No amendment or termination of the Plan shall directly or
indirectly reduce the balance of any account described in Article III as of
the effective date of such amendment or termination. Upon termination of the
Plan, distribution of amounts credited to such account shall be made to the
Participant or his or her Beneficiary in accordance with Article VI. No
additional credits or contributions will be made to any account under the
Plan after termination of the Plan, but gains or losses will continue to be
credited to the Participant's account under the Plan until all benefits are
distributed to the Participants or to their Beneficiaries. No amendment or
termination of the Plan shall directly or indirectly deprive any current or
former Participant or Surviving Spouse of all or any portion of any benefit
under Article IV or Article V of the Plan payment of which has commenced
prior to the effective date of such amendment or termination or which would
be payable if the Participant terminated employment for any reason, including
death, on such effective date.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 The Company has established a Trust which may be used to
pay benefits arising under this Plan and all costs, charges and expenses
relating thereto; except that, to the extent that the funds held in the Trust
are insufficient to pay such benefits, costs, charges and expenses, the
Company shall pay such benefits, costs, charges and expenses.
Section 9.2 The benefits payable hereunder or the right to receive
future benefits under the Plan may not be anticipated, alienated, sold,
transferred, assigned, pledged, encumbered, or subjected to any charge or
legal process; no interest or right to receive a benefit may be taken, either
voluntarily or involuntarily, for the satisfaction of the debts of, or other
obligations or claims against, such person or entity, including claims for
alimony, support, separate maintenance and claims in bankruptcy proceedings.
Section 9.3 The Plan at all times shall be considered entirely unfunded
both for tax purposes and for purposes of Title
14
I of ERISA. Funds invested hereunder shall continue for all purposes to be
part of the general assets of the Company and available to the general
creditors of the Company in the event of the Company's bankruptcy (when the
Company is involved in a pending proceeding under the Federal Bankruptcy
Code) or insolvency (when the Company is unable to pay its debts as they
mature). In the event of the Company's bankruptcy or insolvency, the
Company's Board of Directors and chief executive officer are required to
notify the Trustee and each Participant in writing of such an occurrence
within one (1) day of the Company's knowledge of such occurrence. No
Participant, Surviving Spouse or any other person shall have any interest in
any particular assets of the Company by reason of the right to receive a
benefit under the Plan and to the extent the Participant, Surviving Spouse or
any other person acquires a right to receive benefits under this Plan, such
right shall be no greater than the right of any general unsecured creditor of
the Company. The Plan constitutes a mere promise by the Company to make
payments to the Participants, Surviving Spouses, or Beneficiaries in the
future.
Section 9.4 Except as otherwise provided herein, the terms and
conditions of the Profit Sharing Plan shall apply to the contributions
described in Article III and the terms and conditions of the Pension Plan
shall apply to the benefits described in Articles IV and V. Any benefit
payable under the Company's Employee Stock Ownership Plan, the Pension Plan
or the Profit Sharing Plan shall be paid in accordance with the terms and
conditions of such plan and nothing in this Plan shall operate or be
construed in any way to modify, amend or affect the terms and provisions of
the Company's Employee Stock Ownership Plan, the Pension Plan or the Profit
Sharing Plan.
Section 9.5 Nothing contained in the Plan shall constitute a guaranty
by the Company or any other person or entity that any funds in the Trust or
the assets of the Company will be sufficient to pay any benefit hereunder.
Section 9.6 No Participant or Surviving Spouse shall have any right to
a benefit under this Plan except in accordance with the terms of the Plan.
Establishment of the Plan shall not be construed to give any Participant the
right to be retained in the service of the Company.
Section 9.7 Notwithstanding anything in this Plan or a Participant's
Election Form to the contrary, if the value or actuarial value of any benefit
payable to or on behalf of the Participant under the Plan is $25,000 or less,
the Company shall pay such value or actuarial value of such benefit to the
Participant, Beneficiary, or Surviving Spouse in a single lump sum in lieu of
any further benefit payments under the Plan.
15
Section 9.8 If any person entitled to a benefit payment under the Plan
is declared incompetent and a conservator or other person legally charged
with the care of his or her person or his or her estate is appointed, any
benefits under the Plan to which such person is entitled shall be paid to
such conservator or other person legally charged with the care of his or her
person or his or her estate. Except as provided above, when the Company
determines that such person is unable to manage his or her financial affairs,
the Company may provide for such payment or any part thereof to be made to
any other person or institution then contributing toward or providing for the
care and maintenance of such person. Any such payment shall be a payment for
the account of such person and a complete discharge of any liability of the
Company and the Plan therefor.
Section 9.9 The Plan shall not be automatically terminated by a
transfer or sale of assets of the Company or by the merger or consolidation
of the Company into or with any other corporation or other entity, but the
Plan shall be continued after such sale, merger or consolidation only if and
to the extent that the transferee, purchaser or successor entity agrees to
continue the Plan. In the event that the Plan is not continued by the
transferee, purchaser or successor entity, then the Plan shall terminate
subject to the provisions of Article VIII.
Section 9.10 Each Participant shall keep the Company informed of his or
her current address and the current address of his or her spouse or
designated Beneficiary. The Company shall not be obligated to search for any
person. If the location of a Participant is not made known to the Company
within three (3) years after the date on which payment of the Participant's
benefits payable under this Plan may first be made, payment may be made as
through the Participant had died at the end of the three-year period. If,
within one additional year after such three-year period has elapsed, or,
within three (3) years after the actual death of a Participant, the Company
is unable to locate any Surviving Spouse or designated Beneficiary of the
Participant, then the Company shall have no further obligation to pay any
benefit hereunder to such Participant, Surviving Spouse or designated
Beneficiary and such benefits shall be irrevocably forfeited.
Section 9.11 Notwithstanding any of the preceding provisions of the
Plan, neither the Company nor any individual acting as an employee or agent
of the Company shall be liable to any Participant, former Participant,
Surviving Spouse, or any other person for any claim, loss, liability or
expense incurred in connection with the Plan, unless attributable to fraud or
willful misconduct on the part of the Company or any such employee or agent
of the Company.
Section 9.12 In the event a Participant incurs an unforeseeable
emergency, the Participant may make a written request
16
to the Company for a hardship withdrawal from his or her account established
under Article III. An unforeseeable emergency is a severe financial hardship
to the Participant resulting from a sudden and unexpected illness or
accident of the Participant or of a dependent (as defined in Section 152(a)
of the Code) of the Participant, loss of the Participant's property due to
casualty, or other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the Participant.
Withdrawals of amounts because of an unforeseeable emergency are only
permitted to the extent reasonably needed to satisfy the emergency need. This
section shall be interpreted in a manner consistent with Sections
1.457-2(h)(4) and 1.457-2(h)(5) of the Treasury Regulations.
Section 9.13 If there is a threat of a Change of Control or if a
Participant elects to direct the investment of amounts credited to his or her
account pursuant to Section 3.5, then, upon the occurrence of such threat of
a Change of Control or at the time the Participant makes such an investment
election or at any other time as determined by the Company, the Company shall
transfer cash or property to the Trust in an amount equal to the present
value of all accumulated or accrued benefits then payable to or on behalf of
such Participant or Participants under this Plan, plus any applicable fees.
The Company may also transfer cash or property to the Trust in an amount
equal to the present value of all accumulated or accrued benefits then
payable to or on behalf of any Participant under this Plan on any date
designated in the sole discretion of the Company. If a transfer of cash or
property occurs, the amounts transferred with respect to the benefits payable
under Articles IV and V shall be, for each Participant or Surviving Spouse,
the actuarial equivalent, as determined by using the actuarial assumptions
described in the Pension Plan, of the benefits payable to or on behalf of
each such individual under said Articles IV and V. Thereafter, the Company
shall, for each Plan Year, transfer cash or property no later than thirty
(30) days after the end of the Plan Year in which the initial transfer
occurs, and thereafter on each anniversary thereof, to the Trust for the
benefit of each affected individual in an amount equal to the additional
benefit accrued under the terms of this Plan during and in relation to the
most recent Plan Year then ended. In the event of a transfer, the accounts of
the Participants, established pursuant to Article III, shall be credited
with interest, or earnings and losses in accordance with the provisions under
Sections 3.5 and 3.6. A Change of Control shall be deemed "threatened' at
such time as the Company becomes aware that any individual(s) or entity(s) or
combinations thereof intend(s) to or has commenced a course of conduct which,
if successful, would or could result in a Change of Control.
Section 9.14 Each Participant shall receive a copy of the Plan and the
Company will make available for inspection by any Participant or designated
Beneficiary a copy of the rules and regulations used by the Company in
administering the Plan.
17
Section 9.15 All questions pertaining to the construction, validity and
effect of the Plan shall be determined in accordance with the laws of the
United States and to the extent not preempted by such laws, by the laws of
the State of Minnesota.
Dated this 18th day of September, 1996.
THE TORO COMPANY
By: /s/ K. B. Melrose
-------------------------------------
Title: Chairman, CEO and President
18
THE TORO COMPANY
CHIEF EXECUTIVE OFFICER INCENTIVE AWARD AGREEMENT
AGREEMENT ("Agreement") dated as of July 31, 1995, by and between The Toro
Company, a Delaware corporation (the "Company"), and Kendrick B. Melrose, its
Chief Executive Officer ("Mr. Melrose").
1. PURPOSE. The purpose of this Agreement is to implement The Toro Company
Chief Executive Officer Succession Plan (the "Plan") pursuant to which the
Company will grant to Mr. Melrose a Restricted Stock and Performance Unit award
and enter into a post-retirement and noncompetition agreement with Mr. Melrose,
subject to the terms and conditions of the Plan and to Mr. Melrose's acceptance
of the terms and conditions thereof.
2. GRANT OF AWARD.
a. GRANT OF RESTRICTED STOCK. The Company hereby grants to Mr. Melrose
the number of whole shares of Common Stock having an aggregate fair market value
of $500,000 on July 31, 1995 (the "Restricted Stock"), subject to forfeiture or
reduction of the number of shares in the event performance goals set forth in
Section 2 (the "Performance Goals") are not achieved and to the other terms and
conditions of the Plan; provided however that in the event the fair market value
of the Common Stock on the date of vesting of the Restricted Stock is less than
the fair market value on July 31, 1995, the Company shall make an aggregate
payment to Mr. Melrose of the difference between the fair market value on the
date of vesting of the Restricted Stock and the fair market value on July 31,
1995. Fair market value shall mean the closing price of the Common Stock on the
New York Stock Exchange as reported in THE WALL STREET JOURNAL.
b. GRANT OF PERFORMANCE UNITS AND ANNUITY PURCHASE. Subject to the terms
and conditions of the Plan and this Agreement, the Company hereby grants to Mr.
Melrose performance units equal to the number of whole shares of Common Stock
having an aggregate fair market value of $500,000 on July 31, 1995 (the
"Performance Units"), which Performance Units shall be subject to forfeiture or
reduction in the event the Performance Goals set forth in the Plan and in
Section 2 hereof are not achieved and to the other terms and conditions of the
Plan and this Agreement. Each Performance Unit shall have a value equal to the
fair market value of one share of Common Stock, from time to time, provided
however that the value shall not be less than the fair market value of one share
of Common Stock on July 31, 1995. Performance Units shall be evidenced by this
Agreement. An amount equal to the aggregate value of the Performance Units
remaining at the date of Mr. Melrose's retirement, after forfeiture, if any,
shall be utilized by the Company to purchase a retirement annuity payable to Mr.
Melrose until his 75th birthday, or to his estate or beneficiaries, and for no
other purpose, subject to the condition that Mr. Melrose enter into and comply
with the terms and conditions of a noncompetition agreement, in accordance with
Section 1.c. and 2.b. hereof.
c. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. Subject to
the terms and conditions of the Plan and this Agreement, the Company shall enter
into a post-retirement consulting and non-competition agreement with Mr.
Melrose, providing for the payment of an aggregate amount of up to $500,000,
which amount shall be adjusted not less than once annually to reflect increases
in the consumer price index and which may be utilized to pay expenses of office
and support services for Mr. Melrose for a period of five years following the
date of his retirement.
2. TERMS, CONDITIONS AND RESTRICTIONS.
a. RESTRICTED STOCK AND PERFORMANCE UNIT PERFORMANCE GOAL RESTRICTIONS.
The obligation of the Company to deliver certificates representing the
Restricted Stock granted hereunder and to utilize the aggregate value of the
Performance Units to purchase a retirement annuity shall be subject to the
terms, conditions and restrictions set forth in this Section 2.a.
i. VESTING OF RESTRICTED STOCK AND PERFORMANCE UNITS. Mr. Melrose's
right to receive the Restricted Stock and the value of the Performance Units
shall be subject to the vesting requirements set forth in this Section 2.a.i.
and to the achievement by Mr. Melrose of the Performance Goals set forth in
Section 2.a.i. hereof not later than the last day of the period specified to
achieve such performance (the "Restricted Period"). Upon achievement of a
Performance Goal within an applicable Restricted Period, the restrictions shall
lapse with respect to the specified portion of Restricted Stock, which specified
portion shall vest and become nonforfeitable. Upon achievement of a Performance
Goal within an applicable Restricted Period, the restrictions shall lapse with
respect to the specified portion of Performance Units, which specified portion
shall vest and become nonforfeitable, subject to the further condition that Mr.
Melrose enter into and comply with the terms and conditions of a noncompetition
agreement in accordance with Section 2.b. If Mr. Melrose does not enter into a
noncompetition agreement or does not comply with the terms and conditions of
such a noncompetition agreement, then Mr. Melrose shall forfeit the value of the
Performance Units or, if a retirement annuity has been acquired by the Company,
the retirement annuity.
(A) The following table sets forth the Performance Goals, the
schedule for achievement of each Performance Goal and the portion of Restricted
Stock and Performance Units in which rights vest upon such achievement.
2
Performance Goal Restricted Period Portion of Portion of
to be Achieved (July 31, 1995 Shares of Re- Performance
through earlier of stricted Stock Units to
date shown or to Vest Upon Vest Upon
Goal Achievement) Achievement Achievement
Goal 1:
CEO and senior management
succession plan developed
and progress towards fulfill-
ment of the plan, approved
by Board of Directors July 31, 1998 15% 15%
Goal 2:
Potential CEO successor
identified with approval
of Board of Directors
and continued development
of senior management team July 31, 1999 15% 15%
Goal 3:
CEO successor who was
identified and developed
by Mr. Melrose is elected
as CEO by Board of
Directors July 31, 2000 70% 70%
(B) Early Selection of Successor. Notwithstanding any other
provision of the Plan, in the event that the Board of Directors elects as Mr.
Melrose's successor the individual identified and developed by Mr. Melrose, and
such successor is in place as chief executive officer of the Company and Mr.
Melrose elects to retire prior to the last day of the final Restricted Period,
but no earlier than July 31, 1997, all Restricted Stock and Performance Units
shall vest in full and become nonforfeitable, subject to the condition with
respect to the Performance Units that Mr. Melrose enter into and comply with the
terms and conditions of a noncompetition agreement in accordance with Section
2.b.
(C) The Special CEO Succession Subcommittee of the Compensation
Committee of the Board of Directors (the "Committee") shall be responsible for
certifying in writing to the Company that an applicable Performance Goal has
been met by Mr. Melrose prior to release and delivery of certificates
representing the shares of Restricted Stock or payment of the value of
Performance Units for the purchase of a retirement annuity to Mr. Melrose.
3
ii. Limits on Transfer of Restricted Stock and Performance Units.
Shares of the Restricted Stock which have not vested in accordance with the
provisions of Section 2.a.i. hereof may not be sold, transferred, pledged,
assigned or otherwise encumbered. Performance Units may not be sold,
transferred, pledged, assigned or otherwise encumbered at any time and the value
of Performance Units may be utilized only for the purpose of purchasing the
retirement annuity referred to the Section 1.b. hereof.
iii. Termination, Death or Disability. In the event that the Board of
Directors terminates Mr. Melrose's employment other than for cause (as defined
in Section 2.c. hereof) and elects as Mr. Melrose's successor a chief executive
officer who was identified and developed by Mr. Melrose, or in the event of the
termination of Mr. Melrose's employment due to his death or disability, then all
shares of Restricted Stock and Performance Units shall automatically vest in
full, notwithstanding that Mr. Melrose does not enter into a noncompetition
agreement in accordance with Section 2.b., and shall become nonforfeitable in
the fiscal year following the year of the date of such event, and on the first
day that such vesting would not cause the compensation to be deemed compensation
with respect to the prior fiscal year.
b. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. The Company's
agreement to pay any amount in connection with post-retirement consulting
services to be provided by Mr. Melrose and its payment of the value of
Performance Units for the purchase of a retirement annuity payable to Mr.
Melrose pursuant to Section 1.b. shall be subject to and in consideration of Mr.
Melrose's execution of an agreement not to compete with the Company by serving
as an employee or member of the board of directors of or consultant to Rainbird,
Jacobson or John Deere, or any successor thereof or similar competitor of the
Company for a period of five years following the date of Mr. Melrose's
retirement as Chief Executive Officer. The Company's agreement to pay any
amount in connection with post-retirement consulting services to be provided by
Mr. Melrose shall be subject to his agreement to provide consulting services to
the Company for a period of five years following the date of his retirement;
provided however that Mr. Melrose may elect to terminate the consulting
agreement, but not the agreement not to compete, in which event any balance of
the $500,000 amount referred to in Section 1.c. not then expended for Mr.
Melrose's benefit shall be paid to Mr. Melrose over the remainder of the five
year period. Mr. Melrose shall not have any right to receive payments pursuant
to Section 1.c. or this Section 2.b. until and unless he shall have executed an
agreement not to compete with the Company and delivered a fully executed copy
thereof to the Company, and otherwise complied with the then applicable terms
and conditions of the Plan, except as provided in Section 2.a.iii.
c. TERMINATION OF EMPLOYMENT. Except as otherwise provided by Section
2.a. hereof, if Mr. Melrose resigns his employment with the Company or if his
employment is terminated by the Board of Directors for cause during any
Restricted Period, all shares of Restricted Stock and all Performance Units then
subject to restrictions and all other rights under this Plan shall be forfeited
by Mr. Melrose and the Restricted Stock shall be reacquired by the Company. For
purposes of this Agreement, "Cause" shall mean:
4
(i) the willful and continued failure of Mr. Melrose to perform
substantially his duties with the Company or one of its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Mr. Melrose by the Board of Directors of the Company which specifically
identifies the manner in which the Board of Directors believes that Mr.
Melrose has not substantially performed his duties, or
(ii) the willful engaging by Mr. Melrose in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of Mr.
Melrose, shall be considered "willful" unless it is done, or omitted to be done,
by Mr. Melrose in bad faith or without reasonable belief that Mr. Melrose's
action or omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board of Directors or upon the instructions of a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Mr. Melrose in good
faith and in the best interests of the Company. The cessation of employment of
Mr. Melrose shall not be deemed to be for Cause unless and until there shall
have been delivered to Mr. Melrose a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the entire membership of the
Board at a meeting of the Board of Directors called and held for such purpose
(after reasonable notice is provided to Mr. Melrose and Mr. Melrose is given an
opportunity, together with counsel, to be heard before the Board of Directors),
finding that, in the good faith opinion of the Board of Directors, Mr. Melrose
is guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
d. STOCK CERTIFICATES.
i. ISSUANCE. The Company shall issue a stock certificate or
certificates representing the shares of Restricted Stock granted under the Plan.
Such certificates shall be registered in Mr. Melrose's name and shall bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to the grant, substantially in the following form:
The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Chief Executive Officer Succession Incentive Plan
and an agreement entered into between the registered owner and The
Toro Company. Copies of the plan and agreement are on file in the
offices of The Toro Company, 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420.
ii. ESCROW. Certificates representing the Restricted Stock shall be
physically held by the Company or its nominee during any Restricted Period, and
the Company may require, as a condition of the grant, that Mr. Melrose shall
have delivered a stock power, endorsed in blank, with respect to any shares of
the Restricted Stock. Upon the
5
achievement of the Performance Goals with respect to any shares of Restricted
Stock, as certified to by the Committee, the Company shall cause the certificate
representing such shares of Restricted Stock to be removed from escrow and
delivered to the Company for reissuance and delivery of Common Stock in the name
of Mr. Melrose. If any shares of Restricted Stock are to be forfeited,
certificates representing such shares shall be delivered to the Company for
reissuance in its name or cancellation and Mr. Melrose shall have no further
interest in such stock.
iii. LAPSE OF RESTRICTIONS. When the Performance Goals set forth in
Section 2.a. have been achieved with respect to any portion of the shares of the
Restricted Stock, the Company shall deliver to Mr. Melrose or his legal
representative, beneficiary or heir not later than 60 days thereafter a
certificate or certificates representing the Common Stock without the legend
referred to in Section 2.d.i. hereof. The number of shares of Common Stock to
be released shall be the same number as to which the Performance Goals have been
achieved in accordance with Section 2.a.
e. RIGHTS AS STOCKHOLDER.
i. RIGHT TO VOTE AND DIVIDENDS. Except as provided in Section 1 and
this Section 2, Mr. Melrose shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the right to
vote the shares and the right to receive cash dividends with respect to the
shares.
ii. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or other change in
corporate structure affecting the Common Stock, the Committee shall make such
substitution or adjustment in the aggregate number of shares of Common Stock
reserved for issuance under the Plan or in the number of shares outstanding as
Restricted Stock or in the number of Performance Units, as may be determined to
be appropriate by the Committee, acting in its sole discretion, provided that
the number of shares or Performance Units shall always be a whole number.
f. CHANGE IN CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not approved by the
Board of Directors, all shares of Restricted Stock shall immediately fully vest
and be freely transferable. A Change of Control means the earliest to occur of
(i) a public announcement that a party shall have acquired or obtained the right
to acquire beneficial ownership of 20% or more of the outstanding shares of
Common Stock of the Company, (ii) the commencement or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a party of 30% or more of the
outstanding shares of Common Stock of the Company or (iii) the occurrence of a
tender offer, exchange offer, merger, consolidation, sale of assets or contested
election or any combination thereof, that causes (or would cause) the persons
who were directors of the Company immediately
6
before such Change of Control to cease to constitute a majority of the Board of
Directors of the Company or any parent of or successor to the Company.
3. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan any federal, state or local taxes of any kind,
including FICA and related taxes, required by law to be withheld with respect to
the vesting of rights to receive or payment of remuneration or to take such
other action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. If Common Stock is withheld or
surrendered to satisfy tax withholding, such stock shall be valued at its fair
market value as of the date such Common Stock is withheld or surrendered or the
obligation to pay such taxes becomes fixed.
4. REGISTRATION RIGHTS. Mr. Melrose shall have the right to require that the
Company promptly take all necessary steps to register or qualify the Restricted
Stock, or Common Stock issued upon vesting of the Restricted Stock, under the
Securities Act of 1933, as amended, and the securities laws of such states as
Mr. Melrose may reasonably request. The Company shall keep effective and
maintain any registration, qualification, notification or approval for such
period as is reasonably necessary for Mr. Melrose to dispose of the Restricted
Stock or Common Stock and from time to time shall amend or supplement the
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law. The Company shall bear all fees, costs and expenses
of such registration, qualification, notification or approval.
5. COMPLIANCE WITH RULE 16b-3 AND SECTION 162(m). The grants of Restricted
Stock and Performance Units made under this Agreement and the remuneration to be
paid to Mr. Melrose as a consequence of the grants are intended to comply with
all applicable conditions of Rule 16b-3 under the Securities Exchange Act of
1934 and to avoid the loss of the deduction referred to in paragraph (1) of
Section 162(m) of the Internal Revenue Code of 1986, as amended. Anything in
the Plan or this Agreement to the contrary notwithstanding, to the extent any
provision of the Plan or this Agreement or action by the Committee fails to so
comply or to avoid the loss of such deduction, it shall be deemed null and void
to the extent permitted by law and deemed advisable by the Committee.
6. EMPLOYMENT. Nothing in the Plan or this Agreement shall interfere with or
limit in any way the right of the Company to terminate Mr. Melrose's employment
at any time, with the Company or any subsidiary of the Company, or shall confer
upon Mr. Melrose any right to continue in the employ of the Company.
7. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board
nor the submission of the Plan to stockholders for approval shall be construed
to limit the power of the Board or the Committee to adopt such other incentive
arrangements as either may deem desirable, including without limitation, the
award of stock and cash awards otherwise than under the Plan, or to set
compensation and retirement benefits and make such awards to Mr. Melrose as
either may deem desirable.
7
8. EXCLUSION FROM PENSION, PROFIT SHARING AND OTHER BENEFIT CALCULATIONS. By
acceptance of the award made by this Agreement, Mr. Melrose agrees that the
award or vesting of Restricted Stock and Performance Units constitute special
incentive compensation that is not taken into account as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement or profit sharing plan of the Company or any subsidiary.
Mr. Melrose agrees further that such award shall not be taken into account in
determining the amount of any life insurance coverage, short or long-term
disability coverage or any other pay-based benefit provided by the Company or
any subsidiary.
9. AMENDMENT. This Agreement may be amended, modified or terminated from time
to time, to reflect any amendments, modifications or the termination of the
Plan; provided however that no amendment may be adopted without the approval of
the stockholders of the Company if such amendment requires stockholder approval
pursuant to Rule 16b-3 or Section 162(m), and no amendment, modification or
termination may be adopted without the written agreement of Mr. Melrose if such
amendment, modification or termination would adversely affect his rights.
Subject to the foregoing and the requirements of Section 162(m), the Board may,
in accordance with the recommendation of the Committee and without further
action on the part of stockholders of the Company or the consent of Mr. Melrose,
amend the Plan to preserve the employer deduction under Section 162(m).
10. GOVERNING LAW. This Agreement shall be construed in accordance with and
governed by the laws of the State of Delaware.
11. SUCCESSORS. Except as otherwise provided in the Plan or this Agreement,
the Plan and this Agreement shall be binding upon and inure to the benefit of
the Company, its successors and assigns and Mr. Melrose, his beneficiaries,
heirs, executors, administrators and legal representatives.
IN WITNESS WHEREOF, the Agreement has been executed and delivered by the
Company as of the date first above set forth.
THE TORO COMPANY
By /s/ J. Lawrence McIntyre
--------------------------------
Title Vice President & Secretary
-----------------------------
I hereby agree to the terms and conditions of this Restricted Stock and
Performance Unit Award grant made to me as of July 31, 1995.
KENDRICK B. MELROSE
/s/ Kendrick B. Melrose
-----------------------------------
8
Exhibit 11
THE TORO COMPANY AND SUBSIDIARIES
Computation of Earnings per Share of Common Stock and Common Stock Equivalents
(Not Covered by Independent Auditors' Report)
------------------------------------------------------------
3 MONTHS
YEAR ENDED ENDED YEARS ENDED
------------------------------------------------------------
10/31/96 10/31/95 7/31/95 7/31/94
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $36,409,000 $ 3,997,000 $36,667,000 $22,230,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Primary:
Shares of common stock and common stock equivalents:
Weighted average number of common shares outstanding 12,140,689 12,117,815 12,556,039 12,472,828
Dilutive effect of outstanding stock options (1) 414,026 424,225 476,374 509,538
---------- ---------- ---------- ----------
12,554,715 12,542,040 13,032,413 12,982,366
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and common stock
equivalents $ 2.90 $ 0.32 $ 2.81 $ 1.71
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Fully Diluted:
Shares of common stock and common stock equivalents:
Weighted average number of common shares outstanding 12,140,689 12,117,815 12,556,039 12,472,828
Dilutive effect of outstanding stock options (2) 414,026 424,225 511,133 509,538
---------- ---------- ---------- ----------
12,554,715 12,542,040 13,067,172 12,982,366
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and common stock
equivalents $ $2.90 $ 0.32 $ 2.81 $ 1.71
- - - - -----------------------------------------------------------------------------------------------------------------------------------
(1) Outstanding stock options and options exercised in the current period
are converted to common stock equivalents by the treasury stock method
using the average market price of the company's stock during each
period.
(2) Outstanding stock options and options exercised in the current period
are converted to common stock equivalents by the treasury stock method
using the greater of the average market price or the year-end market
price of the company's shares during each period.
20
AT A GLANCE
- - - - --------------------------------------------------------------------------------
- - - - - TORO CONTINUED TO DEMONSTRATE LEVERAGED OPERATING PERFORMANCE POSTING A 16
PERCENT INCREASE IN EARNINGS PER SHARE ON A SLIGHT SALES INCREASE.
- - - - - EXCELLENT SNOWTHROWER SALES COMBINED WITH STRONG GROWTH IN INTERNATIONAL
PROFESSIONAL TURN MAINTENANCE PRODUCTS HIGHLIGHTED TORO'S SALES
PERFORMANCE.
- - - - - PROFESSIONAL TURN MAINTENANCE SALES CONTINUED TO GROW FASTER THAN
RESIDENTIAL SALES AND HELPED OFFSET THE SLUGGISH LAWN AND GARDEN BUSINESS.
- - - - - THE COMPANY CONTINUED TO BUILD FOR THE FUTURE BY INVESTING IN RESEARCH AND
DEVELOPMENT, NEW BUSINESSES AND STRATEGIC INITIATIVES.
- - - - - SEVERAL ACQUISITIONS AND ALLIANCES TOOK PLACE IN FISCAL 1996 THAT PROVIDE
GROWTH MOMENTUM FOR THE FUTURE.
FINANCIAL HIGHLIGHTS
- - - - --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31 1996 1995 % Change
- - - - --------------------------------------------------------------------------------
Net sales $930,909 $919,427 1.2%
Net earnings 36,409 32,362 12.5
Percent of net sales 3.9% 3.5%
- - - - --------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent $ 2.90 $ 2.50 16.0
Dividends paid per share of
common stock outstanding 0.48 0.48
- - - - --------------------------------------------------------------------------------
Return on:
Beginning common stockholders' equity 19.1% 18.1%
Average common stockholders' equity 18.0 17.5
Average invested capital 15.2 13.8
- - - - --------------------------------------------------------------------------------
AT YEAR END
Working capital $197,144 $165,086 19.4
Total assets 496,877 472,653 5.1
Total debt 94,390 110,274 (14.4)
Common stockholders' equity 213,567 190,892 11.9
Book value per common share 17.75 15.69 13.1
Number of common stockholders 6,841 7,243 (5.6)
Average number of employees 3,509 3,638 (3.5)
- - - - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FISCAL YEAR CHANGE
- - - - --------------------------------------------------------------------------------
This report is the first reflecting Toro's change of fiscal year from July 31 to
October 31. For comparative purposes, financial information for years previously
ended in July has been restated in portions of this report to reflect the new
fiscal year ending in October. Financial information for the year ended October
31, 1996, the three month transition period ended October 31, 1995 and the years
ended July 31, 1995 and 1994 has been derived from the audited financial
statements for the applicable period. Financial information related to the
October 31, 1995 balance sheet has been derived from the October 31, 1995
audited balance sheet. All other financial information for years ending in
October is unaudited.
TORO'S PURPOSE is to help customers beautify and preserve outdoor landscapes
with environmentally responsible products of customer-valued quality and
innovation.
TORO'S MISSION is to be the leading worldwide provider of outdoor landscaping
products, support services and integrated systems. Toro will explore new
opportunities that build revenue growth and sustainability using our core
competencies to gain a leading market position.
ON THE COVER - Toro is the exclusive provider of turf maintenance equipment to
the Valderrama Club de Golf, Spain, site of the 1997 Ryder Cup of golf.
CONTENTS
Letter to Shareholders 2
Review of Operations 6
Eleven-Year Selected
Financial Data 14
Fiscal Year Ended
October 31, 1996
- - - - --------------------------------------------------
Management's Discussion
and Analysis 16
Financial Statements 21
3 months ended October 31, 1995 and Fiscal Years
Ended July 31, 1995 and July 31, 1994.
- - - - --------------------------------------------------
Management's Discussion
and Analysis 25
Financial Statements 30
Notes to Consolidated
Financial Statements 33
Directors, Officers and
Stockholders' Information 45
1
ELEVEN-YEAR SELECTED FINANCIAL DATA The Toro Company
- - - - ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31**** 1996 1995 1994 1993 1992* 1991
- - - - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $930,909 $919,400 $864,300 $706,600 $638,700 $706,200
EARNINGS:
Net earnings (loss) 36,409 32,362 32,426 15,282 (21,726) 16,100
Percent of sales 3.9% 3.5% 3.8% 2.2% (3.4)% 3.8%
Per share of common stock and common
stock equivalent $ 2.90 $ 2.50 $ 2.49 $ 1.22 $ (1.81) $ 0.77
DIVIDENDS:
On common stock outstanding 5,834 5,953 6,022 5,858 5,765 5,710
Per share of common stock outstanding 0.48 0.48 0.48 0.48 0.48 0.48
RETURN ON:
Beginning common stockholders' equity 19.1% 18.1% 22.9% 12.1% (14.2)% 26.4%
Average common stockholders' equity 18.0% 17.5% 20.2% 11.4% (15.5)% 26.2%
SUMMARY OF FINANCIAL POSITION:
Current assets $405,001 $386,259 $373,400 $326,100 $324,200 $322,000
Current liabilities 207,857 221,173 197,200 169,200 132,500 103,800
Working capital 197,144 165,086 176,200 156,900 191,700 218,200
Non-current assets 91,876 86,394 78,200 73,700 85,100 93,400
Total assets 496,877 472,653 451,600 399,800 409,300 415,400
Non-current liabilities, excluding
long-term debt 22,438 7,223 5,300 1,400 2,500 4,100
CAPITALIZATION:
Long-term debt, less current portion 53,015 53,365 70,400 87,300 147,900 154,100
Redeemable preferred stock - - - - - -
Common stockholders' equity 213,567 190,892 178,700 141,900 126,400 153,400
Total capitalization 266,582 244,257 249,100 229,200 274,300 307,500
Book value per common share 17.75 15.69 14.05 11.47 10.50 12.84
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 12,032 12,168 12,720 12,370 12,041 11,950
Number of common stockholders 6,841 7,243 - - - -
Low price $ 28 3/8 $ 25 5/8 $ 20 7/8 $ 14 1/8 $ 11 3/8 $ 11
High price 36 1/4 32 1/4 30 1/2 26 3/4 17 1/2 20 1/2
Close price 31 3/8 28 7/8 27 3/4 25 3/8 14 1/8 14 3/4
- - - - ----------------------------------------------------------------------------------------------------------------------------------
14
- - - - ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31**** 1990** 1989 1988 1987*** 1986
- - - - ----------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $747,300 $639,200 $626,200 $551,600 $422,300
EARNINGS:
Net earnings (loss) 9,130 8,394 19,962 20,500 17,900
Percent of sales 1.3% 1.1% 3.1% 3.3% 3.2%
Per share of common stock and common
stock equivalent $ 0.84 $ 1.90 $ 1.90 $ 1.60 $ 1.39
DIVIDENDS:
On common stock outstanding 6,074 4,774 4,613 3,730 3,135
Per share of common stock outstanding 0.48 0.48 0.45 0.37 0.30
RETURN ON:
Beginning common stockholders' equity 6.2% 8.5% 23.5% 28.4% 28.8%
Average common stockholders' equity 6.1% 6.8% 21.7% 26.1% 26.7%
SUMMARY OF FINANCIAL POSITION:
Current assets $306,800 $271,200 $296,400 $262,600 $216,600
Current liabilities 133,000 125,000 144,200 121,800 114,700
Working capital 173,800 146,200 152,200 140,800 101,900
Non-current assets 103,900 57,100 55,800 52,800 27,300
Total assets 410,700 328,300 352,200 315,400 243,900
Non-current liabilities, excluding
long-term debt 6,100 2,400 1,700 1,100 2,100
CAPITALIZATION:
Long-term debt, less current portion 125,300 95,600 112,200 109,800 54,500
Redeemable preferred stock - 6,000 9,000 10,500 10,500
Common stockholders' equity 146,300 99,300 85,100 72,200 62,100
Total capitalization 271,600 200,900 206,300 192,500 127,100
Book value per common share 12.34 9.98 8.46 7.12 6.04
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 11,859 9,946 10,059 10,144 10,280
Number of common stockholders - - - - -
Low price $ 12 $ 17 7/8 $ 11 1/8 $ 13 1/2 $ 11 1/2
High price 30 24 3/8 24 7/8 23 3/4 19 1/2
Close price 12 3/4 21 5/8 18 3/8 15 1/8 17 3/8
- - - - ----------------------------------------------------------------------------------------------------------------------
* Includes restructuring costs of $24.9 million, or $1.41 per share.
** The company's consolidated financial statements include results of
operations of Lawn-Boy Inc. from November 7, 1989, the date of acquisition.
*** The company's consolidated financial statements include results of
operations of Wheel Horse Products, Inc. from December 19, 1986, the date
of acquisition.
**** The actual date of the year end for years prior to 1995 was the Friday
closest to October 31.
[graph] [graph] [graph] [graph] [graph] [graph]
15
1996 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Toro Company
In November 1995, the company changed its fiscal year ended July 31 to a
fiscal year ended October 31. The following comparisons are based on the
company's new fiscal year end. The 3 month transition period ended October
31, 1995 bridges the gap between the company's old and new fiscal year ends.
A comparison of this transition period to the same period in 1994 is
presented beginning on page 25. In addition, a comparison of the years ended
July 31, 1995 and 1994 is also presented beginning on page 25.
Financial information relating to the year ended October 31, 1996 has been
derived from the audited financial statements. The results of operations for
fiscal years ended in October 1995 and 1994 have been restated from the
previous July 31 year end to the new fiscal year basis and are unaudited. The
October 31, 1995 balance sheet information has been derived from the October
31, 1995 audited balance sheet. Financial information for the year ended
October 28, 1994 is unaudited and is presented for informational purposes
only.
RESULTS OF OPERATIONS
In 1996, the company increased net earnings by 12.3% over the previous year
in spite of only a modest increase in worldwide net sales. The company
continues to focus on implementing operational strategies which improve
production flexibility and efficiency and aggressive expense control measures
which result in increased margins. Weather patterns have a major impact on
the company's sales; however, the company has entered into a number of
strategic alliances and acquisitions in 1996, and continues to seek other
opportunities to diversify both the product categories and the global markets
where products are sold. This has and will continue to reduce the impact of
localized weather patterns and economic conditions on the company's sales and
earnings. See "Acquisitions and Strategic Alliances" included in this MD&A.
SUMMARY
- - - - ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended
OCTOBER 31 October 31 October 28
(Dollars in millions except per share data) 1996 % Change 1995 % Change 1994
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Net sales $930.9 1.3% $919.4 6.4% $864.3
Cost of sales 589.2 - 589.2 7.2 549.7
- - - - -----------------------------------------------------------------------------------------------------------------------------
Gross profit 341.7 3.5 330.2 5.0 314.6
Selling, general and administrative expense 278.3 2.3 272.1 6.5 255.6
- - - - -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations 63.4 9.1 58.1 (1.5) 59.0
Interest expense 13.5 13.4 11.9 (7.0) 12.8
Other income, net (10.3) 33.8 (7.7) (1.3) (7.8)
- - - - -----------------------------------------------------------------------------------------------------------------------------
Earning before income taxes 60.2 11.7 53.9 (0.2) 54.0
Provision for income taxes 23.8 10.7 21.5 (0.5) 21.6
- - - - -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 36.4 12.3% $ 32.4 - $ 32.4
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent $ 2.90 16.0% $ 2.50 0.4% $2.49
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
NET SALES BY PRODUCT LINE
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
- - - - -----------------------------------------------------------------------------------------------------------------------------
Consumer $461.0 (1.3)% $467.2 (1.9)% $476.2
Commercial 322.0 3.6 310.8 18.5 262.3
Irrigation 147.9 4.6 141.4 12.4 125.8
- - - - -----------------------------------------------------------------------------------------------------------------------------
Total* $930.9 1.3% $919.4 6.4% $864.3
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
*Includes international sales of $174.2 16.4% $149.6 6.3% $140.7
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
16
In fiscal 1996, net earnings increased by $4.0 million to $36.4 million from
$32.4 million in the prior fiscal year. Worldwide net sales increased by $11.5
million to $930.9 million in 1996 versus $919.4 million in 1995. The following
is a discussion of the sales by product group:
- - - - - CONSUMER
Worldwide consumer product sales in 1996 fell by 1.3% to $461.0 million from
$467.2 million in 1995. The decrease was primarily the result of a slow start to
the lawn and garden season due to cold, wet weather throughout most of the
United States during the spring season. This decline was offset partially by
increased snowthrower shipments. Snowthrower demand, especially in the
northeast, was high in anticipation of strong retail activity and abnormally low
field inventory levels. For the year, snowthrower sales were up 31.0%, primarily
the result of sales volume increases. International sales included in the
worldwide consumer totals declined by 1% from the prior year. Walk behind mower
sales were lower, but this decline was partially offset by strong riding product
sales.
[GRAPH]
- - - - - COMMERCIAL
Worldwide commercial product sales increased $11.2 million or 3.6% over the
prior year to $322.0 million. International sales were strong, up 30.4% due
primarily to a strong golf market in Europe and Asia. The late spring had an
adverse effect on sales to the domestic golf course market. Many golf courses
were forced to cut their equipment budgets due to loss of income from fewer
rounds played during the inclement spring weather. In addition, the market saw
increased competitive actions among the major equipment manufacturers.
[GRAPH]
- - - - - IRRIGATION
Worldwide irrigation sales totaled $147.9 million representing an increase of
$6.5 million or 4.6% over the prior year. International irrigation sales were
strong, up 15.3% from the prior year, fueled by strong golf market sales. This
was partially offset by lower sales to the residential/commercial markets which
were impacted by the cold, wet spring.
[GRAPH]
- - - - - INTERNATIONAL MARKETS
Total international sales, included in the preceding net sales table, increased
by 16.4% over the previous year to $174.2 million. This was primarily the result
of increased sales volumes in the European and Asian golf markets. International
sales are principally denominated in U.S. dollars; however, a portion of the
company's international sales are denominated in foreign currencies. To reduce
the uncertainty of foreign currency exchange rate movements on these sales
commitments, the company enters into foreign exchange and range forward
contracts. See Note 11 to the Consolidated Financial Statements.
[GRAPH]
COST TRENDS AND PROFIT MARGINS
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended
OCTOBER 31 October 31 October 28
Margins (Percent of net sales) 1996 1995 1994
- - - - --------------------------------------------------------------------------------
Gross profit 36.7% 35.9% 36.4%
Operating profit 6.8 6.3 6.8
Pretax earnings 6.5 5.9 6.2
Net earnings 3.9 3.5 3.7
- - - - --------------------------------------------------------------------------------
The gross profit of $341.7 million represents an $11.5 million or 3.5%
increase over the gross profit of $330.2 million in 1995. As a percent of net
sales, gross profit rose to 36.7% from 35.9% in the prior year. The
percentage margin improvement resulted primarily from reduced production
costs, notably materials and product mix. This improvement was offset
partially by costs resulting from lowered production levels in selected
plants to match market needs.
17
Operating profit rose to $63.4 million or 6.8% of net sales, from $58.1
million or 6.3% of net sales in 1995. The improvement in operating profit
resulted from an increase in gross profit margins of $11.5 million, partially
offset by a $6.2 million increase in SG&A expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A)
- - - - ----------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended
OCTOBER 31 % OF October 31 % of October 28 % of
SG&A Expense (Dollars in millions) 1996 NET SALES 1995 Net Sales 1994 Net Sales
- - - - ----------------------------------------------------------------------------------------------------------------
Administrative $ 97.5 10.5% $ 92.7 10.1% $ 82.6 9.6%
Sales and marketing 87.5 9.4 89.0 9.7 90.8 10.5
Warranty 28.5 3.0 31.9 3.5 30.0 3.5
Distributor/dealer financing 10.3 1.1 9.9 1.1 9.0 1.0
Research and development 31.3 3.4 27.4 2.9 25.0 2.9
Warehousing 15.2 1.6 14.7 1.6 12.2 1.4
Service/quality assurance 8.0 0.9 6.5 0.7 6.0 0.7
- - - - ----------------------------------------------------------------------------------------------------------------
Total $278.3 29.9% $272.1 29.6% $255.6 29.6%
- - - - ----------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------
For 1996, SG&A expenses totaled $278.3 million or 29.9% of net sales
compared to $272.1 million or 29.6% of net sales in 1995.
The increase in administrative expense of $4.8 million was comprised
primarily of additional operating expenses associated with new businesses
acquired in 1996. See "Acquisitions and Strategic Alliances included in this
MD&A.
Sales and marketing expense was down $1.5 million due to reduced direct
expenses from the decrease in consumer lawn and garden sales combined with
savings from added expense controls.
Warranty expense was down $3.4 million from the prior year as a result of
lower warranty reserve requirements due to continuing product quality
improvements and experience factors.
Distribution/dealer financing expense increased by $0.4 million and was
flat as a percent of sales. Distributor/dealer financing expense represents the
cost incurred by the company to contract with a third party financing source to
finance dealer inventory purchases. The $10.3 million charge reflected in SG&A
expense represents credit facility origination costs and interest charged for a
pre-established length of time. Interest is charged at market rates based on
prime plus a negotiated markup. These financing arrangements are used by the
company as a marketing tool to enable customers to buy inventory.
Research and development expenditures increased by $3.9 million reflecting
the company's commitment to invest in product innovation and development.
[GRAPH]
Warehousing expense increased nominally by $0.5 million as the result of
warehousing costs for new businesses.
Service/quality assurance increased 23.1% from 1995 as a result of
additional quality assurance and customer service spending for the company's new
ventures.
INTEREST EXPENSE
Interest expense in 1996 increased by $1.6 million to $13.5 million. Although
the average cost of funds declined from the prior year, the benefit was
diminished by higher overall debt levels resulting from higher levels of average
working capital. In addition to working capital needs, the company
purchased $13.3 million of its own common stock during the year which was funded
with short-term borrowings. This cash outflow was offset partially by $12.1
million received as a result of an interest rate swap entered into during 1996.
The company anticipates a significant increase in interest expense in 1997 as a
result of the additional debt associated with the acquisition of James Hardie
Irrigation Group. See "Acquisitions and Strategic Alliances" in this MD&A.
18
OTHER INCOME, NET
Other income, net totaled $10.3 million in 1996 versus $7.7 million for 1995.
The increase is primarily the result of favorable patent infringement litigation
settlements.
PROVISION FOR TAXES
The effective tax rate for 1996 was 39.5% compared to 39.9% in 1995. In
accordance with Financial Accounting Standards No. 109, the company has
determined that it is not necessary to establish a valuation reserve for the
deferred income tax benefit because it is more likely than not that the net
deferred income tax benefit of $31.5 million will be principally realized
through carry back to taxable income in prior years, future reversals of
existing taxable temporary differences, and to a lesser extent, future
taxable income.
NET EARNINGS
Net earnings for 1996 were $36.4 million, representing a 12.3% increase over
1995 earnings of $32.4 million. The increase is primarily the result of improved
operating margins. On a per share basis, earnings increased 16% to $2.90 from
$2.50 in 1995.
ASSETS
Total assets at October 31, 1996 increased by 5.1% to $496.9 million compared to
$472.7 million for the prior year. The increase was primarily comprised of a
$40.8 million increase in accounts receivable resulting from third and fourth
quarter lawn and garden, and snow sales, new business receivables and dealer
direct financing. This increase was offset partially by a reduction in cash and
cash equivalents and inventories resulting from production management
strategies.
WORKING CAPITAL
Working capital at 1996 year end was $197.1 million which represents an increase
of $32.0 million from the $165.1 million reported for 1995. The current ratio
for 1996 was 1.95 versus 1.75 in 1995. Working capital as a percent of sales was
21.2% in 1996 and 18.0% for 1995.
The increase in working capital resulted from the $18.7 million increase in
current assets, primarily accounts receivable, which was partially offset by
reduced inventories. In addition, current liabilities declined by $13.3 million,
due to a combination of a $15.0 million decline in the current portion of long
term debt, and a $8.2 million decrease in accounts payable. This was offset
partially by a $9.6 million increase in other accrued liabilities, primarily
caused by a change in benefit plan year ends which impacted the timing of
company payments to these plans.
CAPITAL STRUCTURE
Long-term debt includes:
- - - - - $50.0 million of 11% sinking fund debentures, due August 2017 with sinking
fund payments due annually August 1998 through August 2017.
- - - - - $3.4 million variable rate industrial revenue bond, due June 2004 with sinking
fund payments due annually June 1997 through June 2004.
Long-term debt at October 31, 1996 was $53.4 million, down $15.3 million
from $68.7 million at October 31, 1995. The amount of total long-term debt
attributable to Toro Credit Company, the company's consolidated finance
subsidiary, was zero at October 31, 1996 compared to $15.0 million at October
31, 1995. Toro Credit Company is now funded by the parent. The company's capital
structure is managed on a consolidated basis.
19
Total debt at October 31, 1996 was $94.4 million, down $15.9 million from
$110.3 million at October 31, 1995. The total debt to total capital ratio
decreased from 36.6% in 1995 to 30.7% in 1996 as the result of decreased
long-term debt and an increase in current year earnings.
Total capitalization at October 31, 1996 consisted of $53.4 million of
long-term debt, $41.0 million of short-term borrowing and $213.6 million of
stockholders' equity.
[GRAPH]
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the company continued to improve its liquidity through cash management
strategies which included the continued replacement of long-term debt with short
term borrowings at more favorable interest rates, combined with prudent
management of inventory levels.
Management believes that the combination of funds available through its
existing financing options, coupled with forecasted cash flows as well as the
anticipated issuance of public debt described below will provide the capital
resources for its anticipated needs.
- - - - - CASH FLOW
Cash and cash equivalents declined by $7.6 million from 1995 to 1996. This
decline in cash was primarily driven by repayment of debt and stock repurchases.
At October 31, 1996 the company had $4,908,000 included in trade payables that
represented the reclassification of outstanding checks in excess of related bank
balances.
Cash provided by operating activities increased by $12.5 million as a
result of a reduction in inventories and increased earnings. This was offset by
increased accounts receivable attributed to timing of snowthrower and lawn and
garden sales late in the year, expanded dealer direct financing programs through
Toro Credit Company, and receivables resulting from Toro's new businesses.
Cash used in investing activities declined slightly in 1996 from 1995.
Investing activities consisted primarily of initial purchases of tooling
components used to manufacture new products and a variety of expenditures to
improve and modernize the manufacturing plants and administrative offices.
Cash used in financing activities was primarily for retirement of debt and
purchases of Toro stock. The company purchased the stock for use in employee
benefit plans and for potential acquisitions. The major source of cash from
financing activities was cash received from the forward starting interest rate
exchange agreement. See Note 3 to the Consolidated Financial Statements.
- - - - - CREDIT LINES AND OTHER CAPITAL RESOURCES
The company's seasonal working capital requirements are funded with $194.0
million of unsecured bank credit lines. Average borrowings under these lines
were $95.2 million in 1996 and $44.6 million in 1995. The increase in the
average borrowings was the result of the reduction in long-term debt, the
addition of dealer direct financing through Toro Credit Company, the purchase of
the company's stock and the increase in seasonal working capital. At October 31,
1996, the company had $153.0 million of unutilized availability under these
credit lines. Subsequent to the year end, the company executed an agreement for
an additional $150.0 million unsecured bank credit line expiring in December
1997.
Additionally, the company's resources included two bankers' acceptance
financing agreements totaling $40.0 million. There were no amounts outstanding
under these agreements at October 31, 1996 or 1995.
The company's business is seasonal, with accounts receivable balances
historically increasing between January and March as a result of extended
payment terms made available to the company's customers, and decreasing between
April and June when payments become due. The company's peak borrowing usually
occurs between February and May. The seasonal working capital requirements are
financed primarily with the short-term financing arrangements described above.
- - - - - ACQUISITION FINANCING
In December 1996, the company completed the acquisition of James Hardie
Irrigation Group. The purchase price of approximately $119.0 million has been
initially financed with temporary bank debt. The company intends to file a shelf
registration for public debt to facilitate the issuance of long-term
20
debt to replace the temporary bank debt. The company also believes that
financing is available through other resources. Management believes that the
capital resources available under existing arrangements are sufficient to meet
the company's needs through fiscal 1997. See "Acquisitions and Strategic
Alliances" included in this MD&A.
INFLATION
The company is subject to the effects of changing prices. The company has,
however, generally been able to pass along inflationary increases in its costs
by increasing the prices of its products.
ACQUISITIONS AND STRATEGIC ALLIANCES
On December 3, 1996, the company announced that it completed the acquisition of
James Hardie Irrigation Group (JHI) from James Hardie Limited of Australia. The
purchase price of approximately $119.0 million is subject to adjustment based on
changes in working capital and closing balance sheet audit adjustments, and has
been initially financed with temporary bank debt. The company intends to file a
shelf registration for public debt which would facilitate the issuance of
long-term debt to replace the temporary bank debt. The company expects the
purchase to have a modest dilutive effect on earnings per share in 1997. JHI is
a worldwide leader in the production of irrigation systems to the commercial
landscape market. See Note 14 to the Consolidated Financial Statements.
In addition, the company completed the acquisitions of Liquid Ag Systems
and National Service Network in 1996, and joined Walt Disney Wide World of
Sports, Ryobi Outdoor Products, and Maruyama Manufacturing, Inc., in alliances
that provide enhanced visibility and expanded product lines into emerging
markets such as the landscape contractor business.
SUMMARY
The company continued to increase earnings by leveraging a slight sales gain.
Strong sales performance in several product categories offset slower performance
in others. The increase in net earnings resulted from improvements in operating
margin offset partially by added expenses for new businesses and product
research and development. In addition, an increase in other income more than
offset an increase in interest expense resulting from higher working capital
levels during the year. The company strengthened its balance sheet through cash
management, inventory strategies and reduced long-term debt.
CONSOLIDATED STATEMENTS OF EARNINGS The Toro Company
- - - - -------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended
OCTOBER 31 October 31 October 28
(Dollars in thousands, except per share data) 1996 1995 1994
- - - - -------------------------------------------------------------------------------------------------
Net sales $930,909 $919,427 $864,284
Cost of sales 589,186 589,211 549,728
- - - - -------------------------------------------------------------------------------------------------
Gross profit 341,723 330,216 314,556
Selling, general and administrative expense 278,284 272,128 255,625
- - - - -------------------------------------------------------------------------------------------------
Earnings from operations 63,439 58,088 58,931
Interest expense 13,590 11,954 12,705
Other income, net (10,331) (7,747) (7,819)
- - - - -------------------------------------------------------------------------------------------------
Earnings before income taxes 60,180 53,881 54,045
- - - - -------------------------------------------------------------------------------------------------
Provision for income taxes 23,771 21,519 21,619
- - - - -------------------------------------------------------------------------------------------------
Net earnings $ 36,409 $ 32,362 $ 32,426
- - - - -------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------
Net earnings per share of common stock and
common stock equivalent $ 2.90 $ 2.50 $ 2.49
- - - - -------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------
21
CONSOLIDATED BALANCE SHEETS The Toro Company
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) October 31 1996 1995
- - - - ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 66 $ 7,702
Receivables:
Customers 244,434 201,571
Other 5,208 4,787
- - - - ----------------------------------------------------------------------------------------------------------
Subtotal 249,642 206,358
Less allowance for doubtful accounts 10,005 7,542
- - - - ----------------------------------------------------------------------------------------------------------
Total receivables 239,637 198,816
- - - - ----------------------------------------------------------------------------------------------------------
Inventories 130,288 145,862
Prepaid expenses 5,133 6,417
Deferred income tax benefits 29,877 27,462
- - - - ----------------------------------------------------------------------------------------------------------
Total current assets 405,001 386,259
- - - - ----------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and land improvements 6,816 6,569
Buildings and leasehold improvements 46,107 47,601
Equipment 176,157 157,511
- - - - ----------------------------------------------------------------------------------------------------------
Subtotal 229,080 211,681
Less accumulated depreciation and amortization 155,270 141,726
- - - - ----------------------------------------------------------------------------------------------------------
Total property, plant and equipment 73,810 69,955
- - - - ----------------------------------------------------------------------------------------------------------
Deferred income taxes 1,600 2,384
Other assets 16,466 14,055
- - - - ----------------------------------------------------------------------------------------------------------
Total assets $496,877 $472,653
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 350 $ 15,334
Short-term borrowing 41,025 41,575
Accounts payable 43,524 51,757
Accrued warranty 34,722 35,065
Accrued marketing programs 22,600 21,407
Other accrued liabilities 65,636 56,035
- - - - ----------------------------------------------------------------------------------------------------------
Total current liabilities 207,857 221,173
- - - - ----------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 53,015 53,365
Other long-term liabilities 22,438 7,223
Common stockholders' equity:
Common stock, par value $1.00, authorized 35,000,000 shares; issued
and outstanding 12,032,143 shares in 1996 (net of 877,861 treasury shares)
and 12,167,835 shares in 1995 (net of 674,490 treasury shares) 12,032 12,168
Additional paid-in capital 28,462 35,712
Retained earnings 173,630 142,891
Foreign currency translation adjustment (557) 121
- - - - ----------------------------------------------------------------------------------------------------------
Total common stockholders' equity 213,567 190,892
- - - - ----------------------------------------------------------------------------------------------------------
Total liabilities and common stockholders' equity $496,877 $472,653
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
22
CONSOLIDATED STATEMENTS OF CASH FLOWS The Toro Company
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended Year Ended
OCTOBER 31 October 31 October 28
(Dollars in thousands) 1996 1995 1994
- - - - ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 36,409 $ 32,362 $ 32,426
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for depreciation and amortization 18,170 17,115 18,646
(Gain) loss on disposal of property, plant and equipment (260) (147) 1,244
Deferred income taxes 784 (1,089) (2,667)
Tax benefits related to employee stock option transactions 1,490 1,178 953
Changes in operating assets and liabilities:
Net receivables (40,821) 1,094 (39,115)
Inventories 15,574 (13,008) (20,041)
Prepaid expenses and deferred income tax benefits (1,131) (5,660) (3,918)
Accounts payable and accrued expenses 2,218 (11,868) 43,117
- - - - ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,433 19,977 30,645
- - - - ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (21,389) (26,987) (21,036)
Proceeds from asset disposals 543 850 303
(Increase) decrease in other assets/liabilities (857) 4,017 (2,326)
- - - - ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,703) (22,120) (23,059)
- - - - ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowing (550) 41,575 -
Proceeds from issuance of long-term debt - - 4,000
Repayments of long-term debt (15,334) (22,755) (36,077)
Proceeds from deferred income 12,742 - 5,250
Proceeds from exercise of stock options 4,627 7,632 8,518
Purchases of common stock (13,339) (26,024) (2,814)
Dividends on common stock (5,834) (5,953) (6,022)
Repayments from ESOP - 2,612 2,611
- - - - ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,688) (2,913) (24,534)
- - - - ----------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (678) 356 1,151
- - - - ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (7,636) (4,700) (15,797)
Cash and cash equivalents at beginning of year 7,702 12,402 28,199
- - - - ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 66 $ 7,702 $ 12,402
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
23
SELECTED FINANCIAL DATA The Toro Company
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
3 Months Years Ended
YEAR ENDED Ended -------------------------------------------------------------
(Dollars in thousands, OCTOBER 31 October 31 July 31 July 31 July 31 July 31
except per share data) 1996 1995 1995 1994 1993 1992*
- - - - ----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net sales $930,909 $192,278 $932,853 $794,341 $684,324 $643,748
EARNINGS:
Net earnings (loss) 36,409 3,997 36,667 22,230 13,040 (23,753)
Percent of sales 3.9% 2.1% 3.9% 2.8% 1.9% (3.7)%
Per share of common stock and
common stock equivalent $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05 $ (1.98)
DIVIDENDS:
On common stock outstanding 5,834 1,459 6,002 5,993 5,824 5,753
Per share of common
stock outstanding 0.48 0.12 0.48 0.48 0.48 0.48
RETURN ON:
Beginning common
stockholders' equity 19.1% 2.2% 21.7% 15.4% 9.8% (14.8)%
Average common
stockholders' equity 18.0% 2.1% 20.7% 14.2% 9.4% (16.2)%
SUMMARY OF FINANCIAL POSITION:
Current assets $405,001 $386,259 $381,610 $364,495 $344,130 $332,517
Current liabilities 207,857 221,173 212,659 188,712 150,260 122,087
Working capital 197,144 165,086 168,951 175,783 193,870 210,430
Non-current assets 91,876 86,394 86,705 79,144 75,073 88,793
Total assets 496,877 472,653 468,315 443,639 419,203 421,310
Non-current liabilities,
excluding long-term debt 22,438 7,223 5,250 5,250 1,372 2,509
CAPITALIZATION:
Long-term debt,
less current portion 53,015 53,365 64,935 81,025 122,970 164,100
Common stockholders' equity 213,567 190,892 185,471 168,652 144,601 132,614
Total capitalization 266,582 244,257 250,406 249,677 267,571 296,714
Book value per common share 17.75 15.69 15.40 13.43 11.78 11.01
STOCK DATA:
Number of shares
of common stock
outstanding (in thousands) 12,032 12,168 12,040 12,561 12,270 12,042
Number of common
stockholders 6,841 7,243 7,347 7,541 7,968 8,386
Low price $ 28 3/8 $ 28 1/8 $ 21 5/8 $ 19 3/4 $ 11 3/8 $ 12 1/8
High price 36 1/4 32 1/4 30 3/8 30 1/2 21 7/8 17 1/2
Close price 31 3/8 28 7/8 28 5/8 22 5/8 19 3/4 13
- - - - ----------------------------------------------------------------------------------------------------------------------------------
*Includes restructuring costs of $24.9 million, or $1.41 per share.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Toro Company
In November 1995, the company changed its fiscal year ended July 31 to a fiscal
year ended October 31. A comparison of the year ended October 31, 1996 to the
year ended October 31, 1995 is presented beginning on page 16. The 3 month
transition period ended October 31, 1995 bridges the gap between the company's
old and new fiscal year ends. A comparison of this transition period to the same
period in 1994 is presented below. In addition, a comparison of the years ended
July 31, 1995 and 1994 is also presented below.
Financial information related to the 3 month transition period ended October
31, 1995, and the years ended July 31, 1995 and 1994 has been derived from the
audited financial statements. Financial information related to the 3 month
period ended October 28, 1994 is unaudited.
RESULTS OF OPERATIONS
The sales for the 3 month transition period ended October 31, 1995 were $192.3
million versus $205.7 million in the same period of the prior year. The decline
was due to extraordinary snow product sales in 1994. Earnings for the period
were $4.0 million versus $8.3 million in the prior year.
SUMMARY
- - - - ------------------------------------------------------------------------------------------------------------------------------------
- - - - ------------------------------------------------------------------------------------------------------------------------------------
3 Months Ended 3 Months Ended Year Ended Year Ended
October 31 October 28 July 31 July 31
(Dollars in millions except per share data) 1995 % Change 1994 1995 % Change 1994
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Net sales $192.3 (6.5)% $205.7 $932.9 17.4% $794.3
Cost of sales 120.6 (6.9) 129.6 598.3 18.1 506.8
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 71.7 (5.8) 76.1 334.6 16.4 287.5
Selling, general and administrative expense 65.0 3.7 62.7 269.8 10.2 244.9
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 6.7 (50.0) 13.4 64.8 52.1 42.6
Interest expense 2.5 - 2.5 11.9 (12.5) 13.6
Other income, net (2.4) (17.2) (2.9) (8.2) 2.5 (8.0)
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 6.6 (52.2) 13.8 61.1 65.1 37.0
Provision for income taxes 2.6 (52.7) 5.5 24.4 64.9 14.8
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4.0 (51.8)% 8.3 $ 36.7 65.3% $ 22.2
- - - - ------------------------------------------------------------------------------------------------------------------------------------
- - - - ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent $ 0.32 (50.0)% $ 0.64 $ 2.81 64.3% $ 1.71
- - - - ------------------------------------------------------------------------------------------------------------------------------------
- - - - ------------------------------------------------------------------------------------------------------------------------------------
SALES BY PRODUCT LINE
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
3 Months Ended 3 Months Ended Year Ended Year Ended
Net Sales October 31 October 28 July 31 July 31
(Dollars in millions) 1995 % Change 1994 1995 % Change 1994
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Consumer $105.9 (16.4)% $126.7 $488.1 14.6% $425.8
Commercial 54.1 11.1 48.7 305.3 20.6 253.2
Irrigation 32.3 6.6 30.3 139.5 21.0 115.3
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Total* $192.3 (6.5)% $205.7 $932.9 17.4% $794.3
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
*Includes international sales of $ 20.9 (11.8)% $ 23.7 $152.4 17.1% $130.1
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
25
3 MONTHS ENDED OCTOBER 31, 1995 COMPARED WITH 3 MONTHS ENDED OCTOBER 28, 1994
- - - - --------------------------------------------------------------------------------
Worldwide net sales for the 3 months ended October 31, 1995, of $192.3 million
decreased by $13.4 million from the prior year primarily as a result of
decreased sales of snow removal equipment. The decline in the quarter was offset
partially by an increase in commercial and irrigation product sales. The
increase in commercial product sales was the result of new product
introductions, golf course openings, increased sales of equipment to landscape
contractors and increased sales in the municipal markets. Irrigation sales
increased because of new product introductions and increased demand for do-it-
yourself products. International sales included in the table on the previous
page declined from the prior year because of a temporary business interruption
in the irrigation product line as a result of distribution changes as well as
decreased sales of snow removal equipment.
YEAR ENDED JULY 31, 1995 COMPARED WITH YEAR ENDED JULY 31, 1994
- - - - --------------------------------------------------------------------------------
Worldwide sales increased $138.6 million in fiscal 1995 to $932.9 million with
increases in all product lines as discussed below:
- - - - - CONSUMER
Worldwide consumer product sales rose 14.6% to $488.1 million in 1995. Consumer
product sales represented 52.3% and 53.6% of consolidated net sales for 1995 and
1994, respectively. International sales included in consumer product sales
increased $5.6 million from the prior year.
Exceptional sales of snow removal equipment as well as increased sales of
riding products and Toro-Registered Trademark-brand walk power mowers
contributed to the increase over the prior year. This increase was offset
partially by a decline in Lawn-Boy-Registered Trademark- walk power mower
sales as a result of reduced shipments in response to a delayed spring season
as well as actions to reduce excess retail inventory.
- - - - - COMMERCIAL
Worldwide commercial product sales increased $52.1 million over the prior year.
International sales included in commercial product sales increased $9.0 million
from the prior year.
Sales were strong in both the golf and municipal markets because of new golf
course openings and increased spending in the municipal market. Sales of
equipment to landscape contractors and sales of recycling equipment products
also contributed to the increase.
- - - - - IRRIGATION
Worldwide irrigation product sales increased 21.0% to $139.5 million in 1995.
International sales included in irrigation product sales increased $6.0 million.
Increased sales of irrigation products in the golf industry as well as an
improved market share for do-it-yourself products contributed to the sales
increase. The company's change to direct distribution through irrigation product
wholesale dealers in the California and Texas markets, made in 1994 to better
respond to customer needs, was favorably received in the marketplace. Improved
international economies and weather conditions also resulted in increased sales.
- - - - - INTERNATIONAL MARKETS
International sales are included in the preceding net sales table. International
sales increased 17.1% to $152.4 million in 1995. Sales in Canada improved over
the prior year because of the strengthened economy. The drought in Australia
curtailed sales slightly, but was offset by increased sales in Europe because of
the weak U.S. dollar.
26
COST TRENDS AND PROFIT MARGINS
- - - - -----------------------------------------------------------------------------------------------------------------
3 Months Ended 3 Months Ended Year Ended Year Ended
October 31 October 28 July 31 July 31
Margins (Percent of net sales) 1995 1994 1995 1994
- - - - -----------------------------------------------------------------------------------------------------------------
Gross profit 37.3% 37.0% 35.9% 36.2%
Operating profit 3.5 6.5 6.9 5.4
Pretax earnings 3.4 6.7 6.5 4.7
Net earnings 2.1 4.0 3.9 2.8
- - - - -----------------------------------------------------------------------------------------------------------------
3 MONTHS ENDED OCTOBER 31, 1995 COMPARED WITH 3 MONTHS ENDED OCTOBER 28, 1994
- - - - --------------------------------------------------------------------------------
Gross profit of $71.7 million decreased $4.4 million from the prior year because
of the decline in sales. As a percent of sales, gross profit for the period
ended October 31, 1995 was 37.3% compared with 37.0% for the period ended
October 28, 1994 primarily due to increased sales of commercial and irrigation
products, offset partially by reduced sales of snow removal equipment.
YEAR ENDED JULY 31, 1995 COMPARED WITH YEAR ENDED JULY 31, 1994
- - - - --------------------------------------------------------------------------------
Gross profit of $334.6 million increased 16.4% over the $287.5 million in 1994.
As a percent of net sales, gross profit decreased slightly to 35.9% for 1995
compared with 36.2% in 1994. The percentage decrease resulted from the mix of
product sales and increased costs of raw material. Gross profit increased $47.1
million to $334.6 million. This was the result of the increased sales volume
which was offset by the items mentioned above.
Operating profit improved from the prior year by $22.2 million because of
improved operating leverage as a result of increased sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A)
- - - - -----------------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
3 Months Ended % of 3 Months Ended % of Year Ended % of Year Ended % of
SG&A Expense October 31 Net October 28 Net July 31 Net July 31 Net
(Dollars in millions) 1995 Sales 1994 Sales 1995 Sales 1994 Sales
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Administrative $24.0 12.5% $20.8 10.1% $ 89.5 9.6% $ 80.2 10.1%
Sales and marketing 20.6 10.7 23.8 11.6 92.1 9.9 84.4 10.6
Warranty 6.6 3.4 5.7 2.8 31.0 3.3 29.0 3.6
Distributor/dealer financing 2.1 1.1 2.0 1.0 9.7 1.0 8.6 1.1
Research and development 6.9 3.6 6.0 2.9 26.5 2.8 24.6 3.1
Warehousing 3.2 1.7 2.9 1.4 14.5 1.6 11.8 1.5
Service/quality assurance 1.6 0.8 1.5 0.7 6.5 0.7 6.3 0.8
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Total $65.0 33.8% $62.7 30.5% $269.8 28.9% $244.9 30.8%
- - - - -----------------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
3 MONTHS ENDED OCTOBER 31, 1995 COMPARED WITH 3 MONTHS ENDED OCTOBER 28, 1994
- - - - --------------------------------------------------------------------------------
SG&A increased $2.3 million from the prior year and as a percent of sales
increased to 33.8%. Administrative expense increased from the prior year as the
company continued its implementation of a company-wide information system as
well as an overall increase in spending. Warranty increased from the prior year
as a result of a change in the sales mix of products. Research and development
expenditures were above the prior year reflecting the company's continued
commitment to product innovation. These increases were offset partially by a
decrease in sales and marketing expense primarily because of reduced sales.
27
YEAR ENDED JULY 31, 1995 COMPARED WITH YEAR ENDED JULY 31, 1994
- - - - ----------------------------------------------------------------------------
SG&A was up $24.9 million from 1994 and was 28.9% of net sales in 1995
compared with 30.8% in 1994. The decline as a percent of sales was the result
of improved leverage and expense control. The increase in administrative
expense of $9.3 million occurred principally as a result of a company-wide
initiative to replace existing information systems, increased payouts in
various employee incentive and profit sharing plans, the addition of a joint
venture with a distributor, the addition of dealer direct financing through
Toro Credit Company, and distribution support.
Sales and marketing expense was up $7.7 million from the prior year. As a
percent of net sales, sales and marketing was 9.9%, a decrease from 10.6% in
1994. The dollar increase reflected the company's increased sales volume as
well as an increase in brand advertising.
Warranty expense increased by $2.0 million and as a percent of net sales was
3.3% in 1995 compared with 3.6% in 1994. The $2.0 million increase was
primarily the result of increased sales volume, and new product introductions.
Distributor/dealer financing expense represents the cost incurred by the
company to contract with a third party financing source to finance dealer
inventory purchases. The $9.7 million charge reflected in SG&A represents
credit facility origination costs and interest charges for a pre-established
length of time. Interest is charged at market rates based on prime plus a
negotiated mark-up. These financing arrangements are used by the company as a
marketing tool to enable customers to buy inventory. This expense increased
$1.1 million in 1995 because of the increased sales volume and was offset
partially by the reduction of third party financing expense which was taken
on through the addition of dealer direct financing through Toro Credit
Company.
Research and development expense was up $1.9 million primarily as the result
of continued investment in product innovation.
INTEREST EXPENSE
3 MONTHS ENDED OCTOBER 31, 1995 COMPARED WITH 3 MONTHS ENDED OCTOBER 28, 1994
- - - - --------------------------------------------------------------------------------
Interest expense for the 3 months ended October 31, 1995 was $2.5 million which
was unchanged from the amount reported in 1994.
YEAR ENDED JULY 31, 1995 COMPARED WITH YEAR ENDED JULY 31, 1994
- - - - --------------------------------------------------------------------------------
Interest expense for 1995 decreased to $11.9 million from the $13.6 million
reported in 1994 as the result of the company's continued reduction in long-term
debt and utilization of short-term borrowing at lower interest rates.
OTHER INCOME, NET
3 MONTHS ENDED OCTOBER 31, 1995 COMPARED WITH 3 MONTHS ENDED OCTOBER 28, 1994
- - - - --------------------------------------------------------------------------------
Other income, net at October 31, 1995 was $2.4 million versus $2.9 million in
1994. The decrease in other income, net was due to a decline in financing
revenue for the period.
YEAR ENDED JULY 31, 1995 COMPARED WITH YEAR ENDED JULY 31, 1994.
- - - - --------------------------------------------------------------------------------
Other income, net was $0.2 million greater than the $8.0 million reported in
1994. Excluding the effect of two lawsuit settlements and the sale of the
portable heater business in the prior year, other income increased because of
gains on fixed asset disposals versus losses in the prior year, favorable
foreign currency activity, and income resulting from joint venture activity.
28
PROVISION FOR TAXES
3 Months Ended October 31, 1995 Compared With 3 Months Ended October 28, 1994
- - - - --------------------------------------------------------------------------------
The effective tax rate for the period ended October 31, 1995 was 39.5% compared
to 40.0% for the 3 month period ended October 28, 1994.
Year Ended July 31, 1995 Compared With Year Ended July 31, 1994
- - - - --------------------------------------------------------------------------------
The effective tax rate remained at 40% of pretax earnings in 1995. In accordance
with Financial Accounting Standards No. 109, the company has determined that it
is not necessary to establish a valuation reserve for the deferred income tax
benefit because it is more likely than not that the net deferred income tax
benefit of $30.9 million will be principally realized through carry back to
taxable income in prior years, and future reversals of existing taxable
temporary differences, and, to a lesser extent, future taxable income.
NET EARNINGS
3 Months Ended October 31, 1995 Compared With 3 Months Ended October 28, 1994
- - - - --------------------------------------------------------------------------------
Net earnings for the 3 months ended October 31, 1995 was $4.0 million versus
$8.3 million a year prior. The decrease in earnings was primarily the result of
extraordinary snow product sales in the prior 3 month period.
Year Ended July 31, 1995 Compared With Year Ended July 31, 1994
- - - - --------------------------------------------------------------------------------
Net earnings for 1995 were $36.7 million or $2.81 per share, as compared with
net earnings of $22.2 million or $1.71 per share in 1994. The increase in
earnings was primarily the result of increased sales, improved operating
leverage, and cost control measures such as lower borrowing costs.
29
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Toro Company:
We have audited the accompanying consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1996 and 1995, and the related
consolidated statements of earnings and cash flows for the year ended October
31, 1996, the three month period ended October 31, 1995 and the years ended July
31, 1995 and 1994. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Toro
Company and subsidiaries as of October 31, 1996 and 1995, and the results of
their operations and their cash flows for the year ended October 31, 1996, the
three month period ended October 31, 1995 and the years ended July 31, 1995 and
1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 16, 1996
CONSOLIDATED STATEMENTS OF EARNINGS The Toro Company
- - - - -------------------------------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------------------------------
Year Ended
YEAR ENDED 3 Months Ended ----------------------------
OCTOBER 31 October 31 July 31 July 31
(Dollars in thousands, except per share data) 1996 1995 1995 1994
- - - - -------------------------------------------------------------------------------------------------------------------------
Net sales $ 930,909 $192,278 $ 932,853 $794,341
Cost of sales 589,186 120,575 598,275 506,816
- - - - -------------------------------------------------------------------------------------------------------------------------
Gross profit 341,723 71,703 334,578 287,525
Selling, general and administrative expense 278,284 65,048 269,757 244,943
- - - - -------------------------------------------------------------------------------------------------------------------------
Earnings from operations 63,439 6,655 64,821 42,582
Interest expense 13,590 2,532 11,902 13,562
Other income, net (10,331) (2,483) (8,193) (8,030)
- - - - -------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 60,180 6,606 61,112 37,050
- - - - -------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 23,771 2,609 24,445 14,820
- - - - -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 36,409 $ 3,997 $ 36,667 $ 22,230
- - - - -------------------------------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and
common stock equivalent $ 2.90 $ 0.32 $ 2.81 $ 1.71
- - - - -------------------------------------------------------------------------------------------------------------------------
- - - - -------------------------------------------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
30
CONSOLIDATED BALANCE SHEETS The Toro Company
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) October 31 1996 1995
- - - - ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 66 $ 7,702
Receivables:
Customers 244,434 201,571
Other 5,208 4,787
- - - - ----------------------------------------------------------------------------------------------------------
Subtotal 249,642 206,358
Less allowance for doubtful accounts 10,005 7,542
- - - - ----------------------------------------------------------------------------------------------------------
Total receivables 239,637 198,816
- - - - ----------------------------------------------------------------------------------------------------------
Inventories 130,288 145,862
Prepaid expenses 5,133 6,417
Deferred income tax benefits 29,877 27,462
- - - - ----------------------------------------------------------------------------------------------------------
Total current assets 405,001 386,259
- - - - ----------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and land improvements 6,816 6,569
Buildings and leasehold improvements 46,107 47,601
Equipment 176,157 157,511
- - - - ----------------------------------------------------------------------------------------------------------
Subtotal 229,080 211,681
Less accumulated depreciation and amortization 155,270 141,726
- - - - ----------------------------------------------------------------------------------------------------------
Total property, plant and equipment 73,810 69,955
- - - - ----------------------------------------------------------------------------------------------------------
Deferred income taxes 1,600 2,384
Other assets 16,466 14,055
- - - - ----------------------------------------------------------------------------------------------------------
Total assets $496,877 $ 472,653
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 350 $ 15,334
Short-term borrowing 41,025 41,575
Accounts payable 43,524 51,757
Accrued warranty 34,722 35,065
Accrued marketing programs 22,600 21,407
Other accrued liabilities 65,636 56,035
- - - - ----------------------------------------------------------------------------------------------------------
Total current liabilities 207,857 221,173
- - - - ----------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 53,015 53,365
Other long-term liabilities 22,438 7,223
Common stockholders' equity:
Common stock, par value $1.00, authorized 35,000,000 shares; issued
and outstanding 12,032,143 shares in 1996 (net of 877,861 treasury shares)
and 12,167,835 shares in 1995 (net of 674,490 treasury shares) 12,032 12,168
Additional paid-in capital 28,462 35,712
Retained earnings 173,630 142,891
Foreign currency translation adjustment (557) 121
- - - - ----------------------------------------------------------------------------------------------------------
Total common stockholders' equity 213,567 190,892
- - - - ----------------------------------------------------------------------------------------------------------
Total liabilities and common stockholders' equity $496,877 $472,653
- - - - ----------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
31
- - - - -----------------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
YEAR ENDED 3 Months Ended ----------------------------
OCTOBER 31 October 31 July 31 July 31
(Dollars in thousands) 1996 1995 1995 1994
- - - - -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 36,409 $ 3,997 $ 36,667 $ 22,230
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 18,170 3,590 17,240 18,839
(Gain) loss on disposal of property, plant and equipment (260) (34) (135) 1,265
Deferred income taxes 784 194 (1,282) (2,668)
Tax benefits related to employee stock option transactions 1,490 - 1,178 953
Changes in operating assets and liabilities:
Net receivables (40,821) 13,640 (28,773) (3,320)
Inventories 15,574 (22,142) (4,956) (40,056)
Prepaid expenses and deferred income tax benefits (1,131) 1,962 (10,024) (2,551)
Accounts payable and accrued expenses 2,218 (9,770) 5,622 33,152
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 32,433 (8,563) 15,537 27,844
- - - - ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (21,389) (3,302) (28,162) (18,173)
Proceeds from asset disposals 543 43 843 267
(Increase) decrease in other assets/liabilities (857) 1,793 3,935 (4,973)
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,703) (1,466) (23,384) (22,879)
- - - - -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in sale of receivables - (2,331) 2,331 -
(Decrease) increase in short-term borrowing (550) 19,040 22,535 -
Proceeds from issuance of long-term debt - - - 4,000
Repayments of long-term debt (15,334) (12,326) (20,300) (40,645)
Proceeds from deferred income 12,742 5,250
Proceeds from exercise of stock options 4,627 3,586 8,251 6,144
Purchases of common stock (13,339) (891) (26,225) (2,284)
Dividends on common stock (5,834) (1,459) (6,002) (5,993)
Repayments from ESOP - - 2,612 2,611
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (17,688) 5,619 (16,798) (30,917)
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (678) 188 338 390
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (7,636) (4,222) (24,307) (25,562)
Cash and cash equivalents at beginning of period 7,702 11,924 36,231 61,793
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 66 $ 7,702 $ 11,924 $ 36,231
- - - - -----------------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,335 $ 4,694 $ 9,567 $ 14,092
Income taxes 20,447 109 34,936 19,498
- - - - -----------------------------------------------------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Toro Company
- - - - --------------------------------------------------------------------------------
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
FISCAL YEAR CHANGE
Effective November 1995, the company changed its fiscal year ended July 31 to a
fiscal year ended October 31. The 3 month transition period ended October 31,
1995 bridges the gap between the company's old and new fiscal year ends.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Toro Company and all wholly-owned and majority-owned domestic and foreign
subsidiaries (the company). Investments in 50% or less owned companies are
accounted for by the equity method. The accounts of foreign subsidiaries, which
are not material, have been adjusted to conform to U.S. accounting principles
and practices and have been translated to appropriate U.S. dollar equivalents.
All material intercompany accounts and transactions have been eliminated from
the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. At October 31, 1996 the Company had
$4,908,000 included in trade payables that represented the reclassification of
outstanding checks in excess of related bank balances.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts included in selling, general and
administrative expense was $3,358,000 for the year ended October 31, 1996,
$720,000 for the 3 months ended October 31, 1995, $1,543,000 for the year ended
July 31, 1995, and $3,032,000 for the year ended July 31, 1994.
INVENTORIES
The majority of all inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Had the first-in, first-out (FIFO) method of cost determination been used,
inventories would have been $25,642,000 and $24,841,000 higher than reported at
October 31, 1996, and 1995, respectively. Under the FIFO method, work-in-process
inventories were $69,182,000 and $86,285,000 and finished goods inventories were
$86,748,000 and $84,418,000 at October 31, 1996 and 1995, respectively.
PROPERTY AND DEPRECIATION
Property, plant and equipment are carried at cost. The company provides for
depreciation of plant and equipment utilizing the straight-line method over the
estimated useful lives of the assets. Buildings, including leasehold
improvements, are generally depreciated over 10 to 45 years, and equipment over
3 to 7 years. Tooling costs are generally amortized using the units of
production method. Expenditures for major renewals and betterments which
substantially increase the useful lives of existing assets are capitalized, and
maintenance and repairs are charged to operating expenses as incurred. Software
is expensed at the time of purchase. The cost and related accumulated
depreciation of all plant and equipment disposed of are removed from the
accounts, and any gain or loss from such disposal is included in current period
earnings.
ACCRUED WARRANTY
The company provides an accrual for estimated future warranty costs based upon
the historical relationship of warranty costs to sales.
33
DEFERRED INCOME
The company has recorded deferred income related to a forward starting interest
rate exchange agreement. The deferred income will be recognized commencing
August 1, 1997 as an adjustment to interest expense over the term of the
agreement. See Note 3 to the Consolidated Financial Statements.
FOREIGN CURRENCY TRANSLATION
The functional currency of the company's foreign operations is the applicable
local currency. The functional currency is translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation" which is performed for 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 period. The
gains or losses resulting from such translations are included in stockholders'
equity. Gains or losses resulting from foreign currency transactions are
included in other income, net.
ACCOUNTING FOR REVENUES
Revenue is recognized at the time products are shipped to distributors, dealers
or mass merchandisers.
COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY
Included in selling, general and administrative expense are costs associated
with various programs in which the company shares costs of financing distributor
and dealer inventories. These costs of $10,252,000 for the year ended October
31, 1996, $2,063,000 for the 3 months ended October 31, 1995, $9,675,000 for the
year ended July 31, 1995, and $8,587,000 for the year ended July 31, 1994, are
charged against operations as incurred.
RESEARCH AND DEVELOPMENT
Expenditures for research and development, including engineering, of $31,343,000
for the year ended October 31, 1996, $6,864,000 for the 3 months ended October
31, 1995, $26,513,000 for the year ended July 31, 1995 and $24,581,000 for the
year ended July 31, 1994 are charged against operations as incurred.
DISTRIBUTION
Included in selling, general and administrative expense are costs associated
with changes to the company's distribution channels. These costs were $6,682,000
for the year ended October 31, 1996, $823,000 for the 3 months ended October 31,
1995, $3,400,000 for the year ended July 31, 1995 and $4,300,000 for the year
ended July 31, 1994. Those costs associated with business changes are accrued on
the basis of historical experience, while costs related to specific changes to
the company's distribution system are recorded when authorized.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," (FAS 109), deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. The company has reflected the necessary deferred tax asset/liability in
the accompanying balance sheets. Management believes the future tax deductions
will be realized principally through carry back to taxable income in prior
years, future reversals of existing taxable temporary differences, and to a
lesser extent, future
taxable income.
34
NET EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
Net earnings per share of common stock and common stock equivalents are computed
by dividing net earnings by the weighted average number of common shares and
common stock equivalents outstanding during the respective periods. Common stock
equivalents include potentially dilutive stock options. These shares are
included under the treasury stock method using the average market price of the
company's stock during each period. The effect of full dilution using the
year-end price of the company's stock was immaterial.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," (FAS 123). The company accounts for its stock options and
employee stock ownership plan in accordance with the provisions of the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25). FAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The company
expects to continue to account for its employee stock plans in accordance
with the provisions of APB 25. Accordingly, FAS 123 is not expected to have
any material impact on the company's financial position or results of
operations. Effective with the issuance of the company's fiscal 1997
financial statements, the company will disclose proforma net income and per
share amounts as if FAS 123 were applied.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
year presentation.
2 SHORT-TERM CAPITAL RESOURCES
- - - - --------------------------------------------------------------------------------
At October 31, 1996, the company had available unsecured lines of credit with
five banks in the aggregate of $194,000,000. Most of these agreements require
the company to pay a fee of 0.175% per year on the available lines of credit.
This fee is recorded by the company as interest expense.
The company had $41,025,000 outstanding at October 31, 1996, and $41,575,000
outstanding at October 31, 1995. The weighted average interest rate on short-
term borrowing for 1996 was 6.0% (6.0% for the 3 months ended October 31, 1995,
7.7% for the year ended July 31, 1995 and 6.5% for the year ended July 31,
1994). Interest expense was $7,036,000 in 1996 ($695,000 for the 3 months ended
October 31, 1995, $2,498,000 for the year ended July 31, 1995 and $822,000 for
the year ended July 31, 1994), including facility fees. The weighted average
short-term borrowing was $117,080,000 for the year ended October 31, 1996
($11,496,000 for the 3 months ended October 31, 1995, $32,335,000 for the year
ended July 31, 1995 and $12,755,000 for the year ended July 31, 1994).
In addition, the company's capital resources include two $20,000,000
bankers' acceptance financing agreements in 1996 and 1995. The company had no
amount outstanding under these agreements at October 31, 1996, and 1995.
35
3 LONG-TERM DEBT
- - - - --------------------------------------------------------------------------------
A summary of long-term debt is as follows:
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
(Dollars in thousands) October 31 1996 1995
- - - - --------------------------------------------------------------------------------
11% Sinking Fund Debentures due annually
August 1998-2017 callable August 1, 1997 $50,000 $50,000
Industrial Revenue Bond due annually
June 1997-2004 with various interest rates 3,365 3,699
9.57% senior note due January 1996 - 5,000
9.53% senior note due August 1996 - 10,000
- - - - --------------------------------------------------------------------------------
53,365 68,699
Less current portion 350 15,334
- - - - --------------------------------------------------------------------------------
Long-term debt, less current portion $53,015 $53,365
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The weighted average interest rate on long-term debt for 1996 was 10.5%
(10.5% for the 3 months ended October 31, 1995, 9.9% for the year ended July 31,
1995 and 9.8% for the year ended July 31, 1994). Interest expense was $6,555,000
in 1996 ($1,837,000 for the 3 months ended October 31, 1995, $8,673,000 for the
year ended July 31, 1995 and $12,236,000 for the year ended July 31, 1994),
including commitment and facility fees. The weighted average long-term debt
outstanding was $62,366,000 in 1996 ($17,557,000 for the 3 months ended October
31, 1995, $87,330,000 for the year ended July 31, 1995 and $125,388,000 for the
year ended July 31, 1994).
The company entered into a forward starting interest rate exchange
agreement with a bank on March 6, 1996 to hedge the anticipated refinancing of
its $50 million, 11% long-term sinking fund debentures callable August 1, 1997,
and to realize the benefit of favorable interest rates. Simultaneously with
entering into this interest rate exchange agreement, the company terminated its
interest rate exchange agreement entered into during February 1994. The effect
of this transaction was to extend the original forward starting interest rate
exchange agreement from 5 years to 30 years. As a result of this transaction,
the deferred income balance was increased from $5.25 million in 1994 to $17.3
million in March of 1996. The net additional cash received in March 1996 was
$12.1 million. In return for the net proceeds, the company will pay the bank
10.55% on a notational amount of $50 million from August 1, 1997 through August
2, 2027 and the company will receive payments based on a floating rate equal to
the London Interbank Offered Rate (LIBOR) on the notational amount over the same
period.
The net interest rate differential to be received or paid and the $17.3
million deferred income will be recognized commencing August 1, 1997 as an
adjustment to interest expense over the term
of the agreement.
On August 12, 1996 the company entered into another forward starting
interest rate exchange agreement with a bank to additionally hedge the
anticipated refinancing of the $50 million currently financed under short-term
credit agreements. The company received or paid no cash as a result of
this transaction.
Under the terms of the long-term debt agreements and the interest rate
exchange agreements, the company is subject to certain covenants. At October 31,
1996, the company was in compliance with all such covenants.
The terms of certain agreements of Toro Credit Company restrict the payment
of dividends and loans or advances to the parent company. Of the Toro Credit
Company's retained earnings of $63,584,000, all were available for distribution
to the parent at October 31, 1996.
Principal payments required on long-term debt in each of the next five
years ending October 31 are as follows: 1997, $350,000; 1998, $2,865,000; 1999,
$2,885,000; 2000, $2,905,000; 2001, $2,925,000; and after 2001, $41,435,000.
36
4 INCOME TAXES
- - - - -------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the company's
consolidated effective tax rate is summarized as follows:
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 3 Months Ended Year Ended
----------------------------
OCTOBER 31 October 31 July 31 July 31
1996 1995 1995 1994
- - - - -----------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
Benefits from foreign sales corporation (0.8) (0.2) (0.8) (1.6)
State and local income taxes, net of federal
income tax benefit 2.5 4.6 2.4 2.4
Effect of foreign source income 0.0 1.5 0.5 1.3
Other, net 2.8 (1.4) 2.9 2.9
- - - - -----------------------------------------------------------------------------------------------------------------------------
Consolidated effective tax rate 39.5% 39.5% 40.0% 40.0%
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
Components of the provision for income taxes are as follows:
- - - - -------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 3 Months Ended Year Ended
----------------------------
OCTOBER 31 October 31 July 31 July 31
1996 1995 1995 1994
- - - - -----------------------------------------------------------------------------------------------------------------------------
Current:
Federal $22,479 $ 731 $24,878 $18,487
State 2,754 238 2,942 2,610
- - - - -----------------------------------------------------------------------------------------------------------------------------
Current provision 25,233 969 27,820 21,097
- - - - -----------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (1,051) 1,414 (2,689) (5,059)
State (411) 226 (686) (1,218)
- - - - -----------------------------------------------------------------------------------------------------------------------------
Deferred provision (1,462) 1,640 (3,375) (6,277)
- - - - -----------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $23,771 $2,609 $24,445 $14,820
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the net
deferred tax assets at October 31, 1996 and 1995 are presented below.
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- - - - --------------------------------------------------------------------------------
Allowance for doubtful accounts $ 5,151 $ 4,254
Inventory reserves 536 (459)
Uniform capitalization 2,252 2,302
Depreciation 1,600 2,384
Warranty reserves 12,881 12,754
Marketing programs 2,018 1,973
Distributor reserves 2,603 2,474
Restructuring reserves 1,091 1,386
Accrued retirement 3,410 2,770
Other (65) 8
- - - - --------------------------------------------------------------------------------
Consolidated deferred income tax assets $31,477 $29,846
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
During the years ended October 31, 1996 and July 31, 1995, respectively,
$1,490,000 and $1,178,000 was added to additional paid-in capital in accordance
with Accounting Principal Board opinion 25 reflecting the permanent book to tax
difference in accounting for tax benefits related to employee stock option
transactions.
37
5 COMMON STOCKHOLDERS EQUITY
- - - - --------------------------------------------------------------------------------
Changes in the components of common stockholders' equity during the fiscal year
ended October 31, 1996, the 3 months ended October 31, 1995, and the fiscal
years ended July 31, 1995 and 1994 were as follows:
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Foreign
Currency
Common Additional Retained Receivable Translation
(Dollars in thousands) Stock Paid-In Capital Earnings from ESOP Adjustment
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1993 $12,270 $ 44,898 $ 93,451 $(5,223) $(795)
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (5,993) - -
Issuance of 388,588 shares under
stock option plans 388 5,756 - - -
Purchase of 97,758 common shares (97) (2,187) - - -
Payment received from ESOP - - - 2,611 -
Foreign currency translation adjustment - - - - 390
Tax benefits related to employee stock
option transactions - 953 - - -
Net earnings - - 22,230 - -
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 $12,561 $ 49,420 $109,688 $ (2,612) $(405)
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (6,002) - -
Issuance of 444,783 shares under
stock option plans 445 7,806
Purchase of 965,757 common shares (966) (25,259) - - -
Payment received from ESOP - - - 2,612 -
Foreign currency translation adjustment - - - - 338
Tax benefits related to employee stock
option transactions - 1,178 - - -
Net earnings - - 36,667 - -
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 $12,040 $ 33,145 $140,353 $ 0 $ (67)
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.12 per share) - - (1,459) - -
Issuance of 156,263 shares under stock
option plans 156 3,431 - - -
Purchase of 28,204 common shares (28) (864) - - -
Foreign currency translation adjustment - - - - 188
Net earnings - - 3,997 - -
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1995 $12,168 $ 35,712 $142,891 $ 0 $ 121
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (5,834) - -
Issuance of 294,324 shares under stock
option plans 294 4.333 - - -
Purchase of 429,692 common shares (430) (13,073) - - -
Foreign currency translation adjustment - - - - (678)
Tax benefits related to employee stock
option transactions - 1,490 - - -
Other - - 164 - -
Net earnings - - 36,409 - -
- - - - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 $12,032 $ 28,462 $173,630 $ 0 $(557)
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Under the terms of a Rights Agreement established June 14, 1988 each share of
the company's common stock entitles its holder to one preferred share purchase
right. Each right entitles the registered holder to purchase from the company
one one-hundredth of a share of Series B Junior Participating Voting Preferred
Stock, $1.00 par value at a price of $85 per one one-hundredth of a Preferred
Share. The rights become exercisable and tradable 10 days after a person or a
group acquires 20% or more, or makes an offer to acquire 20% or more, of the
company's outstanding common stock. At no time do the rights have any voting
power. The rights may be redeemed by the company for $0.01 per right at any time
prior to the time that a person or group has acquired beneficial ownership of
20% or more of the common shares.
38
6 STOCK OPTION PLANS
- - - - --------------------------------------------------------------------------------
Incentive stock options and nonqualified options may be granted under the terms
of the stockholder approved 1989 Stock Option Plan and the 1993 Stock Option
Plan (the "Plans"). Each incentive stock option and nonqualified stock option is
granted at an exercise price equal to 100% of the fair market value of the
Common Stock on the date of the grant, except for performance based stock
options, such as those granted in connection with the Continuous Performance
Award Plan for which the exercise price is an average of the closing stock
prices for the three months preceding the grant date. Stock options granted
under the Plans may be exercised in whole or in part from time to time, not
later than 10 years from the date of grant or other period, as specified in the
option agreement. Most stock options are subject to cancellation upon
termination of the option holder's employment. However, some nonqualified
options granted under the Plans can be exercised for up to four years after
retirement, at or after age 60, but not beyond the date the option originally
expires. Only nonqualified stock options may be granted under the terms of the
1992 Directors Stock Plan (the "Director Plan"). The Director Plan is a formula
plan. Each option granted under the Director Plan is granted at an exercise
price equal to 100% of the fair market value of the Common Stock on the date of
the grant. Stock options granted under the Director Plan may be exercised only
while serving as a member of the Board of Directors of the company, except in
the event of death or disability. Stock option transactions are summarized as
follows:
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 3 Months Ended Year Ended
----------------------------
OCTOBER 31 October 31 July 31 July 31
1996 1995 1995 1994
- - - - -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 1,253,311 1,166,579 1,259,509 1,421,923
Granted 48,768 256,496 323,474 264,217
Exercised or cancelled (194,221) (169,764) (416,404) (426,631)
- - - - -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 1,107,858 1,253,311 1,166,579 1,259,509
- - - - -----------------------------------------------------------------------------------------------------------------------------
Price range of granted options $29.125-32.50 $ 29.00 $ 23.625-29.50 $ 18.75-25.50
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
Shares reserved for granting future stock
options at end of period 1,009,868 1,040,877 621,738 923,240
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of period 882,670 843,476 780,169 765,510
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
Price range of exercisable options $ 10.90-32.50 $10.90-29.50 $ 10.70-29.50 $10.70-25.875
- - - - -----------------------------------------------------------------------------------------------------------------------------
- - - - -----------------------------------------------------------------------------------------------------------------------------
The options outstanding at October 31, 1996 were granted in 1992 (305,000
shares); 1993 (130,195 shares); 1994 (179,068 shares); and 1995 (209,606
shares); the 3 months ended October 31, 1995 (237,721 shares) and the year ended
October 31, 1996 (46,268 shares).
39
7 EMPLOYEE BENEFIT PROGRAMS
The company has an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees of the company and its subsidiaries. The plan was a
leveraged ESOP which means funds were borrowed to purchase the shares. At July
31, 1995, ESOP indebtedness to the company was paid in full and funding of the
ESOP was completed. Principal payments of ESOP debt were $2,612,000 for the year
ended July 31, 1995 and $2,611,000 for the year ended July 31, 1994. Interest
incurred on ESOP debt and interest received by the company was $258,000 for the
year ended July 31, 1995 and $512,000 for the year ended July 31, 1994.
Dividends on the ESOP shares used for debt service by the ESOP were $107,000 for
the year ended July 31, 1995 and $195,000 for the year ended July 31, 1994.
The expenses recognized related to the ESOP were $2,504,000 for the year ended
July 31, 1995 and $2,417,000 for the year ended July 31, 1994. There were no
principal payments of ESOP debt, interest incurred or received, dividends or
expenses related to the ESOP for the year ended October 31, 1996 or the 3 months
ended October 31, 1995.
On August 1, 1995, the ESOP plan year end was changed to December 31. The
company's contributions to the plan, net of dividends, were $639,000 for the
year ended October 31, 1996, zero for the 3 months ended October 31, 1995,
$2,762,000 for the year ended July 31, 1995 and $2,929,000 for the year ended
July 31, 1994.
Effective August 1, 1995, the company adopted a new employee benefit
program which replaces the ESOP, profit sharing, and matching stock plans. The
current ESOP was replaced with a new Employee Stock Ownership Plan. The employee
profit sharing plans and the matching stock plan were merged into the Toro
Company Investment and Savings Plan which has a plan year end of December 31.
Under this plan, eligible employees receive a pre-established percentage of
their salary. Contributions to this plan for the year ended October 31, 1996
were $2,539,000. In addition, this plan includes a 401(k) which provides for
company matching contributions of up to two percent of salary. Matching
contributions to the Toro 401(k) Employee Savings and Toro Matching Plan for the
year ended October 31, 1996 were $1,679,000.
Contributions to the company's former employee profit sharing plans which
covered substantially all employees of the company and its subsidiaries were
made annually, immediately following the fiscal year end. The contribution made
in the 3 months ended October 31, 1995, which pertained to the year ended July
31, 1995, was $3,833,000. For the years ended July 31, 1995 and 1994 the
contributions paid totaled $4,100,000 and $4,150,000, respectively, and
pertained to the preceding fiscal years. Such amounts are based upon annual
earnings before income taxes and minimum contributions required under the plans.
Under the company's former matching stock plan, shares of common stock were
acquired by employees through payroll deductions and employer matching
contributions pursuant to the plan. Contributions were $660,000 for the year
ended July 31, 1995 and $485,000 for the year ended July 31, 1994.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. Pension expense under these plans
in 1996, 1995 and 1994 was not significant.
40
8 SEGMENT DATA
- - - - --------------------------------------------------------------------------------
The company classifies its operations into one industry segment, outdoor
maintenance equipment. International sales were $174,249,000 for the year
ended October 31, 1996, $20,935,000 for the 3 months ended October 31, 1995,
$152,409,000 for the year ended July 31, 1995 and $130,053,000 for the year
ended July 31, 1994. Of these amounts, export sales were $154,716,000 for the
year ended October 31, 1996, $18,557,000 for the 3 months ended October 31,
1995, $126,560,000 for the year ended July 31, 1995 and $109,344,000 for the
year ended July 31, 1994. Export sales by geographic area are as follows:
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
--------------------
October 31 October 31 July 31 July 31
(Dollars in thousands) 1996 1995 1995 1994
- - - - --------------------------------------------------------------------------------
Europe $ 80,986 $ 6,098 $ 60,239 $ 48,976
Canada 26,322 4,848 31,921 28,039
Pacific Rim 42,976 6,955 28,979 27,535
Other 4,432 656 5,421 4,794
- - - - --------------------------------------------------------------------------------
Total export sales $154,716 $18,557 $126,560 $109,344
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Sales to any particular customer were not significant.
9 LEASE COMMITMENTS
- - - - --------------------------------------------------------------------------------
Minimum lease commitments in future years under noncancelable operating
leases are as follows: 1997, $6,333,000; 1998, $4,147,000; 1999, $2,782,000;
2000, $1,916,000; 2001, $1,457,000; and after 2001, $1,687,000.
Total lease expense was as follows:
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
YEAR ENDED 3 Months Ended Year Ended
---------------------
OCTOBER 31 October 31 July 31 July 31
(Dollars in thousands) 1996 1995 1995 1994
- - - - --------------------------------------------------------------------------------
Warehouse and office space $3,291 $ 905 $3,360 $2,198
Trucks and autos 2,191 374 1,890 2,039
Equipment 3,933 924 3,721 3,044
- - - - --------------------------------------------------------------------------------
Total $9,415 $2,203 $8,971 $7,281
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
10 COMMITMENTS AND CONTINGENT LIABILITIES
The company was contingently liable to repurchase $10,578,000 at October 31,
1996 and $10,442,000 at October 31, 1995, of inventory relating to
receivables under dealer financing arrangements. Additionally, debts incurred
by certain distributors, aggregating $1,008,000 at October 31, 1996, and
$1,176,000 at October 31, 1995, have been guaranteed by the company.
In the ordinary course of business, the company may become liable with
respect to pending and threatened litigation, taxes, environmental, and other
matters. While the ultimate results of investigations, lawsuits, and claims
involving the company cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated
financial position of the company.
41
11 FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
Letters of credit are issued by the company during the ordinary course of
business, as required by certain vendor contracts, through major domestic
banks. As of October 31, 1996, and 1995, the company had $19,705,000 and
$14,735,000, respectively, in outstanding letters of credit.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to concentrations
of credit risk consist principally of accounts receivable which are
concentrated in a single business segment, outdoor maintenance equipment. The
credit risk associated with this segment is limited because of the large
number of customers in the company's customer base and their geographic
dispersion.
FOREIGN CURRENCY INVESTMENTS
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into forward exchange and range forward option contracts.
These contracts are designed to hedge firm anticipated foreign currency
transactions.
At October 31, 1996, the company had contracts maturing at various dates
to purchase $1,196,000 in foreign currencies and to sell $29,198,000 in
foreign currencies at the contract rates. In addition, the company had range
forward options of $1,343,000 at October 31, 1996.
Changes in the market value of the foreign currency instruments are
recognized in the financial statements upon settlement of the hedged
transaction.
FAIR VALUE
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of FAS Statement 107,
"Disclosures about Fair Value of Financial Instruments." Estimated fair value
amounts have been determined using available information and appropriate
valuation methodologies. Because considerable judgement is required in
developing the estimates of fair value, these estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
The carrying and estimated fair values of the company's financial
instruments at October 31, 1996, are as follows:
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Carrying Estimated Fair
(Dollars in millions) Value Value
- - - - --------------------------------------------------------------------------------
Long-term debt $53,365 $62,887
Deferred income (interest rate exchange agreements) 17,992 22,969
- - - - --------------------------------------------------------------------------------
For cash and cash equivalents, receivables, and accounts payable,
carrying value is a reasonable estimate of fair value.
For long-term debt with fixed interest rates, fair value is estimated by
discounting the projected cash flows using the rate at which similar amounts
could currently be borrowed.
The estimated fair value of the 11% sinking fund debentures represents
the amount the company would pay to redeem the notes based on the terms of
the debenture.
The estimated fair value of the deferred income represents the cost to
terminate the interest rate exchange agreements, had management elected to do
so, which would have resulted in a loss of approximately $4,977,000.
42
12 CONSOLIDATED FINANCE SUBSIDIARY - TORO CREDIT COMPANY
Toro Credit Company is a consolidated finance subsidiary of the company and
operates primarily in the finance industry with wholesale financing of
distributor and dealer inventories under various financing arrangements and
other programs.
- - - - ------------------------------------------------------------------------------------
- - - - ------------------------------------------------------------------------------------
YEAR ENDED 3 Months Ended Year Ended
--------------------
OCTOBER 31 October 31 July 31 July 31
(Dollars in thousands) 1996 1995 1995 1994
- - - - ------------------------------------------------------------------------------------
Summary of Earnings
Finance revenues $23,507 $4,641 $21,259 $17,436
Expenses:
Operating 3,371 827 3,428 2,068
Interest 6,248 737 4,902 4,737
Foreign currency exchange
net (gains) losses (10) (18) (37) 96
- - - - ------------------------------------------------------------------------------------
Total expenses 9,609 1,546 8,293 6,901
Earnings before income taxes 13,898 3,095 12,966 10,535
Provision for income taxes 5,230 1,111 4,744 3,669
- - - - ------------------------------------------------------------------------------------
Net earnings $ 8,668 $1,984 $ 8,222 $ 6,866
- - - - ------------------------------------------------------------------------------------
YEAR ENDED Year Ended
OCTOBER 31 October 31
(Dollars in thousands) 1996 1995
- - - - ----------------------------------------------------------------------------
Summary Balance Sheets
Assets
Cash and cash equivalents $ 1,053 $ 1,469
Receivables-net 147,582 131,510
Other receivables and assets 1,766 1,858
- - - - ----------------------------------------------------------------------------
Total assets $150,401 $134,837
- - - - ----------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current portion of long-term debt $ - $ 15,000
Other liabilities 78,817 56,921
Long-term debt, less current portion - -
Shareholders' equity 71,584 62,916
- - - - ----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $150,401 $134,837
- - - - ----------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------
Of the finance revenues presented above, $19,306,000 for the year ended
October 31, 1996, $3,642,000 for the 3 months ended October 31, 1995,
$17,114,000 for the year ended July 31, 1995 and $13,272,000 for the year
ended July 31, 1994, represent transactions with the parent company, The Toro
Company, which are eliminated in consolidation. The remaining finance
revenues of $4,201,000 for the year ended October 31, 1996, $999,000 for the
3 months ended October 31, 1995, $4,145,000 for the year ended July 31, 1995
and $4,164,000 for the year ended July 31, 1994 are included in other income,
in The Toro Company's Consolidated Statements of Earnings. The expenses and
balance sheet items (net of eliminations) are included in the Consolidated
Statements of Earnings and Consolidated Balance Sheets under the
corresponding classifications.
43
13 QUARTERLY FINANCIAL DATA (UNAUDITED)
- - - - --------------------------------------------------------------------------------
Summarized quarterly financial data for 1996 and 1995 is as follows:
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
3 Months Ended FISCAL YEAR ENDED OCTOBER 31, 1996
(Dollars in thousands except ---------------------------------------------------------------------------
per share data) October 31, 1995 FIRST SECOND THIRD FOURTH
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Net sales $192,278 $211,501 $288,646 $232,565 $198,197
Gross profit 71,703 76,329 103,810 85,884 75,700
Net earnings 3,997 8,498 16,820 6,465 4,626
Net earnings per share of common stock
and common stock equivalent 0.32 0.67 1.33 0.52 0.37
Dividends per common share 0.12 0.12 0.12 0.12 0.12
Market price of common stock
High bid 32 1/4 36 1/4 35 1/4 34 5/8 34 1/8
Low bid 28 1/8 28 3/8 30 5/8 30 30 1/4
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended July 31, 1995
---------------------------------------------------------------------------
Quarter First Second Third Fourth
- - - - ----------------------------------------------------------------------------------------------------------------------------------
Net sales $205,704 $213,950 $310,613 $202,586
Gross profit 76,065 76,068 107,342 75,103
Net earnings 8,302 6,799 17,539 4,027
Net earnings per share of common stock
and common stock equivalent 0.64 0.51 1.32 0.32
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 29 7/8 29 3/8 30 3/8 29 7/8
Low bid 21 5/8 26 27 1/2 25 5/8
- - - - ----------------------------------------------------------------------------------------------------------------------------------
14 Subsequent Event
On December 3, 1996, the company acquired James Hardie Irrigation Group (JHI)
from James Hardie Limited of Australia. The purchase price of approximately
$119.0 million is subject to adjustment, based on changes in working capital
and closing balance sheet audit adjustments, and has been initially financed
with temporary bank debt. The acquisition is being accounted for as a
purchase. JHI is headquartered in Laguna Niguel, California and has
production facilities in Texas, California, Florida, and Australia. It is a
worldwide leader in the production of irrigation systems to the commercial
landscape market. For its latest fiscal year ended March 31, 1996, JHI had
unaudited net sales of approximately $140.4 million and unaudited operating
income of approximately $3.7 million.
The Toro Company
44
Exhibit 21
THE TORO COMPANY
SUBSIDIARIES OF REGISTRANT
All of the following are subsidiaries of The Toro Company as of
January 20, 1997.
NAME STATE OR OTHER JURISDICTION OF PERCENTAGE OF VOTING SECURITIES
INCORPORATION OWNED BY IMMEDIATE PARENT
Toro Australia Pty. Limited Australia 100%
Toro Credit Company Minnesota 100%
Toro Europe Belgium 100%
Toro Foreign Sales Corporation Barbados 100%
Lawn-Boy Inc. Delaware 100%
Toro Probiotic Products, Inc. Minnesota 100%
Toro Sales Company Minnesota 100%
Toro Southwest, Inc. California 100%
Toro International Company Minnesota 100%
Hahn Equipment Co. Minnesota 100%
Professional Turf Products of Texas, Inc. Texas 100%
Integration Control Systems & Services, Inc. Texas 100%
Turf Management Systems, Inc. Minnesota 100%
James Hardie Irrigation, Inc. Nevada 100%
James Hardie Irrigation Pty. Limited Australia 100%
James Hardie Irrigation Europe S.p.A. Italy 100%
21
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Toro Company:
We consent to incorporation by reference in the Registration Statements (Nos.
33-26268, 33-31586, 33-38308, 33-44668, 33-51563, 33-55550, 33-59563, 33-62743,
and 333-4521) on Forms S-3 and S-8 of The Toro Company of our reports dated
December 16, 1996, relating to the consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1996 and 1995, and the related
consolidated statements of earnings and cash flows and related financial
statement schedule for the year ended October 31, 1996, the three-month period
ended October 31, 1995 and the years ended July 31, 1995 and 1994, which reports
are included in or incorporated by reference in the annual report on Form 10-K
of The Toro Company.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1997
22
5
1,000
YEAR
OCT-31-1996
NOV-01-1995
OCT-31-1996
66
0
244,434
10,005
130,288
405,001
229,080
155,270
496,877
207,857
53,365
0
0
12,032
201,535
496,877
930,909
930,909
589,186
278,284
(10,331)
3,358
13,590
60,180
23,771
36,409
0
0
0
36,409
2.90
2.90
Total Long-Term Debt
Does not include Additional paid-in capital.
Other income-net.
