SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
THE TORO COMPANY
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11.
4) Proposed minimum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
[LOGO]
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420-1196
612/888-8801 TELEX 290928 FAX NBR 887-8258
KENDRICK B. MELROSE
CHAIRMAN AND CEO
February 2, 1998
To Our Fellow Stockholders:
You are cordially invited to join us for the Toro Annual Meeting of Stockholders
to be held on Wednesday, March 18, 1998 at the corporate offices of The Toro
Company. Details about the meeting, nominees for the Board of Directors and
other matters to be acted on are presented in the Notice of Annual Meeting and
Proxy Statement which follow.
In addition to Annual Meeting formalities, we will report to stockholders
generally on the business of the Company, and will be pleased to answer
stockholders' questions relating to the Company. Refreshments will be served
after the meeting.
We hope you plan to attend the Annual Meeting. However, if you will not be able
to join us, we urge you to exercise your right to vote by signing, dating and
returning the enclosed proxy card.
On behalf of your Toro Board of Directors and management, it is my pleasure to
express our appreciation for your continued support.
Sincerely,
[SIG]
Kendrick B. Melrose
IT IS IMPORTANT THAT YOU VOTE, SIGN AND RETURN THE ACCOMPANYING
PROXY CARD AS SOON AS POSSIBLE. BY DOING SO, YOU MAY SAVE THE COMPANY
THE EXPENSE OF ADDITIONAL SOLICITATION.
[LOGO]
NOTICE OF ANNUAL MEETING
The Toro Company 1998 Annual Meeting of Stockholders will be held on
Wednesday, March 18, 1998 at 3:00 p.m. C.S.T. at Toro's corporate offices at
8111 Lyndale Avenue South, Bloomington, Minnesota, for the following purposes:
1. To elect four directors, each to serve for a term of three years;
2. To approve amendments to the Annual Management Incentive Plan;
3. To approve the selection of auditors for the Company for Fiscal 1998 (the
fiscal year ending October 31, 1998); and
4. To transact any other business properly brought before the Annual Meeting or
any adjournment of the meeting.
Stockholders of record at the close of business on January 19, 1998 (the
"Record Date") will be entitled to vote at the meeting.
A stockholder list will be available at the corporate offices of Toro
beginning March 4, 1998 during normal business hours, for examination by any
stockholder registered on the Company's Stock Ledger as of the Record Date, for
any purpose germane to the Annual Meeting.
Since a majority of the outstanding shares of the Company's Common Stock
must be represented either in person or by proxy to constitute a quorum for the
conduct of business, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY.
February 2, 1998
BY ORDER OF THE BOARD OF DIRECTORS
[SIG]
J. LAWRENCE MCINTYRE
Vice President, Secretary and General
Counsel
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MN 55420-1196
PROXY STATEMENT
The Toro Company Board of Directors is soliciting your proxy for use at the
1998 Annual Meeting of Stockholders on Wednesday, March 18, 1998. This Notice,
Proxy Statement and enclosed form of proxy will be mailed to stockholders
beginning around February 2, 1998.
VOTING
YOUR VOTE
Each share of Toro Common Stock you own entitles you to one vote. You may
vote your shares in person by attending the Annual Meeting or you may vote by
proxy. If you vote by proxy, you must sign, date and return the enclosed proxy
card in the envelope provided.
DIVIDEND REINVESTMENT PLAN SHARES. If you are a participant in the
Company's Dividend Reinvestment Plan, the number of shares shown on the enclosed
proxy card includes shares held for your account in that plan.
EMPLOYEE BENEFIT PLAN SHARES. If you are a participant in a Company
employee benefit plan that allows participant-directed voting of Common Stock
held in the plan, the enclosed proxy card contains separate entries for the
shares you hold in each plan, as well as shares you own of record, if any. The
trustee for each plan will cause votes to be cast confidentially in accordance
with your instructions. Plan shares not voted by participants will be voted by
the trustee in the same proportion as the votes actually cast by participants,
in accordance with the terms of the respective plan.
QUORUM AND VOTE REQUIREMENTS
On January 19, 1998, the Company had 12,823,964 shares of Common Stock
outstanding.
A majority of the outstanding shares of Common Stock must be present in
person or by proxy in order to have a quorum to conduct business at the Annual
Meeting. Shares represented by proxies marked "Abstain" and "broker non-votes"
are counted in determining whether a quorum is present. A "broker non-vote" is a
proxy submitted by a broker that does not indicate a vote for some or all of the
proposals because the broker does not have discretionary voting authority and
has not received instructions from its client as to how to vote on a particular
proposal.
Each of the three proposals presented at the meeting will be approved if a
majority of the shares of Common Stock present, in person or represented by
proxy, vote for the proposal. "Broker non-votes" are not counted, but
abstentions are counted, in determining the total number of votes cast on a
proposal. An abstention has the effect of a negative vote.
IF YOU DO NOT SPECIFY ON YOUR PROXY CARD HOW YOU WANT TO VOTE YOUR SHARES,
WE WILL VOTE THEM FOR THE ELECTION OF ALL NOMINEES FOR DIRECTOR AS DESCRIBED
UNDER PROPOSAL ONE--ELECTION OF DIRECTORS, FOR PROPOSAL TWO--SELECTION OF
INDEPENDENT AUDITORS AND FOR PROPOSAL THREE--AMENDMENTS TO THE ANNUAL MANAGEMENT
INCENTIVE PLAN.
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REVOKING A PROXY
If you give a proxy and later wish to revoke it before it is voted, you may
do so by (1) sending a written statement to that effect to an officer of the
Company or (2) submitting to an officer of the Company a properly signed proxy
bearing a later date.
PROCEDURES AT THE ANNUAL MEETING
The presiding officer at the meeting will determine how business at the
Annual Meeting will be conducted. Only matters properly brought before the
Annual Meeting will be considered.
Only a natural person present at the Annual Meeting who either is a Toro
stockholder or is acting on behalf of a stockholder may make a motion or second
a motion. If the person is acting on behalf of a stockholder, a written
statement must be presented, executed by the stockholder or the duly authorized
representative of the stockholder on whose behalf the person purports to act.
PROPOSALS TO BE VOTED UPON
PROPOSAL ONE. ELECTION OF DIRECTORS
Four directors are to be elected at the Annual Meeting. The nominees are
Robert C. Buhrmaster, Winslow H. Buxton, Robert H. Nassau and Christopher A.
Twomey. All are currently directors. Each has consented to serve a three year
term. See pages 5 and 6 for information on the nominees and other directors.
If any nominee is unable to stand for election, the Board may, by
resolution, designate a substitute.
PROPOSAL TWO. SELECTION OF INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has served as independent auditors to the Company for
many years. The Audit Committee of the Board of Directors has again selected
KPMG Peat Marwick LLP to serve as independent auditors for Fiscal 1998. Although
it is not required to do so, the Board of Directors wishes to submit the
selection of KPMG Peat Marwick LLP for stockholder approval at the meeting.
A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting with the opportunity to make a statement and to be available to
respond to appropriate questions.
If a majority of shares of Common Stock is not voted to approve the
selection of KPMG Peat Marwick LLP, the Board of Directors will reconsider its
selection.
PROPOSAL THREE. AMENDMENTS TO THE ANNUAL MANAGEMENT INCENTIVE PLAN
At its November 1997 meeting, the Compensation Committee recommended, and
the Board of Directors adopted, amendments to the Annual Management Incentive
Plan, including renaming the plan the Annual Management Incentive Plan (the
"Annual Plan"). Stockholders are being asked to consider and approve amendments
(1) to limit eligibility in the Annual Plan to officers of the Company, (2) to
add "Quality of Performance" as a Performance Goal, (3) to increase the maximum
payout level for Quality of Performance participants and (4) to add a Common
Stock acquisition and retention feature ("Stock Retention Award"). A copy of the
Annual Plan as amended is Exhibit A to the Proxy Statement.
The plan was originally approved by stockholders in March 1996 and was
approved as amended in March 1997. Stockholder approval is now sought to ensure
that payments made under the Annual Plan continue to qualify as
"performance-based" for purposes of Section 162(m) of the Internal Revenue Code
(the "Code") and in order to satisfy New York Stock Exchange guidelines relating
to equity compensation for officers.
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If stockholder approval is not received, the Compensation Committee will
reconsider the amendments as they apply to compensation that may be paid to any
person referred to in Section 162(m) and Stock Retention Awards that may be
granted to officers, and the Annual Plan as previously approved by stockholders
will continue in effect as to such persons.
DESCRIPTION OF THE ANNUAL PLAN
The following description of material terms of the Annual Plan, as amended,
is subject to the specific provisions contained in the Annual Plan. Defined
terms have meanings set forth in the Annual Plan.
PURPOSE. The purpose of the Annual Plan is to provide an annual incentive
to reinforce achievement of the performance goals of the Company; to link a
significant portion of a participating officer's compensation to the achievement
by the Company, and in certain cases, a division, of performance goals; to
attract, motivate and retain officers on a competitive basis; and to encourage
selected employees of the Company for whom stock ownership goals have been
established to acquire and retain Common Stock. See the Compensation Committee
Report for information on stock ownership guidelines.
ELIGIBILITY AND PARTICIPATION. Participation is limited to officers of the
Company, including executive officers, who through their position or
performance, can have a significant, positive impact on the Company's financial
results, as determined by the Committee. The Company maintains a separate annual
bonus plan for key employees who are not officers. Approximately 15 individuals,
including the Company's Chief Executive Officer and all other executive
officers, are expected to receive annual Award Payments under the Annual Plan.
AWARD AMOUNTS. The Target Amount that may be paid with respect to an Annual
Performance Award is based on a percentage of a Plan Participant's annual base
salary ("participation factor"), in an amount or within a range stated in the
Annual Plan. The participation factors, which are intended to reflect the Plan
participant's level of responsibility, are as follows: 50% for the Chairman and
Chief Executive Officer, 45% for the President and Chief Operating Officer, 40%
for other elected officers and 25 to 40% for appointed officers.
The Committee may establish Maximum Payouts of up to 175% (and 192.5% for
Participants selected for new Quality of Performance Goal participation) of
Target Payouts in the event Performance Goals are exceeded in an amount
specified by the Committee. At the time an award is made, the Committee may
establish Supplemental Division Performance Goals. If a division specific goal
is achieved, payments to division participants under an award could be increased
to an amount up to 125% of the award payment otherwise determined with respect
to corporate goal achievement. If a supplemental division specific goal is not
achieved, the amount of the award payment could be reduced, including to zero in
the event that the division specific goal is not achieved at a level of at least
60% of the target.
As amended, the Annual Plan gives the Committee the authority to establish
new individual Quality of Performance Goals, described below, for selected Plan
Participants and to increase the Target Payout and Maximum Payout (as prorated)
by up to 10%, but to not more than 192.5% of the Target Payout.
The Committee may establish curves or other measurements for prorating the
amount of payouts for achievement of Performance Goals at less than the Target
Payout, or at greater than the Target Payout but less than the Maximum Payout.
PERFORMANCE GOALS. An award payment under an annual Performance Award will
be paid only upon the achievement of Company Performance Goals established by
the Committee in writing not later than 90 days after the beginning of the
fiscal year to which the Performance Goals relate.
The Board is seeking stockholder approval of a new individual Quality of
Performance Goal which may be based on quantitative or qualitative factors and
may include, but need not be limited to, aggressive
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revenue growth, sustaining earnings initiative, warranty experience, product
recalls, field inventory or acquisition experience.
Performance Goal measures previously approved by stockholders include
earnings per share (EPS), return on average net assets (ROANA), division
controllable profit contribution, division profit adjustment, return on equity,
revenue growth, earnings growth or economic value added. Each such performance
goal is to be specifically defined by the Committee on a Company or division
basis. Previously-approved Supplemental Division Performance Goal measures for
division participants include any of the foregoing measures plus revenue growth,
sustained earnings, product warranty experience, inventory levels or performance
of a subsidiary. Each goal is to be specifically defined on a Company, division
or individual basis and/or in comparison with peer group performance.
MAXIMUM AWARD. The maximum amount that may be paid under an Annual
Performance Award, whether in cash or in Common Stock or Common Stock units, to
a Plan Participant who is or may become a person referred to in Section 162(m)
with respect to any fiscal year is $1,500,000.
PAYMENTS. Before any payment is made under the Annual Plan, the Committee
must certify in writing that the Performance Goals established with respect to
an Annual Performance Award have been met. To the extent necessary with respect
to any fiscal year, in order to avoid any undue windfall or hardship due to
external causes, the Committee may make the determination as to whether a
Performance Goal has been achieved without regard to the effect on the
Performance Goal measure, as it may otherwise be presented in the financial
statements, of any change in accounting standards, any acquisition by the
Company not planned for at the time the Performance Goals are established or any
Board-approved extraordinary or non-recurring event or item.
STOCK RETENTION AWARD. One of the amendments to the Annual Plan authorizes
the grant of Stock Retention Awards to encourage selected participants to
increase their ownership of Toro Common Stock. Under a Stock Retention Award, a
participant may elect to convert up to 50% of a cash award payment to shares of
Common Stock, or defer the compensation into Common Stock Units under a new Toro
Company Deferred Compensation Plan for Officers. For each two shares of Common
Stock or Units acquired upon conversion, a Stock Participant will receive as
additional incentive compensation one additional share or unit of Common Stock
("Matching Shares" or "Matching Units").
Shares or Units acquired under the Annual Plan are purchased at the closing
price of the Common Stock on the date on which the cash award would otherwise be
paid to Plan Participants. Those shares or units ("Retained Shares" or "Retained
Units") are retained by the Company during vesting periods applicable to the
Matching Shares or Units. Matching Shares or Units vest in increments of 25% of
the total number of Matching Shares or Units at the end of each of the second,
third, fourth and fifth years after the date such shares or units are issued or
credited. The Matching Shares or Units are restricted and subject to forfeiture
if the participant does not leave the Retained Shares or Units on deposit with
the Company during the applicable vesting periods. Vesting is accelerated in the
event a participant dies, retires at or after age 65 or becomes permanently
disabled and unable to work.
In the event of an actual or threatened change of control of the Company as
defined in the Annual Plan or the Deferred Compensation Plan, all Matching
Shares and Units will vest.
SHARES AUTHORIZED. The number of shares of Common Stock authorized for
issuance under the Annual Plan is 100,000, subject to adjustment in the event of
stock splits, recapitalization or other similar changes affecting the Common
Stock. Shares of Common Stock to be issued in accordance with the terms of the
Annual Plan may be either unissued authorized shares or treasury shares. Shares
of Common Stock which become available under the forfeiture provisions of the
Annual Plan will again be available for issuance under the Plan.
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ADMINISTRATION. The Annual Plan is administered by the Committee which has
broad authority to administer and interpret the Annual Plan, establish policies
under the Annual Plan, amend the Plan, select Participants, establish
Performance Goals, make awards or terminate the Annual Plan, in its sole
discretion. With respect to any participant who is a person referred to in
Section 162(m) of the Code, the Committee has the discretion to decrease the
amount of an award payment under the Annual Plan, but may not under any
circumstances increase such amount.
PLAN AMENDMENT AND TERMINATION. The Committee may amend, suspend or
terminate the Annual Plan at any time, with or without advance notice to Plan
Participants but no amendment to the plan will be effective that would increase
the maximum amount that may be paid to a Plan Participant, that would change the
stated Performance Goal criteria or that would modify the requirements as to
eligibility for participation, unless the stockholders of the Company approve
the change in accordance with the requirements of Section 162(m). The plan may
be amended, modified or terminated after a change of control in limited
circumstances.
EFFECTIVE DATE OF THE PLAN. The Annual Plan is currently in effect and
first became effective on August 15, 1995. Any amendment to the Annual Plan is
effective on the date established by the Committee, subject to stockholder
approval. The amendments now being proposed for stockholder approval are
effective as of November 1, 1997, subject to stockholder approval.
PLAN BENEFITS. The benefits or amounts that will be received by or
allocated to the Chief Executive Officer, the named executive officers and
executive officers and officers who are not executive officers under the Annual
Plan as amended are not presently determinable because award payments, if any,
will be dependent upon Company performance, participants will change from year
to year and the plan does not have a fixed termination date. Amounts received by
Mr. Melrose and the officers named in the Summary Compensation Table (the "named
executive officers") during Fiscal 1997 are set forth in that table on page 11.
Amounts received by or allocated to current executive officers as a group during
Fiscal 1997 equaled $599,923. Amounts received by or allocated to all employees,
including officers who are not executive officers, as a group, during Fiscal
1997 equaled $890,542. Directors who are not executive officers and employees of
the Company do not receive benefits under the Annual Plan. Subject to the
limitations imposed by Section 162(m), the Committee may amend the Annual Plan
so that the allocation of benefits may be altered and costs may be increased.
BOARD OF DIRECTORS
Under the Company's Certificate of Incorporation, the Toro Board may be
comprised of between eight and eleven directors. The Board currently has fixed
the number of directors at ten.
The Board is divided into three classes, with each class elected in a
different year for a term of three years. The four nominees for election at the
1998 Annual Meeting--Robert C. Buhrmaster, Winslow H. Buxton, Robert H. Nassau
and Christopher A. Twomey. All nominees have consented to serve if elected.
The Board held six meetings during Fiscal 1997. Each incumbent director
attended at least 75% of the aggregate total number of meetings held by the
Board and all committees on which he or she served.
The following information with respect to business experience of nominees
for election to the Board and the continuing directors has been furnished by the
respective directors or nominees or obtained from the records of the Company.
NOMINEES FOR ELECTION TO BOARD OF DIRECTORS (TERM ENDING AFTER FISCAL 2000).
ROBERT C. BUHRMASTER, AGE 50. President and Chief Executive Officer since
March 1994, Jostens, Inc., Minneapolis, Minnesota (consumer manufacturing).
Served as President and Chief Operating Officer from June 1993 to March 1994, as
Executive Vice President from December 1992 to June 1993. Served in
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various capacities at Corning, Inc. for 18 years, serving as Senior Vice
President of Strategy and Business Development immediately prior to joining
Jostens, Inc. First elected to the Toro Board in March 1996, he is a member of
the Audit Committee and the Executive Committee. Mr. Buhrmaster is a director of
Jostens, Inc.
WINSLOW H. BUXTON, AGE 58. Chairman of the Board of Directors since January
1993 and President and Chief Executive Officer since August 1992, Pentair, Inc.,
Saint Paul, Minnesota (diversified manufacturer). From August 1990 to August
1992 he served as Chief Operating Officer. First elected to the Toro Board in
January 1998. Mr. Buxton is a director of Bemis Company, Inc. and Pentair, Inc.
ROBERT H. NASSAU, AGE 56. President and Chief Executive Officer since
January 1, 1997, St. Raymond Wood Products Holding Limited, Boston,
Massachusetts (wood manufacturing). From September 1994 to December 1996 he
served as Senior Vice President Ply Gem Industries, Inc., New York, New York and
President and CEO of the Goldenberg Group, its wholly-owned subsidiary. Also,
President and Chief Executive Officer, Allied Plywood Corporation, Concord,
Massachusetts, a wholly-owned subsidiary of Ply-Gem Industries, Inc. (wood
distribution) from July 1991 to December 1996. First elected to the Toro Board
in 1988, he is a member of the Compensation Committee and the Nominating
Committee.
CHRISTOPHER A. TWOMEY, AGE 49. President and Chief Executive Officer since
January 1986, Arctic Cat Inc., Thief River Falls, Minnesota (recreational
vehicle manufacturer). Served as an executive officer in various capacities
since 1983. First elected to the Toro Board in January 1998. Mr. Twomey is a
director of Arctic Cat Inc. and a Community Board Member, Norwest Bank Minnesota
West, N.A.
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE (TERM ENDING AFTER FISCAL
1998).
RONALD O. BAUKOL, AGE 60. Executive Vice President, International
Operations since May 1995, Minnesota Mining and Manufacturing Company (3M),
Saint Paul, Minnesota (manufacturing). Served as Vice President, Asia Pacific,
Canada and Latin America from February 1994 to April 1995, and as Vice
President, Asia Pacific from July 1991 to February 1994. First elected to the
Toro Board in December 1995, he is a member of the Executive Committee and the
Nominating Committee. Mr. Baukol is a director of Graco, Inc. and Minnesota
Mining and Manufacturing Company.
ALEX A. MEYER, AGE 66. Retired. From January 1986 through April 1992 served
as Senior Vice President of Amana Refrigeration, Inc., a subsidiary of Raytheon,
Inc., Amana, Iowa (manufacturing). First elected to the Toro Board in 1986, he
is a member of the Audit Committee and the Compensation Committee.
DALE R. OLSETH, AGE 67. President and Chief Executive Officer since
November 1986, SurModics, Inc. (formerly BSI Corporation), Eden Prairie,
Minnesota (surface modification). First elected to the Toro Board of Directors
in 1980, he is Chair of the Compensation Committee and a member of the Audit
Committee and the Executive Committee. Mr. Olseth is a director of Graco, Inc.
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE (TERM ENDING AFTER FISCAL
1999).
JANET K. COOPER, AGE 44. Vice President, Treasurer and Tax since July 1997,
The Quaker Oats Company, Chicago, Illinois (foods and beverages). She previously
served as Vice President and Treasurer from July 1992 to July 1997 and as
Assistant Treasurer from March 1990 to July 1992. First elected to the Toro
Board in 1993, she is Chair of the Audit Committee and a member of the
Compensation Committee. Ms. Cooper is a director of Midwest Region Advisory
Board of Awkwright Insurance Company.
KENDRICK B. MELROSE, AGE 57. Chairman of Toro since December 1987 and Chief
Executive Officer of Toro since December 1983. Employed by Toro since 1970.
First elected to the Toro Board in February 1981. Mr. Melrose is also Chair of
the Executive Committee and an ex-officio member of the Nominating Committee.
Mr. Melrose is a director of SurModics, Inc., Donaldson Company, Inc., Jostens,
Inc. and The Valspar Corporation.
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EDWIN H. WINGATE, AGE 65. Retired. From June 1980 through August 1997
served as Senior Vice President--Personnel, Dayton Hudson Corporation,
Minneapolis, Minnesota (retailing). First elected to the Toro Board in 1989, he
is Chair of the Nominating Committee and a member of the Executive Committee.
COMMITTEES OF THE BOARD
To assist in carrying out its duties, the Board has delegated certain
authority to the following four standing committees:
EXECUTIVE COMMITTEE. Its function is to exercise all of the powers and
authority of the Board, including the power to declare dividends on the
Company's Common Stock, during intervals between meetings of the Board. No
meetings of the committee were held during Fiscal 1997.
AUDIT COMMITTEE. Members are not employees of the Company ("outside
directors"). It assists the Board in overseeing the Company's accounting
controls and policies and financial reporting practices. Its functions include
making recommendations regarding the selection, retention or termination of the
Company's independent auditors; review of the professional services, proposed
fees and independence of the auditors; review with the independent auditors of
matters such as the scope of the audit and authorization for special reviews or
audits; review of internal auditing procedures and the adequacy of internal
controls; and review of policies and practices regarding conflict of interest
and compliance with applicable laws. Two meetings of the committee were held
during Fiscal 1997.
COMPENSATION COMMITTEE. All members are outside directors. Its functions
include study and analysis of and recommendations to the Board concerning
specific and general matters of management compensation; periodic review of
management compensation policies and practices, incentive compensation plans and
officer salary adjustments; making incentive compensation awards and setting
base salaries for officers referred to in Section 162(m) of the Code; and
administrative oversight of stock option plans and other incentive and
compensation plans. Two meetings of the committee were held during Fiscal 1997.
NOMINATING COMMITTEE. All members are outside directors (except that the
Chief Executive Officer serves as an ex-officio non-voting member). Its
functions include determining an appropriate size and composition of the Board;
considering qualifications of prospective Board member candidates, including
stockholder recommendations; conducting research to identify and recommend
nomination of suitable candidates who are willing to serve as members of the
Board; reviewing the experience, background, interests, ability and availability
of prospective nominees to meet time commitments of the Board and committee
responsibilities; consideration of nominees recommended by stockholders who
comply with the procedures set forth in the Company's Bylaws, described on page
22; and determining whether any prospective member of the Board has any economic
or familial relationship with the Company or its directors or employees which
may impair the member's suitability for such service. The Committee also has
responsibility to monitor current members of the Board in light of the same
guidelines used to select candidates, and to direct the activities of the Board
and management in matters of corporate governance. One meeting was held during
Fiscal 1997.
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BOARD COMPENSATION
GOAL. Toro's compensation for directors attempts to link a director's
compensation with stockholder interests. The compensation includes the
components described below. The compensation described is paid only to directors
who are not Toro employees.
FEES. - Annual retainer fee $15,000
- Fee or each committee meeting $1,000, with a limit of one
attended committee meeting fee for
committee meetings held in a
single day
A director may receive the annual retainer fee and meeting fees in cash or
shares of Common Stock, or a combination of both.
COMMON STOCK AND OPTION GRANT.
- Annual grant of Common Stock having a $5,000 market value (valued at the
average of the closing prices of Common Stock during the three months
prior to award).
- Annual grant of an option to purchase 1,000 shares of Common Stock (with
an exercise price per share equal to 100% of the fair market value of one
share of Common Stock on the date of grant).
Both grants are made under The Toro Company 1992 Directors Stock Plan.
OTHER. The Company supplies directors with Toro products for their personal
use.
DEFERRED COMPENSATION PLAN. An outside director may elect to defer receipt
of any portion of or all Board compensation until a future date or until the
occurrence of specified events, including disability or death, resignation,
retirement or other termination from the Board. The Board may accelerate
distribution of deferred amounts in its discretion. Deferred amounts are
commingled with the Company's general operating funds and earn interest at the
average prime rate charged by First Bank National Association, Minneapolis,
Minnesota (8.25% to 8.5% in Fiscal 1997).
Upon occurrence of a threat of or actual change of control of the Company
(as defined in the plan), or upon election by a qualified participant to direct
investment of the participant's account, the Company will transfer to a trust an
amount in cash equal to the total amount of all accrued compensation and
interest for all participants or for the electing participant, as the case may
be. Amounts deferred will be paid to the director at retirement or other time
permitted by the plan.
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RETIREMENT PLAN. Under a retirement plan, an outside director who was a
member of the Board of Directors prior to December 1995, who has completed five
years of service and who ceases to be a member of the Board of Directors for any
reason is entitled to receive, for a period of years equal to the number of full
years the director served on the Board but not more than ten years, an annual
payment equal to the full amount paid as an annual retainer at the date of
termination. Beginning in December 1995, that annual payment was limited to
$12,000 annually and payments to new directors are limited to an amount equal to
50% of the amount paid as an annual retainer at the date of termination. In the
event of the death of a director who qualifies for the plan, the retirement
benefit will be paid to the director's beneficiary.
INDEMNIFICATION. Each director is a party to an indemnification agreement
that assures the director of indemnification and advancement of expenses to the
fullest extent permitted by Delaware law and the Company's Certificate of
Incorporation (regardless of, among other things, any amendment to or revocation
of the Certificate of Incorporation, any change in the composition of the Board
of Directors or the occurrence of any acquisition of the Company) and of
continued coverage under the Company's directors and officers liability
insurance, to the extent it is maintained.
STOCK OWNERSHIP INFORMATION
The following table shows how much Toro Common Stock each of the directors
and nominees, the Chief Executive Officer and the four other most highly
compensated executive officers (the named executive officers) beneficially owned
as of January 19, 1998. The table also shows beneficial ownership by holders of
more than 5% of the Common Stock and by all directors and executive officers as
a group.
AMOUNT AND
NATURE
OF
NAME OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER(1) OWNERSHIP OF CLASS
- ----------------- ---------------------------------------- ------------ -------------
Common Stock Franklin Resources, Inc. 676,800(2) 5.3%
777 Mariners Island Blvd.
San Mateo, CA 95504
Common Stock KPM Investment Management, Inc. 668,525(3) 5.2%
10250 Regency Circle
Omaha, NE 68114
Common Stock Ronald O. Baukol 2,391(4) *
Robert C. Buhrmaster 2,781(4) *
Winslow H. Buxton 0 *
Janet K. Cooper 3,339(4) *
Charles B. Lounsbury 55,283(4) *
J. David McIntosh 71,967( (5) *
J. Lawrence McIntyre 29,511(4) *
Kendrick B. Melrose 602,900(4) 4.5%
Karen M. Meyer 31,186(4) *
Alex A. Meyer 3,931(4) *
Robert H. Nassau 3,152(4) *
Edwin H. Wingate 4,280(4) *
Dale R. Olseth 8,733(4) *
Christopher A. Twomey 0 *
Common Stock All directors & executive officers as a 821,174( (5) 7.1%
group (21 persons)
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Shares are deemed to be "beneficially owned" by a person if such person,
directly or indirectly, has or shares (i) the power to vote or to direct the
voting of such shares or (ii) the power to dispose or direct
9
the disposition of such shares. In addition, beneficial ownership includes
shares which such person has the right to acquire within 60 days.
(2) According to a Schedule 13G dated February 12, 1997, one or more closed-end
investment companies or other managed accounts which are advised by certain
investment advisory subsidiaries of Franklin Resources, Inc. ("FRI")
beneficially own an aggregate of 676,800 shares of the Company's Common
Stock, as to which such subsidiaries may be deemed to be the beneficial
owner. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of
10% of the outstanding common stock of FRI, so that FRI and such individuals
may be deemed to be the beneficial owner of all of such shares of the
Company's Common Stock. FRI, such individuals and the subsidiaries of FRI
disclaim any economic interest in or beneficial ownership of the Common
Stock.
(3) According to a Schedule 13G dated February 3, 1997, KPM Investment
Management, Inc., an investment advisor, represents numerous discretionary
accounts and as such beneficially owns 668,525 shares of the Company's
Common Stock, with respect to which it has sole voting and dispositive
power.
(4) Includes shares that may be acquired upon exercise of stock options within
60 days and shares allocated under employee benefit plans. Stock options
exercisable in 60 days for each of the named directors and executive
officers are as follows: Ronald O. Baukol 1,000 shares, Robert C. Buhrmaster
1,000 shares, Janet K. Cooper 2,000 shares, Alex A. Meyer 1,000 shares,
Robert H. Nassau 2,000 shares, Dale R. Olseth 2,000 shares, Edwin H. Wingate
2,000 shares, Kendrick B. Melrose 440,638 shares, Charles B. Lounsbury
48,182 shares, J. David McIntosh 49,990 shares, J. Lawrence McIntyre 25,004
shares, Karen M. Meyer 24,736 shares and all other executive officers as a
group 118,620 shares.
(5) Includes 1,720 shares held in benefit plans by the spouse of Richard R.
Pollick, an executive officer, and 439 shares held of record by Mr.
McIntosh's spouse as custodian for children. Mr. McIntosh disclaims
beneficial ownership of these shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The rules of the Securities and Exchange Commission require disclosure by
the Company of the identity of directors, executive officers and beneficial
owners of more than 10% of the Common Stock of the Company who did not file on a
timely basis reports required by Section 16 of the Securities Exchange Act of
1934. Based solely on review of copies of those reports received by the Company,
or written representations from certain reporting persons that no Form 5 reports
were required for those persons, the Company believes that all directors,
executive officers and greater than 10% owners complied with all filing
requirements applicable to them during Fiscal 1997.
10
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The table below shows the compensation for the Company's Chief Executive
Officer and the four other most highly compensated executive officers who were
serving as executive officers on October 31, 1997, for the last three fiscal
years and for the three-month Transition Period ended October 31, 1995 ("TP95").
(The Transition Period was a result of a change of fiscal year end from July 31
to October 31.)
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION PAYOUTS
----------------------------------- AWARDS -----------
OTHER ANNUAL ------------------------ LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION RESTRICTED OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($)(2) STOCK($)(3) (#)(4) ($)(5) ($)(6)
- ---------------------- ----------- --------- --------- ------------- ----------- ----------- ----------- -------------
Kendrick B. Melrose 1997 541,859 186,264 1,188,463 0 40,054 302,682 141,546
Chairman of the 1996 438,337(7) 256,669 673,373 0 20,062 361,390 157,106
Board & Chief TP95 101,625(7) 189,938 643,632 0 29,028 (8) 285
Executive Officer 1995 380,000(7) 420,000 1,204,329 499,993 50,255 427,964 139,146
Charles B. Lounsbury 1997 261,837 69,845 34,381 0 12,907 73,131 41,984
Group Vice President 1996 223,754 68,491 0 0 2,123 39,381 33,163
TP95 52,155 33,901 33,696 0 9,686 (8) 119
1995 205,752 128,904 12,710 0 11,802 45,862 37,786
J. David McIntosh 1997 261,837 69,125 242,136 0 11,970 73,131 50,237
Group Vice President 1996 215,328 83,729 281,971 0 2,026 37,878 37,380
TP95 50,124 32,581 305,299 0 8,238 (8) 115
1995 195,246 136,672 30,702 0 9,750 43,520 42,461
J. Lawrence McIntyre 1997 189,670 52,159 191,086 0 8,324 37,082 35,133
Vice President, 1996 179,585 71,834 65,000 0 1,754 31,607 23,241
Secretary & General TP95 44,287 28,787 24,336 0 8,224 (8) 0
Counsel 1995 170,004 119,003 13,252 0 9,974 37,894 0
Karen M. Meyer 1997 160,519 44,143 24,265 0 7,009 31,381 23,383
Vice President, 1996 150,677 60,271 108,382 0 1,469 26,519 9,995
Human Resources & TP95 37,113 24,123 39,829 0 6,891 (8) 0
Administration 1995 142,452 99,716 16,894 0 8,358 31,752 27,907
- ------------------------
(1) Amounts indicated include payments made or deferred at the election of the
officer pursuant to the Annual Management Incentive Plan, as in effect for
Fiscal 1997 and Fiscal 1996, and the 1995 Annual Management Incentive Plan.
Bonus amounts paid under the Annual Management Incentive Plan for Fiscal
1997 are based on an earnings per share (EPS) goal. See the Compensation
Committee Report. Amounts for the Transition Period reflect bonus awards
made in lieu of awards under the Annual Management Incentive Plan and were
based on achievement of a target EPS goal established by the Committee.
These amounts also include bonus payments for the Transition Period in lieu
of an award under the Continuous Performance Award Plan, which amounts are
not included under the LTIP Payouts column.
(2) Includes the dollar value of the difference between the fair market value
and the option exercise price (before payment of applicable income taxes) on
stock options exercised. Fair market value is based on the closing price on
the New York Stock Exchange as reported in THE WALL STREET JOURNAL on the
date of exercise or actual sale price. The value of executive perquisites
otherwise reportable as Other Annual Compensation did not exceed $50,000 or
10% of the compensation reported in the table for any named individual. Also
includes dollar value of above-market interest accrued on deferred
compensation during the fiscal year for Mr. McIntosh and Ms. Meyer.
(3) Amount reflects the value, as of the date of award, of 17,467 shares awarded
to Mr. Melrose on July 31, 1995 under the Chief Executive Officer Succession
Incentive Plan which was approved by
11
stockholders in 1994. Restricted stock is subject to performance-based
conditions on vesting which, if not met, will result in forfeiture of
shares. The shares vest 15% not later than July 31, 1998, 15% not later than
October 31, 2000 and 70% not later than October 31, 2003, but only if Mr.
Melrose achieves performance goals related to planning for and implementing
a plan for his succession. The shares had a value of $746,714 at October 31,
1997. All shares of restricted stock are held by the Company until
performance goals have been achieved or other restrictions lapse. Dividends
will be paid, if declared, on all shares of restricted stock reported and
Mr. Melrose may vote the shares. Amounts shown in the Summary Compensation
Table and in this note are calculated by multiplying the closing price of
one share of Common Stock on the New York Stock Exchange as reported in THE
WALL STREET JOURNAL on the relevant date times the number of shares. Under
the plan, the Company also granted Mr. Melrose performance units. See the
Compensation Committee Report.
(4) Includes options granted pursuant to The Toro Company 1993 Stock Option
Plan, The Toro Company 1989 Stock Option Plan and the Continuous Performance
Award Plan. Options under the Continuous Performance Award Plan are subject
to cancellation or reduction in the number of shares covered in the event
the Company does not achieve its long-term performance goals. The number of
shares covered by each such option was reduced with respect to each of
Fiscal 1997, 1996 and 1995.
(5) Amounts reflect payments made pursuant to the Continuous Performance Award
Plan based on the Company's return on beginning equity ("ROBE") performance
relative to its peer group of businesses for the three year performance
period ending with Fiscal 1997. For a more detailed description of the plan
and awards, see Long-Term Incentive Compensation and the Compensation
Committee Report.
(6) Amounts include Company contributions to defined contribution retirement
plans and the Company's Matching Stock Plan (which terminated on July 31,
1995 and was replaced by a similar feature in The Toro Company Investment
and Savings Plan) and allocations to the Company's Employee Stock Ownership
Plan. Also includes amounts accrued pursuant to the Company's Supplemental
Management Retirement Plan for executive officers who receive annual
compensation of $150,000 or more. Participants' accounts are credited with
an amount equal to the difference between the aggregate amount that would
have been allocated to tax-qualified profit-sharing and other defined
contribution plans without regard to limitations imposed by the Code, and
the aggregate amount of contributions actually allocated ("top hat
accounts"). Also includes dollar values of above-market interest accrued
during the fiscal year on top hat accounts for each named executive officer.
Although deferred funds remain a part of the general assets of the Company,
upon occurrence of a threat of or actual change of control of the Company
(as defined in the plan), or upon election by a qualified participant to
direct investment of the account, the Company will transfer to a trust an
amount in cash equal to the total amount of all accrued benefits for all
participants (or for the electing participant, as the case may be). Because
the Company's benefit plans operate on a calendar year basis, amounts shown
for Fiscal 1997 may have been accrued with respect to the prior fiscal year.
(7) Amount reflects the effect of the $100,000 salary reduction, noted in the
Compensation Committee Report.
(8) Amounts paid as long-term incentive payments with respect to the Transition
Period are included in the amount in the Bonus column. See note (1).
12
STOCK OPTIONS
The following table shows options granted under the Company's stock option
plans during Fiscal 1997.
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT
SHARES OPTIONS EXERCISE MARKET ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR PRICE ON PRICE APPRECIATION FOR OPTION
OPTIONS EMPLOYEES BASE DATE OF TERM
GRANTED IN PRICE ($ GRANT ($ EXPIRATION -------------------------------
NAME (#)(1) THE PERIOD PER SHARE) PER SHARE) DATE 0%(2) 5%(2) 10%(2)
- -------------------- ------------- --------------- ----------- ----------- ----------- --------- --------- ---------
Kendrick B. Melrose 18,366(3) 7.48 % $32.3115 $34.2500 3/15/00 $35,602 $134,754 $243,813
21,688 8.83 % $33.8750 $33.8750 11/19/01 $0 $202,979 $448,530
Charles B. Lounsbury 4,457 (3) 1.82 % $32.3115 $34.2500 3/15/00 $8,640 $32,702 $59,168
8,450 3.44 % $33.8750 $33.8750 11/19/01 $0 $79,084 $174,755
J. David McIntosh 4,457 (3) 1.82 % $32.3115 $34.2500 3/15/00 $8,640 $32,702 $59,168
7,513 3.06 % $33.8750 $33.8750 11/19/01 $0 $70,314 $155,377
J. Lawrence McIntyre 2,250 (3) 0.92 % $32.3115 $34.2500 3/15/00 $4,362 $16,509 $29,869
6,074 2.47 % $33.8750 $33.8750 11/19/01 $0 56,847 125,617
Karen M. Meyer 1,895 (3) 0.77 % $32.3115 $34.2500 3/15/00 $3,673 $13,904 $25,157
5,114 2.08 % $33.8750 $33.8750 11/19/01 $0 $47,862 $105,763
- ------------------------
(1) Options are granted pursuant to the 1989 Stock Option Plan and the 1993
Stock Option Plan (the "plans"). The plans are administered by the
Compensation Committee which selects employees to whom options are granted.
The exercise price of each incentive and nonqualified stock option is equal
to 100% of the fair market value of the Common Stock on the date of 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 and on the date of grant could be higher or
lower than fair market value. The options are not transferable except by
will or the laws of descent and distribution. Options granted under the
plans, except those granted in connection with the Continuous Performance
Award Plan, may be exercised immediately after the date of grant, generally
for a period of five years, using cash, stock or a cashless method through a
broker. Most options are subject to cancellation upon termination of the
option holder's employment; however, some nonqualified stock options may be
exercised for up to four years following retirement at or after age 60, but
not later than the expiration date of the option.
(2) Hypothetical potential gains from options granted in Fiscal 1997. The
hypothetical gains are based entirely on assumed annual growth rates
selected by the Securities and Exchange Commission over the five year option
term. Actual gains, if any, on stock option exercises depend on the future
market performance of the Company's Common Stock. Since there is no means of
accurately predicting the future price of the Company's Common Stock, the
future values shown are for illustrative purposes only.
(3) Options granted in connection with the Continuous Performance Award Plan.
The number of shares is subject to reduction if performance goals are not
achieved under the plan. Options are expected to become exercisable in
December 1999, after the Company first makes a public announcement of its
earnings for Fiscal 1999. The option will expire 90 days later. For more
information, see the Compensation Committee Report.
13
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND FISCAL YEAR-END OPTION VALUES
The following table summarizes stock options exercised by the named
executive officers during Fiscal 1997 and the total number of options held by
each listed individual as of the end of Fiscal 1997.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES PERIOD END(#) FISCAL PERIOD END($)(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ------------- ----------- ----------- ------------- ----------- -------------
Kendrick B. Melrose 52,479 $ 1,174,386 397,292 60,322 $ 9,921,119 $ 859,465(2)
Charles B. Lounsbury 2,065 $ 33,298 33,991 8,927 $ 510,127 $ 117,750(2)
J. David McIntosh 10,677 $ 240,767 28,808 8,615 $ 427,209 $ 112,488(2)
J. Lawrence McIntyre 14,385 $ 196,431 14,298 5,942 $ 166,987 $ 82,313(2)
Karen M. Meyer 1,391 $ 23,660 12,005 4,988 $ 140,138 $ 68,065(2)
- ------------------------
(1) Difference between October 31, 1997 closing price on the New York Stock
Exchange ($42.75) and option exercise price (before payment of applicable
income taxes).
(2) Includes options subject to reduction in number of shares or expiration if
performance goals are not achieved under Continuous Performance Award Plan.
LONG-TERM INCENTIVE COMPENSATION
The following table shows awards of long-term incentive compensation made
under the Company's Continuous Performance Award Plan to the named executive
officers during Fiscal 1997. Amounts paid pursuant to the Continuous Performance
Award Plan during Fiscal 1997 are set forth in the Summary Compensation Table
which appears elsewhere in this Proxy Statement.
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS(3)
PERFORMANCE OR OTHER -----------------------------------
NUMBER OF SHARES, UNITS PERIOD UNTIL MATURATION OR THRESHOLD TARGET MAXIMUM
NAME OR OTHER RIGHTS(#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- -------------------- ------------------------- -------------------------- ----------- --------- -----------
Kendrick B. Melrose 1 Award(1) 3 fiscal years(2) $ 16,123 $ 466,119 $ 606,137
Option (18,366 shares)
Charles B. Lounsbury 1 Award(1) 3 fiscal years(2) 4,511 130,406 169,579
Option (4,457 shares)
J. David McIntosh 1 Award(1) 3 fiscal years(2) 4,511 130,406 169,579
Option (4,457 shares)
J. Lawrence McIntyre 1 Award(1) 3 fiscal years(2) 1,974 57,082 74,229
Option (2,250 shares)
Karen M. Meyer 1 Award(1) 3 fiscal years(2) 1,695 49,011 63,734
Option (1,895 shares)
- ------------------------
(1) An award is the right to receive designated target percentages of annual
salary at the end of the three year performance period if the Company
achieves financial performance objectives based on return on beginning
equity relative to the Company's peer group of competitors. No award is paid
if the Company's three year ROBE is in the lowest quartile compared to its
peer group. The value of an award is based on a participant's base
compensation estimated to be paid during the last fiscal year of an award
term multiplied by an individual participation factor established by the
plan or determined by the Compensation Committee within a range set by the
plan. The factor is intended to reflect the
14
participant's ability to implement policy decisions which influence the
financial results of the Company or its divisions or subsidiaries. Each
award recipient also receives an option to purchase the number of shares of
the Company's Common Stock shown, if performance goals are achieved. The
options are the same options reported in the Stock Option table on page 13.
See the Compensation Committee Report for additional information on the
Continuous Performance Award Plan.
(2) The three year performance period includes Fiscal 1997, 1998 and 1999.
(3) Calculated pursuant to the Continuous Performance Award Plan based on
estimated Fiscal 1999 salaries.
EMPLOYMENT AGREEMENTS
Each of the executive officers, including those named in the Summary
Compensation Table, is a party to a change of control employment agreement
adopted in Fiscal 1995 (the "Agreements"). The Agreements are operative only
upon the occurrence of a "change in control", which includes substantially those
events described below. Absent a change in control, the Agreements do not
require the Company to retain the executives or to pay them any specified level
of compensation or benefits.
Each Agreement provides that for three years after a change in control,
there will be no adverse change in the executive's salary, bonus, opportunity,
benefits or location of employment. If during this three year period the
executive's employment is terminated by the Company other than for cause, or if
the executive terminates his employment for good reason (as defined in the
Agreements, and including compensation reductions, demotions, relocation and
excess travel), or voluntarily during the 30-day period following the first
anniversary of the change in control, the executive is entitled to receive an
accrued salary and annual incentive payments through the date of termination
and, except in the event of death or disability, a lump sum severance payment
("Lump Sum Payment") equal to three times the sum of base salary and annual
bonus (and certain insurance and other welfare plan benefits). Further, an
additional payment ("gross-up") is required in an amount such that after the
payment of all taxes, income and excise, the executive will be in the same
after-tax position as if no excise tax under the Code had been imposed.
Generally, and subject to certain exceptions, a change in control is deemed
to have occurred if: (1) a majority of Toro's Board of Directors becomes
comprised of persons other than persons for whose election proxies have been
solicited by the Board, or who are then serving as directors appointed by the
Board to fill vacancies caused by death or resignation (but not removal) of a
director or to fill newly created directorships; (2) another party becomes the
beneficial owner of at least 20% of Toro's outstanding voting stock; or (3)
Toro's stockholders approve a definitive agreement or plan to merge or
consolidate Toro with another party (other than certain limited types of
mergers), exchange shares of voting stock of Toro for shares of another
corporation pursuant to a statutory exchange, sell or otherwise dispose of all
or substantially all of Toro's assets, or liquidate or dissolve Toro.
If a change in control of the Company had occurred at the commencement of
the 1998 calendar year (January 1, 1998) and had resulted in the involuntary
termination of the named executives at such time or the termination by such
executives for good reason, the Lump Sum Payment to be made under such
Agreements to those executive officers named in the Summary Compensation Table
above in the aggregate would have been approximately $7,063,995. The Company has
also established a trust for the benefit of these officers which, in the event
of a threatened or actual change of control, will be funded in an amount equal
to the Company's accrued liability related to such Agreements.
15
PERFORMANCE GRAPH
The following graph depicts total cumulative stockholder return (assuming
reinvestment of dividends) of the Company's Common Stock, the S&P 500 Index and
an industry peer index for the preceding five fiscal years commencing with
Fiscal 1993. The industry peer index is based on the Fortune 500 Industrial and
Farm Equipment Index which is comprised of the companies listed below.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF FIVE YEAR TOTAL RETURN AMONG
The Toro Company, S&P 500, and Peer Group
The Toro Co S&P 500 Peer Group
1992 $100 $100 $100
1993 $184 $115 $143
1994 $205 $119 $158
1995 $217 $151 $174
1996 $239 $187 $226
1997 $330 $247 $309
Fiscal Year Ending October 31,
This graph assumes $100 invested on November 1, 1992 in the Company's Common
Stock, the S&P 500 Index and the peer group index.
The peer group includes: York International Corporation, Briggs &
Stratton Corporation, Stewart & Stevenson Services, Inc., Dover Corporation,
Cummins Engine Company, Inc., Cincinnati Milacron, Inc., Harnischfeger
Industries Inc., Crane Co., Tecumseh Products Company, Ingersoll-Rand
Company, NACCO Industries, Inc., Parker-Hannifin Corporation, Terex
Corporation, Dresser Industries Inc., Aeroquip-Vickers Inc. (formerly
Trinova Corporation), Deere & Company, Timken Company, Baker-Hughes
Incorporated, Caterpillar Inc., The Black & Decker Corporation, American
Standard Companies, Inc., Western Atlas Inc., AGCO Corporation, Kennametal
Inc., The Lincoln Electric Company, Teleflex, Detroit Diesel Corporation and
Case Corporation, as well as the Company. New companies added were Cooper
Cameron Corporation, Lam Research Corporation, Smith International, Inc. and
Nortek, Inc.
Neither the Compensation Committee Report nor this Performance Graph shall
be deemed to be "soliciting material" or to be filed with the Securities and
Exchange Commission or subject to Regulation 14A or 14C under the Securities
Exchange Act of 1934, or to the liabilities of Section 18 of that Act.
16
COMPENSATION COMMITTEE REPORT
This report is furnished by Toro's Compensation Committee, which establishes
compensation policies and administers compensation plans for executive officers
of the Company. The Committee reviews and considers the recommendations of
management and compensation consultants in connection with establishing
compensation policies.
For many years, the Company's compensation plans have aligned total
compensation for Toro's executive officers and other employees with the
financial performance of the Company. If incentive compensation tied to
financial performance is not earned, total compensation will be below market
levels for companies with revenues comparable to the Company's. In order for
executives to be paid the highest levels of incentive compensation, the Company
must not only exceed its own goals, it must also perform well financially
relative to its peer group competitors (33 companies including the Company,
comprising the Fortune 500 Industrial and Farm Equipment Group) (the "peer
group").
Since Fiscal 1990, Toro stockholders have approved two stock option plans, a
long-term bonus plan based on return on beginning equity ("ROBE") performance
and, most recently, an annual bonus plan tied to corporate, and in some cases
division, performance. During this seven year period, the Company's annual
earnings per share have grown from $0.84 for Fiscal 1990 to $3.05 for Fiscal
1997 (before an extraordinary item and one-time charge) and its stock price rose
from $12.75 at October 31, 1990 to $42.75 on October 31, 1997. The Committee
therefore believes that its compensation policies have been effective and
intends to continue the policies in substantially the same manner as in the
recent past, with a few modifications described in this report.
NEW STOCK OWNERSHIP GUIDELINES
At its November 1997 meeting, the Committee adopted guidelines to encourage
accumulation and retention of Toro Common Stock by all officers of the Company,
including the named executive officers. The guidelines are stated as a multiple
of executives' base salaries, as follows: Chief Executive Officer-- 5 times,
Chief Operating Officer/Group Vice Presidents--3 times, Corporate Officers and
Vice Presidents--2 times. The recommended time period for reaching the guideline
is five years. The Committee will review compliance with the policy on an annual
basis. In order to assist officers in achieving the guidelines, the Committee
recommended, and the Board approved, an amendment to the Annual Management
Incentive Plan ("Annual Plan") to add a stock retention award feature. That
amendment is submitted to stockholders for approval in Proposal Three in this
Proxy Statement.
GENERAL POLICIES
While the policies of the Company are designed to compensate executive
officers for personal performance, a substantial portion of annual compensation,
especially that of the Chief Executive Officer, is designed to align the
financial interests of the individual executive officer with those of Company
stockholders, by making certain components of compensation contingent upon the
financial performance of the Company. The Company's compensation program for
executive officers as well as other key management employees continues to be
composed of both cash and equity-based compensation.
Cash compensation consists of base salary and the potential for both annual
and long-term incentive bonuses under the Annual Plan and the Continuous
Performance Award Plan, respectively. Payment of compensation under the two
incentive plans is dependent upon the financial performance of the Company,
although the Committee has recommended, and the Board is seeking stockholder
approval of adding supplemental individual performance goals under the Annual
Plan. See Proposal Three in this Proxy Statement. Equity-based compensation in
the form of stock options constitutes an additional component of long-term
incentive compensation. Options are granted under the Company's two stock option
plans as well as in connection with the Continuous Performance Award Plan. Under
proposed amendments to the
17
Annual Plan, selected award recipients would have the right to convert a portion
of the annual cash award payment to Common Stock or units and to receive
additional matching shares or units.
BASE SALARY
Base salaries for executive officers, including the Chief Executive Officer,
are initially established and thereafter are reviewed at least annually by the
Committee. Based on independent evaluation by professional compensation
consulting firms retained by the Company, a base salary range for each executive
position is established, reflecting median base salaries for similar positions
in businesses with revenues comparable to those of the Company. Some of these
companies are in the Company's peer group index for the Performance Graph on
page 16. However, the Company relies on a broader group of companies for
comparative analysis of executive compensation because the Committee believes
that the Company's competitors for executive talent are more varied than its
business peer group.
A base salary for each executive is set within the market range established
for the position by considering the experience and individual performance of the
executive. For Fiscal 1997, base salaries for executive officers were within the
middle one-third of the market range. Mr. Melrose's salary with respect to
Fiscal 1997 was set at $541,859, based on the same method used in establishing
other executive officers' base salaries. Fiscal 1997 was the first year since
Fiscal 1992 that Mr. Melrose's established base salary did not reflect the
effect of a $100,000 per year reduction made in exchange for a ten year salary
replacement option to purchase 300,000 shares of the Company's Common Stock,
which had been agreed on by the Committee and Mr. Melrose to increase the "at
risk" portion of Mr. Melrose's total compensation.
The Committee conducts a performance evaluation of Mr. Melrose on an annual
basis. The other named executive officers receive evaluations by Mr. Melrose,
which are used by the Committee in establishing base salaries.
INCENTIVE COMPENSATION
An executive of the Company will earn total compensation that is market
competitive only if incentive compensation is earned. In order to earn incentive
compensation sufficient to bring total compensation to average market levels,
Company financial performance targets must be achieved. If those targets are
exceeded, incentive compensation can cause total compensation to be above market
levels.
The incentive components of compensation are intended to encourage
achievement of both short-term and long-term objectives. Short-term performance
is evaluated using performance goal criteria selected annually by the Committee
from among those authorized in the Annual Plan, as approved by stockholders.
Long-term performance has traditionally been evaluated by reference to the
Company's return on beginning equity (ROBE) on a relative basis compared with
the performance of the peer group over a three year period. In Fiscal 1996, net
income growth was approved by stockholders as an additional measure of long-term
performance for awards granted in November of 1995. In Fiscal 1997, net income
growth was again removed, with stockholder approval, as a measure of long-term
performance for awards granted in November of 1996 with respect to the
performance award term including Fiscal 1997, 1998 and 1999, and future periods.
For Fiscal 1997, 47.4% of Mr. Melrose's total cash compensation was
comprised of incentive payments under the Company's short-term and long-term
incentive plans, and his total cash compensation was at the 86% level compared
to total cash compensation paid to chief executive officers in businesses with
revenues comparable to the Company's. If the Company had not met any of its
performance goals and Mr. Melrose had received no incentive payments, his total
cash compensation would have equaled only 45% of such average market levels.
ANNUAL CASH INCENTIVE COMPENSATION. Under the Company's
stockholder-approved Annual Plan, executive officers and other key employees are
eligible to receive an annual cash bonus based on a percentage
18
of base salary (determined by the executive officer's position) and the
Company's achievement of performance goals and, for certain participants,
division performance. If performance goals are exceeded, award amounts increase
up to a pre-established maximum (not more than 175% of the target award amount),
but if goals are not met, awards are reduced or not paid at all. Proposed
participants in the Annual Plan are recommended by management and selected by
the Committee. The target award amount for Mr. Melrose is 50% of his base salary
and for the other named executive officers is 40%. The percentage is based on
the executive's salary grade and job position and not on individual factors.
Under the Annual Plan as in effect for Fiscal 1997, the Compensation
Committee established an earnings per share (EPS) performance goal as the basis
for payment of a target award amount. The Committee also established a ROANA
goal as the basis for payment of higher award amounts, if the EPS target had
been met. The Company did not meet the EPS goal at the target level, but did
achieve the goal at a 93.75% level. Therefore, bonus payments made to
participants who were corporate (not division) participants (including Mr.
Melrose) were paid at a reduced level based on pro rata achievement of the goal,
or 68.75% of the target payout amounts.
If the EPS target goal had been achieved and if the additional ROANA goal
had been achieved or exceeded, a bonus payment of up to 175% of the target
payout amount could have been paid. If EPS had been below a minimum level
established by the Committee, no bonus would have been paid to any plan
participant.
In considering and certifying achievement of performance goals for Fiscal
1997, the Committee eliminated the effect on EPS of the following extraordinary
or non-recurring items: the acquisition of the James Hardie Irrigation Group,
the premium paid by the Company on the call of its 11% Sinking Fund Debentures
and charges associated with the closing of Toro's Mound manufacturing facility,
as approved by the Board.
An additional performance goal applicable to division participants was based
on division profit adjustment (DPA). If such a supplemental division goal is
achieved, the award payment that would otherwise be made based on corporate
performance may be increased by up to 25% (but to not more than 175% of the
target payout). If the goal is not achieved, the award payment amount is reduced
pro rata, including to zero if the target is not achieved at a level of at least
60% of the division target. For Fiscal 1997, some divisions achieved the DPA
goal and others did not. Award payments to division participants in divisions
that exceeded supplemental division goals were increased up to 125% of the
amount that otherwise would have been paid based on corporate performance.
Participants in the consumer division, which did not achieve its division goal,
did not receive Annual Plan bonus payments. The Committee also has the
discretion to reduce award payments made to division general managers, including
certain named executive officers, by up to 10% in the event division performance
is below Committee expectations, judged with respect to supplemental division
performance goals specified in the plan. The Committee exercised this discretion
with respect to Fiscal 1997.
The Committee has approved and recommended to stockholders the amendment of
the Annual Plan to add individual performance goals. See Proposal Three.
LONG-TERM INCENTIVE COMPENSATION. Under the Continuous Performance Award
Plan as in effect for the three year period ending with Fiscal 1997, performance
awards could be earned by eligible executive officers if the Company achieved an
average ROBE for the three year award term that ranked favorably relative to the
ROBE rankings of all companies in the Company's peer group. The maximum value of
a performance award (100%) could be earned only if the Company achieved a ROBE
that ranked among the top 25% of ROBE ratings for companies in the peer group.
The amount of an award payment is reduced proportionately the lower the
Company's performance ranks compared with the peer group, and no award is paid
if the Company does not rank in the top 75%.
19
If the Company's performance goals are achieved, the amount of an individual
participant's award payment is determined based on the individual's
participation factor, which is a percentage of base salary ranging from 25% to
100%, as established in the plan or by the Committee based on the individual's
position and level of responsibility. Mr. Melrose participates in the plan at a
factor of 1.0 (one times base salary), which means that if the Company's ROBE
ranks in the top 25% of companies in the peer group, Mr. Melrose would receive a
long-term incentive payment equal to his base salary during the last fiscal year
of the award, as estimated in advance by the Committee.
In Fiscal 1997, the Company's three year average ROBE performance ranked at
the 46.20% percentile level among its peer group, so that the amount of awards
was 55.86% of the potential maximum for each named executive officer, including
Mr. Melrose. In Fiscal 1997, 37.4% of Mr. Melrose's cash compensation was
comprised of the payment pursuant to the Continuous Performance Award Plan. The
three month Transition Period was not included in the three year calculation.
Under a Continuous Performance Award Plan formula, the Committee also grants
to each participant a nonqualified stock option to purchase shares of Common
Stock. These options are intended to assist executive officers in building stock
ownership and to focus management's attention on long-term stock price
performance. If the Company does not achieve the ROBE performance goal for the
related performance award, the number of shares subject to the option is reduced
in accordance with the formula applicable to reduction of the Performance Award.
The option is exercisable for only 90 days, following the Company's release of
its earnings for the last year of the award term. Payment of the option exercise
price is intended to be facilitated by the cash incentive compensation payment
made before the option becomes exercisable. Options related to the award payment
made with respect to the three year period ended with Fiscal 1997 were reduced
by 55.86%.
In Fiscal 1995, a special committee of the Committee recommended, and the
Board and stockholders approved, a special incentive compensation plan for Mr.
Melrose, to encourage him to remain with the Company until his 60th birthday,
while assuring the timely development and election of his successor as Chief
Executive Officer of the Company. Under the Chief Executive Officer Succession
Incentive Agreement (the "Agreement"), on July 31, 1995, the Company awarded Mr.
Melrose 17,467 shares of Common Stock and Common Stock performance units having
a fair market value of $500,000, subject to forfeiture or reduction in the event
performance goals related to the development and implementation of a senior
management and chief executive officer succession plan are not met by target
dates beginning July 31, 1998 and continuing through July 31, 2003.
During Fiscal 1997, the Committee recommended to the Board that the dates
for identification of a potential CEO successor and continued development of the
senior management team (Goal 2) and for the election of the selected CEO (Goal
3) be modified, and that provisions regarding Mr. Melrose's retirement be
further clarified. The Committee noted that confusion persisted regarding
whether the arrangement requires Mr. Melrose to retire from employment with the
Company not later than July 31, 2000 in connection with the election of a
successor under the Plan. The Agreement does not require that Mr. Melrose retire
from employment with the Company at any particular date. The Committee
recommended to the Board, and the Board agreed, that the Agreement be amended to
provide that the deadline for achievement of Goal 2 be changed from July 31,
1999 to October 31, 2000 and the deadline for achievement of Goal 3 be changed
from July 31, 2000 to October 31, 2003 and that the Agreement and related plan
be clarified to state that Mr. Melrose is not required to retire.
STOCK OPTION PLANS. In addition to options granted in connection with the
Continuous Performance Award Plan, described above, the Committee makes stock
option grants pursuant to the Company's stock option plans. Options are granted
to all key management employees, including Mr. Melrose and the named executive
officers, in amounts determined based on annual base salary, salary grade and
the fair market value of the Common Stock on the date of grant. Except for
performance-based options granted in connection with the Continuous Performance
Award Plan, all options granted under the stock option plans
20
have exercise prices that are equal to fair market value at the date of grant.
These options are exercisable immediately after grant and remain exercisable for
a period of five years. As of October 31, 1997, 876,140 options were outstanding
and 744,875 shares remained available for grant of options under the plans.
In Fiscal 1997, the Committee granted Mr. Melrose options to purchase a
total of 40,054 shares, 18,366 of which were awarded under the Continuous
Performance Award Plan and are subject to reduction.
SECTION 162(m). Section 162(m) of the Code limits to $1 million per year
the compensation expense deduction the Company may take for
non-performance-based compensation paid to a person who is "highly-compensated"
for purposes of the Code (generally, the CEO and other named executive
officers). In making its decisions about compensation for Mr. Melrose and other
officers likely to be named executive officers, the Committee considers Section
162(m). Although the Company's compensation levels have not historically
resulted in total compensation in excess of $1 million (excluding the spread on
stock option exercises) for named executive officers other than Mr. Melrose, it
is generally the policy of the Company that the components of executive
compensation that are inherently performance-based should qualify for exclusion
from the deduction limitation under Section 162(m). The Committee believes that
annual incentive award payments under the Annual Plan, long-term incentive award
payments under the Continuous Performance Award Plan and stock options granted
under all plans currently qualify for exclusion.
The Committee also believes that while tax deductibility is an important
factor, it is not the sole factor to be considered in setting executive
compensation policy, and accordingly reserves the right, in appropriate
circumstances, to pay amounts, in addition to base salary, that might not be
deductible. If non-performance-based compensation in excess of $1 million should
become payable to a person who is "highly-compensated" for purposes of the Code
and regulations, the Committee will consider requiring that individual to defer
any amounts earned in excess of the cap to a tax year following the year in
which the individual leaves the employment of the Company.
APPROVAL OF INCENTIVE PLANS
All of the recommendations of the Committee with respect to compensation
attributable to Fiscal 1997 were approved and adopted by the Board of Directors.
In accordance with the Company's past practice under Section 16 of the
Securities Exchange Act of 1934 and Section 162(m), decisions regarding the
grant of stock options and certain other awards continue to be made by the
Committee and reported to the Board.
Dale R. Olseth, Chairman
Janet K. Cooper
Alex A. Meyer
Robert H. Nassau
21
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Dale R. Olseth, Chair, Janet
K. Cooper, Alex A. Meyer and Robert H. Nassau. None of these directors is or has
been an officer or employee of the Company. Although Mr. Melrose is not a member
of the Committee, he attends the meetings for the purpose of providing
continuity and detailed information about employees and compensation plans. Mr.
Melrose does not participate in any option grant or award decisions or any
decisions of the Committee that might affect him personally.
Mr. Melrose serves on the Board of Directors and Compensation Committee of
SurModics, Inc. of which Mr. Olseth serves as president and chief executive
officer. Mr. Olseth serves on the Board of Directors and is Chair of the
Compensation Committee of the Company.
OTHER INFORMATION
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
The 1999 Annual Meeting of Stockholders is expected to be held on March 11,
1999. Unless the date of the 1999 Annual Meeting is changed by more than 30
calendar days, a stockholder proposal must be received by the Secretary of the
Company no later than the close of business on October 6, 1998, in order to be
included in the Company's Proxy Statement for the 1999 Annual Meeting.
Procedures for nominations by a stockholder of a person for election as a
director at the 1999 Annual Meeting, or any other meeting, are described in the
next paragraph.
PROCEDURE FOR NOMINATIONS
Stockholders who propose to nominate a candidate for election to the Board
of Directors at an annual meeting must give timely written notice to the
Secretary of the Company, in accordance with the Company's Bylaws. In order to
be timely, the notice must be received by the Company not less than 60 days nor
more than 90 days prior to the first anniversary of the preceding year's regular
meeting; provided, however, that in the event that the date of the regular
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such regular meeting and not
later than the close of business on the later of the 60th day prior to such
regular meeting or the 10th day following the day on which public announcement
of the date of such meeting is first made. The notice must set forth all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including
such person's written consent to being named in the Proxy Statement as a nominee
and to serving as a director if elected). In addition, the notice must contain
the name and address of the nominating stockholder(s) as they appear on the
Company's books, and the class and number of shares of the Common Stock
beneficially owned.
ANNUAL REPORT
The Annual Report of the Company for Fiscal 1997 (the fiscal year ended
October 31, 1997) including financial statements is enclosed.
COST AND METHOD OF SOLICITATION
The Company will pay the cost of soliciting proxies and may make
arrangements with brokerage houses, custodians, nominees and other fiduciaries
to send proxy material to beneficial owners of the Common Stock. The Company
will reimburse them for reasonable out-of-pocket expenses. In addition to
solicitation by mail, certain officers and employees of the Company, who will
receive no compensation for such services other than regular employee
compensation, may solicit proxies by telephone, electronic
22
transmission and personally. The Company has retained Morrow & Co. for an
estimated fee of $4,500 plus out-of-pocket costs and expenses, to assist in
distributing proxy materials and in making mail, telephone and personal
solicitation of proxies.
OTHER MATTERS
Toro management knows of no other matters that may come before the Annual
Meeting. However, if matters other than those referred to above should properly
come before the Annual Meeting, the persons named on the enclosed proxy card
intend to vote such proxy in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
[SIG]
J. LAWRENCE MCINTYRE
Vice President, Secretary and General
Counsel
23
EXHIBIT A
THE TORO COMPANY
ANNUAL MANAGEMENT INCENTIVE PLAN II
1. PLAN PURPOSE. The purpose of The Toro Company Annual Management Incentive
Plan II (the "Plan") is to provide an annual incentive to reinforce
achievement of the performance goals of The Toro Company (the "Company");
to link a significant portion of a participating officer's annual
compensation to the achievement by the Company, and in certain cases, a
division, of performance goals; to attract, motivate and retain officers on
a competitive basis by making awards based on annual achievement of
performance goals ("Annual Performance Awards"); and to encourage selected
officers to acquire and retain shares of the Common Stock, par value $1.00
per share, and related Preferred Share Purchase Rights of the Company
("Common Stock").
2. ELIGIBILITY AND PARTICIPATION. Within the first 90 days of each fiscal
year, or before the first 25% of a shorter performance period has elapsed,
the Compensation Committee (the "Committee") shall select as recipients of
Annual Performance Awards ("Plan Participants") those officers of the
Company who, through their position or performance, can have a significant,
positive impact on the Company's financial results. Nominations may be made
to the Chief Executive Officer and presented by the Chief Executive Officer
to the Committee. Plan Participants are designated to participate in the
Plan for one fiscal year, but may be renominated and selected again.
Newly-hired and newly-promoted officers may be selected as Plan
Participants after the first 90 days of a fiscal year subject to the
provisions of this paragraph and subparagraph 4.a. With respect to persons
subject to Section 16 of the Securities Exchange Act of 1934 ("Exchange
Act"), transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange
Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
3. AWARD AMOUNTS.
a. TARGET PAYOUT. The target amount that may be paid with respect to
an Annual Performance Award (the "Target Payout") shall be
determined by the Committee and shall be based on a percentage of a
Plan Participant's actual annual base salary at the time of grant
("Participation Factor"), within the range established by this
subparagraph, and subject to adjustment as provided in the last
sentence of this subparagraph. The Participation Factors, which are
intended to reflect a Plan Participant's level of responsibility,
are 50% for the Chairman and Chief Executive Officer, 45% for the
President and Chief Operating Officer, if one should be elected, 40%
for other elected officers and 25 to 40% for other officers. The
Chief Executive Officer may approve modifications to the foregoing
Participation Factors for any participant who is not a person
referred to in Section 162(m) of the Internal Revenue Code of 1986,
as amended, or the regulations thereunder ("Section 162(m)"), if
such modification is based on level of responsibility. The Committee
may establish curves or other measurements for prorating the amount
of payouts for achievement of Performance Goals at less than the
Target Payout.
b. MAXIMUM PAYOUT. The Committee may also establish a maximum
potential payout amount (the "Maximum Payout") with respect to an
Annual Performance Award of up to 175% (192.5% for selected Plan
Participants as provided in subparagraph 3.d.) of the Target Payout
in the event Performance Goal targets are exceeded by an amount
established by the Committee at the time Performance Goals are
established. The Committee may establish curves or other
measurements for prorating the amount of payouts for achievement of
Performance Goals at greater than the Target Payout but less than
the Maximum Payout.
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c. DIVISION PAYOUT. At the time an Annual Performance Award is made,
the Committee may establish supplemental division specific
performance goals ("Supplemental Division Performance Goals") and
may provide that achievement of a Supplemental Division Performance
Goal at or above an established target level shall result in payment
under an Annual Performance Award at up to 125% of the award payment
otherwise determined pursuant to subparagraph 3.a. or 3.b. and
achievement of a Supplemental Division Performance Goal below an
established target level shall result in a reduction of the amount
of an award payment otherwise determined pursuant to subparagraph
3.a. or 3.b., including to zero in the event that a division goal is
not achieved at a level of at least 60% of the target. The Committee
shall also have the discretion to reduce by an amount up to 10% the
amount that would otherwise be paid under the division payout
formula to a division vice president or general manager based on the
Committee's evaluation of the quality of division performance.
d. QUALITY OF PERFORMANCE PAYOUT. At the time an Annual Performance
Award is made, the Committee may increase the Target Payout and the
Maximum Payout (as either may be prorated in accordance with
subparagraphs 3.a. and 3.b.) by up to 10%, but to not more than
192.5% of the Target Payout, for selected Plan Participants
("Quality of Performance Participants"), to reflect individual
quality of performance goals ("Quality of Performance Goals"),
established at that time by the Committee. The Committee shall have
the discretion to reduce by an amount up to 10% the amount that
would otherwise be paid under the payout formula to a Quality of
Performance Participant based on the Committee's evaluation of the
individual's achievement of the Quality of Performance Goal.
e. SECTION 162(m) MAXIMUM. With respect to any Plan Participant who is
or may become a person referred to in Section 162(m), the maximum
dollar amount that may be paid under an Annual Performance Award
shall be set at the time the Committee grants the award and
establishes the Performance Goals (as defined in subparagraph 4.a.)
under the award.
4. PERFORMANCE GOALS.
a. ESTABLISHMENT. An award payment under an Annual Performance Award
shall be made to a Plan Participant only if the Company achieves
Performance Goals, based on the criteria set forth in subparagraph
4.b. ("Performance Goals"), established by the Committee in writing
not later than 90 days after the commencement of the fiscal year to
which the Performance Goal relates, provided that the outcome is
substantially uncertain at the time the Committee establishes the
Performance Goal; and provided further that in no event will a
Performance Goal be considered to be pre-established 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.
b. PERFORMANCE GOAL CRITERIA. Performance Goals to be established
under subparagraph 4.a. shall be based on earnings per share (EPS),
return on average net assets (ROANA), division profit adjustment,
division controllable profit contribution, return on equity, revenue
growth, earnings growth or economic value added (EVA). Supplemental
Division Performance Goals for division participants that may be
established under subparagraph 4.a. may be based on any of the
foregoing and/or on division specific operating performance goals
including revenue growth, sustained earnings, product warranty
experience, product recalls or inventory levels. Quality of
Performance Goals that may be established under subparagraph 4.a.
may be based on quantitative or qualitative factors, and may
include, but are not limited to, aggressive revenue growth,
sustaining earnings initiative, warranty experience, product
recalls, field inventory or acquisition experience. Each Performance
Goal is to be specifically defined by the Committee on a Company,
division or individual basis and/or in comparison with peer group
performance.
A-2
5. DISCRETION TO DECREASE AWARD PAYMENT. With respect to any Plan Participant
who is a person referred to in Section 162(m), the Committee shall have the
discretion to decrease an award payment under an Annual Performance Award,
but may not under any circumstances increase such amount.
6. MAXIMUM AWARD PAYMENT. Notwithstanding any other provision of this Plan,
the maximum dollar amount a Plan Participant may be paid under an Annual
Performance Award, whether in cash or Common Stock or Common Stock units,
with respect to any fiscal year is $1,500,000. The Committee may, in its
discretion, decrease this maximum, but may not, under any circumstances,
increase this maximum.
7. PAYMENTS. Before any payment is made under the Plan, the Committee must
certify in writing that the Performance Goals established with respect to
an Annual Performance Award have been achieved. To the extent necessary
with respect to any fiscal year, in order to avoid any undue windfall or
hardship due to external causes, the Committee may make the determination
as to whether a Performance Goal has been achieved without regard to the
effect on the Performance Goal measure, as it may otherwise be presented in
the financial statements, of any change in accounting standards, any
acquisition by the Company not planned for at the time the Performance
Goals are established, or any Board-approved extraordinary or non-recurring
event or item.
8. STOCK RETENTION PROVISIONS.
a. ELIGIBILITY FOR STOCK RETENTION AWARD. Subject to the terms and
conditions of this paragraph 8 (the "Stock Retention Provisions"),
at the time the Committee selects Plan Participants, the Committee
may grant to selected Plan Participants ("Stock Participants") a
right (a "Stock Retention Award") to elect (i) to convert to shares
of Common Stock or (ii) to defer, through The Toro Company Deferred
Compensation Plan for Officers (the "Officer Deferred Plan"), into
units having a value based on shares of Common Stock, up to 50% of
the amount of an award payment under an Annual Performance Award
("Base Cash Award") and to receive additional incentive compensation
in the form of one additional share or unit of Common Stock for
every two shares or units acquired upon conversion up to the limit
of 50% of the Base Cash Award (the "Matching Shares" or "Matching
Units"). The shares or units acquired upon conversion of all or a
portion of the Base Cash Award shall be retained by the Company
(which shall be called the "Agent" for purposes of the Stock
Retention Provisions) during the vesting periods for the Matching
Shares or Units described in subparagraph 8.e. Shares of Common
Stock issued under the Stock Retention Provisions shall be called
"Retained Shares" and units of Common Stock deferred under the
Officer Deferred Plan shall be called "Retained Units" under this
paragraph 8.
b. NUMBER OF SHARES OR UNITS. The number of Retained Shares or
Retained Units to be issued or credited upon conversion of a Base
Cash Award under a Stock Retention Award election shall be equal to
the dollar amount of the portion of the Base Cash Award subject to
the election, divided by the fair market value of the Common Stock
on the date that the Committee makes the certification required
under paragraph 7 of this Plan. Fair market value shall be the
closing price of one share of Common Stock, as reported in THE WALL
STREET JOURNAL. Retained Shares shall be issued in whole shares only
and cash shall be paid for fractional shares.
c. ELECTION TO EXERCISE STOCK RETENTION AWARD.
i. On or before the December 31 immediately preceding the end of the
fiscal year to which a Stock Retention Award relates, a Stock
Participant who wishes to convert a portion of a Base Cash Award into
deferred compensation Retained Units shall notify the Company in
writing that he or she has elected to participate in the Stock
Retention Provisions and shall specify the percentage of the Base
Cash Award to be converted, except as otherwise provided in the
Officer Deferred Plan with respect to the year in which that plan is
first implemented or the
A-3
first year in which a Stock Participant becomes eligible to
participate in the Stock Retention Provisions.
ii. On or before the October 31 that is the last day of the fiscal
year to which a Stock Retention Award relates, a Stock Participant
who has not elected to convert the maximum permissible portion of the
Base Cash Award into Retained Units and who wishes to convert up to
the maximum permissible portion of the Base Cash Award into Retained
Shares shall notify the Company in writing that he or she has elected
to participate in the Stock Retention Provisions and shall specify
the percentage of the Base Cash Award to be converted.
iii. An election to participate is effective only for the fiscal year
to which the Stock Retention Award relates.
iv. A Stock Participant who terminates employment, dies, retires at
or after age 65, elects early retirement at or after age 55 or
becomes permanently disabled and unable to work during the fiscal
year to which a Stock Retention Award relates shall not be eligible
to participate in the Stock Retention Provisions, and the Stock
Retention Award and any election made by the Stock Participant shall
be canceled automatically as of the date of any such event.
d. MATCHING SHARES OR UNITS. As soon as practical following the
conversion of a Base Cash Award to Retained Shares or Retained
Units, the Company shall issue one Matching Share or credit one
Matching Unit for each two Retained Shares or Units acquired (up to
the limit of 50% of the Base Cash Award) (the "Restricted Shares" or
"Restricted Units"). Restricted Shares shall be held by the Agent
for the Stock Participant's account. Restricted Shares shall be
issued in whole shares only and cash shall be paid for fractional
shares.
e. VESTING, DELIVERY AND DISTRIBUTION.
i. Vesting. Restricted Shares and Restricted Units held or credited
by the Company shall be forfeitable until they vest and shall vest in
increments of 25% of the total number of such Restricted Shares or
Units at the end of each of the second, third, fourth and fifth years
after the date such Restricted Shares or Units are issued or
credited, provided that such Restricted Shares or Units shall vest
only if the Stock Participant's Retained Shares or Units have been
left on deposit with the Agent through the requisite two, three, four
and five year periods and all other requirements of the Plan have
been met, except as may otherwise be provided in subparagraph 8.f.
ii. Delivery.
A. Retained Shares and Restricted Shares will be delivered as
soon as possible after the applicable vesting requirements
(including accelerated vesting under subparagraph 8.f.) have
been fulfilled. In the event vesting requirements are not
fulfilled, Retained Shares will be returned to a Stock
Participant as soon as possible.
B. Retained Units and Restricted Units that have vested will be
distributed to a Stock Participant consistent with a Stock
Participant's distribution election properly made in
accordance with the provisions of the Officer Deferred Plan.
iii. Retained Shares and Retained Units are fully vested at the time
of issuance or crediting.
f. VESTING AND CANCELLATION UNDER SPECIAL CONDITIONS.
i. Retirement or Disability. Notwithstanding the foregoing, all
Restricted Shares or Units held in a Stock Participant's account
shall vest in full if the participant retires on or after age 65 or
becomes permanently disabled and unable to work while a Stock
Participant under the
A-4
Plan. Notwithstanding the foregoing, if within one year after such
retirement the Stock Participant 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 demand return of the economic value of the Restricted Shares or
Units which vested early under this subparagraph.
ii. Early Retirement. A Stock Participant who retires at or after
age 55, but before age 65, may elect to leave Retained Shares or
Units on deposit until the participant reaches age 65 or until the
applicable vesting requirements of subparagraph 8.e. have been
fulfilled, as the case may be, and Restricted Shares or Units shall
vest upon the occurrence of the earlier of such event.
Notwithstanding the foregoing, if within one year after such early
retirement the Stock Participant 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 demand return of the economic value of the Restricted Shares or
Units which vested after the date of early retirement under this
subparagraph.
iii. Early Withdrawal. In the event that a Stock Participant elects
to withdraw Retained Shares or Units from the account prior to age
65, but before the applicable vesting requirements have been
fulfilled, Restricted Shares or Units held in such participant's
account that have not vested shall not vest and shall be forfeited.
iv. Death. In the event of the death of a Stock Participant before
the applicable vesting requirements have been fulfilled, the
Restricted Shares or Units shall vest in full.
v. Voluntary Resignation. In the event that a Stock Participant
resigns voluntarily, Restricted Shares or Units held in such
participant's account that have not yet vested shall not vest and
shall be forfeited, unless otherwise determined by the Chairman of
the Committee, in his or her discretion, upon recommendation by the
Chief Executive Officer of the Company.
vi. Change of Control. All Restricted Shares or Units shall vest if
there is a change of control of the Company. "Change of Control"
shall mean 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 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 20% 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 (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.
g. TEMPORARY WITHDRAWAL FOR OPTION EXERCISE. A Stock Participant may
temporarily withdraw all or a portion of Retained Shares held in the
participant's account, but not Restricted Shares or Retained or
Restricted Units, in order to exercise Company stock options,
provided that an equal number of shares of Common Stock is promptly
redeposited with the Agent after such exercise.
h. DIVIDENDS AND VOTING. Dividends on Retained and Restricted Shares
may at the election of the Stock Participant be paid to such
participant or reinvested under the Company's dividend reinvestment
plan as then in effect. Dividends on Retained and Restricted Units
shall be credited under the Officer Deferred Plan, in additional
units based on fair market value of one share of the Common Stock on
the record date for payment of dividends. A Stock Participant shall
have the right to vote Retained and Restricted Shares.
A-5
i. MAXIMUM SHARES SUBJECT TO STOCK RETENTION AWARDS. Subject to the
provisions of this subparagraph and paragraph 6 hereof, the number
of shares of Common Stock reserved and available for issuance
pursuant to Stock Retention Awards under the Plan is 100,000. 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 Common
Stock that may be available for such purposes under the Plan 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
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.
9. NON-TRANSFERABILITY. Neither Annual Performance Awards, Stock Retention
Awards, Retained Shares, Restricted Shares, Retained Units, Restricted
Units nor any interest in any one of such awards or shares or units or
benefits may be anticipated, alienated, encumbered, sold, pledged,
assigned, transferred or subjected to any charge or legal process, other
than by will or the laws of descent and distribution, so long as the
Retained and Restricted Shares are held by the Agent or the Retained and
Restricted Units have not been distributed in accordance with the Officer
Deferred Plan, and any sale, pledge, assignment or other attempted transfer
shall be null and void.
10. ADMINISTRATION. The Committee shall have the authority to administer the
Plan; establish policies under the Plan; amend the Plan, subject to the
provisions of paragraph 12; interpret provisions of the Plan; select Plan
Participants and Stock Participants; establish Performance Goals; make
Annual Performance Awards and Stock Retention Awards; or terminate the
Plan, in its sole discretion. The Committee may delegate certain of these
activities and all decisions not required to be exercised by it under
Section 162(m) or Section 16 of the Exchange Act, as it solely determines.
All decisions of the Committee shall be final and binding upon all parties
including the Company, its stockholders, Plan Participants and Stock
Participants.
11. GOVERNING LAW. The Plan shall be construed, administered and governed in
all respects under and by the applicable laws of the State of Delaware.
12. PLAN AMENDMENT AND TERMINATION. The Committee may, in its sole discretion,
amend, suspend or terminate the Plan at any time, with or without advance
notice to Plan Participants, provided that no amendment to the Plan shall
be effective that would increase the maximum amount payable under paragraph
6 to a Plan Participant who is a person referred to in Section 162(m); that
would change the Performance Goal criteria applicable to a Plan Participant
who is a person referred to in Section 162(m) for payment of awards stated
under paragraph 4; or that would modify the requirements as to eligibility
for participation under paragraph 2, unless the stockholders of the Company
shall have approved such change in accordance with the requirements of
Section 162(m). Under no circumstances may the Plan be amended to permit
the Committee to increase an award payment in contravention of the
requirements of paragraph 5. Notwithstanding the foregoing, no amendment,
modification or termination that would affect benefits accrued under this
Plan prior to such amendment, modification or termination may occur after a
Change of Control, as defined in subparagraph 8.f.vi., without the written
consent of a majority of the Plan Participants determined as of the day
before such Change of Control.
13. EFFECTIVE DATE OF THE PLAN AND AMENDMENTS. The Plan first became effective
on November 1, 1995. Any amendment to the Plan shall be effective on the
date established by the Committee, subject to stockholder approval, if
required under the provisions of paragraph 12.
As amended by the Compensation Committee and Board of Directors, to be
effective as of November 1, 1997, subject to stockholder approval.
A-6
- ------------------------------------
THE TORO COMPANY
ANNUAL MEETING
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420
MARCH 18, 1998
3:00 P.M. CENTRAL STANDARD TIME
The Toro Company
[LOGO]
UNLESS YOU INDICATE OTHERWISE, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
BOARD OF DIRECTORS' RECOMMENDATIONS.
(Arrow) PLEASE DETACH HERE (Arrow)
- --------------------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD USING THE ENCLOSED ENVELOPE.
- ---- ----
| |
| |
1. Election of directors: Robert H. Buhrmaster #1 Winslow H. Buxton #2 / / FOR all nominees listed / / WITHHOLD
Robert H. Nassau #3 Christopher A. Twomey #4 below (except as marked AUTHORITY
to the contrary below)
----------------------------------------
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) ----------------------------------------
2. Approval of Selection of Independent Auditors. / / FOR / / AGAINST / / ABSTAIN
3. Approval of Amendment of Annual Management Incentive Plan. / / FOR / / AGAINST / / ABSTAIN
4. To consider and act upon such other matters as may properly
come before the meeting or any adjournments thereof.
Address Change? Mark Box / / I Plan to Attend the Meeting / /
Indicate changes below:
Date
-------------------------------
----------------------------------------
----------------------------------------
Signature(s) in Box
This Proxy Card must be Signed
Exactly as Name Appears Thereon
When shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by president
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
- ---- ----
- --------------------------------------------------------------------------------
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH THIS PROXY IS SOLICITED ON BEHALF OF THE
MINNEAPOLIS, MINNESOTA 55420-1196 BOARD OF DIRECTORS
The undersigned hereby appoints K.B. Melrose and J.L. McIntyre, or either of
them, with full power of substitution to each, as attorneys and proxies to
represent the undersigned at the Annual Meeting of Stockholders of The Toro
company to be held at the corporate offices of The Toro Company, 8111 Lyndale
Avenue South, Bloomington, Minnesota on the 18th day of March, 1998 at 3:00 p.m.
C.S.T. and at any adjournment(s) thereof, and to vote all shares of Common Stock
which the undersigned may be entitled to vote at said meeting as directed below
with respect to the proposals as set forth in the proxy Statement, and in their
discretion upon any other matters that may properly come before said meeting.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES ON
THE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOET IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS EXCEPT THAT SHARES HELD
IN EMPLOYEE BENEFIT PLANS FOR WHICH A PROXY IS NOT RECEIVED WILL BE VOTED BY THE
TRUSTEE IN THE SAME PROPORTION AS VOTES ACTUALLY CAST BY PLAN PARTICIPANTS. THE
TABULATOR CANNOT VOTE YOUR SHARES UNLESS YOU SIGN, DATE AND RETURN THIS PROXY
CARD.
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SEE REVERSE SIDE
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