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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Fiscal Year Ended October 31, 1997.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 1-8649
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420-1196
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $1.00
per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price of the Common Stock on January 16, 1998
as reported by the New York Stock Exchange, was approximately $499,841,000.
The number of shares of Common Stock outstanding as of January 16, 1998 was
12,823,964.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended October 31, 1997 are incorporated by reference into Parts I, II and IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held March 18, 1998 are incorporated by reference into Part
III.
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Part I
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ITEM 1. BUSINESS
INTRODUCTION
The company designs, manufactures and markets consumer and professional turf
maintenance equipment, snow removal products and irrigation systems and provides
landscaping and turf maintenance services. The company produced its first lawn
mower for golf course fairways in 1922 and its first lawn mower for home use in
1939 and has continued to enhance its product lines ever since.
The company emphasizes quality and innovation in its products, manufacturing
and marketing. The company strives to provide well built, dependable
products supported by an extensive service network. The company's
substantial funding of research and development, as well as its acquisition
strategy and its licensing and related agreements, have all contributed to
its new product development efforts. Through these efforts the company also
attempts to be responsive to trends which may affect its target markets, now
and in the future. The company believes that a significant portion of its
revenues in recent years have been attributable to its new and enhanced
products. Examples of recently introduced products include Toro's Contour
Deck for undulating terrain, the Toro-Registered Trademark-Wheel
Horse-Registered Trademark- 5xi garden tractor which completed the redesign
of the entire Toro riding product line and a new low emission snowthrower
engine scheduled for introduction in 1998. Other new products include a new
line of solar-powered and metal low voltage outdoor lighting for landscapes,
a more powerful Toro-Registered Trademark- Super BlowerVac and a redesigned
string trimmer line.
The company has also expanded its product lines and services by making
acquisitions and strategic alliances. See "Recent Developments" below.
The company was incorporated in Minnesota in 1935 as a successor to a
business founded in 1914. It was reincorporated in Delaware in 1983. The
company's executive offices are located at 8111 Lyndale Avenue South,
Bloomington, Minnesota 55420-1196, telephone number (612) 888-8801. Unless
the context indicates otherwise, the terms "company" and "Toro" refer to The
Toro Company and its subsidiaries. The company finances a significant
portion of its receivables through Toro Credit Company ("Toro Credit"), its
wholly-owned finance subsidiary.
OUTDOOR MAINTENANCE EQUIPMENT
The company classifies its operations into one industry segment, outdoor
maintenance equipment. The company continues to be a leader in transforming
advanced technologies into products and services that provide solutions for
landscape and turf care maintenance and beautification demands. Following is
a summary of Toro's product lines:
CONSUMER PRODUCTS
WALK-BEHIND POWER MOWERS. The company has manufactured walk-behind
power mowers for residential use since 1939. Its walk-behind power lawn
mowers are gasoline and electric powered. The company manufactures
numerous models of walk-behind power mowers under its brand names
Toro-Registered Trademark- and Lawn-Boy-Registered Trademark-, including
both four-cycle and two-cycle engine models, battery and electric models.
Models differ as to cutting width, type of starter mechanism, type of
bagging, controls and power sources, and are either self-propelled or
push mowers. Certain of the lawn mowers are backed by the company's
"Guaranteed To Start" program and some Lawn-Boy-Registered
Trademark- models are equipped with a two-cycle engine manufactured by the
company.
RIDING MOWERS AND LAWN AND GARDEN TRACTORS. The company manufactures
riding lawn mowers and lawn and garden tractors under its brand name
Toro-Registered Trademark-Wheel Horse-Registered Trademark- which range
from an eight horsepower, 25 inch deck, rear engine model to a 23
horsepower, front engine, air and liquid cooled, gas and diesel models.
The front engine model is available with a variety of decks and
accessories. Recycler technology is available in select models. Some
models are equipped with hydrostatic transmissions and/or low emission
engines. The company introduced in 1997 the new Toro-Registered
Trademark-Wheel Horse-Registered Trademark- 5xi garden tractor which
completed the redesign of the entire Toro riding product line.
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HOME SOLUTIONS PRODUCTS. The company designs and markets electrical
and gas products under the Toro-Registered Trademark- brand name for
dealers, mass merchandisers and "do-it-yourself" home improvement
markets. These products, which include homeowner-installed, plastic and
metal low voltage and solar lighting, flexible line trimmers and electric
blowers, are intended to require little or no after sales service. Among
recently introduced products include a new line of solar-powered and
metal low voltage outdoor lighting, a more powerful Toro-Registered
Trademark- Super BlowerVac and a redesigned string trimmer line.
SNOW REMOVAL PRODUCTS. The company manufactures and markets
lightweight and larger self-propelled walk-behind snowthrowers and
electric Power Shovel snowthrowers under the Toro-Registered Trademark-
and Lawn-Boy-Registered Trademark- brand names. Single-stage
snowthrowers, developed by the company and first introduced in 1965, are
walk-behind units with a lightweight gasoline engine or electric motor
and the Power Curve-Registered Trademark- snowthrower technology for
general residential use. Two-stage snowthrowers are designed for
relatively large areas with engines ranging from five to 12 horsepower.
Units with eight horsepower and above can be equipped with the Power
Shift-Registered Trademark- snowthrower technology.
PROFESSIONAL TURF PRODUCTS
COMMERCIAL PRODUCTS. Professional turf maintenance equipment marketed
under the Toro-Registered Trademark- brand name is the company's oldest
product line, which began in 1922 with the sale of tractor-pulled reel
mowers to golf courses. Today the company's expanded product line
includes products designed for the large turf areas of schools, parks,
cemeteries, sports fields, plant sites, apartment buildings and townhouse
complexes, as well as golf courses. Management believes that golf courses
will continue to be a significant market for turf maintenance equipment
as new golf course construction continues throughout the world.
Increasing emphasis is being placed on the sports field and landscape
contractor markets.
Products for the golf course include turf sprayer equipment, riding and
walk-behind reel mowers for the putting green, and riding and pull-behind
large reel products for the fairway, rough and trim cutting, turf
aeration and sandtrap/bunker maintenance.
Exmark, one of the company's recent acquisitions, produces mid-sized
walk-behind power mowers and zero-turning-radius riding mowers for
professional contractors.
Other products which service all commercial markets include riding rotary
units with out-front cutting decks ranging from 52 inches to 16 feet
widths of cut, turf sweepers and multipurpose vehicles and attachments
designed for flexibility. Among recently introduced products include the
Toro Contour Deck and a small liquid-cooled riding rotary.
IRRIGATION PRODUCTS. Turf irrigation products marketed under the
Toro-Registered Trademark- and Irritrol-Registered Trademark- Systems
brand names include sprinkler heads and electric and hydraulic control
devices designed to be used in turf irrigation systems for residential,
commercial and golf course use. These products are installed in new
systems and can also be used to replace or retrofit existing systems.
Most of the product line is designed for underground irrigation systems.
Control valves activate the sprinkler heads and controllers typically
activate electric or hydraulic lines to control the valves and sprinkler
heads. The acquisition of the James Hardie Irrigation Group enhanced
Toro's product line for residential and commercial irrigation systems and
provided products for the agricultural micro-irrigation segment,
including drip tape, hose, emitters and other micro-irrigation products.
Recently introduced products include more efficient sprinkler heads and
automatic electronic controllers for residential, commercial and golf
course irrigation systems. Specific introductions in 1997 included the
SitePro-TM- central controller which has made computer technology an easy
and effective way for superintendents to manage the irrigation lifeblood
of a golf course. The company's irrigation products are used in 75 of the
golf courses rated among the top 100 courses in the United States by GOLF
DIGEST.
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See the table entitled "Net Sales By Product Line" under the caption "Results
of Operations" in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 16 of the company's
Annual Report to Stockholders for the fiscal year ended October 31, 1997 for
information regarding revenues in the consumer, commercial and irrigation
product lines, which information is incorporated herein by reference.
INTERNATIONAL OPERATIONS
The company currently distributes its products worldwide with sales and/or
distribution offices in Canada, Belgium, the United Kingdom, Australia,
Singapore, Japan, Italy and Greece.
New product development is primarily pursued in the United States. Products
marketed outside of North America are sold in compliance with local safety
standards. All products shipped to Europe conform to the European Community
Certification standards.
In addition to developing new market-specific products, the International
business is adding customers in new regions. Emerging markets in Eastern
Europe (such as the Czech Republic, Slovakia and Hungary) and in South
America (such as Argentina) have recently been added to the distribution base.
RECENT DEVELOPMENTS
On December 1, 1996 the company acquired James Hardie Irrigation Group
(Hardie) from James Hardie Industries Limited of Australia (JHI Limited).
Hardie is a worldwide leader in the production of irrigation systems to the
commercial landscape market. Hardie manufactures products for all major
segments of the irrigation market, except for the golf market, and sells to
distributors and retailers worldwide. Hardie offers a broad range of
irrigation products and has leading positions in valves and controllers
worldwide. In Australia, Hardie has a leading position in hose, hose-end and
micro-irrigation products. Hardie products are marketed under the
Irritrol-Registered Trademark- Systems brand through Hardie's existing global
distribution network. Toro and Hardie's Lawn Genie-Registered Trademark-
brand for the mass merchant retail market is expected to become a leading
presence in do-it-yourself home irrigation.
Effective November 1, 1997 the company acquired Exmark Manufacturing Company
Incorporated (Exmark), a leading manufacturer of equipment for the
professional landscape contractor industry. Exmark is headquartered in
Beatrice, Nebraska and produces mid-sized walk-behind power mowers and
zero-turning-radius riding mowers for professional contractors. Exmark
employs approximately 280 people in a 164,000 square-foot facility.
In September 1997, the company acquired the manufacturing, sales and
distribution rights to Dingo Digging Systems (Dingo). The Dingo utility
loader is the cornerstone product for the newly established Toro Sitework-TM-
Systems product line. The Dingo is a rugged, compact and powerful piece of
equipment with more than 35 attachments that dramatically increase
productivity. The company will manufacture and sell Dingo landscape products
under the Toro Siteworks-TM- brand name for North and South American markets.
Dingo began distributing its products in North America in 1995 under an
agreement with Dingo Mini Diggers of Australia. These products will be
manufactured at the company's manufacturing facility in Tomah, Wisconsin.
The company also completed several other alliances in key business areas.
Product alliances with Bluebird International and Parker Sweeper Company
contributed to development of the company's landscape contractor business.
The company also formed alliances with Pinehurst Resort, home of the 1999
U.S. Men's Open, and Whitbread-Marriott, a European chain of golfing resorts.
As the official turf maintenance provider to Disney's Wide World of Sports
complex in central Florida, the company's scientists and engineers developed
"tomorrowland" turf solutions for Disney's new complex. The Wide World of
Sports and the Toro Town Green, centerpiece of the complex, opened in 1997
and featured the latest in Toro equipment, irrigation systems and organic
nutrient applications utilizing the company's "fertigation" technology.
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In 1997, the company launched a major initiative to increase the speed,
efficiency and cost effectiveness of its supply chain, including raw material
procurement, customer ordering, manufacturing, distribution and product
delivery. The company focused on reducing costs and realizing synergies and
efficiencies of combined resources. The company transferred valve and
controller production to El Paso, Texas and sprinkler head production to
Riverside, California to take advantage of each plant's expertise. The
company also closed a facility and moved consumer electric product
manufacturing to the El Paso plant and other manufacturing facilities.
New innovations like Toro's Contour Deck for undulating terrain were
developed from the company's longstanding knowledge and understanding of the
golf course superintendent. The Toro-Registered Trademark- Wheel
Horse-Registered Trademark- 5xi garden tractor completed the redesign of the
entire Toro riding product line and received acclaim from national news media
for breakthrough technology. A new, low emission snowthrower engine is
scheduled for 1998 introduction. Other new products include a new line of
solar-powered and metal low voltage outdoor lighting for landscapes, a more
powerful Toro-Registered Trademark- Super BlowerVac, and a redesigned string
trimmer line.
In 1997, the company completed the second year of an enterprise-wide software
system implementation that consolidates and integrates all of the company's
operations. ISO 9000 continues to be a high priority for the company.
Facilities at Riverside, California, Tomah, Wisconsin and Shakopee, Minnesota
were again certified in 1997 and Sardis and Oxford, Mississippi and Windom,
Minnesota are working toward ISO 9000 certification in 1998.
MANUFACTURING
The company's consumer spring and summer products are generally manufactured
in the winter and spring months and its consumer fall and winter products are
generally manufactured in the summer and fall months. The company's
irrigation and commercial products are manufactured throughout the year.
In some areas of its business the company is primarily an assembler while in
others it is a fully integrated manufacturer. Most of the components for the
company's products are commercially available from a number of sources and
the company is generally not dependent on any one supplier. The largest
component costs are generally engines, transmissions and electric motors.
The company purchases most of its engines and motors for consumer and
commercial products from several suppliers. In addition, the company
manufactures two types of two-cycle engines for its consumer products.
Management continues to seek greater efficiencies and improve work processes
throughout the company. Toro's total quality process is focused upon
improving product quality, customer response time and reducing overall
product cost.
TRADEMARKS AND PATENTS
Products manufactured by the company are nationally advertised and sold at the
retail level under the trademarks Toro-Registered Trademark-, Wheel
Horse-Registered Trademark-, Lawn-Boy-Registered Trademark- and
Irritrol-Registered Trademark- Systems, all of which are registered in the
United States and in the principal foreign countries in which the company
markets its products. The company holds patents in the United States and
foreign countries and applies for patents as applicable. Although management
believes patents have value to the company, patent protection does not deter
competitors from attempting to develop similar products. Although patent
protection is considered to be very beneficial, the company is not materially
dependent on any one or more of its patents.
In connection with the acquisition of Hardie, the following brand names were
acquired: Lawn Genie-Registered Trademark-, Irritrol-Registered Trademark-,
Richdel-Registered Trademark-, Pope, Blue Stripe, and Aqua-Traxx. The
company agreed to discontinue use of the name "Hardie" or any similar name
within one year after the acquisition and therefore, Toro will now market
former Hardie brand name products under the Irritrol-Registered Trademark-
brand name. Inventory manufactured prior to that one year may continue to
carry the name "Hardie" or similar name.
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With the recent acquisition of Exmark, the company acquired the Exmark brand
name. The company will also manufacture and sell Dingo landscape products
under the Toro Siteworks-Registered Trademark- brand name for North and South
American markets.
SEASONALITY
Sales of the company's consumer products, which accounted for approximately 43%
of total sales in fiscal 1997, are seasonal with greater sales of consumer
products, excluding snow removal equipment, occurring between February and April
and snow removal equipment between August and January. Opposite seasons in some
global markets somewhat moderate this seasonality in consumer product sales.
Seasonality in irrigation and commercial product sales also exists, but is
tempered because the selling season in west coast and southern states continues
for a longer portion of the year than in northern states. Overall, worldwide
sales levels are highest in the second quarter. Historically, accounts
receivable balances increase between January and March as a result of extended
payment terms made available to the company's customers. Accounts receivable
balances decrease between April and July when payments are made. The seasonal
requirements of the business are financed from operations and with short-term
bank lines of credit.
DISTRIBUTION AND MARKETING
The company markets the majority of its Toro branded products principally
through approximately 40 domestic and 96 foreign distributors and a number of
mass merchandisers worldwide. Toro-Registered Trademark- and
Lawn-Boy-Registered Trademark- consumer products such as walk-behind power
mowers, riding mowers and snowthrowers are sold to distributors for resale to
retail dealers throughout the United States. Home solutions products and
most Lawn-Boy-Registered Trademark- products are sold directly to mass
merchandisers and "do-it-yourself" home improvement retailers. Commercial
and irrigation products are sold to distributors for resale to irrigation
contractors and golf courses. Irrigation products are also sold through
distributors to irrigation dealers and direct to irrigation dealers, mass
merchandisers and "do-it-yourself" home improvement retailers for resale to
contractors, golf courses and end-users. Internationally, consumer products
are sold to distributors for resale to retail dealers and mass merchandisers
outside the United States, principally in Canada and Western Europe. Some
irrigation and consumer products are sold directly to retail dealers in
Canada, Australia and Western Europe.
The company's current marketing strategy is to maintain distinct and separate
brands and brand identification for Toro-Registered Trademark-,
Toro-Registered Trademark- Wheel Horse-Registered Trademark- and
Lawn-Boy-Registered Trademark- products and the recently acquired Hardie and
Exmark products. The product lines included in the acquisition of Hardie
have been branded Irritrol and are distributed through both Toro and non-Toro
irrigation dealers. The Exmark brand is distributed through approximately 25
distributors for resale to retail dealers throughout North America.
The company's distribution systems for the sale of its products are intended
to assure quality of sales and market presence as well as effective
after-market service. The company considers its distribution network to be a
significant competitive asset in marketing Toro-Registered Trademark-,
Toro-Registered Trademark- Wheel Horse-Registered Trademark-,
Lawn-Boy-Registered Trademark-, Irritrol and Exmark products.
The company advertises its products during appropriate seasons throughout the
year on television, radio and in print. Most of the company's advertising
emphasizes its brand names. Advertising is directly paid by the company as
well as through cooperative programs with distributors, dealers and mass
merchants.
BACKLOG OF ORDERS
The approximate backlog of orders believed to be firm at October 31, 1997 and
1996 was as follows:
1997 1996
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Consumer $ 21,729,000 $ 51,373,000
Commercial 38,695,000 55,138,000
Irrigation 8,101,000 4,333,000
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The decline in the consumer product backlog resulted primarily from a
reduction in the overall snow sales for the current season. In addition,
with the increase in sales to mass merchants as some sales have shifted from
dealers to mass merchants, there has been a reduction in order lead time.
The reduction in commercial backlog was caused by a change in the way orders
are taken, from an order covering a three month period to an order covering a
one month period. Irrigation backlog is up due to increased sales from the
Hardie acquisition. The company expects that all of the existing backlog can
be filled in fiscal 1998.
COMPETITION
The principal competitive factors in the company's markets are product
innovation, quality, service and pricing. Management believes the company
offers high quality products with the latest technology and design innovations.
Also, by selling Toro-Registered Trademark-, Toro-Registered Trademark-Wheel
Horse-Registered Trademark-, Lawn-Boy-Registered Trademark- and
Irritrol-Registered Trademark- Systems brand products through a network of
distributors, dealers and mass merchants who provide service, the company offers
competitive service during and after the relevant warranty period.
The company competes in all product lines with numerous manufacturers, many
of which have substantially greater financial resources than the company.
Management believes that its commitment to product innovation, its
distribution systems and its focus on target markets, position it well to
compete in these various markets.
CONSUMER
The company's principal competitors for mowing and snow equipment are
Frigidaire Home Products, Inc. (a subsidiary of Electrolux AB), Deere &
Company, Honda Motor Co., Ltd., MTD Products, Inc., Murray Ohio
Manufacturing Co., Inc. (a subsidiary of Tompkins Corp.), Sears, Roebuck
and Co., Snapper Power Equipment (a division of Metro Media), Ariens
Company, Garden Way, Incorporated and Simplicity Manufacturing Company.
The principal competitors in home solutions products are The Black and
Decker Corporation, Malibu Lighting (a registered trademark of Intermatic,
Inc.), Poulan/Weed Eater and Homelite(a division of Deere & Company).
COMMERCIAL
The company's commercial products compete with products from numerous
manufacturers, but the principal competitors across most of the company's
commercial product lines are Deere & Company, American Honda Motor Co.,
Inc., Echo Inc., Stihl Inc., Scag Power Equipment, Shindaiwa Inc., Snapper
Inc., Gravely International, Lesco Inc., Walker Manufacturing Co., Cub
Cadet Power Equipment, American Yard Products, Husqvarna Forest and Garden
Co., The Ariens Co., MTD Products Inc., Textron Jacobsen and Ransomes Sims
& Jefferies PLC (based in the United Kingdom).
IRRIGATION
The company's principal competitors in irrigation products are Hunter
Industries and Rain Bird Sprinkler Manufacturing Corporation.
INTERNATIONAL
The international market is generally fragmented so that the degree of
competition varies among the different countries in which the company
markets its consumer, commercial and irrigation products. Most competitors
in the irrigation and commercial product lines are based in the United
States. Consumer product lines can face more competition where foreign
competitors manufacture and market competing products in their countries at
a lower cost. In addition, fluctuations in the value of the U.S. dollar
may affect the price of the company's products in such markets, thereby
affecting their competitiveness.
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RESEARCH AND DEVELOPMENT
The company conducts research and development activities in an effort to
improve existing products and develop new products. Amounts expended on such
activities, including engineering costs, aggregated approximately $36.6
million, or 3.5% of net sales for the year ended October 31, 1997, $31.3
million, or 3.4% of net sales for the year ended October 31, 1996, $6.9
million, or 3.6% of net sales for the 3 months ended October 31, 1995 and
$26.5 million, or 2.8% of net sales for the year ended July 31, 1995.
Management believes that the company's research and development efforts are
important to the quality, mix and growth of its businesses and plans to
continue its strong commitment to such activities.
GOVERNMENTAL REGULATION
The company's products are subject to various federal statutes designed to
protect consumers and are subject to the administrative jurisdiction of the
Consumer Product Safety Commission. The company is also subject to certain
federal and state environmental, occupational safety, transportation and
other regulations, none of which has had a material adverse affect on its
operations or business. Management believes the company is in substantial
compliance with all such regulations. The Environmental Protection Agency
(EPA) released Phase I regulations for all gas engines under 25 horsepower in
June of 1995. Toro's four-cycle engine suppliers are currently in compliance
with these regulations. The company received certification in January 1998 on
its own two-cycle walk-behind power mower engines and earlier on the
two-cycle walk-behind power snowthrowers engines. Both now comply with Phase
I regulations. This will allow the company to continue producing its
two-cycle walk-behind power mower engines at its Oxford, Mississippi plant
through the year 2002.
EMPLOYEES
During fiscal 1997 the company employed an average of 3,911 employees. The
total number of employees at October 31, 1997 was 3,908. Approximately 20 %
of these employees are covered by four collective bargaining agreements, one
expiring in May 2000, two expiring in September 2000 and one expiring in
October 1999.
As a result of the acquisition of Hardie, the company added approximately
1,070 employees. Hardie's Australian employees have three local agreements
with the National Union of Workers and the Australian Workers Union which
cover approximately 15% of all Hardie employees. These agreements will
expire in June 2000. None of the Hardie U.S. employees are represented by
unions.
As a result of the acquisition of Exmark, the company added approximately 260
employees, none of which are represented by a union.
Management considers its overall relations with its employees to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
With the exception of the Hardie production facilities in Australia, all of the
company's production facilities are located within the United States. Except
for the sales of the company's foreign subsidiaries, which are not significant
when compared to total company sales, substantially all financial transactions
have been made in U.S. dollars. Consequently, although the Hardie acquisition
has brought an increase in transactions denominated in Australian dollars, the
company did not realize any significant impact to earnings due to fluctuations
in foreign currencies during the fiscal year ended October 31, 1997.
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into foreign currency exchange contracts. These contracts are
designed to hedge firm and anticipated foreign currency transactions.
Export sales were $161,836,000 for the year ended October 31, 1997,
$140,919,000 for the year ended October 31, 1996, $18,557,000 for the 3
months ended October 31, 1995, and $126,560,000 for the year ended July 31
1995. The identifiable assets attributable to foreign operations were not
significant as of October 31, 1997.
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See Notes to the Consolidated Financial Statements of the company contained
in the company's Annual Report to Stockholders for the fiscal year ended
October 31, 1997 for additional information relating to international and
export sales, which information is incorporated herein by reference.
ITEM 2. PROPERTIES
The company utilizes manufacturing and office facilities which total
approximately 4,115,000 square feet of space. The manufacturing facilities,
excluding Hardie, operated at about 57% of total plant capacity in fiscal
1997. Actual plant utilization varies during the year depending upon the
production cycle. In fiscal 1997, the company announced the closing of its
production facility at Mound, Minnesota. Management believes that its
current facilities are sufficient for current production needs. The
following schedule outlines the company's facilities by location, plant size,
ownership and function:
<TABLE>
<CAPTION>
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Location Square Feet Ownership Products Manufactured / Use
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<S> <C> <C> <C>
Plymouth, WI 420,000 Owned Parts distribution center, office
Windom, MN 305,000 Owned Consumer components and products
Lakeville, MN 304,000 Leased Finished Goods distribution center, office
Bloomington, MN 300,000 Owned Corporate headquarters
Tomah, WI 274,000 Owned Consumer and Commercial products
Sardis, MS 245,000 Owned Consumer products and Finished Goods distribution center, office
Baraboo, WI 228,000 Leased Finished Goods distribution center, office
Riverside, CA 217,000 Owned Irrigation and Consumer products
Evansville, IN 178,000 Leased Consumer and Commercial products
Beatrice, NE 164,000 Owned Commercial products, office
Olathe, KS 98,000 Leased Commercial products
Mound, MN 162,000 Leased Plant to be closed and production moved to other manufacturing
plants in fiscal 1998.
Shakopee, MN 146,000 Owned Components for consumer and commercial products
El Paso, TX 143,000 Owned Hardie irrigation products and warehouse
Braeside, Australia 47,000 Leased Hardie irrigation products warehouse
Beverley, Australia 109,000 Owned Hardie Corporate office and distribution center
Murray Bridge, Australia 101,000 Owned Hardie irrigation products and warehouse
El Cajon, California 92,000 Owned Hardie irrigation products and warehouse
Oxford, MS 67,000 Owned Components for consumer products
Oevel, Belgium 63,000 Owned Finished goods distribution center, office
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Total Square Feet 3,663,000
</TABLE>
Other leased office and warehouse space located in various cities in the United
States, Australia, Canada, France, Singapore, Japan and the United Kingdom
totaled approximately 452,000 square feet.
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ITEM 3. LEGAL PROCEEDINGS
The company is a party to litigation in the ordinary course of its business.
Ongoing litigation primarily involves claims for damages arising out of the
use of the company's products, some of which include claims for punitive as
well as compensatory damages. The company is also subject to administrative
proceedings in respect to certain claims involving the discharge of hazardous
substances into the environment. Certain of these claims assert damages and
liability for remedial investigations and clean up costs. Management is of
the opinion that the amounts which may be awarded or assessed in connection
with these matters will not have a material effect on the company's financial
position. Further, the company maintains insurance against product liability
losses. Such insurance presently covers claims in excess of $1,000,000 per
claim or $2,000,000 in the aggregate during any fiscal year. The company
regularly reviews these dollar limits.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None.
10
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The list below identifies those persons deemed to be executive officers of
the company, discloses their age and position with the company as of January
21, 1998 and positions held by them during the last five years. Officers are
elected or appointed annually. A complete list of all officers of the
company is found on the inside back cover of the company's Annual Report to
Stockholders for the year ended October 31, 1997.
Name, Age and Position with Business Experience During the Last Five Years
the Company
- ------------------------------ ----------------------------------------------
Randy B. James Appointed Vice President and Controller in
54, Vice President and December 1988.
Controller
Stephen P. Wolfe Elected Chief Financial Officer May 1997 and
49, Vice President-Finance and Vice President-Finance/Treasurer June 1997.
Chief Financial Officer Appointed Vice President in August 1994.
Elected President, Toro Credit Company in July
1990.
Charles B. Lounsbury Elected Group Vice President September 1996.
55, Group Vice President From November 1993 to September 1996 was
Office of the President appointed Vice President, Distribution Parts
and Debris Management. From May 1991 to
November 1993 was President and Chief
Operating Officer of Leaseway Transportation
Corporation. While Mr. Lounsbury served as
President and a director of Leaseway, it filed
for protection under Chapter 11 and during
that period it was discharged.
J. David McIntosh Elected Group Vice President September 1996.
54, Group Vice President From January 1992 to September 1996 was
Office of the President appointed Vice President and General Manager,
Consumer Division.
J. Lawrence McIntyre Elected Vice President in July 1993. Elected
55, Vice President, Secretary Secretary and General Counsel in August 1993.
and General Counsel Prior to July 1993, was a shareholder with
Doherty, Rumble & Butler Professional
Association.
Kendrick B. Melrose Elected Chairman of the Board in December 1987
57, Chairman and Chief and Chief Executive Officer in December 1983.
Executive Officer
Office of the President
Karen M. Meyer Elected Vice President, Human
48, Vice President, Resources/Administrative Services in December
Human Resources/Administrative 1991.
Services
Richard R. Pollick Appointed Vice President, International
58, Vice President and General Division in March 1990.
Manager
International Division
James H. Beardsley Appointed Vice President and General Manager,
54, Vice President and General Consumer Business June 1997. From October
Manager 1990 to October 1996 was President and Chief
Consumer Business Executive Officer of Master Lock Company.
Michael J. Hoffman Appointed Vice President and General Manager,
42, Vice President and General Commercial Business November 1997. From
Manager November 1996 to November 1997 he served as
Commercial Business General Manager of the Commercial Division.
He served as Managing Director, Recycling
Division from March 1994 to October 1996 and
as Director of Marketing and Service,
Commercial Division from September 1989 to
March 1994.
11
<PAGE>
William J. Miller Appointed Vice President, Operations June
50, Vice President, Operations 1997. From January 1992 to June 1997 he
served as Group Vice President of the
Frigidaire Company in various divisions.
Richard W. Parod Appointed Vice President and General Manager,
44, Vice President and General U.S. Irrigation Business March 1997. From
Manager December 1993 to March 1997 he served as
U.S. Irrigation Business President of James Hardie Irrigation, Inc. and
from September 1993 to December 1993 as Chief
Financial Officer of James Hardie Irrigation,
Inc.
There are no family relationships between any director, executive officer or
person nominated to become a director or executive officer. There are no
arrangements or understandings between any executive officer and any other
person pursuant to which he or she was selected as an officer.
12
<PAGE>
Part II
- -------------------------------------------------------------------------------
All information incorporated by reference in this Part II is from the
Registrant's Annual Report to Stockholders for the fiscal year ended October
31, 1997 ("Annual Report").
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Toro Common Stock (including related Preferred Share Purchase Rights) is
listed for trading on the New York Stock Exchange. As of January 19, 1998
there were 6,564 holders of record of the company's common stock.
See "Quarterly Financial Data" on page 39 of the Annual Report for dividends
paid on and range of high and low sales prices for the company's common stock
on the New York Stock Exchange on a quarterly basis for the period from
November 1, 1995 to October 31, 1997 which information is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
See "Selected Financial Data" on page 23 of the Annual Report for financial
data for the years ended October 31, 1997 and 1996, the 3 month period ended
October 31, 1995 and the years ended July 31, 1995, 1994 and 1993 which
information for these periods is incorporated herein by reference.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Annual Report to Stockholders on
pages 16 through 22 which section is incorporated herein by reference.
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Part I of this Annual Report on Form 10-K and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the company's Annual Report to Stockholders for fiscal 1997 referred to above
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In addition, forward-looking statements may be made orally in the
future by or on behalf of the company.
Statements that are not historical are forward-looking. When used by or on
behalf of the company, the words "expect", "anticipate", "estimate",
"believe", "intend" and similar expressions generally identify
forward-looking statements.
Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a
global market, as well as matters specific to the company and the markets it
serves. Particular risks and uncertainties facing the company at the present
include political and economic uncertainty and instability in many of the
company's markets in Asia; the warm winter being experienced in many of the
company's markets; the strong dollar which increases the cost of the
company's products in foreign markets and limits the company's ability to
increase prices; more cautious buying patterns affecting the company's
consumer business and European sales; increased competition in the company's
businesses; the company's ability to integrate business acquisitions and to
manage alliances successfully; changes in distributor, dealer or mass
merchant purchasing practices; and occasional production delays affecting
selected consumer products.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions
and the economy in general in both foreign and domestic markets; weather
conditions affecting demand, including warm winters and wet spring and summer
weather; lack of growth in the company's markets; financial market changes
including increases in interest rates and fluctuations in foreign exchange
rates; a slowing in housing starts or new golf course starts; inability to
raise prices of products due to market conditions; changes in market
demographics; actions of competitors; unanticipated problems or costs
associated with implementation by the company of computer applications that
will accommodate the Year 2000; the inability of the company's suppliers,
customers, creditors and financial service organizations to implement
computer applications accommodating the Year 2000; the company's ability to
develop, manufacture and sell both new and existing products profitably;
seasonal factors in the company's industry; unforeseen litigation; government
actions including budget levels, regulation and legislation, primarily
legislation relating to the environment, commerce, infrastructure spending
and health and safety; labor relations; and availability of materials.
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements and from historical
results, as a result of the risks and uncertainties described, as well as
others not now anticipated. The foregoing statements are not exclusive and
are in addition to other factors discussed elsewhere in the company's filings
with the Securities and Exchange Commission. The company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made, or to reflect
the occurrence of unanticipated events.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements described in Item 14(a)1 of this report are
incorporated herein by reference.
See "Quarterly Financial Data" appearing on page 39 of the Annual Report to
Stockholders which is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
15
<PAGE>
Part III
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this report for
information regarding the executive officers of the company, which
information is herein incorporated by reference.
Information regarding the directors of the company and additional information
regarding certain executive officers is incorporated herein by reference to
the information to be contained in the company's Proxy Statement to be filed
with the Securities and Exchange Commission with respect to the next meeting
of stockholders which involves the election of directors or, if such Proxy
Statement is not filed within such 120 days after the end of the fiscal year
covered by this Form 10-K, such information will be filed as part of an
amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to the information to be contained in the company's Proxy Statement
to be filed with the Securities and Exchange Commission with respect to the
next meeting of stockholders which involves the election of directors or, if
such Proxy Statement is not filed within such 120 days after the end of the
fiscal year covered by this Form 10-K, such information will be filed as part
of an amendment to this Form 10-K not later than the end of the 120-day
period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and
management of the company is incorporated herein by reference to the
information to be contained in the company's Proxy Statement to be filed with
the Securities and Exchange Commission with respect to the next meeting of
stockholders which involves the election of directors or, if such Proxy
Statement is not filed within such 120 days after the end of the fiscal year
covered by this Form 10-K, such information will be filed as part of an
amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
16
<PAGE>
Part IV
- -------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Incorporated by reference into Part II, Item 8 of Pages in Fiscal
this report: 1997 Annual Report
to Stockholders
---------------
Independent Auditors' Report......................................... 24
Consolidated Statements of Earnings for the years ended
October 31, 1997 and 1996, the 3 months ended October
31, 1995 and the year ended July 31, 1995.......................... 24
Consolidated Balance Sheets
as of October 31, 1997 and 1996.................................... 25
Consolidated Statements of Cash Flows for the
years ended October 31, 1997 and 1996,
the 3 months ended October 31, 1995 and
the year ended July 31, 1995..................................... 26
Notes to Consolidated Financial Statements.......................... 27-39
(a) 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report.
Independent Auditors' Report.................................... 22
Schedule II - Valuation and Qualifying Accounts................. 23
All other schedules are omitted because the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
(a) 3. EXHIBITS
2 and 10(i) Stock Purchase Agreement among The Toro Company, James
Hardie (USA) Inc., James Hardie Industries Limited and
RCI Pty. Ltd. (incorporated by reference to the Exhibit
to Registrant's Current Report on Form 8-K dated
September 18, 1996).
2 and 10(ii) Agreement and Plan of Merger, dated as of October 23,
1997 by and among Exmark, Merger Subsidiary and The
Toro Company, as amended (incorporated by reference to
Exhibit Number 2.1 to Registrant's Registration
Statement on Form S-4, Registration No. 333-39769).
3(i)(a) and 4(a) Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-16125).
17
<PAGE>
3(i)(b) and 4(b) Certificate of Amendment to Certificate of
Incorporation of Registrant dated December 9, 1986
(incorporated by reference to Exhibit 3 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
January 30, 1987, Commission File No. 1-8649).
3(ii) and 4(c) Bylaws of Registrant (incorporated by reference to
Exhibit 3.3 to Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1991, Commission
File No. 1-8649).
4(d) Specimen form of Common Stock certificate (incorporated
by reference to Exhibit 4(c) to Registrant's
Registration Statement on Form S-8, Registration No.
2-94417).
4(e) Rights Agreement dated as of June 14, 1988, between
Registrant and Norwest Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as amended
(incorporated by reference to Exhibit 1 to Registrant's
Registration Statement on Form 8-A dated June 17, 1988
and Exhibit 1 to Registrant's Current Report on Form
8-K dated August 14, 1990, Commission File No. 1-8649).
4(f) Indenture as dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15,
2027 (incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
10(iii)(a) Form of Employment Agreement in effect for certain
officers of Registrant (incorporated by reference to
Exhibit 10(b) to Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1995).*
10(iii)(b) 1992 Directors Stock Plan, as amended (incorporated by
reference to Exhibit 10(iii)(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1996).*
10(iii)(c) Annual Management Incentive Plan for certain key
employees and officers of Registrant (incorporated by
reference to Exhibit B to Registrant's Proxy Statement
dated February 10, 1997).*
10(iii)(d) 1985 Incentive Stock Option Plan, as amended
(incorporated by reference to Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1993).*
10(iii)(e) 1989 Stock Option Plan, as amended.*
10(iii)(f) 1993 Stock Option Plan, as amended.*
10(iii)(g) Continuous Performance Award Plan, as amended
(incorporated by reference to Exhibit 10(iii)(g) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1996).*
10(iii)(h) The Toro Company Supplemental Management Retirement
Plan (incorporated
18
<PAGE>
by reference to Exhibit 10(iii)(h) to Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1996).*
10(iii)(i) Chief Executive Officer Succession Incentive Agreement
dated as of July 31, 1995, as amended.*
11 Computation of Earnings per Share of Common Stock and
Common Stock Equivalent (page 24 of this report).
12 Computation of Ratio of Earnings to Fixed Charges (page
25 of this report).
13 Fiscal 1997 Annual Report to Stockholders for The Toro
Company.
21 Subsidiaries of Registrant (page 26 of this report).
23 Independent Auditors' Consent (page 27 of this report).
27 Supplemental Data Schedule; electronic filing only.
*Management contract or compensatory plan or arrangements
required to be filed as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(c).
19
<PAGE>
(b) REPORTS ON FORM 8-K
None.
- --------------------------------------------------------------------------------
The company's Annual Report on Form 10-K for the fiscal year ended October
31, 1997, at the time of its filing with the Securities and Exchange
Commission, shall modify and supersede all prior documents filed pursuant to
Sections 13, 14 and 15(d) of the 1934 Act for purposes of any offers or sales
of any securities after the date of such filing pursuant to any Registration
Statement or Prospectus filed pursuant to the Securities Act of 1933 which
incorporates by reference such Annual Report on Form 10-K.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE TORO COMPANY
--------------------------------
(Registrant)
Dated: January 21, 1998
/s/ Stephen P. Wolfe
-----------------------
Stephen P. Wolfe
Vice President - Finance
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Signature Title Date
- --------------------------------------------------------------------------------
/s/ Kendrick B. Melrose Chairman, Chief Executive January 21, 1998
- -------------------------- Officer, and Director
Kendrick B. Melrose (principal executive officer)
/s/ Stephen P. Wolfe Vice President - Finance, January 21, 1998
- -------------------------- Chief Financial Officer
Stephen P. Wolfe (principal financial officer)
/s/ Randy B. James Vice President, Controller January 21, 1998
- -------------------------- (principal accounting officer)
Randy B. James
/s/ Ronald O. Baukol Director January 21, 1998
- --------------------------
Ronald O. Baukol
/s/ Robert C. Buhrmaster Director January 21, 1998
- --------------------------
Robert C. Buhrmaster
/s/ Janet K. Cooper Director January 21, 1998
- --------------------------
Janet K. Cooper
/s/ Alex A. Meyer Director January 21, 1998
- --------------------------
Alex A. Meyer
/s/ Robert H. Nassau Director January 21, 1998
- --------------------------
Robert H. Nassau
/s/ Dale R. Olseth Director January 21, 1998
- --------------------------
Dale R. Olseth
/s/ Edwin H. Wingate Director January 21, 1998
- --------------------------
Edwin H. Wingate
21
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Toro Company:
Under the date of December 12, 1997, we reported on the consolidated balance
sheets of The Toro Company and subsidiaries (the Company) as of October 31,
1997 and 1996, and the related consolidated statements of earnings and cash
flows for the years ended October 31, 1997 and 1996, the three-month period
ended October 31, 1995 and the year ended July 31, 1995, as contained in the
1997 annual report to stockholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the fiscal year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedule listed in the accompanying
index. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 12, 1997
22
[LOGO]
<PAGE>
Schedule II
THE TORO COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED TO
DESCRIPTION AT BEGINNING COSTS AND OTHER (a) DEDUCTIONS (b) BALANCE AT END
OF YEAR EXPENSES OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1997
Allowance for doubtful accounts $10,005,000 $ 812,000 $ (425,000) $ 560,000 $ 9,832,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996
Allowance for doubtful accounts $ 7,542,000 $ 3,358,000 $ 330,000 $ 1,225,000 $ 10,005,000
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31, 1995
Allowance for doubtful accounts $ 7,343,000 $ 720,000 $ 0 $ 521,000 $ 7,542,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1995
Allowance for doubtful accounts $ 7,702,000 $ 1,543,000 $ 20,000 $ 1,922,000 $ 7,343,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additions to allowance for doubtful accounts due to
acquisitions and reductions due to reclassification.
(b) Uncollectible accounts charged off, net of recoveries.
23
<PAGE>
THE TORO COMPANY
1989 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1989 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the
Company and its subsidiaries and to certain other key individuals who
perform services for the Company and its subsidiaries, to contribute
significantly to the strategic and long-term performance objectives and
growth of the Company and its subsidiaries. This purpose is expected to be
achieved by granting options to acquire the Common Stock, $1.00 par value,
and related preferred share purchase rights of the Company (the "Common
Stock"). Subject to the provisions of the Plan, options may contain such
terms and conditions as shall be required so as to be either nonqualified
stock options ("nonqualified options") or incentive stock options
("Incentive Stock Options") as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Subject to such limits as
may be imposed by the Plan, nonqualified options or Incentive Stock Options
or both may be granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 8, 1989.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule
and shall qualify to administer the Plan as contemplated by Section 162(m)
of the Code and the regulations thereunder ("Section 162(m)"). A majority
of the members of the Committee shall constitute a quorum for any meeting
of the Committee and the acts of a majority of the members present at any
meeting at which a quorum is present or the acts unanimously approved in
writing by all members of the Committee shall be the acts of the Committee.
The decision of the Committee on any matter affecting the Plan and
obligations arising under the Plan or any option granted thereunder shall
be deemed final and binding upon all persons. No member of the Board or
of the Committee shall be liable for any action or determination taken or
made in good faith with respect to the Plan or any option granted
thereunder. Committee members shall be reimbursed for out-of-pocket
expenses reasonably incurred in the administration of the Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the exercise price of each option to purchase Common Stock, the individuals
to whom and the time or times at which options shall be granted, the number
of shares to be subject to each option, when an option may be exercisable
and the other terms and provisions (and amendments thereto) of the
respective option agreements (which need not be identical); to determine
whether a particular option is to be an Incentive Stock Option and the
terms and provisions thereof that shall be required in the judgment of the
Committee to provide therefor or to conform to any change in any law or
regulation applicable thereto, or to any other law or regulation that may
hereafter become effective to provide similar or related tax benefits to
option holders; and to make all other determinations deemed necessary or
advisable for the administration of the Plan.
<PAGE>
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
this paragraph and subject to increase by amendment of the Plan, the
total number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,700,000
shares. If any option granted hereunder terminates, expires unexercised,
is exchanged for other options without the issuance of shares of Common
Stock or is exercised by the delivery or constructive delivery of shares
of Common Stock already owned by the option holder, the shares of Common
Stock reserved for issuance pursuant to such option shall, to the extent
of any such termination or to the extent shares covered by an option are
not issued or used, again be available for option grants under the Plan.
Any shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not
reduce the shares available for option grants under the Plan. Shares of
Common Stock that may be issued hereunder may be authorized but unissued
shares, reacquired or treasury shares, or outstanding shares acquired in
the market or from private sources, or a combination thereof. Appropriate
adjustments in the number of shares of the Common Stock that may be
available for option grants under the Plan and adjustments in the option
price per share of outstanding options may be made by the Committee in its
discretion to give effect to adjustments made in the number of shares of
Common Stock of the Company through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or other similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or
any subsidiary thereof who is regularly employed in an executive,
managerial, professional or technical position, and to any other
individual who performs services for the Company or any subsidiary and
who contributes significantly to the strategic and long-term performance
objectives of the Company and its subsidiaries. Options may be granted
to directors of the Company who are also employees of the Company. More
than one option may be granted to the same individual. No option may be
granted to an individual who owns, directly or indirectly, Common Stock
or other capital stock of the Company possessing more than 5% of the
total combined voting power or value of any class of capital stock of
the Company or a subsidiary immediately after such option is granted.
Except for the foregoing limitations, there is no minimum or maximum
number of shares of Common Stock with respect to which options may be
granted to any individual under the Plan. Individuals to whom options
are granted are at times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under
the Plan must be granted within ten years from the effective date of the
Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall
contain in substance the following terms and conditions:
2
<PAGE>
A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or
any later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number
of shares that may be covered by any option grant during any
calendar year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at fair market value, except for performance based stock
options, such as those granted in connection with the Continuous
Performance Award Plan, where the exercise price is an average and
on the date of grant could be higher or lower than fair market
value. Fair market value is generally determined to be the closing
price for the Common Stock on the New York Stock Exchange as
reported by The Wall Street Journal or other readily available
quotation of composite transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant
of an option during which the option or any portion thereof
may not yet be exercisable, including provisions applicable to
persons subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of
the Company or otherwise performing services for the Company
or a parent or subsidiary and only if the option holder has
been continuously so employed or engaged since the date such
options were granted; provided, however, that (a) in the event
of disability of an option holder, options may be exercised by
such individual not later than the earlier of the date the
option expires or one year after the date such employment or
performance of services ceases by reason of disability, but
only with respect to an option exercisable at the time such
employment or performance of services ceases and (b) options
may be exercised (I) by an option holder after such individual
ceases to be an employee (for reasons other than disability or
retirement at or after age 60) up to three months after the
day of termination of employment but not later than the date
the option expires, (II) by reason of retirement, either at or
after age 60 but not later than the earlier of the date the
option expires or four years after the date of retirement, or,
if approved by the Committee, after retirement at an age less
than age 60 but not later than the earlier of the date the
option expires or three years after the date of retirement;
and (III) in the event a salary replacement option is granted
by the Committee and the option holder is involuntarily
terminated during the option term or becomes disabled or dies,
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the Committee shall have the right to grant to the option
holder or his personal representative, as the case may be, the
right to request either (1) that the option be cancelled and
the option holder or his estate be paid an amount equal to the
compensation the option holder has given up from the date of
grant to the date of such termination, disability or death
together with interest at the prime rate less the then market
gain on that portion of the shares covered by the option which
is then vested; or (2) that the stock option accelerates such
that the option be deemed to have vested at an appropriate
rate per month (as determined by the Committee) from the date
of grant to the last date of the month in which the date of
termination, disability or death occurs, such accelerated
option to be then exercisable for a period of three years
following such date but only with respect to an option
exercisable at the time such individual ceases to be an
employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if within
one year after the termination of employment with or
performance of services for the Company, an option holder is
employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by such individual and
demand return of the economic value of any option which was
realized or obtained (measured at the date of exercise) by
such individual at any time during the period beginning on the
date which is twelve months prior to the date of termination.
(iv) Absence on leave or any other interruption in the performance
of services by an option holder with the Company shall, if
approved by the Committee, not be deemed a cessation or
interruption of employment or services for the purposes of the
Plan.
(v) No option shall be assignable or transferable by the
individual to whom it is granted except that it may be
transferable by will or the laws of descent and distribution.
An option so transferred may be exercised after the death of
the individual to whom it is granted only by such individual's
legal representatives, heirs or legatees, not later than the
earlier of the date the option expires or one year after the
date of death of such individual, and only with respect to an
option exercisable at the time of death.
(vi) In no event shall any option be exercisable at any time after
its expiration date unless extended by the Committee. When an
option is no longer exercisable, it shall be deemed to have
lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the
Plan and the terms and conditions of the option agreement, an
option may be exercised in whole at any time or in part from time
to time, by delivery to the Company at its principal office of a
written notice of exercise specifying the number of shares with
respect to which the option is being exercised, accompanied by
payment in full of the exercise price for shares to be purchased at
that time. Payment may be made (i) in cash,
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(ii) in shares of Common Stock valued at the fair market value of
the Common Stock on the date of exercise or (iii) in a combination
of cash and Common Stock. The Committee may also, in its sole
discretion, permit option holders to deliver a notice of exercise
of options and to simultaneously sell the shares of Common Stock
thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by proper officers of the Company, using the
proceeds from such sale as payment of the exercise price, or may
authorize such other methods as it deems appropriate and as comply
with requirements of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment
therefor has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of
the Committee, include the right to acquire an accelerated
ownership nonqualified stock option ("AO Option"). An option which
provides for the grant of an AO Option shall entitle the option
holder, upon exercise of that option and payment of the appropriate
exercise price in shares of Common Stock that have been owned by
such option holder for not less than six months prior to the date
of exercise, to receive an AO Option. An AO Option is an option to
purchase, at fair market value at the date of grant of the AO
Option, a number of shares of Common Stock equal to the sum of the
number of whole shares delivered by the option holder in payment of
the exercise price of the original option and the number of whole
shares, if any, withheld by the Company as payment for withholding
taxes. An AO Option shall expire on the same date that the original
option would have expired had it not been exercised. All AO Options
shall be nonqualified options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not
approved by the Board of Directors, all options shall fully vest,
unless otherwise limited by the Committee at the time of the option
grant, and be exercisable in their entirety immediately, and
notwithstanding any other provisions of the Plan, shall continue to
be exercisable for three years following the later of the
threatened or actual Change of Control, but not later than ten
years after the date of grant. A Change of Control means the
earliest to occur of (i) a public announcement that a party shall
have acquired or obtained the right to acquire beneficial ownership
of 20% or more of the outstanding shares of Common Stock of the
Company, (ii) the commencement or announcement of an intention to
make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a party of 30% or more
of the outstanding shares of Common Stock of the Company or (iii)
the occurrence of a tender offer, exchange offer, merger,
consolidation, sale of assets or contested election or any
combination thereof, that causes (or would cause) the persons who
were directors of the Company immediately before such Change of
Control to cease to constitute a majority of the Board of Directors
of the Company or any parent of or successor to the Company.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of
outstanding options in the event of a merger,
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consolidation, reorganization or liquidation of the Company or the
acquisition of stock or assets of the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as a
stockholder with respect to any Common Stock covered by an option
until exercise of such option and issuance of shares of Common
Stock. Except as otherwise expressly provided in the Plan, no
adjustments shall be made for dividends or other rights for which
the record date is prior to issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the
requirement that, if at any time the Board shall determine in its
discretion that the listing, registration or qualification of the
Common Stock subject to such option on any securities exchange or
under any state or federal law, or the consent or approval of any
government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or
the issue or purchase of Common Stock thereunder, such option may
not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the
Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be granted
to individuals who are foreign nationals or are employed or
otherwise performing services for the Company or any subsidiary
outside the United States or both, on such terms and conditions
different from those specified in the Plan as may, in the judgment
of the Committee, be necessary or desirable to further the purpose
of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet
the applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the
time such options are granted; that other options shall not meet such
requirements and shall be nonqualified stock options; and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent. The Committee may grant one or more options of either type,
or of both types, to any one or more individuals either at different
times or concurrently. Such options shall be subject to the terms and
conditions set forth elsewhere in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option
shall meet the requirements of Section 422 of the Code. Any
Incentive Stock Option shall be treated as "outstanding" until it
is exercised in full or expires by reason of lapse of time. To the
extent that the aggregate fair market value of Common Stock
(determined at the time of grant of the Incentive Stock Option in
accordance with paragraph 7.C of the Plan) with respect to which
Incentive Stock Options are exercisable for the first time by an
option holder during any calendar year (under all such plans of the
Company and its parent and subsidiary corporations) exceeds
$100,000 or such other limit as may be imposed by the Code, such
options to the extent they exceed such limit shall be treated as
options which are not Incentive
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<PAGE>
Stock Options. In applying the foregoing limitation, options shall
be taken into account in the order in which they were granted.
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount
of nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or
the sale of shares of Common Stock, any federal, state or local taxes of
any kind required by law to be withheld with respect to such payments or
to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Stock is withheld or surrendered to satisfy tax withholding, such
stock shall be valued at its fair market value as of the date such
Common Stock is withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or
discontinued in whole or in part at any time and from time to time by
the Board, including an amendment to increase the number of shares of
Common Stock with respect to which options may be granted, provided
however that no amendment shall be effective unless and until the same
is approved by stockholders of the Company where the failure to obtain
such approval would adversely affect the availability of any exemption
under Rule 16b-3 under the Exchange Act or successor rule and with other
applicable law, including the Code. No amendment of the Plan shall
adversely affect in a material manner any right of any option holder
with respect to any option theretofore granted without such option
holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
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THE TORO COMPANY
1993 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1993 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the
Company and its subsidiaries and to certain other key individuals who
perform services for the Company and its subsidiaries, to contribute
significantly to the strategic and long-term performance objectives and
growth of the Company and its subsidiaries. This purpose is expected to
be achieved by granting options to acquire the Common Stock, $1.00 par
value, and related preferred share purchase rights of the Company (the
"Common Stock"). Subject to the provisions of the Plan, options may
contain such terms and conditions as shall be required so as to be either
nonqualified stock options ("nonqualified options") or incentive stock
options ("Incentive Stock Options") as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to such
limits as may be imposed by the Plan, nonqualified options or Incentive
Stock Options or both may be granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 17, 1993.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") or any successor
rule and shall qualify to administer the Plan as contemplated by Section
162(m) of the Code and the regulations thereunder ("Section 162(m)"). A
majority of the members of the Committee shall constitute a quorum for
any meeting of the Committee and the acts of a majority of the members
present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be
the acts of the Committee. The decision of the Committee on any matter
affecting the Plan and obligations arising under the Plan or any option
granted thereunder shall be deemed final and binding upon all persons. No
member of the Board or of the Committee shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any
option granted thereunder. Committee members shall be reimbursed for
out-of-pocket expenses reasonably incurred in the administration of the
Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan;
to determine the exercise price of each option to purchase Common Stock,
the individuals to whom and the time or times at which options shall be
granted, the number of shares to be subject to each option, when an
option may be exercisable and the other terms and provisions (and
amendments thereto) of the respective option agreements (which need not
be identical); to determine whether a particular option is to be an
Incentive Stock Option and the terms and provisions thereof that shall be
required in the judgment of the Committee to provide therefor or to
conform to any change in any law or regulation applicable thereto, or to
any other law or regulation that may hereafter become effective to
provide similar or related tax benefits to option holders; and to make
all other determinations deemed necessary or advisable for the
administration of the Plan.
<PAGE>
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
this paragraph and subject to increase by amendment of the Plan, the
total number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,600,000
shares. If any option granted hereunder terminates, expires unexercised,
is exchanged for other options without the issuance of shares of Common
Stock or is exercised by the delivery or constructive delivery of shares
of Common Stock already owned by the option holder, the shares of Common
Stock reserved for issuance pursuant to such option shall, to the extent
of any such termination or to the extent shares covered by an option are
not issued or used, again be available for option grants under the Plan.
Any shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall
not reduce the shares available for option grants under the Plan. Shares
of Common Stock that may be issued hereunder may be authorized but
unissued shares, reacquired or treasury shares, or outstanding shares
acquired in the market or from private sources, or a combination thereof.
Appropriate adjustments in the number of shares of the Common Stock that
may be available for option grants under the Plan and adjustments in the
option price per share of outstanding options may be made by the
Committee in its discretion to give effect to adjustments made in the
number of shares of Common Stock of the Company through any merger,
consolidation, recapitalization, reclassification, combination, stock
dividend, stock split or other similar change in the corporate structure
of the Company affecting the Common Stock, or a sale by the Company of
all or part of its assets or any distribution to stockholders other than
a normal cash dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of
the Company and its subsidiaries. Options may be granted to directors of
the Company who are also employees of the Company. More than one option
may be granted to the same individual. No option may be granted to an
individual who owns, directly or indirectly, Common Stock or other
capital stock of the Company possessing more than 5% of the total
combined voting power or value of any class of capital stock of the
Company or a subsidiary immediately after such option is granted. Except
for the foregoing limitations, there is no minimum or maximum number of
shares of Common Stock with respect to which options may be granted to
any individual under the Plan. Individuals to whom options are granted
are at times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under
the Plan must be granted within ten years from the effective date of the
Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain
in substance the following terms and conditions:
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A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or any
later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number of
shares that may be covered by any option grant during any calendar year
shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be granted
at fair market value, except for performance based stock options, such
as those granted in connection with the Continuous Performance Award
Plan, where the exercise price is an average and on the date of grant
could be higher or lower than fair market value. Fair market value is
generally determined to be the closing price for the Common Stock on the
New York Stock Exchange as reported by The Wall Street Journal or other
readily available quotation of composite transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant of
an option during which the option or any portion thereof may not
yet be exercisable, including provisions applicable to persons
subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of the
Company or otherwise performing services for the Company or a
parent or subsidiary and only if the option holder has been
continuously so employed or engaged since the date such options
were granted; provided, however, that (a) in the event of
disability of an option holder, options may be exercised by such
individual not later than the earlier of the date the option
expires or one year after the date such employment or performance
of services ceases by reason of disability, but only with respect
to an option exercisable at the time such employment or
performance of services ceases and (b) options may be exercised
(I) by an option holder after such individual ceases to be an
employee (for reasons other than disability or retirement at or
after age 60) up to three months after the day of termination of
employment but not later than the date the option expires, (II)
by reason of retirement, either at or after age 60 but not later
than the earlier of the date the option expires or four years
after the date of retirement, or, if approved by the Committee,
after retirement at an age less than age 60 but not later than
the earlier of the date the option expires or three years after
the date of retirement; and (III) in the event a salary
replacement option is granted by the Committee and the option
holder is involuntarily terminated during the option term or
becomes disabled or dies,
3
<PAGE>
the Committee shall have the right to grant to the option holder
or his personal representative, as the case may be, the right to
request either (1) that the option be cancelled and the option
holder or his estate be paid an amount equal to the compensation
the option holder has given up from the date of grant to the date
of such termination, disability or death together with interest
at the prime rate less the then market gain on that portion of
the shares covered by the option which is then vested; or (2)
that the stock option accelerates such that the option be deemed
to have vested at an appropriate rate per month (as determined by
the Committee) from the date of grant to the last date of the
month in which the date of termination, disability or death
occurs, such accelerated option to be then exercisable for a
period of three years following such date but only with respect
to an option exercisable at the time such individual ceases to be
an employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if within
one year after the termination of employment with or performance
of services for the Company, an option holder is employed or
retained by a company that competes with the business of the
Company or such individual violates any confidentiality agreement
with the Company, the Company may cancel and rescind all options
held by such individual and demand return of the economic value
of any option which was realized or obtained (measured at the
date of exercise) by such individual at any time during the
period beginning on the date which is twelve months prior to the
date of termination.
(iv) Absence on leave or any other interruption in the performance of
services by an option holder with the Company shall, if approved
by the Committee, not be deemed a cessation or interruption of
employment or services for the purposes of the Plan.
(v) No option shall be assignable or transferable by the individual
to whom it is granted except that it may be transferable by will
or the laws of descent and distribution. An option so transferred
may be exercised after the death of the individual to whom it is
granted only by such individual's legal representatives, heirs or
legatees, not later than the earlier of the date the option
expires or one year after the date of death of such individual,
and only with respect to an option exercisable at the time of
death.
(vi) In no event shall any option be exercisable at any time after its
expiration date unless extended by the Committee. When an option
is no longer exercisable, it shall be deemed to have lapsed or
terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the Plan
and the terms and conditions of the option agreement, an option may
be exercised in whole at any time or in part from time to time, by
delivery to the Company at its principal office of a written notice
of exercise specifying the number of shares with respect to which the
option is being exercised, accompanied by payment in full of the
exercise price for shares to be purchased at that time. Payment may
be made (i) in cash,
4
<PAGE>
(ii) in shares of Common Stock valued at the fair market value of the
Common Stock on the date of exercise or (iii) in a combination of
cash and Common Stock. The Committee may also, in its sole
discretion, permit option holders to deliver a notice of exercise of
options and to simultaneously sell the shares of Common Stock thereby
acquired pursuant to a brokerage or similar arrangement approved in
advance by proper officers of the Company, using the proceeds from
such sale as payment of the exercise price, or may authorize such
other methods as it deems appropriate and as comply with requirements
of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment therefor
has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of
the Committee, include the right to acquire an accelerated ownership
nonqualified stock option ("AO Option"). An option which provides for
the grant of an AO Option shall entitle the option holder, upon
exercise of that option and payment of the appropriate exercise price
in shares of Common Stock that have been owned by such option holder
for not less than six months prior to the date of exercise, to
receive an AO Option. An AO Option is an option to purchase, at fair
market value at the date of grant of the AO Option, a number of
shares of Common Stock equal to the sum of the number of whole shares
delivered by the option holder in payment of the exercise price of
the original option and the number of whole shares, if any, withheld
by the Company as payment for withholding taxes. An AO Option shall
expire on the same date that the original option would have expired
had it not been exercised. All AO Options shall be nonqualified
options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not
approved by the Board of Directors, all options shall fully vest,
unless otherwise limited by the Committee at the time of the option
grant, and be exercisable in their entirety immediately, and
notwithstanding any other provisions of the Plan, shall continue to
be exercisable for three years following the later of the threatened
or actual Change of Control, but not later than ten years after the
date of grant. A Change of Control means the earliest to occur of (i)
a public announcement that a party shall have acquired or obtained
the right to acquire beneficial ownership of 20% or more of the
outstanding shares of Common Stock of the Company, (ii) the
commencement or announcement of an intention to make a tender offer
or exchange offer, the consummation of which would result in the
beneficial ownership by a party of 30% or more of the outstanding
shares of Common Stock of the Company or (iii) the occurrence of a
tender offer, exchange offer, merger, consolidation, sale of assets
or contested election or any combination thereof, that causes (or
would cause) the persons who were directors of the Company
immediately before such Change of Control to cease to constitute a
majority of the Board of Directors of the Company or any parent of or
successor to the Company.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of outstanding
options in the event of a merger,
5
<PAGE>
consolidation, reorganization or liquidation of the Company or the
acquisition of stock or assets of the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as a
stockholder with respect to any Common Stock covered by an option
until exercise of such option and issuance of shares of Common Stock.
Except as otherwise expressly provided in the Plan, no adjustments
shall be made for dividends or other rights for which the record date
is prior to issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the requirement
that, if at any time the Board shall determine in its discretion that
the listing, registration or qualification of the Common Stock
subject to such option on any securities exchange or under any state
or federal law, or the consent or approval of any government
regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such option or the issue or purchase
of Common Stock thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent
or approval shall have been effected or obtained free of any
conditions not acceptable to the Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be granted
to individuals who are foreign nationals or are employed or otherwise
performing services for the Company or any subsidiary outside the
United States or both, on such terms and conditions different from
those specified in the Plan as may, in the judgment of the Committee,
be necessary or desirable to further the purpose of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet
the applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the
time such options are granted; that other options shall not meet such
requirements and shall be nonqualified stock options; and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent. The Committee may grant one or more options of either type,
or of both types, to any one or more individuals either at different
times or concurrently. Such options shall be subject to the terms and
conditions set forth elsewhere in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option shall
meet the requirements of Section 422 of the Code. Any Incentive Stock
Option shall be treated as "outstanding" until it is exercised in
full or expires by reason of lapse of time. To the extent that the
aggregate fair market value of Common Stock (determined at the time
of grant of the Incentive Stock Option in accordance with paragraph
7.C of the Plan) with respect to which Incentive Stock Options are
exercisable for the first time by an option holder during any
calendar year (under all such plans of the Company and its parent and
subsidiary corporations) exceeds $100,000 or such other limit as may
be imposed by the Code, such options to the extent they exceed such
limit shall be treated as options which are not Incentive Stock
Options. In applying the foregoing limitation, options shall be taken
into account in the order in which they were granted.
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<PAGE>
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount of
nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or
the sale of shares of Common Stock, any federal, state or local taxes of
any kind required by law to be withheld with respect to such payments or
to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Stock is withheld or surrendered to satisfy tax withholding, such
stock shall be valued at its fair market value as of the date such Common
Stock is withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or discontinued
in whole or in part at any time and from time to time by the Board,
including an amendment to increase the number of shares of Common Stock
with respect to which options may be granted, provided however that no
amendment shall be effective unless and until the same is approved by
stockholders of the Company where the failure to obtain such approval
would adversely affect the availability of any exemption under Rule 16b-3
under the Exchange Act or successor rule and with other applicable law,
including the Code. No amendment of the Plan shall adversely affect in a
material manner any right of any option holder with respect to any option
theretofore granted without such option holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
7
<PAGE>
ADDENDUM
DATED AS OF JULY 31, 1997
TO
THE TORO COMPANY
CHIEF EXECUTIVE OFFICER INCENTIVE AWARD AGREEMENT
ADDENDUM ("Addendum") dated as of July 31, 1997, by and between The Toro
Company, a Delaware corporation (the "Company"), and Kendrick B. Melrose, its
Chief Executive Officer ("Mr. Melrose"), to The Toro Company Chief Executive
Officer Incentive Award Agreement dated as of July 31, 1995 (the "Agreement").
1. The section of the Agreement identified as Section 2. Terms, Conditions and
Restrictions is hereby renumbered to become Section 3, in order to
eliminate duplicate numbering, and each reference to Section 2 or to a
subsection of Section 2 throughout the Agreement shall be revised to be a
reference to Section 3, and each reference to Section 1 or to a subsection
of Section 1 throughout the Agreement shall be revised to be a reference to
Section 2.
2. Section 3.a.i.(A) of the Agreement, as renumbered, be and hereby is amended
in connection with the schedule for achievement of each Performance Goal,
as follows:
(a) The deadline for achievement of Goal 2 shall be changed from July 31,
1999, to October 31, 2000; and
(b) The deadline for achievement of Goal 3 shall be changed from July 31,
2000, to October 31, 2003.
3. A new Section 3.a.i.(D) shall be added to the Agreement, as follows:
(D) The terms of this Agreement are not intended to, and do not, impose
on Mr. Melrose a mandatory retirement date not otherwise applicable
to employees of the Company generally, and Mr. Melrose shall not be
obligated to retire as an officer of the Company in order to obtain
the benefits of this Agreement.
4. Except as provided in this Addendum, all other terms and provisions of the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Addendum to the Agreement has been executed and
delivered by the Company of the date first above set forth.
THE TORO COMPANY
By /s/ J. Lawrence McIntyre
------------------------------------
Vice President and Secretary
<PAGE>
I hereby agree to the terms and conditions of the Agreement, as amended by
this Addendum, which together memorialize the terms and conditions of the
Restricted Stock and Performance Unit Award grant made to me as of July 31,
1995, and approved by stockholders of the Company at the 1994 Annual Meeting of
Stockholders and amended by the Compensation Committee and Board of Directors in
July, 1997.
By /s/ Kendrick B. Melrose
------------------------------------
Chairman, CEO and President
<PAGE>
CHIEF EXECUTIVE OFFICER SUCCESSION PLAN
1. PURPOSE. The purpose of this Chief Executive Officer Succession Plan (the
"Plan") is to assist The Toro Company (the "Company") in preparing for
succession in the management of the Company at the retirement of Kendrick B.
Melrose, Chairman and Chief Executive Officer of the Company ("Mr. Melrose"); to
encourage Mr. Melrose to assure the identification, development and readiness of
his successor prior to his retirement, subject to such successor's approval by
the Board of Directors; and to discourage Mr. Melrose from seeking employment
with, consulting for or serving on the board of directors of any competitor of
the Company.
2. EFFECTIVE DATE. The Plan was adopted by the Board of Directors on October
18, 1994, and became effective on July 31, 1995, following approval by the
holders of the Common Stock, par value $1.00 per share, of the Company (the
"Common Stock") at the 1994 Annual Meeting of Stockholders.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company ("the Committee"), which
shall be comprised of not fewer than two members of the Board of Directors of
the Company who shall meet the requirements for service pursuant to Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Section 162(m) under the Internal Revenue Code of 1986, as amended (the "Code"),
and the rules, regulations and interpretations thereunder. The Committee shall
have the authority to interpret the Plan; to prescribe, amend and rescind the
rules and regulations relating to it, and to make all other determinations
deemed necessary or advisable for the administration of the Plan. Such
determinations shall be conclusive.
4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 5.a. and
Section 6.e.ii, the maximum aggregate number of shares of Common Stock that may
be awarded as Restricted Stock under the Plan shall be 23,960. Such shares may
be in whole or in part authorized but unissued shares of Common Stock or shares
of Common Stock previously issued and outstanding and reacquired by the Company.
5. AWARD. The Company shall have the authority to enter into an agreement
with Mr. Melrose, to become effective as of July 31, 1995, embodying the terms
and conditions of this Plan, pursuant to which Mr. Melrose shall be granted an
award comprised of the components set forth in Sections 5.a. through 5.c. Mr.
Melrose shall not have any rights with respect to the award authorized under
this Plan until and unless he shall have executed an agreement or other
instrument evidencing the award and containing the terms and conditions set
forth in this Plan and shall have delivered a fully executed copy thereof to the
Company, and otherwise complied with the then applicable terms and conditions.
a. GRANT OF RESTRICTED STOCK. The Company shall grant to Mr. Melrose on
July 31, 1995 the number of whole shares of Common Stock having an aggregate
fair market value
<PAGE>
of $500,000 on such date of grant (the "Restricted Stock"), subject to
forfeiture or reduction of the number of shares in the event performance
goals set forth in Section 6 (the "Performance Goals") are not achieved and
to the other terms and conditions of the Plan; provided however that in the
event the fair market value of the Common Stock on the date of vesting of the
Restricted Stock is less than the fair market value on July 31, 1995, the
Company shall make an aggregate payment to Mr. Melrose of the difference
between the fair market value on the date of vesting of the Restricted Stock
and the fair market value on July 31, 1995. Fair market value shall mean the
closing price of the Common Stock on the New York Stock Exchange as reported
in THE WALL STREET JOURNAL.
b. GRANT OF PERFORMANCE UNITS AND ANNUITY PURCHASE. Subject to the terms
and conditions of this Plan, the Company shall grant to Mr. Melrose on July 31,
1995, performance units equal to the number of whole shares of Common Stock
having an aggregate fair market value of $500,000 on such date of grant (the
"Performance Units"), subject to forfeiture or reduction in the event the
Performance Goals set forth in Section 6 are not achieved and to the other terms
and conditions of the Plan. Each Performance Unit shall have a value equal to
the fair market value of one share of Common Stock, from time to time, provided
however that the value shall not be less than the fair market value of one share
of Common Stock on July 31, 1995. Performance Units shall be evidenced by the
agreement to be entered into between Mr. Melrose and the Company pursuant to the
preamble to this Section 5. An amount equal to the aggregate value of the
Performance Units remaining at the date of Mr. Melrose's retirement, after
forfeiture, if any, shall be utilized by the Company to purchase a retirement
annuity payable to Mr. Melrose until his 75th birthday, or to his estate or
beneficiaries, and for no other purpose, subject to the condition that Mr.
Melrose enter into and comply with the terms and conditions of a noncompetition
agreement, in accordance with Section 5.c. and 6.b.
c. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. Subject to
the terms and conditions of this Plan, the Company shall have the authority to
enter into a post-retirement consulting and non-competition agreement with Mr.
Melrose, providing for the payment of an aggregate amount of up to $500,000,
which amount shall be adjusted not less than once annually to reflect increases
in the consumer price index and which may be utilized to pay expenses of office
and support services for Mr. Melrose for a period of five years following the
date of his retirement.
6. TERMS, CONDITIONS AND RESTRICTIONS.
a. RESTRICTED STOCK AND PERFORMANCE UNIT PERFORMANCE GOAL RESTRICTIONS.
The obligation of the Company to deliver certificates representing the
Restricted Stock granted hereunder and to utilize the aggregate value of the
Performance Units to purchase a retirement annuity shall be subject to the
terms, conditions and restrictions set forth in this Section 6.a.
2
<PAGE>
i. Vesting of Restricted Stock and Performance Units. Mr. Melrose's
right to receive the Restricted Stock and the value of the Performance Units
shall be subject to the vesting requirements set forth in this Section 6.a.i.
and to the achievement by Mr. Melrose of the Performance Goals set forth in
Section 6.a.i. hereof not later than the last day of the period specified to
achieve such performance (the "Restricted Period"). Upon achievement of a
Performance Goal within an applicable Restricted Period, the restrictions shall
lapse with respect to the specified portion of Restricted Stock, which specified
portion shall vest and become nonforfeitable. Upon achievement of a Performance
Goal within an applicable Restricted Period, the restrictions shall lapse with
respect to the specified portion of Performance Units, which specified portion
shall vest and become nonforfeitable, subject to the further condition that Mr.
Melrose enter into and comply with the terms and conditions of a noncompetition
agreement in accordance with Section 6.b. If Mr. Melrose does not enter into a
noncompetition agreement or does not comply with the terms and conditions of
such a noncompetition agreement, then Mr. Melrose shall forfeit his rights to
the Performance Units and the right to receive the benefits of the retirement
annuity referred to in Section 5.b.
(A) The following table sets forth the Performance Goals, the
schedule for achievement of each Performance Goal and the portion of Restricted
Stock and Performance Units in which rights vest upon such achievement.
Performance Goal Restricted Period Portion of Portion of
to be Achieved (July 31, 1995 Shares of Re- Performance
through earlier of stricted Stock Units to
date shown or to Vest Upon Vest Upon
Goal Achievement) Achievement Achievement
Goal 1:
CEO and senior management
succession plan developed
and progress toward
fulfillment of the plan,
both approved by Board of
Directors July 31, 1998 15% 15%
Goal 2:
Continued development of
senior management team and
identification of
potential CEO successor
identified with approval
of Board of Directors October 31, 2000 15% 15%
3
<PAGE>
Goal 3:
CEO identified and developed
by Mr. Melrose and elected as
CEO by the Board of Directors October 31, 2003 70% 70%
(B) Early Selection of Successor. Notwithstanding any other
provision of the Plan, in the event that the Board of Directors elects as Mr.
Melrose's successor the individual identified and developed by Mr. Melrose, and
such successor is in place as chief executive officer of the Company and Mr.
Melrose elects to retire prior to the last day of the final Restricted Period,
but no earlier than July 31, 1997, all Restricted Stock and Performance Units
shall vest in full and become nonforfeitable, subject to the condition with
respect to the Performance Units that Mr. Melrose enter into and comply with the
terms and conditions of a noncompetition agreement in accordance with Section
6.b.
(C) The Committee shall be responsible for certifying in writing
to the Company that the applicable Performance Goal has been met by Mr. Melrose
prior to release and delivery of certificates representing the shares of
Restricted Stock or payment of the value of Performance Units for the purchase
of a retirement annuity to Mr. Melrose.
The terms of this Plan are not intended to, and do not, impose on
Mr. Melrose a mandatory retirement date not otherwise applicable to employees of
the Company generally, and Mr. Melrose shall not be obligated to retire as an
officer of the Company in order to obtain the benefits of this Agreement.
ii. Limits on Transfer of Restricted Stock and Performance Units.
Shares of the Restricted Stock which have not vested in accordance with the
provisions of Section 6.a. hereof may not be sold, transferred, pledged,
assigned or otherwise encumbered. Performance Units may not be sold,
transferred, pledged, assigned or otherwise encumbered at any time.
iii. Termination, Death or Disability. In the event that the Board of
Directors terminates Mr. Melrose's employment other than for cause and elects as
Mr. Melrose's successor a chief executive officer who was identified and
developed by Mr. Melrose, or in the event of the termination of Mr. Melrose's
employment due to his death or disability, then all shares of Restricted Stock
and Performance Units shall automatically and immediately vest in full and
become nonforfeitable.
b. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. The
Company's agreement to pay any amount in connection with post-retirement
consulting services to be provided by Mr. Melrose and the Company's agreement to
pay the value of
4
<PAGE>
Performance Units to purchase a retirement annuity payable to Mr. Melrose
pursuant to Section 5.c. shall be subject to and in consideration of Mr.
Melrose's execution, not later than July 31, 1995, of an agreement not to
compete with the Company by serving as an employee or member of the board of
directors of or consultant to any competitor to the Company identified in an
SEC Annual Report on Form 10-K or any successor thereof or similar competitor
of the Company for a period of five years following the date of Mr. Melrose's
retirement as Chief Executive Officer of the Company. The Company's
agreement to pay any amount in connection with post-retirement consulting
services to be provided by Mr. Melrose shall be subject to his agreement to
provide consulting services to the Company for a period of five years
following the date of his retirement; provided however that Mr. Melrose may
elect to terminate the consulting agreement, but not the agreement not to
compete, in which event any balance of the $500,000 amount referred to in
Section 5.c. not then expended for Mr. Melrose's benefit shall be paid to Mr.
Melrose over the remainder of the five year period. Mr. Melrose shall not
have any right to receive payments pursuant to Section 5.c. or this Section
6.b. until and unless he shall have executed an agreement not to compete with
the Company and delivered a fully executed copy thereof to the Company, and
otherwise complied with the then applicable terms and conditions of the Plan.
c. TERMINATION OF EMPLOYMENT. Except as otherwise provided by Section
6.a. hereof, if Mr. Melrose resigns his employment with the Company or if his
employment is terminated by the Board of Directors for cause during any
Restricted Period, all shares of Restricted Stock and all Performance Units then
subject to restrictions and all other rights under this Plan shall be forfeited
by Mr. Melrose and the Restricted Stock shall be reacquired by the Company. For
purposes of the Plan, "Cause" shall mean:
i. the willful and continued failure of Mr. Melrose to perform
substantially his duties with the Company or one of its affiliates (other than
any such failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to Mr. Melrose
by the Board of Directors of the Company which specifically identifies the
manner in which the Board of Directors believes that Mr. Melrose has not
substantially performed his duties, or
ii. the willful engaging by Mr. Melrose in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of Mr.
Melrose, shall be considered "willful" unless it is done, or omitted to be done,
by Mr. Melrose in bad faith or without reasonable belief that Mr. Melrose's
action or omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board of Directors or upon the instructions of a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Mr. Melrose in good
faith and in the best interests of the
5
<PAGE>
Company. The cessation of employment of Mr. Melrose shall not be deemed to
be for Cause unless and until there shall have been delivered to Mr. Melrose
a copy of a resolution duly adopted by the affirmative vote of not less than
three quarters of the entire membership of the Board at a meeting of the
Board of Directors called and held for such purpose (after reasonable notice
is provided to Mr. Melrose and Mr. Melrose is given an opportunity, together
with counsel, to be heard before the Board of Directors), finding that, in
the good faith opinion of the Board of Directors, Mr. Melrose is guilty of
the conduct described in subparagraph i. or ii. above, and specifying the
particulars thereof in detail.
d. STOCK CERTIFICATES.
i. ISSUANCE. The Company shall issue a stock certificate or
certificates representing the shares of Restricted Stock granted under the Plan.
Such certificates shall be registered in Mr. Melrose's name and shall bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to the grant, substantially in the following form:
The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Chief Executive Officer Succession Plan and an
agreement entered into between the registered owner and The Toro
Company. Copies of the plan and agreement are on file in the offices
of The Toro Company, 8111 Lyndale Avenue South, Bloomington, Minnesota
55420.
ii. ESCROW. Certificates representing the Restricted Stock shall be
physically held by the Company or its nominee during any Restricted Period, and
the Company may require, as a condition of the grant, that Mr. Melrose shall
have delivered a stock power, endorsed in blank, with respect to any shares of
the Restricted Stock. Upon the achievement of the Performance Goals with
respect to any shares of Restricted Stock, as certified to by the Committee, the
Company shall cause the certificate representing such shares of Restricted Stock
to be removed from escrow and delivered to the Company for reissuance and
delivery of Common Stock in the name of Mr. Melrose in accordance with
instructions from or agreed upon with Mr. Melrose. If any shares of Restricted
Stock are to be forfeited, certificates representing such shares shall be
delivered to the Company for reissuance in the name of the Company or
cancellation and Mr. Melrose shall have no further interest in such stock.
iii. LAPSE OF RESTRICTIONS. When the Performance Goals set forth in
Section 6.a. have been achieved with respect to any portion of the shares of the
Restricted Stock, the Company shall not later than 60 days thereafter, cause the
certificate or certificates representing the Restricted Stock to be reissued
without the legend referred to in Section 6.d.i. hereof. The number of shares
of Common Stock to be reissued shall be the same number as to which the
Performance Goals have been achieved in accordance with Section 6.a.
6
<PAGE>
e. RIGHTS AS STOCKHOLDER.
i. RIGHT TO VOTE AND DIVIDENDS. Except as provided in Section 5 and
this Section 6, Mr. Melrose shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the right to
vote the shares and the right to receive cash dividends with respect to the
shares. Certificates for shares of Restricted Stock shall be delivered to Mr.
Melrose after, and only after, the Restricted Period shall expire without
forfeiture of such shares of Restricted Stock, in accordance with the provisions
of Section 5.a.
ii. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or other change in
corporate structure affecting the Common Stock, the Committee shall make such
substitution or adjustment in the aggregate number of shares of Common Stock
reserved for issuance under this Plan or in the number of shares outstanding as
Restricted Stock or in the number of Performance Units, as may be determined to
be appropriate by the Committee, acting in its sole discretion, provided that
the number of shares or Performance Units shall always be a whole number.
f. CHANGE IN CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not approved by the
Board of Directors, all shares of Restricted Stock shall immediately fully vest
and be freely transferable. A Change of Control means the earliest to occur of
(i) a public announcement that a party shall have acquired or obtained the right
to acquire beneficial ownership of 20% or more of the outstanding shares of
Common Stock of the Company, (ii) the commencement or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a party of 30% or more of the
outstanding shares of Common Stock of the Company or (iii) the occurrence of a
tender offer, exchange offer, merger, consolidation, sale of assets or contested
election or any combination thereof, that causes (or would cause) the persons
who were directors of the Company immediately 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.
7. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan any federal, state or local taxes of any kind,
including FICA and related taxes, required by law to be withheld with respect to
the vesting of rights or payment of remuneration or to take such other action as
may be necessary in the opinion of the Company to satisfy all obligations for
the payment of such taxes. If Common Stock is withheld or surrendered to
satisfy tax withholding, such stock shall be valued at its fair market value as
of the date such Common Stock is withheld or surrendered or the obligation to
pay such taxes becomes fixed.
7
<PAGE>
8. REGISTRATION RIGHTS. Mr. Melrose shall have the right to require that the
Company promptly take all necessary steps to register or qualify the Restricted
Stock, or Common Stock issued upon vesting of the Restricted Stock, under the
Securities Act of 1933, as amended, and the securities laws of such states as
Mr. Melrose may reasonably request. The Company shall keep effective and
maintain any registration, qualification, notification or approval for such
period as is reasonably necessary for Mr. Melrose to dispose of the Restricted
Stock or Common Stock and from time to time shall amend or supplement the
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law. The Company shall bear all fees, costs and expenses
of such registration, qualification, notification or approval.
9. COMPLIANCE WITH RULE 16b-3 AND SECTION 162(m). The grants of Restricted
Stock and Performance Units made under this Plan and the remuneration to be paid
to Mr. Melrose as a consequence of the grants are intended to comply with all
applicable conditions of Rule 16b-3 under the Exchange Act and to avoid the loss
of the deduction referred to in paragraph (1) of Section 162(m) of the Code.
Anything in this Plan to the contrary notwithstanding, to the extent any
provision of this Plan or action by the Committee fails to so comply or to avoid
the loss of such deduction, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Committee.
10. EMPLOYMENT. Nothing in this Plan shall interfere with or limit in any way
the right of the Company to terminate Mr. Melrose's employment at any time, with
the Company or any subsidiary of the Company, or shall confer upon Mr. Melrose
any right to continue in the employ of the Company.
11. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board
nor the submission of the Plan to stockholders for approval shall be construed
to limit the power of the Board or the Committee to adopt such other incentive
arrangements as either may deem desirable, including without limitation, the
award of stock and cash awards otherwise than under the Plan, or to set
compensation and retirement benefits and make such awards to Mr. Melrose as
either may deem desirable.
12. EXCLUSION FROM PENSION, PROFIT SHARING AND OTHER BENEFIT CALCULATIONS. By
acceptance of an award under the Plan, Mr. Melrose shall be deemed to have
agreed that the award or vesting of Restricted Stock and Performance Units under
the award constitutes special incentive compensation that is not taken into
account as "salary" or "compensation" or "bonus" in determining the amount of
any payment under any pension, retirement or profit sharing plan of the Company
or any subsidiary. In addition, Mr. Melrose shall be deemed to have agreed that
such award shall not be taken into account in determining the amount of any life
insurance coverage, short or long-term disability coverage or any other
pay-based benefit provided by the Company or any subsidiary.
8
<PAGE>
13. AMENDMENT. This Plan may be amended, modified or terminated from time to
time, provided however that no amendment may be adopted without the approval of
the stockholders of the Company if such amendment requires stockholder approval
pursuant to Rule 16b-3 or Section 162(m). No amendment, modification or
termination may be adopted without the written agreement of Mr. Melrose if such
amendment, modification or termination would adversely affect his rights.
Subject to the foregoing and the requirements of Section 162(m), the Board may,
in accordance with the recommendation of the Committee and without further
action on the part of stockholders of the Company or the consent of Mr. Melrose,
amend the Plan to preserve the employer deduction under Section 162(m).
14. GOVERNING LAW. This Plan shall be construed in accordance with and
governed by the laws of the State of Delaware.
15. SUCCESSORS. Except as otherwise provided in this Plan, this Plan shall be
binding upon and inure to the benefit of the Company, its successors and assigns
and Mr. Melrose, his beneficiaries, heirs, executors, administrators and legal
representatives.
As amended, effective July 31, 1997.
9
<PAGE>
Exhibit 11
THE TORO COMPANY AND SUBSIDIARIES
Computation of Earnings per Share of Common Stock and Common Stock Equivalents
(Not Covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 3 MONTHS ENDED YEAR ENDED
-------------------------------------------------------------
10/31/97 10/31/96 10/31/95 7/31/95
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $34,845,000 $ 36,409,000 $ 3,997,000 $36,667,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary:
Shares of common stock and common stock equivalents:
Weighted average number of common shares outstanding 12,095,475 12,140,689 12,117,815 12,556,039
Dilutive effect of outstanding stock options (1) 371,007 414,026 424,225 476,374
----------- ----------- ----------- -----------
12,466,482 12,554,715 12,542,040 13,032,413
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and common stock
equivalents $ 2.80 $ 2.90 $ 0.32 $ 2.81
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted:
Shares of common stock and common stock equivalents:
Weighted average number of common shares outstanding 12,095,475 12,140,689 12,117,815 12,556,039
Dilutive effect of outstanding stock options (2) 478,098 414,026 424,225 511,133
----------- ----------- ----------- -----------
12,573,573 12,554,715 12,542,040 13,067,172
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and common stock
equivalents $ 2.77 $ 2.90 $ 0.32 $ 2.81
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Outstanding stock options and options exercised in the current period are
converted to common stock equivalents by the treasury stock method
using the average market price of the company's stock during each period.
(2) Outstanding stock options and options exercised in the current period are
converted to common stock equivalents by the treasury stock method using
the greater of the average market price or the year-end market price of
the company's shares during each period.
24
<PAGE>
Exhibit 12
THE TORO COMPANY AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Not Covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
3 MONTHS
YEAR ENDED ENDED YEAR ENDED
--------------------------------------------------------------------------------------------
10/31/97 10/31/96 10/31/95 7/31/95 7/31/94 7/31/93
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings before income taxes $60,344,000 $ 60,180,000 $6,606,0000 $61,112,000 $37,050,000 $21,355,000
Plus: Fixed charges (1) 23,186,000 16,728,000 3,266,000 14,892,000 15,989,000 19,142,000
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings available to cover
fixed charges $83,530,000 $76,908,000 $9,872,000 $76,004,000 $53,039,000 $40,497,000
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed
charges 3.53 4.60 3.02 5.10 3.32 2.12
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense $20,400,000 $13,590,000 $2,532,000 $11,902,000 $13,562,000 $17,150,000
Rentals (Interest factor) 3,286,000 3,138,000 734,000 2,990,000 2,427,000 1,992,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed charges $23,686,000 $16,728,000 $3,266,000 $14,892,000 $15,989,000 $19,142,000
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fixed charges consist of those above. In 1997, $500,000 of capitalized
interest was excluded.
25
<PAGE>
THE TORO COMPANY is one of the world's leading producers of integrated solutions
for outdoor landscapes. While Toro has many competitors, few if any can match
the company's comprehensive offerings focused exclusively on maintaining turf
and landscapes in a beautiful, productive and ecological way. Toro customers are
caretakers of the environment, whether they are golf course superintendents,
major league or youth league sportsfield groundskeepers, or homeowners. These
caretakers want and need integrated products and systems that create, maintain,
enhance, and conserve beautiful landscapes.
For 83 years, Toro has built on a rich tradition of providing customers with
the tools and equipment necessary to protect and preserve outdoor environments.
Toro experts have walked the fairways with superintendents and backyards with
homeowners to listen to customers and build products that often become the
standard of innovation excellence.
Toro's long-term strategies have focused on reducing the cyclical impacts of
weather and economic variations. Toro is more diversified by product, market,
and global focus than the Toro of 10 or 15 years ago. Today, professional turf
maintenance products make up the majority of Toro sales as the company has
capitalized on growth opportunities in these markets. Residential products are
still a dynamic part of Toro and several new products were added to the Toro
portfolio in 1997. Toro has high brand equity because of superior quality and
customer satisfaction.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31 1997 1996 % Change
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,051,204 $930,909 12.9%
Net earnings, before extraordinary loss* 36,508 36,409 0.3
Percent of net sales 3.5% 3.9%
- ----------------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent,
before extraordinary loss* $ 2.93 $ 2.90 1.0
Dividends paid per share of
common stock outstanding 0.48 0.48
- ----------------------------------------------------------------------------------------
Return on:
Beginning common stockholders' equity 16.3% 19.1%
Average common stockholders' equity 15.3 18.0
Average invested capital 12.1 15.2
- ----------------------------------------------------------------------------------------
AT YEAR END
Working capital $ 234,211 $197,144 18.8
Total assets 661,634 496,877 33.2
Total debt 219,015 94,390 132.0
Common stockholders' equity 241,163 213,567 12.9
Book value per common share 19.78 17.75 11.4
Number of common stockholders 6,560 6,841 (4.1)
Average number of employees 3,911 3,509 11.5
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
*In 1997, the company recognized an extraordinary loss on the early retirement
of debt of $1,663,000 or $0.13 per share.
FISCAL 1997
/ / PROFESSIONAL TURF 57%
/ / RESIDENTIAL 43%
[CHART]
FISCAL 1996
/ / PROFESSIONAL TURF 50%
/ / RESIDENTIAL 50%
[CHART]
CONTENTS
Letter to Shareholders 1
Business Overview 4
Operations Overview 8
Eleven-Year Selected
Financial Data 14
Management's Discussion
and Analysis 16
Financial Statements 24
Notes to Consolidated
Financial Statements 27
Directors, Officers and
Stockholders' Information 41
ON THE COVER
[LOGO]
Toro is the preferred supplier of equipment and irrigation systems for the
Pinehurst Resort and Country Club, including the recently opened Pinehurst No. 8
(cover) and the legendary Pinehurst No. 2, site of the 1999 U.S. Men's Open
Championship.
<PAGE>
ELEVEN-YEAR SELECTED FINANCIAL DATA The Toro Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31(6) 1997(2) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Net sales $1,051,200 $930,900 $919,400 $864,300
EARNINGS:
Net earnings (loss), before extraordinary loss(1) 36,500 36,400 32,400 32,400
Percent of sales 3.5% 3.9% 3.5% 3.8%
Per share of common stock and common stock equivalent,
before extraordinary loss(1) $ 2.93 $ 2.90 $ 2.50 $ 2.49
DIVIDENDS:
On common stock outstanding 5,794 5,834 5,953 6,022
Per share of common stock outstanding 0.48 0.48 0.48 0.48
RETURN ON:
Beginning common stockholders' equity 16.3% 19.1% 18.1% 22.9%
Average common stockholders' equity 15.3% 18.0% 17.5% 20.2%
SUMMARY OF FINANCIAL POSITION:
Current assets $ 472,000 $405,000 $386,300 $373,400
Current liabilities 237,800 207,900 221,200 197,200
Working capital 234,200 197,100 165,100 176,200
Non-current assets 189,600 91,900 86,400 78,200
Total assets 661,600 496,900 472,700 451,600
Non-current liabilities, excluding long-term debt 5,000 22,400 7,200 5,300
CAPITALIZATION:
Long-term debt, less current portion 177,700 53,000 53,400 70,400
Redeemable preferred stock - - - -
Common stockholders' equity 241,200 213,600 190,900 178,700
Total capitalization 418,900 266,600 244,300 249,100
Book value per common share 19.78 17.75 15.69 14.05
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 12,189 12,032 12,168 12,720
Number of common stockholders(7) 6,560 6,841 7,243 7,541
Low price $ 31 1/2 $ 28 3/8 $ 25 5/8 $ 20 7/8
High price 43 3/4 36 1/4 32 1/4 30 1/2
Close price 42 3/4 31 3/8 28 7/8 27 3/4
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1997 net earnings and earnings per share after the extraordinary loss
on early retirement of debt of $1,663,000, or $0.13 per share, were
$34,845,000 and $2.80, respectively.
(2) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996,
the date of acquisition.
(3) Includes restructuring costs of $24.9 million, or $1.41 per share.
(4) The company's consolidated financial statements include results of
operations of Lawn-Boy Inc. from November 7, 1989, the date of
acquisition.
(5) The company's consolidated financial statements include results of
operations of Wheel Horse Products, Inc. from December 19, 1986, the
date of acquisition.
(6) The actual date of the year-end for years prior to 1995 was the Friday
closest to October 31.
(7) Represents the number of stockholders at July 31 for the years
starting in 1987 and ending in 1994.
- ----------------------------------------
NET EARNINGS (1)
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
32.4 32.4 36.4 36.5
- ----------------------------------------
- ----------------------------------------
The Toro Company
14
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended October 31(6) 1993 1992(3) 1991 1990(4) 1989 1988 1987(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $706,600 $638,700 $706,200 $747,300 $639,200 $626,200 $551,600
EARNINGS:
Net earnings (loss), before extraordinary loss(1) 15,300 (21,700) 9,100 8,400 20,000 20,500 17,900
Percent of sales 2.2% (3.4)% 1.3% 1.1% 3.1% 3.3% 3.2%
Per share of common stock and common stock equivalent,
before extraordinary loss(1) $ 1.22 $(1.81) $ 0.77 $ 0.84 $ 1.90 $ 1.90 $ 1.60
DIVIDENDS:
On common stock outstanding 5,858 5,765 5,710 6,074 4,774 4,613 3,730
Per share of common stock outstanding 0.48 0.48 0.48 0.48 0.48 0.45 0.37
RETURN ON:
Beginning common stockholders' equity 12.1% (14.2)% 6.2% 8.5% 23.5% 28.4% 28.8%
Average common stockholders' equity 11.4% (15.5)% 6.1% 6.8% 21.7% 26.1% 26.7%
SUMMARY OF FINANCIAL POSITION:
Current assets $326,100 $324,200 $322,000 $306,800 $271,200 $296,400 $262,600
Current liabilities 169,200 132,500 103,800 133,000 125,000 144,200 121,800
Working capital 156,900 191,700 218,200 173,800 146,200 152,200 140,800
Non-current assets 73,700 85,100 93,400 103,900 57,100 55,800 52,800
Total assets 399,800 409,300 415,400 410,700 328,300 352,200 315,400
Non-current liabilities, excluding long-term debt 1,400 2,500 4,100 6,100 2,400 1,700 1,100
CAPITALIZATION:
Long-term debt, less current portion 87,300 147,900 154,100 125,300 95,600 112,200 109,800
Redeemable preferred stock - - - - 6,000 9,000 10,500
Common stockholders' equity 141,900 126,400 153,400 146,300 99,300 85,100 72,200
Total capitalization 229,200 274,300 307,500 271,600 200,900 206,300 192,500
Book value per common share 11.47 10.5 12.84 12.34 9.98 8.46 7.12
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 12,370 12,041 11,950 11,859 9,946 10,059 10,144
Number of common stockholders(7) 7,968 8,386 8,503 7,706 7,527 6,802 5,587
Low price $ 14 1/8 $ 11 3/8 $ 11 $ 12 $ 17 7/8 $ 11 1/8 $ 13 1/2
High price 26 3/4 17 1/2 20 1/2 30 24 3/8 24 7/8 23 3/4
Close price 25 3/8 14 1/8 14 3/4 12 3/4 21 5/8 18 3/8 15 1/8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------
OPERATING EARNINGS
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
59.0 58.1 63.4 72.3
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
TOTAL DEBT TO CAPITAL
- ----------------------------------------
(In percentages)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
33.8 36.6 30.7 47.6
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
CASH FLOW COVERAGE
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
1.1 1.3 1.0 2.0
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
CASH FLOW FROM OPERATIONS
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
30.6 20.0 32.4 83.9
- ----------------------------------------
- ----------------------------------------
1997 Annual Report
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Toro Company
INCLUDED IN THIS ANALYSIS ARE STATEMENTS WHICH ARE FORWARD-LOOKING. STATEMENTS
THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING AND INVOLVE RISKS AND UNCERTAINTIES.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AND SHOULD NOT BE RELIED UPON AS A PREDICTION OF
ACTUAL FUTURE RESULTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON
WHICH SUCH STATEMENT IS MADE, OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
EVENTS.
In November 1995, the company changed its fiscal year from a fiscal year
ended July 31 to a fiscal year ended October 31. The following comparisons are
based on the company's new fiscal year-end. The financial information relating
to results of operations for the fiscal year ended October 31, 1995 has been
restated from the previous July 31 year-end and is unaudited. All other
financial information has been derived from the audited financial statements.
RESULTS OF OPERATIONS
In 1997, the company achieved its fifth consecutive year of earnings per share
growth prior to the impact of an extraordinary loss on the early retirement of
debt as discussed in the Notes to the Consolidated Financial Statements. This
growth was sustained despite a one-time charge which included the closing of one
manufacturing facility. The refinancing of the company's debt and restructuring
of its manufacturing facilities are expected to have a positive impact on future
company performance.
In 1997, as in the year before, the company continued to feel the impact of
weather patterns worldwide. In addition, priorities continued to change for both
dealers and consumers as they became more and more price and value conscious,
not only in the consumer and residential markets, but also in the professional
<TABLE>
<CAPTION>
SUMMARY
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Year Ended October 31
---------------------------------------------------------
(Dollars in millions, except per share data) 1997 % Change 1996 % Change 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,051.2 12.9% $930.9 1.2% $919.4
Cost of sales 663.2 12.6 589.2 - 589.2
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 388.0 13.6 341.7 3.5 330.2
Selling, general and administrative expense 315.7 13.4 278.3 2.3 272.1
- ----------------------------------------------------------------------------------------------------------------------
Earnings from operations 72.3 14.0 63.4 9.2 58.1
Interest expense 19.9 46.4 13.5 13.7 11.9
Other income, net (7.9) (23.6) (10.3) 33.4 (7.7)
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, and extraordinary loss 60.3 0.3 60.2 11.7 53.9
Provision for income taxes 23.8 0.3 23.8 10.5 21.5
- ----------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary loss 36.5 0.3 36.4 12.5 32.4
Extraordinary loss, net of income tax benefit of $1.1 1.7 - - - -
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 34.8 (4.3)% $ 36.4 12.5% $ 32.4
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and
common stock equivalent before extraordinary loss $ 2.93 1.0% $ 2.90 16.0% $ 2.50
Extraordinary loss per share, net of income tax benefit 0.13 - - - -
- ----------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent $ 2.80 (3.4)% $ 2.90 16.0% $ 2.50
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET SALES BY PRODUCT LINE
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1997 % Change 1996 % Change 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer $ 421.9 (8.5)% $461.0 (1.3)% $467.2
Commercial 344.6 7.0 322.0 3.6 310.8
Irrigation 284.7 92.5 147.9 4.6 141.4
- ----------------------------------------------------------------------------------------------------------------------
Total* $1,051.2 12.9% $930.9 1.2% $919.4
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
*Includes international sales of $ 232.8 33.6% $174.2 16.5% $149.6
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Toro Company
16
<PAGE>
markets. The company faced increasing competitive pressures, both domestically
and internationally. While the international market remains a potentially high
growth market and the company continues to enjoy high market share, increasingly
difficult economic conditions made this a very volatile market in 1997. Although
the James Hardie Irrigation Group (Hardie) acquisition had a substantial impact
on 1997 net sales, the acquisition was still both a resource and dollar drain.
In response to these challenges, the company continued to evaluate its
business units and reinvest in opportunities and initiatives that will help
sustain competitiveness and maintain a leadership position in 1998 and beyond.
In order to hold and/or obtain additional market share in all its businesses,
the company began implementing supply chain management strategies which will
reduce costs in both the manufacturing and distribution systems. In addition,
funds will be earmarked to develop new and innovative products for its markets.
The company also made key investments for the future that helped differentiate
it by broadening its offering of products. This included the acquisition of
Hardie and the manufacturing, sales and distribution rights to Dingo-TM- Digging
Systems (Dingo) under which the company will manufacture and sell Dingo
landscape products under the Toro Sitework-TM- Systems brand name for North and
South American markets. Alliances were formed with Maruyama Manufacturing and
Bluebird International. The company is implementing marketing strategies for
fiscal 1998 including the lowering of prices for the consumer walk-behind power
mowers to reverse share erosion. Finally, the company has established an
international currency fund to protect market share and has continued to develop
long-term relationships with key accounts.
NET SALES
Fiscal 1997 Compared With Fiscal 1996
- -------------------------------------------------------------------------------
Effective December 1, 1996 the company acquired Hardie from James Hardie
Industries Limited of Australia (JHI Limited). Hardie is a worldwide leader in
the production of irrigation systems for the residential and commercial
landscape markets, and agricultural irrigation market. Comparisons of fiscal
1997 to fiscal 1996 are significantly impacted by the acquisition.
Worldwide net sales increased 12.9% to $1.1 billion in 1997
versus $930.9 million in 1996. The following is a discussion of
the sales by product group:
- - CONSUMER
Worldwide consumer product sales declined by 8.5% to $421.9 million in 1997.
Although retail demand for Toro and Lawn-Boy walk-behind power mowers increased
slightly over last year, sales to dealers and distributors declined as their
levels of field inventories were managed down and they shifted their buying
patterns to more closely reflect retail demand. Sales to hardware, home centers
and mass merchant retailers were very strong, partially offsetting the reduction
in dealer and distributor sales. This reflects a shift in consumer buying
patterns from brand specific purchases from dealer outlets to price and value
conscious purchases from hardware, home centers and mass merchant retailers, a
trend throughout the industry. Consumer international sales increased 14.9% due
primarily to product penetration in newer markets such as Eastern Europe.
Although the consumer business did not grow in 1997, the company has taken
aggressive steps to reposition the business for 1998, and these steps, combined
with several new products coming on line in 1998, brighten the outlook of
residential products for 1998 and beyond.
- - COMMERCIAL
Worldwide commercial product sales increased by 7.0% to $344.6 million. The
increase in sales reflected growth in the golf market as well as the landscape
maintenance sector. This was partially offset by reduced sales for recycling
equipment and commercial parts. Although competitors in the commercial market
are aggressively pursuing market share, the company believes it is maintaining
its leadership position. International sales included in the worldwide
commercial totals were up 2.2%. The strong U.S. dollar dampened growth in
foreign golf projects, especially
- ----------------------------------------
CONSUMER SALES
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
476.2 467.2 461.0 421.9
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
COMMERCIAL SALES
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
262.3 310.8 322.0 344.6
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
IRRIGATION SALES
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
125.8 141.4 147.9 284.7
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
INTERNATIONAL SALES*
- ----------------------------------------
(Dollars in millions)
- ----------------------------------------
- ----------------------------------------
94 95 96 97
- ----------------------------------------
140.7 149.6 174.2 232.8
- ----------------------------------------
*(Included in charts at left)
1997 Annual Report
17
<PAGE>
in emerging markets. The company is currently developing strategies to protect
against loss of sales due to fluctuations in foreign currencies.
- - IRRIGATION
Worldwide irrigation product sales totaled $284.7 million, an increase of 92.5%
over the prior year. This increase was almost entirely attributable to the
acquisition of Hardie. Irrigation sales discussed here include sales to both the
residential and professional markets. Golf irrigation and do-it-yourself retail
irrigation product sales also did well for the year. The strength in these two
areas was partially offset by a sluggish residential and commercial irrigation
season. International irrigation sales were up 167.4% from the prior year,
mainly due to the acquisition of Hardie. International sales without Hardie were
flat due principally to the weakening of foreign currencies against the U.S.
dollar. Many new golf projects were postponed or cancelled as a result of
weakened foreign economies. The company is currently developing strategies to
guard against loss of sales due to fluctuations in foreign currencies.
- - INTERNATIONAL MARKETS
Total international product sales, included in the preceding net sales table,
increased by 33.6% over the previous year to $232.8 million. This was primarily
the result of additional sales added by the Hardie acquisition. The remaining
increase occurred as a result of the growth of newer target markets in Eastern
Europe and Latin America. Competitive pressures and the strong U.S. dollar
slowed growth in international markets.
International sales are principally denominated in U.S. dollars, although a
portion of the company's international sales are denominated in foreign
currencies. To reduce the uncertainty of foreign currency exchange rate
movements on these sales commitments, the company enters into foreign currency
exchange contracts and, although the risks of foreign currency transactions are
getting larger, the company is proactively addressing these fluctuations in
currency and their impact on the financial statements. See Notes to the
Consolidated Financial Statements.
FISCAL 1996 COMPARED WITH FISCAL 1995
In fiscal 1996, net earnings increased by $4.0 million to $36.4 million from
$32.4 million in the prior fiscal year. Worldwide net sales increased by $11.5
million to $930.9 million in 1996 versus $919.4 million in 1995. The following
is a discussion of the sales by product group for fiscal 1996 as compared to
fiscal 1995:
- - CONSUMER
Worldwide consumer product sales in 1996 fell by 1.3% to $461.0 million from
$467.2 million in 1995. The decrease was primarily the result of a slow start to
the lawn and garden season due to cold, wet weather throughout most of the
United States during the spring season. This decline was offset partially by
increased snowthrower shipments. Snowthrower demand, especially in the
northeast, was high in anticipation of strong retail activity and abnormally low
field inventory levels. For the year, snowthrower sales were up 31.0%, primarily
the result of sales volume increases. International sales included in the
worldwide consumer totals increased by 8.4% from the prior year. Walk behind
mower sales were lower, but this decline was offset by strong riding product
sales.
- - COMMERCIAL
Worldwide commercial product sales increased $11.2 million or 3.6% over the
prior year to $322.0 million. International sales were up 22.1% due primarily to
a strong golf market in Europe and Asia. The late spring had an adverse effect
on sales to the domestic golf course market. Many golf courses were forced to
cut their equipment budgets due to loss of income from fewer rounds played
during the inclement spring weather. In addition, the market saw increased
competitive actions among the major equipment manufacturers.
- - IRRIGATION
Worldwide irrigation sales totaled $147.9 million representing
an increase of $6.5 million or 4.6% over the prior year. International
irrigation sales were strong, up 15.5% from the prior year, fueled by strong
golf market sales. This was partially offset by lower sales to the
residential/commercial markets which were impacted by the cold, wet spring.
- - INTERNATIONAL MARKETS
Total international sales, included in the preceding net sales table, increased
by 16.5% over the previous year to $174.2 million. This was primarily the result
of increased sales volumes in the European and Asian golf markets.
COST TRENDS AND PROFIT MARGINS
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Year Ended October 31
-------------------------
Margins (Percent of net sales) 1997 1996 1995
- ----------------------------------------------------------------------
Gross profit 36.9% 36.7% 35.9%
Operating profit 6.9% 6.8% 6.3%
Pretax earnings, before
extraordinary loss 5.7% 6.5% 5.9%
Net earnings, before
extraordinary loss 3.5% 3.9% 3.5%
- ----------------------------------------------------------------------
The Toro Company
18
<PAGE>
FISCAL 1997 COMPARED WITH FISCAL 1996
The gross profit of $388.0 million represents a 13.6% increase over the gross
profit of $341.7 million in 1996. As a percent of net sales, gross profit rose
to 36.9% from 36.7% in the prior year. The increase was due primarily to
improved production efficiencies, partially offset by the addition of Hardie
products which carry somewhat lower gross margins. The company is focusing on
cost containment and supply chain management strategies to partially offset the
lower margin contribution of Hardie and the effects of competitive pressures.
FISCAL 1996 COMPARED WITH FISCAL 1995
The gross profit of $341.7 million represented an $11.5 million or 3.5% increase
over the gross profit of $330.2 million in 1995. As a percent of net sales,
gross profit rose to 36.7% from 35.9% in the prior year. The percentage margin
improvement resulted primarily from reduced production costs, notably materials
and product mix. This improvement was partially offset by costs resulting from
lowered production levels in selected plants to match market needs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A)
FISCAL 1997 COMPARED WITH FISCAL 1996
For 1997, SG&A expenses totaled $315.7 million or 30.0% of net sales, a slight
percentage increase over 1996. Of this increase of $37.4 million, Hardie
accounted for $34.8 million.
Increases in sales and marketing, warranty, and research and development
expenses were completely offset by lower administrative expense, after the
impact of Hardie, due to cost containment efforts initiated during the second
half of the year. The remaining increase in SG&A expenses over the prior year
occurred as the company incurred a one-time charge of $2.6 million related to
the closing of the manufacturing facility at Mound, Minnesota and relocation of
those operations to other company facilities throughout the U.S. This move is
part of a long-term corporate strategy to reduce costs and provide opportunities
for longer term capacity increases.
SG&A expense includes distributor/dealer financing costs totaling $10.2
million in 1997 and $10.3 million in 1996 incurred by the company to contract
with a third party financing source to finance dealer inventory purchases. This
charge represents interest for a pre-established length of time at a rate of
prime plus a negotiated markup. This cost includes related expenses such as
credit line origination costs. These financing arrangements are used by the
company as a marketing tool to enable customers to buy inventory.
FISCAL 1996 COMPARED WITH FISCAL 1995
For 1996, SG&A expenses totaled $278.3 million or 29.9% of net sales compared to
$272.1 million or 29.6% of net sales in 1995.
The increase in administrative expense of $4.8 million was comprised
primarily of additional operating expenses associated with new businesses
acquired in 1996. This was partially offset by a decline in sales and marketing
expense of $1.5 million due to reduced direct expenses from the decrease in
consumer lawn and garden sales combined with savings from added expense
controls. In addition, warranty expense declined $3.4 million from the prior
year as a result of lower warranty reserve requirements due to continuing
product quality improvements and experience factors. Research and development
expenditures increased by $3.9 million reflecting the company's commitment to
invest in product innovation and development.
INTEREST EXPENSE
FISCAL 1997 COMPARED WITH FISCAL 1996
Interest expense in 1997 increased by $6.3 million to $19.9 million due to
higher overall debt levels during the year. The Hardie acquisition debt
accounted for approximately $7.1 million of the interest expense. This was
offset by reductions in previously outstanding debt and related interest expense
as cash generated by operations was used to pay off debt. In addition, the
company redeemed higher rate debt by replacing the 11% debentures with lower
rate debt during the year.
1997 Annual Report
19
<PAGE>
FISCAL 1996 COMPARED WITH FISCAL 1995
Interest expense in 1996 increased by $1.6 million to $13.5 million. Although
the average cost of funds declined from the prior year, the benefit was
diminished by higher overall debt levels resulting from higher levels of average
working capital. In addition to working capital needs, the company purchased
$13.3 million of its own common stock during the year which was funded with
short-term borrowings. This cash outflow was offset partially by $12.1 million
received as a result of an interest rate swap entered into during 1996.
OTHER INCOME, NET
FISCAL 1997 COMPARED WITH FISCAL 1996
Other income, net, totaled $7.9 million in 1997 versus $10.3 million for 1996.
The reduction is primarily attributable to favorable results from a patent
infringement lawsuit settlement in the prior year.
FISCAL 1996 COMPARED WITH FISCAL 1995
Other income, net, totaled $10.3 million in 1996 versus $7.7 million for 1995.
The increase was primarily the result of favorable patent infringement
litigation settlements.
PROVISION FOR TAXES
FISCAL 1997 COMPARED WITH FISCAL 1996
The effective tax rate for 1997 and 1996 was 39.5%. In accordance with Financial
Accounting Standards No. 109, the company has determined that it is not
necessary to establish a valuation reserve for the deferred income tax asset
because it is more likely than not that the net deferred income tax asset of
$43.5 million will be principally realized through carryback to taxable income
in prior years, future reversals of existing taxable temporary differences and,
to a lesser extent, future taxable income.
FISCAL 1996 COMPARED WITH FISCAL 1995
The effective tax rate of 39.5% for 1996 was consistent with the 39.9% rate in
1995.
NET EARNINGS
FISCAL 1997 COMPARED WITH FISCAL 1996
Net earnings for 1997 were $34.8 million after the effect of an extraordinary
loss of $1.7 million, on the early retirement of debt. See Notes to the
Consolidated Financial Statements. Net earnings before the extraordinary loss
were $36.5 million, a slight increase from the 1996 net earnings of $36.4
million. Earnings per share before the effect of the extraordinary loss in 1997
were $2.93 up slightly from earnings per share in 1996. On a per share basis,
earnings decreased from $2.90 in 1996 to $2.80 after the effect of the
extraordinary loss of $0.13 in 1997.
Although Hardie contributed most of the sales increase, in the first year
of the acquisition, Hardie resulted in a loss of $.08 per share, a significant
improvement from the original estimate. It is expected that Hardie will
contribute positive earnings in the future. Beginning in 1998, Hardie operations
will be completely integrated into the company's irrigation business.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net earnings for 1996 were $36.4 million, representing a 12.5% increase over
1995 earnings of $32.4 million. The increase was primarily the result of
improved operating margins. On a per share basis, earnings increased 16% to
$2.90 from $2.50 in 1995.
FINANCIAL POSITION
ASSETS
Total assets at October 31, 1997 increased by 33.2% to $661.6 million
compared to $496.9 million for the prior year. Hardie accounted for $103.1
million of this increase. Property, plant and equipment, net of Hardie,
increased $23.8 million as a result of corporate facility expenditures and
tooling for new products. Other assets, net of Hardie, increased $21.2
million as a result of costs related to a debt issuance and interest rate
swap terminations, capitalization of patents and purchase of property for
future corporate expansion. See Notes to the Consolidated Financial
Statements.
WORKING CAPITAL
Working capital at October 31, 1997 was $234.2 million, an 18.8% increase from
$197.1 million reported for 1996. The current ratio for 1997 was 1.98 versus
1.95 in 1996. Working capital as a percent of sales was 22.3% in 1997 and 21.2%
in 1996.
The increase in working capital was due primarily to the additional working
capital requirements due to the growth of the business.
The Toro Company
20
<PAGE>
CAPITAL STRUCTURE
The company's capital structure is managed on a consolidated basis. Long-term
debt at October 31, 1997 was $178.0 million, up $124.7 million from $53.4
million at October 31, 1996.
Total debt at October 31, 1997 was $219.0 million, up $124.6 million from
$94.4 million at October 31, 1996. The total debt to total capital ratio
increased from 30.7% in 1996 to 47.6% in 1997 as additional debt was issued in
connection with the acquisition of Hardie.
Total capitalization at October 31, 1997 consisted of $178.0 million of
long-term debt, $41.0 million of short-term borrowing and $241.2 million of
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the company improved its liquidity position by increasing its current
ratio after the acquisition of Hardie. The short-term financing used to
initially fund the acquisition of Hardie was replaced during the year with
long-term notes and debentures. In addition, the company completed the
restructuring of its higher rate debt by redeeming $50.0 million of 11%
debentures on August 1, 1997.
Management believes that the combination of funds available to the company
through its existing financing options, coupled with forecasted cash flows, will
continue to provide the capital resources for its anticipated needs.
- - CASH FLOW
Cash and cash equivalents declined slightly from 1996 to 1997.
Cash provided by operating activities increased by $51.4 million due
principally to Hardie and an improvement in working capital from the prior year.
Cash used in investing activities increased significantly in 1997 from 1996
due almost entirely to the acquisition of Hardie. In addition, property, plant
and equipment expenditures were up as a result of corporate facility
expenditures and new product tooling.
Cash flows from financing activities increased primarily due to a net
increase in long-term debt of $124.7 million predominantly used to finance the
Hardie acquisition. The termination of interest rate swap agreements in
connection with the debt issue and the purchase of common stock reduced cash
flows from financing activities.
- - CREDIT LINES AND OTHER CAPITAL RESOURCES
The company's seasonal working capital requirements are funded with $190.0
million of unsecured bank credit lines. Average borrowings under these lines
were $149.6 million in 1997 and $95.2 million in 1996. The increase in the
average borrowings was mainly the result of the Hardie acquisition which was
initially funded with temporary bank debt of $118.0 million. In addition,
borrowings were up as a result of increases in seasonal working capital. At
October 31, 1997 the company had $149.0 million of unutilized availability under
these credit lines. The $150.0 million unsecured credit line used to initially
finance the acquisition of Hardie terminated upon the issuance of long-term debt
in June 1997.
The company's business is seasonal, with accounts receivable balances
historically increasing between January and March as a result of extended
payment terms made available to the company's customers, and decreasing between
April and June when payments become due. The company's peak borrowing usually
occurs between February and May. The seasonal working capital requirements are
financed primarily with the short-term financing arrangements described above.
- - ACQUISITION FINANCING
In November 1997, the company completed the acquisition of Exmark Manufacturing
Company Incorporated (Exmark). The initial purchase price of approximately $31.0
million has been financed through the issuance of 598,051 shares of the
company's common stock and approximately $5.5 million in cash. In addition,
under the terms of the purchase agreement, the company will be required to make
contingent payments to Exmark shareholders if Exmark's post-acquisition earnings
and sales growth from November 1, 1997 through October 31, 1999 exceed minimum
levels established in the purchase agreement. The maximum amount of these
contingent payments is $28.0 million. Contingent payments will be paid with a
combination of cash and the company's common stock. See Acquisitions and
Strategic Alliances included in this MD&A.
1997 Annual Report
21
<PAGE>
INFLATION
The company is subject to the effects of changing prices. The company has been
able to deal successfully with inflationary pressures through a combination of
internal cost reduction efforts and selected increases in selling prices of
products.
ACQUISITIONS AND STRATEGIC ALLIANCES
In December 1996, the company acquired Hardie from JHI Limited for $118.0
million. The purchase price is subject to adjustment based upon final audit
results and the resolution of certain matters concerning the purchase price
submitted by the company to JHI Limited. See Notes to the Consolidated Financial
Statements.
In November 1997, the company acquired Exmark, a leading manufacturer of
equipment for the professional landscape contractor industry. Exmark is
headquartered in Beatrice, Nebraska and produces mid-sized walk-behind power
mowers and zero-turning radius riding mowers for professional contractors.
Exmark employs approximately 280 people in a 164,000 square-foot facility.
Exmark had $53.4 million in net sales for its fiscal year ended August 31, 1997.
In addition, in September 1997, the company announced that it had acquired
the manufacturing, sales and distribution rights to Dingo under which the
company will manufacture and sell Dingo landscape products under the Toro
Sitework-TM- Systems brand name for North and South American markets. Dingo
began distributing their products in North America in 1995 under an agreement
with Dingo Mini Diggers of Australia. These products will be manufactured at the
company's manufacturing facility in Tomah, Wisconsin.
The company also completed several other alliances in key business areas.
Product alliances with Maruyama Manufacturing, Bluebird International and Parker
Sweeper Company are contributing to development of the company's landscape
contractor business. The company has also formed alliances with Pinehurst
Resort, home of the 1999 U.S. Men's Open, and Whitbread-Marriott, a European
chain of golfing resorts.
YEAR 2000 COMPLIANCE
The company is in the process of implementing a year 2000 compliant
enterprise-wide information system. This process was initiated in 1995 and is
currently operational in many locations within the company. This implementation
will be largely completed during 1998. The company has also initiated an
assessment project which addresses those other significant systems
that may have year 2000 compliance issues.
The company presently believes that with the implementation of the new
system and modifications to existing software, year 2000 compliance will not
pose a significant operational issue for the company. However, if these
modifications and conversion are not completed on a timely basis, including
implementation by its business partners, year 2000 compliance may have a
material impact on the operations of the company.
SUMMARY
The company experienced a 12.9% increase in net sales, almost entirely
attributable to the acquisition of Hardie. Earnings before the extraordinary
loss increased 0.3% over the prior year. Hardie, in its first year of
integration, had a negative impact on earnings as did costs associated with the
closing of a Toro manufacturing facility. These items, plus the addition of
Exmark, Dingo and other alliances, are expected to have a favorable impact on
earnings in future periods.
The company has maintained a strong balance sheet and improved liquidity by
refinancing short-term debt used to acquire Hardie with long-term debt, and
replacing higher interest rate debt with debt at more favorable interest rates.
The Toro Company
22
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA The Toro Company
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3 Months
Year Ended Ended Year Ended
--------------------------------------------------------------------------------------
(Dollars in thousands, OCTOBER 31 October 31 October 31 July 31 July 31 July 31
except per share data) 1997* 1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $1,051,204 $930,909 $192,278 $932,853 $794,341 $684,324
EARNINGS:
Net earnings, before
extraordinary loss** 36,508 36,409 3,997 36,667 22,230 13,040
Percent of sales 3.5% 3.9% 2.1% 3.9% 2.8% 1.9%
Per share of common stock and
common stock equivalent,
before extraordinary loss** $ 2.93 $ 2.90 $ 0.32 $ 2.81 $ 1.71 $ 1.05
DIVIDENDS:
On common stock outstanding 5,794 5,834 1,459 6,002 5,993 5,824
Per share of common
stock outstanding 0.48 0.48 0.12 0.48 0.48 0.48
RETURN ON:
Beginning common
stockholders' equity 16.3% 19.1% 2.2% 21.7% 15.4% 9.8%
Average common
stockholders' equity 15.3% 18.0% 2.1% 20.7% 14.2% 9.4%
SUMMARY OF FINANCIAL POSITION:
Current assets $472,044 $405,001 $386,259 $381,610 $364,495 $344,130
Current liabilities 237,833 207,857 221,173 212,659 188,712 150,260
Working capital 234,211 197,144 165,086 168,951 175,783 193,870
Non-current assets 189,590 91,876 86,394 86,705 79,144 75,073
Total assets 661,634 496,877 472,653 468,315 443,639 419,203
Non-current liabilities,
excluding long-term debt 4,988 22,438 7,223 5,250 5,250 1,372
CAPITALIZATION:
Long-term debt, less
current portion 177,650 53,015 53,365 64,935 81,025 122,970
Common stockholders' equity 241,163 213,567 190,892 185,471 168,652 144,601
Total capitalization 418,813 266,582 244,257 250,406 249,677 267,571
Book value per common share 19.78 17.75 15.69 15.40 13.43 11.78
STOCK DATA:
Number of shares of
common stock
outstanding
(in thousands) 12,189 12,032 12,168 12,040 12,561 12,270
Number of common
stockholders 6,560 6,841 7,243 7,347 7,541 7,968
Low price $ 31 1/2 $ 28 3/8 $ 28 1/8 $ 21 5/8 $ 19 3/4 $ 11 3/8
High price 43 3/4 36 1/4 32 1/4 30 3/8 30 1/2 21 7/8
Close price 42 3/4 31 3/8 28 7/8 28 5/8 22 5/8 19 3/4
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
** 1997 net earnings and earnings per share after the extraordinary loss on
early retirement of debt of $1,663,000, or $0.13 per share, were
$34,845,000 and $2.80, respectively.
1997 Annual Report
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Toro Company:
We have audited the accompanying consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of earnings and cash flows for the years ended
October 31, 1997 and 1996, the three month period ended October 31, 1995 and
the year ended July 31, 1995. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Toro
Company and subsidiaries as of October 31, 1997 and 1996, and the results of
their operations and their cash flows for the years ended October 31, 1997 and
1996, the three month period ended October 31, 1995 and the year ended July 31,
1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 12, 1997
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS The Toro Company
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
--------------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
(Dollars in thousands, except per share data) 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,051,204 $930,909 $192,278 $932,853
Cost of sales 663,167 589,186 120,575 598,275
- --------------------------------------------------------------------------------------------------------------------
Gross profit 388,037 341,723 71,703 334,578
Selling, general and administrative expense 315,690 278,284 65,048 269,757
- --------------------------------------------------------------------------------------------------------------------
Earnings from operations 72,347 63,439 6,655 64,821
Interest expense 19,900 13,590 2,532 11,902
Other income, net (7,897) (10,331) (2,483) (8,193)
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary loss 60,344 60,180 6,606 61,112
Provision for income taxes 23,836 23,771 2,609 24,445
- --------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary loss 36,508 36,409 3,997 36,667
Extraordinary loss, net of income tax benefit of $1,087 1,663 - - -
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 34,845 $ 36,409 $ 3,997 $ 36,667
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and
common stock equivalent before extraordinary loss $ 2.93 $ 2.90 $ 0.32 $ 2.81
Extraordinary loss per share, net of income tax benefit 0.13 - - -
- --------------------------------------------------------------------------------------------------------------------
Net earnings per share of common stock and
common stock equivalent $ 2.80 $ 2.90 $ 0.32 $ 2.81
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company
24
<PAGE>
CONSOLIDATED BALANCE SHEETS The Toro Company
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) October 31 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8 $ 66
Receivables:
Customers 255,318 244,434
Other 13,648 5,208
- --------------------------------------------------------------------------------
Subtotal 268,966 249,642
Less allowance for doubtful accounts 9,832 10,005
- --------------------------------------------------------------------------------
Total receivables 259,134 239,637
- --------------------------------------------------------------------------------
Inventories 160,122 130,288
Prepaid expenses 10,454 5,133
Deferred income taxes 42,326 29,877
- --------------------------------------------------------------------------------
Total current assets 472,044 405,001
- --------------------------------------------------------------------------------
Property, plant and equipment:
Land and land improvements 9,334 6,816
Buildings and leasehold improvements 67,627 46,107
Equipment 220,880 176,157
- --------------------------------------------------------------------------------
Subtotal 297,841 229,080
Less accumulated depreciation
and amortization 180,989 155,270
- --------------------------------------------------------------------------------
Total property, plant and equipment 116,852 73,810
- --------------------------------------------------------------------------------
Deferred income taxes 1,182 1,600
Other assets 71,556 16,466
- --------------------------------------------------------------------------------
Total assets $661,634 $496,877
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 365 $ 350
Short-term borrowing 41,000 41,025
Accounts payable 58,397 43,524
Accrued warranty 40,792 34,722
Accrued marketing programs 22,691 22,600
Other accrued liabilities 74,588 65,636
- --------------------------------------------------------------------------------
Total current liabilities 237,833 207,857
- --------------------------------------------------------------------------------
Long-term debt, less current portion 177,650 53,015
Other long-term liabilities 4,988 22,438
Common stockholders' equity:
Common stock, par value $1.00, authorized
35,000,000 shares; issued and outstanding
12,189,244 shares in 1997 (net of 720,760
treasury shares) and 12,032,143 shares in
1996 (net of 877,861 treasury shares) 12,189 12,032
Additional paid-in capital 31,371 28,462
Retained earnings 202,681 173,630
Foreign currency translation adjustment (5,078) (557)
- --------------------------------------------------------------------------------
Total common stockholders' equity 241,163 213,567
- --------------------------------------------------------------------------------
Total liabilities and common
stockholders' equity $661,634 $496,877
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
1997 Annual Report
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS The Toro Company
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
-----------------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
(Dollars in thousands) 1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,845 $ 36,409 $ 3,997 $ 36,667
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt 1,663 - - -
Provision for depreciation and amortization 30,878 18,170 3,590 17,240
Loss (gain) on disposal of property, plant and equipment 573 (260) (34) (135)
Change in deferred income taxes 2,053 784 194 (1,282)
Tax benefits related to employee stock option transactions 2,611 1,490 - 1,178
Changes in operating assets and liabilities:
Net receivables 15,067 (40,821) 13,640 (28,773)
Inventories 1,353 15,574 (22,142) (4,956)
Prepaid expenses and deferred income tax benefits (6,595) (1,131) 1,962 (10,024)
Accounts payable and accrued expenses 1,425 2,218 (9,770) 5,622
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 83,873 32,433 (8,563) 15,537
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (37,023) (21,389) (3,302) (28,162)
Proceeds from disposal of property, plant and equipment 1,163 543 43 843
(Increase) decrease in other assets/liabilities (12,784) (857) 1,793 3,935
Acquisition of James Hardie Irrigation, net of cash acquired (118,030) - - -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (166,674) (21,703) (1,466) (23,384)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in sale of receivables - - (2,331) 2,331
(Decrease) increase in short-term borrowing (2,627) (550) 19,040 22,535
Proceeds from issuance of long-term debt 175,000 - - -
Repayments of long-term debt (50,350) (15,334) (12,326) (20,300)
Payments of debt issue costs and prepayment penalty (5,770) - - -
Net payments for termination of interest rate swap agreements (23,650) - - -
Proceeds from interest rate swap agreement - 12,742 - -
Proceeds from exercise of stock options 8,407 4,627 3,586 8,251
Purchases of common stock (7,952) (13,339) (891) (26,225)
Dividends on common stock (5,794) (5,834) (1,459) (6,002)
Repayments from ESOP - - - 2,612
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 87,264 (17,688) 5,619 (16,798)
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (4,521) (678) 188 338
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (58) (7,636) (4,222) (24,307)
Cash and cash equivalents at beginning of period 66 7,702 11,924 36,231
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8 $ 66 $ 7,702 $ 11,924
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,829 $ 15,335 $ 4,694 $ 9,567
Income taxes 25,459 20,447 109 34,936
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Toro Company
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
FISCAL YEAR CHANGE
Effective November 1995, the company changed its fiscal year from a fiscal year
ended July 31 to a fiscal year ended October 31. The 3 month transition period
ended October 31, 1995 bridges the gap between the company's old and new fiscal
year-ends.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Toro Company and all wholly-owned and majority-owned domestic and foreign
subsidiaries (the company). Investments in 50% or less owned companies are
accounted for by the equity method. The accounts of foreign subsidiaries, which
are not material, have been adjusted to conform to U.S. accounting principles
and practices and have been translated to appropriate U.S. dollar equivalents.
All material intercompany accounts and transactions have been eliminated from
the consolidated financial statements. In fiscal 1997, the consolidated
financial statements include the results of the James Hardie Irrigation Group
(Hardie) from December 1, 1996, the effective date of the acquisition.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a maturity of
3 months or less to be cash equivalents. At October 31, 1997 and 1996 the
company had $4,598,000 and $4,908,000, respectively, included in trade payables
that represented the reclassification of outstanding checks in excess of related
bank balances.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts included in selling, general and
administrative expense was $812,000 and $3,358,000 for the years ended October
31, 1997 and 1996, respectively, $720,000 for the 3 months ended October 31,
1995 and $1,543,000 for the year ended July 31, 1995.
INVENTORIES
The majority of all inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Had the first-in, first-out (FIFO) method of cost determination been used,
inventories would have been $27,219,000 and $25,642,000 higher than reported at
October 31, 1997 and 1996, respectively. Under the FIFO method, work-in-process
inventories were $78,570,000 and $69,182,000 and finished goods inventories were
$108,771,000 and $86,748,000 at October 31, 1997 and 1996, respectively.
PROPERTY AND DEPRECIATION
Property, plant and equipment are carried at cost including capitalization of
interest incurred during the construction period for significant capital
projects. During the year ended October 31, 1997 the company capitalized
$500,000 of interest. The company provides for depreciation of plant and
equipment utilizing the straight-line method over the estimated useful lives of
the assets. Buildings, including leasehold improvements, are generally
depreciated over 10 to 45 years, and equipment over 3 to 7 years. Tooling costs
are generally amortized using the units of production method. Expenditures for
major renewals and betterments which substantially increase the useful lives of
existing assets are capitalized, and maintenance and repairs are charged to
operating expenses as incurred. Software is expensed at the time of purchase.
The cost and related accumulated depreciation of all plant and equipment
disposed of are removed from the accounts, and any gain or loss from such
disposal is included in current period earnings.
1997 Annual Report
27
<PAGE>
INTANGIBLE ASSETS
Intangible assets, consisting primarily of goodwill, are amortized on a
straight-line basis over periods ranging from 3 to 20 years. The company
periodically reviews the value of its goodwill and other intangible assets to
determine if impairment has occurred. Goodwill included in "Other assets"
totaled $53,667,000 and $9,267,000 at October 31, 1997 and 1996, respectively,
net of accumulated amortization of $13,744,000 at October 31, 1997 and
$3,625,000 at October 31, 1996.
ACCRUED WARRANTY
The company provides an accrual for estimated future warranty costs based upon
the historical relationship of warranty costs to sales.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency of the company's foreign operations is the applicable
local currency. The functional currency is translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," which is translated for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. The
gains or losses resulting from such translations are included in stockholders'
equity. Gains or losses resulting from transactions denominated in foreign
currencies are included in other income, net.
ACCOUNTING FOR REVENUES
Revenue is recognized at the time products are shipped to distributors, dealers
or mass merchandisers.
COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY
Included in selling, general and administrative expense are costs associated
with programs in which the company shares the expense of financing distributor
and dealer inventories. These costs of $10,192,000 for the year ended October
31, 1997, $10,252,000 for the year ended October 31, 1996, $2,063,000 for the 3
months ended October 31, 1995, and $9,675,000 for the year ended July 31, 1995,
are charged against operations as incurred.
RESEARCH AND DEVELOPMENT
Expenditures for research and development, including engineering, of $36,574,000
for the year ended October 31, 1997, $31,343,000 for the year ended October 31,
1996, $6,864,000 for the 3 months ended October 31, 1995, and $26,513,000 for
the year ended July 31, 1995 are charged against operations as incurred.
DISTRIBUTION
Included in selling, general and administrative expense are costs associated
with changes to the company's distribution channels. These costs were $898,000
for the year ended October 31, 1997, $2,533,000 for the year ended October 31,
1996, $823,000 for the 3 months ended October 31, 1995 and $3,400,000 for the
year ended July 31, 1995. Those costs associated with business changes are
accrued on the basis of historical experience, while costs related to specific
changes to the company's distribution system are recorded when authorized.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized
The Toro Company
28
<PAGE>
in income in the period that includes the enactment date. The company has
reflected the necessary deferred tax asset/liability in the accompanying balance
sheets. Management believes the future tax deductions will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, and to a lesser extent, future
taxable income.
NET EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS
Net earnings per share of common stock and common stock equivalents are computed
by dividing net earnings by the weighted average number of common shares and
common stock equivalents outstanding during the respective periods. Common stock
equivalents include potentially dilutive stock options. These shares are
included under the treasury stock method using the average market price of the
company's stock during each period. The effect of full dilution using the
year-end price of the company's stock was not significant.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting earnings
per share information. The company will be required to adopt the new standard
beginning in the first quarter of fiscal 1998; earlier application is not
permitted. Prior period information is required to be restated to conform with
the requirements of the new standard. Pro forma earnings per share for the years
ended October 31, 1997 and 1996, the 3 month period ended October 31, 1995 and
the year ended July 31, 1995 as computed under SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
-------------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share, before extraordinary loss $ 3.02 $3.00 $0.33 $2.92
Extraordinary loss, net of income tax benefit (0.14) - - -
- --------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.88 $3.00 $0.33 $2.92
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share, before extraordinary loss $ 2.93 $2.90 $0.32 $2.81
Extraordinary loss, net of income tax benefit (0.13) - - -
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 2.80 $2.90 $0.32 $2.81
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
In fiscal 1997, the FASB also issued SFAS 129, SFAS 130 and SFAS 131. SFAS
129, "Disclosure of Information about Capital Structure," consolidates existing
disclosure requirements and will have no impact on the company's financial
statements. SFAS 130, "Reporting Comprehensive Income," establishes standards
for reporting and displaying the components of comprehensive income and will be
adopted by the company in fiscal 1998. The statement requires additional
disclosures, but has no impact on consolidated net earnings. SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information,"
establishes standards for determining operating segments and reporting operating
segment information. SFAS 131 is required to be adopted beginning with the
company's fiscal 1999 year-end annual report. The company has not yet evaluated
the effects of this pronouncement to determine what changes, if any, to its
current reporting format will be required.
1997 Annual Report
29
<PAGE>
BUSINESS ACQUISITIONS
Effective December 1, 1996 the company acquired the James Hardie Irrigation
Group (Hardie) from James Hardie Industries Limited (JHI Limited) for
$118,030,000 based on estimated, unaudited aggregate shareholders' equity of
Hardie on December 1, 1996, subject to further adjustment based on final audit
results.
Based on the financial statements of Hardie as of the acquisition date,
shareholders' equity at the acquisition date was approximately $10,545,000
less than the estimated equity used as the closing date purchase price, and
this $10,545,000 is to be returned from JHI Limited to the company. In
addition, under the procedures established in the purchase agreement, the
company and JHI Limited have entered into an arbitration process related to
the valuation of assets, accounting methods applied, estimates used and other
items. The resolution of these matters may result in an additional reduction
of the purchase price.
The acquisition is accounted for using the purchase accounting method and,
accordingly, the initial purchase price of $118,030,000 has been allocated based
on the estimated fair values of assets acquired and liabilities assumed on the
date of acquisition. The excess of the purchase price over the estimated fair
value of net tangible assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 20 years. Any additional reductions in
the purchase price, as a result of resolution of the objections discussed in the
preceding paragraph, will result in a reduction of goodwill. The related effect
of these adjustments on the Consolidated Statement of Earnings of the company is
not expected to be material.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and Hardie as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with the related income
tax effects.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year Ended
------------------------
OCTOBER 31 October 31
(Dollars in thousands, except per share data) 1997 1996
- --------------------------------------------------------------------------------
Net sales $1,065,370 $1,074,783
- --------------------------------------------------------------------------------
Net earnings before extraordinary loss $ 34,811 $ 30,423
Extraordinary loss, net of income tax benefit 1,663 -
- --------------------------------------------------------------------------------
Net earnings $ 33,148 $ 30,423
- --------------------------------------------------------------------------------
Primary earnings per share before extraordinary loss $ 2.79 $ 2.42
Extraordinary loss per share, net of income tax benefit 0.13 -
- --------------------------------------------------------------------------------
Primary earnings per share $ 2.66 $ 2.42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Effective November 1, 1997 the company acquired Exmark Manufacturing Company
Incorporated (Exmark), a leading manufacturer of equipment for the professional
landscape contractor industry. Exmark is headquartered in Beatrice, Nebraska and
produces mid-sized walk-behind power mowers and zero-turning-radius riding
mowers for professional contractors. Exmark had net sales of $53.4 million and
net earnings of $2.8 million for its fiscal year ended August 31, 1997.
In exchange for all of the capital stock of Exmark, the company issued
598,051 shares of its common stock and paid approximately $5.5 million in cash.
In addition, under the terms of the purchase agreement, the company will be
required to make contingent payments to Exmark shareholders if Exmark's
post-acquisition earnings and sales growth from November 1, 1997 through October
31, 1999 exceed minimum levels established in the purchase agreement. The
maximum amount of these contingent payments is $28,000,000. Contingent payments
will be paid with a combination of cash and the company's common stock. The
acquisition is accounted for using the purchase method of accounting and
accordingly, the purchase price is allocated based on the fair
The Toro Company
30
<PAGE>
value of assets acquired and liabilities assumed. The excess of the purchase
price, including any contingent payment amounts, over the fair value of net
assets acquired will be recorded as goodwill, and amortized on a straight-line
basis over a 20 year period.
SHORT-TERM CAPITAL RESOURCES
At October 31, 1997 the company had available unsecured lines of credit with
four banks in the aggregate of $190,000,000. Most of these agreements require
the company to pay a fee of 0.175% per year on the available lines of credit,
which is included in interest expense.
The company had $41,000,000 outstanding at October 31, 1997 and $41,025,000
outstanding at October 31, 1996. The weighted average interest rate on
short-term borrowing was 5.95% and 6.18% at October 31, 1997 and 1996,
respectively.
LONG-TERM DEBT
A summary of long-term debt is as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) October 31 1997 1996
- --------------------------------------------------------------------------------
7.125% Notes, due June 15, 2007 $ 75,000 $ -
7.80% Debentures, due June 15, 2027 100,000 -
11% Sinking Fund Debentures due annually
August 1998-2017 called August 1, 1997 - 50,000
Industrial Revenue Bond due annually
June 1997-2004 with various interest rates 3,015 3,365
- --------------------------------------------------------------------------------
178,015 53,365
Less current portion 365 350
- --------------------------------------------------------------------------------
Long-term debt, less current portion $177,650 $53,015
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In June 1997, the company issued $175.0 million of debt securities consisting
of $75.0 million of 7.125% coupon 10-year Notes and $100.0 million of 7.80%
coupon 30-year Debentures. The proceeds from the debt securities issued were
used, in part, to repay short-term indebtedness, which was primarily related to
the acquisition of Hardie, and to redeem on August 1, 1997 the company's $50.0
million principal amount of 11% Sinking Fund Debentures. The company paid a
prepayment penalty of $2.8 million for the early retirement of the 11%
Debentures. This penalty is reported in the consolidated statement of earnings
as an extraordinary loss, net of the related income tax benefit.
In connection with the issuance of the $175.0 million in long-term debt
securities, the company paid $23.7 million to terminate three forward-starting
interest rate swap agreements with notational amounts totaling $125.0 million.
These swap agreements had been entered into to reduce exposure to interest rate
risk prior to the issuance of the new long-term debt securities. At the
inception of one of the swap agreements, the company had received payments which
were recorded as deferred income to be recognized as an adjustment to interest
expense over the term of the new debt securities. At the date the swaps were
terminated, this deferred income totaled $18.7 million. The excess of the
termination fees over the deferred income recorded has been deferred and is
being recognized as an adjustment to interest expense over the term of the new
debt securities issued.
Under the terms of the long-term debt agreements the company is subject to
certain covenants. At October 31, 1997 the company was in compliance with all
such covenants.
Principal payments required on long-term debt in each of the next five years
ending October 31 are as follows: 1998, $365,000; 1999, $385,000; 2000,
$405,000; 2001, $425,000; 2002, $450,000; and after 2002, $175,985,000.
1997 Annual Report
31
<PAGE>
INCOME TAXES
A reconciliation of the statutory federal income tax rate to the company's
consolidated effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
----------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
1997 1996 1995 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
Benefits from foreign sales corporation (1.4) (0.8) (0.2) (0.8)
State and local income taxes, net of federal income tax benefit 2.9 2.5 4.6 2.4
Effect of foreign source income 0.9 - 1.5 0.5
Goodwill amortization 2.3 0.4 0.6 0.4
Other, net (0.2) 2.4 (2.0) 2.5
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated effective tax rate 39.5% 39.5% 39.5% 40.0%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
----------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
(Dollars in thousands) 1997 1996 1995 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $15,985 $22,479 $ 731 $24,878
State 1,445 2,754 238 2,942
- -------------------------------------------------------------------------------------------------------------------------------
Current provision 17,430 25,233 969 27,820
- -------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 4,182 (1,051) 1,414 (2,689)
State 1,137 (411) 226 (686)
- -------------------------------------------------------------------------------------------------------------------------------
Deferred provision 5,319 (1,462) 1,640 (3,375)
- -------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $22,749 $23,771 $2,609 $24,445
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to the net deferred
income tax assets at October 31, 1997 and 1996 are presented below.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------
Allowance for doubtful accounts $ 5,070 $ 5,151
Inventory reserves 1,900 536
Uniform capitalization 2,328 2,252
Depreciation 2,201 1,600
Warranty reserves 15,028 12,881
Marketing programs 1,811 2,018
Distributor reserves 2,044 2,603
Restructuring reserves 1,954 1,091
Product liability 2,316 1,957
Accrued retirement 3,961 3,410
Accrued vacation pay 2,087 1,912
Other 2,808 (3,934)
- ---------------------------------------------------------------------------
Consolidated deferred income tax assets $43,508 $31,477
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
During the years ended October 31, 1997 and 1996, respectively, $2,611,000
and $1,490,000 was added to additional paid-in capital in accordance with
Accounting Principal Board Opinion 25 reflecting the permanent book to tax
difference in accounting for tax benefits related to employee stock option
transactions.
32
<PAGE>
COMMON STOCKHOLDERS' EQUITY
Changes in the components of common stockholders' equity during the fiscal years
ended October 31, 1997 and 1996, the 3 months ended October 31, 1995 and the
fiscal year ended July 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
Currency
Common Additional Retained Receivable Translation
(Dollars in thousands) Stock Paid-In Capital Earnings from ESOP Adjustment
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1994 $12,561 $ 49,420 $109,688 $(2,612) $ (405)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (6,002) - -
Issuance of 444,783 shares under stock option plans 445 7,806 - - -
Purchase of 965,757 common shares (966) (25,259) - - -
Payment received from ESOP - - - 2,612 -
Foreign currency translation adjustment - - - - 338
Tax benefits related to employee stock option transactions - 1,178 - - -
Net earnings - - 36,667 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 $12,040 $ 33,145 $140,353 $ 0 $ (67)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.12 per share) - - (1,459) - -
Issuance of 156,263 shares under stock option plans 156 3,431 - - -
Purchase of 28,204 common shares (28) (864) - - -
Foreign currency translation adjustment - - - - 188
Net earnings - - 3,997 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1995 $12,168 $ 35,712 $142,891 $ 0 $ 121
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (5,834) - -
Issuance of 294,324 shares under stock option plans 294 4,333 - - -
Purchase of 429,692 common shares (430) (13,073) - - -
Foreign currency translation adjustment - - - - (678)
Tax benefits related to employee stock option transactions - 1,490 - - -
Other - - 164 - -
Net earnings - - 36,409 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1996 $12,032 $ 28,462 $173,630 $ 0 $ (557)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) - - (5,794) - -
Issuance of 389,101 shares under stock option plans 389 8,018 - - -
Purchase of 232,000 common shares (232) (7,720) - - -
Foreign currency translation adjustment - - - - (4,521)
Tax benefits related to employee stock option transactions - 2,611 - - -
Net earnings - - 34,845 - -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 $12,189 $ 31,371 $202,681 $ 0 $(5,078)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Under the terms of a Rights Agreement established June 14, 1988 each share of
the company's common stock entitles its holder to one preferred share purchase
right. Each right entitles the registered holder to purchase from the company
one one-hundredth of a share of Series B Junior Participating Voting Preferred
Stock, $1.00 par value at a price of $85 per one one-hundredth of a Preferred
Share. The rights become exercisable and tradable 10 days after a person or a
group acquires 20% or more, or makes an offer to acquire 20% or more, of the
company's outstanding common stock. At no time do the rights have any voting
power. The rights may be redeemed by the company for $0.01 per right at any time
prior to the time that a person or group has acquired beneficial ownership of
20% or more of the common shares.
1997 Annual Report
33
<PAGE>
STOCK OPTION PLANS
The company grants incentive and nonqualified stock options under the terms of
the 1989 and 1993 Stock Option Plans. Each option is granted at an exercise
price 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 (CPAP) for which the
exercise price is an average of the closing stock prices for the 3 months
preceding the grant date and may be higher or lower than fair market value.
Stock options other than performance based options are generally exercisable
immediately and can be exercised in whole or in part until expiration or
termination of employment. Stock options granted under the plans, with the
exception of options granted in connection with the CPAP, expire 5 to 10 years
from the date of grant.
Performance based options are granted under the CPAP and generally vest at
the end of the succeeding three fiscal years. Vested options expire 90 days
after the public release of the fiscal year-end earnings. Based on performance
over the three year term, some or all of the options granted may be cancelled.
Options granted under this plan totaled 40,474 and 48,768 for the years ended
October 31, 1997 and 1996, respectively, zero for the 3 months ended October 31,
1995 and 40,031 for the year ended July 31, 1995. CPAP options cancelled were
33,812 during the year ended October 31, 1997 and 18,532 during the year ended
July 31, 1995. There were no CPAP options cancelled during the year ended
October 31, 1996 or during the 3 months ended October 31, 1995.
The company also grants options to members of its Board of Directors under
the 1992 Director Stock Plan. Each option granted under the plan is exercisable
at 100% of the fair market value of the common stock on the date of grant.
Options granted under this plan were 7,000 and 6,000 for the years ended October
31, 1997 and 1996, respectively.
A summary of stock option activity under the plans described above is
presented below:
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Weighted
Options available Options average
for grant outstanding exercise price
- ----------------------------------------------------------------------------
August 1, 1994 1,005,486 1,259,509 $16.35
Granted (323,474) 323,474 23.69
Exercised - (394,432) 16.61
Cancelled 21,972 (21,972) 19.37
- ----------------------------------------------------------------------------
July 31, 1995 703,984 1,166,579 18.24
- ----------------------------------------------------------------------------
Granted (256,496) 256,496 29.00
Exercised - (161,694) 17.49
Cancelled 8,070 (8,070) 15.12
- ----------------------------------------------------------------------------
October 31, 1995 455,558 1,253,311 20.56
- ----------------------------------------------------------------------------
Granted (48,768) 48,768 29.77
Exercised - (193,221) 18.85
Cancelled 1,000 (1,000) 29.13
Increase in options
available for grant 600,000 - -
- --------------------------------------------------------------------------------
October 31, 1996 1,007,790 1,107,858 21.25
- --------------------------------------------------------------------------------
Granted (251,620) 251,620 32.74
Exercised - (443,516) 21.93
Cancelled 33,812 (33,812) 24.49
- --------------------------------------------------------------------------------
OCTOBER 31, 1997 789,982 882,150 $24.06
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Toro Company
34
<PAGE>
The table below presents the number, weighted average remaining contractual
life and weighted average exercise price for options outstanding at
October 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted Weighted
Number average average time
Exercise price range of options exercise price to expiration
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable at October 31, 1997:
$14.75 300,000 $14.75 8.1 years
$20.40 - $23.625 118,098 23.09 1.6 years
$25.50 - $29.125 204,059 28.30 2.4 years
$31.75 - $36.375 162,208 33.85 4.0 years
- ----------------------------------------------------------------------------------------------------
Total 784,365 $23.48 4.8 years
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Options not exercisable at October 31, 1997:
$24.12 - $32.31 97,785 $28.76 1.3 years
- ----------------------------------------------------------------------------------------------------
Grand total 882,150 $24.06 4.4 years
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized for stock option grants, except performance based options. The
company recognized compensation expense of $545,000, $483,000, $127,000 and
$534,000 for the years ended October 31, 1997 and 1996, the 3 month transition
period ended October 31, 1995 and the year ended July 31, 1995, respectively. If
the company had elected to recognize compensation cost consistent with the
methodology prescribed under SFAS 123, "Accounting for Stock-Based
Compensation," the company's net income and earnings per share for the years
ended October 31, 1997 and 1996 would have been as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year ended
----------------------
OCTOBER 31 October 31
(Dollars in thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
Net income, as reported $34,845 $36,409
Pro forma net income 34,289 36,640
- --------------------------------------------------------------------------------
Earnings per share, as reported $ 2.80 $ 2.90
Pro forma earnings per share 2.75 2.92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model and using an expected dividend
yield of 1.5%, expected stock price volatility of 20%, risk free interest rate
of 5.75% and an expected life of 3.5 years for performance based options and 3
years for all other options.
The weighted average fair market value of options on the grant date was $6.44
and $6.07 for options issued during the years ended October 31, 1997 and 1996,
respectively.
On July 31, 1995 the company issued 17,467 shares of restricted stock and
17,467 performance units to the CEO under the terms of the Chief Executive
Officer Succession Plan. The value of each performance unit is equal to the fair
market value of a share of common stock. The restricted stock and performance
units vest based upon achievement of specified succession planning goals.
Dividends are paid and the shares may be voted. Portions of the restricted stock
and performance unit awards
1997 Annual Report
35
<PAGE>
will be forfeited if certain goals are not achieved at various dates, ending on
October 31, 2003 or termination of employment. Compensation expense related to
this plan was $350,000, $254,000 and $57,000 for the years ended October 31,
1997 and 1996 and the 3 month transition period ended October 31, 1995
respectively. There was no expense for the period ended July 31, 1995.
EMPLOYEE BENEFIT PROGRAMS
The company adopted a new employee benefit program effective August 1, 1995
replacing the existing employee benefit plans. Under this new benefit program,
eligible employees receive a pre-established percentage of their salary.
Contributions to the plan were $7,245,000 in fiscal 1997 for benefits earned in
fiscal 1996, and $2,539,000 in fiscal 1996 for benefits earned during the
3 month transition period ended October 31, 1995. In addition, this plan
provides for company matching contributions of up to two percent of salary.
Matching contributions were $2,024,000 and $1,679,000 for the years ended
October 31, 1997 and 1996, respectively.
Prior to August 1, 1995 employee benefits consisted of a leveraged Employee
Stock Ownership Plan (ESOP), as well as a profit sharing and matching stock
plan. At July 31, 1995 the ESOP indebtedness was repaid in full. For the year
ended July 31, 1995 principal payments of ESOP debt were $2,612,000, interest
incurred on ESOP debt and received by the company was $258,000 and dividends on
ESOP shares used for debt service were $107,000. The company's contributions to
the ESOP, net of dividends, were $639,000 for the year ended October 31, 1996
and $2,762,000 for the year ended July 31, 1995. Contributions to the former
profit sharing and matching stock plans were $3,833,000 for the 3 month period
ended October 31,1995 and $4,760,000 for the year ended July 31, 1995.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. The expense related to these plans
is not significant.
SEGMENT DATA
The company classifies its operations into one industry segment, outdoor
maintenance equipment. International sales were $232,808,000 for the year ended
October 31, 1997, $174,249,000 for the year ended October 31, 1996, $20,935,000
for the 3 months ended October 31, 1995 and $152,409,000 for the year ended July
31, 1995. Of these amounts, export sales were $161,836,000 for the year ended
October 31, 1997, $140,919,000 for the year ended October 31, 1996, $18,557,000
for the 3 months ended October 31, 1995 and $126,560,000 for the year ended July
31, 1995. Export sales by geographic area are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
-------------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
(Dollars in thousands) 1997 1996 1995 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Europe $ 79,515 $ 71,325 $ 6,098 $ 60,239
Canada 33,349 29,578 4,848 31,921
Pacific Rim 34,417 34,975 6,955 28,979
Other 14,555 5,041 656 5,421
- ------------------------------------------------------------------------------------------
Total export sales $161,836 $140,919 $18,557 $126,560
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The Toro Company
36
<PAGE>
LEASE COMMITMENTS
Minimum lease commitments in future years under noncancelable operating leases
are as follows: 1998, $7,555,000; 1999, $5,431,000; 2000, 3,339,000; 2001,
$2,135,000; 2002, $845,000; and after 2002, $178,000.
Total lease expense was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Year Ended 3 Months Ended Year Ended
------------------------------------------------------------
OCTOBER 31 October 31 October 31 July 31
(Dollars in thousands) 1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warehouse and office space $3,604 $3,291 $ 905 $3,360
Trucks and autos 1,959 2,191 374 1,890
Equipment 4,297 3,933 924 3,721
- ----------------------------------------------------------------------------------------------------
Total $9,860 $9,415 $2,203 $8,971
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
COMMITMENTS AND CONTINGENT LIABILITIES
The company was contingently liable to repurchase $9,438,000 at October 31, 1997
and $10,578,000 at October 31, 1996 of inventory relating to receivables under
dealer financing arrangements. Additionally, debts incurred by certain
distributors, aggregating $5,600,000 at October 31, 1997 and $1,008,000 at
October 31, 1996 have been guaranteed by the company.
In the ordinary course of business the company may become liable with respect
to pending and threatened litigation, tax, environmental, and other matters.
While the ultimate results of investigations, lawsuits, and claims involving the
company cannot be determined, management does not expect that these matters will
have a material adverse effect on the consolidated financial position of the
company.
FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
Letters of credit are issued by the company during the ordinary course of
business, as required by certain vendor contracts, through major domestic banks.
As of October 31, 1997 and 1996 the company had $25,985,000 and $19,705,000,
respectively, in outstanding letters of credit.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of accounts receivable which are concentrated in
a single business segment, outdoor maintenance equipment. The credit risk
associated with this segment is limited because of the large number of customers
in the company's customer base and their geographic dispersion.
1997 Annual Report
37
<PAGE>
FOREIGN CURRENCY INVESTMENTS
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into foreign currency exchange contracts. These contracts are
designed to hedge firm anticipated foreign currency transactions. Gains and
losses on foreign currency contracts are deferred and recognized upon
settlement of the underlying hedged transaction.
At October 31, 1997 the company had contracts maturing at various dates to
purchase $5,781,000 in foreign currencies and to sell $42,478,000 in foreign
currencies at the contract rates. In addition, the company had range forward
options of $3,000,000 at October 31, 1997.
The company enters into forward currency exchange contracts on behalf of
certain distributors in order to cover a portion of the payments owed by the
distributor to the company. Any currency losses incurred by the company are
reimbursed by the distributor.
Changes in the market value of the foreign currency instruments are
recognized in the financial statements upon settlement of the hedged
transaction.
As discussed under the Long-term Debt caption in these Notes to the
Consolidated Financial Statements, the company entered into interest rate
exchange or swap agreements to hedge interest rate exposure on the anticipated
issuance of new long-term debt securities. The net loss on these swap agreements
has been deferred and is being amortized as an adjustment to interest expense
over the term of the debt securities. In June 1997, the company terminated all
of its outstanding interest rate exchange agreements upon the issuance of the
new long-term debt securities.
FAIR VALUE
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of FAS Statement 107,
"Disclosures about Fair Value of Financial Instruments." Estimated fair value
amounts have been determined using available information and appropriate
valuation methodologies. Because considerable judgment is required in
developing the estimates of fair value, these estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
For cash and cash equivalents, receivables and accounts payable, carrying
value is a reasonable estimate of fair value.
At October 31, 1997 the estimated fair value of long-term debt with fixed
interest rates was $187,713,000 compared to its carrying value of $178,015,000.
The fair value is estimated by discounting the projected cash flows using the
rate at which similar amounts could currently be borrowed.
The Toro Company
38
<PAGE>
(unaudited)
Summarized quarterly financial data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED OCTOBER 31, 1997
-----------------------------------------------------
Quarter (Dollars in thousands, except per share data) FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $208,957 $352,203 $249,274 $240,770
Gross profit 75,227 125,117 92,395 95,298
Net earnings, before extraordinary loss 2,491 19,040 9,949 5,028
Net earnings 2,491 19,040 8,286 5,028
Net earnings per share of common stock
and common stock equivalent, before extraordinary loss 0.20 1.53 0.80 0.40
Net earnings per share of common stock and
common stock equivalent 0.20 1.53 0.67 0.40
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 36 5/8 36 7/8 38 7/8 43 3/4
Low bid 31 1/2 33 35 1/8 35 7/16
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31, 1996
---------------------------------------------------
Quarter (Dollars in thousands, except per share data) First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $211,501 $288,646 $232,565 $198,197
Gross Profit 76,329 103,810 85,884 75,700
Net earnings 8,498 16,820 6,465 4,626
Net earnings per share of common stock and
common stock equivalent 0.67 1.33 0.52 0.37
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 36 1/4 35 1/4 34 5/8 34 1/8
Low bid 28 3/8 30 5/8 30 30 1/4
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Annual Report
39
<PAGE>
Exhibit 21
THE TORO COMPANY
SUBSIDIARIES OF REGISTRANT
All of the following are subsidiaries of The Toro Company as of December 17,
1997.
STATE OR OTHER PERCENTAGE OF VOTING
JURISDICTION SECURITIES OWNED BY
NAME OF INCORPORATION IMMEDIATE PARENT
Toro Australia Pty. Limited Australia 100%
Toro Credit Company Minnesota 100%
Toro Europe Belgium 100%
Toro Foreign Sales Corporation Barbados 100%
Lawn-Boy Inc. Delaware 100%
Toro Probiotic Products, Inc. Minnesota 100%
Toro Sales Company Minnesota 100%
Toro Southwest, Inc. California 100%
Toro International Company Minnesota 100%
Hahn Equipment Co. Minnesota 100%
Professional Turf Products of Texas 100%
Texas, Inc.
Integration Control Systems & Texas 100%
Services, Inc.
Turf Management Systems, Inc. Minnesota 100%
James Hardie Irrigation Pty. Australia 100%
Limited
Irritrol Systems of Europe S.p.A. Italy 100%
Exmark Manufacturing Company Nebraska 100%
Incorporated
26
<PAGE>
[LETTERHEAD]
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Toro Company:
We consent to incorporation by reference in the Registration Statements (Nos.
33-26268, 33-31586, 33-38308, 33-44668, 33-51563, 33-55550, 33-59563,
333-4521 and 333-20901) on Forms S-3 and S-8 of The Toro Company of our
reports dated December 12, 1997, relating to the consolidated balance sheets
of The Toro Company and subsidiaries as of October 31, 1997 and 1996, and the
related consolidated statements of earnings and cash flows and related
financial statement schedule for the years ended October 31, 1997 and 1996,
three-month period ended October 31, 1995 and the year ended July 31, 1995,
which reports are included in or incorporated by reference in the annual
report on Form 10-K of The Toro Company.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1998
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS, THE BALANCE SHEETS AND 10-K
SCHEDULE II AND EXHIBIT 11 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 255,318
<ALLOWANCES> 9,832
<INVENTORY> 160,122
<CURRENT-ASSETS> 472,044
<PP&E> 297,841
<DEPRECIATION> 180,989
<TOTAL-ASSETS> 661,634
<CURRENT-LIABILITIES> 237,833
<BONDS> 178,015<F1>
0
0
<COMMON> 12,189<F2>
<OTHER-SE> 228,974
<TOTAL-LIABILITY-AND-EQUITY> 661,634
<SALES> 1,051,204
<TOTAL-REVENUES> 1,051,204
<CGS> 663,167
<TOTAL-COSTS> 315,690
<OTHER-EXPENSES> (7,897)<F3>
<LOSS-PROVISION> 812
<INTEREST-EXPENSE> 19,900
<INCOME-PRETAX> 60,344
<INCOME-TAX> 23,836
<INCOME-CONTINUING> 36,508
<DISCONTINUED> 0
<EXTRAORDINARY> (1,663)
<CHANGES> 0
<NET-INCOME> 34,845
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.77
<FN>
<F1>Total long-term debt
<F2>Does not include additional-paid-in capital
<F3>Other income, net
</FN>
</TABLE>
