<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
THE TORO COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[LOGO]
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420-1196
TELEPHONE 612/888-8801
KENDRICK B. MELROSE
CHAIRMAN AND CEO
February 5, 1999
To Our Fellow Stockholders:
You are cordially invited to join us for the Toro Annual Meeting of Stockholders
to be held on Wednesday, March 24, 1999 at the corporate offices of The Toro
Company. Details about the meeting, nominees for the Board of Directors and
other matters to be acted on are presented in the Notice of Annual Meeting and
Proxy Statement that follow.
In addition to Annual Meeting formalities, we will report to stockholders
generally on the business of the Company, and will be pleased to answer
stockholders' questions relating to the Company. Refreshments will be served
after the meeting.
We hope you plan to attend the Annual Meeting. However, if you will not be able
to join us, we urge you to exercise your right to vote by signing, dating and
returning the enclosed proxy card.
On behalf of your Toro Board of Directors and management, it is my pleasure to
express our appreciation for your continued support.
Sincerely,
[SIG]
Kendrick B. Melrose
IT IS IMPORTANT THAT YOU VOTE, SIGN AND RETURN THE ACCOMPANYING
PROXY CARD AS SOON AS POSSIBLE. BY DOING SO, YOU MAY SAVE THE COMPANY
THE EXPENSE OF ADDITIONAL SOLICITATION.
<PAGE>
[LOGO]
NOTICE OF ANNUAL MEETING
The Toro Company 1999 Annual Meeting of Stockholders will be held on
Wednesday, March 24, 1999 at 3:00 p.m. C.S.T. at Toro's corporate offices at
8111 Lyndale Avenue South, Bloomington, Minnesota, for the following purposes:
1. To elect three directors, each to serve for a term of three years;
2. To approve amendments to The Toro Company Annual Management Incentive Plan
II;
3. To approve The Toro Company Performance Share Plan;
4. To approve the selection of auditors for the Company for Fiscal 1999 (the
fiscal year ending October 31, 1999); and
5. To transact any other business properly brought before the Annual Meeting or
any adjournment of the meeting.
Stockholders of record at the close of business on January 25, 1999 (the
"Record Date") will be entitled to vote at the meeting.
A stockholder list will be available at the Company's corporate offices
beginning March 10, 1999 during normal business hours, for examination by any
stockholder registered on the Company's Stock Ledger as of the Record Date, for
any purpose germane to the Annual Meeting.
Since a majority of the outstanding shares of the Company's Common Stock
must be represented either in person or by proxy to constitute a quorum for the
conduct of business, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY.
February 5, 1999
BY ORDER OF THE BOARD OF DIRECTORS
[SIG]
J. LAWRENCE MCINTYRE
Vice President, Secretary and General
Counsel
<PAGE>
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MN 55420-1196
PROXY STATEMENT
The Toro Company Board of Directors is soliciting your proxy for use at the
1999 Annual Meeting of Stockholders on Wednesday, March 24, 1999. This Notice,
Proxy Statement and enclosed form of proxy will be mailed to stockholders
beginning February 5, 1999.
VOTING
Each share of Toro Common Stock you own entitles you to one vote. You may
vote your shares in person by attending the Annual Meeting or you may vote by
proxy. If you vote by proxy, you must sign, date and return the enclosed proxy
card in the envelope provided.
DIVIDEND REINVESTMENT PLAN SHARES. If you are a participant in the
Company's Dividend Reinvestment Plan, the number shown on the enclosed proxy
card represents shares held for your account in that plan.
EMPLOYEE BENEFIT PLAN SHARES. If you are a participant in a Company
employee benefit plan that allows participant-directed voting of Common Stock
held in the plan, the number shown on the enclosed proxy card represents shares
you hold in each plan, as well as shares you own of record, if any. The trustee
for each plan will cause votes to be cast confidentially in accordance with your
instructions. Plan shares not voted by participants will be voted by the trustee
in the same proportion as the votes actually cast by participants, in accordance
with the terms of the respective plan.
QUORUM AND VOTE REQUIREMENTS
On January 25, 1999, the Company had 12,487,098 shares of Common Stock
outstanding.
A majority of the outstanding shares of Common Stock must be present in
person or by proxy in order to have a quorum to conduct business at the Annual
Meeting. Shares represented by proxies marked "Abstain" and "broker non-votes"
are counted in determining whether a quorum is present. A "broker non-vote" is a
proxy submitted by a broker that does not indicate a vote for some or all of the
proposals because the broker does not have discretionary voting authority and
has not received instructions from its client as to how to vote on a particular
proposal.
The affirmative vote of a plurality of shares present at the meeting is
required for the election of directors. Other matters will be decided by the
affirmative vote of a majority of the shares of Common Stock present, in person
or represented by proxy, except that Proposal Two and Proposal Three will be
decided by a majority of votes cast. "Broker non-votes" are not counted, but
abstentions are counted, in determining the total number of votes cast on a
proposal. An abstention has the effect of a negative vote.
IF YOU SPECIFY ON YOUR PROXY CARD HOW YOU WANT TO VOTE YOUR SHARES, THE
SHARES WILL BE VOTED IN ACCORDANCE WITH YOUR SPECIFICATIONS. IF YOU DO NOT
SPECIFY ON YOUR PROXY CARD HOW YOU WANT TO VOTE YOUR SHARES, WE WILL VOTE THEM
FOR THE ELECTION OF ALL NOMINEES FOR DIRECTOR AS DESCRIBED UNDER PROPOSAL ONE--
ELECTION OF DIRECTORS, FOR PROPOSAL TWO--AMENDMENTS TO THE TORO COMPANY ANNUAL
MANAGEMENT INCENTIVE PLAN II, FOR PROPOSAL THREE--ADOPTION OF THE TORO COMPANY
PERFORMANCE SHARE PLAN AND FOR PROPOSAL FOUR--SELECTION OF INDEPENDENT AUDITORS.
1
<PAGE>
REVOKING A PROXY
If you give a proxy and later wish to revoke it before it is voted, you may
do so by sending a written statement to that effect or by submitting a properly
signed proxy bearing a later date to the office of the Company's Corporate
Secretary.
PROCEDURES AT THE ANNUAL MEETING
The presiding officer at the meeting will determine how business at the
Annual Meeting will be conducted. Only matters brought before the Annual Meeting
in accordance with the Company's Bylaws will be considered.
Only a natural person present at the Annual Meeting who either is a Toro
stockholder or is acting on behalf of a stockholder may make a motion or second
a motion. If the person is acting on behalf of a stockholder, a written
statement must be presented, executed by the stockholder or the duly authorized
representative of the stockholder on whose behalf the person purports to act.
STOCK OWNERSHIP
The following table shows how much Toro Common Stock each of the directors
and nominees, the Chief Executive Officer and the other most highly compensated
executive officers named in the Summary Compensation Table ("named executive
officers") beneficially owned as of January 29, 1999. The table also shows
beneficial ownership by holders of more than 5% of the Common Stock and by all
directors and executive officers as a group, including the named executive
officers.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER(1) OWNERSHIP OF CLASS
- ----------------- ---------------------------------------- ---------------------- -----------
<S> <C> <C> <C>
Common Stock Franklin Resources, Inc. 1,434,400(2) 11.0%
777 Mariners Island Blvd.
San Mateo, CA 95504
Common Stock KPM Investment Management, Inc. 732,325(3) 5.6
10250 Regency Circle
Omaha, NE 68114
Common Stock Ronald O. Baukol 3,980(4) *
Robert C. Buhrmaster 4,014(4) *
Winslow H. Buxton 1,730(4) *
Janet K. Cooper 4,809(4) *
Michael J. Hoffman 30,503(4) *
Charles B. Lounsbury 8,743(4) *
J. David McIntosh 97,417(4)(5) *
J. Lawrence McIntyre 42,606(4) *
Kendrick B. Melrose 648,201(4) 4.8
Alex A. Meyer 5,164(4) *
Robert H. Nassau 4,385(4) *
Dale R. Olseth 10,322(4) *
Richard W. Parod 20,678(4) *
Christopher A. Twomey 1,233(4) *
Edwin H. Wingate 5,513(4) *
Common Stock All directors and executive officers as 1,093,385(4)(5) 7.9
a group, including one former executive
officer (21 persons)
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
2
<PAGE>
(1) Shares are deemed to be "beneficially owned" by a person if such person,
directly or indirectly, has or shares (i) the power to vote or to direct the
voting of such shares or (ii) the power to dispose or direct the disposition
of such shares. In addition, beneficial ownership includes shares which such
person has the right to acquire within 60 days.
(2) According to a Schedule 13G dated May 6, 1998, one or more closed-end
investment companies or other managed accounts which are advised by certain
investment advisory subsidiaries of Franklin Resources, Inc. ("FRI")
beneficially own an aggregate of 1,434,400 shares of the Company's Common
Stock, as to which such subsidiaries may be deemed to be the beneficial
owner. Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of
10% of the outstanding common stock of FRI, so that FRI and such individuals
may be deemed to be the beneficial owner of all of such shares of the
Company's Common Stock. FRI, such individuals and the subsidiaries of FRI
disclaim any economic interest in or beneficial ownership of the Common
Stock.
(3) According to a Schedule 13G dated February 3, 1998, KPM Investment
Management, Inc., an investment advisor, represents numerous discretionary
accounts and as such beneficially owns 732,325 shares of the Company's
Common Stock, with respect to which it has sole voting and dispositive
power.
(4) Includes shares that may be acquired upon exercise of stock options within
60 days and shares allocated under employee benefit plans. Stock options
exercisable in 60 days for each of the named directors and executive
officers are as follows: Ronald O. Baukol 2,000 shares, Robert C. Buhrmaster
2,000 shares, Janet K. Cooper 3,000 shares, Alex A. Meyer 2,000 shares,
Robert H. Nassau 3,000 shares, Dale R. Olseth 3,000 shares, Edwin H. Wingate
3,000 shares, Kendrick B. Melrose 463,397 shares, J. David McIntosh 45,022
shares, Charles B. Lounsbury 169 shares, Richard W. Parod 19,341 shares, J.
Lawrence McIntyre 34,716 shares, Michael J. Hoffman 20,553 shares and all
other executive officers as a group 141,386 shares.
(5) Includes 3,205 stock options and 1,743 shares held in benefit plans by the
spouse of an executive officer and 1,171 shares held of record by the
spouses of other executive officers.
SECTION 16(b) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The rules of the Securities and Exchange Commission require disclosure by
the Company of the identity of directors, executive officers and beneficial
owners of more than 10% of the Common Stock of the Company who did not file on a
timely basis reports required by Section 16 of the Securities Exchange Act of
1934. Based solely on review of copies of those reports received by the Company,
or written representations from certain reporting persons that no Form 5 reports
were required for those persons, the Company believes that all directors,
executive officers and greater than 10% owners complied with all filing
requirements applicable to them during Fiscal 1998.
3
<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTORS
Under the Company's Certificate of Incorporation, the Toro Board of
Directors may be comprised of between eight and eleven directors. The Board
currently has fixed the number of directors at ten. The Board is divided into
three classes, with each class elected in a different year for a term of three
years. The three nominees for election at the 1999 Annual Meeting--Ronald O.
Baukol, Alex A. Meyer and Dale R. Olseth--have consented to serve if elected. If
any nominee is unable to stand for election, the Board may, by resolution,
designate a substitute.
The Board held six meetings during Fiscal 1998. Each incumbent director
attended at least 75% of the aggregate total number of meetings held by the
Board and all committees on which he or she served.
The following information with respect to business experience of nominees
for election to the Board and the continuing directors has been furnished by the
respective directors or nominees or obtained from the records of the Company.
NOMINEES FOR ELECTION TO BOARD OF DIRECTORS (TERM ENDING AFTER FISCAL 2001)
RONALD O. BAUKOL, AGE 61. Executive Vice President, International
Operations since May 1995, Minnesota Mining and Manufacturing Company (3M),
Saint Paul, Minnesota (manufacturing). Served as Vice President, Asia Pacific,
Canada and Latin America from February 1994 to April 1995, and as Vice
President, Asia Pacific from July 1991 to February 1994. First elected to the
Toro Board in 1995, he is a member of the Executive Committee, Compensation
Committee and Nominating Committee. Mr. Baukol is a director of Graco, Inc. and
3M.
ALEX A. MEYER, AGE 68. Retired. From January 1986 through April 1992 served
as Senior Vice President of Amana Refrigeration, Inc., a subsidiary of Raytheon,
Inc., Amana, Iowa (manufacturing). First elected to the Toro Board in 1986, he
is a member of the Audit Committee and Compensation Committee.
DALE R. OLSETH, AGE 68. Chairman of the Board and Chief Executive Officer
since November 1996, SurModics, Inc., Eden Prairie, Minnesota (surface
modification). He also served as President of SurModics, Inc. from November 1996
to July 1998. First elected to the Toro Board in 1980, he is Chair of the
Compensation Committee and a member of the Audit Committee and Executive
Committee. Mr. Olseth is a director of Graco, Inc. and SurModics, Inc.
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE (TERM ENDING AFTER FISCAL
1999)
JANET K. COOPER, AGE 45. Vice President and Treasurer since May 1998, U S
West Communications, Denver, Colorado (telecommunications). She previously was
employed by The Quaker Oats Company and served as Vice President, Treasurer and
Tax from July 1997 to May 1998 and Vice President and Treasurer from July 1992
to July 1997. First elected to the Toro Board in 1994, she is Chair of the Audit
Committee and a member of the Compensation Committee.
KENDRICK B. MELROSE, AGE 58. Chairman of Toro since December 1987 and Chief
Executive Officer of Toro since December 1983. Employed by Toro since 1970.
First elected to the Toro Board in 1981. Mr. Melrose is also Chair of the
Executive Committee and an ex-officio member of the Nominating Committee. Mr.
Melrose is a director of SurModics, Inc., Donaldson Company, Inc., Jostens, Inc.
and The Valspar Corporation.
EDWIN H. WINGATE, AGE 66. Retired. From June 1980 through August 1997
served as Senior Vice President--Personnel, Dayton Hudson Corporation,
Minneapolis, Minnesota (retailing). First elected to the Toro Board in 1989, he
is Chair of the Nominating Committee and a member of the Audit Committee and
Executive Committee.
4
<PAGE>
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE (TERM ENDING AFTER FISCAL
2000)
ROBERT C. BUHRMASTER, AGE 51. Chairman since February 1998 and President
and Chief Executive Officer since May 1994, Jostens, Inc., Minneapolis,
Minnesota (consumer manufacturing). Served as President and Chief Operating
Officer from June 1993 to March 1994, as Executive Vice President from December
1992 to June 1993. First elected to the Toro Board in 1996, he is a member of
the Audit Committee, Executive Committee and Nominating Committee. Mr.
Buhrmaster is a director of Jostens, Inc.
WINSLOW H. BUXTON, AGE 59. Chairman of the Board of Directors since January
1993 and President and Chief Executive Officer since August 1992, Pentair, Inc.,
Saint Paul, Minnesota (diversified manufacturer). From August 1990 to August
1992 he served as Chief Operating Officer. First elected to the Toro Board in
1998, he is a member of the Audit Committee, Executive Committee and Nominating
Committee. Mr. Buxton is a director of Bemis Company, Inc. and Pentair, Inc.
ROBERT H. NASSAU, AGE 57. President and Chief Executive Officer since
January 1, 1997, St. Raymond Wood Products Holding Limited, Boston,
Massachusetts (wood manufacturing). From September 1994 to December 1996 he
served as Senior Vice President Ply Gem Industries, Inc., New York, New York and
President and CEO of the Goldenberg Group, its wholly-owned subsidiary. Also
President and Chief Executive Officer, Allied Plywood Corporation, Concord,
Massachusetts, a wholly-owned subsidiary of Ply-Gem Industries, Inc. (wood
distribution) from July 1991 to December 1996. First elected to the Toro Board
in 1988, he is a member of the Compensation Committee and Nominating Committee.
CHRISTOPHER A. TWOMEY, AGE 50. President and Chief Executive Officer since
February 1986, Arctic Cat Inc., Thief River Falls, Minnesota (recreational
vehicle manufacturer). Served as an executive officer in various capacities
since 1983. First elected to the Toro Board in 1998 and is a member of the
Compensation Committee and Nominating Committee. Mr. Twomey is a director of
Arctic Cat Inc.
COMMITTEES OF THE BOARD
To assist in carrying out its duties, the Board has delegated certain
authority to the following four standing committees:
EXECUTIVE COMMITTEE. Its function is to exercise all of the powers and
authority of the Board, including the power to declare dividends on Toro Common
Stock, during intervals between meetings of the Board. No meetings of the
committee were held during Fiscal 1998.
AUDIT COMMITTEE. Members are not employees of the Company ("outside
directors"). It assists the Board in overseeing the Company's accounting
controls and policies and financial reporting practices. Its functions include
making recommendations regarding the selection, retention or termination of the
Company's independent auditors; review of the professional services, proposed
fees and independence of the auditors; review with the independent auditors of
matters such as the scope of the audit and authorization for special reviews or
audits; review of internal auditing procedures and the adequacy of internal
controls; and review of policies and practices regarding conflict of interest
and compliance with applicable laws. Two meetings of the committee were held
during Fiscal 1998.
COMPENSATION COMMITTEE. All members are outside directors. Its functions
include study and analysis of and recommendations to the Board concerning
specific and general matters of management compensation; periodic review of
management compensation policies and practices, incentive compensation plan and
officer salary adjustments; making incentive compensation awards and setting
base salaries for officers referred to in Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"); and administrative oversight of stock
option plans and other incentive and compensation plans. Three meetings of the
committee were held during Fiscal 1998.
5
<PAGE>
NOMINATING COMMITTEE. All members are outside directors (except that the
Chief Executive Officer serves as an ex-officio non-voting member). Its
functions include determining an appropriate size and composition of the Board;
considering qualifications of prospective Board member candidates, including
stockholder recommendations; conducting research to identify and recommend
nomination of suitable candidates who are willing to serve as members of the
Board; reviewing the experience, background, interests, ability and availability
of prospective nominees to meet time commitments of the Board and committee
responsibilities; consideration of nominees recommended by stockholders who
comply with the procedures set forth in the Company's Bylaws, described on page
24; and determining whether any prospective member of the Board has any economic
or familial relationship with the Company or its directors or employees which
may impair the member's suitability for such service. The committee also has
responsibility to monitor current members of the Board in light of the same
guidelines used to select candidates, and to direct the activities of the Board
and management in matters of corporate governance. No meetings of the committee
were held during Fiscal 1998.
BOARD COMPENSATION
FEES. Toro's compensation for directors who are not employees attempts to
link a director's compensation with stockholder interests. The compensation
includes cash and stock components. Cash compensation includes a cash annual
retainer and meeting fees ($15,000 plus a fee of $1,000 for each meeting of the
Board or a committee attended, except that no more than one committee meeting
fee is paid for committee meetings held in a single day). In addition, outside
directors receive an annual grant of Common Stock having a $5,000 market value
(valued at the average of the closing prices of Common Stock during the three
months prior to the award) and a 1,000 share stock option award (with an
exercise price equal to 100% of the fair market value of one share of Common
Stock on the date of grant) pursuant to The Toro Company Directors Stock Plan
("Directors Plan"). A director may receive the annual retainer fee and meeting
fees in cash or shares of Common Stock, or a combination of both, as provided
for under the Directors Plan. The Company also supplies directors with Company
products for their use.
RETIREMENT PLAN. Under a retirement plan, an outside director who was a
member of the Board of Directors prior to December 1995, who has completed five
years of service and who ceases to be a member of the Board of Directors for any
reason, is entitled to receive, for a period of years equal to the number of
full years the director served on the Board but not more than ten years, an
annual payment equal to the full amount paid as an annual retainer at the date
of termination. Since December 1995, that annual payment has been limited to
$12,000 annually and payments to new directors are limited to an amount equal to
50% of the amount paid as an annual retainer at the date of termination. In the
event of the death of a director who qualifies for the plan, the retirement
benefit will be paid to the director's beneficiary.
OTHER ARRANGEMENTS. An outside director may elect to defer receipt of Board
compensation under a standard deferred compensation plan and earn interest on
deferred amounts at the average prime rate charged by U. S. Bank National
Association, Minneapolis, Minnesota (8.5% in Fiscal 1998). Each director is a
party to an indemnification agreement that assures the director of
indemnification and advancement of expenses to the fullest extent permitted by
Delaware law and the Company's Certificate of Incorporation, and of continued
coverage under the Company's directors and officers liability insurance, to the
extent it is maintained.
6
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below shows compensation for the Company's Chief Executive Officer
and the named executive officers for the last three fiscal years. The named
executive officers include the four most highly compensated executive officers,
other than the CEO, who were serving as executive officers on October 31, 1998,
and Mr. Lounsbury, who was one of the four most highly compensated executive
officers during Fiscal 1998 but was no longer serving as an executive officer on
October 31, 1998.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------
ANNUAL COMPENSATION PAYOUTS
--------------------------------------- AWARDS -------
OTHER ANNUAL ----------------------- LTIP ALL OTHER
SALARY BONUS COMPENSATION RESTRICTED OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) STOCK($) (#)(3) ($)(4) ($)(5)
- ---------------------------------------- ---- ------- ------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kendrick B. Melrose 1998 574,371 0 497,624 0 50,215 45,835 146,764
Chairman of the Board & 1997 541,859 186,264 1,188,463 0 40,054 302,682 141,546
Chief Executive Officer 1996 438,337 256,669 673,373 0 20,065 361,390 157,106
J. David McIntosh 1998 272,898 0 154,807 0 17,585 10,889 59,978
Executive Vice President 1997 261,837 69,125 242,136 0 11,970 73,131 50,237
Professional Business and 1996 215,328 83,729 281,971 0 2,026 37,878 37,380
International
Charles B. Lounsbury(6) 1998 272,898 0 88,338 0 17,585 10,889 53,176
Former Group Vice 1997 261,837 69,845 34,381 0 12,907 73,131 41,984
President 1996 223,754 68,491 0 0 2,123 39,381 33,163
Richard W. Parod, U.S. 1998 195,328 36,655(7) 0 0 11,954 0 34,264
Irrigation Vice President 1997 110,833 26,632 0 0 4,000 0 19,603
and General Manager 1996 0 0 0 34,250(8) 0 0 0
J. Lawrence McIntyre 1998 200,100 0 16,438 0 11,537 5,589 35,851
Vice President, Secretary 1997 189,670 52,159 191,086 0 8,324 37,082 35,133
and General Counsel 1996 179,585 71,834 65,000 0 1,754 31,607 23,241
Michael J. Hoffman 1998 165,000 34,828(9) 0 0 10,289 0 22,025
Vice President & General 1997 133,392 39,320 75,062 0 1,690 0 19,612
Manager Commercial 1996 106,708 10,250 70,899 0 0 0 14,665
Business
</TABLE>
- ------------------------
(1) Amounts indicated include payments made or deferred at the election of the
officer pursuant to the Annual Management Incentive Plan II, as in effect
for Fiscal 1997 and Fiscal 1996. Because the Company did not achieve its
earnings per share goal, no bonuses were paid under the plan for Fiscal
1998. See the Compensation Committee Report and Proposal Two for a
discussion of the plan.
(2) Includes the dollar value of the difference between the fair market value
and the option exercise price (before payment of applicable income taxes) on
stock options exercised. Fair market value is based on the closing price on
the New York Stock Exchange as reported in THE WALL STREET JOURNAL on the
date of exercise or actual sale price. Also includes the dollar value of
executive perquisites for Mr. Melrose ($17,366 of his perquisites were for
car lease and expenses).
(3) Includes options granted pursuant to The Toro Company 1993 Stock Option
Plan, The Toro Company 1989 Stock Option Plan and the Continuous Performance
Award Plan. Options under the Continuous Performance Award Plan are subject
to cancellation or reduction in the number of shares covered in the event
the Company does not achieve its long-term performance goals. The number of
shares covered by each such option was reduced with respect to each of
Fiscal 1998, 1997 and 1996. Such options granted in Fiscal 1998 and 1997
will be canceled if the proposed Performance Share Plan is approved by
stockholders. See Proposal Three and Long-Term Incentive Compensation in
this Proxy Statement.
7
<PAGE>
(4) Amounts reflect payments made pursuant to the Continuous Performance Award
Plan based on the Company's return on beginning equity performance relative
to its peer group of businesses for the three year performance period ending
with Fiscal 1998. For a more detailed description of the plan and awards,
see Long-Term Incentive Compensation and the Compensation Committee Report.
(5) Amounts include Company contributions to The Toro Company Investment and
Savings Plan (a defined contribution retirement plan) and allocations to the
Company's Employee Stock Ownership Plan (for Fiscal 1998, $19,603 each for
Mr. Melrose and the other named executive officers). Also includes amounts
accrued pursuant to the Company's Supplemental Management Retirement Plan
for executive officers who receive annual compensation of $150,000 or more
(for Fiscal 1998, $109,518 for Mr. Melrose, $30,741 for Mr. McIntosh,
$30,831 for Mr. Lounsbury, $14,484 for Mr. Parod, $15,095 for Mr. McIntyre
and $2,318 for Mr. Hoffman). Participants' accounts are credited with an
amount equal to the difference between the aggregate amount that would have
been allocated to tax-qualified profit-sharing and other defined
contribution plans, without regard to limitations imposed by the Code, and
the aggregate amount of contributions actually allocated ("excess benefits
accounts"). Also includes dollar value of above-market interest accrued
during the fiscal year on excess benefit and other deferred compensation
accounts for each named executive officer (for Fiscal 1998, $17,643 for Mr.
Melrose, $9,634 for Mr. McIntosh, $2,742 for Mr. Lounsbury, $177 for Mr.
Parod, $1,153 for Mr. McIntyre and $104 for Mr. Hoffman). Although amounts
credited to such accounts remain a part of the general assets of the
Company, upon the occurrence of a threat of or actual change of control of
the Company (as defined in the plans), or upon the Company's acceptance of a
request made by a qualified participant to direct investment of the account,
the Company will transfer to a trust an amount in cash equal to the total
amount of all accrued benefits for all participants (or for the electing
participant, as the case may be). Because the Company's benefit plans
operate on a calendar year basis, amounts shown for Fiscal 1998 may have
been accrued with respect to the prior fiscal year.
(6) Mr. Lounsbury ceased to be an executive officer of the Company as of July
28, 1998. Under a separation and early retirement agreement with the
Company, Mr. Lounsbury will remain a part-time employee until October 31,
1999, and will receive severance payments and benefits with a value of
approximately $348,443 in Fiscal 1999. Under the agreement, Mr. Lounsbury
has agreed not to become employed by certain competitors of the Company and
otherwise not to engage in certain competitive activity during the period of
the agreement.
(7) Includes a $32,759 discretionary bonus awarded by the Compensation Committee
to recognize exceptional performance of the Irrigation Division and a $3,896
payment with respect to a one year award under the Continuous Performance
Award Plan.
(8) Mr. Parod was awarded 1,000 shares of restricted stock in Fiscal 1997 in
connection with commencement of his employment. These shares vest on
February 29, 2000 if Mr. Parod remains employed by the Company. Dividends
are paid on the shares. The restricted stock had an aggregate value of
$22,125 on October 31, 1998.
(9) Includes a $31,536 discretionary bonus awarded by the Compensation Committee
to recognize exceptional performance of the Commercial Division and a $3,292
payment with respect to a one year award under the Continuous Performance
Award Plan.
EMPLOYMENT AGREEMENTS
Each of the executive officers, including those named in the Summary
Compensation Table, is a party to a change of control employment agreement
adopted in Fiscal 1995 and amended in Fiscal 1998. The agreements are operative
only upon the occurrence of a "change in control", which includes substantially
those events described below. Absent a change in control, the agreements do not
require the Company to retain the executives or to pay them any specified level
of compensation or benefits.
8
<PAGE>
Each agreement provides that for three years after a change in control,
there will be no adverse change in the executive's salary, bonus opportunity,
benefits or location of employment. If during this three year period the
executive's employment is terminated by the Company other than for cause, or if
the executive terminates his employment for good reason (as defined in the
agreements, and including compensation reductions, demotions, relocation and
excess travel), or voluntarily during the 30-day period following the first
anniversary of the change in control, the executive is entitled to receive an
accrued salary and annual incentive payments through the date of termination
and, except in the event of death or disability, a lump sum severance payment
("Lump Sum Payment") equal to three times the sum of base salary and annual
bonus (and certain insurance and other welfare plan benefits). Further, an
additional payment ("gross-up") is required in an amount such that after the
payment of all taxes, income and excise, the executive will be in the same
after-tax position as if no excise tax under the Code had been imposed.
Generally, and subject to certain exceptions, a change in control is deemed
to have occurred if: (1) a majority of Toro's Board of Directors becomes
comprised of persons other than persons for whose election proxies have been
solicited by the Board, or who are then serving as directors appointed by the
Board to fill vacancies caused by death or resignation (but not removal) of a
director or to fill newly created directorships; (2) another party becomes the
beneficial owner of at least 15% of Toro's outstanding voting stock; or (3)
Toro's stockholders approve a definitive agreement or plan to merge or
consolidate Toro with another party (other than certain limited types of
mergers), exchange shares of voting stock of Toro for shares of another
corporation pursuant to a statutory exchange, sell or otherwise dispose of all
or substantially all of Toro's assets, or liquidate or dissolve Toro.
If a change in control of the Company had occurred at the commencement of
the 1999 calendar year (January 1, 1999) and had resulted in the involuntary
termination of the named executives at such time or the termination by such
executives for good reason, the Lump Sum Payment to be made under such
agreements to those executive officers named in the Summary Compensation Table
above in the aggregate would have been approximately $9,178,123. The Company has
also established a trust for the benefit of these officers which, in the event
of a threatened or actual change of control, will be funded in an amount equal
to the Company's accrued liability related to such agreements.
9
<PAGE>
STOCK OPTIONS
The following table shows options granted under the Company's stock option
plan during Fiscal 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ GRANT
PERCENT OF DATE
NUMBER OF TOTAL VALUE
SHARES OPTIONS EXERCISE MARKET -----------
UNDERLYING GRANTED TO OR PRICE ON GRANT DATE
OPTIONS EMPLOYEES BASE DATE OF PRESENT
GRANTED IN PRICE ($ GRANT ($ EXPIRATION VALUE
NAME (#)(1) THE PERIOD PER SHARE) PER SHARE) DATE ($)(2)
- ------------------------- ------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kendrick B. Melrose 15,999(3) 5.03% $ 39.3157 $ 43.375 3/18/2001 $ 137,751
34,216 10.76% $ 43.5000 $ 43.500 11/25/2002 $ 300,758
J. David McIntosh 4,476(3) 1.41% $ 39.3157 $ 43.375 3/18/2001 $ 38,538
13,109 4.12% $ 43.5000 $ 43.500 11/25/2002 $ 115,228
Charles B. Lounsbury(4) 4,476(3) 1.41% $ 39.3157 $ 43.375 3/18/2001 $ 38,538
13,109 4.12% $ 43.5000 $ 43.500 11/25/2002 $ 115,228
Richard W. Parod 1,242(3) 0.39% $ 39.3157 $ 43.375 3/18/1999 $ 10,694
1,304(3) 0.41% $ 39.3157 $ 43.375 3/18/2000 $ 11,227
1,366(3) 0.43% $ 39.3157 $ 43.375 3/18/2001 $ 11,761
8,042 2.53% $ 43.5000 $ 43.500 11/25/2002 $ 70,689
J. Lawrence McIntyre 1,959(3) 0.62% $ 39.3157 $ 43.375 3/18/2001 $ 16,867
9,578 3.01% $ 43.5000 $ 43.500 11/25/2002 $ 84,190
Michael J. Hoffman 1,049(3) 0.33% $ 39.3157 $ 43.375 3/18/1999 $ 9,032
1,102(3) 0.35% $ 39.3157 $ 43.375 3/18/2000 $ 9,488
1,154(3) 0.36% $ 39.3157 $ 43.375 3/18/2001 $ 9,936
6,984 2.20% $ 43.5000 $ 43.500 11/25/2002 $ 61,389
</TABLE>
- ------------------------
(1) Options are granted pursuant to the 1989 Stock Option Plan and the 1993
Stock Option Plan (the "Plans"). The Plans are administered by the
Compensation Committee which selects employees to whom options are granted.
The exercise price of each incentive and nonqualified stock option is equal
to not less than 100% of the fair market value of the Common Stock on the
date of grant, except that performance-based stock options, such as those
granted in connection with the Continuous Performance Award Plan, have an
exercise price that is an average and on the date of grant could be higher
or lower than fair market value. Options are not transferable except by will
or the laws of descent and distribution. Options granted under the plan,
except those granted in connection with the Continuous Performance Award
Plan, may be exercised immediately after the date of grant, for a period of
five to ten years, using cash, stock or a cashless method through a broker.
Most options are subject to cancellation upon termination of the option
holder's employment; however, incentive stock options may be exercised for
up to three months following termination of employment and some nonqualified
stock options may be exercised for up to four years following retirement at
or after age 60, but not later than the expiration date of the option.
(2) The grant date present values are estimates only, arrived at using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.71%, expected life of option of
3.9 years, expected dividend yield of 0.8% and expected stock volatility of
21%.
(3) Options granted in connection with the Continuous Performance Award Plan.
The Continuous Performance Award Plan and all related outstanding stock
option grants with an expiration date in the year 2000 and after were
terminated and canceled by action of the Compensation Committee of the Board
of Directors on November 18, 1998, subject to stockholder approval of the
new Long-Term Plan. See Proposal Three in this Proxy Statement. If the new
plan is not adopted by stockholders, the Continuous Performance Award Plan
will remain in effect. Under that plan the number of shares subject to
options shown would be subject to reduction if performance goals are not
achieved under
10
<PAGE>
the plan. The options shown would become exercisable in December 2000, after
the Company first makes a public announcement of its earnings for Fiscal
2000, and would expire 90 days later. For more information, see the
Compensation Committee Report.
(4) Mr. Lounsbury is no longer an officer of the Company and these options have
expired by their terms.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END OPTION VALUES
The following table summarizes stock options exercised by the named
executive officers during Fiscal 1998 and the total number of options held by
each listed individual as of the end of Fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES PERIOD END(#) FISCAL PERIOD END($)(1)
ACQUIRED ON VALUE -------------------------- --------------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE(2)(3)
- ---------------------------- ----------- ----------- ----------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Kendrick B. Melrose 30,440 $ 434,029 413,296 54,430 $ 2,212,500 $ 0
J. David McIntosh 14,247 $ 154,807 28,860 10,959 0 0
Charles B. Lounsbury(4) 7,711 $ 88,338 40,700 2,123 0 0
Richard W. Parod 0 $ 0 12,042 3,912 0 0
J. Lawrence McIntyre 1,082 $ 16,438 23,876 5,963 0 0
Michael J. Hoffman 0 $ 0 13,269 3,305 0 0
</TABLE>
- ------------------------
(1) Difference between October 30, 1998 closing price of the Common Stock on the
New York Stock Exchange ($22.125) and the option exercise price (before
payment of applicable income taxes).
(2) As reflected in the column, most options outstanding at fiscal period end
had exercise prices that exceeded fair market value on that date.
(3) Includes options subject to reduction in number of shares or expiration if
performance goals are not achieved under the Continuous Performance Award
Plan. Except for options exercisable from December 1998 to March 15, 1999,
these options have been canceled, subject to stockholder approval of the
proposed Performance Share Plan.
(4) Mr. Lounsbury is no longer an officer of the Company and unexercised options
have expired by their terms.
11
<PAGE>
LONG-TERM INCENTIVE COMPENSATION
The following table shows awards of long-term incentive compensation made
under the Company's Continuous Performance Award Plan to the named executive
officers during Fiscal 1998. Amounts paid pursuant to the Continuous Performance
Award Plan with respect to Fiscal 1998 are set forth in the Summary Compensation
Table which appears elsewhere in this Proxy Statement. In November 1998, the
Compensation Committee canceled these awards and options, subject to stockholder
approval of a new Performance Share Plan to replace the Continuous Performance
Award Plan. If the new plan is approved, these awards will be replaced by awards
made by the Committee under the new plan.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLAN(S)(2)
NUMBER OF SHARES, UNITS -----------------------------------
OR PERFORMANCE OR OTHER PERIOD THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS (#) UNTIL MATURATION OR PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ------------------------- ------------------------- ---------------------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Kendrick B. Melrose 1 Award(1) Fiscal 1998 to 2000 $ 18,127 $ 199,393 $ 681,453
Option (15,999)
J. David McIntosh 1 Award(1) Fiscal 1998 to 2000 4,224 46,469 158,813
Option (4,476)
Charles B. Lounsbury(3) 1 Award(1) Fiscal 1998 to 2000 0 0 0
Option (4,476 shares)
Richard W. Parod 3 Awards(1) Fiscal 1998 1,429 31,428 53,704
Fiscal 1998 to 1999 1,499 26,999 56,389
Fiscal 1998 to 2000 1,575 39,373 59,208
Option (1,242 shares) Fiscal 1998
Option (1,304 shares) Fiscal 1998 to 1999
Option (1,366 shares) Fiscal 1998 to 2000
J. Lawrence McIntyre 1 Award(1) Fiscal 1998 to 2000 2,062 45,359 77,510
Option (1,959 Shares)
Michael J. Hoffman 3 Awards(1) Fiscal 1998 1,354 14,897 50,912
Fiscal 1998 to 1999 1,422 25,596 53,458
Fiscal 1998 to 2000 1,493 37,327 56,131
Option (1,049 shares) Fiscal 1998
Option (1,102 shares) Fiscal 1998 to 1999
Option (1,154 shares) Fiscal 1998 to 2000
</TABLE>
- ------------------------
(1) An award is the right to receive designated target percentages of annual
salary at the end of the three year performance period if the Company
achieves financial performance objectives based on return on beginning
equity relative to the Company's peer group of competitors. No award is paid
if the Company's three year return on beginning equity is in the lowest
quartile compared to its peer group. The value of an award is based on a
participant's base compensation estimated to be paid during the last fiscal
year of an award term multiplied by an individual participation factor
established by the plan or determined by the Compensation Committee within a
range set by the plan. Each award recipient also receives an option to
purchase the number of shares of the Company's Common Stock shown, if
performance goals are achieved. The options are the same options reported in
the Stock Option table on page 10. See the Compensation Committee Report for
additional information on the Continuous Performance Award Plan.
(2) Calculated pursuant to the Continuous Performance Award Plan based on
estimated Fiscal 2000 salaries.
(3) Mr. Lounsbury is no longer an officer of the Company, and this award and the
options have expired by their terms.
12
<PAGE>
PERFORMANCE GRAPH
The following graph depicts total cumulative stockholder return (assuming
reinvestment of dividends) of the Company's Common Stock, the S&P 500 Index and
an industry peer index for the preceding five fiscal years commencing with
Fiscal 1994.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR TOTAL RETURN AMONG
<S> <C> <C> <C>
The Toro Company, S&P 500, and Peer Group
The Toro Co Peer Group S&P 500
1993 $100 $100 $100
1994 $111 $111 $104
1995 $118 $124 $131
1996 $130 $157 $163
1997 $179 $216 $215
1998 $94 $167 $263
Fiscal Year Ending October 31,
</TABLE>
This graph assumes $100 invested on November 1, 1993 in the Company's Common
Stock, the S&P 500 Index and the peer group index.
The industry peer index is based on the Fortune 500 Industrial and Farm
Equipment Index which includes: York International Corporation, Briggs &
Stratton Corporation, Stewart & Stevenson Services, Inc., Dover Corporation,
Cummins Engine Company, Inc., Cincinnati Milacron, Inc., Harnischfeger
Industries Inc., Crane Co., Tecumseh Products Company, Ingersoll-Rand Company,
NACCO Industries, Inc., Parker-Hannifin Corporation, Dresser Industries Inc.,
Aeroquip-Vickers Inc. (formerly Trinova Corporation), Deere & Company, Timken
Company, Baker-Hughes Incorporated, Caterpillar Inc., The Black & Decker
Corporation, American Standard Companies, Inc., Western Atlas Inc., AGCO
Corporation, Kennametal Inc., The Lincoln Electric Company, Teleflex, Detroit
Diesel Corporation, Case Corporation, Cooper Cameron Corporation, Smith
International, Inc. and Nortek, Inc. as well as the Company. New companies added
were Premark International, Inc., Unova, Inc., United States Filter Corporation
and Pall Corporation. Companies removed were Terex Corporation and Lam Research
Corporation.
NEITHER THIS PERFORMANCE GRAPH NOR THE COMPENSATION COMMITTEE REPORT WHICH
FOLLOWS SHALL BE DEEMED TO BE "SOLICITING MATERIAL" OR TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR SUBJECT TO REGULATION 14A OR 14C UNDER THE
SECURITIES EXCHANGE ACT OF 1934, OR TO THE LIABILITIES OF SECTION 18 OF THAT
ACT.
13
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is furnished by Toro's Compensation Committee of the Board of
Directors, which establishes compensation policies and administers compensation
plans for executive officers of the Company.
GENERAL POLICIES
The compensation policies of the Company are designed to attract, retain and
motivate highly qualified executives, to assure that the Company competes
successfully for executive talent and to compensate executive officers for
personal performance. However, a substantial portion of compensation aligns
total compensation of individual executive officers with the financial
performance of the Company by making that compensation contingent upon
achievement of financial goals of the Company. The Committee believes it has
been successful in achieving these goals. For instance, the Company's Fiscal
1998 financial results were disappointing, particularly in the Consumer
Division. As a result, total cash compensation for named executive officers who
were also named executive officers for Fiscal 1997 was substantially lower for
Fiscal 1998.
The Committee reviews and considers compensation surveys and recommendations
of management and compensation consultants in connection with establishing
compensation policies and developing competitive compensation plans. These
surveys have indicated to the Committee that it must be watchful to maintain
compensation at market competitive levels in order to retain its most talented
executives. The Committee has therefore made adjustments to base salary levels
for selected officers for Fiscal 1999 and has proposed The Toro Company
Performance Share Plan. This new plan is intended to strengthen the link between
executive compensation and the Company's long-term financial goals by using
Common Stock to pay awards, which are earned only if performance goals are
achieved. See Proposal Three in this Proxy Statement.
BASE SALARY
Based on independent evaluation by professional compensation consulting
firms retained by the Company, the Committee establishes a base salary range for
each executive position reflecting median base salaries for similar positions in
businesses with revenues comparable to those of the Company. While some of these
companies are in the Company's peer group index for the Performance Graph on
page 13, the Company relies on a broader group of companies for comparative
analysis of executive compensation because the Company's competitors for
executive talent are more varied than its business peer group. Although surveys
may be conducted annually, salaries are adjusted only if market surveys indicate
adjustment is necessary, so that greater weight remains on the variable portion
of the compensation package.
A base salary within the market range is set for each executive by
considering the experience and individual performance of the executive. For
Fiscal 1998, base salaries for executive officers were within the middle
one-third of the market range. Mr. Melrose's salary with respect to Fiscal 1998
was set at $574,371, based on the same method used in establishing other
executive officers' base salaries. The Committee conducts a performance
evaluation of Mr. Melrose on an annual basis. The other named executive officers
receive evaluations by Mr. Melrose, which are used by the Committee in
establishing base salaries.
INCENTIVE COMPENSATION
An executive of the Company will earn total compensation that is market
competitive only if incentive compensation tied to achievement of performance
goals is earned. If those goals are exceeded, incentive compensation can cause
total compensation to be above market levels. The incentive components of
14
<PAGE>
compensation are intended to encourage achievement of both short-term and
long-term financial and operational objectives.
Due to the Company's disappointing financial results for Fiscal 1998, only
7% of Mr. Melrose's total cash compensation was comprised of incentive payments
under the Company's short-term and long-term incentive plans, and his total cash
compensation was therefore below the median level (at 35%) of total cash
compensation paid to chief executive officers in businesses with revenues
comparable to the Company's. If the Company had met its annual and long-term
performance goals at target levels, 84% of Mr. Melrose's total compensation
would have consisted of incentive payments.
ANNUAL INCENTIVE COMPENSATION. Under the Company's stockholder-approved
Annual Plan, executive officers and other key employees are eligible to receive
an annual cash bonus based on a percentage of base salary (determined by the
executive officer's position) and the Company's achievement of performance goals
and, for certain participants, division and individual performance. If
performance goals are exceeded, award amounts increase up to a pre-established
maximum, but if goals are not met, awards are reduced or not paid at all.
Proposed participants in the Annual Plan are recommended by management and
selected by the Committee. The target award amount for Mr. Melrose is 50% of his
base salary and for the other named executive officers is 40%. The percentage is
based on the executive's salary grade and job position and not on individual
factors.
Under the Annual Plan as in effect for Fiscal 1998, the Compensation
Committee established an earnings per share (EPS) performance goal as the basis
for payment of a target award amount. The Committee also established a return on
average net assets goal as the basis for payment of higher award amounts, if the
EPS target was met. Additional performance goals applicable to division
participants were based on controllable profit contribution (net income before
taxes and interest expense).
The Company did not meet the corporate EPS goal at the threshold level
necessary for payment of an award. Therefore, no bonus payments were made with
respect to Fiscal 1998 under the Annual Plan.
The Committee has approved and recommended to stockholders the amendment of
the Annual Plan to add additional corporate, division and individual performance
goals. See Proposal Two in this Proxy Statement.
Although the Committee did not authorize the payment of annual bonuses under
the Annual Plan, the Committee determined that cash bonuses should be paid on a
limited basis to selected executive officers whose divisions performed well
notwithstanding disappointing corporate performance. The Committee exercised its
discretion to make these one-time bonuses in order to assure the retention of
its most productive executives. These bonuses were paid to the U.S. Irrigation
Vice President and General Manager and the Vice President and General Manager
Commercial Business, but not to other named executive officers and not to the
Chief Executive Officer.
LONG-TERM INCENTIVE COMPENSATION. Under the Continuous Performance Award
Plan, payments under performance awards are earned by eligible executive
officers if the Company achieves a return on beginning equity (ROBE) for the
three year award term that ranks favorably relative to the ROBE rankings of all
companies in the Company's peer group (the Industrial and Farm Equipment Group
of the Fortune 500).
The amount of an individual participant's award payment is based on the
individual's participation factor, which is a percentage of base salary ranging
from 25% to 100%, as established by the Committee. Mr. Melrose participates in
the plan at a factor of 1.0 (one times base salary), which means that if the
Company's ROBE ranks among the top quarter of companies in the peer group, Mr.
Melrose would receive a long-term incentive payment equal to his base salary
during the last fiscal year of the award.
In Fiscal 1996, net income growth was approved by stockholders as an
additional measure of long-term performance for awards granted in November of
1995. In Fiscal 1997, net income growth was
15
<PAGE>
removed as a performance measure, with stockholder approval. Awards for the
three year period of Fiscal 1996 to 1998 were first granted based on both ROBE
and net income growth. Following the Fiscal 1997 stockholder approval of
elimination of net income growth as a performance measure, the Committee
determined that those awards should be based only on a ROBE measure.
Accordingly, for the three year award term ended with Fiscal 1998, the Committee
certified that the Company's three year average ROBE performance ranked only at
the 27th percentile level (close to the lowest quarter) among its peer group.
The amount of awards paid was approximately 8% of the potential maximum for each
named executive officer, including Mr. Melrose. In Fiscal 1998, only 7% of Mr.
Melrose's cash compensation was comprised of payments pursuant to the Continuous
Performance Award Plan.
Under a Continuous Performance Award Plan formula, the Committee also
granted to each participant a nonqualified stock option to purchase shares of
Common Stock. Because the Company did not achieve the ROBE performance goal for
the Fiscal 1996 to 1998 award term, the number of shares subject to the option
was reduced by 92%, in accordance with the formula applicable to reduction of
the Performance Award. The exercise price of these options exceeded the fair
market value of the Common Stock at the time the 90 day exercise period
commenced on December 16, 1998.
In Fiscal 1995, a special committee of the Committee recommended, and the
Board and stockholders approved, a special incentive compensation plan for Mr.
Melrose, to encourage him to remain with the Company until his 60th birthday,
while assuring the timely development and election of his successor as Chief
Executive Officer of the Company. Under the Chief Executive Officer Succession
Incentive Award Agreement, on July 31, 1995, the Company awarded Mr. Melrose
17,467 shares of Common Stock and Common Stock performance units having a fair
market value of $500,000, subject to forfeiture or reduction in the event
performance goals related to the development and implementation of a senior
management and chief executive officer succession plan were not met by target
dates beginning July 31, 1998 and continuing through July 31, 2000.
During Fiscal 1997, the Committee recommended to the Board, and the Board
agreed, that the dates for identification of a potential CEO successor and
continued development of the senior management team (Goal 2) and for the
election of the selected CEO (Goal 3) be changed from July 31, 1999 to October
31, 2000 and from July 31, 2000 to October 31, 2003, respectively. During Fiscal
1998, the Committee recognized that it had not modified the deadline for
achievement of Goal 1 consistent with the other deadline changes and therefore
recommended, and the Board agreed, that the deadline for development of a CEO
and senior management succession plan and progress towards fulfillment of the
plan (Goal 1), be changed from July 31, 1998 to October 31, 1999.
STOCK OPTION PLANS. In addition to options granted in connection with the
Continuous Performance Award Plan described above, the Committee makes stock
option grants pursuant to the Company's stock option plans. Options are granted
to all key management employees, including Mr. Melrose and the named executive
officers, under a formula based on annual base salary, salary grade and the fair
market value of the Common Stock on the date of grant. Except for
performance-based options granted in connection with the Continuous Performance
Award Plan, all options granted under the stock option plans have exercise
prices that are equal to fair market value at the date of grant. The options
granted in Fiscal 1998 were exercisable immediately after grant and remain
exercisable for a period of five years.
In Fiscal 1998, the Committee granted Mr. Melrose options to purchase a
total of 50,215 shares, 15,999 of which were awarded under the Continuous
Performance Award Plan. The Committee canceled the Continuous Performance Award
Plan options, subject to stockholder approval of the new Performance Share Plan.
If that plan is not adopted, these options will not be canceled.
SECTION 162(M). In making its decisions about compensation for Mr. Melrose
and other officers likely to be named executive officers, the Committee
considers Section 162(m) of the Code, which limits to $1 million per year the
compensation expense deduction the Company may take for compensation paid to
16
<PAGE>
a person who is "highly-compensated" for purposes of the Code, unless the
compensation is "performance-based". Although the Company's compensation levels
have not historically resulted in total compensation in excess of $1 million for
named executive officers other than Mr. Melrose, it is generally the policy of
the Company that the components of executive compensation that are inherently
performance-based should qualify for exclusion from the deduction limitation
under Section 162(m). The Committee believes that annual incentive award
payments under the Annual Plan, long-term incentive award payments under the
Continuous Performance Award Plan and stock options granted under all plans
currently qualify for exclusion.
The Committee believes, however, that while tax deductibility is an
important factor, it is not the sole factor to be considered in setting
executive compensation policy, and accordingly reserves the right, in
appropriate circumstances, to pay amounts in addition to base salary that might
not be deductible. The Committee's purpose in doing so is to assure that the
Company retains its best executives and remains competitive in the market for
executive talent.
If non-performance-based compensation in excess of $1 million should become
payable to a person who is "highly-compensated" for purposes of the Code and
regulations, the Committee may consider requiring that individual to defer
receipt of any amounts earned in excess of the cap to a tax year following the
year in which the individual leaves the employment of the Company.
STOCK OWNERSHIP GUIDELINES
In November 1997, the Committee adopted guidelines to encourage accumulation
and retention of Toro Common Stock by officers of the Company, ranging from a
goal of five times base salary for the Chief Executive Officer to two or three
times for other corporate officers. The recommended time period for reaching the
guideline is five years. The Committee will continue to review compliance with
the policy on an annual basis.
APPROVAL OF INCENTIVE PLANS
All of the recommendations of the Committee with respect to compensation
attributable to Fiscal 1998 were approved and adopted by the Board of Directors.
In accordance with the Company's past practice under Section 16 of the
Securities Exchange Act of 1934 and Section 162(m), decisions regarding the
grant of stock options and certain other awards continue to be made by the
Committee and reported to the Board.
Dale R. Olseth, Chair Alex A. Meyer
Ronald O. Baukol Robert H. Nassau
Janet K. Cooper Christopher A. Twomey
17
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Dale R. Olseth, Chair, Ronald
O. Baukol, Janet K. Cooper, Alex A. Meyer, Robert H. Nassau and Christopher A.
Twomey. None of these directors is or has been an officer or employee of the
Company. Although Mr. Melrose is not a member of the Committee, he attends the
meetings for the purpose of providing continuity and detailed information about
employees and compensation plans. Mr. Melrose does not participate in any option
grant or incentive award decisions or any decisions of the Committee that might
affect him personally.
Mr. Melrose serves on the Board of Directors and Compensation Committee of
SurModics, Inc., of which Mr. Olseth serves as chairman and chief executive
officer. Mr. Olseth serves on the Toro Board of Directors and is Chair of the
Compensation Committee of the Company.
PROPOSAL TWO
AMENDMENTS TO THE TORO COMPANY ANNUAL MANAGEMENT INCENTIVE PLAN II
At its November 1998 meeting, the Compensation Committee recommended, and
the Board of Directors adopted, amendments to the Annual Plan to more closely
align an executive's total compensation with the Company's achievement of new
corporate performance targets based on effective use of assets and to provide
individual incentives to achieve greater customer satisfaction. The amendments
are also intended to improve the quality of the Company's earnings and to keep
the Company competitive in the market for executive talent. Stockholders are
being asked to consider and approve additional financial performance goals of
corporate average net asset dollars and division average asset dollars, and
additional individual strategic performance measures ("SPM Performance Goals")
of customer satisfaction, inventory reduction and inventory turnover, to ensure
that payments made under the Annual Plan continue to qualify as
"performance-based" for purposes of Section 162(m) of the Code and in order to
satisfy New York Stock Exchange guidelines relating to equity compensation for
officers. A copy of the Annual Plan as amended is attached as Exhibit A to this
Proxy Statement. Defined terms have the meanings described in the Annual Plan.
In November 1998, the Board also adopted amendments to increase the
percentage amounts of annual base salary that may be paid as annual bonuses to
officers, to increase the Maximum Payout level from a previous maximum of 175%
to 200% of the Target Payout level and to increase from 10% to 20% the
adjustment to compensation permitted in connection with SPM Performance Goals.
The Annual Plan was originally approved by stockholders in March 1996 and was
again approved as amended at annual meetings in 1997 and 1998.
If stockholder approval of the Performance Goal amendments is not obtained,
the Compensation Committee will reconsider the amendments as they apply to
compensation that may be paid to any person referred to in Section 162(m), and
the Annual Plan as previously approved by stockholders will continue in effect
as to such persons.
DESCRIPTION OF THE ANNUAL PLAN
The following description of the more important provisions of the Annual
Plan, as amended, is subject to the specific terms contained in the plan itself.
PURPOSE. The purpose of the Annual Plan is to enhance stockholder value by
providing participants an annual incentive to reinforce achievement of the
Company's performance goals; to link a significant portion of a participating
officer's compensation to the achievement by the Company, and in certain cases,
a division or an individual, of performance goals; to attract, motivate and
retain officers on a competitive basis; and to encourage selected officers of
the Company for whom stock ownership goals have been established to acquire and
retain Common Stock. See the Compensation Committee Report for information on
stock ownership guidelines.
18
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ELIGIBILITY AND PARTICIPATION. Participation is limited to officers of the
Company, including executive officers, who through their position or
performance, can have a significant, positive impact on the Company's financial
results, as determined by the Compensation Committee. The Company maintains a
separate annual bonus plan for key employees who are not officers. Approximately
12 individuals, including the Company's Chief Executive Officer and the named
executive officers, are expected to receive awards under the Annual Plan each
year.
AWARD AMOUNTS. The Target Payout for an Annual Performance Award is based
on a percentage of a Plan Participant's annual base salary ("participation
factor"), which is intended to reflect the participant's level of
responsibility. Prior to its recent amendment, the Annual Plan established fixed
participation factors, while the participation factors as amended establish a
ceiling. Therefore actual factors may be set below the maximum percentage
permitted, although the maximums have been raised. As amended, the participation
factors are as follows: up to 60% for the Chairman and Chief Executive Officer,
up to 55% for the President and Chief Operating Officer, up to 50% for other
elected officers and up to 45% for appointed officers.
The Target Payout can be earned only if Performance Goals are achieved at
levels established in advance by the Compensation Committee. The Committee may
establish Maximum Payouts of up to 200% of Target Payouts in the event corporate
and division goals are exceeded in an amount specified by the Committee. At the
time an award is made, the Committee may establish additional individual SPM
Performance Goals. SPM Performance Goals were previously called Quality of
Performance Goals. If an SPM Performance Goal is achieved, payments to
participants under an award may be increased by up to 20% of the award payment
that would otherwise be made with respect to corporate and division Performance
Goal achievement, but to not more than 200% of the Target Payout.
PERFORMANCE GOALS. An award payment under an annual Performance Award will
be paid only upon the achievement of Performance Goals established by the
Compensation Committee in writing not later than 90 days after the beginning of
the fiscal year to which the Performance Goals relate.
The Board is seeking approval of the addition of corporate average net asset
dollars and division average asset dollars as corporate and division Performance
Goals. Corporate average net asset dollars is total assets less current
liabilities and division average asset dollars is the average of divisional
total assets for the fiscal year. Performance Goal measures previously approved
by stockholders include earnings per share, return on average net assets,
division controllable profit contribution, division profit adjustment, return on
equity, revenue growth, earnings growth and economic value added.
Previously-approved Supplemental Division Performance Goal measures for division
participants include any of the foregoing measures plus revenue growth,
sustained earnings, product warranty experience, inventory levels or performance
of a subsidiary.
The Board is also seeking stockholder approval of three additional SPM
Performance Goals-- customer satisfaction, inventory reduction and inventory
turnover. Customer satisfaction may be determined by measurement of product
quality, warranty, on time delivery, fill rate, after-market service and
customer satisfaction survey results. In 1998, stockholders approved other
predecessor Quality of Performance Goals, including aggressive revenue growth,
sustained earnings initiative, warranty experience, product recalls, field
inventory and acquisition experience. SPM Performance Goals are intended to be
either qualitative or quantitative.
Each year the Committee establishes Performance Goals on a Company, division
and/or individual basis from among the stockholder-approved goals in the plan.
MAXIMUM AWARD. The maximum amount that may be paid under an Annual
Performance Award, whether in cash or in Common Stock or Common Stock units, to
a Plan Participant who is or may become a person referred to in Section 162(m)
with respect to any fiscal year is $1,500,000.
19
<PAGE>
PAYMENTS. Before any payment is made under the Annual Plan, the Committee
must certify in writing, as reflected in the minutes, that the Performance Goals
established with respect to an Annual Performance Award have been met. To the
extent necessary with respect to any fiscal year, in order to avoid any undue
windfall or hardship due to external causes, the Committee may make the
determination as to whether a Performance Goal has been achieved without regard
to the effect on the Performance Goal measure, as it may otherwise be presented
in the financial statements, of any change in accounting standards, any
acquisition by the Company not planned for at the time the Performance Goals are
established or any Board-approved extraordinary or non-recurring event or item.
STOCK RETENTION AWARD. The Annual Plan authorizes the grant of Stock
Retention Awards to encourage selected participants to increase their ownership
of Toro Common Stock. Under a Stock Retention Award, a participant may elect to
convert up to 50% of a cash award payment to shares of Common Stock, or defer
the compensation into Common Stock units under The Toro Company Deferred
Compensation Plan for Officers (the "Officer Deferred Plan"). For each two
shares of Common Stock or units acquired upon conversion, a Stock Participant
will receive as additional incentive compensation one additional share or unit
of Common Stock ("Matching Shares" or "Matching Units"). Those shares or units
are retained by the Company during vesting periods applicable to the Matching
Shares or Matching Units. Matching Shares and Matching Units vest in increments
of 25% of the total at the end of each of the second, third, fourth and fifth
years after the date such shares or units are issued or credited. In the event
of an actual or threatened change of control of the Company as defined in the
Annual Plan or the Officer Deferred Plan, all Matching Shares and Matching Units
that have not yet vested will vest and become immediately payable.
SHARES AUTHORIZED. The number of shares of Common Stock authorized for
issuance under the Annual Plan is 100,000, subject to adjustment in the event of
stock splits, recapitalization or other similar changes affecting the Common
Stock.
PLAN AMENDMENT AND TERMINATION. The Committee may amend, suspend or
terminate the Annual Plan at any time, with or without advance notice to Plan
Participants, but no amendment to the plan will be effective that would increase
the maximum amount that may be paid to a Plan Participant, that would change the
stated Performance Goal criteria or that would modify the requirements as to
eligibility for participation, unless the stockholders of the Company approve
the change in accordance with the requirements of Section 162(m).
20
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PROPOSAL THREE
ADOPTION OF THE TORO COMPANY PERFORMANCE SHARE PLAN
At its November 18, 1998 meeting, the Compensation Committee recommended,
and the Board of Directors adopted, The Toro Company Performance Share Plan (the
"Long-Term Plan"), a plan designed to tie a portion of executive compensation to
achievement of the Company's long-term financial goals through the grant of
Performance Shares. A Performance Share is a right to receive shares of Common
Stock or deferred Common Stock units, contingent on the achievement of
performance goals of the Company, generally over a three year period. The
proposed Long-Term Plan will replace the Company's Continuous Performance Award
Plan which the Board has terminated, ccntingent upon obtaining stockholder
approval of the new plan. The new Long-Term Plan is intended to simplify the
long-term incentive component of executive compensation and to contribute to
maintaining the Company's competitiveness in the market for executive talent. In
addition, because awards under the new plan are to be paid only in Common Stock
or Common Stock units, and not in cash, the Compensation Committee and Board of
Directors believe that an executive's compensation will be more closely aligned
with interests of stockholders.
Stockholders are being asked to approve the performance goals, eligibility
requirements and maximum award amount under the Long-Term Plan, in order to
qualify payments that may be made under the plan as "performance-based" for
purposes of Section 162(m) of the Code. Approval is also sought in order to
satisfy New York Stock Exchange guidelines relating to equity compensation for
officers. If stockholder approval of the new Long-Term Plan is not obtained, the
Continuous Performance Award Plan will continue in effect.
DESCRIPTION OF THE PLAN
The following discussion sets forth the material terms of the Long-Term
Plan, which is attached as Exhibit B to this Proxy Statement. Defined terms have
the meanings described in the plan.
PURPOSE. The purpose of the Long-Term Plan is to enhance long-term
stockholder value by reinforcing the incentives of key employees to achieve
long-term performance goals of the Company, to link a significant portion of a
participant's compensation to the achievement by the Company of performance
goals and to the value of the Common Stock and to attract, motivate and retain
executives on a competitive basis.
ELIGIBILITY AND PARTICIPATION. Participation in the Plan is limited to key
employees of the Company who are in a position to have a significant, positive
impact on the Company's financial results and who are selected by the
Compensation Committee. Approximately 12 individuals, including the Company's
Chief Executive Officer and the named executive officers, are expected to
receive awards under the plan annually.
PERFORMANCE GOALS. The Performance Goals that may be used by the Committee
with respect to each Performance Share Award are cumulative earnings, cumulative
earnings per share, profit after tax, net income, return on invested capital,
invested capital dollars, earnings per share, average net assets, after-tax
interest expense, return on average net assets, return on equity, return on
beginning equity, revenue growth and earnings growth.
MAXIMUM AWARD. The maximum award payment that may be made with respect to
any Performance Share Award is 100,000 shares, subject to adjustment to give
effect to adjustments in the Common Stock or changes in the corporate structure
of the Company.
PAYMENT. Before any payment or delivery of Common Stock is made under the
plan to any participant who is a person referred to in Section 162(m) of the
Code, the Committee must certify that the Performance Goals established with
respect to the award have been achieved. Award payments are made
21
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in Common Stock, although a participant may defer award compensation into Common
Stock units in accordance with the Officer Deferred Plan.
CHANGE OF CONTROL. In the event of a threatened or actual change of control
of the Company (as defined in the Long-Term Plan), Performance Shares that have
been awarded but have not yet vested will vest and become immediately payable.
MISCELLANEOUS. Neither Performance Shares nor Performance Share Awards may
be transferred. A participant may receive payment pursuant to a Performance
Share Award only while an employee and only if continuously employed since the
date the award was granted, except that in the event of death, disability or
retirement, shares of Common Stock will be delivered with respect to an award if
otherwise earned, subject to proration to reflect the portion of the applicable
Award Term completed at the date of death, disability or retirement.
SHARES AUTHORIZED. The number of shares of Common Stock authorized for
issuance under the Long-Term Plan is 500,000, subject to adjustment in the event
of stock splits, recapitalization or other similar changes affecting the Common
Stock.
NEW PLAN BENEFITS
The benefits or amounts that will be received by or allocated to the Chief
Executive Officer, the named executive officers as a group and officers who are
not executive officers under the Annual Plan and the Long-Term Plan are not
presently determinable because award payments, if any, will be dependent upon
Company performance, participants will change from year to year and neither plan
has a fixed termination date.
The following table reflects estimated award payments that would be paid
with respect to a fiscal year if Performance Goals were achieved at target
levels. Amounts shown for the Annual Plan reflect Target Payouts that may be
made with respect to Fiscal 1999 if Performance Goals are achieved at target
levels. Actual payments and share values could be higher (up to 200% of the
amounts shown) or lower (including none). Amounts shown for the Long-Term Plan
reflect Performance Share Awards that have been granted with respect to the
three year period of Fiscal 1999 to 2001, subject to stockholder approval. The
number of Performance Shares shown is the number of shares of Common Stock that
would be issued if Performance Goals are achieved at target levels. The actual
number of shares issued could be higher (up to twice the number shown) or lower
(including none). This table does not include one year and two year awards
granted with respect to Fiscal 1999 and Fiscal 1999 to 2000 because those grants
were made as a transition into the three year award cycle to replace awards
canceled under the Continuous Performance Award Plan and are, therefore,
atypical.
Directors who are not executive officers and employees of the Company do not
receive benefits under either plan and are not shown in the table. The
Compensation Committee may in its discretion amend
22
<PAGE>
both the Annual Plan and Long-Term Plan so that the allocation of benefits may
be altered and costs may be increased.
<TABLE>
<CAPTION>
ANNUAL MANAGEMENT INCENTIVE
PLAN II PERFORMANCE SHARE PLAN
---------------------------- -----------------------------
TARGET DOLLAR TARGET VALUE TARGET DOLLAR TARGET NUMBER
NAME AND POSITION VALUE ($) OF SHARES(1) VALUE ($)(2) OF SHARES
- --------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Kendrick B. Melrose
Chairman and Chief Executive Officer $ 371,700 $ 92,925 $ 523,698 21,000
J. David McIntosh
Executive Vice President, Professional
Business and International $ 141,750 $ 35,438 $ 174,566 7,000
Charles B. Lounsbury(3)
Former Group Vice President 0 0 0 0
Richard W. Parod
U.S. Irrigation Vice President and
General Manager $ 83,155 $ 20,789 $ 77,308 3,100
J. Lawrence McIntyre
Vice President, Secretary and
General Counsel $ 98,422 $ 24,606 $ 114,715 4,600
Michael J. Hoffman
Vice President General Manager
Commercial Business $ 79,800 $ 19,950 $ 77,308 3,100
Executive Group $1,195,200 $298,800 $ 471,328 18,900
Non-Executive Officer Group $ 147,211 $ 36,802 $ 102,246 4,100
Total Executive Group and Non-Executive
Officer Group (12 persons) $1,342,411 $335,602 $1,541,169 61,800
</TABLE>
- ------------------------
(1) The number of Matching Shares or Units that may be awarded in connection
with a Stock Retention Award, if exercised, is presently not determinable.
The amount shown reflects the dollar value of Matching Shares or Units that
could be awarded if Performance Goals are achieved at the Target Payout
level.
(2) The dollar value of shares of Common Stock that may be issued in connection
with a Performance Share Award is not presently determinable. The amount
shown reflects the market value of the number of shares shown at the
November 18, 1998 date of grant of Performance Shares for the three year
performance period of Fiscal 1999 to 2001.
(3) Mr. Lounsbury is no longer an officer of the Company.
PROPOSAL FOUR
SELECTION OF INDEPENDENT AUDITORS
KPMG Peat Marwick LLP has served as independent auditors to the Company for
many years. The Audit Committee of the Board of Directors has again selected
KPMG Peat Marwick LLP to serve as independent auditors for Fiscal 1999. Although
it is not required to do so, the Board of Directors wishes to submit the
selection of KPMG Peat Marwick LLP for stockholder approval at the meeting.
A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting with the opportunity to make a statement and to be available to
respond to appropriate questions.
If the stockholders do not approve the selection of KPMG Peat Marwick LLP,
the Board of Directors will reconsider its selection.
23
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OTHER INFORMATION
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
The 2000 Annual Meeting of Stockholders is expected to be held on March 23,
2000. If you wish to make a proposal to be included in the Company's Proxy
Statement for the 2000 Annual Meeting, you must assure that the proposal is
received by the Secretary of the Company no later than the close of business on
October 8, 1999, unless the date of the meeting is delayed by more than 30
calendar days.
If you wish to nominate a candidate for election to the Board of Directors
or propose other business at an annual meeting, you must give complete and
timely written notice to the Secretary of the Company, in accordance with the
Company's Bylaws. The deadline for the 2000 Annual Meeting is not later than
December 22, 1999 nor earlier than November 7, 1999, unless the date of the
meeting is advanced by more than 30 days or delayed by more than 60 days. If you
would like a copy of Toro's Bylaws, you may write to Toro's Assistant Corporate
Secretary. If a proposal is not timely and properly made in accordance with the
procedures set forth in the Bylaws, it will be defective and will not be brought
before the meeting. If the proposal is nonetheless brought before the meeting
and the chairman of the meeting does not exercise the power and duty to declare
the proposal defective, the persons named in the proxy may use their
discretionary voting with respect to the proposal.
ANNUAL REPORT
The Annual Report of the Company for Fiscal 1998 (the fiscal year ended
October 31, 1998) including financial statements is enclosed.
COST AND METHOD OF SOLICITATION
The Company will pay the cost of soliciting proxies and may make
arrangements with brokerage houses, custodians, nominees and other fiduciaries
to send proxy material to beneficial owners of the Common Stock. The Company
will reimburse them for reasonable out-of-pocket expenses. In addition to
solicitation by mail, certain officers and employees of the Company, who will
receive no compensation for such services other than regular employee
compensation, may solicit proxies by telephone, electronic transmission and
personally. The Company has retained Morrow & Co., for an estimated fee of
$5,000 plus out-of-pocket costs and expenses, to assist in distributing proxy
materials and in making mail, telephone and personal solicitation of proxies.
OTHER MATTERS
The Company's management knows of no other matters that may come before the
Annual Meeting. However, if matters other than those referred to above should
properly come before the Annual Meeting, the persons named on the enclosed proxy
card intend to vote such proxy in accordance with their best judgment.
Dated: February 5, 1999 BY ORDER OF THE BOARD OF DIRECTORS
[SIG]
J. LAWRENCE MCINTYRE
Vice President, Secretary and
General Counsel
24
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EXHIBIT A
THE TORO COMPANY
ANNUAL MANAGEMENT INCENTIVE PLAN II
1. PLAN PURPOSE. The purpose of The Toro Company Annual Management Incentive
Plan II (the "Plan") is to enhance stockholder value of The Toro Company
(the "Company") by providing an annual incentive to reinforce achievement
of the Company's performance goals ("Performance Goals"); to link a
significant portion of a participating officer's annual compensation to the
achievement by the Company, and in certain cases, a division or individual,
of Performance Goals; to attract, motivate and retain officers on a
competitive basis by making awards based on annual achievement of
Performance Goals ("Annual Performance Awards"); and to encourage selected
officers to acquire and retain shares of the Common Stock, par value $1.00
per share, and related Preferred Share Purchase Rights of the Company
("Common Stock").
2. ELIGIBILITY AND PARTICIPATION. Within the first 90 days of each fiscal
year, or before the first 25% of a shorter performance period has elapsed,
the Compensation Committee (the "Committee") shall select as recipients of
Annual Performance Awards ("Plan Participants") those officers of the
Company who, through their position or performance, can have a significant,
positive impact on the Company's financial results. Plan Participants are
designated to participate in the Plan for one fiscal year, but may be
renominated and selected again. Newly-hired and newly-promoted officers may
be selected as Plan Participants after the first 90 days of a fiscal year
subject to the provisions of this paragraph and subparagraph 4.a. With
respect to persons subject to Section 16 of the Securities Exchange Act of
1934 ("Exchange Act"), transactions under the Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successor provisions
under the Exchange Act. To the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
3. AWARD AMOUNTS.
a. TARGET PAYOUT. The target amount that may be paid with respect to
an Annual Performance Award (the "Target Payout") shall be
determined by the Committee and shall be based on a percentage of a
Plan Participant's actual annual base salary at the time of grant
("Participation Factor"), within the range established by this
subparagraph and subject to adjustment as provided in the last
sentence of this subparagraph. The Participation Factors, which are
intended to reflect a Plan Participant's level of responsibility,
are up to 60% for the Chairman and Chief Executive Officer, up to
55% for the President and Chief Operating Officer if one should be
elected, up to 50% for other elected officers and up to 45% for
other officers. The Chief Executive Officer may approve
modifications to the foregoing Participation Factors for any
participant who is not a person referred to in Section 162(m) of the
Internal Revenue Code of 1986, as amended, or the regulations
thereunder ("Section 162(m)"), if such modification is based on
level of responsibility. The Committee may establish curves,
matrices or other measurements for prorating the amount of payouts
for achievement of Performance Goals at less than the Target Payout.
b. MAXIMUM PAYOUT. The Committee may also establish a maximum
potential payout amount (the "Maximum Payout") with respect to an
Annual Performance Award of up to 200% of the Target Payout in the
event Performance Goal targets are exceeded by an amount established
by the Committee at the time Performance Goals are established. The
Committee may establish curves, matrices or other measurements for
prorating the amount of payouts for achievement of Performance Goals
at greater than the Target Payout but less than the Maximum Payout.
A-1
<PAGE>
c. DIVISION PAYOUT. At the time an Annual Performance Award is made,
the Committee may establish supplemental division-specific
Performance Goals ("Supplemental Division Performance Goals") and
may provide that achievement of a Supplemental Division Performance
Goal at or above an established target level shall be required in
order to earn a Target Payout or Maximum Payout. The Committee shall
also have the discretion to reduce by an amount up to 20% the amount
that would otherwise be paid under the division payout formula to a
division vice president or general manager based on the Committee's
evaluation of the quality of division performance.
d. STRATEGIC PERFORMANCE MEASURE PAYOUT. At the time an Annual
Performance Award is made, the Committee may increase the Target
Payout and the Maximum Payout (as either may be prorated in
accordance with subparagraphs 3.a. and 3.b.) by up to 20% but to not
more than 200% of the Target Payout, for selected Plan Participants
("Strategic Performance Participants"), to reflect individual
strategic performance measures ("SPM Performance Goals") established
at that time by the Committee. The Committee shall have the
discretion to reduce by an amount up to 20% the amount that would
otherwise be paid under the payout formula to a Strategic
Performance Participant based on the Committee's evaluation of the
individual's achievement of the SPM Performance Goal.
e. SECTION 162(m) MAXIMUM. With respect to any Plan Participant who is
or may become a person referred to in Section 162(m), the maximum
dollar amount that may be paid under an Annual Performance Award
shall be set at the time the Committee grants the award and
establishes Performance Goals under the award.
4. PERFORMANCE GOALS.
a. ESTABLISHMENT. An award payment under an Annual Performance Award
shall be made to a Plan Participant only if the Company, a division
and/or the individual participant achieves Performance Goals
established by the Committee in writing not later than 90 days after
the commencement of the fiscal year to which the Performance Goal
relates, provided that the outcome is substantially uncertain at the
time the Committee establishes the Performance Goal; and provided
further that in no event will a Performance Goal be considered to be
pre-established if it is established after 25% of the period of
service (as scheduled in good faith at the time the Performance Goal
is established) has elapsed.
b. PERFORMANCE GOAL CRITERIA. Performance Goals to be established
under subparagraph 4.a. shall be based on earnings per share (EPS),
return on average net assets (ROANA), average net asset dollar
level, division profit adjustment, division controllable profit
contribution, division average asset dollars, return on equity,
revenue growth, earnings growth or economic value added.
Supplemental Division Performance Goals for division participants
that may be established under subparagraph 4.a. may be based on any
of the foregoing and/or on division specific operating performance
goals including revenue growth, sustained earnings, product warranty
experience, product recalls or inventory levels. SPM Performance
Goals that may be established under subparagraph 4.a. may be based
on quantitative or qualitative factors, and may include, but are not
limited to, aggressive revenue growth, sustaining earnings
initiative, warranty experience, product recalls, field inventory,
or acquisition experience, customer satisfaction (determined by such
measurements as product quality, warranty, on-time delivery, fill
rate, after-market service or customer satisfaction survey results),
inventory reduction and inventory turnover. Each Performance Goal is
to be specifically defined by the Committee on a Company, division
or individual basis and/or in comparison with peer group
performance.
A-2
<PAGE>
5. DISCRETION TO DECREASE AWARD PAYMENT. With respect to any Plan Participant
who is a person referred to in Section 162(m), the Committee shall have the
discretion to decrease an award payment under an Annual Performance Award,
but may not under any circumstances increase such amount.
6. MAXIMUM AWARD PAYMENT. Notwithstanding any other provision of this Plan,
the maximum dollar amount a Plan Participant may be paid under an Annual
Performance Award, whether in cash or Common Stock or Common Stock units,
with respect to any fiscal year is $1,500,000. The Committee may, in its
discretion, decrease this maximum, but may not, under any circumstances,
increase this maximum.
7. PAYMENTS. Before any payment is made under the Plan, the Committee must
certify in writing, as reflected in the minutes, that the Performance Goals
established with respect to an Annual Performance Award have been achieved.
To the extent necessary with respect to any fiscal year, in order to avoid
any undue windfall or hardship due to external causes, the Committee may
make the determination as to whether a Performance Goal has been achieved
without regard to the effect on the Performance Goal measure, as it may
otherwise be presented in the financial statements, of any change in
accounting standards, any acquisition by the Company not planned for at the
time the Performance Goals are established, or any Board-approved
extraordinary or non-recurring event or item.
8. STOCK RETENTION PROVISIONS.
a. ELIGIBILITY FOR STOCK RETENTION AWARD. Subject to the terms and
conditions of this paragraph 8 (the "Stock Retention Provisions"),
at the time the Committee selects Plan Participants, the Committee
may grant to selected Plan Participants ("Stock Participants") a
right (a "Stock Retention Award") to elect (i) to convert to shares
of Common Stock or (ii) to defer, through The Toro Company Deferred
Compensation Plan for Officers (the "Officer Deferred Plan"), into
units having a value based on shares of Common Stock, up to 50% of
the amount of an award payment under an Annual Performance Award
("Base Cash Award") and to receive additional incentive compensation
in the form of one additional share or unit of Common Stock for
every two shares or units acquired upon conversion up to the limit
of 50% of the Base Cash Award (the "Matching Shares" or "Matching
Units"). The shares or units acquired upon conversion of all or a
portion of the Base Cash Award shall be retained by the Company
(which shall be called the "Agent" for purposes of the Stock
Retention Provisions) during the vesting periods for the Matching
Shares or Units described in subparagraph 8.e. Shares of Common
Stock issued under the Stock Retention Provisions shall be called
"Retained Shares" and units of Common Stock deferred under the
Officer Deferred Plan shall be called "Retained Units" under this
paragraph 8.
b. NUMBER OF SHARES OR UNITS. The number of Retained Shares or
Retained Units to be issued or credited upon conversion of a Base
Cash Award under a Stock Retention Award election shall be equal to
the dollar amount of the portion of the Base Cash Award subject to
the election, divided by the fair market value of the Common Stock
on the date that the Committee makes the certification required
under paragraph 7 of this Plan. Fair market value shall be the
closing price of one share of Common Stock, as reported in THE WALL
STREET JOURNAL. Retained Shares shall be issued in whole shares only
and cash shall be paid for fractional shares.
c. ELECTION TO EXERCISE STOCK RETENTION AWARD.
i. On or before the December 31 immediately preceding the end of
the fiscal year to which a Stock Retention Award relates, a
Stock Participant who wishes to convert a portion of a Base Cash
Award into deferred compensation Retained Units shall notify the
Company in writing that he or she has elected to participate in
the Stock Retention
A-3
<PAGE>
Provisions and shall specify the percentage of the Base Cash
Award to be converted, except as otherwise provided in the
Officer Deferred Plan with respect to the year in which that
plan is first implemented or materially amended or the first
year in which a Stock Participant becomes eligible to
participate in the Stock Retention Provisions.
ii. On or before the September 15 immediately prior to the last day
of the fiscal year to which a Stock Retention Award relates, a
Stock Participant who has not elected to convert the maximum
permissible portion of the Base Cash Award into Retained Units
and who wishes to convert up to the maximum permissible portion
of the Base Cash Award into Retained Shares shall notify the
Company in writing that he or she has elected to participate in
the Stock Retention Provisions and shall specify the percentage
of the Base Cash Award to be converted.
iii. An election to participate is effective only for the fiscal
year to which the Stock Retention Award relates.
iv. A Stock Participant who terminates employment, dies, retires at
or after age 65, elects early retirement at or after age 55 or
becomes permanently disabled and unable to work during the
fiscal year to which a Stock Retention Award relates shall not
be eligible to participate in the Stock Retention Provisions
for that fiscal year, and any Stock Retention Award for that
year and any election made by the Stock Participant shall be
canceled automatically as of the date of any such event.
d. MATCHING SHARES OR UNITS. As soon as practical following the
conversion of a Base Cash Award to Retained Shares or Retained
Units, the Company shall issue one Matching Share or credit one
Matching Unit for each two Retained Shares or Units acquired (up to
the limit of 50% of the Base Cash Award) (the "Restricted Shares" or
"Restricted Units"). Restricted Shares shall be held by the Agent
for the Stock Participant's account. Restricted Shares shall be
issued in whole shares only and cash shall be paid for fractional
shares.
e. VESTING, DELIVERY AND DISTRIBUTION.
i. Vesting. Restricted Shares and Restricted Units held or credited
by the Company shall be forfeitable until they vest and shall
vest in increments of 25% of the total number of such Restricted
Shares or Units at the end of each of the second, third, fourth
and fifth years after the date such Restricted Shares or Units
are issued or credited, provided that such Restricted Shares or
Units shall vest only if the Stock Participant's Retained Shares
or Units have been left on deposit with the Agent through the
requisite two, three, four and five year periods and all other
requirements of the Plan have been met, except as may otherwise
be provided in subparagraph 8.f.
ii. Delivery.
A. Retained Shares and Restricted Shares will be delivered as
soon as possible after the applicable vesting requirements
(including accelerated vesting under subparagraph 8.f.) have
been fulfilled. In the event vesting requirements are not
fulfilled, Retained Shares will be returned to a Stock
Participant as soon as possible.
B. Retained Units and Restricted Units that have vested will be
distributed to a Stock Participant consistent with a Stock
Participant's distribution election properly made in
accordance with the provisions of the Officer Deferred Plan.
iii. Retained Shares and Retained Units are fully vested at the time
of issuance or crediting.
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<PAGE>
f. VESTING AND CANCELLATION UNDER SPECIAL CONDITIONS.
i. Retirement or Disability. Notwithstanding the foregoing, all
Restricted Shares or Units held in a Stock Participant's
account shall vest in full if the participant retires on or
after age 65 or becomes permanently disabled and unable to work
while a Stock Participant under the Plan. Notwithstanding the
foregoing, if within one year after such retirement the Stock
Participant is employed or retained by a company that competes
with the business of the Company, or such individual violates
any confidentiality agreement with the Company, the Company may
demand return of the economic value of the Restricted Shares or
Units which vested early under this subparagraph.
ii. Early Retirement. Restricted Units held in the account of a
Stock Participant who retires at or after age 55, but before
age 65, shall vest or be forfeited in accordance with the
provisions of the Officer Deferred Plan. A Stock Participant
who retires at or after age 55, but before age 65, may elect
to leave Retained Shares on deposit until the participant
reaches age 65 or until the applicable vesting requirements of
subparagraph 8.e. have been fulfilled, as the case may be, and
Restricted Shares shall vest upon the occurrence of the
earlier of such event. Notwithstanding the foregoing, if
within one year after such early retirement the Stock
Participant is employed or retained by a company that competes
with the business of the Company, or such individual violates
any confidentiality agreement with the Company, the Company
may demand return of the economic value of the Restricted
Shares which vested after the date of early retirement under
this subparagraph.
iii. Early Withdrawal. In the event that a Stock Participant elects
to withdraw Retained Shares or Units from the account prior to
age 65, but before the applicable vesting requirements have
been fulfilled, Restricted Shares or Units held in such
participant's account that have not vested shall not vest and
shall be forfeited.
iv. Death. In the event of the death of a Stock Participant before
the applicable vesting requirements have been fulfilled, the
Restricted Shares or Units shall vest in full.
v. Voluntary Resignation. In the event that a Stock Participant
resigns voluntarily, Restricted Shares or Units held in such
participant's account that have not yet vested shall not vest
and shall be forfeited, unless otherwise determined by the
Chairman of the Committee, in his or her discretion, upon
recommendation by the Chief Executive Officer of the Company.
vi. Change of Control. All Restricted Shares and Restricted Units
shall vest if there is a Change of Control of the Company. A
Change of Control means the earliest to occur of (A) a public
announcement that a Person shall have acquired or obtained the
right to acquire Beneficial Ownership (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act")) of 15% or more of the outstanding shares of
Common Stock of the Company, (B) the commencement of, or
announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the
Beneficial Ownership by a Person of 15% or more of the
outstanding shares of Common Stock of the Company or (C) the
occurrence of a tender offer, exchange offer, merger,
consolidation, sale of assets or earning power, 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.
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<PAGE>
For purposes of this subparagraph 8.f.vi., Person means any
individual, corporation, partnership, trust, other entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (excluding the Company, a subsidiary of the
Company, any employee benefit plan of the Company or any
subsidiary or any entity holding shares of Common Stock for or
pursuant to the terms of any such plan). For purposes of this
subparagraph, Beneficial Ownership includes securities
beneficially owned, directly or indirectly, by a Person and
such Person's affiliates and associates, as defined under Rule
12b-2 under the Exchange Act, and securities which such Person
and its affiliates and associates have the right to acquire or
the right to vote, or by any other Person with which such
Person or any of such Person's affiliates or associates has any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of shares of Common
Stock, as more fully described in The Toro Company Preferred
Share Purchase Rights Plan dated as of May 20, 1998.
g. TEMPORARY WITHDRAWAL FOR OPTION EXERCISE. A Stock Participant may
temporarily withdraw all or a portion of Retained Shares held in the
participant's account, but not Restricted Shares or Retained or
Restricted Units, in order to exercise Company stock options,
provided that an equal number of shares of Common Stock is promptly
redeposited with the Agent after such exercise.
h. DIVIDENDS AND VOTING. Dividends on Retained and Restricted Shares
may at the election of the Stock Participant be paid to such
participant or reinvested under the Company's dividend reinvestment
plan as then in effect. Dividends on Retained and Restricted Units
shall be credited under the Officer Deferred Plan, in additional
units based on the fair market value of one share of the Common
Stock on the record date for payment of dividends. A Stock
Participant shall have the right to vote Retained and Restricted
Shares.
i. MAXIMUM SHARES SUBJECT TO STOCK RETENTION AWARDS. Subject to the
provisions of this subparagraph and paragraph 6 hereof, the number
of shares of Common Stock reserved and available for issuance
pursuant to Stock Retention Awards under the Plan is 100,000. Shares
of Common Stock that may be issued hereunder may be authorized but
unissued shares, reacquired or treasury shares or outstanding shares
acquired in the market or from private sources or a combination
thereof. Appropriate adjustments in the number of shares of Common
Stock that may be available for such purposes under the Plan may be
made by the Committee in its discretion to give effect to
adjustments made in the number of shares of Common Stock of the
Company through any merger, consolidation, recapitalization,
reclassification, combination, stock dividend, stock split or
similar change in the corporate structure of the Company affecting
the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
9. NON-TRANSFERABILITY. Neither Annual Performance Awards, Stock Retention
Awards, Retained Shares, Restricted Shares, Retained Units, Restricted
Units nor any interest in any one of such awards or shares or units or
benefits may be anticipated, alienated, encumbered, sold, pledged,
assigned, transferred or subjected to any charge or legal process, other
than by will or the laws of descent and distribution, so long as the
Retained and Restricted Shares are held by the Agent or the Retained and
Restricted Units have not been distributed in accordance with the Officer
Deferred Plan, and any sale, pledge, assignment or other attempted transfer
shall be null and void.
10. ADMINISTRATION. The Committee shall have the authority to administer the
Plan; establish policies under the Plan; amend the Plan, subject to the
provisions of paragraph 12; interpret provisions of the Plan; select Plan
Participants and Stock Participants; establish Performance Goals; make
Annual Performance Awards and Stock Retention Awards; or terminate the
Plan, in its sole discretion. The Committee may delegate certain of these
activities and all decisions not required to be exercised by it
A-6
<PAGE>
under Section 162(m) or Section 16 of the Exchange Act, as it solely
determines. All decisions of the Committee shall be final and binding upon
all parties including the Company, its stockholders, Plan Participants and
Stock Participants.
11. GOVERNING LAW. The Plan, awards granted under the Plan, agreements entered
into under the Plan, Retained or Restricted Shares and Retained or
Restricted Units shall be construed, administered and governed in all
respects under and by the applicable laws of the State of Delaware, without
giving effect to principles of conflicts of laws.
12. PLAN AMENDMENT AND TERMINATION. The Committee may, in its sole discretion,
amend, suspend or terminate the Plan at any time, with or without advance
notice to Plan Participants, provided that no amendment to the Plan shall
be effective that would increase the maximum amount payable under paragraph
6 to a Plan Participant who is a person referred to in Section 162(m); that
would change the Performance Goal criteria applicable to a Plan Participant
who is a person referred to in Section 162(m) for payment of awards stated
under paragraph 4; or that would modify the requirements as to eligibility
for participation under paragraph 2, unless the stockholders of the Company
shall have approved such change in accordance with the requirements of
Section 162(m). Notwithstanding the foregoing, no amendment, modification
or termination that would affect benefits accrued under this Plan prior to
such amendment, modification or termination may occur after a Change of
Control, as defined in subparagraph 8.f.vi., without the written consent of
a majority of the Plan Participants determined as of the day before such
Change of Control.
13. EFFECTIVE DATE OF THE PLAN AND AMENDMENTS. The Plan first became effective
on November 1, 1995. Any amendment to the Plan shall be effective on the
date established by the Committee, subject to stockholder approval, if
required under the provisions of paragraph 12.
As amended by the Compensation Committee and Board of Directors on November
18, 1998, subject to stockholder approval on March 24, 1999.
A-7
<PAGE>
EXHIBIT B
THE TORO COMPANY
PERFORMANCE SHARE PLAN
1. PURPOSE. The purpose of the Toro Company Performance Company Performance
Share Plan (the "Plan") is to enhance long-term stockholder value of The
Toro Company (the "Company"), by reinforcing the incentives of key
executives to achieve long-term performance goals of the Company; to link a
significant portion of a participant's compensation to the achievement by
the Company of performance goals and to the value of the Company's Common
Stock, par value $1.00 per share, and related Preferred Share Purchase
Rights ("Common Stock"); and to attract and motivate executives and to
encourage their continued employment on a competitive basis. The purposes
of the Plan are to be achieved by the grant of Performance Share Awards.
2. ELIGIBILITY AND PARTICIPATION. Key employees of the Company who, through
their position or performance, can have a significant, positive impact on
the Company's financial results, shall be eligible to participate in the
Plan. The Compensation Committee (the "Committee") shall select recipients
of Performance Shares ("Plan Participants"). Newly-hired and newly-promoted
executives may be selected as Plan Participants subject to the provisions
of subparagraph 3.c.(ii), if applicable.
3. PERFORMANCE SHARE AWARDS.
a. PERFORMANCE SHARE DEFINED. A Performance Share is a right to receive
shares of Common Stock or Common Stock units, contingent on the
achievement of performance goals of the Company during a three period,
except that a shorter period may be established for new participants and
for awards granted at the time the Plan is adopted (the "Award Term"). A
Performance Share Award shall be subject to such conditions,
restrictions and contingencies as the Committee shall determine.
b. VESTING. Performance Shares shall be subject to forfeiture until they
vest and shall vest only after the conclusion of the Award Term, and
only if the Committee makes the certification required by subparagraph
3.c.(iii), except as may otherwise be provided in subparagraph 3.e.
c. SECTION 162(m) CONDITIONS. Performance Share Awards may be designated
as "performance-based compensation" as that term is used in Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
(i) PERFORMANCE GOALS. The Performance Goal criteria ("Performance
Goals") that may be used by the Committee for Performance Shares
shall include one or more of the following, as selected by the
Committee: cumulative earnings, cumulative earnings per share,
profit after tax, net income, return on invested capital, invested
capital dollars, earnings per share, average net assets, after-tax
interest expense, return on average net assets, return on equity,
return on beginning equity, revenue growth and earnings growth.
(ii) ESTABLISHMENT OF PERFORMANCE GOALS. Performance Share Awards
designated "performance-based compensation" shall be granted, and
Performance Goals shall be established, by the Committee in writing
not later than 90 days after the commencement of the period of
service to which the Performance Goal relates, or such other period
required under Section 162(m) of the Code, provided that the
outcome is substantially uncertain at the time the Committee
establishes the Performance Goal; and provided further that in no
event will a Performance Goal be considered to be pre-established
if it is established after 25% of the period of service (as
scheduled in good faith at the time the Performance Goal is
established) has elapsed.
(iii) SECTION 162(m) MAXIMUM AWARD PAYMENT. With respect to a
Performance Share Award that is designated "performance-based
compensation" for purposes of Section 162(m), the
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<PAGE>
maximum number of shares that may be issued under the award shall
be set at the time the Committee grants the award and establishes
Performance Goals under the award. Notwithstanding any other
provision of this Plan, the maximum number of Performance Shares
that may be granted to a Plan Participant with respect to any Award
Term is 100,000, subject to adjustment as provided in paragraph 4.
(iv) CERTIFICATION OF PAYMENT. Before any payment or delivery of shares
of Common Stock is made under the Plan to any Participant who is a
person referred to in Section 162(m), the Committee must certify in
writing, as reflected in the minutes, that the Performance Goals
established with respect to a Performance Share Award have been
achieved. To the extent necessary with respect to any fiscal year,
in order to avoid any undue windfall or hardship due to external
causes, the Committee may make the determination as to whether a
Performance Goal has been achieved without regard to the effect on
the Performance Goal measure, as it may otherwise be presented in
the financial statements, of any change in accounting standards,
any acquisition by the Company not planned for at the time the
Performance Goals are established or any Board-approved
extraordinary or non-recurring event or item. With respect to any
Plan Participant who is a person referred to in Section 162(m), the
Committee shall have the discretion to decrease an award payment
under a Performance Share Award, but may not under any
circumstances increase such amount.
d. DELIVERY. Certificates for shares of Common Stock in the number of
Performance Shares that vest under an award will be delivered as soon as
possible after the applicable vesting requirements (including
accelerated vesting under subparagraph 3.e.) have been fulfilled, except
that if a Plan Participant has properly elected to defer income that may
be attributable to an award under a Company deferred compensation plan,
Common Stock units will be credited to the Plan Participant's account
thereunder. In the event vesting requirements are not fulfilled,
Performance Shares shall be canceled and have no value.
e. VESTING AND CANCELLATION UNDER SPECIAL CIRCUMSTANCES.
(i) RETIREMENT, DEATH OR DISABILITY. If a Plan Participant retires on
or after age 65 or dies or becomes permanently disabled and unable
to work, shares of Common Stock shall be delivered with respect to
the participant's Performance Share Award only if otherwise earned
and only with respect to the portion of the applicable Award Term
completed at the date of such event (based on a 360 day year and
expressed as a percentage). Such shares shall be delivered only
after the conclusion of the Award Term in accordance with the
provisions of subparagraphs 3.b., 3.c. and 3.d. of the Plan.
(ii) VOLUNTARY RESIGNATION AND EARLY RETIREMENT. In the event that a
Participant resigns voluntarily or retires before age 65,
Performance Shares in such participant's name that have not yet
vested shall not vest and shall be canceled.
(iii) CHANGE OF CONTROL. Notwithstanding the provisions of subparagraphs
3.b. and 3.c., all Performance Shares that have not yet vested
shall vest and become immediately payable if there is a change of
control of the Company. A Change of Control means the earliest to
occur of (A) a public announcement that a Person shall have
acquired or obtained the right to acquire Beneficial Ownership
(within the meaning of Rule 13d-3 under the Securities Exchange Act
of 1934 (the "Exchange Act")) of 15% or more of the outstanding
shares of Common Stock of the Company, (B) the commencement of, or
announcement of an intention to make, a tender offer or exchange
offer, the consummation of which would result in the Beneficial
Ownership by a Person of 15% or more of the outstanding shares of
Common Stock of the Company or (C) the occurrence of a tender
offer, exchange offer, merger, consolidation, sale of assets or
earning power, or contested election or any combination thereof,
that causes or would cause the persons who were directors of the
Company
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<PAGE>
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.
For purposes of this subparagraph 3.e.(iii), Person means any
individual, corporation, partnership, trust, other entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act) (excluding the Company, a subsidiary of the Company, any
employee benefit plan of the Company or any subsidiary or any entity
holding shares of Common Stock for or pursuant to the terms of any
such plan). For purposes of this subparagraph, Beneficial Ownership
includes securities beneficially owned, directly or indirectly, by a
Person and such Person's affiliates and associates, as defined under
Rule 12b-2 under the Exchange Act, and securities which such Person
and its affiliates and associates have the right to acquire or the
right to vote, or by any other Person with which such Person or any
of such Person's affiliates or associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of shares of Common Stock, as more fully
described in The Toro Company Preferred Share Purchase Rights Plan
dated as of May 20, 1998.
f. DIVIDENDS AND VOTING. A Plan Participant shall have no rights as a
stockholder with respect to Performance Shares unless and until Common
Stock or Common Stock units are issued in settlement of the award.
Except as 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 or crediting of Common Stock units.
g. NON-TRANSFERABILITY. Neither Performance Shares nor Performance Share
Awards nor any interest in any one of such awards or shares may be
anticipated, alienated, encumbered, sold, pledged, assigned, transferred
or subjected to any charge or legal process, other than by will or the
laws of descent and distribution, so long as the Performance Shares have
not vested and shares of Common Stock have not been distributed in
accordance with the Plan, and any sale, pledge, assignment or other
attempted transfer shall be null and void. A Plan Participant may
receive payment under a Performance Share Award only while an employee
of the Company and only if continuously employed from the date the award
was granted, except as may otherwise be provided in subparagraph 3.e.
4. MAXIMUM SHARES SUBJECT TO PERFORMANCE SHARE AWARDS. Subject to the
provisions of subparagraph 4.a., the number of shares of Common Stock
reserved and available for issuance pursuant to Performance Share Awards
under the Plan is 500,000. Shares of Common Stock that may be issued
hereunder may be authorized but unissued shares, reacquired or treasury
shares or outstanding shares acquired in the market or from private sources
or a combination thereof.
a. ADJUSTMENTS. Appropriate adjustments in (i) the number or kind of
Performance Shares previously granted or (ii) the maximum number of
shares of Common Stock or number or kind of securities that may be
subject to Performance Share Awards or otherwise available for the
purposes of the Plan may be made by the Committee in its discretion to
give effect to adjustments made in the number of shares of Common Stock
of the Company or other security through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of
its assets or any distribution to stockholders other than a normal cash
dividend.
5. ADMINISTRATION. The Plan shall be administered by the Committee. The
Committee shall have the authority to administer the Plan; establish
policies under the Plan; amend the Plan, subject to the provisions of
paragraph 8; interpret provisions of the Plan; select Plan Participants;
establish Performance Goals; make Performance Share Awards; or terminate
the Plan, in its sole discretion. The Committee may delegate administrative
duties and all decisions not required to be exercised by it under Section
162(m) or Section 16 of the Exchange Act, as it solely determines,
including to
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<PAGE>
Company officers. All decisions of the Committee shall be final and binding
upon all parties including the Company, its stockholders and Plan
Participants.
6. TAX WITHHOLDING. The Company shall have the right to deduct from any
settlement made under the Plan or to require the Participant to pay the
amount of any federal, state or local taxes of any kind required by law to
be withheld with respect to the grant, vesting, payment or settlement of an
award under this Plan, 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 it is withheld or surrendered. The Company may also deduct from any
award settlement any other amounts due the Company by the Plan Participant.
7. GOVERNING LAW. The Plan, awards granted under the Plan, agreements entered
into under the Plan and Performance Shares shall be construed, administered
and governed in all respects under and by the applicable laws of the State
of Delaware, without giving effect to principles of conflicts of laws.
8. PLAN AMENDMENT AND TERMINATION. The Committee may, in its sole discretion,
amend, suspend or terminate the Plan at any time, with or without advance
notice to Plan Participants, provided that no amendment to the Plan shall
be effective that would increase the maximum number of Performance Shares
that may be granted under subparagraph 3.c.(iii) to a Participant who is a
person referred to in Section 162(m); that would change the Performance
Goal criteria applicable to a Participant who is a person referred to in
Section 162(m) for payment of awards as set forth in subparagraph 3.c.(i);
or that would modify the requirements as to eligibility for participation
under paragraph 2, unless the stockholders of the Company shall have
approved such change in accordance with the requirements of Section 162(m).
No amendment, modification or termination of the Plan may adversely affect
in a material manner any right of any Plan Participant with respect to any
Performance Share Award theretofore granted without such participant's
written consent.
9. EFFECTIVE DATE OF THE PLAN AND AMENDMENTS. The Plan shall first become
effective on November 18, 1998, subject to stockholder approval. Any
amendment to the Plan shall be effective on the date established by the
Committee, subject to stockholder approval, if required under the
provisions of paragraph 8.
As adopted by the Compensation Committee and Board of Directors, to be
effective as of November 18, 1998, subject to stockholder approval on March
24, 1999.
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<PAGE>
THE TORO COMPANY
8111 LYNDALE AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55420-1196
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints K. B. Melrose and J. L. McIntyre, or either
of them, with full power of substitution to each, as attorneys and proxies to
represent the undersigned at the Annual Meeting of Stockholders of The Toro
Company to be held in the corporate offices of The Toro Company, 8111 Lyndale
Avenue South, Bloomington, Minnesota on the 24th day of March, 1999 at 3:00
p.m. C.S.T. and at any adjournment(s) thereof, and to vote all shares of
Common Stock which the undersigned may be entitled to vote at said meeting as
directed below with respect to the proposals as set forth in the Proxy
Statement, and in their discretion upon any other matters that may properly
come before said meeting.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES
ON THE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS EXCEPT THAT SHARES
HELD IN EMPLOYEE BENEFIT PLANS FOR WHICH A PROXY IS NOT RECEIVED WILL BE
VOTED BY THE TRUSTEE IN THE SAME PROPORTION AS VOTES ACTUALLY CAST BY PLAN
PARTICIPANTS. THE TABULATOR CANNOT VOTE YOUR SHARES UNLESS YOU SIGN, DATE
AND RETURN THIS PROXY CARD.
----------------
SEE REVERSE SIDE
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<PAGE>
UNLESS YOU INDICATE OTHERWISE, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH
THE BOARD OF DIRECTORS' RECOMMENDATIONS.
<TABLE>
<S> <C> <C> <C>
1. Election of Directors / / FOR all nominees listed below / / WITHHOLD AUTHORITY
(except as marked to the contrary below)
</TABLE>
Ronald O. Baukol Alex A. Meyer Dale R. Olseth
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR MORE INDIVIDUAL
NOMINEES, STRIKE A LINE THROUGH THE NOMINEE'S NAME).
<TABLE>
<S> <C> <C> <C> <C>
2. Approval of Amendment of Annual Management Incentive Plan II FOR / / AGAINST / / ABSTAIN / /
3. Approval of Adoption of The Toro Company Performance Share Plan FOR / / AGAINST / / ABSTAIN / /
4. Approval of Selection of Independent Auditors FOR / / AGAINST / / ABSTAIN / /
</TABLE>
5. To consider and act upon such other matters as may properly come before
the meeting or any adjournments thereof.
---------------------------------------
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SIGNATURE(S) DATE
This Proxy Card must be Signed
Exactly as Name Appears Thereon
When shares are held by joint tenants,
both should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
Title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer.
If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD USING THE ENCLOSED ENVELOPE.
