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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For Fiscal Year Ended October 31, 1998.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ____________________
Commission File Number 1-8649
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420-1196
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $1.00 per New York Stock Exchange
share
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Common Stock on January 7, 1999
as reported by the New York Stock Exchange, was approximately $384,891,687.
The number of shares of Common Stock outstanding as of January 7, 1999 was
12,565,257.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended October 31, 1998 are incorporated by reference into Parts I, II, and IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held March 24, 1999 are incorporated by reference into Part
III.
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THE TORO COMPANY
FORM 10-K
TABLE OF CONTENTS
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PART I. DESCRIPTION PAGE NUMBERS
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ITEM 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . .3-10
ITEM 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 12
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . 12
Executive Officers of the Registrant. . . . . . . . . . . 13-14
PART II.
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 15
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 15
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 16-17
ITEM 7A. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . 17
ITEM 9. Disagreements on Accounting and Financial Disclosure. . . . 17
PART III.
ITEM 10. Directors and Executive Officers of the Registrant. . . . . 18
ITEM 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 18
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 13. Certain Relationships and Related Transactions. . . . . . . 18
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 19-21
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 22
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Part I
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ITEM 1. BUSINESS
INTRODUCTION
The company designs, manufactures, and markets professional turf maintenance
equipment, irrigation systems, landscaping equipment, agricultural irrigation
systems, and consumer products. The company produced its first lawn mower for
golf course fairways in 1921 and its first lawn mower for home use in 1939 and
has continued to enhance its product lines ever since.
Toro's web sites on the Internet are at www.toro.com, www.exmark.com,
www.irritrolsystems.com, www.lawnboy.com, www.lawngenie.com, www.nsn.com. You
can learn about the company and its products by visiting these web sites.
The company emphasizes quality and innovation in its products, manufacturing,
and marketing. The company strives to provide well built, dependable products
supported by an extensive service network. The company's commitment and funding
for engineering costs, as well as acquisition strategy and its licensing and
related agreements, have all contributed to improvement of existing products and
new product development efforts. Through these efforts, the company is
responsive to trends, which may affect its target markets now and in the future.
The company believes that a significant portion of its revenues in recent years
have been attributable to its new and enhanced products.
The company has expanded its product lines and services in recent years by
making acquisitions and strategic alliances. See "Acquisitions, Divestitures,
and Strategic Alliances" below.
The company was incorporated in Minnesota in 1935 as a successor to a business
founded in 1914. It was reincorporated in Delaware in 1983. The company's
executive offices are located at 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420-1196, telephone number (612) 888-8801. Unless the context
indicates otherwise, the terms "company" and "Toro" refer to The Toro Company
and its subsidiaries. The company finances a significant portion of its
receivables through Toro Credit Company ("Toro Credit"), its wholly owned
finance subsidiary.
OUTDOOR MAINTENANCE EQUIPMENT
The company classifies its operations into one industry segment, outdoor
maintenance equipment. The company continues to be a leader in transforming
advanced technologies into products and services that provide solutions for
landscape and turf care maintenance and beautification demands. Following is a
summary of Toro's product lines:
CONSUMER PRODUCTS
Toro markets its consumer products to homeowners through a variety of
distribution channels, including distributors, dealers, home centers, and mass
retailers. These products are sold mainly in North America, Europe, Asia, and
Australia, with the exception of snow removal products which are only sold in
North America and Europe.
WALK POWER MOWERS. The company has manufactured walk power mowers for
residential use since 1939. Its walk power lawn mowers are gasoline,
battery, and electric powered. The company manufactures numerous models of
walk power mowers under its brand names Toro-Registered Trademark- and
Lawn-Boy-Registered Trademark-, including both four-cycle and two-cycle gas
engine models, and corded and battery electric models. Models differ as
to cutting width, type of starter mechanism, type of bagging, controls, and
power sources, and are either self-propelled or push mowers. Certain of
the lawn mowers are backed by the company's "Guaranteed To Start" program
and some Lawn-Boy-Registered Trademark- models are equipped with a
two-cycle engine manufactured by the company. In fiscal 1998, the company
introduced its new two-cycle low-emission Lawn-Boy-Registered Trademark-
DuraForce-TM- walk power mower and a new line of shorter-width European
Toro-Registered Trademark- walk power mowers.
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RIDING MOWERS AND LAWN AND GARDEN TRACTORS. The company manufactures
riding lawn mowers and lawn and garden tractors under its brand name
Toro-Registered Trademark-Wheel Horse-Registered Trademark-, which range
from an eight horsepower rear engine rider model with a 25 inch deck, to a
23 horsepower diesel engine garden tractor model with a 60 inch
side-discharge deck. The front engine model's are available with a variety
of decks and accessories. Recycler-Registered Trademark- technology is
available in select models. Some models are equipped with hydrostatic
transmissions and/or low-emission engines.
HOME SOLUTIONS PRODUCTS. The company designs and markets electrical and
gas products under the Toro-Registered Trademark- brand name. These
products, which include homeowner-installed, plastic and metal, low-voltage
and solar lighting, gas and electric flexible line trimmers, and electric
blowers, are intended to require little or no after sales service. In
fiscal 1998, Toro introduced a more powerful and quieter version of its
electric blower, the Toro-Registered Trademark- QuieTech-TM-. Toro also
sells do-it-yourself irrigation products under the Toro-Registered
Trademark- and Lawn Genie-Registered Trademark- brand names to certain home
centers and mass retailers.
SNOW REMOVAL PRODUCTS. The company manufactures and markets a range of
electric and gas single-stage and gas two-stage snowthrower models under
the Toro-Registered Trademark- and Lawn-Boy-Registered Trademark- brand
names. Single-stage snowthrowers, developed by the company and first
introduced in 1965, are walk-behind units with a lightweight gasoline
engine or electric motor or some including Power Curve-Registered
Trademark- snowthrower technology for general residential use. Two-stage
snowthrowers are designed for relatively large areas with engines ranging
from five to twelve horsepower. Units with eight horsepower and above
can be equipped with the Power Shift-Registered Trademark- snowthrower
technology.
PROFESSIONAL TURF PRODUCTS
Toro markets professional turf products worldwide through a network of
distributors and dealers. The products are then sold to the end user
professional who maintains golf courses, sports fields, municipality properties,
and landscapes.
COMMERCIAL PRODUCTS. Professional turf maintenance equipment marketed
under the Toro-Registered Trademark- brand name is the company's
oldest product line, which began in 1921 with tractor-pulled reel mowers
for golf courses. Today, the company's expanded product line includes
products designed for large turf areas of schools, parks, cemeteries,
sports fields, plant sites, apartment buildings, and townhouse complexes,
as well as golf courses. Management believes that golf courses will
continue to be a significant market for turf maintenance equipment as new
golf course construction continues throughout the world, with the exception
of Asia which is experiencing an economic recession, and existing courses
continue to provide the greatest market for Toro products. Increasing
emphasis is being placed on the golf and landscape contractor markets.
Products for the golf course include turf sprayer equipment, utility
vehicles, riding and walk power reel mowers for the putting green, and
riding and pull-behind large reel and rotary products for the fairway,
rough and trim cutting, turf aeration, and sandtrap/bunker maintenance.
Products for the landscape contractor market include mid-size walk power
mowers, zero-turning radius riding mowers, handheld trimmers, and compact
utility vehicles. The company markets products for landscape contractors
under both the Toro-Registered Trademark- and Exmark-Registered Trademark-
brands. See "Recent Developments - Acquisitions, Divestitures, and
Strategic Alliances" below for information on the company's recent
acquisition of Exmark products.
The company acquired the manufacturing, sales, and distribution rights to
Dingo-Registered Trademark- Digging Systems (Dingo) in fiscal 1997. The
Dingo-Registered Trademark- utility vehicle is a cornerstone product for
the newly established Toro-Registered Trademark- Sitework-TM- Systems
product line, which improves efficiency in the construction and creation of
landscapes. The company began manufacturing and selling the Toro-Registered
Trademark- Sitework-TM- Systems in fiscal 1998 for the U.S. market.
Other products for all commercial markets include riding rotary units with
out-front cutting decks ranging from 52 inches to 16 feet, turf sweepers,
and multipurpose vehicles and attachments designed for flexibility of use.
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IRRIGATION PRODUCTS. Turf irrigation products marketed under the
Toro-Registered Trademark- and Irritrol-Registered Trademark- Systems brand
names include sprinkler heads and electric and hydraulic control devices
designed to be used in turf irrigation systems for residential, commercial,
golf course, and agricultural use. These products are installed in new
systems and can also be used to replace or retrofit existing systems. Most
of the product line is designed for underground irrigation systems.
Control valves activate the sprinkler heads and controllers typically
activate electric or hydraulic lines to control the valves and sprinkler
heads. The acquisition of Drip In in fiscal 1998 enhanced Toro's product
line for the agricultural micro-irrigation market, including drip tape,
hose, emitters, and other micro-irrigation products. The company's
irrigation products are used in 74 of the golf courses rated among the top
100 courses in the United States by GOLF DIGEST, dated May 1997.
See the table entitled "Net Sales By Product Line" under the caption "Results of
Operations" in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 12 of the company's
Annual Report to Stockholders for the fiscal year ended October 31, 1998 for
information regarding revenues in the consumer, commercial, and irrigation
product lines, which information is incorporated herein by reference.
INTERNATIONAL OPERATIONS
The company currently distributes its products worldwide with sales and/or
distribution offices in the United States, Canada, Belgium, the United Kingdom,
Australia, Singapore, Japan, and Italy. New product development is pursued
primarily in the United States.
Products marketed outside of North America are sold in compliance with local
safety standards. All products shipped to Europe are designed to conform to
European Community Certification standards. In addition to developing new
market-specific products, the International business is adding customers in new
regions. Emerging markets in Argentina, Russia, and the Czech Republic have
recently been added to the distribution base.
RECENT DEVELOPMENTS
PROFIT IMPROVEMENT PLAN
In fiscal 1998, Toro implemented a profit improvement plan to reposition
the consumer business and improve overall company profitability and
competitiveness. This strategy included organizational changes in the
consumer division, decentralizing manufacturing and inventory management,
initiating a multi-year strategy for warehousing and transportation
services with third party vendors, sale of the recycling equipment
business, the restructuring of the professional fertilizer business, and
plant closings.
ACQUISITIONS, DIVESTITURES, AND STRATEGIC ALLIANCES
In fiscal 1998, Toro announced the establishment of Logistics 2000, a
multi-year supply chain management program to streamline the supply chain
and provide greater inventory control and management. Toro entered into a
contract with GATX Logistics, Inc. for logistics management and systems
integration services. These services include transportation, storage, and
distribution of selected Toro products. The first phase of the plan
includes closing leased warehouses in Riverside and Laguna Niguel,
California, and transferring their irrigation inventories to GATX's
facility in Mira Loma, California. Also, GATX will assume management and
warehousing responsibilities of the recently closed Sardis, Mississippi
manufacturing facility. The company is currently evaluating expansion of
Logistics 2000. Phase two of the program could include additional
GATX-managed regional distribution centers for all Toro goods. The
expected benefits after Logistics 2000 is fully implemented are greater
efficiency along with better fill rates, improved time of delivery, and
reduced overall system inventories.
In February 1998, the company acquired GR Driplines, Incorporated (Drip
In), a manufacturer of agricultural micro-irrigation products with a
reputation for quality and innovation. Drip In is headquartered in Madera,
California and employs approximately 60 people in a 58,000 square foot
facility.
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In November 1997, the company acquired Exmark Manufacturing Company
Incorporated (Exmark), a leading manufacturer of equipment for the
professional landscape contractor industry. Exmark is headquartered in
Beatrice, Nebraska and produces mid-sized walk-behind power mowers and
zero-turning radius riding mowers for professional contractors. Exmark
employs approximately 280 people in a 164,000 square foot facility.
In September 1997, the company acquired the manufacturing, sales, and
distribution rights to Dingo-Registered Trademark- Digging Systems (Dingo).
The Dingo-Registered Trademark- utility vehicle is the cornerstone product
for the newly established Toro-Registered Trademark- Sitework-TM- Systems
product line. The Dingo-Registered Trademark- is a rugged, compact, and
powerful piece of equipment with more than 35 attachments that can
dramatically increase landscape contractors' productivity. The company
manufactures and sells Dingo-Registered Trademark- landscape products under
the Toro-Registered Trademark- Sitework-TM- brand name for U.S markets.
In December 1996, the company acquired James Hardie Irrigation Group
(Hardie) from James Hardie Industries Limited of Australia (JHI Limited).
Hardie was a worldwide leader in the production of irrigation systems to
the residential/commercial landscape market. Hardie manufactured products
for all major segments of the irrigation market, except for the golf
market, and sold to distributors and retailers worldwide. Hardie offered a
broad range of irrigation products and had leading positions in valves and
controllers worldwide. Hardie products are now marketed under the
Irritrol-Registered Trademark- Systems brand through its existing global
distribution network. The Lawn Genie-Registered Trademark- brand for the
mass retailer market is expected to become a leading presence in
do-it-yourself home irrigation.
In the fourth quarter of fiscal 1998, Toro completed the sale of its
non-core recycling equipment business. The company also announced that it
is restructuring its non-core professional fertilizer business, including
the possibility of selling portions of the business.
SOFTWARE AND ISO 9000
In 1998, the company continued integrating its operations to an
enterprise-wide software system, which is expected to be completed in
fiscal 1999 with the exception of two domestic subsidiaries and the
company's European subsidiaries. ISO 9000 continues to be a priority for
the company's manufacturing facilities. The manufacturing facilities at
Tomah, Wisconsin, Shakopee, Minnesota, Riverside, California, and the
commercial business unit at Bloomington, Minnesota maintained their
certification in fiscal 1998 and Windom, Minnesota and Oxford, Mississippi
are working towards ISO 9000 certification in fiscal 1999.
MANUFACTURING AND PRODUCTION
In some areas of its business, the company is primarily an assembler while in
others it is a fully integrated manufacturer. The company's consumer spring and
summer products are generally manufactured in the winter and spring months and
its consumer fall and winter products are generally manufactured in the summer
and fall months. The company's irrigation and commercial products are
manufactured throughout the year. A majority of the company's manufacturing
facilities are located in the United States, with the exception of some
irrigation production facilities that are located in Australia and Italy.
Sales to independent distributors and dealers closely correspond with Toro's
production levels, which are based on its estimates of the demand for its
products, taking into account the timing of shipments, distributor and dealer
inventory levels, the need to shut down production to enable manufacturing
facilities to be prepared for the manufacture of new or different models, the
efficient use of manpower and facilities, labor disruptions, and other matters
not within Toro's control.
Management continues to seek greater efficiencies and improve work processes
throughout the company. Toro's total quality process is focused on improving
product quality, customer response time, and reducing overall product cost.
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SOURCES AND AVAILABILITY OF RAW MATERIALS
Most of the components for the company's products are commercially available
from a number of sources and the company is generally not dependent on any one
supplier. In fiscal 1998, Toro experienced no significant or unusual problems in
the purchase of raw materials or commodities. The largest component costs are
generally engines, transmissions, and electric motors. The company purchases
most of its engines and motors for consumer and commercial products from several
suppliers from around the world. In addition, the company manufactures
two-cycle engines for some of its consumer products.
SERVICE AND WARRANTY
Toro products are warranted to the end-user to ensure end-user confidence in
design, workmanship, and material quality. Warranty lengths vary depending on
whether use is "residential" or "commercial" within individual product lines.
Some products have an over-the-counter exchange option and some have a 30-day
satisfaction guarantee. In general, warranties tend to be for six months to
five years, and cover all parts and labor for non-maintenance repairs and wear
items, provided the repair was not necessitated by operator abuse, improper use,
or negligence. An authorized independent Toro distributor or dealer must
perform warranty work. Distributors and dealers submit claims for warranty
reimbursement to Toro and are credited for the cost of repairs and labor as long
as the repairs meet Toro's prescribed standards. Warranty expense is accrued at
the time of sale based upon historical claims by individual products. Special
warranty reserves are also accrued for specific known product modifications.
Service support outside of the warranty period is provided by independent Toro
distributors and dealers at the customer's expense.
TRADEMARKS AND PATENTS
Products manufactured by the company are nationally advertised and sold at the
retail level under the trademarks Toro-Registered Trademark-, Wheel
Horse-Registered Trademark-, Lawn-Boy-Registered Trademark-, Irritrol-Registered
Trademark- Systems, and Lawn Genie-Registered Trademark-, all of which are
registered in the United States and in the principal foreign countries in which
the company markets its products. With the recent acquisitions of Exmark and
Drip In, the company acquired the Exmark-Registered Trademark- and Drip
In-Registered Trademark- brand names. The company also manufactures and sells
Dingo-Registered Trademark- landscape products under the Toro-Registered
Trademark- Sitework-TM- Systems brand name for U.S. markets.
The company holds patents in the United States and foreign countries and applies
for patents as applicable. Although management believes patents have value to
the company, patent protection does not deter competitors from attempting to
develop similar products. Although patent protection is considered to be very
beneficial, the company is not materially dependent on any one or more of its
patents.
SEASONALITY
Sales of the company's consumer products, which accounted for approximately 34
percent of total sales in fiscal 1998, are seasonal with greater sales of lawn
and garden products occurring between February and July, and of snow removal
equipment occurring between August and January. Opposite seasons in some global
markets somewhat moderate this seasonality in consumer product sales.
Seasonality in irrigation and commercial product sales also exists, but is
tempered because the selling season in West Coast and Southern states continues
for a longer portion of the year than in northern states. Overall, worldwide
sales levels are highest in the second quarter. Historically, accounts
receivable balances increase between January and April as a result of extended
payment terms made available to the company's customers. Accounts receivable
balances decrease between May and August when payments are made. The seasonal
requirements of the business are financed from operations and with short-term
bank lines of credit, where the peak borrowing usually occurs between February
and May.
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DISTRIBUTION AND MARKETING
The company markets the majority of its Toro branded products principally
through 39 domestic and 107 foreign distributors, and a number of home centers
and mass retailers in more than 70 countries worldwide. Toro-Registered
Trademark- and certain Lawn-Boy-Registered Trademark- consumer products such as
walk power mowers, riding mowers, and snowthrowers are sold to distributors for
resale to retail dealers throughout the United States. Home solutions products
and most Lawn-Boy-Registered Trademark- products are also sold directly to home
centers and mass retailers. Beginning in the spring of fiscal 1999, the
Toro-Registered Trademark- Recycler-Registered Trademark- walk power mower will
be sold in certain home centers. Commercial and irrigation products are sold to
distributors for resale to irrigation contractors, municipalities, and golf
courses. Irrigation products are also sold through distributors to irrigation
dealers and direct to irrigation dealers, mass retailers, and home centers for
resale to contractors, golf courses, and end-users. Internationally, consumer
products are sold to distributors for resale to retail dealers and mass
merchandisers outside the United States, principally in Canada and Western
Europe. Some irrigation and consumer products are sold directly to retail
dealers in Canada, Australia, and Western Europe.
The company's current marketing strategy is to maintain distinct and separate
brands and brand identification for Toro-Registered Trademark-, Toro-Registered
Trademark- Wheel Horse-Registered Trademark-, Lawn-Boy-Registered Trademark-,
and Irritrol-Registered Trademark- products, as well as the recently acquired
Exmark-Registered Trademark- and Drip In-Registered Trademark- products. The
Exmark-Registered Trademark- brand is distributed through approximately 25
distributors for resale to retail dealers throughout North America.
The company's distribution systems for the sale of its products are intended to
assure quality of sales and market presence as well as effective after-market
service. The company considers its distribution network to be a competitive
asset in marketing Toro-Registered Trademark-, Toro-Registered Trademark- Wheel
Horse-Registered Trademark-, Lawn-Boy-Registered Trademark-, Irritrol-Registered
Trademark-, and Exmark-Registered Trademark- products.
The company advertises its products during appropriate seasons throughout the
year on television, radio, and in print. Most of the company's advertising
emphasizes its brand names. Advertising is paid by the company as well as
through cooperative programs with distributors, dealers, home centers, and mass
retailers.
CUSTOMERS
No material part of the company's business is dependent upon a single customer.
While the loss of any substantial customer could have a material short-term
impact on the company's business, Toro believes that its diverse distribution
channels should minimize the long-term impact on any such loss.
BACKLOG OF ORDERS
The approximate backlog of orders believed to be firm at October 31, 1998 was
$27,693,000.
Due to the company's implementation of its enterprise-wide software system that
was in progress at the time, it was necessary to estimate the backlog of orders
at October 31, 1997. That estimate at October 31, 1997 was $68,525,000, which
was an estimate based on sales for the first quarter of fiscal 1998. The
backlog of orders for October 31, 1998 was based on an actual run from the
company's now-installed operating system at October 31, 1998 and should not be
compared to the October 31, 1997 number.
The company expects that all existing backlog can be filled in fiscal 1999.
COMPETITION
The company's products are sold in highly competitive markets throughout the
world. The principal competitive factors in the company's markets are pricing,
product innovation, quality, and service. Pricing has become more of a factor,
especially for the consumer and commercial products. Management believes the
company offers total solution, full service packages with high quality products
that have the latest technology and design innovations. Also, by selling
Toro-Registered Trademark-, Toro-Registered Trademark-Wheel Horse-Registered
Trademark-, Lawn-Boy-Registered Trademark-, Exmark-Registered Trademark-, and
Irritrol-Registered Trademark- Systems branded products through a network of
distributors, dealers, hardware, home center, and mass retailers, the company
offers comprehensive service support during and after the relevant warranty
period. The company competes in all product lines with numerous manufacturers,
many of which have substantially greater financial resources than the company.
Management believes that its commitment to product innovation, its distribution
systems, and its focus on target markets, position it well to compete in these
various markets.
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CONSUMER
The company's principal competitors for mowing and snow equipment are
Frigidaire Home Products, Inc. (a subsidiary of Electrolux AB), Deere &
Company, Honda Motor Co., Ltd., MTD Products, Inc., Murray Ohio
Manufacturing Co., Inc. (a subsidiary of Tompkins Corp.), Sears, Roebuck
and Co., Snapper Power Equipment (a division of Metro Media), Ariens
Company, Cub Cadet Power Equipment, Garden Way, Incorporated, and
Simplicity Manufacturing Company. The principal competitors in home
solutions products are The Black and Decker Corporation, Malibu Lighting (a
registered trademark of Intermatic, Inc.), Poulan/Weed Eater, and Homelite
(a division of Deere & Company).
COMMERCIAL
The company's commercial products compete with products from numerous
manufacturers, but the principal competitors across most of the company's
commercial product lines are Deere & Company, Lesco Inc., National Mower,
Jacobsen/Textron, and Ransomes Sims & Jefferies PLC (recently acquired by
Textron, Inc.)
IRRIGATION
The company's principal competitors in irrigation products are Hunter
Industries, Rain Bird Sprinkler Manufacturing Corporation, Netafim, and
T-Systems International.
INTERNATIONAL
The international market is generally fragmented so that the degree of
competition varies among the different countries in which the company
markets its consumer, commercial, and irrigation products. Most
competitors in the irrigation and commercial product lines are based in the
United States. Consumer product lines can face more competition where
foreign competitors manufacture and market competing products in their
countries at a lower cost. In addition, fluctuations in the value of the
U.S. dollar may affect the price of the company's products in such markets,
thereby affecting their competitiveness.
GOVERNMENTAL REGULATION
The company's consumer products are subject to various federal statutes designed
to protect consumers and are subject to the administrative jurisdiction of the
Consumer Product Safety Commission. The company is also subject to certain
federal and state environmental, occupational safety, transportation, and other
regulations, none of which has had a material adverse effect on its operations
or business. Management believes the company is in substantial compliance with
all such regulations. The Environmental Protection Agency (EPA) released Phase
I regulations for all gas engines under 25 horsepower in June of 1995. Toro's
four-cycle engine suppliers are currently in compliance with these regulations.
The company received certification in January 1998 on its own two-cycle walk
power mower engines and earlier on the two-cycle snowthrower engines. Both now
comply with Phase I regulations. This will allow the company to continue
producing its two-cycle engines at its Oxford, Mississippi plant through the
calendar year 2002.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
With the exception of irrigation production facilities in Australia and Italy,
all of the company's production facilities are located in the United States.
Substantially all financial transactions are in U.S. dollars, although sales of
the company's foreign subsidiaries, which are insignificant when compared to
total company sales, may be conducted in local currencies.
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into foreign currency exchange contracts. These contracts are
designed to hedge firm and anticipated foreign currency transactions.
Export sales were $153,500,000 for the year ended October 31, 1998, $161,836,000
for the year ended October 31, 1997, and $140,919,000 for the year ended October
31, 1996. The identifiable assets attributable to foreign operations were not
significant as of October 31, 1998.
See Notes to the Consolidated Financial Statements of the company contained in
the company's Annual Report to Stockholders for the fiscal year ended October
31, 1998 for additional information relating to currency risk management on page
18 and for information on international and export sales by geographic area on
page 32, which information is incorporated herein by reference.
WHOLESALE FINANCING
Toro Credit Company, a wholly owned finance subsidiary of the company, provides
financing of products manufactured by Toro for North American distributors and
approximately 250 domestic dealers. Toro Credit Company purchases selected
receivables from Toro and its independent consumer product distributors for
extended periods, which enables the independent distributors and dealers to
carry representative inventories of equipment. Down payments are not required,
and for each product line, finance charges during the pre-season period are
incurred primarily by Toro. During the in-season period, finance charges are
accrued to the accounts of the distributor or dealers, and during the carry-over
period, finance charges may be shared. A security interest is retained in the
distributors' and dealers' inventories, and periodic physical checks are made of
those inventories. Generally, terms to the distributors and dealers require
payments as the equipment which secures the indebtedness is sold to customers.
Rates are generally based on prime rate plus a fixed percentage that differs
based on whether the financing is for a distributor or dealer. Rates may also
vary based upon the product that is financed.
Independent Toro dealers that do not finance through the Toro Credit Company
finance their inventories with a third party financing source. The finance
charges represent interest for a pre-established length of time at a predefined
rate from a contract with this third party financing source.
Dealer and distributor defaults in recent years have not been significant.
YEAR 2000
The discussion of year 2000 issues in the Management Discussion and Analysis
section in the Annual Report, on page 17, is incorporated herein by reference.
EMPLOYEES
During fiscal 1998, the company employed an average of 4,695 employees. The
total number of employees at October 31, 1998 was 4,381. Four collective
bargaining agreements, one expiring in October 1999, one expiring in May 2000,
one expiring in August 2000, and one expiring in September 2001 cover
approximately 22 percent of these employees.
As a result of the acquisitions of Exmark and Drip In, the company added
approximately 320 non-union employees.
Management considers its overall relations with its employees to be good.
10
<PAGE>
ITEM 2. PROPERTIES
The company utilizes manufacturing and office facilities, which total
approximately 3,751,000 square feet of space. Toro also utilizes 20.34 acres as
a testing facility. Plant utilization varies during the year depending upon the
production cycle. In fiscal 1998, the company announced the closing of its
production facilities at Sardis, Mississippi and Olathe, Kansas. The company
considers each of its current facilities in use to be in good operating
condition and adequate for its present use. Management believes that it has
sufficient capacity to meet its current production needs. The following
schedule outlines the company's significant facilities by location, ownership
and function:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Location Ownership Products Manufactured / Use
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plymouth, WI Owned Parts distribution center, office
Windom, MN Owned/Leased Consumer components and products and warehouse
Lakeville, MN Leased Finished Goods distribution center, office
Bloomington, MN Owned/Leased Corporate headquarters and test facility
Tomah, WI Owned/Leased Consumer and Commercial products and warehouse
Baraboo, WI Leased Finished Goods distribution center, office
Riverside, CA Owned/Leased Irrigation and Consumer products and warehouse, office
Evansville, IN Leased Consumer and Commercial products
Beatrice, NE Owned Commercial products, office
Shakopee, MN Owned Components for consumer and commercial products
El Paso, TX Owned/Leased Irrigation and Consumer products and warehouse
Beverley, Australia Owned Office and distribution center
Murray Bridge, Australia Owned Irrigation products and warehouse
El Cajon, California Owned Irrigation products and warehouse
Oxford, MS Owned Components for consumer products
Oevel, Belgium Owned Finished goods distribution center, office
Madera, CA Owned Agricultural irrigation products and warehouse, office
Laguna, CA Leased Irrigation products warehouse
Braeside, Australia Leased Irrigation products warehouse
Lincoln, NE Leased Commercial products warehouse
DFW Airport, TX Leased Distribution facility
Mountaintop, PA Leased Parts distribution center
</TABLE>
Toro also owns and leases other facilities that are currently idle and available
for sale or subleasing.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The company is a party to litigation in the ordinary course of its business.
Ongoing litigation primarily involves claims for damages arising out of the use
of the company's products, some of which include claims for punitive as well as
compensatory damages. The company is also subject to administrative proceedings
in respect to certain claims involving the discharge of hazardous substances
into the environment. Certain of these claims assert damages and liability for
remedial investigations and clean up costs. Management is of the opinion that
amounts which may be awarded or assessed in connection with these matters will
not have a material effect on the company's financial position. Further, the
company maintains insurance against product liability losses.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The list below identifies those persons deemed to be executive officers of the
company, discloses their age and position with the company as of January 7, 1999
and positions held by them during the last five years. Officers are elected or
appointed annually. A complete list of all officers of the company is found on
page 36 of the company's Annual Report to Stockholders for the year ended
October 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name, Age and Position with the Company Business Experience During the Last Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Kendrick B. Melrose Elected Chairman of the Board in December 1987 and Chief Executive Officer in
58, Chairman and Chief Executive Officer December 1983.
- ------------------------------------------------------------------------------------------------------------------------------------
J. David McIntosh Elected Executive Vice President, Professional Businesses and International
55, Executive Vice President, Professional August 1998. From September 1996 to August 1998, he served as Group Vice
Businesses and International President. From January 1992 to September 1996, he was appointed Vice
President and General Manager, Consumer Division.
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen P. Wolfe Elected Vice President Finance, Treasurer in June 1997 and Chief Financial
50, Vice President Finance, Treasurer and Officer in May 1997. Appointed Vice President in August 1994. Elected
Chief Financial Officer President, Toro Credit Company in July 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
J. Lawrence McIntyre Elected Vice President in July 1993. Elected Secretary and General Counsel in
56, Vice President, Secretary and General Counsel August 1993. Prior to July 1993, he was a shareholder with Doherty, Rumble &
Butler Professional Association.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen M. Meyer Elected Vice President, Administration August 1998. From December 1991 to
49, Vice President, Administration August 1998, she served as Vice President, Human Resources/Administrative
Services.
- ------------------------------------------------------------------------------------------------------------------------------------
Dennis P. Himan Appointed Vice President and General Manager, Landscape Contractor Businesses
54, Vice President and General Manager Landscape August 1998. From June 1997 to August 1998, he served as Vice President,
Contractor Businesses Distributor Development and Mergers/Acquisitions. From March 1996 to June
1997, he served as Vice President and Treasurer.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael J. Hoffman Appointed Vice President and General Manager, Commercial Business November
43, Vice President and General Manager 1997. From November 1996 to November 1997, he served as General Manager of
Commercial Business the Commercial Division. He served as Managing Director, Recycling Division
from March 1994 to October 1996 and as Director of Marketing and Service,
Commercial Division from September 1989 to March 1994.
- ------------------------------------------------------------------------------------------------------------------------------------
William D. Hughes Appointed Vice President and General Manager, Consumer Business August 1998.
48, Vice President and General Manager From September 1983 to August 1998, he was Chairman and Chief Operating
Consumer Business Officer of Turf Equipment and Supply Company, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Randy B. James Appointed Vice President and Controller in December 1988.
55, Vice President and Controller
- ------------------------------------------------------------------------------------------------------------------------------------
13
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Richard W. Parod Appointed Vice President and General Manager, Irrigation Business March 1997.
45, Vice President and General Manager From December 1993 to March 1997, he served as President of James Hardie
Irrigation Business Irrigation, Inc. From September 1993 to December 1993, he served as Chief
Financial Officer of James Hardie Irrigation, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard R. Pollick Appointed Vice President and General Manager, International Business in March
59, Vice President and General Manager 1990.
International Business
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There are no family relationships between any director, executive officer or
person nominated to become a director or executive officer. There are no
arrangements or understandings between any executive officer and any other
person pursuant to which he or she was selected as an officer.
14
<PAGE>
Part II
- --------------------------------------------------------------------------------
All information incorporated by reference in this Part II is from the
Registrant's Annual Report to Stockholders for the fiscal year ended October 31,
1998 ("Annual Report").
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Toro Common Stock (including related Preferred Share Purchase Rights) is listed
for trading on the New York Stock Exchange. As of January 7, 1999 there were
6,393 holders of record of the company's common stock.
See "Quarterly Financial Data" on page 33 of the Annual Report for dividends
paid and range of high and low sales prices for the company's common stock on
the New York Stock Exchange on a quarterly basis for the period from November 1,
1996 to October 31, 1998, which information is incorporated herein by reference.
Although the company intends to declare cash dividends on a quarterly basis in
the future, the determination as to the payment and the amount of any cash
dividend will depend upon the company's then current financial condition,
capital requirements, results of operations, and other factors deemed relevant
by the company's board of directors.
ITEM 6. SELECTED FINANCIAL DATA
See "Selected Financial Data" on page 20 of the Annual Report for financial data
for the years ended October 31, 1998, 1997, 1996, the 3 month period ended
October 31, 1995, and the years ended July 31, 1995 and 1994, which information
for these periods is incorporated herein by reference.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
See the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Annual Report to Stockholders on
pages 12 through 19, which section is incorporated herein by reference.
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Part I of this Annual Report on Form 10-K and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
company's Annual Report to Stockholders for fiscal 1998 referred to above
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
In addition, forward-looking statements may be made orally or in press releases,
conferences, reports or otherwise, in the future by or on behalf of the company.
Statements that are not historical are forward-looking. When used by or on
behalf of the company, the words "expect", "anticipate", "estimate", "believe",
"intend" and similar expressions generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the company and the markets it serves. Particular risks
and uncertainties facing the company at the present include political and
economic uncertainty throughout the world; whether the announced profit
improvement plan can be successfully implemented; increased competition in the
company's businesses from competitors that have greater financial resources; the
cost of closing certain plants and selling certain business units; the success
of new marketing programs; continued deterioration in the company's markets in
Asia and softening in other international markets; the strong dollar which
increases the cost of the company's products in foreign markets resulting in
cancellation of planned projects and limiting the company's ability to increase
prices; competitive implications and price transparencies related to the euro
conversion; changing buying patterns affecting the company's consumer business,
including but not limited to a trend away from purchases at dealer outlets to
price and value conscious purchases at hardware, home center, and mass
retailers; changes in distributor ownership; the company's expansion into
selected home center markets; the company's ability to integrate business
acquisitions and to manage alliances successfully; the addition of outside
providers for warehousing and transportation services; the company's ability to
develop and manufacture new and existing products profitably; market acceptance
of existing and new products; changes in distributors, dealers, home center, or
mass retailers' purchasing practices; the company's ability to rationalize its
product lines and plant configurations; the ability to eliminate cost overruns
affecting selected consumer and irrigation products at the El Paso, Texas
facility; the company's ability to maintain good relations with its union
employees; and the ability to retain and hire quality employees.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions and
the economy in general in both foreign and domestic markets; weather conditions
affecting demand, including warm winters and wet spring and summer weather;
slower growth in the company's markets; financial market changes including
increases in interest rates and fluctuations in foreign exchange rates;
unanticipated problems or costs associated with the transition of European
currencies to the common euro currency; a slowing in housing starts or new golf
course starts; inability to raise prices of products due to market conditions;
changes in market demographics; actions of competitors; unanticipated problems
or costs associated with accommodation of the year 2000 in computer applications
or products; the inability of the company's suppliers, customers, creditors,
government agencies, public utility providers, and financial service
organizations to implement computer applications accommodating the year 2000;
the inability of the company's suppliers, customers, creditors, government
agencies, public utility providers, and financial service organizations to
implement computer applications accommodating the year 2000; seasonal factors in
the company's industry; unforeseen litigation; government actions including
budget levels, regulation and legislation, primarily legislation relating to the
environment, commerce, infrastructure spending, health, and safety; and
availability of materials.
16
<PAGE>
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements and from historical
results, due to the risks and uncertainties described above, as well as others
not now anticipated. The foregoing statements are not exclusive and further
information concerning the company and its businesses, including factors that
potentially could materially affect the company's financial results, may emerge
from time to time. It is not possible for management to predict all risk
factors or to assess the impact of such risk factors on the company's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
The company is exposed to foreign currency exchange risk arising from
transactions that are entered into during the normal course of business. To
mitigate the risk from foreign currency exchange rate fluctuations, the company
will generally enter into forward currency exchange contracts for the purchase
or sale of a currency. Decisions on whether to use forward currency exchange
contracts to hedge transactions exposed to foreign exchange rate changes are
made based on the amount of those exposures, by currency, and an assessment of
the near-term market value for each currency. These instruments used as hedges
are managed to reduce the risk associated with the exposure being hedged and are
designated as a hedge at the inception of the contract. Accordingly, changes in
market values of these hedge instruments are highly correlated with changes in
market values of underlying hedged items both at inception of the hedge and over
the life of the hedge contract. Gains and losses on foreign currency contracts
are recorded on the Consolidated Statements of Earnings.
The following forward exchange contracts held by the company have maturity dates
in fiscal year 1999. All items are non-trading and stated in U.S. dollars. The
average contracted rate, notional amount, and fair value impact at October 31,
1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE FAIR VALUE
DOLLARS IN THOUSANDS CONTRACTED NOTIONAL IMPACT
(EXCEPT AVERAGE CONTRACTED RATE) RATE AMOUNT GAIN (LOSS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Buy Australian dollar/Sell US dollar .6368 $ 1,022.8 $ (18.2)
- --------------------------------------------------------------------------------
Buy US dollar/Sell Australian dollar .6040 5,614.1 (206.9)
- --------------------------------------------------------------------------------
Buy US dollar/Sell Canadian dollar 1.5135 7,168.8 140.0
- --------------------------------------------------------------------------------
Buy German mark/Sell US dollar 1.7808 2,948.2 251.5
- --------------------------------------------------------------------------------
</TABLE>
DEBT FINANCING
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term
borrowing rates are dependent upon the LIBOR rate plus an additional percentage
based on the company's current borrowing level.
At October 31, 1998, the estimated fair value of long-term debt with fixed
interest rates was $182,273,000 compared to its carrying value of $197,424,000.
The fair value is estimated by discounting the projected cash flows using the
rate at which similar amounts of debt could currently be borrowed.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements described in Item 14(a)1 of this report are
incorporated herein by reference.
See "Quarterly Financial Data" appearing on page 33 of the Annual Report to
Stockholders which is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
<PAGE>
Part III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this report for
information regarding the executive officers of the company, which information
is herein incorporated by reference.
Information regarding the directors of the company and additional information
regarding certain executive officers is incorporated herein by reference to
information to be contained in the company's Proxy Statement to be filed with
the Securities and Exchange Commission with respect to the next annual meeting
of stockholders which involves the election of directors or, if such Proxy
Statement is not filed within 120 days after the end of the fiscal year covered
by this Form 10-K, such information will be filed as part of an amendment to
this Form 10-K not later than the end of the 120-day period.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to information to be contained in the company's Proxy Statement to be
filed with the Securities and Exchange Commission with respect to the next
meeting of stockholders which involves the election of directors or, if such
Proxy Statement is not filed within 120 days after the end of the fiscal year
covered by this Form 10-K, such information will be filed as part of an
amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and
management of the company is incorporated herein by reference to information to
be contained in the company's Proxy Statement to be filed with the Securities
and Exchange Commission with respect to the next meeting of stockholders which
involves the election of directors or, if such Proxy Statement is not filed
within 120 days after the end of the fiscal year covered by this Form 10-K, such
information will be filed as part of an amendment to this Form 10-K not later
than the end of the 120-day period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
18
<PAGE>
Part IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Incorporated by reference into Part II, Pages in Fiscal 1998
Item 8 of this report: Annual Report
to Stockholders
---------------
<S> <C>
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . .21
Consolidated Statements of Earnings for the years ended
October 31, 1998, 1997, and 1996. . . . . . . . . . . . . . . . .22
Consolidated Balance Sheets
as of October 31, 1998 and 1997 . . . . . . . . . . . . . . . . .23
Consolidated Statements of Cash Flows for the
years ended October 31, 1998, 1997 and 1996. . . . . . . . . . .24
Notes to Consolidated Financial Statements. . . . . . . . . . . . .25-33
(a) 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report.
Independent Auditors' Report . . . . . . . . . . . . . . . . . .23
Schedule II - Valuation and Qualifying Accounts. . . . . . . . .24
</TABLE>
All other schedules are omitted because the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(a) 3. EXHIBITS
<TABLE>
<S> <C>
3(i)(a) and 4(a) Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of
Incorporation of Registrant dated December 9, 1986
(incorporated by reference to Exhibit 3 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
January 30, 1987, Commission File No. 1-8649).
3(i)(c) and 4(c) Certificate of Designation to Certificate of
Incorporation of Registrant dated May 28, 1998
(incorporated by reference to Exhibit (1)(A) to
Registrants' Current Report on Form 8-K dated May 27,
1998).
3(ii) and 4(d) Bylaws of Registrant, as amended.
4(e) Specimen form of Common Stock certificate (incorporated
by reference to Exhibit 4(c) to Registrant's
Registration Statement on Form S-8, Registration
No. 2-94417).
19
<PAGE>
4(f) Rights Agreement dated as of May 20, 1998, between
Registrant and Norwest Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as amended
(incorporated by reference to Registrant's Current
Report on Form 8-K dated May 27, 1998, Commission File
No. 1-8649).
4(g) Indenture as dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15,
2027 (incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
10(a) Form of Employment Agreement in effect for certain
officers of Registrant (incorporated by reference
Exhibit 10(iii)(a) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 1, 1998).*
10(b) Directors Stock Plan, as amended.*
10(c) Annual Management Incentive Plan II for officers of
Registrant, as amended.*
10(d) 1985 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1993).*
10(e) 1989 Stock Option Plan, as amended.*
10(f) 1993 Stock Option Plan, as amended.*
10(g) Continuous Performance Award Plan, as amended.*
10(h) The Toro Company Supplemental Management Retirement
Plan (incorporated by reference to Exhibit 10(iii)(h)
to Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996).*
10(i) Chief Executive Officer Succession Incentive Agreement
dated as of July 31, 1995 (incorporated by reference to
Exhibit 10(iii)(i) to Registrant's Annual Report on
Form 10-K for the year ended October 31, 1997).*
10(j) The Toro Company Deferred Compensation Plan for
Officers, (incorporated by reference Exhibit 10(iii)(a)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended May 1, 1998).*
12 Computation of Ratio of Earnings to Fixed Charges.
13 Fiscal 1998 Annual Report to Stockholders for The Toro
Company.
21 Subsidiaries of Registrant.
23 Independent Auditors' Consent.
27 Supplemental Data Schedule.
</TABLE>
*Management contract or compensatory plan or arrangements required to be filed
as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
20
<PAGE>
(b) REPORTS ON FORM 8-K
None.
- --------------------------------------------------------------------------------
The company's Annual Report on Form 10-K for the fiscal year ended October 31,
1998, at the time of its filing with the Securities and Exchange Commission,
shall modify and supersede all prior documents filed pursuant to Sections 13, 14
and 15(d) of the 1934 Act for purposes of any offers or sales of any securities
after the date of such filing pursuant to any Registration Statement or
Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference such Annual Report on Form 10-K.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE TORO COMPANY
-----------------------
(Registrant)
Dated: January 29, 1999
/s/ Stephen P. Wolfe
----------------------
Stephen P. Wolfe
Vice President - Finance
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Signature Title Date
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Kendrick B. Melrose Chairman, Chief Executive January 29, 1999
- ------------------------------ Officer, and Director
Kendrick B. Melrose (principal executive officer)
/s/ Stephen P. Wolfe Vice President - Finance, January 29, 1999
- ------------------------------ Treasurer and Chief Financial Officer
Stephen P. Wolfe (principal financial officer)
/s/ Randy B. James Vice President, Controller January 29, 1999
- ------------------------------ (principal accounting officer)
Randy B. James
/s/ Ronald O. Baukol Director January 29, 1999
- ------------------------------
Ronald O. Baukol
/s/ Robert C. Buhrmaster Director January 29, 1999
- ------------------------------
Robert C. Buhrmaster
/s/ Winslow H. Buxton Director January 29, 1999
- ------------------------------
Winslow H. Buxton
/s/ Janet K. Cooper Director January 29, 1999
- ------------------------------
Janet K. Cooper
/s/ Alex A. Meyer Director January 29, 1999
- ------------------------------
Alex A. Meyer
/s/ Robert H. Nassau Director January 29, 1999
- ------------------------------
Robert H. Nassau
/s/ Dale R. Olseth Director January 29, 1999
- ------------------------------
Dale R. Olseth
/s/ Christopher A. Twomey Director January 29, 1999
- ------------------------------
Christopher A. Twomey
/s/ Edwin H. Wingate Director January 29, 1999
- ------------------------------
Edwin H. Wingate
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Toro Company:
Under the date of December 11, 1998, we reported on the consolidated balance
sheets of The Toro Company and subsidiaries (the Company) as of October 31, 1998
and 1997, and the related consolidated statements of earnings and cash flows for
each of the years in the three-year period ended October 31, 1998, as contained
in the 1998 annual report to stockholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the fiscal year 1998. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedule listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 11, 1998
23
<PAGE>
Schedule II
THE TORO COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED TO
DESCRIPTION AT BEGINNING COSTS AND OTHER (a) DEDUCTIONS (b) BALANCE AT END
OF YEAR EXPENSES OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1998
Allowance for doubtful accounts $ 9,832,000 $ 623,000 $ 250,000 $ 1,381,000 $ 9,324,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997
Allowance for doubtful accounts $ 10,005,000 $ 812,000 $ (425,000) $ 560,000 $ 9,832,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996
Allowance for doubtful accounts $ 7,542,000 $ 3,358,000 $ 330,000 $ 1,225,000 $ 10,005,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Additions to allowance for doubtful accounts due to
acquisitions and reductions due to reclassification.
(b) Uncollectible accounts charged off, net of recoveries.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED TO
DESCRIPTION AT BEGINNING COSTS AND OTHER (c) DEDUCTIONS (d) BALANCE AT END
OF YEAR EXPENSES OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1998
Accrued warranties $ 40,792,000 $ 39,877,000 $ 951,000 $ 35,276,000 $ 46,344,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997
Accrued warranties $ 34,722,000 $ 35,045,000 $ 5,940,000 $ 34,915,000 $ 40,792,000
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996
Accrued warranties $ 35,065,000 $ 28,567,000 $ 0 $ 28,910,000 $ 34,722,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Additions to accrued warranties due to acquisitions.
(d) Warranty claims processed.
24
<PAGE>
BYLAWS
OF
THE TORO COMPANY
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES, CORPORATE SEAL, AND RECORDS
SECTION 1.1 THE REGISTERED OFFICE OF THE CORPORATION SHALL BE ESTABLISHED AND
MAINTAINED AT THE OFFICE OF THE PRENTICE-HALL CORPORATION SYSTEM, INC., IN THE
CITY OF DOVER, IN THE COUNTY OF KENT, IN THE STATE OF DELAWARE, AND SAID
CORPORATION SHALL BE THE REGISTERED AGENT OF THE CORPORATION IN CHARGE THEREOF,
AND THE CORPORATION MAY HAVE OTHER OFFICES, EITHER WITHIN OR WITHOUT THE STATE
OF DELAWARE, AT SUCH PLACE OR PLACES AS THE BOARD OF DIRECTORS MAY FROM TIME TO
TIME DETERMINE. UNLESS OTHERWISE DETERMINED BY THE BOARD OF DIRECTORS, THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION SHALL BE AT 8111 LYNDALE AVENUE
SOUTH, IN THE CITY OF BLOOMINGTON, COUNTY OF HENNEPIN, STATE OF MINNESOTA.
SECTION 1.2 THE CORPORATION MAY HAVE A CORPORATE SEAL IN SUCH FORM AS
DETERMINED BY THE BOARD OF DIRECTORS, WHICH MAY BE ALTERED AT PLEASURE, AND THE
SEAL MAY BE USED BY CAUSING IT OR A FACSIMILE THEREOF TO BE IMPRESSED OR AFFIXED
OR IN ANY OTHER MANNER REPRODUCED.
SECTION 1.3 THE CORPORATION SHALL AT ALL TIMES KEEP AT ITS PRINCIPAL EXECUTIVE
OFFICE, OR AT SUCH OTHER PLACE OR PLACES AS THE BOARD OF DIRECTORS MAY
DETERMINE, A SHARE REGISTER GIVING THE NAMES AND ADDRESSES OF THE STOCKHOLDERS,
THE NUMBER AND CLASSES OF SHARES HELD BY EACH, AND THE DATES ON WHICH THE
CERTIFICATES THEREFOR WERE ISSUED.
SECTION 1.4 THE CORPORATION SHALL AT ALL TIMES KEEP AT ITS PRINCIPAL EXECUTIVE
OFFICE THE FOLLOWING RECORDS:
(a) THE ORIGINAL OR COPIES OF RECORDS OF ALL PROCEEDINGS OF
STOCKHOLDERS AND DIRECTORS, OF ITS BYLAWS AND ALL AMENDMENTS
THERETO, AND OF REPORTS MADE TO STOCKHOLDERS OR ANY OF THEM
WITHIN THE NEXT PRECEDING THREE YEARS;
(b) A STATEMENT OF NAMES AND USUAL BUSINESS ADDRESSES OF ITS
DIRECTORS AND PRINCIPAL OFFICERS;
(c) APPROPRIATE FINANCIAL STATEMENTS.
SECTION 1.5 SUBJECT TO LAW AND ANY ORDER OF THE COURT OF CHANCERY, ANY
STOCKHOLDER OF RECORD SHALL HAVE THE RIGHT TO INSPECT AND MAKE COPIES OR
EXTRACTS THEREFROM, UPON PROPER WRITTEN DEMAND UNDER OATH STATING THE PURPOSE
THEREOF, IN PERSON OR BY ATTORNEY OR OTHER AGENT, AT ANY REASONABLE TIME OR
TIMES, FOR ANY PROPER PURPOSE, AND AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION, THE STOCK LEDGER, A LIST OF STOCKHOLDERS, AND OTHER BOOKS AND
RECORDS,
<PAGE>
REQUIRED FINANCIAL STATEMENTS, AND THE RECORDS OF THE PROCEEDINGS OF THE
STOCKHOLDERS AND DIRECTORS.
ARTICLE II
MEETING OF STOCKHOLDERS
SECTION 2.1 ALL MEETINGS OF THE STOCKHOLDERS SHALL BE HELD AT SUCH OTHER PLACE
WITHIN OR WITHOUT THE STATE OF DELAWARE AS MAY BE DESIGNATED BY THE BOARD OF
DIRECTORS IN THE NOTICE OF THE MEETING.
SECTION 2.2 THE REGULAR MEETINGS OF THE STOCKHOLDERS, IF ANY, SHALL BE HELD ON
THE DAY OR DATE AND AT THE TIME AND PLACE AS THE BOARD OF DIRECTORS MAY FIX FROM
TIME TO TIME IN ITS DISCRETION, FOR THE ELECTION OF DIRECTORS AND THE
TRANSACTION OF SUCH OTHER BUSINESS AS MAY COME BEFORE THE MEETING; PROVIDED,
HOWEVER, THAT ANY PREVIOUSLY SCHEDULED REGULAR MEETING OF THE STOCKHOLDERS MAY
BE POSTPONED BY RESOLUTION OF THE BOARD OF DIRECTORS UPON PUBLIC NOTICE GIVEN
PRIOR TO THE DATE PREVIOUSLY SCHEDULED FOR SUCH REGULAR MEETING OF THE
STOCKHOLDERS; AND PROVIDED, FURTHER, THAT NO BUSINESS WITH RESPECT TO WHICH
SPECIAL NOTICE IS REQUIRED BY LAW SHALL BE TRANSACTED AT A REGULAR MEETING
UNLESS SUCH NOTICE SHALL HAVE BEEN GIVEN.
SECTION 2.3 SPECIAL MEETINGS OF THE STOCKHOLDERS FOR ANY PURPOSE OR PURPOSES
MAY BE CALLED ONLY BY THE BOARD OF DIRECTORS, PURSUANT TO A RESOLUTION APPROVED
BY A MAJORITY OF THE ENTIRE BOARD OF DIRECTORS; PROVIDED, HOWEVER, THAT ANY
PREVIOUSLY SCHEDULED SPECIAL MEETING OF THE STOCKHOLDERS MAY BE POSTPONED BY
RESOLUTION OF THE BOARD OF DIRECTORS UPON PUBLIC NOTICE GIVEN PRIOR TO THE DATE
PREVIOUSLY SCHEDULED FOR SUCH SPECIAL MEETING OF THE STOCKHOLDERS. BUSINESS
TRANSACTED AT A SPECIAL MEETING SHALL BE CONFINED TO THE PURPOSES STATED IN THE
CALL AND NOTICE THEREOF.
SECTION 2.4 NOTICE OF EACH REGULAR AND SPECIAL MEETING OF STOCKHOLDERS STATING
THE DATE, TIME AND PLACE THEREOF, AND THE GENERAL NATURE OF THE BUSINESS TO BE
CONSIDERED THEREAT, SHALL BE GIVEN AT LEAST TEN (10) DAYS AND NOT MORE THAN
SIXTY (60) DAYS BEFORE THE DATE OF THE MEETING TO EACH STOCKHOLDER ENTITLED TO
VOTE THEREAT. SUCH NOTICE SHALL BE DEEMED DELIVERED WHEN DEPOSITED IN THE
UNITED STATES MAIL WITH POSTAGE THEREON PREPAID, ADDRESSED TO THE STOCKHOLDER AT
HIS ADDRESS AS IT APPEARS ON THE STOCK TRANSFER BOOKS OF THE CORPORATION.
SECTION 2.5 EACH STOCKHOLDER WHO IS ENTITLED TO VOTE PURSUANT TO THE TERMS OF
THE CERTIFICATE OF INCORPORATION AND THESE BYLAWS, OR WHO IS ENTITLED TO VOTE
PURSUANT TO THE LAWS OF THE STATE OF DELAWARE, SHALL BE ENTITLED TO VOTE IN
PERSON OR BY PROXY, BUT NO PROXY SHALL BE VOTED AFTER THREE YEARS FROM ITS DATE
UNLESS SUCH PROXY PROVIDES FOR A LONGER PERIOD. ALL ELECTIONS FOR DIRECTORS
SHALL BE DETERMINED BY A PLURALITY OF THE VOTES OF THE SHARES PRESENT IN PERSON
OR REPRESENTED BY PROXY AT THE MEETING AND ENTITLED TO VOTE ON THE ELECTION OF
DIRECTORS. ALL OTHER QUESTIONS SHALL BE DECIDED BY THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES PRESENT IN PERSON OR REPRESENTED BY PROXY AT THE MEETING
AND ENTITLED TO VOTE ON SUCH QUESTION.
<PAGE>
A COMPLETE LIST OF THE STOCKHOLDERS ENTITLED TO VOTE AT ANY MEETING OF
STOCKHOLDERS AT WHICH DIRECTORS ARE TO BE ELECTED, ARRANGED IN ALPHABETICAL
ORDER, WITH THE ADDRESS OF EACH, AND THE NUMBER OF SHARES HELD BY EACH, SHALL BE
OPEN TO THE EXAMINATION OF ANY STOCKHOLDER, FOR ANY PURPOSE GERMANE TO THE
MEETING, DURING ORDINARY BUSINESS HOURS, FOR A PERIOD OF AT LEAST TEN DAYS PRIOR
TO THE MEETING, EITHER AT A PLACE WITHIN THE CITY WHERE THE MEETING IS TO BE
HELD, WHICH PLACE SHALL BE SPECIFIED IN THE NOTICE OF THE MEETING, OR IF NOT SO
SPECIFIED, AT THE PLACE WHERE THE MEETING IS TO BE HELD. THE LIST SHALL ALSO BE
PRODUCED AND KEPT AT THE TIME AND PLACE OF THE MEETING DURING THE WHOLE TIME
THEREOF, AND MAY BE INSPECTED BY ANY STOCKHOLDER WHO IS PRESENT.
THE BOARD OF DIRECTORS BY RESOLUTION SHALL APPOINT ONE OR MORE INSPECTORS, WHICH
INSPECTOR OR INSPECTORS MAY INCLUDE INDIVIDUALS WHO SERVE THE CORPORATION IN
OTHER CAPACITIES, INCLUDING WITHOUT LIMITATION AS OFFICERS, EMPLOYEES, AGENTS OF
REPRESENTATIVES OF THE CORPORATION, TO ACT AT THE MEETING AND MAKE A WRITTEN
REPORT THEREOF. ONE OR MORE PERSONS MAY BE DESIGNATED AS ALTERNATE INSPECTORS
TO REPLACE ANY INSPECTOR WHO FAILS TO ACT. IF NO INSPECTOR OR ALTERNATE
INSPECTOR HAS BEEN APPOINTED TO ACT OR IS ABLE TO ACT AT A MEETING OF
STOCKHOLDERS, THE CHAIRMAN OF THE MEETING SHALL APPOINT ONE OR MORE INSPECTORS
TO ACT AT THE MEETING. EACH INSPECTOR, BEFORE DISCHARGING HIS OR HER DUTIES,
SHALL TAKE AND SIGN AN OATH FAITHFULLY TO EXECUTE THE DUTIES OF INSPECTOR WITH
STRICT IMPARTIALITY AND ACCORDING TO THE BEST OF HIS OR HER ABILITY. THE
INSPECTORS SHALL HAVE THE DUTIES PRESCRIBED BY LAW.
THE CHAIRMAN OF THE MEETING SHALL FIX AND ANNOUNCE AT THE MEETING THE DATE AND
TIME OF THE OPENING AND THE CLOSING OF THE POLLS FOR EACH MATTER UPON WHICH THE
STOCKHOLDERS WILL VOTE AT THE MEETING.
SECTION 2.6 EXCEPT AS OTHERWISE REQUIRED BY LAW, BY THE CERTIFICATE OF
INCORPORATION OR BY THESE BYLAWS, THE PRESENCE, IN PERSON OR BY PROXY, OF
STOCKHOLDERS HOLDING A MAJORITY OF THE VOTING POWER OF THE OUTSTANDING STOCK OF
THE CORPORATION SHALL CONSTITUTE A QUORUM AT ALL MEETINGS OF THE STOCKHOLDERS.
THE CHAIRMAN OF ANY REGULAR OR SPECIAL MEETING OF THE STOCKHOLDERS OR A MAJORITY
IN INTEREST OF THE STOCKHOLDERS ENTITLED TO VOTE THEREAT SHALL HAVE THE POWER TO
ADJOURN SUCH MEETING FROM TIME TO TIME, WITHOUT NOTICE OTHER THAN ANNOUNCEMENT
AT THE MEETING, WHETHER OR NOT THERE IS SUCH A QUORUM. NO NOTICE OF THE TIME
AND PLACE OF ADJOURNED MEETINGS NEED BE GIVEN EXCEPT AS REQUIRED BY LAW;
PROVIDED, HOWEVER, THAT IF SUCH ADJOURNMENT IS FOR MORE THAN THIRTY (30) DAYS,
OR IF AFTER SUCH ADJOURNMENT A NEW RECORD DATE IS FIXED FOR THE ADJOURNED
MEETING, A NOTICE OF THE ADJOURNED MEETING SHALL BE GIVEN TO EACH STOCKHOLDER OF
RECORD ENTITLED TO VOTE AT SUCH ADJOURNED MEETING. AT ANY SUCH ADJOURNED
MEETING AT WHICH THE REQUISITE AMOUNT OF STOCK ENTITLED TO VOTE SHALL BE
REPRESENTED, ANY BUSINESS MAY BE TRANSACTED WHICH MIGHT HAVE BEEN TRANSACTED AT
THE MEETING AS ORIGINALLY NOTICED; BUT ONLY THOSE STOCKHOLDERS ENTITLED TO VOTE
AT THE MEETING AS ORIGINALLY NOTICED SHALL BE ENTITLED TO VOTE AT ANY
ADJOURNMENT OR ADJOURNMENTS THEREOF UNLESS THE BOARD OF DIRECTORS SHALL HAVE
FIXED A NEW RECORD DATE FOR SUCH ADJOURNMENT OR ADJOURNMENTS PURSUANT TO SECTION
2.7 OF THESE BYLAWS.
<PAGE>
THE STOCKHOLDERS PRESENT AT A DULY ORGANIZED MEETING MAY CONTINUE TO TRANSACT
BUSINESS UNTIL ADJOURNMENT, NOTWITHSTANDING THE WITHDRAWAL OF ENOUGH
STOCKHOLDERS TO LEAVE LESS THAN A QUORUM.
SECTION 2.7 IN ORDER THAT THE CORPORATION MAY DETERMINE THE STOCKHOLDERS
ENTITLED TO NOTICE OF OR TO VOTE AT ANY MEETING OF STOCKHOLDERS OR ANY
ADJOURNMENT THEREOF, OR ENTITLED TO RECEIVE PAYMENT OF ANY DIVIDEND OR OTHER
DISTRIBUTION OR ALLOTMENT OF ANY RIGHTS, OR ENTITLED TO EXERCISE ANY RIGHTS IN
RESPECT TO ANY CHANGE, CONVERSION OR EXCHANGE OF STOCK OR FOR THE PURPOSE OF ANY
OTHER LAWFUL ACTION, THE BOARD OF DIRECTORS MAY FIX, IN ADVANCE, A RECORD DATE,
WHICH SHALL NOT BE LESS THAN TEN NOR MORE THAN SIXTY DAYS BEFORE THE DATE OF
SUCH MEETING, NOR MORE THAN SIXTY DAYS PRIOR TO ANY OTHER ACTION. A
DETERMINATION OF STOCKHOLDERS OF RECORD ENTITLED TO NOTICE OF OR TO VOTE AT A
MEETING OF STOCKHOLDERS SHALL APPLY TO ANY ADJOURNMENT OR ADJOURNMENTS OF THE
MEETING; PROVIDED, HOWEVER, THAT THE BOARD OF DIRECTORS MAY FIX A NEW RECORD
DATE FOR THE ADJOURNED MEETING.
SECTION 2.8 SECTION 2.8 (A) (1) NOMINATIONS OF PERSONS FOR ELECTION TO THE
BOARD OF DIRECTORS OF THE CORPORATION AND THE PROPOSAL OF BUSINESS TO BE
CONSIDERED BY THE STOCKHOLDERS MAY BE MADE AT A REGULAR MEETING OF STOCKHOLDERS
(a) PURSUANT TO THE CORPORATION'S NOTICE OF MEETING, (b) BY OR AT THE DIRECTION
OF THE BOARD OF DIRECTORS OR (c) BY ANY STOCKHOLDER OF THE CORPORATION WHO WAS
A STOCKHOLDER OF RECORD AT THE TIME OF GIVING OF NOTICE PROVIDED FOR IN THIS
BYLAW, WHO IS ENTITLED TO VOTE AT THE MEETING AND WHO COMPLIED WITH THE NOTICE
PROCEDURES SET FORTH IN THIS BYLAW.
(2) FOR NOMINATIONS OR OTHER BUSINESS TO BE PROPERLY BROUGHT BEFORE A REGULAR
MEETING BY A STOCKHOLDER PURSUANT TO CLAUSE (c) OF PARAGRAPH (A) (1) OF THIS
BYLAW, THE STOCKHOLDER MUST HAVE GIVEN TIMELY NOTICE THEREOF IN WRITING TO THE
SECRETARY OF THE CORPORATION. TO BE TIMELY, A STOCKHOLDER'S NOTICE SHALL BE
DELIVERED TO THE SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION
NOT LESS THAN FORTY-FIVE (45) DAYS NOR MORE THAN NINETY (90) DAYS PRIOR TO THE
FIRST ANNIVERSARY OF THE DATE ON WHICH THE CORPORATION FIRST MAILED ITS PROXY
MATERIALS FOR THE PRECEDING YEAR'S REGULAR MEETING; PROVIDED, HOWEVER, THAT IN
THE EVENT THAT THE DATE OF THE REGULAR MEETING IS ADVANCED BY MORE THAN THIRTY
(30) DAYS OR DELAYED BY MORE THAN SIXTY (60) DAYS FROM THE ANNIVERSARY DATE OF
THE PRECEDING YEAR'S REGULAR MEETING, NOTICE BY THE STOCKHOLDER TO BE TIMELY
MUST BE SO DELIVERED NOT EARLIER THAN THE 90TH DAY PRIOR TO SUCH RESCHEDULED
REGULAR MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS ON THE LATER OF THE
60TH DAY PRIOR TO SUCH RESCHEDULED REGULAR MEETING OR THE 10TH DAY FOLLOWING THE
DAY ON WHICH PUBLIC ANNOUNCEMENT OF THE DATE OF SUCH MEETING IS FIRST MADE.
SUCH STOCKHOLDER'S NOTICE SHALL SET FORTH (a) AS TO EACH PERSON WHOM THE
STOCKHOLDER PROPOSES TO NOMINATE FOR ELECTION OR REELECTION AS A DIRECTOR ALL
INFORMATION RELATING TO SUCH PERSON THAT IS REQUIRED TO BE DISCLOSED IN
SOLICITATIONS OF PROXIES FOR ELECTION OF DIRECTORS, OR IS OTHERWISE REQUIRED, IN
EACH CASE PURSUANT TO REGULATION 14A UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT") (INCLUDING SUCH PERSON'S WRITTEN CONSENT TO
BEING NAMED IN THE PROXY STATEMENT AS A NOMINEE AND TO SERVING AS A DIRECTOR IF
ELECTED); (b) AS TO ANY OTHER BUSINESS THAT THE STOCKHOLDER PROPOSES TO BRING
BEFORE THE MEETING, A BRIEF DESCRIPTION OF THE BUSINESS DESIRED TO BE BROUGHT
BEFORE THE MEETING, THE REASONS FOR CONDUCTING SUCH BUSINESS AT THE MEETING AND
ANY MATERIAL INTEREST IN SUCH BUSINESS OF SUCH STOCKHOLDER AND THE BENEFICIAL
<PAGE>
OWNER, IF ANY, ON WHOSE BEHALF THE PROPOSAL IS MADE; AND (c) AS TO THE
STOCKHOLDER GIVING THE NOTICE AND THE BENEFICIAL OWNER, IF ANY, ON WHOSE BEHALF
THE NOMINATION OR PROPOSAL IS MADE (i) THE NAME AND ADDRESS OF SUCH STOCKHOLDER,
AS THEY APPEAR ON THE CORPORATION'S BOOKS, AND OF SUCH BENEFICIAL OWNER AND (ii)
THE CLASS AND NUMBER OF SHARES OF THE CORPORATION THAT ARE OWNED BENEFICIALLY
AND OF RECORD BY SUCH STOCKHOLDER AND SUCH BENEFICIAL OWNER.
(3) NOTWITHSTANDING ANYTHING IN PARAGRAPH (A) (2) OF THIS BYLAW, IN THE EVENT
THAT THE NUMBER OF DIRECTORS TO BE ELECTED TO THE BOARD OF DIRECTORS OF THE
CORPORATION IS INCREASED AND THERE IS NO PUBLIC ANNOUNCEMENT NAMING ALL OF THE
NOMINEES FOR DIRECTOR OR SPECIFYING THE SIZE OF THE INCREASED BOARD OF DIRECTORS
MADE BY THE CORPORATION AT LEAST SEVENTY (70) DAYS PRIOR TO THE FIRST
ANNIVERSARY OF THE PRECEDING YEAR'S REGULAR MEETING, A STOCKHOLDER'S NOTICE
REQUIRED BY THIS BYLAW SHALL ALSO BE CONSIDERED TIMELY, BUT ONLY WITH RESPECT TO
NOMINEES FOR ANY NEW POSITIONS CREATED BY SUCH INCREASE, IF IT SHALL BE
DELIVERED TO THE SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION
NOT LATER THAN THE CLOSE OF BUSINESS ON THE 10TH DAY FOLLOWING THE DAY ON WHICH
SUCH PUBLIC ANNOUNCEMENT IS FIRST MADE BY THE CORPORATION.
(B) NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS MAY BE MADE
AT A SPECIAL MEETING OF STOCKHOLDERS AT WHICH DIRECTORS ARE TO BE ELECTED
PURSUANT TO THE CORPORATION'S NOTICE OF MEETING (a) BY OR AT THE DIRECTION OF
THE BOARD OF DIRECTORS OR (b) PROVIDED THAT THE BOARD OF DIRECTORS HAS
DETERMINED THAT DIRECTORS SHALL BE ELECTED AT SUCH MEETING, BY ANY STOCKHOLDER
OF THE CORPORATION WHO IS A STOCKHOLDER OF RECORD AT THE TIME OF GIVING OF
NOTICE PROVIDED FOR IN THIS BYLAW, WHO SHALL BE ENTITLED TO VOTE AT THE MEETING
AND WHO COMPLIES WITH THE NOTICE PROCEDURES SET FORTH IN THIS BYLAW. IN THE
EVENT THE CORPORATION CALLS A SPECIAL MEETING OF STOCKHOLDERS FOR THE PURPOSE OF
ELECTING ONE OR MORE DIRECTORS TO THE BOARD OF DIRECTORS, ANY SUCH STOCKHOLDER
MAY NOMINATE A PERSON OR PERSONS (AS THE CASE MAY BE) FOR ELECTION TO SUCH
POSITION(S) AS SPECIFIED IN THE CORPORATION'S NOTICE OF MEETING, IF THE
STOCKHOLDER'S NOTICE REQUIRED BY PARAGRAPH (A) (2) AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE CORPORATION NOT EARLIER THAN THE 90TH DAY PRIOR TO SUCH SPECIAL
MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS ON THE LATER OF THE 60TH DAY
PRIOR TO SUCH SPECIAL MEETING OR THE 10TH DAY FOLLOWING THE DAY ON WHICH PUBLIC
ANNOUNCEMENT IS FIRST MADE OF THE DATE OF THE SPECIAL MEETING AND OF THE
NOMINEES PROPOSED BY; THE BOARD OF DIRECTORS TO BE ELECTED AT SUCH MEETING.
(C) (1) ONLY SUCH PERSONS WHO ARE NOMINATED IN ACCORDANCE WITH THE PROCEDURES
SET FORTH IN THIS BYLAW SHALL BE ELIGIBLE TO SERVE AS DIRECTORS AND ONLY SUCH
BUSINESS SHALL BE CONDUCTED AT A REGULAR MEETING OF STOCKHOLDERS AS SHALL HAVE
BEEN BROUGHT BEFORE THE MEETING IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN
THIS BYLAW AND, IF ANY PROPOSED NOMINATION OR BUSINESS IS NOT IN COMPLIANCE WITH
THIS BYLAW, TO DECLARE THAT SUCH DEFECTIVE PROPOSAL SHALL BE DISREGARDED. THE
CHAIRMAN OF THE MEETING SHALL HAVE THE POWER AND DUTY TO DETERMINE WHETHER A
NOMINATION OR ANY BUSINESS PROPOSED TO BE BROUGHT BEFORE THE MEETING WAS MADE IN
ACCORDANCE WITH THE PROCEDURES SET FORTH IN THIS BYLAW AND, IF ANY PROPOSED
NOMINATION OR BUSINESS IS NOT IN COMPLIANCE WITH THIS BYLAW, TO DECLARE THAT
SUCH DEFECTIVE PROPOSAL SHALL BE DISREGARDED.
<PAGE>
(2) NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS BYLAW, A STOCKHOLDER SHALL
ALSO COMPLY WITH ALL APPLICABLE REQUIREMENTS OF THE EXCHANGE ACT AND THE RULES
AND REGULATIONS THEREUNDER WITH RESPECT TO THE MATTERS SET FORTH IN THIS BYLAW.
NOTHING IN THIS BYLAW SHALL BE DEEMED TO AFFECT ANY RIGHTS OF STOCKHOLDERS TO
REQUEST INCLUSION OF PROPOSALS IN THE CORPORATION'S PROXY STATEMENT PURSUANT TO
RULE 14a-8 UNDER THE EXCHANGE ACT.
(3) FOR PURPOSES OF THIS BYLAW, "PUBLIC ANNOUNCEMENT" SHALL MEAN DISCLOSURE IN
A PRESS RELEASE REPORTED BY THE DOW JONES NEWS SERVICE, ASSOCIATED PRESS OR
COMPARABLE NATIONAL NEWS SERVICE OR IN A DOCUMENT PUBLICLY FILED BY THE
CORPORATION WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SECTIONS 13,
14 OR 15(d) OF THE EXCHANGE ACT.
ARTICLE III
DIRECTORS
SECTION 3.1 THE BUSINESS AND AFFAIRS OF THE CORPORATION SHALL BE MANAGED UNDER
THE DIRECTION OF A BOARD OF DIRECTORS WHICH, SUBJECT TO ANY RIGHT OF THE HOLDERS
OF ANY SERIES OF PREFERRED STOCK THEN OUTSTANDING TO ELECT ADDITIONAL DIRECTORS
UNDER SPECIFIED CIRCUMSTANCES, SHALL CONSIST OF NOT LESS THAN EIGHT (8) NOR MORE
THAN ELEVEN (11) PERSONS. THE EXACT NUMBER OF DIRECTORS WITHIN THE MINIMUM AND
MAXIMUM LIMITATIONS SPECIFIED IN THE PRECEDING SENTENCE SHALL BE FIXED FROM TIME
TO TIME BY THE BOARD PURSUANT TO A RESOLUTION ADOPTED BY A MAJORITY OF ITS
MEMBERS. THE DIRECTORS SHALL BE DIVIDED INTO THREE CLASSES, AS NEARLY EQUAL IN
NUMBER AS POSSIBLE, WITH THE TERM OF OFFICE OF CLASS A TO EXPIRE AT THE 1984
ANNUAL MEETING OF STOCKHOLDERS, THE TERM OF OFFICE OF CLASS B TO EXPIRE AT THE
1985 ANNUAL MEETING OF STOCKHOLDERS AND THE TERM OF OFFICE OF CLASS C TO EXPIRE
AT THE 1986 ANNUAL MEETING OF STOCKHOLDERS. AT EACH ANNUAL MEETING OF
STOCKHOLDERS FOLLOWING SUCH INITIAL CLASSIFICATION AND ELECTION, DIRECTORS
ELECTED TO SUCCEED THOSE DIRECTORS WHOSE TERMS EXPIRE SHALL BE ELECTED FOR A
TERM OF OFFICE TO EXPIRE AT THE THIRD SUCCEEDING ANNUAL MEETING OF STOCKHOLDERS
AFTER THEIR ELECTION.
SECTION 3.2 SUBJECT TO THE RIGHTS OF THE HOLDERS OF ANY SERIES OF PREFERRED
STOCK THEN OUTSTANDING, NEWLY CREATED DIRECTORSHIPS RESULTING FROM ANY INCREASE
IN THE AUTHORIZED NUMBER OF DIRECTORS OR ANY VACANCIES IN THE BOARD RESULTING
FROM DEATH, RESIGNATION, RETIREMENT, DISQUALIFICATION, REMOVAL FROM OFFICE OR
OTHER CAUSE SHALL BE FILLED ONLY BY MAJORITY VOTE OF THE DIRECTORS THEN IN
OFFICE, AND DIRECTORS SO CHOSEN SHALL HOLD OFFICE FOR A TERM EXPIRING AT THE
ANNUAL MEETING OF STOCKHOLDERS AT WHICH THE TERM OF THE CLASS TO WHICH THEY HAVE
BEEN ELECTED EXPIRES. NO DECREASE IN THE NUMBER OF DIRECTORS CONSTITUTING THE
BOARD SHALL SHORTEN THE TERM OF ANY INCUMBENT DIRECTOR. SUBJECT TO THE RIGHTS
OF THE HOLDERS OF ANY SERIES OF PREFERRED STOCK THEN OUTSTANDING, ANY DIRECTOR,
OR THE ENTIRE BOARD, MAY BE REMOVED FROM OFFICE AT ANY TIME, BUT ONLY FOR CAUSE
AND ONLY BY THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST 80% OF THE VOTING
POWER OF THE THEN OUTSTANDING COMMON STOCK OF THE COMPANY.
SECTION 3.3 REGULAR MEETINGS OF THE BOARD SHALL BE HELD AT BI-MONTHLY INTERVALS
DURING EACH FISCAL YEAR, OR ON SUCH ALTERNATE INTERVALS OR DATES AS THE BOARD
MAY FIX FROM TIME TO TIME IN ITS DISCRETION, AND AT SUCH TIME AND PLACE AS THE
CHAIRMAN OF THE BOARD OF DIRECTORS OR, IN HIS
<PAGE>
ABSENCE, THE PRESIDENT SHALL DETERMINE, PREFERABLY AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE CORPORATION DURING THE THIRD WEEK OF THE MONTH. AT LEAST THREE
(3) DAYS' NOTICE THEREOF SHALL BE GIVEN BY THE SECRETARY TO EACH DIRECTOR,
EITHER PERSONALLY OR BY TELEPHONE, MAIL, TELEGRAM OR FACSIMILE TRANSMISSION.
SECTION 3.4 SPECIAL MEETINGS OF THE BOARD MAY BE CALLED BY THE CHIEF EXECUTIVE
OFFICER OR BY ANY TWO DIRECTORS, AND NOT LESS THAN TWENTY-FOUR (24) HOURS'
NOTICE THEREOF SHALL BE GIVEN BY THE SECRETARY TO ANY DIRECTOR, EITHER
PERSONALLY OR BY TELEPHONE, MAIL, TELEGRAM OR FACSIMILE TRANSMISSION.
SECTION 3.5 ANY ACTION TAKEN BY THE BOARD OR ANY COMMITTEE THEREOF AT ANY
MEETING WHERE ALL MEMBERS ARE PRESENT SHALL BE VALID WHETHER OR NOT NOTICE OF
SUCH MEETING WAS IN FACT GIVEN, EXCEPT AS PROVIDED BY LAW. ANY ACTION WHICH
MIGHT BE TAKEN AT A MEETING OF THE BOARD, OR AT A MEETING OF ANY COMMITTEE
THEREOF AS THE CASE MAY BE, MAY BE TAKEN WITHOUT MEETING AS PROVIDED BY LAW.
SECTION 3.6 AT ALL MEETINGS OF THE BOARD A MAJORITY OF THE DIRECTORS SHALL BE
NECESSARY AND SUFFICIENT TO CONSTITUTE A QUORUM FOR THE TRANSACTION OF BUSINESS,
BUT IF LESS THAN A QUORUM ARE PRESENT, THOSE PRESENT MAY ADJOURN THE MEETING
FROM TIME TO TIME UNTIL A QUORUM SHALL BE PRESENT.
SECTION 3.7 THE BOARD MAY UNANIMOUSLY ELECT FROM AMONG THE DIRECTORS AN
EXECUTIVE COMMITTEE, A COMPENSATION COMMITTEE, AN AUDIT COMMITTEE, AND A
NOMINATING COMMITTEE, AND SUCH OTHER COMMITTEES AS THE BOARD MAY FROM TIME TO
TIME DETERMINE, TO SERVE AT THE PLEASURE OF THE BOARD. THE MEMBERS OF THE BOARD
OF DIRECTORS AND OF SAID COMMITTEES SHALL HAVE THE ROLE OF MONITORING THE
CONDUCT OF THE BUSINESS AND AFFAIRS OF THE CORPORATION ON BEHALF OF ALL OF THE
CONSTITUENCIES OF THE CORPORATION, INCLUDING IN PARTICULAR, THOSE WHO INVEST IN
THE STOCK OF THE CORPORATION, IN AN ENVIRONMENT OF LOYAL BUT INDEPENDENT
OVERSIGHT. EACH COMMITTEE SHALL MAINTAIN INDEPENDENT MINUTES OF ACTION, AND
WITH THE EXCEPTION OF THE AUDIT COMMITTEE, AND RESOLUTIONS OF THE COMPENSATION
COMMITTEE RELATING TO MATTERS GOVERNED BY OR WITHIN THE SCOPE OF SECTION 16 OF
THE SECURITIES AND EXCHANGE ACT OF 1934 OR SECTION 162(m) OF THE INTERNAL
REVENUE CODE OF 1986, OR ITS SUCCESSOR PROVISION, SUCH MINUTES SHALL BE SUBJECT
TO APPROVAL BY THE BOARD.
SECTION 3.8 THE EXECUTIVE COMMITTEE SHALL CONSIST OF TWO OR MORE OF THE
DIRECTORS OF THE CORPORATION, INCLUDING THE CHAIRMAN OF THE BOARD OF DIRECTORS,
AND ONE OF THE MEMBERS SHALL BE DESIGNATED BY THE BOARD OF DIRECTORS AS ITS
CHAIRMAN. THE CHAIRMAN OF THE EXECUTIVE COMMITTEE SHALL PRESIDE AT ALL MEETINGS
OF THE EXECUTIVE COMMITTEE AND SHALL PERFORM SUCH OTHER DUTIES AS MAY BE
PRESCRIBED BY THE BOARD OF DIRECTORS. THE UNDERLYING PURPOSE OF THE EXECUTIVE
COMMITTEE IS TO EXERCISE ALL OF THE POWERS AND AUTHORITY OF THE BOARD DURING
INTERVALS BETWEEN MEETINGS OF THE BOARD, INCLUDING THE POWER TO DECLARE
DIVIDENDS ON THE CORPORATION'S COMMON STOCK. THE COMMITTEE SHALL HAVE
DISCRETIONARY AUTHORITY TO UNDERTAKE ADDITIONAL ACTIVITIES WITHIN THE SCOPE OF
ITS PRIMARY FUNCTIONS.
<PAGE>
SECTION 3.9 THE AUDIT COMMITTEE SHALL CONSIST OF TWO OR MORE OF THE DIRECTORS
OF THE CORPORATION, NONE OF WHOM SHALL BE OFFICERS OR EMPLOYEES OF THE
CORPORATION, AND ONE OF THE MEMBERS SHALL BE DESIGNATED BY THE BOARD OF
DIRECTORS AS ITS CHAIRMAN. THE CHAIRMAN OF THE AUDIT COMMITTEE SHALL PRESIDE AT
ALL MEETINGS OF THE AUDIT COMMITTEE AND SHALL PERFORM SUCH OTHER DUTIES AS MAY
BE PRESCRIBED BY THE BOARD OF DIRECTORS. THE PURPOSE OF THE AUDIT COMMITTEE IS
TO ASSIST THE BOARD OF DIRECTORS IN FULFILLING THE BOARD'S RESPONSIBILITY TO
OVERSEE THE CORPORATION'S ACCOUNTING CONTROLS AND POLICIES, AND REPORTING
PRACTICES, INCLUDING MAKING RECOMMENDATIONS REGARDING THE SELECTION, RETENTION
AND TERMINATION OF THE CORPORATION'S INDEPENDENT AUDITORS, REVIEW OF
PROFESSIONAL SERVICES, PROPOSED FEES AND INDEPENDENCE OF SUCH AUDITORS, SCOPE OF
THE AUDIT, AUTHORIZATION OF SPECIAL REVIEWS OR AUDITS, REVIEW OF INTERNAL
AUDITING PROCEDURES AND THE ADEQUACY OF INTERNAL CONTROLS, AND REVIEW OF
POLICIES AND PRACTICES RESPECTING CONFLICT OF INTEREST AND COMPLIANCE WITH
APPLICABLE LAWS. THE MANAGER OF THE CORPORATION'S INTERNAL AUDITING FUNCTION,
WHEN OPERATIVE, SHALL HAVE AN INDIRECT REPORTING RELATIONSHIP TO THE CHAIRMAN OF
THE AUDIT COMMITTEE, AND SHALL PERFORM SUCH DUTIES AS MAY BE PRESCRIBED BY THE
BOARD OF DIRECTORS OR BY THE CHAIRMAN OF THE AUDIT COMMITTEE. THE COMMITTEE
SHALL HAVE DISCRETIONARY AUTHORITY TO UNDERTAKE ADDITIONAL ACTIVITIES WITHIN THE
SCOPE OF ITS PRIMARY FUNCTIONS.
SECTION 3.10 THE COMPENSATION COMMITTEE SHALL CONSIST OF TWO OR MORE DIRECTORS
OF THE CORPORATION, NONE OF WHOM SHALL BE OFFICERS OR EMPLOYEES OF THE
CORPORATION, AND ONE OF THE MEMBERS SHALL BE DESIGNATED BY THE BOARD OF
DIRECTORS AS ITS CHAIRMAN. THE CHAIRMAN OF THE COMPENSATION COMMITTEE SHALL
PRESIDE AT ALL MEETINGS OF THE COMPENSATION COMMITTEE AND SHALL PERFORM SUCH
OTHER DUTIES AS MAY BE PRESCRIBED BY THE BOARD OF DIRECTORS. THE PURPOSES OF
THE COMPENSATION COMMITTEE INCLUDE: TO ADMINISTER ALL EMPLOYEE BENEFIT PLANS
HERETOFORE OR HEREAFTER ESTABLISHED INCLUDING THE GRANTING OF STOCK OPTIONS AND
INCENTIVE AWARDS AUTHORIZED UNDER EMPLOYEE BENEFIT PLANS GOVERNED BY OR WITHIN
THE SCOPE OF SECTION 16 OF THE SECURITIES AND EXCHANGE ACT OF 1934 OR SECTION
162(m) OF THE INTERNAL REVENUE CODE OF 1986, OR ITS SUCCESSOR PROVISION; TO
STUDY AND ANALYZE SPECIFIC AND GENERAL MATTERS OF MANAGEMENT COMPENSATION; TO
PERIODICALLY REVIEW MANAGEMENT COMPENSATION POLICIES AND PRACTICES; TO MAKE
RECOMMENDATIONS TO THE BOARD RESPECTING INCENTIVE COMPENSATION AWARDS; AND TO
CONSIDER AND APPROVE OFFICER SALARY ADJUSTMENTS OF ELECTED OFFICERS OF THE
CORPORATION AT THE LEVEL OF VICE PRESIDENT AND ABOVE.
SECTION 3.11 THE NOMINATING COMMITTEE SHALL CONSIST OF TWO OR MORE DIRECTORS OF
THE CORPORATION WHO DO NOT HAVE ANY DIRECT OR INDIRECT ECONOMIC OR PERSONAL
ASSOCIATION WITH THE CORPORATION, OR WITH ANY OF ITS AFFILIATES OR THE EMPLOYEES
THEREOF. THE CHIEF EXECUTIVE OFFICER OF THE CORPORATION SHALL SERVE AS AN EX
OFFICIO NON-VOTING MEMBER. ONE OF THE MEMBERS OF THE COMMITTEE SHALL BE
DESIGNATED AS ITS CHAIRMAN BY THE BOARD OF DIRECTORS. THE CHAIRMAN OF THE
NOMINATING COMMITTEE SHALL PRESIDE AT ALL MEETINGS OF THE NOMINATING COMMITTEE
AND SHALL PERFORM SUCH OTHER DUTIES AS MAY BE PRESCRIBED BY THE BOARD OF
DIRECTORS. THE PRIMARY FUNCTIONS OF THE NOMINATING COMMITTEE ARE TO REVIEW WITH
THE CHIEF EXECUTIVE OFFICER OF THE CORPORATION AN APPROPRIATE SIZE AND MAKEUP
FOR THE BOARD OF DIRECTORS, INCLUDING INDIVIDUALS HAVING SUCH BACKGROUND AND
BUSINESS EXPERIENCE AS ARE CONSISTENT WITH AND COMPATIBLE TO THE LONG-RANGE
INTERESTS AND FUTURE DIRECTION OF THE CORPORATION; TO CONSIDER THE
QUALIFICATIONS OF PERSONS IDENTIFIED AS PROSPECTIVE DIRECTORS TO
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EITHER FILL VACANCIES ON THE BOARD OR ENLARGE ITS MEMBERSHIP; TO CONDUCT
RESEARCH TO IDENTIFY AND RECOMMEND NOMINATION OF SUITABLE CANDIDATES WHO ARE
WILLING TO SERVE AS MEMBERS OF THE BOARD OF DIRECTORS AND WHO WILL MAKE A
SUBSTANTIAL CONTRIBUTION TO THE CORPORATION BASED UPON A CAREFUL REVIEW OF THEIR
EXPERIENCE, BACKGROUND, INTERESTS, ABILITY AND AVAILABILITY TO MEET TIME
COMMITMENTS FOR BOARD AND COMMITTEE RESPONSIBILITIES; AND TO DETERMINE WHETHER
ANY PROSPECTIVE OR SEATED MEMBER OF THE BOARD HAS ANY ECONOMIC OR FAMILIAL
RELATIONSHIP WITH THE CORPORATION WHICH MAY NEGATE HIS/HER SUITABILITY FOR SUCH
SERVICE. THE COMMITTEE SHALL ALSO MONITOR CURRENT MEMBERS OF THE BOARD IN LIGHT
OF THE SAME GUIDELINES USED TO SELECT CANDIDATES, SHALL DIRECT THE ACTIVITIES OF
THE BOARD AND MANAGEMENT IN MATTERS OF CORPORATE GOVERNANCE, AND SHALL HAVE
GENERAL DISCRETIONARY AUTHORITY TO UNDERTAKE ADDITIONAL ACTIVITIES WITHIN THE
SCOPE OF ITS PRIMARY FUNCTIONS.
SECTION 3.12 MEETINGS OF EACH COMMITTEE SHALL BE HELD FROM TIME TO TIME AS THE
CHAIRMAN OF SUCH COMMITTEE, THE CHAIRMAN OF THE BOARD OF DIRECTORS, OR ANY TWO
MEMBERS OF SUCH COMMITTEE SHALL DETERMINE, PREFERABLY AT THE PRINCIPAL EXECUTIVE
OFFICE OF THE CORPORATION. ALL MEMBERS OF EACH COMMITTEE SHALL BE GIVEN WRITTEN
NOTICE OF ANY MEETING BY THE SECRETARY, SUCH NOTICE TO BE MAILED TO EACH MEMBER
AT LEAST THREE (3) DAYS PRIOR TO THE DATE THEREOF; PROVIDED, HOWEVER, SUCH
WRITTEN NOTICE SHALL NOT BE REQUIRED AS TO ANY MEMBER WHO SHALL RECEIVE NOTICE
IN PERSON AT LEAST TWENTY-FOUR (24) HOURS PRIOR TO THE TIME OF THE MEETING. ANY
MEMBER MAY IN WRITING, BEFORE OR AFTER ANY MEETING, WAIVE NOTICE THEREOF, AND
ANY MEMBER BY HIS ATTENDANCE AT, AND PARTICIPATION IN, THE ACTION TAKEN AT ANY
MEETING SHALL BE DEEMED TO HAVE WAIVED NOTICE THEREOF. A MAJORITY OF THE
MEMBERS OF A COMMITTEE SHALL CONSTITUTE A QUORUM. ANY ACTION WHICH MIGHT BE
TAKEN AT A MEETING OF A COMMITTEE MAY BE TAKEN WITHOUT MEETING IF EVIDENCED BY A
RESOLUTION SIGNED BY ALL MEMBERS. THE CHAIRMAN OF EACH BOARD COMMITTEE SHALL
PRESIDE AT ALL MEETINGS OF SUCH COMMITTEE AND SHALL PERFORM SUCH OTHER DUTIES AS
MAY BE PRESCRIBED BY THE BOARD OF DIRECTORS OR THE CHAIRMAN THEREOF.
SECTION 3.13 ALL ACTION TAKEN BY THE BOARD COMMITTEES SHALL BE REPORTED TO THE
BOARD OF DIRECTORS AT ITS MEETING NEXT SUCCEEDING SUCH ACTION AND SHALL BE
SUBJECT TO REVISION BY THE BOARD OF DIRECTORS PROVIDED THAT NO ACTS OR RIGHTS OF
THIRD PARTIES SHALL BE PREJUDICED THEREBY. ALL SUCH ACTION SHALL ALSO BE
RECORDED IN THE MINUTE BOOKS OF THE CORPORATION IN THE SAME MANNER IN WHICH
ACTION TAKEN BY THE BOARD OF DIRECTORS IS RECORDED. THE AFFIRMATIVE VOTE OF THE
MAJORITY OF ALL MEMBERS OF EACH COMMITTEE SHALL BE NECESSARY TO ITS ADOPTION OF
ANY RESOLUTION.
ARTICLE IV
OFFICERS
SECTION 4.1 THE OFFICERS OF THIS CORPORATION SHALL BE ELECTED BY THE BOARD FROM
TIME TO TIME AS IT DEEMS APPROPRIATE, AND SHALL INCLUDE A CHAIRMAN OF THE BOARD
OF DIRECTORS, WHO SHALL SERVE AS CHIEF EXECUTIVE OFFICER, TO BE ELECTED BY THE
BOARD OF DIRECTORS FROM AMONG ITS MEMBERS, A PRESIDENT, AND ONE OR MORE VICE
PRESIDENTS ONE OF WHOM SHALL PERFORM THE DUTIES OF THE CHIEF FINANCIAL OFFICER,
A SECRETARY, A TREASURER, AND SUCH OTHER OFFICERS AND AGENTS AS
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MAY FROM TIME TO TIME BE ELECTED BY THE BOARD OF DIRECTORS. ANY TWO OFFICES
EXCEPT THOSE OF THE PRESIDENT AND VICE PRESIDENT MAY BE HELD BY THE SAME PERSON.
ALL OFFICERS SHALL HOLD OFFICE AT THE PLEASURE OF THE BOARD OF DIRECTORS AND BE
SUBJECT TO DISMISSAL BY IT, WITH OR WITHOUT CAUSE.
SECTION 4.2 THE SALARY AND OTHER COMPENSATION OF THE CHAIRMAN OF THE BOARD, THE
PRESIDENT AND ALL ELECTED VICE PRESIDENTS SHALL BE FIXED BY THE BOARD OF
DIRECTORS. IF ANY VACANCY SHALL OCCUR AMONG THE ELECTED OFFICERS, IT SHALL BE
FILLED BY THE BOARD.
SECTION 4.3 THE CHAIRMAN OF THE BOARD OF DIRECTORS, OR IN HIS ABSENCE THE
CHAIRMAN OF THE ORGANIZATION AND COMPENSATION COMMITTEE, SHALL PRESIDE AT ALL
MEETINGS OF THE BOARD OF DIRECTORS. THE CHAIRMAN OF THE BOARD HAS AUTHORITY TO
APPOINT CERTAIN OFFICERS OF THE COMPANY, INCLUDING VICE PRESIDENTS AND CERTAIN
ASSISTANT OFFICERS WHOSE RESPONSIBILITIES DO NOT WARRANT ELECTION BY THE BOARD
OF DIRECTORS, AND SHALL ALSO PERFORM SUCH OTHER DUTIES AS MAY BE PRESCRIBED BY
THE BOARD OF DIRECTORS.
SECTION 4.4 THE PRESIDENT SHALL BE CHIEF OPERATING OFFICER OF THE CORPORATION
AND, AS SUCH, SHALL CARRY OUT THE PLANS FOR THE CORPORATION AS APPROVED BY THE
CHAIRMAN OF THE BOARD AND THE BOARD OF DIRECTORS. IN THE ABSENCE OF THE
CHAIRMAN OF THE BOARD OF DIRECTORS, HE SHALL PRESIDE AT ALL MEETINGS OF THE
STOCKHOLDERS AND OTHERWISE PERFORM THE CHIEF EXECUTIVE OFFICER'S DUTIES AS
PRESCRIBED BY THE BOARD OF DIRECTORS.
SECTION 4.5 EACH VICE PRESIDENT SHALL PERFORM SUCH DUTIES AS MAY BE PRESCRIBED
BY THE BOARD OF DIRECTORS. THE VICE PRESIDENT OF FINANCE SHALL BE THE CHIEF
FINANCIAL OFFICER. IN THE ABSENCE OR DISABILITY OF THE CHAIRMAN OF THE BOARD,
THE PRESIDENT SHALL SUCCEED TO HIS POWERS AND DUTIES, AND IN THE ABSENCE OF THE
PRESIDENT, THE CHIEF FINANCIAL OFFICER SHALL SUCCEED TO HIS POWERS AND DUTIES,
AND IN THE EVENT ALL ARE UNABLE TO SERVE FOR ANY REASON, THE VICE PRESIDENTS
SHALL SUCCEED TO THEIR POWER AND DUTIES IN THE ORDER IN WHICH ELECTED.
SECTION 4.6 THE SECRETARY SHALL ATTEND ALL MEETINGS OF THE BOARD OF DIRECTORS,
EXECUTIVE COMMITTEE, AND OF THE STOCKHOLDERS, AND RECORD ALL VOTES AND KEEP
MINUTES OF ALL PROCEEDINGS. HE SHALL GIVE, OR CAUSE TO BE GIVEN, REQUIRED
NOTICES OF MEETINGS OF THE BOARD OF DIRECTORS, EXECUTIVE COMMITTEE AND OF THE
STOCKHOLDERS. HE SHALL KEEP IN SAFE CUSTODY THE SEAL OF THE CORPORATION AND,
WHEN AUTHORIZED BY THE BOARD, AFFIX THE SAME TO ANY INSTRUMENT REQUIRING IT, AND
SHALL PERFORM SUCH OTHER DUTIES AS MAY BE PRESCRIBED BY THE BOARD OF DIRECTORS.
SECTION 4.7 THE TREASURER SHALL MAINTAIN NECESSARY RELATIONSHIPS WITH BANKS AND
OTHER FINANCIAL INSTITUTIONS AND PROVIDE FOR ADEQUATE LINES OF CREDIT; SHALL
PLAN FOR AND MAINTAIN ADEQUATE FUNDS IN APPROPRIATE WORKING AND DEPOSITORY
ACCOUNTS TO MEETING OUTSTANDING AND PLANNED COMMITMENTS; AND SHALL BE
RESPONSIBLE FOR SAFE CUSTODY AND CONTROL OF ALL FUNDS AND SECURITIES OF THE
CORPORATION. HE SHALL ESTABLISH POLICIES AND PROCEDURES IN RELATION TO, AND
SUPERVISE MANAGEMENT OF, THE EXTENSION OF CREDIT, AND THE COLLECTION OF
RECEIVABLES. HE SHALL MAINTAIN APPROPRIATE BOND AND DIVIDEND RECORDS, PROVIDE
FOR PROPER SIGNATURE OR ENDORSEMENT ON ALL FINANCIAL DOCUMENTS OF THE
CORPORATION, AND SHALL PERFORM SUCH OTHER DUTIES AS MAY BE PRESCRIBED BY THE
PRESIDENT.
<PAGE>
SECTION 4.8 THE ASSISTANT TO ANY OFFICER SHALL, IN THE ABSENCE OR DISABILITY OF
THAT OFFICER, PERFORM HIS DUTIES AND SHALL PERFORM SUCH OTHER DUTIES AS MAY BE
PRESCRIBED BY THE BOARD OF DIRECTORS.
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THE TORO COMPANY
DIRECTORS STOCK PLAN
1. PURPOSE OF THE PLAN. The purpose of The Toro Company 1992 Directors Stock
Plan ("Plan") is to enable The Toro Company (the "Company") to attract and
retain experienced and knowledgeable directors to serve on the Board of
Directors of the Company or its subsidiaries, and to further align their
interests with those of the stockholders of the Company by providing for or
increasing their stock ownership interests in the Company. It is intended
that the Plan be interpreted so that transactions under the Plan are
exempt under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to the extent applicable.
2. ELIGIBILITY. All members of the Company's Board of Directors who are not
current employees of the Company or any of its subsidiaries ("Nonemployee
Directors") are eligible to participate in the Plan.
3. PLAN AWARDS.
a. DIRECTORS SHARES. To carry out the purposes of the Plan, the Company
shall issue shares ("Directors Shares") of the Company's Common
Stock, $1.00 par value and related preferred share purchase rights
(subject to adjustment as provided in Section 4 hereof) (the "Common
Stock"), to each person who is then a Nonemployee Director, on the
first day of each fiscal year in an amount equal to $5,000 divided
by the fair market value of one share of Common Stock. The "fair
market value of one share of Common Stock" shall be the average of
the closing prices of the Common Stock on the New York Stock
Exchange as reported in The Wall Street Journal for each of the
trading days in the three calendar months immediately prior to the
date of issue of the Directors Shares.
b. DIRECTORS OPTIONS.
i. ANNUAL GRANT. Subject to the terms and conditions of this
Section 3.b., the Company shall grant a nonqualified option
("Directors Options") to purchase 1,000 shares of the Common
Stock, to each person who is then a Nonemployee Director, on
the first day of each fiscal year at an exercise price per
share equal to the fair market value of one share of Common
Stock on the date of grant The "fair market value of one share
of Common Stock" shall be the closing price of the Common
Stock on the New York Stock Exchange on the first business day
of the Company's fiscal year with respect to which the grant
is made, as reported in The Wall Street Journal.
ii. OPTION TERMS.
(a) Directors Options shall be exercisable in whole or in
part commencing six months following the date of grant
and shall remain exercisable for a term of five years
after the date of grant.
(b) No Directors Option shall be assigned or transferred,
except by will or the laws of descent and distribution.
An option so transferred may be
<PAGE>
exercised after the death of the individual to whom it
is granted only by such individual's legal
representatives, heirs or legatees, not later than the
earlier of the date the option expires or one year
after the date of death of such individual, and only
with respect to an option exercisable at the time of
death.
(c) During the lifetime of a Nonemployee Director, options
held by such individual may be exercised only by the
Nonemployee Director and only while serving as a member
of the Board of Directors of the Company and only if
the Nonemployee Director has been continuously so
serving since the date such options were granted;
provided, however, that in the event of disability of a
Nonemployee Director, options may be exercised by such
individual not later than the earlier of the date the
option expires or one year after the date such service
as a member of the Board of Directors ceases by reason
of disability, but only with respect to an option
exercisable at the time such service ceases.
(d) Payment of the exercise price may be made in cash, in
shares of Common Stock valued at fair market value on
the date of exercise or in a combination of cash and
Common Stock.
c. SHARE PRORATION. If, on any date on which Directors Shares are to be
issued pursuant to Section 3.a. or Directors Options are to be
granted pursuant to Section 3.b., the number of shares of Common
Stock is insufficient for the issuance of the entire number of
shares to be issued or the grant of the entire number of options as
calculated in accordance with Section 3.a. or Section 3.b., then the
number of shares to be issued to each Nonemployee Director entitled
to receive Directors Shares or Directors Options on such date shall
be such Nonemployee Director's proportionate share of such available
number of shares or options (rounded down to the greatest number of
whole shares), provided that if a sufficient number of shares of
Common Stock is available to issue all of the Directors Shares, then
the entire number of Directors Shares shall be issued first and the
number of shares to be subjected to options shall be prorated in
accordance with this section.
d. SUPPLEMENTAL BENEFIT. Directors Shares and Directors Options are a
supplemental benefit and are not a component of the annual retainer
and meeting fees paid to Nonemployee Directors. The value of
Directors Shares and Directors Options shall not be included in the
calculation by the Company of the amount of compensation upon which
a Nonemployee Director's retirement benefit is calculated for
purposes of the Company's Director Retirement Plan or any similar
plan.
4. SHARES IN LIEU OF FEES. A Nonemployee Director shall have the right to
elect to receive shares of Common Stock in lieu of annual retainer and
meeting fees otherwise payable in cash. The election to receive Common
Stock shall be made prior to the first day of the calendar year in which
the fees are to be earned. Fees that are earned shall be reserved through
the year and shares shall be issued in December of that year. The number
of shares to be issued shall be determined by dividing the amount of the
cash that otherwise would have been paid by the market value of one share
of Common Stock on the date that the shares are issued.
5. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in this paragraph
and subject to increase by amendment of the Plan, the total number of
shares of Common Stock that is reserved and
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<PAGE>
available for issuance in connection with the Plan shall be 65,000 shares.
If any Directors Option granted hereunder expires unexercised or
terminates, the shares of Common Stock reserved for issuance pursuant to
such option shall, to the extent of any such termination or to the extent
the shares covered by an option are not issued or used, again be available
for option grants under the Plan. Any shares issued by the Company in
connection with the assumption or substitution of outstanding option grants
from any acquired corporation shall not reduce the shares available for
stock awards or option grants under the Plan. Appropriate adjustments in
the number of shares of the Common Stock that may be available for option
grants under the Plan and adjustments in the option price per share of
outstanding options may be made by the Committee in its discretion to give
effect to adjustments made in the number of shares of Common Stock of the
Company through any merger, consolidation, recapitalization,
reclassification, combination, stock dividend, stock split or other similar
change in the corporate structure of the Company affecting the Common
Stock, or a sale by the Company of all or part of its assets or any
distribution to stockholders other than a normal cash dividend.
6. CHANGE OF CONTROL. In the event of a threatened or actual Change of Control
of the Company as hereinafter defined, whether or not approved by the Board
of Directors, all options shall fully vest, unless otherwise limited by the
Committee at the time of the option grant, and be exercisable in their
entirety immediately, and notwithstanding any other provisions of the Plan,
shall continue to be exercisable for three years following the later of the
threatened or actual Change of Control, but not later than ten years after
the date of grant. A Change of Control means the earliest to occur of (i)
a public announcement that a 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, (ii) 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 (iii) 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.
For purposes of this paragraph, 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 plans 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 paragraph, 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.
7. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a committee
composed of those members of the Board of Directors of the Company who are
also employees of the Company (the "Committee"). The Committee shall have
the authority to carry out all provisions of the Plan; provided, however,
that it shall have no discretion to determine which Nonemployee Directors
may
3
<PAGE>
receive Directors Shares or Directors Options or to set the value of such
Directors Shares or Directors Options, other than to make the calculations
required by Section 3.a. and Section 3.b.
8. TERM OF PLAN. The Plan became effective on August 20, 1992 and shall be
perpetual, unless sooner terminated by action of the Board of Directors.
9. AMENDMENT. The effective date of any amendment to the Plan shall be the
date of its adoption by the Board of Directors. No amendment of the Plan
shall adversely affect in a material manner any right of any option holder
with respect to any option theretofore granted without such option holder's
written consent.
10. GOVERNING LAW. The Plan, options and awards granted under the Plan and
agreements entered into under the Plan 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.
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<PAGE>
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
<PAGE>
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.
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.
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<PAGE>
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.
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.
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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.
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c. ELECTION TO EXERCISE STOCK RETENTION AWARD.
i. On or before the December 31 immediately preceding the end of
the fiscal year to which a Stock Retention Award relates, a Stock
Participant who wishes to convert a portion of a Base Cash Award
into deferred compensation Retained Units shall notify the
Company in writing that he or she has elected to participate in
the Stock Retention Provisions and shall specify the percentage
of the Base Cash Award to be converted, except as otherwise
provided in the Officer Deferred Plan with respect to the year in
which that plan is first implemented or 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.
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e. VESTING, DELIVERY AND DISTRIBUTION.
i. Vesting. Restricted Shares and Restricted Units held or
credited by the Company shall be forfeitable until they vest and
shall vest in increments of 25% of the total number of such
Restricted Shares or Units at the end of each of the second,
third, fourth and fifth years after the date such Restricted
Shares or Units are issued or credited, provided that such
Restricted Shares or Units shall vest only if the Stock
Participant's Retained Shares or Units have been left on deposit
with the Agent through the requisite two, three, four and five
year periods and all other requirements of the Plan have been
met, except as may otherwise be provided in subparagraph 8.f.
ii. Delivery.
A. Retained Shares and Restricted Shares will be delivered
as soon as possible after the applicable vesting
requirements (including accelerated vesting under
subparagraph 8.f.) have been fulfilled. In the event
vesting requirements are not fulfilled, Retained Shares
will be returned to a Stock Participant as soon as
possible.
B. Retained Units and Restricted Units that have vested
will be distributed to a Stock Participant consistent
with a Stock Participant's distribution election
properly made in accordance with the provisions of the
Officer Deferred Plan.
iii. Retained Shares and Retained Units are fully vested at the
time of issuance or crediting.
f. VESTING AND CANCELLATION UNDER SPECIAL CONDITIONS.
i. Retirement or Disability. Notwithstanding the foregoing, all
Restricted Shares or Units held in a Stock Participant's account
shall vest in full if the participant retires on or after age 65
or becomes permanently disabled and unable to work while a Stock
Participant under the 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
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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.
For purposes of this subparagraph 8.f.vi., Person means any
individual,
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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.
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9. NON-TRANSFERABILITY. Neither Annual Performance Awards, Stock Retention
Awards, Retained Shares, Restricted Shares, Retained Units, Restricted
Units nor any interest in any one of such awards or shares or units or
benefits may be anticipated, alienated, encumbered, sold, pledged,
assigned, transferred or subjected to any charge or legal process, other
than by will or the laws of descent and distribution, so long as the
Retained and Restricted Shares are held by the Agent or the Retained and
Restricted Units have not been distributed in accordance with the Officer
Deferred Plan, and any sale, pledge, assignment or other attempted transfer
shall be null and void.
10. ADMINISTRATION. The Committee shall have the authority to administer the
Plan; establish policies under the Plan; amend the Plan, subject to the
provisions of paragraph 12; interpret provisions of the Plan; select Plan
Participants and Stock Participants; establish Performance Goals; make
Annual Performance Awards and Stock Retention Awards; or terminate the
Plan, in its sole discretion. The Committee may delegate certain of these
activities and all decisions not required to be exercised by it under
Section 162(m) or Section 16 of the Exchange Act, as it solely determines.
All decisions of the Committee shall be final and binding upon all parties
including the Company, its stockholders, Plan Participants and Stock
Participants.
11. GOVERNING LAW. The Plan, 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.
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As amended by the Compensation Committee and Board of Directors on November
18, 1998, subject to stockholder approval on March 24, 1999.
10
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THE TORO COMPANY
1989 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1989 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the
Company and its subsidiaries and to certain other key individuals who
perform services for the Company and its subsidiaries, to contribute
significantly to the strategic and long-term performance objectives and
growth of the Company and its subsidiaries. This purpose is expected to
be achieved by granting options to acquire the Common Stock, $1.00 par
value, and related preferred share purchase rights of the Company (the
"Common Stock"). Subject to the provisions of the Plan, options may
contain such terms and conditions as shall be required so as to be either
nonqualified stock options ("nonqualified options") or incentive stock
options ("Incentive Stock Options") as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to such
limits as may be imposed by the Plan, nonqualified options or Incentive
Stock Options or both may be granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 8, 1989.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") or any successor
rule and shall qualify to administer the Plan as contemplated by Section
162(m) of the Code and the regulations thereunder ("Section 162(m)"). A
majority of the members of the Committee shall constitute a quorum for
any meeting of the Committee and the acts of a majority of the members
present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be
the acts of the Committee. The decision of the Committee on any matter
affecting the Plan and obligations arising under the Plan or any option
granted thereunder shall be deemed final and binding upon all persons. No
member of the Board or of the Committee shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any
option granted thereunder. Committee members shall be reimbursed for
out-of-pocket expenses reasonably incurred in the administration of the
Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan;
to determine the exercise price of each option to purchase Common Stock,
the individuals to whom and the time or times at which options shall be
granted, the number of shares to be subject to each option, when an
option may be exercisable and the other terms and provisions (and
amendments thereto) of the respective option agreements (which need not
be identical); to determine whether a particular option is to be an
Incentive Stock Option and the terms and provisions thereof that shall be
required in the judgment of the Committee to provide therefor or to
conform to any change in any law or regulation applicable thereto, or to
any other law or regulation that may hereafter become effective to
provide similar or related tax benefits to option holders; and to make
all other determinations deemed necessary or advisable for the
administration of the Plan.
<PAGE>
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
this paragraph and subject to increase by amendment of the Plan, the
total number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,700,000
shares. If any option granted hereunder terminates, expires unexercised,
is exchanged for other options without the issuance of shares of Common
Stock or is exercised by the delivery or constructive delivery of shares
of Common Stock already owned by the option holder, the shares of Common
Stock reserved for issuance pursuant to such option shall, to the extent
of any such termination or to the extent shares covered by an option are
not issued or used, again be available for option grants under the Plan.
Any shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall
not reduce the shares available for option grants under the Plan. Shares
of Common Stock that may be issued hereunder may be authorized but
unissued shares, reacquired or treasury shares, or outstanding shares
acquired in the market or from private sources, or a combination thereof.
Appropriate adjustments in the number of shares of the Common Stock that
may be available for option grants under the Plan and adjustments in the
option price per share of outstanding options may be made by the
Committee in its discretion to give effect to adjustments made in the
number of shares of Common Stock of the Company through any merger,
consolidation, recapitalization, reclassification, combination, stock
dividend, stock split or other similar change in the corporate structure
of the Company affecting the Common Stock, or a sale by the Company of
all or part of its assets or any distribution to stockholders other than
a normal cash dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of
the Company and its subsidiaries. Options may be granted to directors of
the Company who are also employees of the Company. More than one option
may be granted to the same individual. No option may be granted to an
individual who owns, directly or indirectly, Common Stock or other
capital stock of the Company possessing more than 5% of the total
combined voting power or value of any class of capital stock of the
Company or a subsidiary immediately after such option is granted. Except
for the foregoing limitations, there is no minimum or maximum number of
shares of Common Stock with respect to which options may be granted to
any individual under the Plan. Individuals to whom options are granted
are at times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under
the Plan must be granted within ten years from the effective date of the
Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain
in substance the following terms and conditions:
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A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or
any later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number
of shares that may be covered by any option grant during any
calendar year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at not less than fair market value, except for performance
based stock options, such as those granted in connection with the
Continuous Performance Award Plan, where the exercise price is an
average and on the date of grant could be higher or lower than fair
market value. Fair market value is generally determined to be the
closing price for the Common Stock on the New York Stock Exchange as
reported by The Wall Street Journal or other readily available
quotation of composite transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether
an option agreement shall specify periods after the date of
grant of an option during which the option or any portion
thereof may not yet be exercisable, including provisions
applicable to persons subject to Section 16 of the Exchange
Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and
only while an employee of the Company or a parent or
subsidiary of the Company or otherwise performing services
for the Company or a parent or subsidiary and only if the
option holder has been continuously so employed or engaged
since the date such options were granted; provided, however,
that (a) in the event of disability of an option holder,
options may be exercised by such individual not later than
the earlier of the date the option expires or one year after
the date such employment or performance of services ceases by
reason of disability, but only with respect to an option
exercisable at the time such employment or performance of
services ceases and (b) options may be exercised (I) by an
option holder after such individual ceases to be an employee
(for reasons other than disability or retirement at or after
age 60) up to three months after the day of termination of
employment but not later than the date the option expires,
(II) by reason of retirement, either at or after age 60 but
not later than the earlier of the date the option expires or
four years after the date of retirement, or, if approved by
the Committee, after retirement at an age less than age 60
but not later than the earlier of the date the option expires
or three years after the date of retirement; and (III) in the
event a salary replacement option is granted by the Committee
and the option holder is involuntarily terminated during the
option term or becomes disabled or dies,
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the Committee shall have the right to grant to the option
holder or his personal representative, as the case may be,
the right to request either (1) that the option be cancelled
and the option holder or his estate be paid an amount equal
to the compensation the option holder has given up from the
date of grant to the date of such termination, disability or
death together with interest at the prime rate less the then
market gain on that portion of the shares covered by the
option which is then vested; or (2) that the stock option
accelerates such that the option be deemed to have vested at
an appropriate rate per month (as determined by the
Committee) from the date of grant to the last date of the
month in which the date of termination, disability or death
occurs, such accelerated option to be then exercisable for a
period of three years following such date but only with
respect to an option exercisable at the time such individual
ceases to be an employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if
within one year after the termination of employment with or
performance of services for the Company, an option holder is
employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by such individual and
demand return of the economic value of any option which was
realized or obtained (measured at the date of exercise) by
such individual at any time during the period beginning on
the date which is twelve months prior to the date of
termination.
(iv) Absence on leave or any other interruption in the performance
of services by an option holder with the Company shall, if
approved by the Committee, not be deemed a cessation or
interruption of employment or services for the purposes of
the Plan.
(v) No option shall be assignable or transferable by the
individual to whom it is granted except that it may be
transferable by will or the laws of descent and distribution.
An option so transferred may be exercised after the death of
the individual to whom it is granted only by such
individual's legal representatives, heirs or legatees, not
later than the earlier of the date the option expires or one
year after the date of death of such individual, and only
with respect to an option exercisable at the time of death.
(vi) In no event shall any option be exercisable at any time after
its expiration date unless extended by the Committee. When an
option is no longer exercisable, it shall be deemed to have
lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the Plan
and the terms and conditions of the option agreement, an option may
be exercised in whole at any time or in part from time to time, by
delivery to the Company at its principal office of a written notice
of exercise specifying the number of shares with respect to which
the option is being exercised, accompanied by payment in full of the
exercise price for shares to be purchased at that time. Payment may
be made (i) in cash,
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(ii) in shares of Common Stock valued at the fair market value of
the Common Stock on the date of exercise or (iii) in a combination
of cash and Common Stock. The Committee may also, in its sole
discretion, permit option holders to deliver a notice of exercise of
options and to simultaneously sell the shares of Common Stock
thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by proper officers of the Company, using the
proceeds from such sale as payment of the exercise price, or may
authorize such other methods as it deems appropriate and as comply
with requirements of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment
therefor has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of
the Committee, include the right to acquire an accelerated ownership
nonqualified stock option ("AO Option"). An option which provides
for the grant of an AO Option shall entitle the option holder, upon
exercise of that option and payment of the appropriate exercise
price in shares of Common Stock that have been owned by such option
holder for not less than six months prior to the date of exercise,
to receive an AO Option. An AO Option is an option to purchase, at
fair market value at the date of grant of the AO Option, a number of
shares of Common Stock equal to the sum of the number of whole
shares delivered by the option holder in payment of the exercise
price of the original option and the number of whole shares, if any,
withheld by the Company as payment for withholding taxes. An AO
Option shall expire on the same date that the original option would
have expired had it not been exercised. All AO Options shall be
nonqualified options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not
approved by the Board of Directors, all options shall fully vest,
unless otherwise limited by the Committee at the time of the option
grant, and be exercisable in their entirety immediately, and
notwithstanding any other provisions of the Plan, shall continue to
be exercisable for three years following the later of the threatened
or actual Change of Control, but not later than ten years after the
date of grant. A Change of Control means the earliest to occur of
(i) a public announcement that a 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, (ii) 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 (iii) 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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For purposes of this paragraph, 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 plans 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 paragraph, 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.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of outstanding
options in the event of a merger, consolidation, reorganization or
liquidation of the Company or the acquisition of stock or assets of
the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as a
stockholder with respect to any Common Stock covered by an option
until exercise of such option and issuance of shares of Common
Stock. Except as otherwise expressly provided in the Plan, no
adjustments shall be made for dividends or other rights for which
the record date is prior to issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the requirement
that, if at any time the Board shall determine in its discretion
that the listing, registration or qualification of the Common Stock
subject to such option on any securities exchange or under any state
or federal law, or the consent or approval of any government
regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such option or the issue or
purchase of Common Stock thereunder, such option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be granted
to individuals who are foreign nationals or are employed or
otherwise performing services for the Company or any subsidiary
outside the United States or both, on such terms and conditions
different from those specified in the Plan as may, in the judgment
of the Committee, be necessary or desirable to further the purpose
of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet
the applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the
time such options are granted; that other options shall not meet such
requirements and shall be
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nonqualified stock options; and that any ambiguities in construction
shall be interpreted in order to effectuate such intent. The Committee
may grant one or more options of either type, or of both types, to any
one or more individuals either at different times or concurrently. Such
options shall be subject to the terms and conditions set forth elsewhere
in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option
shall meet the requirements of Section 422 of the Code. Any
Incentive Stock Option shall be treated as "outstanding" until it is
exercised in full or expires by reason of lapse of time. To the
extent that the aggregate fair market value of Common Stock
(determined at the time of grant of the Incentive Stock Option in
accordance with paragraph 7.C of the Plan) with respect to which
Incentive Stock Options are exercisable for the first time by an
option holder during any calendar year (under all such plans of the
Company and its parent and subsidiary corporations) exceeds $100,000
or such other limit as may be imposed by the Code, such options to
the extent they exceed such limit shall be treated as options which
are not Incentive Stock Options. In applying the foregoing
limitation, options shall be taken into account in the order in
which they were granted.
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount
of nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or
the sale of shares of Common Stock, any federal, state or local taxes of
any kind required by law to be withheld with respect to such payments or
to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Stock is withheld or surrendered to satisfy tax withholding, such
stock shall be valued at its fair market value as of the date such Common
Stock is withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or discontinued
in whole or in part at any time and from time to time by the Board,
including an amendment to increase the number of shares of Common Stock
with respect to which options may be granted, provided however that no
amendment shall be effective unless and until the same is approved by
stockholders of the Company where the failure to obtain such approval
would adversely affect the availability of any exemption under Rule 16b-3
under the Exchange Act or successor rule and with other applicable law,
including the Code. No amendment of the Plan shall adversely affect in a
material manner any right of any option holder with respect to any option
theretofore granted without such option holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
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B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
C. GOVERNING LAW. The Plan, options granted under the Plan and
agreements entered into under the Plan 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.
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THE TORO COMPANY
1993 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1993 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the
Company and its subsidiaries and to certain other key individuals who
perform services for the Company and its subsidiaries, to contribute
significantly to the strategic and long-term performance objectives and
growth of the Company and its subsidiaries. This purpose is expected to
be achieved by granting options to acquire the Common Stock, $1.00 par
value, and related preferred share purchase rights of the Company (the
"Common Stock"). Subject to the provisions of the Plan, options may
contain such terms and conditions as shall be required so as to be either
nonqualified stock options ("nonqualified options") or incentive stock
options ("Incentive Stock Options") as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to such
limits as may be imposed by the Plan, nonqualified options or Incentive
Stock Options or both may be granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 17, 1993.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") or any successor
rule and shall qualify to administer the Plan as contemplated by Section
162(m) of the Code and the regulations thereunder ("Section 162(m)"). A
majority of the members of the Committee shall constitute a quorum for
any meeting of the Committee and the acts of a majority of the members
present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be
the acts of the Committee. The decision of the Committee on any matter
affecting the Plan and obligations arising under the Plan or any option
granted thereunder shall be deemed final and binding upon all persons. No
member of the Board or of the Committee shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any
option granted thereunder. Committee members shall be reimbursed for
out-of-pocket expenses reasonably incurred in the administration of the
Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan;
to determine the exercise price of each option to purchase Common Stock,
the individuals to whom and the time or times at which options shall be
granted, the number of shares to be subject to each option, when an
option may be exercisable and the other terms and provisions (and
amendments thereto) of the respective option agreements (which need not
be identical); to determine whether a particular option is to be an
Incentive Stock Option and the terms and provisions thereof that shall be
required in the judgment of the Committee to provide therefor or to
conform to any change in any law or regulation applicable thereto, or to
any other law or regulation that may hereafter become effective to
provide similar or related tax benefits to option holders; and to make
all other determinations deemed necessary or advisable for the
administration of the Plan.
<PAGE>
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
this paragraph and subject to increase by amendment of the Plan, the
total number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,600,000
shares. If any option granted hereunder terminates, expires unexercised,
is exchanged for other options without the issuance of shares of Common
Stock or is exercised by the delivery or constructive delivery of shares
of Common Stock already owned by the option holder, the shares of Common
Stock reserved for issuance pursuant to such option shall, to the extent
of any such termination or to the extent shares covered by an option are
not issued or used, again be available for option grants under the Plan.
Any shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall
not reduce the shares available for option grants under the Plan. Shares
of Common Stock that may be issued hereunder may be authorized but
unissued shares, reacquired or treasury shares, or outstanding shares
acquired in the market or from private sources, or a combination thereof.
Appropriate adjustments in the number of shares of the Common Stock that
may be available for option grants under the Plan and adjustments in the
option price per share of outstanding options may be made by the
Committee in its discretion to give effect to adjustments made in the
number of shares of Common Stock of the Company through any merger,
consolidation, recapitalization, reclassification, combination, stock
dividend, stock split or other similar change in the corporate structure
of the Company affecting the Common Stock, or a sale by the Company of
all or part of its assets or any distribution to stockholders other than
a normal cash dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of
the Company and its subsidiaries. Options may be granted to directors of
the Company who are also employees of the Company. More than one option
may be granted to the same individual. No option may be granted to an
individual who owns, directly or indirectly, Common Stock or other
capital stock of the Company possessing more than 5% of the total
combined voting power or value of any class of capital stock of the
Company or a subsidiary immediately after such option is granted. Except
for the foregoing limitations, there is no minimum or maximum number of
shares of Common Stock with respect to which options may be granted to
any individual under the Plan. Individuals to whom options are granted
are at times referred to as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under
the Plan must be granted within ten years from the effective date of the
Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain
in substance the following terms and conditions:
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A. DATE OF GRANT. An option agreement shall specify the date of
grant, which shall be the date on which the Committee grants an
option or any later date which the Committee specifically
designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall
specify the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum
number of shares that may be covered by any option grant during
any calendar year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at not less than fair market value, except for performance
based stock options, such as those granted in connection with the
Continuous Performance Award Plan, where the exercise price is an
average and on the date of grant could be higher or lower than
fair market value. Fair market value is generally determined to be
the closing price for the Common Stock on the New York Stock
Exchange as reported by The Wall Street Journal or other readily
available quotation of composite transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether
an option agreement shall specify periods after the date of
grant of an option during which the option or any portion
thereof may not yet be exercisable, including provisions
applicable to persons subject to Section 16 of the Exchange
Act.
(ii) During the lifetime of an option holder, options held by
such individual may be exercised only by the option holder
and only while an employee of the Company or a parent or
subsidiary of the Company or otherwise performing services
for the Company or a parent or subsidiary and only if the
option holder has been continuously so employed or engaged
since the date such options were granted; provided,
however, that (a) in the event of disability of an option
holder, options may be exercised by such individual not
later than the earlier of the date the option expires or
one year after the date such employment or performance of
services ceases by reason of disability, but only with
respect to an option exercisable at the time such
employment or performance of services ceases and
(b) options may be exercised (I) by an option holder after
such individual ceases to be an employee (for reasons other
than disability or retirement at or after age 60) up to
three months after the day of termination of employment but
not later than the date the option expires, (II) by reason
of retirement, either at or after age 60 but not later than
the earlier of the date the option expires or four years
after the date of retirement, or, if approved by the
Committee, after retirement at an age less than age 60 but
not later than the earlier of the date the option expires
or three years after the date of retirement; and (III) in
the event a salary replacement option is granted by the
Committee and the option holder is involuntarily terminated
during the option term or becomes disabled or dies,
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<PAGE>
the Committee shall have the right to grant to the option
holder or his personal representative, as the case may be,
the right to request either (1) that the option be
cancelled and the option holder or his estate be paid an
amount equal to the compensation the option holder has
given up from the date of grant to the date of such
termination, disability or death together with interest at
the prime rate less the then market gain on that portion of
the shares covered by the option which is then vested; or
(2) that the stock option accelerates such that the option
be deemed to have vested at an appropriate rate per month
(as determined by the Committee) from the date of grant to
the last date of the month in which the date of
termination, disability or death occurs, such accelerated
option to be then exercisable for a period of three years
following such date but only with respect to an option
exercisable at the time such individual ceases to be an
employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if
within one year after the termination of employment with or
performance of services for the Company, an option holder
is employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by such individual and
demand return of the economic value of any option which was
realized or obtained (measured at the date of exercise) by
such individual at any time during the period beginning on
the date which is twelve months prior to the date of
termination.
(iv) Absence on leave or any other interruption in the
performance of services by an option holder with the
Company shall, if approved by the Committee, not be deemed
a cessation or interruption of employment or services for
the purposes of the Plan.
(v) No option shall be assignable or transferable by the
individual to whom it is granted except that it may be
transferable by will or the laws of descent and
distribution. An option so transferred may be exercised
after the death of the individual to whom it is granted
only by such individual's legal representatives, heirs or
legatees, not later than the earlier of the date the option
expires or one year after the date of death of such
individual, and only with respect to an option exercisable
at the time of death.
(vi) In no event shall any option be exercisable at any time
after its expiration date unless extended by the Committee.
When an option is no longer exercisable, it shall be deemed
to have lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the
Plan and the terms and conditions of the option agreement, an
option may be exercised in whole at any time or in part from time
to time, by delivery to the Company at its principal office of a
written notice of exercise specifying the number of shares with
respect to which the option is being exercised, accompanied by
payment in full of the exercise price for shares to be purchased
at that time. Payment may be made (i) in cash,
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<PAGE>
(ii) in shares of Common Stock valued at the fair market value of
the Common Stock on the date of exercise or (iii) in a combination
of cash and Common Stock. The Committee may also, in its sole
discretion, permit option holders to deliver a notice of exercise
of options and to simultaneously sell the shares of Common Stock
thereby acquired pursuant to a brokerage or similar arrangement
approved in advance by proper officers of the Company, using the
proceeds from such sale as payment of the exercise price, or may
authorize such other methods as it deems appropriate and as comply
with requirements of the Code and the Exchange Act.
No shares of Common Stock shall be issued until full payment
therefor has been made.
G. ACCELERATED OWNERSHIP FEATURE. An option may, in the discretion of
the Committee, include the right to acquire an accelerated
ownership nonqualified stock option ("AO Option"). An option which
provides for the grant of an AO Option shall entitle the option
holder, upon exercise of that option and payment of the
appropriate exercise price in shares of Common Stock that have
been owned by such option holder for not less than six months
prior to the date of exercise, to receive an AO Option. An AO
Option is an option to purchase, at fair market value at the date
of grant of the AO Option, a number of shares of Common Stock
equal to the sum of the number of whole shares delivered by the
option holder in payment of the exercise price of the original
option and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO Option shall
expire on the same date that the original option would have
expired had it not been exercised. All AO Options shall be
nonqualified options.
H. CHANGE OF CONTROL. In the event of a threatened or actual Change
of Control of the Company as hereinafter defined, whether or not
approved by the Board of Directors, all options shall fully vest,
unless otherwise limited by the Committee at the time of the
option grant, and be exercisable in their entirety immediately,
and notwithstanding any other provisions of the Plan, shall
continue to be exercisable for three years following the later of
the threatened or actual Change of Control, but not later than ten
years after the date of grant. A Change of Control means the
earliest to occur of (i) a public announcement that a 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, (ii) 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 (iii) 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.
5
<PAGE>
For purposes of this paragraph, 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 plans 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 paragraph, 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.
I. REORGANIZATION. The Committee may, in its sole discretion, make
provisions in any option agreement for the protection of
outstanding options in the event of a merger, consolidation,
reorganization or liquidation of the Company or the acquisition of
stock or assets of the Company by another entity.
J. RIGHTS AS A STOCKHOLDER. An option holder shall have no rights as
a stockholder with respect to any Common Stock covered by an
option until exercise of such option and issuance of shares of
Common Stock. Except as otherwise expressly provided in the Plan,
no adjustments shall be made for dividends or other rights for
which the record date is prior to issuance of the Common Stock.
K. GENERAL RESTRICTION. Each option shall be subject to the
requirement that, if at any time the Board shall determine in its
discretion that the listing, registration or qualification of the
Common Stock subject to such option on any securities exchange or
under any state or federal law, or the consent or approval of any
government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option
or the issue or purchase of Common Stock thereunder, such option
may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the
Board.
L. FOREIGN NATIONALS. Without amending the Plan, awards may be
granted to individuals who are foreign nationals or are employed
or otherwise performing services for the Company or any subsidiary
outside the United States or both, on such terms and conditions
different from those specified in the Plan as may, in the judgment
of the Committee, be necessary or desirable to further the purpose
of the Plan.
8. INCENTIVE AND NONQUALIFIED OPTIONS. It is intended that certain options
granted under the Plan shall be Incentive Stock Options and shall meet
the applicable requirements of and contain or be deemed to contain all
provisions required under Section 422 of the Code or corresponding
provisions of subsequent revenue laws and regulations in effect at the
time such options are granted; that other options shall not meet such
requirements and shall be
6
<PAGE>
nonqualified stock options; and that any ambiguities in construction
shall be interpreted in order to effectuate such intent. The Committee
may grant one or more options of either type, or of both types, to any
one or more individuals either at different times or concurrently. Such
options shall be subject to the terms and conditions set forth elsewhere
in the Plan and to the following:
A. INCENTIVE STOCK OPTIONS. The term of any Incentive Stock Option
shall meet the requirements of Section 422 of the Code. Any
Incentive Stock Option shall be treated as "outstanding" until it
is exercised in full or expires by reason of lapse of time. To the
extent that the aggregate fair market value of Common Stock
(determined at the time of grant of the Incentive Stock Option in
accordance with paragraph 7.C of the Plan) with respect to which
Incentive Stock Options are exercisable for the first time by an
option holder during any calendar year (under all such plans of
the Company and its parent and subsidiary corporations) exceeds
$100,000 or such other limit as may be imposed by the Code, such
options to the extent they exceed such limit shall be treated as
options which are not Incentive Stock Options. In applying the
foregoing limitation, options shall be taken into account in the
order in which they were granted.
B. NONQUALIFIED OPTIONS. There is no limitation on the maximum amount
of nonqualified options which may be exercised in any year.
9. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan, including the exercise of an option or
the sale of shares of Common Stock, any federal, state or local taxes of
any kind required by law to be withheld with respect to such payments or
to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Stock is withheld or surrendered to satisfy tax withholding, such
stock shall be valued at its fair market value as of the date such Common
Stock is withheld or surrendered.
10. AMENDMENT OF THE PLAN. The Plan may be amended, suspended or discontinued
in whole or in part at any time and from time to time by the Board,
including an amendment to increase the number of shares of Common Stock
with respect to which options may be granted, provided however that no
amendment shall be effective unless and until the same is approved by
stockholders of the Company where the failure to obtain such approval
would adversely affect the availability of any exemption under Rule 16b-3
under the Exchange Act or successor rule and with other applicable law,
including the Code. No amendment of the Plan shall adversely affect in a
material manner any right of any option holder with respect to any option
theretofore granted without such option holder's written consent.
11. MISCELLANEOUS.
A. USE OF PROCEEDS. The proceeds derived from the sale of shares of
Common Stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
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<PAGE>
B. PARENT AND SUBSIDIARY. As used herein, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary
corporation", respectively, as defined in Section 424 of the Code.
C. GOVERNING LAW. The Plan, options granted under the Plan and
agreements entered into under the Plan 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.
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THE TORO COMPANY
CONTINUOUS PERFORMANCE AWARD PLAN
1. PURPOSE OF THE PLAN. The purpose of the Continuous Performance Award
Plan (the "Plan") is to provide an incentive to members of management of
The Toro Company (the "Company") who are primarily responsible for the
management, growth and sound development of the business of the Company
to achieve the Company's long-term financial objectives, by making awards
based on achievement of performance goals ("Performance Awards").
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company, or its successor
committee (the "Committee"), it being intended that members of the
Committee shall qualify to administer the Plan as contemplated by Rule
16b-3 promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act") or any successor rule, and as contemplated by Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and
the rules and regulations thereunder, and provided further that, if the
stock options granted pursuant to paragraph 5 hereof are authorized to be
granted under the Company's stock option plans, the members of the
Committee shall also have authority to act under those plans. The
Committee shall have power to select employees to whom Performance Awards
are made, to determine the terms of the Performance Awards consistent
with the Plan, to prescribe rules and regulations relating to the Plan
and to construe and otherwise implement the Plan.
3. ELIGIBILITY. Performance Awards may be made to any employee who has
primary responsibility for and directly influences achievement of
long-term financial results of the Company. Officers of the Company who
are also members of the Board of Directors shall be eligible to receive
Performance Awards. Members of the Committee shall not be eligible to
receive Performance Awards. Individuals to whom Performance Awards are
made are referred to as "Participants."
4. TERMS OF AWARDS. Performance Awards shall be evidenced by written
agreements in such form, not inconsistent with this Plan, as the
Committee shall approve from time to time, which agreements shall contain
in substance the following terms and conditions:
a. "AWARD TERM". Unless otherwise provided herein, each Performance
Award shall have a term of three fiscal years and shall be payable
only at the conclusion of such term. Notwithstanding the
foregoing, and for the purpose of bringing a Participant who has
not previously participated in this Plan into the three year award
cycle of the Plan, the Committee may grant, in addition to a three
year Performance Award, a Performance Award having a term of one
fiscal year and a Performance Award having a term of two fiscal
years, such that an award may be payable, if otherwise earned, at
the conclusion of each of the first two fiscal years after
commencement of participation in the Plan. The Committee may, in
its discretion, grant additional, successive three year Performance
Awards to any Participant with respect to subsequent three year
periods. Notwithstanding the foregoing, the Committee may, in its
discretion, make Performance Awards having a duration of less than
the normal Award Term to an individual who is selected to first
become a Participant at a time other than the beginning of a fiscal
year of the Company or to reflect a fiscal transition period
resulting from a change in fiscal year end or similar significant
event; provided that such award shall otherwise be generally
<PAGE>
on the same terms and conditions applicable to Performance Awards
granted as of the first day of the applicable fiscal year.
SPECIAL RULE FOR PERSONS REFERRED TO IN SECTION 162(m). If a
Performance Award is granted at a time other than the beginning of
a fiscal year, such award shall not be granted later than 90 days
after the commencement of the period of service to which the
Performance Award relates or after more than 25% of the period of
service has elapsed, in accordance with the provisions of
subparagraph 4.c.ii hereof.
b. DATE OF GRANT. Except as otherwise permitted under this Plan,
Performance Awards, whether one year, two year or three year
awards, shall be granted as of the date which marks the first day
of any Award Term.
c. BASIS OF AWARD.
i. The maximum amount that may be paid with respect to any
Performance Award (the "Award Maximum") shall be determined
by multiplying (a) the base compensation actually paid to the
Participant during the period of any one-year Award Term or
the last fiscal year of any multiple-year Award Term, as the
case may be, exclusive of any bonus or other incentive
compensation but including deferred compensation, times (b) a
participation factor which represents a percentage of base
compensation (such as .25 for 25% of base compensation)
determined by the Committee at the time an award is granted ,
which is intended to reflect the Participant's ability to
influence the financial results of the Company or its
divisions or subsidiaries and the Participant's relative
seniority within management.
SPECIAL RULE FOR PERSONS REFERRED TO IN SECTION 162(m): With
respect to a Performance Award granted to a person referred
to in Section 162(m), the maximum dollar amount of the Award
Maximum shall be set by the Committee at the time of grant of
a Performance Award and the Committee shall have the
discretion to decrease this maximum dollar amount but may not
increase such amount with respect to a Peformance Award
granted to a person referred to in Section 162(m). The
participation factors applicable to such persons, which are
intended to reflect a Plan Participant's level of
responsibility, are 1.0 for the Chairman and Chief Executive
Officer, .75 for the President and Chief Operating Officer,
if one should be elected, .50 for the Group Vice Presidents
and Chief Financial Officer, and .25 to .35 for other
officers, including other named executive officers.
ii. The Committee shall establish a financial performance goal
based on the Company's relative performance in achieving a
return on beginning stockholders equity (ROBE) as compared
with other similarly classified Fortune 500 companies (the
"Performance Goal"), and the amount that shall be paid (the
"Award Payout") with respect to each Performance Award shall
be based on the achievement by the Company of such
Performance Goal during the applicable Award Term; provided
that the Performance Goal shall be established not later than
90 days after the commencement of the period of service to
which the Performance Goal relates,
2
<PAGE>
provided that the outcome is substantially uncertain at the
time the Committee actually establishes the Performance Goal;
and provided further that in no event will a Performance Goal
be considered to be preestablished if it is established after
25% of the period of service (as scheduled in good faith at
the time the Performance Goal is established) has elapsed.
SPECIAL RULE FOR PERSONS REFERRED TO IN SECTION 162(m): In
no case shall the Award Payout with respect to a Performance
Award granted to a person referred to in Section 162(m)
exceed the maximum dollar amount established by the Committee
in accordance with the Special Rule set forth in subparagraph
4.c.i. or set forth in subparagraph 4.e.
d. CALCULATION OF AWARD PAYMENT.
i. STANDARD CALCULATION. The Company's ROBE for each fiscal
year shall be converted to a percentile score (the
"Percentile Score") by comparing the ROBE to comparable data
for all companies in the Industrial and Farm Equipment Group
of Fortune 500 (as reported for the calendar year ended
during such fiscal year). The one year Percentile Score
shall be used to determine the Award Payout with respect to a
one year Award Term and the average of the Percentile Scores
for a two or three year Award Term shall be used in
determining the Award Payout for any multiple year
Performance Award. If the Percentile Score (or average
Percentile Score for a two or three year Award Term) is: (a)
at or above the 75th percentile, each Participant shall be
paid the Award Maximum; (b) between the 50th and 75th
percentile, each Participant shall be paid an amount equal to
two-thirds of the Award Maximum at the 50th percentile and
ranging up on a straight line basis to 100% of the Award
Maximum at the 75th percentile; (c) between the 25th and 50th
percentile, each Participant shall be paid two-thirds of the
Award Maximum at the 50th percentile and ranging down on a
straight line basis to zero at the 25th percentile; and (d)
at or below the 25th percentile, no Performance Award shall
be paid. The Award Payout with respect to a Performance
Award covering two or three fiscal years shall not be earned
or paid until the completion of the final fiscal year of the
Award Term. However, no Award Payout will be earned or paid
to any participant during the first six months of any Award
Term.
ii. Notwithstanding the provisions of subparagraph i of this
subparagraph 4.d., any individual who has participated in the
Plan for less than a full fiscal year during a one year
Award Term shall receive a payment only for that portion of
the fiscal year during which the individual was a Participant
(expressed as a percentage and based on a 360 day year).
e. MAXIMUM AWARD PAYMENT. Notwithstanding any other provision of this
Plan, the maximum dollar amount a Participant may be paid under a
Performance Award with respect to any Award Term is $1,500,000.
The Committee may in its discretion, decrease this maximum, but may
not under any circumstances increase the maximum.
3
<PAGE>
f. PAYMENT. Before any payment is made under the Plan, the Committee
must certify in writing that the Performance Goal justifying the
payment has been met. Subject to the provisions of subparagraph
4.g. hereof, any amount earned with respect to a Performance Award
shall be paid in cash within a reasonable time after the last day
of the Award Term and after the Committee has certified in writing
that the applicable Performance Goal and any other material terms
were satisfied. A Participant shall have no control over the date
of payment.
g. CHANGE OF CONTROL. Each Performance Award shall provide that in
the event of a threatened or actual Change of Control of the
Company after one full year of any multiple year Award Term, or
during the final six months of a one year Award Term, any such
Performance Award shall become immediately payable and the
calculation of the amount payable shall be based on the ROBE of the
Company for the fiscal period most recently ended and the most
recent Fortune 500 publication then available. A Change of Control
means the earliest to occur of (i) 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, (ii)
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 (iii) 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.
For purposes of this paragraph, 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 plans 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 paragraph, 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.
h. TRANSFERABILITY. No Performance Award granted hereunder may be
transferred by a Participant. A Participant may receive payment
with respect to a Performance Award only while an employee of the
Company or a parent or subsidiary of the Company and only if he or
she has been continuously employed since the date the Performance
Award was granted; provided, however, that:
4
<PAGE>
i. In the event of the death, disability or retirement of a
Participant, an Award Payout shall be made if otherwise
earned in accordance with subparagraph 4.d. hereof, with
respect to the portion of the applicable Award Term completed
at the date of such event (based on a 360 day year and
expressed as a percentage). The amount shall be calculated
and paid in accordance with the applicable provisions of
subparagraphs 4.d. and 4.e., notwithstanding the earlier
occurrence of such event.
ii. In the event of involuntary termination of employment of a
Participant, during the Award Term, for reasons other than
death, disability or retirement, an Award Payout shall be
made, if otherwise earned in accordance with subparagraph
4.d. hereof, with respect to the portion of the applicable
Award Term completed at the date of such event (based on a
360 day year and expressed as a percentage). Any payment
made under this subparagraph 4.h.ii. shall be based on the
ROBE of the Company for the fiscal period then most recently
ended and the most recent Fortune 500 publication then
available.
5. STOCK OPTIONS. At the time of granting any Performance Award, the
Committee shall grant to each Participant options to purchase shares of
the Common Stock, $1.00 par value and related Preferred Share Purchase
Rights of the Company (the "Common Stock") under the Company's then
effective stock option plan or plans, on such terms and conditions as may
be required or permitted under such stock option plan, provided, however,
that the following terms shall be applicable unless otherwise not
permitted by such stock option plan:
a. Each Participant shall be granted one option with respect to each
Performance Award.
b. The number of shares to be subject to an option granted to a
Participant (the "Option Amount") shall be determined by
multiplying (i) the estimated base compensation of the Participant
during the first fiscal year of the Award Term, as determined by
the Human Resources department of the Company, exclusive of any
bonus or other incentive compensation but including deferred
compensation times (ii) the participation factor described in
subparagraph 4.c.i above times (iii) 1.0 for a one-year Award Term,
1.05 for a two-year Award Term, and 1.1 for a three-year Award
Term; and dividing that result by (iv) the Fair Market Value of one
share of Common Stock of the Company determined in accordance with
subparagraph 5.d. hereof.
c. Notwithstanding subparagraph 5.b., the number of shares subject to
an option shall be subject to reduction as follows: If the
Company's Percentile Score (or average Percentile Score for a
multiple year Award Term) as calculated in accordance with
subparagraph 4.d. above, is not at or above the 75th percentile,
but is at or above the 25th percentile, a portion of the option
related to the applicable Performance Award shall be deemed to
expire so that the number of shares subject to the option shall be
reduced pro rata on a straight-line basis (full shares only) to
two-thirds of the Option Amount at a 50th Percentile Score and to
zero at a 25th Percentile Score, on the same basis as provided in
subparagraph 4.d. above. Thus, if the Company does not achieve a
Performance Goal equal to at least the 25th percentile as herein
provided for the Award Term, the option shall expire automatically.
The calculation required by this subparagraph shall be made and
certified by the Committee promptly after the end of each fiscal
year, and any option or portion of an option deemed to expire shall
expire automatically upon the making of
5
<PAGE>
such calculation. The Committee shall promptly notify the
Participants of the results of the calculation.
d. The exercise price per share under any option shall be the fair
market value of one share of Common Stock of the Company. The fair
market value of one share of Common Stock, for the purpose of
determining the Option Amount and the exercise price per share,
shall be the average closing price of the Common Stock on the New
York Stock Exchange for the three month period immediately prior to
the grant date, provided that such result shall otherwise be in
accordance with the then effective stock option plan.
e. An option granted with respect to any Performance Award, or the
portion thereof which remains after application of subparagraph
5.c. above, shall become exercisable on the date the Company
releases to the public its earnings for the prior fiscal year and
shall remain exercisable until 90 days thereafter. If permitted
under the then effective stock option plan or under applicable
securities laws, each option shall provide that in the event of a
Change of Control of the Company during the Award Term, the option
shall become immediately exercisable in the full Option Amount and
the calculation pursuant to subparagraph 5.c. shall not be
applicable.
f. An option shall, by its terms, expire upon the termination of
employment of a Participant, except that in the event of retirement
by a Participant after the end of an Award Term, such retired
Participant shall be entitled to exercise the option or options
involved during the period provided in subparagraph 5.e. above.
6. 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 which would increase the
maximum amount payable under subparagraph 4.e. to a Participant who
is a person referred to in Section 162(m), which would change the
Performance Goal applicable to a Participant who is a person
referred to in Section 162(m) for payment of awards stated under
subparagraph 4.c.ii.; or which would modify the requirements as to
eligibility for participation under paragraph 3, unless the
stockholders of the Company shall have approved such change in
accordance with the requirements of Section 162(m). Under no
circumstances may the Plan be amended to permit the Committee to
increase an Award Payment in contravention of the requirements of
subparagraph 4.c.i.
7. GOVERNING LAW. The Plan, awards granted under the Plan and
agreements entered into under the Plan 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. EFFECTIVE DATE OF THE PLAN AND AMENDMENTS. The Plan first became
effective on August 1, 1991. 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
6.
As amended by the Compensation Committee and Board of Directors
July 30, 1998.
6
<PAGE>
Exhibit 12
THE TORO COMPANY AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Not Covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
YEARS ENDED 3 MONTHS YEARS ENDED
ENDED
------------------------------------------------------------------------------------
10/31/98 10/31/97 10/31/96 10/31/95 7/31/95 7/31/94
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings before income taxes $ 6,761,000 $60,344,000 $ 60,180,000 $6,606,0000 $61,112,000 $37,050,000
Plus: Fixed charges 29,375,000 23,186,000 16,728,000 3,266,000 14,892,000 15,989,000
- ----------------------------------------------------------------------------------------------------------------------
Earnings available to cover
fixed charges $36,136,000 $83,530,000 $76,908,000 $9,872,000 $76,004,000 $53,039,000
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed
charges 1.23 3.60 4.60 3.02 5.10 3.32
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Interest Expense $25,428,000 $19,900,000 $13,590,000 $2,532,000 $11,902,000 $13,562,000
Rentals (Interest factor) 3,987,000 3,286,000 3,138,000 734,000 2,990,000 2,427,000
- ----------------------------------------------------------------------------------------------------------------------
Total fixed charges $29,375,000 $23,186,000 $16,728,000 $3,266,000 $14,892,000 $15,989,000
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS The Toro Company
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data and number of stockholders)
Years ended October 31 1998 1997 % Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,110,434 $ 1,051,204 5.6%
Net earnings, before extraordinary loss* 4,090 36,508 (88.8)
Percent of net sales 0.4% 3.5%
- -----------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common
stock, before extraordinary loss* $ 0.31 $ 2.93 (89.4)
Dividends paid per share of common stock outstanding 0.48 0.48
- -----------------------------------------------------------------------------------------------------
Return on:
Average stockholders' equity 1.6% 15.3%
Average invested capital 2.9 12.1
- -----------------------------------------------------------------------------------------------------
AT YEAR END
Working capital $ 221,227 $ 234,211 (5.5)
Total assets 723,991 661,634 9.4
Total debt 228,424 219,015 4.3
Stockholders' equity 263,399 241,163 9.2
Book value per common share 20.63 19.79 4.2
Number of common stockholders 6,364 6,560 (3.0)
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
*In 1997, the company recognized an extraordinary loss on the early retirement
of debt of $1,663,000 or $0.13 per dilutive share.
[GRAPH]
NET SALES
(DOLLARS IN MILLIONS)
95 $919.4
96 $930.9
97 $1,051.2
98 $1,110.4
[GRAPH]
NET EARNINGS
(DOLLARS IN MILLIONS)
95 $32.4
96 $36.4
97 $36.5*
98 $4.1
[GRAPH]
RETURN ON AVERAGE EQUITY
(PERCENT)
95 17.5%
96 18.0%
97 15.3%
98 1.6%
[GRAPH]
BOOK VALUE
(IN DOLLARS PER COMMON SHARE)
95 $15.69
96 $17.75
97 $19.79
98 $20.63
11
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Toro Company
RESULTS OF OPERATIONS
Results in fiscal 1998 were disappointing compared to fiscal 1997. Although Toro
recorded strong performances from its professional businesses, which now make up
65.7 percent of total consolidated sales, several events had a negative effect
on Toro's consumer business and the company as a whole. Toro had strong sales
and earnings growth from the commercial and irrigation businesses, and had
significant contributions from the acquisitions of Exmark Manufacturing Company
Incorporated (Exmark) in the landscape contractor market and GR Driplines,
Incorporated (Drip In) in the agricultural irrigation market. The growth of the
golf course market continued to be strong around the world, with the exception
of Asia, which contributed to the growth in the commercial and irrigation
businesses. Toro's consumer business struggled during the year, which resulted
in the adoption of a company-wide plan to improve profitability. The lack of
snow during the winter of 1997-1998 significantly lowered sales of the
profitable snowthrower line. Performance was also hampered by manufacturing
problems related to poor execution of the production transfer from Mound,
Minnesota to El Paso, Texas, which led to significant cost overruns for certain
consumer handheld electric products and certain irrigation products.
SUMMARY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended October 31
-------------------------------------------------------------
(Dollars in millions, except per share data) 1998 % Change 1997 % Change 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,110.4 5.6% $1,051.2 12.9% $930.9
Cost of sales 726.1 9.5 663.2 12.6 589.2
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 384.3 (1.0) 388.0 13.6 341.7
Gross profit percentage 34.6% (2.3) 36.9% 0.2 36.7%
Selling, general, and administrative expense 345.6 10.4 313.1 12.5 278.3
Restructuring and other unusual expense 15.0 478.5 2.6 - -
- ---------------------------------------------------------------------------------------------------------------------------
Earnings from operations 23.7 (67.2) 72.3 14.0 63.4
Operating profit percentage 2.1% (4.8) 6.9% 0.1 6.8%
Interest expense (25.4) 27.8 (19.9) (46.4) (13.5)
Other income, net 8.5 7.3 7.9 23.6 10.3
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary loss 6.8 (88.8) 60.3 0.3 60.2
Provision for income taxes 2.7 (88.8) 23.8 0.3 23.8
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary loss 4.1 (88.8) 36.5 0.3 36.4
Extraordinary loss, net of income tax benefit of $1.1 - - 1.7 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4.1 (88.3)% $ 34.8 (4.3)% $ 36.4
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock
before extraordinary loss $ 0.32 (89.4)% $ 3.02 0.7% $ 3.00
Extraordinary loss per share, net of income tax benefit - - 0.14 - -
- ---------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock $ 0.32 (88.9)% $ 2.88 (4.0)% $ 3.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock
before extraordinary loss $ 0.31 (89.4)% $ 2.93 1.0% $ 2.90
Extraordinary loss per share, net of income tax benefit - - 0.13 - -
- ---------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock $ 0.31 (88.9)% $ 2.80 (3.4)% $ 2.90
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET SALES BY PRODUCT LINE
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1998 % Change 1997 % Change 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer $ 380.9 (16.8)% $ 458.1 (0.6)% $461.0
Commercial 451.3 31.0 344.6 7.0 322.0
Irrigation 278.2 12.0 248.5 68.0 147.9
- ---------------------------------------------------------------------------------------------------------------------------
Total* $1,110.4 5.6% $1,051.2 12.9% $930.9
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
*Includes international sales of $ 235.9 1.3% $ 232.8 33.6% $174.2
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
In fiscal 1998, Toro's sales increased 5.6 percent, due to the incremental
revenue of Exmark and Drip In products. Net sales would have dropped slightly
without Exmark and Drip In products due to significantly lower levels of
shipments for consumer products, including snowthrowers, gas powered trimmers,
and riding products. Lower consumer shipments were partially offset by strong
sales of commercial equipment and irrigation products. Asia sales have also
dropped from 3.1 percent of total consolidated sales in fiscal 1997 to 1.7
percent in fiscal 1998 due to the political and economic instabilities in that
market.
In response to the challenges faced in fiscal 1998, Toro continues to
evaluate its business units and reinvest in opportunities and initiatives that
it believes will help sustain competitiveness and maintain a leadership
position. Toro implemented a profit improvement plan to reposition the consumer
business and improve overall company profitability and competitiveness. This
strategy included organizational changes in the consumer division;
decentralizing manufacturing and inventory management; initiating a multi-year
strategy for warehousing and transportation services with third party vendors;
the sale of the recycling equipment business; the restructuring of the
professional fertilizer business; and plant closings. The company expects
significant savings from the profit improvement plan by fiscal year 2000.
In conclusion, positive results in the professional sector were offset by
the disappointing results in the consumer business. Toro has embarked on a
company-wide profit improvement plan that it believes will reposition the
consumer business and make the company as a whole more competitive. This plan,
combined with a generally favorable outlook in professional markets, positions
Toro for significant improvement in fiscal 1999, although earnings per share are
not expected to reach fiscal 1997 levels.
NET SALES
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Effective November 1997, the company acquired Exmark, a leading manufacturer of
equipment for the professional landscape contractor industry. Effective February
1998, the company acquired Drip In, a manufacturer of agricultural
micro-irrigation products. These two acquisitions resulted in all of the
increase in fiscal 1998 sales.
Worldwide net sales in fiscal 1998 were $1,110.4 million compared to
$1,051.2 million in fiscal 1997, an increase of 5.6 percent. The following is a
discussion of sales by product lines:
CONSUMER - Net sales of worldwide consumer products in fiscal 1998 were
$380.9 million compared to $458.1 million in fiscal 1997, a decrease of 16.8
percent. Domestic snowthrower sales, which accounted for a significant
portion of this decrease, were down due to the lack of snow experienced
during the winter of 1997-1998. Shipments of domestic riding products were
also below fiscal 1997 levels as a result of lower than expected demand for a
new repositioned higher-priced garden tractor, along with increased
competition. Toro also discontinued selling gas powered trimmers to certain
home centers due to low product profitability. In addition, wet spring
weather experienced in key Sun Belt markets resulted in lower do-it-yourself
irrigation product sales. The company also discontinued certain low profit
margin Lawn Genie-Registered Trademark- irrigation products. Offsetting the
negative points was an increase in sales for walk power mowers, due mainly to
a favorable sales comparison to the previous spring, which was late and wet.
In fiscal 1998, Toro reduced the price of certain Toro-Registered Trademark-
brand walk power mowers. Management believes this strategy maintained market
share but did not increase market share as planned. Lawn-Boy-Registered
Trademark- also introduced its new DuraForce-TM- engine walk power mower,
which had a strong first year in the marketplace. Startup delays with the
DuraForce-TM- engine prevented Toro from fully capitalizing on the demand for
this low-emissions product. As part of the company's profit improvement plan,
the company introduced special marketing programs and reduced shipments of
certain consumer products in order to reduce consumer field inventories to
historically low levels.
International consumer sales were down slightly from fiscal 1997. The main
factor contributing to this decrease was lower Australian sales due to the
conversion of Australian denominated dollar sales into U.S. dollars at a
substantially lower exchange rate as a result of the currency movements in
fiscal 1998. Offsetting that factor were strong sales to the European market for
new diesel riding products introduced in fiscal 1998.
The company also believes that sales were lower as a result of a
continuing shift in consumer buying patterns throughout the industry from
brand specific purchases at dealer outlets to price and value conscious
purchases at hardware, home center, and mass retailers. Because the company
expects this trend to continue, the company announced that the
Toro-Registered Trademark- Recycler-Registered Trademark- walk power mower
will be sold in select home centers beginning in the spring of 1999. In
response to struggles of the consumer business in fiscal 1998, the company
plans to continue to take steps to reposition the business for a more
competitive and stronger performance in fiscal 1999 and beyond.
COMMERCIAL - Net sales of worldwide commercial products in fiscal 1998 were
$451.3 million compared to $344.6 million in fiscal 1997, a significant increase
of 31.0 percent. The increase was attributable to the addition of Exmark, new
product introductions in the landscape contractor market, and growth in the golf
course market. Despite strong competition, sales of equipment to golf courses
did well. International sales were down slightly due to weak sales in Asia,
which were partially offset by an increase in demand in the Canadian and
European market for golf course equipment and landscape contractor products. The
substantial sales increase of commercial products occurred despite aggressive
competition and Asian market weakness, and Toro believes it has maintained its
market leadership.
IRRIGATION - Net sales of worldwide irrigation products in fiscal 1998 were
$278.2 million compared to $248.5 million in fiscal 1997, an increase of 12.0
percent. The sales increase was driven by strong domestic golf irrigation
revenues, sales growth of worldwide agricultural irrigation products, and the
addition
13
<PAGE>
of sales from Drip In-Registered Trademark- agricultural micro-irrigation
products. Certain residential/commercial irrigation products rebounded well
during fiscal 1998, which also contributed to the strong sales increase.
International net sales increased from fiscal 1997 due to strong worldwide
agricultural irrigation and golf irrigation sales, except for the Asian
market.
FISCAL 1997 COMPARED WITH FISCAL 1996
In December 1996, the company acquired James Hardie Irrigation Group (Hardie)
from James Hardie Industries Limited of Australia (JHI Limited). Hardie was a
worldwide leader in production of irrigation systems for the residential and
commercial landscape markets, and the agricultural irrigation market.
Comparisons of fiscal 1997 to fiscal 1996 were significantly impacted by the
acquisition.
Worldwide net sales were $1,051.2 million in fiscal 1997 compared to $930.9
million in fiscal 1996, an increase of 12.9 percent. The following is a
discussion of sales by product lines:
CONSUMER - Net sales of worldwide consumer products were $458.1 million in
fiscal 1997 compared to $461.0 million in fiscal 1996, a decrease of 0.6
percent. Although retail demand for Toro-Registered Trademark- and
Lawn-Boy-Registered Trademark- walk power mowers increased slightly, sales to
dealers and distributors declined as their levels of field inventories were
managed down and they shifted their buying patterns to more closely reflect
retail demand. Sales of leaf blowers, Lawn-Boy-Registered Trademark- walk
power mowers, and electric trimmers to hardware, home center, and mass
retailers were very strong, partially offsetting the reduction in dealer and
distributor sales. This reflects a shift in consumer buying patterns from
brand specific purchases at dealer outlets to price and value conscious
purchases at hardware, home center, and mass retailers. Sales of
do-it-yourself irrigation did well in fiscal 1997. Consumer international
sales also increased primarily due to product penetration in newer markets
such as Eastern Europe.
COMMERCIAL - Net sales of worldwide commercial products were $344.6 million in
fiscal 1997 compared to $322.0 million in fiscal 1996, an increase of 7.0
percent. The increase in sales reflected the growth in the golf market as well
as the landscape contractor market. This was partially offset by reduced sales
for recycling equipment and commercial parts. Although competitors in the
commercial market aggressively pursued market share, the company believes it is
maintaining its leadership position. International sales were up 2.2 percent
although the strong U.S. dollar dampened growth in foreign golf projects,
especially in emerging markets.
IRRIGATION - Net sales of worldwide irrigation products in fiscal 1997 were
$248.5 million compared to $147.9 million in fiscal 1996, an increase of 68.0
percent. This increase was almost entirely attributable to the acquisition of
Hardie. Strong golf irrigation sales for the year were offset by sluggish sales
of residential/commercial irrigation products. International irrigation sales
were up 167.4 percent mainly due to the acquisition of Hardie. International
sales, without the incremental revenue from Hardie, were flat due principally to
the weakening of foreign currencies against the U.S. dollar. Many new golf
projects were postponed or cancelled as a result of weakened foreign economies.
GROSS PROFIT
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Gross profit was $384.3 million in fiscal 1998 compared to $388.0 million in
fiscal 1997, a decrease of 1.0 percent. As a percentage of net sales, gross
profit was 34.6 percent in fiscal 1998 compared to 36.9 percent in fiscal
1997. The decline was primarily due to manufacturing cost overruns related to
the poor execution of the production transfer from Mound, Minnesota to El
Paso, Texas, reduced sales of higher gross margin snowthrowers, and lower
pricing of Toro-Registered Trademark- brand walk power mowers due to
competitive pressures. For fiscal 1999, the company is focusing on cost
containment and supply chain management to partially offset the effects of
competitive pressures on gross profit margins.
FISCAL 1997 COMPARED WITH FISCAL 1996
Gross profit was $388.0 million in fiscal 1997 compared to $341.7 million in
fiscal 1996, an increase of 13.6 percent. As a percentage of net sales, gross
profit was 36.9 percent in fiscal 1997 compared to 36.7 percent in fiscal 1996.
The increase was due primarily to improved production efficiencies, partially
offset by the addition of Hardie products which carry somewhat lower gross
margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE (SG&A)
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
SG&A expenses were $345.6 million in fiscal 1998 compared to $313.1 million in
fiscal 1997, an increase of 10.4 percent. As a percentage of net sales, SG&A
increased to 31.1 percent from 29.8 percent in fiscal 1997. The additions of
Exmark and Drip In contributed $17.8 million of incremental SG&A expense during
fiscal 1998. Without Exmark and Drip In, SG&A increased 2.1 percent as a
percentage of net sales due to higher costs of administrative expenses related
to information services and higher warranty expense. The warranty expense
increase was attributable to a change in the product mix. Sales of products with
overall higher warranty occurrence rates increased as compared to the prior
year. Special warranty reserves for product modifications also contributed to
the increase in fiscal 1998.
FISCAL 1997 COMPARED WITH FISCAL 1996
SG&A expenses were $313.1 million in fiscal 1997 compared to $278.3 million in
fiscal 1996, an increase of 12.5 percent. As a percentage of net sales, SG&A
decreased slightly from fiscal 1996. Hardie accounted for $34.8 million of the
increase. Increases in sales and marketing, warranty, and research and
development expenses were completely offset by lower administrative expense,
after the impact of Hardie, due to cost containment efforts initiated in the
second half of fiscal 1997. SG&A expense for distributor/dealer financing costs
were slightly below fiscal 1996.
14
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RESTRUCTURING AND OTHER UNUSUAL EXPENSE
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Restructuring and other unusual expense was $15.0 million in fiscal 1998
compared to $2.6 million in fiscal 1997. The restructuring charge in fiscal 1998
consisted of $4.3 million for severance and asset write-down related to the
closure of two manufacturing facilities, and $1.4 million for other severance
costs. Other unusual expense consisted of $5.3 million representing an
impairment loss on the expected sale of the recycling equipment business and
portions of the professional fertilizer business, and $4.0 million for special
consumer marketing programs. These programs consist of rebates and co-op
advertising credits designed to reduce certain consumer field inventories to
historically low levels by providing incentives to increase retail sales in
preparation for potential changes in warehousing and transportation in fiscal
1999.
FISCAL 1997 COMPARED WITH FISCAL 1996
The $2.6 million restructuring and other unusual expense in fiscal 1997 related
to the closing of a manufacturing facility in Mound, Minnesota and relocation of
those operations to other company facilities throughout the U.S. The closure of
the manufacturing facilities is part of a long-term corporate strategy to reduce
costs.
INTEREST EXPENSE
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Interest expense was $25.4 million in fiscal 1998 compared to $19.9 million in
fiscal 1997, an increase of $5.5 million. Higher average working capital levels,
as a result of higher inventory, and incremental cash and debt required for the
acquisitions of Exmark and Drip In, contributed to the increase in interest
expense.
FISCAL 1997 COMPARED WITH FISCAL 1996
Interest expense was $19.9 million in fiscal 1997 compared to $13.5 million in
fiscal 1996, an increase of $6.4 million. The Hardie acquisition debt accounted
for approximately $7.1 million of interest expense. This was offset by
reductions in previously outstanding debt and related interest expense as cash
generated by operations was used to pay off debt. In addition, the company
redeemed higher rate debt by replacing 11% Debentures with lower rate debt
ranging from 7.125 percent to 7.80 percent during fiscal 1997.
OTHER INCOME, NET
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Other income, net, was $8.5 million in fiscal 1998 compared to $7.9 million in
fiscal 1997. The increase was mainly attributed to a favorable settlement of a
trade secret lawsuit.
FISCAL 1997 COMPARED WITH FISCAL 1996
Other income, net, totaled $7.9 million in fiscal 1997 compared to $10.3 million
in fiscal 1996. The reduction was primarily attributable to a favorable patent
infringement lawsuit settlement in fiscal 1996.
PROVISION FOR TAXES
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
The effective tax rate for fiscal 1998 and fiscal 1997 was 39.5 percent. The
company has determined that it is not necessary to establish a valuation reserve
for deferred income tax benefit because it believes that the net deferred income
tax asset of $42.8 million will be principally realized through carrybacks to
taxable income in prior years, future reversals of existing taxable temporary
differences and, to a lesser extent, future taxable income.
FISCAL 1997 COMPARED WITH FISCAL 1996
The effective tax rate for fiscal 1997 and fiscal 1996 was 39.5 percent.
NET EARNINGS
- --------------------------------------------------------------------------------
FISCAL 1998 COMPARED WITH FISCAL 1997
Net earnings were $4.1 million compared to $34.8 million in fiscal 1997 after
the effect of an extraordinary loss of $1.7 million on the early retirement of
debt in fiscal 1997. Dilutive earnings per share were $0.31 in fiscal 1998
compared to $2.80 after the extraordinary loss of $0.13 in fiscal 1997. Earnings
were down sharply from fiscal 1997 due to the significant decrease in consumer
sales, restructuring and other unusual expense of $15.0 million, and lower
operating margins due to manufacturing inefficiencies experienced in the
transition to the El Paso, Texas, facility as described previously.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net earnings were $34.8 million after the effect of an extraordinary loss of
$1.7 million due to the early retirement of debt in fiscal 1997 compared to
$36.4 million in fiscal 1996. Net earnings before the extraordinary loss were
$36.5 million, a slight increase from fiscal 1996 net earnings. Dilutive
earnings per share before the effect of the extraordinary loss in fiscal 1997
were $2.93, up slightly from $2.90 of dilutive earnings per share in fiscal
1996.
Although Hardie contributed most of the sales increase in fiscal 1997,
Hardie resulted in a loss of $0.08 per dilutive share. Beginning in fiscal 1998,
Hardier operations were integrated into the company's irrigation business.
FINANCIAL POSITION
WORKING CAPITAL
- --------------------------------------------------------------------------------
Working capital at October 31, 1998 was $221.2 million compared to $234.2
million at October 31, 1997, a decrease of 5.5 percent. The current ratio for
fiscal 1998 was 1.86 compared to 1.98 in fiscal 1997. Working capital as a
percent of sales was 19.9 percent in fiscal 1998 and 22.3 percent in fiscal
1997.
The decrease in working capital was due primarily to lower levels of
accounts receivable, and higher accounts payable and accrued liability balances,
offset by higher levels of inventory. The decrease in accounts receivable was
mainly attributable to the lower levels of consumer sales. The increase in
inventory and accounts payable was due to the acquisitions of Exmark and
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<PAGE>
Drip In, along with increased inventory balances for new products introduced
in fiscal 1998 in the landscape contractor business. The increase in accrued
liabilities was due to increased accruals for warranty, and restructuring and
other unusual expense.
LONG TERM ASSETS
- --------------------------------------------------------------------------------
Long-term assets at October 31, 1998 were $244.6 million compared to $189.6
million at October 31, 1997, an increase of $55.0 million. Net property, plant,
and equipment increased $10.3 million due primarily to the acquisition of Exmark
and Drip In assets. Goodwill and other assets increased $42.1 million over
fiscal 1997 mainly as a result of the goodwill representing the excess purchase
price of Exmark and Drip In over the fair value of the net assets acquired.
CAPITAL STRUCTURE
- --------------------------------------------------------------------------------
Long-term debt at October 31, 1998 was $197.4 million compared to $178.0 million
at October 31, 1997, an increase of $19.4 million. The increase in long-term
debt was a result of the issuance of additional debt and debt assumed in
connection with the acquisitions of Exmark and Drip In. The total debt to
capital ratio was 46.4 percent in fiscal 1998 compared to 47.6 percent in fiscal
1997. The decrease in debt to capital ratio was due to the reduction of working
capital as compared to fiscal 1997 as well as the increase in equity due to
stock issued for the Exmark acquisition.
Total capitalization at October 31, 1998 consisted of $197.4 million of
long-term debt, $31.0 million of short-term borrowings, and $263.4 million of
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
CASH FLOW - Cash provided by operating activities decreased by $14.8 million
from fiscal 1997 due primarily to the decrease in net earnings. The increase in
inventory also contributed to the decline. However, lower levels of accounts
receivable and increased levels of accounts payable and accrued expenses
provided cash from operating activities.
Cash used in investing activities decreased significantly in fiscal 1998
from fiscal 1997 as the purchase price net of cash acquired for Hardie in fiscal
1997 of $118.0 million exceeded the net cash purchase price for Exmark and Drip
In, which was $17.2 million. In addition, property, plant, and equipment
expenditures were down comparatively because a majority of the corporate
facility expansion expenditures were incurred in fiscal 1997.
Cash provided by financing activities decreased primarily due to lower
borrowing needs in fiscal 1998 as compared to fiscal 1997 when debt was used
to finance the Hardie acquisition in fiscal 1997.
Management believes that the combination of funds available through its
existing financing arrangements, coupled with forecasted cash flows, will
provide the necessary capital resources for the company's anticipated working
capital, capital additions, acquisitions, and potential stock repurchases.
CREDIT LINES AND OTHER CAPITAL RESOURCES - The company's seasonal U.S. working
capital requirements are funded with $237.0 million of committed and uncommitted
unsecured bank credit lines. The company also has bankers' acceptance agreements
under which an additional $40.0 million of credit lines are available. Average
borrowings under these lines were $143.2 million in fiscal 1998 and $149.6
million in fiscal 1997. The decrease in the average borrowings was mainly the
result of higher levels of average short-term borrowings in fiscal 1997 due to
the acquisition of Hardie in December 1996, which was financed with short-term
debt until June 1997. In addition, in fiscal 1998, the company's non-U.S.
operations maintained unsecured short-term lines of credit of $6.9 million. At
October 31, 1998, the company had $252.9 million of unutilized availability
under these credit lines.
The company's business is seasonal, with accounts receivable balances
historically increasing between January and April as a result of extended
payment terms made available to the company's customers, and decreasing between
May and August when payments become due. The company's peak borrowing usually
occurs between February and May. The seasonal working capital requirements are
financed primarily with short-term financing arrangements described above.
ACQUISITION FINANCING - The acquisitions of Exmark and Drip In were financed
through the issuance of shares of the company's common stock, issuance of
long-term debt to sellers, and short-term borrowings under the company's current
facilities. See Acquisitions and Strategic Alliances included in this MD&A, and
Business Acquisitions and Divestitures Footnote 2 in the Notes to the
Consolidated Financial Statements.
INFLATION
- --------------------------------------------------------------------------------
The company is subject to the effects of changing prices. However, the company
is not currently experiencing any material effects of rising costs. The company
attempts to deal with inflationary pressures through a combination of internal
cost reduction efforts and selected increases in selling prices of certain
products.
ACQUISITIONS AND STRATEGIC ALLIANCES
- --------------------------------------------------------------------------------
In February 1998, the company completed the acquisition of Drip In. Drip In is a
manufacturer of agricultural micro-irrigation products headquartered in Madera,
California, which employs approximately 60 people.
In November 1997, the company acquired Exmark, a leading manufacturer of
equipment for the professional landscape contractor industry. Exmark is
headquartered in Beatrice, Nebraska and produces mid-sized walk power mowers and
zero-turning radius riding mowers for professional contractors. Exmark employs
approximately 280 people in a 164,000 square foot facility.
In September 1997, the company announced that it had acquired the
manufacturing, sales, and distribution rights to
16
<PAGE>
Dingo-Registered Trademark- under which the company manufactures and sells
Dingo-Registered Trademark- landscape products under the Toro-Registered
Trademark- Sitework-TM- Systems brand name for the U.S. markets.
In December 1996, the company acquired Hardie from JHI Limited for $118.0
million in cash. The price was subsequently reduced by approximately $10 million
based on estimated equity used as the closing date purchase price. In addition,
the company entered into an arbitration process related to valuation and
accounting issues used in determining the purchase price of Hardie. This process
was completed on April 20, 1998 and resulted in an additional $1.8 million
reduction of the purchase price.
YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
During fiscal 1998, Toro continued its company-wide program to prepare the
company's computer systems for year 2000 compliance. The year 2000 issue relates
to computer systems that use the last two digits rather than all four to define
a year and whether such systems will properly and accurately process information
when the year changes to 2000. Incomplete or untimely resolution of year 2000
issues by the company, by its important suppliers and customers, by public
utility providers, or by governmental entities could have a material adverse
impact on the company's business, operations, or financial condition.
STATE OF READINESS - The company is nearing completion of its project to replace
core-business information systems with an Enterprise Resource Planning (ERP)
software package, which the company has been informed is year 2000 compliant.
The package includes software to support the company's facilities and business
units with the exception of two domestic subsidiaries and the company's European
facilities, which are believed to be year 2000 compliant. The ERP is expected to
be in place by mid-1999.
Toro has assessed its products and believes them to be year 2000 compliant
with the exception of six irrigation control systems. After testing is
completed, Toro will distribute year 2000 remediations by mid-1999.
Toro's year 2000 issues list, based on the company's initial assessment,
has over three hundred software and hardware items, the majority of which are
single-user, departmental or plant systems. The company continues to request
year 2000 compliance information from its software and hardware vendors and is
in the process of prioritizing business-critical systems that require testing.
The company also plans to test its ERP, payroll, and Product Data Management
(PDM) systems, even though the vendors claim the systems are year 2000
compliant.
Communications have been sent to Toro's customers (dealers and
distributors) informing them of the company's efforts and asking them to ensure
that their business operations will not be adversely impacted by year 2000
issues. Surveys have also been sent to the company's suppliers requesting
information on their year 2000 efforts. The company has also been communicating
with certain home centers and mass retailers about their readiness for the year
2000.
COSTS - Year 2000 costs through October 31, 1998 were approximately $1.3 million
and have been expensed as incurred. These costs include contractor support and
ERP implementation for the company's recently-acquired businesses. Costs
remaining that have been identified are estimated to be less than $2.0 million,
which include expenses for contract support, telephone system upgrades, software
modifications for irrigation systems, and business unit system upgrades. The
estimated cost of year 2000 modifications is less than 10 percent of the
company's information system budget. No significant information system projects
have been deferred to accommodate the year 2000 issues.
RISKS - The company is currently undergoing the testing of its core-business
operating and financial systems and as such, the company remains uncertain of
the risks the year 2000 will have on its business operations. Another area of
risk appears to be whether the company's business partners, including dealers,
distributors, home center and mass retailers, banks, and suppliers will be
compliant with the year 2000. The scope of Toro's year 2000 project does not
include ensuring public utility and governmental agency's readiness for the year
2000. Toro has little to no control over these institutions, thereby introducing
some level of risk in the company's ability to continue normal operations
through the turn of the century.
Testing remains to be performed to validate assumptions, which is planned
to continue through mid-1999. The company believes this timetable should allow
enough time to fix or replace any business-critical problems discovered during
the testing phase.
CONTINGENCY PLANS - The company's contingency plans will evolve as the testing
phase of the business-critical systems and technologies is completed. The
company is in the stage of defining a Business Resumption Plan, which will
include documented manual processes for critical business functions that could
be invoked for any type of business interruption, including any year 2000
issues.
The company is also planning on performing complete, system-wide backups
on December 30 and 31, 1999 and is also discussing the possibility of
shutting down all systems so they are not actually running at the turn of the
century. Key information system personnel will also be on-site and on-call
for the month of January 2000 to deal with any problems that may occur.
With respect to non-compliant irrigation systems that have been identified,
the company intends to develop software modifications to correct the year 2000
problem and complete testing by mid-1999. The worst case scenario to make the
irrigation systems year 2000 compliant would be to replace the Toro manufactured
hardware and software systems, at a cost of approximately $2.0 million. However,
the company believes a simple software modification or a minor upgrade will make
the units compliant.
17
<PAGE>
CURRENCY RISK MANAGEMENT
- --------------------------------------------------------------------------------
The company is exposed to foreign currency exchange risk arising from
transactions that are entered into during the normal course of business. To
mitigate the risk from foreign currency exchange rate fluctuations, the company
will generally enter into forward currency exchange contracts for the purchase
or sale of a currency. Decisions on whether to use forward currency exchange
contracts to hedge transactions exposed to foreign exchange rate changes are
made based on the amount of those exposures, by currency, and an assessment of
the near-term market value for each currency. These instruments used as hedges
are managed to reduce the risk associated with the exposure being hedged and are
designated as a hedge at the inception of the contract. Accordingly, changes in
market values of these hedge instruments are highly correlated with changes in
market values of underlying hedged items both at inception of the hedge and over
the life of the hedge contract. Gains and losses on foreign currency contracts
are recorded to the Consolidated Statements of Earnings. See Financial
Instruments Footnote 14 in the Notes to the Consolidated Financial Statements
for more detail.
EURO CURRENCY
- --------------------------------------------------------------------------------
Beginning in January 1999, the European Monetary Union (EMU) will enter into a
three-year transition phase during which a common currency called the euro will
be introduced in participating countries. Initially, this new currency will be
used for financial transactions, and progressively, it will replace the old
national currencies that will be withdrawn by July 2002. The transition to the
euro currency will involve changing budgetary, accounting, and fiscal systems in
companies and public administrations, as well as simultaneous handling of
parallel currencies and conversion of legacy data. Uncertainty exists as to the
effects the conversion to euro currency will have on the marketplace. One of the
largest unknowns for the company is the potential equalization of prices to
customers among countries and the resulting competitive impact on our
distributor partner sales and Toro sales, and market support given to its
distribution partners in those countries. The euro will make price differences
on goods in the various countries transparent to the consumer and make
comparisons much easier. The company at this time cannot estimate the effects of
the above items on its operations, cash flows, or financial conditions in future
periods.
The company continued its program to evaluate whether the company's
computer systems and programs will experience operational problems when the
euro is fully implemented. The company's European subsidiaries' financial
systems have completed initial testing and no problems were discovered for
their ability to function using the euro. These subsidiaries began disclosing
the euro value on each customer's invoice in January 1999. The company plans
to continue testing its computer systems in fiscal 1999 for additional euro
functionality. The risk is thought to be minimal as billing and banking
functions are already being performed in multiple currencies within these
entities. Further, the company is monitoring the rules and regulations as
they become known in order to make any changes to its computer programs that
are deemed necessary to comply. Although the company believes that it will be
able to accommodate any required euro currency changes in its computer
programs, there can be no assurance that once the final rules and regulations
are completed that the company's computer programs will contain all of the
necessary changes or meet all of the euro currency requirements. Based on its
evaluation to date, management currently believes that, while the company
will incur internal and external costs to adjust to the euro, such costs are
not expected to have a material impact on operations, cash flows or the
financial condition of the company and its subsidiaries, taken as a whole, in
future periods.
MARKET CONDITIONS AND OUTLOOK
- --------------------------------------------------------------------------------
Toro expects overall demand for its products to be good in fiscal 1999. New
products, new markets, and acquisitions over the past two years have helped Toro
maintain its leadership across many professional markets. Management believes
Toro is well positioned in the marketplace.
The professional markets in which Toro operates are generally healthy and
are expected to grow. The golf course industry continues to expand with new
course openings scheduled in the U.S. and abroad, except for Asia. Toro
continues to be the provider of choice for premium golf venues, such as the 1999
U.S. Open at Pinehurst, North Carolina, the 1999 Ryder Cup at The Country Club
in Brookline, Massachusetts, and the 2000 British Open at Old St. Andrews in
Scotland. Toro has also been named an official equipment and irrigation provider
for The First Tee, a project aimed at expanding opportunities for youth in the
game of golf. The sports market is also growing, driven by gender equity at the
collegiate and high school level, and a demand for better quality and safer turf
fields. Toro is expanding its popular Workman-Registered Trademark- vehicle into
the industrial sector, which is expected to become another market niche for this
product.
The landscaping industry is one of the fastest growing professional
markets, fueled by demographic and environmental trends. Professional and
residential customers continue to desire beautiful and eco-balanced landscapes,
and increasingly they demand contractor services to provide it. Toro is well
positioned in this market with equipment and irrigation products. Toro's dual
branding strategy of Exmark-Registered Trademark- and Toro-Registered
Trademark-, widely believed to be the top two premium brands in this market
based on size, number, quality of products, and distribution channels, provides
a strong market share. Toro's multi-branded irrigation strategy of
Toro-Registered Trademark-, Irritrol-Registered Trademark-, and Lawn
Genie-Registered Trademark-, likewise gives Toro a preeminent position, with
diversity in product lines and distribution, for a balanced approach to the
market.
The agricultural irrigation market has many opportunities for Toro as the
need grows for more arable land to feed the world's expanding population.
Although new to the company, Toro Agricultural Irrigation, and its recent
acquisition, Drip In, have operated in this industry for many years and bring a
growth business that is positioned to diversify Toro's overall professional
irrigation business.
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<PAGE>
Toro's consumer business struggled in fiscal 1998, but the profit
improvement plan has reduced costs and increased the likelihood for
profitability for the consumer business in fiscal 1999. An expanded
distribution strategy, providing certain Toro-Registered Trademark- brand
lawn mowers to 1,600 select home centers in fiscal 1999, is expected to
provide added sales momentum for the Toro-Registered Trademark- brand. Demand
for Lawn-Boy's-Registered Trademark- new DuraForce-TM- low-emission engine
lawn mowers, was strong in fiscal 1998, and is expected to continue into
fiscal 1999. Expanded distribution of Toro-Registered Trademark- electric
products is expected to add incremental sales to that product line. Another
environmentally sensitive product, a quieter version of Toro's powerful
electric leaf blower vacuum, was introduced in late fiscal 1998 and is
expected to have a positive market impact in fiscal 1999. Manufacturing
improvements at Toro's El Paso, Texas, plant are expected to provide better
margins than experienced in fiscal 1998. Toro's snowthrower business is
expected to be modest in fiscal 1999. Toro has planned conservatively for its
snowthrower business and will be utilizing a promotional program that ties
price discounts to snowfall levels. This promotional program is substantially
insured with a third party.
The international sector remains unpredictable entering the new year. Sales
to the Asian market will likely be down, but Asia accounted for less than 2
percent of overall revenues in fiscal 1998 and the expected decline is not
expected to have a material impact on the company's operations. The Latin
American market is also expected to be soft in fiscal 1999, but also accounts
for a small part of overall sales. The European, Canadian, and Australian
markets expect good performance in fiscal 1999, which should partially offset
struggling Asian and Latin American markets.
Overall, Toro is expecting a good year in fiscal 1999, while keeping a
cautionary eye on the weather, competition, and the world economic scene.
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This annual report contains not only historical information, but also
forward-looking statements regarding expectations for future company
performance. Statements that are not historical are forward-looking. When
used by or on behalf of the company, the words "expect", "anticipate",
"believe", "intend", and similar expressions generally identify
forward-looking statements.
Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a global
market, as well as matters specific to the company and the markets it serves.
Particular risks and uncertainties facing the company at the present include
political and economic uncertainty throughout the world; whether the announced
profit improvement plan will be successful; increased competition in the
company's businesses from competitors that have greater financial resources; the
cost of closing certain plants and selling certain business units; the success
of new marketing programs; continued deterioration in the company's markets in
Asia and softening in other international markets; the strong dollar which
increases the cost of the company's products in foreign markets resulting in
cancellation of planned projects and limiting the company's ability to increase
prices; competitive implications and price transparencies related to the euro
conversion; changing buying patterns affecting the company's consumer business,
including but not limited to a trend away from purchases at dealer outlets to
price and value conscious purchases at hardware, home center, and mass
retailers; changes in distributor ownership; the company's expansion into
selected home center markets; the company's ability to integrate business
acquisitions and to manage alliances successfully; the addition of outside
providers for warehousing and transportation services; the company's ability to
develop and manufacture new and existing products profitably; market acceptance
of existing and new products; changes in distributors, dealers, home center or
mass retailers' purchasing practices; the company's ability to rationalize its
product lines and plant configurations; the ability to eliminate cost overruns
affecting selected consumer and irrigation products at the El Paso, Texas
facility; the company's ability to maintain good relations with its union
employees; and the ability to retain and hire quality employees.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions, and
the economy in general in both foreign and domestic markets; weather conditions
affecting demand, including warm winters and wet spring and summer weather;
slower growth in the company's markets; financial market changes including
increases in interest rates and fluctuations in foreign exchange rates;
unanticipated problems or costs associated with the transition of European
currencies to the common euro currency; a slowing in housing starts or new golf
course starts; inability to raise prices of products due to market conditions;
changes in market demographics; actions of competitors; unanticipated problems
or costs associated with accommodation of the year 2000 in computer applications
or products; the inability of the company's suppliers, customers, creditors,
government agencies, public utility providers, and financial service
organizations to implement computer applications accommodating the year 2000;
seasonal factors in the company's industry; unforeseen litigation; government
action, including budget levels, regulation and legislation, primarily
legislation relating to the environment, commerce, infrastructure spending,
health, and safety; and availability of materials.
The company wishes to caution readers not to place undo reliance on any
forward-looking statement and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements and from historical
results, due to the risks and uncertainties described above, as well as others
not now anticipated. The foregoing statements are not exclusive and further
information concerning the company and its businesses, including factors that
potentially could materially affect the company's financial results, is included
in the company's filings with the Securities and Exchange Commission.
19
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SELECTED FINANCIAL DATA The Toro Company
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
3 Months
(Dollars and shares in Years Ended Ended Years Ended
thousands, except per share --------------------------------------------------------------------------------------------
data, number of employees and October 31 October 31 October 31 October 31 July 31 July 31
stockholders) 1998 (1) 1997 (2) 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales $1,110,434 $1,051,204 $930,909 $192,278 $932,853 $794,341
Net sales growth from
prior year(5) 5.6% 12.9% (0.2)% - 17.4% 16.1%
Gross profit percentage 34.6% 36.9% 36.7% 37.3% 35.9% 36.2%
Earnings from operations(3) $ 23,716 $ 72,347 $ 63,439 $ 6,655 $ 64,821 $ 42,582
Interest expense 25,428 19,900 13,590 2,532 11,902 13,562
Net earnings, before
extraordinary loss 4,090 36,508 36,409 3,997 36,667 22,230
Percentage of net sales 0.4% 3.5% 3.9% 2.1% 3.9% 2.8%
Net earnings(4) $ 4,090 $ 34,845 $ 36,409 $ 3,997 $ 36,667 $ 22,230
Basic earnings per share 0.32 2.88 3.00 0.33 2.92 1.78
Dilutive earnings per share(4) 0.31 2.80 2.90 0.32 2.81 1.71
Return on average common
stockholders' equity 1.6% 15.3% 18.0% 2.1% 20.7% 14.2%
SUMMARY OF FINANCIAL POSITION:
Current assets $ 479,437 $ 472,044 $405,001 $386,259 $381,610 $364,495
Current liabilities 258,210 237,833 207,857 221,173 212,659 188,712
Working capital 221,227 234,211 197,144 165,086 168,951 175,783
Total assets 723,991 661,634 496,877 472,653 468,315 443,639
Long-term debt 197,424 178,015 53,365 68,699 81,025 101,325
Stockholders' equity 263,399 241,163 213,567 190,892 185,471 168,652
Debt to capitalization ratio 46.4% 47.6% 30.7% 36.6% 35.8% 37.5%
OTHER STATISTICAL DATA:
Capital expenditures $ 33,893 $ 37,023 $ 21,389 $ 3,302 $ 28,162 $ 18,173
Depreciation and amortization
expense 38,240 30,878 18,170 3,590 17,240 18,839
Book value per common share 20.63 19.79 17.75 15.69 15.40 13.43
Dividends per common share .48 .48 .48 .12 .48 .48
Number of common shares
outstanding 12,770 12,189 12,032 12,168 12,040 12,561
Number of common stockholders 6,364 6,560 6,841 7,243 7,347 7,541
Market price range-
High $ 46 5/16 $ 43 3/4 $ 36 1/4 $ 32 1/4 $ 30 3/8 $ 30 1/2
Low 16 1/2 31 1/2 28 3/8 28 1/8 21 5/8 19 3/4
Average number of employees 4,695 4,309 3,610 3,638 3,626 3,434
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, the dates of acquisition.
(2) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(3) 1998 and 1997 earnings from operations includes restructuring and other
unusual expense of $15.0 million and $2.6 million, respectively.
(4) 1997 net earnings and earnings per share data includes the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share.
(5) Sales growth from prior year for October 31, 1996 was compared to the year
ended July 31, 1995.
20
<PAGE>
REPORT OF MANAGEMENT The Toro Company
The Stockholders and Board of Directors
The Toro Company:
Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been prepared
in accordance with generally accepted accounting principles. Where necessary,
the financial statements reflect estimates based on management judgement.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, transactions are
appropriately authorized and included in the financial records in all material
aspects, and that policies and procedures are implemented by qualified
personnel. This system of financial controls and procedures is reviewed,
modified, and improved as changes occur in business conditions and operations,
and as a result of suggestions from independent auditors.
Our independent auditors, KPMG Peat Marwick LLP, in their audit of The Toro
Company's consolidated financial statements, considered the internal control
structure of the company to gain a basic understanding of the accounting system
in order to design an effective and efficient audit approach, not for the
purpose of providing assurance on the system of internal control.
The Audit Committee, comprised of members of the Board of Directors who are
not employees of the company, meets periodically with the independent auditors
and management of the company to monitor the functioning of the accounting
control systems and discuss auditing and financial reporting matters. The Audit
Committee recommends the selection of the independent auditors, who are then
appointed by the board of directors, subject to ratification by the
shareholders.
The independent auditors conduct an independent audit of the consolidated
financial statements.
/s/ Kendrick B. Melrose
- ------------------------
Kendrick B. Melrose
Chairman of the Board and Chief Executive Officer
/s/ Stephen P. Wolfe
- ------------------------
Stephen P. Wolfe
Vice President Finance, Treasurer and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Toro Company:
We have audited the accompanying consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of earnings and cash flows for each of the three years
in the period ended October 31, 1998. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Toro
Company and subsidiaries as of October 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 11, 1998
21
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS The Toro Company
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data) Years ended October 31 1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $1,110,434 $1,051,204 $930,909
Cost of sales 726,118 663,167 589,186
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 384,316 388,037 341,723
Selling, general, and administrative expense 345,558 313,090 278,284
Restructuring and other unusual expense 15,042 2,600 -
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations 23,716 72,347 63,439
Interest expense (25,428) (19,900) (13,590)
Other income, net 8,473 7,897 10,331
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary loss 6,761 60,344 60,180
Provision for income taxes 2,671 23,836 23,771
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary loss 4,090 36,508 36,409
Extraordinary loss, net of income tax benefit of $1,087 - 1,663 -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,090 $ 34,845 $ 36,409
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock
before extraordinary loss $ 0.32 $ 3.02 $ 3.00
Extraordinary loss per share, net of income tax benefit - 0.14 -
- -----------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock $ 0.32 $ 2.88 $ 3.00
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 12,794 12,095 12,141
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock
before extraordinary loss $ 0.31 $ 2.93 $ 2.90
Extraordinary loss per share, net of income tax benefit - 0.13 -
- -----------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock $ 0.31 $ 2.80 $ 2.90
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and assumed
conversion shares outstanding 13,198 12,466 12,555
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
22
<PAGE>
CONSOLIDATED BALANCE SHEETS The Toro Company
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts) October 31 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 90 $ 8
Receivables:
Customers 246,504 255,318
Other 4,246 13,648
- --------------------------------------------------------------------------------------
Subtotal 250,750 268,966
Less allowance for doubtful accounts 9,324 9,832
- --------------------------------------------------------------------------------------
Total receivables 241,426 259,134
Inventories, net 184,306 160,122
Prepaid expenses and other current assets 14,618 10,454
Deferred income taxes 38,997 42,326
- --------------------------------------------------------------------------------------
Total current assets 479,437 472,044
- --------------------------------------------------------------------------------------
Property, plant, and equipment:
Land and land improvements 12,130 9,334
Buildings and leasehold improvements 85,392 67,627
Equipment 233,017 220,880
- --------------------------------------------------------------------------------------
Subtotal 330,539 297,841
Less accumulated depreciation 203,402 180,989
- --------------------------------------------------------------------------------------
Total property, plant and equipment 127,137 116,852
- --------------------------------------------------------------------------------------
Deferred income taxes 3,763 1,182
Goodwill and other assets 113,654 71,556
- --------------------------------------------------------------------------------------
Total assets $723,991 $661,634
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 580 $ 365
Short-term borrowings 31,000 41,000
Accounts payable 65,273 58,397
Accrued warranties 46,344 40,792
Accrued marketing programs 28,946 22,691
Accrued compensation and benefit costs 36,344 32,552
Other accrued liabilities 49,723 42,036
- --------------------------------------------------------------------------------------
Total current liabilities 258,210 237,833
- --------------------------------------------------------------------------------------
Long-term debt, less current portion 196,844 177,650
Other long-term liabilities 5,538 4,988
Stockholders' equity:
Stock, par value $1.00, authorized 35,000,000 shares;
issued and outstanding 12,769,560 shares in 1998
(net of 738,495 treasury shares) and 12,189,244
shares in 1997 (net of 720,760 treasury shares) 12,770 12,189
Additional paid-in capital 56,546 31,371
Retained earnings 200,609 202,681
Foreign currency translation adjustment (6,526) (5,078)
- --------------------------------------------------------------------------------------
Total stockholders' equity 263,399 241,163
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $723,991 $661,634
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS The Toro Company
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Years ended October 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,090 $ 34,845 $ 36,409
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt - 1,663 -
Provision for depreciation and amortization 38,240 30,878 18,170
Loss (gain) on disposal of property, plant, and equipment 789 573 (260)
Change in deferred income taxes 1,229 2,053 784
Tax benefits related to employee stock option transactions 491 2,611 1,490
Changes in operating assets and liabilities:
Net receivables 26,391 15,067 (40,821)
Inventories (12,755) 1,353 15,574
Prepaid expenses and other current assets (3,629) (6,595) (1,131)
Accounts payable and accrued expenses 14,248 1,425 2,218
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 69,094 83,873 32,433
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (33,893) (37,023) (21,389)
Proceeds from disposal of property, plant, and equipment 3,956 1,163 543
Increase in other assets (929) (12,784) (857)
Acquisition of James Hardie Irrigation, net of cash acquired - (118,030) -
Other acquisitions, net of cash acquired (17,173) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (48,039) (166,674) (21,703)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowing (10,000) (2,627) (550)
Proceeds from issuance of long-term debt - 175,000 -
Repayments of long-term debt (3,808) (50,350) (15,334)
Payments of debt issue costs and prepayment penalty - (5,770) -
Decrease in other long-term liabilities (50) - -
Net payments for termination of interest rate swap agreements - (23,650) -
Proceeds from interest rate swap agreement - - 12,742
Proceeds from exercise of stock options 2,219 8,407 4,627
Purchases of common stock (1,724) (7,952) (13,339)
Dividends on common stock (6,162) (5,794) (5,834)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (19,525) 87,264 (17,688)
- -------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (1,448) (4,521) (678)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 82 (58) (7,636)
Cash and cash equivalents at beginning of the fiscal year 8 66 7,702
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the fiscal year $ 90 $ 8 $ 66
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for:
Interest $ 24,363 $ 16,829 $ 15,335
Income taxes 3,345 25,459 20,447
Stock issued in connection with an acquisition 24,770 - -
Debt issued in connection with an acquisition 15,761 - -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Toro Company
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
- --------------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Toro Company and all wholly owned and majority-owned domestic and foreign
subsidiaries (the company). The company records its investment in each
unconsolidated affiliated company (20 to 50 percent ownership) at its related
equity in the net assets of such affiliate and other investments (less than 20
percent ownership) are recorded at cost. All material intercompany accounts and
transactions have been eliminated from the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a maturity of
3 months or less to be cash equivalents. At October 31, 1998 and 1997, the
company had $12,951,000 and $4,598,000, respectively, included in trade payables
that represented the reclassification of outstanding checks in excess of related
bank balances.
INVENTORIES
The majority of all inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Inventories at October 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and work in process $ 97,248 $ 85,020
Finished goods 128,747 117,699
- --------------------------------------------------------------------------------
225,995 202,719
Less LIFO and other reserves 41,689 42,597
- --------------------------------------------------------------------------------
Total $184,306 $160,122
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
PROPERTY AND DEPRECIATION
Property, plant, and equipment are carried at cost. The company provides for
depreciation of plant and equipment utilizing the straight-line method over the
estimated useful lives of the assets. Buildings, including leasehold
improvements, are generally depreciated over 10 to 45 years, and equipment over
3 to 7 years. Tooling costs are generally amortized over 3 to 5 years using the
units of production method. Expenditures for major renewals and betterments,
which substantially increase the useful lives of existing assets, are
capitalized, and maintenance and repairs are charged to operating expenses as
incurred. Software is expensed at the time of purchase. Interest is capitalized
during the construction period for significant capital projects. During the
years ended October 31, 1998 and 1997, the company capitalized $447,000 and
$500,000 of interest, respectively.
GOODWILL AND OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 3 to 20
years. Goodwill totaled $91,433,000 and $53,667,000 at October 31, 1998 and
1997, respectively, net of accumulated amortization of $19,368,000 at October
31, 1998 and $13,744,000 at October 31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The company reviews long-lived assets, including identifiable intangibles and
associated goodwill, for impairment when events or changes in circumstances
warrant such a review. An asset is deemed impaired and written down to its fair
value if expected associated undiscounted future cash flows are less than its
carrying value.
ACCRUED WARRANTIES
The company provides an accrual for estimated future warranty costs based upon
the historical relationship of warranty costs to sales by product line.
DERIVATIVES
Derivative financial instruments are used by the company to manage foreign
exchange risks. These financial exposures are managed in accordance with the
company's policies and procedures. The company does not hold or issue
derivative financial instruments for trading purposes.
Foreign exchange contracts are accounted for as hedges to the extent they
are designated as, and are effective as, hedges of firm foreign currency
commitments. Foreign currency exchange contract gains and losses are included in
other income, net on the Consolidated Statements of Earnings.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency of the company's foreign operations is the applicable
local currency. The functional currency is translated into U.S. dollars for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. The translation adjustments are deferred as a
separate component of stockholders' equity. Gains or losses resulting from
transactions denominated in foreign currencies are included in other income,
net.
25
<PAGE>
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to measure employee stock compensation plans based on the fair value method
of accounting or to continue to apply APB No. 25, "Accounting for Stock
Issued to Employees," and provide pro forma footnote disclosures under the
fair value method in SFAS No. 123. The company continues to apply the
principals of APB No. 25 and has provided pro forma fair value disclosures in
Note 9.
ACCOUNTING FOR REVENUES
Revenue is recognized at the time products are shipped to customers.
ADVERTISING
General advertising expenditures and the related production are expensed in the
period in which costs are incurred or the first time advertising takes place.
Cooperative advertising represents expenditures for advertising costs that the
company reimburses customers for some or all of their advertising costs. These
obligations are accrued and expensed when the related revenues are recognized in
accordance with the program established for the various product lines.
Advertising costs were $36,055,000, $35,220,000, and $32,247,000 for the fiscal
years ended 1998, 1997, and 1996, respectively.
COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY
As part of dealer agreements, the company enters into certain inventory
repurchase agreements with third party financing companies. The company records
sales when product is shipped to distributors, and the distributors then sell
product to dealers. The company has only repurchased immaterial amounts of
inventory from third party financing companies over the last three years. Any
expected inventory that would need to be repurchased has been provided for in
the allowance for doubtful accounts. The company was contingently liable to
repurchase $20,272,000 at October 31, 1998 and $9,438,000 at October 31, 1997 of
inventory relating to receivables under dealer financing arrangements.
Included in selling, general, and administrative expense are costs
associated with programs in which the company shares the expense of financing
distributor and dealer inventories. This charge represents interest for a
pre-established length of time at a predefined rate from a contract with a third
party financing source to finance dealer inventory purchases. These financing
arrangements are used by the company as a marketing tool to enable customers to
buy inventory. The financing costs for distributor and dealer inventories were
$10,499,000, $10,192,000, and $10,252,000 for the fiscal years ended 1998, 1997,
and 1996, respectively.
DISTRIBUTION
Included in selling, general, and administrative expense are costs associated
with changes in the company's independent distribution channels. These costs
were $510,000, $898,000, and $2,533,000 for the fiscal years ended 1998,
1997, and 1996, respectively. Those costs associated with business changes
are accrued on the basis of historical experience, while costs related to
specific changes to the company's independent distribution system are
recorded when authorized.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The company has reflected the necessary
deferred tax asset/liability in the accompanying balance sheets. Management
believes the future tax deductions will be realized principally through
carryback to taxable income in prior years, future reversals of existing taxable
temporary differences, and to a lesser extent, future taxable income.
NET EARNINGS PER SHARE
In 1998, the company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and dilutive earnings per share.
Basic earnings per share is calculated using net earnings available to common
stockholders divided by the weighted average number of shares of common stock
outstanding during the year. Dilutive earnings per share is similar to basic
earnings per share except that the weighted average number of shares of common
stock outstanding is increased to include the number of additional shares of
common stock that would have been outstanding, such as stock to be issued upon
exercise of options. The treasury stock method is used to calculate the number
of dilutive shares, which reduces the gross number of dilutive shares by the
number of shares purchasable from the proceeds of the options assumed to be
exercised. All prior year earnings per share have been restated in accordance
with the provisions of SFAS 128. Adoption of SFAS 128 did not have a material
effect on the companys historical disclosure of earnings per share.
26
<PAGE>
Reconciliations of basic and dilutive weighted average shares of common
stock outstanding are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Years ended October 31 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 12,794,128 12,095,475 12,140,689
Assumed conversion of stock
options and contingently
issuable shares 403,548 371,007 414,026
- ---------------------------------------------------------------------------
Weighted average number of
common shares and assumed
conversion shares outstanding 13,197,676 12,466,482 12,554,715
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period.Actual results could
differ from those estimates.
BASIS OF PRESENTATION
Certain amounts from prior years financial statements have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and the Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
SFAS 133 establishes new standards for recognizing all derivatives as
either assets or liabilities, and measuring those instruments at fair value. The
company plans to adopt the new standard beginning with the first quarter of
fiscal year 2000, as required. The company is in the process of evaluating SFAS
133 and the impact on the company.
SOP 98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use and does not require additional
disclosures. The company plans to adopt the SOP in the beginning of fiscal year
2000, as required. Costs incurred prior to the initial application of the SOP
will not be adjusted to conform with SOP 98-1. The adoption of SOP 98-1 is not
expected to have a material impact on the company's consolidated financial
statements.
During fiscal 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
SFAS 130 establishes standards for reporting and displaying the
components of comprehensive income and the accumulated balance of other
comprehensive income within total stockholders' equity. The company is
required to adopt SFAS 130 beginning in the fiscal year 1999, with
reclassification of prior period information for comparative purposes. The
adoption of SFAS 130 will require additional disclosures, but will not have a
material impact on the company's consolidated financial statements.
SFAS 131 requires disclosure of selected information about operating
segments including segment income, revenues, and asset data, as well as
descriptive information about how operating segments are determined and the
products and services provided by the segments. The company will be required to
adopt SFAS 131 beginning with its 1999 fiscal year-end annual report. The
company is in the process of evaluating SFAS 131 and the impact on the companys
current disclosures.
2 BUSINESS ACQUISITIONS AND DIVESTITURES
- --------------------------------------------------------------------------------
On February 19, 1998, the company completed the acquisition of Drip In, which is
a manufacturer of agricultural micro-irrigation products headquartered in
Madera, California.
On November 25, 1997 the company completed the acquisition of Exmark, a
leading manufacturer of equipment for the professional landscape contractor
industry. In exchange for all of the capital stock of Exmark, the company
issued 598,051 shares of its common stock and paid approximately $5.5 million
in cash. In addition, under the terms of the purchase agreement, the company
will be required to make contingent payments to Exmark shareholders if
Exmark's post-acquisition earnings and sales growth from November 1, 1997
through October 31, 1999 exceed minimum levels established in the purchase
agreement. The maximum amount of these contingent payments is $28.0 million.
Contingent payments will be paid with a combination of cash and the company's
common stock. The company expects to issue approximately 512,000 shares of
stock and pay approximately $1,800,000 of cash in January 1999 related to the
fiscal 1998 contingent payment.
Effective December 1, 1996 the company acquired Hardie from JHI Limited for
an adjusted price of $106.9 million.
27
<PAGE>
The acquisitions described above were accounted for using the purchase
accounting method and, accordingly, the purchase price was allocated based on
the estimated fair values of assets acquired and liabilities assumed on the date
of acquisition. The excess purchase price over the estimated fair value of net
tangible assets acquired was recorded as goodwill, and is being amortized on a
straight-line basis over a 20 year period.
During the fourth quarter of fiscal 1998, Toro recognized a $1.8 million
impairment loss related to the restructuring of its professional fertilizer
business, including the expected sale of portions of this business.
During the third quarter of fiscal 1998, Toro recognized a $3.5 million
impairment loss related to the expected sale of its recycling equipment
business. On September 23, 1998, Toro entered into an agreement to sell this
business, which resulted in no additional loss.
3 SPECIAL CHARGES
- --------------------------------------------------------------------------------
During fiscal 1998, the company committed itself to a profit improvement plan to
make the company as a whole more competitive. The elements of this strategy
include broad organizational initiatives for profit improvement, organizational
changes in the consumer division, initiating a multi-year strategy for
warehousing and transportation services with third party vendors, product line
and business rationalizations, and reducing the number of manufacturing
facilities. The company recorded a charge of $15,042,000 for restructuring and
other unusual expenses. The restructuring charges of $5,770,000 consisted of
$4,359,000 for the severance and asset write-down related to the closure of two
manufacturing facilities and $1,411,000 for other severance costs. Other unusual
expenses consisted of $5,321,000 for the impairment loss related to the expected
sale of the recycling equipment business and portions of the professional
fertilizer business, and $3,951,000 for special marketing programs. These
programs consist of rebates and co-op advertising credits designed to reduce
certain consumer field inventories to historically low levels by providing
incentives to increase retail sales in preparation for potential changes in
warehousing and transportation in fiscal 1999. Restructuring and other unusual
expenses included approximately $8,600,000 of cash charges primarily related to
severance and marketing programs, and approximately $6,400,000 of non-cash
charges related to the write-down of assets.
During fiscal 1997, the company recorded a restructuring charge of
$2,600,000 for the severance and costs related to the closure of a manufacturing
facility.
At October 31, 1998, the company had $10,716,000 of restructuring and other
unusual expense remaining in other accrued liabilities. The company expects the
majority of these reserves to be utilized by the end of fiscal 1999.
4 OTHER INCOME, NET
- --------------------------------------------------------------------------------
Other income (expense) is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 853 $1,129 $ 985
Gross finance
charge revenue 4,503 4,519 4,201
Royalties 1,815 1,870 2,582
Exchange rate losses (602) (328) (10)
Miscellaneous 1,904 707 2,573
- --------------------------------------------------------------------------------
Total $8,473 $7,897 $10,331
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
5 SHORT-TERM CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At October 31, 1998, the company had available committed and uncommitted
unsecured lines of credit with domestic banks in the aggregate of $237,000,000.
Most of these agreements require the company to pay a fee of 0.175 percent per
year on the available lines of credit, which is included in interest expense.
The company also has bankers' acceptance agreements under which an additional
$40.0 million of credit lines are available. The company's non-U.S. operations
maintain unsecured short-term lines of credit of $6,946,000. These facilities
bear interest at various rates depending on the rates in their respective
countries of operations.
The company had $31,000,000 outstanding at October 31, 1998 and $41,000,000
outstanding at October 31, 1997 under these lines of credit. The weighted
average interest rate on short-term borrowings outstanding at October 31, 1998
and 1997 was 5.64 percent and 5.95 percent, respectively.
Under the terms of the short-term debt agreements, the company is subject
to certain covenants. As of October 31, 1998, the company amended its U.S.
unsecured credit lines with its banks. The debt interest coverage covenant was
modified and the company is in compliance with all of its covenants at October
31, 1998.
28
<PAGE>
6 LONG-TERM DEBT
- --------------------------------------------------------------------------------
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) October 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Industrial Revenue Bond due June 1999-2004
with various interest rates $ 2,650 $ 3,015
7.000% Notes, due February 17, 2003 15,761 -
7.125% Notes, due June 15, 2007 75,000 75,000
Industrial Revenue Bond due
November 1, 2017 at 4.500% 3,600 -
7.800% Debentures, due June 15, 2027 100,000 100,000
Other 413 -
- --------------------------------------------------------------------------------
197,424 178,015
Less current portion 580 365
- --------------------------------------------------------------------------------
Long-term debt, less current portion $196,844 $177,650
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
In June 1997, the company issued $175.0 million of debt securities
consisting of $75.0 million of 7.125 percent coupon 10-year Notes and $100.0
million of 7.80 percent coupon 30-year Debentures. The proceeds from the debt
securities issued were used, in part, to repay short-term indebtedness, which
was primarily related to the acquisition of Hardie, and to redeem on August 1,
1997 the company's $50.0 million principal amount of 11% Sinking Fund
Debentures. The company paid a prepayment penalty of $2.8 million for the early
retirement of the 11% Debentures. This penalty is reported in the consolidated
statement of earnings as an extraordinary loss, net of the related income tax
benefit.
In connection with the issuance of the $175.0 million in long-term debt
securities, the company paid $23.7 million to terminate three forward-starting
interest rate swap agreements with notional amounts totaling $125.0 million.
These swap agreements had been entered into to reduce exposure to interest rate
risk prior to the issuance of the new long-term debt securities. At the
inception of one of the swap agreements, the company had received payments,which
were recorded as deferred income to be recognized as an adjustment to interest
expense over the term of the new debt securities. At the date the swaps were
terminated, this deferred income totaled $18.7 million. The excess termination
fees over the deferred income recorded has been deferred and is being recognized
as an adjustment to interest expense over the term of the new debt securities
issued.
Principal payments required on long-term debt in each of the next five
years ending October 31 are as follows: 1999, $580,000; 2000, $540,000; 2001,
$461,000; 2002, $473,000; 2003, $16,265,000; and after 2003, $179,105,000.
7 INCOME TAXES
- --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the company's
consolidated effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in income taxes
resulting from:
Benefits from foreign sales
corporation (17.6) (1.4) (0.8)
State and local income taxes,
net of federal income tax benefit 1.7 2.9 2.5
Effect of foreign source income (10.0) 0.9 -
Goodwill amortization 26.0 2.3 0.4
Other, net 4.4 (0.2) 2.4
- --------------------------------------------------------------------------------
Effective tax rate 39.5% 39.5% 39.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $4,558 $15,985 $22,479
State 345 1,445 2,754
- --------------------------------------------------------------------------------
Current provision 4,903 17,430 25,233
- --------------------------------------------------------------------------------
Deferred:
Federal (2,060) 4,182 (1,051)
State (172) 1,137 (411)
- --------------------------------------------------------------------------------
Deferred provision (2,232) 5,319 (1,462)
- --------------------------------------------------------------------------------
Total provision for income taxes $2,671 $22,749 $23,771
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to the net deferred
income tax assets at October 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 4,357 $ 5,070
Inventory items 3,435 4,228
Depreciation 3,763 2,201
Warranty reserves 16,944 15,028
Employee benefits 6,491 6,048
Other nondeductible accruals 7,770 10,933
- --------------------------------------------------------------------------------
Deferred income tax assets $42,760 $43,508
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
During the years ended October 31, 1998 and 1997, respectively, $491,000
and $2,611,000 was added to additional paid-in capital in accordance with
Accounting Principal Board Opinion 25 reflecting the permanent book to tax
difference in accounting for tax benefits related to employee stock option
transactions.
29
<PAGE>
8 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Changes in the components of stockholders' equity during the fiscal years ended
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign
Additional Currency
Common Paid-In Retained Translation
(Dollars in thousands) Stock Capital Earnings Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1995 $12,168 $ 35,712 $142,891 $ 121 $190,892
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (5,834) - (5,834)
Issuance of 294,324 shares under stock option plans 294 4,333 - - 4,627
Purchase of 429,692 shares of common stock (430) (13,073) - - (13,503)
Foreign currency translation adjustment - - - (678) (678)
Tax benefits related to employee stock option transactions - 1,490 - - 1,490
Other - - 164 - 164
Net earnings - - 36,409 - 36,409
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1996 $12,032 $28,462 $173,630 $ (557) $213,567
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (5,794) - (5,794)
Issuance of 389,101 shares under stock option plans 389 8,018 - - 8,407
Purchase of 232,000 shares of common stock (232) (7,720) - - (7,952)
Foreign currency translation adjustment - - - (4,521) (4,521)
Tax benefits related to employee stock option transactions - 2,611 - - 2,611
Net earnings - - 34,845 - 34,845
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1997 $12,189 $ 31,371 $202,681 $(5,078) $241,163
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (6,162) - (6,162)
Issuance of 82,386 shares under stock option plans 83 2,136 - - 2,219
Issuance of 598,051 shares of common stock for
acquisition of Exmark 598 24,172 - - 24,770
Purchase of 100,000 shares of common stock (100) (1,624) - - (1,724)
Foreign currency translation adjustment - - - (1,448) (1,448)
Tax benefits related to employee stock option transactions - 491 - - 491
Net earnings - - 4,090 - 4,090
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1998 $12,770 $56,546 $200,609 $(6,526) $263,399
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Under the terms of a Rights Agreement effective May 20, 1998, each share of
the company's common stock entitles its holder to one preferred share purchase
right. Each right entitles the registered holder to purchase from the company
one one-hundredth of a share of Series B Junior Participating Voting Preferred
Stock, $1.00 par value at a price of $180 per one one-hundredth of a Preferred
Share. The rights become exercisable and tradable 10 days after a person or a
group acquires 15 percent or more, or makes an offer to acquire 15 percent or
more, of the company's outstanding common stock. At no time do the rights have
any voting power. The rights may be redeemed by the company for $0.01 per right
at any time prior to the time that a person or group has acquired beneficial
ownership of 15 percent or more of the common shares.
During November and December, 1998, Toro repurchased 152,600 shares of
stock in anticipation of shares to be issued in connection with a prior
acquisition as discussed in Footnote 2, Business Acquisitions and Divestitures.
9 STOCK OPTION PLANS
- --------------------------------------------------------------------------------
Under the company's stock option plans, certain employees and non-employee
directors have been granted options to purchase shares of common stock at prices
equal to the fair market value on the date the option was granted, except for
performance-based stock options discussed below. The stock options are generally
exercisable immediately, and expire five to ten years after the date of grant.
30
<PAGE>
In connection with the acquisition of Drip In, the company granted Drip
In's former owner an option to purchase 80,000 shares of common stock at a price
based on the fair market value prior to the closing of the acquisition. The
option will vest on the seventh anniversary of grant, except that vesting will
be accelerated if certain performance goals are achieved. The option will expire
seven years after grant.
Performance-based stock options have been granted under the Continuous
Performance Award Plan (CPAP). The exercise price is an average of the closing
stock prices for the three months preceding the grant date. These options
generally vest upon the public release of fiscal year-end earnings for the last
year of the three year award term, and expire 90 days thereafter. Options
granted under this plan totaled 53,871, 40,474, and 36,768 in the fiscal years
ended 1998, 1997, and 1996, respectively. CPAP options cancelled were 26,607,
33,812, and 0 during the fiscal years ended 1998, 1997, and 1996, respectively.
The company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized for stock option grants, except with respect to performance-based
options. The company recognized compensation expense of $267,000, $545,000, and
$483,000 for the fiscal years ended 1998, 1997, and 1996, respectively. If the
company elected to recognize compensation expense consistent with the
methodology prescribed in SFAS 123, "Accounting for Stock-Based Compensation,"
the company's net income and dilutive earnings per share would have been as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Years ended October 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income, as reported $4,090 $34,845
Pro forma net income 2,626 34,289
- --------------------------------------------------------------------------------
Dilutive earnings per share, as reported $ 0.31 $ 2.80
Pro forma dilutive earnings per share 0.20 2.75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The fair value of stock options is estimated at the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years ended October 31 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.71% 5.75%
Expected life of option in years 3.9 3.1
Expected dividend yield 0.8% 1.5%
Expected stock volatility 21% 20%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The weighted average fair market value of options was estimated to be
$10.01 and $6.14 per share for the years ended October 31, 1998 and 1997,
respectively.
A summary of stock option activity under the plans described above is
presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted
Options available Options average
for grant outstanding exercise price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
October 31, 1995 455,669 1,253,311 $20.56
- --------------------------------------------------------------------------------
Granted (48,768) 48,768 29.77
Exercised - (193,221) 18.85
Cancelled 1,000 (1,000) 29.13
Increase in options
available for grant 600,000 - -
- --------------------------------------------------------------------------------
October 31, 1996 1,007,901 1,107,858 21.25
- --------------------------------------------------------------------------------
Granted (251,620) 251,620 32.74
Exercised - (443,516) 21.93
Cancelled 33,812 (33,812) 24.49
- --------------------------------------------------------------------------------
October 31, 1997 790,093 882,150 24.06
- --------------------------------------------------------------------------------
Granted (397,882) 397,882 41.97
Increase in options
available for grant 80,000 - -
Exercised - (103,792) 25.37
Cancelled 62,869 (64,514) 31.55
- --------------------------------------------------------------------------------
October 31, 1998 535,080 1,111,726 $29.92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The table below presents the number, weighted average remaining contractual
life, and weighted average exercise price for options outstanding at October 31,
1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted
Weighted average
Number average remaining
Exercise price range of options exercise price contractual life
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable at
October 31, 1998:
$14.75 300,000 $14.75 7.1 years
$23.625 - $29.125 223,032 27.01 1.4 years
$31.75 - $36.375 156,108 33.84 3.0 years
$43.376 - $43.50 246,039 43.50 4.1 years
- --------------------------------------------------------------------------------
Total 925,179 $28.57 4.2 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Options not exercisable at
October 31, 1998:
$29.796 - $39.316 186,547 $36.58 3.5 years
- --------------------------------------------------------------------------------
Grand total 1,111,726 $29.92 4.1 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
On July 31, 1995, the company issued 17,467 shares of restricted stock and
17,467 performance units to the CEO under the terms of the Chief Executive
Officer Succession Plan. The value of each performance unit is equal to the fair
market value of a share of common stock. The restricted stock and performance
units vest based upon achievement of specified succession planning goals.
Dividends are paid with respect to the restricted stock and those shares may be
voted. Portions of the
31
<PAGE>
restricted stock and performance unit awards will be forfeited if specified
goals are not achieved at various dates, ending on October 31, 2003 or
termination of employment. Compensation expense related to this plan was
$89,000, $350,000, and $254,000 for the fiscal years ended 1998, 1997, and 1996,
respectively.
10 EMPLOYEE BENEFIT PROGRAMS
- --------------------------------------------------------------------------------
The company maintains the following significant plans for eligible employees:
- The Toro Company Investment and Savings Plan
- The Toro Company Employee Stock Ownership Plan
The company's expenses under these plans were $11,245,000, $10,797,000, and
$9,476,000 for fiscal years ended 1998, 1997, and 1996, respectively.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. The expense related to these plans
was not significant.
11 SEGMENT DATA
- --------------------------------------------------------------------------------
The company classifies its operations into one industry segment, outdoor
maintenance equipment. International sales were $235,940,000, $232,808,000, and
$174,249,000 for the fiscal years ended 1998, 1997, and 1996, respectively. Of
these amounts, export sales were $153,500,000, $161,836,000, and $140,919,000
for the years ended 1998, 1997, and 1996, respectively. Export sales by
geographic area were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe $ 86,953 $ 79,515 $ 71,325
Canada 35,123 33,349 29,578
Pacific Rim 16,693 34,417 34,975
Other 14,731 14,555 5,041
- --------------------------------------------------------------------------------
Total export sales $153,500 $161,836 $140,919
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
12 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
As of October 31, 1998, future minimum lease payments under capital leases
totaled $949,000. Total rental expense for operating leases was $11,962,000,
$12,467,000, and $11,048,000 for the fiscal years ended 1998, 1997, and 1996,
respectively. At October 31, 1998, future minimum lease payments under
noncancelable operating leases amounted to $15,703,000 as follows: 1999,
$7,270,000; 2000, $4,031,000; 2001, $2,647,000; 2002, $1,000,000; 2003,
$424,000; and beyond, $331,000.
13 COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Debts incurred by certain distributors, aggregating $4,172,000 at October 31,
1998 and $5,600,000 at October 31, 1997, have been guaranteed by the company.
In the ordinary course of business, the company may become liable with
respect to pending and threatened litigation, tax, environmental, and other
matters. While the ultimate results of investigations, lawsuits, and claims
involving the company cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated financial
position of the company.
14 FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET RISK
Letters of credit are issued by the company during the ordinary course of
business, as required by certain vendor contracts, through major domestic banks.
As of October 31, 1998 and 1997, the company had $28,007,000 and $25,985,000,
respectively, in outstanding letters of credit.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the company to concentrations
of credit risk, consist principally of accounts receivable, which are
concentrated in a single business segment, outdoor maintenance equipment. The
credit risk associated with this segment is limited because of the large number
of customers in the company's customer base and their geographic dispersion.
FOREIGN CURRENCY INVESTMENTS
The company has entered into various foreign currency exchange contracts
designed to manage its exposure to exchange rate fluctuations on foreign
currency transactions. These instruments used as hedges are managed to reduce
the risk associated with the exposure being hedged and are designated as a hedge
at the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Gains and losses on foreign currency contracts are recorded to
the Consolidated Statements of Earnings. The company also enters into forward
currency exchange contracts on behalf of certain distributors in order to cover
a portion of the payments owed by the distributor to the company. Any currency
losses incurred by the company are reimbursed by the distributor.
32
<PAGE>
The following forward exchange contracts held by the company have maturity
dates in fiscal year 1999. All items are non-trading and stated in U.S. dollars.
The average contracted rate, notional amount, and fair value impact at October
31, 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Fair Value
Dollars in thousands Contracted Notional Impact
(except average contracted rate) Rate Amount Gain (Loss)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Buy Australian dollar/Sell U $ .6368 $1,022.8 $(18.2)
Buy US $/Sell Australian dollar .6040 5,614.1 (206.9)
Buy US $/Sell Canadian dollar 1.5135 7,168.8 140.0
Buy German mark/Sell US $ 1.7808 2,948.2 251.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
FAIR VALUE
Estimated fair value amounts have been determined using available information
and appropriate valuation methodologies. Because considerable judgment is
required in developing the estimates of fair value, these estimates are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
For cash and cash equivalents, receivables, and accounts payable, carrying
value is a reasonable estimate of fair value.
At October 31, 1998, the estimated fair value of long-term debt with fixed
interest rates was $182,273,000 compared to its carrying value of $197,424,000.
The fair value is estimated by discounting the projected cash flows using the
rate at which similar amounts of debt could currently be borrowed.
15 QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Summarized quarterly financial data for fiscal 1998 and fiscal 1997 is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED OCTOBER 31, 1998
---------------------------------------------------------
Quarter (Dollars in thousands, except per share data) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $210,059 $379,686 $290,993 $229,696
Gross profit 73,052 132,949 101,280 77,035
Restructuring and other unusual expense - - 10,452 4,590
Net earnings (loss) (1,061) 20,053 (2,553) (12,349)
Basic net earnings (loss) per share (0.08) 1.56 (0.20) (0.96)
Dilutive net earnings (loss) per share (0.08) 1.53 (0.20) (0.96)
Dividends per share of common stock 0.12 0.12 0.12 0.12
Market price of common stock
High sales price 46 5/16 40 15/16 37 10/16 27 9/16
Low sales price 38 1/2 36 3/16 26 3/4 16 1/2
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31, 1997
---------------------------------------------------------
Quarter (Dollars in thousands, except per share data) First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $208,957 $352,203 $249,274 $240,770
Gross profit 75,227 125,117 92,395 95,298
Restructuring and other unusual expense - - - 2,600
Net earnings, before extraordinary loss 2,491 19,040 9,949 5,028
Net earnings 2,491 19,040 8,286 5,028
Basic net earnings per share, before extraordinary loss 0.21 1.58 0.82 0.41
Basic net earnings per share 0.21 1.58 0.69 0.41
Dilutive net earnings per share, before extraordinary loss 0.20 1.53 0.80 0.40
Dilutive net earnings per share 0.20 1.53 0.67 0.40
Dividends per share of common stock 0.12 0.12 0.12 0.12
Market price of common stock
High sales price 36 5/8 36 7/8 38 7/8 43 3/4
Low sales price 31 1/2 33 35 1/8 35 7/16
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As of January 7, 1999, the company had 6,393 stockholders of record.
33
<PAGE>
ELEVEN-YEAR SELECTED FINANCIAL DATA The Toro Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1998 (1)(2) 1997 (4)(5) 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS:
Net sales $1,110,400 $1,051,200 $930,900
Net sales growth from prior year 5.6% 12.9% 1.3%
Net earnings (loss), before extraordinary loss(3) $ 4,090 $ 36,500 $ 36,400
Percentage of net sales 0.4% 3.5% 3.9%
Net earnings (loss) $ 4,090 $ 34,845 $ 36,400
Dilutive earnings (loss) per share, before
extraordinary loss(3) 0.31 2.93 2.90
Return on average stockholders' equity 1.6% 15.3% 18.0%
SUMMARY OF FINANCIAL POSITION:
Current assets $ 479,400 $ 472,000 $405,000
Current liabilities 258,200 237,800 207,900
Working capital 221,200 234,200 197,100
Long-term debt, less current portion 196,800 177,700 53,000
Stockholders' equity 263,400 241,200 213,600
Debt to capitalization ratio 46.4% 47.6% 30.7%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 20.63 $ 19.79 $ 17.75
Dividends per share of common stock 0.48 0.48 0.48
Number of shares of common stock
outstanding 12,770 12,189 12,032
Number of common stockholders(9) 6,364 6,560 6,841
Market price range -
High price $ 46 5/16 $ 43 3/4 $ 36 1/4
Low price 16 1/2 31 1/2 28 3/8
Average number of employees 4,695 4,309 3,610
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes restructuring and other unusual expenses of $15.0 million in
fiscal 1998.
(2) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, dates of acquisitions.
(3) 1997 net earnings and earnings per dilutive share after the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share, were $34,845,000 and $2.80, respectively.
(4) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(5) Includes restructuring and other unusual expense of $2.6 million in fiscal
1997.
(6) Includes restructuring costs of $24.9 million in fiscal 1992.
(7) The company's consolidated financial statements include results of
operations of LawnBoy Inc. from November 7, 1989, the date of acquisition.
(8) In 1995, the company changed its fiscal year end from July 31 to October
31. Therefore, actual date of the yearend for years prior to 1995 are
unaudited and were restated to include twelve months of data through the
Friday closest to October 31 for comparative purposes.
(9) Represents the number of stockholders at July 31 for the years starting in
1988 and ending in 1994.
34
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1995 1994 1993 1992 (6)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales $919,400 $864,300 $706,600 $638,700
Net sales growth from prior year 6.4% 22.3% 10.6% (9.6)%
Net earnings (loss), before extraordinary loss(3) $ 32,400 $ 32,400 $ 15,300 $(21,700)
Percentage of net sales 3.5% 3.8% 2.2% (3.4)%
Net earnings (loss) $ 32,400 $ 32,400 $ 15,300 $(21,700)
Dilutive earnings (loss) per share, before
extraordinary loss(3) 2.50 2.49 1.22 (1.81)
Return on average stockholders' equity 17.5% 20.2% 11.4% (15.5)%
SUMMARY OF FINANCIAL POSITION:
Current assets $386,300 $373,400 $326,100 $324,200
Current liabilities 221,200 197,200 169,200 132,500
Working capital 165,100 176,200 156,900 191,700
Long-term debt, less current portion 53,400 70,400 87,300 147,900
Stockholders' equity 190,900 178,700 141,900 126,400
Debt to capitalization ratio 36.6% 33.8% 46.5% 56.5%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 15.69 $ 14.05 $ 11.47 $ 10.50
Dividends per share of common stock 0.48 0.48 0.48 0.48
Number of shares of common stock
outstanding 12,168 12,720 12,370 12,041
Number of common stockholders(9) 7,243 7,541 7,968 8,386
Market price range -
High price $ 32 1/4 $ 30 1/2 $ 26 3/4 $ 17 1/2
Low price 25 5/8 20 7/8 14 1/8 11 3/8
Average number of employees 3,638 3,434 3,117 3,084
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1991 1990 (7) 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales $706,200 $747,300 $639,200 $626,200
Net sales growth from prior year (5.5)% 16.9% 2.1% 13.5%
Net earnings (loss), before extraordinary loss(3) $ 9,100 $ 8,400 $ 20,000 $ 20,500
Percentage of net sales 1.3% 1.1% 3.1% 3.3%
Net earnings (loss) $ 9,100 $ 8,400 $ 20,000 $ 20,500
Dilutive earnings (loss) per share, before
extraordinary loss(3) 0.77 0.84 1.90 1.90
Return on average stockholders' equity 6.1% 6.8% 21.7% 26.1%
SUMMARY OF FINANCIAL POSITION:
Current assets $322,000 $306,800 $271,200 $296,400
Current liabilities 103,800 133,000 125,000 144,200
Working capital 218,200 173,800 146,200 152,200
Long-term debt, less current portion 154,100 125,300 95,600 112,200
Stockholders' equity 153,400 146,300 99,300 85,100
Debt to capitalization ratio 51.9% 54.3% 54.7% 65.0%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 12.84 $ 12.34 $ 9.98 $ 8.46
Dividends per share of common stock 0.48 0.48 0.48 0.45
Number of shares of common stock
outstanding 11,950 11,859 9,946 10,059
Number of common stockholders(9) 8,503 7,706 7,527 6,802
Market price range -
High price $ 20 1/2 $ 30 $ 24 3/8 $ 24 7/8
Low price 11 12 17 7/8 11 1/8
Average number of employees 3,580 3,771 3,068 3,105
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes restructuring and other unusual expenses of $15.0 million in
fiscal 1998.
(2) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, dates of acquisitions.
(3) 1997 net earnings and earnings per dilutive share after the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share, were $34,845,000 and $2.80, respectively.
(4) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(5) Includes restructuring and other unusual expense of $2.6 million in fiscal
1997.
(6) Includes restructuring costs of $24.9 million in fiscal 1992.
(7) The company's consolidated financial statements include results of
operations of LawnBoy Inc. from November 7, 1989, the date of acquisition.
(8) In 1995, the company changed its fiscal year end from July 31 to October
31. Therefore, actual date of the yearend for years prior to 1995 are
unaudited and were restated to include twelve months of data through the
Friday closest to October 31 for comparative purposes.
(9) Represents the number of stockholders at July 31 for the years starting in
1988 and ending in 1994.
35
<PAGE>
BOARD OF DIRECTORS
Ronald O. Baukol (C/E/N)
Executive Vice President
International Operations
3M
St. Paul, Minnesota
Robert C. Buhrmaster (A/E/N)
President and Chief Executive Officer
Jostens, Inc.
Minneapolis, Minnesota
Winslow H. Buxton (A/E/N)
Chairman, President and
Chief Executive Officer
Pentair, Inc.
St. Paul, Minnesota
Janet K. Cooper (A*/C)
Vice President, Treasurer
U.S. West
Denver, Colorado
Kendrick B. Melrose (E*/N**)
Chairman and Chief Executive Officer
The Toro Company
Alex A. Meyer (A/C)
Retired
Amana Refrigeration, Inc.
Amana, Iowa
Robert H. Nassau (C/N)
President and Chief Executive Officer
St. Raymond Wood Products Holding Limited
Boston, Massachusetts
Dale R. Olseth (A/C*/E)
Chairman and Chief Executive Officer
SurModics, Inc.
Minneapolis, Minnesota
Christopher A. Twomey (C/N)
President and Chief Executive Officer
Arctic Cat, Inc.
Thief River Falls, Minnesota
Edwin H. Wingate (A/E/N*)
Retired
Dayton Hudson Corporation
Minneapolis, Minnesota
(A) Audit Committee Member
(C) Compensation Committee Member
(E) Executive Committee Member
(N) Nominating Committee Member
* Committee Chairman
** Ex-officio Non-voting Member
OFFICERS
Kendrick B. Melrose
Chairman and Chief Executive Officer+
J. David McIntosh
Executive Vice President
Professional Businesses and International+
William D. Hughes
Vice President and General Manager
Consumer Business+
Steven P. Hansen
Vice President
Corporate Information Services
Dennis P. Himan
Vice President and General Manager
Landscape Contractor Businesses+
Michael J. Hoffman
Vice President and General Manager
Commercial Business+
Randy B. James
Vice President and Controller+
Stephen D. Keating
Assistant Treasurer, Investor Relations
Ram N. Kumar
Vice President, Distributor Development
and New Businesses
J. Lawrence McIntyre
Vice President, Secretary and General Counsel+
Karen M. Meyer
Vice President, Administration+
Richard W. Parod
Vice President and General Manager
Irrigation Business+
Richard R. Pollick
Vice President and General Manager
International Business+
N. Jeanne Ryan
Assistant Secretary
Stephen P. Wolfe
Vice President Finance, Treasurer and
Chief Financial Officer+
+Executive officers subject to Section 16
36
<PAGE>
STOCKHOLDERS' INFORMATION
DIVIDENDS
Communications concerning transfer requirements, address changes, dividends and
lost certificates should be addressed to:
Shareholder Assistance
Norwest Bank Minnesota, N.A.
P.O. Box 64854
St. Paul, Minnesota 55164-0854
651-450-4064
1-800-468-9716
DIVIDEND REINVESTMENT
The company sponsors an Automatic Dividend Reinvestment Plan. For enrollment
information contact:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
Inquiries about existing dividend reinvestment accounts should be addressed to:
Dividend Reinvestment Plan
The Toro Company
Norwest Bank Minnesota, N.A.
P.O. Box 64854
St. Paul, Minnesota 55164-0854
651-450-4064
1-800-468-9716
QUARTERLY INFORMATION
Quarterly earnings results are expected to be announced on the following dates:
First Quarter: February 23, 1999
Second Quarter: May 26, 1999
Third Quarter: August 25, 1999
Fourth Quarter: December 14, 1999
To obtain a copy of the quarterly financial results, contact:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420
E-mail: [email protected]
Phone: 612-887-7141
FORM 10-K
THE ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST BY A STOCKHOLDER TO:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
E-mail: [email protected]
STOCK LISTING
New York Stock Exchange (TTC)
ANNUAL MEETING
March 24, 1999, 3:00 p.m. (CST)
The Toro Company Corporate Offices
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
INTERNET ADDRESSES
www.toro.com
www.lawnboy.com
www.irritrolsystems.com
www.lawngenie.com
www.exmark.com
www.nsn.com
WORLDWIDE LOCATIONS
UNITED STATES
Abilene, Texas
Baraboo, Wisconsin
Beatrice, Nebraska
Bloomington, Minnesota
Dallas, Texas
El Cajon, California
El Paso, Texas
Evansville, Indiana
Laguna, California
Lakeville, Minnesota
Lincoln, Nebraska
Madera, California
Mountaintop, Pennsylvania
Oxford, Mississippi
Plymouth, Wisconsin
Riverside, California
Sanford, Florida
Shakopee, Minnesota
Tomah, Wisconsin
Windom, Minnesota
AROUND THE WORLD
Balcatta, Australia
Beverly, Australia
Braeside, Australia
Eagle Farm, Australia
Murray Bridge, Australia
Oevel, Belgium
Parramatta, Australia
Rome, Italy
<PAGE>
Exhibit 21
THE TORO COMPANY
SUBSIDIARIES OF REGISTRANT
All of the following are subsidiaries of The Toro Company as of December 31,
1998.
<TABLE>
<CAPTION>
NAME STATE OR OTHER JURISDICTION OF PERCENTAGE OF VOTING SECURITIES
INCORPORATION OWNED BY IMMEDIATE PARENT
<S> <C> <C>
Toro Australia Pty. Limited Australia 100%
Toro Credit Company Minnesota 100%
Toro Europe Belgium 100%
Toro Foreign Sales Corporation Barbados 100%
Lawn-Boy Inc. Delaware 100%
Toro Probiotic Products, Inc. Minnesota 100%
Toro Sales Company Minnesota 100%
Toro Southwest, Inc. California 100%
Toro International Company Minnesota 100%
Hahn Equipment Co. Minnesota 100%
Professional Turf Products of Texas 100%
Texas, Inc.
Turf Management Systems, Inc. Minnesota 100%
ACN 007 664 315 Pty. Limited Australia 100%
(formerly James Hardie
Irrigation Pty. Limited)
Irritrol Systems Europe, S.p.A. Italy 100%
Exmark Manufacturing Company Nebraska 100%
Incorporated
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Toro Company:
We consent to incorporation by reference in the Registration Statements (Nos.
33-26268, 33-31586, 33-38308, 33-44668, 33-51563, 33-55550, 33-59563, 333-44879,
and 333-20901) on Forms S-3 and S-8 of The Toro Company of our reports dated
December 11, 1998, relating to the consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of earnings and cash flows and related financial
statement schedule for each of the years in the three-year period ended October
31, 1998, which reports are included in or incorporated by reference in the
annual report on Form 10-K of The Toro Company.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS, BALANCE SHEETS, AND 10-K SCHEDULE
II, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 90
<SECURITIES> 0
<RECEIVABLES> 246,504
<ALLOWANCES> 9,324
<INVENTORY> 184,306
<CURRENT-ASSETS> 479,437
<PP&E> 330,539
<DEPRECIATION> 203,402
<TOTAL-ASSETS> 723,991
<CURRENT-LIABILITIES> 258,210
<BONDS> 197,424<F1>
0
0
<COMMON> 12,770<F2>
<OTHER-SE> 250,629
<TOTAL-LIABILITY-AND-EQUITY> 723,991
<SALES> 1,110,434
<TOTAL-REVENUES> 1,110,434
<CGS> 726,118
<TOTAL-COSTS> 360,600
<OTHER-EXPENSES> (8,473)<F3>
<LOSS-PROVISION> 623
<INTEREST-EXPENSE> 25,428
<INCOME-PRETAX> 6,761
<INCOME-TAX> 2,671
<INCOME-CONTINUING> 4,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,090
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
<FN>
<F1>TOTAL LONG-TERM DEBT
<F2>DOES NOT INCLUDE ADDITIONAL PAID-IN-CAPITAL
<F3>OTHER INCOME, NET
</FN>
</TABLE>
