1
TWIN DISC, INCORPORATED
1328 Racine Street, Racine, Wisconsin 53403
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 18, 2002
NOTICE IS HEREBY GIVEN TO THE
SHAREHOLDERS OF TWIN DISC, INCORPORATED
The Annual Meeting of Shareholders of Twin Disc, Incorporated, a
Wisconsin corporation will be held at 2 P.M. (Central Daylight Time) on
Friday, October 18, 2002 at the Corporate Offices, 1328 Racine Street, Racine,
Wisconsin for the following purposes:
1. Election of three Directors to serve until the Annual Meeting in 2005.
2. To transact any other business that may properly come before the
meeting.
Only holders of record of shares of common stock of the Corporation at
the close of business on August 30, 2002, shall be entitled to vote at the
meeting.
A proxy appointment and proxy statement are enclosed herewith. The proxy
appointment shows the form in which your shares are registered. Your signature
should be in the same form.
FRED H. TIMM
Secretary
September 18, 2002
IF YOU ARE UNABLE TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND
RETURN YOUR PROXY APPOINTMENT IN THE ENCLOSED ENVELOPE BEFORE THE DEADLINE
STATED IN THE PROXY STATEMENT. IF YOUR PROXY APPOINTMENT IS NOT RECEIVED BY
THE SECRETARY BEFORE THAT DEADLINE, IT WILL BE RULED INVALID. SHOULD YOU FIND
IT CONVENIENT TO ATTEND THE MEETING PERSONALLY, AND DESIRE TO VOTE IN PERSON,
YOU MAY REQUEST BEFORE ANY VOTE THAT YOUR PROXY APPOINTMENT BE RETURNED TO YOU
IN ORDER THAT YOU MAY VOTE IN PERSON.
YOUR VOTE IS IMPORTANT!
PLEASE SIGN, DATE AND RETURN
THE ENCLOSED PROXY APPOINTMENT
IMMEDIATELY.
2
2002 Proxy Statement
TWIN DISC, INCORPORATED
September 18, 2002
DATE, TIME AND PLACE OF MEETING
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of the Corporation of proxies for use at the Annual
Meeting of Shareholders to be held at 2 P.M. (Central Daylight Time), at the
Corporate Offices, 1328 Racine Street, Racine, Wisconsin on Friday, October
18, 2002, or any adjournment thereof. Holders of common stock of record at the
close of business on the 30th day of August 2002, are entitled to vote at the
meeting and each shareholder shall have one vote for each share of common
stock registered in the shareholder's name. Shares represented by a signed
proxy appointment will be voted in the manner specified in the form of proxy
or, if no specification is made, in favor of each of the propositions
mentioned therein. The presence of a majority of the outstanding shares of
common stock of the Corporation, either in person or represented by a signed
proxy appointment, will constitute a quorum at the meeting. The Corporation
intends to mail this statement to shareholders on or before September 18,
2002.
The enclosed proxy appointment form must be signed and delivered to the
Secretary either in person, by mail, or by messenger. Appointment forms
transmitted by facsimile, telex, telegram, or electronic means will not be
accepted. Furthermore, appointment forms must be received by the Secretary not
less than 48 hours prior to the date of the meeting. PROXY APPOINTMENT FORMS
NOT MEETING THE ABOVE REQUIREMENTS WILL BE RULED INVALID.
The proxy appointment form must be signed in handwriting. The signature
must be sufficiently legible to allow the inspector to distinguish it as
representing the name of the registered shareholder, or must be accompanied by
a rubber stamp facsimile or hand-printed name, including the shareholders
surname and either the shareholders first or middle name as represented on the
corporate records, and any titles, offices or words indicating agency which
appear in the Corporate records.
The person giving the proxy may revoke it before it is exercised, either
in person, by mail, or by messenger, by submitting a later dated proxy
appointment form to the Secretary at least forty-eight (48) hours prior to the
date of the meeting. The person giving the proxy may also revoke it by openly
stating the revocation at the meeting, by voting at the meeting in person, or
by delivering a signed written statement revoking the proxy to the Secretary
prior to the date of the meeting. Appointment forms or revocations transmitted
by facsimile, telex, telegram, or electronic means will not be accepted. ANY
ATTEMPTED REVOCATIONS NOT MEETING THE ABOVE REQUIREMENTS WILL BE RULED
INVALID.
The record date with respect to this solicitation is August 30, 2002. On
August 30, 2002, there were outstanding 2,807,832 shares of common stock of
the Corporation entitled to vote at the Annual Meeting. There also are
200,000 shares of no-par preferred stock authorized, of which 50,000 shares
have been designated Series A Junior Preferred Stock, but none are
outstanding.
SHAREHOLDER PROPOSALS FOR 2003
If a shareholder wishes to present a proposal for consideration for
inclusion in the Notice of the Meeting and Proxy Statement for the 2003 Annual
Meeting, the proposal must be received at the Corporation's principal
executive offices no later than May 21, 2003. Shareholder proposals received
later than August 4, 2003 will be considered untimely, and will not be
considered at the Corporation's 2003 Annual Meeting.
3
PERSONS MAKING THE SOLICITATION
The proxy is being solicited by the Corporation's Board of Directors and
will be voted in favor of the Directors' recommendations on each and all
matters properly brought before the meeting, unless the undersigned
shareholder specifically instructs the holder or holders of the proxy to the
contrary. With regard to the election of directors, votes may be cast in favor
or withheld; votes that are withheld will be excluded entirely from the vote
and will have no effect. Abstentions may be specified on all proposals
submitted to shareholders (other than the election of directors). Abstentions
and "broker non-votes" are counted for purposes of determining the presence or
absence of a quorum for the transaction of business. Under the rules of the
New York Stock Exchange, Inc., brokers who hold shares in street name for
customers may have authority to vote on certain items when they have not
received instructions from beneficial owners. A "broker non-vote" occurs on an
item submitted for shareholder approval when the broker does not have
authority to vote on the item in the absence of instructions from the
beneficial owner. Such "broker non-votes" will have no effect on the outcome
of the election of directors. The approval of a majority of the votes cast on
a particular matter shall be an act of the shareholders.
PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
PRINCIPAL SHAREHOLDERS
Based upon the records of the Corporation and filings with the Securities
and Exchange Commission as of July 31, 2002, the following table sets forth
the persons or group of persons having beneficial ownership (as defined by the
Securities and Exchange Commission) of more than 5% of the issued and
outstanding common stock of the Corporation.
Nature of
Beneficial Amount Percent of
Name Address Ownership Owned Class
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Michael E. Batten 3419 Michigan Blvd. Power to vote 538,431<F1> 19.2%
Racine, WI Beneficial 144,213<F2> 5.1%
Fidelity Management 82 Devonshire St. Power to vote & 269,300 9.6%
and Research Corp. Boston, MA dispose of stock
Dimensional Fund 1299 Ocean Ave. Power to vote & 213,500 7.6%
Advisors Santa Monica, CA dispose of stock
Artisan Partners 1000 N. Water St. Power to vote & 153,466 5.5%
Limited Milwaukee, WI dispose of stock
Shufro Rose 745 Fifth Ave. Power to vote & 210,900 7.5%
& Co. LLC New York, NY Dispose of stock
<FN>
<F1> Held as trustee under various trusts.
<F2> Includes 2,600 shares owned by the wife of Michael E. Batten and 63,500
subject to currently exercisable stock options.
</FN>
4
DIRECTORS AND EXECUTIVE OFFICERS
Based upon the records of the Corporation and filings with the Securities
and Exchange Commission as of July 31, 2002, the following table sets forth
the number of shares of common stock of the Corporation beneficially owned by
each of the Directors of the Corporation, each of the executive officers named
in the Summary Compensation Table and the number of shares beneficially owned
by all Directors and executive officers of the Corporation as a group.
Amount and Nature
Name of of Beneficial Percent of
Beneficial Owner Ownership <F4> Class
- - - - - - - - - - - - - - - - - - - - - - - -
Michael E. Batten 682,644 <F5> 24.3%
Michael H. Joyce 45,665 <F6> 1.6%
James E. Feiertag 9,000 <F6> *<F3>
John A. Mellowes 4,000 <F6> *<F3>
James O. Parrish 32,960 <F6> 1.2%
Lance J. Melik 8,315 <F6> *<F3>
Paul J. Powers 8,200 <F6> *<F3>
David B. Rayburn 2,000 <F6> *<F3>
David L. Swift 5,700 <F6> *<F3>
George E. Wardeberg 4,400 <F6> *<F3>
David R. Zimmer 6,578 <F6> *<F3>
All Directors and
Executive Officers
as a group (15 persons) 851,043 <F6> 30.3%
<FN>
<F3> * Denotes ownership of less than one percent of shares outstanding.
<F4> Shares listed include any shares owned by a spouse, minor children and
immediate relatives who share the same household as a Director or officer.
Inclusion of any such shares is not to be considered an admission of
beneficial ownership.
<F5> Includes 2,600 shares held by Mr. Batten's wife, 538,431 shares held by
him as trustee under various family trusts, and 63,500 shares subject to
presently exercisable stock options.
<F6> Shares subject to currently exercisable stock options included in the
above are as follows: Mr. Parrish 24,800, Mr. Powers 7,900, Mr. Joyce 40,500,
Mr. Rayburn 2,000, Mr. Swift 5,500, Mr. Zimmer 5,500, Mr. Melik 8,250,
Mr. Feiertag 9,000, Mr. Mellowes 4,000, Mr. Wardeberg 4,200, and all Directors
and executive officers as a group 208,550.
</FN>
5
ELECTION OF DIRECTORS
Three directors are to be elected for a term to expire at the annual
meeting following the fiscal year ended June 30, 2005. Shares of common stock
represented by properly executed proxy appointments in the accompanying form
will be voted for the nominees listed for the term indicated unless authority
to do so is withheld.
The nominees for the Board of Directors and the Directors whose terms
will continue and the class to which he has been or is to be elected are as
set forth below. Each nominee and each Director was elected to his present
term of office by a vote of shareholders at a meeting for which proxies were
solicited.
Served as
Principal Occupation Director
Name of Director and other Public Continuously
and Current Age Company Directorships Since
- - - - - - - - - - - - - - - - - - - - - - - - - -
NOMINEES FOR DIRECTORS FOR TERMS TO EXPIRE IN 2005:
Michael E. Batten . . . . . Chairman and Chief Executive Officer, May 1974
Age 62 Twin Disc, Incorporated
Also Director,
Briggs & Stratton Corporation,
Sensient Technologies Corporation
David L. Swift . . . . . . . Former Chairman, President and July 1995
Age 65 Chief Executive Officer,
Acme-Cleveland Corporation,
Pepper Pike, Ohio
(A manufacturer of diversified
industrial products)
Also Director,
Jarden Corporation and
Cuno Incorporated
David R. Zimmer. . . . . . . Chief Executive Officer, July 1995
Age 56 Twitchell Corporation,
Dothan, AL
(A privately held manufacturer
and marketer of highly engineered,
synthetic yarns, fabrics, extrusions,
and coatings)
Also Director,
Detrex Corporation
6
DIRECTORS WHOSE TERMS EXPIRE IN 2004:
James O. Parrish . . . . . . Vice President-Finance December 1982
Age 62 & Treasurer
Twin Disc, Incorporated
Paul J. Powers . . . . . . . Retired Chairman, President and July 1992
Age 67 Chief Executive Officer,
Commercial Intertech, Corp.,
Youngstown, Ohio
(A leading manufacturer of hydraulic
components, pre-engineered buildings
and stamped metal products)
Director of Global Marine Incorporated,
First Energy Corporation, and
York International Corporation
John A. Mellowes . . . . . . Chairman and October, 1999
Age 64 Chief Executive Officer,
Charter Manufacturing Co.,
Mequon, Wisconsin
(A privately held producer of bar,
rod wire and wire parts)
Also Director,
Marshall & Ilsley Corporation
DIRECTORS WHOSE TERMS EXPIRE IN 2003:
Michael H. Joyce . . . . . . President and October 1991
Age 61 Chief Operating Officer,
Twin Disc, Incorporated
Also Director, Woodward
Governor Company and
Oil Gear Company
David B. Rayburn . . . . . . President and July 2000
Age 54 Chief Operating Officer,
Modine Manufacturing Company,
Racine, Wisconsin
(A manufacturer of heat
exchange equipment)
George E. Wardeberg . . . . Retired Vice Chairman, July 1997
Age 67 Wisconsin Energy Corporation
Milwaukee, Wisconsin
(A holding company with subsidiaries in
utility and non-utility businesses)
Also Director,
Marshall & Ilsley Corporation
7
DIRECTOR COMMITTEES AND ATTENDANCE
BOARD OF DIRECTORS MEETINGS AND ATTENDANCE
The Corporation's Board of Directors met 6 times during the year ended
June 30, 2002. There were three absences from these meetings.
DIRECTORS COMMITTEE MEETINGS AND ATTENDANCE
The Executive Selection and Salary and Audit Committees met 1 and 3 times
respectively, during the year. The Director Nominating and Board Affairs
Committee met once during the year. The Pension and Finance Committees met 2
times during the year. Each Director attended at least 75% of the meetings
requiring his attendance.
DIRECTOR COMMITTEE FUNCTIONS
Audit Committee
The Audit Committee reviews with the Corporation's Internal Auditor and
Independent Public Accountants their activities, reports and comments, and
recommends to the Board any action which it deems appropriate. The Committee
recommends to the Board the selection of auditors.
Finance Committee
The Finance Committee considers management's proposed financial policies
and actions, and makes appropriate recommendations to the Board regarding:
Debt and capital structure, acquisitions, capital budgets, dividend policy and
other financial matters.
Nominating and Board Affairs Committee
The Nominating and Board Affairs Committee recommends nominees for the Board
to the Board of Directors. The Committee will consider nominees recommended by
shareholders in writing to the Secretary. In addition, the Committee reviews
proposed changes in corporate structure and governance, committee structure
and function, and meeting schedules, making recommendations to the Board as
appropriate.
Executive Selection and Salary Committee
The Executive Selection and Salary Committee reviews nominees for Corporate
offices and related compensation levels, making recommendations to the Board
of Directors as considered necessary.
Pension Committee
The Pension Committee reviews and recommends to the Board for approval
the pension funds' professional advisors and auditors. The Committee annually
reviews actuarial assumptions, actuarial valuations, investment performance,
funding policies and investment policies.
Committee Membership
The Directors' committees are currently comprised of the following
Directors; the Chairman of the Committee is listed first:
Executive
Selection Nominating
and and
Audit Finance Pension Salary Board Affairs
- - - - - - - - - - - - - - - - - - - - - - - -
Swift Wardeberg Zimmer Powers Mellowes
Mellowes Powers Mellowes Swift Powers
Rayburn Rayburn Rayburn Zimmer Zimmer
Wardeberg Swift Wardeberg
Joyce
Parrish
8
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation received by the
Corporation's Chief Executive Officer and the 4 most highly paid executive
officers for the 3 fiscal years ended June 30, 2000, 2001, and 2002,
respectively.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
- - - - - - - - - - - - - -
Name and Stock All Other
Principal Position Year Salary Bonus <F7> Options Compensation<F8>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Michael E. Batten 2002 $376,792 $172,429 8,000 $18,041
Chairman and 2001 358,721 174,141 6,000 17,366
Chief Executive 2000 345,000 119,800 6,000 12,503
Officer
Michael H. Joyce 2002 $282,074 $106,873 4,000 $ 8,245
President and 2001 267,107 103,785 3,000 8,665
Chief Operating 2000 263,154 59,400 3,000 5,921
Officer
James E. Feiertag 2002 $216,451 $ 63,310 4,000 $ 8,452
Vice President 2001 135,404 39,645 5,000 59,184
Manufacturing 2000 - - - -
James O. Parrish 2002 $190,172 $ 54,063 3,000 $ 8,171
Vice President 2001 180,312 52,553 2,500 9,454
Finance & 2000 171,600 35,700 2,000 9,720
Treasurer
Lance J. Melik 2002 $149,747 $ 40,788 2,500 $ 6,182
Vice President and 2001 140,663 34,202 2,000 7,707
General Manager, 2000 130,685 23,908 1,250 4,700
Industrial and
Transmission
<FN>
<F7> Represents annual incentive bonuses determined by the Board of
Directors. See "Board Executive Selection and Salary Committee Report on
Executive Compensation-Annual Incentives". Bonuses represent amounts earned
during the fiscal year and are paid in the subsequent fiscal year.
<F8> Amounts are comprised of Corporation's 401(k) matching contributions and
Corporation paid life insurance includible in income, and for Mr. Feiertag a
signing bonus.
</FN>
Stock Options
The following table summarizes option grants during fiscal year 2002 to
the executive officers named in the Summary Compensation Table above, and the
potential realizable values at assumed annual rates of stock price
appreciation for the applicable 5 or 10 year option term.
9
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------- -----------------------------
# of
Securities % of Total
Underlying Options
Options Granted to Exercise Expiration
Name Granted<F9> Employees Price<F10> Date 5% 10%
- ----------- ---------- --------- -------- ---------- -------- --------
M. Batten 4,000 8.9% $15.0500 8/13/06 $ 37,859 $ 95,943
M. Batten 4,000 8.9% 16.5600 8/13/11 41,658 105,570
M. Joyce 4,000 8.9% 15.0500 8/13/11 37,859 95,943
J. Feiertag 4,000 8.9% 15.0500 8/13/11 37,859 95,943
J. Parrish 3,000 6.7% 15.0500 8/13/11 28,395 71,957
L. Melik 2,500 5.6% 15.0500 8/13/11 23,662 59,965
<FN>
<F9> During the fiscal year ended June 30, 2002, a total of 44,700 options
were granted to officers, key employees and directors, with 38,700 granted
under the 1998 Incentive Compensation Plan, and 6,000 options granted under
the 1998 Stock Option Plan for Non-Employee Directors.
<F10> The exercise price is the fair market value on the date of grant, except
for incentive stock options granted to Mr. Batten which are exercisable at
110% of the fair market value at date of grant.
</FN>
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
2002 by the named executive officers and the value of such officers'
unexercised options at June 30, 2002.
Total Number Total Value
of Unexercised of Unexercised,
Options Held In-the-Money Options
Shares Value at Fiscal Year End Held at Fiscal Year End
Acquired on Real- Exer- Unexer- Exer- Unexer-
Name Exercise ized cisable cisable cisable cisable
- ---- ----------- ----- --------- --------- --------- -----------
M. Batten 0 N/A 63,500 0 $ 0 $ 0
M. Joyce 0 N/A 40,500 0 0 0
J. Parrish 0 N/A 24,800 0 0 0
J. Feiertag 0 N/A 9,000 0 0 0
L. Melik 0 N/A 8,250 0 0 0
Retirement Income Plan
The Twin Disc, Inc., Retirement Plan for Salaried Employees provides
non-contributory benefits based upon both years of service and the employees'
highest consecutive 5-year average annual compensation during the last 10
calendar years of service. The non-contributory benefits were frozen as of
December 31, 1996. The Plan is integrated with Social Security. The following
table presents the non-contributory benefits payable for life under the Plan
to employees assuming normal retirement in the current year.
AVERAGE HIGH NON-CONTRIBUTORY PENSION BASED ON
5-YEAR ANNUAL YEARS OF CREDIT SERVICE
COMPENSATION 10 YEARS 20 YEARS 25 YEARS 30 YEARS 40 YEARS
$ 50,000 $ 9,428 $18,256 $19,795 $21,214 $24,398
75,000 14,628 28,356 30,908 33,239 38,076
100,000 19,828 38,456 42,021 45,264 51,754
150,000 30,228 58,656 64,247 69,314 79,111
The values reflected in the table represent the application of the Plan
formula to the appropriate amounts of compensation and years of service.
Benefits payable under the Plan, however, must be in compliance with the
applicable guidelines or maximum prescribed in the Internal Revenue Code and
in the Employee Retirement Income Security Act of 1974 (ERISA), as currently
stated or as adjusted from time to time. As of December 31, 1996, the
credited years of service for each of the Corporation's executive officers
named in the Summary Compensation Table is as follows: Mr. Batten 27 years;
Mr. Joyce 6 years; Mr. Parrish 23 years; and Mr. Melik 29 years. Mr. Feiertag
was not an employee as of December 31, 1996, therefore has no accrued benefit
under the Plan.
10
Effective January 1, 1997, the Plan was amended to add a cash balance formula
for post-January 1, 1997, accruals. Benefits under the Plan are generally
equal to the sum of the benefits as frozen on December 31, 1996, plus benefits
that accumulate under the cash balance formula beginning on January 1, 1997.
Benefits under the cash balance formula are generally stated as a lump sum
amount, but may be distributed as a lump sum or an annuity. Accruals under
the cash balance formula are based on a percentage of compensation, from 4.5%
to 6.5% based on years of service, with interest credits at the thirty year
U.S. Treasury Bond rate with a minimum guaranty of 3%. To record these pay
credits and interest credits, a hypothetical account balance is maintained for
each participant. The hypothetical account balance for each named executive
as of June 30, 2002, is as follows: Mr. Batten $73,613; Mr. Joyce $53,866; Mr.
Parrish $67,504; Mr. Melik $62,701; and Mr. Feiertag $14,522. If the named
executives continue in their respective positions and retire at the normal
retirement age of 65, their estimated annual pension amount under cash balance
portion of the Plan would be: Mr. Batten $10,048; Mr. Joyce $ 8,367; Mr.
Parrish $ 10,211; Mr. Melik $ 12,315 ; and Mr. Feiertag $ 26,033.
Supplemental Retirement Benefit Plan
A supplemental retirement benefit is extended to qualified management.
The supplemental retirement benefit is calculated as a single life annuity at
an amount approximating 50% of the highest rate of pay attained during a
specified period. The benefit is payable in the form of a single life annuity,
contingent annuity, 10-year temporary annuity, a single lump sum payment, or
two payments. The contingent annuity provides for payments to continue to the
surviving spouse at a rate equal to 50% of the rate previously paid to the
participant. In the event of death of a plan member after attaining a
retirement age but prior to retirement, the surviving spouse will receive a
lump sum benefit.
Compensation of Directors
Outside Directors of the Corporation (non-corporation employees) are paid
an annual retainer of $10,000. In addition, outside Directors receive a $1,400
fee for each board meeting and each committee meeting attended. Directors who
are officers do not receive any fees in addition to their remuneration as
officers.
Outside Directors (non-Corporation employees) are eligible to participate
in the 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and
Directors and the 1998 Stock Option Plan for Non-Employee Directors. Under
the 1998 Plan, each outside Director receives 1,000 options upon election or
re-election at an annual meeting and 600 options if appointed to the Board
between annual meetings.
Outside Directors (non-Corporation employees) who reach the age of 68 or
who retire from full-time employment maybe required to retire from the Board
of Directors effective as of the completion of their current term. Retired
outside directors are entitled to an annual retirement benefit equal to the
sum of:
a) The annual retainer at the time of retirement.
b) 6 monthly fees for Director Meetings at the rate prevailing at the
time of retirement.
The benefit is payable for a term equal to the Director's years of service or
life, whichever is shorter.
Employment Contracts
The Corporation has entered into agreements with certain of its key
executives, including Messrs. Batten, Joyce, Parrish, Melik and Feiertag. The
agreements provide for severance benefits to be paid to the executive
following a change in control of the Corporation (as defined in those
agreements) and a termination (as defined in those agreements) of the
employment of the executive. Upon the occurrence of the events, as specified
in the agreements, which would entitle the executive to the payment of
severance benefits, the maximum contingent liability of the Corporation for
the payment of such severance benefits would be approximately $3,326,000.
Severance benefits for an executive officer would generally consist of the sum
of the executive's highest annual base salary between the change in control
and the date of termination plus the executive's most recent annual bonus
times the lesser of 1.50 (2.75 for Messrs. Batten, Joyce and Parrish) or the
number of whole and fractional years between the termination date and his
normal retirement date. In addition, the executive would be entitled to the
cash value of any shares of common stock subject to unexercised stock options
held by the executive and a continuance of fringe benefits for 24 months
following termination. The agreements are specifically designed to assure that
benefits will not exceed the limitations and provisions of Sec. 280(g) of the
Internal Revenue Code.
11
Board Executive Selection and Salary Committee Report
on Executive Compensation
Compensation Philosophy
The Corporation's primary business objective is to maximize shareholder
value over the long term. To accomplish this objective, the Corporation has
developed a comprehensive business strategy that emphasizes maximizing
long-term cash flow and earnings, maintaining leadership or becoming the
leader in its markets, and providing products of the highest quality.
The Executive Selection and Salary Committee of the Board of Directors
(the "Committee") is comprised of 3 independent directors, none of whom has
interlocking or other relationships which might be considered conflicts of
interest. The Committee establishes compensation programs which are designed
to foster the Corporation's business objectives. The Committee approves the
design of, assesses the effectiveness of, and administers executive
compensation programs in support of compensation policies.
Committee members believe that the compensation program should target
compensation levels at rates that are reflective of current market practices.
Offering market-comparable pay opportunities allows the Corporation to
maintain a stable, successful management team.
Competitive market data is provided by an independent compensation
consultant. The data provided compares the Corporation's compensation
practices to a group of comparative companies. The Corporation's market for
compensation comparison purposes is comprised of a group of companies that
have national and international business operations and similar sales volumes,
market capitalizations, employment levels, and lines of business. In
establishing a comparative group for compensation purposes, the Committee
exercises its judgment and makes its decision after considering the factors it
deems relevant.
The companies chosen for the comparative group used for compensation
purposes are not necessarily the same companies which comprise the peer group
index in the Performance Graph included in this proxy statement. The Committee
believes that the Corporation's most direct competitors for executive talent
include many companies in geographical areas in which the Corporation operates
as well as many of the companies that are included in the peer group
established for comparing shareholders returns.
The key elements of the Corporation's executive compensation are base
salary, annual incentives, long-term compensation, and benefits. These key
elements are addressed separately below. In determining compensation, the
Committee considers all elements of an executive's total compensation package,
including severance plans, insurance, and other benefits, with the objective
of being competitive but not trend setting.
Base Salaries
The Committee regularly reviews each executive's base salary. Base
salaries are targeted at market levels, based upon the Committee's analysis of
marketplace practices. Base salaries for executives are initially determined
by evaluating executives' levels of responsibility, prior experience, breadth
of knowledge, internal equity issues, and external pay practices.
Base salaries offer stability to executives and allow the Corporation to
attract competent executive talent and maintain an effective management team.
They also allow executives to be rewarded for individual performance based on
the Corporation's evaluation process which encourages the development of
executives. Pay for individual performance rewards executives for achieving
goals which may not be immediately evident in common financial measurement.
Increases to base salaries are driven primarily by individual
performance. Individual performance is evaluated based on sustained levels of
individual contribution to the Corporation. When evaluating individual
performance, the Committee considers the executive's effort in promoting
Corporate values; improving product quality; developing relationships with
customers, suppliers, and employees; demonstrating leadership abilities among
coworkers; and other goals. Overall, executive salaries were increased at
rates comparable to the increases provided at other companies and are near
market levels.
12
As reflected in the Summary Compensation Table on page 8, Mr. Batten's
base salary was increased in fiscal year 2002 by $18,071. In determining Mr.
Batten's base salary in 2002, the Committee considered the Company's financial
performance for the year, Mr. Batten's individual performance, and his
long-term contributions to the success of the Corporation. The Committee also
compared Mr. Batten's base salary to the base salaries of CEOs at comparative
companies.
Annual Incentives
The Twin Disc Incentive Bonus Program (the "Annual Plan") promotes the
Corporation's pay-for-performance philosophy by providing executives with
direct financial incentives in the form of annual cash bonuses to achieve
corporate, business unit, and individual performance goals. Annual bonus
opportunities allow the Corporation to communicate specific goals that are of
primary importance during the coming year and motivate executives to achieve
these goals.
Eligibility to participate in the Annual Plan, as well as the individual
payout percentages assigned to each eligible executive's position, are
determined annually by Mr. Batten, as chief executive officer, subject to the
approval of the Committee.
Each year, the Committee approves specific goals relating to each
executive's bonus opportunity. Eligible executives are assigned threshold and
target bonus levels based on a percentage of base salary. Executives earn
bonuses to the extent to which preestablished goals are achieved.
In fiscal year 2002 bonus awards were granted as earnings targets were
attained indicating prior long-term decisions are providing favorable results.
Corporate goals in 2002 were based on target earnings and return on net assets
employed.
Target bonus awards are established at levels approximating marketplace
practices for each executive. Targets are considered by the Committee to be
achievable, but to require above average performance from each of the
executives.
In fiscal year 2002, Mr. Batten received a bonus under the Annual Plan of
$172,429. This reflects achievements towards the Corporation's goals relating
to earnings and return on net assets employed in fiscal year 2002.
Long-Term Incentives
Long-term incentives are provided pursuant to the Corporation's 1988
Non-Qualified Stock Option Plan for Officers, Key Employees and Directors, the
1988 Incentive Stock Option Plan, the 1998 Incentive Compensation Plan and the
1998 Stock Option Plan for Non-Employee Directors.
In keeping with the Corporation's commitment to provide a total
compensation package which includes at-risk components of pay, the Committee
makes annual decisions regarding appropriate stock option grants for each
executive. When awarding stock options, the Committee considers executives'
levels of responsibility, prior experience, historical award data, various
performance criteria, and compensation practices at comparator companies.
Consistent with the above stated goals, Mr. Batten received options to
purchase 8,000 shares in fiscal year 2002.
Stock options are granted at an option price not less than the fair
market value of the Corporation's common stock on the date of grant.
Accordingly, stock options have value only if the stock price appreciates from
the date the options are granted. This design focuses executives on the
creation of shareholder value over the long term and encourages equity
ownership in the Corporation.
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to the Company's CEO and four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The compensation of the
Corporation's CEO and the four other most highly compensated executive
officers currently does not approach the disqualifying threshold. In the
future, in the event the disqualifying threshold becomes an issue, the
Committee will weigh all the facts and circumstances in existence at the time.
Executive Selection and Salary Committee
Paul J. Powers, Chairman
David L. Swift
David R. Zimmer
July 26, 2002
13
The following Report of the Audit Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent the Company specifically
incorporates this report by reference therein.
Audit Committee Report
The charter reflects standards set forth in SEC regulations and New York
Stock Exchange rules. All members of the Audit Committee are independent, as
defined in Sections 303.01(B)(2)(a) and (3) of the listing standards of the
New York Stock Exchange.
The Committee has implemented procedures to ensure that during the course
of each fiscal year it devotes the attention that it deems necessary or
appropriate to each of the matters assigned to it under the Committee's
charter. To carry out its responsibilities, the Committee met three times
during fiscal 2002.
As part of its responsibilities, and as set forth in its charter, the
Audit Committee met with both management and the Corporation's independent
accountants to review and discuss the audited financial statements prior to
their issuance and to discuss significant accounting issues. Management
advised the Committee that all financial statements were prepared in
accordance with generally accepted accounting principles, and the Committee
discussed the statements with both management and the independent accountants.
The Committee's review included discussion with the independent accountants of
matters required to be discussed pursuant to Statement on Auditing Standards
No. 61 (Communication with Audit Committee).
The Committee received the written disclosures and the letter required
from the independent accountants as required by the Independence Standards
Board Standard No. 1 (Independence Discussions with Audit Committee). The
Committee also discussed with PricewaterhouseCoopers LLP matters relating to
its independence.
On the basis of these reviews and discussions, the Committee recommended
to the Board of Directors that the Board approve the inclusion of the
Corporation's audited financial statements in the Corporation's Annual Report
on Form 10-K for the fiscal year ended June 30, 2002, for filing with the
Securities and Exchange Commission.
Audit Committee
David L. Swift, Chairman
John A. Mellowes
David B. Rayburn
George E. Wardeberg
July 26, 2002
INDEPENDENT PUBLIC AUDITORS
The firm of PricewaterhouseCoopers LLP has audited the Corporation's books
annually since 1928. Representatives of PricewaterhouseCoopers LLP are
expected to be present at the meeting and, while no formal statement will be
made by them, they will be available to respond to appropriate questions.
14
CORPORATE PERFORMANCE GRAPH
The following table compares total shareholder return over the last 5
fiscal years to the Standard & Poor's Machinery Index and the Russell 2000
index. The S&P Machinery Index consists of a broad range of manufacturers. The
Russell 2000 Index consists of a broad range of 2,000 Companies. The
Corporation believes, because of the similarity of its business with those
companies contained in the S&P Machinery Index, that comparison of shareholder
return with this index is appropriate. Total return values for the
Corporation's common stock, the S&P Machinery Index and the Russell 2000 Index
were calculated based upon an assumption of a $100 investment on June 30, 1996
and based upon cumulative total return values assuming reinvestment of
dividends on a quarterly basis.
Comparison of Five-Year Cumulative Total Return
Twin Disc, Inc.; S&P Machinery; and Russell 2000
06/30/97 06/30/98 06/30/99 06/30/00 06/30/01 06/30/02
-------- -------- -------- -------- -------- --------
Twin Disc 100.00 107.80 74.27 65.94 63.98 62.66
S&P Machinery 100.00 101.96 111.70 82.48 87.07 95.61
Russell 2000 100.00 116.51 118.25 135.20 135.97 124.28
SECTION 16 (a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Based solely on a review of the copies of such forms furnished to the
Corporation and representations from executive officers and Directors, the
Corporation believes that during the period from July 1, 2001 to June 30,
2002, all Section 16(a) filing requirements applicable to its executive
officers, Directors and greater than ten (10%) beneficial owners were complied
with.
AUDIT FEES
Aggregate fees, including out-of-pocket expenses, for professional
services rendered by PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") in
connection with (i) the audit of the Company's consolidated financial
statements as of and for the year ended June 30, 2002, including statutory
audits of the financial statements of the Company's affiliates that are relied
on in performance of the audit of the Company's consolidated financial
statements, and (ii) the limited reviews of the Company's quarterly financial
statements were $299,400.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
During the year ended June 30, 2002, PricewaterhouseCoopers rendered no
professional services to the Company in connection with the design and
implementation of financial information systems.
15
ALL OTHER FEES
In addition to the other fees described above, aggregate fees, including
out-of-pocket expenses, of $592,500 were paid to PricewaterhouseCoopers during
the year ended June 30, 2002, primarily for the following professional
services: tax-related services, due diligence for acquisitions, and other
non-recurring audit services.
The Audit Committee has determined that the provision of services for (a)
financial information systems design and implementation fees listed above, if
any, and (b) all other fees listed above, is compatible with maintaining
PricewaterhouseCoopers LLP's independence.
GENERAL
The Corporation will bear the cost of the solicitation of proxies. The
firm of Georgeson Shareholder Communications Inc., New York, NY has been
retained to assist in solicitation of proxies for the Annual Meeting at a fee
not to exceed $7,000 plus expenses.
Management does not know of any other business to come before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the persons named in the accompanying form of proxy to vote
upon such matters in their discretion in accordance with the authorization of
the proxy.
If you do not contemplate attending in person, we respectfully request
that you fill in, sign and return the accompanying proxy at your early
convenience. However, remember that in order to have your proxy validated, it
must be delivered to the Secretary either in person, by mail, or by messenger,
and it must be received by the Secretary not less than forty-eight (48) hours
prior to the date of the meeting.