THE TORO COMPANY
ANNUAL MANAGEMENT INCENTIVE PLAN II
1. PLAN PURPOSE. The purpose of The Toro Company Annual Management Incentive
Plan II (the "Plan") is to enhance stockholder value of The Toro Company
(the "Company") by providing an annual incentive to reinforce achievement
of the Company's performance goals ("Performance Goals"); to link a
significant portion of a participating officer's annual compensation to the
achievement by the Company, and in certain cases, a division or individual,
of Performance Goals; to attract, motivate and retain officers on a
competitive basis by making awards based on annual achievement of
Performance Goals ("Annual Performance Awards"); and to encourage selected
officers to acquire and retain shares of the Common Stock, par value $1.00
per share, and related Preferred Share Purchase Rights of the Company
("Common Stock").
2. ELIGIBILITY AND PARTICIPATION. Within the first 90 days of each fiscal
year, or before the first 25% of a shorter performance period has elapsed,
the Compensation Committee (the "Committee") shall select as recipients of
Annual Performance Awards ("Plan Participants") those officers of the
Company who, through their position or performance, can have a significant,
positive impact on the Company's financial results. Plan Participants are
designated to participate in the Plan for one fiscal year, but may be
renominated and selected again. Newly-hired and newly-promoted officers may
be selected as Plan Participants after the first 90 days of a fiscal year
subject to the provisions of this paragraph and subparagraph 4.a. With
respect to persons subject to Section 16 of the Securities Exchange Act of
1934 ("Exchange Act"), transactions under the Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successor provisions
under the Exchange Act. To the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
3. AWARD AMOUNTS.
a. TARGET PAYOUT. The target amount that may be paid with respect
to an Annual Performance Award (the "Target Payout") shall be
determined by the Committee and shall be based on a percentage of
a Plan Participant's actual annual base salary at the time of
grant ("Participation Factor"), within the range established by
this subparagraph and subject to adjustment as provided in the
last sentence of this subparagraph. The Participation Factors,
which are intended to reflect a Plan Participant's level of
responsibility, are up to 60% for the Chairman and Chief
Executive Officer, up to 55% for the President and Chief
Operating Officer if one should be elected, up to 50% for other
elected officers and up to 45%for other officers. The Chief
Executive Officer may approve modifications to the foregoing
Participation Factors for any participant who is not a person
referred to in
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the regulations thereunder ("Section 162(m)"), if
such modification is based on level of responsibility. The
Committee may establish curves, matrices or other measurements
for prorating the amount of payouts for achievement of
Performance Goals at less than the Target Payout.
b. MAXIMUM PAYOUT. The Committee may also establish a maximum
potential payout amount (the "Maximum Payout") with respect to an
Annual Performance Award of up to 200% of the Target Payout in
the event Performance Goal targets are exceeded by an amount
established by the Committee at the time Performance Goals are
established. The Committee may establish curves, matrices or
other measurements for prorating the amount of payouts for
achievement of Performance Goals at greater than the Target
Payout but less than the Maximum Payout.
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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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.
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