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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended July 31, 1998 Commission File Number 1-8649
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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
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of August 31, 1998 was
12,867,614.
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<PAGE>
THE TORO COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Operations and
Retained Earnings -
Three and Nine Months Ended
July 31, 1998 and August 1, 1997..........................................3
Condensed Consolidated Balance Sheets -
July 31, 1998, August 1, 1997 and October 31, 1997........................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 1998 and August 1, 1997........................5
Notes to Condensed Consolidated Financial Statements........................6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................8-14
PART II. OTHER INFORMATION:
ITEM 5. Other Information...........................................................15
ITEM 6. Exhibits and Reports on Form 8-K...........................................15-16
Signatures..................................................................17
Exhibit 11 Computation of Earnings (Loss) Per Share of Common Stock.........18
</TABLE>
2
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PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
July 31, August 1, July 31, August 1,
1998 1997 1998 1997
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 290,993 $ 249,274 $ 880,738 $ 810,434
Cost of sales ..................................... 189,713 156,879 573,457 517,695
------------- ----------- ------------- ------------
Gross profit ................................ 101,280 92,395 307,281 292,739
Selling, general and administrative expense ....... 89,532 73,626 256,431 231,255
Restructuring and other unusual expense ........... 10,452 - 10,452 -
------------- ----------- ------------- ------------
Earnings from operations .................... 1,296 18,769 40,398 61,484
Interest expense .................................. (6,650) (5,476) (19,366) (15,408)
Other income, net ................................. 1,135 3,151 6,140 5,957
------------- ----------- ------------- ------------
Earnings (loss) before income taxes ......... (4,219) 16,444 27,172 52,033
Provision (benefit) for income taxes .............. (1,666) 6,495 10,733 20,553
------------- ----------- ------------- ------------
Net earnings (loss) before extraordinary loss (2,553) 9,949 16,439 31,480
Extraordinary loss, net of income tax benefit of
$1,087 ...................................... - (1,663) - (1,663)
------------- ----------- ------------- ------------
Net earnings (loss) ......................... $ (2,553) $ 8,286 $ 16,439 $ 29,817
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Retained earnings at beginning of period .......... $ 218,597 $ 192,276 $ 202,681 $ 173,630
Net earnings (loss) ............................... (2,553) 8,286 16,439 29,817
Dividends on common stock of $0.12, $0.12,
$0.36 and $0.36 per share, respectively ..... (1,543) (1,452) (4,619) (4,337)
------------- ----------- ------------- ------------
Retained earnings at end of period ................ $ 214,501 $ 199,110 $ 214,501 $ 199,110
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Basic net earnings (loss) per share of common stock
before extraordinary loss ................... $ (0.20) $ 0.82 $ 1.28 $ 2.60
Extraordinary loss, net of income tax benefit ..... - (0.13) - (0.13)
------------- ----------- ------------- ------------
Basic net earnings (loss) per share of common
stock ....................................... $ (0.20) $ 0.69 $ 1.28 $ 2.47
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Diluted net earnings (loss) per share of common
stock and common stock equivalents before
extraordinary loss ....................... $ (0.20) $ 0.80 $ 1.24 $ 2.53
Extraordinary loss, net of income tax benefit ..... - (0.13) - (0.13)
------------- ----------- ------------- ------------
Diluted net earnings (loss) per share of common
stock and common stock equivalents ....... $ (0.20) $ 0.67 $ 1.24 $ 2.40
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, August 1, October 31,
1998 1997 1997
-------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
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Cash and cash equivalents ........................... $ 2,800 $ 4 $ 8
Receivables, net .................................... 328,628 308,234 259,134
Inventories ......................................... 202,999 161,825 160,122
Other current assets ................................ 52,069 39,285 52,780
-------------- ------------- -------------
Total current assets ......................... 586,496 509,348 472,044
-------------- ------------- -------------
Property, plant, and equipment ...................... 325,473 322,708 297,841
Less accumulated depreciation ................ 192,510 206,105 180,989
-------------- ------------- -------------
132,963 116,603 116,852
Other assets ........................................ 113,904 79,019 72,738
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Total assets ................................. $ 833,363 $ 704,970 $ 661,634
-------------- ------------- -------------
-------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current portion of long-term debt ................... $ 684 $ 365 $ 365
Short-term borrowing ................................ 158,031 95,000 41,000
Accounts payable .................................... 30,505 46,531 58,397
Other accrued liabilities ........................... 161,581 146,358 138,071
-------------- ------------- -------------
Total current liabilities .................... 350,801 288,254 237,833
-------------- ------------- -------------
Long-term debt, less current portion ................ 196,947 177,650 177,650
Other long-term liabilities ......................... 6,625 5,399 4,988
Stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 12,867,614 shares at July 31,
1998 (net of 640,441 treasury shares),
12,112,310 shares at August 1, 1997
(net of 797,694 treasury shares), and
12,189,244 shares at October 31, 1997 (net
of 720,760 treasury shares) .................. 12,868 12,112 12,189
Additional paid-in capital ....................... 59,455 28,241 31,371
Retained earnings ................................ 214,501 199,110 202,681
Foreign currency translation adjustment .......... (7,834) (5,796) (5,078)
-------------- ------------- -------------
Total stockholders' equity ....................... 278,990 233,667 241,163
-------------- ------------- -------------
Total liabilities and stockholders' equity ... $ 833,363 $ 704,970 $ 661,634
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
July 31, August 1,
1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................................. $ 16,439 $ 29,817
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Extraordinary loss on early extinguishment of debt .................... - 1,663
Provision for depreciation and amortization ........................... 22,593 16,675
Loss (gain) on disposal of property, plant and equipment .............. 301 (70)
Deferred income taxes ................................................. (2,490) 1,528
Tax benefits related to employee stock option transactions ............ 1,815 1,224
Changes in operating assets and liabilities:
Receivables, net ................................................ (60,811) (43,488)
Inventories ..................................................... (31,448) (747)
Other current assets ............................................ 4,283 (3,606)
Accounts payable and accrued expenses ........................... (18,100) 8,009
-------------- -------------
Net cash (used in) provided by operating activities ......... (67,418) 11,005
-------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment ............................ (24,514) (24,729)
Proceeds from asset disposals ......................................... 1,330 1,160
Decrease (increase) in other assets ................................... 1,362 (7,877)
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 ....................... (38,995) (149,476)
-------------- -------------
Cash flows from financing activities:
Increase in short-term borrowing ...................................... 117,031 53,975
Proceeds from issuance of long-term debt .............................. - 175,000
Repayments of long-term debt .......................................... (3,601) (50,350)
Payments for termination of interest rate swaps ....................... - (23,650)
Payment of debt issue costs and prepayment penalty .................... - (5,625)
Increase in other long-term liabilities ............................... 972 -
Proceeds from exercise of stock options ............................... 2,176 6,587
Purchases of common stock ............................................. - (7,952)
Dividends on common stock ............................................. (4,619) (4,337)
-------------- -------------
Net cash provided by financing activities ................... 111,959 143,648
-------------- -------------
Foreign currency translation adjustment .................................. (2,754) (5,239)
-------------- -------------
Net increase (decrease) in cash and cash equivalents ..................... 2,792 (62)
Cash and cash equivalents at beginning of period ......................... 8 66
-------------- -------------
Cash and cash equivalents at end of period ............................... $ 2,800 $ 4
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1998
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by generally accepted
accounting principles for complete financial statements. Unless the context
indicates otherwise, the term's "company" and "Toro" refer to The Toro
Company and its subsidiaries. In the opinion of management, the unaudited
condensed consolidated financial statements include all adjustments,
consisting primarily of recurring accruals, considered necessary for a fair
presentation of the financial position and the results of operations. Since
the company's business is seasonal, operating results for the nine months
ended July 31, 1998 are not necessarily indicative of the results that may
be expected for the year ended October 31, 1998. Certain amounts from prior
period's financial statements and financial information have been
reclassified to conform to this period's presentation.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the year
ended October 31, 1997. The policies described in that report are used for
preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO)
method. Had the first-in, first-out (FIFO) method of cost determination
been used, inventories would have been $27,023,000 and $25,642,000 higher
than reported at July 31, 1998, and August 1, 1997, respectively. Under the
FIFO method, work-in-process inventories were $84,360,000 and $72,008,000
and finished goods inventories were $145,662,000 and $115,459,000 at July
31, 1998, and August 1, 1997, respectively.
BUSINESS ACQUISITIONS
On November 25, 1997, the company completed the acquisition of Exmark
Manufacturing Company Incorporated (Exmark). In exchange for all 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 terms
of the purchase agreement, the company will be required to make contingent
payments to Exmark's former 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
acquisition is accounted for using the purchase method of accounting.
On February 19, 1998, the company completed the acquisition of GR
Driplines, Inc. (Drip In) and various other assets. The acquisition was
accounted for using the purchase method of accounting.
The company and James Hardie Irrigation Limited (Hardie) entered into an
arbitration process related to the valuation and accounting issues used in
determining the purchase price of Hardie. This process was completed on
April 20, 1998 resulting in a further $1.8 million reduction of the
purchase price.
6
<PAGE>
RESTRUCTURING AND OTHER UNUSUAL EXPENSE
During the third quarter of fiscal 1998, the company recorded a charge of
$10.5 million for restructuring and other unusual expense. The
restructuring charges of $3.3 million consisted of $2.2 million for the
severance and asset write-down related to the closure of a manufacturing
facility and $1.1 million for other restructuring severance costs. Other
unusual expense consisted of $3.5 million for the expected loss related to
the sale of the recycling equipment division and $3.7 million for special
marketing programs consisting of rebates and co-op credits in order to
reduce certain consumer product field inventories to historically low
levels in preparation of a new distribution logistical program next fiscal
year.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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 will be required to adopt the new standard beginning
with the first quarter of fiscal year 2000; earlier application is
permitted. The adoption of SFAS 133 is not expected to have a material
impact on the company's consolidated financial statements.
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 will be required to adopt the SOP at the beginning
of fiscal year 2000; earlier application is permitted. Costs incurred prior
to the initial application of the SOP should not be adjusted to conform
with SOP 98-1. However, costs incurred for all projects in process at the
beginning of fiscal year 2000 should apply the provisions established in
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 at the beginning of 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 company's current disclosures.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made
orally in the future by or on behalf of the company.
Statements that are not historical are forward-looking. When used by or on
behalf of the company, the words "expect", "anticipate", "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 whether the announced profit improvement plan can be successfully
implemented and expected cost savings can be achieved; the cost of closing
certain plants and selling certain business units; the success of new
marketing programs; instability in many of the company's markets in Asia and
other parts of the world; 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; increased
emphasis on price and value affecting consumer buying patterns which affect
the company's consumer business; uncertainties inherent in modification of
distribution of consumer products from dealer outlets to hardware, home
centers, and mass merchant retailers; changes in distributor ownership;
increased competition in the company's businesses; the company's ability to
integrate recent business acquisitions and to manage alliances successfully;
changes in the company's distribution logistics; changes in distributor,
dealer or mass merchant purchasing practices; the company's ability to
rationalize its product lines and plant configurations; the company's ability
to negotiate expected covenant waivers with its banks; and continuing cost
overruns affecting manufacturing efficiencies for selected consumer products.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions,
and the economy in general in both foreign and domestic markets; weather
conditions affecting demand, including warm winters and wet spring and summer
weather; lack of growth in the company's markets; financial market changes
including increases in interest rates and fluctuations in foreign exchange
rates; a slowing in housing starts or new golf course starts; inability to
raise prices of products due to market conditions; changes in market
demographics; actions of competitors; unanticipated problems or costs
associated with implementation by the company of computer applications that
will accommodate the year 2000; the inability of the company's suppliers,
customers, creditors and financial service organizations to implement
computer applications accommodating the year 2000; the company's ability to
develop, manufacture, and sell both new and existing products profitably;
seasonal factors in the company's industry; unforeseen litigation; government
action including budget levels, regulation and legislation, primarily
legislation relating to the environment, commerce, infrastructure spending,
and health and safety; labor relations; and availability of materials.
The company wishes to caution readers not to place 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 are in
addition to other factors discussed elsewhere in the company's filings with
the Securities and Exchange Commission. The company undertakes no obligation
to update any forward-looking statements to reflect events or circumstances
after the date on which such statement is made, or to reflect the occurrence
of unanticipated events.
8
<PAGE>
RESULTS OF OPERATIONS
The company has experienced poor results for the nine months ended July 31,
1998 compared to last year. The company has been affected by several events
outside its control. The lack of snow experienced this year negatively
impacted highly profitable snowthrower sales, the wet spring led to lower
irrigation sales in certain markets in the second quarter, and weakness in
Asia has affected commercial and irrigation golf related sales in that
market. The company also was affected by poor execution of the transfer of
manufacturing certain consumer product from its closed Mound, Minnesota
facility to its El Paso, Texas facility, which has resulted in significant
manufacturing inefficiencies. The company also had delays in manufacturing
the new Dura-Force(TM) Lawn Boy-Registered Trademark- walk power mower, which
did not allow the company to fully capitalize on the acceptance of the new
product. The company is focusing on improving the manufacturing efficiencies
at its El Paso plant and expects the majority of the issues to be resolved by
fiscal year-end. The company has begun a profit improvement plan noted below
to improve overall company profitability.
Third quarter net sales were $291.0 million versus $249.3 million last year,
an increase of 16.7 percent. Sales would have been up 8.8 percent without the
incremental revenue from the acquisitions of Exmark-Registered Trademark- and
Drip In. The increase in sales is due to a strong demand for professional
turf equipment and parts and certain irrigation products, and the newly
acquired Drip In and Exmark-Registered Trademark- products. The increase in
sales is also due to a shift of revenue from the second to the third quarter
for walk power mowers, which was partially caused by production delays in the
first and second quarters. The increase, however, was offset partially by a
planned reduction of sales of gas trimmers to certain home centers due to low
product profitability. Net loss for the quarter was $2.6 million versus net
income of $8.3 million for the same quarter in the previous year, and loss
per basic share was $0.20 versus net income of $0.67 per dilutive share last
year. The current period net loss was primarily due to restructuring and
other unusual expense of $10.5 million along with lower operating margins due
to manufacturing inefficiencies experienced at the El Paso facility. The
change in results for the prior comparable period was also affected by higher
interest expense resulting from higher levels of working capital and interest
on debt related to the current year's acquisitions.
Year-to-date net sales were $880.7 million versus $810.4 million last year,
an increase of 8.7 percent. Without the incremental revenue of
Exmark-Registered Trademark- and Drip In products, sales would have been up
only slightly. The increase in net sales without Exmark-Registered Trademark-
and Drip In products were due to strong sales of professional turf equipment
and irrigation products that were partially offset by the significantly lower
levels of shipments for consumer products including snowthrowers, gas powered
trimmers, and riding products. Net earnings were $16.4 million versus $29.8
million last year, 1.9 percent of net sales as compared to 3.7 percent of net
sales for the same period last year. The reasons for the nine-month decrease
in net earnings is due to the significant decrease in consumer sales and the
reasons noted for the third quarter decrease.
The company is in the process of implementing a profit improvement plan and
is formulating additional programs to reposition the consumer business and
make the company as a whole more competitive. The expected primary elements
of this strategy include decentralizing manufacturing and inventory
management, changes in distribution logistics to an outside provider, sale of
the recycling equipment division, and plant closings. The company expects
this program will result in restructuring and other unusual expense totaling
approximately $15.0 million in fiscal 1998, of which $10.5 million was
recorded in the third quarter. Approximately $3.0 to $4.5 million will be
expensed in the fourth quarter of fiscal 1998. The company is also reviewing
other programs, which could result in additional expense of $3.0 to $5.0
million in fiscal 1999. Due to the additional restructuring and other unusual
expense that will be recorded in the fourth quarter, in addition to the
reasons discussed below, the company expects a significant loss for the
fourth quarter. The expected savings from the profit improvement plan are
estimated to be $20.0 million by the end of fiscal 2000.
9
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RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth net sales by product line.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
(Dollars in thousands) July 31, August 1,
1998 1997 $ Change % Change
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Consumer products ..................... $ 96,138 $ 93,471 $ 2,667 2.9%
Commercial products ................... 111,725 89,832 21,893 24.4%
Irrigation products ................... 83,130 65,971 17,159 26.0%
------------ ------------- ------------
Total * ........................... $290,993 $249,274 $ 41,719 16.7%
------------ ------------- ------------
------------ ------------- ------------
* Includes international sales of: .... $ 51,661 $ 48,972 $ 2,689 5.5%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------------------
(Dollars in thousands) July 31, August 1,
1998 1997 $ Change % Change
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Consumer products .................... $293,855 $333,533 $(39,678) (11.9)%
Commercial products .................. 368,316 289,819 78,497 27.1%
Irrigation products .................. 218,567 187,082 31,485 16.8%
------------ ------------- ------------
Total * .......................... $880,738 $810,434 $ 70,304 8.7%
------------ ------------- ------------
------------ ------------- ------------
* Includes international sales of: ... $186,038 $184,952 $ 1,086 0.6%
</TABLE>
CONSUMER PRODUCT SALES
Third quarter net sales of worldwide consumer products were $96.1 million
versus $93.5 million last year, an increase of 2.9 percent. The company
experienced strong shipments of the Lawn-Boy-Registered Trademark- walk power
mowers due to delays in production of the new Dura-Force-TM-
Lawn-Boy-Registered Trademark- product that shipped this quarter instead
of the second quarter. The Toro-Registered Trademark- branded walk power
mower also experienced strong third quarter sales compared to the same period
last year due to the prior year's weak spring sales. In addition, dealers are
purchasing product closer to retail demand, which management believes may be
causing sales to shift from the second to the third quarter. These increases
were offset by the planned reduction of sales of gas powered trimmers to
certain home centers and a reduction in snowthrower shipments due to
inventory carryover at the dealers from last winter.
Year-to-date net sales of worldwide consumer products were $293.9 million
versus $333.5 million last year, a decrease of 11.9 percent. Shipments were
down for riding products as a result of lower demand for a new garden tractor
priced higher than the prior year model and production delays for lawn
tractors. Do-it-yourself irrigation sales were below last year due to the wet
spring weather experienced this year and the discontinuance of several low
margin products. Gas powered trimmer sales were significantly below last year
as the company discontinued the product line in certain home centers due to
product profitability. International sales were below last year due to
product availability. The Canadian demand for the new Dura-Force-TM-
Lawn-Boy-Registered Trademark- walk power mowers could not be met due to
production delays. The company also believes that sales were lower as a
result of a shift in consumer buying patterns from brand specific purchases
from dealer outlets to price and value conscious purchases from hardware,
home centers, and mass merchant retailers, a trend throughout the industry.
Because the company expects this trend to continue, the company recently
announced that certain Toro-Registered Trademark- branded walk power mowers
will be sold in certain home centers next fiscal year.
As of July 31, 1998, dealer snowthrower inventory is abnormally high due to
the lack of snow experienced during the company's first quarter. Sales for
snowthrower products are expected to be significantly below prior years'
levels in the fourth quarter of fiscal 1998.
10
<PAGE>
COMMERCIAL PRODUCT SALES
Third quarter net sales of worldwide commercial products were $111.7 million
versus $89.8 million last year, an increase of 24.4 percent. Despite strong
competition, sales of equipment to golf courses did well, reflecting the
continued growth of the golf market. Sales were also strong for service parts
due to a new maintenance kit program. The acquisition of Exmark-Registered
Trademark- in November 1997 also significantly contributed to the sales
increase. However, Toro sales to the landscape contractor market were below
prior year, when the company conducted a strong marketing effort to sell
certain landscape contractor products. International sales were strong due to
an increase in demand in the European market for golf course equipment and
landscape contractor products, but were offset by weak sales in Asia.
Year-to-date net sales of worldwide commercial products were $368.3 million
versus $289.8 million last year, a significant increase of 27.1 percent. The
increase was mainly attributable to the addition of Exmark-Registered
Trademark- along with strong sales to the landscape contractor market due to
new product introductions and continued growth of sales to the golf market,
except Asia.
IRRIGATION PRODUCT SALES
Third quarter net sales of worldwide irrigation products were $83.1 million
versus $66.0 million last year, an increase of 26.0 percent. Strong domestic
golf revenues, the acquisition of Drip In, the growth of the worldwide
agricultural irrigation market, and the success of a new marketing program
for certain irrigation products contributed to the majority of the increase.
Year-to-date net sales of worldwide irrigation products were $218.6 million
versus $187.1 million last year, an increase of 16.8 percent. As mentioned in
the quarter comparison, strong golf irrigation revenues and worldwide
agricultural irrigation revenues contributed to the increase as did the
addition of sales from Drip In. However, sales of certain
residential/commercial irrigation products decreased due to wet weather in
certain key markets during the spring of the current year.
GROSS PROFIT
Third quarter gross profit was $101.3 million versus $92.4 million last year,
an increase of 9.6 percent. As a percentage of net sales, gross profit margin
for the third quarter was 34.8 percent versus 37.1 percent last year. The
lower gross margin percentage was primarily due to manufacturing
inefficiencies at the El Paso facility related to certain consumer products
and lower pricing on the Toro-Registered Trademark- branded walk power mowers.
Year-to-date gross profit was $307.3 million versus $292.7 million last year.
As a percentage of net sales, year-to-date gross profit margin was 34.9
percent versus 36.1 percent last year. The decrease in gross margin
percentage was due to the same contributing factors as in the quarter
comparison with the addition of reduced sales of higher gross margin
snowthrowers.
Dealer snowthrower inventory is abnormally high at July 31, 1998 due to the
lack of snow experienced this past winter. Sales for snowthrower products are
expected to be significantly below prior years' levels in the fourth quarter
of fiscal 1998. Since snowthrowers tend to have a higher gross profit margin,
this is expected to cause a reduction of gross profit in the fourth quarter.
Also, continued inefficiencies in the manufacturing of certain consumer
products will put a downward pressure on gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Third quarter selling, general and administrative expenses (SG&A) were $89.5
million versus $73.6 million last year, an increase of 21.6 percent. As a
percentage of net sales, SG&A increased to 30.8 percent from 29.5 percent for
the same quarter in fiscal 1997. The additions of Exmark-Registered
Trademark-and Drip In contributed $4.7 million of incremental SG&A expense
during the third quarter of fiscal 1998. Without Exmark-Registered Trademark-
and Drip In, SG&A increased 1.8 percent as a percent of net sales due to
higher costs of promotional programs and administrative expenses related to
information services.
Year-to-date SG&A expenses were $256.4 million versus $231.3 million last
year, an increase of $25.1 million. The increase was due to the same
contributing factors outlined above for the quarter with the addition of
higher warranty expense due to product mix from consumer to commercial
products and higher overall warranty accrual rates when compared to last year.
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RESTRUCTURING AND OTHER UNUSUAL EXPENSE
Third quarter restructuring and other unusual expense was $10.5 million. The
restructuring charge consisted of $2.2 million for the severance and asset
write-down to the closure of a manufacturing facility and $1.1 million for
other restructuring severance costs. Other unusual expense consisted of $3.5
million for the expected loss on the sale of the recycling equipment division
and $3.7 million for special consumer marketing programs consisting of
rebates and co-op credits in order to reduce certain consumer field
inventories to historically low levels in the preparation for a new
distribution logistical program next year. Additional restructuring and other
unusual expense of $3.0 to $4.5 million are expected to be recorded in the
fourth quarter of fiscal 1998.
INTEREST EXPENSE
Third quarter interest expense was $6.7 million versus $5.5 million last
year, an increase of $1.2 million. Year-to-date interest expense was $19.4
million versus $15.4 million last year, an increase of $4.0 million. Higher
working capital levels as a result of higher inventory and accounts
receivable balances and incremental cash required for the acquisitions of
Exmark-Registered Trademark- and Drip In also contributed to the increase in
interest expense.
OTHER INCOME, NET
Third quarter other income, net, was $1.1 million versus $3.1 million last
year, a decrease of $2.0 million. In the prior period, the company received a
worker's compensation insurance refund, and the company experienced higher
currency losses in the current period. Year-to-date other income, net, was
$6.1 million versus $6.0 million last year.
FINANCIAL POSITION AS OF JULY 31, 1998
JULY 31, 1998 COMPARED TO AUGUST 1, 1997
Total assets at July 31, 1998 were $833.4 million versus $705.0 million on
August 1, 1997, an increase of $128.4 million. This increase is comprised of
approximately $77.0 million related to the acquisitions of Exmark-Registered
Trademark- and Drip In and various other changes discussed below. Net
accounts receivable increased by $20.4 million due to increased sales of
irrigation and landscape contractor products this year, and the addition of
Exmark-Registered Trademark- and Drip In receivables. Inventory also
increased $41.2 million due to lower than expected garden tractor sales,
higher levels of landscape contractor equipment, and the addition of
Exmark-Registered Trademark- and Drip In. Net property, plant, and equipment
rose $16.4 million due primarily to the acquisition of Exmark-Registered
Trademark- and Drip In, expansion of the corporate headquarters, plant
equipment additions, and new tooling projects. Other assets increased $34.9
million mainly as a result of the capitalization of the excess purchase price
of Exmark-Registered Trademark- and Drip In over the fair value of the assets
acquired.
Total current liabilities were $350.8 million versus $288.3 million last
year, an increase of $62.5 million. The majority of this increase was the
result of additional short-term borrowings of $63.0 million reflecting the
company's strategy of utilizing short-term borrowing to fund the company's
seasonal working capital needs and funding a portion of the cost of the
acquisitions of Exmark-Registered Trademark- and Drip In. Accounts payable
decreased $16.0 million due to the seasonal shut down of certain
manufacturing facilities during July 1998. Other accrued liabilities
increased $15.2 million, which reflects the restructuring and other unusual
expense accrual, additional warranty reserves, and higher marketing reserves.
Long-term debt increased $19.3 million as a result of the acquisitions of
Exmark-Registered Trademark- and Drip In.
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FINANCIAL POSITION AS OF JULY 31, 1998 (CONTINUED)
JULY 31, 1998 COMPARED TO OCTOBER 31, 1997
Total assets at July 31, 1998 were $833.4 million versus $661.6 million at
October 31, 1997, an increase of $171.8 million. Accounts receivable
increased $69.5 million due to increased receivables from the acquisitions of
Exmark-Registered Trademark- and Drip In, the seasonal increase in accounts
receivable, and the increased sales of landscape contractor products earlier
this year. Inventory increased by $42.9 million due to lower than projected
sales of riding products and higher levels of landscape contractor products
from lower sales experienced in the third quarter this year along with new
product introductions. Net property, plant, and equipment increased $16.1
million due primarily to the acquisition of Exmark-Registered Trademark- and
Drip In along with the expansion of the corporate headquarters and plant
equipment additions. Other assets increased $41.2 million mainly as a result
of the excess purchase price of Exmark-Registered Trademark- and Drip In over
the fair value of the net assets acquired.
Total current liabilities at July 31, 1998 were $350.8 million versus $237.8
million at October 31, 1997, an increase $113.0 million. The majority of this
increase was short-term borrowing, which increased by $117.0 million
reflecting the company's strategy of utilizing short-term borrowing to fund
seasonal working capital needs and the funding of a portion of the costs of
the acquisitions of Exmark-Registered Trademark- and Drip In. Accounts
payable decreased $27.9 million due to the seasonal shut down of certain
manufacturing facilities during July 1998. Other accrued liabilities
increased by $23.5 million due to the accrual for restructuring and other
unusual expenses, higher warranty accruals, and higher sales and marketing
accruals. Long-term debt increased $19.3 million as a result of the funding
of a portion of the acquisitions of Exmark-Registered Trademark- and Drip In.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first nine months of fiscal 1998
was primarily for the seasonal increase in accounts receivable and inventory.
A majority of the increase in inventory came from the consumer business
inventory levels for riding products due to lower than expected demand and
higher levels of landscape contractor products. Accounts payable has
decreased due to the seasonal shut down of certain facilities in July. The
Company's working capital needs are funded with $230.0 million of unsecured
bank credit lines. The Company also has banker's acceptance financing
agreements under which an additional $40.0 million is available.
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 needs.
The company expects to be out of compliance with its debt interest coverage
covenant related to its short-term debt facility in the fourth quarter of
fiscal 1998. The company has begun discussions with its banks and anticipates
being able to obtain waivers for the expected non-compliance.
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.
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YEAR 2000 ISSUE
During 1998, the company has continued with its company-wide program to
prepare the company's systems for year 2000 compliance. The year 2000 issue
relates to computer systems that use two digits rather than four to define
the applicable year and whether such systems will properly process
information when the year changes to 2000.
STATE OF READINESS
The company is nearing completion of its project to replace all core-business
information systems with a year 2000 compliant Enterprise Resource Planning
(ERP) software package. The plan is that this software will support all the
company's facilities and business units by June 1999 with the exception of
the company's European facilities, which are believed to be year 2000
compliant.
Based upon the company's initial assessment, the product that the company
sells that contain embedded systems using date logic are irrigation control
systems. These products are currently undergoing testing and the majority of
them are year 2000 compliant. The testing is planned to be completed by June
1999.
The year 2000 issues list based on the company's initial assessment has over
three hundred software and hardware items of which the majority are
single-user, departmental or plant systems. The company continues to request
year 2000 compliance information from the vendors of their software and
hardware items and are in the process of prioritizing business-critical
systems that require testing. The company also plan to test our ERP, payroll,
and Product Data Management (PDM) systems even though the vendors claim they
are year 2000 compliant.
Communications have been sent to the company's customers (dealers and
distributors) informing them of the company's efforts and asking them to
ensure their business operations are not impacted. Surveys have also been
sent to all the company's suppliers requesting information on their year 2000
efforts. The company has also been communicating with certain home centers
and mass merchants about the company's readiness as well as theirs for the
year 2000.
COSTS
Costs through July 31, 1998 are approximately $1.0 million and have been
expensed as incurred. These costs to address the year 2000 issues include
contractor support and ERP implementation for recent acquisitions. Estimated
identified remaining costs are less than $1.0 million, which include expenses
for contract support, telephone system upgrades and business unit system
upgrades. The estimated cost of year 2000 issues 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 is 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 the
dealers, distributors, banks, and suppliers will be compliant.
Testing remains to be performed to validate assumptions, which is planned to
continue through June 1999. The company believes this should be 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 early stages 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, which would include any year
2000 issues.
Certain irrigation control systems discussed above that the company sells that
contain embedded date logic are currently undergoing testing, which is
estimated to be completed in June 1999. If the embedded systems are not year
2000 compliant, the worst case scenario is that the company would need to
replace the hardware and software of the systems, which would cost
approximately $1.0 to $2.0 million.
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PART II. OTHER INFORMATION
Item 5. Other Information
Rule 14a-4 Notice of Deadline for Certain Stockholder Proposals
A stockholder who wishes to make a proposal for consideration at the
Annual Meeting of Stockholders expected to be held on March 11, 1999 (the
"1999 Annual Meeting"), but does not seek to include the proposal in the
company's proxy statement with respect to the meeting in accordance with Rule
14a-8 (a "non-14a-8 proposal"), must timely and properly notify the company
in accordance with the provisions of the company's Bylaws, but not later than
January 17, 1999 nor earlier than December 18, 1998. If a non-14a-8 proposal
is not timely and properly made in accordance with the procedures set forth
in the bylaws, the defective proposal shall not be brought before the meeting
and shall be disregarded. If the proposal were nonetheless brought before the
meeting and the chairman of the meeting did not exercise his power and duty
to declare that such a defective proposal be disregarded, the persons named
on the company's proxy card for the 1999 Annual Meeting would use their
discretionary voting with respect to such proposal.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits
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
Registrant's Current Report on Form 8-K dated May 27,
1998, Commission File No. 1-8649).
3(ii) and 4(d) Bylaws of Registrant (incorporated by reference to
Exhibit 3.3 toRegistrant's Annual Report on Form 10-K
for the year ended July 31, 1991, Commission File No.
1-8649).
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).
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 dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15, 2027
(incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
10(iii)(a) Form of Employment Agreement in effect for certain
officers of Registrant, as amended.
10(iii)(b) 1992 Directors Stock Plan, as amended.
10(iii)(c) Annual Management Incentive Plan II for officers of
Registrant, as amended.
</TABLE>
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Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<S> <C>
10(iii)(d) 1985 Incentive Stock Option Plan, as amended
(incorporated by reference Exhibit 10(b) to Registrant's
Annual Report on Form 10-K for the year ended July 31,
1993).
10(iii)(e) 1989 Stock Option Plan, as amended.
10(iii)(f) 1993 Stock Option Plan, as amended.
10(iii)(g) Continuous Performance Award Plan, as amended.
10(iii)(h) The Toro Company Supplemental Management Retirement Plan
(incorporated by reference Exhibit 10(iii)(h) to
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996).
10(iii)(i) Chief Executive Officer Succession Incentive Agreement dated as of
July 31, 1995, as amended.
10(iii)(j) The Toro Company Deferred Compensation Plan for Officers, as
amended.
11 Computation of Earnings per Share of Common Stock and Common
Stock Equivalent (page 18 of this report).
27 Financial Data Schedule; electronic filing only.
(b) Reports on Form 8-K
</TABLE>
A current Report on Form 8-K dated May 27, 1998 was filed to report the
Company's adoption of a Rights Agreement dated as of May 20, 1998 between the
company and Norwest Bank of Minnesota, National Association relating to
rights to purchase Series B Junior Participating Voting Preferred Stock.
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SIGNATURES
Pursuant to the requirements 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)
By /s/ Stephen P. Wolfe
------------------------------
Stephen P. Wolfe
Vice President, Finance
Chief Financial Officer
(principal financial officer)
Date: September 11, 1998
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THE TORO COMPANY
EMPLOYMENT AGREEMENT
AGREEMENT by and between The Toro Company, a Delaware Company (the
"Company"), and _______________ ___________________(the "Executive"), dated as
of the _____ day of _____________, ____.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS. (a) The "Effective Date" shall mean the first
date during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the Contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal Date"), unless previously terminated, the Change of
Control Period shall be automatically extended so as to terminate three years
from such Renewal Date, unless at least 60 days prior to the Renewal Date the
Company shall give notice to the Executive that the Change of Control Period
shall not be so extended.
2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"))
<PAGE>
(a"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 15% or more of either (i) the
then-outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then-outstanding shares of common stock and the combined
voting power of the then-outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 15% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination, or the
combined voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
2
<PAGE>
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period").
4. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than twelve months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
3
<PAGE>
(ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the "Annual Bonus") in cash at least equal to the Executive's
highest bonus under the Company's [Annual Incentive Plans], or any comparable
bonus under any predecessor or successor plan, for the last three full fiscal
years prior to the Effective Date (annualized in the event that the Executive
was not employed by the Company for the whole of such fiscal year) (the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of
the third month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the receipt
of such Annual Bonus.
(iii) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) EXPENSES. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) FRINGE BENEFITS. During the Employment Period, the Executive shall
be entitled to
4
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fringe benefits, including, without limitation, tax and financial planning
services, payment of club dues, and, if applicable, use of an automobile and
payment of related expenses, in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated companies in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) VACATION. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this
Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative.
(b) CAUSE. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from the incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or
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Chief Executive Officer believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by
the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
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(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement
to the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER
THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any
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bonus or portion thereof which has ben earned but deferred (and
annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve
full months), for the most recently completed fiscal year during the
Employment Period, if any (such higher amount being referred to as the
"Highest Annual Bonus") and (y) a fraction, the numerator of which is
the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum of the amounts
described in clauses (1), (2), and (3) shall be hereinafter referred
to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum
of (x) the Executive's Annual Base Salary and (y) the Highest Annual
Bonus; and
C. an amount equal to the excess of (1) the actuarial equivalent
of the benefit under the Company's qualified defined benefit
retirement plan (the "Retirement Plan") (utilizing actuarial
assumptions no less favorable to the Executive than those in effect
under the Company's Retirement Plan immediately prior to the Effective
Date), and any excess or supplemental retirement plan in which the
Executive participates (together, the "SERP") which the Executive
would receive if the Executive's employment continued for three years
after the Date of Termination assuming for this purpose that all
accrued benefits are fully vested, and, assuming that the Executive's
compensation in each of the three years is that required by Section
4(b)(i) and Section 4(b)(ii), over (2) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if any, under the
Retirement Plan and the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would
have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iv) of this Agreement if
the Executive's employment had not been terminated or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies and
their families, provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to
have retired on the last day of such period;
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(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall
be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other amounts
and benefits shall be hereinafter referred to as the "Other Benefits").
(b) DEATH. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) DISABILITY. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without
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further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, (y) the
amount of any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations and the timely
payment or provision of Other Benefits. In such case, all Accrued Obligations
shall be paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination.
7. NONEXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company or any of its affiliated companies at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
8. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this
Agreement to the contrary notwithstanding and except as set forth below, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount
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such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it
shall be determined that the Executive is entitled to a Gross-Up Payment, but
that the Executive, after taking into account the Payments and the Gross-Up
Payment, would not receive a net after-tax benefit of at least $10,000 (taking
into account both income taxes and any Excise Tax) as compared to the net
after-tax proceeds to the Executive resulting from an elimination of the
Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount
(the "Reduced Amount") such that the receipt of Payments would not give rise to
any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the
Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by KPMG Peat Marwick
LLP or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall
be paid by the Company to the Executive within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts it remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is required to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to
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such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or to contest
the claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced
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by the Company pursuant to Section 9(c), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
10. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. SUCCESSORS. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested,
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postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
IF TO THE COMPANY: The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420
Attention Mr. J. Lawrence McIntyre, General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communication shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which case
the Executive shall have no further rights under this Agreement. From and after
the Effective Date this Agreement shall supersede any other agreement between
the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
THE TORO COMPANY
_____________________________________ ___________________________________
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THE TORO COMPANY
1992 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 independent 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 to comply with 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; provided, however, that the
first award of Directors Shares made under the Plan shall be made on
the date that the Plan is first approved by the Company's stockholders
to Nonemployee Directors then serving. 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;
provided, however, that the first award of Directors Options made
under the Plan shall be contingent on approval by the Company's
stockholders of the grant of Directors Options. 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 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.
<PAGE>
(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, except that the first Directors Options awarded
contingent upon approval by the Company's stockholders of
the grant of Directors Options shall expire on October 31,
2000.
(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 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
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.
<PAGE>
4. 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 available for issuance as
Directors Shares or pursuant to Directors Options granted under 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.
5. CHANGE OF CONTROL. 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.
6. 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 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.
<PAGE>
7. TERM OF PLAN. The Plan became effective on August 20, 1992 and shall
terminate ten (10) years thereafter, unless sooner terminated by action of
the Board of Directors.
8. AMENDMENT.
a. The effective date of any amendment to the Plan shall be the date of
its adoption by the Board of Directors; provided, however, that no
amendment shall be effective unless and until the same is approved by
the stockholders of the Company where the failure to obtain such
approval would adversely affect the compliance of the Plan with any
law or rule, including the Exchange Act and the Internal Revenue Code
of 1986, as amended. In the event the stockholders do not approve such
an amendment, the amendment shall be of no effect and the Plan shall
continue in effect as if such amendment had not been adopted by the
Board of Directors, unless the Board otherwise determines. 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.
b. The provisions of Section 3.a. and Section 3.b. shall not be amended
more than once every six (6) months other than to comport with changes
in the Code, the Employee Retirement Income Security Act, or the rules
thereunder.
9. 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.
<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 provide an annual incentive to reinforce
achievement of the performance goals (Performance Goals") of The Toro
Company (the "Company"); to link a significant portion of a participating
officer's annual compensation to the achievement by the Company, and in
certain cases, a division, 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. Nominations may be made
to the Chief Executive Officer and presented by the Chief Executive Officer
to the Committee. 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 successors 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 50% for the Chairman and Chief Executive
Officer, 45% for the President and Chief Operating Officer, if
one should be elected, 40% for other elected officers and 25 to
40% 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)
<PAGE>
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 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 175% (192.5% for selected Plan
Participants as provided in subparagraph 3.d.) 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 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
result in payment under an Annual Performance Award at up to 125%
of the award payment otherwise determined pursuant to
subparagraph 3.a. or 3.b. and achievement of a Supplemental
Division Performance Goal below an established target level shall
result in a reduction of the amount of an award payment otherwise
determined pursuant to subparagraph 3.a. or 3.b., including to
zero in the event that a division goal is not achieved at a level
of at least 60% of the target. The Committee shall also have the
discretion to reduce by an amount up to 10% 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. QUALITY OF PERFORMANCE 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 10%, but to not more than
192.5% of the Target Payout, for selected Plan Participants
("Quality of Performance Participants"), to reflect individual
quality of performance goals ("Quality of Performance Goals"),
established at that time by the Committee. The Committee shall
have the discretion to reduce by an amount up to 10% the amount
that would otherwise be paid under the payout formula to a
Quality of Performance Participant based on the Committee's
evaluation of the individual's achievement of the Quality of
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
2
<PAGE>
amount that may be paid under an Annual Performance Award shall
be set at the time the Committee grants the award and establishes
Performance Goals under the award.
4. PERFORMANCE GOALS.
a. ESTABLISHMENT. An award payment under an Annual Performance
Award shall be made to a Plan Participant only if the Company
achieves Performance Goals based on the criteria set forth in
subparagraph 4.b., 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), division profit
adjustment, division controllable profit contribution, return on
equity, revenue growth, earnings growth or economic value added
(EVA). 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. Quality of 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. 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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<PAGE>
7. PAYMENTS. Before any payment is made under the Plan, the Committee must
certify in writing 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.
4
<PAGE>
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 the first year in which a
Stock Participant becomes eligible to participate in the Stock
Retention Provisions.
ii. On or before the October 31 that is 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.
5
<PAGE>
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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<PAGE>
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.. 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
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<PAGE>
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.
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 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.
8
<PAGE>
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). Under no circumstances
may the Plan be amended to permit the Committee to increase an award
payment in contravention of the requirements of paragraph 5.
Notwithstanding the foregoing, no amendment, modification or termination
that would affect benefits accrued under this Plan prior to such amendment,
modification or termination may occur after a Change of Control, as defined
in subparagraph 8.f.vi., without the written consent of a majority of the
Plan Participants determined as of the day before such Change of Control.
13. EFFECTIVE DATE OF THE PLAN AND AMENDMENTS. The Plan first became effective
on November 1, 1995. Any amendment to the Plan shall be effective on the
date established by the Committee, subject to stockholder approval, if
required under the provisions of paragraph 12.
As amended by the Compensation Committee and Board of Directors, to be
effective as of
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May 20, 1998.
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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 fair market value, except for performance based stock
options, such as those granted in connection with the Continuous
Performance Award Plan, where the exercise price is an average and on
the date of grant could be higher or lower than fair market value.
Fair market value is generally determined to be the closing price for
the Common Stock on the New York Stock Exchange as reported by The
Wall Street Journal or other readily available quotation of composite
transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant
of an option during which the option or any portion thereof
may not yet be exercisable, including provisions applicable to
persons subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of
the Company or otherwise performing services for the Company
or a parent or subsidiary and only if the option holder has
been continuously so employed or engaged since the date such
options were granted; provided, however, that (a) in the event
of disability of an option holder, options may be exercised by
such individual not later than the earlier of the date the
option expires or one year after the date such employment or
performance of services ceases by reason of disability, but
only with respect to an option exercisable at the time such
employment or performance of services ceases and (b) options
may be exercised (I) by an option holder after such individual
ceases to be an employee (for reasons other than disability or
retirement at or after age 60) up to three months after the
day of termination of employment but not later than the date
the option expires, (II) by reason of retirement, either at or
after age 60 but not later than the earlier of the date the
option expires or four years after the date of retirement, or,
if approved by the Committee, after retirement at an age less
than age 60 but not later than the earlier of the date the
option expires or three years after the date of retirement;
and (III) in the event a salary replacement option is granted
by the Committee and the option holder is involuntarily
terminated during the option term or becomes disabled or dies,
3
<PAGE>
the Committee shall have the right to grant to the option
holder or his personal representative, as the case may be, the
right to request either (1) that the option be cancelled and
the option holder or his estate be paid an amount equal to the
compensation the option holder has given up from the date of
grant to the date of such termination, disability or death
together with interest at the prime rate less the then market
gain on that portion of the shares covered by the option which
is then vested; or (2) that the stock option accelerates such
that the option be deemed to have vested at an appropriate
rate per month (as determined by the Committee) from the date
of grant to the last date of the month in which the date of
termination, disability or death occurs, such accelerated
option to be then exercisable for a period of three years
following such date but only with respect to an option
exercisable at the time such individual ceases to be an
employee.
(iii) Notwithstanding any provision of this paragraph 7.E, if within
one year after the termination of employment with or
performance of services for the Company, an option holder is
employed or retained by a company that competes with the
business of the Company or such individual violates any
confidentiality agreement with the Company, the Company may
cancel and rescind all options held by such individual and
demand return of the economic value of any option which was
realized or obtained (measured at the date of exercise) by
such individual at any time during the period beginning on the
date which is twelve months prior to the date of termination.
(iv) Absence on leave or any other interruption in the performance
of services by an option holder with the Company shall, if
approved by the Committee, not be deemed a cessation or
interruption of employment or services for the purposes of the
Plan.
(v) No option shall be assignable or transferable by the
individual to whom it is granted except that it may be
transferable by will or the laws of descent and distribution.
An option so transferred may be exercised after the death of
the individual to whom it is granted only by such individual's
legal representatives, heirs or legatees, not later than the
earlier of the date the option expires or one year after the
date of death of such individual, and only with respect to an
option exercisable at the time of death.
(vi) In no event shall any option be exercisable at any time after
its expiration date unless extended by the Committee. When an
option is no longer exercisable, it shall be deemed to have
lapsed or terminated.
F. METHODS OF EXERCISE. Subject to the terms and conditions of the Plan
and the terms and conditions of the option agreement, an option may be
exercised in whole at any time or in part from time to time, by
delivery to the Company at its principal office of a written notice of
exercise specifying the number of shares with respect to which the
option is being exercised, accompanied by payment in full of the
exercise price for shares to be purchased at that time. Payment may be
made (i) in cash,
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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. 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
5
<PAGE>
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 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:
6
<PAGE>
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.
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
7
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under and by the applicable laws of the State of Delaware, without
giving effect to principles of conflicts of laws.
8
<PAGE>
THE TORO COMPANY
1993 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1993 Stock Option Plan (the "Plan") is to
advance the interests of The Toro Company (the "Company") and its
stockholders by providing an incentive to certain employees of the Company
and its subsidiaries and to certain other key individuals who perform
services for the Company and its subsidiaries, to contribute significantly
to the strategic and long-term performance objectives and growth of the
Company and its subsidiaries. This purpose is expected to be achieved by
granting options to acquire the Common Stock, $1.00 par value, and related
preferred share purchase rights of the Company (the "Common Stock").
Subject to the provisions of the Plan, options may contain such terms and
conditions as shall be required so as to be either nonqualified stock
options ("nonqualified options") or incentive stock options ("Incentive
Stock Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Subject to such limits as may be imposed by
the Plan, nonqualified options or Incentive Stock Options or both may be
granted to an eligible individual.
2. EFFECTIVE DATE. The effective date of the Plan shall be August 17, 1993.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), provided that members of the Committee shall be
Non-employee Directors as contemplated by Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule
and shall qualify to administer the Plan as contemplated by Section 162(m)
of the Code and the regulations thereunder ("Section 162(m)"). A majority
of the members of the Committee shall constitute a quorum for any meeting
of the Committee and the acts of a majority of the members present at any
meeting at which a quorum is present or the acts unanimously approved in
writing by all members of the Committee shall be the acts of the Committee.
The decision of the Committee on any matter affecting the Plan and
obligations arising under the Plan or any option granted thereunder shall
be deemed final and binding upon all persons. No member of the Board or of
the Committee shall be liable for any action or determination taken or made
in good faith with respect to the Plan or any option granted thereunder.
Committee members shall be reimbursed for out-of-pocket expenses reasonably
incurred in the administration of the Plan.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine
the exercise price of each option to purchase Common Stock, the individuals
to whom and the time or times at which options shall be granted, the number
of shares to be subject to each option, when an option may be exercisable
and the other terms and provisions (and amendments thereto) of the
respective option agreements (which need not be identical); to determine
whether a particular option is to be an Incentive Stock Option and the
terms and provisions thereof that shall be required in the judgment of the
Committee to provide therefor or to conform to any change in any law or
regulation applicable thereto, or to any other law or regulation that may
hereafter become effective to provide similar or related tax benefits to
option holders; and to make all other determinations deemed necessary or
advisable for the administration of the Plan.
<PAGE>
4. COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in this
paragraph and subject to increase by amendment of the Plan, the total
number of shares of Common Stock that is reserved and available for
issuance pursuant to options granted under the Plan shall be 1,600,000
shares. If any option granted hereunder terminates, expires unexercised, is
exchanged for other options without the issuance of shares of Common Stock
or is exercised by the delivery or constructive delivery of shares of
Common Stock already owned by the option holder, the shares of Common Stock
reserved for issuance pursuant to such option shall, to the extent of any
such termination or to the extent shares covered by an option are not
issued or used, again be available for option grants under the Plan. Any
shares issued by the Company in connection with the assumption or
substitution of outstanding grants from any acquired corporation shall not
reduce the shares available for option grants under the Plan. Shares of
Common Stock that may be issued hereunder may be authorized but unissued
shares, reacquired or treasury shares, or outstanding shares acquired in
the market or from private sources, or a combination thereof. Appropriate
adjustments in the number of shares of the Common Stock that may be
available for option grants under the Plan and adjustments in the option
price per share of outstanding options may be made by the Committee in its
discretion to give effect to adjustments made in the number of shares of
Common Stock of the Company through any merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock
split or other similar change in the corporate structure of the Company
affecting the Common Stock, or a sale by the Company of all or part of its
assets or any distribution to stockholders other than a normal cash
dividend.
5. ELIGIBILITY. Options may be granted to any employee of the Company or any
subsidiary thereof who is regularly employed in an executive, managerial,
professional or technical position, and to any other individual who
performs services for the Company or any subsidiary and who contributes
significantly to the strategic and long-term performance objectives of the
Company and its subsidiaries. Options may be granted to directors of the
Company who are also employees of the Company. More than one option may be
granted to the same individual. No option may be granted to an individual
who owns, directly or indirectly, Common Stock or other capital stock of
the Company possessing more than 5% of the total combined voting power or
value of any class of capital stock of the Company or a subsidiary
immediately after such option is granted. Except for the foregoing
limitations, there is no minimum or maximum number of shares of Common
Stock with respect to which options may be granted to any individual under
the Plan. Individuals to whom options are granted are at times referred to
as "option holders".
6. DURATION OF THE PLAN. The Plan shall remain in effect until all shares
reserved for issuance pursuant to the Plan shall have been purchased
pursuant to options granted under the Plan, provided that options under the
Plan must be granted within ten years from the effective date of the Plan.
7. GENERAL TERMS OF OPTIONS. Options shall be evidenced by stock option
agreements in such form and not inconsistent with the Plan as the Committee
shall approve from time to time, which agreements shall contain in
substance the following terms and conditions:
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A. DATE OF GRANT. An option agreement shall specify the date of grant,
which shall be the date on which the Committee grants an option or any
later date which the Committee specifically designates.
B. NUMBER OF SHARES OF COMMON STOCK. An option agreement shall specify
the number of shares of Common Stock to which it pertains.
Notwithstanding any other provision of the Plan, the maximum number of
shares that may be covered by any option grant during any calendar
year shall be 100,000 shares.
C. EXERCISE PRICE. The exercise price of all stock options will be
granted at fair market value, except for performance based stock
options, such as those granted in connection with the Continuous
Performance Award Plan, where the exercise price is an average and on
the date of grant could be higher or lower than fair market value.
Fair market value is generally determined to be the closing price for
the Common Stock on the New York Stock Exchange as reported by The
Wall Street Journal or other readily available quotation of composite
transactions.
D. TERM OF OPTIONS. The term of each option shall be fixed by the
Committee.
E. EXERCISABILITY AND TRANSFERABILITY.
(i) The Committee shall have the authority to determine whether an
option agreement shall specify periods after the date of grant
of an option during which the option or any portion thereof
may not yet be exercisable, including provisions applicable to
persons subject to Section 16 of the Exchange Act.
(ii) During the lifetime of an option holder, options held by such
individual may be exercised only by the option holder and only
while an employee of the Company or a parent or subsidiary of
the Company or otherwise performing services for the Company
or a parent or subsidiary and only if the option holder has
been continuously so employed or engaged since the date such
options were granted; provided, however, that (a) in the event
of disability of an option holder, options may be exercised by
such individual not later than the earlier of the date the
option expires or one year after the date such employment or
performance of services ceases by reason of disability, but
only with respect to an option exercisable at the time such
employment or performance of services ceases and (b) options
may be exercised (I) by an option holder after such individual
ceases to be an employee (for reasons other than disability or
retirement at or after age 60) up to three months after the
day of termination of employment but not later than the date
the option expires, (II) by reason of retirement, either at or
after age 60 but not later than the earlier of the date the
option expires or four years after the date of retirement, or,
if approved by the Committee, after retirement at an age less
than age 60 but not later than the earlier of the date the
option expires or three years after the date of retirement;
and (III) in the event a salary replacement option is granted
by the Committee and the option holder is involuntarily
terminated during the option term or becomes disabled or dies,
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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. 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
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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 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:
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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.
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
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under and by the applicable laws of the State of Delaware, without
giving effect to principles of conflicts of laws.
8
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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 on
<PAGE>
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,
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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.
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
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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. 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:
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.
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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 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
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<PAGE>
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.
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[rev.7/98]
7
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THE TORO COMPANY
CHIEF EXECUTIVE OFFICER INCENTIVE AWARD AGREEMENT
AGREEMENT ("Agreement") dated as of July 31, 1995, as amended July 31, 1997
and as amended and restated July 31, 1998, by and between The Toro Company, a
Delaware corporation (the "Company"), and Kendrick B. Melrose, its Chief
Executive Officer ("Mr. Melrose").
1. PURPOSE. The purpose of this Agreement is to implement The Toro Company
Chief Executive Officer Succession Plan (the "Plan") pursuant to which the
Company will grant to Mr. Melrose a Restricted Stock and Performance Unit award
and enter into a post-retirement and noncompetition agreement with Mr. Melrose,
subject to the terms and conditions of the Plan and to Mr. Melrose's acceptance
of the terms and conditions thereof.
2. GRANT OF AWARD.
a. GRANT OF RESTRICTED STOCK. The Company hereby grants to Mr. Melrose
the number of whole shares of Common Stock having an aggregate fair market value
of $500,000 on July 31, 1995 (the "Restricted Stock"), subject to forfeiture or
reduction of the number of shares in the event performance goals set forth in
Subsection 3.a.i(A) (the "Performance Goals") are not achieved and to the other
terms and conditions of the Plan; provided however that in the event the fair
market value of the Common Stock on the date of vesting of the Restricted Stock
is less than the fair market value on July 31, 1995, the Company shall make an
aggregate payment to Mr. Melrose of the difference between the fair market value
on the date of vesting of the Restricted Stock and the fair market value on July
31, 1995. Fair market value shall mean the closing price of the Common Stock on
the New York Stock Exchange as reported in THE WALL STREET JOURNAL.
b. GRANT OF PERFORMANCE UNITS AND ANNUITY PURCHASE. Subject to the terms
and conditions of the Plan and this Agreement, the Company hereby grants to Mr.
Melrose performance units equal to the number of whole shares of Common Stock
having an aggregate fair market value of $500,000 on July 31, 1995 (the
"Performance Units"), which Performance Units shall be subject to forfeiture or
reduction in the event the Performance Goals set forth in the Plan and in
Subsection 3.a.i(A) hereof are not achieved and to the other terms and
conditions of the Plan and this Agreement. Each Performance Unit shall have a
value equal to the fair market value of one share of Common Stock, from time to
time, provided however that the value shall not be less than the fair market
value of one share of Common Stock on July 31, 1995. Performance Units shall be
evidenced by this Agreement. An amount equal to the aggregate value of the
Performance Units remaining at the date of Mr. Melrose's retirement, after
forfeiture, if any, shall be utilized by the Company to purchase a retirement
annuity payable to Mr. Melrose until his 75th birthday, or to his estate or
beneficiaries, and for no other purpose, subject to the condition that Mr.
Melrose enter into
<PAGE>
and comply with the terms and conditions of a noncompetition agreement, in
accordance with Subsections 2.c. and 3.b. hereof.
c. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. Subject to
the terms and conditions of the Plan and this Agreement, the Company shall enter
into a post-retirement consulting and non-competition agreement with Mr.
Melrose, providing for the payment of an aggregate amount of up to $500,000,
which amount shall be adjusted not less than once annually to reflect increases
in the consumer price index and which may be utilized to pay expenses of office
and support services for Mr. Melrose for a period of five years following the
date of his retirement.
3. TERMS, CONDITIONS AND RESTRICTIONS.
a. RESTRICTED STOCK AND PERFORMANCE UNIT PERFORMANCE GOAL RESTRICTIONS.
The obligation of the Company to deliver certificates representing the
Restricted Stock granted hereunder and to utilize the aggregate value of the
Performance Units to purchase a retirement annuity shall be subject to the
terms, conditions and restrictions set forth in this Subsection 3.a.
i. VESTING OF RESTRICTED STOCK AND PERFORMANCE UNITS. Mr. Melrose's
right to receive the Restricted Stock and the value of the Performance Units
shall be subject to the vesting requirements set forth in this Subsection 3.a.i.
and to the achievement by Mr. Melrose of the Performance Goals set forth in
Subsection 3.a.i.(A) hereof not later than the last day of the period specified
to achieve such performance (the "Restricted Period"). Upon achievement of a
Performance Goal within an applicable Restricted Period, the restrictions shall
lapse with respect to the specified portion of Restricted Stock, which specified
portion shall vest and become nonforfeitable. Upon achievement of a Performance
Goal within an applicable Restricted Period, the restrictions shall lapse with
respect to the specified portion of Performance Units, which specified portion
shall vest and become nonforfeitable, subject to the further condition that Mr.
Melrose enter into and comply with the terms and conditions of a noncompetition
agreement in accordance with Subsections 2.c and 3.b. If Mr. Melrose does not
enter into a noncompetition agreement or does not comply with the terms and
conditions of such a noncompetition agreement, then Mr. Melrose shall forfeit
the value of the Performance Units or, if a retirement annuity has been acquired
by the Company, the retirement annuity.
(A) The following table sets forth the Performance Goals, the
schedule for achievement of each Performance Goal and the portion of Restricted
Stock and Performance Units in which rights vest upon such achievement.
2
<PAGE>
<TABLE>
<CAPTION>
Performance Goal Restricted Period Portion of Portion of
to be Achieved (July 31, 1995 Shares of Re- Performance
through earlier of stricted Stock Units to
date shown or to Vest Upon Vest Upon
Goal Achievement) Achievement Achievement
<S> <C> <C> <C>
Goal 1:
CEO and senior management
succession plan developed
and progress towards fulfill-
ment of the plan, approved
by Board of Directors October 31, 1999 15% 15%
Goal 2:
Potential CEO successor
identified with approval
of Board of Directors
and continued development
of senior management team October 31, 2000 15% 15%
Goal 3:
CEO successor who was
identified and developed
by Mr. Melrose is elected
as CEO by Board of
Directors October 31, 2003 70% 70%
</TABLE>
(B) Early Selection of Successor. Notwithstanding any other
provision of the Plan, in the event that the Board of Directors elects as Mr.
Melrose's successor the individual identified and developed by Mr. Melrose,
and such successor is in place as chief executive officer of the Company and
Mr. Melrose elects to retire prior to the last day of the final Restricted
Period, but no earlier than July 31, 1997, all Restricted Stock and
Performance Units shall vest in full and become nonforfeitable, subject to
the condition with respect to the Performance Units that Mr. Melrose enter
into and comply with the terms and conditions of a noncompetition agreement
in accordance with Subsection 3.b.
(C) The Special CEO Succession Subcommittee of the
Compensation Committee of the Board of Directors (the "Committee") shall be
responsible for certifying in writing to the Company that an applicable
Performance Goal has been met by Mr. Melrose prior to release and delivery of
certificates representing the shares of Restricted Stock or
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<PAGE>
payment of the value of Performance Units for the purchase of a retirement
annuity to Mr. Melrose.
ii. Limits on Transfer of Restricted Stock and Performance Units.
Shares of the Restricted Stock which have not vested in accordance with the
provisions of Subsection 3.a.i. hereof may not be sold, transferred, pledged,
assigned or otherwise encumbered. Performance Units may not be sold,
transferred, pledged, assigned or otherwise encumbered at any time and the value
of Performance Units may be utilized only for the purpose of purchasing the
retirement annuity referred to the Subsection 2.b. hereof.
iii. Termination, Death or Disability. In the event that the Board of
Directors terminates Mr. Melrose's employment other than for cause (as defined
in Subsection 3.c. hereof) and elects as Mr. Melrose's successor a chief
executive officer who was identified and developed by Mr. Melrose, or in the
event of the termination of Mr. Melrose's employment due to his death or
disability, then all shares of Restricted Stock and Performance Units shall
automatically vest in full, notwithstanding that Mr. Melrose does not enter into
a noncompetition agreement in accordance with Subsections 2.c. and 3.b., and
shall become nonforfeitable in the fiscal year following the year of the date of
such event, and on the first day that such vesting would not cause the
compensation to be deemed compensation with respect to the prior fiscal year.
(D) The terms of this Agreement are not intended to, and do not,
impose on Mr. Melrose a mandatory retirement date not otherwise applicable to
employees of the Company generally, and Mr. Melrose shall not be obligated to
retire as an officer of the Company in order to obtain the benefits of this
Agreement.
b. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. The Company's
agreement to pay any amount in connection with post-retirement consulting
services to be provided by Mr. Melrose and its payment of the value of
Performance Units for the purchase of a retirement annuity payable to Mr.
Melrose pursuant to Subsection 2.b. shall be subject to and in consideration of
Mr. Melrose's execution of an agreement not to compete with the Company by
serving as an employee or member of the board of directors of or consultant to
Rainbird, Jacobson or John Deere, or any successor thereof or similar competitor
of the Company for a period of five years following the date of Mr. Melrose's
retirement as Chief Executive Officer. The Company's agreement to pay any
amount in connection with post-retirement consulting services to be provided by
Mr. Melrose shall be subject to his agreement to provide consulting services to
the Company for a period of five years following the date of his retirement;
provided however that Mr. Melrose may elect to terminate the consulting
agreement, but not the agreement not to compete, in which event any balance of
the $500,000 amount referred to in Subsection 2.c. not then expended for Mr.
Melrose's benefit shall be paid to Mr. Melrose over the remainder of the five
year period. Mr. Melrose shall not have any right to receive payments pursuant
to Subsection 2.c. or this Subsection 3.b. until and
4
<PAGE>
unless he shall have executed an agreement not to compete with the Company
and delivered a fully executed copy thereof to the Company, and otherwise
complied with the then applicable terms and conditions of the Plan, except as
provided in Subsection 3.a.(C)iii.
c. TERMINATION OF EMPLOYMENT. Except as otherwise provided by Subsection
3.a. hereof, if Mr. Melrose resigns his employment with the Company or if his
employment is terminated by the Board of Directors for cause during any
Restricted Period, all shares of Restricted Stock and all Performance Units then
subject to restrictions and all other rights under this Plan shall be forfeited
by Mr. Melrose and the Restricted Stock shall be reacquired by the Company. For
purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of Mr. Melrose to perform
substantially his duties with the Company or one of its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Mr. Melrose by the Board of Directors of the Company which specifically
identifies the manner in which the Board of Directors believes that Mr.
Melrose has not substantially performed his duties, or
(ii) the willful engaging by Mr. Melrose in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of Mr.
Melrose, shall be considered "willful" unless it is done, or omitted to be done,
by Mr. Melrose in bad faith or without reasonable belief that Mr. Melrose's
action or omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board of Directors or upon the instructions of a senior officer of the
Company or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Mr. Melrose in good
faith and in the best interests of the Company. The cessation of employment of
Mr. Melrose shall not be deemed to be for Cause unless and until there shall
have been delivered to Mr. Melrose a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the entire membership of the
Board at a meeting of the Board of Directors called and held for such purpose
(after reasonable notice is provided to Mr. Melrose and Mr. Melrose is given an
opportunity, together with counsel, to be heard before the Board of Directors),
finding that, in the good faith opinion of the Board of Directors, Mr. Melrose
is guilty of the conduct described in Subsection 3.c.(i) or (ii) above, and
specifying the particulars thereof in detail.
d. STOCK CERTIFICATES.
i. ISSUANCE. The Company shall issue a stock certificate or
certificates representing the shares of Restricted Stock granted under the
Plan. Such certificates shall be
5
<PAGE>
registered in Mr. Melrose's name and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable to the grant,
substantially in the following form:
The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Chief Executive Officer Succession Incentive Plan
and an agreement entered into between the registered owner and The
Toro Company. Copies of the plan and agreement are on file in the
offices of The Toro Company, 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420.
ii. ESCROW. Certificates representing the Restricted Stock shall be
physically held by the Company or its nominee during any Restricted Period, and
the Company may require, as a condition of the grant, that Mr. Melrose shall
have delivered a stock power, endorsed in blank, with respect to any shares of
the Restricted Stock. Upon the achievement of the Performance Goals with
respect to any shares of Restricted Stock, as certified to by the Committee, the
Company shall cause the certificate representing such shares of Restricted Stock
to be removed from escrow and delivered to the Company for reissuance and
delivery of Common Stock in the name of Mr. Melrose. If any shares of
Restricted Stock are to be forfeited, certificates representing such shares
shall be delivered to the Company for reissuance in its name or cancellation and
Mr. Melrose shall have no further interest in such stock.
iii. LAPSE OF RESTRICTIONS. When the Performance Goals set forth in
Subsection 3.a.i.(A) have been achieved with respect to any portion of the
shares of the Restricted Stock, the Company shall deliver to Mr. Melrose or his
legal representative, beneficiary or heir not later than 60 days thereafter a
certificate or certificates representing the Common Stock without the legend
referred to in Subsection 3.d.i. hereof. The number of shares of Common Stock
to be released shall be the same number as to which the Performance Goals have
been achieved in accordance with Subsection 3.a.i.(A).
e. RIGHTS AS STOCKHOLDER.
i. RIGHT TO VOTE AND DIVIDENDS. Except as provided in Section 2 and
this Section 3, Mr. Melrose shall have, with respect to the shares of Restricted
Stock, all of the rights of a stockholder of the Company, including the right to
vote the shares and the right to receive cash dividends with respect to the
shares.
ii. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or other change in
corporate structure affecting the Common Stock, the Committee shall make such
substitution or adjustment in the aggregate number of shares of Common Stock
reserved for issuance under the Plan or in the number of shares outstanding as
Restricted Stock or in the number of
6
<PAGE>
Performance Units, as may be determined to be appropriate by the Committee,
acting in its sole discretion, provided that the number of shares or
Performance Units shall always be a whole number.
f. CHANGE IN CONTROL. In the event of a threatened or actual Change of
Control of the Company as hereinafter defined, whether or not approved by the
Board of Directors, all shares of Restricted Stock shall immediately fully vest
and be freely transferable. A Change of Control means the earliest to occur of
(i) a public announcement that a 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 Subsection 3.f., 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 Subsection 3.f., 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.
4. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made under the Plan any federal, state or local taxes of any kind,
including FICA and related taxes, required by law to be withheld with respect to
the vesting of rights to receive or payment of remuneration or to take such
other action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. If Common Stock is withheld or
surrendered to satisfy tax withholding, such stock shall be valued at its fair
market value as of the date such Common Stock is withheld or surrendered or the
obligation to pay such taxes becomes fixed.
7
<PAGE>
5. REGISTRATION RIGHTS. Mr. Melrose shall have the right to require that the
Company promptly take all necessary steps to register or qualify the Restricted
Stock, or Common Stock issued upon vesting of the Restricted Stock, under the
Securities Act of 1933, as amended, and the securities laws of such states as
Mr. Melrose may reasonably request. The Company shall keep effective and
maintain any registration, qualification, notification or approval for such
period as is reasonably necessary for Mr. Melrose to dispose of the Restricted
Stock or Common Stock and from time to time shall amend or supplement the
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law. The Company shall bear all fees, costs and expenses
of such registration, qualification, notification or approval.
6. COMPLIANCE WITH RULE 16B-3 AND SECTION 162(m). The grants of Restricted
Stock and Performance Units made under this Agreement and the remuneration to be
paid to Mr. Melrose as a consequence of the grants are intended to comply with
all applicable conditions of Rule 16b-3 under the Securities Exchange Act of
1934 and to avoid the loss of the deduction referred to in paragraph (1) of
Section 162(m) of the Internal Revenue Code of 1986, as amended. Anything in
the Plan or this Agreement to the contrary notwithstanding, to the extent any
provision of the Plan or this Agreement or action by the Committee fails to so
comply or to avoid the loss of such deduction, it shall be deemed null and void
to the extent permitted by law and deemed advisable by the Committee.
7. EMPLOYMENT. Nothing in the Plan or this Agreement shall interfere with or
limit in any way the right of the Company to terminate Mr. Melrose's employment
at any time, with the Company or any subsidiary of the Company, or shall confer
upon Mr. Melrose any right to continue in the employ of the Company.
8. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to stockholders for approval shall be
construed to limit the power of the Board or the Committee to adopt such
other incentive arrangements as either may deem desirable, including without
limitation, the award of stock and cash awards otherwise than under the Plan,
or to set compensation and retirement benefits and make such awards to Mr.
Melrose as either may deem desirable.
9. EXCLUSION FROM PENSION, PROFIT SHARING AND OTHER BENEFIT CALCULATIONS. By
acceptance of the award made by this Agreement, Mr. Melrose agrees that the
award or vesting of Restricted Stock and Performance Units constitute special
incentive compensation that is not taken into account as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement or profit sharing plan of the Company or any subsidiary.
Mr. Melrose agrees further that such award shall not be taken into account in
determining the amount of any life insurance coverage, short or long-term
disability coverage or any other pay-based benefit provided by the Company or
any subsidiary.
8
<PAGE>
10. AMENDMENT. This Agreement may be amended, modified or terminated from time
to time, to reflect any amendments, modifications or the termination of the
Plan; provided however that no amendment may be adopted without the approval of
the stockholders of the Company if such amendment requires stockholder approval
pursuant to Rule 16b-3 or Section 162(m), and no amendment, modification or
termination may be adopted without the written agreement of Mr. Melrose if such
amendment, modification or termination would adversely affect his rights.
Subject to the foregoing and the requirements of Section 162(m), the Board may,
in accordance with the recommendation of the Committee and without further
action on the part of stockholders of the Company or the consent of Mr. Melrose,
amend the Plan to preserve the employer deduction under Section 162(m).
11. GOVERNING LAW. This 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.
12. SUCCESSORS. Except as otherwise provided in the Plan or this Agreement,
the Plan and this Agreement shall be binding upon and inure to the benefit of
the Company, its successors and assigns and Mr. Melrose, his beneficiaries,
heirs, executors, administrators and legal representatives.
IN WITNESS WHEREOF, the Agreement has been executed and delivered by the
Company as of the date first above set forth.
THE TORO COMPANY
By: J. Lawrence McIntyre
Title: Vice President & Secretary
I hereby agree to the terms and conditions of this Restricted Stock and
Performance Unit Award grant made to me as of July 31, 1995, as amended July 31,
1997 and as amended and restated July 31, 1998.
KENDRICK B. MELROSE
/s/ Kendrick B. Melrose
9
<PAGE>
THE TORO COMPANY
DEFERRED COMPENSATION PLAN
FOR OFFICERS
(JULY 27, 1998 RESTATEMENT)
The Toro Company hereby amends and restates The Toro Company Deferred
Compensation Plan for Officers, originally effective as of January 21, 1998.
The purpose of the Plan is to provide the opportunity for selected officers
of Toro to defer receipt of compensation that may be payable under the AMIP
II and, at the same time, to acquire and retain Common Stock in the form of
Common Stock Units.
ARTICLE I.
DEFINITIONS
Section 1.1 DEFINITIONS. When used in the Plan with initial capital
letters, the following terms have the meanings indicated unless a different
meaning is plainly required by the context:
"Account" means a book entry account established and maintained in the
Company's records in the name of a Participant pursuant to Articles II and
III of the Plan, and includes Retained Units Accounts and Matching Units
Accounts.
"AMIP II" means The Toro Company Annual Management Incentive Plan II, as
amended from time to time.
"Annual Performance Award" means an award granted under the AMIP II
pursuant to which annual incentive compensation based on achievement of
annual performance goals may be paid.
"Base Cash Award" means the actual amount of an award payment that may
be paid under an Annual Performance Award, as calculated in accordance with
the AMIP II.
"Board of Directors" means the Board of Directors of Toro.
"Change of Control 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)
<PAGE>
(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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the Common Stock, par value $1.00 per share, and
the related Preferred Share Purchase Rights, of Toro as such shares may be
adjusted in accordance with subparagraph 8.i. of the AMIP II.
"Compensation Committee" means the Compensation Committee of the Toro
Board of Directors, which has the authority to administer the AMIP II.
"Deferral Election" shall mean the written election form set forth in
Exhibit B hereto.
"Disability" means a Participant is permanently disabled and unable to
work and entitled to a disability benefit under a program sponsored or
maintained by Toro.
"Effective Date" means January 21, 1998, the date the Plan was adopted
by the Board of Directors, subject to stockholder approval at the March 18,
1998 Annual Meeting of Stockholders.
"Eligible Officer" means an officer of Toro described in Section 2.1.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Fiscal Year" means the fiscal year of Toro, which year begins on
November 1 and ends on the following October 31.
"Matching Units Account" means an Account with entries denominated in
Units (including fractions) that are credited in accordance with Section 3.3.
"Participant" means an Eligible Officer who delivers a Deferral Election
in accordance with Sections 2.2 and 2.3 of the Plan and for whom Units are
actually credited to an Account. An individual shall not cease to be a
Participant if the person ceases to be an Eligible Officer, so long as Units
have been credited to such Participant's Accounts.
2
<PAGE>
"Plan" means The Toro Company Deferred Compensation Plan for Officers,
as amended from time to time.
"Retained Units Account" means an Account with entries denominated in
Units (including fractions) that are credited in accordance with Section 3.2
of the Plan.
"Stock Retention Award" means a right granted under the AMIP II to elect
(i) to convert to shares of Common Stock or (ii) to defer through the Plan,
into Units, up to 50% of a Base Cash Award and to receive additional
incentive compensation in the form of one additional Unit for every two Units
acquired upon conversion.
"Toro" means The Toro Company, a Delaware corporation.
"Trust" means a trust which shall be established or maintained by Toro
that may be used in connection with this Plan to assist Toro in meeting its
obligations under the Plan. Such a Trust shall constitute an unfunded
arrangement and shall not affect the status of the Plan as an unfunded plan.
Participants and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of any such Trust.
"Trustee" means the corporation or person or persons selected by Toro to
serve as Trustee for the Trust.
A "Unit" has a value equal to one share of Common Stock or fraction
thereof, adjusted in accordance with paragraph 8.i. of the AMIP II.
ARTICLE II
ELIGIBILITY, PARTICIPATION AND DEFERRAL ELECTION
Section 2.1 ELIGIBILITY. An officer of Toro who is granted a Stock
Retention Award under the AMIP II is eligible to participate in the Plan.
Section 2.2. PARTICIPATION. An Eligible Officer may become a
Participant in the Plan by executing and delivering to Toro a Deferral
Election.
Section 2.3. DEFERRAL ELECTION.
(a) DEADLINE FOR DELIVERY. An Eligible Officer may elect to defer Base
Cash Award compensation that may be earned under the AMIP II by completing
and submitting to Toro a Deferral Election not later than the December 31
immediately following the grant to such individual of a Stock Retention
Award. Notwithstanding the foregoing, the deadline for delivering a
Deferral Election in the year in which the Plan is implemented and for new
Eligible Officers shall be as follows:
3
<PAGE>
(i) In the year in which the Plan is first implemented, an Eligible
Officer may make a Deferral Election with respect to a Base Cash
Award that may be paid in connection with the Stock Retention
Award most recently granted not later than 30 days after the
Effective Date of the Plan, but at least six months prior to the
date on which the Base Cash Award becomes payable.
(ii) In the year in which an individual first becomes an Eligible
Officer, if at a time other than that date the Compensation
Committee typically makes awards to other officers, the Eligible
Officer may make a Deferral Election with respect to a Base Cash
Award that may be paid in connection with a Stock Retention Award
granted in connection with becoming an Eligible Officer not later
than 30 days after the date the individual becomes an Eligible
Officer, but at least six months prior to the date on which the
Base Cash Award becomes payable.
(b) AMOUNT TO BE DEFERRED. The Deferral Election shall relate to
compensation that may be earned with respect to the fiscal year to
which the Stock Retention Award relates (the fiscal year ending on the
subsequent October 31). A Deferral Election may designate up to 50%
of a Base Cash Award to be deferred and credited to the Participant's
Retained Units Account.
(c) EFFECTIVENESS. The Deferral Election is irrevocable and shall be
effective upon delivery to the Director of Compensation and Benefits
of Toro and shall remain in effect only with respect to the fiscal
year for which it is made.
(d) RECORD OF PARTICIPANTS. The name of each Participant and the date on
which participation commences with respect to each Stock Retention
Award shall be recorded on Exhibit A which is attached hereto and
which shall be revised from time to time by the Secretary or Assistant
Secretary of Toro, or their designee.
ARTICLE III
PARTICIPANTS' ACCOUNTS
Section 3.1 GENERAL.
(a) CERTIFICATION REQUIRED. No Units or other amount shall be credited to
any Account with respect to any Stock Retention Award relating to a
particular fiscal year until the Compensation Committee has certified
in writing that the performance goals established with respect to that
fiscal year (as described in the AMIP II) have been achieved.
(b) SEPARATE ACCOUNTS. The value of each of a Participant's Retained
Units Account and Matching Units Account shall be accounted for
separately.
4
<PAGE>
(c) ACCOUNT VALUE. The value of Units in any Account shall fluctuate with
the Fair Market Value of the Common Stock, as defined in Section
3.1(d)(i).
(d) DIVIDENDS. In the event that Toro pays dividends on its Common Stock,
each Retained Units Account and Matching Units Account shall be
credited with additional Units (including fractions). The number of
additional Units to be credited shall be determined by dividing the
aggregate dollar value of the dividends that would be paid on the
Units, if such Units were Common Stock, by the Fair Market Value of
one share of the Common Stock on the record date for payment of
dividends.
(i) "Fair Market Value" means the closing price of one share of
Common Stock as reported in THE WALL STREET JOURNAL, unless a
different meaning is established in the AMIP II, in which case
that meaning shall govern.
(e) CONTINUATION OF ACCOUNTS. Notwithstanding that a Participant ceases to
be an Eligible Officer, any Accounts established for such Participant
shall continue to be maintained until distribution of the assets in
accordance with the Plan and the Participant's Deferral Election.
Section 3.2. RETAINED UNITS ACCOUNT.
(a) NUMBER OF UNITS TO BE CREDITED. The dollar amount of the portion of a
Base Cash Award subject to a Deferral Election with respect to any
Stock Retention Award shall be divided by the Fair Market Value of the
Common Stock and the resulting number of Units (including fractions)
shall be credited to a Participant's Retained Units Account.
(i) For purposes of Sections 3.2 and 3.3, Fair Market Value shall be
determined as of the date that the Compensation Committee makes
the certification required under paragraph 7 of the AMIP II and
Subsection 3.1(a) of this Plan.
Section 3.3. MATCHING UNITS ACCOUNT.
(a) NUMBER OF UNITS TO BE CREDITED. One-half of the dollar amount of the
portion of the Base Cash Award subject to the Deferral Election with
respect to any Stock Retention Award shall be divided by the Fair
Market Value of the Common Stock and the resulting number of Units
(including fractions) shall be credited to a Participant's Matching
Units Account.
ARTICLE IV.
VESTING
Section 4.1 RETAINED UNITS ACCOUNT.
Retained Units (including fractions) credited to a Participant's Retained
Units Account
5
<PAGE>
shall be 100% vested at all times.
6
<PAGE>
Section 4.2 MATCHING UNITS ACCOUNT.
(a) GENERAL REQUIREMENT. Matching Units shall vest only if Retained Units
related to the Units credited as Matching Units remain credited to a
Participant's Retained Units Account through the requisite vesting
periods and all other requirements of the AMIP II have been met by the
Participant, except as otherwise provided in paragraph 8.f. of the
AMIP II. Forfeited Units shall not be reallocated or credited to the
Accounts of remaining Participants.
(b) VESTING SCHEDULE. Matching Units (including fractions) credited to a
Participant's Matching Units Account with respect to a Stock Retention
Award shall vest in accordance with the following schedule:
<TABLE>
<CAPTION>
DATE PERCENTAGE OF UNITS TO VEST
---- ---------------------------
<S> <C>
- At the end of the second year after the First 25%
date Units are first credited to a
Matching Units Account
- At the end of the third year after the Second 25%
date Units are first credited to a
Matching Units Account
- At the end of the fourth year after the Third 25%
date Units are first credited to a
Matching Units Account
- At the end of the fifth year after the Final 25%
date Units are first credited to a
Matching Units Account
</TABLE>
(c) DEATH OR DISABILITY. Notwithstanding any provision herein or in the
AMIP II to the contrary, in the event of a Participant's death or
Disability, vesting shall accelerate and all Matching Units shall vest
in full.
(d) RETIREMENT. Notwithstanding any provision herein or in the AMIP II to
the contrary, in the event of a Participant's retirement at or after
age 65, vesting shall accelerate and all Matching Units shall vest in
full. Notwithstanding the foregoing, if within one year after such
retirement the Participant is employed or retained by a company that
competes with the business of Toro, or such individual violates any
confidentiality agreement with Toro, Toro may demand the return of the
economic value of the Matching Units which vested early under this
Subsection 4.2.(d).
(e) EARLY RETIREMENT. Notwithstanding any provision herein or in the AMIP
II to the contrary, but subject to the distribution election permitted
under Subsection 5.4(c), in the event of a Participant's retirement at
or after age 55 but before age 65the Participant's Retained Units
shall remain credited to the Retained Units Account until the earlier
of the date the Participant reaches age 65 or until applicable vesting
requirements have been fulfilled, and Matching Units shall continue to
vest in accordance with the Vesting Schedule of Subsection 4.2(b), or
until vesting is accelerated by Participant's attaining age 65,
whichever occurs earlier. Notwithstanding the foregoing, if within
one year after such early retirement the
7
<PAGE>
Participant is employed or retained by a company that competes with
the business of Toro, or such individual violates any confidentiality
agreement with Toro, Toro may demand the return of the economic value
of the Matching Units which vested after the date of early retirement
under this Subsection 4.2.(e).
(f) VOLUNTARY RESIGNATION. In the event that a Participant resigns
voluntarily, Matching Units held in such Participant's Account that
have not yet vested shall not vest and shall be forfeited, unless
otherwise determined by the Chair of the Compensation Committee, in
his or her discretion, upon recommendation by the Chief Executive
Officer of Toro.
(g) CHANGE OF CONTROL. All Matching Units that have not yet vested shall
vest if there is a Change of Control.
ARTICLE V.
DISTRIBUTIONS.
Section 5.1 DISTRIBUTABLE EVENTS. Benefits shall be payable under the
Plan to or on behalf of a Participant, in accordance with the elections made
by the Participant under the Plan, upon the earliest to occur of the
following events:
(a) death;
(b) Disability; or
(c) termination of employment.
Section 5.2 DISTRIBUTION OF BENEFITS.
(a) VALUE OF BENEFITS. In the event a Participant becomes eligible to
receive a payment under the Plan, the Participant shall be entitled to
receive the value of the Retained Units Account and the vested portion
of the Matching Units Account. If a Participant elects to receive
benefits under the installment payment method referred to in
Subsection 5.2(d), the Participant's Accounts shall continue to be
credited with additional Units equal in value to dividends that would
be paid on Units remaining in the Accounts, as if such Units were
Common Stock.
(b) ELECTION OF METHOD OF PAYMENT. Benefits payable to a Participant or,
in the event of the Participant's death, to the Participant's
designated beneficiary under the Plan shall be paid in accordance with
one of the available methods of payment referred to in Subsection
5.2(d) in accordance with the Participant's most recently-dated
Deferral Election form.
(c) CHANGE IN ELECTION OF METHOD OF PAYMENT. An election of a method of
payment will apply to all benefits payable to or on behalf of a
participant under the Plan, including
8
<PAGE>
amounts deferred in prior years and subject to a prior election. A
Participant may change the method of payment by electing another
method available under the Plan, but such change in the method of
payment will not be effective until the calendar year following the
calendar year in which the change was elected. Further, in no event
will any such change in the method of payment be effective if such
change is elected during the calendar year in which the distributable
event occurs and no further elections may be made once a distributable
event occurs.
(d) AVAILABLE METHODS OF PAYMENT. Available methods of payment are (i)
approximately equal annual installment payments over a period certain
(not to exceed ten (10), unless a longer period is approved by the
Compensation Committee) or (ii) a lump sum payment.
(e) COMPENSATION COMMITTEE DISCRETION. The Compensation Committee may, in
its sole discretion, reduce the payment period over which payments
would have been made pursuant to the method of payment selected by a
Participant.
(f) ABSENCE OF ELECTION OF METHOD OF PAYMENT. Absent a Deferral Election
specifying a method of payment, benefits payable under the Plan to or
on behalf of a Participant shall be paid in a lump sum payment to the
Participant, or in the event of the Participant's death, to the
Participant's designated beneficiary under the Plan.
Section 5.3 OTHER DISTRIBUTIONS. Notwithstanding any provision in this
Plan to the contrary, if at any time a court or the Internal Revenue Service
determines that the value of any Units credited to a Participant's Accounts
under the Plan or Trust is includable in the gross income of the Participant and
subject to tax, the Compensation Committee may, in its sole discretion, permit a
lump sum distribution of an amount equal to the value of the units determined to
be includable in the Participant's gross income.
Section 5.4 COMMENCEMENT OF DISTRIBUTIONS. Notwithstanding any provision
in this Plan to the contrary, payment of a benefit shall begin in accordance
with the provisions of this Section 5.4.
(a) DEATH OR DISABILITY. If a benefit is payable in the event of a
Participant's death or Disability, payment shall begin on the 15th day
of the first month immediately following the month in which the
Participant's death occurred or the determination of Disability is
made.
(b) OTHER TERMINATION. Except as otherwise provided in this Section 5.4,
if a benefit is payable in the event of a Participant's termination of
employment, payment shall begin on or about the 15th day of January
immediately following the calendar year in which the Participant's
termination of employment occurs.
(c) EARLY RETIREMENT. If a Participant has properly made an early
distribution election on a Deferral Election, and the Compensation
Committee has consented to the election, in
9
<PAGE>
the event of a Participant's retirement on or after the date on which
the Participant attains age 55 at a time when the Units in the
Participant's Matching Units Accounts are not yet fully vested
under Subsection 4.2(b) of the Plan, the Participant shall forfeit
Matching Units that have not vested at the date of early retirement,
and payment shall begin on or about the 15th day of January
immediately following the calendar year in which the Participant's
termination of employment occurs. If a participant has not made such
an early distribution election, payment shall begin on or about the
15th day of January immediately following the calendar year in which
(i) the applicable vesting requirements are fulfilled or (ii) the
Participant attains age 65, whichever is earlier.
Section 5.5 FORM OF PAYMENT. If a benefit is payable to or on behalf
of a Participant under the Plan, vested Units shall be distributed in the
form of an equal number of shares of Common Stock and any vested fractional
Unit shall be converted into cash based on the Fair Market Value of the
Common Stock immediately prior to distribution, unless the Compensation
Committee in its sole discretion, determines to pay the entire benefit in
cash. Common Stock may be original issue shares, treasury shares or shares
purchased in the market or from private sources of a combination thereof.
ARTICLE VI.
THE TRUST
Section 6.1 THE TRUST. In order to provide assets from which to pay
the benefit obligations to the Participants and their beneficiaries under the
Plan, Toro shall maintain a Trust by a trust agreement with a third party,
the Trustee, to which Toro may, in its discretion, contribute cash or other
property, including securities issued by Toro, to provide for the benefit
payments under the Plan. However, in the event of a Change of Control, Toro
shall, as soon as possible, but in no event longer than 30 days following the
Change of Control, make irrevocable contributions to the Trust in amounts
that are sufficient to pay the Participants or beneficiaries the benefits to
which the Participants or their beneficiaries would be entitled pursuant to
the terms of the Plan as of the date on which the Change of Control occurred,
including benefits that vest under Subsection 4.2(g) as a result of the
Change of Control. The Trustee will have the duty to invest the Trust assets
and funds in accordance with the terms of the Trust. Toro is entitled at any
time, and from time to time, in its sole discretion, to substitute assets of
equal fair market value for any assets held in the Trust. All rights
associated with the assets of the Trust will be exercised by the Trustee or
the person designated by the Trustee, and will in no event be exercisable by
or rest with Participants or their beneficiaries. The Trust shall provide
that in the event of the insolvency of Toro or any of its affiliated
companies, the Trustee shall hold the assets for the benefit of the general
creditors of Toro and its affiliated companies. The Trust shall be based
substantially on the model trust contained in Internal Revenue Service
Revenue Procedure 92-64.
Section 6.2 NO ASSETS REQUIRED. Neither the Plan nor any of the
Accounts shall hold or be required to hold actual shares of Common Stock,
funds or assets.
10
<PAGE>
ARTICLE VII
NONTRANSFERABILITY
Section 7.1 ANTI-ALIENATION OF BENEFITS. Units credited to a
Participant's Accounts, and any rights or privileges pertaining thereto, may
not be anticipated, alienated, sold, transferred, assigned, pledged,
encumbered, or subjected to any charge or legal process; and no interest or
right to receive a benefit may be taken, either voluntarily or involuntarily,
for the satisfaction of the debts of, or other obligations or claims against,
such person or entity, including claims for alimony, support, separate
maintenance and claims in bankruptcy proceedings.
Section 7.2 INCOMPETENT PARTICIPANTS. If any person who may be
eligible to receive a benefit under the Plan has been declared incompetent
and a conservator or other person legally charged with the care of such
person or of his or her estate has been appointed, any benefit payable under
the Plan which the person is eligible to receive shall be paid to such
conservator or other person legally charged with the care of the person or
his or her estate. Except as provided above, when the Compensation Committee
has determined that such a person is unable to manage his or her affairs, the
Compensation Committee may provide for such payment or any part thereof to be
made to any other person or institution then contributing toward or providing
for the care and maintenance of such person. Any such payment shall be a
payment for the account of such person and a complete discharge of any
liability of Toro and the Plan therefor.
Section 7.3 DESIGNATED BENEFICIARY. In the event of a Participant's
death prior to the payment of all or a portion of any benefits which may be
payable with respect to the Participant under the Plan, the payment of any
benefits payable on behalf of the Participant under the Plan shall be made to
the Participant's beneficiary designated on the Deferred Election form
provided to the Participant by Toro. If no such beneficiary has been
designated, payment shall be made as required under the Participant's will;
or, in the event that there shall be no will under applicable state law, then
to the persons who, at the date of the Participant's death, would be entitled
to share in the distribution of such deceased Participant's personal estate
under the provisions of the applicable statute then in force governing the
decedent's intestate property.
ARTICLE VIII.
WITHHOLDING
Section 8.1 WITHHOLDING. The amounts payable pursuant to the Plan
may be reduced by the amount of any federal, state or local taxes required by
law to be withheld with respect to such payments.
ARTICLE IX.
VOTING OF STOCK
Section 9.1 VOTING OF COMMON STOCK. Participant shall not be
entitled to voting rights with respect to Units.
11
<PAGE>
ARTICLE X.
ADMINISTRATION OF THE PLAN
Section 10.1 ADMINISTRATOR. The administrator of the Plan shall be
Toro. However, the Compensation Committee shall act on behalf of Toro with
respect to the administration of the Plan and may delegate authority with
respect to the administration of the Plan to a committee, person or persons
as it deems necessary or appropriate for the administration and operation of
the Plan. It is Toro's intention that with respect to Participants subject to
Section 16 of the Securities Exchange Act of 1934, transactions under the
Plan will comply with all applicable requirements of Rule 16b-3 or its
successors. To the extent any action by the administrator fails to so
comply, it shall be deemed null and void to the extent permitted by law and
deemed advisable by the Compensation Committee.
Section 10.2 AUTHORITY OF ADMINISTRATOR. Toro shall have the
authority, duty and power to interpret and construe the provisions of the
Plan as it deems appropriate; to adopt, establish and revise rules,
procedures and regulations relating to the Plan; to determine the conditions
subject to which any benefits may be payable; to resolve all questions
concerning the status and rights of Participants and others under the Plan,
including, but not limited to, eligibility for benefits, and to make any
other determinations necessary or advisable for the administration of the
Plan. Toro shall have the duty and responsibility of maintaining records,
making the requisite calculations and disbursing payments hereunder. The
determinations, interpretations, regulations and calculations of Toro shall
be final and binding on all persons and parties concerned. The Secretary of
Toro shall be the agent of the Plan for the service of legal process in
accordance with Section 502 of ERISA.
Section 10.3 OPERATION OF PLAN. Toro shall be responsible for the
general operation and administration of the Plan and for carrying. out the
provisions thereof. Toro shall be responsible for the expenses incurred in
the administration of the Plan. Toro shall also be responsible for
determining eligibility for payments and the amounts payable pursuant to the
Plan. Toro shall be entitled to rely conclusively upon all tables,
valuations, certificates, opinions and reports furnished by any actuary,
accountant, controller, counsel or other person employed or engaged by Toro
with respect to the Plan.
Section 10.4 CLAIMS PROCEDURES. Toro intends to make payments under the
Plan without a Participant submitting a claim form. However, a Participant
who believes a payment is due under the Plan may submit a claim for payments.
For claims procedures purposes, the "Claims Manager" shall be Toro.
(a) CLAIM. A claim for payments under the Plan must be made by the
Participant or his or her beneficiary (the "claimant" in this Section
and Section 10.5) in writing filed with the Claims Manager and must
state the claimant's name and the nature of benefits payable. If a
claim for payments under the Plan is denied by Toro, the Claims
Manager shall deliver to the claimant a written explanation setting
forth the reasons for the denial, references to the pertinent
provisions of the Plan on which the denial is based, a description of
any information necessary for the claimant to perfect the claim and an
explanation of why such information is necessary, and information on
the procedures to
12
<PAGE>
be followed by the claimant in obtaining a review of his or her claim,
all written in a manner calculated to be understood by the claimant.
For this purpose:
(i) The claimant's claim shall be deemed to be filed when actually
received by the Claims Manager.
(ii) The Claims Manager's denial of a claim, if there is one, shall be
delivered to the claimant not later than 90 days after the date
the claimant's claim is filed.
(b) CLAIM DENIAL PROCEDURES. The claimant shall have 60 days following
receipt of the denial of a claim to file with the Claims Manager a
written request for review of the denial.
(c) CLAIMS MANAGER DECISION. The Claims Manager shall review the denial
and furnish the claimant with a response not later than 60 days after
receipt of the claimant's request for review of the denial. The
decision on review shall be in writing and shall include reasons for
the decision, written in a manner calculated to be understood by the
claimant, as well as references to the pertinent provisions in the
Plan on which the decision is based. If a copy of the decision is not
so furnished to the claimant within such 60 days, the claim shall be
deemed denied on review. In no event may a claimant commence an
arbitration of a claim until the claimant has exhausted all of the
remedies and procedures afforded by this Section 10.4.
Section 10.5 ARBITRATION.
(a) In the event that a claimant has exhausted all of the remedies
afforded by the claims procedures of Section 10.4, and a claim or
controversy relating to the Plan remains, the claim or controversy
shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA"),
as modified by this Section.
(b) An award rendered in connection with an arbitration pursuant to this
Section 10.5 shall be final and binding and judgment upon such an
award may be entered and enforced in any court of competent
jurisdiction.
(c) The forum for arbitration under this Plan shall be Minneapolis,
Minnesota and the governing law for such arbitration shall be laws of
the State of Delaware.
(d) Arbitration under this Section shall be conducted by a single
arbitrator selected jointly by Toro and the claimant.
If within 30 days after a demand for arbitration is made, Toro and the
claimant are unable to agree on a single arbitrator, three arbitrators
shall be appointed.
13
<PAGE>
Each party shall select one arbitrator and those two arbitrators shall
then select a third neutral arbitrator within 30 days after their
appointments. In connection with the selection of the third
arbitrator, consideration shall be given to familiarity with executive
compensation plans and experience in dispute resolution between
parties, as a judge or otherwise. If the arbitrators selected by the
parties cannot agree on the third arbitrator, they shall discuss the
qualifications of such third arbitrator with the AAA, prior to
selection of such arbitrator, which selection shall be in accordance
with the Commercial Arbitration Rules of the AAA.
(e) If an arbitrator cannot continue to serve, a successor to an
arbitrator selected by a party shall be also selected by the same
party, and a successor to a neutral arbitrator shall be selected as
specified in subsection (d) of this section. A full rehearing will be
held only if the neutral arbitrator is unable to continue to serve or
if the remaining arbitrators unanimously agree that such a rehearing
is appropriate.
(f) The arbitrator or arbitrators shall be guided, but not bound, by the
Federal Rules of Evidence and by the procedural rules, including
discovery provisions, of the Federal Rules of Civil Procedure. Any
discovery shall be limited to information directly relevant to the
controversy or claim in arbitration.
(g) The parties shall each be responsible for their own costs and
expenses, except for the fees and expenses of the arbitrators, which
shall be shared equally by Toro and the claimant.
Section 10.6 PARTICIPANT'S ADDRESS. Each Participant shall keep Toro
informed of his or her current address and the current address of his or her
beneficiary. Toro shall not be obligated to search for any person. If the
location of a Participant is not made known to Toro within three (3) years
after the date on which payment of the Participant's benefits payable under
the Plan may be made, payment may be made as though the Participant had died
at the end of the three-year period. If, within one (1) additional year
after such three-year period has elapsed, or, within three (3) years after
the actual death of a Participant, Toro is unable to locate any designated
beneficiary of the Participant (including the Participant's estate), then
Toro shall have no further obligation to pay any benefit hereunder to or on
behalf of such Participant or designated beneficiary and such benefits shall
be irrevocably forfeited.
Section 10.7 LIABILITY. Notwithstanding any of the provisions of the
Plan to the contrary, neither Toro nor any individual acting as an employee
or agent of Toro shall be liable to any Participant or any other person for
any claim, loss, liability or expense incurred in connection with the Plan,
unless attributable to fraud or willful misconduct on the part of Toro or any
such employee or agent of Toro.
14
<PAGE>
ARTICLE XI.
MISCELLANEOUS PROVISIONS
Section 11.1 NO EMPLOYMENT RIGHTS. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee a right to be employed by
Toro.
15
<PAGE>
Section 11.2 UNFUNDED AND UNSECURED. The Plan shall at all times be
considered entirely unfunded both for tax purposes and for purposes of Title
I of the Employee Retirement Income Security Act of 1974, as amended. Funds
invested hereunder shall continue for all purposes to be part of the general
assets of Toro and available to the general creditors of Toro in the event of
a bankruptcy (involvement in a pending proceeding under the Federal
Bankruptcy Code) or insolvency (inability to pay debts as they mature). In
the event of such a bankruptcy or insolvency, Toro is required to notify the
Trustee of the Trust and each Participant in writing of such an occurrence
within one (1) day of Toro's knowledge of such occurrence. No Participant or
any other person shall have any interests in any particular assets of Toro by
reason of the right to receive a benefit under the Plan and to the extent a
Participant or any other person acquires a right to receive benefits under
the Plan, such right shall be no greater than the right of any general
unsecured creditor of Toro. The Plan constitutes a mere promise by Toro to
make payments to the Participants in the future. Nothing contained in the
Plan shall constitute a guaranty by Toro or any other person or entity that
any funds in any trust or the assets of Toro will be sufficient to pay any
benefit hereunder. Furthermore, no Participant shall have any right to a
benefit under the Plan except in accordance with the terms of the Plan.
Section 11.3 SINGULAR AND PLURAL. Except when otherwise required by
the context, any singular terminology shall include the plural.
Section 11.4 SEVERABILITY. If a provision of the Plan shall be held
to be illegal or invalid, the illegality or invalidity shall not affect the
remaining parts of the Plan and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
Section 11.5 APPLICABLE LAW. To the extent not preempted by the laws
of the United States, the laws of the State of Delaware shall apply with
respect to the Plan without giving effect to principles of conflicts of laws.
ARTICLE XII.
AMENDMENT OR TERMINATION
Section 12.1 AMENDMENT OR TERMINATION OF THE PLAN. Toro reserves the
power to amend or terminate the Plan at any time by action of the
Compensation Committee, ratified by the Board of Directors, but
(a) no amendment or termination of the Plan may alter, impair or reduce
any benefit of a Participant under the Plan to which such Participant
may have previously become entitled prior to the effective date of
such amendment or termination, without the written consent of such
Participant, and
(b) no amendment may be made that would contravene the provisions of
paragraph 12 of the AMIP II, if applicable, and
(c) no amendment may increase the benefits payable to a Participant who is
referred to in Section 162(m) of the Code unless the AMIP II has first
been amended to permit an
16
<PAGE>
increase, in accordance with the provisions of paragraph 12 of the
AMIP II relating to stockholder approval.
Section 12.2 ACCOUNTS AFTER TERMINATION. No further Units (or
fractions thereof) shall be credited to any Account of any Participant after
the date on which the Plan is terminated, except that (a) Accounts shall
continue to be credited with additional Units (and fractions thereof) equal
in value to dividends paid on an equivalent value of Common Stock, if any, in
accordance with Section 3.1(d) until all benefits are distributed to a
Participant or to the Participant's beneficiaries and (b) the distribution
provisions of the Plan shall continue in effect as if the Plan had not been
terminated. Accordingly, upon such termination of the Plan the benefits
credited to the Accounts shall be payable in accordance with the elections
made by the Participants and the distribution provisions of the Plan.
Dated this 11th day of August, 1998.
THE TORO COMPANY
/s/ Kendrick B. Melrose
-----------------------------------
By: K. B. Melrose
Title: Chairman & CEO
[rev. 7/98 - Change of Control Provision and Governing Law Provision]
17
<PAGE>
Exhibit 11
THE TORO COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
July 31, August 1, July 31, August 1,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) before extraordinary loss ........ $ (2,553) $ 9,949 $ 16,439 $ 31,480
Extraordinary loss, net of income tax benefit of
$1,087 ........................................ - (1,663) - (1,663)
------------- ------------- ------------- -------------
Net earnings (loss) .................................. $ (2,553) $ 8,286 $ 16,439 $ 29,817
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic:
Weighted average number of common shares
outstanding ............................... 12,854,127 12,078,431 12,845,073 12,079,763
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net earnings (loss) per share of common
stock before extraordinary loss .............. $ (0.20) $ 0.82 $ 1.28 $ 2.60
Extraordinary loss, net of income tax benefit.. - (0.13) - (0.13)
------------- ------------- ------------- -------------
Net earnings (loss) per share of common
stock ........................................ $ (0.20) $ 0.69 $ 1.28 $ 2.47
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted:
Shares of common stock and common
stock equivalents:
Weighted average number of common shares
outstanding ............................... 12,854,127 12,078,431 12,845,073 12,079,763
Dilutive effect of outstanding
stock options ............................. - 342,662 456,763 368,049
------------- ------------- ------------- -------------
12,854,127 12,421,093 13,301,836 12,447,812
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net earnings (loss) per share of common
stock and common stock equivalents
before extraordinary loss .................... $ (0.20) $ 0.80 $ 1.24 $ 2.53
Extraordinary loss, net of income tax benefit.. - (0.13) - (0.13)
------------- ------------- ------------- -------------
Net earnings (loss) per share of common
stock and common stock equivalents ........... $ (0.20) $ 0.67 $ 1.24 $ 2.40
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS THE
CONDENSED CONSOLIDATED BALANCE SHEET AND EXHIBIT 11. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 2,800
<SECURITIES> 0
<RECEIVABLES> 328,628<F5>
<ALLOWANCES> 0<F4>
<INVENTORY> 202,999
<CURRENT-ASSETS> 586,496
<PP&E> 325,473
<DEPRECIATION> 192,510
<TOTAL-ASSETS> 833,363
<CURRENT-LIABILITIES> 350,801
<BONDS> 197,631<F1>
0
0
<COMMON> 12,868<F2>
<OTHER-SE> 266,122
<TOTAL-LIABILITY-AND-EQUITY> 833,363
<SALES> 880,738
<TOTAL-REVENUES> 880,738
<CGS> 573,457
<TOTAL-COSTS> 266,883
<OTHER-EXPENSES> (6,140)<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,366
<INCOME-PRETAX> 27,172
<INCOME-TAX> 10,733
<INCOME-CONTINUING> 16,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,439
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.24
<FN>
<F1>TOTAL LONG-TERM DEBT
<F2>DOES NOT INCLUDE ADDITIONAL PAID-IN-CAPITAL
<F3>OTHER INCOME, NET
<F4>NOT INCLUDED IN QUARTERLY FINANCIAL INFORMATION
<F5>TOTAL NET RECEIVABLES
</FN>
</TABLE>
