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THE TORO COMPANY
ANNUAL MANAGEMENT INCENTIVE PLAN II
1. PLAN PURPOSE. The purpose of The Toro Company Annual Management Incentive
Plan II (the "Plan") is to enhance stockholder value of The Toro Company
(the "Company") by providing an annual incentive to reinforce achievement of
the Company's performance goals ("Performance Goals"); to link a significant
portion of a participating officer's annual compensation to the achievement
by the Company, and in certain cases, a division or individual, of
Performance Goals; to attract, motivate and retain officers on a competitive
basis by making awards based on annual achievement of Performance Goals
("Annual Performance Awards"); and to encourage selected officers to acquire
and retain shares of the Common Stock, par value $1.00 per share, and
related Preferred Share Purchase Rights of the Company ("Common Stock").
2. ELIGIBILITY AND PARTICIPATION. Within the first 90 days of each fiscal year,
or before the first 25% of a shorter performance period has elapsed, the
Compensation Committee (the "Committee") shall select as recipients of
Annual Performance Awards ("Plan Participants") those officers of the
Company who, through their position or performance, can have a significant,
positive impact on the Company's financial results. Plan Participants are
designated to participate in the Plan for one fiscal year, but may be
renominated and selected again. Newly-hired and newly-promoted officers may
be selected as Plan Participants after the first 90 days of a fiscal year
subject to the provisions of this paragraph and subparagraph 4.a. With
respect to persons subject to Section 16 of the Securities Exchange Act of
1934 ("Exchange Act"), transactions under the Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successor provisions
under the Exchange Act. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
3. AWARD AMOUNTS.
a. TARGET PAYOUT. The target amount that may be paid with respect to an
Annual Performance Award (the "Target Payout") shall be determined by
the Committee and shall be based on a percentage of a Plan Participant's
actual annual base salary at the time of grant ("Participation Factor"),
within the range established by this subparagraph and subject to
adjustment as provided in the last sentence of this subparagraph. The
Participation Factors, which are intended to reflect a Plan
Participant's level of responsibility, are up to 60% for the Chairman
and Chief Executive Officer, up to 55% for the President and Chief
Operating Officer if one should be elected, up to 50% for other elected
officers and up to 45% for other officers. The Chief Executive Officer
may approve modifications to the foregoing Participation Factors for any
participant who is not a person referred to in Section 162(m) of the
Internal Revenue Code of 1986, as amended, or the regulations thereunder
("Section 162(m)"), if such modification is based on level of
responsibility. The Committee may establish curves, matrices or other
measurements for prorating the amount of payouts for achievement of
Performance Goals at less than the Target Payout.
b. MAXIMUM PAYOUT. The Committee may also establish a maximum potential
payout amount (the "Maximum Payout") with respect to an Annual
Performance Award of up to 200% of the Target Payout in the event
Performance Goal targets are exceeded by an amount established by the
Committee at the time Performance Goals are established. The Committee
may establish curves, matrices or other measurements for prorating the
amount of payouts for achievement of Performance Goals at greater than
the Target Payout but less than the Maximum Payout.
c. DIVISION PAYOUT. At the time an Annual Performance Award is made, the
Committee may establish supplemental division-specific Performance Goals
("Supplemental Division Performance Goals") and may provide that
achievement of a Supplemental Division Performance Goal at or above an
established target level shall be required in order to earn a Target
Payout or Maximum Payout. The Committee shall also have the discretion
to reduce by an amount up to 20% the amount that would otherwise be paid
under the division payout formula to a division vice president or
general manager based on the Committee's evaluation of the quality of
division performance.
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d. STRATEGIC PERFORMANCE MEASURE PAYOUT. At the time an Annual Performance
Award is made, the Committee may increase the Target Payout and the
Maximum Payout (as either may be prorated in accordance with
subparagraphs 3.a. and 3.b.) by up to 20% but to not more than 200% of
the Target Payout, for selected Plan Participants ("Strategic
Performance Participants"), to reflect individual strategic performance
measures ("SPM Performance Goals") established at that time by the
Committee. The Committee shall have the discretion to reduce by an
amount up to 20% the amount that would otherwise be paid under the
payout formula to a Strategic Performance Participant based on the
Committee's evaluation of the individual's achievement of the SPM
Performance Goal.
e. SECTION 162(m) MAXIMUM. With respect to any Plan Participant who is or
may become a person referred to in Section 162(m), the maximum dollar
amount that may be paid under an Annual Performance Award shall be set
at the time the Committee grants the award and establishes Performance
Goals under the award, and the Committee shall have the discretion to
decrease an award payment, but may not under any circumstances increase
such amount. 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.
4. PERFORMANCE GOALS.
a. ESTABLISHMENT. An award payment under an Annual Performance Award shall
be made to a Plan Participant only if the Company, a division and/or the
individual participant achieves Performance Goals established by the
Committee in writing not later than 90 days after the commencement of
the fiscal year to which the Performance Goal relates, provided that the
outcome is substantially uncertain at the time the Committee establishes
the Performance Goal; and provided further that in no event will a
Performance Goal be considered to be pre-established if it is
established after 25% of the period of service (as scheduled in good
faith at the time the Performance Goal is established) has elapsed.
b. PERFORMANCE GOAL CRITERIA. Performance Goals to be established under
subparagraph 4.a. shall be based on revenue, revenue growth, cost of
goods sold, earnings per share (EPS), earnings growth, return on average
net assets (ROANA), return on average total assets, return on average
current assets, return on equity, average net asset dollar level,
average current asset turns, average net asset turns, average inventory
asset turns, division profit adjustment, division controllable profit
contribution, division average asset dollars, economic value added,
controllable value added, product innovation, asset management, customer
satisfaction scores, customer care and fill rate. 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 sustained
earnings, product warranty experience, product recalls or inventory
levels. SPM Performance Goals that may be established under subparagraph
4.a. may be based on quantitative or qualitative factors, and may
include, but are not limited to, aggressive revenue growth, sustained
earnings initiative, warranty experience, product recalls, field
inventory, acquisition experience, customer satisfaction (determined by
such measurements as product innovation, asset management, product
quality, warranty, on-time delivery, after-market service, customer care
or customer satisfaction scores or survey results), inventory reduction
and inventory turnover or any of the other Performance Goals listed in
this paragraph. 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.
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5. PAYMENTS. Before any payment is made under the Plan, the Committee must
certify in writing, as reflected in the minutes, that the Performance Goals
established with respect to an Annual Performance Award have been achieved.
To the extent necessary with respect to any fiscal year, in order to avoid
any undue windfall or hardship due to external causes, the Committee may
make the determination as to whether a Performance Goal has been achieved
without regard to the effect on the Performance Goal measure, as it may
otherwise be presented in the financial statements, of any change in
accounting standards, any acquisition by the Company not planned for at the
time the Performance Goals are established or any Board-approved
extraordinary or non-recurring event or item.
6. STOCK RETENTION PROVISIONS.
a. ELIGIBILITY FOR STOCK RETENTION AWARD. Subject to the terms and
conditions of this paragraph 6 (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 "Officers 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 of the Base Cash Award, up to the 50% limit
(the "Matching Shares" or "Matching Units"). The shares or units
acquired upon conversion of the Base Cash Award shall be retained by the
Company during the vesting periods for the Matching Shares or Units
described in subparagraph 6.e. Shares of Common Stock issued under the
Stock Retention Provisions shall be called "Retained Shares" and units
of Common Stock deferred under the Officers Deferred Plan shall be
called "Retained Units."
b. NUMBER OF SHARES OR UNITS. The number of Retained Shares or Retained
Units to be issued or credited upon conversion 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
5 of this Plan. Fair market value shall be the 4 p.m. Eastern Time
closing price of one share of Common Stock, as reported by the New York
Stock Exchange. Retained Shares shall be issued in whole shares only and
cash shall be paid for fractional shares.
c. ELECTION TO EXERCISE STOCK RETENTION AWARD.
i. On or before the December 31 immediately preceding the end of the
fiscal year to which a Stock Retention Award relates, a Stock
Participant who wishes to convert a portion of a Base Cash Award
into deferred compensation Retained Units shall notify the Company
in writing that he or she has elected to participate in the Stock
Retention Provisions and shall specify the percentage of the Base
Cash Award to be converted, up to the 50% limit, except as otherwise
provided in the Officers Deferred Plan with respect to any year in
which that plan is materially amended or the first year in which a
Stock Participant becomes eligible to participate in the Stock
Retention Provisions.
ii. On or before the September 15 immediately prior to the last day of
the fiscal year to which a Stock Retention Award relates, a Stock
Participant who has not elected to convert the maximum permissible
portion of the Base Cash Award into Retained Units and who wishes to
convert the portion of the Base Cash Award not yet subject to an
election under paragraph 6.c.i. 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.
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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 Retained Units acquired upon conversion. Matching
Shares shall be held by the Company for the Stock Participant's account.
Matching Shares shall be issued in whole shares only and cash shall be
paid for fractional shares.
e. VESTING, DELIVERY AND DISTRIBUTION.
i. Vesting.
A. Retained Shares and Retained Units are fully vested at the time
of issuance or crediting.
B. Matching Shares and Matching 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 Matching Shares or
Units at the end of each of the second, third, fourth and fifth
years after the date such Matching Shares or Units are issued or
credited, provided that such Matching Shares or Units shall vest
only if the Stock Participant's Retained Shares or Units have
been left on deposit with the Company 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 6.f.
ii. Delivery.
A. Retained Shares and Matching Shares will be delivered as soon as
possible after the applicable vesting requirements (including
accelerated vesting under subparagraph 6.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 Matching 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 Officers Deferred Plan.
f. VESTING AND CANCELLATION UNDER SPECIAL CONDITIONS.
i. Retirement or Disability. Notwithstanding the foregoing, all
Matching 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. Notwithstanding the
foregoing, if within one year after such retirement the Stock
Participant (A) is employed or retained by or renders service to any
organization that, directly or indirectly, competes with or becomes
competitive with the Company, or if the rendering of such services
is prejudicial or in conflict with the interests of the Company, or
(B) violates any confidentiality agreement or agreement governing
the ownership or assignment of intellectual property rights with the
Company, or (C) engages in any other conduct or act determined to be
injurious, detrimental or prejudicial to any interest of the
Company, the Company may rescind or restrict such early vesting or
withhold or have the right to the return of the economic value of
the Matching
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Shares or Units which vested early under this subparagraph;
provided, however, that this provision shall not be applicable in
the event of a Change of Control.
ii. Early Retirement. Matching 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
Officers Deferred Plan. A Stock Participant who retires at or after
age 55, but before age 65, may elect at anytime to have Retained
Shares then on deposit with the Company delivered and to forfeit
Matching Shares that have not yet vested. If the Stock Participant
does not make this election, Retained Shares and Matching Shares
shall remain on deposit until the participant reaches age 65 or
until the applicable vesting requirements of subparagraph 6.e. have
been fulfilled, as the case may be, and Matching Shares shall vest
upon the occurrence of the earlier of such event. Notwithstanding
the foregoing, if within one year after such retirement the Stock
Participant (A) is employed or retained by or renders service to any
organization that, directly or indirectly, competes with or becomes
competitive with the Company, or if the rendering of such services
is prejudicial or in conflict with the interests of the Company, or
(B) violates any confidentiality agreement or agreement governing
the ownership or assignment of intellectual property rights with the
Company, or (C) engages in any other conduct or act determined to be
injurious, detrimental or prejudicial to any interest of the
Company, the Company may rescind or restrict such vesting or
withhold or have the right to the return of the economic value of
the Matching Shares or Units which vested after the date of early
retirement under this subparagraph; provided, however, that this
provision shall not be applicable in the event of a Change of
Control.
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,
Matching 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 Matching
Shares or Units shall vest in full.
v. Voluntary Resignation. In the event that a Stock Participant resigns
voluntarily, Matching Shares or Units held in such participant's
account that have not yet vested shall not vest and shall be
forfeited, unless otherwise determined by the Chairman of the
Committee, in his or her discretion, upon recommendation by the
Chief Executive Officer of the Company.
vi. Change of Control. All Matching Shares and Matching Units shall vest
if there is a Change of Control of the Company.
Change of Control means:
(A) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of 15% or more of either (A) the
then-outstanding shares of Common Stock of the Company (the
"Outstanding Company Common Stock") or (B) 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 subparagraph (A), the following acquisitions shall not
constitute a Change of Control: (a) any acquisition directly from
the Company, (b) any acquisition by the Company, (c) any acquisition
by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company, or (d) any acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b) and (c) of
subparagraph (C) of this subparagraph 8.f.vi.; or
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(B) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (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 stockholders, 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 of
the Company or sale or other disposition of all or substantially all
of the assets of the Company or the acquisition by the Company of
assets or stock of another entity (a "Business Combination"), in
each case, unless, following such Business Combination, (a) 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, (b) 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 (c) 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
(D) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
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 Matching Shares or Retained or Matching
Units, in order to exercise Company stock options, provided that an
equal number of shares of Common Stock is promptly redeposited with the
Company after such exercise.
h. DIVIDENDS AND VOTING. Dividends on Retained and Matching 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 Matching Units shall be credited under
the Officers Deferred Plan, in additional units based on the fair market
value of one share of the Common Stock on the dividend payment date. A
Stock Participant shall have the right to vote Retained and Matching
Shares.
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i. MAXIMUM SHARES SUBJECT TO STOCK RETENTION AWARDS. Subject to the
provisions of this subparagraph and paragraph 3.e. 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. In the event of
a corporate transaction involving the Company, the Common Stock or the
Company's corporate or capital structure, including but not limited to
any stock dividend, stock split, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation,
reclassification, split-up, spin-off, combination or exchange of shares,
or a sale of the Company or of all or part of its assets or any
distribution to stockholders other than a normal cash dividend, the
Committee shall make such proportional adjustments as are necessary to
preserve the benefits or potential benefits of the Stock Retention
Awards. Action by the Committee may include all or any of adjustment in
(i) the maximum number and kind of securities subject to the Plan as set
forth in this paragraph; (ii) the maximum number and kind of securities
that may be made subject to Stock Retention Awards for any individual as
set forth in paragraph 3.e.; (iii) the number and kind of securities
subject to any outstanding Stock Retention Award; (iv) the conversion
price of a Stock Retention Award, without any change in the aggregate
price to be paid therefor; and (v) any other adjustments that the
Committee determines to be equitable.
j. TAX WITHHOLDING. The Company shall have the right to deduct from any
settlement made under the Plan or to require the participant to pay the
amount of any federal, state or local taxes of any kind required by law
to be withheld with respect to the grant, vesting, payment or settlement
of an award under this Plan, or to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for
the payment of such taxes. If Common Stock is withheld or surrendered to
satisfy tax withholding, such stock shall be valued at its fair market
value as of the date it is withheld or surrendered. The Company may also
deduct from any award settlement any other amounts due the Company by
the Plan Participant.
7. NON-TRANSFERABILITY. Neither Annual Performance Awards, Stock Retention
Awards, Retained Shares, Matching Shares, Retained Units, Matching 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 Matching Shares are
held by the Company or the Retained and Matching Units have not been
distributed in accordance with the Officers Deferred Plan, and any sale,
pledge, assignment or other attempted transfer shall be null and void.
8. 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 10; 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.
9. GOVERNING LAW. The Plan, awards granted under the Plan, agreements entered
into under the Plan, Retained or Matching Shares and Retained or Matching
Units shall be construed, administered and governed in all respects under
and by the applicable laws of the State of Delaware, excluding any conflicts
or choice of law rule or principle that might otherwise refer construction
or interpretation of the Plan or an award or agreement or shares or units to
the substantive law of another jurisdiction.
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10. 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
3.e. 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). No amendment, modification or termination of
the Plan may adversely affect in a material manner any right of any Plan
Participant with respect to any Performance Share Award theretofore granted
without such participant's written consent.
11. 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 10.
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