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 ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, 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.
▇. ▇▇▇▇▇ 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.
▇. ▇▇▇▇▇ 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 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 noncompetition 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.
2
(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.
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
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%
(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
3
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 payment of the
value of Performance Units for the purchase of
a retirement annuity to Mr. Melrose.
(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.
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.
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, ▇▇▇▇▇▇▇▇ or ▇▇▇▇ 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 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.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
4
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 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, ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
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
5
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 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 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.
Change of Control means:
i. 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 subsection i., 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
6
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction that complies with clauses (A), (B) and (C) of subsection iii. of
this Subsection 3.f.; or
ii. 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
iii. 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
iv. Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
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
7
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.
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
8
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.
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.
9
IN WITNESS WHEREOF, the Agreement has been executed and delivered by
the Company as of the date first above set forth.
THE TORO COMPANY
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 and as amended 5/13/99.
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
10