100 PAGES COMPLETE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5684
W.W. Grainger, Inc.
(Exact name of registrant as specified in its charter)
Illinois 36-1150280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Grainger Parkway, Lake Forest, Illinois 60045-5201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 847/535-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock $0.50 par value, and accompanying New York Stock Exchange
Preferred Share Purchase Rights Chicago Stock Exchange
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 ________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $3,024,466,645 as of the close of trading reported on the
Consolidated Transaction Reporting System on March 6, 2000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock $0.50 par value 93,523,827 shares outstanding as of March 6, 2000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the annual meeting of shareholders
of the registrant to be held on April 26, 2000 are incorporated by reference
into Part III hereof.
The Exhibit Index appears on page 15 in the sequential numbering system.
(The Securities and Exchange Commission has not approved or disapproved of this
report nor has it passed on the accuracy or adequacy hereof.)
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CONTENTS
<S> <C>
Page
PART I
Item 1: BUSINESS........................................................... 3-6
THE COMPANY...................................................... 3
BRANCH-BASED DISTRIBUTION BUSINESSES............................. 3-5
GRAINGER INDUSTRIAL SUPPLY..................................... 3-4
GRAINGER.COM................................................... 4
ACKLANDS-GRAINGER INC. ........................................ 4
GRAINGER CUSTOM SOLUTIONS...................................... 5
GRAINGER GLOBAL SOURCING....................................... 5
GRAINGER PARTS................................................. 5
GRAINGER, S.A. de C.V. ........................................ 5
DIGITAL BUSINESSES............................................... 5
ORDERZONE.COM.................................................. 5
FINDMRO.COM.................................................... 5
GRAINGER AUCTION............................................... 5
OTHER BUSINESS UNITS............................................. 6
GRAINGER CONSULTING SERVICES................................... 6
GRAINGER INTEGRATED SUPPLY..................................... 6
LAB SAFETY SUPPLY, INC......................................... 6
INDUSTRY SEGMENTS................................................ 6
COMPETITION...................................................... 6
EMPLOYEES........................................................ 6
Item 2: PROPERTIES......................................................... 7
Item 3: LEGAL PROCEEDINGS.................................................. 7
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 7
Executive Officers of the Company................................................. 7-8
PART II
Item 5: MARKETS FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.................................. 8
Item 6: SELECTED FINANCIAL DATA............................................ 9
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS.................................... 9-14
RESULTS OF OPERATIONS............................................ 9-13
YEAR 2000........................................................ 13
FINANCIAL CONDITION.............................................. 13
INFLATION AND CHANGING PRICES.................................... 14
FORWARD-LOOKING STATEMENTS....................................... 14
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 14
Item 9: DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 14
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 14
Item 11: EXECUTIVE COMPENSATION............................................. 14
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 14
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 14
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.... 15
Signatures........................................................................ 16
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 17
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................... 18-38
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PART I
Item 1: Business
The Company
The registrant, W.W. Grainger, Inc., was incorporated in the State of Illinois
in 1928. It is the leading North American provider of maintenance, repair, and
operating (MRO) supplies, services, and related information to businesses and
institutions. W.W. Grainger, Inc. regards itself as being in the service
business. As used herein, "Company" means W.W. Grainger, Inc., and/or its
subsidiaries as the context may require. In late 1997, the Company began an
organizational restructuring with the formation of several business operations.
Several of these operations were originally part of the Grainger branch-based
business. In addition, Grainger Integrated Supply began refocusing on serving
customers through materials management service contracts. These changes were
made to create greater focus and accountability in serving the diverse needs of
the Company's customers. 1998 was a transition year in establishing the
refocused organization. Further refinements in 1999 were in response to
significant initiatives designed to take advantage of the opportunities created
by Internet commerce, including two new businesses, OrderZone.com and
FindMRO.com.
The Company offers a breadth of MRO solutions by combining products, services,
and information. It tailors its capabilities toward the objective of providing
the lowest total cost MRO solution to select customer groups. The Branch-based
Distribution Businesses serve primarily North American businesses with immediate
and/or planned purchase MRO needs. The Digital Businesses offer a broad array of
indirect materials and related information to meet the needs of businesses
looking to reduce process costs through Internet-enabled solutions. The Other
Businesses of the Company serve customers who seek to outsource their indirect
procurement and management process or customers who choose to purchase safety
and other industrial products through a direct marketing company.
The Company also has business support functions which provide coordination and
guidance in the areas of Accounting, Administrative Services, Aviation, Business
Development, Communications, Compensation and Benefits, Employee Development,
Finance, Government Regulations, Human Resources, Industrial Relations, Investor
Relations, Insurance and Risk Management, Internal Audit, International
Operations, Legal, Planning, Real Estate and Construction Services, Security and
Safety, Taxes, and Treasury services. These services are provided in varying
degrees to all of the business units.
A number of Company-wide capabilities assist business units in serving their
respective markets. These capabilities include technology and information
management, supplier partnerships, supply chain integration skills, and an
understanding of the customers' MRO environments.
The Company's efforts are guided by two major strategic objectives designed to
drive sales growth and provide value:
o Develop and embrace Internet-enabled solutions to strengthen the Company's
current capabilities and help fashion the future of the MRO marketplace.
o Create focused businesses to serve customer needs and find new growth
opportunities within existing businesses.
The Company does not engage in basic or substantive product research and
development activities. New items are added regularly to the Company's product
lines on the basis of market information, recommendations of its employees,
customers, and suppliers, and other factors. The Company's research and
development effort is focused on new methods of serving customers.
Branch-based Distribution Businesses
The Company's Branch-based Distribution Businesses provide customers with
solutions to their immediate and/or planned purchase MRO needs throughout North
America. Logistics networks are configured for rapid availability. A broad
selection of MRO products is offered at local branches through user-friendly
catalogs and via the Internet. The Branch-based Distribution Businesses consist
of Grainger Industrial Supply, Grainger.com, Acklands-Grainger Inc., Grainger
Custom Solutions, Grainger Export, Grainger Global Sourcing, Grainger Parts,
Grainger, S.A. de C.V. (Mexico), and Puerto Rico. Described below are the more
significant of these businesses.
Grainger Industrial Supply
- ---------------------------
The focus of Grainger Industrial Supply is to provide the best combination of
product selection, local availability, speed of delivery, and simplicity of
ordering at a competitive price to North American businesses and institutions of
all sizes. Its primary customers are small and medium-sized companies. It also
addresses large-sized organizations' MRO needs.
Grainger Industrial Supply operates 371 branches in all 50 states. These
branches are located within minutes of the majority of U.S. businesses and carry
inventory to support their local market needs. Products are available for
immediate pick up, same-day shipment, or delivery.
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An average branch has 15 employees and handles about 260 transactions per day.
During 1999, an average of approximately 96,700 sales transactions were
completed daily. Each branch tailors its inventory to local product demand. In
1999, Grainger Industrial Supply invested more than $6,800,000 in new branches,
relocations, and additions to branches. During the year 22 new branches were
opened, three were relocated, and a number of remodeling projects were
completed.
Grainger Industrial Supply has six Zone Distribution Centers (ZDCs) in
operation. ZDCs ship orders directly to customers for all branches located in
their zone, including Internet orders. The ZDC logistics network also provides a
break-bulk function for faster branch stock replenishment.
Two Regional Distribution Centers (RDCs) located in Greenville County, South
Carolina, and Kansas City, Missouri, provide the branches with product. A
National Distribution Center (NDC) is a centralized storage and shipping
facility serving customers and the entire network with slower moving inventory
items. The Company plans to remodel its distribution network to improve
warehouse productivity, and provide additional capacity for efficient support of
future growth.
During 1998, Grainger Industrial Supply began its conversion from its legacy
systems to a new business enterprise system. Conversion at all branch and ZDC
locations was completed in 1999.
Grainger Industrial Supply sells principally to contractors, service shops,
industrial and commercial maintenance departments, manufacturers, hotels,
government, and health care and educational facilities. Sales transactions
during 1999 were made to more than 1,400,000 customers. It is estimated that
approximately 24% of 1999 sales consisted of items bearing the Company's
registered trademarks, including DAYTON(R) (principally electric motors, heating
and ventilation equipment), TEEL(R) (liquid pumps), SPEEDAIRE(R) (air
compressors), AIRHANDLER(R) (air filtration equipment), DEM-KOTE(R) (spray
paints), WESTWARD(R) (hand and power tools), and LUMAPRO(TM) (task and outdoor
lighting), as well as other trademarks. The Company has taken steps to protect
these trademarks against infringement and believes that they will remain
available for future use in its business. Sales of remaining items generally
consisted of products carrying the names of other well recognized brands.
The Grainger Industrial Supply catalog offers more than 85,000 MRO products from
more than 1,000 suppliers, most of whom are manufacturers. Approximately 2
million copies of the catalog were distributed in 1999. The most current edition
was issued in January 2000. The largest supplier in 1999, a diversified
manufacturer through 20 of its divisions, accounted for about 10% of purchases.
No significant difficulty has been encountered with respect to sources of
supply.
The Grainger Industrial Supply CD ROM catalog is designed to bring, directly to
the customer's place of business, a fast, easy way to select products. Through
the CD ROM catalog, the customer can use a variety of ways to describe a needed
product, and then review Grainger Industrial Supply's offerings, complete with
specifications, prices, and pictures. Another CD ROM catalog feature includes a
cross-reference function that allows customers to retrieve product information
using their own stock numbers. More than 350,000 copies of the CD ROM catalog
version were produced for distribution in 1999. The CD ROM catalog is also used
at the branches as a training tool and resource for identifying appropriate
products for customers' applications.
Grainger.com
- ------------
The Grainger.com site was one of the first MRO Web sites. This Web site is an
"e-store front" or "point of access" into the Grainger Industrial Supply
business. Grainger.com, however, offers more products, automated search, and
customer personalization. It is available 24 hours a day, seven days a week
providing real-time availability, customer specific pricing, search engines, and
a number of other enhancements.
Customers have access to a much larger selection of MRO products through
Grainger.com, which has more than 220,000 products available. The average order
size is approaching twice the average order size in the physical world. About
20% of orders are placed after hours. Orders processed through Grainger.com
resulted in sales of approximately $100,000,000 in 1999 and $13,500,000 in 1998.
Based on year end volumes, the Company estimated that the annualized run rate
for orders processed through Grainger.com was more than $200,000,000. For the
third year in a row, Grainger.com was named among the top business-to-business
Internet sites in the world by Advertising Age's Business Marketing Magazine.
Acklands-Grainger Inc. (AGI)
- ----------------------------
AGI, acquired in December 1996, is Canada's leading branch-based broad line MRO
distributor. It serves customers through 188 branches and 6 distribution centers
across Canada. AGI distributes tools, lighting, HVAC, safety supplies,
pneumatics, instruments, welding equipment and supplies, motors, and shop
equipment, as well as many other items. A comprehensive catalog is used to
showcase the product line and to help customers select products. This catalog,
with over 70,000 products listed, supports the efforts of 275 sales
representatives throughout Canada and is printed in both English and French.
During 1999, an average of 17,900 sales transactions were completed daily.
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Grainger Custom Solutions
- --------------------------
Grainger Custom Solutions was formed in 1998. Its business is to provide large
organizations with planned MRO products across multiple indirect materials
categories. These services are marketed primarily to companies that are looking
for some of the benefits of integrated supply, but are not ready for a total
outsourcing solution or on-site management services.
Grainger Custom Solutions offers to provide cost savings through supply chain
optimization and enhanced information technology, as well as products,
logistics, and services specific to a customer's situation.
In 1998, the business began operating two call centers and four distribution
centers. A fifth distribution center was opened during 1999.
The business focuses on planned delivery of seven core commodity product lines
with access to other broad product lines from Grainger Industrial Supply. The
business employed 161 sales representatives at December 31, 1999.
Grainger Global Sourcing
- ------------------------
Grainger Global Sourcing's business is to procure competitively priced,
high-quality products sourced outside the United States. These items are sold
primarily under private label by Grainger Industrial Supply and the Company's
other businesses. Products obtained through Grainger Global Sourcing in 1999
include WESTWARD(R) tools and LUMAPRO(TM) lighting products.
Grainger Parts
- --------------
Grainger Parts provides access to over 285,000 parts and accessories through its
centralized warehouse located in Northbrook, Illinois. More than 180,000 pages
of parts diagrams are maintained on-line. Grainger Parts handled about 1,700,000
customer calls in 1999 through its call centers in Northbrook, Illinois, and
Waterloo, Iowa.
Grainger Parts has been ISO 9002 certified since 1995. Grainger Parts' 100%
compliance with ISO 9002 standards ranked it among the top 10% of all
ISO-certified companies.
Grainger, S.A. de C.V.
- ----------------------
Grainger, S.A. de C.V. serves the traditional MRO product needs of customers in
Mexico. The business employed 95 sales representatives at December 31, 1999.
From its 80,000 square foot facility outside Monterrey, the business provides
delivery of over 72,000 products throughout Mexico. A new branch in Guadalajara
is scheduled to open in 2000.
Digital Businesses
The Digital Businesses represent a suite of e-commerce products designed to meet
the needs of businesses looking to reduce cost and increase the effectiveness of
their MRO/indirect materials process through Internet-enabled solutions. The
Digital Businesses consist of OrderZone.com, FindMRO.com, and Grainger Auction.
OrderZone.com
- -------------
Launched in May 1999, OrderZone.com is a business-to-business indirect materials
marketplace where customers can buy products from a number of different
suppliers using a single site. Six suppliers currently participate in
OrderZone.com's one-stop, on-line, business-to-business service for the
procurement of a wide variety of products and services. Customers using
OrderZone.com can purchase MRO products from Grainger Industrial Supply, office
supplies from Corporate Express, safety equipment from Lab Safety Supply,
electronic supplies from Avnet, uniforms from Cintas, and laboratory equipment
from VWR Scientific Products. OrderZone.com is designed to be a powerful, easy,
and convenient solution for businesses looking to streamline their procurement
process. Using OrderZone.com's Internet-based multi-distributor site, customers
can search for products from a number of leading complementary distributors,
place a single order across multiple distributors, and receive a single invoice.
FindMRO.com
- -----------
FindMRO.com is an Internet-based sourcing center for indirect material spot
buys. Launched in November 1999, FindMRO.com accesses a database of more than
12,000 suppliers and five million products. Through the convenience of the
Internet, sophisticated search technologies, and sourcing expertise of its
sourcing professionals, FindMRO.com offers to address the time-consuming problem
of finding the best product when a source is unknown to the buyer. From frequent
to hard-to-find or from daily to once-in-a-lifetime purchases, FindMRO.com is
designed to meet a number of the needs of customers including product search,
product sourcing, supplier management, order processing, order fulfillment,
technical support facilitation, and logistics management.
Grainger Auction
- ----------------
Launched in November 1999, Grainger Auction provided an outlet for Grainger
Industrial Supply to move discontinued inventory, which is undamaged products
that are not the latest versions, or excess inventory. Initially, the site
handled discontinued inventory from Grainger Industrial Supply. Customer
response was such that Grainger Auction was established as a separate business
in early 2000. The site will be opened to Company suppliers, additional Company
businesses, and others.
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Other Business Units
Other businesses of the Company are Grainger Consulting Services, Grainger
Integrated Supply, and Lab Safety Supply.
Grainger Consulting Services
- ----------------------------
Grainger Consulting Services is a professional services firm specializing in MRO
materials management consulting. Its primary market consists of businesses
seeking to manage their MRO procurement process more effectively.
Grainger Consulting Services provides expertise and professional resources
intended to help clients address indirect materials management issues and
improve operating efficiencies, productivity, and asset utilization. The
business offers consulting services, which include process reengineering,
inventory database development, and "turnkey" stockroom set up.
Grainger Integrated Supply
- --------------------------
Grainger Integrated Supply serves customers who have chosen to outsource
components or all of their indirect materials management process. The service
offering is designed to enable customers to focus on their core business
objectives and the improvement of their global competitiveness.
Grainger Integrated Supply offers a full complement of on-site outsourcing
solutions, including business process reengineering, inventory management,
supply chain management, tool crib management, and information management.
Grainger Integrated Supply provides its clients with access to more than five
million products through its relationships with respected manufacturers, service
providers, Grainger Industrial Supply, and other distributors.
Lab Safety Supply, Inc.
- -----------------------
Lab Safety Supply is a direct marketer of safety and other industrial products
to U.S. and Canadian businesses. Located in Janesville, Wisconsin, Lab Safety
Supply reaches its customers through its General Catalog, targeted catalogs, and
other marketing materials which are distributed throughout the year.
Lab Safety Supply offers extensive product depth (over 60,000 products in the
2000 General Catalog), technical support, and high service levels. It is a
primary safety supplier for many small and medium-sized companies and a critical
backup supplier for many larger companies.
Industry Segments
Segment reporting was modified in 1999 to recognize the emphasis being placed on
the Company's digital strategy and to reflect the role of Grainger.com within
the Branch-based Distribution segment. The new segment reporting reflects how
management is evaluating business operations. For 1999 the Company is reporting
two industry segments: Branch-based Distribution and Digital. For segment
information and the Company's consolidated revenue and operating earnings see
"Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations," and "Item 8: Financial Statements and Supplementary
Data." The total assets of the Company for the last five years were: 1999,
$2,564,826,000; 1998, $2,103,966,000; 1997, $2,000,116,000; 1996,
$2,119,021,000; and 1995, $1,669,243,000.
Competition
The Company faces competition in all the markets it serves, from manufacturers
(including some of the Company's own suppliers) that sell directly to certain
segments of the market, from wholesale distributors, from catalog houses, from
certain Internet-based businesses and product fulfillment mechanisms, and from
certain retail enterprises.
The principal means by which the Company competes with manufacturers and other
distributors is by local stock availability, efficient service, account
managers, competitive pricing, its several catalogs, which include product
descriptions and in certain cases, extensive technical and application data,
procurement process consulting services, electronic and Internet commerce
technology, and other efforts to assist customers in lowering their total MRO
costs. The Company believes that it can effectively compete on a price basis
with its manufacturing competitors on small orders, but that such manufacturers
may enjoy a cost advantage in filling large orders.
The Company serves a number of diverse markets and is able in some markets to
reasonably estimate the Company's competitive position within that market.
However, taken as a whole, the Company is unable to determine its market shares
relative to others engaged in whole or in part in similar activities.
Employees
As of December 31, 1999, the Company had 16,730 employees, 14,030 of whom were
full-time and 2,700 were part-time or temporary. The Company has never had a
major work stoppage and considers its employee relations generally to be good.
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Item 2: Properties
As of December 31, 1999, the Company's owned and leased facilities totaled
17,707,000 square feet, an increase of 5.4% over 1998. Grainger Industrial
Supply and Acklands-Grainger Inc. (AGI) accounted for the majority of the total
square footage. Grainger Industrial Supply facilities are located throughout the
United States. AGI facilities are located throughout Canada.
Grainger Industrial Supply branches range in size from 1,000 to 109,000 square
feet and average 21,000 square feet. Most are located in or near major
metropolitan areas, many in industrial parks. Typically, an owned branch is on
one floor, is of masonry construction, consists primarily of warehouse space,
contains an air-conditioned office and sales area, and has off-the-street
parking for customers and employees. The Company considers that its properties
are generally in good condition and well maintained and are suitable and
adequate to carry on the Company's business.
The significant facilities of the Company are briefly described below:
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Size in
Location Facility and Use Square Feet
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Chicago Area (1) General Offices & National Distribution Center 2,112,000
Kansas City, MO (1) Regional Distribution Center 1,435,000
Greenville County, SC (1) Regional Distribution Center 1,090,000
United States (1) 6 Zone Distribution Centers 1,345,000
United States (2) 371 Grainger Industrial Supply branch locations 7,690,000
United States and Mexico (3) All other facilities 1,703,000
Canada (4) 190 AGI facilities 2,332,000
----------
Total square feet 17,707,000
==========
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(1) These facilities are either owned or leased with leases expiring between
2000 and 2004. The owned facilities are not subject to any mortgages. In
1999, the Company completed the construction of an office facility, on
owned property, to house a large portion of the Chicago-area work force.
Certain Chicago-area owned and leased office facilities were vacated when
the new Lake Forest, Illinois facility became operational.
(2) Grainger Industrial Supply branches consist of 302 owned and 69 leased
properties. The owned facilities are not subject to any mortgages.
(3) Other facilities represent owned and leased general branch offices,
distribution centers, and branches. Two branches are located in Puerto Rico
and one branch/distribution center is located in Monterrey, Mexico. The
owned facilities are not subject to any mortgages.
(4) AGI facilities consist of general offices, distribution centers, and
branches that are either owned or leased. The owned facilities are not
subject to any mortgages.
Item 3: Legal Proceedings
There are pending various legal and administrative proceedings involving the
Company that are incidental to the business. It is not expected that the outcome
of any such proceeding will have a material adverse effect upon the Company's
consolidated financial position or its results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
Executive Officers of the Company
Following is information about the Executive Officers of the Company as of March
1, 2000. Executive Officers of the Company generally serve until the next annual
election of officers, or until earlier resignation or removal.
Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
James M. Baisley (67) Senior Vice President, General Counsel, and
Secretary
Donald E. Bielinski (50) Group President, a position assumed in 1997 after
serving as Senior Vice President, Marketing and
Sales. Prior to assuming the last-mentioned position
in 1995, Mr. Bielinski served as Senior Vice
President, Organization and Planning.
Wesley M. Clark (47) Group President, a position assumed in 1997 after
serving as Senior Vice President, Operations and
Quality. Prior to assuming the last-mentioned
position earlier in 1997, Mr. Clark served as Vice
President, Field Operations and Quality.
(continued on next page)
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Positions and Offices Held and Principal
Name and Age Occupations and Employment During the Past Five Years
- ------------------------- -----------------------------------------------------
Edward J. Franczek (43) Senior Vice President, Marketing. Before joining the
Company in 1999, Mr. Franczek was Vice President,
Corporate Marketing at Kemper Insurance. Prior to
assuming the last-mentioned position in 1998, he
served Ameritech Corporation as Vice President,
Corporate Product Management. Mr. Franczek has also
served Kraft Foods, Inc., most recently as Vice
President, Marketing and Business Director.
Gary J. Goberville (53). Vice President, Human Resources. Before joining the
Company in 1995, Mr. Goberville served as an
executive with GenCorp, Inc.
Dennis G. Jensen (49) Senior Vice President, Sales and Operations, a
position assumed in January 2000 after serving as
Vice President and General Manager, Sales and
Operations. Prior to assuming the last-mentioned
position in 1997, Mr. Jensen was Vice President,
Field Operations. Previously, he served in various
other managerial operating positions.
Richard L. Keyser (57) Chairman of the Board, a position assumed in 1997,
and Chief Executive Officer, a position assumed in
1995. Previously, Mr. Keyser served as President and
Chief Operating Officer.
P. Ogden Loux (57) Senior Vice President, Finance and Chief Financial
Officer, positions assumed in 1997 after serving as
Vice President, Finance.
Robert D. Pappano (57) Vice President, Financial Reporting, a position
assumed in 1999 after serving as Vice President,
Financial Reporting and Investor Relations.
Previously, he served as Vice President and
Treasurer.
James T. Ryan (41) Vice President of the Company and President,
Grainger.com, a position assumed in January 2000
after serving as Vice President, Information
Services. Prior to assuming the last-mentioned
position in 1994, Mr. Ryan served the Company as
President, Parts Company of America.
John A. Schweig (42) Senior Vice President, Business Development and
International, a position assumed in 1997 after
serving as Vice President, Business Development and
General Manager, International. Prior to assuming
the last-mentioned position in 1996, Mr. Schweig
served as Vice President and General Manager, Direct
Marketing. Previously, he served the Grainger
Division as Vice President, Marketing.
John W. Slayton, Jr. (54) Senior Vice President, Supply Chain Management, a
position assumed in 1997 after serving as Senior
Vice President, Product Management. Prior to
assuming the last-mentioned position in 1995, Mr.
Slayton served the Grainger Division as Vice
President, Product Management.
PART II
Item 5: Markets for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange, with the ticker symbol GWW. The high and low sales
prices for the common stock, and the dividends declared and paid for each
calendar quarter during 1999 and 1998, as adjusted to reflect the Company's
2-for-1 stock split effective May 11, 1998, are shown below.
Prices
----------------------------
Quarters High Low Dividends
- ---------------------------------------------------------------------------
1999 First $48 $36 7/8 $0.15
Second 58 1/8 42 0.16
Third 57 1/4 42 7/8 0.16
Fourth 50 5/8 40 5/8 0.16
- ---------------------------------------------------------------------------
Year $58 1/8 $36 7/8 $0.63
- ---------------------------------------------------------------------------
1998 First $51 13/16 $46 1/2 $0.135
Second 54 23/32 49 1/8 0.15
Third 51 13/16 39 3/16 0.15
Fourth 47 36 7/16 0.15
- ---------------------------------------------------------------------------
Year $54 23/32 $36 7/16 $0.585
- ---------------------------------------------------------------------------
The approximate number of shareholders of record of the Company's common stock
as of March 6, 2000 was 1,700.
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Item 6: Selected Financial Data
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<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
(In thousands of dollars except for per share amounts)
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $4,533,853 $4,341,269 $4,136,560 $3,537,207 $3,276,910
Net earnings ........................... 180,731 238,504 231,833 208,526 186,665
Net earnings per basic share ........... 1.95 2.48 2.30 2.04 1.84
Net earnings per diluted share ......... 1.92 2.44 2.27 2.02 1.82
Total assets ........................... 2,564,826 2,103,966 2,000,116 2,119,021 1,669,243
Long-term debt ......................... 124,928 122,883 131,201 6,152 8,713
Cash dividends paid per share .......... $ 0.63 $ 0.585 $ 0.53 $ 0.49 $ 0.445
</TABLE>
Item 7: Management's Discussion and Analysis of Financial Condition and the
Results of Operations
RESULTS OF OPERATIONS
The Company continues to tailor its capabilities to provide the lowest total
cost MRO solution to each customer group. In this connection, segment reporting
was modified in 1999 to recognize the emphasis being placed on the Company's
digital strategy and to reflect the role of Grainger.com within the Branch-based
Distribution segment. The new segment reporting reflects how management is
evaluating business operations. While 1999 and 1998 data are reported on the
basis of the new segments, 1997 data are not because of the impracticability of
restatement. (See Note 16 to the Consolidated Financial Statements.)
The following table is included as an aid to understanding changes in the
Company's Consolidated Statements of Earnings.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
Items in Consolidated Statements Percent of Increase
of Earnings as a Percent of (Decrease) from
Net Sales Prior Year
1999 1998 1997 1999 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0% 4.4% 4.9%
Cost of merchandise sold .......... 63.5 63.2 63.9 5.0 3.8
Operating expenses ................ 29.5 27.4 26.6 12.2 8.0
Operating earnings ................ 7.0 9.4 9.5 (22.2) 3.8
Other deductions, net ............. 0.3 0.2 0.1 88.9 102.5
Income taxes ...................... 2.7 3.7 3.8 (24.2) 2.9
Net earnings ...................... 4.0% 5.5% 5.6% (24.2)% 2.9%
</TABLE>
Company Net Sales - 1999 Compared to 1998
- -----------------------------------------
The Company's net sales of $4,533,853,000 for 1999 increased 4.4% from net sales
of $4,341,269,000 for 1998. This increase resulted from a 3.3% increase in the
Branch-based Distribution Businesses segment, a 498.6% increase in the Digital
Businesses segment, and a 17.2% increase in the Other Business Units of the
Company. Since 1999 had one fewer sales day than did 1998 (254 versus 255), the
Company's net sales increased 4.8% on a daily basis.
Despite a soft industrial economy in the United States, sales growth was
positive in 1999 versus 1998. Sales growth for the year 1999 was primarily
volume-driven, reflecting the favorable effects from the Company's
customer-focused business unit strategy, new marketing initiatives, and the
continuing acceleration in Internet transactions. Sales growth was constrained,
however, by customer service issues at Grainger Industrial Supply and Grainger
Parts related to the field rollout of the new enterprise resource planning (ERP)
system. A total of $20,000,000 of sales are estimated to have been lost as a
result of these service issues.
Segment Net Sales
The following comments at the segment level include external and intersegment
net sales; those comments at the business unit level include external and inter-
and intrasegment net sales.
Branch-based Distribution Businesses
Sales at the Branch-based Distribution Businesses amounted to $4,132,591,000 in
1999, a 3.3% increase over 1998 sales of $4,002,051,000. Average daily sales
increased by 3.7%.
9
<PAGE>
Grainger Industrial Supply - Average daily sales increased 2% in 1999 as
compared with 1998. Contributing to the 1999 sales growth were the addition of
22 new branches during the year and increased sales to large customers. Sales
were negatively affected by approximately $18,000,000 as a result of the
customer service issues discussed above. Sales prices decreased 0.7% in 1999
versus 1998.
This business also realized incremental sales of $15,000,000 during the 1999
fourth quarter, including $7,000,000 in December 1999, related to customer
concerns about Y2K. Products affected included generators, flashlights, and
batteries.
Sales were favorably affected by continued momentum in the Company's Internet
strategy. Orders for sales processed through Grainger.com in 1999 were
approximately $100,000,000. Based on year-end volumes, the annualized run rate
for orders processed through Grainger.com was estimated at more than
$200,000,000.
Acklands-Grainger Inc. (Canada) - Average daily sales increased 6% in 1999 as
compared with 1998. This increase was driven by growth in both Eastern and
Western Canada. The growth in Eastern Canada was primarily attributable to the
addition of 14 new branches during 1999 and 1998. The growth in Western Canada
was driven by an improvement in the oil and gas, forestry, and industrial
sectors of the economy, along with gains in sales to large customers, including
government agencies. In Canadian dollars, average daily sales increased 7%.
Grainger, S.A. de C.V. (Mexico) - Average daily sales increased 16% in 1999 as
compared with 1998. This sales growth reflects the continuing planned
development of this new business. A key driver was increased sales to customers
located in Mexico's interior, who are served by the Company's facility in
Monterrey.
Grainger Custom Solutions - Average daily sales decreased 2% in 1999 as compared
with 1998. The focus of this business is the transitioning of large, complex
customers to the new business platform, while pursuing rationalization of
facilities and other synergies with Grainger Industrial Supply.
Digital Businesses
Sales at the Digital Businesses amounted to $2,977,000 in 1999, a 498.6%
increase over 1998 sales of $497,000. These sales include product sales and
service fee revenues for FindMRO.com and service fee revenues for OrderZone.com.
Both businesses were officially launched in 1999. Revenue recorded in 1998
represents intracompany sales for FindMRO.com.
Other Business Units
Sales at the Other Businesses amounted to $415,152,000 in 1999, a 17.2% increase
over 1998 sales of $354,360,000. This equates to an average daily sales increase
of 17.6%.
Grainger Integrated Supply - Average daily sales increased 48% for 1999 as
compared with 1998. Sales for this business unit include product throughput and
management fees. Growth was driven by new engagements, contract renewals, and
scope expansions, reflecting increasing demand for this outsourcing business,
which provides fee-based, on-site indirect materials management services to
large businesses.
Lab Safety Supply - Average daily sales increased 8% in 1999 as compared with
1998. This sales growth is largely attributable to Lab Safety Supply's product
line expansion program.
Company Net Sales - 1998 Compared to 1997
- -----------------------------------------
As used within this section, the term "Grainger branch-based businesses"
reflects the operations of the Company excluding Acklands-Grainger Inc., Lab
Safety Supply, Inc., and Grainger Parts.
The 1998 Company net sales increase of 4.9%, as compared with 1997, was
principally volume related. This increase primarily represented the effects of
the Company's marketing initiatives, which included new product additions, and
the National Accounts, Integrated Supply, and direct marketing programs.
Partially offsetting the growth from these initiatives was a decline in sales at
Acklands-Grainger Inc. (AGI), the Company's Canadian subsidiary. This decline
resulted from an unfavorable change in the Canadian exchange rate. In Canadian
dollars, AGI's sales rate was relatively flat when comparing 1998 with 1997.
Weak demand in the mining, forestry, oil, exploration, and agriculture sectors
was the primary cause for AGI's flat sales performance. The Company's sales
growth rate was 6.1% after excluding AGI from both 1998 and 1997.
The Company's Grainger branch-based business experienced selling price increases
of about 0.7% when comparing 1998 with 1997. Sales to National Account customers
within the Grainger branch-based businesses increased to approximately
$1,120,000,000. Sales to National Account customers increased about 8%, on a
comparable basis, over 1997.
10
<PAGE>
Company Net Earnings - 1999 Compared to 1998
- --------------------------------------------
The Company's net earnings of $180,731,000 for 1999 decreased 24.2% compared
with 1998 net earnings of $238,504,000. This decline resulted from lower
operating earnings and higher other deductions. Operating earnings declined at
the Branch-based Distribution Businesses and the loss at the Digital Businesses
increased. Operating earnings improved at the Other Businesses.
The Company's Branch-based Distribution Businesses were affected by system
related customer service issues. It is estimated that these service issues cost
the Company $32,000,000 in operating earnings in 1999, comprised of gross profit
on lost sales and incremental operating expenses. Also affecting performance
were the continuing investments incurred to launch, enhance, and market the
Company's Internet related businesses.
Segment Operating Earnings
The following comments at the segment level include external and intersegment
operating earnings; those comments at the business unit level include external
and inter- and intrasegment operating earnings.
Branch-based Distribution Businesses
Operating earnings of $357,925,000 declined 18% in 1999 as compared with
$435,891,000 for 1998. Operating earnings performance was affected by lower than
expected sales growth, largely due to weakness in the North American industrial
economy and to system related customer service issues at Grainger Industrial
Supply and Grainger Parts, as previously described. Also contributing to the
decline were a slightly lower gross profit margin and higher operating expenses.
Of note are the following factors affecting the gross profit margin:
1. Grainger Industrial Supply's gross profit margin declined slightly.
2. Acklands-Grainger Inc. had a lower gross profit margin primarily due to an
unfavorable change in selling price category mix as a result of increased
sales to large customers.
3. The gross profit margin at Grainger Custom Solutions improved.
4. Sales at Grainger Custom Solutions declined, which had a positive effect on
the Company's gross profit margin since Grainger Custom Solutions' gross
profit margin is lower than the Company's average gross profit margin.
Operating expenses increased about 11% in 1999 versus 1998. This rate of growth
exceeded the rate of growth in net sales due to:
1. Increased expenses relating to the development of the business in Mexico;
2. Increased occupancy expenses;
3. Increased data processing expense relating to the installation of Grainger
Industrial Supply's new ERP system;
4. Increased expenses incurred to maintain customer service levels during the
installation of the new ERP system;
5. Higher freight out expenses primarily driven by increased shipments
qualifying for prepaid freight and the use of premium freight to meet
service objectives;
6. Continued spending to develop and market Grainger.com (Grainger.com
spending in 1999 was $20,900,000 compared with $6,700,000 in 1998);
7. Increased expenses related to the opening of eight new branches in Canada
and 22 new branches in the United States; and
8. Increased infrastructure expenses relating to developing the Grainger
Custom Solutions business.
The above factors were partially offset by decreased advertising expenses at
Grainger Industrial Supply resulting from increased cooperative programs.
Digital Businesses
The Digital Businesses incurred operating losses of $20,560,000 in 1999 compared
with operating losses of $8,091,000 in 1998. During 1999 the Company continued
to invest in the development of these businesses. The Digital Businesses
incurred operating expenses of $23,500,000 in 1999 versus $8,600,000 in 1998 for
developing, enhancing, and marketing OrderZone.com and FindMRO.com.
Other Business Units
Operating earnings of $26,572,000 increased 43.6% in 1999 as compared with
$18,508,000 for 1998. This increase was primarily attributable to improved
operating results at Grainger Integrated Supply and Lab Safety Supply. Of note
were the following:
1. The gross profit margin decreased at Grainger Integrated Supply. This
decrease related to product sales throughput, which grew at a faster rate
than the related management fee income.
2. Operating expenses at Grainger Integrated Supply decreased from 1998 levels
while average daily sales increased 48%.
3. The growth in operating earnings at Lab Safety Supply was in line with the
growth in net sales.
11
<PAGE>
Other Income Statement Data
Interest expense increased by $8,944,000 in 1999 as compared with 1998. This
increase resulted from higher average borrowings and higher average interest
rates paid on all outstanding debt, partially offset by higher capitalized
interest.
Unclassified-net had a positive effect on earnings before income taxes of
$2,555,000 in 1999 as compared with 1998. In 1999, the Company recorded a gain
related to the disposal of facilities in the Chicagoland area. The expenses in
1998 were primarily the result of foreign currency translation losses relating
to the Company's operations in Mexico and a write-off of abandoned capital
projects.
The Company's effective income tax rate was 40.5% in both 1999 and 1998.
Company Net Earnings - 1998 Compared to 1997
- --------------------------------------------
As used within this section, the term "Grainger branch-based businesses"
reflects the operations of the Company excluding Acklands-Grainger Inc., Lab
Safety Supply, Inc., and Grainger Parts.
Net earnings for 1998 increased 2.9% over 1997. The increase for 1998 was lower
than the increase in net sales due to losses incurred in developing business
ventures, operating expenses increasing at a rate faster than the growth rate in
net sales, lower interest income, higher interest expense, and higher
unclassified-net expenses, partially offset by higher gross profit margins. A
number of factors contributed to 1998 net earnings increasing at a slower rate
than 1998 net sales.
1. The Company continues to invest in developing its business operations. The
following operations experienced pretax operating losses for the year 1998:
Operating
(Loss)
Net Sales (pretax)
--------- ----------
(In thousands of dollars)
Grainger Integrated Supply....... $80,577 $(17,685)
Mexico business.................. 49,325 (3,399)
Grainger Integrated Supply's average daily sales grew about 56% for the
year 1998 as compared with 1997. Grainger Integrated Supply serves
customers through materials management services contracts. These contracts
are characterized by a complete outsourcing of the indirect materials
process. Customers not meeting the above definition were transferred to the
Company's Grainger Custom Solutions and Grainger Industrial Supply
businesses during 1998.
Average daily sales in Mexico grew about 21% for the year 1998 as compared
with 1997.
Grainger Integrated Supply and the Mexico business continue to grow sales,
improve processes, develop systems, and expand marketing programs.
2. The Company's business-to-business Web site, Grainger.com, allows customers
to do business using the Internet. The Company developed an Internet
marketplace where customers will be able to buy products from a number of
different suppliers using a single site. This marketplace concept is
currently being tested with customers. In developing these Internet
initiatives, the Company incurred operating expenses of approximately
$14,000,000 in 1998 and $6,000,000 in 1997.
3. Operating expenses related to data processing were higher by an estimated
$15,000,000 as compared with 1997, as adjusted for 1998 volume increases.
This was primarily due to incurring expenses related to Year 2000
compliance and the ongoing installation of the new business enterprise
system.
4. Operating expenses were also higher in 1998 versus 1997 as a result of the
following investments:
a. Development of the Grainger Custom Solutions business; and
b. Expanded marketing programs at Lab Safety Supply.
The decrease in interest income resulted from lower average daily invested
balances and from lower average interest rates earned. The increase in interest
expense resulted from higher average interest rates paid on all outstanding
debt, partially offset by lower average borrowings and by higher capitalized
interest. The higher unclassified-net expense primarily resulted from foreign
currency translation losses relating to the Company's operations in Mexico and
to a write-off of abandoned capital projects.
12
<PAGE>
The Company's gross profit margin increased by 0.67 percentage point when
comparing the years 1998 and 1997. Of note are the following factors affecting
the Company's gross profit margin:
1. Ongoing programs to reduce product costs improved the gross profit margin.
2. Selling price increases of 0.7% on Grainger Industrial Supply Catalog
products improved the gross profit margin.
3. The change in product mix improved the gross profit margin. The sales of
Lab Safety Supply (generally higher than average gross profit margins)
increased as a percent of total sales. The sales of AGI (generally lower
than average gross profit margins) decreased as a percent of total sales.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits rather
than four to define the applicable year. Computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failure or in miscalculations
causing disruptions to operations.
The Company's efforts in response to the Year 2000 issue included the review of
information technology and non-information technology products and systems, the
remediation or replacement, and testing, of affected information technology
systems and facilities, the surveying of key suppliers of goods and services,
and the creation of reasonable contingency plans to address potentially serious
Year 2000 problems. Expenses associated with the Year 2000 project included both
a reallocation of existing internal resources and the use of outside services.
Year 2000 expenses from the inception of the project through 1999 year end are
estimated to be $62,000,000, of which $23,000,000 was attributable to 1999.
Remaining Year 2000 expenses are estimated to be nominal.
The Company did not experience any material systems, product supply, or customer
service disruptions as a result of Year 2000 problems. There can be no
assurance, however, that such disruptions will not occur by reason of Year 2000
or other date-related problems yet to become manifest.
FINANCIAL CONDITION
Working capital was $600,611,000 at December 31, 1999, compared with
$541,872,000 at December 31, 1998, and $649,107,000 at December 31, 1997. The
ratio of current assets to current liabilities was 1.7, 1.8, and 2.2 at such
dates.
Net cash flows from operations of $29,747,000 in 1999, $332,360,000 in 1998, and
$432,910,000 in 1997, have continued to improve the Company's financial position
and serve as the primary source of funding for capital requirements. For
information as to the Company's cash flows, see "Item 8: Financial Statements
and Supplementary Data."
In each of the past three years, a portion of working capital has been used for
additions to property, buildings, equipment, and capitalized software as
summarized in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Land, buildings, structures, and improvements ......... $ 42,935 $ 85,016 $ 78,529
Furniture, fixtures, machinery, and equipment ......... 71,121 45,170 29,723
-------- -------- --------
114,056 130,186 108,252
Capitalized software .................................. 26,473 36,983 122
-------- -------- --------
Total ................................................. $140,529 $167,169 $108,374
======== ======== ========
</TABLE>
The Company repurchased 355,300 shares of its common stock during 1999,
4,483,100 shares of its common stock during 1998, and 8,435,972 shares of its
common stock during 1997. As of December 31, 1999, approximately 5,300,000
shares of common stock remained available under this repurchase authorization.
Dividends paid to shareholders were $58,817,000 in 1999, $56,683,000 in 1998,
and $53,934,000 in 1997.
Internally generated funds have been the primary source of working capital and
funds needed for expanding the business, supplemented by debt as circumstances
dictated. In addition to continuing facilities optimization efforts, business
development, and systems and other infrastructure enhancements, funds are being
expended to develop and enhance the Company's Internet initiatives.
The Company maintains a debt ratio and liquidity position that provides
reasonable flexibility in funding working capital needs and long-term cash
requirements. In addition to internally generated funds, the Company has various
sources of financing available, including commercial paper sales and bank
borrowings under lines of credit and otherwise. Total debt as a percent of
Shareholders' Equity was 30%, 18%, and 12%, at December 31, 1999, 1998, and
1997, respectively.
13
<PAGE>
INFLATION AND CHANGING PRICES
Inflation during the last three years has not been a significant factor to
operations. The predominant use of the last-in, first-out (LIFO) method of
accounting for inventories and accelerated depreciation methods for financial
reporting and income tax purposes result in a substantial recognition of the
effects of inflation in the primary financial statements.
The major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost continues to be significant for these
long-lived assets. The related depreciation expense associated with these assets
increases significantly when adjusting for the cumulative effect of inflation.
The Company believes the most positive means to combat inflation and advance the
interests of investors lies in continued application of basic business
principles, which include improving productivity, increasing working capital
turnover, and offering products and services which can command proper price
levels in the marketplace.
FORWARD-LOOKING STATEMENTS
Throughout this Form 10-K are forward-looking statements about the Company's
expected future financial results and business plans, strategies, and
objectives. These forward-looking statements are often identified by qualifiers
such as: "expects," "plans," "anticipates," "intends," or similar expressions.
There are risks and uncertainties the outcome of which could cause the Company's
results to differ materially from what is projected.
Factors that may affect the forward-looking statements include the following:
higher product costs or other expenses; a major loss of customers; increased
competitive pricing pressure on the Company's businesses; failure to develop,
implement, or commercialize successfully new Internet technologies or other
business strategies; the outcome of pending and future litigation and
governmental proceedings; changes in laws and regulations; facilities
disruptions or shutdowns due to accidents, natural acts or governmental action;
unanticipated weather conditions; and other difficulties in improving margins or
financial performance.
Trends and projections could also be affected by general industry and market
conditions and growth rates, general economic conditions, including currency
rate fluctuations and other factors.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data are included on pages 18 to 38.
See the Index to Financial Statements and Supplementary Data on page 17.
Item 9: Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held April 26, 2000, and, to the extent required, is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
under the caption "Executive Officers of the Company."
Item 11: Executive Compensation
Information regarding executive compensation will be set forth in the Company's
proxy statement relating to the annual meeting of shareholders to be held April
26, 2000, and, to the extent required, is incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held April 26, 2000, and, to the extent
required, is incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will be set
forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held April 26, 2000, and, to the extent required, is
incorporated herein by reference.
14
<PAGE>
<TABLE>
<CAPTION>
PART IV
Exhibit Index
-------------
<S> <C>
Item 14: Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. Financial Statements. See Index to Financial Statements and
Supplementary Data.
2. Financial Statement Schedule. See Index to Financial Statements and
Supplementary Data.
3. Exhibits:
(3)(a) Restated Articles of Incorporation dated April 27, 1994,
incorporated by reference to Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(b) Bylaws, as amended. 39-55
(10) Material Contracts:
(a) No instruments which define the rights of holders of the
Company's Industrial Development Revenue Bonds are filed
herewith, pursuant to the exemption contained in Regulation
S-K, Item 601(b)(4)(iii). The Company hereby agrees to
furnish to the Securities and Exchange Commission, upon
request, a copy of any such instrument.
(b) Shareholder rights agreement dated as of April 28, 1999,
incorporated by reference to Exhibit 4 to the Company's
Current Report on Form 8-K dated April 28, 1999.
(c) Compensatory Plans or Arrangements
(i) W.W. Grainger, Inc. Director Stock Plan, as
amended, incorporated by reference to Exhibit
10(d)(i) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(ii) W.W. Grainger, Inc. Office of the Chairman
Incentive Plan, incorporated by reference to
Appendix B of the Company's Proxy Statement dated
March 26, 1997.
(iii) W.W. Grainger, Inc. 1990 Long-Term Stock Incentive
Plan, as amended. 56-69
(iv) W.W. Grainger, Inc. 1975 Non-Qualified Stock
Option Plan as Amended and Restated, incorporated
by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1987.
(v) Executive Death Benefit Plan, as amended. 70-78
(vi) Executive Deferred Compensation Plan, incorporated
by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989.
(vii) 1985 Executive Deferred Compensation Plan, as
amended, incorporated by reference to Exhibit
10(d)(vii) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(viii) Supplemental Profit Sharing Plan, as amended,
incorporated by reference to Exhibit 10(c)(ii) to
the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.
(ix) Form of Change in Control Employment Agreement
between the Company and certain of its executive
officers. 79-99
(11) Computations of Earnings Per Share. See Index to Financial
Statements and Supplementary Data.
(21) Subsidiaries of the Company. 100
(23) Consent of Independent Certified Public Accountants. See Index to
Financial Statements and Supplementary Data.
(27) Financial Data Schedule.
(b) Reports on Form 8-K. During the last quarter of 1999, the Company filed a
Current Report on Form 8-K, dated December 6, 1999, announcing the decision
of J. D. Fluno to retire as Vice Chairman of the Company, effective July 1,
2000, after 31 years of service.
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly issued this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: March 22, 2000
W.W. GRAINGER, INC.
By: /s/ R. L. Keyser By: /s/ R. D. Pappano
--------------------------------- --------------------------
R. L. Keyser R. D. Pappano
Chairman of the Board Vice President, Financial
and Chief Executive Officer Reporting
(Principal Executive Officer and (Principal Accounting Officer)
a Director)
By: /s/ P. O. Loux
---------------------------------
P. O. Loux
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
<TABLE>
<S> <C>
/s/ Brian P. Anderson March 22, 2000 /s/ Neil S. Novich March 22, 2000
- -------------------------- ------------------------------
Brian P. Anderson Neil S. Novich
Director Director
/s/ George R. Baker March 22, 2000 /s/ James D. Slavik March 22, 2000
- -------------------------- ------------------------------
George R. Baker James D. Slavik
Director Director
/s/ Jere D. Fluno March 22, 2000 /s/ Harold B. Smith March 22, 2000
- -------------------------- ------------------------------
Jere D. Fluno Harold B. Smith
Director Director
/s/ Wilbur H. Gantz March 22, 2000 /s/ Fred L. Turner March 22, 2000
- -------------------------- ------------------------------
Wilbur H. Gantz Fred L. Turner
Director Director
/s/ David W. Grainger March 22, 2000 /s/ Janiece S. Webb March 22, 2000
- -------------------------- ------------------------------
David W. Grainger Janiece S. Webb
Director Director
/s/ John W. McCarter, Jr. March 22, 2000
- --------------------------
John W. McCarter, Jr.
Director
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
December 31, 1999, 1998, and 1997
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. 18
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS..................................... 19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS....................... 19
CONSOLIDATED BALANCE SHEETS
ASSETS........................................................... 20
LIABILITIES AND SHAREHOLDERS' EQUITY............................. 21
CONSOLIDATED STATEMENTS OF CASH FLOWS................................... 22-23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY......................... 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. 25-36
SCHEDULE II - ALLOWANCE FOR DOUBTFUL ACCOUNTS................................... 36
EXHIBIT 11 - COMPUTATIONS OF EARNINGS PER SHARE................................. 37
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................ 38
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
W.W. Grainger, Inc.
We have audited the accompanying consolidated balance sheets of W.W.
Grainger, Inc., and Subsidiaries as of December 31, 1999, 1998, and 1997, and
the related consolidated statements of earnings, comprehensive earnings,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of W.W. Grainger,
Inc., and Subsidiaries as of December 31, 1999, 1998, and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
We have also audited Schedule II of W.W. Grainger, Inc., and Subsidiaries for
the years ended December 31, 1999, 1998, and 1997. In our opinion, this Schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Chicago, Illinois
January 28, 2000
18
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars except for per share amounts)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .............................................. $ 4,533,853 $ 4,341,269 $ 4,136,560
Cost of merchandise sold ............................... 2,881,219 2,743,598 2,642,208
------------- ------------- -------------
Gross profit ................................... 1,652,634 1,597,671 1,494,352
Warehousing, marketing, and
administrative expenses .............................. 1,335,406 1,189,689 1,101,193
------------- ------------- -------------
Operating earnings ............................. 317,228 407,982 393,159
Other income or (deductions)
Interest income ...................................... 1,606 1,560 2,896
Interest expense ..................................... (15,596) (6,652) (5,461)
Unclassified--net .................................... 512 (2,043) (958)
------------- ------------- -------------
(13,478) (7,135) (3,523)
------------- ------------- -------------
Earnings before income taxes ................... 303,750 400,847 389,636
Income taxes ........................................... 123,019 162,343 157,803
------------- ------------- -------------
Net earnings ................................... $ 180,731 $ 238,504 $ 231,833
============= ============= =============
Earnings per share:
Basic ................................................ $ 1.95 $ 2.48 $ 2.30
============= ============= =============
Diluted .............................................. $ 1.92 $ 2.44 $ 2.27
============= ============= =============
Weighted average number of shares outstanding:
Basic ................................................ 92,836,696 96,231,829 100,604,518
============= ============= =============
Diluted .............................................. 94,315,479 97,846,658 102,178,952
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands of dollars)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings ........................................... $ 180,731 $ 238,504 $ 231,833
Other comprehensive earnings (loss):
Foreign currency translation adjustments ............. 9,672 (10,354) (6,948)
Unrealized gain on investments, net of tax ........... 78,683 -- --
------------- ------------- -------------
88,355 (10,354) (6,948)
------------- ------------- -------------
Comprehensive earnings ................................. $ 269,086 $ 228,150 $ 224,885
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31,
---------------------------------------------
ASSETS 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .................................. $ 62,683 $ 43,171 $ 49,224
Accounts receivable, less allowances for
doubtful accounts of $18,369 for 1999,
$15,951 for 1998, and $15,803 for 1997 ................... 561,786 463,377 455,457
Inventories ................................................ 762,495 626,731 612,132
Prepaid expenses ........................................... 18,387 11,950 9,122
Deferred income tax benefits ............................... 65,794 61,200 59,348
------------- ------------- -------------
Total current assets ................................... 1,471,145 1,206,429 1,185,283
PROPERTY, BUILDINGS, AND EQUIPMENT
Land ....................................................... 147,118 135,636 133,213
Buildings, structures, and improvements .................... 683,426 662,236 583,823
Furniture, fixtures, machinery, and equipment .............. 471,485 411,295 370,122
------------- ------------- -------------
1,302,029 1,209,167 1,087,158
Less accumulated depreciation
and amortization ......................................... 604,278 548,639 494,245
------------- ------------- -------------
Property, buildings, and
equipment--net ......................................... 697,751 660,528 592,913
DEFERRED INCOME TAXES ........................................ -- 3,187 --
OTHER ASSETS
Goodwill ................................................... 186,504 177,355 187,963
Customer lists and other intangibles ....................... 89,680 89,573 89,699
------------- ------------- -------------
276,184 266,928 277,662
Less accumulated amortization .............................. 102,913 86,296 70,814
------------- ------------- -------------
173,271 180,632 206,848
Investments ................................................ 154,203 5,000 --
Capitalized software--net .................................. 49,431 33,280 970
Sundry ..................................................... 19,025 14,910 14,102
------------- ------------- -------------
Other assets--net ........................................ 395,930 233,822 221,920
------------- ------------- -------------
TOTAL ASSETS ................................................. $ 2,564,826 $ 2,103,966 $ 2,000,116
============= ============= =============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED BALANCE SHEETS--CONTINUED
(In thousands of dollars)
December 31,
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Short-term debt ............................................ $ 296,836 $ 88,060 $ 2,960
Current maturities of long-term debt ....................... 27,721 22,831 23,834
Trade accounts payable ..................................... 260,084 212,872 207,584
Accrued contributions to employees'
profit sharing plans ..................................... 66,356 75,113 62,234
Accrued expenses ........................................... 219,151 232,461 204,662
Income taxes ............................................... 386 33,220 34,902
------------- ------------- -------------
Total current liabilities ................................ 870,534 664,557 536,176
LONG-TERM DEBT (less current maturities) ..................... 124,928 122,883 131,201
DEFERRED INCOME TAXES ........................................ 48,117 -- 2,871
ACCRUED EMPLOYMENT RELATED BENEFITS COSTS .................... 40,718 37,785 35,207
SHAREHOLDERS' EQUITY
Cumulative Preferred Stock--
$5 par value--authorized, 12,000,000 shares,
issued and outstanding, none ............................. -- -- --
Common Stock--$0.50 par value--authorized,
300,000,000 shares;
issued, 107,460,978 shares, 1999,
107,233,771 shares, 1998, and
106,971,524 shares, 1997 ................................. 53,730 53,617 53,486
Additional contributed capital ............................. 255,569 249,482 242,289
Retained earnings .......................................... 1,707,258 1,585,344 1,403,523
Unearned restricted stock compensation ..................... (16,581) (17,238) (16,528)
Accumulated other comprehensive earnings (loss) ............ 68,791 (19,564) (9,210)
Treasury stock, at cost--14,079,292 shares, 1999,
13,728,672 shares, 1998, and
9,249,572 shares, 1997 ................................... (588,238) (572,900) (378,899)
------------- ------------- -------------
Total shareholders' equity ............................. 1,480,529 1,278,741 1,294,661
------------- ------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ....................................... $ 2,564,826 $ 2,103,966 $ 2,000,116
============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ............................................... $ 180,731 $ 238,504 $ 231,833
Provision for losses on accounts receivable ................ 13,585 10,310 9,984
Depreciation and amortization:
Property, buildings, and equipment ....................... 72,446 58,256 63,257
Intangibles and goodwill ................................. 15,941 15,964 16,394
Capitalized software ..................................... 9,840 4,645 1,556
Change in operating assets and liabilities:
(Increase) in accounts receivable ........................ (111,994) (18,230) (31,866)
(Increase) decrease in inventories ....................... (135,764) (14,599) 74,793
(Increase) decrease in prepaid expenses .................. (6,437) (2,828) 2,849
(Increase) decrease in deferred income taxes ............. (5,310) (7,910) 2,153
Increase in trade accounts payable ....................... 47,212 5,288 2,171
(Decrease) increase in other current liabilities ......... (22,067) 40,678 48,125
(Decrease) increase in current
income taxes payable ................................... (32,834) (1,682) 7,098
Increase in accrued employment
related benefits costs ................................. 2,933 2,578 3,275
Other--net ................................................. 1,465 1,386 1,288
------------- ------------- -------------
Net cash provided by operating activities .................... 29,747 332,360 432,910
Cash flows from investing activities:
Additions to property, buildings, and equipment ............ (114,056) (130,186) (108,252)
Proceeds from sale of property, buildings,
and equipment--net ....................................... 4,387 4,315 3,066
Expenditures for capitalized software ...................... (26,473) (36,983) (122)
Purchases of available-for-sale securities ................. (18,500) (5,000) --
Other--net ................................................. 5,200 (8,488) 1,682
------------- ------------- -------------
Net cash (used in) investing activities ...................... (149,442) (176,342) (103,626)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In thousands of dollars)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in short-term debt ................. $ 208,776 $ 85,100 $ (132,315)
Proceeds from long-term debt ............................... -- -- 126,127
Long-term debt payments .................................... (93) (1,079) (1,997)
Stock options exercised .................................... 1,223 443 2,239
Tax benefit of stock incentive plan ........................ 3,424 4,107 3,759
Purchase of treasury stock--net ............................ (15,306) (193,959) (346,822)
Cash dividends paid ........................................ (58,817) (56,683) (53,934)
------------- ------------- -------------
Net cash provided by (used in) financing activities .......... 139,207 (162,071) (402,943)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ....................................... 19,512 (6,053) (73,659)
Cash and cash equivalents at beginning of year ............... 43,171 49,224 122,883
------------- ------------- -------------
Cash and cash equivalents at end of year ..................... $ 62,683 $ 43,171 $ 49,224
============= ============= =============
Supplemental Cash Flow Information
Cash payments for interest ................................. $ 16,305 $ 5,027 $ 5,773
Cash payments for taxes .................................... 157,561 165,668 143,471
Non-cash Investing Activities:
Increase in fair value of securities available-for-sale .... $ 130,703 $ -- $ --
Income tax effect related to increase in fair value ........ (52,020) -- --
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars except for per share amounts)
Unearned Accumulated
Additional Restricted Other
Common Contributed Retained Stock Comprehensive Treasury
Stock Capital Earnings Compensation Earnings (Loss) Stock
------------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ....... $ 53,338 $ 235,649 $ 1,225,624 $ (17,597) $ (2,262) $ (32,090)
Exercise of stock options ........ 138 5,753 -- -- -- --
Issuance of 20,000 shares
of restricted common stock ..... 10 793 -- (803) -- --
Amortization of unearned
restricted stock compensation .. -- 107 -- 1,872 -- --
Purchase of 8,430,372 shares
of treasury stock, net of
5,600 shares issued ............ -- (13) -- -- -- (346,809)
Cumulative translation
adjustments .................... -- -- -- -- (6,948) --
Net earnings ..................... -- -- 231,833 -- -- --
Cash dividends paid
($0.53 per share) .............. -- -- (53,934) -- -- --
------------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 1997 ..... 53,486 242,289 1,403,523 (16,528) (9,210) (378,899)
Exercise of stock options ........ 105 4,316 -- -- -- --
Issuance of 52,500 shares
of restricted common stock ..... 26 2,706 -- (2,732) -- --
Amortization of unearned
restricted stock compensation .. -- 129 -- 2,022 -- --
Purchase of 4,479,100 shares
of treasury stock, net of
4,000 shares issued ............ -- 42 -- -- -- (194,001)
Cumulative translation
adjustments .................... -- -- -- -- (10,354) --
Net earnings ..................... -- -- 238,504 -- -- --
Cash dividends paid
($0.585 per share) ............. -- -- (56,683) -- -- --
------------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 1998 ..... 53,617 249,482 1,585,344 (17,238) (19,564) (572,900)
Exercise of stock options ........ 97 4,411 -- -- -- --
Issuance of 42,000 shares
of restricted common stock ..... 21 1,880 -- (1,901) -- --
Cancellation of 10,000 shares
of restricted common stock ..... (5) (375) -- 380 -- --
Amortization of unearned
restricted stock compensation .. -- 139 -- 2,178 -- --
Purchase of 350,620 shares
of treasury stock, net of
4,680 shares issued ............ -- 32 -- -- -- (15,338)
Cumulative translation
adjustments .................... -- -- -- -- 9,672 --
Unrealized gain on
investments, net of tax ........ -- -- -- -- 78,683 --
Net earnings ..................... -- -- 180,731 -- -- --
Cash dividends paid
($0.63 per share) .............. -- -- (58,817) -- -- --
------------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 1999 ..... $ 53,730 $ 255,569 $ 1,707,258 $ (16,581) $ 68,791 $ (588,238)
============= ============ ============ ============= ============= ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
24
<PAGE>
W.W. Grainger, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INDUSTRY INFORMATION
The Company is engaged in the distribution of maintenance, repair, and operating
(MRO) supplies, services, and related information to businesses and institutions
in North America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated from
the consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements, as previously
reported, have been reclassified to conform to the 1999 presentation.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the estimates of revenues and expenses.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are generally
measured using the local currency as the functional currency. Net exchange gains
or losses resulting from the translation of financial statements of foreign
operations, and related long-term debt, except for those from highly
inflationary economies, are recorded as a separate component of shareholders'
equity.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
primarily by the last-in, first-out (LIFO) method.
PROPERTY, BUILDINGS, AND EQUIPMENT
Property, buildings, and equipment are valued at cost.
For financial statement purposes, depreciation and amortization are provided in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on the declining-balance and
sum-of-the-years-digits methods. The principal estimated useful lives used in
determining depreciation are as follows:
Buildings, structures, and improvements.............. 10 to 45 years
Furniture, fixtures, machinery, and equipment........ 3 to 10 years
Improvements to leased property are amortized over the initial terms of the
respective leases or the estimated service lives of the improvements, whichever
is shorter.
The Company capitalized interest costs of $3,238,000, $2,323,000, and
$1,810,000, in 1999, 1998, and 1997, respectively.
CAPITALIZED SOFTWARE
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement requires capitalization of certain costs incurred
in the development of internal-use software, including purchased software and
services and employee payroll and payroll-related costs. Prior to adoption of
SOP 98-1, the Company expensed portions of these costs. The effect of this
change in accounting principle on earnings for 1999 was immaterial.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
fair value of an asset is determined to be less than the carrying amount of the
asset, a loss is recognized for the difference.
REVENUE RECOGNITION
Revenues recognized include product sales and fees earned for services provided.
The Company recognizes product sales at the date products are shipped and fee
revenue at the date services are completed.
25
<PAGE>
INCOME TAXES
Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes being provided
for temporary differences between financial and tax reporting.
PURCHASED TAX BENEFITS
The Company purchased tax benefits through leases as provided by the Economic
Recovery Tax Act of 1981. Realized tax benefits, net of repayments, are included
in Deferred Income Taxes.
COMPREHENSIVE EARNINGS
The Company's comprehensive earnings include unrealized gains on investments,
net of tax, and foreign currency translation adjustments with no related income
tax effects. The cumulative amount of other comprehensive earnings (loss) was
$68,791,000, ($19,564,000), and ($9,210,000) at December 31, 1999, 1998, and
1997, respectively.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No.133 is effective for fiscal years
beginning after June 15, 1999 (fiscal 2000 for the Company). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded in
current-period earnings or other comprehensive earnings, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The ineffective portion of all hedges will be recognized
in current-period earnings. The Company has determined that SFAS No. 133 will
not have a material effect on its results of operations or financial position.
NOTE 2--CASH FLOWS
The Company considers investments in highly liquid debt instruments, purchased
with an original maturity of ninety days or less, to be cash equivalents. For
cash equivalents the carrying amount approximates fair value due to the short
maturity of these instruments.
NOTE 3--CONCENTRATION OF CREDIT RISK
The Company places temporary cash investments with institutions of high credit
quality and, by policy, limits the amount of credit exposure to any one
institution.
The Company has a broad customer base representing many diverse industries doing
business in all regions of the United States as well as other areas of North
America. Consequently, no significant concentration of credit risk is considered
to exist.
NOTE 4--INVENTORIES
Inventories primarily consist of merchandise purchased for resale.
Inventories would have been $211,490,000, $217,455,000, and $215,707,000 higher
than reported at December 31, 1999, 1998, and 1997, respectively, if the
first-in, first-out (FIFO) method of inventory accounting had been used for all
Company inventories. Inventories under FIFO approximate replacement cost.
NOTE 5--INTANGIBLES
Goodwill represents the cost in excess of net assets of acquired companies and
is amortized on a straight-line basis over periods of five to forty years. The
Company's goodwill is predominately denominated in Canadian dollars and
accordingly, the changes in the asset balance are due to foreign exchange rate
fluctuations.
Customer lists and other intangibles are amortized on a straight-line basis over
periods of eight to seventeen years.
Note 6--Investments
The Company classifies all of its investments as available-for-sale securities.
These investments consist of marketable securities, and non-publicly traded
equity securities for which a market value is not readily determinable.
Marketable securities are reported at fair value, with unrealized gains or
losses on such securities reflected, net of taxes, as a separate component of
shareholders' equity. Non-publicly traded equity securities are reported at
cost. There have been no dividends earned on these investments.
26
<PAGE>
At the time of sale, any gains or losses, calculated on the specific
identification method, will be reported in Unclassified-net.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------
Unrealized Fair
Cost Gains Value
------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Available-for-Sale Securities
Marketable securities...................... $18,500 $130,703 $149,203
======= ======== ========
Non-publicly traded equity securities...... $5,000
=======
</TABLE>
The Company had investments in non-publicly traded equity securities of
$5,000,000 at December 31, 1998 and no such investments at December 31, 1997.
NOTE 7--CAPITALIZED SOFTWARE
Amortization of capitalized software is predominately on a straight-line basis
over five years. During 1998, the Company acquired a new business enterprise
software system. Amortization expense was $9,840,000, $4,645,000, and $1,556,000
for the years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 8--SHORT-TERM DEBT
The following summarizes information concerning short-term debt:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- -----------
Bank Debt (In thousands of dollars)
- ----------------
<S> <C> <C> <C>
Outstanding at December 31 .............................. $ 4,598 $ 3,704 $ 2,960
Maximum month-end balance during the year ............... $ 4,675 $ 3,704 $ 139,187
Average amount outstanding during the year .............. $ 3,263 $ 2,565 $ 119,962
Weighted average interest rates during the year ......... 6.1% 6.0% 3.5%
Weighted average interest rates at December 31 .......... 6.6% 5.7% 6.2%
Commercial Paper
- ----------------
Outstanding at December 31 .............................. $ 292,238 $ 84,356 $ --
Maximum month-end balance during the year ............... $ 292,250 $ 84,356 $ 81,355
Average amount outstanding during the year .............. $ 193,674 $ 15,668 $ 15,429
Weighted average interest rates during the year ......... 5.7% 5.3% 5.7%
Weighted average interest rates at December 31 .......... 6.2% 5.4% --
</TABLE>
The Company and its subsidiaries had committed lines of credit totaling
$568,848,000, $318,069,000, and $168,983,000 at December 31, 1999, 1998, and
1997, respectively, including $13,848,000, $13,069,000, and $13,983,000
denominated in Canadian dollars. A Company subsidiary also has a $17,311,000,
$32,673,000, and $34,958,000 uncommitted line of credit denominated in Canadian
dollars as of December 31, 1999, 1998, and 1997, respectively. At December 31,
1999, 1998, and 1997, borrowings under the subsidiaries' committed lines of
credit were $4,598,000, $3,704,000, and $2,960,000, respectively. The Company
has guaranteed these borrowings.
NOTE 9--EMPLOYEE BENEFITS
RETIREMENT PLANS. A majority of the Company's employees are covered by a
noncontributory profit sharing plan. This plan provides for annual employer
contributions based upon a formula related primarily to earnings before federal
income taxes, limited to 15% of the total compensation paid to all eligible
employees. The Company also sponsors additional profit sharing and defined
benefit plans, which cover most of the other employees. Provisions under all
plans were $55,007,000, $65,576,000, and $55,052,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
POSTRETIREMENT BENEFITS. The Company has a health care benefits plan that
provides coverage to its retired employees and their dependents should they
elect to maintain such coverage. A majority of the Company's employees become
eligible for participation when they qualify for retirement while working for
the Company.
27
<PAGE>
The amount charged to operating expense for postretirement health care benefits
was $4,523,000, $4,256,000, and $3,653,000 for the years ended December 31,
1999, 1998, and 1997, respectively. Components of the expense were:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands of dollars)
<S> <C> <C> <C>
Service cost ............................................... $ 3,446 $ 3,076 $ 2,442
Interest cost .............................................. 2,854 2,546 2,272
Expected return on assets .................................. (1,302) (968) (738)
Amortization of transition asset (22 year amortization) .... (143) (143) (143)
Amortization of unrecognized gain .......................... (257) (180) (262)
Amortization of prior service cost ......................... (75) (75) 82
------- ------- -------
$ 4,523 $ 4,256 $ 3,653
======= ======= =======
</TABLE>
Participation in the plan is voluntary at retirement and requires participants
to make contributions, as determined by the Company, toward the cost of the
plan. The accounting for the health plan anticipates future cost-sharing changes
to retiree contributions that will maintain the current cost-sharing ratio
between the Company and the retirees.
A Group Benefit Trust has been established as the vehicle to process benefit
payments. The assets of the trust are invested in a Standard & Poors 500 index
fund. The assumed weighted average long-term rate of return is 7.7%, which is
net of a 33.0% tax rate. The funding of the trust is an estimated amount which
is intended to allow the maximum deductible contribution under the Internal
Revenue Code of 1986, as amended, and was $1,686,000, $2,444,000, and $859,000,
for the years ended December 31, 1999, 1998, and 1997, respectively.
A reconciliation of the beginning and ending balances of the accumulated
postretirement benefit obligation (APBO), the fair value of assets, and the
funded status of the benefit obligation as of December 31, 1999, 1998, and 1997
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Benefit obligation at the beginning of the year ....................... $ 43,675 $ 35,866 $ 31,909
Service cost ........................................................ 3,446 3,076 2,442
Interest cost ....................................................... 2,854 2,546 2,272
Plan participant contributions ...................................... 535 366 376
Amendments .......................................................... -- -- (2,516)
Actuarial (gain) loss ............................................... (7,913) 3,503 2,544
Benefits paid ....................................................... (2,203) (1,682) (1,161)
-------- -------- --------
Benefit obligation at the end of the year ............................. 40,394 43,675 35,866
-------- -------- --------
Fair value of plan assets at beginning of year ........................ 21,699 16,127 12,307
Actual return on plan assets ........................................ 4,331 4,444 3,745
Employer contributions .............................................. 1,686 2,444 859
Plan participant contributions ...................................... 535 366 377
Benefits paid ....................................................... (2,203) (1,682) (1,161)
-------- -------- --------
Fair value of plan assets at the end of the year ...................... 26,048 21,699 16,127
-------- -------- --------
Funded status ......................................................... (14,346) (21,976) (19,739)
Unrecognized transition asset ......................................... (2,142) (2,285) (2,428)
Unrecognized net actuarial gain ....................................... (15,040) (4,359) (4,589)
Unrecognized prior service cost ....................................... (852) (927) (1,003)
-------- -------- --------
Accrued postretirement benefits cost .................................. $(32,380) $(29,547) $(27,759)
======== ======== ========
</TABLE>
To determine the APBO as of December 31, 1999, 1998, and 1997, the assumed
weighted average discount rate used was 7.8%, 6.8%, and 7.0%, respectively. The
assumed health care cost trend rate for 2000 is 8.0%. Beginning in 2001, the
assumed health care cost trend rate declines on a straight-line basis until
2010, when the ultimate trend rate of 5.0% is achieved.
28
<PAGE>
If the assumed health care cost trend rate was increased by one percentage point
for each year, the APBO as of December 31, 1999 would increase by $8,254,000.
The aggregate of the service cost and interest cost components of the 1999 net
periodic postretirement benefits expense would increase by $1,619,000.
If the assumed health care cost trend rate was decreased by one percentage point
for each year, the APBO as of December 31, 1999 would decrease by $6,537,000.
The aggregate of the service cost and interest cost components of the 1999 net
periodic postretirement benefits expense would decrease by $1,235,000.
NOTE 10--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
1999 1998 1997
-------- -------- --------
(In thousands of dollars)
Uncommitted revolving credit facility ...... $124,914 $117,885 $126,127
Industrial development revenue bonds ....... 27,650 27,650 27,650
Other ...................................... 85 179 1,258
-------- -------- --------
152,649 145,714 155,035
Less current maturities .................... 27,721 22,831 23,834
-------- -------- --------
$124,928 $122,883 $131,201
======== ======== ========
As part of the permanent financing for a Canadian Subsidiary, the Company
maintained a $138,485,000 uncommitted revolving credit facility, denominated in
Canadian dollars. The Company has $124,914,000 outstanding at December 31, 1999
relating to this facility with a weighted average interest rate of 5.8%. The
Company has the intent and the ability to refinance the obligation on a
long-term basis through its credit lines and, therefore, the obligation is
included in long-term debt.
The industrial development revenue bonds include various issues that bear
interest at variable rates up to 15%, or variable rates up to 78.2% of the prime
rate, and come due in various amounts from 2001 through 2021. Interest rates on
some of the issues are subject to change at certain dates in the future. The
bondholders may require the Company to redeem certain bonds concurrent with a
change in interest rates and certain other bonds annually. In addition,
$13,545,000 of these bonds had an unsecured liquidity facility available at
December 31, 1999, for which the Company compensated a bank through a commitment
fee of 0.07%. There were no borrowings related to this facility at December 31,
1999. The Company classified $27,650,000 of bonds currently subject to
redemption options in current maturities of long-term debt at December 31, 1999.
The Company classified $22,755,000 of bonds subject to redemption options in
current maturities of long-term debt at December 31, 1998 and 1997.
The aggregate amounts of long-term debt maturing in each of the five years
subsequent to December 31, 1999 are as follows:
Amounts Amounts
Payable Under Subject to
Terms of Redemption
Agreements Options
----------- --------
(In thousands of dollars)
2000 ............................. $ 71 $ 27,650
2001 ............................. 14 --
2002 ............................. -- --
2003 ............................. 124,914 --
2004 ............................. -- --
29
<PAGE>
NOTE 11--LEASES
The Company leases certain land, buildings, and equipment. The Company
capitalizes all significant leases which qualify as capital leases.
At December 31, 1999, the approximate future minimum aggregate payments for all
leases were as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------------------------
Real Personal Capital
Property Property Total Leases
---------- ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
2000 ........................................ $ 15,729 $ 441 $ 16,170 $ 75
2001 ........................................ 12,192 197 12,389 15
2002 ........................................ 10,547 197 10,744 --
2003 ........................................ 7,607 -- 7,607 --
2004 ........................................ 4,662 -- 4,662 --
Thereafter .................................. 4,834 -- 4,834 --
---------- ---------- ---------- ----------
Total minimum payments required ............. 55,571 835 56,406 90
Less amounts representing sublease income ... 2,846 -- 2,846
---------- ---------- ----------
$ 52,725 $ 835 $ 53,560
========== ========== ==========
Less imputed interest........................ 5
----------
Present value of minimum lease payments
(included in long-term debt)............... $ 85
==========
</TABLE>
Total rent expense, including both items under lease and items rented on a
month-to-month basis, was $19,383,000, $16,336,000, and $21,396,000 for 1999,
1998, and 1997, respectively.
NOTE 12--STOCK INCENTIVE PLANS
The Company's Long-Term Stock Incentive Plan ("The Plan") allows the Company to
grant a variety of incentive awards to key employees of the Company. A maximum
of 8,056,828 shares of common stock are authorized for issuance under the Plan,
in connection with awards of non-qualified stock options, stock appreciation
rights, restricted stock, phantom stock rights, and other stock-based awards.
The Plan authorizes the granting of restricted stock which is held by the
Company until terms and conditions specified by the Company are satisfied.
Except for the right of disposal, holders of restricted stock have full
shareholders' rights during the period of restriction, including voting rights
and the right to receive dividends.
The Plan authorizes the granting of options to purchase shares at a price of not
less than 100% of the closing market price on the last trading day preceding the
date of grant. The options expire no later than ten years after the date of
grant.
Shares covered by terminated, surrendered or canceled options and stock
appreciation rights, by forfeited restricted stock, or by the forfeiture of
other awards that do not result in shares being issued, are again available for
awards under the Plan.
There were 42,000 shares of restricted stock issued in 1999 with a weighted
average fair market value of $45.26 per share. There were 52,500 shares of
restricted stock issued in 1998 with a weighted average fair market value of
$52.04 per share. There were 20,000 shares of restricted stock issued in 1997
with a fair market value of $40.125 per share. The shares vest over periods from
three to ten years from issuance, although accelerated vesting is provided in
certain instances. Restricted stock released totaled 400 and 1,000 shares in
1998 and 1997, respectively. There was no restricted stock released in 1999.
Compensation expense related to restricted stock awards is based upon market
price at date of grant and is charged to earnings on a straight-line basis over
the period of restriction. Total compensation expense related to restricted
stock was $2,178,000, $2,022,000, and $1,872,000 in 1999, 1998, and 1997,
respectively.
During 1997, the Company adopted a Director Stock Plan in which non-employee
directors participate. A total of 500,000 shares of common stock were reserved
for issuance in connection with awards of stock, stock units, stock options,
restricted stock, and other stock-based awards under the new plan.
The Company awarded Stock Units under the Director Stock Plan in connection with
the termination of previous director compensation plans. A Stock Unit is
essentially the economic equivalent of a share of Company stock. Additional
deferred fees and dividends are converted to Stock Units based on the market
value of the stock at the relevant time.
30
<PAGE>
Payment of the value of Stock Units generally will be made after the termination
of service as a director. As of December 31, 1999, nine directors held Stock
Units. As of December 31, 1998 and 1997, eight directors held Stock Units. The
Company recognized expense of $300,000, $286,000, and $1,850,000 for 1999, 1998,
and 1997, respectively.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Price Per
Option Shares Share Exercisable
----------- ---------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1997................ 3,063,122 $26.01 1,710,182
===========
Granted..................................... 694,660 $37.38
Exercised................................... (412,702) $19.17
Canceled or expired......................... (51,720) $33.63
----------
Outstanding at December 31, 1997.............. 3,293,360 $29.14 1,679,900
===========
Granted..................................... 884,620 $51.35
Exercised................................... (335,900) $19.94
Canceled or expired......................... (51,640) $38.32
----------
Outstanding at December 31, 1998.............. 3,790,440 $35.01 1,732,300
===========
Granted..................................... 1,234,100 $48.43
Exercised................................... (304,380) $21.49
Canceled or expired......................... (110,400) $46.23
----------
Outstanding at December 31, 1999.............. 4,609,760 $39.23 2,239,940
========== ===========
</TABLE>
All options were issued at market price on the date of grant. Options were
issued with initial vesting periods ranging from immediate to five years.
Information about stock options outstanding at December 31, 1999, is as follows:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Average
-----------------------------------
Range of Exercise Number Remaining Contractual Exercise
Prices Outstanding Life (Years) Price
- ----------------- ----------- --------------------- --------
$13.94-$29.44 839,680 2.3 $24.75
$30.75-$38.94 1,727,000 6.2 $34.01
$40.63-$53.63 2,043,080 8.9 $49.55
Options Exercisable
- ---------------------------------------------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
- ----------------- ----------- -----------------
$13.94-$29.44 839,680 $24.75
$30.75-$38.75 1,400,260 $32.18
Shares available for future awards were 2,717,158, 3,877,538, and 4,767,018, at
December 31, 1999, 1998, and 1997, respectively.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
to account for stock compensation under Accounting Principles Board Opinion No.
25. Pro forma net earnings and earnings per share, as calculated under SFAS No.
123, are as follows:
1999 1998 1997
----------- ----------- -----------
(In thousands of dollars
except for per share amounts)
Net earnings ............ $ 174,144 $ 234,257 $ 229,107
Earnings per share:
Basic ................. $ 1.88 $ 2.43 $ 2.28
Diluted ............... $ 1.85 $ 2.39 $ 2.25
31
<PAGE>
The weighted average fair value of the stock options granted during 1999, 1998,
and 1997 was $17.26, $16.12, and $12.95, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model based on
the date of the grant and the following weighted average assumptions:
1999 1998 1997
--------- --------- ---------
Risk-free interest rate ...... 6.8% 5.8% 6.7%
Expected life ................ 7.0 years 7.0 years 7.0 years
Expected volatility .......... 20.1% 20.1% 21.0%
Expected dividend yield ...... 1.5% 1.5% 1.5%
NOTE 13--INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
This method requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial bases and tax bases of assets and liabilities.
Income tax expense consisted of the following:
1999 1998 1997
--------- --------- ---------
(In thousands of dollars)
Current provision:
Federal (including foreign) ........ $ 106,993 $ 141,462 $ 128,470
State .............................. 21,336 28,791 27,180
--------- --------- ---------
Total current .................... 128,329 170,253 155,650
Deferred tax (benefits) expenses ..... (5,310) (7,910) 2,153
--------- --------- ---------
Total provision ...................... $ 123,019 $ 162,343 $ 157,803
========= ========= =========
The deferred tax (benefits) expenses represent the net effect of the changes in
the amounts of temporary differences.
The income tax effects of temporary differences that gave rise to the net
deferred tax asset as of December 31, 1999, 1998, and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Current deferred tax assets (liabilities):
Inventory valuations ............................................... $ 26,043 $ 25,012 $ 26,130
Administrative and general expenses
deducted on a paid basis for tax purposes ........................ 36,208 33,776 31,330
Employment related benefits expense ................................ 2,755 2,454 2,160
Other .............................................................. 788 (42) (272)
-------- -------- --------
Total net current deferred tax asset ............................. $ 65,794 $ 61,200 $ 59,348
-------- -------- --------
Noncurrent deferred tax assets (liabilities):
Purchased tax benefits ............................................. $(17,482) $(22,185) $(26,185)
Temporary differences related to property,
buildings, and equipment ......................................... (2,257) (388) (816)
Intangible amortization ............................................ 9,825 10,368 9,116
Deferred tax liability of foreign investment corporation ........... (4,674) (1,233) --
Employment related benefits expense ................................ 16,206 15,038 14,012
Net operating loss carryforwards ................................... 6,492 4,372 1,785
Unrealized gain on investments ..................................... (52,020) -- --
Other .............................................................. 2,285 1,587 1,002
-------- -------- --------
Gross noncurrent deferred tax (liability) asset .................. (41,625) 7,559 (1,086)
Less valuation allowance ........................................... (6,492) (4,372) (1,785)
-------- -------- --------
Net noncurrent deferred tax (liability) asset .................... (48,117) 3,187 (2,871)
-------- -------- --------
Net deferred tax asset ............................................... $ 17,677 $ 64,387 $ 56,477
======== ======== ========
</TABLE>
32
<PAGE>
The purchased tax benefits represent lease agreements acquired in prior years
under the provisions of the Economic Recovery Act of 1981.
A valuation allowance is provided for deferred tax assets if realization of the
future benefit is uncertain. Since 1997, the Company has experienced net
operating losses (NOLs) for a foreign start-up operation. The full amount of the
deferred tax asset is offset by a valuation allowance due to the uncertainty of
utilizing these NOLs.
A reconciliation of income tax expense with U.S. federal income taxes at the
statutory rate follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Federal income taxes at the statutory rate ................. $106,313 $140,296 $136,373
Foreign rate differences ................................... 1,429 1,703 2,034
State income taxes, net of federal income tax benefits ..... 13,368 17,637 17,954
Other--net ................................................. 1,909 2,707 1,442
-------- -------- --------
Income tax expense ....................................... $123,019 $162,343 $157,803
======== ======== ========
Effective tax rate ....................................... 40.5% 40.5% 40.5%
======== ======== ========
</TABLE>
NOTE 14--EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding during the year. Diluted earnings per share is based on the
combination of weighted average number of shares outstanding and dilutive
potential shares.
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands except for per share amounts)
<S> <C> <C> <C>
Net earnings ............................................... $180,731 $238,504 $231,833
======== ======== ========
Denominator for basic earnings per share--
weighted average shares .................................. 92,837 96,232 100,605
Effect of dilutive securities--
stock based compensation ................................. 1,478 1,615 1,574
-------- -------- --------
Denominator for diluted earnings per share--weighted
average shares adjusted for dilutive securities .......... 94,315 97,847 102,179
======== ======== ========
Basic earnings per common share ............................ $ 1.95 $ 2.48 $ 2.30
======== ======== ========
Diluted earnings per common share .......................... $ 1.92 $ 2.44 $ 2.27
======== ======== ========
</TABLE>
NOTE 15--ISSUANCE OF PREFERRED SHARE PURCHASE RIGHTS
The Company adopted a Shareholder Rights Plan, under which there is outstanding
one preferred share purchase right (Right) for each outstanding share of the
Company's common stock. Each Right, under certain circumstances, may be
exercised to purchase one one-hundredth of a share of Series A-1999 Junior
Participating Preferred Stock (intended to be the economic equivalent of one
share of the Company's common stock) at a price of $250.00, subject to
adjustment. The Rights become exercisable only after a person or a group, other
than a person or group exempt under the plan, acquires or announces a tender
offer for 15% or more of the Company's common stock. If a person or group, other
than a person or group exempt under the plan, acquires 15% or more of the
Company's common stock or if the Company is acquired in a merger or other
business combination transaction, each Right generally entitles the holder,
other than such person or group, to purchase, at the then-current exercise
price, stock and/or other securities or assets of the Company or the acquiring
company having a market value of twice the exercise price.
The Rights expire on May 15, 2009, unless earlier redeemed. They generally are
redeemable at $.001 per Right until thirty days following announcement that a
person or group, other than a person or group exempt under the plan, has
acquired 15% or more of the Company's common stock. The Rights do not have
voting or dividend rights and, until they become exercisable, have no dilutive
effect on the earnings of the Company.
33
<PAGE>
NOTE 16--SEGMENT INFORMATION
The Company has two reported segments: Branch-based Distribution and Digital.
The Branch-based Distribution segment provides customers with solutions to their
immediate MRO needs. Branch-based Distribution is an aggregation of the
following business segments: Grainger Industrial Supply, Grainger.com,
Acklands-Grainger Inc., Grainger Custom Solutions, Grainger Export, Grainger
Global Sourcing, Grainger Parts, Grainger, S.A. de C.V. and Puerto Rico. The
Digital Business segment provides e-commerce solutions to customers' MRO and
other needs. The Digital segment is an aggregation of the FindMRO.com and
OrderZone.com business segments. The Grainger Consulting Services, Grainger
Integrated Supply, and Lab Safety Supply, Inc. segments are included in Other.
The Company's segments offer differing ranges of services and/or products and
require different resources and marketing strategies. The Company's segments
were initially formed in late 1997 as the Company refocused its organization to
meet the diverse needs of its customers. In late 1999, the Company modified its
segment reporting to better reflect the current state of the business. In 1997
the Company had one segment and the restatement of 1997 into comparable segment
information is not practicable.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment transfer prices were
established at external selling prices less costs not incurred due to the
related party sale.
<TABLE>
<CAPTION>
1999
--------------------------------------------------
Branch-based
Distribution Digital Other Totals
------------ ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Total net sales ...................... $4,132,591 $ 2,977 $ 415,152 $4,550,720
Intersegment net sales ............... 9,826 2,499 4,542 16,867
Net sales from external customers .... 4,122,765 478 410,610 4,533,853
Segment operating earnings ........... 357,925 (20,560) 26,572 363,937
Segment assets ....................... $2,060,781 $ 3,615 $ 161,865 $2,226,261
Depreciation and amortization ........ 66,710 534 18,314 85,558
Additions to long-lived assets ....... 102,835 2,560 13,556 118,951
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Branch-based
Distribution Digital Other Totals
------------ ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Total net sales ...................... $4,002,051 $ 497 $ 354,360 $4,356,908
Intersegment net sales ............... 8,610 497 6,532 15,639
Net sales from external customers .... 3,993,441 -- 347,828 4,341,269
Segment operating earnings ........... 435,891 (8,091) 18,508 446,308
Segment assets ....................... $1,830,172 $ 858 $ 143,084 $1,974,114
Depreciation and amortization ........ 56,388 41 17,709 74,138
Additions to long-lived assets ....... 127,811 1,054 8,994 137,859
</TABLE>
34
<PAGE>
Following are reconciliations of the segment information with the consolidated
totals per the financial statements (in thousands of dollars).
1999 1998
----------- ------------
Operating earnings:
Total operating earnings for reportable segments . $ 363,937 $ 446,308
Unallocated expenses ............................. (46,709) (38,326)
----------- ------------
Total Consolidated operating earnings .......... $ 317,228 $ 407,982
=========== ============
Assets:
Total assets for reportable segments ............. $ 2,226,261 $ 1,974,114
Unallocated assets ............................... 338,565 129,852
----------- ------------
Total Consolidated assets ...................... $ 2,564,826 $ 2,103,966
=========== ============
1999
------------------------------------
Segment Consolidated
Other Significant Items: Totals Adjustments Totals
-------- ----------- --------
Depreciation and amortization ........ $ 85,558 $ 12,669 $ 98,227
Additions to long-lived assets ....... $118,951 $ 21,578 $140,529
Long-lived
Geographic Information: Revenues Assets
---------- ----------
United States ............................ $4,104,302 $ 732,994
Canada ................................... 350,144 184,834
Other foreign countries .................. 79,407 2,625
---------- ----------
$4,533,853 $ 920,453
========== ==========
1998
------------------------------------
Segment Consolidated
Other Significant Items: Totals Adjustments Totals
-------- ----------- --------
Depreciation and amortization ........ $ 74,138 $ 4,727 $ 78,865
Additions to long-lived assets ....... $137,859 $ 29,310 $167,169
Long-lived
Geographic Informatation: Revenues Assets
---------- ----------
United States ............................ $3,940,604 $ 692,747
Canada ................................... 329,565 180,613
Other foreign countries .................. 71,100 1,080
---------- ----------
$4,341,269 $ 874,440
========== ==========
Long-lived assets consist of property, buildings, equipment, capitalized
software, goodwill, and other intangibles. Revenues are attributed to countries
based on the location of the customer.
35
<PAGE>
NOTE 17--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly information for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 Quarter Ended
------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .................... $ 1,090,843 $ 1,146,175 $ 1,175,393 $ 1,121,442 $ 4,533,853
Gross profit ................. $ 402,862 $ 416,015 $ 422,736 $ 411,021 $ 1,652,634
Net earnings ................. $ 56,263 $ 50,553 $ 45,757 $ 28,158 $ 180,731
Earnings per share-basic ..... $ 0.61 $ 0.54 $ 0.49 $ 0.31 $ 1.95
Earnings per share-diluted ... $ 0.60 $ 0.53 $ 0.49 $ 0.30 $ 1.92
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended
------------------------------------------------------------------------
(In thousands of dollars except for per share amounts)
March 31 June 30 September 30 December 31 Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .................... $ 1,057,107 $ 1,118,970 $ 1,120,038 $ 1,045,154 $ 4,341,269
Gross profit ................. $ 385,155 $ 401,959 $ 405,311 $ 405,246 $ 1,597,671
Net earnings ................. $ 57,172 $ 59,250 $ 56,089 $ 65,993 $ 238,504
Earnings per share-basic ..... $ 0.59 $ 0.61 $ 0.58 $ 0.70 $ 2.48
Earnings per share-diluted ... $ 0.58 $ 0.60 $ 0.57 $ 0.69 $ 2.44
</TABLE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries
SCHEDULE II-ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions (a) of period
- ------------------------------- ---------- ---------- ------------- ---------
(In thousands of dollars)
Allowance for doubtful accounts
<S> <C> <C> <C> <C>
1999 .......................... $15,951 $13,585 $11,167 $18,369
1998 .......................... 15,803 10,310 10,162 15,951
1997 .......................... 15,302 9,984 9,483 15,803
<FN>
(a) Accounts charged off as uncollectible, less recoveries.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
W.W. Grainger, Inc., and Subsidiaries EXHIBIT 11
COMPUTATIONS OF EARNINGS PER SHARE
1999 1998 1997
-------------- -------------- --------------
BASIC:
<S> <C> <C> <C>
Weighted average number of shares
outstanding during the year ......................... 92,836,696 96,231,829 100,604,518
============== ============== ==============
Net earnings .......................................... $ 180,731,000 $ 238,504,000 $ 231,833,000
============== ============== ==============
Earnings per share .................................... $ 1.95 $ 2.48 $ 2.30
============== ============== ==============
DILUTED:
Weighted average number of shares
outstanding during the year (basic) ................. 92,836,696 96,231,829 100,604,518
Potential shares:
Shares issuable under outstanding options ........... 2,991,418 3,187,915 3,249,490
Shares which could have been purchased based on
the average market value for the period ........... 2,089,599 2,114,482 2,184,102
-------------- -------------- --------------
901,819 1,073,433 1,065,388
Dilutive effect of exercised options
prior to being exercised .......................... 18,464 21,604 18,046
-------------- -------------- --------------
Shares for the portion of the period
that the options were outstanding ................. 920,283 1,095,037 1,083,434
Contingently issuable shares ........................ 558,500 519,792 491,000
-------------- -------------- --------------
1,478,783 1,614,829 1,574,434
-------------- -------------- --------------
Adjusted weighted average number of shares
outstanding during the year ......................... 94,315,479 97,846,658 102,178,952
============== ============== ==============
Net earnings .......................................... $ 180,731,000 $ 238,504,000 $ 231,833,000
============== ============== ==============
Earnings per share .................................... $ 1.92 $ 2.44 $ 2.27
============== ============== ==============
</TABLE>
37
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report on page 18 of this Form
10-K by reference in the prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 2-67983, 2-54995, 33-43902, and 333-24215) and on
Form S-4 (No. 33-32091) of W.W. Grainger, Inc.
GRANT THORNTON LLP
Chicago, Illinois
March 22, 2000
38
<PAGE>
Exhibit 3(b) to the Annual Report
on Form 10-K of W.W. Grainger, Inc. for
the year ended December 31, 1999
As Amended March 1, 2000
BY-LAWS
OF
W.W. GRAINGER, INC.
ARTICLE I
OFFICES
The principal office of the corporation shall be located in the State
of Illinois. The corporation may have such other offices, either within or
without the State of Illinois, as the business of the corporation may require
from time to time.
The registered office of the corporation required by the Illinois
Business Corporation Act to be maintained in the State of Illinois may be, but
need not be, identical with the principal office in the State of Illinois, and
the address of the registered office may be changed from time to time by the
board of directors.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. (a) The annual meeting of the shareholders
shall be held on the last Wednesday of April, in each year, or at such time as
may be determined by the board of directors, for the purpose of electing
directors and for the transaction of such other business as may properly come
before the meeting. If the day fixed for the annual meeting shall be a legal
holiday, such meeting shall be held on the next succeeding business day. If the
election of the directors shall not be held on the day designated herein for any
annual meeting or adjournment thereof, the board of directors shall cause the
election to be held at a meeting of the shareholders as soon thereafter as
conveniently may be.
(b) At any annual meeting or adjournment thereof only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the board of directors or (ii) by any shareholder (x) who is
entitled to vote at the time of giving notice provided for in this Section 1(b)
and remains such until the meeting and (y)
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who complies with the procedures set forth in this Section 1(b). For business to
be properly brought before an annual meeting or adjournment thereof by a
shareholder, the shareholder must have given timely notice thereof in proper
written form to the secretary. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal office of the corporation
no less than thirty days nor more than sixty days prior to the meeting;
provided, however, that in the event that less than forty days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be received not later than the close
of business on the tenth day following the day on which such notice of the date
of the annual meeting was mailed or such public disclosure was made. To be in
proper written form, a shareholder's notice to the secretary shall set forth in
writing as to each matter the shareholder proposes to bring before the meeting
(i) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (ii) the name and
address, as they appear on the corporation's books, of the shareholder proposing
such business, (iii) the class and number of shares of the corporation which are
beneficially owned by the shareholder and (iv) any material interest of the
shareholder in such business. Notwithstanding anything in these by-laws to the
contrary, no business shall be conducted at any annual meeting or adjournment
thereof except in accordance with the procedures set forth in this Section 1(b).
The officer or other person presiding shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the procedures set forth in this Section 1(b), and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the chairman of the board, the vice chairman, the president and
chief executive officer, the board of directors or by the holders of not less
than one-fifth of all the outstanding shares of the corporation, for the purpose
or purposes for which the meeting is called. Unless otherwise stated in the
notice of special meeting, no other business may be transacted at any such
meeting.
SECTION 3. PLACE OF MEETING. The board of directors may designate any
place, either within or without the State of Illinois, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal office of the corporation in
the State of Illinois.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the place, day
and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
nor more than sixty days before the date of the meeting, or in the case of a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than twenty days nor more than sixty days before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board or the secretary, or the officer or persons calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
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mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the shareholder at his address as it appears on the
records of the corporation, with postage thereon prepaid.
SECTION 5. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors of the corporation may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than sixty days and, in case of a meeting of shareholders, not less than ten
days, or in the case of a merger, consolidation, share exchange, dissolution or
sale, lease or exchange of assets, not less than twenty days, prior to the date
on which the particular action, requiring such determination of shareholders, is
to be taken. If no record date is fixed for the determination of shareholders
entitled to notice of or entitled to vote at a meeting of shareholders, or
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided above,
such determination shall apply to any adjournment thereof.
SECTION 6. VOTING LISTS. The officer or agent having charge of the
transfer books for shares of the corporation shall make within twenty days after
the record date for a meeting of shareholders, or ten days before such meeting
of shareholders, whichever is earlier, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the principal office of
the corporation in the State of Illinois and shall be subject to inspection by
any shareholder at any time during usual business hours and to copying at the
shareholder's expense. Such list shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The original share ledger or
transfer book, or a duplicate thereof kept in the State, shall be prima facie
evidence as to who are the shareholders entitled to examine such list or share
ledger, or transfer book or to vote at any meeting of shareholders.
SECTION 7. QUORUM. A majority of the outstanding shares of the
corporation, entitled to vote on a matter, represented in person or by proxy,
shall constitute a quorum at any meeting of shareholders; provided, that if less
than a majority of the outstanding shares are represented at said meeting, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice.
SECTION 8. PROXIES. A shareholder may appoint a proxy to vote or
otherwise act for the shareholder by delivering a valid appointment to the
person so appointed or such person's agent; provided that no shareholder may
name more than three persons
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as proxies to attend and to vote the shareholder's shares at any meeting of
shareholders. Such appointment may be by any means, including means of
electronic transmission, permitted by law. No proxy shall be valid after the
expiration of eleven months from the date thereof unless otherwise provided in
the proxy.
SECTION 9. VOTING OF SHARES. Subject to the provisions of Section 11 of
this Article, each outstanding share, regardless of class, shall be entitled to
one vote upon each matter submitted to vote at a meeting of shareholders.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation, domestic or foreign, may be voted by such officer,
agent, or proxy as the by-laws of such corporation may prescribe, or, in the
absence of such provision, as the board of directors of such corporation may
determine.
Shares standing in the name of a deceased person may be voted by his
administrator or executor, either in person or by proxy. Shares standing in the
name of a guardian, conservator, or trustee may be voted by such fiduciary,
either in person or by proxy, but no guardian, conservator, or trustee shall be
entitled, as such fiduciary, to vote shares held by him without a transfer of
such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to this corporation shall not be
voted, directly or indirectly, at any meeting and shall not be counted in
determining the total number of outstanding shares at any given time, but shares
of its own stock held by it in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
SECTION 11. CUMULATIVE VOTING. In all elections for directors, every
shareholder shall have the right to vote, in person or by proxy, the number of
shares owned by him, for as many persons as there are directors to be elected,
or to cumulate said shares, and give one candidate as many votes as the number
of directors multiplied by the number of his shares shall equal, or to
distribute them on the same principle among as many candidates as he shall see
fit.
SECTION 12. VOTING BY BALLOT. Voting on any question or in any election
may be by voice, unless the officer or other person presiding over the meeting
shall order or any shareholder shall demand that voting be by ballot.
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ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the corporation
shall be managed under the direction of its board of directors.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
of the corporation shall be not less than seven nor more than twelve. The number
of directors may be fixed or changed from time to time, within the minimum and
maximum, by the directors or the shareholders without amending these by-laws.
Each director shall hold office until the next annual meeting of shareholders or
until his successor shall have been elected and qualified. Directors need not be
residents of Illinois or shareholders of the corporation.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this by-law, immediately after
the annual meeting of shareholders. The board of directors may provide by
resolution, the time and place, either within or without the State of Illinois,
for the holding of additional regular meetings without other notice than such
resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the chairman of the board or any two
directors. The person or persons authorized to call special meetings of the
board of directors may fix any place, either within or without the State of
Illinois, as the place for holding any special meeting of the board of directors
called by them.
SECTION 5. NOTICE. Notice of any special meeting shall be given at
least two days previously thereto by written notice delivered personally or
mailed to each director at his business address, or by telegram. If mailed, such
notice shall be deemed to be delivered 24 hours after deposited in the United
States mail, next-day delivery guaranteed, so addressed with postage thereon
prepaid. If notice to be given by telegram, such notice shall be deemed to be
delivered 24 hours after the telegram is delivered to the telegraph company. Any
director may waive notice of any meeting. The attendance of a director at any
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 6. QUORUM. A majority of the board of directors shall
constitute a quorum for transaction of business at any meeting of the board of
directors, provided, that if less than a majority of the directors are present
at said meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice.
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SECTION 7. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors.
SECTION 8. VACANCIES. Any vacancy occurring in the board of directors
and any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual meeting or at a special meeting
of shareholders called for that purpose; provided, however, vacancies arising
between meetings of shareholders by reason of an increase in the number of
directors or otherwise may be filled by a majority of the board of directors
then remaining. A director elected by the shareholders to fill a vacancy shall
hold office for the balance of the term for which elected. A director appointed
by the directors to fill a vacancy shall serve until the next meeting of
shareholders at which directors are to be elected.
SECTION 9. COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, for attendance at each meeting of
the board or of a committee thereof, and may be paid a fixed sum for attendance
at meetings and/or a stated retainer as directors. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
SECTION 10. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
SECTION 11. COMMITTEES. Committees of the board of directors shall
consist of an audit committee, a compensation committee, a board affairs and
nominating committee, and such other committees as the board of directors by
resolution may create. Each committee shall have such number of members and
shall exercise such authority and carry out such duties as are set forth in
resolutions of the board of directors. Committee members shall be elected
annually but shall serve at the discretion of the board of directors and may be
removed by the board of directors. The board of directors may increase or
decrease the number of members of any committee at any time and may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member or members at any meeting of the committee. A
majority of members of a committee shall constitute a quorum and, unless
otherwise set forth in resolutions of the board of directors, a majority of
those members present at a meeting and not disqualified from voting shall
constitute the acts of the committee.
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SECTION 12. INFORMAL ACTION BY DIRECTORS. (a) Any action required to be
taken at a meeting of the board of directors of the corporation, or any other
action which may be taken at a meeting of the board of directors or a committee
thereof, may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the directors entitled to vote
with respect to the subject matter thereof, or by all of the members of such
committee, as the case may be.
(b) The consent shall be evidenced by one or more written approvals,
each of which sets forth the action taken and bears the signature of one or more
directors. All the approvals evidencing the consent shall be delivered to the
secretary to be filed in the corporate records. The action taken shall be
effective when all the directors have approved the consent unless the consent
specifies a different effective date.
(c) Any such consent signed by all the directors or all the members of
a committee shall have the same effect as a unanimous vote, and may be stated as
such in any document filed with the Secretary of State.
SECTION 13. TELEPHONE ATTENDANCE. (a) Members of the board of directors
or of any committee of the board of directors may participate in and act at any
meeting of such board or committee through the use of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in such meeting shall constitute
attendance and presence in person at the meeting of the person or persons so
participating.
(b) The board of directors or any committee may, at its option, provide
for a tape recording of any such conference telephone portion of a meeting but
the lack thereof shall not affect the validity of any actions taken at such
meeting.
SECTION 14. REMOVAL OF DIRECTORS. One or more of the directors may be
removed, with or without cause, at a meeting of shareholders by the affirmative
vote of the holders of a majority of the outstanding shares then entitled to
vote at an election of directors, except that:
(1) No director shall be removed at a meeting of shareholders unless
the notice of such meeting shall state that a purpose of the meeting is to vote
upon the removal of one or more directors named in the notice. Only the named
director or directors may be removed at such meeting;
(2) If less than the entire board is to be removed, no director may be
removed, with or without cause, if the votes cast against his removal would be
sufficient to elect him, if then cumulatively voted at an election of the entire
board of directors; and
(3) If a director is elected by a class or series of shares, he may be
removed only by the shareholders of that class or series.
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SECTION 15. DIRECTOR CONFLICT OF INTEREST. If a transaction is fair to
the corporation at the time it is authorized, approved or ratified, the fact
that a director of the corporation is directly or indirectly a party to the
transaction shall not be grounds for invalidating the transaction.
SECTION 16. NOMINATIONS OF DIRECTORS. (a) Except for directors elected
to fill vacancies pursuant to these by-laws, nominations for election for the
board of directors may be made by the board of directors, or by the nominating
committee of the board of directors and approved by the board of directors. Such
nominations shall be submitted to a vote of the shareholders at the next annual
meeting of shareholders or at a special meeting of shareholders called for such
purpose.
(b) Nominations for election to the board of directors may be made by
any shareholder of any outstanding class of stock of the corporation entitled to
vote for the election of directors provided that; (i) any such shareholder
nominating a director shall, not later than the date with respect to submission
of shareholders' proposals for the next annual meeting as set forth in the
corporation's proxy statement for the preceding annual meeting of shareholders,
notify the chairman of the board of the corporation in writing of the intent to
so nominate one or more persons and shall further set forth in such notice the
names of all such nominees together with, with respect to each such nominee, his
principal occupation, age, holdings of equity securities of the corporation and
such other information as would be required under applicable laws, including the
various securities laws, to be set forth by the corporation in its proxy
statement and related materials if such person were a nominee of the board of
directors; (ii) such shareholder so proposing to nominate a person remains a
shareholder of the corporation through the date of the annual meeting at which
such shareholder, or such shareholder's proxy, nominates such person for
election as a director; and (iii) such shareholder delivers the consent of each
such nominee to serve as director, or states in the notice that each such
nominee, if elected, has consented to serve as director.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the corporation shall be a chairman
of the board, a vice chairman of the board, a senior chairman of the board, one
or more presidents, one or more vice presidents, a treasurer, a secretary, and
such other officers and such assistant or administrative officers as may be
elected or appointed as hereinafter provided. Any two or more offices may be
held by the same person.
SECTION 2. ELECTION, APPOINTMENT AND TERM OF OFFICE. Officers of the
corporation shall be elected or appointed annually by the board of directors,
although vacancies may be filled or new offices created and filled at any
meeting of the board of directors. Each officer elected or appointed by the
board of directors shall hold office until the next annual election or
appointment of officers by the board of directors,
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or until his earlier death, resignation or removal. Officers and assistant or
administrative officers of the corporation may also be appointed from time to
time by the chairman of the board, to serve as such at his pleasure.
SECTION 3. REMOVAL. Any officer or assistant or administrative officer
of the corporation elected or appointed by the board of directors may be removed
by the board of directors whenever in its judgment the best interests of the
corporation would be served thereby. Any officer or assistant or administrative
officer of the corporation appointed by the chairman of the board may be removed
by the chairman of the board whenever in his judgment the best interests of the
corporation would be served thereby. Any removal provided for in this Section 3
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or assistant or administrative
officer of the corporation shall not itself create contract rights.
SECTION 4. CHAIRMAN OF THE BOARD. The chairman of the board shall be
the chief executive officer. He shall preside at all meetings of the
shareholders and the board of directors or, from time to time, may delegate any
part of such responsibilities to the vice chairman of the board or any other
member of the board of directors. He may sign, with the secretary or any other
authorized officer, certificates for shares of the corporation. He shall be
primarily responsible for carrying out the policies established by and the
directions of the board of directors and shall perform such other duties as may
be prescribed from time to time by the board of directors. He may from time to
time, to the extent not delegated by the board of directors, delegate and
re-delegate any part of any of the responsibilities and authority set forth
herein to the vice chairman of the board, the senior chairman of the board
and/or a president. The chairman of the board must be a director of the
corporation.
SECTION 5. VICE CHAIRMAN OF THE BOARD. The vice chairman of the board
shall perform such duties as may from time to time be prescribed by the board of
directors or delegated to him by the chairman of the board, including the
presiding at meetings of the shareholders and the board of directors. He may
sign, with the secretary or any other authorized officer, certificates for
shares of the corporation. The vice chairman of the board must be a director of
the corporation.
SECTION 6. SENIOR CHAIRMAN OF THE BOARD. The senior chairman of the
board shall, in the absence of the chairman of the board, the vice chairman of
the board, or another director to whom the responsibilities have been delegated,
preside at all meetings of the shareholders and the board of directors. He shall
advise the chairman of the board on matters of long- and short-term strategic
planning and policy and other significant matters affecting the corporation, and
shall perform such other duties as may from time to time be prescribed by the
board of directors, or delegated to him by the chairman of the board. The senior
chairman of the board must be a director of the corporation.
SECTION 7. OFFICE OF THE CHAIRMAN. The chairman of the board, the vice
chairman of the board, and the senior chairman of the board shall comprise the
office of
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the chairman, which shall act as the senior management of the corporation. By
agreement of the members of the office of the chairman, any member or members
thereof shall be authorized to act as the office of the chairman.
Any member of the office of the chairman and a president may sign
deeds, mortgages, bonds, contracts or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors or by
these by-laws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed. The office of the chairman
and a president may delegate signing authority to other persons within the
corporation as shall be deemed necessary.
SECTION 8. PRESIDENTS. The president or, if there be more than one, the
presidents shall oversee and direct such operations, shall be responsible for
such day-to-day activities, and shall do and perform such other duties as from
time to time may be assigned by the board of directors or the chairman of the
board. If there be more than one president, the board of directors may designate
one or more of them as group president or use a similar descriptive designation.
SECTION 9. VICE PRESIDENTS. Each of the vice presidents shall be
responsible for those activities and shall perform those duties as from time to
time may be assigned by the board of directors, the chairman of the board, the
vice chairman of the board, or a president. The board of directors may designate
one or more of the vice presidents as executive, group or senior vice presidents
or use a similar descriptive designation.
SECTION 10. TREASURER. If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his duties in such sum
and with such surety or sureties as the board of directors shall determine. He
shall (a) have charge and custody of and be responsible for all funds and
securities of the corporation, (b) receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositories as shall be selected in accordance with the provisions of Article V
of these by-laws and (c) in general perform all the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the board of directors, the chairman of the board, the vice chairman
of the board, or the chief financial officer.
SECTION 11. SECRETARY. The secretary shall (a) keep the minutes of the
shareholders' and of the board of directors' meetings in one or more books
provided for that purpose, (b) see that all notices are duly given in accordance
with the provisions of these by-laws or as required by law, (c) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all certificates for shares prior to the issue
thereof and to all documents, the execution of which on behalf of the
corporation under its seal is duly authorized in accordance with the provisions
of these by-laws, (d) keep, or cause the transfer agent to keep, a register
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of the post office address of each shareholder which shall be furnished to the
secretary by such shareholder, (e) sign with the chairman of the board or the
vice chairman of the board certificates for shares of the corporation, the issue
of which shall have been authorized by resolution of the board of directors, (f)
have general charge of the stock transfer books of the corporation and (g) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the board of directors,
the chairman of the board, or the vice chairman of the board.
SECTION 12. SALARIES. The salaries of the officers elected or appointed
by the board of directors shall be fixed from time to time by the board of
directors and no such officer shall be prevented from receiving such salary by
reason of the fact that he is also a director of the corporation.
ARTICLE V
---------
CONTRACTS, LOANS, CHECKS AND DEPOSITS
-------------------------------------
SECTION 1. CONTRACTS. The board of directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. DEPOSITS. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies, or other depositaries as the board of directors
may select.
ARTICLE VI
----------
CERTIFICATES FOR SHARES
AND THEIR TRANSFER
-----------------------
SECTION 1. CERTIFICATES FOR SHARES. The issued shares of the
corporation shall be represented by certificates, except as and to the extent
determined
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by, or pursuant to, resolution adopted by the board of directors. Certificates
representing shares of the corporation shall be in such form as may be
determined by the board of directors. Such certificates shall be signed by the
chairman of the board or the vice chairman of the board, and by the secretary or
an assistant secretary, and shall be sealed with the seal of corporation. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name of the person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered in the books of the
corporation, as shall similar information with respect to shares that are
uncertificated. All certificates surrendered to the corporation for transfer
shall be canceled. No new certificate shall be issued until the former
certificate for a like number of shares, unless the shares are uncertificated,
shall have been surrendered and canceled except that in the case of a lost,
destroyed or mutilated certificate a new one may be issued therefor upon such
terms and indemnity to the corporation as the board of directors may prescribe.
SECTION 2. TRANSFERS OF SHARES. Transfers of shares of the corporation
shall be made either on the books of the corporation or on the books of the duly
authorized and appointed agent or agents of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the secretary of the corporation or proper
officer of the transfer agent and, unless such shares are uncertificated, on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation or its duly authorized
and appointed transfer agent or agents shall be deemed the owner thereof for all
purposes as regards the corporation.
ARTICLE VII
-----------
FISCAL YEAR
-----------
The fiscal year of the corporation shall begin on the first day of
January in each year and end on the last day of December in each year.
ARTICLE VIII
------------
DIVIDENDS
---------
The board of directors may from time to time, declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its articles of incorporation.
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ARTICLE IX
----------
SEAL
----
The board of directors shall provide a corporate seal which shall be in
the form of a circle and shall have inscribed thereon the name of the
corporation and the words, "Corporate Seal, Illinois".
ARTICLE X
---------
WAIVER OF NOTICE
----------------
Whenever any notice whatever is required to be given under the
provisions of these by-laws or under the provisions of the articles of
incorporation or under the provisions of the Illinois Business Corporation Act,
a waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein shall be deemed
equivalent to the giving of such notice.
ARTICLE XI
----------
AMENDMENTS
----------
These by-laws may be altered, amended or repealed and new by-laws may
be adopted at any meeting of the board of directors of the corporation by a
majority vote of the directors present at the meeting.
ARTICLE XII
-----------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
SECTION 1. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its
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equivalent shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 2. The corporation shall indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action, suit or proceeding, if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to the best interests
of the corporation, and except that no indemnification shall be made with
respect to any claim, issue or matter as to which such person has been finally
adjudged to have been liable to the corporation, unless, and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.
SECTION 3. Any indemnification under Sections 1 or 2 (unless ordered by
a court) shall be made only as authorized in the specific case, upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 or 2. Such determination shall be made (1) by the board of directors
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (2) if such a quorum is not obtainable (or,
even if obtainable, a quorum of disinterested directors so directs) by
independent legal counsel in a written opinion, or (3) by the shareholders. In
any event, to the extent that a director or officer of the corporation has been
successful, on the merits or otherwise, in the defense of any action, suit or
proceeding referred to in Sections 1 or 2 or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including reasonable
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
SECTION 4. (a) Reasonable expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding, upon receipt of (i)
a statement signed by such director or officer to the effect that such director
or officer acted in good faith and in a manner which he believed to be in, or
not opposed to the best interests of the corporation and (ii) an undertaking by
or on behalf of the director or officer to repay such amount, if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized in this Article.
(b) The board of directors may, by separate resolution adopted under
and referring to this Article of the by-laws, provide for securing the payment
of authorized
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advances by the creation of escrow accounts, the establishment of letters of
credit or such other means as the board deems appropriate and with such
restrictions, limitations and qualifications with respect thereto as the board
deems appropriate in the circumstances.
SECTION 5. (a) The indemnification and advancement of expenses provided
by or granted under other subsections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(b) The provisions of this ARTICLE XII shall be deemed to be a contract
between the corporation and each director and officer who serves in such
capacity at anytime while this ARTICLE XII is in effect and any indemnification
provided under this ARTICLE XII to a person shall continue after such person
ceases to be an officer, director, agent or employee of the corporation as to
all facts, circumstances and events occurring while such person was such
officer, director, agent or employee, and shall not be decreased or diminished
in scope without such person's consent, regardless of the repeal or modification
of this Article or any repeal or modification of the Illinois Business
Corporation Act or any other applicable law. If the scope of indemnity provided
by this ARTICLE XII or any replacement article, or pursuant to the Illinois
Business Corporation Act or any modification or replacement thereof is
increased, then such person shall be entitled to such increased indemnification
as is in existence at the time indemnity is provided to such person, it being
the intent, subject to Section 10 of this ARTICLE XII, to indemnify persons
under this ARTICLE XII to the fullest extent permitted by law.
SECTION 6. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
SECTION 7. Subject to Section 10 of this Article, if a claim under this
Article is not promptly paid in full by the corporation after a written claim
has been received by the corporation or if expenses pursuant to Section 4 of
this Article have not been promptly advanced after a written request for such
advancement accompanied by the statement and undertaking required by Section 4
of this Article has been received by the corporation, the director or officer
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim or the advancement of expenses. If successful, in
whole or in part, in such suit, such director or officer shall also be entitled
to be paid the reasonable expense thereof, including attorneys' fees. It shall
be
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a defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking has been tendered to the corporation)
that the director or officer has not met the standards of conduct which make it
permissible under the Illinois Business Corporation Act for the corporation to
indemnify the director or officer for the amount claimed, but the burden of
proving such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
shareholders) to have made a determination, if required, prior to the
commencement of such action that indemnification of the director or officer is
proper in the circumstances because he or she has met the applicable standard of
conduct required under the Illinois Business Corporation Act, nor an actual
determination by the corporation (including its board of directors, independent
legal counsel, or its shareholders) that the director or officer had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the director or officer had not met the applicable standard
of conduct.
SECTION 8. For purposes of this Article, references to "the
corporation" shall include, in addition to the surviving corporation, any
merging corporation (including any corporation having merged with a merging
corporation) absorbed in a merger which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers and employees or agents, so that any person who was a director or
officer of such merging corporation, or was serving at the request of such
merging corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article with respect to the surviving
corporation as such person would have with respect to such merging corporation
if its separate existence had continued.
SECTION 9. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by such director, officer,
employee, or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and references to "officers" shall include elected and
appointed officers. A person who acted in good faith and in a manner he
reasonably believed to be in the best interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this Article.
SECTION 10. Anything herein to the contrary notwithstanding, if the
corporation purchases insurance in accordance with Section 6 of this ARTICLE
XII, the corporation shall not be required to, but may (if the board of
directors so determines in accordance with this ARTICLE XII) reimburse any party
instituting any action, suit or proceeding if a result of the institution
thereof is the denial of or limitation of payment of losses under such insurance
when such losses would have been paid thereunder if a non-insured third party
had instituted such action, suit or proceedings.
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ARTICLE XIII
------------
INDEMNIFICATION OF EMPLOYEES AND AGENTS
---------------------------------------
The corporation may indemnify any agent or employee of the corporation
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (including, but not limited to
any such proceeding by or in the right of the corporation) whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was serving the corporation at its request and in the course and scope of his
duties and acting in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the corporation, against expenses
(including reasonable attorney's fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action, suit or proceeding.
The standards of conduct, the provisions for payment and advances, and the terms
and conditions contained in Article XII, Sections 1, 2, 3, 4, 5(a), 6, 8, 9 and
10 shall apply to any indemnification hereunder.
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Exhibit 10(c)(iii) to the Annual Report
on Form 10-K of W.W. Grainger, Inc. for
the year ended December 31, 1999
W.W. GRAINGER, INC.
1990 LONG TERM STOCK INCENTIVE PLAN
AS AMENDED DECEMBER 8, 1999
Section 1. Objective.
The objective of the W.W. Grainger, Inc. 1990 Long Term Stock Incentive
Plan (the "Plan") is to attract and retain the best available executive
personnel and other key employees to be responsible for the management, growth
and success of the business, and to provide an incentive for such employees to
exert their best efforts on behalf of the Company and its shareholders.
Section 2. Definitions.
2.1. General Definitions. The following words and phrases, when used
herein, shall have the following meanings:
(a) "Act" - The Securities Exchange Act of 1934, as amended.
(b) "Agreement" - The document which evidences the grant of any Award
under the Plan and which sets forth the terms, conditions, and limitations
relating to such Award.
(c) "Award" - The grant of any stock option, stock appreciation right,
share of restricted stock, share of phantom stock, other stock-based award, or
any combination thereof.
(d) "Board" - The Board of Directors of W.W. Grainger, Inc.
(e) "Change in Control" means any one or more of the following events:
(i) approval by the shareholders of the Company of:
(A) any merger, reorganization or consolidation of
the Company or any Subsidiary with or into any corporation or
other Person if Persons who were the beneficial owners (as
such term is used in Rule 13d-3 under the Act) of Common Stock
and securities of the Company entitled to vote generally in
the election of directors ("Voting Securities") immediately
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before such merger, reorganization or consolidation are not,
immediately thereafter, the beneficial owners, directly or
indirectly, of at least 60% of the then-outstanding common
shares and the combined voting power of the then-outstanding
Voting Securities ("Voting Power") of the corporation or other
Person surviving or resulting from such merger, reorganization
or consolidation (or the parent corporation thereof) in
substantially the same respective proportions as their
beneficial ownership, immediately before the consummation of
such merger, reorganization or consolidation, of the
then-outstanding Common Stock and Voting Power of the Company;
(B) the sale or other disposition of all or
substantially all of the consolidated assets of the Company,
other than a sale or other disposition by the Company of all
or substantially all of its consolidated assets to an entity
of which at least 60% of the common shares and the Voting
Power outstanding immediately after such sale or other
disposition are then beneficially owned (as such term is used
in Rule 13d-3 under the Act) by shareholders of the Company in
substantially the same respective proportions as their
beneficial ownership of Common Stock and Voting Power of the
Company immediately before the consummation of such sale or
other disposition; or
(C) a liquidation or dissolution of the Company;
provided, however, that if the consummation of an event described in
this paragraph (i) (a "Transaction") is subject to an Other Party
Approval Requirement (as defined below), the approval of such
Transaction by the shareholders of the Company shall not be deemed a
Change in Control until the first date on which such Other Party
Approval Requirement has been satisfied. For this purpose, "Other Party
Approval Requirement" means a requirement expressly set forth in a
Transaction Agreement (as defined below) between the Company and
another Person to the effect that such Person shall obtain the approval
of one or more elements of the Transaction by the stockholders,
members, partners, or other holders of equity interests of such Person
(or of a parent of such Person) prior to the consummation of such
Transaction in order to comply with the mandatory provisions of (x) the
law of the jurisdiction of the incorporation or organization of such
Person (or its parent) or (y) the articles of incorporation or other
charter or organizational documents of such Person (or its parent) that
are applicable to such Transaction. For this purpose, "Transaction
Agreement" means a written agreement that sets forth the terms and
conditions of the Transaction;
(ii) the following individuals cease for any reason to
constitute a majority of the directors of the Company then serving:
individuals who, on the Effective Date, constitute the Board and any
subsequently appointed or elected director of the Company (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including a consent
solicitation, relating to the election or removal of one or more
directors of the
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Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by a
vote of at least two-thirds of the Company's directors then in office
whose appointment, election or nomination for election was previously
so approved or recommended or who were directors on the Effective Date;
or
(iii) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act,
other than by any Exempt Person (as such term is defined below), the
Company, any Subsidiary, any employee benefit plan of the Company or a
Subsidiary) of beneficial ownership (within the meaning of Rule 13d-3
under the Act) of 20% or more of either the Company's then-outstanding
Common Stock or Voting Power; provided that:
(A) no such person, entity or group shall be deemed
to own beneficially any securities held by the Company or a
Subsidiary or any employee benefit plan (or any related trust)
of the Company or a Subsidiary;
(B) no Change in Control shall be deemed to have
occurred solely by reason of any such acquisition if both (x)
after giving effect to such acquisition, such person, entity
or group has beneficial ownership of less than 30% of the
then-outstanding Common Stock and Voting Power of the Company
and (y) prior to such acquisition, at least two-thirds of the
directors described in (and not excluded from) paragraph (ii)
of this definition vote to adopt a resolution of the Board to
the specific effect that such acquisition shall not be deemed
a Change in Control; and
(C) no Change in Control shall be deemed to have
occurred solely by reason of any such acquisition or holding
in connection with any merger, reorganization or consolidation
of the Company or any Subsidiary which is not a Change in
Control within the meaning of paragraph (i)(A) above.
Notwithstanding the occurrence of any of the events specified in
paragraphs (i), (ii) or (iii) of this definition, no Change in Control shall
occur with respect to any Participant if (x) the event which otherwise would be
a Change in Control (or the transaction which resulted in such event) was
initiated by such Participant, or was discussed by him with any third party,
without the approval of the Board with respect to such Participant's initiation
or discussion, as applicable, or (y) such Participant is, by written agreement,
a participant on his own behalf in a transaction in which the persons (or their
affiliates) with whom such Participant has the written agreement cause the
Change in Control to occur and, pursuant to the written agreement, such
Participant has an equity interest (or a right to acquire such equity interest)
in the resulting entity.
(f) "Code" - The Internal Revenue Code of 1986, as amended, including
the regulations promulgated pursuant thereto.
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(g) "Committee" - The Compensation Committee of the Board, which shall
consist of two or more members. The members of the Committee shall be
"non-employee directors" within the meaning of Rule 16b-3, as the same may be
amended or supplemented from time to time, as promulgated under the Act.
(h) "Common Stock" - The present shares of common stock of the Company,
and any shares into which such shares are converted, changed or reclassified.
(i) "Company" - W.W. Grainger, Inc., an Illinois corporation.
(j) "Effective Date" - December 9, 1998.
(k) "Employee" - Any person designated as an employee of the Company or
a Subsidiary on the payroll records thereof.
(l) "Exempt Person" means any one or more of the following:
(i) any descendant of W.W. Grainger (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Grainger Family
Members");
(ii) any descendant of E.O. Slavik (deceased) or any spouse,
widow or widower of any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Slavik Family Members"
and with the Grainger Family Members collectively defined as the
"Family Members");
(iii) any trust which is in existence on the Effective Date
and which has been established by one or more Grainger Family Members,
any estate of a Grainger Family Member who died on or before the
Effective Date, and The Grainger Foundation (such trusts, estates and
named entity collectively defined as the "Grainger Family Entities");
(iv) any trust which is in existence on the Effective Date and
which has been established by one or more Slavik Family Members, any
estate of a Slavik Family Member who died on or before the Effective
Date, Mark IV Capital, Inc., and Mountain Capital Corporation (such
trusts, estates and named entities collectively defined as the "Slavik
Family Entities" and with the Grainger Family Entities collectively
defined as the "Existing Family Entities");
(v) any estate of a Family Member who dies after the Effective
Date or any trust established after the Effective Date by one or more
Family Members or Existing Family Entities; provided that one or more
Family Members, Existing Family Entities or charitable organizations
which qualify as exempt organizations under Section 501(c) of the Code
("Charitable Organizations"), collectively, are
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the beneficiaries of at least 50% of the actuarially determined
beneficial interests in such estate or trust;
(vi) any Charitable Organization which is established by one
or more Family Members or Existing Family Entities (a "Family
Charitable Organization");
(vii) any corporation of which a majority of the voting power
and a majority of the equity interest is held, directly or indirectly,
by or for the benefit of one or more Family Members, Existing Family
Entities, estates or trusts described in clause (v) above, or Family
Charitable Organizations; or
(viii) any partnership or other entity or arrangement of which
a majority of the voting interest and a majority of the economic
interest is held, directly or indirectly, by or for the benefit of one
or more Family Members, Existing Family Entities, estates or trusts
described in clause (v) above, or Family Charitable Organizations.
(m) "Fair Market Value" - The fair market value of Common Stock on a
particular day shall be the closing price of the Common Stock on the New York
Stock Exchange, or any other national stock exchange on which the Common Stock
is traded, on the last preceding trading day on which such Common Stock was
traded.
(n) "Option" - The right to purchase Common Stock at a stated price for
a specified period of time. For purposes of the Plan, the option is a
non-qualified stock option.
(o) "Other Stock Based Award" - An award under Section 9 that is valued
in whole or in part by reference to, or is otherwise based on, the Common Stock.
(p) "Participant" - Any Employee designated by the Committee to
participate in the Plan.
(q) "Person" - Any individual, corporation, partnership, limited
liability company, sole proprietorship, trust or other entity.
(r) "Period of Restriction" - The period during which Shares of
Restricted Stock or Phantom Stock rights are subject to forfeiture or
restrictions on transfer pursuant to Section 8 of the Plan.
(s) "Phantom Stock" - A right to receive payment from the Company in
cash, stock, or in combination thereof, in an amount determined by the Fair
Market Value.
(t) "Restricted Stock" - Shares granted to a Participant which are
subject to restrictions on transferability pursuant to Section 8 of the Plan.
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(u) "Shares" - Shares of Common Stock.
(v) "Stock Appreciation Right" or "SAR" - The right to receive a
payment from the Company in cash, Common Stock, or in combination thereof, equal
to the excess of the Fair Market Value of a share of Common Stock on the date of
exercise over a specified price fixed by the Committee, but subject to such
maximum amounts as the Committee may impose.
(w) "Subsidiary" - Any corporation, partnership, joint venture, limited
liability company, or other entity in which the Company directly or indirectly
owns securities representing a majority of the aggregate voting power.
2.2. Other Definitions. In addition to the above definitions, certain
words and phrases used in the Plan and any Agreement may be defined elsewhere in
the Plan or in such Agreement.
Section 3. Common Stock.
3.1. Number of Shares. Subject to the provisions of Section 3.3, the
number of Shares which may be issued or sold or for which Options or Stock
Appreciation Rights may be granted under the Plan may not exceed 8,056,828
Shares.* Notwithstanding the foregoing, the total number of Shares with respect
to which Options or Stock Appreciation Rights may be granted to any Participant
shall not exceed 800,000 Shares** (proportionately adjusted pursuant to Section
3.3) in any calendar year.
3.2. Re-usage. If an Option or SAR expires or is terminated, surrendered,
or canceled without having been fully exercised, if Restricted Stock is
forfeited, or if any other grant results in any Shares not being issued, the
Shares covered by such Option, SAR, grant of Restricted Stock or other grant, as
the case may be, shall again be immediately available for Awards under the Plan.
3.3. Adjustments. In the event of any change in the outstanding Common
Stock by reason of a stock split, stock dividend, combination, reclassification
or exchange of Shares, recapitalization, merger, consolidation or other similar
event, the number of SARs and the number of Shares available for Options, grants
of Restricted Stock, and Other Stock Based Awards and the number of Shares
subject to outstanding Options, SARs, grants of Restricted Stock, and Other
Stock Based Awards, and the price
- --------------------------------------
* As adjusted to reflect (i) the number of shares remaining available for
grants under the Company's Restated 1975 Non-Qualified Stock Option Plan, (ii)
the Company's 1991 two-for-one stock split and (iii) the Company's 1998
two-for-one stock split.
** As adjusted to reflect the Company's 1998 two-for-one stock split.
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thereof, and the Fair Market Value, as applicable, shall be appropriately
adjusted by the Committee in its sole discretion and any such adjustment shall
be binding and conclusive on all parties. Any fractional Shares resulting from
any such adjustment shall be disregarded.
Section 4. Eligibility and Participation.
Participants in the Plan shall be those key employees selected by the
Committee to participate in the Plan who hold positions of responsibility and
whose participation in the Plan the Committee or management of the Company
determines to be in the best interests of the Company.
Section 5. Administration.
5.1. Committee. The Plan shall be administered by the Committee. The
members of the Committee shall be appointed by and shall serve at the pleasure
of the Board, which may from time to time change the Committee's membership.
5.2. Authority. The Committee shall have the sole and complete authority
to:
(a) determine the individuals to whom Awards are granted, the type and
amounts of awards to be granted and the time of all such grants;
(b) determine the terms, conditions and provisions of, and restrictions
relating to, each Award granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to the
Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Awards under the Plan;
(g) maintain accounts, records and ledgers relating to Awards;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for such
purposes as the Committee considers necessary or desirable;
(j) do and perform all acts which it may deem necessary or appropriate
for the administration of the Plan and to carry out the objectives of the Plan.
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5.3. Determinations. All determinations, interpretations, or other actions
made or taken by the Committee pursuant to the provisions of the Plan shall be
final, binding, and conclusive for all purposes and upon all persons.
5.4. Delegation. Except as required by Rule 16b-3 promulgated under the
Act (and any successor to such Rule) with respect to the grant of Awards to
Participants who are subject to Section 16 of the Act, the Committee may
delegate to appropriate senior officers of the Company its duties under the Plan
pursuant to such conditions and limitations as the Committee may establish.
Section 6. Stock Options.
6.1. Type of Option. It is intended that only non-qualified stock options
may be granted by the Committee under this section of the Plan.
6.2. Grant of Option. An Option may be granted to Participants at such
time or times as shall be determined by the Committee. Each Option shall be
evidenced by an Option Agreement that shall specify the exercise price, the
duration of the Option, the number of Shares to which the Option applies, and
such other terms and conditions not inconsistent with the Plan as the Committee
shall determine.
6.3. Option Price. The per share option price shall be at least 100% of
the Fair Market Value at the time the Option is granted.
6.4. Exercise of Options. Options awarded under the Plan shall be
exercisable at such times and shall be subject to such restrictions and
conditions, including the performance of a minimum period of service after the
grant, as the Committee may impose, which need not be uniform for all
participants; provided, however, that no Option shall be exercisable for more
than 10 years after the date on which it is granted.
6.5. Payment. Options shall be exercised by the delivery of a written
notice to the Company, setting forth the number of Shares with respect to which
the Option is to be exercised, and accompanied by full payment for the Shares.
Upon the exercise of any Option, the exercise price shall be payable by any one
or combination of the following means:
(a) cash or its equivalent,
(b) with the prior approval of the Committee, delivery of Shares
already owned by the participant and valued at the Fair Market Value thereof at
the time of exercise,
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(c) with the prior approval of the Committee, a cashless exercise
through a broker-dealer approved for this purpose by the Company.
6.6. Rights as a Shareholder. Until the exercise of an Option and the
issuance of the Shares in respect thereof, a Participant shall have no rights as
a Shareholder with respect to the Shares covered by such Option.
Section 7. Stock Appreciation Rights.
7.1. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
granted to Participants at such time or times as shall be determined by the
Committee and shall be subject to such terms and conditions as the Committee may
decide. A grant of an SAR shall be made pursuant to a written Agreement
containing such provisions not inconsistent with the Plan as the Committee shall
approve.
7.2. Exercise of SARs. SARs may be exercised at such times and subject to
such conditions, including the performance of a minimum period of service, as
the Committee shall impose. SARs which are granted in tandem with an Option may
only be exercised upon the surrender of the right to exercise an equivalent
number of Shares under the related Option and may be exercised only with respect
to the Shares for which the related Option is then exercisable. Notwithstanding
any other provision of the Plan, the Committee may impose conditions on the
exercise of an SAR, including, without limitation, the right of the Committee to
limit the time of exercise to specified periods.
7.3. Payment of SAR Amount. Upon exercise of an SAR, the Participant shall
be entitled to receive payment of an amount determined by multiplying:
(a) any increase in the Fair Market Value of a Share at the date of
exercise over the Fair Market Value of a Share at the date of grant, by
(b) the number of Shares with respect to which the SAR is exercised;
provided, however, that at the time of grant, the Committee may establish, in
its sole discretion, a maximum amount per Share which will be payable upon
exercise of an SAR.
7.4. Method of Payment. Subject to the discretion of the Committee, which
may be exercised at the time of grant, the time of payment, or any other time,
payment of an SAR may be made in cash, Shares or any combination thereof.
Section 8. Restricted Stock or Phantom Stock.
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8.1. Grant of Restricted Stock or Phantom Stock. The Committee may grant
Shares of Restricted Stock or Phantom Stock rights to such Participants at such
times and in such amounts, and subject to such other terms and conditions not
inconsistent with the Plan as it shall determine. Each grant of Restricted Stock
or Phantom Stock rights shall be evidenced by a written Agreement setting forth
the terms of such Award.
8.2. Restrictions on Transferability. Restricted Stock or Phantom Stock
rights may not be sold, transferred, pledged, assigned, or otherwise alienated
until such time, or until the satisfaction of such conditions as shall be
determined by the Committee (including without limitation, the satisfaction of
performance goals or the occurrence of such events as shall be determined by the
Committee). At the end of the period of restriction applicable to any Restricted
Stock, such Shares will be transferred to the Participant free of all
restrictions.
8.3. Rights as a Shareholder. Unless otherwise determined by the Committee
at the time of grant, Participants holding Restricted Stock granted hereunder
may exercise full voting rights and other rights as a Shareholder with respect
to those Shares during the period of restriction. Holders of Phantom Stock
rights shall not be deemed Shareholders and, except to the extent provided in
accordance with the Plan, shall have no rights related to any Shares.
8.4. Dividends and Other Distributions. Unless otherwise determined by the
Committee at the time of grant, Participants holding Restricted Stock shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares, provided that if any such dividends or distributions are paid in
shares of stock, such shares shall be subject to the same forfeiture
restrictions and restrictions on transferability as apply to the Restricted
Stock with respect to which they were paid. Unless otherwise determined by the
Committee at the time of grant, Participants holding Phantom Stock rights shall
be entitled to receive cash payments equal to any cash dividends and other
distributions paid with respect to a corresponding number of Shares.
8.5. Payment of Phantom Stock Rights. The Committee may, at the time of
grant, provide for other methods of payment in respect of Phantom Stock rights
in cash, Shares, partially in cash and partially in Shares, or in any other
manner not inconsistent with this Plan.
Section 9. Other Stock Based Awards and Other Benefits.
9.1. Other Stock Based Awards. The Committee shall have the right to grant
Other Stock Based Awards which may include, without limitation, the grant of
Shares based on certain conditions, the payment of cash based on the performance
of the Common Stock, and the payment of Shares in lieu of cash under other
Company incentive bonus
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programs. Payment under or settlement of any such Awards shall be made in such
manner and at such times as the Committee may determine.
9.2. Other Benefits. The Committee shall have the right to provide types
of Awards under the Plan in addition to those specifically listed utilizing
shares of stock or cash, or a combination thereof, if the Committee believes
that such Awards would further the purposes for which the Plan was established.
Payment under or settlement of any such Awards shall be made in such manner and
at such times as the Committee may determine.
Section 10. Amendment, Modification, and Termination of Plan.
The Board at any time may terminate or suspend the Plan, and from time to
time may amend or modify the Plan. No amendment, modification, or termination of
the Plan shall in any manner adversely affect any Award theretofore granted
under the Plan to a Participant without the consent of such Participant.
Section 11. Termination of Employment.
11.1. Termination of Employment Due to Retirement. Unless otherwise
determined by the Committee at the time of grant, in the event a Participant's
employment terminates by reason of retirement, any Option or SAR granted to such
Participant which is then outstanding may be exercised at any time prior to the
expiration of the term of the Option or SAR or within six (6) years following
the Participant's termination of employment, whichever period is shorter, and
any Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the effective date of retirement
shall be forfeited.
11.2. Termination of Employment Due to Death or Disability. Unless
otherwise determined by the Committee at the time of grant, in the event a
Participant's employment is terminated by reason of death or disability, any
Option or SAR granted to such Participant which is then outstanding may be
exercised by the Participant or the Participant's legal representative at any
time prior to the expiration date of the term of the Option or SAR or within six
(6) years following the Participant's termination of employment, whichever
period is shorter, and any Restricted Stock, Phantom Stock rights, or other
Award then outstanding shall become nonforfeitable and shall become transferable
or payable, as the case may be, as though any restriction had expired.
11.3. Termination of Employment for Any Other Reason. Unless otherwise
determined by the Committee at the time of grant, in the event the employment of
the Participant shall terminate for any reason other than misconduct or one
described in Section 11.1 or 11.2, any Option or SAR granted to such Participant
which is then outstanding may be exercised by the Participant at any time prior
to the expiration date
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of the term of the Option or SAR or within three (3) months following the
Participant's termination of employment, whichever period is shorter; any
Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the date of termination of
employment shall be forfeited upon termination of employment. If the employment
of a Participant is terminated by the Company or a Subsidiary by reason of the
Participant's misconduct, any outstanding Option or SAR shall cease to be
exercisable on the date of the Participant's termination of employment; any
Restricted Stock, Phantom Stock rights, or other Award then outstanding for
which any restriction has not lapsed prior to the date of termination of
employment shall be forfeited upon termination of employment. As used herein,
"misconduct" means that the Participant has engaged, or intends to engage, in
competition with the Company or a Subsidiary, has induced any customer of the
Company or a Subsidiary to breach any contract with the Company or a Subsidiary,
has made any unauthorized disclosure of any of the secrets or confidential
information of the Company or a Subsidiary, has committed an act of
embezzlement, fraud, or theft with respect to the property of the Company or a
Subsidiary, or has deliberately disregarded the rules of the Company or a
Subsidiary in such a manner as to cause any loss, damage, or injury to, or
otherwise endanger the property, reputation, or employees of the Company or a
Subsidiary. The Committee shall determine whether a Participant's employment is
terminated by reason of misconduct.
11.4. Accrual of Right at Date of Termination. The Participant shall have
the right to exercise an Option or SAR as indicated in Sections 11.1, 11.2, and
11.3 only to the extent the Participant's right to exercise such Option or SAR
had accrued at the date of termination of employment pursuant to the terms of
the Option or SAR Agreement and had not previously been exercised.
Section 12. Change in Control.
Except as otherwise provided in an Agreement, if a Change in Control
occurs, then:
(i) the Participant's Restricted Stock that was forfeitable
shall thereupon become nonforfeitable; and
(ii) any unexercised Option or SAR, whether or not exercisable
on the date of such Change in Control, shall thereupon be fully
exercisable and may be exercised, in whole or in part.
Section 13. Miscellaneous Provisions.
13.1. Non-transferability of Awards. Unless otherwise determined by the
Committee at the time of grant, and except as provided in Section 11, no Awards
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granted under the Plan shall be assignable, transferable, or payable to or
exercisable by anyone other than the Participant to whom it was granted.
13.2. No Guarantee of Employment or Participation. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or a
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employment of the Company or a
Subsidiary. No employee shall have a right to be selected as a Participant, or,
having been so selected, to receive any future awards.
13.3. Tax Withholding. The Company shall have the authority to withhold,
or require a Participant to remit to the Company an amount sufficient to satisfy
federal, state, and local withholding tax requirements on any Award under the
Plan, and the Company may defer payment of cash or issuance of Shares until such
requirements are satisfied. The Committee may, in its discretion, permit a
Participant to elect, subject to such conditions as the Committee shall require,
to have Shares otherwise issuable under the Plan withheld by the Company and
having a Fair Market Value sufficient to satisfy all or part of the
Participant's estimated total federal, state, and local tax obligation
associated with the transaction.
13.4. Governing Law. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by the Code or Act,
shall be governed by the law of the State of Illinois and construed in
accordance therewith.
13.5. Effectiveness of Plan. The Plan became effective upon its approval
by the shareholders of the Company on April 25, 1990; provided, however, that no
Award requiring the issuance of Shares shall be exercised or paid out unless at
the time of such exercise or payout (i) such Shares are covered by a currently
effective registration statement filed under the Securities Act of 1933, as
amended, if one is then required, or in the sole opinion of the Company and its
counsel such issuance of Shares is otherwise exempt from the registration
requirements of such act, and (ii) such Shares are listed on any securities
exchange upon which the Common Stock of the Company is listed.
13.6. Termination of the 1975 Plan. The Company's Restated 1975
Non-Qualified Stock Option Plan shall be terminated as of the date of
Shareholder approval of this Plan, provided, however, that such termination
shall not affect any Options or Stock Appreciation Rights outstanding
thereunder, all of which shall remain subject to and be governed by such plan.
13.7. Unfunded Plan. Insofar as the Plan provides for Awards of cash,
Shares, rights or a combination thereof, the Plan shall be unfunded. The Company
may maintain bookkeeping accounts with respect to Participants who are entitled
to Awards
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under the Plan, but such accounts shall be used merely for bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by interests in Awards nor shall the Plan be
construed as providing for any such segregation. None of the Committee, the
Company or Board shall be deemed to be a trustee of any cash, Shares or rights
to Awards granted under the Plan. Any liability of the Company to any
Participant with respect to an Award or any rights thereunder shall be based
solely upon any contractual obligations that may be created by the Plan and any
Agreement, and no obligation of the Company under the Plan shall be deemed to be
secured by any pledge or other encumbrance on any property of the Company.
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Exhibit 10(c)(v) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1999
W.W. GRAINGER, INC.
EXECUTIVE DEATH BENEFIT PLAN
(Conformed Copy Including Amendments Effective May 8, 1995, December 9, 1998,
March 3, 1999, and December 8, 1999)
ARTICLE 1
PURPOSE
-------
1.1 Purpose. The purpose of this W.W. GRAINGER, INC.
EXECUTIVE DEATH BENEFIT PLAN (the "Plan") is to improve and maintain
relations with a select group of management employees (the "key
employees"), to induce them to remain employed by W.W. Grainger, Inc.,
its divisions or subsidiaries, and to provide an incentive to them to
not enter into competitive employment or engage in a competitive
business by providing supplemental survivor security benefits. All
benefits hereunder shall be paid solely from the general assets of the
Company, and the right of any Participant or Beneficiary to receive
payments under this Plan shall be as an unsecured general creditor of
the Company.
1.2 Construction. In construing the terms of the Plan, the
primary consideration shall be the Plan's stated purpose, i.e., to
provide certain disability and survivors' benefits and to supplement
certain benefits from the Company's Group Insurance Plans.
ARTICLE II
DEFINITIONS AND DESIGNATIONS
----------------------------
2.1 "Annual Compensation" shall mean the sum of:
(a) the annual salary of the Participant determined by the
Board of Directors of the Company in effect on the Date Creating
an Entitlement, and
(b) the Participant's target bonus under the Company's
Management Incentive Program (which term shall be deemed to
include such equivalent
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incentive bonus programs as the Committee may recognize for
purposes of this Plan) for the calendar year in which the Date
Creating an Entitlement occurs.
2.2 "Average Monthly Earnings" shall mean Annual Compensation
divided by twelve (12).
2.3 "Committee" shall mean the Compensation Committee of
Management described in Article VII hereof.
2.4 "Company" shall mean W.W. Grainger, Inc., an Illinois
corporation, and its divisions and subsidiaries.
2.5 'Date Creating an Entitlement' shall mean the
Participant's date of death for benefits described in Section 4.1 or
date of Termination of Service for benefits described in Section 4.3.
Notwithstanding, if a Participant's annual salary and/or target bonus
under the Company's Management Incentive Program is significantly
decreased while such Participant continues to be employed in good
standing by the Company, the Committee may, in its sole discretion,
define Date Creating an Entitlement for that Participant as the day
immediately prior to the effective date of such decrease.
2.6 "Disability" means a condition that totally and
continuously prevents the Participant, for at least six (6) consecutive
months, from engaging in an "occupation" for Compensation or profit.
During the first twenty-four (24) months of total disability,
"occupation" means the Participant's occupation at the time the
disability began. After that period, "occupation" means any occupation
for which the Participant is or becomes reasonably fitted by education,
training or experience. Notwithstanding the foregoing, a disability
shall not exist for purposes of this Plan if the Participant fails to
qualify for disability benefits under the Social Security Act, unless
the Committee determines, in its sole discretion, that a disability
exists.
2.7 "Early Retirement Date" shall mean the earliest of the
date on which the Participant:
(a) attains age sixty (60),
(b) attains age fifty-five (55) or older after
completing ten (10) Years of Service,
(c) completes twenty-five (25) Years of Service, or
(d) incurs a Disability.
2.8 "Forfeiting Act" shall mean the Participant's fraud,
dishonesty, willful destruction of Company property, revealing Company
trade secrets, acts of competition against the Company or acts in aid
of a competitor of the Company.
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2.9 "Group Life Insurance Plan" shall mean the Company's Group
Term Life and Accidental Death and Dismemberment Insurance Plan (or
equivalent program as recognized by the committee for purposes of this
plan), as amended from time to time.
2.10 "Normal Retirement Date" shall mean the date on which the
Participant attains age sixty-five (65).
2.11 "Participant" shall mean a person designated as such
under Article III of the Plan.
2.12 "Plan" shall mean the W.W. Grainger, Inc. Executive Death
Benefit Plan.
2.13 "Termination of Service" shall mean the Participant's
ceasing his Service with the Company for any reason whatsoever, whether
voluntarily or involuntarily, including by reason of death or
disability.
2.14 "Years of Service" shall mean years that a Participant
hereunder is "eligible" under the W.W. Grainger, Inc. Employees Profit
Sharing Plan or such equivalent retirement program as the committee may
recognize for purposes of this Plan.
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. An Employee of the Company
shall become eligible to be a Participant in the Plan by designation of
the Committee. The Committee shall make such designation, specifying
the effective date of the Participant's eligibility. The Committee
shall notify each Participant of his eligibility date. Each designated
Employee shall furnish such information and perform such acts as the
Committee may require prior to becoming a Participant.
3.2 Re-Employment. Any Participant who terminates employment
shall not be eligible to participate in the Plan on re-employment
unless the Committee so determines. In such event, the Committee shall
specify the effective date of the Participant's renewed eligibility.
The Committee shall notify each re-employed former Participant of his
eligibility, of the effective date and of the conditions of
participation.
ARTICLE IV
DEATH BENEFITS
4.1 Death During Employment. If a Participant's death occurs
while
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he is in the employ of the Company, his Beneficiary shall receive a
monthly payment in an amount equal to:
(a) fifty percent (50%) of the Participant's Average
Monthly Earnings as defined under the Plan on the Date
Creating an Entitlement, which payments shall commence on the
first day of the month following the Participant's death and
end as of the date on which the 120th monthly payment is made;
or"
(b) for a Participant who was a Participant on the
effective date of the First Amendment of the Plan [May 8,
1995], and notwithstanding anything to the contrary in section
8.2:
(i) fifty percent (50%) of the Participant's
Average Monthly Earnings as defined under the Plan on
the Date Creating an Entitlement, determined without
regard to Section 2.1(b)."
(ii) which payment shall commence on the
first day of the month following the Participant's
death and end as of the later of the date the
Participant would have attained age 65 or the date on
which the 120th monthly payment is made,
if the benefit so calculated would have a greater present
value on the date of the Participant's death than the benefit
calculated under paragraph (a) next above. The Committee shall
use reasonable and consistent assumptions to determine present
values.
4.2 Additional Death Benefit. The Company will maintain death
benefit coverage for each Participant in the amount of fifty thousand
dollars ($50,000) under the Company's Group Life Insurance Plan.
Payment of such benefit shall be made in accordance with the provisions
of the Group Life Insurance Plan.
4.3 Death After Retirement. If a Participant incurs
Termination of Service on or after an Early Retirement Date, or on or
after his Normal Retirement Date, and dies after such Termination of
Service, the Company will pay to his Beneficiary a lump sum death
benefit equal to one hundred percent (100%) of his Annual Compensation
as defined under the Plan on the Date Creating an Entitlement. Such
death benefit amount shall be increased to reflect estimated federal
income tax payable on such death benefit, based on the then maximum tax
rate, determined in accordance with rules established from time to time
by the Committee, provided that in no event shall the death benefit
exceed two hundred percent (200%) of Annual Compensation.
4.4 Death After Termination of Employment. Except as provided
in Section 4.3, no benefits shall be payable to or on behalf of a
Participant whose death occurs subsequent to his Termination of
Employment.
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4.5 Benefit Upon Change in Control. Upon a Change in Control
(as defined in Section 2.1(e) of the W.W. Grainger, Inc. 1990 Long Term
Stock Incentive Plan, as may be amended from time to time), for each
Participant who then has reached his Early Retirement Date or Normal
Retirement Date, the Company immediately will pay to such Participant a
lump sum benefit equal to the present value (determined using 120% of
the applicable federal rate as defined under Section 1274 of the
Internal Revenue Code and published periodically by the Internal
Revenue Service) of the death benefit that would have been payable on
behalf of such Participant under Section 4.3 if such Participant had
died at age eighty (80). In determining whether a Participant has
reached his Early Retirement Date or Normal Retirement Date for
purposes of this Section 4.5, the Participant's age and Years of
Service each shall be deemed increased by three (3) years. Following
payment of a benefit under this Section 4.5, no additional benefits
shall be payable to or on behalf of a Participant under this Plan.
ARTICLE V
BENEFICIARIES
-------------
5.1 Designation by Participant. Each Participant may designate
a Beneficiary or Beneficiaries who shall, upon his death, receive the
death benefits, if any, payable pursuant to Sections 4.1 and 4.3. The
Participant's Beneficiary under this Plan shall be the Beneficiary
designated by the Participant in the Special Beneficiary Designation
filed under the Company's Group Life Insurance Plan unless the
Participant files a written notice of a different Beneficiary
Designation in such form as the Committee requires. The form may
include contingent Beneficiaries. A Beneficiary Designation shall be
effective when filed during the Participant's life, in accordance with
applicable Company procedures, and shall cancel and revoke all prior
designations.
5.2 Payment of Benefits Upon Death - Other Beneficiary. If no
primary or contingent Beneficiary survives a Participant or if no
Beneficiary Designation is in effect upon his death, then the payments
shall be made to the deceased Participant's spouse. If his spouse does
not survive him, then payments shall be made to the Participant's
descendants who survive him by right of representation; or if no
descendants of the Participant survive him, then to his estate. In the
event any person entitled to receive benefits in accordance with this
Section dies prior to his receipt of all of the benefits to which he is
entitled, the balance of such benefits, if any, shall be payable to the
next class of recipients.
5.3 Minors and Persons Under Legal Disability. Benefits
payable to a minor or a person under a legal disability shall be paid
in a manner determined appropriate by the Committee.
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ARTICLE VI
CLAIMS PROCEDURE
6.1 Claim for Benefits. Any claim for benefits under the Plan
shall be made in writing to any member of the Committee. If such claim
for benefits is wholly or partially denied by the Committee Members,
the Committee Members shall, within a reasonable period of time, but
not later than sixty (60) days after receipt of the claim, notify the
claimant of the denial of the claim. Such notice of denial shall be in
writing and shall contain:
(a) the specific reason or reasons for denial of the
claim,
(b) a reference to the relevant Plan provisions upon
which the denial is based,
(c) a description of any additional material or
information necessary for the claimant to perfect the claim,
together with an explanation of why such material or
information is necessary, and
(d) an explanation of the Plan's claim review
procedure.
6.2 Request for Review of a Denial of a Claim for Benefits.
Upon the receipt by the claimant of written notice of denial of the
claim, the claimant may within ninety (90) days file a written request
to the full Committee, requesting a review of the denial of the claim,
which review shall include a hearing if deemed necessary by the
Committee. In connection with the claimant's appeal of the denial of
his claim, he may review relevant documents and may submit issues and
comments in writing.
6.3 Decision Upon Review of Denial of Claim for Benefits. The
Committee shall render a decision on the claim review promptly, but no
more than sixty (60) days after the receipt of the claimant's request
for review, unless special circumstances (such as the need to hold a
hearing) require an extension of time, in which case the sixty (60)-day
period shall be extended to one hundred twenty (120) days. Such
decision shall:
(a) include specific reasons for the decision,
(b) be written in a manner calculated to be
understood by the claimant, and
(c) contain specific references to the relevant Plan
provisions upon which the decision is based.
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ARTICLE VII
COMMITTEE
---------
7.1 General Rights, Powers and Duties of the Committee. The
Compensation Committee of Management shall be the Named Fiduciary and
Committee responsible for the management, operation and administration
of the Plan. In addition to any powers, rights and duties set forth
elsewhere in the Plan, it shall have the following powers and duties:
(a) to adopt such rules and regulations consistent
with the provisions of the Plan as it deems necessary for the
proper and efficient administration of the Plan;
(b) to enforce the Plan in accordance with its terms
and any rules and regulations it establishes;
(c) to maintain records concerning the Plan
sufficient to prepare reports, returns and other information
required by the Plan or by law;
(d) to construe and interpret the Plan and to resolve
all questions arising under the Plan;
(e) to direct the Company to pay benefits under the
Plan, and to give such other directions and instructions as
may be necessary for the proper administration of the Plan;
(f) to employ or retain agents, attorneys, actuaries,
accountants or other persons, who may also be employed by or
represent the Company; and
(g) to be responsible for the preparation, filing and
disclosure on behalf of the Plan of such documents and reports
as are required by any applicable federal or state law.
7.2 Information to be Furnished to Committee. The Company
shall furnish the Committee such data and information as it may
require. The records of the Company shall be determinative of each
Participant's period of employment, termination of employment and the
reason therefor, leave of absence, re-employment, Years of Service,
personal data, and Compensation or bonus reductions. Participants and
their Beneficiaries shall furnish to the Committee such evidence, data
or information, and execute such documents as the Committee requests.
7.3 Responsibility. No member of the Committee or of the Board
of Directors of the Company shall be liable to any person for any
action taken or omitted in connection with the administration of this
Plan unless attributable to his own fraud or
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willful misconduct; nor shall the Company be liable to any person for
any such action unless attributable to fraud or willful misconduct on
the part of a director, officer or employee of the Company.
ARTICLE VIII
AMENDMENT AND TERMINATION
-------------------------
8.1 Amendment. The Plan may be amended in whole or in part by
the Company at any time by a resolution of the Board of Directors
delivered to the Committee; provided, however, that no amendment of the
Plan adopted on or after the date of a Change in Control shall (i)
adversely affect the eligibility of any Participant to continue to
qualify as a Participant or (ii) eliminate, reduce or otherwise
adversely affect the amount or terms of benefits payable to or on
behalf of any Participant.
8.2 Right to Terminate Plan. The Company reserves the right to
reduce or terminate benefits under the Plan with regard to any or all
Participants at any time before the date of a Change in Control by a
resolution of the Board of Directors delivered to the Committee;
provided however, that both before and after a Change in Control, a
Beneficiary receiving benefits payable by the Plan shall continue to
receive such benefits, and further provided, that at any time before
the date of a Change in Control, the Company may not terminate its
obligation to pay the death benefit to the Beneficiary of a Participant
who:
(a) already has incurred a Termination of Service
after his Early or Normal Retirement Date, or
(b) is still an active Employee but has attained an
Early Retirement Date.
The amount of the benefit payable in the event clause (b) above is
applicable shall be determined as if the date of the reduction in
benefits or termination of the Plan is a Date Creating an Entitlement.
The Committee shall notify any Participant affected by such reduction
of termination or such action and its effective date within thirty (30)
days after it receives notice from the Company. Notwithstanding the
foregoing, on and after the date of a Change in Control, the provisions
of Section 4.5 shall be applicable, rather than the foregoing
provisions of this Section 8.2, with respect to participants who are
then living.
ARTICLE IX
MISCELLANEOUS
-------------
9.1 No Funding nor Guarantee. This plan is unfunded. Nothing
contained in the Plan shall be deemed to create a trust or fiduciary
relationship of any kind. The rights of Participants and of any
Beneficiary shall be no greater than the rights
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of unsecured general creditors of the Company. Nothing contained in the
Plan constitutes a guarantee by the Company that the assets of the
Company will be sufficient to pay any benefit to any person.
9.2 Inalienability of Benefits. The right of any Participant
or Beneficiary to any benefit or payment under the Plan shall not be
subject to voluntary or involuntary transfer, alienation, pledge,
assignment, garnishment, sequestration or other legal or equitable
process. Any attempt to transfer, alienate, pledge, assign or otherwise
dispose of such right or any attempt to subject such right to
attachment, execution, garnishment, sequestration or other legal or
equitable process shall be null and void.
9.3 No Implied Rights. Neither the establishment of the Plan
nor any modification thereof shall be construed as giving any
Participant, Beneficiary or other person any legal or equitable right
unless such right shall be specifically provided for in the Plan or
conferred by affirmative action of the Company in accordance with the
terms and provisions of the Plan.
9.4 Forfeiture for Cause. Notwithstanding any other provisions
of this Plan to the contrary, if the Participant commits one or more
Forfeiting Acts during his employment with the Company, all benefits
due the Participant or his Beneficiary shall be forfeited. This
provision shall apply regardless of the date the Company first learns
of the occurrence of a Forfeiting Act.
9.5 Binding Effect. The provisions of the Plan shall be
binding on the Company, the Committee and all persons entitled to
benefits under the Plan, together with their respective heirs, legal
representatives and successors in interest.
9.6 Governing Laws. The Plan shall be construed and
administered according to the laws of the State of Illinois.
9.7 Number and Gender. Whenever appropriate, the singular
shall include the plural, the plural shall include the singular, and
the masculine shall include the feminine or neuter.
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Exhibit 10(c)(ix) to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1999
CHANGE IN CONTROL EMPLOYMENT AGREEMENT
(Senior Executive)
AGREEMENT by and between W.W. Grainger, Inc., an Illinois corporation (the
"Company"), and [[Officer]] ("Executive"), dated as of March ___ , 1999 (the
"Agreement Date").
Recitals
A. 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 Executive,
notwithstanding the possibility, threat, or occurrence of a Change in Control
(as defined below) of the Company.
B. The Board believes it is imperative to diminish the inevitable
distraction of Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control, to encourage Executive's
full attention and dedication to the Company, and to provide Executive with
compensation and benefits arrangements upon a Change in Control which (i) will
satisfy Executive's compensation and benefits expectations and (ii) are
competitive with those of other major corporations.
Agreement
In consideration of the mutual agreements contained herein, the Company
and Executive hereby agree as follows:
1. Certain Definitions. The terms set forth below in alphabetical order
have the following meanings (such meanings to be applicable to both the singular
and plural forms):
"Accrued Annual Bonus" means the amount of any Annual Bonus accrued but
not yet paid with respect to each fiscal year of the Company ended prior to the
Date of Termination.
"Accrued Base Salary" means the amount of Executive's Annual Base
Salary which is accrued but not yet paid as of the Date of Termination.
"Accrued Obligations" -- see Section 4(a)(i)(A).
"Agreement Term" means the period commencing on the Agreement Date and
ending on the third anniversary of such date or, if later, such later date to
which the Agreement
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Term is extended pursuant to the following sentence. On each day after the
second anniversary of the Agreement Date, the Agreement Term shall be
automatically extended by one day to create a new one-year term until, at any
time on or after the second anniversary of the Agreement Date, the Company
delivers a written notice (an "Expiration Notice") to Executive stating that
this Agreement shall expire on a date specified in the Expiration Notice (the
"Expiration Date") that is at least 12 months after the date the Expiration
Notice is delivered to Executive; provided, however, that if a Change in Control
occurs before the Expiration Date specified in an Expiration Notice, then (a)
such Expiration Notice shall automatically be cancelled and of no further effect
and (b) the Company shall not give Executive any additional Expiration Notice
prior to the date which is 24 months after the Effective Date.
"Annual Base Salary" -- see Section 2(b)(i).
"Annual Bonus" -- see Section 2(b)(ii).
"Cause" -- see Section 3(b).
"Change in Control" means any one or more of the following events:
(a) approval by the shareholders of the Company of:
(i) any merger, reorganization or consolidation of
the Company or any Subsidiary with or into any corporation or other
Person if Persons who were the beneficial owners (as such term is used
in Rule 13d-3 under the Act) of the Company's Common Stock and
securities of the Company entitled to vote generally in the election of
directors ("Voting Securities") immediately before such merger,
reorganization or consolidation are not, immediately thereafter, the
beneficially owners, directly or indirectly, of at least 60% of the
then-outstanding common shares and the combined voting power of the
then-outstanding Voting Securities ("Voting Power") of the corporation
or other Person surviving or resulting from such merger, reorganization
or consolidation (or the parent corporation thereof) in substantially
the same respective proportions as their beneficial ownership,
immediately before the consummation of such merger, reorganization or
consolidation, of the then-outstanding Common Stock and Voting Power of
the Company; or
(ii) the sale or other disposition of all or
substantially all of the consolidated assets of the Company, other than
a sale or other disposition by the Company of all or substantially all
of its consolidated assets to an entity of which at least 60% of the
common shares and the Voting Power outstanding immediately after such
sale or other disposition are then beneficially owned (as such term is
used in Rule 13d-3 under the Act) by shareholders of the Company in
substantially the same respective proportions as their beneficial
ownership of Common Stock and Voting Power of the Company immediately
before the consummation of such sale or other disposition; or
(iii) a liquidation or dissolution of the Company; or
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(b) the following individuals cease for any reason to
constitute a majority of the directors of the Company then serving: individuals
who, on the Agreement Date, constitute the Board and any subsequently-appointed
or elected director of the Company (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest, including a consent solicitation, relating to the election or removal
of one or more directors of the Company) whose appointment or election by the
Board or nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds of the Company's directors then in
office whose appointment, election or nomination for election was previously so
approved or recommended or who were directors on the Agreement Date; or
(c) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act), other
than by any Exempt Person, the Company, any Subsidiary, any employee benefit
plan of the Company or a Subsidiary, of beneficial ownership (as such term is
used in Rule 13d-3 under the Act) of 20% or more of either the Company's
then-outstanding Common Stock or Voting Power; provided that:
(i) no such person, entity or group shall be deemed
to own beneficially any securities held by the Company or a Subsidiary
or any employee benefit plan (or any related trust) of the Company or a
Subsidiary;
(ii) no Change in Control shall be deemed to have
occurred solely by reason of any such acquisition if both (x) after
giving effect to acquisition, such person, entity or group has
beneficial ownership of less than 30% of the then-outstanding Common
Stock and Voting Power of the Company and (y) prior to such
acquisition, at least two-thirds of the directors described in (and not
excluded from) paragraph (b) of this definition vote to adopt a
resolution of the Board to the specific effect that such acquisition
shall not be deemed a Change in Control; and
(iii) no Change in Control shall be deemed to have
occurred solely by reason any such acquisition or holding in connection
with any merger, reorganization or consolidation of the Company or any
Subsidiary which is not a Change in Control within the meaning of
paragraph (a)(i) of this definition.
Notwithstanding the occurrence of any of the foregoing events, no Change in
Control shall occur with respect to Executive if (i) the event which otherwise
would be a Change in Control (or the transaction which resulted in such event)
was initiated by Executive or was discussed by him with any third party, in
either case without the approval of the Board with respect to Executive's
initiation or discussion, as applicable, or (ii) Executive is, by written
agreement, a participant on his own behalf in a transaction in which the persons
(or their affiliates) with whom Executive has the written agreement cause the
Change in Control to occur and, pursuant to the written agreement, Executive has
an equity interest (or a right to acquire such equity interest) in the resulting
entity.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Date of Termination" means the effective date of any termination of
Executive's employment for any or no reason, whether by the Company or by
Executive, as specified in the Notice of Termination; provided, however, that if
Executive's employment is terminated by reason of his death or Disability, the
Date of Termination shall be the date of death or the Disability Effective Date,
as the case may be.
"Effective Date" means the first date during the Agreement Term on
which a Change in Control occurs. Anything in this Agreement to the contrary
notwithstanding, if Executive's employment with the Company is terminated prior
to the date on which a Change in Control occurs, and Executive reasonably
demonstrates that such termination of employment (i) was requested by a third
party who has taken steps reasonably calculated to effect the Change in Control
or (ii) otherwise arose in connection with or anticipation of the Change in
Control, then for all purposes of this Agreement the Effective Date shall be the
date immediately prior to the Date of Termination.
"Employment Period" means the period commencing on the Effective Date
and ending on the second anniversary of such date.
"Exempt Person" means any one or more of the following:
(a) any descendant of W.W. Grainger, or any spouse, widow or
widower of W.W. Grainger or any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Grainger Family Members");
(b) any descendant of E.O. Slavik, or any spouse, widow or
widower of E.O. Slavik or any such descendant (any such descendants, spouses,
widows and widowers collectively defined as the "Slavik Family Members" and with
the Grainger Family Members collectively defined as the "Family Members");
(c) any trust which is in existence on the Agreement Date and
which has been established by one or more Grainger Family Members, any estate of
a Grainger Family Member who died on or before the Agreement Date, and The
Grainger Foundation (such trusts, estates and named entity collectively defined
as the "Grainger Family Entities");
(d) any trust which is in existence on the Agreement Date and
which has been established by one or more Slavik Family Members, any estate of a
Slavik Family Member who died on or before the Agreement Date, Mark IV Capital,
Inc., and Mountain Capital Corporation (such trusts, estates and named entities
collectively defined as the "Slavik Family Entities" and with the Grainger
Family Entities collectively defined as the "Existing Family Entities");
(e) any estate of a Family Member who dies after the Agreement
Date or any trust established after the Agreement Date by one or more Family
Members or Existing Family Entities; provided that one or more Family Members,
Existing Family
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Entities or charitable organizations which qualify as exempt organizations under
Section 501(c) of the Code ("Charitable Organizations"), collectively are the
beneficiaries of at least 50% of the actuarially-determined beneficial interests
in such estate or trust;
(f) any Charitable Organization which is established by one or
more Family Members or Existing Family Entities (a "Family Charitable
Organization");
(g) any corporation of which a majority of the voting power
and a majority of the equity interest is held, directly or indirectly, by or for
the benefit of one or more Family Members, Existing Family Entities, estates or
trusts described in clause (e) above, or Family Charitable Organizations; or
(h) any partnership or other entity or arrangement of which a
majority of the voting interest and a majority of the economic interest is held,
directly or indirectly, by or for the benefit of one or more Family Members,
Existing Family Entities, estates or trusts described in clause (e) above, or
Family Charitable Organizations.
"Formula Bonus" means the greater of:
(a) the average dollar amount of annual bonus paid or payable
to Executive during the three fiscal years preceding the Date of Termination
(any such annual bonus amount to be annualized for any fiscal year consisting of
less than 12 full months or with respect to which Executive has been employed by
the Company for less than 12 full months), or
(b) the amount of the Annual Bonus which Executive was, as of
the Date of Termination, eligible to receive in respect of the fiscal year of
the Date of Termination, assuming for purposes of this paragraph (i) that
target-level performance had been achieved for such fiscal year, (ii) that
Executive's employment would have continued until the first date on which such
Annual Bonus would have been payable, and (iii) if the amount of such Annual
Bonus that Executive was eligible to receive was reduced after the Effective
Date (whether or not such reduction qualified as Good Reason), that such
reduction had not occurred.
"Good Reason" -- see Section 3(c).
"Gross-Up Multiple" -- see Section 9(e).
"Highest Profit Sharing Plan Contribution" -- see Section 2(b)(iii).
"including" means including without limitation.
"Non-Employee Director" means a director of the Company who is not an
employee of (i) the Company, (ii) any Subsidiary or (iii) any Person who
beneficially owns more than 30% of the Common Stock then outstanding.
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"Person" means any individual, corporation, partnership, limited
liability company, sole proprietorship, trust or other entity.
"Policies" means policies, practices and programs.
"Prorated Annual Bonus" means the product of (i) the amount of the
Annual Bonus to which Executive would have been entitled (based on target-level
performance) if he had been employed by the Company on the last day of the
Company's fiscal year that includes the Date of Termination and if performance
were achieved at the target level for such fiscal year, multiplied by (ii) a
fraction of which the numerator is the numbers of days that have elapsed in such
fiscal year through the Date of Termination and the denominator is 365.
"Subsidiary" means corporation, limited liability company, partnership
or other business entity in which the Company, directly or indirectly, holds a
majority of the voting power of the outstanding securities.
"Taxes" means the incremental United States federal, state and local
income, excise and other taxes payable by Executive with respect to any
applicable item of income.
2. Terms of Employment. The Company shall continue Executive in its
employ during the Employment Period on the following terms and conditions:
(a) Position and Duties.
(i) During the Employment Period, (A) 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 90-day period
immediately preceding the Effective Date and (B) Executive's services
shall be performed at the location where Executive was employed
immediately preceding the Effective Date or any office or location less
than 50 miles from such location.
(ii) During the Employment Period, and excluding any
periods of vacation, sick leave and disability to which Executive is
entitled, Executive shall 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
Executive thereunder, use Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the
Employment Period, Executive may (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 are consistent with
the policies of the Company at the Effective Date and do not
significantly interfere with the performance of Executive's
responsibilities (as set forth in this Agreement) as an employee of the
Company. To the extent that any such activities have been
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conducted by Executive prior to the Effective Date and were consistent with the
policies of the Company at 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 Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period,
Executive shall receive an annual base salary in cash ("Annual Base
Salary"), which shall be paid in a manner consistent with the Company's
payroll practices immediately preceding the Effective Date at a rate at
least equal to 12 times the highest monthly base salary (unreduced by
any salary reductions or deferrals pursuant to a plan maintained under
Section 401(k) of the Code or any similar plan) paid or payable to
Executive by the Company in respect of the 12-month period immediately
preceding the month in which the Effective Date occurs. During the
Employment Period, the Company shall review the Annual Base Salary at
least annually and shall increase Annual Base Salary at any time and
from time to time as shall be substantially consistent with increases
in base salary awarded in the ordinary course of business to peer
executives of the Company. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to Executive under this
Agreement. Annual Base Salary shall not be reduced after any such
increase and the term "Annual Base Salary" shall refer to Annual Base
Salary as so increased.
(ii) Annual Bonus. In addition to Annual Base Salary,
Executive shall be awarded, for each fiscal year during the Employment
Period, an annual bonus (the "Annual Bonus") in cash which is at least
equal to the average dollar amount of annual bonus paid or payable to
Executive during the three fiscal years preceding the Effective Date
(any such annual bonus amount to be annualized for any fiscal year
consisting of less than 12 full months or with respect to which
Executive has been employed by the Company for less than 12 full
months). The Company shall pay each such Annual Bonus no later than 90
days after the end of the fiscal year for which the Annual Bonus is
awarded, unless Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. In
addition to Annual Base Salary and Annual Bonus payable as hereinabove
provided, Executive shall be entitled to participate during the
Employment Period in all incentive, savings and retirement plans and
Policies applicable to peer executives of the Company, but in no event
shall such plans and Policies provide Executive with incentive, savings
and retirement benefits opportunities, in each case, less favorable, in
the aggregate, than the most favorable of those provided by the Company
for Executive under such plans and Policies as in effect at any time
during the 90-day period immediately preceding the Effective Date.
Benefits to which this paragraph shall apply include, but are not
limited to, a contribution ("Highest Profit Sharing Plan Contribution")
for each calendar year of Executive's employment during the Employment
Period, on Executive's behalf to the W.W.
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Grainger, Inc. Profit Sharing Plan (the "PST") and, if applicable, a
credit under the W.W. Grainger, Inc. Supplemental Profit Sharing Plan
(the "Supplemental Plan" and with the PST, collectively referred to as
the "Profit Sharing Plans") equal to not less than the product of (A)
the greater of (I) 15%; or (II) the highest percentage of the sum of
Executive's base salary and annual bonus paid or payable as a
contribution to or credit under the Profit Sharing Plans, as
applicable, for any of the three fiscal years preceding the Effective
Date, and (B) the sum of Executive's Annual Base Salary and Annual
Bonus, each as of the first day of such calendar year. In the event
that a contribution or credit, as applicable, of less than the Highest
Profit Sharing Plan Contribution is made to the Profit Sharing Plans on
Executive's behalf for any calendar year of Executive's employment
during the Employment Period, Executive shall be entitled to a cash
payment equal to the difference between the Highest Profit Sharing Plan
Contribution and the amount of the Company's contribution or credit, as
applicable, to the Profit Sharing Plans on Executive's behalf for such
year, payable at the time that the Company's contribution is made to
the PST, but in no event later than the date prescribed by law,
including extensions of time, for the filing of the Company's federal
income tax return for such year.
(iv) Welfare Benefit Plans. During the Employment
Period, Executive and/or Executive's family, as the case may be, shall
be eligible to participate in and shall receive all benefits under
welfare benefit plans and Policies provided by the Company (including
medical, prescription, dental, disability, salary continuance, employee
life, group life, accidental death and travel accident insurance plans
and programs) and applicable to peer executives of the Company, but in
no event shall such plans and Policies provide benefits which are less
favorable, in the aggregate, than the most favorable of such plans and
Policies in effect at any time during the 90-day period immediately
preceding the Effective Date.
(v) Expenses. During the Employment Period, Executive
shall be entitled to prompt reimbursement for all reasonable expenses
incurred by Executive in accordance with the most favorable Policies of
the Company in effect at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to Executive, as in
effect at any time thereafter with respect to peer executives of the
Company.
(vi) Fringe Benefits. During the Employment Period,
Executive shall be entitled to fringe benefits in accordance with the
most favorable plans and Policies of the Company in effect at any time
during the 90-day period immediately preceding the Effective Date or,
if more favorable to Executive, as in effect at any time thereafter
with respect to peer executives of the Company.
(vii) Office; Support Staff. During the Employment
Period, Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to Executive by the Company at any time
during the 90-day period immediately preceding the
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Effective Date or, if more favorable to Executive, as provided at any
time thereafter with respect to peer executives of the Company.
(viii) Vacation. During the Employment Period,
Executive shall be entitled to paid vacation in accordance with the
most favorable plans and Policies of the Company as in effect at any
time during the 90-day period immediately preceding the Effective Date
or, if more favorable to Executive, as in effect at any time thereafter
with respect to peer executives of the Company.
(ix) Subsidiaries. To the extent that, immediately
prior to the Effective Date, Executive has been on the payroll of, and
participated in the bonus, incentive or employee benefit plans of, a
Subsidiary, the references to the Company contained in Sections 2(b)(i)
through 2(b)(viii) and elsewhere in this Agreement referring to
benefits to which Executive may be entitled shall also refer to such
Subsidiary.
3. Termination of Employment.
--------------------------
(a) Death or Disability. Executive's employment shall
terminate automatically upon Executive's death during the Employment Period. If
the Company determines in good faith that the Disability of Executive has
occurred during the Employment Period, it may give to Executive written notice
of its intention to terminate Executive's employment. In such event, Executive's
employment with the Company shall terminate as of the 30th day after Executive's
receipt of such notice (the "Disability Effective Date"); provided that, within
the 30 days after such receipt, Executive shall not have returned to full-time
performance of his duties. "Disability" means the absence of Executive from
Executive's duties with the Company on a full-time basis for a period of time
equal to the Waiting Period as a result of incapacity due to mental or physical
illness that is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to Executive or Executive's legal
representative (such agreement as to acceptability not to be unreasonably
withheld or delayed). "Waiting Period" means the waiting period under a
long-term disability plan of the Company that is applicable to Executive and
satisfies the requirements of Section 2(b)(iv).
(b) Cause. The Company may terminate Executive's employment
during the Employment Period for Cause. "Cause" means the occurrence of any one
or more of the following actions or failures to act as determined by the Board
in its reasonable judgment and in good faith:
(i) embezzlement, fraud or theft with respect to the
property of the Company or a conviction for any felony involving moral
turpitude or causing material harm, financial or otherwise, to the
Company;
(ii) habitual neglect in the performance of
Executive's significant duties (other than on account of incapacity due
to physical or mental illness or Disability); or
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(iii) a demonstrably deliberate act or failure to
act, including a violation of the rules or policies of the Company,
which causes a material financial or other loss, damage or injury to
the property, reputation or employees of the Company; provided,
however, that, unless such an act or a failure to act was done by
Executive in bad faith or without a reasonable belief that Executive's
act or failure to act, as the case may be, was in the best interest of
the Company or was required by applicable law, such act or failure to
act shall not constitute Cause if, within 20 days after the Board or
the Chief Executive Officer of the Company gives Executive written
notice of such act or failure to act that specifically refers to this
Section, Executive cures such act or failure to act to the fullest
extent that it is curable.
"Cause" shall not mean (x) bad judgment or negligence other than habitual
neglect of significant duties or (y) any act or omission in respect of which the
Board could have properly determined that Executive met the applicable standard
of conduct for the indemnification or reimbursement under the by-laws of the
Company or applicable law, in each case as in effect at the time of such act or
omission. In addition, a termination of Executive's employment shall not be
deemed to be for Cause unless each of the following conditions is satisfied:
(v) The Company provides Executive a written notice
(a "Notice of Intent to Terminate") not less than 30 days prior to the
Date of Termination setting forth the Company's intention to consider
terminating Executive's employment. Such Notice shall include a
statement of the intended Date of Termination and a detailed
description of the specific facts that the Company believes to
constitute Cause.
(w) No act or omission of Executive shall constitute
Cause if such act or omission occurred more than 12 months before the
earliest date on which any member of the Board who is not a party to
the act or omission knew or in the reasonable exercise of his or her
duties as a director should have known of such act or omission.
(x) Executive is offered an opportunity to respond to
such Notice of Intent to Terminate by appearing in person, together
with Executive's legal counsel, before the Board on a date specified in
the Notice of Intent to Terminate, which date shall be at least 25 days
after Executive's receipt of the Notice of Intent to Terminate and, in
any event, at least five days prior to the Date of Termination proposed
in such Notice.
(y) By a vote of the Board that includes the
affirmative vote of at least 75% of the Non-Employee Directors, the
Board determines that the actions of Executive specified in the Notice
of Intent to Terminate constitute Cause and that Executive's employment
should accordingly be terminated for Cause.
(z) The Company provides Executive a copy of the
Board's written determination setting forth in detail (I) the specific
basis for such termination for Cause and (II) if the Date of
Termination is other than the date of Executive's
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receipt of such determination, the Date of Termination (which date
shall be not more than 15 days after the giving of such notice).
By determination of the Board, the Company may suspend Executive from his duties
for a period of up to 30 days with full pay and benefits thereunder during the
period of time in which the Board is determining whether to terminate Executive
for Cause. Any purported termination for Cause by the Company that does not
satisfy each substantive and procedural requirement of this Section 3(b) shall
be treated for all purposes under this Agreement as a termination by the Company
without Cause.
(c) Good Reason. Executive may terminate his employment at any
time during the Employment Period for Good Reason. "Good Reason" means any one
or more of the following:
(i) the assignment to Executive of any duties
inconsistent in any respect with Executive's position (including
status, offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 2(a), or any other
action by the Company which results in a material adverse change in
such position, authority, duties or responsibilities, excluding 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 Executive;
(ii) any failure by the Company to comply with any of
the provisions of Section 2(b), 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 Executive;
(iii) any requirement that Executive be based at any
office or location other than the location specified in Section
2(a)(i)(B);
(iv) any purported termination by the Company of
Executive's employment otherwise than as expressly permitted by this
Agreement (it being understood that any such purported termination
shall not be effective for any other purpose of this Agreement);
(v) any failure by the Company to comply with Section
10(c); or
(vi) anything in this Agreement to the contrary
notwithstanding, any termination by Executive for any reason during the
30-day period immediately following the first anniversary of the
Effective Date.
Any good faith determination of Good Reason made by Executive shall be
conclusive.
(d) Notice of Termination. Any termination of Executive's
employment by the Company or by Executive shall be communicated by Notice of
Termination to the other party hereto. "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this Agreement
relied upon, (ii) sets forth in
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reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated and (iii)
if the Date of Termination is other than the date of receipt of such notice,
specifies the Date of Termination (which date shall be not more than 15 days
after the giving of such notice). The failure by Executive to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason shall not waive any right of Executive thereunder or preclude
Executive from asserting such fact or circumstance in enforcing Executive's
rights thereunder.
4. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause or Disability. If,
during the Employment Period, Executive's employment shall be terminated by the
Company other than for Cause, death or Disability, or by Executive for Good
Reason, then the Company shall have all of the following obligations:
(i) The Company shall pay to Executive the following
amounts in a lump sum in cash within 10 days after Executive's Date of
Termination:
(A) an amount equal to the sum of
Executive's Accrued Base Salary, Accrued Annual Bonus and
accrued but unpaid vacation pay (collectively, the "Accrued
Obligations"),
(B) the Prorated Annual Bonus,
(C) the product of three (3.0) (such number,
the "Severance Multiple") times the sum of Executive's (I)
Annual Base Salary, (II) Formula Bonus and (III) Highest
Profit Sharing Plan Contribution; and
(D) an amount equal to the value of the
unvested portion of Executive's accounts under the Profit
Sharing Plans as of the Date of Termination.
(ii) (A) During the period commencing on the Date of
Termination and continuing thereafter for a number of years
equal to the Severance Multiple, or such longer period as any
plan or Policy in which Executive is a participant as of the
Date of Termination (such eligibility to be determined based
on the terms of such plan or Policy as in effect on the
Effective Date or, if more favorable to Executive, the terms
of such plan or Policy as in effect on the Date of
Termination), the Company shall continue to provide, at no
cost to Executive, medical (including post-retirement medical
benefits to the extent that Executive is or becomes eligible
for such benefits as of the Date of Termination after giving
effect to paragraph (C) of this Section 4(a)(ii)),
prescription, dental and similar health care benefits (or, if
such benefits are not available, the after-tax economic value
thereof determined pursuant to paragraph (D) of this Section
4(a)(ii)) to Executive and his family.
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(B) The terms of such benefits shall be at
least as favorable to Executive as the terms of the most
favorable plans or Policies of the Company applicable to peer
executives at Executive's Date of Termination, but in no event
less favorable to Executive than the most favorable plans or
Policies of the Company applicable to peer executives during
the 90-day period immediately preceding the Effective Date.
(C) For purposes of determining whether, and
on what terms and conditions, Executive is eligible to receive
the post-retirement medical benefits specified in paragraph
(A) above, Executive shall on the Date of Termination be
credited with three (3.0) additional years for purposes of
attained age and years of service.
(D) The after-tax economic value of any
benefit to be provided pursuant to paragraph (A) above shall
be deemed to be the present value of the premiums expected to
be paid for all such benefits that are to be provided on an
insured basis. The after-tax economic value of all other
benefits shall be deemed to be the present value of the
expected net cost to the Company of providing such benefits.
(iii) The Company shall cause Executive to receive,
at the Company's expense, standard outplacement services from a
nationally-recognized firm selected by Executive; provided that the
cost of such services to the Company shall not exceed 15% of
Executive's Annual Base Salary in effect on the Date of Termination.
(b) Cause; Other than for Good Reason. If, during the
Employment Period, Executive's employment is terminated by the Company for Cause
or by Executive other than for Good Reason, the Company shall pay to Executive
in a lump sum in cash within no more than 10 days after the Date of Termination,
any Accrued Obligations.
(c) Death or Disability. If, during the Employment Period,
Executive's employment is terminated by reason of Executive's death or
Disability, the Company shall pay to Executive in cash a lump sum amount equal
to all Accrued Obligations within no more than 10 days after the Date of
Termination.
5. Non-exclusivity of Rights. If Executive receives payments pursuant
to Section 4(a), Executive hereby waives the right to receive severance payments
under any other plan, policy or agreement of the Company. Except as provided in
the previous sentence, nothing in this Agreement shall prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans or Policies provided by the Company or any of its Subsidiaries
and for which Executive may qualify, nor shall anything herein limit or
otherwise affect such rights as Executive may have under any other agreements
with the Company or any of its Subsidiaries.
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6. 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 circumstances, including set-off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Executive or others.
7. No Duty to Mitigate. Executive shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to Executive under any of the provisions of this Agreement, nor shall the amount
of any payment hereunder be reduced by any compensation earned by Executive as
result of employment by another employer or by any retirement benefits which may
be paid or payable to Executive; provided, however, that any continued welfare
benefits provided for pursuant to Section 4(a)(ii) shall not duplicate any
benefits that are provided to Executive and his family by such other employer
and shall be secondary to any coverage provided by such other employer.
8. Enforcement.
(a) If Executive incurs legal, accounting, expert witness or
other fees and expenses in an effort to establish entitlement to compensation
and benefits under this Agreement, the Company shall, regardless of the outcome
of such effort, pay or reimburse Executive for such fees and expenses, together
with an additional amount such that, after providing for the Taxes payable by
Executive in respect of such additional amount, there remains a balance
sufficient to pay the Taxes payable by Executive in respect of such payment or
reimbursement of fees and expenses by the Company. The Company shall reimburse
Executive for such fees and expenses on a monthly basis within 10 days after its
receipt of his request for reimbursement accompanied by reasonable evidence that
the fees and expenses were incurred.
(b) If Executive does not prevail (after exhaustion of all
available judicial remedies), and the Company establishes before a court of
competent jurisdiction that Executive had no reasonable basis for bringing an
action hereunder and acted in bad faith in doing so, no further reimbursement
for legal fees and expenses shall be due to Executive and Executive shall refund
any amounts previously reimbursed hereunder with respect to such action.
(c) If the Company fails to pay any amount provided under this
Agreement when due, the Company shall pay interest on such amount at a rate
equal to 200 basis points over the prime commercial lending rate published from
time to time in The Wall Street Journal; provided, however, that if the interest
rate determined in accordance with this Section shall in no event exceed the
highest legally-permissible interest rate.
9. Certain Additional Payments by the Company.
(a) Gross-Up. If it is determined (by the reasonable
computation of the Company's independent auditors, which determination shall be
certified to by such auditors and set forth in a written certificate
("Certificate") delivered to Executive) that any monetary or other benefit
received or deemed received by Executive from the
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Company or any Subsidiary or affiliate pursuant to this Agreement or otherwise,
whether or not in connection with a Change in Control (such monetary or other
benefits collectively, the "Potential Parachute Payments"), is or will become
subject to any excise tax under Section 4999 of the Code or any similar tax
under any United States federal, state, local or other law (such excise tax and
all such similar taxes collectively, "Excise Taxes"), then the Company shall,
subject to Section 9(h), within five business days after such determination, pay
Executive an amount (the "Gross-Up Payment") equal to the product of:
(i) the amount of such Excise Taxes
multiplied by
(ii) the Gross-Up Multiple.
The Gross-Up Payment is intended to compensate Executive for the Excise Taxes
and any other Taxes payable by Executive with respect to the Gross-Up Payment.
(b) Timing. Executive or the Company may at any time request
the preparation and delivery to Executive of a Certificate. The Company shall,
in addition to complying with Section 9(c), cause all determinations and
certifications under this Article to be made as soon as reasonably possible and
in adequate time to permit Executive to prepare and file his individual tax
returns on a timely basis.
(c) Determination by Executive.
(i) If (A) the Company shall fail to deliver a
Certificate to Executive within 30 days after receipt from Executive of
a written request for a Certificate, (B) the Company shall deliver a
Certificate to Executive but shall fail to pay to Executive the full
amount of the Gross-Up Payment set forth therein, or (C) at any time
following his receipt of a Certificate, Executive disputes either (x)
the amount of the Gross-Up Payment set forth therein or (y) the
determination set forth therein to the effect that no Gross-Up Payment
is due by reason of Section 9(h), then Executive may elect to require
the Company to pay a Gross-Up Payment in the amount determined by
Executive, in accordance with an Executive Counsel Opinion (as defined
in Section 9(f)). Executive shall make any such demand by delivery to
the Company of a written notice that specifies the Gross-Up Payment
determined by Executive and an Executive Counsel Opinion regarding such
Gross-Up Payment (such written notice and opinion collectively, the
"Executive's Determination"). Within 15 days after delivery of
Executive's Determination to the Company, the Company shall either (1)
pay Executive the Gross-Up Payment set forth in the Executive's
Determination (less the portion of such amount, if any, previously paid
to Executive by the Company) or (2) deliver to Executive a Certificate
specifying the Gross-Up Payment determined by the Company's independent
auditors, together with a Company Counsel Opinion (as defined in
Section 9(f)), and pay Executive the Gross-Up Payment specified in such
Certificate. If for any reason the Company fails to
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comply with the preceding sentence, the Gross-Up Payment specified in the
Executive's Determination shall be controlling for all purposes.
(ii) If Executive does not request a Certificate, and
the Company does not deliver a Certificate to Executive, the Company
shall, for purposes of Section 9(h), be deemed to have determined that
no Gross-Up Payment is due.
(d) Additional Gross-Up Amounts. If for any reason (whether
pursuant to subsequently-enacted provisions of the Code, final regulations or
published rulings of the Internal Revenue Service ("IRS"), a final judgment of a
court of competent jurisdiction or a determination of the Company's independent
auditors) it is later determined that the amount of Excise Taxes payable by
Executive is greater than the amount determined by the Company or Executive
pursuant to Section 9(a) or 9(b), as applicable, then the Company shall pay
Executive an amount (which shall also be deemed a Gross-Up Payment) equal to the
product of:
(i) the sum of (A) such additional Excise Taxes and
(B) any interest, fines, penalties, expenses or other costs incurred by
Executive as a result of having taken a position in accordance with a
determination made pursuant to Section 9(a) or 9(b), as applicable,
multiplied by:
(ii) the Gross-Up Multiple.
(e) Gross-Up Multiple. The Gross-Up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the sum, expressed as a decimal fraction, of the effective
after-tax marginal rates of all Taxes and any Excise Taxes applicable to the
Gross-Up Payment; provided that such sum of rates shall not exceed 0.8 and if it
does exceed 0.8, it shall be deemed to be 0.8. If different rates of tax are
applicable to various portions of a Gross-Up Payment, the weighted average (not
to exceed 0.80) of such rates shall be used.
(f) Opinion of Counsel. "Executive Counsel Opinion" means a
legal opinion of nationally-recognized executive compensation counsel to the
effect that the amount of the Gross-Up Payment determined by Executive is the
amount that courts of competent jurisdiction, based on a final judgment not
subject to further appeal, are most likely to decide to have been calculated in
accordance with this Article and applicable law. "Company Counsel Opinion" means
a legal opinion of nationally-recognized executive compensation counsel to the
effect that (i) the amount of the Gross-Up Payment set forth in the Certificate
of the Company's independent auditors is the amount that courts of competent
jurisdiction, based on a final judgment not subject to further appeal, are most
likely to decide to have been calculated in accordance with this Article and
applicable law, and (ii) there is no reasonable basis for the calculation of the
Gross-Up Payment determined by Executive.
(g) Amount Increased or Contested. Executive shall notify the
Company in writing of (i) any claim by the IRS or other taxing authority that,
if successful, would
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<PAGE>
require the payment by Executive of Excise Taxes in respect of Potential
Parachute Payments or (ii) of any intention by Executive to pay any Excise Taxes
in respect of Potential Parachute Payments notwithstanding the absence of such a
claim. Such notice shall include the nature of such claim and the date on which
such claim is due to be paid. Executive shall give such notice as soon as
practicable, but no later than 10 business days, after Executive first obtains
actual knowledge of such claim; provided, however, that any failure to give or
delay in giving such notice shall affect the Company's obligations under this
Article only if and to the extent that such failure results in actual prejudice
to the Company. Executive shall not pay such claim less than 30 days after
Executive gives such notice to the Company (or, if sooner, the date on which
payment of such claim is due). If the Company notifies Executive in writing
before the expiration of such 30-day period that the Company desires to contest
such claim, Executive shall:
(i) give the Company any information that it
reasonably requests relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company reasonably requests in writing from time to
time, including accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith 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
Executive harmless, on an after-tax basis, for any Excise Tax or income
tax, including related interest and penalties, imposed as a result of
such representation and payment of costs and expenses. Without limiting
the foregoing, the Company shall control all proceedings in connection
with such contest and, at its sole option, may pursue or forego 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 Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner. 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 Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to
Executive, on an interest-free basis and shall indemnify Executive, on
an after-tax basis, for any Excise Tax or income tax, including related
interest or penalties, imposed with respect to such advance; and
further provided that any extension of the statute of limitations
relating to payment of taxes
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for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
The Company's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable. Executive shall
be entitled to settle or contest, as the case may be, any other issue
raised by the IRS or other taxing authority.
(h) Limitation on Gross-Up Payments. Notwithstanding any other
provision of this Section 9, if it shall be determined (by the reasonable
computation of the Company's independent auditors, which determination shall be
certified to by such auditors and set forth in the Certificate delivered to
Executive) that the aggregate amount of the Potential Parachute Payments that,
but for this Section 9(h), would be payable to Executive, does not exceed 110%
of the greatest amount of Potential Parachute Payments that could be paid to
Executive without giving rise to any liability for Excise Taxes in connection
therewith (such greatest amount, the "Floor Amount"), then:
(i) no Gross-Up Payment shall be made to Executive; and
(ii) the aggregate amount of Potential Parachute
Payments payable to Executive shall be reduced (but not below the Floor
Amount) to the largest amount which would both (A) not cause any Excise
Taxes to be payable by Executive and (B) not cause any Potential
Parachute Payments to become nondeductible by the Company by reason of
Section 280G of the Code (or any successor provision); provided,
however, that in no event shall any such reduction (x) in any way
affect any Potential Parachute Payments that are provided to Executive
in any form other than cash or (y) reduce the aggregate amount of
Potential Parachute Payment that are payable in cash to an amount below
the aggregate amount of Taxes payable by Executive in respect of all
Potential Parachute Payments received by him (whether in cash or
otherwise).
For purposes of the preceding sentence, Executive shall be deemed to be subject
to the highest effective after-tax marginal rate of federal and Illinois Taxes.
(i) Refunds. If, after the receipt by Executive of any payment
or advance of Excise Taxes by the Company pursuant to this Article, Executive
becomes entitled to receive any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 9(g)) promptly pay the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 9(g), a determination is made that Executive shall
not be entitled to any refund with respect to such claim and the Company does
not notify Executive in writing of its intent to contest such determination
before 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. Any contest of a denial of refund shall be controlled by
Section 9(g).
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10. Successors.
(a) This Agreement is personal to Executive and without the
prior written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by Executive's legal
representatives.
(b) The Company may not assign its rights and obligations
under this Agreement without the prior written consent of Executive except to a
successor which has satisfied the provisions of Section 10(c). This Agreement
shall inure to the benefit of the Company and such permitted 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. All references to the Company shall also refer to any such
successor, and the Company and such successor shall be jointly and severally
liable for all obligations of the Company under this Agreement.
11. Miscellaneous.
--------------
(a) Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, without
reference to such State's principles of conflict of laws.
(b) Notices. All notices hereunder shall be in writing and
shall be given by hand delivery, nationally-recognized courier service that
provides overnight delivery, or by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to Executive, at his most recent home address on file with the
Company.
If to the Company, to: W.W. Grainger, Inc.
455 Knightsbridge Parkway
Lincolnshire, Illinois 60069-3620
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice shall be effective when actually received
by the addressee.
(c) Severability. If any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such unlawfulness
or invalidity shall not serve to invalidate any part of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
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<PAGE>
(d) Tax Withholding. The Company may withhold from any amounts
payable under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) Amendments; Waiver. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the Company and
Executive. A waiver of any term, covenant or condition contained in this
Agreement shall not result in a waiver of any other term, covenant or condition,
and any waiver of any default shall not result in a waiver of any later default.
(f) Entire Agreement. This Agreement contains the entire
understanding of the Company and Executive with respect to the subject matter
hereof, and shall supersede all prior agreements, promises and representations
of the parties regarding employment or severance, whether in writing or
otherwise.
(g) No Right to Employment. Except as may be provided under
any other agreement between Executive and the Company, the employment of
Executive by the Company is at will, and, prior to the Effective Date, may be
terminated by either Executive or the Company at any time. Upon a termination of
Executive's employment prior to the Effective Date, there shall be no further
rights under this Agreement.
(h) Sections. Except where otherwise indicated by the context,
any reference to a "Section" shall be to a section of this Agreement.
(i) Survival of Executive's Rights. All of Executive's rights
hereunder shall survive the termination of Executive's employment.
(j) Number and Gender. Wherever appropriate, the singular
shall include the plural, the plural shall include the singular, and the
masculine shall include the feminine.
(k) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
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IN WITNESS WHEREOF, Executive and the Company have executed this
Agreement as of the date first above written.
W.W. GRAINGER, INC.
By:------------------------------------
Richard L. Keyser
Chairman and Chief Executive Officer
EXECUTIVE:
------------------------------------
[[Officer]]
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Exhibit 21 to the Annual Report
on Form 10-K of W.W. Grainger, Inc.
for the year ended December 31, 1999
W.W. GRAINGER, INC.
Subsidiaries as of December 31, 1999
Acklands - Grainger Inc. (Canada)
- 370071 Alberta Ltd. (Alberta) (50% owned)
- 655206 Alberta Ltd. (Alberta) (50% owned)
- Wilter Auto & Industrial Supply (Lloyd) Ltd. (Alberta) (50% owned)
AGI Investment Corporation (Alberta)
Dayton Electric Manufacturing Co. (Illinois)
Grainger Caribe, Inc. (Illinois)
Grainger FSC, Inc. (U.S. Virgin Islands)
Grainger International, Inc. (Illinois)
- WWG de Mexico, S.A. de C.V. (Mexico)
- Grainger, S.A. de C.V. (Mexico)
- WWG Servicios, S.A. de C.V. (Mexico)
- Grainger Canada Inc. (Canada)
Lab Safety Supply, Inc. (Wisconsin)
100
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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0
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