GRACO INC
10-Q, 1994-08-12
PUMPS & PUMPING EQUIPMENT
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                        
                             Washington, D.C.  20549
                                        
                                    FORM 10-Q
                                        
            Quarterly Report Pursuant to Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934



For the quarterly period ended July 1, 1994

Commission File Number:  1-9249


                                    GRACO INC
             (Exact name of Registrant as specified in its charter)



        Minnesota                                                    41-0285640
(State of incorporation)                (I.R.S. Employer Identification Number)


4050 Olson Memorial Highway
  Golden Valley, Minnesota                                                55422
(Address of principal executive offices)                               Zip Code)


                                 (612) 623-6000
              (Registrant's telephone number, including area code)
                                        
                                        
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, and (2) has been subject to such filing  requirements
for the past 90 days.


                                                Yes  X          No

          11,629,204 common shares were outstanding as of July 1, 1994.
                                        
                           GRACO INC. AND SUBSIDIARIES
                                        
                                      INDEX




                                                                   Page Number

PART I      FINANCIAL INFORMATION


            Item 1. Financial Statements

                       Consolidated Statements of Earnings                   3
                       Consolidated Balance Sheets                           4
                       Consolidated Statements of Cash Flows                 5 
                       Notes to Consolidated Financial
                          Statements                                         6


            Item 2. Management's Discussion and Analysis
                       of Results of Operations and
                       Financial Condition                                   7



PART II     OTHER INFORMATION

            Item 4. Submission of Matters to a Vote                          8
                    of Security Holders
            Item 6. Exhibits and Reports on Form 8-K                         8



            SIGNATURES                                                       9

            Nonemployee Director Stock Plan                         Exhibit 10.1
            1994 Corporate and Business Unit Annual Bonus Plan      Exhibit 10.2
            Stock Option Agreement (Non-ISO)                        Exhibit 10.3
            Computation of Net Earnings per Common Share            Exhibit 11





                                        2
<TABLE>
                                     PART I

                         GRACO  INC.  AND  SUBSIDIARIES

Item 1                       CONSOLIDATED STATEMENTS OF EARNINGS

                                    (Unaudited)

                                        
<CAPTION>
                                        Thirteen Weeks Ended              Twenty-Six Weeks Ended
                                    July 1, 1994      June 25, 1993      July 1, 1994       June 25, 1993
                                             (In thousands except per share amounts)
 <S>                                      <C>                 <C>            <C>                 <C>

 Net sales                                $94,179             $79,415        $175,109            $157,226

      Cost of products sold                49,952              40,094          92,446              81,696

 Gross profit                              44,227              39,321          82,663              75,530

      Product development                   3,566               2,865           7,122               5,642
      Selling                              22,789              20,791          45,088              40,231
      General and administrative           10,659               9,306          20,147              18,456

 Operating profit                           7,213               6,359          10,306              11,201

      Interest expense                        480                 537             848               1,143
      Other expense, net                      138                 158             177                 272


 Earnings before income taxes                6,595               5,664           9,281               9,786

      Income taxes                           2,400               1,550           3,250               3,100

 Net earnings                               $4,195              $4,114          $6,031              $6,686


 Net earnings per common share               $0.36               $0.36           $0.52               $0.59

 Cash dividend per common share              $0.14               $0.13           $0.28               $0.25




See notes to consolidated financial statements.
</TABLE>
                                        3

<TABLE>
                           GRACO  INC.  AND  SUBSIDIARIES
                                        
                            CONSOLIDATED  BALANCE  SHEETS

<CAPTION>                                        
                                                   July 1, 1994     December 31, 1993
                    ASSETS                         (Unaudited)
                                                              (In thousands)
<S>                                                    <C>                    <C>

Current Assets:
  Cash and cash equivalents                            $2,577                 $11,095
  Marketable securities                                     0                  26,345
  Accounts receivable, less allowancces of             74,833                  62,178
    $4,700 and $4,100
  Inventories                                          48,874                  35,719
  Deferred income taxes                                 9,542                   8,843
  Other current assets                                  4,037                   3,079
    Total current assets                              139,863                 147,259

Property, plant and equipment:
  Cost                                                135,915                 129,876
  Less accumulated depreciation                       (75,475)                (72,132)
                                                       60,440                  57,744

Other assets                                           10,986                  11,362

                                                     $211,289                $216,365


                    LIABILITIES  AND  SHAREHOLDERS'  EQUITY

Current liabilities:
  Notes payable to banks                              $20,066                  $3,234
  Current portion of long-term debt                     5,606                   5,543
  Trade accounts payable                               18,860                  16,737
  Dividends payable                                     1,628                  32,535
  Income taxes payable                                  4,481                   5,658
  Other current liabilities                            37,503                  35,904
    Total current liabilities                          88,144                  99,611

Long-term debt, less current portion above             13,544                  13,937

Retirement benefits and deferred compensation          29,312                  28,132

Shareholders' equity:
  Preferred stock                                       1,474                   1,485
  Common stock                                         11,629                  11,449
  Additional paid-in capital                           22,268                  19,813
  Retained earnings                                    44,875                  42,430
  Other, net                                               43                    (492)
                                                       80,289                  74,685

                                                     $211,289                $216,365


See notes to consolidated financial statements.
</TABLE>
                                          4

<TABLE>
                         GRACO  INC.  AND  SUBSIDIARIES
                                        
                    CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
                                        
                                   (Unaudited)

<CAPTION>                                        
                                                      Twenty-Six Weeks Ended
                                                      July 1, 1994      June 26, 1993
CASH FLOWS FROM OPERATING ACTIVITIES:                           (In thousands)

<S>                                                         <C>                <C>

Net earnings                                                $6,031             $6,686
 Adjustments to reconcile net earnings to
   net cash provided by operating activities:
    Depreciation and amortization                            5,157              4,860
    Deferred income taxes                                     (549)               257
    Change in:
      Accounts receivable                                  (11,644)             3,552
      Inventories                                          (12,868)             3,989
      Trade accounts payable                                 1,895             (5,066)
      Accrued salaries                                        (872)            (1,211)
      Retirement benefits and deferred compensation          1,025              2,028
      Other accrued liabilities                              1,097             (7,829)
      Other                                                   (831)            (3,327)

                                                           (11,559)             3,939

CASH FLOWS FROM INVESTING ACTIVITIES:

 Property, plant and equipment additions                    (7,659)            (6,023)
 Proceeds from sale of property, plant, and equipment          169                626
 Purchases of marketable securities                         (5,464)            (7,512)
 Proceeds from marketable securities                        31,809              5,806

                                                            18,855             (7,103)

CASH FLOWS FROM FINANCING ACTIVITIES:

 Notes payable, net change                                  16,643             (2,807)
 Payments on long-term debt                                   (332)              (192)
 Common stock issued                                         2,774              2,378
 Retirement of common and preferred stock                       (5)            (1,750)
 Cash dividends paid                                       (34,493)            (2,919)
                                                           (15,413)            (5,290)

Effect of exchange rate changes on cash                       (401)               170

Net decrease in cash and cash equivalents                   (8,518)            (8,284)

Cash and cash equivalents:

 Beginning of year                                          11,095             18,869

 End of period                                              $2,577            $10,585



                 See notes to consolidated financial statements.
</TABLE>
                                        
                                        5
                                        
                                        
                                        
                           GRACO INC. AND SUBSIDIARIES
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                   (Unaudited)


1.  The  consolidated  balance  sheet  as of  July  1,  1994,  the  consolidated
    statements  of  earnings for the twenty-six weeks ended July  1,  1994,  and
    June 25, 1993, and the consolidated statements of cash flows for the twenty-
    six  weeks  then  ended  have  been prepared by the  Company  without  being
    audited.

    In  the  opinion  of management, these consolidated statements  reflect  all
    adjustments  necessary  to present fairly the financial  position  of  Graco
    Inc.  at     July 1, 1994, and June 25, 1993, and the results of  operations
    and cash flows for all periods presented.

    Certain  information and footnote disclosures normally included in financial
    statements   prepared  in  accordance  with  generally  accepted  accounting
    principles  have  been  condensed or omitted.  Therefore,  these  statements
    should  be  read  in  conjunction with the financial  statements  and  notes
    thereto included in the Company's 1993 Form 10-K.

    The results of operations for interim periods are not necessarily indicative
    of results which will be realized for the full fiscal year.

2.  Major components of inventories were as follows:
<TABLE>
<CAPTION>
                                                         July 1, 1994     Dec. 31,1993
                                                               (In thousands)
       <S>                                               <C>                   <C>

       Finished products and components                  $47,017               $42,010
       Products and components in
           various stages of completion                   28,455                21,410
       Raw Materials                                      10,195                 8,642
       Reduction to LIFO cost                            (36,793)              (36,343)
                                                         $48,874               $35,719
</TABLE>

                                        6
                                        
Item 2.                    GRACO INC. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Net earnings in the second quarter of $4,195,000 increased $81,000 from the same
period  a  year ago as higher operating earnings were nearly offset by a  higher
tax  rate.  Net earnings of $6,031,000 for the first half of 1994 were  $655,000
below 1993 as increased sales, up 11 percent over 1993, were more than offset by
a lower gross margin rate and higher expenses.

Sales in the second quarter of $94,179,000 increased $14,764,000, or 19 percent,
from the same period in 1993.  Second quarter sales in the Americas increased 27
percent  overall  to  $66,424,000.   Contractor  Equipment  sales  increased  33
percent,    Lubrication   Equipment   sales   were    up    24    percent    and
Industrial/Automotive Equipment rose 21 percent, with new product sales  and  an
expanding  economy driving the increases.  Sales in Europe were up 7 percent  to
$15,072,000  (a  12 percent volume increase, offset 5 percent  due  to  exchange
rates).   In the Pacific, sales were down 4 percent to $12,683,000 (a 9  percent
volume decline, and a gain of 5 percent on exchange rates).

Sales for the six months were $175,109,000, an 11 percent increase over the same
period  last year.  In the Americas, sales increased 20 percent to $125,108,000.
European  sales  were  down 1 percent to $27,125,000 (a  volume  increase  of  4
percent,  offset  by  a  5 percent exchange rate loss).  Sales  in  the  Pacific
decreased 9 percent to $22,876,000 (a 14 percent volume decline and a 5  percent
exchange rate gain.)

Gross  profit margins decreased during the second quarter 1994 to 47 percent  of
sales from 50 percent for the same period in 1993, primarily due to an increased
volume of lower-margin, large engineered systems.

Operating expenses in the second quarter of $37,014,000 increased $4,052,000, or
12  percent,  from  the  second  quarter of 1993.  Product  development  expense
increased  24  percent  over  1993, as previously announced  spending  increases
continued.    Selling   expenses  were  up  10  percent,   while   general   and
administrative expenses were up 15 percent.  Approximately half of the  increase
in  selling  and  general and administrative expense is  attributable  to  costs
associated  with  the  Company's  ongoing  cost  reduction  efforts.   Operating
expenses for the six months increased $8,028,000, or 12 percent.

Because of operating losses at certain of its foreign subsidiaries for which  no
tax  benefit has been recorded, Graco has increased its expected annual tax rate
for  1994  to  35  percent, resulting in a 36 percent tax rate  for  the  second
quarter.

For the second quarter, overall bookings were up 17 percent.  Bookings were very
strong in the Americas, up modestly in Europe, and down in the Pacific.  Backlog
at  July  1,  1994  was $30 million, down $3 million from the beginning  of  the
quarter, but an increase of $7 million from   $23 million on June 25, 1993.

The  Company  expects continued strong performance in the Americas and  improved
performance  in  Europe  as  the economies there continue  to  strengthen.   The
Pacific, and Japan in particular, remain weak.  The Company is encouraged by the
increase  in  its  bookings.   It  intends to  continue  making  investments  in
manufacturing efficiency and new product development, and is striving for a more
efficient  global  sales  and marketing organization to  improve  its  financial
performance.

Financial Condition

Accounts  receivable increased $11,644,000 from the prior year-end  due  to  the
increased sales volume, and inventories increased $12,868,000 primarily  in  the
Minneapolis  production  areas  and in Europe.  Property,  plant  and  equipment
totaling $7,659,000 was purchased year-to-date.  Marketable securities were sold
to  fund the special one-time dividend of $31,200,000 which was paid in March of
this year.

The  Company has unused lines of credit available at July 1, 1994, totaling  $28
million.

                                        7

                                     PART II
                                        
Item 4. Submission of Matters to a Vote of Security Holders

        At  the  Annual  Meeting of Shareholders held on  May  3,  1994,  George
        Aristides,  Ronald  O. Baukol, Joe R. Lee and Gerard  C.  Planchon  were
        elected to the Office of Director with the following votes:
   
                                                 For              Withheld
         George Aristides                     9,673,251            64,396
         Ronald O. Baukol                     9,674,586            63,061
         Joe R. Lee                           9,675,011            62,635
         Gerard C. Planchon                   9,671,077            66,570
   
        At  the same meeting, the Graco Inc. Nonemployee Director Stock Plan was
        presented  for  approval.  The plan allows nonemployee  members  of  the
        Board  of  Directors to receive, in lieu of cash, part or all  of  their
        annual  cash  retainer in Graco Common Stock.  The  plan  was  approved,
        with the following votes:
        
           For            Against            Abstentions         Broker Non-Vote
        9,594,427         110,380               32,840                  0
        
        At  the  same meeting, the selection of Deloitte & Touche as independent
        auditors  for  the  current year was approved  and  ratified,  with  the
        following votes:
        
           For            Against            Abstentions         Broker Non-Vote
        9,706,530          17,371               13,746                  0
        
        No other matters were voted on at the meeting.

Item 6.  Exhibits and Reports on Form 8-K

         (a) Exhibits


                Nonemployee Director Stock Plan                   Exhibit 10.1

                1994 Corporate and Business                       Exhibit 10.2
                Unit Annual Bonus Plan

                Stock Option Agreement. Form                      Exhibit 10.3
                of Agreement used for award of
                non-incentive stock options to
                executive officers

                Statement on Computation                          Exhibit 11
                of Per Share Earnings


         (b) No reports on Form 8-K have been
             filed during the quarter for which this
             report is filed.


                                        8



                                   SIGNATURES
                                        
                                        

Pursuant  to  the  requirements of the Securities  Exchange  Act  of  1934,  the
registrant  has  duly  caused this report to be signed  on  its  behalf  by  the
undersigned thereunto duly authorized.










                                     GRACO INC.


Date:  August 8, 1994                By:  /s/ David A. Koch
                                         David A. Koch
                                         Chairman and Chief Executive Officer





Date:  August 5, 1994                By:  /s/ Robert A. Wagner
                                        Robert A. Wagner
                                        Vice President and Treasurer
                                        (Principal Financial Officer)








                                        9


                                                                    Exhibit 10.1


                                   GRACO INC.
                         NONEMPLOYEE DIRECTOR STOCK PLAN
                                    ("PLAN")
                                        
    1.  Purpose of the Plan.  The purpose of the Graco Inc. Nonemployee Director
Stock Plan (the "Plan") is to provide an opportunity for nonemployee members  of
the Board of Directors (the "Board") of Graco Inc. ("Graco" or the "Company") to
increase  their  ownership of Graco Common Stock ("Common  Stock")  and  thereby
align  their interest in the long-term success of the Company with that  of  the
other shareholders.

    2. Eligibility.  Directors of the Company who are not also officers or other
employees of the Company or its subsidiaries are eligible to participate in this
Plan ("Eligible Directors").

    3.  Administration.  This Plan will be administered by the Secretary of  the
Company  (the  "Administrator").  Since the issuance of shares of  Common  Stock
pursuant  to  this  Plan is based on elections made by Eligible  Directors,  the
Administrator's  duties  under  this  Plan  will  be  limited  to   matters   of
interpretation and administrative oversight.  All questions of interpretation of
this  Plan  will  be  determined by the Administrator, and  each  determination,
interpretation or other action that the Administrator makes or takes pursuant to
the  provisions of this Plan will be conclusive and binding for all purposes and
on  all  persons.   The  Administrator will not be  liable  for  any  action  or
determination made in good faith with respect to this Plan.

   4.  Election to Receive Stock and Stock Issuance.

      4.1.  Election to Receive Stock in Lieu of Cash.  On forms provided by the
Company,  each  Eligible Director may irrevocably elect  ("Stock  Election")  to
receive, in lieu of cash, shares of Common Stock having a Fair Market Value,  as
defined  in  Section  4.3, equal to  25%, 50%, 75% or 100% of  the  annual  cash
retainer  (the 'Retainer") payable to that director for services rendered  as  a
director ("Participating Director").  A Stock Election shall apply only  to  the
Retainer  and  not  to  any fees payable for attendance at  Board  or  Committee
meetings.   Eligible  Directors are customarily paid the Retainer  in  quarterly
installments  in arrears at the end of each fiscal quarter.  Any Stock  Election
must  be  received  by  the  Company at least  six  months  in  advance  of  the
commencement of the first fiscal quarter with respect to which such election  is
made.   Any  Stock  Election  may only be amended  or  revoked  ("Amended  Stock
Election") in accordance with the procedure set forth in Section 4.4.

       4.2.   Issuance of Stock in Lieu of Cash.  Shares of Graco  Common  Stock
having a Fair Market Value equal to the amount of the Retainer so elected  shall
be  issued to each Participating Director when each quarterly installment of the
Retainer  is  customarily paid.  The Company shall not issue fractional  shares.
Whenever, under the terms of this Plan, a fractional share would be required  to
be  issued,  an amount in lieu thereof shall be paid in cash for such fractional
share  based  upon the same Fair Market Value as was utilized to  determine  the
number  of Shares to be issued on the relevant issue date.  In the event that  a
Participating  Director  elects to receive less  than  100%  of  each  quarterly
installment  of  the Retainer in shares of Common Stock, he  shall  receive  the
balance of the quarterly installment in cash.

       4.3    Fair Market Value.  For purposes of converting dollar amounts into
shares  of  Common Stock, the Fair Market Value of each share  of  Common  Stock
shall  be equal to the closing price of one share of the Company's Common  Stock
on  the New York Stock Exchange-Composite Transactions on the last business  day
of the fiscal quarter for which such shares are issued.

       4.4.   Change  in Election.  Each Participating Director may  irrevocably
elect  in  writing  to  change an earlier Stock Election, either  to  receive  a
different percentage of that director's Retainer in shares of Common Stock or to
receive the entire Retainer in cash (an "Amended Stock Election").  Such Amended
Stock  Election  shall  not  become effective until  the  first  fiscal  quarter
commencing  at least six months after the date of receipt of such Amended  Stock
Election by the Company.

       4.5    Termination of Service as a Director.  If a Participating Director
leaves  the Board before the conclusion of any fiscal quarter, he will  be  paid
the quarterly installment of the Retainer entirely in cash, notwithstanding that
a  Stock  Election or Amended Stock Election is on file with the  Company.   The
date  of termination of a Participating Director's service as a director of  the
Company  will be deemed to be the date of termination recorded on the  personnel
or other records of the Company.

   5. Shares Available for Issuance.

      5.1.  Maximum Number of Shares Available.  The maximum number of shares of
the  Company's Common Stock, par value $1.00 per share, that will  be  available
for  issuance under this Plan will be 100,000 shares, subject to any adjustments
made  in accordance with the provisions of Section 5.2.  At the election of  the
Administrator, the shares of Common Stock available for issuance under this Plan
may  be  either authorized but unissued shares or treasury shares.  If  treasury
shares  are used, all references in the Plan to the issuance of shares  will  be
deemed to mean the transfer of shares from treasury.

       5.2.  Adjustments to Shares.  In the event of any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock  dividend,
stock   split,   combination   of  shares,  rights  offering,   divestiture   or
extraordinary  dividend, an appropriate adjustment will be made  in  the  number
and/or  kind  of  securities available for issuance under the  Plan  to  prevent
either  the  dilution  or  the enlargement of the rights  of  the  Eligible  and
Participating Directors.

      6.    Limitation on Rights of Eligible and Participating Directors.

            6.1.  Service as a Director.  Nothing in this Plan will interfere
with or limit in any way the right of the Company's Board or its shareholders to
remove an Eligible or Participating Director from the Board.  Neither this Plan
nor any action taken pursuant to it will constitute or be evidence of any
agreement or understanding, express or implied, that the Company's Board or its
shareholders have retained or will retain an Eligible or Participating Director
for any period of time or at any particular rate of compensation.

            6.2.  Nonexclusivity of the Plan.  Nothing contained in this Plan is
intended to effect, modify or rescind any of the Company's existing compensation
plans or programs or to create any limitations on the Board's power or authority
to modify or adopt compensation arrangements as the Board may from time to time
deem necessary or desirable.

      7.    Plan Amendment, Modification and Termination.  The Board may suspend
or terminate this Plan at any time.  The Board may amend this Plan from time to
time in such respects as the Board may deem advisable in order that this Plan
will conform to any change in applicable laws or regulations or in any other
respect that the Board may deem to be in the Company's best interests; provided,
however, that no amendments to this Plan will be effective without approval of
the Company's shareholders, if shareholder approval of the amendment is then
required pursuant to Rule 16b-3 (or any successor rule) under the Securities
Exchange Act of 1934, as amended, or the rules of the New York Stock Exchange.
In addition, the Plan may not be amended more than once every six months other
than to conform it with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974, or the rules thereunder.

      8.    Effective Date and Duration of the Plan.  This Plan shall become
effective as of the date the Company's shareholders approve it and will
terminate on December 31, 2003, unless earlier terminated by the Company's
Board.

      9.    Miscellaneous.

            9.1   Securities Law and Other Restrictions.  Notwithstanding any
other provision of this Plan or any Stock Election or Amended Stock Election
delivered pursuant to this Plan, the Company will not be required to issue any
shares of Common Stock under this Plan and a Participating Director may not
sell, assign, transfer or otherwise dispose of shares of Common Stock issued
pursuant to this Plan, unless (a) there is in effect with respect to such shares
a registration statement under the Securities Act of 1933, as amended (the
"Securities Act") and any applicable state securities laws or an exemption from
such registration under the Securities Act and applicable state securities laws,
and (b) there has been obtained any other consent, approval or permit from any
other regulatory body that the Administrator, in his or her sole discretion,
deems necessary or advisable.  The Company may condition such issuance, sale or
transfer upon the receipt of any representations or agreements from the parties
involved, and the placement of any legends on certificates representing shares
of Common Stock, as may be deemed necessary or advisable by the Company, in
order to comply with such securities law or other restriction.

      9.2.  Governing Law.  The validity, construction, interpretation,
administration and effect of this Plan and any rules, regulations and actions
relating to this Plan will be governed by and construed exclusively in
accordance with the laws of the State of Minnesota.



                                                                    Exhibit 10.2
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                   GRACO INC.
                                        
                                        
                                 1994 CORPORATE
                                        
                                        &
                                        
                                  BUSINESS UNIT
                                        
                                        
                                ANNUAL BONUS PLAN
                                        
                                        






















                                                       Effective January 1, 1994
                                                                 Human Resources



                                       GRACO INC.
                                        
                               CORPORATE & BUSINESS UNIT
                                        
                                   ANNUAL BONUS PLAN

Objectives

    -    To create shareholder value through achievement of annual
         financial objectives.

    -    To motivate and retain those key executives and managers who work
         in positions where they can impact the Company's annual financial
         objectives.


Plan Design

The Plan links the size of each individual's award to specific financial
objectives.  These objectives are tailored for the Corporation and for each
Business Unit.  These objectives are:

    -       Corporation
               Corporate earnings

    -       Business Units
               Profitability objective


Eligibility Requirements

Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate earnings objective and Business Unit
profitability and sales objectives are eligible to be included in this Plan.

Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.

Participation

The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.

The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.

The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.

Bonus Maximum

Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:

    -    Commensurate with the position's ability to impact the annual Corporate
         earnings objective and Business Unit profitability and sales
         objectives.

    -    Consistent with total compensation levels prevalent for similar
         positions in the market place.

Based on these criteria, bonus maximums ranging from 10% to 80% have been
established for each individual.

Bonus Payment

The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate earnings performance (expressed
in percent) to the bonus results attained for any applicable Business Unit's
contribution or margin growth performance (expressed in percent).  These bonus
results are then multiplied by the participant's Maximum Bonus Percentage and
then multiplied by the participant's Base Salary for the Plan Year, to determine
the total Bonus Payment.

Example:

 Annual         Annual           Participant's     Participant's   
 Corporate   +  Business    x    Maximum       x   Annual          =    Bonus
 Performance    Unit             Bonus             Base
 Results        Performance      Salary            Salary
                Results          
                (if              
                applicable)

    %                %               $                $                    $

Administration

The following rules have been established to insure equitable administration of
Graco's Annual Bonus Plan (the Plan):

1.  The Plan will be administered by the Management Organization and
    Compensation Committee of the Board of Directors.  The Committee may cancel
    the Plan and interpret the Plan.

2.  The Management Organization and Compensation Committee shall establish the
    annual corporate bonus plan financial objectives.  Within the basic
    framework of the Plan, the Chief Executive Officer may establish the annual
    bonus plan financial objectives for individual Business Units.  The CEO may
    also establish deadlines for filing administrative forms and adopt other
    administrative rules.

    The CEO has established the Bonus Administrative Committee consisting of
    the President, the Vice President, Human Resources, and the Compensation
    Manager.  This Committee is responsible for making approval recommendations
    on all Annual Bonus Program administrative matters, such as participation
    award payments, performance measures, and performance results.  All
    requests for adjustments or exceptions are to be formally submitted to this
    Committee for review through the Compensation Manager.

3.  Key executives and managers selected to participate in the Plan after its
    annual effective date (January 1st) may be included on a pro-rata basis.

4.  Participation in the Plan one year does not necessarily assure participa
    tion in subsequent years.  Eligibility requirements for both the position
    and individual performance must be met continually.

5.  Participation continues during any paid time off such as short term
    disability (up to six months).  Participation ceases with retirement,
    death,  or long term disability (over six months).  In the event
    participation ceases due to retirement, death, or long term disability, the
    Participant will be eligible for a Bonus Payment, calculated using the
    Maximum Bonus Percent and Base Salary up to the time of retirement, death,
    or long term disability and the annual performance results for the year in
    which retirement, death, or long term disability occurs.

6.  A participant who transfers to a position not eligible for inclusion in the
    Plan will be eligible for a pro-rata award based on the actual time
    employed in the eligible position during the year.  The pro-rated award
    will be paid as described in Administrative Rule #11.

7.  A participant who resigns or is terminated effective during the Plan Year is
    ineligible for a bonus.

    Participants must maintain satisfactory performance throughout the Plan
    year in order to be eligible to receive a bonus award payment.

    In addition, a participant whose employment termination has been requested
    due to performance or otherwise for cause will be ineligible for a bonus
    payment even though the participant is still employed at year-end.

8.  Corporate earnings calculations will include such effects as those created
    by foreign exchange gain/loss translation and income tax rate changes.

9.  Corporate earnings calculations will be based on actual exchange rates, not
    plan rates.

10. Acquisitions and divestitures not included in the annual business plan for
    the Plan Year will be excluded from the corporate earnings calculations.

11. Significant changes in historical FASB accounting practices or income tax
    rates will be included in corporate earnings calculations at the discretion
    of the Management Organization and Compensation Committee of the Board of
    Directors.

12. Payments will be made by March 15th of the year following each successive
    Corporate and Business Unit performance year.





                                                                    Exhibit 10.3
                                                                                
                                                                                
                                        
                             STOCK OPTION AGREEMENT
                                    (NON-ISO)


      THIS AGREEMENT, made this 2nd day of May, 1994, by and between Graco Inc.,
a Minnesota corporation (the "Company") and _____________________________
(the "Employee").

      WITNESSETH THAT:

      WHEREAS, the Company pursuant to it's Long-Term Incentive Stock Plan
wishes to grant this stock option to Employee;

      NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:

      1. Grant of Option

         The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an aggregate of
____________ Common Shares, par value $1.00 per share, at the price of
$____________ per share on the terms and conditions set forth herein.

      2. Duration and Exercisability

         (a) This option may not be exercised by Employee until the expiration
of two (2) years from the date of grant, and this option shall in all events
terminate ten (10) years after the date of grant.  During the first two years
from the date of grant of this option, no portion of this option may be
exercised.  Thereafter this option shall become exercisable in four cumulative
installments of 25% as follows:

                                            Total Portion of Option
                       Date                   Which is Exercisable

         Two Years after Date of Grant               25%            
         Three Years after Date of Grant             50%            
         Four Years after Date of Grant              75%            
         Five Years after Date of Grant              100%           


In the event that Employee does not purchase in any one year the full number of
shares of Common Stock of the Company to which he/she is entitled under this
option, he/she may, subject to the terms and conditions of Section 3 hereof,
purchase such shares of Common Stock in any subsequent year during the term of
this option.

         (b) During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or transferable by
him/her otherwise than by will or the laws of descent and distribution.

      3. Effect of Termination of Employment

         (a) In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her gross and willful
misconduct, death, retirement (as defined in Section 3(d) below), or disability
(as defined in Section 3(d) below), Employee shall have the right to exercise
the option at any time within one month after such termination of employment to
the extent of the full number of shares he/she was entitled to purchase under
the option on the date of termination, subject to the condition that no option
shall be exercisable after the expiration of the term of the option.

         (b) In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and willful misconduct
during the course of his/her employment, including but not limited to wrongful
appropriation of Company funds or the commission of a felony, the option shall
be terminated as of the date of the misconduct.

         (c) If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment for any reason
other than gross and willful misconduct and shall not have fully exercised the
option, all remaining shares shall become immediately exerciseable and such
option may be exercised at any time within twelve months after his/her death by
the executors or administrators of the Employee or by any person or persons to
whom the option is transferred by will or the applicable laws of descent and
distribution, and subject to the condition that no option shall be exercisable
after the expiration of the term of the option.

         (d) If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or attaining age 65, or
due to disability within the meaning of the provisions of the Graco Long-Term
Disability Plan), all remaining shares shall become immediately exerciseable and
the option may be exercised by the Employee at any time within three years of
the employee's retirement, or in the event of the death of the Employee within
the three-year period after retirement, the option may be exercised at any time
within twelve months after his/her death by the executors or administrators of
the Employee or by any person or persons to whom the option is transferred by
will or the applicable laws of descent and distribution, to the extent of the
full number of shares he/she was entitled to purchase under the option on the
date of death, and subject to the condition that no option shall be exercisable
after the expiration of the term of the option.

      4. Manner of Exercise

         (a) The option can be exercised only by Employee or other proper party
within the option period delivering written notice to the Company at its
principal office in Minneapolis, Minnesota, stating the number of shares as to
which the option is being exercised and, except as provided in Section 4(c),
accompanied by payment-in-full of the option price for all shares designated in
the notice.

         (b) The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check) or by
delivering to the Company for cancellation Common Shares of the Company with a
fair market value equal to the option price.  For these purposes, the fair
market value of the Company's Common Shares shall be the closing price of the
Common Shares on the date of exercise on the New York Stock Exchange (the
"NYSE") or on the principal national securities exchange on which the shares are
traded if the shares are not then traded on the NYSE.  If there is not a
quotation available for such day, then the closing price on the next preceding
day for which such a quotation exists shall be determinative of fair market
value.  If the shares are not then traded on an exchange, the fair market value
shall be the average of the closing bid and asked prices of the Common Shares as
reported by the National Association of Securities Dealers Automated Quotation
System.  If the Common Shares are not then traded on NASDAQ or on an exchange,
then the fair market value shall be determined in such manner as the Company
shall deem reasonable.

         (c) The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the shares issued
upon exercise of the option by a securities dealer and the payment to the
Company by the securities dealer of the option exercise price.

      5. Payment of Withholding Taxes

      Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local withholding
tax requirements which arise as a result of the exercise of the option or
provide the Company with satisfactory indemnification for such payment.

      6. Adjustments

         If Employee exercises all or any portion of the option subsequent to
any change in the number or character of the Common Shares of the Company
(through merger, consolidation, reorganization, recapitalization, stock
dividend, or otherwise), Employee shall then receive for the aggregate price
paid by him/her on such exercise of the option, the number and type of
securities or other consideration which he/she would have received if such
option had been exercised prior to the event changing the number or character of
outstanding shares.

      7. Miscellaneous

         (a) This option is issued pursuant to the Company's Long-Term Incentive
Stock Plan and is subject to its terms.  A copy of the Plan has been given to
the Employee.  The terms of the Plan are also available for inspection during
business hours at the principal offices of the company.

         (b) This Agreement shall not confer on Employee any right with respect
to continuance of employment by the Company or any of its subsidiaries, nor will
it interfere in any way with the right of the Company to terminate such
employment at any time.  Employee shall have none of the rights of a shareholder
with respect to shares subject to this option until such shares shall have been
issued to him upon exercise of this option.

         (c) The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be sufficient to
satisfy the requirements of this Agreement.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.

                                    GRACO INC.


                                    By________________________________________
                                    Its:  Chairman and Chief Executive Officer


                                    ___________________________________________
                                                 Employee




                                                                  EXHIBIT NO. 11
                                                                                
<TABLE>
                           GRACO INC. AND SUBSIDIARIES
                                        
                  COMPUTATION OF NET EARNINGS PER COMMON SHARE
                                        
                                   (Unaudited)
                                        
<CAPTION>                                        
                                                   Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                           July 1, 1994      June 25, 1993     July 1, 1994      June 25, 1993
                                                      (In thousands except per share amounts)
<S>                                              <C>              <C>                <C>                <C>

Net earnings applicable to common stock:

   Net earnings                                  $4,195           $4,114             $6,031             $6,686

   Less dividends on preferred stock                 19               19                 37                 37

                                                 $4,176           $4,095             $5,994             $6,649    


Average number of common and common
   equivalent shares outstanding:

   Average number of common
      shares outstanding                         11,514             11,392          11,514              11,372

   Dilutive effect of stock options
      computed on the treasury stock                 49                 86              57                  71


                                                 11,563             11,478          11,571              11,443


Net earnings per common share
   and common equivalent share                    $0.36              $0.36           $0.52               $0.58



Primary and fully diluted earnings per share are substantially the same.
</TABLE>

                                          10




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