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 September 26, 1997
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
--------- --------
16,979,650 common shares were outstanding as of October 23, 1997.
1
<PAGE>
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 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Stock Option Agreement. Form of agreement used for
award of nonstatutory stock options to nonemployee
director, dated September 5, 1997 Exhibit 10.1
Trust Agreement dated September 30, 1997,
between the Company and Norwest Bank
Minnesota, N.A. Exhibit 10.2
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule (EDGAR filing only) Exhibit 27
2
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<TABLE>
<CAPTION>
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Sept. 26, 1997 Sept. 27, 1996 Sept. 26, 1997 Sept. 27, 1996
-------------- -------------- -------------- --------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales ................................... $ 101,920 $ 97,680 $ 305,740 $ 284,932
Cost of products sold ................. 50,558 47,704 156,446 140,697
-------------- -------------- -------------- --------------
Gross profit ............................... 51,362 49,976 149,294 144,235
Product development .................. 4,167 4,714 13,820 13,566
Selling .............................. 21,051 21,624 66,448 62,714
General and administrative ........... 8,425 8,316 25,264 29,996
-------------- -------------- -------------- --------------
Operating profit ........................... 17,719 15,322 43,762 37,959
Interest expense ..................... 216 155 663 732
Other expense, net ................... 124 310 371 (447)
-------------- -------------- -------------- --------------
Earnings before income taxes ............... 17,379 14,857 42,728 37,674
Income taxes ......................... 4,500 4,700 13,250 11,900
-------------- -------------- -------------- --------------
Net earnings ............................... $ 12,879 $ 10,157 $ 29,478 $ 25,774
============== ============== ============== ===============
Net earnings per common and
common equivalent share .............. $ .74 $ .58 $ 1.69 $ 1.47
============== ============== ============== ===============
Cash dividend declared per common share .... $ .14 $ .12 $ .42 $ .36
============== ============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 26, 1997 December 27, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 7,382 $ 6,535
Accounts receivable, less allowances
of $4,196 and $4,723 ................................. 82,566 83,474
Inventories ............................................. 44,768 41,531
Deferred income taxes ................................... 12,459 11,633
Other current assets .................................... 1,387 1,321
------------------ -----------------
Total current assets .............................. 148,562 144,494
Property, plant and equipment:
Cost .................................................... 194,343 183,085
Less Accumulated Depreciation ........................... (94,310) (88,913)
------------------ -----------------
100,033 94,172
Other assets .................................................. 9,066 9,148
------------------ -----------------
$ 257,661 $ 247,814
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks .................................. $ 2,444 $ 3,813
Current portion of long-term debt ....................... 1,620 1,845
Trade accounts payable .................................. 14,191 13,854
Salaries, wages and commissions ......................... 13,639 14,808
Accrued insurance liabilities ........................... 12,157 10,925
Income taxes payable .................................... 7,453 4,647
Other current liabilities ............................... 20,810 30,718
------------------ -----------------
Total current liabilities ......................... 72,314 80,610
Long-term debt, less current portion .......................... 7,145 8,075
Retirement benefits and deferred compensation ................. 33,795 33,079
Shareholders' equity:
Common stock ............................................ 17,020 17,047
Additional paid-in capital .............................. 19,399 22,254
Retained earnings ....................................... 106,471 85,232
Other, net .............................................. 1,517 1,517
------------------ -----------------
Total shareholders' equity ........................ 144,407 126,050
------------------ -----------------
$ 257,661 $ 247,814
================== =================
</TABLE>
See notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks
-----------------
Sept. 26, 1997 Sept. 27, 1996
-------------- --------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ...................................................... $ 29,478 $ 25,774
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ............................... 10,507 9,633
Deferred income taxes ....................................... (2,137) 2,318
Change in:
Accounts receivable ....................................... (2,665) (3,182)
Inventories ............................................... (4,972) (7,147)
Trade accounts payable .................................... 655 (380)
Retirement benefits and deferred
compensation ............................................. 1,036 564
Other accrued liabilities ................................. (5,743) 6,813
Other ..................................................... (240) 350
-------------- --------------
25,919 34,743
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions ........................ (16,793) (18,681)
Proceeds from sale of property, plant,
and equipment ............................................. 1,642 62
-------------- --------------
(15,151) (18,619)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit ............. 40,289 13,932
Payments on notes payable and lines of credit .............. (41,470) (13,957)
Borrowing on long-term debt ................................ -- 198
Payments on long-term debt ................................. (922) (1,347)
Common stock issued ........................................ 2,926 2,352
Retirement of common and preferred stock ................... (6,971) (6,819)
Cash dividends paid ........................................ (7,219) (6,293)
-------------- --------------
(13,367) (11,934)
-------------- --------------
Effect of exchange rate changes on cash ....................... 3,446 1,568
-------------- --------------
Net increase in cash and cash equivalents ..................... 847 5,758
Cash and cash equivalents:
Beginning of year .......................................... 6,535 1,643
-------------- --------------
End of period .............................................. $ 7,382 $ 7,401
============== ==============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company)
as of September 26, 1997 and the related statements of earnings for the
thirteen and thirty-nine weeks ended September 26, 1997 and September 27,
1996 and cash flows for the thirty-nine weeks ended September 26, 1997, and
September 27, 1996, have been prepared by the Company without being
audited.
In the opinion of management, these consolidated statements reflect all
adjustments necessary (consisting of only normal recurring adjustments) to
present fairly the financial position of Graco Inc. and Subsidiaries as of
September 26, 1997, 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 1996 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 (in thousands):
Sept. 26, 1997 Dec. 27, 1996
-------------- -------------
Finished products and components $43,148 $38,707
Products and components in various
stages of completion 26,943 24,691
Raw materials 12,387 15,192
-------------- -------------
82,478 78,590
Reduction to LIFO cost (37,710) (37,059)
-------------- -------------
$44,768 $41,531
============== =============
6
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3. Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", was issued in February 1997 and requires adoption for annual
periods ending after December 15, 1997. Earnings per Share determined in
accordance with SFAS No. 128 are not materially different than the current
disclosure under APB Opinion No. 15.
4. In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning with the 1998 fiscal year. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain
financial and description information about a company's operating segments.
The Company has not yet determined the nature of its segments, nor has it
determined how adoption of SFAS No. 131 will impact its future disclosures.
7
<PAGE>
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net earnings of $12.9 million for the quarter ended September 26, 1997 increased
27 percent over the third quarter of 1996 earnings of $10.2 million. For the
nine months ended September 26, 1997, net earnings of $29.5 million were 14
percent over 1996 earnings of $25.8 million. The quarterly earnings improvement
results primarily from a 4 percent increase in sales, coupled with a 3 percent
decline in operating expenses. A lower effective tax rate and income of
approximately $450,000, net of tax, related to the settlement of a lawsuit, also
contributed to the net earnings improvement. Partially offsetting the
improvements were a lower gross profit margin on product sales and losses
resulting from unfavorable exchange rate changes.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
<TABLE>
<CAPTION>
Third Quarter Nine Months
(13 weeks) Ended (39 weeks) Ended
---------------- ----------------
September September September September
26, 1997 27, 1996 26, 1997 27, 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales ................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
Cost of Products Sold ....................... 49.6 48.8 51.2 49.4
Product Development ......................... 4.1 4.8 4.5 4.8
Selling ..................................... 20.7 22.1 21.7 22.0
General and Administrative .................. 8.2 8.6 8.3 10.5
--------- --------- --------- ---------
Operating Profit ............................ 17.4 15.7 14.3 13.3
--------- --------- --------- ---------
Interest Expense ............................ .2 .2 .2 .3
--------- --------- --------- ---------
Other Income(Expense), Net .................. (.1) (.3) (.1) .2
--------- --------- --------- ---------
Earnings Before Income Taxes ................ 17.1 15.2 14.0 13.2
Income Taxes ................................ 4.5 4.8 4.4 4.2
--------- --------- --------- ---------
Net Earnings ................................ 12.6% 10.4% 9.6% 9.0%
========= ========= ========= =========
</TABLE>
8
<PAGE>
Net Sales
Net sales during the third quarter of $101.9 million were 4 percent higher than
1996's third quarter. Year-to-date sales of $305.7 million were 7 percent higher
than the first nine months of 1996. Improved sales levels were achieved despite
a negative currency impact, which reduced sales by 4 percent for the quarter and
3 percent for the nine month period.
Industrial/Automotive Equipment sales worldwide fell 5 percent to $53.5 million
from last year's third quarter, 4 percent due to exchange and most of the
remainder due to a decline in automotive systems demand in Europe. Sales for the
nine month period ended September 26, 1997 in Industrial/Automotive of $160.9
million were 3 percent higher than 1996. Third quarter Contractor Equipment
sales of $37.2 million were 22 percent higher than last year due primarily to
new products and price repositioning. Year-to-date Contractor Equipment sales
were up 15 percent to $110.7 million. Lubrication Equipment quarterly sales
increased 3 percent to $11.2 million. Sales of $34.1 million for the first nine
months in Lubrication were up 6 percent over the same period last year
reflecting a healthy North American economy and an increased key distributor
base.
Sales in the Americas (North, South and Central) increased 12 percent to $69.3
million for the quarter primarily due to strong sales performance in Contractor
Equipment, partially offset by a decline in North American automotive systems
sales. Year-to-date sales in the Americas of $207.8 million were up 11 percent
compared to the same period last year. Quarterly sales in Europe of $18.5
million were 15 percent lower than last year. Much of the decline (9 percent)
can be attributed to changes in exchange rates. The remainder is due primarily
to a shift in timing of automotive systems sales between quarters. Year-to-date
automotive system sales remain ahead of last year. Sales in Europe for the nine
months ended September 26, 1997 of $57.3 million improved 5 percent from the
same period last year (a 13 percent volume increase, and an 8 percent decline
due to exchange rates). Asia Pacific sales of $14.1 million were 2 percent
higher than last year's third quarter (a 7 percent volume increase, and a 5
percent decline due to exchange rates). Sales in Asia Pacific for nine months of
$40.7 million were 4 percent lower than last year (a 3 percent volume increase,
and a 7 percent decline due to exchange rates).
Gross Profit
Gross profit as a percentage of quarterly and year-to-date net sales has risen
to 50.4 and 48.8 percent respectively from the second quarter of 1997. These
rates, however, are .8 and 1.8 percentage points lower than the 1996 third
quarter and year-to-date rates, respectively. The decreases for the quarter and
nine months were primarily the result of a shift in the product mix within
Contractor Equipment to an upgraded product line which generates a lower margin
than other products. The strengthening of the U.S. dollar also reduced the gross
margin as a greater proportion of the Company's sales, relative to costs, are
denominated in currencies other than the U.S. dollar.
9
<PAGE>
Operating Expenses
Operating expenses for the quarter ended September 26, 1997 of $33.6 million
decreased 3 percent from the same quarter of 1996. Operating expenses of $105.5
million for the first nine months were 1 percent below the 1996 level. Quarterly
product development expense decreased 12 percent from 1996 and selling expense
decreased 3 percent. The decline in both product development and selling can be
attributed to lower employee benefit costs. General and administrative costs
remained relatively flat in comparison to the third quarter of 1996.
Other Income (Expense)
Other expense was $.1 million in the third quarter, compared to expense of $.3
million for the same period last year. The third quarter of 1997 includes
proceeds from the settlement of a lawsuit. This income was partially offset by
losses due to exchange rate fluctuations. Other expense for the nine months
ended September 26, 1997 was $.4 million, compared to income of $.4 million in
the same period of 1996.
Income Taxes
The quarterly and year-to-date effective income tax rates decreased to 25.9
percent and 31.0 percent, respectively compared to 31.6 percent for both periods
last year. The lower rates in 1997 were principally due to previously
unrecognized foreign tax benefits.
Liquidity and Capital Resources
- -------------------------------
The Company generated $25.9 million of cash flow from operating activities in
the first nine months of 1997 compared to $34.7 million for the same period last
year. Significant uses of operating cash flow in 1997 resulted from an increase
in accounts receivable balances attributable to higher sales levels and from a
reduction in other accrued liabilities, most significantly the reserve
established in the prior year for the relocation of the Company's Franklin Park,
Illinois operations. Operating cash was also used to fund an increase in
inventory levels which was driven by higher engineered systems activity in the
foreign operations. Available cash, borrowing on lines of credit of $40.3
million, and proceeds from issuances of common stock were used to fund
short-term operating needs, finance capital expenditures of $16.8 million,
repurchase $7.0 million in common stock and pay dividends of $7.2 million. The
Company had unused lines of credit available at September 26, 1997 totaling
$68.7 million. The available credit facilities and internally-generated funds
provide the Company with the financial flexibility to meet liquidity needs.
Outlook
The Company is optimistic about performance for the remainder of the year. With
the exception of North American Automotive, the Company is experiencing strong
demand for its products. Sales backlog has grown by $11 million since the
beginning of the year to $30 million. Also, despite continuing unfavorable
exchange rate changes, the Company's profitability has improved.
10
<PAGE>
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations, and additional factors
identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year
1996.
11
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Stock Option Agreement. Form of agreement used
for award of nonstatutory stock options to
nonemployee director, dated September 5, 1997 Exhibit 10.1
Trust agreement dated September 30, 1997, between
the Company and Norwest Bank, Minnesota N.A. Exhibit 10.2
Statement on Computation Exhibit 11
of Per Share Earnings
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
12
<PAGE>
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: 11/6/97 By:/s/George Aristides
George Aristides
Chief Executive Officer
Date: 11/6/97 By:/s/Mark W. Sheahan
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
13
GRACO INC.
NONEMPLOYEE DIRECTOR
NONSTATUTORY STOCK OPTION AGREEMENT
(NSO)
THIS AGREEMENT, made this 5th day of September, 1997 by and between Graco
Inc., a Minnesota corporation (the "Company") and ____________ (the "Nonemployee
Director").
WITNESSETH THAT:
WHEREAS, the Company pursuant to its Nonemployee Director Stock Option
Plan wishes to grant this stock option to Nonemployee Director.
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 Nonemployee Director, the right and option
(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. This is a nonstatutory stock Option
which does not qualify for special tax treatment under Sections 421 or 422
of the Internal Revenue Code.
2. Duration and Exercisability
a. This Option may not be exercised by Employee until the expiration of
one (1) year from the date of grant, and this Option shall in all
events terminate ten (10) years after the date of Grant. During the
first year 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
Date Option Which is Exercisable
One Year after Date of Grant 25%
Two Years after Date of Grant 50%
Three Years after Date of Grant 75%
Four Years after Date of Grant 100%
In the event that Nonemployee Director 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 Nonemployee Direction, 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 Membership on the Board
a. In the event a Nonemployee Director ceases being a director of the
Company for any reason other than the reasons identified in section
3b below, the Nonemployee Director shall have the right to exercise
the Option as follows, subject to the condition that no Option shall
be exercisable after the expiration of the term of the Option:
(1) If the Nonemployee Director was a member of the Board of
Directors of the Company for five (5) or more years, the
option becomes immediately exercisable upon the date the
Nonemployee Director ceases being a director. The Nonemployee
Director may exercise the Option for a period of thirty six
(36) months from the date the Nonemployee Director ceased
being a director, provided that if the Nonemployee Director
dies before the thirty-six (36) month period has expired, the
Option may be exercised by the Nonemployee Director's legal
representative or any person who acquires the right to
exercise an Option by reason of the Nonemployee Director's
death for a period of twelve (12) months from the date of the
Nonemployee Director's death.
(2) If the Nonemployee Director was a member of the Board of
Directors of the Company for less than five (5) years, the
Nonemployee Director may exercise the Option, to the extent
the Option was exercisable at the date the Nonemployee
Director ceases being a member of the Board, for a period of
thirty (30) days following the date the Nonemployee Director
ceased being a director, provided that, if the Nonemployee
Director dies before the thirty (30) day period has expired,
the Option may be exercised by the Nonemployee Director's
legal representative, or any person who acquires the right to
exercise an Option by reason of the Nonemployee Director's
death, for a period of twelve (12) months from the date of the
Nonemployee Director's death.
(3) If the Nonemployee Director dies while a member of the Board
of Directors of the Company, the Option, to the extent
exercisable by the Nonemployee Director at the date of death,
may be exercised by the Nonemployee Director's legal
representative, or any person who acquires the right to
exercise an Option by reason of the Nonemployee Director's
death, for a period of twelve (12) months from the date of the
Nonemployee Director's death.
(4) In the event the Option is exercised by the executors,
administrators, legatees, or distributees of the estate of a
deceased optionee, the Company shall be under no obligation to
issue stock thereunder unless and until the Company is
satisfied that the person or persons exercising the Option are
the duly appointed legal representatives of the deceased
optionee's estate or the proper legatees or distributees
thereof.
b. If a Nonemployee Director ceases being a director of the Company due
to an act of (a) fraud or intentional misrepresentation or (b)
embezzlement, misappropriation or conversion of assets or
opportunities of the Company or any Affiliate of the Company or (c)
any other gross or willful misconduct, as determined by the Board, in
its sole and conclusive discretion, the Option granted to such
Nonemployee Director shall immediately be forfeited as of the date of
the misconduct.
4. Manner of Exercise
a. The Option can be exercised only by Nonemployee Director or other
proper party within the Option period by 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 sections 4b(2) and 4b(3) below,
accompanied by payment in full of one hundred percent (100%) of the
Option price.
b. The Nonemployee Director may, at his/her election, pay the Option
price as follows:
(1) by cash or by certified check,
(2) by delivery of shares of common stock to the Company, which
shall have been owned for at least six (6) months and have a
fair market value per share on the date of surrender equal to
the exercise price, or
(3) by delivery to Company of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly
deliver to the Company from sale or loan proceeds the amount
required to pay the exercise price.
For purposes of subsection 4b(2) hereunder, the fair market value
per share is the last sale price reported on the composite tape by
the New York Stock Exchange on the business day immediately
preceding the date as of which fair market value is being determined
or, if there were no sales of shares of the Company's common stock
reported on the composite tape on such day, on the most recently
preceding day on which there were sales, or if the shares of the
Company's stock are not listed or admitted to trading on the New
York Stock Exchange on the day as of which the determination is
made, the amount determined by the Board or its delegate to be the
fair market value of a share on such day.
c. Such Option price shall be subject to adjustment as provided in
Section 6 hereof.
5. Change of Control
a. Notwithstanding Section 2(a) hereof, all outstanding Options not
yet exercisable shall become immediately and fully exercisable on
the day following a "Change of Control" and shall remain fully
exercisable until either exercised or expiring by their terms. A
"Change of Control" means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934), (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 under the 1934 Act) which results in the
beneficial ownership by such Person of 25% or more of either
(a) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock
or other Company voting securities owned by the
Trust Under the Will of Clarissa L. Gray ("Trust
Person"), provided that such acquisition does not
result in the beneficial ownership by such Person
of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting
Securities, and provided further that for purposes
of this Section 9, a Trust Person shall not be
deemed --- to have beneficial ownership of the
Company common stock or other Company voting
securities owned by The Graco Foundation or any
employee benefit plan of the Company, including,
without limitations, the Graco Employee Retirement
Plan and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Nonemployee Director or any
group that includes the Nonemployee Director, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b),
and (c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding Company
Voting Securities is 25% or more as a result of a transaction
described in clause (i) or (ii) above, and such Person
subsequently acquires beneficial ownership of additional
Outstanding Company Common Stock or Outstanding Company Voting
Securities as a result of a transaction other than that
described in clause (i) or (ii) above, such subsequent
acquisition will be treated as an acquisition that causes such
Person to own 25% or more of the Outstanding Company Common
Stock or Outstanding Company Voting Securities and be deemed a
Change of Control; and provided further, that in the event any
acquisition or other transaction occurs which results in the
beneficial ownership of 32% or more of either the Outstanding
Company Common Stock or the Outstanding Company Voting
Securities by any Trust Person, the Incumbent Board may by
majority vote increase the threshold beneficial ownership
percentage to a percentage above 32% for any Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of said Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
membership on the Board occurs as a result of an actual or
threatened election contest with respect to the election or
removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(3) The commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a Person of 25% or
more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business Combination
is subject, at the time of such approval by stockholders, to
the consent of any government or governmental agency, the
obtaining of such consent (either explicitly or implicitly by
consummation) excluding, however, such a Business combination
pursuant to which
(a) all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding
Company Common Stock or Outstanding Company Voting
Securities immediately prior to such Business
Combination beneficially own, directly or indirectly,
more than 80% of, respectively, the then outstanding
shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such Business
Combination (including, without limitation, a
corporation that as a result of such transaction owns
the Company or all or substantially all of the Company's
assets either directly or through one or more
subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock or
Outstanding Company Voting Securities,
(b) no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities
of such corporation except to the extent that such
ownership existed prior to the Business Combination, and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such
Business Combination were members of the Incumbent Board
at the time of the execution of the initial agreement,
or of the action of the Board, providing for such
Business Combination; or
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
b. A Change of Control shall not be deemed to have occurred with
respect to a Nonemployee Director if:
(1) the acquisition of the 25% or greater interest referred to in
subsection a(1) of this Section 5 is by a group, acting in
concert, that includes the Nonemployee Director or
(2) if at least 25% of the then outstanding common stock or
combined voting power of the then outstanding company voting
securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company shall be
beneficially owned, directly or indirectly, immediately after
a reorganization, merger, consolidation, statutory share
exchange, disposition of assets, liquidation or dissolution
referred to in subsections (4) or (5) of this section by a
group, acting in concert, that includes that Nonemployee
Director.
6. Adjustments and Changes in the Stock
a. If Nonemployee Director exercises all or any portion of the Option
subsequent to any change in the common stock of the Company by
reason of any stock dividend, stock split, spin-off, split-up,
merger, consolidation, recapitalization, reclassification,
combination or exchange of shares, or any other similar corporate
event, the aggregate number of shares available under the Plan, and
the number and the price of shares of common stock subject to
outstanding Options shall be appropriately adjusted automatically.
b. No right to purchase fractional shares shall result from any
adjustment in the Option pursuant to subsection 6a of this
Agreement. In case of any such adjustment, the shares subject to the
Option shall be rounded down to the nearest whole share.
c. Notice of any adjustment shall be given by the Company to
Nonemployee Director for the Option which shall have been so
adjusted and such adjustment (whether or not such notice is given)
shall be effective and binding for all purposes of the Plan.
7. Miscellaneous
a. This Option is issued pursuant to the Company's Nonemployee Director
Stock Option Plan and is subject to its terms. A copy of the Plan
has been given to the Nonemployee Director. 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 Nonemployee Director or other
person any claim or right to be granted an Option under the Plan,
except as expressly provided in the Plan. Neither the Plan nor any
action taken hereunder shall be construed as giving Nonemployee
Director any right to be retained in the service of the Company.
c. Neither Nonemployee Director, the Nonemployee Director's legal
representative, nor any person who acquires the right to exercise
this Option by reason of the Nonemployee Director's death shall be
or have any of the rights or privileges of, a shareholder of the
Company in respect of any shares of common stock receivable upon the
exercise of this Option, in whole or in part, unless and until
certificates for such shares shall have been issued upon exercise of
this Option.
d. 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.
e. This Agreement will be governed by and constructed exclusively in
accordance with the laws of the State of Minnesota.
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
---------------------------------
--------------------------------------
Nonemployee Director
TRUST AGREEMENT
GRACO INC. NONEMPLOYEE DIRECTOR
DEFERRED STOCK ACCOUNT
THIS TRUST AGREEMENT, Made and entered into as of September 30, 1997, by
and between GRACO INC., a Minnesota corporation (hereinafter sometimes referred
to as "Graco"), and NORWEST BANK MINNESOTA, N.A., a national banking
association, as trustee (said trustee and its successor or successors in trust
from time to time being hereinafter collectively referred to as "Trustee"):
WHEREAS, Graco has established a nonemployee director stock plan for the
benefit of its outside directors by the adoption of a document known as the
"GRACO INC. NONEMPLOYEE DIRECTOR STOCK PLAN" (the "Plan"); and
WHEREAS, Graco may from time to time hereafter amend, renew and
extend such Plan; and
WHEREAS, Graco has determined that it will establish a trust fund
which, subject to the claims of creditors of Graco, shall be held to pay such
portion of the benefits under the Plan which Graco does not directly pay; and
WHEREAS, the creation of such a trust fund requires that Graco
select a Trustee and enter into a Trust Agreement; and
WHEREAS, this is the Trust Agreement so contemplated; and
WHEREAS, the Trustee has agreed to serve as Trustee according to the
terms of this Trust Agreement and the officers of Graco are authorized to
execute this Trust Agreement on behalf of Graco;
NOW, THEREFORE, in consideration of the premises, the parties hereto
do hereby agree as follows:
SECTION 1
INTRODUCTION
1.1. Definitions. When used herein with initial capital letters, the
following words have the following meanings:
1.1.1. Administrator - the Secretary of Graco appointed by the Plan to
administer this Trust.
1.1.2. Beneficiary - a person designated by a Participant (or
automatically by operation of the Plan) to receive any benefit remaining at
the death of a Participant under the terms of the Plan.
1.1.3. Change in Control
1.1.3.1 A Change of Control means any one of the following
events:
1.1.3.1(a) acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) which results in
the beneficial ownership by such Person of 25% or more of either
1.1.3.1(a)(1) the then outstanding shares of Common
Stock of the Company (the "Outstanding Company Common
Stock") or
1.1.3.1(a)(2) the combined voting power of the then
outstanding voting securities of the Company entitled to
vote generally in the election of directors (the
"Outstanding Company Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or
any corporation controlled by the Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Common Stock or other voting
securities of the Company owned by the Trust Under the Will
of Clarissa L. Gray ("Trust Person"), provided that such
acquisition does not result in the beneficial ownership by
such Person of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting Securities,
and provided further that for purposes of this Section
1.1.3, a Trust Person shall not be deemed to have beneficial
ownership of the Common Stock or other voting securities of
the Company owned by The Graco Foundation or any employee
benefit plan of the Company, including the Graco Employee
Retirement Plan and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Participating Director or
any group that includes the Participating Director, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (1), (2) and (3) of
subsection 1.1.3.1(d) below; and
provided, further, that if any Person's beneficial ownership of
the Outstanding Company Common Stock or Outstanding Company
Voting Securities is 25% or more as a result of a transaction
described in clause (i) or (ii) above, and such Person
subsequently acquires beneficial ownership of additional
Outstanding Company Common Stock or Outstanding Company Voting
Securities as a result of a transaction other than that described
in clause (i) or (ii) above, such subsequent acquisition will be
treated as an acquisition that causes such Person to own 25% or
more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities and be deemed a Change of Control; and
provided further, that in the event any acquisition or other
transaction occurs which results in the beneficial ownership of
32% or more of either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities by any Trust Person, the
Incumbent Board, as defined below, may by majority vote increase
the threshold beneficial ownership percentage to a percentage
above 32% for any Trust Person; or
1.1.3.1(b) individuals who, as of the date hereof,
constitute the Board of Directors of the Company (the "Incumbent
Board") cease for any reason to constitute at least a majority of
said Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial membership on
the Board occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board, or
1.1.3.1(c) the commencement or announcement of an intention
to make a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a Person of 25%
or more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities; or
1.1.3.1(d) the approval by the shareholders of the Company
of a reorganization, merger, consolidation or statutory exchange
of Outstanding Company Common Stock or Outstanding Company Voting
Securities or sale or other disposition of all or substantially
all of the assets of the Company ("Business Combination") or, if
consummation of such Business Combination is subject, at the time
of such approval by shareholders, to the consent of any
government or governmental agency, the obtaining of such consent
(either explicitly or implicitly by consummation); excluding,
however, such a Business Combination pursuant to which
1.1.3.1(d)(1) all or substantially all of the
individuals and entities who were the beneficial owners of
the Outstanding Company Common Stock or Outstanding Company
Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more
than 80% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such Business Combination
(including, without limitation, a corporation that as a
result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock
or Outstanding Company Voting Securities,
1.1.3.1(d)(2) no Person (excluding any employee benefit
plan, or related trust, of the Company or such corporation
resulting from such Business Combination) beneficially owns,
directly or indirectly, 25% or more of the then outstanding
shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of
the then outstanding voting securities of such corporation,
except to the extent that such ownership existed prior to
the Business Combination, and
1.1.3.1(d)(3) at least a majority of the members of the
board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business
Combination; or
1.1.3.1(e) approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
1.1.3.2 A Change of Control shall not be deemed to have occurred
with respect to a Participating Director if:
1.1.3.2(a) the acquisition of the 25% or greater interest
referred to in subparagraph 1.1.3.1(a) of this Section 1.1.3 is
by a group, acting in concert, that includes the Participating
Director or
1.1.3.2(b) if at least 25% of the then outstanding common
stock or combined voting power of the then outstanding company
voting securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring all
or substantially all of the assets of the Company shall be
beneficially owned, directly or indirectly, immediately after a
reorganization, merger, consolidation, statutory share exchange,
disposition of assets, liquidation or dissolution referred to in
subparagraph 1.1.3.1(d) or 1.1.3.1(e) of this Section by a group,
acting in concert, that includes that Participating Director.
1.1.4. Common Stock - common shares of Graco, par value $1.00.
1.1.5. Company - GRACO INC., a Minnesota corporation, and any
successor thereof that adopts the Plan.
1.1.6. Fund - the assets held under this Trust Agreement by the
Trustee from time to time, including all contributions of the Company and
the investments and reinvestments, earnings and profits thereon.
1.1.7. Insolvent, Insolvency - the condition which exists when Company
is: (i) generally unable to pay its debts when they are due, or (ii)
subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
1.1.8. Participant - a nonemployee director of the Company who has
become and remains a participant in the Plan in accordance with the
provisions of the Plan.
1.1.9. Plan - the unfunded, nonqualified "GRACO INC. NONEMPLOYEE
DIRECTOR STOCK PLAN" of the Company which has been established for the
benefit of the nonemployee directors of the Company eligible to participate
therein.
1.1.10. Trust Agreement - this written document entitled "TRUST
AGREEMENT, GRACO NONEMPLOYEE DIRECTOR DEFERRED STOCK ACCOUNT" entered into
by and between Company and the Trustee effective as of September 30, 1997,
as the same may be amended from time to time thereafter.
1.1.11. Trustee - the Trustee originally named hereunder and its
successor in Trust.
1.2. Rules of Interpretation. Whenever appropriate, words used herein in
the singular may be read in the plural, or words used herein in the plural may
be read in the singular; the masculine may include the feminine; and the words
"hereof", "herein" or "hereunder" or other similar compounds of the word "here"
shall mean and refer to this entire Trust Agreement and not to any particular
paragraph or section of this Trust Agreement unless the context clearly
indicates to the contrary. The titles given to the various sections of this
Trust Agreement are inserted for convenience of reference only and are not part
of this Trust Agreement, and they shall not be considered in determining the
purpose, meaning or intent of any provision hereof. Any reference in this Trust
Agreement to a statute or regulation shall be considered also to mean and refer
to any subsequent amendment or replacement of that statute or regulation. This
instrument has been executed and delivered in the State of Minnesota and has
been drawn in conformity to the laws of that State and shall be construed and
enforced in accordance with the laws of the State of Minnesota.
SECTION 2
ESTABLISHMENT OF TRUST
2.1. Establishment of Trust. Company hereby deposits with Trustee in Trust
One Hundred Dollars and no/100 ($100.00), which shall become the principal of
the Trust to be held, administered and disposed of by Trustee as provided in
this Trust Agreement. The Company shall make additional deposits of cash or
other property from time to time as it may determine in its sole and absolute
discretion. Neither Trustee nor any Participant or Beneficiary shall have any
right to compel any additional deposits.
2.2. Fund Established. A Fund is hereby established by Company. The Fund
shall be held by Trustee in Trust and dealt with in accordance with the
provisions of this Trust Agreement. This Trust Agreement is intended to create a
trust which is a grantor trust within the meaning of section 671 of the Internal
Revenue Code, as amended, and shall be construed accordingly. The principal of
the Trust, and any earnings thereon shall be held separate and apart from other
funds of the Company and shall be used exclusively for the uses and purposes of
Plan Participants and general creditors as herein set forth. Plan Participants
and their Beneficiaries shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created under the
Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan
Participants and their Beneficiaries against Company. Any assets held by the
Trust will be subject to the claims of Company's general creditors under federal
and state law in the event of Insolvency.
2.3. Revocable Trust. The Trust hereby established is revocable by Company;
it shall become irrevocable upon a Change in Control, as defined herein.
SECTION 3
PAYMENTS TO PLAN PARTICIPANTS
AND THEIR BENEFICIARIES
3.1. Company shall deliver to Trustee from time to time one or more
schedules (the "Payment Schedule") that indicate the amounts payable in respect
of each Participant (and his or her Beneficiaries), that provides a formula or
other instructions acceptable to Trustee for determining the amounts so payable,
the form in which such amount is to be paid (as provided for or available under
the Plan), and the time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the Participants or
their Beneficiaries in accordance with the Payment Schedule. Company may direct
Trustee, with Trustee's consent, to withhold, report and remit any federal,
state and local taxes that may be required to be withheld with respect to the
payments of benefits pursuant to the terms of the Plan and Trustee shall pay the
amounts withheld to the appropriate taxing authorities. In the event Company
does not direct the Trustee or Trustee does not consent to withhold, report and
remit all federal, state and local taxes, the Company will perform such
activities itself.
3.2. The entitlement of a Participant or Beneficiary to benefits under the
Plan shall be determined by Company or such party as it shall designate under
the Plan, and any claim for such benefits shall be considered and reviewed under
the procedures set forth in the Plan.
3.3. Company may make payment of benefits directly to Participants or
their Beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits within a
reasonable time prior to the time amounts are payable to Participants or their
Beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plan, Company shall make the balance of each such payment as it
falls due. Trustee shall notify Company where principal and earnings are not
sufficient.
SECTION 4
PAYMENTS TO COMPANY
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
Company or to divert to others any of the Trust assets before all payments of
benefits have been made to Plan Participants and their Beneficiaries pursuant to
the terms of the Plan. Prior to the date the Trust becomes irrevocable, the
Company may request the Trustee to return assets to the Company which are
determined by the Company to be in excess of amounts reasonably believed
necessary to satisfy the claims of all Participants and Beneficiaries under the
terms of the Plan.
SECTION 5
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS
TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT
5.1. Cease Payments. Trustee shall cease payment of benefits to
Participants and Beneficiaries if the Company is insolvent.
5.2. Claims of Creditors. At all times during the continuance of this
Trust, the principal and income of the Trust shall be subject to claims of
general creditors of Company under federal and state law as set forth below.
5.2.1. The Administrator and the Chief Executive Officer of the
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in
writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits to Participants or
Beneficiaries.
5.2.2. Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a determination
concerning Company's solvency.
5.2.3. If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Participants and
Beneficiaries and shall hold the assets of the Trust for the benefit of
Company's general creditors. Nothing in this Trust Agreement shall in any
way diminish any rights of Participants and Beneficiaries to pursue their
rights as general creditors of Company with respect to benefits due under
the Plan or otherwise.
5.2.4. Trustee shall resume the payment of benefits to Participants
and Beneficiaries in accordance with Section 3 of this Agreement only after
Trustee has determined that Company is not Insolvent ( or is no longer
Insolvent).
5.3. Resumption of Payments. Provided that there are sufficient assets, if
Trustee discontinues the payment of benefits from the Trust pursuant to Section
5 hereof and subsequently resumes such payments, the first payment following
such discontinuance shall include the aggregate amount of all payments due to
Participants and Beneficiaries under the terms of the Plan for the period of
such discontinuance, less the aggregate amount of payment, if any, made to
Participants and Beneficiaries by Company pursuant to the Plan during any such
period of discontinuance.
SECTION 6
INVESTMENT AUTHORITY
Trustee shall invest any funds transferred to it by Company in such manner
as may be directed by Company. In the event Company fails to give such
instructions to Trustee, Trustee shall then have full authority to invest any
funds transferred to it by Company as Trustee sees fit, consistent with the
terms and conditions of this Trust Agreement and the Plan. Notwithstanding
anything to the contrary, if so directed by the Company, the Trustee shall
invest all or any portion of the Fund in securities (including stock or rights
to acquire stock) or obligations issued by Company. All voting rights associated
with assets of the Trust consisting of Common Stock of the Company shall be
exercisable by the Participants or Beneficiaries in proportion to the number of
shares of Common Stock of the Company held in the deferred stock account
established under the Plan for each such Participant or Beneficiary as of the
applicable record date as determined by the Administrator and pursuant to such
rules as may be established by the Administrator and the Trustee. All other
rights associated with assets of the Trust, including voting rights with respect
to any equity securities held by the Trust (but not including Common Stock of
the Company), shall be exercised by Trustee or the person designated by Trustee,
and shall in no event be exercisable by or rest with Participants.
Company shall have the right at any time, and from time to time in its
sole discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
SECTION 7
DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, if any, shall be accumulated and reinvested in accordance
with the terms hereof. All cash dividends, if any, paid with respect to the
Common Stock of the Company shall be reinvested in Common Stock of the Company.
SECTION 8
ACCOUNTING BY TRUSTEE
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each calendar
year, or such other date or dates specified by the Company and within sixty (60)
days after the removal or resignation of Trustee, Trustee shall deliver to
Company a written account of its administration of the Trust during such year or
during the period from the close of the last preceding year to the date of such
removal or resignation, setting forth all investments, receipts, disbursements
and other transactions effected by it, including a description of all securities
and investments purchased and sold with the cost of net proceeds of such
purchases or sales (accrued interest paid or receivable being shown separately),
and showing all cash, securities and other property held in the Trust at the end
of such year or as of the date of such removal or resignation, as the case may
be. It is recognized that in the operation and administration of the Trust
certain mathematical or accounting errors may be made or mistakes may arise by
reason of errors in information supplied to Trustee. Trustee shall have the
power to cause such equitable adjustments to be made to correct such errors as
Trustee in its discretion considers appropriate. Such adjustments shall be final
and binding on all persons.
SECTION 9
RESPONSIBILITY OF TRUSTEE
9.1. General Duty of Care. Trustee shall act with the care, skill,
prudence and diligence under the circumstances then prevailing that a prudent
person acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims, provided,
however, that Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by Company which is
contemplated by, and in conformity, the terms of the Plan or this Trust and is
given in writing by Company. In the event of a dispute between Company and any
person, Trustee may apply to a court of competent jurisdiction to resolve the
dispute.
9.2. No Duty to Determine Taxability. Trustee has no responsibility to
advise Company as to the taxability or deductibility of contributions to or
distributions from the Trust, or gains or losses thereon, whether with regard to
any federal, state, local or other taxes, and Company acknowledges that it has
not and will not rely on Trustee for such purposes. Trustee does not warranty
and shall not be liable for any tax consequences associated with the Trust or
the Plan.
9.3. Indemnification of Trustee. Company will indemnify Trustee and hold
it harmless from and against all claims, liabilities, legal fees and expenses
that may be asserted against it, otherwise than on account of the Trustee's own
negligence or willful misconduct (as found by a final judgment of a court of
competent jurisdiction) by reason of the Trustee's taking or refraining from
taking any action in accordance with the Trust agreement, whether or not Trustee
is a party to a legal proceeding or otherwise.
9.4. Trustee May Rely on Company Information. Trustee shall be entitled to
rely on any information furnished to it by the Company or any other party from
whom the Trustee reasonably believes it is authorized to provide any information
to the Trust. Trustee shall have no duty to determine or inquire whether any
contributions to this Trust are in compliance with the Plan, or to compute any
amount to be paid to Trustee; nor shall Trustee be responsible for the
collection or adequacy of any contributions to the Trust or for the adequacy of
the Trust to meet and discharge liabilities to Participants and their
Beneficiaries under the Plan or to other creditors of the Company.
9.5. Litigation Expenses. If Trustee undertakes or defends any litigation
arising in connection with this Trust, Company agrees to indemnify Trustee
against Trustee's costs, expenses and liabilities (including, without
limitation, attorneys' fees and expenses) relating thereto and to be primarily
liable for such payments. If Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, Trustee may obtain payment from the
Trust.
9.6. Use of Counsel. Trustee may consult with legal counsel (who may also
be counsel for Company generally) with respect to any of its duties or
obligations hereunder.
9.7. Use of Agents. Trustee may hire such attorneys, agents and advisors
as are reasonably necessary to interpret the provisions of the Trust and this
agreement and to resolve any disputes that may arise on these issues. Trustee
may recover the reasonable costs of hiring such attorneys, agents and advisors
from the Company or, in the absence of such payment, from the Trust. Trustee
shall not be liable to anyone for any action it may take in good faith in
reliance upon the advice of such attorneys, agents and advisors.
9.8. General Grant of Authority. Trustee shall have, without exclusion, all
powers conferred on trustees by applicable law, unless expressly provided
otherwise herein.
9.9. No Business Obligation. Notwithstanding any powers granted to Trustee
pursuant to this Trust Agreement or to applicable law, Trustee shall not have
any power that could give this Trust the objective or carrying on a business and
dividing the gains therefrom, within the meaning of Section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to the Internal
Revenue Code of 1986, as amended.
SECTION 10
COMPENSATION AND EXPENSES OF TRUSTEE
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust.
SECTION 11
RESIGNATION AND REMOVAL OF TRUSTEE
11.1. Resignation. Trustee may resign at any time by written notice to
Company, which shall be effective thirty (30) days after receipt of such notice
unless Company and Trustee agree otherwise.
11.2. Removal. Trustee may be removed by Company on thirty (30) days notice
or upon shorter notice accepted by Trustee.
11.3. Change in Control. Upon a Change in Control, as defined herein,
Trustee may not be removed by Company for ninety (90) days. If for any reason
Trustee resigns or is removed within ninety (90) days of a Change in Control,
Trustee shall select a successor Trustee in accordance with the provisions of
Section 12.2 hereof prior to the effective date of Trustee's resignation or
removal.
11.4. Transfer of Assets. Upon resignation or removal of Trustee and
appointment of a successor Trustee, all assets shall subsequently be transferred
to the successor Trustee. The transfer shall be completed within thirty (30)
days after receipt of notice of resignation, removal or transfer, unless Company
extends the time limit.
11.5. Court Appointment. If Trustee resigns or is removed, a successor
shall be appointed, in accordance with the terms hereof. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
SECTION 12
APPOINTMENT OF SUCCESSOR
12.1. New Trustee. If Trustee resigns or is removed in accordance with
Section 11.1 or 11.2 hereof, the Administrator may appoint any third party, such
as a bank trust department or other party that may be granted corporate trustee
powers under Minnesota law, as a successor to replace Trustee upon resignation
or removal. The appointment shall be effective when accepted in writing by the
new Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the Trust assets. The former Trustee shall execute
any instrument necessary or reasonably requested by Company or the successor
Trustee to evidence the transfer.
12.2. Change in Control. Upon a Change in Control, if Trustee resigns or is
removed and selects a successor Trustee pursuant to Section 11.3, Trustee may
appoint any third party such as a bank trust department or other party that may
be granted corporate trustee powers under Minnesota law. The appointment of a
successor Trustee shall be effective when accepted in writing by the new
Trustee. The new Trustee shall have all the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by Company or the
successor Trustee to evidence the transfer.
SECTION 13
AMENDMENT OR TERMINATION
13.1. This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after it
has become irrevocable in accordance with Section 2.3
13.2. The Trust shall not terminate until the date on which Plan
Participants and their Beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan unless sooner revoked in accordance with Section 2.3.
Upon termination of the Trust any assets remaining in the Trust shall be
returned to the Company.
13.3. Upon written approval of Participants or Beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, Company may terminate
this Trust prior to the time all benefit payments under the Plan have been made.
All assets in the Trust at termination shall be returned to the Company.
SECTION 14
MISCELLANEOUS
14.1. Separability. Any provision of this Trust Agreement prohibited by law
shall be ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
14.2. Spendthrift Provision. Benefits payable to Participants and
Beneficiaries under this Trust Agreement may not be anticipated, assigned
(either at law or in equity), alienated, pledges, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable process.
SECTION 15
EFFECTIVE DATE
The effective date of this Trust Agreement shall be September 30, 1997.
IN WITNESS WHEREOF, each of the parties hereto has caused this Trust
Agreement to be executed as of the day and year first above written.
GRACO INC.
By:/s/Mark W. Sheahan
Its: Treasurer
And:/s/Robert M. Mattison
Its: Vice President, General Counsel
and Secretary
NORWEST BANK MINNESOTA, N.A.
as TRUSTEE
By:/s/George S. Scalia
Its: Vice President
And:/s/Donna K. Dickinson
Its: Vice President
<TABLE>
<CAPTION>
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Sept. 26, 1997 Sept 27, 1996 Sept 26, 1997 Sept. 27, 1996
-------------- ------------- ------------- --------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
Net earnings ................................................. $12,879 $10,157 $29,478 $25,774
============== ============= ============== ==============
Average number of common and common equivalent shares outstanding:
Average number of common
shares outstanding ........................................ 17,050 17,181 17,096 17,282
Dilutive effect of stock options
computed on the treasury
stock method .............................................. 405 229 386 236
-------------- ------------- ------------- ---------------
17,455 17,410 17,482 17,518
============== ============= ============== ==============
Net earnings per common
and common equivalent share ............................... $ .74 $ .58 $ 1.69 $ 1.47
============== ============= ============== ==============
Primary and fully diluted earnings per share are substantially the same.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Graco
Inc. and subsidiaries consolidated statements of earnings and consolidated
balance sheets for the quarterly period ending September 26, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000042888
<NAME> GRACO INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 7,382
<SECURITIES> 0
<RECEIVABLES> 82,566
<ALLOWANCES> 4,196
<INVENTORY> 44,768
<CURRENT-ASSETS> 148,562
<PP&E> 194,343
<DEPRECIATION> 94,310
<TOTAL-ASSETS> 257,661
<CURRENT-LIABILITIES> 72,314
<BONDS> 8,765
0
0
<COMMON> 17,020
<OTHER-SE> 127,387
<TOTAL-LIABILITY-AND-EQUITY> 257,661
<SALES> 305,740
<TOTAL-REVENUES> 305,740
<CGS> 156,446
<TOTAL-COSTS> 156,446
<OTHER-EXPENSES> 106,566
<LOSS-PROVISION> 101
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> 42,728
<INCOME-TAX> 13,250
<INCOME-CONTINUING> 29,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,478
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
</TABLE>
