SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. )
Filed by the Registrant [X]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
GRACO INC.
------------------------------------------------
(Name of Registrant as Specified in its Charter)
------------------------------------------------------------------------
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Item 22(a)(2) of Schedule 14A.
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1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule O-11 (Set forth the amount on which the
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<PAGE>
[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Shareholder:
Please join us on Tuesday, May 5, 1998, at 1:00 p.m. for Graco's Annual
Meeting of Shareholders in the first floor auditorium of the Russell J. Gray
Technical Center, 88-11th Avenue N.E., Minneapolis, Minnesota.
At this meeting, shareholders will consider the following matters:
1. Election of four directors to serve for three-year terms.
2. Ratification of the selection of independent auditors for the current
year.
3. Transaction of such other business as may properly come before the
meeting.
Shareholders of record at the close of business on March 6, 1998, are
entitled to vote at this meeting or any adjournment.
We encourage you to join us and participate in the meeting. If you are
unable to do so, a Proxy Card is enclosed for your use. When marked and
returned, it will authorize us to vote your shares according to your
instructions.
If you do not return the Proxy Card and do not vote your shares in person
at the meeting, you will lose your right to vote on matters which are important
to you as a shareholder. Accordingly, if you do not plan to attend the meeting,
please execute and return the enclosed Proxy Card promptly. This will not
prevent you from voting in person if you decide to attend the meeting.
Sincerely,
/s/George Aristides /s/Robert M. Mattison
George Aristides Robert M. Mattison
Chief Executive Officer Secretary
March 26, 1998
Golden Valley, Minnesota
================================================================================
YOUR VOTE IS IMPORTANT
We urge you to mark, date and sign the enclosed Proxy Card and return it in the
accompanying envelope as soon as possible. If you attend the meeting, you may
still revoke your proxy and vote in person if you wish.
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
Election of Directors........................................2
Nominees and Other Directors...............................2
Meetings and Committees of the Board of Directors..........4
Nomination of Directors....................................5
Executive Compensation.....................................5
Report of the Management Organization and
Compensation Committee...............................5
Comparative Stock Performance Graph.....................7
Summary Compensation Table..............................8
Option Grants Table (Last Fiscal Year)..................9
Aggregated Option Exercises In Last Fiscal Year and
Fiscal Year-End Option Values.......................10
Change in Control Arrangements.........................10
Retirement Arrangements................................11
Directors' Fees........................................11
Beneficial Ownership of Shares............................12
Principal Shareholders.................................13
Section 16 Reporting Compliance........................13
Ratification of Appointment of Independent Public Auditors..14
Other Matters...............................................14
Shareholder Proposals.......................................14
================================================================================
A copy of the 1997 Graco Inc. Annual Report on Form 10-K, including the
Financial Statements and the Financial Statement Schedule, can be obtained free
of charge by calling (612) 623-6778 or writing:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
================================================================================
1
<PAGE>
[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 5, 1998
Your proxy, represented by the accompanying Proxy Card, is solicited by the
Board of Directors of Graco Inc. ("Graco" or the "Company") in connection with
the Annual Meeting of the Shareholders of the Company to be held on May 5, 1998,
and any adjournments of that meeting.
The costs of the solicitation, including the cost of preparing and mailing
the Notice of Meeting and this Proxy Statement, will be paid by the Company.
Solicitation will be primarily by mailing this Proxy Statement to all
shareholders entitled to vote at the meeting. Proxies may be solicited by
officers of the Company personally, but at no compensation in addition to their
regular compensation as officers. The Company may reimburse brokers, banks and
others holding shares in their names for third parties, for the cost of
forwarding proxy material to, and obtaining proxies from, third parties. The
Proxy Statement and accompanying Proxy Card will be first mailed to shareholders
on or about March 26, 1998.
Proxies may be revoked at any time prior to being voted by giving written
notice of revocation to the Secretary of the Company. All properly executed
proxies received by management will be voted in the manner set forth in this
Proxy Statement or as otherwise specified by the shareholder giving the proxy.
Shares voted as abstentions on any matter (or a "withhold vote for" as to
directors) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum at the meeting and as unvoted,
although present and entitled to vote, for purposes of determining the approval
of each matter as to which the shareholder has abstained. If a broker submits a
proxy which indicates that the broker does not have discretionary authority as
to certain shares to vote on one or more matters, those shares will be counted
as shares that are present and entitled to vote for purposes of determining the
presence of a quorum at the meeting, but will not be considered as present and
entitled to vote with respect to such matters.
Only shareholders of record as of the close of business on March 6, 1998,
may vote at the meeting or at any adjournment. As of that date, there were
issued and outstanding 25,790,412 common shares of the Company, the only class
of securities entitled to vote at the meeting. Each share registered to a
shareholder of record is entitled to one vote. Cumulative voting is not
permitted.
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES AND OTHER DIRECTORS
The number of directors of the Company is currently fixed at ten members,
two of whom are executive officers of the Company. Members of the Board of
Directors serve for three-year terms, with a class of directors consisting of
three or four members being elected each year. Vacancies that occur during a
term may be filled by a majority vote of the directors then in office, though
less than a quorum, and directors so chosen hold office for a term expiring at
the next Annual Meeting of Shareholders.
At the forthcoming Annual Meeting, four persons are to be elected to the
Company's Board of Directors. The Board has nominated Dale R. Olseth, Charles M.
Osborne, Jerald L. Scott, and William G. Van Dyke for three-year terms expiring
in the year 2001. Three nominees, Dale R. Olseth, Charles M. Osborne, and
William G. Van Dyke, have previously been elected as directors of the Company by
the shareholders.
2
<PAGE>
Unless otherwise instructed not to vote for the election of directors,
proxies will be voted to elect the nominees. A director candidate must receive
the vote of a majority of the voting power of shares present in order to be
elected. Unless the Board reduces the number of directors, the enclosed proxy
will be voted to elect the replacement nominee designated by the Board in the
event that a nominee is unable or unwilling to serve.
The following information is given as of March 6, 1998 with respect to the
nominees for election and the six directors whose terms of office will continue
after the Annual Meeting. Except as noted below, each of the nominees and
directors has held the same position, or another executive position with the
same employer, for the past five years.
Nominees for election at this meeting to terms expiring in the year 2001:
Dale R. Olseth
Mr. Olseth, 67, is President and Chief Executive Officer, SurModics, Inc.
(formerly BSI Corporation), a biotechnical company specializing in the
modification of material surfaces. Mr. Olseth has been a director of Graco
since 1972 and is a director of The Toro Company.
Charles M. Osborne
Mr. Osborne, 44, is President and Chief Operating Officer of the Company.
From 1989 to 1997, he was Senior Vice President and Chief Financial
Officer, Deluxe Corporation, a printer of checks and business forms and a
supplier of electronic processing services to the financial payments
industry. Mr. Osborne has been a director of Graco since 1995. Dale
Johnson, a Vice President of the Company, is the brother-in-law of Mr.
Osborne.
Jerald L. Scott
Mr. Scott, 56, is Senior Vice President, Operations, H.B. Fuller Company, a
worldwide manufacturer and marketer of adhesives, sealants, coatings,
paints and other specialty chemical products. Mr. Scott has been a director
of Graco since 1997.
William G. Van Dyke
Mr. Van Dyke, 52, is Chairman, President and Chief Executive Officer,
Donaldson Company, Inc., a diversified manufacturer of air and liquid
filtration products. Mr. Van Dyke has been a director of Graco since 1995
and is a director of Donaldson Company, Inc.
Directors whose terms continue until 1999:
David A. Koch
Mr. Koch, 67, is Chairman of the Board of the Company. He was formerly
Chairman and Chief Executive Officer from 1985 to 1996. Mr. Koch has been a
director of Graco since 1962 and is a director of ReliaStar Financial Corp.
Richard D. McFarland
Mr. McFarland, 68, is Vice Chairman, Dain Rauscher (formerly Dain Bosworth
Incorporated), a brokerage firm. Dain Rauscher has performed investment
banking services for Graco in the past and this relationship is expected to
continue. He was formerly Chairman of Inter-Regional Financial Group, Inc.,
currently Interra Financial. Mr. McFarland has been a director of Graco
since 1969.
Lee R. Mitau
Mr. Mitau, 49, is Executive Vice President, General Counsel and Secretary
of U.S. Bancorp (formerly First Bank System, Inc.), a regional bank holding
company. First Bank National Association has extended a credit line to the
Company and also provides cash management and foreign exchange services.
The trustee of the Graco Employee Retirement Plan is First Trust National
Association. Both of these associations are subsidiaries of U.S. Bancorp.
From 1983 to 1995, Mr. Mitau was a partner of Dorsey & Whitney LLP. Mr.
Mitau has been a director of Graco since 1990 and is a director of H.B.
Fuller Company.
3
<PAGE>
Martha A.M. Morfitt
Ms. Morfitt, 40, is President, Chief Operating Officer and a director of
CNS Inc., a manufacturer and marketer of consumer products, including the
Breathe Right(R) nasal strip, effective March 30, 1998. From 1997 to 1998,
she was Vice President, Meals, from 1994 to 1997, Vice President, Green
Giant Brands, and from 1993 to 1994, Team Leader, Green Giant Shelf Stable
Vegetables, The Pillsbury Company, a diversified marketer of packaged food
products. Ms. Morfitt has been a director of Graco since 1995.
Directors whose terms continue until 2000:
George Aristides
Mr. Aristides, 62, is Chief Executive Officer of the Company. From 1996 to
1997 he was President and Chief Executive Officer; from 1993 to 1996, he
was President and Chief Operating Officer; from March to June 1993, he was
Executive Vice President; and from 1985 to March 1993, he was Vice
President, Manufacturing Operations and Controller. Mr. Aristides has been
a director of Graco since 1993.
Ronald O. Baukol
Mr. Baukol, 60, is Executive Vice President, International Operations,
Minnesota Mining and Manufacturing Company ("3M"), a diversified
manufacturer of industrial, commercial, consumer and health care products.
Mr. Baukol has been a director of Graco since 1989 and is a director of 3M
and The Toro Company.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1997, the Board of Directors met six times. Attendance of the
Company's directors at all Board and Committee meetings averaged 95 percent.
During 1997, each director attended at least 88 percent of the aggregate number
of meetings of the Board and of all committees of the Board on which he or she
served.
The Board of Directors has an Audit Committee, a Board Structure and Policy
Committee, and a Management Organization and Compensation Committee. Membership
as of March 6, 1998, the record date, was as follows:
Management
Board Structure Organization
Audit and Policy and Compensation
- ---------------------- ------------------- ---------------------
L. R. Mitau, Chair D. R. Olseth, Chair R. O. Baukol, Chair
R. D. McFarland G. Aristides M. A.M. Morfitt
J. L. Scott D. A. Koch D. R. Olseth
W. G. Van Dyke R. D. McFarland W. G. Van Dyke
L. R. Mitau
Audit Committee (2 meetings in fiscal 1997)
o Reviews the accounting, control and legal compliance policies and
procedures of the Company.
Board Structure and Policy Committee (3 meeting in fiscal 1997)
o Evaluates policies related to Board membership and procedure;
o Reviews and makes recommendations on fees and benefits for
directors; and
o Recommends to the Board of Directors nominees for the position of
director.
Management Organization and Compensation Committee (3 meetings in fiscal 1997)
o Develops the Company's philosophy on executive compensation;
o Determines the compensation of the Company's executive officers;
o Reviews and makes recommendations on management organization and
succession plans; and
o Administers the Company's stock option and incentive plans.
4
<PAGE>
NOMINATION OF DIRECTORS
Shareholders may nominate candidates for election to the Board of Directors
who will be considered by the Board Structure and Policy Committee.
Recommendations should be made in writing and addressed to the Committee in care
of the Secretary of the Company at the Company's corporate headquarters. The
By-laws provide that timely notice must be received by the Secretary not less
than 60 days prior to the date of the Annual Meeting of Shareholders, the first
Tuesday in May of each year. The nominations must set forth (i) the name, age,
business and residential addresses and principal occupation or employment of
each nominee proposed in such notice; (ii) the name and address of the
shareholder giving the notice, as it appears in the Company's stock register;
(iii) the number of shares of capital stock of the Company which are
beneficially owned by each such nominee and by such shareholder; and (iv) such
other information concerning each such nominee as would be required under the
rules of the Securities and Exchange Commission in a proxy statement soliciting
proxies for the election of such nominee. Such notice must also include a signed
consent of each such nominee to serve as a director of the Company, if elected.
EXECUTIVE COMPENSATION
Report of the Management Organization and Compensation Committee
Overview
The Management Organization and Compensation Committee of the Board of
Directors (hereafter called "the Committee"), composed of four independent
nonemployee directors, is responsible for developing the Company's philosophy on
executive compensation. Consistent with this philosophy, the Committee develops
compensation programs for the Chief Executive Officer and each of the other
executive officers of the Company. On an annual basis, the Committee determines
the compensation to be paid to the Chief Executive Officer and other executive
officers, based on the provisions of the compensation plans.
Compensation plans which provide for grants or awards of Company stock are
approved by the Board of Directors and the shareholders of the Company. In 1993,
the Internal Revenue Code was amended to include a deductibility limit for
remuneration to certain executive officers [Section 162(m) of the Code].
Qualified performance-based compensation is not subject to this deductibility
limit. In order to qualify grants of stock options and stock appreciation rights
as performance-based compensation under Section 162(m), the Company's Long Term
Stock Incentive Plan was amended to include an annual periodic per person
aggregate limit of 300,000 shares of Company stock subject to award or grant.
The Long Term Stock Incentive Plan meets the requirements of Section 162(m) in
all respects.
Executive Compensation Philosophy and Program
It is the Company's philosophy to set its executive compensation structure
at levels which are competitive with those of durable goods manufacturers of
comparable size. These levels are determined by consulting a variety of
independent third-party executive compensation surveys. Executive compensation
is then delivered through:
o base salaries which recognize the experience and performance of individual
executives;
o aggressive, performance-driven incentives which:
- enhance shareholder value,
- balance annual and long-term corporate objectives, and
- provide meaningful amounts of Company stock; and
o competitive benefits.
The specific components of the executive compensation program are described
below:
Base salary ranges are established by the Committee, using the fiftieth
percentile salary and trend data for comparably-sized durable goods
manufacturers, as published in a variety of independent third-party executive
compensation surveys. The actual base salary of each officer, within the range,
is determined by the executive's performance, which is evaluated annually by the
officer's supervisor - either the Chief Executive Officer or the President and
Chief Operating Officer - and reviewed and approved by the Committee. Both
financial and management factors are considered in the evaluation.
The Annual Bonus Plan, available in 1997 to 12 executive officers and 43
other management employees, is structured to encourage growth in both sales and
net earnings by the Company. The plan determines individual awards for executive
officers by measuring Company performance against corporate sales and net
earnings growth targets established by the Committee in the first quarter of
5
<PAGE>
each year. Sales and net earnings targets for 1997 were established to exceed
prior year earnings results. In addition, the Chief Executive Officer has been
given the authority to establish divisional and regional growth targets for the
executive officers in charge of specific divisions and regions. Overall
performance for the divisional and regional executives is measured against both
divisional and corporate targets. Targets are set at one-half the maximum
potential payout under the plan. In 1997, the Committee established a range of
payouts as a percent of base salary for executive positions as follows:
Minimum Payout as Maximum Payout as
Position a % of Base Salary a % of Base Salary
- ------------------------------------- ------------------- -------------------
Chief Executive Officer 0% 80%
President and Chief Operating Officer 0% 70%
Vice President (Board-elected) 0% 60%
Vice President (By appointment) 0% 50%
The actual Annual Bonus Plan award is determined by evaluating corporate,
divisional and regional performance against the established financial
objectives. For 1997, sales reached 35 percent of the maximum target, and
corporate net earnings reached 98 percent of the maximum target. Awards were
made to all executive officers under the 1997 Annual Bonus Plan.
Under the Chairman's Award Program, the Chairman is also able to grant a
total of $100,000 in individual discretionary awards to recognize significant
contributions by selected executive officers and other management employees. In
1997 a total of $71,556 was granted to nine employees including an award of
$25,000 to Roger L. King.
The Executive Long Term Incentive Program is structured to align the
interests of executive officers with those of all Graco shareholders. The Long
Term Incentive Program for 1997 consisted of stock options granted to the
executive officers. The number of stock options granted to each executive
officer was determined using competitive data for comparably-sized durable goods
manufacturers, as reflected in independent third-party long-term incentive
surveys. These options were non-incentive stock options with a 10-year duration
and a vesting schedule of 25 percent after two years, with 25 percent additional
vesting after years three, four and five. The value of the restricted shares
remaining to be vested under the 1991-1993 Executive Long Term Incentive Program
was considered in determining stock option awards made during 1997. Executive
officers are eligible to participate in the employee benefit programs available
to all Graco employees.
Compensation of the Chief Executive Officer
On an annual basis, the Committee is responsible for reviewing the
individual performance of the Chief Executive Officer and determining
appropriate adjustments in base pay and award opportunities under the Annual
Bonus Plan and Executive Long Term Incentive Program.
Awards made to the Chief Executive Officer under the Annual Bonus Plan are
determined by the growth in sales and net earnings of the Company. Sales of
$413.9 million in 1997 represents a growth of 6 percent. Net earnings in 1997 of
$44.7 million represent an increase of 24 percent from 1996. This growth in
sales and earnings for 1997 yielded a bonus award to Mr. Aristides of 66 percent
of his base salary.
In reviewing Mr. Aristides' 1997 performance, the Committee recognized a
number of significant accomplishments including record sales and net earnings, a
24 percent increase in diluted earnings per share, continued emphasis on expense
management while maintaining high levels of customer satisfaction, and continued
superior return to Graco shareholders, particularly in comparison to the Dow
Jones Factory Equipment Index and the S&P 500 Index. Continued focus on
investment in new products, global marketing, and enhanced distribution and
manufacturing have been effective in yielding the 5th consecutive year of
improved sales and net earnings. Based upon this analysis, the Committee
increased Mr. Aristides' base salary from $400,000 to $430,000, effective
January 1, 1998. The Annual Bonus Plan payout maximum for Mr. Aristides remained
unchanged.
6
<PAGE>
To realize the full potential of the strategic and cultural initiatives which
Mr. Aristides has taken during his tenure as Chief Executive Officer, the
Committee made a 67,500 (restated for the three-for-two stock split paid
February 4, 1998) share restricted stock grant to him in May 1997, which will
vest as follows: 15,000 shares on March 31, 1998, 22,500 shares on March 31,
1999, and 30,000 shares on March 31, 2000. This grant is intended to encourage
Mr. Aristides to remain with the Company at least through the final vest date of
the grant.
The Members of the Committee
Mr. Ronald O. Baukol
Ms. Martha A.M. Morfitt
Mr. Dale R. Olseth
Mr. William G. Van Dyke
Comparative Stock Performance Graph
The graph below compares the cumulative total shareholder return on the
common stock of the Company for the last five fiscal years with the cumulative
total return of the S&P 500 Index and of the Dow Jones Factory Equipment Index
over the same period (assuming the value of investment in Graco common stock and
each index was 100 on December 25, 1992, and all dividends were reinvested).
Five Year* Cumulative Total Shareholder Returns
[GRAPH-Table Below Lists Data Points Included in Graph]
Dow Jones
Year Graco Inc. S&P 500 Factory Equipment
- ---- ---------- ------- -----------------
1992 100 100 100
1993 157 110 119
1994 164 112 121
1995 236 153 157
1996 296 189 162
1997 431 252 184
*Fiscal Year Ended Last Friday in December
7
<PAGE>
Summary Compensation Table
The following table shows both annual and long-term compensation awarded to
or earned by the Chief Executive Officer and the four most highly compensated
executive officers of the Company whose total annual salary and bonus for 1997
exceeded $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
--------------------------------------------------- --------------------------------
(a) (b) (c) (d) (e) (f) (g) (i)
Other Restricted Securities All Other
Annual Stock Underlying Compen-
Name and Salary Bonus Compen- Award(s) Options/ sation
Principal Position Year ($)<F1><F2> ($)<F1><F3> sation ($) ($)<F4><F5> SARs (#)<F5> ($)<F6><F7>
- ------------------ ---- -------- -------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
George Aristides 1997 $402,102 $262,965 0 $1,164,375<F8> 60,000 $ 3,467
Chief Executive 1996 362,096 287,992 0 0 26,127 6,394
Officer 1995 309,613 215,600 0 0 135,945<F9> 5,401
Charles M. Osborne 1997 190,101 109,237 0 0 37,500 2,719
President and Chief 1996 0 0 0 0 0 0
Operating Officer 1995 0 0 0 0 0 0
Roger L. King 1997 187,788 59,901 28,501<F10> 0 7,500 40,971<F11>
Vice President 1996 180,864 68,083 0 0 6,800 4,777
and General Manager 1995 181,032 108,000 0 0 10,197 4,671
European Operations
John L. Heller 1997 165,856 83,048 0 0 9,000 3,466
Vice President, 1996 152,106 85,752 0 0 1,500 4,137
Asia Pacific and 1995 181,613 108,000 0 0 12,159 3,941
Latin America
James A. Graner 1997 140,868 69,031 0 0 7,500 3,474
Vice President 1996 133,774 79,804 0 0 7,500 3,150
and Controller 1995 116,380 69,600 0 0 11,250 3,052
<FN>
<F1>
(1) Deferred compensation is included in Salary and Bonus in the year earned.
<F2>
(2) In addition to base salary, the reported figure includes amounts
attributable to the imputed value of the group term life insurance benefit for
each of the named executive officers.
<F3>
(3) Bonus includes any awards under the Annual Bonus Plan and a $25,000
Chairman's Award for 1997 to Mr. King under the Chairman's Award Program
described in the Management Organization and Compensation Committee Report.
<F4>
(4) Under the prior Graco Executive Long Term Incentive Program, participants
were eligible to receive restricted stock awards and performance-based cash
payouts. Restricted stock grants made in 1991 vested over six years (one-sixth
per year), except that the unvested balance of the award had the potential to
vest at the end of three years if certain financial goals were met. Since the
financial goals for 1991-1993 were not met, the balance of the 1991 restricted
stock grant did not vest at the end of 1993, and no cash awards were made under
the program. Over the next five years, a portion of the restricted stock grant
vested each year. The balance vested in 1997.
<F5>
(5) On December 12, 1997, the Board of Directors approved a three-for-two stock
split, effected in the form of a 50 percent common stock dividend, payable
February 4, 1998, to shareholders of record on January 7, 1998. The number of
restricted shares and options, as well as the exercise price for options, has
been restated in this table and all subsequent tables to reflect the split.
<F6>
(6) The compensation reported includes the Company contributions under the Graco
Employee Investment Plan (excluding employee contributions), plus Company
contributions under the Graco Employee Stock Ownership Plan. For 1997, the
Company contribution accrued under the Graco Employee Investment Plan for each
named executive officer was as follows: $2,400 for Mr. Aristides; $1,652 for Mr.
Osborne; $2,424 for Mr. King; $2,399 for Mr. Heller; and $2,407 for Mr. Graner.
8
<PAGE>
In 1997, Company contributions under the Graco Employee Stock Ownership Plan had
a fair market value at the date of issuance of $1,067 for Mr. Aristides, Mr.
King, Mr. Heller and Mr. Graner. Mr. Osborne was not eligible for this program.
The allocation of stock under the Graco Employee Stock Ownership Plan ended
September 30, 1997, at which time the ten-year allocation term of the Plan
expired.
<F7>
(7) During 1994 and 1995, the Employee Investment Plan accepted contributions
from certain executive officers attributable to compensation in excess of
$150,000. These excess contributions have been returned to the participants.
Employer matching contributions attributable to these amounts have been left in
the Plan and will be used to offset future employer contributions. Amounts
equivalent to the employer matching contributions have been paid to the
executives in 1996 and these amounts appear in this column as income as follows:
Mr. Aristides $3,571; Mr. King $1,954; Mr. Heller $1,314; and Mr. Graner $294.
<F8>
(8) A restricted stock grant was made to Mr. Aristides on May 6, 1997, in the
amount shown on the table. The restricted stock will vest as follows: 15,000
shares on March 31, 1998, 22,500 shares on March 31, 1999, and 30,000 shares on
March 31, 2000. The market value of the unvested restricted shares at the end of
the 1997 fiscal year was $1,608,525.
<F9>
(9) Includes a one-time 112,500 share stock option grant to recognize additional
responsibilities resulting from Mr. Aristides' election as President and Chief
Executive Officer in 1995.
<F10>
(10) The reported figure represents a tax equalization payment, attributable to
Mr. King's expatriate assignment.
<F11>
(11) The reported figure represents a goods and services cost differential
provided to Mr. King as a result of his expatriate assignment.
</FN>
</TABLE>
Option Grants Table (Last Fiscal Year)
The following table shows the stock options granted to the named executives
during 1997, their exercise price and their grant date present value. This table
has been restated to reflect the three-for-two stock split paid February 4,
1998.
<TABLE>
<CAPTION>
Individual Grant Grant Date Value<F5>
-------------------------------------------------- ----------------
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options Exercise Grant
Underlying Granted to or Base Date
Options Employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value ($)
- ---------------- ----------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
George Aristides<F1> 30,000 13.5% $20.75 02/28/07 $247,200
George Aristides<F2> 30,000 13.5% 16.25 04/23/07 216,000
Charles M. Osborne<F3> 37,500 16.9% 17.25 05/06/07 212,250
John L. Heller<F4> 7,500 3.4% 17.25 05/06/07 42,450
John L. Heller<F1> 1,500 0.7% 20.75 02/28/07 12,360
Roger L. King<F1> 7,500 3.4% 20.75 02/28/07 61,800
James A. Graner<F1> 7,500 3.4% 20.75 02/28/07 61,800
<FN>
<F1>
(1) Non-incentive stock options were granted on February 28, 1997, in the
amounts shown on the table. The options may be exercised in equal installments
over four years, beginning with the second anniversary date of the grant.
<F2>
(2) Non-incentive stock options were granted to Mr. Aristides on April 23, 1997,
in the amount shown on the table. This grant was in addition to Mr. Aristides'
1997 Graco Executive Long Term Incentive Program grant, adjusting the total
number of shares granted to Mr. Aristides under this plan to an amount which is
equal to the competitive market. The options may be exercised in equal
installments over four years, beginning with the second anniversary date of the
grant.
<F3>
(3) Non-incentive stock options were granted to Mr. Osborne on May 6, 1997, in
the amount shown on the table to recognize his election as President and Chief
Operating Officer. The options may be exercised in equal installments over four
years, beginning with the second anniversary date of the grant.
<F4>
(4) Non-incentive stock options were granted to Mr. Heller on May 6, 1997, in
the amount shown on the table. They represent an adjustment to his 1997 Graco
Executive Long Term Incentive Program grant in recognition of his additional
management responsibilities in Asia Pacific. The options may be exercised in
equal installments over four years, beginning with the second anniversary date
of the grant.
9
<PAGE>
<F5>
(5) The Black-Scholes option pricing model has been used to determine the grant
date present value of the grants. Annual volatility was calculated using monthly
returns for 36 months prior to the grant date; the interest rate was set using
U.S. Treasury securities of similar duration to the option period as of the
grant date; and dividend yield was established as the yield on the grant date. A
10 percent discount for nontransferability and a 3 percent discount to reflect
the possibility of forfeiture over a two-year period were applied. For grants
expiring on February 28, 2007, the assumptions used in the model were annual
volatility of 31.68 percent, interest rate of 6.49 percent, dividend yield of
1.74 percent, and time to exercise of 10 years. For grants expiring on April 23,
2007, the assumptions used in the model were annual volatility of 30.85 percent,
interest rate of 6.90 percent, dividend yield of 1.95 percent, and time to
exercise of 10 years. For grants expiring on May 7, 2007, the assumptions used
in the model were annual volatility of 32.69 percent, interest rate of 6.72
percent, dividend yield of 2.37 percent, and time to exercise of 10 years.
</FN>
</TABLE>
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
The following table shows options exercised during 1997 by Mr. Osborne and
the value of outstanding in-the-money options at the end of the fiscal year for
the named executive officers.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
at FY-End (#) at FY-End ($)<F2>
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)<F1> Unexercisable Unexercisable
- ------------------ ------------ -------- --------------- --------------------
<S> <C> <C> <C> <C>
George Aristides 0 0 101,961/199,806 $1,374,852/1,763,798
Charles M. Osborne<F3> 750 $5,183 0/39,750 $0/271,923
Roger L. King 0 0 58,275/27,044 $899,595/267,014
John L. Heller 0 0 16,997/33,572 $246,091/397,078
James A. Graner 0 0 15,863/32,438 $235,883/344,344
<FN>
<F1>
(1) "Value realized" is the difference between the closing price of the
Company's common stock on the day of exercise and the option price of the
options multiplied by the number of shares received.
<F2>
(2) "Value at fiscal year-end" is the difference between $23.83, the closing
price of the Company's common stock on December 26, 1997, and the option price
multiplied by the number of shares subject to option.
<F3>
(3) Includes non-incentive stock options granted under the Non-Employee Director
Stock Plan prior to Mr. Osborne's employment by the Company.
</FN>
</TABLE>
Change in Control Arrangements
Each of the Named Executive Officers, and certain other key executives of
the Company, have entered into a change of control agreement with the Company
(singularly "Agreement"; collectively the "Agreements"). The change of control
period is defined to extend from the date the Agreement is executed for two
years. Each year this period is automatically extended for one year so as to
terminate two years from the annual anniversary date of the Agreement, unless
the Company gives the executive notice that the Company does not wish to extend
this period.
A change of control is generally defined in the Agreements to have occurred
if: (i) a person other than a trust person (as defined in the Agreement)
acquires beneficial ownership of 25 percent or more of the Company's outstanding
common stock, except acquisitions directly from the Company, by the Company, by
a Company employee benefit plan, by the executive or a group of which he is a
part, or by a person with beneficial ownership of shares under the Trust Under
the Will of Clarissa L. Gray which equals or exceeds a certain percentage; or
(ii) members of the Incumbent Board (as defined in the Agreement) cease to be in
the majority on the Board; or (iii) the shareholders approve a reorganization,
merger, consolidation or statutory exchange of the Company's outstanding common
stock, or approve a sale or other disposition of all or substantially all of the
assets of the Company; or (iv) the shareholders approve a complete liquidation
or dissolution of the Company.
Each Agreement provides that for two years after a change of control there
will be no adverse change in the executive's duties and responsibilities,
compensation program, benefits or other circumstances, provided that nothing
will restrict the right of the executive or the Company to terminate the
employment of the executive. If the executive's employment is terminated by the
Company for any reason other than for good cause, death, or disability, or by
the executive for "good reason" (as defined in the Agreement), within two years
10
<PAGE>
following a change of control, the executive will be entitled to certain
benefits. These benefits include a sum equivalent to the executive's base salary
to the date of termination (to the extent not yet paid), a bonus calculated
according to a formula (set forth in the Agreement) for the year in which the
termination occurs, two times the executive's annual base salary, two times the
midpoint between the maximum and minimum bonus for the fiscal year in which the
termination occurs, and benefit coverage for a minimum of two years following
the date of termination.
The payments to which the employee is entitled are subject to reduction in
the event the payments would constitute a parachute payment within the meaning
of Section 280G of the Internal Revenue Code of 1989, as amended, (the "Code")
or any successor provision, provided that the reduction does not exceed $25,000.
If the reduction would exceed $25,000, there will be no reduction and the
Company will make an additional payment to the executive in an amount that will
put the executive in the same after-tax position as if no excise tax under the
Code had been imposed.
Retirement Arrangements
The Company has an employee retirement plan which provides pension benefits
for eligible regular, full- and part-time employees. Benefits under the Graco
Employee Retirement Plan ("Retirement Plan") consist of a fixed benefit which is
designed to provide retirement income at age 65 of 43.5 percent of average
monthly compensation, less 18 percent of Social Security-covered compensation
(calculated in a life annuity option) for an employee with 30 years of service.
Average monthly compensation is defined as the average of the five consecutive
highest years' salary during the last ten years of service, including base
salary and Annual Bonus Plan awards, but excluding Executive Long Term Incentive
Program awards. Benefits under the Retirement Plan vest upon five years of
benefit service. Federal tax laws limit the annual benefits that may be paid
from a tax-qualified plan such as the Retirement Plan. The Company has adopted
an unfunded plan to provide benefits to retired executive officers impacted by
the benefit limits, so that they will receive, in the aggregate, the benefits
the executive would have been entitled to receive under the Retirement Plan had
the limits imposed by the tax laws not been in effect. Effective January 1,
1998, the maximum annual pension payable to or on behalf of the executive under
the unfunded plan will be equal to the difference between $170,000 and the
benefits actually payable under the Retirement Plan when the limits imposed by
the tax laws are applied.
The following table shows the estimated aggregate annual benefits payable
under the Graco Employee Retirement Plan and the unfunded plan for the earnings
and years of service specified. The years of benefit service for the Chief
Executive Officer and the executive officers listed in the Summary Compensation
Table are: Mr. Aristides, 24 years; Mr. Osborne, 8 months; Mr. King, 27 years;
Mr. Heller, 25 years; and Mr. Graner, 23 years. A maximum of 30 years has
previously been counted in the pension benefit calculation. For 1998 and
subsequent years, the 30 year maximum has been eliminated.
<TABLE>
<CAPTION>
Estimated Aggregate Annual Retirement Benefit
---------------------------------------------
Final Average 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
Compensation Service Service Service Service Service Service Service Service Service
- ------------- ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$200,000 $13,621 $ 27,242 $ 40,863 $ 54,484 $ 68,104 $ 81,725 $ 95,346 $108,967 $122,588
300,000 20,871 41,742 62,613 83,484 104,354 125,225 146,096 166,967 170,000
400,000 28,121 56,242 84,363 112,484 140,604 168,725 170,000 170,000 170,000
500,000 35,371 70,742 106,113 141,484 170,000 170,000 170,000 170,000 170,000
600,000 42,621 85,242 127,863 170,000 170,000 170,000 170,000 170,000 170,000
700,000 49,871 99,742 149,613 170,000 170,000 170,000 170,000 170,000 170,000
800,000 57,121 114,242 170,000 170,000 170,000 170,000 170,000 170,000 170,000
</TABLE>
Prior to December 31, 1996, the Company entered into deferred compensation
agreements with selected executive officers, including certain named executives
in the Summary Compensation Table. These agreements provide for the payment per
year of $10,000 in deferred compensation to the officer for ten years after
retirement, or to a beneficiary in the event of death prior to the expiration of
the ten year period. These agreements also include provisions for
non-competition and the payment of $5,000 per year in the event the officer
becomes disabled prior to age 65. The $5,000 per year disability payments cease
upon the attainment of age 65. Deferred compensation agreements remain in effect
for Mr. Aristides, Mr. King, Mr. Heller, and Mr. Graner. In addition, it is the
practice of the Company to continue to provide base salary to selected executive
officers whose employment is involuntarily terminated by the Company for a
period of twelve months or until the officer secures other employment.
Directors' Fees
During 1997, the Company paid each director, except directors who also
served as officers, an annual retainer of $15,000, plus a meeting fee of $900
for each Board meeting and $700 for each Committee meeting attended. Upon
11
<PAGE>
cessation of service, nonemployee directors who have served for five full years
will receive quarterly payments for five years at a rate equal to the director's
annual retainer in effect on the director's last day of service on the Board.
In 1994, shareholders approved a Nonemployee Director Stock Plan. Under
this Plan, a nonemployee director may elect to receive all or part of the
director's annual retainer in the form of shares of the Company's common stock
instead of cash. In September 1997, the Plan was amended to create a deferred
stock account alternative for the deferral of the annual retainer. This
alternative provides for the crediting of shares of Common Stock to a deferred
stock account held by a trustee in the name of the nonemployee director.
Dividends paid on the Common Stock, held in the deferred accounts, will be
credited to the accounts at the time of payment. Participating directors may
elect to receive payment from his or her deferred stock account in a lump sum or
installments. Payments, whether in a lump sum or by installments, shall be made
in shares of Common Stock plus cash in lieu of any fractional share. Seven
directors have elected to defer all of their annual retainer into the deferred
stock accounts established under this Plan.
In 1996, shareholders approved a Nonemployee Director Stock Option Plan.
Under this Plan, nonemployee directors receive an initial option grant of 3,000
shares (restated to reflect the three-for-two stock split paid February 4, 1998)
upon first appointment or election and an annual option grant of 2,250 shares
(restated to reflect the three-for-two stock split paid February 4, 1998) on the
date of the Company's Annual Shareholders Meeting. Options granted under the
Plan are non-statutory, have a ten-year duration and may be exercised in equal
installments over four years, beginning with the first anniversary date of the
grant. The option exercise price is the fair market value on the date of grant.
BENEFICIAL OWNERSHIP OF SHARES
The following information, furnished as of March 6, 1998, indicates
beneficial ownership of the common shares of the Company by each director, each
nominee for election as director, the executive officers listed in the Summary
Compensation Table who are still executive officers on that date, and by all
directors and executive officers as a group. Except as otherwise indicated, the
persons listed have sole voting and investment power.
<TABLE>
<CAPTION>
Percent of
Amount and Nature of Common Stock
Name of Beneficial Owner Beneficial Ownership<F1><F2> Outstanding*
- ------------------------ -------------------- ------------
<S> <C> <C>
G. Aristides<F3><F4> 350,536
R. O. Baukol 5,468
J. A. Graner 49,654
J. L. Heller 96,504
R. L. King 108,131
D. A. Koch<F3><F4><F5> 7,362,041 28.6%
R. D. McFarland<F3><F4> 93,519
L. R. Mitau 4,353
M. A.M. Morfitt<F4> 3,240
D. R. Olseth<F4> 18,882
C. M. Osborne 15,764
J. L. Scott 309
W. G. Van Dyke 3,066
All directors and
executive officers as a
group (20 persons) <F3><F4><F5><F6> 8,212,222 31.8%
* Less than one 1 percent, if no percentage is given.
<FN>
<F1>
(1) All share data reflects the three-for-two stock split paid February 4, 1998.
<F2>
(2) Includes 314,238 shares with respect to which executive officers have a
right, as of May 5, 1998, to acquire beneficial ownership upon the exercise of
vested stock options.
<F3>
(3) Includes the following shares owned by spouses of directors and named
executive officers as to which the director or executive officer may be deemed
to share voting and investment power: Mr. Aristides, 69,597; Mr. Koch, 67,491;
and Mr. McFarland, 23,094 shares.
<F4>
(4) Excludes the following shares as to which beneficial ownership is
disclaimed: (i) 677,782 shares owned by the Graco Employee Retirement Plan, as
to which Messrs. McFarland, Aristides, Koch, Ms. Morfitt and Mr. Osborne and
certain executive officers of the Company share voting and investment power as
12
<PAGE>
members of the Company's Investment Committee; (ii) 44,825 shares held by The
Graco Foundation; and (iii) 348,750 shares held by the Greycoach Foundation as
to which Mr. Koch shares voting and investment power as a director.
<F5>
(5) Includes 6,793,642 shares held by the Clarissa L. Gray Trust, of which Mr.
Koch's wife, Barbara Gray Koch, and their children are the beneficiaries and as
to which Mr. Koch shares voting and investment power as trustee. See "Principal
Shareholders."
<F6>
(6) If the shares referred to in footnote 3 above, as to which one or more
directors and designated executive officers share voting power, were included,
the number of shares beneficially owned by all directors, nominees for election
as director and executive officers would be 9,283,579 shares, or 36 percent of
the outstanding shares.
</FN>
</TABLE>
Principal Shareholders
The following table identifies each person or group known to the Company to
beneficially own more than 5 percent of the outstanding common shares of the
Company as of March 6, 1998, the only class of security entitled to vote at the
Annual Meeting.
<TABLE>
<CAPTION>
Beneficial Percent
Ownership of Class
---------------- --------
<S> <C> <C>
Trust under the Will of Clarissa L. Gray,
and David A. Koch,<F1><F2> 7,362,041 shares 28.6%
<FN>
<F1>
(1) Includes 6,793,642 shares owned by the Clarissa L. Gray Trust. Mr. Koch is
one of the trustees of the Trust and the beneficiaries of the Trust are Mrs.
Koch and their children. The other trustees are Paul M. Torgerson, a partner at
Dorsey & Whitney LLP, Minneapolis, Minnesota, and First Bank of South Dakota,
N.A., Sioux Falls, South Dakota. The Trustees share voting and dispositive
power. Includes 568,399 shares owned by David A. Koch or Mrs. Koch.
<F2>
(2) Excludes the following shares as to which beneficial ownership is
disclaimed: (i) 677,782 shares owned by the Graco Employee Retirement Plan, as
to which Messrs. McFarland, Aristides, Koch, Ms. Morfitt and Mr. Osborne and
certain executive officers of the Company share voting and investment power as
members of the Company's Investment Committee; (ii) 44,825 shares held by The
Graco Foundation; and (iii) 348,750 shares held by the Greycoach Foundation as
to which Mr. Koch shares voting and investment power as a director.
</FN>
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's executive officers, directors and 10 percent shareholders are
required under the Securities Exchange Act of 1934 and regulations promulgated
thereunder to file initial reports of ownership of the Company's securities and
reports of changes in that ownership with the Securities and Exchange
Commission. Copies of these reports must also be provided to the Company.
Based upon its review of the reports and any amendments made thereto
furnished to the Company, or written representations that no reports were
required, the Company believes that all reports were filed on a timely basis by
reporting persons during and with respect to 1997.
13
<PAGE>
PROPOSAL 2
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS
Deloitte & Touche LLP has acted as independent auditors for the Company
since 1962. The Board of Directors recommends ratification of the selection of
Deloitte & Touche LLP as independent auditors for the current year. If the
shareholders do not ratify the selection of Deloitte & Touche LLP, the selection
of the independent auditors will be reconsidered by the Board of Directors. A
representative of Deloitte & Touche LLP will be present at the meeting and will
have the opportunity to make a statement if so desired and be available to
respond to any shareholder questions.
OTHER MATTERS
The Board of Directors is not aware of any matter, other than those stated
above, which will or may properly be presented for action at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the shares represented by
such proxies in accordance with their best judgment.
SHAREHOLDER PROPOSALS
The Company did not receive any request from shareholders relating to
matters to be submitted for a vote at the 1998 Annual Meeting. Any shareholder
wishing to have any matter considered for submission at the next Annual Meeting
must request such submission in writing, directed to the Secretary of the
Company at the address shown on page 1 of this statement, not later than
November 25, 1998.
YOU ARE RESPECTFULLY REQUESTED TO EXERCISE YOUR RIGHT TO VOTE BY FILLING IN AND
SIGNING THE ENCLOSED PROXY CARD AND RETURNING IT PROMPTLY IN THE ENVELOPE
ENCLOSED FOR YOUR CONVENIENCE. In the event that you attend the meeting, you may
revoke your proxy and vote your shares in person if you wish.
For the Board of Directors
/s/Robert M. Mattison
Robert M. Mattison
Secretary
Dated: March 26, 1998
(C) 1998 Graco Inc. 3/98 6.5M Printed in U.S.A.
14
<PAGE>
[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
This Proxy is Solicited by the Board of Directors for use at the Graco Inc.
Annual Meeting on Tuesday, May 5, 1998.
The shares of common stock of Graco Inc. which you are entitled to vote on March
6, 1998, will be voted as you specify on this card.
By signing this proxy, you revoke all prior proxies and appoint George Aristides
and Mark W. Sheahan as Proxies, each with full power of substitution, to vote
your shares as specified on this card and at their discretion on any other
matter which may properly come before the Annual Meeting or any adjournment
thereof.
Item 1. Election of Directors __ FOR ALL __ WITHHOLD FOR ALL
NOMINEES: Dale R. Olseth Charles M. Osborne
Jerald L. Scott William G. Van Dyke
(INSTRUCTION: To withhold authority to vote for any individual
nominee, strike a line through the nominee's name in the list above)
Item 2. Ratification of Appointment of Deloitte & Touche LLP as
Independent Auditors
__ FOR __ AGAINST __ ABSTAIN
PLEASE SIGN AND DATE THE REVERSE SIDE BEFORE MAILING
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the meeting. This proxy properly executed will be
voted in the manner directed by the undersigned. If no choice is specified, this
proxy will be voted "FOR" Items 1 and 2.
Please sign exactly as your name(s) appears at left. In the case of joint
owners, each should sign. If signing as executor, trustee, guardian or in any
other representative capacity or as an officer of a corporation, please indicate
your full title.
Dated:_________________________ , 1998
______________________________________
Signature
PLEASE MARK, SIGN, DATE AND ______________________________________
RETURN THE PROXY CARD PROMPTLY Signature
USING THE ENCLOSED ENVELOPE.
