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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 26, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________.
Commission File No. 1-9249
Graco Inc.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
(Address of principal executive offices) (Zip Code)
(612) 623-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
None
As of March 6, 1998, 25,790,412 shares of Common Stock were outstanding.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of approximately 16,506,833 shares held by
non-affiliates of the registrant was approximately $492 million on March 6,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 5, 1998, are incorporated by reference into Part
III, as specifically set forth in said Part III.
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1
<PAGE>
GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
Part I
Item 1 Business ...........................................................3
Item 2 Properties .........................................................5
Item 3 Legal Proceedings ..................................................6
Item 4 Submission of Matters to a Vote of Security Holders ................6
Executive Officers of the Company ..................................6
Part II
Item 5 Market for the Company's Common Stock and
Related Stockholder Matters......................................8
Item 6 Selected Financial Data.............................................9
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
Item 8 Financial Statements and Supplementary Data........................14
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure .........................29
Part III
Item 10 Directors and Executive Officers of the Company....................29
Item 11 Executive Compensation.............................................29
Item 12 Security Ownership of Certain Beneficial Owners and Management.....29
Item 13 Certain Relationships and Related Transactions.....................29
Part IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K....29
Signatures ...................................................................31
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NOTE: Certain exhibits listed in the Index to Exhibits beginning on
page 32, and filed with the Securities and Exchange Commission, have
been omitted. Copies of such exhibits may be obtained upon written
request directed to:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
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2
<PAGE>
PART I
Item 1. Business
General Information. Graco Inc. ("Graco" or "the Company") supplies technology
and expertise for the management of fluids in both industrial and commercial
settings. Based in Minneapolis, Minnesota, Graco serves customers around the
world in the manufacturing, processing, construction and maintenance industries.
It designs, manufactures and markets systems, products and technology to move,
measure, control, dispense and apply a wide variety of fluids and viscous
materials. The Company helps customers solve difficult manufacturing problems,
increase productivity, improve quality, conserve energy, save expensive
material, control environmental emissions and reduce labor costs. Primary uses
of the Company's equipment include the application of coatings and finishes to
various industrial and commercial products; the mixing, metering, dispensing and
application of adhesive, sealant and chemical bonding materials; the application
of paint and other materials to architectural structures; the lubrication and
maintenance of vehicles and industrial machinery; and the transferring and
dispensing of various fluids. Graco is the successor to Gray Company, Inc.,
which was incorporated in 1926 as a manufacturer of auto lubrication equipment,
and became a public company in 1969.
It is Graco's strategic objective to be the highest quality, lowest cost, most
responsive supplier in the world for its principal products. In working to
achieve its goal to be a world-class manufacturer, Graco has organized its
manufacturing operations around focused factories which contain product-based
cells. The Company continues to refine these cells as new products are
introduced and new equipment is purchased with the ultimate goal of creating
cells which function independently of each other. Substantial investments in new
manufacturing technology have reduced cycle time and improved quality.
The Company operates in one industry segment, namely the design, manufacture,
marketing, sale and installation of systems and equipment for the handling of
fluids. Financial information concerning geographic operations and export sales
for the last three fiscal years is set forth in Note B of the Notes to
Consolidated Financial Statements.
Recent Developments. The David A. Koch Center, a world-class manufacturing and
global distribution facility, which opened in November 1996 in Rogers,
Minnesota, finished its first full year of operation in 1997. The Koch Center
provides additional production capacity, enhanced build-to-order capability for
projected growth and expanded space for warehousing and distribution. During
1997, the Company's product development efforts resulted in the introduction of
approximately 250 new products and pre-engineered system packages. During 1997,
Graco completed construction of a laboratory in its Riverside facility to
support the consolidation of product development activities in Minneapolis and
to provide world-class demonstration, training, test and display capabilities.
Products. Graco manufactures a wide array of specialized pumps, applicators,
regulators, valves, meters, atomizing devices, replacement parts, and
accessories, both individually and in system configurations which are used in
industrial and commercial applications in the movement, measurement, control,
dispensing and application of many fluids and semi-solids, including paints,
adhesives, sealants, and lubricants. In addition, it offers an extensive line of
portable equipment which is used in construction and maintenance businesses for
the application of paint and other materials.
Commercial and industrial equipment offered by Graco includes specialized pumps,
air and airless spray units, manual finishing equipment and fluid handling
systems. A variety of pumps provide fluid pressures ranging from 20 to more than
6,000 pounds per square inch and flow rates from under 1 gallon to 275 gallons
per minute.
The Company sells accessories for use with its equipment, including hoses,
couplings, regulators, valves, filters, reels, meters, and gauges, as well as a
complete line of spray guns, tips and applicators. These accessories increase
the flexibility, efficiency and effectiveness of Graco equipment. Packings,
seals, hoses and other parts, which must be replaced periodically in order to
maintain efficiency and prevent loss of material, are also sold by the Company.
Graco introduced a family of sophisticated plural component electronic
proportioners in 1996 and 1997. These proportioners, which provide high ratio
accuracy, on-line diagnostics and an electronic display panel, proportion, mix
and apply two-component materials. One of these proportioners is targeted at the
application of hem flange adhesive by automotive customers. The first in a line
of sealant and adhesive devices for manual bead dispense applications in the
automotive industry was introduced in 1997. These application devices possess
substantially reduced size, weight and trigger pull. In 1997, the Company
launched the Delta Spray"(TM)" family of air and high volume low pressure spray
guns designed for the application of paints and coatings. Two electronic meters
for automotive service applications were introduced in 1997. These streamlined
meters have a digital display and dispense up to five gallons per minute.
3
<PAGE>
Sales of replacement parts and accessories have averaged 46 percent of the
Company's consolidated net sales and approximately 52 percent of gross profits
during the last three years. The following table summarizes the consolidated net
sales and gross profits (net sales less cost of products sold) by the Company's
principal product groups for that same period.
<TABLE>
<CAPTION>
Product Group Sales and Gross Profit
(In thousands) 1997 1996 1995
---------------- ---------------- ---------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
NET SALES
Commercial and industrial equipment $226,198 54.7% $207,327 52.9% $206,558 53.5%
Accessories and replacement parts 187,699 45.3 184,429 47.1 179,756 46.5
-------- ----- -------- ----- -------- -----
$413,897 100.0% $391,756 100.0% $386,314 100.0%
======== ===== ======== ===== ======== =====
GROSS PROFIT
Commercial and industrial equipment $ 99,063 48.8% $ 92,480 47.2% $ 90,526 47.7%
Accessories and replacement parts 103,925 51.2 103,501 52.8 99,101 52.3
-------- ----- -------- ----- -------- -----
$202,988 100.0% $195,981 100.0% $189,627 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Marketing and Distribution. Graco's operations are organized to allow its full
line of products and systems to be offered in each of its major geographic
markets: the Americas (North, Central and South America), Europe (includes the
Middle East and Africa), and Asia Pacific. The Industrial Equipment Division,
the Automotive Equipment Division, the Contractor Equipment Division, and the
Lubrication Equipment Division provide worldwide marketing direction and product
design and application assistance to each of these geographic markets.
Graco sells its equipment worldwide principally through independent
distributors. In Canada, Japan, Korea, and Europe, Graco equipment is sold to
distribution through sales subsidiaries. In the Americas and Europe, the Company
maintains a specialized direct sales force, which handles sales of large systems
and sales to certain corporate accounts. Manufacturers' representatives are used
with some product lines.
In 1997, Graco's net sales in the Americas were $276,410,000 or approximately 67
percent of the Company's consolidated net sales; in Europe net sales were
$82,028,000 or approximately 20 percent; and in the Asia Pacific region, net
sales were $55,459,000 or approximately 13 percent.
Consolidated backlog at December 26, 1997, was $22 million compared to $19
million at the end of 1996.
Research, Product Development and Technical Services. Graco's research,
development and engineering activities focus on new product design, product
improvements, applied engineering and strategic technologies. A dedicated
support group of application engineers and technicians also provides specialized
technical assistance to customers in the design and evaluation of fluid transfer
and application systems. It is one of Graco's goals to generate 30 percent of
each year's sales from products introduced in the prior three years. With the
exception of an automotive design group based at the Plymouth, Michigan
facility, all major research and development activities are now conducted in
facilities located in Minneapolis, and Rogers, Minnesota. Total research and
development expenditures were $17,817,000, $17,909,000, and $15,715,000 for the
1997, 1996, and 1995 fiscal years, respectively.
Intellectual Property. Graco owns a number of patents and has patent
applications pending both in the United States and in foreign countries,
licenses its patents to others, and is licensed under patents owned by others.
In the opinion of the Company, its business is not materially dependent upon any
one or more of these patents or licenses. The Company also owns a number of
trademarks in the United States and foreign countries, including the registered
trademarks for "GRACO," several forms of a capital "G" and various product
trademarks which are material to the business of the Company inasmuch as they
identify Graco and its products to its customers.
4
<PAGE>
Competition. Graco faces substantial competition in all of its markets. The
nature and extent of this competition varies in different markets due to the
diversity of the Company's products. Product quality, reliability, design,
customer support and service, specialized engineering and pricing are the major
competitive factors. Although no competitor duplicates all of Graco's products,
some competitors are larger than the Company, both in terms of sales of directly
competing products and in terms of total sales and financial resources. Graco
believes it is one of the world's leading producers of high-quality specialized
fluid management equipment and systems. It is impossible, because of the absence
of reliable industry-wide third-party data, to determine its exact relative
market position.
Environmental Protection. During the fiscal year ending December 26, 1997, the
amounts incurred to comply with federal, state and local legislation pertaining
to environmental standards did not have a material effect upon the capital
expenditures or earnings of the Company.
Employees. As of December 26, 1997, the Company employed approximately 2,086
persons on a full-time basis. Of this total, approximately 352 were employees
based outside the United States, and 843 were hourly factory workers in the
United States.
Item 2. Properties
As of December 31, 1997, the Company's principal operations that occupy more
than 10,000 square feet were conducted in the following facilities:
<TABLE>
<CAPTION>
Gross
Type of Facility Location Square Footage
- ---------------- -------- --------------
Owned
- -----
<S> <C> <C>
Distribution/Manufacturing/Office Rogers, Minnesota 333,000
Manufacturing/Office Minneapolis, Minnesota 242,300
Manufacturing/Office Minneapolis, Minnesota 202,300
Engineering/Research & Development Minneapolis, Minnesota 138,700
Engineering/Manufacturing/Office Plymouth, Michigan 106,000
Assembly/European Headquarters/Warehouse Maasmechelen, Belgium 75,800
Corporate Headquarters Golden Valley, Minnesota 73,800
Manufacturing/Office Sioux Falls, South Dakota 55,100
Sales Office/Warehouse Los Angeles, California 21,000
Office/Warehouse Mississauga, Ontario, Canada 20,000
Leased
- ------
Engineering/Office/Warehouse Yokohama, Japan (4 facilities) 48,724
Sales Office Rungis, France 12,626
Assembly/Engineering/Office/Warehouse Neuss, Germany 41,765
Sales Office West Midlands, United Kingdom 16,320
Warehouse Gwangju-Gun, Korea 10,549
</TABLE>
The lease of the Graco Communications Center, (18,200 square foot facility in
Minneapolis, Minnesota) where technical publication, mail and literature
operations were previously performed, was terminated on February 28, 1997. These
operations were transferred to the David A. Koch Center in Rogers, Minnesota and
the Riverside facility in Minneapolis, Minnesota.
The sales office in Rungis, France was moved in February, 1997, to a smaller
facility within the same industrial park. The previous lease was terminated
effective March 31, 1997.
Manufacturing operations previously conducted in the facility in Franklin Park,
Illinois (82,000 square feet) were relocated to the Riverside facility and the
facility was sold.
A world-class demonstration laboratory in the Riverside facility was completed
during the second quarter of 1997. This laboratory is used for product training
and product demonstrations to customers.
5
<PAGE>
The Company leases space for subsidiary sales or liaison offices around the
world, some of which have demonstration areas and/or warehouse space.
Graco's facilities are in satisfactory condition, suitable for their respective
uses and are sufficient and adequate to meet current needs, with the recent
expansions. Manufacturing capacity met business demand in 1997. Future
production requirements are expected to be met through existing production
capabilities, efficiency and productivity improvement and the use of available
subcontract services.
Item 3. Legal Proceedings
The Company is engaged in routine litigation incident to its business, which
management believes will not have a material adverse effect upon its operations
or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter
of 1997.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 6, 1998.
George Aristides, 62, was elected Chief Executive Officer on January 1, 1996.
From 1993 to 1997 he was President. From 1993 to 1996 he was Chief Operating
Officer. From March 1993 to June 1993, he was Executive Vice President,
Industrial/Automotive Equipment Division, Manufacturing, Distribution and
Eurafrican Operations. From 1985 until 1993, he was Vice President,
Manufacturing Operations and Controller. He joined the Company in 1973 as
Corporate Controller and became Vice President and Controller in 1980. He has
served as a director of the Company since 1993.
Charles M. Osborne, 44, was elected President and Chief Operating Officer on May
6, 1997. 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.
He has been a director of Graco since 1995. Dale Johnson, a Vice President of
the Company, is a brother-in-law to Mr. Osborne.
Clayton R. Carter, 59, was elected Vice President, Industrial Equipment
Division, effective December 17, 1996. From January 1, 1995, he was Vice
President, Lubrication Equipment Division. He became Director, Vehicle Services
Division, in February 1994. He joined the Company in 1962 and has held various
sales management positions.
James A. Graner, 53, was elected Vice President and Controller in February 1994.
He became Treasurer in May 1993. Prior to becoming Assistant Treasurer in 1988,
he held various managerial positions in the treasury, accounting and information
systems departments. He joined Graco in 1974.
Clyde W. Hansen, 65, was elected Vice President, Human Resources and Quality
Management Systems, in December 1993. He joined the Company in 1984 as Employee
Relations Director, a position he held until December 1993.
John L. Heller, 61, was elected Vice President, Asia Pacific, Latin America &
Developing Markets in 1997. From 1996 to 1997 he was Vice President, Latin
America & Developing Markets. From July 1993 to December 1995, he was Senior
Vice President and General Manager - Contractor Equipment Division. He became
Vice President, Far East Operations and Latin America, in 1992. Prior to
becoming Vice President, Far East Operations in 1984, he held various management
and staff positions in sales and human resources. He joined the Company in 1972.
Dale D. Johnson, 43, was appointed Vice President, Contractor Equipment
Division, on December 17, 1996. Prior to becoming the Director of Marketing in
June 1996, he held various marketing and sales positions in the Contractor
Equipment Division. He joined the Company in 1976. Charles Osborne, President
and Chief Operating Officer of the Company, is a brother-in-law to Mr. Johnson.
6
<PAGE>
Roger L. King, 52, was named Vice President & General Manager, European
Operations, effective January 4, 1996. From July 1993 to December 1995, he was
Senior Vice President and General Manager - International Operations. He was
Senior Vice President and Chief Financial Officer from March 1993 to July 1993,
and Vice President and Treasurer from 1987 to March 1993. Prior to becoming Vice
President, Treasurer and Secretary in 1980, he held the position of Treasurer
and Secretary and various treasury management positions with Graco. He joined
the Company in 1970.
David M. Lowe, 42, was elected to the position of Vice President, Lubrication
Equipment Division, in December 1996. From February 1995 to December 1996, he
was Treasurer. Prior to joining the Company, he was employed by Ecolab Inc.,
where he held various positions in the Treasury Department, including
Manager-Corporate Finance; Director, Corporate Finance and most recently
Director, Corporate Development.
Robert M. Mattison, 50, was elected Vice President, General Counsel and
Secretary, in January 1992, a position which he holds today. Prior to joining
the Company, he held various legal positions with Honeywell Inc., most recently
as Associate General Counsel.
Charles L. Rescorla, 46, is Vice President, Manufacturing & Distribution
Operations, a position to which he was appointed on January 1, 1995. Prior to
becoming the Director of Manufacturing in March 1994, he was the Director of
Engineering, Industrial Division, a position which he assumed in 1988 when he
joined the Company.
Mark W. Sheahan, 33, was elected Treasurer, effective December 17, 1996. He
joined the Company as Treasury Operations Manager in 1995. Prior to joining the
Company, he was a Senior Manager with KPMG Peat Marwick llp.
The Board of Directors elected Messrs. Aristides, Osborne, Carter, Graner,
Hansen, Heller, King, Lowe, Mattison and Sheahan on May 6, 1997, all to hold
office until the next annual meeting of directors or until their successors are
elected and qualify. Messrs. Johnson and Rescorla were appointed to their
positions by management effective December 17, 1996 and January 1, 1995,
respectively.
7
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange
under the ticker symbol "GGG." As of March 6, 1998, there were 25,790,412 shares
outstanding and 2,426 common shareholders of record, which includes nominees or
broker dealers holding stock on behalf of an estimated 3,950 beneficial owners.
<TABLE>
<CAPTION>
Quarterly Financial Information.<F1>
(In thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $92,099 $111,721 $101,920 $108,157
Gross Profit 44,533 53,399 51,362 53,694
Net Earnings 6,181 10,418 12,879 15,238
Per Common Share:<F1>
Basic Net Earnings 0.24 0.41 0.50 0.60
Diluted Net Earnings 0.24 0.40 0.49 0.58
Dividends Declared 0.09 0.09 0.09 0.11
- --------------------------------------------------------------------------------
Stock Price (per share)
High $ 24.08 $ 21.25 $ 23.25 $ 26.46
Low 16.17 15.67 19.42 22.17
Close* 19.17 20.08 23.83 24.87
- --------------------------------------------------------------------------------
Volume (# of shares) 2,958 4,030 1,577 2,307
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Net Sales $90,153 $ 97,099 $ 97,680 $106,824
Gross Profit 44,837 49,422 49,976 51,746
Net Earnings 5,585 10,032 10,157 10,395
Per Common Share:<F1>
Basic Net Earnings 0.22 0.39 0.39 0.41
Diluted Net Earnings 0.21 0.38 0.39 0.40
Dividends Declared 0.08 0.08 0.08 0.09
- --------------------------------------------------------------------------------
Stock Price (per share)
High $ 13.83 $ 14.42 $ 13.59 $ 17.33
Low 11.83 11.92 12.17 12.33
Close* 13.00 13.42 12.50 16.33
- --------------------------------------------------------------------------------
Volume (# of shares) 2,693 2,832 2,270 2,269
- --------------------------------------------------------------------------------
<FN>
<F1>
(1) All share and per share data has been restated for the three-for-two stock
split declared on December 12, 1997 and paid February 4, 1998.
</FN>
*As of the last trading day of the calendar quarter.
</TABLE>
8
<PAGE>
Item 6. Selected Financial Data <F2>
<TABLE>
<CAPTION>
Graco Inc. & Subsidiaries
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $413,897 $391,756 $386,314 $360,013 $322,602
Net Earnings 44,716 36,169 27,706 15,326 9,493
- ---------------------------------------------------------------------------------------------
Per Common Share:
Basic Net Earnings $ 1.75 $ 1.40 $ 1.07 $ .59 $ .37
Diluted Net Earnings 1.71 1.38 1.06 .59 .37
- ---------------------------------------------------------------------------------------------
Total Assets $264,532 $247,814 $217,833 $228,385 $216,365
Long-term Debt (including current portion) 7,959 9,920 12,009 32,483 19,480
Redeemable Preferred Stock -- -- -- 1,474 1,485
- ---------------------------------------------------------------------------------------------
Cash Dividends Declared
per Common Share $ 0.38 $ 0.33 $ 0.30 $ 0.26 $ 1.43<F1>
=============================================================================================
<FN>
<F1>
(1) Includes the special one-time dividend of $1.20 per share declared December
17, 1993.
<F2>
(2) All per share data has been restated for the three-for-two stock split
declared on December 12, 1997 and paid February 4, 1998.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
The following is Management's Review and Discussion and is not covered by the
Independent Auditors' Report.
Graco's net earnings of $44.7 million in 1997 are 24 percent higher than the
$36.2 million earned in 1996 and are significantly higher than the $27.7 million
recorded in 1995. The large increases in 1997 and 1996 are due largely to
enhanced profit margins, lower effective tax rates and higher net sales.
The table below indicates the percentage relationship between income and expense
items included in the Consolidated Statements of Earnings for the three most
recent fiscal years and the percentage changes in those items for such years.
<TABLE>
<CAPTION>
Revenue & Expense Item Revenue & Expense Item
As a Percentage of Net Sales Percentage Increase (Decrease)
1997 1996 1995 1997/96 1996/95
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 6 1
- ------------------------------------------------------------------------------------------------
Cost of Products Sold 51.0 50.0 50.9 8 --
Product Development 4.3 4.6 4.1 -- 14
Selling 21.1 21.8 22.4 3 (2)
General & Administrative 7.8 10.1 10.9 (19) (5)
- ------------------------------------------------------------------------------------------------
Operating Profit 15.8 13.5 11.7 23 17
- ------------------------------------------------------------------------------------------------
Interest Expense (0.2) (0.2) (0.6) 4 (64)
Other (Expense) Income, Net (0.3) 0.1 0.2 * *
- ------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 15.3 13.4 11.3 20 21
Income Taxes 4.5 4.2 4.1 13 5
- ------------------------------------------------------------------------------------------------
Net Earnings 10.8 9.2 7.2 24 31
================================================================================================
* Not a Meaningful Figure
</TABLE>
9
<PAGE>
NET SALES
In 1997, Graco recorded its fifth consecutive year of record net sales, posting
a 6 percent increase over 1996 to $413.9 million. The 1997 increase was due to
higher sales in all regions except Asia Pacific. Geographically, net sales in
the Americas of $276.4 million in 1997 increased by 9 percent when compared to
1996. European sales increased 4 percent in 1997 to $82.0 million, a 13 percent
increase, offset by a 9 percent decline due to exchange rates. Sales in Asia
Pacific declined 8 percent in 1997 to $55.5 million, a 1 percent decrease and a
7 percent decline due to exchange rates. For the past two years, declines in
Asia Pacific have been primarily due to exchange rates.
In 1996, sales increased 1 percent over 1995, due primarily to higher sales in
North America, somewhat offset by declines in Europe and Asia Pacific.
Periodic price increases have contributed to net sales increases. The Company's
most recent U.S. price increase was effective in March 1997 and represented an
average 0.4 percent increase from its January 1996 price lists. The January 1996
U.S. price change was an average 2.5 percent increase from January 1995 prices.
Consolidated backlog at December 26, 1997, was $22 million compared to $19
million at the end of 1996, and $20 million at the end of 1995.
<TABLE>
<CAPTION>
% Increase (Decrease)
---------------------
(In thousands) 1997 1996 1995 1997/96 1996/95
- ------------------------ -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Division Sales:
Industrial Equipment $162,557 $154,866 $151,016 5 3
Automotive Equipment 63,557 69,910 75,637 (9) (8)
Contractor Equipment 142,400 124,392 118,818 15 5
Lubrication Equipment 45,383 42,588 40,843 7 4
-------- -------- -------- ------- -------
Consolidated $413,897 $391,756 $386,314 6 1
======== ======== ======== ======= =======
Geographic Sales:
Americas $276,410 $252,615 $238,874 9 6
Europe 82,028 78,666 82,552 4 (5)
Asia Pacific 55,459 60,475 64,888 (8) (7)
-------- -------- -------- ------- -------
Consolidated $413,897 $391,756 $386,314 6 1
======== ======== ======== ======= =======
</TABLE>
COST OF PRODUCTS SOLD
The cost of products sold, as a percentage of net sales, increased in 1997 to
51.0 percent from 50.0 percent in 1996. This increase was the result of several
factors, including material cost increases and exchange rates, partially offset
by improved manufacturing efficiencies. The cost of products sold as a
percentage of net sales of 50.0 percent in 1996 decreased from 50.9 percent in
1995, due to a combination of factors including modest price increases and
improved manufacturing efficiencies, partially offset by material and
manufacturing cost increases.
OPERATING EXPENSES
Operating expenses in 1997 declined 4 percent from 1996, primarily due to the
impact of lower general and administrative expenses, partially offset by higher
selling expenses resulting from increased net sales. The lower expense level is
the result of the ongoing benefits of restructuring, exchange rates, higher
investment returns on employee retirement plan assets, and elimination of
discretionary contributions. Operating expenses in 1996 declined 1 percent from
1995, due primarily to lower selling and general and administrative expenses as
well as lower non-recurring charges in 1996 when compared to 1995.
Product development expenses in 1997 were virtually unchanged from 1996 levels.
In 1996, product development costs were 14 percent higher than 1995
expenditures. Graco is committed to expanding its sales by making significant
investments in product development.
10
<PAGE>
FOREIGN CURRENCY EFFECTS
Foreign currency translations negatively impacted 1997 earnings before income
taxes by $6.2 million when compared to 1996, and decreased earnings before
income taxes by $2.7 million in 1996 when compared to 1995. The reduced profits
in both years were due to a strong U.S. dollar versus other foreign currencies.
Since approximately 34 percent of the Company's sales and 12 percent of its
product costs are in currencies other than the U.S. dollar, a strong U.S. dollar
reduces the Company's profits. A weakening of the U.S. dollar has the reverse
impact on the Company's profits. Gains and losses attributable to translating
the financial statements for all non-U.S. subsidiaries, and the gains and losses
on the forward and option contracts used to hedge these exposures, which are
non-speculative, are in Other (expense) income.
OTHER (EXPENSE) INCOME
The Company's interest expense rose 4 percent in 1997, primarily reflecting an
increase in the average levels of debt during the year. This increase in debt
levels resulted from higher short-term debt during portions of 1997.
Other expense of $1.1 million in 1997, other income of $0.5 million in 1996, and
$0.7 million for 1995, include, among other things, the foreign currency
translation gains and losses discussed above, a $1.2 million gain from the sale
of real estate in 1997, a $0.8 million favorable settlement of a legal dispute
in 1997, a $1.5 million favorable settlement of a legal dispute in 1996, and a
$0.9 million gain from the sale of real estate in 1995.
INCOME TAXES
The Company's net effective tax rate of 30 percent in 1997 is five percentage
points lower than the 1997 U.S. federal tax rate of 35 percent. The decrease
from the 31 percent rate in 1996 is due primarily to foreign earnings being
taxed at effective rates lower than the U.S. rate as foreign subsidiary earnings
permitted recognition of previously reserved deferred tax benefits and previous
tax filings were validated. The effective tax rate of 31 percent in 1996 was
lower than the 1995 rate of 36 percent principally due to foreign earnings being
taxed at lower effective rates than the U.S. rate from the utilization of
previously reserved net operating losses. Detailed reconciliations of the U.S.
federal tax rate to the effective rates for 1997, 1996, and 1995 are included in
Note D to the Consolidated Financial Statements.
EARNINGS
In 1997, earnings increased by 24 percent to $44.7 million, or $1.71 per diluted
share as compared to 1996, when earnings increased by 31 percent to $36.2
million or $1.38 per diluted share as compared to 1995.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" in 1997. Refer to notes A and K to the Consolidated
Financial Statements for more detailed information.
YEAR 2000 INFORMATION SYSTEMS DISCLOSURES
The Year 2000 issue is the result of a computer program being written using two
digits rather than four to define the applicable year, which could cause
potential failure or miscalculation in date-sensitive software that recognizes
"00" as 1900, rather than 2000.
The Company is continuing its program, begun in 1996, to ensure that all
hardware and software will be year 2000 compliant. A dedicated project team is
expected to complete the conversion of core business applications in 1998.
Additional teams have initiated year 2000 compliance projects on the Company's
network, operating system software, and distributed systems.
The Company has incurred costs totaling $1 million during 1997, and estimates a
total of an additional $5 to $8 million to be spent in 1998 and 1999 to resolve
year 2000 issues. These costs are charged to expense as incurred and include
software license fees and allocation of internal staff time. Incremental costs
associated with year 2000 compliance are not anticipated to result in
significant increases in future operating expenses and will not have a material
adverse effect on the results of operations, liquidity and capital resources.
Rather, existing resources are being redeployed and other projects are being
delayed to accommodate year 2000 related projects. A contingency plan is being
11
<PAGE>
developed in 1998 for critical business applications to mitigate potential
problems or delays associated with either new system replacements or established
vendor delivery dates. Additionally, the Company is working with customers and
suppliers to assess the potential impact of their year 2000 compliance issues on
Graco. Although all companies have risks associated with the year 2000,
management believes that sufficient resources have been allocated and project
plans are in place which will result in uninterrupted business activity with no
material impact on operations or operating results.
OUTLOOK
Overall we expect improved financial results in 1998. We anticipate higher
sales, driven by continued new product introductions, an improved and expanding
worldwide distribution network and good economic conditions in North America and
Europe, despite weakness in Asia Pacific, including Japan, South Korea and
Southeast Asia.
Graco has undertaken a number of restructuring efforts in recent years that have
improved its effectiveness in the markets it serves, and have increased the
Company's operating margins and net profits. These efforts will continue to
favorably impact margins and profits in 1998. We are implementing additional
measures to improve operating efficiency.
We anticipate that the strength of the U.S. dollar relative to other major
currency will negatively impact operating margins in 1998. We also anticipate a
higher tax rate in 1998.
SAFE HARBOR CAUTIONARY STATEMENT
This annual report on Form 10-K 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.
Risk 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
1997.
SHAREHOLDER ACTIONS
Periodically, the Company initiates measures aimed at enhancing shareholder
value, broadening common stock ownership, improving the liquidity of its common
shares, and effectively managing its cash balances. A summary of recent actions
follows:
o three-for-two stock splits paid in 1998 and in 1996;
o share repurchases of approximately 1 million shares over the last two
years;
o a 18 percent increase in the regular dividend in 1997;
o a 17 percent increase in the regular dividend in 1996;
o a 13 percent increase in the regular dividend in 1995.
ASSETS
The following table highlights several key measures of asset performance.
(In thousands) 1997 1996
- ------------------------------------ ------- -------
Cash and Cash Equivalents $13,523 $ 6,535
Working Capital $87,312 $63,884
Current Ratio 2.3 1.8
Average Days Receivables Outstanding 75 75
Inventory Turnover 4.9 4.7
Average inventory balances and inventory turnover increased during 1997 when
compared to 1996, and year-end inventory was higher at $43.9 million to
accommodate increased sales activity. Accounts receivable at year end increased
3 percent to $86.1 million.
12
<PAGE>
LIABILITIES
At the end of 1997, the Company's long-term debt (including the current portion
thereof) was 5 percent of total capital (long-term debt plus shareholders'
equity) compared to 7 percent in 1996. The Company's total debt (notes payable
to banks plus long-term debt including the current portion thereof) as a
percentage of total capital fell to 7 percent at the end of 1997, down from 10
percent in 1996. The Company had $67.7 million in unused credit lines available
at December 26, 1997. The Company believes that available credit lines plus
operating cash flows are adequate to fund its short and long-term initiatives.
SHAREHOLDERS' EQUITY
Shareholders' equity totaled $157.5 million on December 26, 1997, $31.5 million
higher than 1996.
CASH FLOWS FROM OPERATING ACTIVITIES
During 1997, the Company's operating cash flow of $36.3 million was lower than
1996 due to changes in working capital requirements. Cash flow from operating
activities in 1996 was $48.6 million, slightly lower than the $51.7 million
recorded in 1995.
The Company's operating cash flows have been, and are expected to be, the
principal source of funds required for future additions to property, plant, and
equipment, and working capital, as well as for other corporate purposes.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures were $20.1 million in 1997, $30.0 million in 1996, and
$19.8 million in 1995. These expenditures have enhanced the Company's
engineering and manufacturing capabilities, improved product quality, increased
capacity, and lowered costs. Substantial expenditures in 1997 included the
addition of manufacturing equipment and the construction of a demonstration
laboratory in the Riverside facility.
The Company expects to spend in excess of $20 million on capital improvements in
1998. Capital expenditures in 1998 will include manufacturing equipment, and
cellular manufacturing and information systems initiatives.
CASH FLOWS FROM FINANCING ACTIVITIES
The amount of common stock issued represents the funds received for shares sold
through the Company's Dividend Reinvestment Plan, its Employee Stock Purchase
Plan, and the distribution of shares pursuant to its Long Term Stock Incentive
Plan, more fully described in Note H to the Consolidated Financial Statements.
Graco offers an Automatic Dividend Reinvestment Plan, which gives shareholders a
simple and convenient way to reinvest quarterly cash dividends in additional
shares of Graco common stock. Brokerage and service charges are paid by the
Company.
From time to time, the Company may make open market purchases of its common
shares. On February 20, 1998, the Company's Board of Directors authorized
management to repurchase up to 1,200,000 shares for a period ending on February
28, 2000. In 1997, the Company repurchased 389,550 split-adjusted shares at an
average split-adjusted price per share of $17.90.
Graco is currently paying 11 cents per share as its regular quarterly dividend.
Annual cash dividends paid on the Company's common and preferred stock were $9.6
million in 1997, $8.3 million in 1996, and $7.5 million in 1995. The Company
expects to continue paying regular quarterly dividends to its common
shareholders at amounts that will adjust periodically to reflect earning
performance and management expectations.
Debt was reduced by $1.9 million and $2.4 million in 1997 and 1996,
respectively, reflecting strong cash flows from operations attributable to
higher net income and lower working capital requirements.
13
<PAGE>
Item 8. Financial Statements and Supplementary Data
Page
o Responsibility for Financial Reporting 15
o Independent Auditors' Report 15
o Consolidated Statements of Earnings for fiscal years
1997, 1996, and 1995 16
o Consolidated Statements of Changes in Shareholders' Equity
Accounts (See Footnote F, Notes to Consolidated Financial
Statements) 23
o Consolidated Balance Sheets for fiscal years 1997 and 1996 17
o Consolidated Statements of Cash Flows for fiscal years
1997, 1996, and 1995 18
o Notes to Consolidated Financial Statements 19
o Selected Quarterly Financial Data (See Part II, Item 5, Market
for the Company's Common Stock and Related Stockholder Matters) 8
14
<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the accuracy, consistency, and integrity of the
information presented in this annual report on Form 10-K. The consolidated
financial statements and financial statement schedule have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include estimates based upon management's informed judgment.
In meeting this responsibility, management believes that its comprehensive
systems of internal controls provide reasonable assurance that the Company's
assets are safeguarded and transactions are executed and recorded by qualified
personnel in accordance with approved procedures. Internal auditors periodically
review these accounting and control systems. Deloitte & Touche LLP, independent
certified public accountants, are retained to audit the consolidated financial
statements, and express an opinion thereon. Their opinion is included below.
The Board of Directors pursues its oversight role through its Audit Committee.
The Audit Committee, composed of directors who are not employees, meets twice a
year with management, internal auditors, and Deloitte & Touche LLP to review the
systems of internal control, accounting practices, financial reporting, and the
results of auditing activities.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Graco Inc. and
Subsidiaries (the "Company") as of December 26, 1997 and December 27, 1996, and
the related statements of earnings and cash flows for each of the three years in
the period ended December 26, 1997. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graco Inc. and Subsidiaries as of
December 26, 1997 and December 27, 1996, and the results of their operations and
their cash flows for each of the three years in the period ended December 26,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche llp
Minneapolis, Minnesota
January 19, 1998
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS GRACO INC. & Subsidiaries
Years Ended
--------------------------------------------
December 26, December 27, December 29,
(In thousands, except per share amounts) ..................... 1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Net Sales .................................................... $ 413,897 $ 391,756 $ 386,314
Cost of products sold ...................................... 210,909 195,775 196,687
------------ ----------- ------------
Gross Profit ................................................. 202,988 195,981 189,627
Product development ........................................ 17,817 17,909 15,715
Selling .................................................... 87,479 85,281 86,634
General and administrative ................................. 32,219 39,734 42,044
------------ ----------- ------------
Operating Profit ............................................. 65,473 53,057 45,234
Interest expense ........................................... (866) (831) (2,335)
Other (expense) income, net ................................ (1,091) 543 657
------------ ----------- ------------
Earnings before Income Taxes ................................. 63,516 52,769 43,556
Income taxes ............................................... 18,800 16,600 15,850
------------ ----------- ------------
Net Earnings ................................................. $ 44,716 $ 36,169 $ 27,706
============ =========== ============
Basic Net Earnings per Common Share .......................... $ 1.75 $ 1.40 $ 1.07
============ =========== ============
Diluted Net Earnings per Common Share ........................ $ 1.71 $ 1.38 $ 1.06
============ =========== ============
All per share data has been restated for the three-for-two stock split declared
on December 12, 1997, paid February 4, 1998.
See Notes to Consolidated Financial Statement.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS GRACO INC. & Subsidiaries
December 26, December 27,
(In thousands, except share amounts) 1997 1996
- ------------------------------------ ------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents....................... $ 13,523 $ 6,535
Accounts receivable, less allowances of
$4,100 in 1997 and $4,700 in 1996............ 86,148 83,474
Inventories..................................... 43,942 41,531
Deferred income taxes, net...................... 11,140 11,633
Other current assets............................ 1,539 1,321
------------ ------------
Total current assets........................... 156,292 144,494
Property, Plant and Equipment, at Cost:
Land............................................ 5,083 5,227
Buildings and improvements...................... 63,981 63,213
Manufacturing equipment......................... 91,161 82,544
Office, warehouse and automotive equipment...... 30,497 31,049
Construction in progress........................ 6,218 1,052
------------ ------------
Total property, plant and equipment, at cost... 196,940 183,085
Accumulated depreciation........................ (96,760) (88,913)
------------ ------------
Net property, plant and equipment.............. 100,180 94,172
Other Assets...................................... 8,060 9,148
------------ ------------
$264,532 $247,814
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable to banks.......................... $ 2,911 $ 3,813
Current portion of long-term debt............... 1,796 1,845
Trade accounts payable.......................... 12,542 13,854
Salaries, wages and commissions................. 14,903 14,808
Accrued insurance liabilities................... 10,227 10,925
Income taxes payable............................ 5,546 4,647
Other current liabilities....................... 21,055 30,718
------------ ------------
Total current liabilities...................... 68,980 80,610
Long-term Debt, less current portion.............. 6,163 8,075
Retirement Benefits and Deferred Compensation..... 31,880 33,079
Commitments and Contingencies (Note J)
Shareholders' Equity
Common stock, $1 par value; 33,750,000 shares
authorized; shares outstanding, 25,552,694
and 17,047,166, in 1997 and 1996,
respectively................................. 25,553 17,047
Additional paid-in capital...................... 26,085 22,254
Retained earnings............................... 105,030 85,232
Other, net...................................... 841 1,517
------------ ------------
Total shareholders' equity..................... 157,509 126,050
------------ ------------
$264,532 $247,814
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS GRACO INC. & Subsidiaries
Years Ended
------------------------------------------
December 26, December 27, December 29,
(In thousands) 1997 1996 1995
- ---------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings ..................................... $ 44,716 $ 36,169 $ 27,706
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization ................ 13,494 12,658 11,082
Deferred income taxes ........................ (358) 781 1,938
Change in:
Accounts receivable ........................ (7,804) (10,192) 4,499
Inventories ................................ (3,860) (394) 9,693
Trade accounts payable ..................... (839) 459 (6,193)
Salaries, wages and commissions ............ 437 1,081 999
Retirement benefits and deferred
compensation ............................ (626) 928 2,448
Other accrued liabilities .................. (8,549) 6,963 (3,417)
Other ...................................... (330) 148 2,955
------------ ------------ ------------
36,281 48,601 51,710
------------ ------------ ------------
Cash Flows from Investing Activities:
Property, plant and equipment additions .......... (20,109) (30,038) (19,848)
Proceeds from sale of property, plant and
equipment..................................... 1,990 1,058 3,036
------------ ------------ ------------
(18,119) (28,980) (16,812)
------------ ------------ ------------
Cash Flows from (for) Financing Activities:
Borrowing on notes payable and lines of credit.... 44,033 15,890 44,248
Payments on notes payable and lines of credit..... (44,460) (16,657) (50,927)
Payments on long-term debt ....................... (1,455) (1,652) (20,333)
Common stock issued .............................. 3,260 2,525 2,485
Retirement of common and preferred stock ......... (6,971) (8,115) (1,547)
Cash dividends paid .............................. (9,608) (8,344) (7,490)
------------ ------------ ------------
(15,201) (16,353) (33,564)
------------ ------------ ------------
Effect of exchange rate changes on cash ............ 4,027 1,624 (2,135)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,988 4,892 (801)
Cash and cash equivalents
Beginning of year ................................ 6,535 1,643 2,444
------------ ------------ ------------
End of year ...................................... $ 13,523 $ 6,535 $ 1,643
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRACO INC. & Subsidiaries
Years Ended December 26, 1997, December 27, 1996, and December 29, 1995
A. Summary of Significant Accounting Policies
Fiscal Year. The Company's fiscal year is 52 or 53 weeks, ending on the last
Friday in December.
Basis of Statement Presentation. The Consolidated Financial Statements include
the accounts of the parent company and its subsidiaries after elimination of all
significant intercompany balances and transactions. As of December 26, 1997, all
subsidiaries are 100 percent owned. Subsidiaries outside North America have been
included principally on the basis of fiscal years ended November 30 to effect
more timely consolidated financial reporting. The U.S. dollar is the functional
currency for all foreign subsidiaries.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents. All highly liquid investments with a maturity of three months
or less at the date of purchase are considered to be cash equivalents.
Inventory Valuation. Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) cost method is used for valuing all U.S. inventories.
Inventories of foreign subsidiaries are valued using the first-in, first-out
(FIFO) cost method.
Currency Hedges. The Company periodically evaluates its monetary asset and
liability positions denominated in foreign currencies. The Company enters into
forward contracts, borrowings in various currencies or options, in order to
hedge its net monetary positions. Consistent with financial reporting
requirements, these hedges and net monetary positions are recorded at current
market values and the gains and losses are included in Other (expense) income.
The Company believes it uses strong financial counterparts in these transactions
and that the resulting credit risk under these hedging strategies is not
significant. The notional amounts (which may not be indicative of credit or
market risk) of such contracts were (in U.S. dollars) $28,271,000 and $9,322,000
at December 26, 1997 and December 27, 1996, respectively.
Property, Plant and Equipment. For financial reporting purposes, plant and
equipment are depreciated over their estimated useful lives, primarily by using
the straight-line method as follows:
Buildings and improvements 10 to 30 years
Leasehold improvements 3 to 10 years
Manufacturing equipment and tooling 3 to 10 years
Office, warehouse and automotive equipment 4 to 10 years
Revenue Recognition. Revenue is recognized on large contracted systems using the
percentage-of-completion method of accounting. The Company recognizes revenue on
other products when title passes, which is usually upon shipment.
Earnings Per Common Share. Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" was issued in February 1997 and requires the
presentation of earnings per share on a basic and diluted basis. Basic earnings
per share is computed by dividing earnings available to common shareholders by
the weighted average number of shares outstanding during the year. Diluted
earnings per share is computed after giving effect to the exercise of all
dilutive outstanding options grants. The Company adopted SFAS No. 128 in 1997.
Stock Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued in October 1995 and requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
However, the statement allows the alternative of continued use of Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," with pro forma disclosure of net income and earnings per share
determined as if the fair value method had been applied in measuring
compensation cost. The Company adopted SFAS No. 123 in 1996 and elected the
continued use of APB No. 25.
19
<PAGE>
Segment Reporting. 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 January 1, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company has
not yet completed its analysis of which operating segments it will report on.
B. Industry Segment and Foreign Operations
The Company operates in one industry segment, namely, the design, manufacture,
marketing, sale and installation of systems and equipment for the management of
fluids.
The Company's operations by geographical area for the last three years are shown
below.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Sales to unaffiliated customers: <F1>
Americas $ 276,410 $ 252,615 $ 238,874
Europe 82,028 78,666 82,552
Asia Pacific 55,459 60,475 64,888
--------- --------- ---------
413,897 391,756 386,314
Intercompany sales between geographic areas:<F2>
Americas 74,633 54,615 56,703
Europe 5 57 32
Asia Pacific 997 433 1,398
Eliminations (75,635) (55,105) (58,133)
--------- --------- ---------
Total sales $ 413,897 $ 391,756 $ 386,314
========= ========= =========
Operating profit:
Americas $ 86,858 $ 71,909 $ 70,037
Europe 7,480 9,153 1,916
Asia Pacific 3,195 6,312 4,384
Eliminations (1,167) 1,203 1,139
--------- --------- ---------
96,366 88,577 77,476
General corporate expenses and corporate initiatives (31,984) (34,977) (31,585)
Interest expense (866) (831) (2,335)
--------- --------- ---------
Earnings before income taxes $ 63,516 $ 52,769 $ 43,556
========= ========= =========
Assets:
Americas $ 193,310 $ 180,467 $ 152,831
Europe 39,722 40,938 46,618
Asia Pacific 22,499 26,492 26,985
Corporate 13,526 6,536 1,643
Eliminations (4,525) (6,619) (10,244)
--------- --------- ---------
Total assets $ 264,532 $ 247,814 $ 217,833
========= ========= =========
<FN>
<F1>
1 Included are U.S. export sales to unaffiliated customers of $37,477, $27,989,
and $29,549, in 1997, 1996, and 1995, respectively.
<F2>
2 Transfers between entities are made at prices which allow appropriate markups
to the manufacturing and selling unit.
</FN>
</TABLE>
Net earnings for subsidiaries operating outside the U.S. were $6,500,000,
$10,468,000, and $12,506,000 for 1997, 1996, and 1995, respectively.
Retained earnings for subsidiaries operating outside the U.S. were $8,889,000
and $8,872,000 for 1997 and 1996, respectively.
Net transaction and translation gains or losses, included in Other (expense)
income, were $(2,825,000), $(617,000), and $528,000 for 1997, 1996, and 1995,
respectively.
20
<PAGE>
C. Inventories
Major components of inventories for the last two years were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------- ------- -------
<S> <C> <C>
Finished products and components $38,290 $38,707
Products and components in various stages of completion 25,320 24,691
Raw materials 16,715 15,192
------- -------
80,325 78,590
Reduction to LIFO cost (36,383) (37,059)
------- -------
$43,942 $41,531
------- -------
</TABLE>
Inventories valued under the LIFO method were $26,593,000 and $26,303,000 for
1997 and 1996, respectively. All other inventory was valued on the FIFO method.
In 1997, certain inventory quantities were reduced, resulting in liquidation of
LIFO inventory quantities carried at lower costs from prior years. The effect on
net earnings in 1997 was not significant.
D. Income Taxes
Earnings before income tax expense consist of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------- ------- ------- -------
<S> <C> <C> <C>
Domestic $53,139 $33,844 $27,247
Foreign 10,377 18,925 16,309
------- ------- -------
Total $63,516 $52,769 $43,556
======= ======= =======
</TABLE>
Income tax expense consists of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------- ------- ------- -------
<S> <C> <C> <C>
Current:
Domestic:
Federal $11,729 $10,518 $ 9,629
State and local 1,709 1,201 1,591
Foreign 5,281 4,638 3,479
------- ------- -------
18,719 16,357 14,699
------- ------- -------
Deferred:
Domestic 1,994 (227) 227
Foreign (1,913) 470 924
------- ------- -------
81 243 1,151
------- ------- -------
Total $18,800 $16,600 $15,850
------- ------- -------
</TABLE>
Income taxes paid were $17,148,000, $14,967,000, and $16,019,000 in 1997, 1996,
and 1995, respectively.
21
<PAGE>
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35% 35% 35%
Foreign earnings with (lower) higher tax rates (3) (2) 3
Reduction of valuation allowance (3) (6) (4)
State taxes, net of federal effect 2 2 2
U.S. general business tax credits (1) (1) (1)
Other -- (1) 1
---- ---- ----
Effective tax rate 30% 31% 36%
==== ==== ====
</TABLE>
Deferred income taxes are provided for all temporary differences between the
financial reporting and the tax basis of assets and liabilities. The deferred
tax assets (liabilities) resulting from these differences are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Inventory valuations $ 3,299 $ 3,307
Insurance accruals 3,445 3,669
Vacation accruals 1,343 1,417
Bad debt reserves 1,109 1,281
Other 1,944 1,959
-------- --------
Current 11,140 11,633
-------- --------
Unremitted earnings of consolidated foreign subsidiaries<F1> (3,500) (3,800)
Excess of tax over book depreciation (5,594) (4,906)
Postretirement benefits 5,149 4,891
Pension and deferred compensation 5,397 5,352
Net operating loss carryforward -- 1,272
Other 480 594
Valuation allowance -- (1,995)
-------- --------
Non-current 1,932 1,408
-------- --------
Net deferred tax assets $ 13,072 $ 13,041
======== ========
<FN>
<F1>
1 Payable at the time these earnings are distributed to the parent, however, tax
planning strategies may mitigate this liability.
</FN>
</TABLE>
Net non-current deferred tax assets above are included in Other Assets. Total
deferred tax assets were $22,522,000 and $22,247,000, and total deferred tax
liabilities were $9,450,000 and $9,206,000 on December 26, 1997 and December 27,
1996, respectively. A valuation allowance of $1,995,000 has been recorded as of
December 27, 1996, primarily related to the uncertainty of obtaining tax
benefits for subsidiary operating losses.
E. Debt
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------ ----- ------
<S> <C> <C>
Term debt, 5.08% at October 1, 1997, final
equal annual installment paid in 1997 $ -- $ 300
Industrial development refunding revenue
bonds, 4.38% at December 26, 1997,
payable through 2002 (property carried at
$2,852 pledged as collateral) 3,500 4,000
Obligations related to low-income housing investments 2,508 3,205
Other 1,951 2,415
------ ------
Total long-term debt 7,959 9,920
Less current portion 1,796 1,845
------ ------
Long-term portion $6,163 $8,075
====== ======
</TABLE>
22
<PAGE>
Aggregate annual scheduled maturities of long-term debt for the next five years
are as follows: 1998-$1,796,000; 1999-$3,088,000; 2000-$1,215,000;
2001-$1,310,000; 2002-$550,000. Interest paid on debt during 1997, 1996, and
1995 amounted to $856,000, $841,000, and $2,179,000, respectively. The fair
value of the Company's long-term debt at December 26, 1997 and December 27,
1996, is not materially different than its recorded value.
The Company has an interest rate swap agreement in place whereby it fixed the
interest rate of the remaining principal amounts of the Company's previously
variable interest rate revenue bond debt at 4.38 percent through 2002. At
December 26, 1997, the contractual variable interest rate under the revenue
bonds was Bankers Trust reference rate plus 0.62 percent, or 4.78 percent. The
cash flows related to the swap agreement are recorded as income when received
and expense when paid. Market and credit risk are not significant.
On December 26, 1997, the Company had lines of credit with U.S. and foreign
banks of $70,082,000, including a $25,000,000 revolving credit agreement. The
unused portion of these credit lines was $67,734,000 at December 26, 1997.
Borrowing rates under these facilities vary with the prime rate, rates on
domestic certificates of deposit, and the London interbank market. The weighted
short-term borrowing rates were 5.8 percent, 3.6 percent, and 2.2 percent at
December 26, 1997, December 27, 1996, and December 29, 1995, respectively. The
Company pays commitment fees of up to 3/16 percent per annum on the daily
average unused amounts on certain of these lines. No compensating balances are
required.
The Company is in compliance with the financial covenants of its debt
agreements. Under the most restrictive terms of the agreements, approximately
$28,137,000 of retained earnings were available for payment of cash dividends at
December 26, 1997.
F. Shareholders' Equity
<TABLE>
<CAPTION>
Changes in shareholders' equity accounts are as follows:
(In thousands) 1997 1996 1995
- ----------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Preferred Stock
Balance, beginning of year $ -- $ -- $ 1,474
Shares repurchased -- -- (1,474)
--------- --------- ---------
Balance, end of year -- -- --
--------- --------- ---------
Common Stock
Balance, beginning of year 17,047 17,265 11,377
Stock split 8,516 -- 5,754
Shares issued 250 188 143
Shares repurchased (260) (406) (9)
--------- --------- ---------
Balance, end of year 25,553 17,047 17,265
--------- --------- ---------
Additional Paid-In Capital
Balance, beginning of year 22,254 20,397 18,289
Shares issued 4,171 2,337 2,342
Shares repurchased (340) (480) (234)
--------- --------- ---------
Balance, end of year 26,085 22,254 20,397
--------- --------- ---------
Retained Earnings
Balance, beginning of year 85,232 64,949 50,702
Net income 44,716 36,169 27,706
Cash dividends declared (10,033) (8,657) (7,705)
Stock split (8,516) -- (5,754)
Shares repurchased (6,369) (7,229) --
--------- --------- ---------
Balance, end of year 105,030 85,232 64,949
--------- --------- ---------
Other, Net
Balance, end of year 841 1,517 960
--------- --------- ---------
Total Shareholders' Equity $ 157,509 $ 126,050 $ 103,571
========= ========= =========
</TABLE>
23
<PAGE>
The Board of Directors declared three-for-two stock splits on December 12, 1997
and December 15, 1995, respectively; effected in the form of 50 percent stock
dividends payable February 4, 1998 and February 7, 1996, respectively; to
shareholders of record on January 7, 1998, and January 3, 1996, respectively.
Accordingly, December 26, 1997 and December 29, 1995 balances reflect the splits
with an increase in common stock and reduction in retained earnings of
$8,516,000 and $5,754,000, respectively. All stock option, share, and per share
data has been restated to reflect the splits.
At December 26, 1997, the Company had 22,549 authorized, but not issued,
cumulative preferred shares. The Company also has authorized, but not issued, a
separate class of 3,000,000 shares of preferred stock, $1 par value.
During 1995, the Company redeemed all 14,740 outstanding shares of cumulative
preferred stock at the call price of $105 per share plus accrued and unpaid
dividends. Prior to redemption, the holders of the cumulative preferred stock
were entitled to fixed cumulative dividends of 5 percent per annum on the par
value before cash dividends were paid or declared on common stock.
The Company maintains a Plan in which one preferred share purchase right
("Right") exists for each common share of the Company. Each Right will entitle
its holder to purchase one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $80, subject to
adjustment. The Rights are exercisable only if a person or group acquires
beneficial ownership of 20 percent or more of the Company's outstanding common
stock. The Rights expire in March 2000 and may be redeemed earlier by the Board
of Directors for $.01 per Right.
G. Employee Stock Ownership Plan
The Company has a leveraged Employee Stock Ownership Plan (ESOP) under which
there was an outstanding debt of $300,000 at December 27, 1996. The remaining
balance of a concurrent loan to the ESOP Trust from the Company was paid in
1997. The Company's loan was included in long-term debt with the receivable from
the ESOP in a like amount recorded as a reduction of shareholders' equity
reflected in the Other, net category. The Company has made an annual
contribution to the ESOP Trust through 1997 which was sufficient to repay the
loan and interest thereon.
H. Stock Option and Purchase Plans
Stock Option Plans. The Company has a Long Term Stock Incentive Plan, under
which a total of 5,212,500 common shares have been reserved for issuance, with
2,029,073 shares remaining reserved at December 26, 1997. Grants under this Plan
are in the form of restrictive share awards and stock options. Restrictive share
awards of 963,914 common shares have been made to certain key employees under
the Plan, with 67,500 shares still restricted for disposition, such restrictions
will lapse on 15,000, 22,500, and 30,000 common shares in 1998, 1999, and 2000,
respectively. Compensation cost charged to operations for the restricted share
awards was $188,000, $256,000, and $319,000, in 1997, 1996, and 1995,
respectively. In 1997, certain officers of the Company agreed to forfeit certain
stock appreciation rights under an agreement which had been granted in prior
years. The net impact on earnings before income taxes in 1997 was $898,000.
Unearned compensation expense relating to the remaining restricted shares is
$976,000 at December 26, 1997 and is included as a reduction of shareholders'
equity in the Other, net category.
Stock options for 2,366,405 common shares have also been granted under the Plan.
The option price is the market price at the date of grant. Options become
exercisable at such time and in such installments as set by the Company, and
expire ten years from the date of grant.
In 1996, the shareholders approved a Nonemployee Director Stock Option Plan,
under which the Company makes initial and annual grants to the nonemployee
directors of the Company. There are 300,000 common shares authorized for
issuance under the Plan, all of which remained reserved at the end of 1997.
Nonemployee directors receive an initial option grant of 3,000 shares upon first
appointment or election and an annual option grant of 2,250 shares. The exercise
price of each option is the fair market value at the date of grant. The options
have a ten-year duration and may be exercised in equal installments over four
years, beginning one year from the date of grant.
24
<PAGE>
Options on common shares granted and outstanding, as well as the weighted
average exercise price, are shown below:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, December 30, 1994 1,026,815 $ 8.00
Granted 220,716 12.60
Exercised (58,478) 5.96
Canceled (133,258) 7.66
--------- ----------------
Outstanding, December 29, 1995 1,055,795 9.13
Granted 105,039 13.10
Exercised (43,680) 8.02
Canceled (54,362) 8.09
--------- ----------------
Outstanding, December 27, 1996 1,062,792 9.56
Granted 237,000 19.51
Exercised (80,961) 21.46
Canceled (115,113) 10.92
--------- ----------------
Outstanding, December 26, 1997 1,103,718 $ 11.65
========= ================
The number of stock options exercisable was 460,146, 349,094, and 208,863, at
December 26, 1997, December 27, 1996, and December 29, 1995, respectively. These
stock options had a weighted average exercise price per share of $8.73, $7.97,
and $7.62, at December 26, 1997, December 27, 1996, and December 29, 1995,
respectively.
The outstanding options at December 26, 1997 expire from 2002 to 2007, with a
weighted average contractual life remaining of 7.2 years, at exercise prices
ranging from $6.89 to $22.75.
Stock Purchase Plans. Under the Company's Employee Stock Purchase Plan,
3,900,000 common shares have been reserved for sale to employees, 914,174 of
which remained unissued at the end of 1997. The purchase price of the shares
under the Plan is the lesser of 85 percent of the fair market value on the first
day or the last day of the Plan year.
In 1994, the shareholders approved a Nonemployee Director Stock Plan which
enable individual nonemployee directors of the Company to elect to receive or
defer all or part of a director's annual retainer in the form of shares of the
Company's common stock instead of cash. The Company issued 2,725, 2,282, and 728
shares under this plan during 1997, 1996, and 1995, respectively. The expense
related to this plan is not significant.
Stock-Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
and purchase plans. Accordingly, no compensation cost has been recognized for
the Employee Stock Purchase Plan and stock options granted under the Long Term
Incentive Plan and the Nonemployee Director Stock Option Plan. Had compensation
cost for the stock option plans been determined based upon fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123 - "Accounting for Stock-Based Compensation," the
Company's net earnings and earnings per share would have been reduced as
follows:
1997 1996 1995
------- ------- -------
Net earnings
As reported $44,716 $36,169 $27,706
Pro forma 43,358 35,276 27,075
Net earnings per common share
Basic as reported $1.75 $1.40 $1.07
Diluted as reported 1.71 1.38 1.06
Pro forma Basic $1.70 $1.36 $1.05
Pro forma Diluted 1.66 1.34 1.04
25
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995, respectively: dividend
yields of 2.0%, 2.9%, and 2.6%, expected volatility of 32.0%, 25.1%, and 21.8%,
risk-free interest rates of 6.6%, 6.3%, and 6.5% and expected lives of an
average of 8 years. Based upon these assumptions, the weighted average fair
value at grant date of options granted during 1997, 1996, and 1995 was $10.47,
$5.25, and $5.02, respectively.
The FAS No. 123 weighted average fair value of the employees' purchase rights
under the Employee Stock Purchase Plan was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1997,
1996, and 1995, respectively: dividend yields of 1.7%, 2.4%, and 2.7%, expected
volatility of 31.7%, 25.1%, and 20.5%, risk-free interest rate of 6.5%, 6.1%,
and 7.7% and expected lives of 1 year. The benefit of the 15% discount from the
lesser of the fair market value per common share on the first day and the last
day of the Plan year was added to the fair value of the employees' purchase
rights determined using Black-Scholes. The weighted average fair value per
common share was $8.05, $4.67, and $3.51 in 1997, 1996, and 1995, respectively.
I. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the
Internal Revenue Code, which provides additional retirement benefits to all U.S.
employees who elect to participate. The Company matched employee contributions
at a 50 percent rate, up to 3 percent of the employee's compensation prior to
1998. Currently, the Company matches employee contributions at a 100 percent
rate, up to 3 percent of the employee's compensation. Employer contributions
were $941,000, $841,000, and $852,000 in 1997, 1996, and 1995, respectively.
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. employees and directors and certain of the employees of
the Company's non-U.S. subsidiaries. For the U.S. plans, the benefits are based
on years of service and the highest five consecutive years' earnings in the ten
years preceding retirement. The Company funds these plans annually in amounts
consistent with minimum funding requirements and maximum tax deduction limits
and invests primarily in common stocks and bonds, including the Company's common
stock. The market value of the plans' investment in the common stock of the
Company was $16,860,000 and $11,070,000 at December 26, 1997 and December 27,
1996, respectively. The expenses for these plans consist of the following
components:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,366 $ 2,366 $ 2,385
Interest cost on projected benefit obligation 5,031 4,699 4,561
Actual return on assets (14,557) (12,228) (12,774)
Net amortization and deferral 5,339 6,254 7,879
Cost of pension plans which are not significant
and have not adopted SFAS No. 87 233 171 65
-------- -------- --------
Net periodic pension cost ($ 1,588) $ 1,262 $ 2,116
======== ======== ========
</TABLE>
26
<PAGE>
The plans' funded status and the amounts recognized in the Company's financial
statements are summarized below:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(In thousands) Benefits Exceed Assets Benefits Exceed Assets
- ----------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value:
Vested benefit obligation $ 60,181 $ 4,348 $ 55,688 $ 4,340
Accumulated benefit obligation $ 65,262 $ 4,783 $ 60,609 $ 4,772
------------- ------------- ------------- -------------
Projected benefit obligation $ 72,963 $ 6,086 $ 67,921 $ 6,258
Plan assets at fair value 89,460 -- 76,797 --
------------- ------------- ------------- -------------
Projected benefit obligation (in
excess of) less than plan assets 16,497 (6,086) 8,876 (6,258)
Unrecognized net (gain) loss (23,824) (404) (18,553) 43
Unrecognized net (asset) liability
being amortized (113) 53 (128) 144
Adjustment required to recognize
minimum liability -- (210) -- (327)
------------- ------------- ------------- -------------
Accrued pension cost ($ 7,440) ($ 6,647) ($ 9,805) ($ 6,398)
------------- ------------- ------------- -------------
</TABLE>
Major assumptions at year-end:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate 4 - 7% 4 - 7% 4 - 7%
Rate of increase in future compensation levels 2 1/2 - 7% 2 1/2 - 7% 2 1/2 - 7%
Expected long-term rate of return on plan assets 11%<F1> 9% 9%
<FN>
<F1>
1 The estimated impact in 1997, of the change in the expected long-term rate of
return on plan assets, was a reduction of employee benefit cost of approximately
$1,700.
</FN>
</TABLE>
In addition to providing pension benefits, the Company pays part of the health
insurance costs for its retired U.S. employees and their dependents.
The Company's retiree health benefit expense for 1997, 1996, and 1995 was as
follows:
(In thousands) 1997 1996 1995
- -------------------- -------- -------- --------
Service cost $ 484 $ 457 $ 496
Interest cost 979 924 890
-------- -------- --------
Net benefit expense $ 1,463 $ 1,381 $ 1,386
======== ======== ========
The Company's policy is to fund these benefits on a pay-as-you-go basis. The
actuarial present value of these health benefit obligations and the amount
recognized in the consolidated balance sheets were as follows:
(In thousands) 1997 1996
- ---------------------------------------------- ---------- ----------
Accumulated postretirement benefit obligation:
Retirees and beneficiaries ($ 6,444) ($ 6,000)
Fully eligible active plan participants (2,456) (2,531)
Other active plan participants (6,165) (5,738)
---------- ---------
Accumulated benefit obligations (15,065) (14,269)
Unrecognized net loss 353 415
---------- ---------
Accrued postretirement benefit cost ($ 14,712) ($ 13,854)
========== =========
27
<PAGE>
The Company's retirement medical benefit plan limits the annual cost increase
that will be paid by the Company. In measuring the Accumulated Postretirement
Benefit Obligation (APBO), a 6 percent maximum annual trend rate for healthcare
costs was assumed for the year ending December 26, 1997. This rate is assumed to
remain constant through the year 2001, decline by 1/2 percent for each of the
following three years to 4.5 percent and remain at that level thereafter. The
discount rate assumption at year-end for 1997, 1996, and 1995 was 7.0 percent.
If the assumed healthcare cost trend rate changed by 1 percent, the APBO as of
December 26, 1997 would change by 14.1 percent. The effect of a 1 percent change
in the cost trend rate on the service and interest cost components of the net
periodic postretirement benefits expense would be a change of 16.3 percent.
J. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments at December 26, 1997,
under operating leases with noncancelable terms of more than one year, were
$6,101,000, payable as follows:
Vehicles &
(In thousands) Buildings Equipment Total
- --------------- --------- ---------- -------
1998 $ 1,716 $ 779 $ 2,495
1999 1,032 459 1,491
2000 582 154 736
2001 389 11 400
2002 264 2 266
Thereafter 713 - 713
--------- ---------- -------
$ 4,696 $ 1,405 $ 6,101
========= ========== =======
Total rental expense was $3,339,000 for 1997, $3,815,000 for 1996, and
$4,722,000 for 1995.
Contingencies. The Company is party to various legal proceedings arising in the
normal course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's consolidated results
of operations or its financial position.
K. Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securitities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, where appropriate, restated to conform to the Statement 128
requirements.
Earnings per share for all years presented, has been calculated to reflect the 3
for 2 stock splits declared on December 12, 1997 and December 15, 1995,
respectively. The following table set forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Numerator:
Net earnings $44,716 $36,169 $27,706
Less dividends on preferred stock -- -- 61
------- ------- -------
Numerator for basic and diluted earnings per share
-earnings available to common shareholders $44,716 $36,169 $27,645
======= ======= =======
Denominator
Denominator for basic earnings per share - weighted average shares 25,575 25,908 25,774
Dilutive effect of stock options computed based on the treasury
stock method using the average market price 591 394 239
------- ------- -------
Denominator for diluted earnings per share 26,166 26,302 26,013
======= ======= =======
Basic earnings per share $ 1.75 $ 1.40 $ 1.07
======= ======= =======
Diluted earnings per share $ 1.71 $ 1.38 $ 1.06
======= ======= =======
</TABLE>
28
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the heading "Executive Officers of the Company" in Part I
of this 1997 Annual Report on Form 10-K and the information under the headings
"Election of Directors, Nominees and Other Directors" on pages 2 through 4 and
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance on
page 13, of the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be held on May 5, 1998 (the "Proxy Statement"), is incorporated
herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" on pages 5
through 12 of the Proxy Statement is incorporated herein by reference, other
than the subsection thereunder entitled "Report of the Management Organization
and Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of Shares" on
pages 12 through 13 of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The Company knows of no relationships or transactions which meet the
requirements of this Item 13.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Part II
(2) Financial Statement Schedule
Page
o Schedule II - Valuation and Qualifying Accounts..............30
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or
Arrangement. (See Exhibit Index)................................32
Those entries marked by an asterisk are Management Contracts,
Compensatory Plans or Arrangements.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the thirteen weeks ended
December 26, 1997.
(c) Exhibit Index.....................................................32
29
<PAGE>
<TABLE>
<CAPTION>
Schedule II - Valuation and Qualifying Accounts GRACO INC. & Subsidiaries
(In thousands)
Additions
Balance charged to Deductions
at costs and from Balance at
Description beginning expenses reserves end of year
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 26, 1997:
Allowance for doubtful accounts $ 2,400 $ 500 $ 700<F1> $ 2,200
Allowance for obsolete and
overstock inventory 5,100 1,500 1,900<F2> 4,700
Allowance for returns and credits 2,300 3,700 4,100<F3> 1,900
Valuation allowance for tax
benefits 1,995 -- 1,995 --
--------- ---------- ---------- -----------
$11,795 $ 5,700 $ 8,695 $ 8,800
========= ========== ========== ===========
Year ended December 27, 1996:
Allowance for doubtful accounts $ 2,800 $ 900 $ 1,300<F1> $ 2,400
Allowance for obsolete and
overstock inventory 5,900 2,500 3,300<F2> 5,100
Allowance for returns and credits 2,000 4,100 3,800<F3> 2,300
Valuation allowance for tax
benefits 5,020 -- 3,025 1,995
--------- ---------- ---------- -----------
$15,720 $ 7,500 $11,425 $11,795
========= ========== ========== ===========
Year ended December 29, 1995:
Allowance for doubtful accounts $ 2,700 $ 700 $ 600<F1> $ 2,800
Allowance for obsolete and
overstock inventory 6,400 1,400 1,900<F2> 5,900
Allowance for returns and credits 2,000 3,400 3,400<F3> 2,000
Valuation allowance for tax
benefits 6,900 -- 1,880 5,020
--------- ---------- ---------- -----------
$18,000 $ 5,500 $ 7,780 $15,720
========= ========== ========== ===========
<FN>
<F1>
1 Accounts determined to be uncollectible and charged against reserve, net of
collections on accounts previously charged against reserves.
<F2>
2 Items scrapped or otherwise disposed of during the year.
<F3>
3 Credits issued and returns processed, related to prior years.
</FN>
</TABLE>
30
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
Chief Executive Officer
(Principal Executive Officer)
/s/Mark W. Sheahan March 17, 1998
----------------------------- --------------
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
/s/James A. Graner March 17, 1998
----------------------------- --------------
James A. Graner
Vice President and Controller
(Principal Accounting Officer)
D. A. Koch Director, Chairman of the Board
G. Aristides Director, and Chief Executive Officer
C. M. Osborne Director, President and Chief Operating Officer
R. O. Baukol Director
R. D. McFarland Director
L. R. Mitau Director
M. A.M. Morfitt Director
D. R. Olseth Director
J. L. Scott Director
W. G. Van Dyke Director
George Aristides, by signing his name hereto, does hereby sign this document on
behalf of himself and each of the above named directors of the Registrant
pursuant to powers of attorney duly executed by such persons.
/s/George Aristides March 17, 1998
----------------------------- --------------
George Aristides
(For himself and as attorney-in-fact)
31
<PAGE>
Exhibit Index
Exhibit
Number Description
------ -----------------------------------------------------------------
3.1 Restated Articles of Incorporation as amended December 12, 1997.
See also Exhibit 4.3.
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 3 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
4.1 Credit Agreement dated October 1, 1990, between the Company and
First Bank National Association. (Incorporated by reference to
Exhibit 5 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated
October 1, 1990, between the Company and First Bank National
Association; and Amendment 2 dated December 31, 1992, to the same
Agreement. (Incorporated by reference to Exhibit 1 to the
Company's Report on Form 8-K dated March 11, 1993.) Amendment 3
dated November 8, 1993, and Amendment 4, dated February 8, 1994.
(Incorporated by reference to Exhibit 4.2 to the Company's 1993
Annual Report on Form 10-K.) Amendment 5, dated April 10, 1995.
(Incorporated by reference to Exhibit 4.2 to the Company's 1995
Annual Report on Form 10-K.) Amendment 6, dated September 27,
1996. (Incorporated by reference to Exhibit 4 to the Company's
Report on Form 10-Q for the thirty-nine weeks ended September 27,
1996.) Amendment 7 dated May 27, 1997. (Incorporated by reference
to Exhibit 4 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.)
4.3 Rights Agreement dated as of March 9, 1990, between the Company
and Norwest Bank Minnesota, National Association, as Rights
Agent, including as Exhibit A the form of the Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Shares. (Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated March 19,
1990.)
*10.1 1997 Corporate and Business Unit Annual Bonus Plan.
(Incorporated by reference to Exhibit 10 to the Company's Report
on Form 10-Q for the thirteen weeks ended March 28, 1997.)
*10.2 Deferred Compensation Plan Restated, effective December 1, 1992.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 11, 1993.) Amendment 1 dated September 1,
1996. (Incorporated by reference to the Company's Report on Form
10-Q for the twenty-six weeks ended June 27, 1997.)
*10.3 Executive Deferred Compensation Agreement. Form of supplementary
agreement entered into by the Company which provides a retirement
benefit to selected executive officers, as amended by Amendment
1, effective September 1, 1990. (Incorporated by reference to
Exhibit 3 to the Company's Report on Form 8-K dated March 11,
1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit 3
to the Company's Report on Form 8-K dated March 7, 1988.)
*10.5 Long Term Stock Incentive Plan, as amended December 12, 1997.
*10.6 Retirement Plan for Non-Employee Directors. (Incorporated by
reference to Attachment C to Item 5 to the Company's Report on
Form 10-Q for the thirteen weeks ended March 29, 1991.)
32
<PAGE>
*10.7 Deferred Compensation Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 7, 1988.)
*10.8 Restoration Plan (1998 Restatement).
*10.9 Stock Option Agreement. Form of agreement used for incentive
stock option/alternative stock appreciation right award to
selected officers, dated February 25, 1993. (Incorporated by
reference to Exhibit 10.14 to the Company's 1993 Annual Report on
Form 10-K.)
*10.10 Stock Option Agreement. Form of agreement used for non-
incentive stock option/alternative stock appreciation right
award to selected officers, dated May 4, 1993. (Incorporated by
reference to Exhibit 10.15 to the Company's 1993 Annual Report on
Form 10-K.)
*10.11 Nonemployee Director Stock Plan, as amended November 6, 1997.
*10.12 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated May 2,
1994. (Incorporated by reference to Exhibit 10.3 to the Company's
Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.13 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to selected officers, dated December
15, 1994, December 27, 1994 and February 23, 1995. (Incorporated
by reference to Exhibit 10.16 to the Company's 1994 Annual Report
on Form 10-K.)
*10.14 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated March 1,
1995. (Incorporated by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the thirteen weeks ended March 31, 1995.)
*10.15 Stock Option Agreement. Form of agreement used for award of non-
incentive stock option to one executive officer, dated December
15, 1995. (Incorporated by reference to Exhibit 10.18 to the
Company's 1995 Annual Report on Form 10-K.)
*10.16 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated March 1,
1996. (Incorporated by reference to Exhibit 10.19 to the
Company's 1995 Annual Report on Form 10-K.)
*10.17 Form of salary protection arrangement between the Company and
executive officers. (Incorporated by reference to Exhibit 10.21
to the Company's 1995 Annual Report on Form 10-K.)
*10.18 Nonemployee Director Stock Option Plan, as amended November 6,
1997.
*10.19 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 7,
1996. (Incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 28,
1996.)
*10.20 Stock Option Agreement. Form of agreement used for award of non-
incentive stock options to executive officers, dated February 28,
1997.(Incorporated by reference to Exhibit 10.24 to the Company's
1996 Annual Report on Form 10-K.)
*10.21 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from incentive stock option agreement dated February 25,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.25 to the Company's 1996 Annual Report on Form 10-K.)
33
<PAGE>
*10.22 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from non-incentive stock option agreement dated May 4,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.26 to the Company's 1996 Annual Report on Form 10-K.)
*10.23 Key Employee Agreement. Form of agreement with officers and
other key employees relating to change of control, dated April 2,
1997. (Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 27,
1997.)
*10.24 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to executive officer dated May 2,
1994, March 1, 1995 and March 1, 1996. (Incorporated by reference
to Exhibit 10.6 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.)
*10.25 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to selected officers dated December
15, 1994. (Incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.26 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to one executive officer dated
December 15, 1995. (Incorporated by reference to Exhibit 10.8 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.27 Stock Option Agreement. Form of agreement used for award of non-
incentive stock option to one executive officer, dated April 23,
1997. (Incorporated by reference to Exhibit 10.9 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.28 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 6,
1997. (Incorporated by reference to Exhibit 10.10 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.29 Executive Long Term Incentive Agreement. Form of restricted
stock award agreement used for award to one executive officer,
dated May 6, 1997. (Incorporated by reference to Exhibit 10.11 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.30 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to two executive officers, dated May
6, 1997. (Incorporated by reference to Exhibit 10.12 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.31 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee director, dated
September 5, 1997. (Incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the thirty-nine weeks ended
September 26, 1997.)
*10.32 Trust Agreement dated September 30, 1997, between the Company
and Norwest Bank Minnesota, N.A. (Incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 26, 1997.)
*10.33 Key Employee Agreement Amendment. Form of amendment dated
January 9, 1998, revising payment reduction provisions.
34
<PAGE>
11 Statement of Computation of Earnings per share included in
footnote K on page 28.
21 Subsidiaries of the Registrant included herein on page 36.
23 Independent Auditor's Consent included herein on page 36.
24 Power of Attorney included herein on page 37.
27 Financial Data Schedule (EDGAR filing only).
99 Cautionary Statement Regarding Forward-Looking Statements.
*Management Contracts, Compensatory Plans or Arrangements.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments
defining the rights of holders of certain long-term debt of the Company and its
subsidiaries are not filed as exhibits because the amount of debt authorized
under any such instrument does not exceed 10 percent of the total assets of the
Company and its subsidiaries. The Company agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
35
Exhibit 21
Subsidiaries of Graco Inc.
The following are subsidiaries of the Company:
Jurisdiction Percentage of Voting
of Securities Owned by
Subsidiary Organization the Company
---------- ------------ --------------------
Equipos Graco Argentina S.A. Argentina 100%*
Graco Barbados FSC Limited Barbados 100%
Graco Canada Incorporated Canada 100%
Graco Chile Limitada Chile 100%*
Graco do Brasil Limitada Brazil 100%*
Graco Europe N.V. Belgium 100%*
Graco GmbH Germany 100%
Graco Hong Kong Limited Hong Kong 100%*
Graco K.K. Japan 100%
Graco Korea Inc. Korea 100%
Graco Limited England 100%*
Graco N.V. Belgium 100%*
Graco S.A. France 100%*
Graco S.r.l. Italy 100%*
* Includes shares held by selected directors and/or executive officers of the
Company or the relevant subsidiary to satisfy the requirements of local
law.
Exhibit 23
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement No.
333-17691 on Form S-8 (the Company's Long Term Stock Incentive Plan), in
Registration Statement No. 333-17787 on Form S-8 (the Company's Employee Stock
Purchase Plan), in Registration Statement No. 33-54205 on Form S-8 (the
Company's Nonemployee Director Stock Plan) and in Registration Statement No.
333-03459 on Form S-8 (the Company's Nonemployee Director Stock Option Plan) of
our report dated January 19, 1998, appearing in this Annual Report on Form 10-K
of Graco Inc. for the year ended December 26, 1997.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 13, 1998
36
Exhibit 24
Power of Attorney
Know all by these presents, that each person whose signature appears below
hereby constitutes and appoints George Aristides or Mark W. Sheahan, that
person's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for that person and in that person's name, place
and stead, in any and all capacities, to sign the Report on Form 10-K for the
year ended December 26, 1997, of Graco Inc. (and any and all amendments thereto)
and to file the same with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as that person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In witness whereof, this Power of Attorney has been signed by the following
persons on the date indicated.
Date
-----------------
/s/G. Aristides February 20, 1998
------------------------- -----------------
G. Aristides
/s/R. O. Baukol February 20, 1998
------------------------- -----------------
R. O. Baukol
/s/D. A. Koch February 20, 1998
------------------------- -----------------
D. A. Koch
/s/R. D. McFarland February 20, 1998
------------------------- -----------------
R. D. McFarland
/s/L. R. Mitau February 20, 1998
------------------------- -----------------
L. R. Mitau
/s/M. A.M. Morfitt February 20, 1998
------------------------- -----------------
M. A.M. Morfitt
/s/D. R. Olseth February 20, 1998
------------------------- -----------------
D. R. Olseth
/s/C. M. Osborne February 20, 1998
------------------------- -----------------
C. M. Osborne
/s/J. L. Scott February 20, 1998
------------------------- -----------------
J. L. Scott
/s/W. G. Van Dyke February 20, 1998
------------------------- -----------------
W. G. Van Dyke
37
ARTICLES OF AMENDMENT
RESTATING
ARTICLES OF INCORPORATION OF
GRACO INC.
1. The name of the corporation is Graco Inc., a Minnesota corporation.
2. On December 12, 1997, the Board of Directors of Graco Inc. amended article
5.1(a) of its Articles of Incorporation, pursuant to the Minnesota Business
Corporation Act, Minnesota Statutes, Section 302A.402, subd. 3, to read as
follows:
5.1(a) The total number of shares which this corporation shall be
authorized to issue is Thirty-six Million Seven Hundred
Seventy-two, Five Hundred Forty-nine (36,772,549), of which
Thirty-three Million Seven Hundred Fifty Thousand (33,750,000)
shares of the par value of $1.00 per share shall be Common
Shares, Three Million (3,000,000) shares of the par value of
$1.00 per share shall be Preferred Shares and Twenty-two Thousand
Five Hundred Forty-nine (22,549) shares of the par value of
$100.00 per share shall be Cumulative Preferred Shares.
3. The document entitled "Restated Articles of Incorporation of Graco Inc."
marked as Exhibit A and attached hereto, contains the full text of the
Articles of Incorporation of Graco Inc., incorporating in its entirety the
amendment of Article 5.1(a) adopted by the Board of Directors on December
12, 1997.
4. The document entitled "Restated Articles of Incorporation of Graco Inc."
attached hereto as Exhibit A correctly sets forth, without change, the
corresponding provisions of the existing articles as previously amended and
merely restates the existing Articles, including the amendment to Article
5.1(a), in their entirety.
5. The "Restated Articles of Incorporation of Graco Inc." attached hereto as
Exhibit A, supersede the prior restated Articles and all amendments
thereto.
IN WITNESS WHEREOF, the undersigned, the Secretary of Graco Inc., being
duly authorized on behalf of Graco Inc., has executed this document this twelfth
day of December, 1997.
/s/Robert M. Mattison
Robert M. Mattison
Secretary
Exhibit A
RESTATED ARTICLES OF INCORPORATION
OF
GRACO INC.
(Approved by the Board of Directors on December 12, 1997)
ARTICLE I
1. The name of this corporation shall be Graco Inc.
ARTICLE 2
2. CT Corporation System Inc., is this corporation's
registered agent in the State of Minnesota, and 405 Second Avenue South,
Minneapolis, Minnesota 55401, the business office address of CT Corporation
System Inc., is the registered office of this corporation.
ARTICLE 3
3. Except as provided in Article 6, (i) the holders of a
majority of the Common Shares outstanding shall have power to authorize the
sale, lease, exchange, or other disposal of all, or substantially all, of the
property and assets of the corporation, including its goodwill, to adopt or
reject a plan of merger or exchange and (ii) the holders of a majority of the
Common Shares present and entitled to vote at a meeting shall have the power
to amend the Articles of Incorporation.
ARTICLE 4
4. Any action required or permitted to be taken at a meeting
of the Board of Directors of this corporation not needing approval by the
shareholders under Minnesota Statutes, Chapter 302A, may be taken by written
action signed by the number of directors that would be required to take such
action at a meeting of the Board of Directors at which all directors are
present.
ARTICLE 5
5.1 (a) The total number of shares which this corporation
shall be authorized to issue is Thirty-six Million Seven Hundred
Seventy-two, Five Hundred Forty-nine (36,772,549), of which
Thirty-three Million Seven Hundred Fifty Thousand (33,750,000) shares
of the par value of $1.00 per share shall be Common Shares, Three
Million (3,000,000) shares of the par value of $1.00 per share shall be
Preferred Shares and Twenty-two Thousand Five Hundred Forty-nine
(22,549) shares of the par value of $100.00 per share shall be
Cumulative Preferred Shares.
(b) Preferred Shares may be issued from time to time in one or
more series as the Board of Directors may determine, as hereinafter
provided. The Board of Directors is hereby authorized by resolution or
resolutions, to provide from time to time for series of Preferred
Shares out of the unissued Preferred Shares not then allocated to any
series of Preferred Shares. Before any shares of any such series are
issued, the Board of Directors shall fix and determine, and is hereby
expressly empowered to fix and determine, by resolution or resolutions,
the designations and the relative rights and preferences thereof, of
the shares of such series. Preferred Shares will be senior to the
Cumulative Preferred Shares in terms of dividend and liquidation rights
unless the Board of Directors specifically provides otherwise in the
resolution or resolutions establishing a series of Preferred Shares.
The Board of Directors is expressly authorized to vary the
provisions relating to the foregoing matters among the various series of
Preferred Shares.
Preferred Shares of any series that shall be issued and
thereafter acquired by the corporation through purchase, redemption (whether
through the operation of a sinking fund or otherwise), conversion, exchange
or otherwise, shall, upon appropriate filing and recording to the extent
required by law, have the status of authorized and unissued Preferred Shares
and may be reissued as part of such series or as part of any other series of
Preferred Shares. Unless otherwise provided in the resolution or resolutions
of the Board of Directors providing for the issue thereof, the number of
authorized shares of any series of Preferred Shares may be increased or
decreased (but not below the number of shares thereof then outstanding) by
resolution or resolutions of the Board of Directors and appropriate filing
and recording to the extent required by law. In case the number of shares of
any such series of Preferred Shares shall be decreased, the shares
representing such decrease shall, unless otherwise provided in the resolution
or resolutions of the Board of Directors providing for the issuance thereof,
resume the status of authorized but unissued Preferred Shares, undesignated
as to series.
5.2 The designations, relative rights, voting powers,
preferences and restrictions granted to or imposed upon the Common Shares and
Cumulative Preferred Shares, which shall be subject to the rights granted to
any series of Preferred Shares in the resolutions authorizing the series, are
as follows:
(a) Voting. Except as expressly set forth in sub-division (f)
below and except as otherwise provided in the resolutions authorizing
any series of Preferred Shares or by law, the holders of Common Shares
shall have the sole voting rights of shareholders of the corporation
and shall be entitled to one vote for each share held. The
shareholders of the corporation shall have no right to cumulate votes
for the election of directors.
(b) No Pre-emptive Rights. Except as provided in the
resolutions authorizing any series of Preferred Shares, no holders of
any share of stock of any class of this corporation shall have any
pre-emptive right to subscribe to any issue of shares of any class of
this corporation now or hereafter authorized or any security hereafter
issued by this corporation convertible into shares of this corporation.
(c) Dividends. The holders of Cumulative Preferred Shares
shall be entitled to receive out of any assets legally available
therefor, when and as declared by the Board of Directors, fixed
cumulative dividends at the rate of five percent (5%) per annum upon
the par value thereof, and no more, payable semiannually on January 1
and July 1 of each year. Such dividends shall be cumulative from
January 1, 1969.
In no event shall any dividend be paid or declared (other than
dividends payable in Common Shares of any class), nor shall any
distribution be made on the Common Shares of any class of the
corporation, nor shall any Common Shares of any class be purchased,
redeemed or otherwise acquired by the corporation for value unless all
dividends on the Cumulative Preferred Shares for all past semiannual
dividend periods and for the then current semiannual dividend period
shall have been paid, or declared and a sum sufficient for the payment
thereof set apart for payment.
Subject to the provisions of this Article 5 and not otherwise,
dividends may be declared by the Board of Directors and paid from time
to time, out of any funds legally available therefor, upon the Common
Shares, and the holders of Cumulative Preferred Shares shall not be
entitled to participate in any such dividends.
(d) Redemption. The Cumulative Preferred Shares of the
corporation may be redeemed as a whole at any time or in part from time
to time at the option of the corporation by resolution of the Board of
Directors at the redemption price of $105 per share together with an
amount equal to all accrued and unpaid cumulative dividends thereon
from the date on which dividends thereon became cumulative to the
redemption date. If less than all of the outstanding Cumulative
Preferred Shares are to be redeemed, the shares to be redeemed shall be
selected by the Board of Directors or by a person appointed for such
purpose by the Board of Directors.
Notice of every redemption of Cumulative Preferred Shares shall
be mailed addressed to the holders of record of the shares to be
redeemed at their respective addresses as they appear on the stock
books of the corporation not less than thirty (30) and not more than
sixty (60) days prior to the date fixed for redemption.
If notice of redemption shall have been duly given as aforesaid
and if on or before the redemption date specified in the notice, all
funds necessary for the redemption shall have been deposited in trust
with a bank or trust company in good standing and doing business at any
place within the United States, and designated in the notice of
redemption, for the pro rata benefit of the shares so called for
redemption, so as to be and continue to be available therefor, then,
from and after the date of such deposit, notwithstanding that any
certificate for Cumulative Preferred Shares so called for redemption
shall not have been surrendered for cancellation, the shares
represented thereby shall no longer be deemed outstanding, and the
dividends thereon shall cease to accumulate from and after the date
fixed for redemption, and all rights with respect to the Cumulative
Preferred Shares so called for redemption shall forthwith, on the date
of such deposit, cease and terminate except only the right of the
holders thereof to receive the redemption price of the shares so
redeemed, including accrued cumulative dividends to the redemption
date, but without interest. Any funds deposited by the corporation
pursuant to this paragraph and unclaimed at the end of six (6) years
after the date fixed for redemption shall be repaid to the corporation
upon its request expressed in a resolution of its Board of Directors,
after which repayment the holders of the shares so called for
redemption shall look only to the corporation for the payment thereof.
(e) Dissolution, Liquidation, etc. In the event of any
dissolution, liquidation or winding up of the affairs of the
corporation, before any distribution or payment shall be made to the
holders of Common Shares, the holders of the Cumulative Preferred
Shares shall be entitled to be paid in full the par value thereof if
such liquidation, dissolution or winding up shall be involuntary, and
the sum of $105 per share if such liquidation, dissolution or winding
up shall be voluntary, together, in either event, with a sum, in the
case of each share, equal to the cumulative accrued and unpaid
dividends thereon to the date fixed for such distribution or payment.
If such distribution or payment shall have been made to the holders of
the Cumulative Preferred Shares or moneys made available for such
payment in full, the remaining assets and funds of the corporation
shall be distributed ratably to the holders of the Common Shares. If
there shall be insufficient assets to make full payment to the holders
of Cumulative Preferred Shares as above provided, the assets of the
corporation shall be distributed among the holders of Cumulative
Preferred Shares ratably. Except as herein otherwise expressly
provided, the Cumulative Preferred Shares shall not be entitled to
participate in any of the profits, surplus or assets of the
corporation. The consolidation or merger of the corporation into or
with any other corporation or corporations pursuant to the statutes of
the State of Minnesota shall not be deemed a liquidation, dissolution
or winding up of the affairs of the corporation within the meaning of
any of the provisions of this paragraph.
(f) Special Voting Rights. The holders of Cumulative Preferred
Shares shall not be entitled as such to vote at any meeting of the
shareholders of the corporation except as required by law or as
hereinafter otherwise provided.
(i) If an amendment to the Articles of Incorporation of
the corporation would adversely affect the rights of the
holders of Cumulative Preferred Shares, then in addition to
the vote thereon by the holders of the Common Shares, the
holders of Cumulative Preferred Shares shall be entitled to
vote separately as a class thereon, and such amendment
shall be adopted only if it receives the affirmative vote
of the holders of a majority of the Cumulative Preferred
Shares.
(ii) After an amount equivalent to three (3) full
semi-annual dividend installments of the Cumulative
Preferred Shares shall be in default, the holders of
Cumulative Preferred Shares at the time outstanding, voting
separately as a class shall, at any annual meeting of the
shareholders or any special meeting of the shareholders
called as herein provided occurring during such period,
elect two (2) members of the Board of Directors, and the
holders of the Common Shares, voting separately as a class,
shall elect the remaining directors of the corporation.
(iii) After an amount equivalent to six (6) full
semi-annual dividend installments of the Cumulative
Preferred Shares shall be in default, the holders of
Cumulative Preferred Shares, voting separately as a class,
shall, at any annual meeting of the shareholders or any
special meeting of the shareholders called as herein
provided occurring during such period, elect the smallest
number of directors necessary to constitute a majority of
the full Board of Directors, and the holders of the Common
Shares, voting separately as a class, shall elect the
remaining directors of the corporation.
At any annual meeting or special meeting of shareholders for the
election of directors occurring after all cumulative dividends then in
default on the Cumulative Preferred Shares then outstanding, including
the dividend for the then current semi-annual period, shall have been
paid, or declared and set apart for payment, the Cumulative Preferred
Shares shall thereupon be divested of any rights with respect to the
election of directors as above provided, but always subject to the same
provisions for the revesting of such voting power in the Cumulative
Preferred Shares in the case of a future like default or defaults in
dividends on Preferred Shares.
Voting power for the election of directors vested in the holders
of the Cumulative Preferred Shares as above provided may be exercised
at any annual meeting of shareholders or at a special meeting of
shareholders held for such purpose, which special meeting of
shareholders shall be called by the proper officers of the corporation
at any time when such voting power shall be vested within twenty (20)
days after written request therefor signed by the holder or holders of
not less than ten percent (10%) of the Cumulative Preferred Shares then
outstanding, the date of such special meeting to be not more than
twenty (20) days from the date of giving notice thereof, and such
notice shall be given to all holders of Cumulative Preferred Shares and
Common Shares not less than ten (10) days prior to said meeting. In
each such case such notice shall direct attention to the voting rights
of the holders of Cumulative Preferred Shares. At any such meeting the
presence in person or by proxy of the holders of a majority of the
Cumulative Preferred Shares outstanding shall be required to constitute
a quorum for the election of directors whom the holders of Cumulative
Preferred Shares are entitled to elect and, likewise, the presence in
person or by proxy of the holders of a majority of the Common Shares
outstanding shall be required to constitute a quorum for the election
of directors whom the holder of Common Shares are entitled to elect;
provided that either the Cumulative Preferred shareholders or the
Common shareholders who are present in person or by proxy at such a
meeting shall have power to adjourn such meeting for the election of
directors to be elected by them from time to time, without notice other
than announcement at the meeting and, provided further, that the
adjournment of the meeting for lack of a quorum of the Common
shareholders shall not prevent the election at that meeting of the
directors whom the Cumulative Preferred shareholders are entitled to
elect if there is a quorum of the Cumulative preferred shareholders.
If at any time the holders of Cumulative Preferred Shares shall
become entitled to elect two (2) directors or a majority of the Board
of Directors as aforesaid, the terms of all incumbent directors shall
expire whenever such two (2) directors or such majority have been duly
elected and qualified.
Whenever the Cumulative Preferred Shares shall be divested of
voting power with respect to the election of directors the terms of all
then incumbent directors shall expire upon the election of a new board
by the holders of Common Shares at the next annual or special meeting
for the election of directors.
If a vacancy or vacancies in the Board of Directors shall exist
with respect to a director or directors elected by the Cumulative
Preferred shareholders, the remaining director or directors elected by
the Cumulative Preferred shareholders may, by the vote of such
remaining director if there be but one, or by the vote of a majority of
such remaining directors if there be more than one, elect a successor
or successors to hold office for the unexpired term. Likewise, a
vacancy or vacancies existing with respect to directors elected by the
Common shareholders may be filled by the remaining director or
directors elected by the Common shareholders.
ARTICLE 6
6.1 Whether or not a vote of shareholders is otherwise
required, the affirmative vote of the holders of not less than two-thirds of
the outstanding shares of "Voting Stock" (as hereafter defined) of the
corporation shall be required for the approval or authorization of any
"Business Combination" (as hereafter defined) with any Related Person (as
hereafter defined) involving the corporation or the approval or authorization
by the corporation in its capacity as a shareholder of any Business
Combination involving a "Subsidiary" (as hereafter defined) which requires
the approval or authorization of the shareholders of the Subsidiary;
provided, however, that the two-thirds voting requirement shall not be
applicable if:
(a) The "Continuing Directors" (as hereafter defined) by a
majority vote have expressly approved the Business Combination; or
(b) The Business Combination is a merger, consolidation,
exchange of shares or sale of all or substantially all of the assets of
the corporation and the cash or fair market value (determined as of the
effective date of such Business Combination or, in the case of a sale
of assets as of the date of the distribution of the proceeds of the
sale to the shareholders of the corporation) of the property,
securities or other consideration to be received per share by holders
of common stock of the corporation other than the Related Person is not
less than the highest per share price (with appropriate adjustments for
recapitalizations, stock splits, stock dividends and like
distributions), paid by the Related Person in acquiring any of its
holdings of the corporation's common stock during the two-year period
prior to the effective date of the Business Combination or the
distribution of the proceeds of a sale of assets.
6.2 For the purposes of this Article 6:
(a) The term "Business Combination" shall mean
(i) any merger or consolidation of the corporation or a
Subsidiary with or into a Related Person,
(ii) any exchange of shares of the corporation or a
Subsidiary for shares of a Related Person which, in the
absence of this Article, would have required the
affirmative vote of at least a majority of the voting power
of the outstanding shares of the corporation entitled to
vote or the affirmative vote of the corporation, in its
capacity as a shareholder of the Subsidiary,
(iii) any sale, lease, exchange, transfer or other
disposition (in one transaction or a series of
transactions), including, without limitation, a mortgage or
any other security device, of all or any "Substantial Part"
(as hereinafter defined) of the assets either of the
corporation (including, without limitation, any voting
securities of a Subsidiary) or of a Subsidiary, to or with
a Related Person,
(iv) any sale, lease, exchange, transfer or other
disposition (in one transaction or a series of
transactions) of all or any Substantial Part of the assets
of a Related Person to or with the corporation or a
Subsidiary,
(v) the issuance of any securities to a Related Person
(except pursuant to stock dividends, stock splits or
similar transactions which would not have the effect of
increasing the proportionate voting power of a Related
Person) of the corporation, or of a Subsidiary (except
pursuant to a pro rata distribution to all holders of
common stock of the corporation),
(vi) any recapitalization or reclassification that would
have the effect of increasing the voting power of a Related
Person, and
(vii) any agreement, contract or other arrangement
providing for any of the transactions described in this
definition of Business Combination.
(b) The term "Related Person" shall mean and include any
individual, corporation, partnership or other person or entity which,
together with its "Affiliates" and "Associates" (as defined on February
24, 1984 by Rule 12b-2 under the Securities Exchange Act of 1934),
"Beneficially Owns" (as defined on February 24, 1984 by Rule 13d-3
under the Securities Exchange Act of 1934) in the aggregate 15 percent
or more of the outstanding Voting Stock of the corporation, and any
Affiliate or Associate (other than the corporation or a wholly-owned
subsidiary of the corporation) of any such individual, corporation,
partnership or other person or entity.
(c) The term "Substantial Part" shall mean more than 30 percent
of the fair market value of the total assets of the corporation in
question, as of the end of its most recent fiscal year ending prior to
the time the determination is being made.
(d) Without limitation, any shares of common stock of the
corporation that any Related Person has the right to acquire pursuant
to any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise, shall be deemed beneficially owned by the
Related Person.
(e) The term "Subsidiary" shall mean any corporation, a
majority of the equity securities of any class of which are owned by
the corporation, by another Subsidiary, or in the aggregate by the
corporation and one or more of its Subsidiaries.
(f) The term "Voting Stock" shall mean all outstanding shares
of capital stock of the corporation entitled to vote generally in the
election of directors and each reference to a proportion of shares of
Voting Stock shall refer to such proportion of the votes entitled to be
cast by such shares.
(g) The term "Continuing Director" shall mean (i) a director
who was a member of the Board of Directors of the corporation either on
February 24, 1984 or immediately prior to the time that any Related
Person involved in the Business Combination in question became a
Related Person and (ii) any person becoming a director whose election,
or nomination for election by the corporation's shareholders, was
approved by a vote of a majority of the Continuing Directors; provided,
however, that in no event shall a Related Person involved in the
Business Combination in question be deemed to be a Continuing Director.
6.3 For the purposes of this Article 6 the Continuing Directors
by a majority vote shall have the power to make a good faith determination,
on the basis of information known to them, of: (i) the number of shares of
Voting Stock of the corporation that any person or entity Beneficially Owns,
(ii) whether a person or entity is an Affiliate or Associate of another,
(iii) whether the assets subject to any Business Combination constitute a
Substantial Part, (iv) whether any business transaction is one in which a
Related Person has an interest, (v) whether the cash or fair market value of
the property, securities or other consideration to be received per share by
holders of capital stock of the corporation other than the Related Person in
a Business Combination is an amount at least equal to the highest per share
price paid by the Related Person and (vi) such other matters with respect to
which a determination is required under this Article 6.
6.4 The provisions set forth in this Article 6 may not be
repealed or amended in any respect, unless such action is approved by the
affirmative vote of the holders of not less than two-thirds of the
outstanding shares of Voting Stock of the corporation.
ARTICLE 7
7.1 The number of directors shall initially be ten and,
thereafter, shall be fixed from time to time by the Board of Directors or by
the affirmative vote of the holders of two-thirds of the voting power of the
outstanding capital stock of the corporation, voting together as a single
class. The directors shall be divided into three classes, as nearly equal in
number as reasonably possible, with the term of office of the first class to
expire at the 1988 annual meeting of shareholders, the term of office of the
second class to expire at the 1989 annual meeting of shareholders and the
term of office of the third class to expire at the 1990 annual meeting of
shareholders. At each annual meeting of shareholders following such initial
classification and election, directors elected to succeed those directors
whose terms expire shall be elected for a term of office to expire at the
third succeeding annual meeting of shareholders after their election.
7.2 Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled by a
majority vote of the directors then in office though less than a quorum, and
directors so chosen shall hold office for a term expiring at the next annual
meeting of shareholders. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
7.3 Any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the
affirmative vote of the holders of the proportion or number of the voting
power of the shares of the classes or series the director represents
sufficient to elect them.
7.4 The provisions of this Article 7 may not be repealed or
amended in any respect, unless such action is approved by the affirmative
vote of the holders of not less than two-thirds of the outstanding shares of
the capital stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class.
ARTICLE 8
8. No director of the corporation shall be personally liable
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty by such director as a director; provided, however, that this
Article 8 shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
302A.559 of the Minnesota Business Corporation Act or Section 80A.23 of the
Minnesota Securities Law, or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this
Article 8 shall apply to or have any effect on the liability or alleged
liability of any director of the corporation for or with respect to any acts
or omissions of such director occurring prior to such amendment or repeal.
ARTICLE 9
9. The Board of Directors of the corporation (the "Board"),
when evaluating any offer of another party, (a) to make a tender or exchange
offer for any Voting Stock (as defined in Article 6) of the corporation or
(b) to effect a Business Combination (as defined in Article 6), shall, in
connection with the exercise of its judgment in determining what is in the
best interests of the corporation as a whole, be authorized to give due
consideration to such factors as the Board determines to be relevant,
including, without limitation:
(i) the interests of the corporation's shareholders;
(ii) the social, legal and economic effects upon
employees, suppliers, customers and others having similar
relationships with the corporation, and the communities in
which the corporation conducts its business;
(iii) whether the proposed transaction might violate
federal or state laws; and
(iv) not only the consideration being offered in the
proposed transaction, in relation to the then current
market price for the outstanding capital stock of the
corporation, but also the market price for the capital
stock of the corporation over a period of years, the
estimated price that might be achieved in a negotiated sale
of the corporation as a whole or in part of through orderly
liquidation, the premiums over market price for the
securities of other corporations in similar transactions,
current political, economic or other factors bearing on
securities prices and the corporation's financial condition
and future prospects.
In connection with any such evaluation, the Board is authorized
to conduct such investigations and to engage in such legal proceedings as the
Board may determine.
December 12, 1997
LONG TERM STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Graco Inc. Long Term Stock Incentive Plan
(the "Plan") is to further the growth in earnings and market appreciation of
Graco Inc. (the "Company"). The Plan provides substantial contributions to the
Company through ability, performance, industry and invention. The Company
intends that the Plan will thereby facilitate securing, retaining and motivating
officers and key employees of high caliber and good potential.
2. Administration. The Plan shall be administered by a committee (the
"Committee") selected by the Board of Directors of the Company (the "Board").
The Committee shall consist of two or more members who are members of the Board
and who are "Non-Employee Directors" within the meaning of Rule 16b-3
promulgated by the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), which term "Non-Employee
Director" is defined in this paragraph for purposes of describing the members of
the Committee only and is not intended to define such term as it may be used
elsewhere in the Plan. The Committee may delegate to one or more officers of the
Company or a committee of such officers the authority, subject to such terms and
limitations as the Committee shall determine to grant awards to employees of the
Company who are not officers or directors of the Company for purposes of Section
16 of the Exchange Act.
The Committee shall have full and final authority, in its discretion, to
interpret the provisions of the Plan and to decide all questions of fact arising
in its application; to determine the employees to whom awards shall be made
under the Plan; to determine the type of award to be made and the amount, size,
terms and conditions of each such award; to determine and establish additional
terms and conditions not inconsistent with the Plan and for any agreements
entered into with participants in connection with the Plan; to determine the
time when awards will be granted and when rights may be exercised, which may be
after termination of employment; and to make all other determinations necessary
or advisable for the administration of the Plan.
The Committee shall select one of its members as its Chairman and shall
hold its meetings at such times and places as it may determine. A majority of
its members shall constitute a quorum. All determinations of the Committee shall
be made by not less than a majority of its members. Any decision or
determination reduced to writing and signed by all of the members of the
Committee shall be fully effective as if it had been made by a majority vote at
a meeting duly called and held. The granting of a stock option or restricted
stock award pursuant to the Plan shall be effective only if a written agreement
shall have been duly executed and delivered by and on behalf of the Company and,
in the case of a restricted stock award, by the employee to whom such right is
granted. The Committee may appoint a Secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable.
3. Participants. Persons eligible to participate in the Plan shall be those
officers and key employees of the Company or its subsidiaries who are in
positions in which their decisions, actions and counsel significantly impact the
performance of the Company or its subsidiaries. Directors of the Company who are
not otherwise salaried employees of the Company shall not be eligible to receive
awards under the Plan. For the purpose of awards of incentive stock options (as
hereinafter defined) made under the Plan, the term "subsidiary" shall have the
meaning given to it by Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code"). For the purpose of all other awards made under the Plan,
the term "subsidiary" shall have the meaning given to it by Rule 405 promulgated
under the Securities Act of 1933, as amended. References to "the Company" in
this Plan or in any option or other award granted pursuant to the Plan shall be
deemed references to a subsidiary if appropriate.
4. Awards under the Plan. Awards by the Committee under the Plan may be in
the form of stock options intended to qualify as "incentive stock options" under
the provision of Section 422 of the Code, stock options which do not qualify for
special tax treatment under Section 422, restricted stock and other stock awards
pursuant to such bonus and incentive plans as the Committee may deem
appropriate.
4.1 Award Limitation. In any calendar year beginning with January 31,
1997, the Committee may not award stock options or stock appreciation
rights on more than 300,000 Shares in the aggregate to any Participant who
is an employee of the Company at the time of such award. This award limit
may be adjusted in accordance with the provisions of Section 15. This
limitation is intended to qualify the award of options and stock
appreciation rights as performance-based compensation within the meaning of
Section 162(m) of the Code.
5. Shares Subject to Plan. The shares that may be issued under the Plan
shall not exceed in the aggregate 5,212,500 common shares, $1.00 par value, of
the Company. Except as otherwise provided herein, any shares subject to an
option or right or other awards which for any reason expires or terminates
without issuance or final vesting of such shares shall again be available under
the Plan. No fractional shares shall be issued under the Plan.
6. Stock Options. Stock options shall be evidenced by stock option
agreements in such form not inconsistent with the Plan as the Committee shall
approve from time to time, which agreements shall contain in substance the
following terms and conditions.
6.1. Option Price. The purchase price per common share deliverable
upon the exercise of an option shall not be less than 100% of the fair
market value of the stock on the day the option is granted, as determined
by the Committee.
6.2. Exercise of Option. Each stock option agreement shall state the
period or periods of time within which the option may be exercised by the
participant, in whole or in part, which shall be such period or periods of
time as may be determined by the Committee, provided that the option period
shall not end later than ten years after the date of the grant of the
option.
6.3. Payment of Shares. An optionee electing to exercise an option
shall give written notice to the Company of such election and of the number
of shares subject to such exercise. The full purchase price of such shares
shall be tendered with such notice of exercise or, at the discretion of the
Committee, pursuant to any arrangements satisfactory to the Committee which
provide that the Company will be paid at the time the shares are delivered
to the optionee or his designee. Payment shall be made either in cash
(including check, bank draft or money order) or, at the discretion of the
Committee, (i) by delivering the Company's common shares already owned by
the optionee having a fair market value equal to the full purchase price of
the shares, or (ii) a combination of cash and such shares.
6.4. Special Rule for Incentive Stock Options. The aggregate fair
market value (determined as of the time the option is granted) of the
common shares with respect to which all incentive stock options granted
after January 1, 1987 are exercisable for the first time by any individual
during any calendar year (under all option plans of the Company and its
parent and subsidiary corporations) shall not exceed $100,000.
7. Restricted Stock Awards. Restricted stock awards shall be evidenced by
restricted stock agreements in such form not inconsistent with the Plan as the
Committee shall approve from time to time, which agreements shall contain in
substance the following terms and conditions.
7.1. Restriction Period. Shares awarded pursuant to restricted stock
awards shall be subject to such conditions, terms and restrictions
(including continued employment, achievement of performance targets,
forfeiture and transfer) and for such period or periods as shall be
determined by the Committee. The Committee shall have the power, in its
discretion, to permit an acceleration of the expiration of the applicable
restriction period with respect to any part of all of the shares awarded to
a participant.
7.2 Restrictions Upon Transfer. The common shares subject to an award,
may not be sold, assigned, transferred, exchanged, pledged, hypothecated,
or otherwise encumbered, except as herein provided, during the restriction
period applicable to such shares, but a participant shall have all the
other rights of a stockholder, including the right to receive cash
dividends and the right to vote such shares, until such time as the
restrictions have lapsed or the shares have been forfeited.
7.3 Certificates. Each certificate issued in respect of common shares
awarded to a participant shall be deposited with the Company, or its
designee, and shall bear an appropriate legend noting the existence of
restrictions upon the transfer of such Common Stock.
7.4 Lapse of Restrictions. The agreement governing the awards shall
specify the conditions and terms upon which any restrictions upon shares
awarded under the Plan shall lapse, as determined by the Committee. Upon
lapse of such restrictions, common shares free of any restrictive legend,
other than as may be required under Section 9 hereof, shall be issued and
delivered to the participant of his legal representative.
8. Fair Market Value. The fair market value of the Company's common shares
for purposes of the Plan shall be the last sale price of the common shares as
reported on the New York Stock Exchange on the business day as of which the fair
market value is being determined or if no sale occurred on that date, the last
sale on the most recent date for which a sale is reported. If the Company's
common shares are not then traded on the New York Stock Exchange, the Committee
may determine fair market value in some other reasonable way.
9. General Restrictions. Each award under the Plan shall be subject to the
requirement that, if at anytime the Committee shall determine that (a) the
listing, registration or qualification of the common shares subject or related
thereto upon any securities exchange or under any state or federal law, or (b)
the consent or approval of any government regulatory body, or (c) an agreement
by the recipient of an award with respect to the disposition of common shares,
is necessary or desirable in connection with, the granting of such award or the
issue or purchase of common shares thereunder, such award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee. A participant shall agree, as a
condition of receiving any award under the Plan, to execute any documents, make
any representations, agree to restrictions on stock transferability and take any
actions which in the opinion of legal counsel to the Company is required by any
applicable law, ruling or regulation.
10. Rights of a Shareholder. The recipient of any award under the Plan,
unless otherwise provided by the Plan, shall have no rights as a shareholder
with respect thereto unless and until certificates for common shares are issued
to the recipient.
11. Right to Terminate Employment. Nothing in the Plan or in any agreement
entered into pursuant to the Plan shall confer upon any participant the right to
continue in the employment of the Company or its subsidiaries, or affect any
right which the Company or such subsidiaries may have to terminate the
employment of the participant.
12. Withholding.
12.1. Payment of Withholding Taxes. Whenever the Company proposes or
is required to issue or transfer common shares under the Plan, the Company
shall have the right to require the recipient to remit to the Company, or
provide indemnification satisfactory to the Company for, an amount
sufficient to satisfy any federal, state or local withholding tax
requirements prior to the issuance or delivery of any certificate or
certificates for such shares.
12.2. Use of Common Shares to Satisfy Tax Obligation. In order to
assist an optionee or grantee in paying all federal, state and local taxes
to be withheld or collected upon exercise of an option or the grant of a
stock award or the lapse of restrictions relating to a restricted stock
award hereunder, the Committee in its sole discretion and subject to such
rules as it may adopt, may permit the optionee or grantee to satisfy such
tax obligation, in whole or in part, by (i) electing to have the Company
withhold common shares otherwise to be delivered with a fair market value
equal to the amount of such tax obligation, or (ii) electing to surrender
to the Company previously owned common shares with a fair market value
equal to the amount of such tax obligation. The election must be made on or
before the date that the amount of tax to be withheld is determined.
13. Non-Assignability. No award under the Plan shall be assignable or
transferable by the participant except by will or by laws of descent and
distribution. During the life of a participant, such award shall be exercisable
only by the participant or by the participant's guardian or legal
representative.
14. Non-Uniform Determinations. The Committee's determinations under the
Plan (including, without limitation, determinations of the persons to receive
awards, the form, amount and timing of such awards, the terms and provisions of
awards and the agreements evidencing the awards, and the establishment of values
and performance targets) need not be uniform and may be made by it selectively
among persons who receive, or are eligible to receive, awards under the Plan
whether or not such persons are similarly situated.
15. Adjustments in Shares. In the event of any change in the outstanding
common shares of the Company by reason of a stock dividend or distribution,
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or otherwise, the Board shall adjust the number of shares which may be
issued under the Plan and the Board shall provide for an equitable adjustment of
any shares issuable pursuant to awards outstanding under the Plan.
16. Adoption, Amendment and Termination.
16.1. Adoption. This Plan was originally adopted in February 1982 as
the Graco Inc. Incentive Stock Option Plan. The Plan was amended and
restated as the Graco Inc. Long Term Stock Incentive Plan by the Board of
Directors on March 4, 1988 and was further amended by the Board on December
13, 1991, February 21, 1992, February 23, 1996 and May 7, 1996, which
amendments requiring shareholder approval were approved by the shareholders
on May 5, 1992 and May 7, 1996, respectively.
16.2 Amendment. The Board may amend, suspend, or terminate the Plan at
any time, but without shareholder approval, no amendment shall materially
increase the maximum number of shares which may be issued under the Plan
(other than increases pursuant to Section 15 hereof), materially increase
the benefits accruing to participants under the Plan, materially modify the
requirements as to eligibility for participation, or extend the term of the
Plan.
16.3. Termination. Unless the Plan shall have been discontinued at an
earlier date, the Plan shall terminate on December 13, 2001. No option,
restricted stock award or stock awards may be granted after such
termination, but termination of the Plan shall not, without the consent of
the optionee or grantee, alter or impair any rights or obligations under
any award theretofore granted.
November 6, 1997
GRACO INC.
NONEMPLOYEE DIRECTOR STOCK PLAN
("PLAN")
1. Purpose of the Plan. The purpose of the Graco Inc. Nonemployee Director
Stock Plan (the "Plan") is to provide an opportunity for nonemployee members of
the Board of Directors (the "Board") of Graco Inc. ("Graco" or the "Company") to
increase their ownership of Graco Common Stock ("Common Stock") and thereby
align their interest in the long-term success of the Company with that of the
other shareholders. Each nonemployee director may elect to receive all or a
portion of his or her retainer in the form of shares of Common Stock or defer
the receipt of such shares until a later date pursuant to an election made under
the Plan.
2. Eligibility. Directors of the Company who are not also officers or other
employees of the Company or its subsidiaries are eligible to participate in the
Plan ("Eligible Directors").
3. Administration. The Plan will be administered by the Secretary of the
Company (the "Administrator"). Since the issuance or crediting of shares of
Common Stock pursuant to the Plan is based on elections made by Eligible
Directors, the Administrator's duties under the Plan will be limited to matters
of interpretation and administrative oversight. All questions of interpretation
of the Plan will be determined by the Administrator, and each determination,
interpretation or other action that the Administrator makes or takes pursuant to
the provisions of the Plan will be conclusive and binding for all purposes and
on all persons. The Administrator will not be liable for any action or
determination made in good faith with respect to the Plan.
4. Election to Receive Stock and Stock Issuance.
4.1. Election to Receive Stock/Credit in Lieu of Cash. On forms
provided by the Company, each Eligible Director may irrevocably elect
("Stock Election") in lieu of cash, (i) to be issued shares of Common Stock
or (ii) to have credited to an account ("Deferred Stock Account") the
number of shares of Common Stock having a Fair Market Value, as defined in
Section 4.3, equal to 25%, 50%, 75% or 100% of the annual cash retainer
(the "Retainer") payable to that director for services rendered as a
director ("Participating Director"). A Stock Election shall apply only to
the Retainer and not to any fees payable for attendance at Board or
Committee meetings. Eligible Directors are customarily paid the Retainer in
quarterly installments in arrears at the end of each calendar quarter. Any
Stock Election must be received by the Company before the commencement of
the calendar quarter with respect to which such election is made. Any Stock
Election may only be amended or revoked ("Amended Stock Election") in
accordance with the procedure set forth in Section 4.4.
4.2. Issuance of Stock/Application of Credit in Lieu of Cash. If the
Stock Election is for the issuance of shares of Common Stock, shares of
Common Stock having a Fair Market Value equal to the amount of the Retainer
so elected shall be issued to each Participating Director when each
quarterly installment of the Retainer is customarily paid. The Company
shall not issue fractional shares, but in lieu thereof shall pay cash of
equivalent value using the same Fair Market Value used to determine the
number of Shares to be issued on the relevant issue date. If the Stock
Election is for a credit to a Deferred Stock Account, the number of shares
of Common Stock (rounded to the nearest hundredth of a share) having a Fair
Market Value equal to the amount of the Retainer so elected shall be
credited to the Participating Director's Deferred Stock Account when each
quarterly installment of the Retainer is customarily paid. In the event
that a Participating Director elects to receive less than 100% of each
quarterly installment of the Retainer in shares of Common Stock, either
issued or credited, he shall receive the balance of the quarterly
installment in cash.
4.3 Fair Market Value. For purposes of converting dollar amounts into
shares of Common Stock, the Fair Market Value of each share of Common Stock
shall be equal to the closing price of one share of the Company's Common
Stock on the New York Stock Exchange-Composite Transactions on the last
business day of the calendar quarter for which such shares are issued or
credited.
4.4. Change in Election. Each Participating Director may irrevocably
elect in writing to change an earlier Stock Election, either to elect to be
issued shares of Common Stock or to have credited to the Participating
Director's Deferred Stock Account, a number of shares of Common Stock
having a Fair Market Value equal to a percentage of the Participating
Director's Retainer different from the percentage previously elected or to
receive the entire Retainer in cash (an "Amended Stock Election"). An
Amended Stock Election shall not become effective until the commencement of
the first full calendar quarter after the date of receipt of such Amended
Stock Election by the Company.
4.5 Termination of Service as a Director. If a Participating Director
leaves the Board before the conclusion of any calendar quarter, he or she
will be paid the quarterly installment of the Retainer entirely in cash,
notwithstanding that a Stock Election or Amended Stock Election is on file
with the Company. The date of termination of a Participating Director's
service as a director of the Company will be deemed to be the date of
termination recorded on the personnel or other records of the Company.
4.6 Dividend Credit. Each time a dividend is paid on the Common Stock,
each Participating Director who has a Deferred Stock Account shall receive
a credit to his or her Deferred Stock Account equal to that number of
shares of Common Stock (rounded to the nearest one-hundredth of a share)
having a Fair Market Value on the dividend payment date equal to the amount
of the dividend payable on the number of shares of Common Stock credited to
the Participating Director's Deferred Stock Account on the dividend record
date.
5. Shares Available for Issuance.
5.1. Maximum Number of Shares Available. The maximum number of shares
of the Company's Common Stock, par value $1.00 per share, that will be
available for issuance under the Plan will be 150,000 shares, subject to
any adjustments made in accordance with the provisions of Section 5.2. At
the election of the Administrator, the shares of Common Stock available for
issuance under the Plan may be either authorized but unissued shares or
treasury shares. If treasury shares are used, all references in the Plan to
the issuance of shares will be deemed to mean the transfer of shares from
treasury.
5.2. Adjustments to Shares. In the event of any reorganization,
merger, consolidation, recapitalization, liquidation, reclassification,
stock dividend, stock split, combination of shares, rights offering,
divestiture or extraordinary dividend, an appropriate adjustment will be
made in the number and/or kind of securities available for issuance under
the Plan to prevent either the dilution or the enlargement of the rights of
the Eligible and Participating Directors.
6. Deferral Payment
6.1 Deferral Payment Election. At the time of making the Stock
Election in which the Participating Director elects to have a Deferred
Stock Account credited in accordance with the provisions of Section 4.1,
the Participating Director will also elect the manner and timing for
payment of the amounts credited to his or her Deferred Stock Account
("Deferral Payment Election") from the alternatives described in Section
6.2. The Participating Director may change the manner and timing for
payment of amounts to be credited to his or her Deferred Stock Account by
executing another Deferral Payment Election; provided, however, that the
previously made Deferral Payment Election will be irrevocable as to all
amounts credited to the Participating Director's Deferred Stock Account
prior to receipt by the Company of a new Deferral Payment Election.
6.2 Payment from Deferred Stock Accounts. A Participating Director 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. Unless the Participating Director elects to receive payment in
installments, credits to a Participating Director's Deferred Stock Account
shall be payable in full on January 10 of the year following the
Participating Director's termination of service on the Board, or the first
business day thereafter, or such other date as elected by the Participating
Director pursuant to Section 6.1. If the Participating Director elects to
receive payment from his or her Deferred Stock Account in installments,
each installment payment will be made annually on January 10 of each year,
or the first business day thereafter, and the amount of each payment will
be computed by multiplying the number of shares credited to the Deferred
Stock Account as of January 10 of each year by a fraction, the numerator of
which is one and the denominator of which is the total number of
installments elected (not to exceed fifteen) minus the number of
installments previously paid. Amounts paid prior to the final installment
payment will be rounded to the nearest whole number of shares; the final
installment payment shall be for the whole number of shares remaining
credited to the Deferred Stock Account, plus cash in lieu of any fractional
share.
6.3 Change of Control. Notwithstanding the foregoing, in the event of
a Change of Control (as defined in Section 11), the number of shares
credited to the Deferred Stock Account of a Participating Director as of
the business day immediately prior to the effective date of the transaction
constituting the Change of Control, shall be paid in full to the
Participating Director or the Participating Director's beneficiary or
estate, as the case may be, in whole shares of Common Stock plus cash in
lieu of any fractional share on the tenth business day following the
effective date of the transaction constituting the Change of Control.
7. Limitation on Rights of Eligible and Participating Directors.
7.1. Service as a Director. Nothing in the Plan will interfere with or
limit in any way the right of the Company's Board or its shareholders to
remove an Eligible or Participating Director from the Board. Neither the
Plan nor any action taken pursuant to it will constitute or be evidence of
any agreement or understanding, express or implied, that the Company's
Board or its shareholders have retained or will retain an Eligible or
Participating Director for any period of time or at any particular rate of
compensation.
7.2. Nonexclusivity of the Plan. Nothing contained in the Plan is
intended to effect, modify or rescind any of the Company's existing
compensation plans or programs or to create any limitations on the Board's
power or authority to modify or adopt compensation arrangements as the
Board may from time to time deem necessary or desirable.
8. Plan Amendment, Modification and Termination. The Board may suspend or
terminate the Plan at any time. The Board may amend the Plan from time to time
in such respects as the Board may deem advisable in order that the Plan will
conform to any change in applicable laws or regulations or in any other respect
that the Board may deem to be in the Company's best interests; provided,
however, that no amendments to the Plan will be effective without approval of
the Company's shareholders, if shareholder approval of the amendment is then
required pursuant to Rule 16b-3 (or any successor rule) under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") or the rules of the New
York Stock Exchange.
9. Effective Date and Duration of the Plan. The Plan shall become effective
as of the date the Company's shareholders approve it and will terminate on
December 31, 2003, unless earlier terminated by the Company's Board.
10. Participants are General Creditors of the Company. The Participating
Directors and beneficiaries thereof shall be general, unsecured creditors of the
Company with respect to any payments to be made pursuant to the Plan and shall
not have any preferred interest by way of trust, escrow, lien or otherwise in
any specific assets of the Company. If the Company shall, in fact, elect to set
aside monies or other assets to meet its obligations hereunder (there being no
obligation to do so), whether in a grantor's trust or otherwise, the same shall,
nevertheless, be regarded as part of the general assets of the Company subject
to the claims of its general creditors, and neither any Participating Director
nor any beneficiary thereof shall have a legal, beneficial or security interest
therein.
11. Change of Control
11.1 A "Change of Control" means any one of the following events:
(1) 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
(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 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 11, 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 (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, as defined below, 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 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
(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 shareholders of the Company of a complete
liquidation or dissolution of the Company.
11.2 A Change of Control shall not be deemed to have occurred with respect
to a Participating Director if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph 11.1(1) of this Section 11 is by a group, acting in concert,
that includes the Participating 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
subparagraph 11.1(4) or (5) of this Section by a group, acting in concert,
that includes that Participating Director.
12. Miscellaneous.
12.1 Securities Law and Other Restrictions. Notwithstanding any other
provision of the Plan or any Stock Election or Amended Stock Election
delivered pursuant to the Plan, the Company will not be required to issue
any shares of Common Stock under the Plan and a Participating Director may
not sell, assign, transfer or otherwise dispose of shares of Common Stock
issued pursuant to the Plan, unless:
(a) there is in effect with respect to such shares a registration
statement under the Securities Act of 1933, as amended (the
"Securities Act") and any applicable state securities laws or an
exemption from such registration under the Securities Act and
applicable state securities laws, and
(b) there has been obtained any other consent, approval or permit
from any other regulatory body that the Administrator, in his or her
sole discretion, deems necessary or advisable. The Company may
condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common
Stock, as may be deemed necessary or advisable by the Company, in
order to comply with such securities law or other restriction.
12.2 Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed
exclusively in accordance with the laws of the State of Minnesota.
November 6, 1997
GRACO INC. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose
The purpose of the Graco Inc. Nonemployee Director Stock Option Plan (the
"Plan") is to secure for Graco Inc. (the "Company") and its shareholders
the benefits of the long-term incentives inherent in increased common stock
ownership by the members of the Board of Directors (the "Board") of the
Company who are not employees of the Company or its Affiliates, by
strengthening the identification of Nonemployee Directors with the
interests of all Graco shareholders.
2. Definitions
The terms defined in this Section 2 shall have the following meanings,
unless the context otherwise requires.
a. Affiliate shall mean any corporation, partnership, joint venture or
other entity in which the Company holds an equity, profit or voting
interest of more than fifty percent (50%).
b. Annual Meeting of Shareholders shall mean the annual meeting of
shareholders of the Company held each calendar year.
c. Code shall mean the Internal Revenue Code of 1986, as amended to date
and as it may be amended from time to time.
d. Company shall mean Graco Inc., a Minnesota corporation.
e. ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended to date and as it may be amended from time to time.
f. Fair Market Value per Share shall mean as of any day
(1) The fair market value of a share of the Company's common stock 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
(2) 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.
g. Nonemployee Director shall mean a member of the Board of Directors of
the Company who is not also an officer or other employee of the
Company or an Affiliate.
h. Nonstatutory Stock Option ("NSO") shall mean a stock option, which
does not qualify for special tax treatment under Sections 421 or 422
of the Internal Revenue Code.
i. Option shall mean either a First Option or an Annual Option granted
pursuant to the provisions of Section 4 of this Plan.
j. Participant shall mean any person who holds an Option granted under
this Plan.
k. Plan shall mean this Graco Inc. Nonemployee Director Stock Option
Plan.
3. Administration
a. The Plan shall be administered by the Board. The Board may, by
resolution, delegate part or all of its administrative powers with
respect to the Plan.
b. The Board shall have all of the powers vested in it by the terms of
the Plan, such powers to include the authority, within the limits
prescribed herein, to establish the form of the agreement embodying
grants of Options made under the Plan.
c. The Board shall, subject to the provisions of the Plan, have the power
to construe the Plan, to determine all questions arising thereunder
and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable, such
administrative decisions of the Board to be final and conclusive.
d. The Board shall have no discretion to select the Nonemployee Directors
to receive Option grants under the Plan, to determine the number of
shares of the Company's common stock subject to the Plan or to each
grant, nor the exercise price of the Options granted pursuant to the
Plan.
e. The Board may authorize any one or more of their number or the
Secretary or any other officer of the Company to execute and deliver
documents on behalf of the Board. The Board hereby authorizes the
Secretary to execute and deliver all documents to be delivered by the
Board pursuant to the Plan.
f. The expenses of the Plan shall be borne by the Company.
4. Automatic Grants to Nonemployee Directors
a. As of the date of adoption of this Plan by the shareholders of the
Company, each Nonemployee Director shall be granted an option to
purchase two thousand (2,000) shares of the Company's common stock
under the Plan (the "First Option"). Thereafter, as of the day upon
which shareholders vote to elect directors at each annual meeting of
the Company, each Nonemployee Director of the Board shall be granted
an additional option to purchase fifteen hundred (1,500) shares of the
Company's common stock under the Plan (the "Annual Option"); provided,
however, that a Nonemployee Director who has not previously been
elected as a member of the Board of Directors of the Company shall
also be granted a First Option; i.e., an option to purchase two
thousand (2,000) shares of the Company's common stock under the Plan,
on the first business day of the Nonemployee Director's election to
the Board, including election by the Board of Directors to fill a
vacancy on the Board.
b. The automatic grants to Nonemployee Directors shall not be subject to
the discretion of any person.
c. Each Option granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to, and incorporate, by
reference or otherwise, the applicable terms of this Plan.
d. During the lifetime of a Participant, each Option shall be exercisable
only by the Participant. No Option granted under the Plan shall be
assignable or transferable by the Participant, except by will or by
the laws of descent and distribution.
5. Shares of Stock Subject to the Plan
a. Subject to adjustment as provided in Section 11 of the Plan, an
aggregate of two hundred thousand (200,000) shares of the Company's
common stock, $1.00 par value, shall be available for issuance to
Nonemployee Directors under the Plan. No fractional shares shall be
issued.
b. First Option Grants and Annual Option Grants shall reduce the shares
available for issuance under the Plan by the number of shares subject
thereto. The shares deliverable upon exercise of any First Option
Grant or Annual Option Grant may be made available from authorized but
unissued shares or shares reacquired by the Company, including shares
purchased in the open market or in private transactions. If any
unexercised First Option Grant or Annual Option Grant shall terminate
for any reason, the shares subject to, but not delivered under, such
First Option Grant or Annual Option Grant shall be available for other
First Option Grants or Annual Option Grants.
6. Nonstatutory Options.
a. All Options granted to Nonemployee Directors pursuant to the Plan
shall be NSOs.
7. Exercise Price.
a. The price per share of the shares of the Company's common stock which
may be purchased upon exercise of an Option ("Exercise Price") shall
be one hundred percent (100%) of the Fair Market Value per Share on
the date the Option is granted and shall be payable in full at the
time the Option is exercised as follows:
(1) in 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 the 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.
b. Such price shall be subject to adjustment as provided in Section 11
hereof.
8. Duration and Vesting of Options.
a. The term of each Option granted to a Nonemployee Director shall be for
ten (10) years from the date of grant, unless terminated earlier
pursuant to the provisions of Section 10 hereof.
b. Each Option shall vest and become exercisable according to the
following schedule:
(1) twenty-five percent (25%) of the total number of shares covered
by the Option shall become exercisable beginning with the first
anniversary date of the grant of the Option;
(2) thereafter twenty-five percent (25%) of the total number of
shares covered by the Option shall become exercisable on each
subsequent anniversary date of the grant of the Option until the
fourth anniversary date of the grant of the Option upon which the
total number of shares covered by Option shall become
exercisable.
9. Change of Control
a. Notwithstanding Section 8b(1) and (2) 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 9 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.
10. Effect of Termination of Membership on the Board.
a. The right to exercise an Option granted to a Nonemployee Director
shall be limited as follows, provided the actual date of exercise is
in no event after the expiration of the term of the Option:
(1) If a Nonemployee Director ceases being a director of the Company
for any reason other than the reasons identified in subparagraph
(2) of this Section 10, the Nonemployee Director shall have the
right to exercise the Options as follows, subject to the
condition that no Option shall be exercisable after the
expiration of the term of the Option:
(a) If the Nonemployee Director was a member of the Board of
Directors of the Company for five (5) or more years, all
outstanding Options become immediately exercisable upon the
date the Nonemployee Director ceases being a director. The
Nonemployee Director may exercise the Options for a period
of thirty-six months (36) 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 Options 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.
(b) 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 Options, to the extent
they were 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
Options 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.
(c) If the Nonemployee Director dies while a member of the
Board, the Options, 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.
(d) In the event any 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.
(2) 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, all Options granted to such Nonemployee Director
shall immediately be forfeited as of the date of the misconduct.
11. Adjustments and Changes in the Stock
a. If there is 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, the number and
the price of shares of common stock subject to outstanding Options and
the number of shares referenced by the terms, "First Option" and
"Annual Option", respectively, in Section 4a hereof, shall be
appropriately adjusted automatically.
b. No right to purchase fractional shares shall result from any
adjustment in Options pursuant to this Section 11. 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 each holder
of any 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.
12. Effective Date of the Plan
a. The Plan shall become effective on the date it is approved by the
shareholders of the Company.
b. Any amendment to the Plan shall become effective when adopted by the
Board, unless specified otherwise, but no Option granted under any
increase in shares authorized to be issued under this Plan shall be
exercisable until the increase is approved in the manner prescribed in
Section 13 of this Plan.
13. Amendment of the Plan
a. The Board of Directors may amend, suspend or terminate the Plan at any
time, but without shareholder approval, no amendment shall materially
increase the maximum number of shares which may be issued under the
Plan (other than adjustments pursuant to Section 11 hereof),
materially increase the benefits accruing to Participants under the
Plan, materially modify the requirements as to eligibility for
participation or extend the term of the Plan. Approval of the
shareholders may be obtained, at a meeting of shareholders duly called
and held, by the affirmative vote of a majority of the holders of the
Company's voting stock who are present or represented by proxy and are
entitled to vote on the Plan.
b. It is intended that the Plan meet the requirements of Rule 16b-3 or
any successor thereto promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended,
including any applicable requirements regarding shareholder approval.
Amendments to the Plan shall be subject to approval by the
shareholders of the Company to the extent determined by the Board of
Directors to be necessary to satisfy such requirements as in effect
from time to time.
c. Rights and obligations under any Option granted before any amendment
of this Plan shall not be materially and adversely affected by
amendment of the Plan, except with the consent of the person who holds
the Option, which consent may be obtained in any manner that the Board
or its delegate deems appropriate.
14. Termination of the Plan
a. The Plan, unless sooner terminated, shall terminate at the end of ten
(10) years from the date the Plan is approved by the shareholders of
the Company. No Option may be granted under the Plan while the Plan is
suspended or after it is terminated.
b. Rights or obligations under any Option granted while the Plan is in
effect, including the maximum duration and vesting provisions, shall
not be altered or impaired by suspension or termination of the Plan,
except with the consent of the person who holds the Option, which
consent may be obtained in any manner that the Board or its delegate
deems appropriate.
15. Registration, Listing, Qualification, Approval of Stock and Options
a. If the Board shall determine, in its discretion, that it is necessary
or desirable that the shares of common stock subject to any Option
(1) be registered, listed or qualified on any securities exchange or
under any applicable law, or
(2) be approved by any governmental regulatory body, or
(3) approved by the shareholders of the Company,
as a condition of, or in connection with, the granting of such Option,
or the issuance or purchase of shares upon exercise of the Option, the
Option may not be exercised in whole or in part unless such
registration, listing, qualification or approval has been obtained
free of any condition not acceptable to the Board of Directors.
16. No Right to Option or as Shareholder
a. No Nonemployee Director or other person shall have any claim or right
to be granted an Option under the Plan, except as expressly provided
herein. Neither the Plan nor any action taken hereunder shall be
construed as giving any Nonemployee Director any right to be retained
in the service of the Company.
b. Neither a Nonemployee Director, the Nonemployee Director's legal
representative, nor any person who acquires the right to exercise an
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
any Option granted under this Plan, in whole or in part, unless and
until certificates for such shares shall have been issued.
17. Governing Law
The validity, construction, interpretation, administration and effect of
this Plan and any rules, regulations and actions relating to this Plan will
be governed by and construed exclusively in accordance with the laws of the
State of Minnesota.
AMENDMENT TO
GRACO INC. KEY EMPLOYEE AGREEMENT
AMENDMENT AGREEMENT, by and between Graco Inc., a Minnesota corporation (the
"Company") and __________________ (the "Executive"), dated as of the 9th day of
January, 1998.
WHEREAS, the Executive and the Company have entered into an agreement entitled
Graco Inc. Key Employee Agreement, dated March, 1997 (the "Key Employee
Agreement"); and
WHEREAS, the parties wish to amend the Key Employee Agreement as set forth below
in order to assure that the purposes of said Key Employee Agreement, as set
forth in the premises thereto, are fulfilled;
Now, therefore, the parties agree as follows:
1. Section 6(e) of the Key Employee Agreement is hereby amended to read as set
forth below, and a new Section 6(f), as set forth below, is hereby added to the
Key Employee Agreement:
6(e) Possible Payment Reduction.
(i) Notwithstanding any provision to the contrary contained in
this Agreement, if the lump sum cash payment due and the other
benefits to which the Executive shall become entitled under Section
6(a) hereof, either alone or together with other payments in the
nature of compensation to the Executive which are contingent on a
change in the ownership or effective control of the Company or in the
ownership of a substantial portion of the assets of the Company or
otherwise, would constitute a "parachute payment" (as defined in
Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") or any successor provision thereto), such lump sum payment
shall be reduced (but not below zero) to the largest aggregate amount
as will result in no portion thereof being subject to the excise tax
imposed under Section 4999 of the Code (or any successor provision
thereto) or being non-deductible to the Company for Federal Income Tax
purposes pursuant to Section 280G of the Code (or any successor
provision thereto), provided, however, that no such reduction shall
occur, and this Section 6(e) shall not apply, in the event that the
amount of such reduction would be more than $25,000. The Executive in
good faith shall determine the amount of any reduction to be made
pursuant to this Section 6(e) and shall select from among the
foregoing benefits and payments those which shall be reduced. No
modification of, or successor provision to, Section 280G or Section
4999 subsequent to the date of this Agreement shall, however, reduce
the benefits to which the Executive would be entitled under this
Agreement in the absence of this Section 6(e) to a greater extent than
they would have been reduced if Section 280G and Section 4999 had not
been modified or superseded subsequent to the date of this Agreement,
notwithstanding anything to the contrary provided in the first
sentence of this Section 6(e)(i).
6(f) Certain Additional Payments by the Company.
(i) Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that Section 6(e) above does not
apply and any payment or distribution by the Company to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement, any stock
option, restricted stock agreement or otherwise, but determined
without regard to any additional payments required under this Section
6(f)) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code") or any interest or penalties are incurred by the Executive
with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then the Executive shall be entitled to receive
an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without
limitation, any income taxes (and any interest and penalties imposed
with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(ii) Subject to the provisions of Section 6(f)(iii), all
determinations required to be made under this Section 6(f), including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at
such determination, shall be made by Deloitte and Touche LLP or such
other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within
15 business days of the receipt of notice from the Executive that
there has been a Payment, or such earlier time as is requested by the
Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting
the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 6(f), shall be paid by the Company
to the Executive within five days of the receipt of the Accounting
Firm's determination. If the Accounting Firm determines that no Excise
Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not result in
the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments
which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies
pursuant to Section 6(f)(iii) and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(iii) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than
ten business days after the Executive is informed in writing of such
claim (provided that any delay in so informing the Company within such
ten business day period shall not affect the obligations of the
Company under this Section 6(f) except to the extent that such delay
materially and adversely affects the Company) and shall apprise the
Company of the nature of such claim and the date on which such claim
is requested to be paid. The Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which it
gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If
the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive
shall:
(A) give the Company any information reasonably requested by the
Company relating to such claim,
(B) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(C) cooperate with the Company in good faith in order to
effectively contest such claim, and
(D) permit the Company to participate in any proceedings relating
to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall
indemnify and hold the Executive harmless, on an after-tax basis, for
any Excise Tax or income tax (including interest and penalties with
respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing
provisions of this Section 6(f)(iii), the Company shall control all
proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 6(f)(iii), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 6(f)(iii)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section
6(f)(iii), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does
not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required to be
paid.
3. The Key Employee Agreement shall in all other respects stay in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
Executive Graco Inc.
- --------- ----------
_____________________________ ________________________________
George Aristides
Chief Executive Officer
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Graco Inc. (the "Company") wishes to take advantage of the "safe harbor"
provisions regarding forward-looking statements of the Private Securities
Litigation Reform Act of 1995 and is filing this Cautionary Statement in order
to do so.
From time to time various forms filed by the Company with the Securities
and Exchange Commission, including the Company's Form 10-K, Form 10-Q and Form
8-K, its Annual Report to Shareholders, and other written documents or oral
statements released by the Company, may contain forward-looking statements.
Forward-looking statements generally use words such as "expect," "foresee,"
"anticipate," "believe," "project," "should," "estimate," and similar
expressions, and reflect the Company's expectations concerning the future. Such
statements are based upon currently available information, but various risks and
uncertainties may cause the Company's actual results to differ materially from
those expressed in these statements. Among the factors which management believes
could affect the Company's operating results are the following:
o With respect to the Company's business as a whole, the Company's
prospects and operating results may be affected by:
- changing economic conditions in the United States and other major
world economies, including economic downturns or recessions and
foreign currency exchange rate fluctuations;
- international trade factors, including changes in international
trade policy, such as trade sanctions, increased tariff barriers
and other restrictions, weaker protection of the Company's
proprietary technology in certain foreign countries, the burden
of complying with foreign laws and standards, and potentially
adverse taxes;
- the ability of the Company to develop new products and
technologies, maintain and enhance its market position relative
to its competitors, maintain and enhance its distribution
channels, realize productivity and product quality improvements,
and continue to control expenses.
- the ability of the Company and its suppliers, customers,
creditors and financial service organizations to implement
information processing software and hardware that will
accommodate the Year 2000;
- disruption in operations, transportation, communication, sources
of supply, customer operations or payment, caused by acts of God,
labor disputes, war, embargo, fire or other cause beyond its
reasonable control.
o The prospects and operating results of the Company's Contractor
Equipment Division may be affected by: variations in the level of
housing starts; the level of repairs, remodeling and additions to
existing homes; the level of commercial and institutional building and
remodeling activity; the availability and cost of financing; changes
in the environmental regulation of coatings; the consolidation in the
paint manufacturing industry; changes in construction materials and
techniques; the cost of labor in foreign markets; the regional market
strength of certain competitors; and the level of government spending
on road construction and infrastructure development.
o The prospects and operating results of the Company's Industrial
Equipment Division may be affected by the capital equipment spending
levels of industrial customers, the availability and cost of
financing, changes in the environmental regulation of coatings,
changes in the technical characteristics of materials, changes in
application technology, and the ability of the Company to meet
changing customer requirements.
o The prospects and operating results of the Company's Lubrication
Equipment Division may be affected by variations in the equipment
spending levels of the major oil companies, and the relative market
strength and pricing strategies of competitors, especially in major
foreign markets.
o The prospects and operating results of the Company's Automotive
Equipment Division may be affected by the equipment purchase plans of
major automobile manufacturers worldwide (which are in turn impacted
by the level of automotive sales worldwide), changes in automotive
manufacturing processes, and the pricing strategies of competitors.
GRACO INC.
RESTORATION PLAN
(1998 Restatement)
Article 1
Purpose
1.1 Purpose. Effective as of July 1, 1988, the Board of Directors of Graco
Inc. ("Graco"), a Minnesota corporation, established an unfunded restoration
benefit plan (the "Restoration Plan") consisting of:
a. an excess benefit plan designed to provide retirement benefits to
eligible employees as a replacement for the retirement benefits
limited under the Graco Employee Retirement Plan by operation of
Section 415 of the Code ("Plan A"), which plan is not subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), and
b. an excess compensation plan designed to provide benefits to eligible
employees as a replacement for the retirement benefits limited under
the Graco Employee Retirement Plan by operation of Section 401(a)(17)
of the Code ("Plan B"), which plan is subject to ERISA as a so-called
"top hat" plan for a select group of management or highly compensated
employees.
Plan A and Plan B under the Restoration Plan shall constitute separate plans. It
now is desired to amend and restate the Restoration Plan in its entirety in a
new document. This is the amended and restated plan document so contemplated and
is effective January 1, 1998.
Article 2
Definitions
2.1 Incorporation by Reference. The Definitions contained in Subsection 1.1
and the Rules of Interpretation contained in Subsection 1.2 of the Graco
Employee Retirement Plan, as the same may be amended from time to time, are
hereby incorporated herein by reference as if set forth herein in full, subject
to the following qualifications:
a. "Plan" when used herein shall mean the Restoration Plan.
b. "Effective Date" when used herein shall mean January 1, 1998. This
Plan Restatement shall not affect the rights of or the benefits
payable to, or with respect to, any employee who died, retired or
otherwise had a Termination of Employment prior to the Effective Date.
c. "Graco Employee Retirement Plan" when used herein shall mean the
tax-qualified defined benefit pension plan established by the Employer
for the benefit of employees eligible to participate therein, as
amended in the written document entitled "Graco Employee Retirement
Plan (1991 Restatement)" as the same may be further amended from time
to time.
d. "Restoration Plan" when used herein shall mean the Plan established by
the Employers consisting of the unfunded excess benefit plan ("Plan
A") and the unfunded excess compensation plan ("Plan B") as set forth
in the Plan Statement.
e. "Plan Statement" when used herein shall mean this written document
entitled "Restoration Plan (1998 Restatement)" as the same may be
amended from time to time.
Article 3
Eligibility
3.1 General Eligibility Rule. The individuals eligible to participate in
and receive benefits under the Plan are those employees of the Employer:
a. who, on or after July 1, 1988, are Participants in the Graco Employee
Retirement Plan,
b. who, at some time on or after July 1, 1988, are in Covered Employment,
and
c. who have experienced a legislated reduction in benefits under the
Graco Employee Retirement Plan due to limitations imposed by Code
Section 415 [Plan A] or Code Section 401(a)(17) [Plan B].
3.2 Continuation. Any Participant in the Plan shall continue as a
Participant until all benefits which are due under the Plan have been received
without regard to whether he or she continues as a participant in the Graco
Employee Retirement Plan or in Covered Employment. Notwithstanding anything
apparently to the contrary contained in this Plan, the Plan shall be construed
and administered to prevent the duplication of benefits provided under this Plan
and any other qualified or nonqualified plan maintained in whole or in part by
the Employer.
3.3 Select Group. Notwithstanding anything apparently to the contrary in
this Plan or in any written communication, summary, resolution or document or
oral communication, no individual shall be a Participant in this Plan, develop
benefits under this Plan or be entitled to receive benefits under this Plan
(either for himself or his or her survivors) unless such individual is a member
of a select group of management or highly compensated employees (as that
expression is used in ERISA). If a court of competent jurisdiction, any
representative of the U.S. Department of Labor or any other governmental,
regulatory or similar body makes any direct or indirect, formal or informal,
determination that an individual is not a member of a select group of management
or highly compensated employees (as that expression is used in ERISA), such
individual shall not be (and shall not have ever been) a Participant in this
Plan at any time. If any person not so defined has been erroneously treated as a
Participant in this Plan, upon discovery of such error such person's erroneous
participation shall immediately terminate ab initio and upon demand such person
shall be obligated to reimburse the Employer for all amounts erroneously paid to
him or her.
Article 4
Benefits
4.1 Retirement Benefits. Upon Termination of Employment, this Plan shall
pay as a benefit to a Participant the excess, if any, of:
a. the amount that would have been payable to the Participant under the
Graco Employee Retirement Plan if such benefit had been determined:
(i) without regard to the benefit limitations under Section 415 of
the Code,
(ii) without regard to the compensation limitation of Section
401(a)(17) of the Code,
(iii)disregarding, however, any Accrued Benefit over One Hundred
Seventy Thousand Dollars ($170,000) per year;
minus
b. the amount actually paid from the Graco Employee Retirement Plan.
Except as may be otherwise specifically provided in this Plan, this benefit
(minus the withholding, payroll and other taxes which must be deducted
therefrom) shall be paid to the Participant in the same manner, at the same
time, for the same duration and in the same form as if such benefit had
been paid directly from the Graco Employee Retirement Plan. All elections
and optional forms of settlement in effect and all other rules governing
the payment of benefits under the Graco Employee Retirement Plan shall, to
the extent practicable, be given effect under this Plan so that the
Participant will receive from a combination of the Graco Employee
Retirement Plan and this Plan the same benefit (minus the withholding,
payroll and other taxes which must be deducted therefrom) which would have
been received under the Graco Employee Retirement Plan if this Plan benefit
had been paid from the Graco Employee Retirement Plan.
4.2 Death Benefits. Upon the death of a Participant, this Plan shall pay as
a benefit to the surviving spouse or other joint or contingent annuitant or
beneficiary of a Participant, the excess, if any, of:
a. the amount that would have been payable to such person under the Graco
Employee Retirement Plan if such benefit had been determined:
(i) without regard to the benefit limitations under Section 415 of
the Code,
(ii) without regard to the compensation limitation of Section
401(a)(17) of the Code,
(iii)disregarding, however, any Accrued Benefit over One Hundred
Seventy Thousand Dollars ($170,000) per year;
minus
b. the amount actually paid from the Graco Employee Retirement Plan.
The death benefit (minus the withholding, payroll and other taxes which
must be deducted therefrom) shall be paid to such person in the same
manner, at the same time, for the same duration and in the same form as if
such benefit had been paid directly from the Graco Employee Retirement
Plan. All elections and optional forms of settlement in effect and all
other rules governing the payment of benefits under the Graco Employee
Retirement Plan shall, to the extent practicable, be given effect under
this Plan so that such person will receive from a combination of the Graco
Employee Retirement Plan and this Plan the same benefit (minus the
withholding, payroll and other taxes which must be deducted therefrom)
which would have been received under the Graco Employee Retirement Plan if
the Plan benefit had been paid from the Graco Employee Retirement Plan.
4.3 Incorporation by Reference. The following provisions of the Graco
Employee Retirement Plan, as they may from time to time be amended, are hereby
incorporated herein by reference as if set forth herein in full with the
qualifications set forth in Subsection 2.1 hereof:
a. Subsection 5.1 Suspension of Benefits;
b. Subsection 5.4 Effect of Misstatements by Participants
c. Subsection 5.6 Facility of Payment
d. Section 6 Spendthrift Provisions
4.4 Nonduplication of Benefits. There shall be no duplication of benefits
under this Plan. If by reason of his employment, a Participant is eligible for
more than one benefit, he shall elect only one such benefit.
4.5 Lump Sum Payment. If the value of the Participant's benefit under this
Plan is less than $15,000 when calculated using rates provided by the Graco
Employee Retirement Plan, the benefit shall be paid in a lump sum.
Article 5
Funding
5.1 Benefits Unfunded. The benefits payable under Plan A and Plan B shall
be paid by the Employer each year out of its general assets and shall not be
funded in any manner. No fund, trust or account will be established or
maintained by the Employer for the purpose of paying these benefits, nor shall
any action pursuant to the Restoration Plan be construed to create a trust of
any kind. Participants' (or a beneficiary's) rights to receive payments from the
Employer under the Restoration Plan shall be no greater than the right of any
unsecured creditor of the Employer. Title to and beneficial ownership of any
assets, whether cash or investments set aside or earmarked by the Employers to
meet their contingent deferred obligation hereunder shall at all times remain in
the name of the Employers, and neither the Participants nor any beneficiary
shall under any circumstances acquire any property interest or rights in any
specific assets of the Employers.
Article 6
Amendment and Termination
6.1 Amendment. Graco, by action of its Board of Directors, shall have the
power to amend this Restoration Plan from time to time in any respect. The
entire power of amendment herein reserved shall be vested in Graco and, when
exercised, shall be effective not only to Graco, its Participants and employees,
but also to each other Employer and its Participants and employees, and to the
spouses, children, joint annuitants and beneficiaries of such Participants and
employees.
6.2 Termination. Each Employer contemplates that this Plan will be
continued indefinitely into the future, but Graco, by action of its Board of
Directors, shall have the right at any time to terminate this entire Plan. Any
Employer who has adopted this Plan, by action of its Board of Directors and with
the consent of Graco, may at any time terminate this Plan with respect to the
Participants in its employ.
Article 7
Administration
7.1 Administrator. Graco shall be the administrator for purposes of Section
3(16)(A) or ERISA.
7.2 Benefit Plans Committee. The provisions of Subsection 8.2 Benefit Plans
Committee of the Graco Employee Retirement Plan are hereby incorporated by
reference as if set forth herein in full. The Benefit Plans Committee shall be
responsible for administering this Plan and shall have the authority set forth
in Subsection 8.2 and other sections of the Graco Employee Retirement Plan
Statement.
Article 8
Miscellaneous
8.1 No Right to Employment. Participation in this Plan or eligibility for
participation in it shall not give any employee the right to be retained in an
Employer's employment nor, upon dismissal or severance of employment, to have
any right or interest in this Plan, other than as herein provided.
8.2 Source of Benefits. The general assets of the Employer shall be the
sole source of all benefits provided for under this Plan.
8.3 Headings. The headings used in this Plan Statement are for information
purposes only.
8.4 Governing Law. The laws of the State of Minnesota shall govern the
interpretation and application of this Plan.
IN WITNESS WHEREOF, Graco has caused this Restoration Plan to be executed
by its duly authorized officers the 20th day of March, 1998.
GRACO INC.
By: /s/Robert M. Mattison
By: /s/Clyde W. Hansen
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GRACO INC.
AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE
SHEETS FOR THE 52 WEEKS ENDED DECEMBER 26, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> GRACO INC.
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<PP&E> 196,940
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<COMMON> 25,553
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<TOTAL-LIABILITY-AND-EQUITY> 264,532
<SALES> 413,897
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<CGS> 210,909
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<OTHER-EXPENSES> 139,472
<LOSS-PROVISION> 154
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