UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 27, 1998
Commission File Number: 1-9249
GRACO INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612-623-6000)
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
25,814,967 common shares were outstanding as of April 30, 1998.
<PAGE>
GRACO INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
1998 Corporate and Business Unit Annual Bonus Plan Exhibit 10
Stock Option Agreement. Form of agreement used for
award of non-incentive stock options to executive
officers, dated February 27, 1998 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
Financial Data Schedule Exhibit 27
2
<PAGE>
PART I
GRACO INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
--------------------
March 27, 1998 March 28, 1997
-------------- --------------
(In thousands except per share amounts)
Net Sales $ 105,717 $ 92,099
Cost of products sold 53,772 47,566
-------------- --------------
Gross Profit 51,945 44,533
Product development 4,782 4,825
Selling 22,647 21,633
General and administrative 10,165 8,555
-------------- --------------
Operating Profit 14,351 9,520
Interest expense 225 207
Other expense, net 279 (368)
-------------- --------------
Earnings Before Income Taxes 13,847 9,681
Income taxes 4,900 3,500
-------------- --------------
Net Earnings $ 8,947 $ 6,181
============== ==============
Basic Net Earnings Per Common Share* $ .35 $ .24
============== ==============
Diluted Net Earnings Per Common* $ .34 $ .24
============== ==============
Basic Weighted Average Number
of Common Shares* 25,635 25,659
Diluted Weighted Average Number
of Common Shares* 26,239 26,248
*All 1997 per share data has been restated for the three-for-two stock split
paid February 4, 1998.
See notes to consolidated financial statements.
3
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 27, 1998 December 26, 1997
-------------- -----------------
ASSETS (In thousands)
Current Assets:
Cash and cash equivalents $ 28,383 $ 13,523
Accounts receivable, less allowances
of $4,600 and $4,100 83,699 86,148
Inventories 46,170 43,942
Deferred income taxes 10,949 11,140
Prepaid expenses 1,282 1,539
-------------- -----------------
Total current assets 170,483 156,292
Property, Plant and Equipment:
Cost 197,284 196,940
Accumulated depreciation (98,176) (96,760)
-------------- -----------------
99,108 100,180
Other Assets 7,586 8,060
-------------- -----------------
$ 277,177 $ 264,532
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 4,996 $ 2,911
Current portion of long-term debt 1,796 1,796
Trade accounts payable 14,562 12,542
Salaries, wages & commissions 10,753 14,903
Accrued insurance liabilities 10,571 10,227
Income taxes payable 7,399 5,546
Other current liabilities 21,853 21,055
-------------- -----------------
Total current liabilities 71,930 68,980
Long-term debt, less current portion 5,809 6,163
Retirement benefits and deferred compensation 31,594 31,880
Shareholders' equity:
Common stock 25,792 25,553
Additional paid-in capital 29,670 26,085
Retained earnings 112,382 105,030
Other, net 0 841
-------------- -----------------
Total Shareholders' Equity 167,844 157,509
-------------- -----------------
$ 277,177 $ 264,532
============== =================
See notes to consolidated financial statements.
4
<PAGE>
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
--------------
March 27, 1998 March 28, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $ 8,947 $ 6,181
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 3,994 3,548
Deferred income taxes 158 (481)
Change in:
Accounts receivable 952 (61)
Inventories (2,531) (6,688)
Trade accounts payable 1,999 (419)
Retirement benefits and deferred
compensation (200) 571
Other accrued liabilities (1,125) (7,029)
Other 839 (1,453)
-------------- --------------
13,033 (5,831)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (2,995) (6,340)
Proceeds from sale of property, plant,
and equipment 170 1,578
-------------- --------------
(2,825) (4,762)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on notes payable and lines of credit 5,037 5,335
Payments on notes payable and lines of credit (2,772) (1,528)
Payments on long-term debt (310) (326)
Common stock issued 3,822 2,790
Repurchase of common stock (12) --
Cash dividends paid (2,811) (2,420)
-------------- --------------
2,954 3,851
-------------- --------------
Effect of exchange rate changes on cash 1,698 1,585
-------------- --------------
Net increase (decrease) in cash and cash
equivalents 14,860 (5,157)
Cash and cash equivalents:
Beginning of year 13,523 6,535
-------------- --------------
End of period $ 28,383 $ 1,378
============== ==============
See notes to consolidated financial statements.
5
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated balance sheet of Graco Inc. and Subsidiaries (the Company)
as of March 27, 1998 and the related statements of earnings for the
thirteen weeks ended March 27, 1998 and March 28, 1997 and cash flows for
the thirteen weeks ended March 27, 1998, and March 28, 1997, have been
prepared by the Company without being audited.
In the opinion of management, these consolidated statements reflect all
adjustments necessary to present fairly the financial position of Graco
Inc. and Subsidiaries as of March 27, 1998, and the results of operations
and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Therefore, these statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 1997 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
March 27, 1998 December 26, 1997
-------------- -----------------
Finished products and components $ 39,170 $ 38,290
Products and components in various
stages of completion 24,375 25,320
Raw materials 19,171 16,715
-------------- -----------------
82,716 80,325
Reduction to LIFO cost (36,546) (36,383)
-------------- -----------------
$ 46,170 $ 43,942
============== =================
6
<PAGE>
GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
( Continued)
3. 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 at the end of the 1998 fiscal year. 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 determined the nature of its segments, nor has it
determined how adoption of SFAS No. 131 will impact its future disclosures.
4. Europe's December 1997 operating results were recorded as an adjustment to
equity. Those results included sales of $3,836,000 and net earnings of
$300,000. The results of operations for Graco Inc., (the Company) for the
quarter ended March 27, 1998 include Europe's operations for the months of
January, February and March. First quarter 1997 results included the months
of December, 1996 and January and February, 1997. Had the company included
the months of January, February and March in its operating results for
Europe in the first quarter of 1997, net sales would have been $94,099,000,
net earnings would have been $6,854,000 and diluted earnings per share
would have been $0.26.
7
<PAGE>
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net earnings of $8.9 million for the quarter ended March 27, 1998 increased 45
percent over the first quarter of 1997 earnings of $6.2 million. The quarterly
earnings improvement was driven by higher sales and improved gross margin rates.
First quarter operating earnings include charges related to restructuring
Graco's Automotive operation in Plymouth, Michigan. Many of the functions that
were performed in Plymouth will be relocated to Graco's Minneapolis facilities.
Most of the restructuring charges have been recognized, and it is expected that
the transition will be completed by the end of the second quarter of 1998. First
quarter operating results also include charges for restructuring operations in
Asia Pacific.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
First Quarter
(13 weeks) Ended
----------------
March 27, 1998 March 28, 1997
-------------- --------------
Net Sales 100.0% 100.0%
-------------- --------------
Cost of Products Sold 50.9 51.6
Product Development 4.5 5.2
Selling 21.4 23.6
General and Administrative 9.6 9.3
-------------- --------------
Operating Profit 13.6 10.3
-------------- --------------
Interest Expense (.2) (.2)
-------------- --------------
Other Income(Expense), Net (.3) .4
-------------- --------------
Earnings Before Income Taxes 13.1 10.5
-------------- --------------
Income Taxes 4.6 3.8
-------------- --------------
Net Earnings 8.5% 6.7%
============== ==============
8
<PAGE>
GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net Sales
Net sales in the first quarter of $105.7 million were 15 percent higher than the
same period last year. The improved sales level was achieved despite a negative
currency impact, which had a 3 percent impact on sales for the quarter.
The Contractor Equipment Division sales of $37.4 million increased from last
year's first quarter due to new product introductions and stronger demand for
existing products. Industrial Equipment Division sales of $40.5 million improved
10 percent, driven by strong demand for industrial products in Europe and the
Americas. Automotive sales of $17.0 million increased 26 percent due to strong
sales in North America, improved system sales in Europe and the change in
calendar months reported in Europe. Lubrication Equipment Division quarterly
sales increased 2 percent to $10.9 million.
Geographically, sales in the Americas (North, South and Central) increased 15
percent to $71.9 million for the quarter primarily due to strong Contractor and
Industrial activity. European sales, on a comparable basis, of $20.4 million
were 21 percent higher than last year, and would have been 29% higher with
constant exchange rates The growth in Europe was attributable primarily to
strong Industrial and Automotive sales. Asia Pacific sales of $10.5 million were
17 percent lower than last year's first quarter (including an 11 percent decline
due to exchange rates) due to the instability in the economies of Japan, Korea
and Southeast Asia.
Gross Profit
Gross profit as a percentage of net sales increased to 49.1 percent in the first
quarter, compared to 48.4 percent for the same period last year. The increases
were primarily due to manufacturing efficiencies and price increases.
Operating Expenses
Operating expenses in the first quarter of $37.6 million increased 7 percent
from the first quarter of 1997, but decreased from 38.1% to 35.5% of net sales.
General and administrative expenses were 19 percent higher than the same quarter
last year, largely due to restructuring charges related to operations in
Plymouth, Michigan and South East Asia. Selling expenses increased 5 percent
compared to the first quarter last year due to increased sales levels and
increased warranty costs. Product development costs remained relatively flat in
comparison to the first quarter of 1997.
9
<PAGE>
GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other Income (Expense)
Other expense was $0.3 million in the first quarter, compared to $0.4 million of
income for the same period last year. The first quarter of 1998 was affected
more unfavorably by foreign exchange rate changes, while 1997 was favorably
impacted by a gain on the sale of the Company's Franklin Park, Illinois
facility.
Income Taxes
The effective tax rate decreased to 35 percent in the quarter compared to 36
percent last year.
Liquidity and Capital Resources
The Company generated $13.0 million of cash flow from operating activities in
the first three months of 1998 compared to using cash of $5.8 million for the
same period last year. Significant uses of operating cash flow in 1998 resulted
from a planned increase in inventory levels primarily in Europe. Available cash
and borrowing on lines of credit of $5.0 million were used to fund short-term
operating needs, finance capital expenditures of $3.0 million and pay dividends
of $2.8 million. The Company had unused lines of credit available at March 27,
1998 totaling $70.1 million. The available credit facilities and
internally-generated funds provide the Company with the financial flexibility to
meet liquidity needs.
Outlook
The Company is cautiously optimistic about the outlook for 1998 based on the
level of activity during the first quarter. 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 recently to improve 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.
10
<PAGE>
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10Q contains "forward-looking statements" about the
Company's expectations of the future, which are subject to certain risk factors
that could cause actual results to differ materially from those expectations.
These factors include economic conditions in the United States and other major
world economies, currency exchange fluctuations, and additional factors
identified in Exhibit 99 to the Company's Report on Form 10-K for fiscal year
1997.
11
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1998 Corporate and Business Unit
Annual Bonus Plan Exhibit 10
Stock Option Agreement. Form of agreement
used for award of non-incentive stock options
to executive officers, dated February 28, 1998. Exhibit 10.1
Statement on Computation Exhibit 11
of Per Share Earnings
Financial Data Schedule (EDGAR filing only) Exhibit 27
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRACO INC.
Date: May 8, 1998 By:/s/George Aristides
George Aristides
Chief Executive Officer
Date: May 8, 1998 By:/s/Mark W. Sheahan
Mark W. Sheahan
Treasurer
(Principal Financial Officer)
13
GRACO INC.
1998 CORPORATE
&
BUSINESS UNIT
ANNUAL BONUS PLAN
Effective January 1, 1998
Human Resources
<PAGE>
1998 EXECUTIVE CORPORATE & SBU BONUS PLAN
Objectives
- ----------
o To create shareholder value through achievement of annual financial
objectives.
o To motivate and retain those key executives and managers who work in
positions where they can impact the Company's annual financial objectives.
Plan Design
- -----------
The Plan links the size of each individual's award to specific financial
objectives. These objectives are tailored for the Corporation and for each
Business Unit. These objectives are:
o Corporation
o Corporate Sales and/or Net Earnings objectives
o Business Units
o Sales and/or Contribution Growth objectives
Eligibility Requirements
- ------------------------
Only those positions which carry clear managerial responsibility for directly
contributing to Graco's Corporate Sales and/or Net Earnings objective and
Business Unit Sales and/or Contribution Growth objectives are eligible to be
included in this Plan.
Only those individuals in eligible positions who have demonstrated and are
maintaining a performance level that meets the supervisor's normal expectations
for that position are eligible for annual participation in this Plan as well as
the receipt of any annual Bonus Payments.
<PAGE>
Participation
- -------------
The top executive in each organizational unit may nominate managers for
participation in this Plan when the established position and individual
eligibility requirements have been met.
The Management Organization and Compensation Committee of the Graco Inc. Board
of Directors has sole authority to approve the participation of the Chief
Executive Officer in the Plan.
The Chief Executive Officer of Graco Inc. has sole authority to select and
approve all other Plan participants.
Bonus Maximum
- -------------
Taken in conjunction with base salary market comparisons, bonus maximum for all
positions will be:
o Commensurate with the position's ability to impact the annual
Corporate Sales and/or Net Earnings objective and Business Unit Sales
and/or Contribution Growth objectives.
o Consistent with total compensation levels prevalent for similar
positions in the market place.
Based on these criteria, bonus maximums ranging from 10% to 80% have been
established for each individual.
Bonus Payment
- -------------
The determination of a participant's annual Bonus Payment will be calculated by
adding the bonus results attained for Corporate Sales and/or Net Earnings
performance (expressed in percent) to the bonus results attained for any
applicable Business Unit's Sales and/or Contribution Growth performance
(expressed in percent). These bonus results are then multiplied by the
participant's Maximum Bonus Percentage and then multiplied by the participant's
Base Salary for the Plan Year, to determine the total Bonus Payment.
Example:
|------------- ---------------|
|Annual Annual | Participant's Participant's
|Corporate Business | Maximum Annual
|Performance + Unit | x Bonus x Base = Bonus
|Results Performance | Salary Salary
| Results |
| (if |
| applicable) |
| |
| % % | $ $ $
|------------- ---------------|
<PAGE>
1998 EXECUTIVE CORPORATE & SBU BONUS PLAN
Administration
- --------------
The following rules have been established to insure equitable administration of
Graco's Annual Bonus Plan (the Plan):
1. The Plan will be administered by the Management Organization and
Compensation Committee of the Board of Directors. The Committee may cancel
the Plan and interpret the Plan.
2. The Management Organization and Compensation Committee shall establish the
Annual Corporate Bonus Plan financial objectives. Within the basic
framework of the Plan, the Chief Executive Officer may establish the annual
bonus plan financial objectives for individual Business Units. The CEO may
also establish deadlines for filing administrative forms and adopt other
administrative rules.
The CEO has established the Bonus Administrative Committee consisting of
the President, the Vice President, Human Resources, and the Compensation
Manager. This Committee is responsible for making approval recommendations
on all Annual Bonus Program administrative matters, such as participation
award payments, performance measures, and performance results. All requests
for adjustments or exceptions are to be formally submitted to this
Committee for review through the Compensation Manager.
3. Key executives and managers selected to participate in the Plan after its
annual effective date (January 1st) may be included on a pro-rata basis.
4. Participation in the Plan one year does not necessarily assure
participation in subsequent years. Eligibility requirements for both the
position and individual performance must be met continually.
5. Participation continues during any paid time off such as short-term
disability (up to six months). Participation ceases with retirement, death,
or long-term disability (over six months). In the event participation
ceases due to retirement, death, or long term disability, the Participant
will be eligible for a Bonus Payment, calculated using the Maximum Bonus
Percent and Base Salary up to the time of retirement, death, or long-term
disability and the annual performance results for the year in which
retirement, death, or long-term disability occurs.
6. A participant who transfers to a position not eligible for inclusion in the
Plan will be eligible for a pro-rata award based on the actual time
employed in the eligible position during the year. The pro-rated award will
be paid as described in Administrative Rule #11.
<PAGE>
1998 Executive Corporate & SBU Bonus Plan
Administration (continued)
- --------------------------
7. A participant who resigns or is terminated effective during the Plan Year
is ineligible for a bonus.
Participants must maintain satisfactory performance throughout the Plan
year in order to be eligible to receive a bonus award payment.
In addition, a participant whose employment termination has been requested
due to performance or otherwise for cause will be ineligible for a bonus
payment even though the participant is still employed at year-end.
8. All matrix calculations will include such effects as those created by
foreign exchange gain/loss translation and income tax rate changes.
9. All matrix calculations will be based on actual exchange rates, not plan
rates.
10. Acquisitions and divestitures not included in the annual business plan for
the Plan Year will be excluded from the Corporate Sales and/or Net Earnings
calculations.
11. Significant changes in historical FASB accounting practices or income tax
rates will be included in corporate earnings calculations at the discretion
of the Management Organization and Compensation Committee of the Board of
Directors.
12. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
<PAGE>
1998
Corporate Performance Results and Awards
for 100% Corporate Participants
================================================
1998 Corporate Percent of Maximum
Net Earnings Bonus Award
Results Earned
-------------- ------------------
$40,000 0.00%
$43,000 18.75%
$46,000 37.50%
$49,000 56.25%
$52,000 75.00%
================================================
================================================
1998 Percent of Maximum
Corporate Sales Bonus Award
Results Earned
-------------- ------------------
$414,000 0.00%
$426,000 6.25%
$438,000 12.50%
$450,500 18.75%
$463,000 25.00%
================================================
Note: Calculations exclude acquisitions and divestitures which were not included
in the 1998 Annual Business Plan.
STOCK OPTION AGREEMENT
(NON-ISO)
THIS AGREEMENT, made this ______ day of ________, 199__, by and between
Graco Inc., a Minnesota corporation (the "Company") and ______________________
(the "Employee").
WITNESSETH THAT:
WHEREAS, the Company pursuant to it's Long-Term Incentive Stock Plan wishes
to grant this stock option to Employee;
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
---------------
The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an
aggregate of _______________ Common Shares, par value $1.00 per share,
at the price of $___________ per share on the terms and conditions set
forth herein.
2. Duration and Exercisability
---------------------------
A. This option may not be exercised by Employee until the expiration
of two (2) years from the date of grant, and this option shall in
all events terminate ten (10) years after the date of grant.
During the first two years from the date of grant of this option,
no portion of this option may be exercised. Thereafter this
option shall become exercisable in four cumulative installments
of 25% as follows:
Total Portion of Option
Date Which is Exercisable
---- --------------------------
Two Years after Date of Grant 25%
Three Years after Date of Grant 50%
Four Years after Date of Grant 75%
Five Years after Date of Grant 100%
In the event that Employee does not purchase in any one year the
full number of shares of Common Stock of the Company to which
he/she is entitled under this option, he/she may, subject to the
terms and conditions of Section 3 hereof, purchase such shares of
Common Stock in any subsequent year during the term of this
option.
B. During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or
transferable by him/her otherwise than by will or the laws of
descent and distribution.
3. Effect of Termination of Employment
-----------------------------------
A. In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her
gross and willful misconduct, death, retirement (as defined in
Section 3(d) below), or disability (as defined in Section 3(d)
below), Employee shall have the right to exercise the option at
any time within one month after such termination of employment to
the extent of the full number of shares he/she was entitled to
purchase under the option on the date of termination, subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
B. In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and
willful misconduct during the course of his/her employment,
including but not limited to wrongful appropriation of Company
funds or the commission of a felony, the option shall be
terminated as of the date of the misconduct.
C. If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment
for any reason other than gross and willful misconduct and shall
not have fully exercised the option, all remaining shares shall
become immediately exercisable and such option may be exercised
at any time within twelve months after his/her death by the
executors or administrators of the Employee or by any person or
persons to whom the option is transferred by will or the
applicable laws of descent and distribution, and subject to the
condition that no option shall be exercisable after the
expiration of the term of the option.
D. If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or
attaining age 65, or due to disability within the meaning of the
provisions of the Graco Long-Term Disability Plan), all remaining
shares shall become immediately exercisable and the option may be
exercised by the Employee at any time within three years of the
employee's retirement, or in the event of the death of the
Employee within the three-year period after retirement, the
option may be exercised at any time within twelve months after
his/her death by the executors or administrators of the Employee
or by any person or persons to whom the option is transferred by
will or the applicable laws of descent and distribution, to the
extent of the full number of shares he/she was entitled to
purchase under the option on the date of death, and subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
4. Manner of Exercise
------------------
A. The option can be exercised only by Employee or other proper
party within the option period delivering written notice to the
Company at its principal office in Minneapolis, Minnesota,
stating the number of shares as to which the option is being
exercised and, except as provided in Section 4(c), accompanied by
payment-in-full of the option price for all shares designated in
the notice.
B. The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check)
or by delivering to the Company for cancellation Common Shares of
the Company with a fair market value equal to the option price.
For these purposes, the fair market value of the Company's Common
Shares shall be the closing price of the Common Shares on the
date of exercise on the New York Stock Exchange (the "NYSE") or
on the principal national securities exchange on which the shares
are traded if the shares are not then traded on the NYSE. If
there is not a quotation available for such day, then the closing
price on the next preceding day for which such a quotation exists
shall be determinative of fair market value. If the shares are
not then traded on an exchange, the fair market value shall be
the average of the closing bid and asked prices of the Common
Shares as reported by the National Association of Securities
Dealers Automated Quotation System. If the Common Shares are not
then traded on NASDAQ or on an exchange, then the fair market
value shall be determined in such manner as the Company shall
deem reasonable.
C. The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the
shares issued upon exercise of the option by a securities dealer
and the payment to the Company by the securities dealer of the
option exercise price.
5. Payment of Withholding Taxes
----------------------------
Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local
withholding tax requirements which arise as a result of the exercise
of the option or provide the Company with satisfactory indemnification
for such payment.
6. Change of Control
-----------------
A. Notwithstanding Section 2(a) hereof, the entire option 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 its 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 Out-
standing Company Voting Securities, and provided
further that for purposes of this Section 6, 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 Employee or any group
that includes the Employee, 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 an Employee if:
(1) the acquisition of the 25% or greater interest referred to
in subparagraph A.(1) of this Section 6 is by a group,
acting in concert, that includes the Employee 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
Employee.
7. Adjustments
-----------
If Employee exercises all or any portion of the option subsequent to
any change in the number or character of the Common Shares of the
Company (through merger, consolidation, reorganization,
recapitalization, stock dividend, or otherwise), Employee shall then
receive for the aggregate price paid by him/her on such exercise of
the option, the number and type of securities or other consideration
which he/she would have received if such option had been exercised
prior to the event changing the number or character of outstanding
shares.
8. Miscellaneous
-------------
A. This option is issued pursuant to the Company's Long-Term
Incentive Stock Plan and is subject to its terms. A copy of the
Plan has been given to the Employee. The terms of the Plan are
also available for inspection during business hours at the
principal offices of the company.
B. This Agreement shall not confer on Employee any right with
respect to continuance of employment by the Company or any of its
subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment at any time. Employee
shall have none of the rights of a shareholder with respect to
shares subject to this option until such shares shall have been
issued to him upon exercise of this option.
C. The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
GRACO INC.
By Its Chief Executive Officer
------------------------------
Employee
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended
--------------------
Mar 27, 1998 Mar 28, 1997
------------ ------------
Net earnings applicable to common shareholders
for basic and diluted earnings per share $ 8,947 $ 6,181
============ ============
Weighted average shares outstanding for basic 25,635 25,659
earnings per share
Dilutive effect of stock options computed
using the treasury stock method and the
average market price 604 589
Weighted average shares outstanding for diluted
earnings per share 26,239 26,248
============ ============
Basic earnings per share $ 0.35 $ 0.24
============ ============
Diluted earnings per share $ 0.34 $ 0.24
============ ============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Graco Inc. and subsidiaries consolidated statements of earnings and
consolidated balance sheets for the quarterly period ending March 27,
1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000042888
<NAME> GRACO INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> MAR-27-1998
<EXCHANGE-RATE> 1
<CASH> 28,383
<SECURITIES> 0
<RECEIVABLES> 83,699
<ALLOWANCES> 4,628
<INVENTORY> 46,170
<CURRENT-ASSETS> 170,483
<PP&E> 197,284
<DEPRECIATION> 98,177
<TOTAL-ASSETS> 277,176
<CURRENT-LIABILITIES> 71,930
<BONDS> 7,605
0
0
<COMMON> 25,798
<OTHER-SE> 142,045
<TOTAL-LIABILITY-AND-EQUITY> 277,176
<SALES> 105,717
<TOTAL-REVENUES> 105,717
<CGS> 53,772
<TOTAL-COSTS> 53,772
<OTHER-EXPENSES> 38,098
<LOSS-PROVISION> 278
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> 13,847
<INCOME-TAX> 4,900
<INCOME-CONTINUING> 8,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,947
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
