[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Dear Shareholder:
Please join us on Tuesday, May 4, 1999, at 1:00 p.m. for Graco's Annual
Meeting of Shareholders in the first floor auditorium of the Russell J. Gray
Technical Center, 88-11th Avenue N.E., Minneapolis, Minnesota.
At this meeting, shareholders will consider the following matters:
1. Election of five directors to serve for three-year terms.
2. Approval of the Executive Officer Annual Incentive Bonus Plan.
3. Ratification of the selection of independent auditors for the current
year.
4. Transaction of such other business as may properly come before the
meeting.
Shareholders of record at the close of business on March 5, 1999, are
entitled to vote at this meeting or any adjournment.
We encourage you to join us and participate in the meeting. If you are
unable to do so, you may either call our new toll-free telephone vote number, or
mark and return the enclosed Proxy Card. Have your Proxy Card in front of you
when you make your call as it contains important information which is required
to access the system.
If you do not call us, return your Proxy Card or vote your shares in person
at the meeting, you will lose your right to vote on matters that are important
to you as a shareholder. Accordingly, if you do not plan to attend the meeting,
please call 1-800-240-6326 and vote your shares or execute and return the
enclosed Proxy Card. This will not prevent you from voting in person if you
decide to attend the meeting.
Sincerely,
/s/James A. Earnshaw /s/Robert M. Mattison
James A. Earnshaw Robert M. Mattison
President and Chief Executive Officer Secretary
March 25, 1999
Golden Valley, Minnesota
YOUR VOTE IS IMPORTANT
We urge you to call our transfer agent any time toll-free at 1-800-240-6326 and
vote your shares. Have your Proxy Card in front of you when you make your call
as it contains important information, including a unique shareholder control
number that is required to access the system. Follow the prompts in the
automated menu. If you do not wish to take advantage of the telephone voting,
please mark, date and sign the Proxy Card and return it in the accompanying
envelope as soon as possible. If you attend the meeting, you may still revoke
your proxy and vote in person if you wish.
<PAGE>
TABLE OF CONTENTS
Page
Election of Directors.....................................................2
Nominees and Other Directors............................................2
Meetings and Committees of the Board of Directors.......................4
Nomination of Directors.................................................4
Executive Compensation..................................................5
Report of the Management Organization and Compensation Committee.....5
Comparative Stock Performance Graph..................................7
Summary Compensation Table...........................................8
Option Grants Table (Last Fiscal Year)...............................9
Aggregated Option Exercises In Last Fiscal Year and
Fiscal Year-End Option Values.....................................9
Change in Control Arrangements......................................10
Retirement Arrangements.............................................10
Directors' Fees.....................................................11
Certain Business Relationships......................................11
Beneficial Ownership of Shares.........................................11
Principal Shareholders..............................................12
Section 16 Reporting Compliance.....................................13
Executive Officer Annual Incentive Bonus Plan............................14
Ratification of Appointment of Independent Public Auditors...............15
Other Matters............................................................15
Shareholder Proposals....................................................15
Annex A - Executive Officer Annual Incentive Bonus Plan..................16
A copy of the 1998 Graco Inc. Annual Report on Form 10-K, including the
Financial Statements and the Financial Statement Schedule, can be obtained free
of charge by calling (612) 623-6778, requesting a copy from our web site at
www.graco.com, or writing:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
NOTE: New telephone voting number available - call 1-800-240-6326
<PAGE>
[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 4, 1999
Your proxy, represented by the accompanying Proxy Card, is solicited by the
Board of Directors of Graco Inc. ("Graco" or the "Company") in connection with
the Annual Meeting of the Shareholders of the Company to be held on May 4, 1999,
and any adjournments of that meeting.
The costs of the solicitation, including the cost of preparing and mailing
the Notice of Meeting and this Proxy Statement, will be paid by the Company.
Solicitation will be primarily by mailing this Proxy Statement to all
shareholders entitled to vote at the meeting. Proxies may be solicited by
officers of the Company personally, but at no compensation in addition to their
regular compensation as officers. The Company may reimburse brokers, banks and
others holding shares in their names for third parties, for the cost of
forwarding proxy material to, and obtaining proxies from, third parties. The
Proxy Statement and accompanying Proxy Card will be first mailed to shareholders
on or about March 25, 1999.
Proxies may be revoked at any time prior to being voted by giving written
notice of revocation to the Secretary of the Company. All properly executed
proxies received by management will be voted in the manner set forth in this
Proxy Statement or as otherwise specified by the shareholder giving the proxy.
Shares voted as abstentions on any matter (or a "withhold vote for" as to
directors) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum at the meeting and as unvoted,
although present and entitled to vote, for purposes of determining the approval
of each matter as to which the shareholder has abstained. If a broker submits a
proxy which indicates that the broker does not have discretionary authority as
to certain shares to vote on one or more matters, those shares will be counted
as shares that are present and entitled to vote for purposes of determining the
presence of a quorum at the meeting, but will not be considered as present and
entitled to vote with respect to such matters.
Only shareholders of record as of the close of business on March 5, 1999,
may vote at the meeting or at any adjournment. As of that date, there were
issued and outstanding 20,290,698 common shares of the Company, the only class
of securities entitled to vote at the meeting. Each share registered to a
shareholder of record is entitled to one vote. Cumulative voting is not
permitted.
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES AND OTHER DIRECTORS
The number of directors of the Company is currently fixed at 10 members,
two of whom are executive officers of the Company. The directors are divided
into three classes as equal in number as reasonably possible. Vacancies that
occur during a term may be filled by a majority vote of the directors then in
office, though less than a quorum, and directors so chosen hold office for a
term expiring at the next Annual Meeting of Shareholders. Board policy states
that no director may continue to serve on the Board after the last day of the
month of his/her seventieth (70th) birthday.
At the forthcoming Annual Meeting, five persons are to be elected to the
Company's Board of Directors. The Board has nominated James A. Earnshaw, David
A. Koch, Richard D. McFarland, Lee R. Mitau, and Martha A.M. Morfitt for
three-year terms expiring in the year 2002. Four nominees, David A. Koch,
Richard D. McFarland, Lee R. Mitau and Martha A.M. Morfitt have previously been
elected as directors of the Company by the shareholders.
Unless otherwise instructed not to vote for the election of directors,
proxies will be voted to elect the nominees. A director candidate must receive
the vote of a majority of the voting power of shares present in order to be
elected. Unless the Board reduces the number of directors, the enclosed proxy
will be voted to elect the replacement nominee designated by the Board in the
event that a nominee is unable or unwilling to serve.
The following information is given as of March 5, 1999 with respect to the
nominees for election and the five directors whose terms of office will continue
after the Annual Meeting. Except as noted below, each of the nominees and
directors has held the same position, or another executive position with the
same employer, for the past five years.
Nominees for election at this meeting to terms expiring in the year 2002:
James A. Earnshaw
Mr. Earnshaw, 50, is President and Chief Executive Officer of the Company,
effective March 1, 1999. From 1993 to 1999 he was Vice President, General
Manager - Worldwide Hydraulics Business, Eaton Corporation, a manufacturer
and marketer of electrical and electromechanical components and ion
implanters. Mr. Earnshaw has been a director of Graco since March 1, 1999.
David A. Koch
Mr. Koch, 68, is Chairman of the Board of the Company. He was formerly
Chairman and Chief Executive Officer from 1985 to 1996. Mr. Koch has been a
director of Graco since 1962. He is also a director of ReliaStar Financial
Corp. and SurModics, Inc. In accordance with Board policy, Mr. Koch will
retire from the Board on June 30, 2000.
Richard D. McFarland
Mr. McFarland, 69, is Vice Chairman, Dain Rauscher (formerly Dain Bosworth
Incorporated), a brokerage firm. He was formerly Chairman of Inter-Regional
Financial Group, Inc., currently Interra Financial. Mr. McFarland has been
a director of Graco since 1969. In accordance with Board policy, Mr.
McFarland will retire from the Board on January 31, 2000.
Lee R. Mitau
Mr. Mitau, 50, is Executive Vice President, General Counsel and Secretary
of U.S. Bancorp (formerly First Bank System, Inc.), a regional bank holding
company. U.S. Bank National Association, a subsidiary of U.S. Bancorp,
provides Graco with cash management, loans and foreign exchange services.
The trustee of the Graco Employee Retirement Plan is First Trust National
Association. Both of these companies are subsidiaries of U.S. Bancorp. From
1983 to 1995, Mr. Mitau was a partner of Dorsey & Whitney LLP. Mr. Mitau
has been a director of Graco since 1990 and is a director of H.B. Fuller
Company. (See section entitled Certain Business Relationships on page 11.)
Martha A.M. Morfitt
Ms. Morfitt, 41, is President, Chief Operating Officer and a director of
CNS Inc., a manufacturer and marketer of consumer products, including the
Breathe Right(R) nasal strip. From 1997 to 1998, she was Vice President,
Meals, from 1994 to 1997, Vice President, Green Giant Brands, and from 1993
to 1994, Team Leader, Green Giant Shelf Stable Vegetables, The Pillsbury
Company, a diversified marketer of packaged food products. Ms. Morfitt has
been a director of Graco since 1995.
Directors whose terms continue until 2000:
George Aristides
Mr. Aristides, 63, is Vice Chairman of the Company. From 1997 to March 1,
1999 he was Chief Executive Officer. From 1996 to 1997 he was President and
Chief Executive Officer; from 1993 to 1996, he was President and Chief
Operating Officer; from March to June 1993, he was Executive Vice
President; and from 1985 to March 1993, he was Vice President,
Manufacturing Operations and Controller. Mr. Aristides has been a director
of Graco since 1993.
Ronald O. Baukol
Mr. Baukol, 61, is Executive Vice President, International Operations,
Minnesota Mining and Manufacturing Company ("3M"), a diversified
manufacturer of industrial, commercial, consumer and health care products.
Mr. Baukol has been a director of Graco since 1989 and is a director of 3M
and The Toro Company.
<PAGE>
Directors whose terms continue until 2001:
Dale R. Olseth
Mr. Olseth, 68, is Chairman and Chief Executive Officer, SurModics, Inc.
(formerly BSI Corporation), a biotechnical company specializing in the
modification of material surfaces. Mr. Olseth has been a director of Graco
since 1972 and is a director of The Toro Company. In accordance with Board
policy, Mr. Olseth will retire from the Board on October 31, 2000.
Jerald L. Scott
Mr. Scott, 57, is retired. Prior to November, 1998, Mr. Scott was Senior
Vice President, Operations, H.B. Fuller Company, a worldwide manufacturer
and marketer of adhesives, sealants, coatings, paints and other specialty
chemical products. Mr. Scott has been a director of Graco since 1997.
William G. Van Dyke
Mr. Van Dyke, 53, is Chairman, Chief Executive Officer and President,
Donaldson Company, Inc., a diversified manufacturer of air and liquid
filtration products. Mr. Van Dyke has been a director of Graco since 1995
and is a director of Donaldson Company, Inc.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1998, the Board of Directors met eight times. Attendance of the
Company's directors at all Board and Committee meetings averaged 97 percent.
During 1998, each director attended at least 87 percent of the aggregate number
of meetings of the Board and of all committees of the Board on which he or she
served.
The Board of Directors has an Audit Committee, a Board Structure and Policy
Committee, and a Management Organization and Compensation Committee. Membership
as of March 5, 1999, the record date, was as follows:
Management
Board Structure Organization
Audit and Policy And Compensation
- ---------------------- ------------------- ---------------------
L. R. Mitau, Chair D. R. Olseth, Chair R. O. Baukol, Chair
R. D. McFarland G. Aristides M. A.M. Morfitt
J. L. Scott D. A. Koch D. R. Olseth
W. G. Van Dyke R. D. McFarland W. G. Van Dyke
L. R. Mitau
Audit Committee (2 meetings in fiscal 1998)
o Reviews the accounting, control and legal compliance policies and
procedures of the Company.
Board Structure and Policy Committee (1 meeting in fiscal 1998)
o Evaluates policies related to Board membership and procedure;
o Reviews and makes recommendations on fees and benefits for directors; and
o Recommends to the Board of Directors nominees for the position of director.
Management Organization and Compensation Committee (3 meetings in fiscal 1998)
o Develops the Company's philosophy on executive compensation;
o Determines the compensation of the Company's executive officers;
o Reviews and makes recommendations on management organization and succession
plans; and
o Administers the Company's executive stock option and incentive plans.
NOMINATION OF DIRECTORS
Shareholders may nominate candidates for election to the Board of Directors
who will be considered by the Board Structure and Policy Committee.
Recommendations should be made in writing and addressed to the Committee in care
of the Secretary of the Company at the Company's corporate headquarters. The
By-laws provide that timely notice must be received by the Secretary not less
than 60 days prior to the date of the Annual Meeting of Shareholders, the first
Tuesday in May of each year. The nominations must set forth (i) the name, age,
business and residential addresses and principal occupation or employment of
each nominee proposed in such notice; (ii) the name and address of the
shareholder giving the notice, as it appears in the Company's stock register;
(iii) the number of shares of capital stock of the Company which are
beneficially owned by each such nominee and by such shareholder; and (iv) such
other information concerning each such nominee as would be required under the
rules of the Securities and Exchange Commission in a proxy statement soliciting
proxies for the election of such nominee. Such notice must also include a signed
consent of each such nominee to serve as a director of the Company, if elected.
EXECUTIVE COMPENSATION
Report of the Management Organization and Compensation Committee
Overview
The Management Organization and Compensation Committee of the Board of
Directors (hereafter called "the Committee"), composed of four independent
nonemployee directors, is responsible for developing the Company's philosophy on
executive compensation. Consistent with this philosophy, the Committee develops
compensation programs for the Chief Executive Officer and each of the other
executive officers of the Company. On an annual basis, the Committee determines
the compensation to be paid to the Chief Executive Officer and other executive
officers, based on the provisions of the compensation plans.
Compensation plans which provide for grants or awards of Company stock to
executive officers are approved by the Board of Directors and the shareholders
of the Company. In 1993, the Internal Revenue Code was amended to include a
deductibility limit for remuneration to certain executive officers [Section
162(m) of the Code]. Qualified performance-based compensation is not subject to
this deductibility limit. In order to qualify grants of stock options and stock
appreciation rights as performance-based compensation under Section 162(m), the
Company's Long Term Stock Incentive Plan was amended to include an annual
periodic per person aggregate limit of 300,000 shares of Company stock subject
to award or grant. The Long Term Stock Incentive Plan meets the requirements of
Section 162(m) in all respects. In order to qualify annual incentive awards to
the Chief Executive Officer and other executive officers as performance-based
compensation under Section 162(m), the Company has prepared an Executive Officer
Annual Incentive Bonus Plan which will be placed before the shareholders for
approval at the Annual Meeting of the Company scheduled for May 4, 1999. (See
Proposal 2, page 14 of this Proxy Statement.) The proposed Executive Officer
Annual Incentive Bonus Plan meets the requirements of Section 162(m) in all
respects.
Executive Compensation Philosophy and Program
It is the Company's philosophy to set its executive compensation structure
at levels which are competitive with those of durable goods manufacturers of
comparable size. These levels are determined by consulting a variety of
independent third-party executive compensation surveys. Executive compensation
is then delivered through:
o base salaries which recognize the experience and performance of individual
executives;
o aggressive, performance-driven incentives which:
- enhance shareholder value,
- balance annual and long-term corporate objectives, and
- provide meaningful amounts of Company stock; and
o competitive benefits.
The specific components of the executive compensation program are described
below:
Base salary ranges are established by the Committee, using the fiftieth
percentile salary and trend data for comparably-sized durable goods
manufacturers, as published in a variety of independent third-party executive
compensation surveys. The actual base salary of each officer, within the range,
is determined by the executive's performance, which is evaluated annually by the
Chief Executive Officer and reviewed and approved by the Committee. Both
financial and management factors are considered in the evaluation.
The Executive Officer Annual Incentive Bonus Plan (the "Executive Bonus
Plan") is available in 1999 to the Chief Executive Officer and any other
executive officer designated by the Committee. The Committee is authorized to
establish financial growth targets for each participant directly and
specifically tied to one or more financial measures. On or before the 90th day
of the Company's fiscal year, the Committee will identify the participants, in
addition to the Chief Executive Officer, establish the Targeted Bonus Maximum
Percentages for each participant, and establish the applicable Financial
Measures and the Company Performance Target(s) for each Financial Measure, as
these terms are defined in the Executive Bonus Plan. At the close of the fiscal
year, the Committee will certify whether or not the Company Performance
Target(s) have been attained.
The Annual Bonus Plan covers key managers of the Company and executive
officers other than the Chief Executive Officer who do not participate in the
Executive Bonus Plan.
The Annual Bonus Plan, available in 1998 to 13 executive officers and 35
other management employees, is structured to encourage growth in both sales and
net earnings by the Company. The plan determines individual awards for executive
officers by measuring Company performance against corporate sales and net
earnings growth targets established by the Committee in the first quarter of
each year. Sales and net earnings targets for 1998 were established to exceed
prior year results. In addition, the Chief Executive Officer has been given the
authority to establish divisional and regional growth targets for the executive
officers in charge of specific divisions and regions. Overall performance for
the divisional and regional executives is measured against both divisional and
corporate targets. Targets are set at one-half the maximum potential payout
under the plan. In 1998, the Committee established a range of payouts as a
percent of base salary for executive positions as follows:
Minimum Payout Maximum Payout
Position as a % of Base Salary as a % of Base Salary
- ------------------------------- --------------------- ---------------------
Chief Executive Officer 0% 80%
Vice President (Board-elected) 0% 60%
Vice President (By appointment) 0% 50%
The actual Annual Bonus Plan award is determined by evaluating corporate,
divisional and regional performance against the established financial
objectives. For 1998, sales reached 46 percent of the maximum target, and
corporate net earnings reached 97 percent of the maximum target. Awards were
made to all executive officers under the 1998 Annual Bonus Plan.
Under the Chairman's Award Program, the Chairman is also able to grant a
total of $100,000 in individual discretionary awards to recognize significant
contributions by selected executive officers and other management employees. In
1998 a total of $68,000 was granted to 6 employees including an award of $10,000
to Dale D. Johnson and $33,000 to Charles L. Rescorla.
The Executive Long Term Incentive Program is structured to align the
interests of executive officers with those of all Graco shareholders. The Long
Term Incentive Program for 1998 consisted of stock options granted to the
executive officers. The number of stock options granted to each executive
officer was determined using competitive data for comparably-sized durable goods
manufacturers, as reflected in independent third-party long-term incentive
surveys. These options were non-incentive stock options with a 10-year duration
and a vesting schedule of 25 percent after two years, with 25 percent additional
vesting after years three, four and five.
Executive officers are eligible to participate in the employee benefit
programs available to all Graco employees.
Compensation of the Chief Executive Officer
On an annual basis, the Committee is responsible for reviewing the
individual performance of the Chief Executive Officer and determining
appropriate adjustments in base pay and award opportunities under the Executive
or Annual Bonus Plan and Executive Long Term Incentive Program.
Awards made to the Chief Executive Officer under the Annual Bonus Plan were
determined by the growth in sales and net earnings of the Company. Sales of $436
million in 1998 represents a growth of 5 percent. Net earnings in 1998 of $47.6
million represent an increase of 6 percent from 1997<F1>. This growth in sales
and earnings for 1998 yielded a bonus award to Mr. Aristides of 67 percent of
his base salary.
In reviewing Mr. Aristides' 1998 performance, the Committee recognized a
number of significant accomplishments, including record sales and net earnings,
an 18 percent increase in diluted earnings per share, continued emphasis on
expense management while maintaining high levels of customer satisfaction, and
continued superior return to Graco shareholders, particularly in comparison to
the Dow Jones Factory Equipment Index and the S&P 500 Index. High levels of
performance were maintained while, at the same time, significant investments
were made in information systems and product development. Continued investment
in new products, certifying and training of distributors, upgrading the
marketing organization and expanding sales coverage have been effective in
yielding the 6th consecutive year of improved sales and net earnings.
<PAGE>
To realize the full potential of the strategic and cultural initiatives
which Mr. Aristides has taken during his tenure as Chief Executive Officer, the
Committee made a 67,500 (restated for the three-for-two stock split paid
February 4, 1998) share restricted stock grant to him in May 1997, which will
vest as follows: 15,000 shares on March 31, 1998, 22,500 shares on March 31,
1999, and 30,000 shares on December 27, 1999. This grant is intended to
encourage Mr. Aristides to remain with the Company at least through the final
vest date of the grant.
The Members of the Committee
Mr. Ronald O. Baukol
Ms. Martha A.M. Morfitt
Mr. Dale R. Olseth
Mr. William G. Van Dyke
<F1>
The European subsidiaries' one month reporting lag was eliminated in 1998 with
Europe's December 1997 net earnings being recorded as an adjustment to equity
for external reporting purposes. For internal measurement, the sales and
earnings for this month were included.
<PAGE>
Comparative Stock Performance Graph
The graph below compares the cumulative total shareholder return on the
common stock of the Company for the last five fiscal years with the cumulative
total return of the S&P 500 Index and of the Dow Jones Factory Equipment Index
over the same period (assuming the value of investment in Graco common stock and
each index was 100 on December 31, 1993, and all dividends were reinvested).
Five Year* Cumulative Total Shareholder Returns
[GRAPH - Table below lists data points included in graph]
Dow Jones
Year Graco Inc. S&P 500 Factory Equipment
- ---- ---------- ------- -----------------
1993 100 100 100
1994 104 101 99
1995 150 139 131
1996 188 171 134
1997 273 229 145
1998 304 294 126
*Fiscal Year Ended Last Friday in December
<PAGE>
Summary Compensation Table
The following table shows both annual and long-term compensation awarded to
or earned by the Chief Executive Officer and the four most highly compensated
executive officers of the Company whose total annual salary and bonus for 1998
exceeded $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------------------------------------------ --------------------------
(a) (b) (c) (d) (e) (f) (g) (i)
Other Restricted Securities All Other
Annual Stock Underlying Compen-
Name and Salary Bonus Compen- Award(s) Options/ sation
Principal Position Year ($)<F1><F2> ($)<F1><F3> sation ($) ($)<F4> SARs (#)<F4> ($)<F5><F6>
- ------------------ ---- -------- -------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
George Aristides 1998 $432,106 $290,233 0 0 40,000 $ 4,800
Chief Executive 1997 402,102 262,965 0 $1,164,375<F7> 60,000 3,467
Officer 1996 362,096 287,992 0 0 26,127 6,394
Roger L. King 1998 195,864 114,485 117,739<F8> 0 10,000 39,182<F9>
Vice President and 1997 187,788 59,901 28,501<F8> 0 7,500 40,971<F9>
General Manager, 1996 180,864 68,083 0 0 6,800 4,777
European Operations
John L. Heller 1998 182,106 41,958 0 0 10,000 4,800
Vice President, 1997 165,856 83,048 0 0 9,000 3,466
Asia Pacific and 1996 152,106 85,752 0 0 1,500 4,137
Latin America
Dale D. Johnson 1998 138,178 80,589 0 0 10,000 4,800
Vice President, 1997 111,586 46,660 0 0 4,500 3,053
Contractor Equipment 1996 80,720 20,959 0 0 0 1,948
Division
Charles L. Rescorla 1998 135,295 87,837 0 0 5,000 4,800
Vice President, 1997 129,877 35,687 0 0 4,500 3,412
Manufacturing & 1996 118,960 46,894 0 0 0 2,832
Distribution
Operations
<FN>
<F1>
(1) Deferred compensation is included in Salary and Bonus in the year earned.
<F2>
(2) In addition to base salary, the reported figure includes amounts
attributable to the imputed value of the group term life insurance benefit
for each of the named executive officers.
<F3>
(3) Bonus includes any awards under the Annual Bonus Plan and the Chairman's
Award Program described in the Management Organization and Compensation
Committee Report. Chairman's Awards for 1998 included a $10,000 award to
Mr. Johnson and a $33,000 award to Mr. Rescorla. Mr. King received $25,000
for 1997 under the Chairman's Award Program.
<F4>
(4) On December 12, 1997, the Board of Directors approved a three-for-two stock
split, effected in the form of a 50 percent common stock dividend, payable
February 4, 1998, to shareholders of record on January 7, 1998. The number
of restricted shares and options, as well as the exercise price for
options, has been restated in this table and all subsequent tables to
reflect the split.
<F5>
(5) The compensation reported includes the Company contributions under the
Graco Employee Investment Plan (excluding employee contributions), plus
Company contributions under the Graco Employee Stock Ownership Plan for
1996 and 1997. The allocation of stock under the Graco Employee Stock
Ownership Plan ended September 30, 1997, at which time the ten-year
allocation term of the Plan expired. For 1998, the Company contribution
accrued under the Graco Employee Investment Plan for each named executive
officer was as follows: $4,800 for Mr. Aristides; $4,800 for Mr. King;
$4,800 for Mr. Heller; $4,800 for Mr. Johnson, and $4,800 for Mr. Rescorla.
The Company contribution under the Graco Employee Investment Plan increased
January 1, 1998 to a dollar for dollar match up to the first 3% of employee
contribution.
<F6>
(6) During 1994 and 1995, the Employee Investment Plan accepted contributions
from certain executive officers attributable to compensation in excess of
$150,000. These excess contributions have been returned to the
participants. Employer matching contributions attributable to these amounts
have been left in the Plan and will be used to offset future employer
contributions. Amounts equivalent to the employer matching contributions
have been paid to the executives in 1996 and these amounts appear in this
column as income as follows: Mr. Aristides $3,571; Mr. King $1,954; and Mr.
Heller $1,314.
<F7>
(7) A restricted stock grant was made to Mr. Aristides on May 6, 1997, in the
amount shown on the table. The vesting schedule is as follows: 15,000
shares vested on March 31, 1998, 22,500 shares will vest on March 31, 1999,
and 30,000 shares on December 27, 1999. The market value of the unvested
restricted shares at the end of the 1998 fiscal year was $1,368,150.
<F8>
(8) The reported figure represents a tax equalization payment, attributable to
Mr. King's expatriate assignment.
<F9>
(9) The reported figure includes a goods and services cost differential
provided to Mr. King as a result of his expatriate assignment.
</FN>
</TABLE>
Option Grants Table (Last Fiscal Year)
The following table shows the stock options granted to the named executive
officers during 1998, their exercise price and their grant date present value.
<TABLE>
<CAPTION>
Individual Grant Grant Date Value<F2>
-------------------------------------------------------- ----------------
(a) (b) (c) (d) (e) (f)
Number of % of Total
Securities Options Exercise Grant
Underlying Granted to or Base Date
Options Employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value ($)
- ------------------- ----------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
George Aristides<F1> 40,000 13.3% $29.50 02/27/08 $475,200
Roger L. King<F1> 10,000 3.3% 29.50 02/27/08 118,800
John L. Heller<F1> 10,000 3.3% 29.50 02/27/08 118,800
Dale D. Johnson<F1> 10,000 3.3% 29.50 02/27/08 118,800
Charles L. Rescorla<F1> 5,000 1.7% 29.50 02/27/08 59,400
<FN>
<F1>
(1) Non-incentive stock options were granted on February 27, 1998, in the
amounts shown on the table. The options may be exercised in equal
installments over four years, beginning with the second anniversary date of
the grant.
<F2>
(2) The Black-Scholes option pricing model has been used to determine the grant
date present value of the grants. Annual volatility was calculated using
monthly returns for 36 months prior to the grant date; the interest rate
was set using U.S. Treasury securities of similar duration to the option
period as of the grant date; and dividend yield was established as the
yield on the grant date. A 10 percent discount for nontransferability and a
3 percent discount to reflect the possibility of forfeiture over a two-year
period were applied. For grants expiring on February 27, 2008, the
assumptions used in the model were annual volatility of 40.17 percent,
interest rate of 5.50 percent, dividend yield of 1.58 percent, and time to
exercise of 10 years.
</FN>
</TABLE>
<PAGE>
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
The following table shows the value of outstanding in-the-money options at
the end of the fiscal year for the named executive officers. There were no
option or SAR exercises by these officers during 1998.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
at FY-End (#) at FY-End ($)<F2>
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($)<F1> Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
George Aristides 0 0 148,339/193,428 $2,190,555/1,482,888
Roger L. King 0 0 65,072/30,247 $1,131,479/190,712
John L. Heller 0 0 27,388/33,180 $454,338/267,045
Dale D. Johnson 0 0 4,425/10,125 $79,765/9,374
Charles L. Rescorla 0 0 12,488/12,312 $226,738/56,383
<FN>
<F1>
(1) "Value realized" is the difference between the closing price of the
Company's common stock on the day of exercise and the option price of the
options multiplied by the number of shares received.
<F2>
(2) "Value at fiscal year-end" is the difference between $26.06, the closing
price of the Company's common stock on December 25, 1998, and the option
price multiplied by the number of shares subject to option.
</FN>
</TABLE>
Change in Control Arrangements
Each of the executive officers listed in the Summary Compensation Table,
and certain other key executives of the Company, have entered into a change of
control agreement with the Company (singularly "Agreement"; collectively the
"Agreements"). The change of control period is defined to extend for two years
from the date the Agreement is executed. Each year this period is automatically
extended for one year so as to terminate two years from the annual anniversary
date of the Agreement, unless the Company gives the executive notice that the
Company does not wish to extend this period.
A change of control is generally defined in the Agreements to have occurred
if: (i) a person other than a trust person (as defined in the Agreement)
acquires beneficial ownership of 25 percent or more of the Company's outstanding
common stock, except acquisitions directly from the Company, by the Company, by
a Company employee benefit plan, by the executive or a group of which he is a
part, or by a person with beneficial ownership of shares under the Trust Under
the Will of Clarissa L. Gray which equals or exceeds a certain percentage; or
(ii) members of the Incumbent Board (as defined in the Agreement) cease to be in
the majority on the Board; or (iii) the shareholders approve a reorganization,
merger, consolidation or statutory exchange of the Company's outstanding common
stock, or approve a sale or other disposition of all or substantially all of the
assets of the Company; or (iv) the shareholders approve a complete liquidation
or dissolution of the Company.
Each Agreement provides that for two years after a change of control there
will be no adverse change in the executive's duties and responsibilities,
compensation program, benefits or other circumstances, provided that nothing
will restrict the right of the executive or the Company to terminate the
employment of the executive. If the executive's employment is terminated by the
Company for any reason other than for good cause, death, or disability, or by
the executive for "good reason" (as defined in the Agreement), within two years
following a change of control, the executive will be entitled to certain
benefits. These benefits include a sum equivalent to the executive's base salary
to the date of termination (to the extent not yet paid), a bonus calculated
according to a formula (set forth in the Agreement) for the year in which the
termination occurs, two times the executive's annual base salary, two times the
midpoint between the maximum and minimum bonus for the fiscal year in which the
termination occurs, and benefit coverage for a minimum of two years following
the date of termination.
The payments to which the employee is entitled are subject to reduction in
the event the payments would constitute a parachute payment within the meaning
of Section 280G of the Internal Revenue Code of 1989, as amended, (the "Code")
or any successor provision, provided that the reduction does not exceed $25,000.
If the reduction would exceed $25,000, there will be no reduction and the
Company will make an additional payment to the executive in an amount that will
put the executive in the same after-tax position as if no excise tax under the
Code had been imposed.
Retirement Arrangements
The Company has an employee retirement plan which provides pension benefits
for eligible regular, full- and part-time employees. Benefits under the Graco
Employee Retirement Plan ("Retirement Plan") consist of a fixed benefit which is
designed to provide retirement income at age 65 of 43.5 percent of average
monthly compensation, less 18 percent of Social Security-covered compensation
(calculated in a life annuity option) for an employee with 30 years of service.
Average monthly compensation is defined as the average of the five consecutive
highest years' salary during the last ten years of service, including base
salary and Annual Bonus Plan awards, but excluding Executive Long Term Incentive
Program awards. Benefits under the Retirement Plan vest upon five years of
benefit service.
Federal tax laws limit the annual benefits that may be paid from a
tax-qualified plan such as the Retirement Plan. The Company has adopted an
unfunded plan to provide benefits to retired executive officers impacted by the
benefit limits, so that they will receive, in the aggregate, the benefits the
executive would have been entitled to receive under the Retirement Plan had the
limits imposed by the tax laws not been in effect. Effective January 1, 1998,
the maximum annual pension payable to or on behalf of the executive under the
unfunded plan will be equal to the difference between $170,000 and the benefits
actually payable under the Retirement Plan when the limits imposed by the tax
laws are applied.
The following table shows the estimated aggregate annual benefits payable
under the Graco Employee Retirement Plan and the unfunded plan for the earnings
and years of service specified. The years of benefit service for the Chief
Executive Officer and the executive officers listed in the Summary Compensation
Table are: Mr. Aristides, 25 years; Mr. King, 28 years; Mr. Heller, 26 years;
Mr. Johnson, 23 years; and Mr. Rescorla, 10 years. A maximum of 30 years has
previously been counted in the pension benefit calculation. For 1998 and
subsequent years, the 30 year maximum has been eliminated.
<TABLE>
<CAPTION>
Estimated Aggregate Annual Retirement Benefit
---------------------------------------------
Final Average 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
Compensation Service Service Service Service Service Service Service Service Service
- ------------ ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$200,000 $13,566 $ 27,132 $ 40,699 $ 54,265 $ 67,831 $ 81,397 $ 94,963 $108,529 $122,095
300,000 20,816 41,632 62,449 83,265 104,081 124,897 145,713 166,529 170,000
400,000 28,066 56,132 84,199 112,265 140,331 168,397 170,000 170,000 170,000
500,000 35,316 70,632 105,948 141,265 170,000 170,000 170,000 170,000 170,000
600,000 42,566 85,132 127,698 170,000 170,000 170,000 170,000 170,000 170,000
700,000 49,816 99,632 149,448 170,000 170,000 170,000 170,000 170,000 170,000
800,000 57,066 114,132 170,000 170,000 170,000 170,000 170,000 170,000 170,000
</TABLE>
Prior to December 31, 1996, the Company entered into deferred compensation
agreements with selected executive officers, including certain named executives
in the Summary Compensation Table. These agreements provide for the payment per
year of $10,000 in deferred compensation to the officer for ten years after
retirement, or to a beneficiary in the event of death prior to the expiration of
the ten year period. These agreements also include provisions for
non-competition and the payment of $5,000 per year in the event the officer
becomes disabled prior to age 65. The $5,000 per year disability payments cease
upon the attainment of age 65. Deferred compensation agreements remain in effect
for Mr. Aristides, Mr. King, and Mr. Heller. In addition, it is the practice of
the Company to continue to provide base salary to selected executive officers
whose employment is involuntarily terminated by the Company for a period of
twelve months or until the officer secures other employment.
Directors' Fees
During 1998, the Company paid each director, except directors who also
served as officers, an annual retainer of $15,000, plus a meeting fee of $900
for each Board meeting and $700 for each Committee meeting attended. Upon
cessation of service, nonemployee directors who have served for five full years
will receive quarterly payments for five years at a rate equal to the director's
annual retainer in effect on the director's last day of service on the Board.
In 1994, shareholders approved a Nonemployee Director Stock Plan. Under
this Plan, a nonemployee director may elect to receive all or part of the
director's annual retainer in the form of shares of the Company's common stock
instead of cash. In September 1997, the Plan was amended to create a deferred
stock account alternative for the deferral of the annual retainer. This
alternative provides for the crediting of shares of Common Stock to a deferred
stock account held by a trustee in the name of the nonemployee director.
Dividends paid on the Common Stock, held in the deferred accounts, will be
credited to the accounts at the time of payment. Participating directors may
elect to receive payment from his or her deferred stock account in a lump sum or
installments. Payments, whether in a lump sum or by installments, shall be made
in shares of Common Stock plus cash in lieu of any fractional share. Seven
directors have elected to defer all of their annual retainer into the deferred
stock accounts established under this Plan.
In 1996, shareholders approved a Nonemployee Director Stock Option Plan.
Under this Plan, nonemployee directors receive an initial option grant of 3,000
shares upon first appointment or election and an annual option grant of 2,250
shares on the date of the Company's Annual Shareholders Meeting. Options granted
under the Plan are non-statutory, have a ten-year duration and may be exercised
in equal installments over four years, beginning with the first anniversary date
of the grant. The option exercise price is the fair market value on the date of
grant.
Certain Business Relationships
Mr. Mitau, who has been a director of Graco since 1990, is Executive Vice
President, General Counsel and Secretary of U.S. Bancorp, a bank holding
company. U.S. Bank Trust National Association, South Dakota, a subsidiary of
U.S. Bancorp, is the lead bank in a syndicate of ten banks with which the
Company entered into a five-year $190,000,000 reducing revolving credit
facility. The July 2, 1998 repurchase of 5,800,000 shares of the Company's
common stock from the Company's largest shareholder, the Trust under the Will of
Clarissa L. Gray, was financed in part by an initial borrowing of $158,000,000
under this credit facility. As of March 5, 1999, $109,509,000 is outstanding
under this credit facility. For further information see footnote E to the
Company's financial statements in its annual report on Form 10-K for fiscal year
1998.
BENEFICIAL OWNERSHIP OF SHARES
The following information, furnished as of March 5, 1999, indicates
beneficial ownership of the common shares of the Company by each director, each
nominee for election as director, the executive officers listed in the Summary
Compensation Table who are still executive officers on that date, and by all
directors and executive officers as a group. Except as otherwise indicated, the
persons listed have sole voting and investment power.
Percent of
Amount and Nature of Common Stock
Name of Beneficial Owner Beneficial Ownership<F1><F2> Outstanding*
- ------------------------ -------------------- ------------
G. Aristides<F3><F4> 326,937 1.6%
R. O. Baukol 7,365
J.A. Earnshaw 5,000
J. L. Heller 105,513
D. D. Johnson 7,528
R. L. King 102,647
D. A. Koch<F3><F4><F5> 1,569,259 7.7%
R. D. McFarland<F3><F4> 87,731
L. R. Mitau 6,196
M. A.M. Morfitt<F4> 5,083
D. R. Olseth 20,725
C. L. Rescorla 24,456
J. L. Scott 2,589
W. G. Van Dyke 4,940
All directors and
executive officers as a
group (20 persons)<F3><F4><F5><F6> 2,409,606 11.9%
* Less than one 1 percent, if no percentage is given.
<F1>
(1) All share data reflects the three-for-two stock split paid February 4,
1998.
<F2>
(2) Includes 433,563 shares with respect to which executive officers have a
right, as of May 4, 1999, to acquire beneficial ownership upon the exercise
of vested stock options.
<F3>
(3) Includes the following shares owned by spouses of directors and named
executive officers as to which the director or executive officer may be
deemed to share voting and investment power: Mr. Aristides, 69,597; Mr.
Koch, 67,491; and Mr. McFarland, 19,744 shares.
<F4>
(4) Excludes the following shares as to which beneficial ownership is
disclaimed: (i) 677,782 shares owned by the Graco Employee Retirement Plan,
as to which Messrs. McFarland, Aristides, Koch, Ms. Morfitt and certain
executive officers of the Company share voting and investment power as
members of the Company's Investment Committee; (ii) 45,522 shares held by
The Graco Foundation; and (iii) 348,750 shares held by the Greycoach
Foundation. With respect to (ii) and (iii), Mr. Koch shares voting and
investment power as a director.
<F5>
(5) Includes 993,642 shares held by the Clarissa L. Gray Trust, of which Mr.
Koch's wife, Barbara Gray Koch, and their children are the beneficiaries
and as to which Mr. Koch shares voting and investment power as trustee. See
"Principal Shareholders."
<F6>
(6) If the shares referred to in footnote 3 above, as to which one or more
directors and designated executive officers share voting power, were
included, the number of shares beneficially owned by all directors,
nominees for election as director and executive officers would be 3,481,660
shares, or 17 percent of the outstanding shares.
Principal Shareholders
The following table identifies each person or group known to the Company to
beneficially own more than 5 percent of the outstanding common shares of the
Company as of March 5, 1999, the only class of security entitled to vote at the
Annual Meeting.
Beneficial Percent
Ownership of Class
- --------------------------------------------------------------------------------
Trust under the Will of Clarissa L. Gray,
and David A. Koch<F1><F2> 1,569,259 shares 7.7%
<F1>
(1) Includes 993,642 shares owned by the Clarissa L. Gray Trust. Mr. Koch is
one of the trustees of the Trust and the beneficiaries of the Trust are
Mrs. Koch and their children. The other trustees are Paul M. Torgerson, a
partner at Dorsey & Whitney LLP, Minneapolis, Minnesota, and First Bank of
South Dakota, N.A., Sioux Falls, South Dakota. The Trustees share voting
and dispositive power. Includes 549,519 shares owned by David A. Koch or
Mrs. Koch. Includes 26,098 shares with respect to which Mr. Koch has a
right, as of May 4, 1999, to acquire beneficial ownership upon the exercise
of vested stock options.
<F2>
(2) Excludes the following shares as to which beneficial ownership is
disclaimed: (i) 677,782 shares owned by the Graco Employee Retirement Plan,
as to which Messrs. McFarland, Aristides, Koch, Ms. Morfitt and certain
executive officers of the Company share voting and investment power as
members of the Company's Investment Committee; (ii) 45,522 shares held by
The Graco Foundation; and (iii) 348,750 shares held by the Greycoach
Foundation. With respect to (ii) and (iii), Mr. Koch shares voting and
investment power as a director.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's executive officers, directors and 10 percent shareholders are
required under the Securities Exchange Act of 1934 and regulations promulgated
thereunder to file initial reports of ownership of the Company's securities and
reports of changes in that ownership with the Securities and Exchange
Commission. Copies of these reports must also be provided to the Company.
Based upon its review of the reports and any amendments made thereto
furnished to the Company, or written representations that no reports were
required, the Company believes that all reports were filed on a timely basis by
reporting persons during and with respect to 1998.
<PAGE>
PROPOSAL 2
PROPOSAL TO APPROVE THE GRACO INC. EXECUTIVE OFFICER ANNUAL INCENTIVE BONUS PLAN
The Company seeks shareholder approval of the Graco Inc. Executive Officer
Annual Incentive Bonus Plan (the "Plan"). The Plan will be administered by the
Management Organization and Compensation Committee of the Board of Directors
(the "Committee"). The Plan is intended to qualify compensation paid thereunder
as "qualified performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Section
162(m) of the Code generally limits to $1 million the Company's federal income
tax deductions for compensation paid to named executive officers that is not
performance-based compensation within the meaning of that section. Shareholder
approval of the Plan is necessary.
The Committee is composed solely of non-employee directors who are outside
directors within the meaning of Section 162(m) of the Code. Participants in the
Plan are the Chief Executive Officer and any other executive officer of the
Company designated by the Committee within the first 90 days of the fiscal year.
Participants shall be eligible for the payment of a bonus if certain
performance targets are achieved. The performance targets are financial growth
targets established by the Committee at the beginning of each fiscal year and
must be directly tied to one or more financial measures, including, among other
things, net earnings and net revenues. No payment may be made if the performance
targets are not achieved. No adjustment of the award to any participant is
permitted, but certain changes in status, such as death, retirement or
disability, will cause the bonus payment to be pro-rated and resignation or
termination prior to the end of the fiscal year will eliminate the bonus
entirely. There is a $1,000,000 individual award limit in any fiscal year.
The Committee may amend the Plan prospectively and may terminate or curtail
the benefits of the Plan.
The above description summarizes the principal features of the Plan, but is
qualified in its entirety by reference to the text of the Plan which is set
forth as Annex A to this Proxy Statement.
Awards under the Plan will be based upon performance targets established
with respect to each fiscal year. Accordingly, the amount of awards to be paid
in the future to any participant cannot be determined at this time since the
performance period has not yet been completed. Actual awards will depend upon
actual performance measured against the attainment of the pre-established
performance targets.
If the shareholders fail to approve the Plan at the Annual Meeting, the
compensation awarded under the Plan will not qualify as "performance-based" for
purposes of the deductibility limits of Section 162(m) of the Code.
Other Bonus Plans. The Company has other plans pursuant to which bonuses
may be awarded to the employees eligible to participate in the above-described
Plan, if they are not designated as participants in this Plan.
Federal Income Tax Consequences. The Company will generally be entitled to
a deduction equal to the amount of ordinary income realized by the participant
upon payment of a bonus. The amount of bonus received by a participant under the
Plan will be included in the income of the participant at the time of payment
and will be subject to tax at ordinary income rates.
<PAGE>
PROPOSAL 3
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS
Deloitte & Touche llp has acted as independent auditors for the Company
since 1962. The Board of Directors recommends ratification of the selection of
Deloitte & Touche llp as independent auditors for the current year. If the
shareholders do not ratify the selection of Deloitte & Touche llp, the selection
of the independent auditors will be reconsidered by the Board of Directors. A
representative of Deloitte & Touche llp will be present at the meeting and will
have the opportunity to make a statement if so desired and be available to
respond to any shareholder questions.
OTHER MATTERS
The Board of Directors is not aware of any matter, other than those stated
above, which will or may properly be presented for action at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the shares represented by
such proxies in accordance with their best judgment.
SHAREHOLDER PROPOSALS
The Company did not receive a request from any shareholder that a matter be
submitted to a vote at the 1999 Annual Meeting. Any shareholder wishing to have
a matter considered for inclusion in the proxy statement for the Annual Meeting
in the year 2000 must submit such proposal in writing to the Secretary of the
Company at the address shown on page 1 of this statement no later than November
25, 1999.
The persons named as proxies intend to exercise their discretionary
authority to vote as they deem in the best interests of the Company on any
shareholder proposal submitted at the Annual Meeting in year 2000 if the Company
has not received advance written notice of the matter from the proponent by
February 8, 2000.
YOU ARE RESPECTFULLY REQUESTED TO EXERCISE YOUR RIGHT TO VOTE. YOU MAY DO
SO BY CALLING OUR TOLL-FREE TELEPHONE VOTE NUMBER (1-800-240-6326) AND FOLLOWING
THE VOICE INSTRUCTIONS OR BY FILLING IN AND SIGNING THE ENCLOSED PROXY CARD AND
RETURNING IT IN THE ENVELOPE ENCLOSED FOR YOUR CONVENIENCE. In the event that
you attend the meeting, you may revoke your proxy (either given by telephone or
by mail) and vote your shares in person if you wish.
For the Board of Directors
/s/Robert M. Mattison
Robert M. Mattison
Secretary
Dated: March 25, 1999
(C) 1999 Graco Inc. 3/99 6.5M Printed in U.S.A.
NOTE: New telephone voting number available - call 1-800-240-6326.
<PAGE>
ANNEX A
EXECUTIVE OFFICER
ANNUAL INCENTIVE BONUS PLAN
1. Definitions. When the following terms are used herein with initial capital
letters, they shall have the following meanings:
1.1 Base Salary - a specific dollar amount for each Participant as
identified in Schedule A
1.2 Compensation Committee - the Management Organization and Compensation
Committee of the Board of Directors of Graco Inc.; it is intended that the
Compensation Committee will satisfy the requirements of Section 162(m) of
the Code by being comprised of two or more "outside directors."
1.3 Code - the Internal Revenue Code of 1986, as it may be amended from
time to time, and any proposed, temporary or final Treasury Regulations
promulgated thereunder.
1.4 Company - Graco Inc., a Minnesota corporation, and any of its
affiliates that adopt the Plan.
1.5 Eligible Employee - the chief executive officer and any executive
officer of the Company designated by the Compensation Committee.
1.6 Participant - an Eligible Employee designated by the Compensation
Committee, at any time ending on or before the 90th day of each Performance
Period, as subject to the Plan.
1.7 Performance Period - the Company's fiscal year.
1.8 Plan - this Executive Officer Annual Incentive Bonus Plan.
1.9 Maximum Targeted Bonus Percentage - the maximum potential bonus payout
expressed as a percentage of Participant's Base Salary as identified in
Schedule B.
1.10 Company Performance Target(s) - the financial growth target(s)
established by the Compensation Committee for a Performance Period and
reflected in the percentages identified in Schedule C. The Company
Performance Target(s) shall be directly and specifically tied to one or
more of the following financial measures: consolidated pre-tax earnings,
net revenues, net earnings, operating income, earnings before interest and
taxes, cash flow, return on equity, return on net assets employed or
earnings per share [hereinafter "Financial Measure(s)"]for the applicable
Performance Period, all as computed in accordance with generally accepted
accounting principles as in effect from time to time and as applied by the
Company in the preparation of its financial statements and subject to other
special rules and conditions as the Compensation Committee may establish at
any time ending on or before the 90th day of the applicable Performance
Period. Any Financial Measure may be stated in absolute terms or as
compared to another company or companies. Such Financial Measures shall
constitute the sole bases upon which the Company Performance Targets shall
be based.
2. Administration.
2.1 Determinations must be made prior to each Performance Period - At any
time ending on or before the 90th day of each Performance Period, the
Compensation Committee shall:
(a) designate the Participants in the Plan for that Performance
Period;
(b) indicate the Base Pay of each Participant for the Performance
Period by amending Schedule A in writing;
<PAGE>
(c) establish Targeted Bonus Percentages for the Performance Period by
amending Schedule B in writing;
(d) establish Company Performance Target(s)s for the Performance
Period by amending Schedule C in writing.
2.3 Certification - Following the close of each Performance Period and
prior to payment of any bonus under the Plan, the Compensation Committee
must certify in writing that the Company Performance Target(s) and all
other factors upon which a bonus is based have been attained.
2.4 Shareholder Approval - The material terms of the Plan shall be
disclosed to and approved by shareholders of the Company in accordance with
Section 162(m) of the Code. No bonus shall be paid under the Plan unless
such shareholder approval has been obtained.
3. Bonus Payment
3.1 Maximum - Each Participant shall receive a bonus payment for each
Performance Period calculated in accordance with the formula set forth in
subparagraph 3.2 and in an amount not greater than the Participant's
Maximum Targeted Bonus Percentage multiplied by the Participant's Base
Salary.
3.2 Formula - Subject to other provisions of this Plan, each Participant
shall receive a bonus payment for each Performance Period calculated as
follows:
(a) Each of the Company Performance Targets shall be assigned a weight
expressed as a percent of the Participant's Maximum Targeted Bonus
Percentage.
(b) At the conclusion of each Performance Period, the percent of the
Participant's Maximum Targeted Bonus Percentage achieved for each
applicable Financial Measure shall be calculated.
(c) The percentages achieved by performing the calculation described
in subparagraph 3.2(b) shall be added together and this sum shall be
multiplied by the Participant's Maximum Targeted Bonus Percentage.
(d) The amount obtained by performing the calculation described in
subparagraph 3.2(c) shall be multiplied by the Participant's Base
Salary.
3.3 Limitations
(a) No payment if Company Performance Targets not achieved - In no
event shall any Participant receive a bonus payment hereunder if the
Company Performance Targets and all other factors on which the bonus
payment is based are not achieved during the Performance Period.
(b) No payment in excess of preestablished amount - No Participant
shall receive a payment under the Plan for any Performance Period in
excess of One Million Dollars ($1,000,000).
(c) Pro-ration or elimination of Bonus payment - Participation in the
Plan ceases with resignation, termination, retirement, death or
long-term disability. A Participant who resigns or is terminated
effective during the Performance Period is ineligible for a bonus
payment. A Participant who retires, dies or becomes eligible for
long-term disability benefits under the Company's long-term disability
benefit plan during the Performance Period will be paid a bonus based
on a calculation performed in accordance with the provisions of
subparagraph 3.2, provided, however, the Participant's Base Salary
shall be pro-rated to the date of retirement, death or eligibility for
long-term disability benefits.
<PAGE>
4. Time and Form of Payments; Taxability - Subject to any deferred compensation
election pursuant to any such plans of the Company, a bonus payment shall be
made to the Participant in one or more cash payments as soon as determined by
the Compensation Committee after it has certified that the Company Performance
Target(s) and all other factors upon which the bonus payment for the Participant
is based have been achieved.
4.1 Nontransferability - Participants and beneficiaries shall not have the
right to assign, encumber or otherwise anticipate the payments to be made
under the Plan, and the benefits provided hereunder shall not be subject to
seizure for payment of any debts or judgments against any Participant or
any beneficiary.
4.2 Tax Withholding - In order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action as
it deems appropriate to ensure that all applicable federal or state
payroll, withholding, income or other taxes, which are the sole and
absolute responsibility of a Participant, are withheld or collected from
such Participant.
5. Amendment and Termination - The Compensation Committee may amend the Plan
prospectively at any time and for any reason deemed sufficient by it without
notice to any person affected by the Plan and may likewise terminate or curtail
the benefits of the Plan, both with regard to persons expecting to receive
benefits hereunder in the future and persons already receiving benefits at the
time of such action, provided that no amendment to the Plan shall be effective
which would increase the maximum amount payable to a Participant under paragraph
3.3(b), which would change the Financial Measures upon which Company Performance
Targets must be based as set forth in subparagraph 1.10 of this Plan or which
would modify the requirements for eligibility under subparagraph 1.5, unless the
shareholders of the Company shall have approved such change in accordance with
the requirements of Section 162(m).
6. Miscellaneous
6.1 Effective Date - January 1, 1999
6.2 Term of the Plan - Unless the Plan shall have been discontinued or
terminated, the Plan shall terminate on December 31, 2003. No bonus shall
be granted after the termination of the Plan; provided, however, that a
payment with respect to a Performance Period which begins before such
termination may be made thereafter. In addition, the authority of the
Compensation Committee to amend the Plan shall extend beyond the
termination of the Plan.
6.3 Headings - Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
6.4 Applicability to Successors - The Plan shall be binding upon and inure
to the benefit of the Company and each Participant, the successors and
assigns of the Company, and the beneficiaries, personal representatives and
heirs of each Participant. If the Company becomes a party to any merger,
consolidation or reorganization, this Plan shall remain in full force and
effect as an obligation of the Company or its successors in interest.
6.5 Employment Rights and Other Benefit Programs - The provisions of the
Plan shall not give any Participant any right to be retained in the
employment of the Company. In the absence of any specific agreement to the
contrary, the Plan shall not affect any right of the Company, or of any
affiliate of the Company, to terminate, with or without cause, the
Participant's employment at any time. The Plan shall not replace any
contract of employment, whether oral or written, between the Company and
any Participant, but shall be considered a supplement thereto. The Plan is
in addition to, and not in lieu of, any other employee benefit plan or
program in which any Participant may be or become eligible to participate
by reason of employment with the Company. Receipt of benefits hereunder
shall have such effect on contributions to and benefits under such other
plans or programs as the provisions of each such other plan or program may
specify.
<PAGE>
6.6 No Trust or Fund Created - The Plan shall not create or be construed to
create a trust or separate fund of any kind or a fiduciary relationship
between the Company or any affiliate and a Participant or any other person.
To the extent that any person acquires a right to receive payments from the
Company or any affiliate pursuant to the Plan, such right shall be no
greater than the right of any unsecured general creditor of the Company or
of any affiliate.
6.7 Governing Law - The validity, construction and effect of the Plan or
any bonus payable under the Plan shall be determined in accordance with the
laws of the State of Minnesota.
6.8 Severability - If any provision of the Plan is or becomes or is deemed
to be invalid, illegal or unenforceable in any jurisdiction such provision
shall be construed or deemed amended to conform to applicable laws, or if
it cannot be so construed or deemed amended without, in the determination
of the Compensation Committee, materially altering the purpose or intent of
the Plan, such provision shall be stricken as to such jurisdiction, and the
remainder of the Plan shall remain in full force and effect.
6.9 Qualified Performance-Based Compensation - All of the terms and
conditions of the Plan shall be interpreted in such a fashion as to qualify
all compensation paid hereunder as qualified performance-based compensation
within the meaning of Section 162(m) of the Code.
<PAGE>
SCHEDULE A
BASE SALARY FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
--------------- ------------
Name Base Salary
---- -----------
Actual paid salary for the calendar
year that most closely coincides
with Company fiscal year but not in
excess of $1,250,000
<PAGE>
SCHEDULE B
TARGETED BONUS PERCENTAGE FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
--------------- ------------
Minimum Targeted Bonus Maximum Targeted Bonus
Percentage Percentage
as a Percentage of as a Percentage of
Name Base Salary Base Salary
---- ---------------------- ----------------------
<PAGE>
SCHEDULE C
COMPANY PERFORMANCE TARGETS
FOR PERFORMANCE PERIOD
BEGINNING ON AND ENDING ON
--------------- ------------
Company
Performance Minimum Company Maximum Company
Target(s) Performance Performance
Financial Measure(s) Weight Target(s) Target(s)
-------------------- ----------- --------------- ---------------
% $ $
----- ---------- ------------
% $ $
----- ---------- ------------
<PAGE>
[MAP]
I-94 to Broadway
East on Broadway to Marshall
Southwest Corner of Broadway & Marshall
GRACO INC.
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, May 4, 1999
1: 00 p.m.
Russell J. Gray Technical Center
88-11th Avenue N.E.
Minneapolis, Minnesota 55413
[LOGO]
GRACO INC.
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422
This Proxy is Solicited by the Board of Directors for use at the Graco Inc.
Annual Meeting on Tuesday, May 4, 1999.
The shares of common stock of Graco Inc. which you are entitled to vote on March
5, 1999, will be voted as you specify on this card.
By signing this proxy, you revoke all prior proxies and appoint George Aristides
and Mark W. Sheahan as Proxies, each with full power of substitution, to vote
your shares as specified on the reverse side and at their discretion on any
other matter which may properly come before the Annual Meeting or any
adjournment thereof.
There are two alternative ways to vote your Proxy
You may vote either by telephone or by mail.
TO VOTE BY TELEPHONE - TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE
Your telephone vote authorizes the Named Proxies to vote your shares in the same
manner as if you marked, signed and returned your proxy card.
o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week.
o You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which appear in the box in the upper right hand corner.
o Follow the simple instructions provided.
- -OR-
TO VOTE BY MAIL
If you do not vote by telephone, mark, sign and date your proxy card and return
it in the postage-paid envelope provided (Graco Inc., c/o Shareowner Services,SM
P.O. Box 64873, St. Paul, MN 55164-0873).
If you vote by telephone, please do not mail your Proxy Card
Item 1. Election of Directors __ FOR ALL __ WITHHOLD FOR ALL
NOMINEES: James A. Earnshaw Lee R. Mitau
David A. Koch Martha A.M. Morfitt
Richard D. McFarland
(INSTRUCTION: To withhold authority to vote for any individual
nominee, strike a line through the nominee's name in the list above)
Item 2. Approval of Executive Officer Annual Incentive Bonus Plan
__ FOR __ AGAINST __ ABSTAIN
Item 3. Ratification of Appointment of Deloitte & Touche LLP as Independent
Auditors
__ FOR __ AGAINST __ ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the meeting. This proxy properly executed will be
voted in the manner directed by the undersigned. If no choice is specified, this
proxy will be voted "FOR" Items 1, 2, and 3.
Please sign exactly as your name(s) appears at left. In the case of joint
owners, each should sign. If signing as executor, trustee, guardian or in any
other representative capacity or as an officer of a corporation, please indicate
your full title.
Dated:_________________________ , 1999
______________________________________
Signature
______________________________________
Signature
