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 30, 2001
Commission File Number: 001-9249
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GRACO INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
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(State of incorporation) (I.R.S. Employer Identification Number)
88 - 11th Avenue N.E.
Minneapolis, Minnesota 55413
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(Address of principal executive offices) (Zip Code)
(612) 623-6000
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(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
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30,794,894 common shares were outstanding as of May 3, 2001.
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
2001 Executive Corporate and SBU Bonus Plan Exhibit 10
Non-employee Director Stock Option Plan, as amended and
Restated February 23, 2001 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
PART I
GRACO INC. AND SUBSIDIARIES
Item I. CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Weeks Ended
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March 30, 2001 March 31, 2000
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(In thousands except per share amounts)
Net Sales $109,814 $122,227
Cost of products sold 54,676 60,098
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Gross Profit 55,138 62,129
Product development 6,287 5,024
Selling, marketing and distribution 20,672 23,814
General and administrative 7,696 8,644
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Operating Profit 20,483 24,647
Interest expense 450 1,235
Other (income) expense, net 213 437
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Earnings Before Income Taxes 19,820 22,975
Income taxes 6,700 8,000
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Net Earnings $ 13,120 $ 14,975
============== ==============
Basic Net Earnings Per Common Share $ .43 $ .49
============== ==============
Diluted Net Earnings Per Common Share $ .42 $ .48
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See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 30, 2001 Dec. 29, 2000
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ASSETS
Current Assets:
Cash and cash equivalents $ 4,682 $ 11,071
Accounts receivable, less allowances
of $4,800 and $4,700 83,301 85,836
Inventories 41,177 33,079
Deferred income taxes 11,627 11,574
Other current assets 2,565 2,182
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Total current assets 143,352 143,742
Property, Plant and Equipment:
Cost 193,942 186,872
Accumulated depreciation (106,615) (102,883)
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87,327 83,989
Other Assets 20,840 10,245
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$251,519 $ 237,976
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ 14,241 $ 15,713
Current portion of long-term debt 1,050 1,310
Trade accounts payable 12,742 12,899
Salaries, wages & commissions 7,962 14,532
Accrued insurance liabilities 10,925 10,622
Income taxes payable 10,678 4,642
Other current liabilities 20,026 22,123
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Total current liabilities 77,624 81,841
Long-term Debt, less current portion 20,500 18,050
Retirement Benefits and Deferred 27,106 27,230
Compensation
Shareholders' Equity:
Common stock 30,778 20,274
Additional paid-in capital 45,902 39,954
Retained earnings 49,992 50,233
Other, net (383) 394
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Total shareholders' equity 126,289 110,855
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$251,519 $ 237,976
============== =============
See notes to consolidated financial statements.
GRACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks
--------------
March 30, 2001 March 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
Net Earnings $13,120 $14,975
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,240 4,005
Deferred income taxes (182) 127
Change in:
Accounts receivable 4,065 (9,733)
Inventories (5,510) (4,255)
Trade accounts payable (358) 1,941
Salaries, wages and commissions (6,569) (3,283)
Retirement benefits and deferred
compensation 272 124
Other accrued liabilities 2,832 5,267
Other (789) (356)
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11,121 8,812
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (6,203) (2,968)
Proceeds from sale of property, plant
and equipment 45 58
Acquisition of business, net of cash acquired (15,949) -
-------------- --------------
(22,107) (2,910)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable and lines of credit 36,274 47,979
Payments on notes payable and lines of credit (37,307) (49,939)
Borrowings on long-term debt 23,000 20,000
Payments on long-term debt (20,810) (17,265)
Common stock issued 6,320 6,632
Retirement of common stock (177) (15,300)
Cash dividends paid (3,044) (2,862)
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4,256 (10,755)
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Effect of exchange rate changes on cash 341 1,099
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Net increase (decrease) in cash and cash (6,389) (3,754)
equivalents
Cash and cash equivalents:
Beginning of year 11,071 6,588
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End of Period $ 4,682 $ 2,834
============== ==============
See notes to consolidated financial statements.
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 30, 2001, and the related statements of earnings and
cash flows for the thirteen weeks then ended, have been prepared by the
Company without being audited.
In the opinion of management, these consolidated statements reflect all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Graco Inc. and Subsidiaries as of
March 30, 2001, 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 2000 Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Major components of inventories were as follows (in thousands):
Mar. 30, 2001 Dec. 29, 2000
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Finished products and components $29,675 $26,812
Products and components in various
stages of completion 21,961 20,153
Raw materials 22,601 19,259
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74,237 66,224
Reduction to LIFO cost (33,060) (33,145)
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$41,177 $33,079
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GRACO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. The Company has three reportable segments; Industrial/Automotive,
Contractor and Lubrication. The Company does not identify assets by
segment. Sales and operating profit by segment for the thirteen weeks
ended March 30, 2001 and March 31, 2000 are as follows (in thousands):
Mar. 30, 2001 Mar. 31,2000
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Net Sales
Industrial/Automotive $ 47,649 $ 56,831
Contractor 49,901 54,481
Lubrication 12,264 10,915
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Total $109,814 $122,227
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Operating Profit
Industrial/Automotive $ 9,394 $ 12,507
Contractor 8,620 10,486
Lubrication 2,956 2,316
Unallocated Corporate
Expenses (487) (662)
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Consolidated Operating Profit $ 20,483 $ 24,647
============= ============
4. There have been no changes to the components of comprehensive income from
those noted in the 2000 Form 10-K. Total comprehensive income for the
quarter was $12.4 million in 2001 and $14.2 million in 2000.
5. The adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" on December 30, 2000, resulted in no transition
adjustment. See Note A to financial statements included in the Company's
2000 Form 10-K for a description of the Company's use of derivative
instruments and hedging activities.
6. On March 19, 2001, the Company purchased ASM Company, Inc. for $16 million
cash. Based on management's estimates of value, the purchase price has been
allocated to net tangible assets of approximately $5 million and intangible
assets totaling approximately $11 million. Intangible assets are included
in the other assets caption on the consolidated balance sheets. The
purchase price allocation is subject to adjustment upon completion of an
independent appraisal. ASM manufactures and markets spray tips, guns, poles
and other accessories for the professional painter. ASM had sales of
approximately $11 million in 2000.
Item 2. GRACO INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales and earnings in the first quarter decreased from last year. The impact
of reduced sales on net earnings was mitigated by a reduction of expenses. The
increase in product development expense was more than offset by reductions in
other operating expenses.
The following table sets forth items from the Company's Consolidated Statements
of Earnings as percentages of net sales:
Thirteen Weeks Ended
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March 30, 2001 March 31,2000
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Net Sales 100.0% 100.0%
Cost of products sold 49.8 49.2
Product development 5.7 4.1
Selling, marketing and distribution 18.8 19.5
General and administrative 7.0 7.0
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Operating Profit 18.7 20.2
Interest expense 0.4 1.0
Other (income) expense, net 0.2 0.4
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Earnings Before Income Taxes 18.1 18.8
Income taxes 6.1 6.5
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Net Earnings 12.0% 12.3%
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Net Sales
Net sales in the first quarter of 2001 were down 10 percent from first quarter
2000. Economic conditions in North America led to reduced demand and lower sales
in the Industrial / Automotive segment (down 16 percent) and the Contractor
Equipment segment (down 8 percent). Lubrication Equipment segment sales (up 12
percent) were helped by new products launched last September and large sales to
several key customers. Within the Contractor Equipment segment, sales in the
home center channel were $9.3 million, up 3 percent from the first quarter of
2000. The Company began selling through the home center channel in January 2000,
and most of the sales in the first quarter of 2000 were initial stocking orders.
Geographically, sales in the Americas decreased 13 percent. In Europe, sales
measured in local currencies increased 2 percent, but decreased 4 percent after
unfavorable currency translation. Asia Pacific sales were 3 percent lower than
last year, but would have increased 4 percent if translated at consistent
exchange rates. Fluctuations in exchange rates adversely impacted consolidated
net sales for the quarter by approximately $2 million.
Gross Profit
Gross profit as a percentage of net sales was 50.2 percent compared to 50.8
percent last year. Gross profit as a percentage of net sales would have
decreased only .2 percentage points if sales and cost of products sold were
translated at consistent exchange rates.
Operating Expenses
Product development expense increased 25 percent from the first quarter of 2000,
as several new products approached launch dates. Other operating expenses
decreased commensurate with reduced sales levels. Selling, marketing and
distribution expense decreased 13 percent and decreased as a percentage of sales
to 18.8 percent from 19.5 percent. First quarter 2000 included significant
spending related to the introduction of new products and entry into the home
center channel. General and administrative expenses were down 11 percent due to
controls placed on spending, including restrictions on discretionary items, and
the impact of reduced sales on incentive bonus provisions.
Interest Expense and Other Income (Expense)
Interest expense decreased due to reduced debt levels.
Liquidity and Capital Resources
- -------------------------------
The Company generated $11.1 million of cash flow from operating activities in
the first three months of 2000, compared to $8.8 million for the same period
last year. Significant uses of cash in 2001 included the acquisition of ASM
Company, Inc. and the construction in progress of expanded manufacturing,
warehouse and office facilities in Minneapolis. In 2000, the Company utilized
cash flow to retire $15.3 million of common stock. The Company plans to expand
its Sioux Falls, South Dakota manufacturing facilities to accommodate the move
of ASM operations from its current location in California. The Company had
unused lines of credit available at March 30, 2001 totaling $90 million. The
available credit facilities and internally generated funds provide the Company
with the financial flexibility to meet liquidity needs.
Outlook
- -------
The Company remains cautious about its outlook for 2001, as the North American
economy has slowed down considerably from the levels of a year ago. Nonetheless,
management remains confident that the Company will continue to post good results
in light of the circumstances. Management expects to generate incremental
revenues and profits by aggressively implementing growth strategies of
developing new products, expanding distribution, entering new markets and
pursuing strategic acquisitions.
SAFE HARBOR CAUTIONARY STATEMENT
The information in this 10-Q 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
2000.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2001 Executive Corporate and SBU Bonus Plan Exhibit 10
Non-employee Director Stock Option Plan,
as amended and restated February 23, 2001 Exhibit 10.1
Computation of Net Earnings per Common Share Exhibit 11
(b) Reports on Form 8-K
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 1, 2001 By: /s/George Aristides
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George Aristides
Chief Executive Officer
Date: May 1, 2001 By: /s/James A. Graner
-------------------------------- ---------------------------------
James A. Graner
Vice President & Controller
("duly authorized officer")
2001 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.
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 90% 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) | $ $ $
| |
| % |
- -------------- ---------------
Administration
- --------------
The following rules have been established to ensure 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 CEO, 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 (e.g. through job posting or job
elimination) that is 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.
If, due to unique skills possessed by a participant, the company requests
that the participant accept a transfer to a non-bonus eligible position,
the participant will remain on the Plan. The participant's eligibility will
be reviewed annually as noted in Administrative Rule #4.
7. A participant must be an employee in good standing on 12/31 of the Plan
Year in order to receive a bonus. 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 job elimination, performance or otherwise for cause will be
ineligible for a bonus payment even though the participant is still
employed at year-end.
8. Targets and actual performance for Corporate and Division measures will be
at actual exchange rates. Targets and actual performance for international
measures where business is conducted in foreign currency will be at prior
year's actual rates.
9. 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.
10. 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.
11. Payments will be made by March 15th of the year following each successive
Corporate and Business Unit performance year.
These Administrative Rules indicate Graco's intent. Situations may arise which
are not specifically covered by these rules and will require the use of judgment
and discretion. Final responsibility for interpretation of these Administrative
Rules rests solely with the Vice President, Human Resources.
February 23, 2001
GRACO INC. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose
The purpose of the Graco Inc. Nonemployee Director Stock Option Plan (the
"Plan") is to secure for Graco Inc. (the "Company") and its shareholders
the benefits of the long-term incentives inherent in increased common
stock ownership by the members of the Board of Directors (the "Board") of
the Company who are not employees of the Company or its Affiliates, by
strengthening the identification of Nonemployee Directors with the
interests of all Graco shareholders.
2. Definitions
The terms defined in this Section 2 shall have the following meanings,
unless the context otherwise requires.
a. Affiliate shall mean any corporation, partnership, joint venture or
other entity in which the Company holds an equity, profit or voting
interest of more than fifty percent (50%).
b. Annual Meeting of Shareholders shall mean the annual meeting of
shareholders of the Company held each calendar year.
c. Code shall mean the Internal Revenue Code of 1986, as amended to date
and as it may be amended from time to time.
d. Company shall mean Graco Inc., a Minnesota corporation.
e. ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended to date and as it may be amended from time to time.
f. Fair Market Value per Share shall mean as of any day
(1) The fair market value of a share of the Company's common stock is
the last sale price reported on the composite tape by the New
York Stock Exchange on the business day immediately preceding the
date as of which fair market value is being determined or, if
there were no sales of shares of the Company's common stock
reported on the composite tape on such day, on the most recently
preceding day on which there were sales, or
(2) if the shares of the Company's stock are not listed or admitted
to trading on the New York Stock Exchange on the day as of which
the determination is made, the amount determined by the Board or
its delegate to be the fair market value of a share on such day.
g. Nonemployee Director shall mean a member of the Board of Directors of
the Company who is not also an officer or other employee of the
Company or an Affiliate.
h. Nonstatutory Stock Option ("NSO") shall mean a stock option, which
does not qualify for special tax treatment under Sections 421 or 422
of the Internal Revenue Code.
i. Option shall mean either a First Option or an Annual Option granted
pursuant to the provisions of Section 4 of this Plan.
j. Participant shall mean any person who holds an Option granted under
this Plan.
k. Plan shall mean this Graco Inc. Nonemployee Director Stock Option
Plan.
3. Administration
a. The Plan shall be administered by the Board. The Board may, by
resolution, delegate part or all of its administrative powers with
respect to the Plan.
b. The Board shall have all of the powers vested in it by the terms of
the Plan, such powers to include the authority, within the limits
prescribed herein, to establish the form of the agreement embodying
grants of Options made under the Plan.
c. The Board shall, subject to the provisions of the Plan, have the power
to construe the Plan, to determine all questions arising thereunder
and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable, such
administrative decisions of the Board to be final and conclusive.
d. The Board shall have no discretion to select the Nonemployee Directors
to receive Option grants under the Plan, to determine the number of
shares of the Company's common stock subject to the Plan or to each
grant, nor the exercise price of the Options granted pursuant to the
Plan.
e. The Board may authorize any one or more of their number or the
Secretary or any other officer of the Company to execute and deliver
documents on behalf of the Board. The Board hereby authorizes the
Secretary to execute and deliver all documents to be delivered by the
Board pursuant to the Plan.
f. The expenses of the Plan shall be borne by the Company.
4. Automatic Grants to Nonemployee Directors
a. As of the day upon which shareholders vote to elect directors at each
annual meeting of the Company, each Nonemployee Director of the Board
shall be granted an option to purchase two thousand five hundred
(2,500) shares of the Company's common stock under the Plan (the
"Annual Option"); and a Nonemployee Director who has not previously
been elected as a member of the Board of Directors of the Company
shall be granted a First Option; i.e., an option to purchase three
thousand (3,000) shares of the Company's common stock under the Plan,
on the first business day of the Nonemployee Director's election to
the Board, including election by the Board of Directors to fill a
vacancy on the Board.
b. The automatic grants to Nonemployee Directors shall not be subject to
the discretion of any person.
c. Each Option granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to, and incorporate, by
reference or otherwise, the applicable terms of this Plan.
d. During the lifetime of a Participant, each Option shall be exercisable
only by the Participant. No Option granted under the Plan shall be
assignable or transferable by the Participant, except by will or by
the laws of descent and distribution.
5. Shares of Stock Subject to the Plan
a. Subject to adjustment as provided in Section 11 of the Plan, an
aggregate of four hundred fifty thousand (450,000) shares of the
Company's common stock, $1.00 par value, shall be available for
issuance to Nonemployee Directors under the Plan. No fractional shares
shall be issued.
b. First Option Grants and Annual Option Grants shall reduce the shares
available for issuance under the Plan by the number of shares subject
thereto. The shares deliverable upon exercise of any First Option
Grant or Annual Option Grant may be made available from authorized but
unissued shares or shares reacquired by the Company, including shares
purchased in the open market or in private transactions. If any
unexercised First Option Grant or Annual Option Grant shall terminate
for any reason, the shares subject to, but not delivered under, such
First Option Grant or Annual Option Grant shall be available for other
First Option Grants or Annual Option Grants.
6. Nonstatutory Options.
a. All Options granted to Nonemployee Directors pursuant to the Plan
shall be NSOs.
7. Exercise Price.
a. The price per share of the shares of the Company's common stock which
may be purchased upon exercise of an Option ("Exercise Price") shall
be one hundred percent (100%) of the Fair Market Value per Share on
the date the Option is granted and shall be payable in full at the
time the Option is exercised as follows:
(1) in cash or by certified check,
(2) by delivery of shares of common stock to the Company which shall
have been owned for at least six (6) months and have a Fair
Market Value per Share on the date of surrender equal to the
exercise price, or
(3) by delivery to the Company of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly
deliver to the Company from sale or loan proceeds the amount
required to pay the exercise price.
b. Such price shall be subject to adjustment as provided in Section 11
hereof.
8. Duration and Vesting of Options.
a. The term of each Option granted to a Nonemployee Director shall be for
ten (10) years from the date of grant, unless terminated earlier
pursuant to the provisions of Section 10 hereof.
b. Each Option shall vest and become exercisable according to the
following schedule:
(1) twenty-five percent (25%) of the total number of shares covered
by the Option shall become exercisable beginning with the first
anniversary date of the grant of the Option;
(2) thereafter twenty-five percent (25%) of the total number of
shares covered by the Option shall become exercisable on each
subsequent anniversary date of the grant of the Option until the
fourth anniversary date of the grant of the Option upon which the
total number of shares covered by Option shall become
exercisable.
9. Change of Control
a. Notwithstanding Section 8b(1) and (2) hereof, all outstanding Options
not yet exercisable shall become immediately and fully exercisable on
the day following a "Change of Control" and shall remain fully
exercisable until either exercised or expiring by their terms. A
"Change of Control" means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934), (a "Person"), of beneficial ownership (within the meaning
of Rule 13d-3 under the 1934 Act) which results in the beneficial
ownership by such Person of 25% or more of either
(a) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting
Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii)an acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock or
other Company voting securities owned by the Trust
Under the Will of Clarissa L. Gray ("Trust Person"),
provided that such acquisition does not result in the
beneficial ownership by such Person of 32% or more of
either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, and provided
further that for purposes of this Section 9, a Trust
Person shall not be deemed to have beneficial ownership
of the Company common stock or other Company voting
securities owned by The Graco Foundation or any
employee benefit plan of the Company, including,
without limitations, the Graco Employee Retirement Plan
and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Nonemployee Director or any group
that includes the Nonemployee Director, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b), and
(c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership of
the Outstanding Company Common Stock or Outstanding Company
Voting Securities is 25% or more as a result of a transaction
described in clause (i) or (ii) above, and such Person
subsequently acquires beneficial ownership of additional
Outstanding Company Common Stock or Outstanding Company Voting
Securities as a result of a transaction other than that described
in clause (i) or (ii) above, such subsequent acquisition will be
treated as an acquisition that causes such Person to own 25% or
more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities and be deemed a Change of Control; and
provided further, that in the event any acquisition or other
transaction occurs which results in the beneficial ownership of
32% or more of either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities by any Trust Person, the
Incumbent Board may by majority vote increase the threshold
beneficial ownership percentage to a percentage above 32% for any
Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of said Board; provided,
however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
will be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial membership on the Board occurs as a
result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(3) The commencement or announcement of an intention to make a tender
offer or exchange offer, the consummation of which would result
in the beneficial ownership by a Person of 25% or more of the
Outstanding Company Common Stock or Outstanding Company Voting
Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange of
Outstanding Company Common Stock or Outstanding Company Voting
Securities or sale or other disposition of all or substantially
all of the assets of the Company ("Business Combination") or, if
consummation of such Business Combination is subject, at the time
of such approval by stockholders, to the consent of any
government or governmental agency, the obtaining of such consent
(either explicitly or implicitly by consummation) excluding,
however, such a Business combination pursuant to which
(a) all or substantially all of the individuals and entities who
were the beneficial owners of the Outstanding Company Common
Stock or Outstanding Company Voting Securities immediately
prior to such Business Combination beneficially own,
directly or indirectly, more than 80% of, respectively, the
then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the
Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination of the
Outstanding Company Common Stock or Outstanding Company
Voting Securities,
(b) no Person [excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from
such Business Combination] beneficially owns, directly or
indirectly, 25% or more of the then outstanding shares of
common stock of the corporation resulting from such Business
Combination or the combined voting power of the then
outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business
Combination, and
(c) at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
b. A Change of Control shall not be deemed to have occurred with respect
to a Nonemployee Director if:
(1) the acquisition of the 25% or greater interest referred to in
subsection a(1) of this Section 9 is by a group, acting in
concert, that includes the Nonemployee Director or
(2) if at least 25% of the then outstanding common stock or combined
voting power of the then outstanding company voting securities
(or voting equity interests) of the surviving corporation or of
any corporation (or other entity) acquiring all or substantially
all of the assets of the Company shall be beneficially owned,
directly or indirectly, immediately after a reorganization,
merger, consolidation, statutory share exchange, disposition of
assets, liquidation or dissolution referred to in subsections (4)
or (5) of this section by a group, acting in concert, that
includes that Nonemployee Director.
10. Effect of Termination of Membership on the Board.
a. The right to exercise an Option granted to a Nonemployee Director
shall be limited as follows, provided the actual date of exercise is
in no event after the expiration of the term of the Option:
(1) If a Nonemployee Director ceases being a director of the Company
for any reason other than the reasons identified in subparagraph
(2) of this Section 10, the Nonemployee Director shall have the
right to exercise the Options as follows, subject to the
condition that no Option shall be exercisable after the
expiration of the term of the Option:
(a) If the Nonemployee Director was a member of the Board of
Directors of the Company for five (5) or more years, all
outstanding Options become immediately exercisable upon the
date the Nonemployee Director ceases being a director. The
Nonemployee Director may exercise the Options for a period
of thirty-six months (36) from the date the Nonemployee
Director ceased being a director, provided that if the
Nonemployee Director dies before the thirty-six (36) month
period has expired, the Options may be exercised by the
Nonemployee Director's legal representative or any person
who acquires the right to exercise an Option by reason of
the Nonemployee Director's death for a period of twelve (12)
months from the date of the Nonemployee Director's death.
(b) If the Nonemployee Director was a member of the Board of
Directors of the Company for less than five (5) years, the
Nonemployee Director may exercise the Options, to the extent
they were exercisable at the date the Nonemployee Director
ceases being a member of the Board, for a period of thirty
(30) days following the date the Nonemployee Director ceased
being a director, provided that, if the Nonemployee Director
dies before the thirty (30) day period has expired, the
Options may be exercised by the Nonemployee Director's legal
representative, or any person who acquires the right to
exercise an Option by reason of the Nonemployee Director's
death, for a period of twelve (12) months from the date of
the Nonemployee Director's death.
(c) If the Nonemployee Director dies while a member of the
Board, the Options, to the extent exercisable by the
Nonemployee Director at the date of death, may be exercised
by the Nonemployee Director's legal representative, or any
person who acquires the right to exercise an Option by
reason of the Nonemployee Director's death, for a period of
twelve (12) months from the date of the Nonemployee
Director's death.
(d) In the event any Option is exercised by the executors,
administrators, legatees, or distributees of the estate of a
deceased optionee, the Company shall be under no obligation
to issue stock thereunder unless and until the Company is
satisfied that the person or persons exercising the Option
are the duly appointed legal representatives of the deceased
optionee's estate or the proper legatees or distributees
thereof.
(2) If a Nonemployee Director ceases being a director of the Company
due to an act of
(a) fraud or intentional misrepresentation or
(b) embezzlement, misappropriation or conversion of assets or
opportunities of the Company or any Affiliate of the Company
or
(c) any other gross or willful misconduct
as determined by the Board, in its sole and conclusive
discretion, all Options granted to such Nonemployee Director
shall immediately be forfeited as of the date of the misconduct.
11. Adjustments and Changes in the Stock
a. If there is any change in the common stock of the Company by reason of
any stock dividend, stock split, spin-off, split-up, merger,
consolidation, recapitalization, reclassification, combination or
exchange of shares, or any other similar corporate event, the
aggregate number of shares available under the Plan, and the number
and the price of shares of common stock subject to outstanding
Options, shall be appropriately adjusted automatically.
b. No right to purchase fractional shares shall result from any
adjustment in Options pursuant to this Section 11. In case of any such
adjustment, the shares subject to the Option shall be rounded down to
the nearest whole share.
c. Notice of any adjustment shall be given by the Company to each holder
of any Option which shall have been so adjusted and such adjustment
(whether or not such notice is given) shall be effective and binding
for all purposes of the Plan.
12. Effective Date of the Plan
a. The Plan shall become effective on the date it is approved by the
shareholders of the Company.
b. Any amendment to the Plan shall become effective when adopted by the
Board, unless specified otherwise, but no Option granted under any
increase in shares authorized to be issued under this Plan shall be
exercisable until the increase is approved in the manner prescribed in
Section 13 of this Plan.
13. Amendment of the Plan
a. The Board of Directors may amend, suspend or terminate the Plan at any
time, but without shareholder approval, no amendment shall materially
increase the maximum number of shares which may be issued under the
Plan (other than adjustments pursuant to Section 11 hereof),
materially increase the benefits accruing to Participants under the
Plan, materially modify the requirements as to eligibility for
participation or extend the term of the Plan. Approval of the
shareholders may be obtained, at a meeting of shareholders duly called
and held, by the affirmative vote of a majority of the holders of the
Company's voting stock who are present or represented by proxy and are
entitled to vote on the Plan.
b. It is intended that the Plan meet the requirements of Rule 16b-3 or
any successor thereto promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended,
including any applicable requirements regarding shareholder approval.
Amendments to the Plan shall be subject to approval by the
shareholders of the Company to the extent determined by the Board of
Directors to be necessary to satisfy such requirements as in effect
from time to time.
c. Rights and obligations under any Option granted before any amendment
of this Plan shall not be materially and adversely affected by
amendment of the Plan, except with the consent of the person who holds
the Option, which consent may be obtained in any manner that the Board
or its delegate deems appropriate.
14. Termination of the Plan
a. The Plan, unless sooner terminated, shall terminate at the end of ten
(10) years from the date the Plan is approved by the shareholders of
the Company. No Option may be granted under the Plan while the Plan is
suspended or after it is terminated.
b. Rights or obligations under any Option granted while the Plan is in
effect, including the maximum duration and vesting provisions, shall
not be altered or impaired by suspension or termination of the Plan,
except with the consent of the person who holds the Option, which
consent may be obtained in any manner that the Board or its delegate
deems appropriate.
15. Registration, Listing, Qualification, Approval of Stock and Options
a. If the Board shall determine, in its discretion, that it is necessary
or desirable that the shares of common stock subject to any Option
(1) be registered, listed or qualified on any securities exchange or
under any applicable law, or
(2) be approved by any governmental regulatory body, or
(3) approved by the shareholders of the Company,
as a condition of, or in connection with, the granting of such Option,
or the issuance or purchase of shares upon exercise of the Option, the
Option may not be exercised in whole or in part unless such
registration, listing, qualification or approval has been obtained
free of any condition not acceptable to the Board of Directors.
16. No Right to Option or as Shareholder
a. No Nonemployee Director or other person shall have any claim or right
to be granted an Option under the Plan, except as expressly provided
herein. Neither the Plan nor any action taken hereunder shall be
construed as giving any Nonemployee Director any right to be retained
in the service of the Company.
b. Neither a Nonemployee Director, the Nonemployee Director's legal
representative, nor any person who acquires the right to exercise an
Option by reason of the Nonemployee Director's death shall be, or have
any of the rights or privileges of, a shareholder of the Company in
respect of any shares of common stock receivable upon the exercise of
any Option granted under this Plan, in whole or in part, unless and
until certificates for such shares shall have been issued.
17. Governing Law
The validity, construction, interpretation, administration and effect of
this Plan and any rules, regulations and actions relating to this Plan will
be governed by and construed exclusively in accordance with the laws of the
State of Minnesota.
EXHIBIT 11
GRACO INC. AND SUBSIDIARIES
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(Unaudited)
Thirteen Weeks Ended
-------------------------------
Mar. 30, 2001 Mar. 31, 2000
------------- -------------
(in thousands except per share amounts)
Net earnings applicable to common
shareholders for basic and
diluted earnings per share $13,120 $14,975
Weighted average shares outstanding
for basic earnings per share 30,561 30,590
Dilutive effect of stock options
computed using the treasury stock
method and the average market price 568 479
Weighted average shares outstanding
for diluted earnings per share 31,129 31,068
Basic earnings per share $ 0.43 $ 0.49
Diluted earnings per share $ 0.42 $ 0.48
