May 6, 1997
GRACO INC.
NONEMPLOYEE DIRECTOR STOCK PLAN
("PLAN")
1. Purpose of the Plan. The purpose of the Graco Inc. Nonemployee Director
Stock Plan (the "Plan") is to provide an opportunity for nonemployee members of
the Board of Directors (the "Board") of Graco Inc. ("Graco" or the "Company") to
increase their ownership of Graco Common Stock ("Common Stock") and thereby
align their interest in the long-term success of the Company with that of the
other shareholders. Each nonemployee director may elect to receive all or a
portion of his or her retainer in the form of shares of Common Stock or defer
the receipt of such shares until a later date pursuant to an election made under
the Plan.
2. Eligibility. Directors of the Company who are not also officers or other
employees of the Company or its subsidiaries are eligible to participate in the
Plan ("Eligible Directors").
3. Administration. The Plan will be administered by the Secretary of the
Company (the "Administrator"). Since the issuance of shares of Common Stock
pursuant to the Plan is based on elections made by Eligible Directors, the
Administrator's duties under the Plan will be limited to matters of
interpretation and administrative oversight. All questions of interpretation of
the Plan will be determined by the Administrator, and each determination,
interpretation or other action that the Administrator makes or takes pursuant to
the provisions of the Plan will be conclusive and binding for all purposes and
on all persons. The Administrator will not be liable for any action or
determination made in good faith with respect to the Plan.
4. Election to Receive Stock and Stock Issuance.
4.1. Election to Receive Stock/Credit in Lieu of Cash. On forms
provided by the Company, each Eligible Director may irrevocably elect
("Stock Election") in lieu of cash, (i) to be issued shares of Common Stock
or (ii) to have credited to an account ("Deferred Stock Account") the
number of shares of Common Stock having a Fair Market Value, as defined in
Section 4.3, equal to 25%, 50%, 75% or 100% of the annual cash retainer
(the "Retainer") payable to that director for services rendered as a
director ("Participating Director"). A Stock Election shall apply only to
the Retainer and not to any fees payable for attendance at Board or
Committee meetings. Eligible Directors are customarily paid the Retainer in
quarterly installments in arrears at the end of each fiscal quarter. Any
Stock Election must be received by the Company before the commencement of
the fiscal quarter with respect to which such election is made. Any Stock
Election may only be amended or revoked ("Amended Stock Election") in
accordance with the procedure set forth in Section 4.4.
4.2. Issuance of Stock/Application of Credit in Lieu of Cash. If the
Stock Election is for the issuance of shares of Common Stock, shares of
Common Stock having a Fair Market Value equal to the amount of the Retainer
so elected shall be issued to each Participating Director when each
quarterly installment of the Retainer is customarily paid. The Company
shall not issue fractional shares, but in lieu thereof shall pay cash of
equivalent value using the same Fair Market Value used to determine the
number of Shares to be issued on the relevant issue date. If the Stock
Election is for a credit to a Deferred Stock Account, the number of shares
of Common Stock (rounded to the nearest hundredth of a share) having a Fair
Market Value equal to the amount of the Retainer so elected shall be
credited to the Participating Director's Deferred Stock Account when each
quarterly installment of the Retainer is customarily paid. In the event
that a Participating Director elects to receive less than 100% of each
quarterly installment of the Retainer in shares of Common Stock, either
issued or credited, he shall receive the balance of the quarterly
installment in cash.
4.3 Fair Market Value. For purposes of converting dollar amounts into
shares of Common Stock, the Fair Market Value of each share of Common Stock
shall be equal to the closing price of one share of the Company's Common
Stock on the New York Stock Exchange-Composite Transactions on the last
business day of the fiscal quarter for which such shares are issued or
credited.
4.4. Change in Election. Each Participating Director may irrevocably
elect in writing to change an earlier Stock Election, either to elect to be
issued shares of Common Stock or to have credited to the Participating
Director's Deferred Stock Account, a number of shares of Common Stock
having a Fair Market Value equal to a percentage of the Participating
Director's Retainer different from the percentage previously elected or to
receive the entire Retainer in cash (an "Amended Stock Election"). An
Amended Stock Election shall not become effective until the commencement of
the first full fiscal quarter after the date of receipt of such Amended
Stock Election by the Company.
4.5 Termination of Service as a Director. If a Participating Director
leaves the Board before the conclusion of any fiscal quarter, he or she
will be paid the quarterly installment of the Retainer entirely in cash,
notwithstanding that a Stock Election or Amended Stock Election is on file
with the Company. The date of termination of a Participating Director's
service as a director of the Company will be deemed to be the date of
termination recorded on the personnel or other records of the Company.
4.6 Dividend Credit. Each time a dividend is paid on the Common Stock,
each Participating Director who has a Deferred Stock Account shall receive
a credit to his or her Deferred Stock Account equal to that number of
shares of Common Stock (rounded to the nearest one-hundredth of a share)
having a Fair Market Value on the dividend payment date equal to the amount
of the dividend payable on the number of shares of Common Stock credited to
the Participating Director's Deferred Stock Account on the dividend record
date.
5. Shares Available for Issuance.
5.1. Maximum Number of Shares Available. The maximum number of shares
of the Company's Common Stock, par value $1.00 per share, that will be
available for issuance under the Plan will be 150,000 shares, subject to
any adjustments made in accordance with the provisions of Section 5.2. At
the election of the Administrator, the shares of Common Stock available for
issuance under the Plan may be either authorized but unissued shares or
treasury shares. If treasury shares are used, all references in the Plan to
the issuance of shares will be deemed to mean the transfer of shares from
treasury.
5.2. Adjustments to Shares. In the event of any reorganization,
merger, consolidation, recapitalization, liquidation, reclassification,
stock dividend, stock split, combination of shares, rights offering,
divestiture or extraordinary dividend, an appropriate adjustment will be
made in the number and/or kind of securities available for issuance under
the Plan to prevent either the dilution or the enlargement of the rights of
the Eligible and Participating Directors.
6. Deferral Payment
6.1 Deferral Payment Election. At the time of making the Stock
Election in which the Participating Director elects to have a Deferred
Stock Account credited in accordance with the provisions of Section 4.1,
the Participating Director will also elect the manner and timing for
payment of the amounts credited to his or her Deferred Stock Account
("Deferral Payment Election") from the alternatives described in Section
6.2. The Participating Director may change the manner and timing for
payment of amounts to be credited to his or her Deferred Stock Account by
executing another Deferral Payment Election; provided, however, that the
previously made Deferral Payment Election will be irrevocable as to all
amounts credited to the Participating Director's Deferred Stock Account
prior to receipt by the Company of a new Deferral Payment Election.
6.2 Payment from Deferred Stock Accounts. A Participating Director may
elect to receive payment from his or her Deferred Stock Account in a lump
sum or installments. Payments, whether in a lump sum or by installments,
shall be made in shares of Common Stock plus cash in lieu of any fractional
share. Unless the Participating Director elects to receive payment in
installments, credits to a Participating Director's Deferred Stock Account
shall be payable in full on January 10 of the year following the
Participating Director's termination of service on the Board, or the first
business day thereafter, or such other date as elected by the Participating
Director pursuant to Section 6.1. If the Participating Director elects to
receive payment from his or her Deferred Stock Account in installments,
each installment payment will be made annually on January 10 of each year,
or the first business day thereafter, and the amount of each payment will
be computed by multiplying the number of shares credited to the Deferred
Stock Account as of January 10 of each year by a fraction, the numerator of
which is one and the denominator of which is the total number of
installments elected (not to exceed fifteen) minus the number of
installments previously paid. Amounts paid prior to the final installment
payment will be rounded to the nearest whole number of shares; the final
installment payment shall be for the whole number of shares remaining
credited to the Deferred Stock Account, plus cash in lieu of any fractional
share.
6.3 Change of Control. Notwithstanding the foregoing, in the event of
a Change of Control (as defined in Section 11), the number of shares
credited to the Deferred Stock Account of a Participating Director as of
the business day immediately prior to the effective date of the transaction
constituting the Change of Control, shall be paid in full to the
Participating Director or the Participating Director's beneficiary or
estate, as the case may be, in whole shares of Common Stock plus cash in
lieu of any fractional share on the tenth business day following the
effective date of the transaction constituting the Change of Control.
7. Limitation on Rights of Eligible and Participating Directors.
7.1. Service as a Director. Nothing in the Plan will interfere with or
limit in any way the right of the Company's Board or its shareholders to
remove an Eligible or Participating Director from the Board. Neither the
Plan nor any action taken pursuant to it will constitute or be evidence of
any agreement or understanding, express or implied, that the Company's
Board or its shareholders have retained or will retain an Eligible or
Participating Director for any period of time or at any particular rate of
compensation.
7.2. Nonexclusivity of the Plan. Nothing contained in the Plan is
intended to effect, modify or rescind any of the Company's existing
compensation plans or programs or to create any limitations on the Board's
power or authority to modify or adopt compensation arrangements as the
Board may from time to time deem necessary or desirable.
8. Plan Amendment, Modification and Termination. The Board may suspend or
terminate the Plan at any time. The Board may amend the Plan from time to time
in such respects as the Board may deem advisable in order that the Plan will
conform to any change in applicable laws or regulations or in any other respect
that the Board may deem to be in the Company's best interests; provided,
however, that no amendments to the Plan will be effective without approval of
the Company's shareholders, if shareholder approval of the amendment is then
required pursuant to Rule 16b-3 (or any successor rule) under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") or the rules of the New
York Stock Exchange. In addition, the Plan may not be amended more than once
every six months other than to conform it with changes in the Internal Revenue
Code, as amended, the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
9. Effective Date and Duration of the Plan. The Plan shall become effective
as of the date the Company's shareholders approve it and will terminate on
December 31, 2003, unless earlier terminated by the Company's Board.
10. Participants are General Creditors of the Company. The Participating
Directors and beneficiaries thereof shall be general, unsecured creditors of the
Company with respect to any payments to be made pursuant to the Plan and shall
not have any preferred interest by way of trust, escrow, lien or otherwise in
any specific assets of the Company. If the Company shall, in fact, elect to set
aside monies or other assets to meet its obligations hereunder (there being no
obligation to do so), whether in a grantor's trust or otherwise, the same shall,
nevertheless, be regarded as part of the general assets of the Company subject
to the claims of its general creditors, and neither any Participating Director
nor any beneficiary thereof shall have a legal, beneficial or security interest
therein.
11. Change of Control
11.1 A "Change of Control" means any one of the following events:
(1) acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act), (a "Person"), of
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) which results in the beneficial ownership by such Person of 25% or
more of either
(a) the then outstanding shares of Common Stock of the Company
(the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions will not result in a Change
of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
corporation controlled by the Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Common Stock or other voting
securities of the Company owned by the Trust Under the Will of
Clarissa L. Gray ("Trust Person"), provided that such acquisition
does not result in the beneficial ownership by such Person of 32%
or more of either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, and provided further that
for purposes of this Section 11, a Trust Person shall not be
deemed to have beneficial ownership of the Common Stock or other
voting securities of the Company owned by The Graco Foundation or
any employee benefit plan of the Company, including the Graco
Employee Retirement Plan and the Graco Employee Stock Ownership
Plan,
(v) an acquisition by the Participating Director or any
group that includes the Participating Director, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b) and (c) of
subsection (4) below; and provided, further, that if any Person's
beneficial ownership of the Outstanding Company Common Stock or
Outstanding Company Voting Securities is 25% or more as a result
of a transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of additional
Outstanding Company Common Stock or Outstanding Company Voting
Securities as a result of a transaction other than that described
in clause (i) or (ii) above, such subsequent acquisition will be
treated as an acquisition that causes such Person to own 25% or
more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities and be deemed a Change of Control; and
provided further, that in the event any acquisition or other
transaction occurs which results in the beneficial ownership of
32% or more of either the Outstanding Company Common Stock or the
Outstanding Company Voting Securities by any Trust Person, the
Incumbent Board, as defined below, may by majority vote increase
the threshold beneficial ownership percentage to a percentage
above 32% for any Trust Person; or
(2) individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of said Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board, or
(3) the commencement or announcement of an intention to make a tender
offer or exchange offer, the consummation of which would result in the
beneficial ownership by a Person of 25% or more of the Outstanding Company
Common Stock or Outstanding Company Voting Securities; or
(4) the approval by the shareholders of the Company of a
reorganization, merger, consolidation or statutory exchange of Outstanding
Company Common Stock or Outstanding Company Voting Securities or sale or
other disposition of all or substantially all of the assets of the Company
("Business Combination") or, if consummation of such Business Combination
is subject, at the time of such approval by shareholders, to the consent of
any government or governmental agency, the obtaining of such consent
(either explicitly or implicitly by consummation); excluding, however, such
a Business Combination pursuant to which
(a) all or substantially all of the individuals and entities who
were the beneficial owners of the Outstanding Company Common Stock or
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 80% of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation that as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock or Outstanding Company Voting
Securities,
(b) no Person (excluding any employee benefit plan, or related
trust, of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 25% or more of
the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power
of the then outstanding voting securities of such corporation, except
to the extent that such ownership existed prior to the Business
Combination, and
(c) at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for such
Business Combination; or
(5) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
11.2 A Change of Control shall not be deemed to have occurred with
respect to a Participating Director if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph 11.1(1) of this Section 11 is by a group, acting in concert,
that includes the Participating Director or
(2) if at least 25% of the then outstanding common stock or combined
voting power of the then outstanding company voting securities (or voting
equity interests) of the surviving corporation or of any corporation (or
other entity) acquiring all or substantially all of the assets of the
Company shall be beneficially owned, directly or indirectly, immediately
after a reorganization, merger, consolidation, statutory share exchange,
disposition of assets, liquidation or dissolution referred to in
subparagraph 11.1(4) or (5) of this Section by a group, acting in concert,
that includes that Participating Director.
12. Miscellaneous.
12.1 Securities Law and Other Restrictions. Notwithstanding any other
provision of the Plan or any Stock Election or Amended Stock Election
delivered pursuant to the Plan, the Company will not be required to issue
any shares of Common Stock under the Plan and a Participating Director may
not sell, assign, transfer or otherwise dispose of shares of Common Stock
issued pursuant to the Plan, unless:
(a) there is in effect with respect to such shares a registration
statement under the Securities Act of 1933, as amended (the
"Securities Act") and any applicable state securities laws or an
exemption from such registration under the Securities Act and
applicable state securities laws, and
(b) there has been obtained any other consent, approval or permit
from any other regulatory body that the Administrator, in his or her
sole discretion, deems necessary or advisable. The Company may
condition such issuance, sale or transfer upon the receipt of any
representations or agreements from the parties involved, and the
placement of any legends on certificates representing shares of Common
Stock, as may be deemed necessary or advisable by the Company, in
order to comply with such securities law or other restriction.
12.2. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and
actions relating to the Plan will be governed by and construed exclusively
in accordance with the laws of the State of Minnesota.