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UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 25, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the transition period from ___________ to _____________.
Commission File No. 001-9249
Graco Inc.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0285640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4050 Olson Memorial Highway
Golden Valley, Minnesota 55422-2332
(Address of principal executive offices) (Zip Code)
(612) 623-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
Preferred Share Purchase Rights
Shares registered on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
None
As of March 5, 1999, 20,290,698 shares of Common Stock were outstanding.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of approximately 16,809,038 shares held by
non-affiliates of the registrant was approximately $368 million on March 5,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 4, 1999, are incorporated by reference into Part
III, as specifically set forth in said Part III.
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GRACO INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Page
Part I
Item 1 Business............................................................3
Item 2 Properties..........................................................6
Item 3 Legal Proceedings...................................................6
Item 4 Submission of Matters to a Vote of Security Holders.................6
Executive Officers of the Company...................................7
Part II
Item 5 Market for the Company's Common Stock and
Related Stockholder Matters.....................................8
Item 6 Selected Financial Data.............................................9
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations...................9
Item 8 Financial Statements and Supplementary Data........................14
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ........................29
Part III
Item 10 Directors and Executive Officers of the Company....................29
Item 11 Executive Compensation.............................................29
Item 12 Security Ownership of Certain Beneficial Owners and Management.....29
Item 13 Certain Relationships and Related Transactions.....................29
Part IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K....29
Signatures ...................................................................31
NOTE: Certain exhibits listed in the Index to Exhibits beginning on page
32, and filed with the Securities and Exchange Commission, have been
omitted. Copies of such exhibits may be obtained upon written request
directed to:
Treasurer
Graco Inc.
P.O. Box 1441
Minneapolis, Minnesota
55440-1441
Part I
Item 1. Business
General Information
Graco Inc. ("Graco" or "the Company") supplies technology and expertise for the
management of fluids in both industrial/automotive and commercial settings. The
Company helps customers solve difficult manufacturing problems, increase
productivity, improve quality, conserve energy, save expensive material, control
environmental emissions and reduce labor costs. Graco is the successor to Gray
Company, Inc., which was incorporated in 1926 as a manufacturer of auto
lubrication equipment, and became a public company in 1969.
Based in Minneapolis, Minnesota, Graco serves customers around the world in the
manufacturing, processing, construction and maintenance industries. It designs,
manufactures and markets systems, products and technology to move, measure,
control, dispense and apply a wide variety of fluids and viscous materials.
It is Graco's strategic objective to be the highest quality, lowest cost, most
responsive supplier in the world for its principal products. In working to
achieve its goal to be a world-class manufacturer, Graco has organized its
manufacturing operations around product focused factories which contain
product-based cells. The Company continues to refine these factories as new
products are introduced and new equipment is purchased with the ultimate goal of
creating factories which function independently. Substantial investments in new
manufacturing technology have reduced cycle time and improved quality.
Operating Segment Information
Graco's businesses are classified by management into three primary operating
segments: (1) Industrial/Automotive Equipment, (2) Contractor Equipment, and (3)
Lubrication Equipment. Financial information concerning these operating segments
is set forth in Part II, Item 7, at page 10.
Industrial/Automotive Equipment
Graco's Industrial/Automotive Equipment segment designs and markets fluid
application systems, primarily for paints, coatings, sealants and adhesives. The
markets served include automotive assembly and components plants, wood products,
rail, marine, aerospace, farm and construction equipment, truck, bus and
recreational vehicles and approximately thirty other industries, including
sanitary processing, chemical processing and printing.
Worldwide, Industrial/Automotive Equipment is sold through general and
specialized distribution and integrators. These distributors promote and sell
the equipment, provide expertise to customers in its application, and offer
integration capabilities, on-site service and technical support.
Products for the industrial/automotive markets are manufactured by product
focused factories in Rogers and Minneapolis, Minnesota, and Sioux Falls, South
Dakota. Assembly of certain products for the European market is performed in
Maasmechelen, Belgium.
Recent Developments. In order to strengthen the sales and profitability, Graco
has recently modified the way in which it markets its products to the automotive
industry. It has shifted from custom-designed systems sold directly, to
pre-engineered packages and modules sold through independent distributors,
integrators and robot companies. As part of these changes, the automotive
engineering, manufacturing and marketing functions, previously headquartered in
Plymouth, Michigan, moved to Minneapolis, Minnesota in 1998. Specialized
automotive marketing personnel will continue to be responsible for identifying
and developing new products for automotive plants. Since integrators, line
builders and robotic companies remain key channel partners in serving the
automotive market despite the move to distribution, Graco will continue to field
an experienced specialized sales force to serve them.
Graco is implementing a similar shift to pre-engineered packages for other
targeted industries, such as wood furniture, marine and rail, where product
packages will offer increased reliability and convenience to end users. In the
international arena, Graco is expanding its specialized distribution to achieve
maximum coverage in these industries.
In 1998, Graco introduced the PrecisionFlo Plus(TM) in the United States and
expect to expand its distribution of this product worldwide in 1999. The
PrecisionFlo Plus is a sophisticated electronic control device for use in
sealant and adhesive dispensing systems. It maintains a uniform volume output
and the desired flow rate regardless of changes in the operating environment.
Process information can be stored and later analyzed. Graco also introduced a
new line of variable ratio high-pressure proportioners known as Supercats(TM),
designed specifically for corrosion control in the marine industry.
Products. Products offered by the segment include high and low pressure
hydraulic, electric, and air-powered pumps that pressurize and transfer paints,
stains, chemicals, sealants, adhesives, food, and other viscous materials
through various application devices such as air, airless, electrostatic, and
high-volume-low-pressure ("HVLP") spray guns. Fluid pressures ranging from 20 to
more than 6,000 pounds per square inch and flow rates from under 1 gallon to 275
gallons per minute are available. Sealant and adhesive, paint circulating
packages and modules, and a complete line of parts and accessories are also
offered.
Contractor Equipment
Graco's Contractor Equipment segment designs and markets professional sprayers
for the application of paint, and other architectural coatings and for the
high-pressure cleaning of equipment and structures. The segment offers its
equipment to distributors selling to professional contractors in the painting,
roofing, texture, corrosion control and line striping markets.
The equipment is sold primarily through retail stores which also sell paint and
other coatings, and secondarily through general equipment distributors.
Manufacturers' representatives are used to sell the Company's contractor
equipment to the rental market.
Products for the contractor equipment markets are manufactured by product
focused factories in Rogers, Minnesota, and Sioux Falls, South Dakota. Assembly
of certain products for the European market is performed in Maasmechelen,
Belgium.
Recent Developments. The Ultra(R) Max electronic airless sprayers introduced in
1998 provide a higher output and more consistent spraying pressure, convenient
features such as loading handles, hose racks and built-in toolboxes, and simple
maintenance through easy access to the pump and intake valve. The GMax(TM)
sprayers, a new line of gas-powered airless sprayers, also introduced during
1998, have similar features. In 1999, a new line of line striping equipment,
LineLazer II(TM), will be offered with higher pressure, more flow and the same
ease of use.
Products. The segment's primary product lines are airless paint sprayers and
associated accessories such as spray guns, filters, valves and tips,
high-pressure washing sprayers and specialized spraying equipment for the
application of roofing materials, texture coatings and traffic paint. Fluid
pressures ranging from 5 to more than 4,000 pounds per square inch and flow
rates up to 4 gallons per minute are available. Pumps are available in gas,
hydraulic and air-powered models in addition to electric, increasing the
flexibility of contractors in areas where electricity is not readily available.
High-volume-low-pressure ("HVLP") equipment has become increasingly popular as
regulation of volatile emissions has increased. Replacement and maintenance
parts, such as packings, seals and hoses, which must be replaced periodically in
order to maintain efficiency and prevent loss of material, are also offered for
sale.
Lubrication Equipment
The Lubrication Equipment segment designs, and markets products for the
lubrication and maintenance of vehicles and other equipment. Equipment which
dispenses, recycles and recovers lubricants in industrial/automotive settings is
also offered. The markets for the segment's products include fast oil change
facilities, fleet service centers, automobile dealerships and the mining
industry. The purchase of vehicle lubrication equipment is often funded by major
oil companies for their lubrication product customers as a marketing tool.
Products are distributed primarily through independent distributors worldwide,
which are serviced by a network of independent sales representatives. Efforts
have been underway in recent years to increase the number and quality of
distributors serving the mining industry.
Recent Developments. The segment has developed an automatic lubricating system
which is being marketed to the mining industry where continuous operations
require an on-site lubricating capability and cost pressures drive the effort to
mechanize and automate the production processes.
Ongoing consolidation in the oil industry and low prices for petroleum products
have caused the capital spending levels of major oil companies to decline.
Products. The Lubrication Equipment segment offers a full line of lubrication
pumps (air and hydraulic-powered), meters, fluid and air pressure gauges, fluid
management systems, hose reels and dispense valves. The segment sells a fluid
management system for the vehicle services market, which tracks and records
inventories of lubricants and the quantities dispensed. It is also developing
its capability to service the mining industry with automatic lubrication
systems. A complete line of parts and accessories is also offered.
Products for the Lubrication Equipment markets are manufactured by product
focused factories in Minneapolis, Minnesota.
Marketing and Distribution
Graco's operations are organized to sell its full line of products in each of
the major geographic markets: the Americas (North, Central and South America),
Europe (includes the Middle East and Africa), and Asia Pacific. The
Industrial/Automotive Equipment segment, Contractor Equipment segment, and the
Lubrication Equipment segment provide worldwide marketing direction and product
design and application assistance to each of these geographic markets.
Graco sells its equipment worldwide principally through independent
distributors. In Japan, Korea, and Europe, Graco equipment is sold to
distribution through sales subsidiaries. Manufacturers' representatives are used
with the Lubrication Equipment product lines and in marketing to the rental
market by the Contractor Equipment segment.
In 1998, Graco's net sales in the Americas were $299,799,000 or approximately 69
percent of the Company's consolidated net sales; in Europe net sales were
$93,114,000 or approximately 22 percent; and in the Asia Pacific Region, net
sales were $39,272,000 approximately 9 percent.
Consolidated backlog at December 25, 1998, was $13 million compared to $22
million at the end of 1997.
Research, Product Development and Technical Services
Graco's research, development and engineering activities are organized by
operating segment. The engineering group in each segment focuses on new product
design, product improvements, applied engineering and strategic technologies for
its specific customer base. A dedicated support group of application engineers
and technicians also provides specialized technical assistance to customers in
the design and evaluation of fluid transfer and application systems. It is one
of Graco's goals to generate 30 percent of each year's sales from products
introduced in the prior three years. With the move of the automotive engineering
group to Minneapolis, Minnesota, in the summer of 1998 and its integration into
the Industrial/Automotive Equipment segment, all major research and development
activities are now conducted in facilities located in Minneapolis, and Rogers,
Minnesota. Total research and development expenditures were $18,213,000,
$17,817,000 and $17,909,000 for 1998, 1997, and 1996, respectively.
Intellectual Property
Graco owns a number of patents and has patent applications pending both in the
United States and in foreign countries, licenses its patents to others, and is
licensed under patents owned by others. In the opinion of the Company, its
business is not materially dependent upon any one or more of these patents or
licenses. The Company also owns a number of trademarks in the United States and
foreign countries, including the registered trademarks for "GRACO," several
forms of a capital "G" and various product trademarks which are material to the
business of the Company inasmuch as they identify Graco and its products to its
customers.
Competition
Graco faces substantial competition in all of its markets. The nature and extent
of this competition varies in different markets due to the diversity of the
Company's products. Product quality, reliability, design, customer support and
service, specialized engineering and pricing are the major competitive factors.
Although no competitor duplicates all of Graco's products, some competitors are
larger than the Company, both in terms of sales of directly competing products
and in terms of total sales and financial resources. Graco believes it is one of
the world's leading producers of high-quality specialized fluid management
equipment. It is impossible, because of the absence of reliable industry-wide
third-party data, to determine its relative market position.
Environmental Protection
During the fiscal year ending December 25, 1998, the amounts incurred to comply
with federal, state and local legislation pertaining to environmental standards
did not have a material effect upon the capital expenditures or earnings of the
Company.
Employees
As of December 25, 1998, the Company employed approximately 1,864 persons on a
full-time basis. Of this total, approximately 278 were employees based outside
the United States, and 784 were hourly factory workers in the United States.
Item 2. Properties
As of December 31, 1998, the Company's principal operations that occupy more
than 10,000 square feet were conducted in the following facilities:
Gross
Type of Facility Location Square Footage
--------------------------------- -------- --------------
Owned
-----
Distribution/Manufacturing/Office Rogers, Minnesota 333,000
Manufacturing/Office Minneapolis, Minnesota 242,300
Manufacturing/Office Minneapolis, Minnesota 202,300
Engineering/Research & Development Minneapolis, Minnesota 138,700
Office Plymouth, Michigan 106,000
Assembly/European Headquarters/Warehouse Maasmechelen, Belgium 75,175
Corporate Headquarters Golden Valley, Minnesota 73,800
Manufacturing/Office Sioux Falls, South Dakota 55,100
Leased
Office/Warehouse Yokohama, Japan (3 facilities) 42,525
Office Rungis, France 12,626
Office Neuss, Germany 41,765
Office West Midlands, United Kingdom 16,320
Office/Warehouse Gwangju-Gun, Korea 10,549
A 20,000 square foot building in Mississauga, Ontario, Canada was sold during
the last quarter of 1998.
A 106,000 square foot building in Plymouth, Michigan and a 21,000 square foot
building in Los Angeles, California are currently for sale.
The Company leases space for liaison offices in China.
Graco's facilities are in satisfactory condition, suitable for their respective
uses and are sufficient and adequate to meet current needs. Manufacturing
capacity met business demand in 1998. Production requirements in the immediate
future are expected to be met through existing production capabilities,
efficiency and productivity improvements and the use of available subcontract
services.
Item 3. Legal Proceedings
The Company is engaged in routine litigation incident to its business, which
management believes will not have a material adverse effect upon its operations
or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No issues were submitted to a vote of security holders during the fourth quarter
of 1998.
Executive Officers of the Company
The following are all the executive officers of the Company as of March 5, 1999.
George Aristides, 63, was elected Vice Chairman effective March 1, 1999. From
January 1, 1996 to March 1, 1999 he was Chief Executive Officer. From 1993 to
1997 he was President. From 1993 to 1996 he was Chief Operating Officer. He
joined the Company in 1973 as Corporate Controller and became Vice President and
Controller in 1980. He has served as a director of the Company since 1993.
Clayton R. Carter, 60, was elected Vice President, Industrial/Automotive
Equipment Division, effective December 17, 1996. From January 1, 1995, he was
Vice President, Lubrication Equipment Division. He became Director, Vehicle
Services Division, in February 1994. He joined the Company in 1962 and has held
various sales management positions.
James A. Earnshaw, 50, was elected President and Chief Executive Officer
effective March 1, 1999. From 1993 to March 1999, he was Vice President, General
Manager - Worldwide Hydraulics Business, Eaton Corporation, a manufacturer and
marketer of electrical and electromechanical components for a wide variety of
industries and a maker of ion implanters used in manufacturing semiconductors.
James A. Graner, 54, was elected Vice President and Controller in February 1994.
He became Treasurer in May 1993. Prior to becoming Assistant Treasurer in 1988,
he held various managerial positions in the treasury, accounting and information
systems departments. He joined Graco in 1974.
John L. Heller, 62, announced his retirement effective May 3, 1999. Mr. Heller
was elected Vice President, Asia Pacific, and Latin America in 1998. From 1996
to 1997 he was Vice President, Latin America and Developing Markets. From July
1993 to December 1995, he was Senior Vice President and General Manager -
Contractor Equipment Division. He became Vice President, Far East Operations and
Latin America, in 1992. Prior to becoming Vice President, Far East Operations in
1984, he held various management and staff positions in sales and human
resources. He joined the Company in 1972.
Dale D. Johnson, 44, was elected Vice President, Contractor Equipment Division,
on May 5, 1998. Mr. Johnson was previously appointed to that position on
December 17, 1996. Prior to becoming the Director of Marketing in June 1996, he
held various marketing and sales positions in the Contractor Equipment Division.
He joined the Company in 1976.
Roger L. King, 53, was elected Vice President and General Manager, European
Operations, effective January 4, 1996. From July 1993 to December 1995, he was
Senior Vice President and General Manager - International Operations. He was
Senior Vice President and Chief Financial Officer from March 1993 to July 1993,
and Vice President and Treasurer from 1987 to March 1993. Prior to becoming Vice
President, Treasurer and Secretary in 1980, he held the position of Treasurer
and Secretary and various treasury management positions with Graco. He joined
the Company in 1970.
David M. Lowe, 43, was elected to the position of Vice President, Lubrication
Equipment Division, in December 1996. From February 1995 to December 1996, he
was Treasurer. Prior to joining the Company in 1995, he was employed by Ecolab
Inc., where he held various positions in the Treasury Department, including
Manager - Corporate Finance; Director, Corporate Finance and most recently
Director, Corporate Development.
Robert M. Mattison, 51, was elected Vice President, General Counsel and
Secretary, in January 1992, a position which he holds today.
Charles L. Rescorla, 47, is Vice President, Manufacturing and Distribution
Operations, a position to which he was elected on May 5, 1998. Mr. Rescorla was
previously appointed to that position on January 1, 1995. Prior to becoming the
Director of Manufacturing in March 1994, he was the Director of Engineering,
Industrial/Automotive Division, a position which he assumed in 1988 when he
joined the Company.
Mark W. Sheahan, 34, was elected Vice President and Treasurer on December 11,
1998. Effective December 17, 1996, he was elected Treasurer. Prior to joining
the Company as Treasury Operations Manager in 1995, he was a Senior Manager with
KPMG Peat Marwick LLP.
Fred A. Sutter, 38, was recently appointed Vice President, Asia Pacific and
Latin America. He will fully assume Mr. Heller's responsibilities effective
March 1, 1999. From March 1995 to December 1998, he was Director of Marketing.
Prior to joining the Company in 1995, he held various positions with
Fisher-Rosemount, most recently as Director of Marketing.
The Board of Directors elected Messrs. Aristides, Carter, Graner, Heller,
Johnson, King, Lowe, Mattison, Rescorla and Sheahan on May 5, 1998, all to hold
office until the next annual meeting of directors or until their successors are
elected and qualify.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Graco Common Stock. Graco common stock is traded on the New York Stock Exchange
under the ticker symbol "GGG." As of March 5, 1999, there were 20,290,698 shares
outstanding and 6,928 common shareholders of record, which includes nominees or
broker dealers holding stock on behalf of an estimated 4,462 beneficial owners.
Quarterly Financial Information.
(In thousands, except per share amounts)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ----------------------- -------- -------- -------- --------
Net sales $105,717 $115,153 $106,202 $105,113
Gross profit 51,945 58,087 53,981 55,388
Net earnings 8,947 12,765 11,073 14,478
Per common share:
Basic net earnings 0.35 0.49 0.54 0.72
Diluted net earnings 0.34 0.48 0.53 0.70
Dividends declared 0.11 0.11 0.11 0.11
-------- -------- -------- --------
Stock price (per share)
High $ 31.19 $ 36.50 $ 35.31 $ 30.13
Low 22.83 29.25 24.13 19.88
Close* 30.31 34.88 23.25 29.50
-------- -------- -------- --------
Volume (# of shares) 2,499 3,478 3,350 2,756
======== ======== ======== ========
1997
- ------------------------
Net sales $ 92,099 $111,721 $101,920 $108,157
Gross profit 44,533 53,399 51,362 53,694
Net earnings 6,181 10,418 12,879 15,238
Per common share:
Basic net earnings 0.24 0.41 0.50 0.60
Diluted net earnings 0.24 0.40 0.49 0.58
Dividends declared 0.09 0.09 0.09 0.11
-------- -------- -------- --------
Stock price (per share)
High $ 24.08 $ 21.25 $ 23.25 $ 26.46
Low 16.17 15.67 19.42 22.17
Close* 19.17 20.08 23.83 24.87
-------- -------- -------- --------
Volume (# of shares) 2,958 4,030 1,577 2,307
======== ======== ======== ========
*As of the last trading day of the calendar quarter.
Item 6. Selected Financial Data
Graco Inc. & Subsidiaries
(In thousands, except per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------- -------- -------- -------- -------- --------
Net sales $432,185 $413,897 $391,756 $386,314 $360,013
Net earnings 47,263 44,716 36,169 27,706 15,326
-------- -------- -------- -------- --------
Per common share:
Basic net earnings $ 2.06 $ 1.75 $ 1.40 $ 1.07 $ .59
Diluted net earnings 2.01 1.71 1.38 1.06 .59
-------- -------- -------- -------- --------
Total assets $233,702 $264,532 $247,814 $217,833 $228,385
Long-term debt (including current portion 115,739 7,959 9,920 12,009 32,483
Redeemable preferred stock -- -- -- -- 1,474
-------- -------- -------- -------- --------
Cash dividends declared per common share $ 0.44 $ 0.38 $ 0.33 $ 0.30 $ 0.26
======== ======== ======== ======== ========
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S REVIEW AND DISCUSSION
Graco's net earnings of $47.3 million in 1998 are 6 percent higher than the
$44.7 million earned in 1997 and are significantly higher than the $36.2 million
recorded in 1996. The increases in 1998 and 1997 are primarily due to higher net
sales and enhanced profit margins in both years and a lower effective tax rate
in 1997.
The table below reflects the percentage relationship between income and expense
items included in the Consolidated Statements of Earnings for the three fiscal
years and the percentage changes in those items for such years.
Revenue & Expense Item Revenue & Expense Item
As a Percentage of Net Sales Percentage Increase (Decrease)
---------------------------- ------------------------------
1998 1997 1996 1998/97 1997/96
----- ----- ----- ------- -------
Net Sales 100.0 100.0 100.0 4 6
----- ----- ----- ------- -------
Cost of products sold 49.2 51.0 50.0 1 8
Product development 4.2 4.3 4.6 2 --
Selling 19.2 21.1 21.8 (5) 3
General and administrative 9.6 7.8 10.1 28 (19)
----- ----- ----- ------- ------
Operating profit 17.8 15.8 13.5 17 23
----- ----- ----- ------- ------
Interest expense 1.3 0.2 0.2 * 4
Other expense (income), net -- 0.3 (0.1) (82) *
----- ----- ----- ------- ------
Earnings before income taxes 16.5 15.3 13.4 12 20
Income taxes 5.6 4.5 4.2 28 13
----- ----- ----- ------- ------
Net Earnings 10.9 10.8 9.2 6 24
===== ===== ===== ======= ======
* Not a meaningful figure.
NET SALES
Worldwide net sales in 1998 reached a record $432.2 million, a 4 percent
increase over 1997 sales of $413.9 million. Advances in local volume and price
increases accounted for a 7 percent increase in sales, but the impact of the
strong U.S. dollar on currency translations reduced reported sales by 3 percent.
By segment, 1998 net sales were up, versus 1997 in the Contractor and
Industrial/Automotive segments by 10 percent and 3 percent, respectively, while
sales in the Lubrication segment were 4 percent lower.
Geographically, sales outside of the Americas represented 31 percent of total
sales in 1998, compared to 33 percent in 1997. The decline was due to poor
economic conditions in the Asia Pacific Region. Volume gains were achieved in
the Americas in 1998 with an increase of 8 percent for the year, primarily due
to strong sales in the Company's Contractor Equipment and Industrial/Automotive
Equipment business segments. In Europe, local sales volume advanced 16 percent
and reported sales were 14 percent higher after currency translations, with
double-digit sales increases in the Industrial/Automotive Equipment and
Contractor Equipment segments. In the Asia Pacific Region, sales volumes
declined 20 percent primarily due to poor economic conditions in the region, and
were 29 percent lower after currency translations.
Worldwide net sales in 1997 were $413.9 million, a 6 percent increase over 1996.
Advances in local volume and price increases accounted for a 9 percent increase,
but the impact of the strong U.S. dollar on currency translations reduced
reported sales by 3 percent. The 1997 increase was due to higher sales in all
regions except Asia Pacific. Sales volume in the Americas, which accounted for
67 percent of net sales, advanced 9 percent. Graco's sales outside the Americas
accounted for 33 percent of total 1997 sales, and were down slightly from 1996.
Consolidated backlog at December 25, 1998, was $13 million compared to $22
million at the end of 1997 and $19 million at the end of 1996. The decline in
backlog was primarily due to Graco's strategic decision to restructure its
automotive business, which resulted in fewer large orders.
% Increase (Decrease)
---------------------
(In thousands) 1998 1997 1996 1998/97 1997/96
- --------------------------------- -------- -------- -------- ------- -------
Segment Sales:
Industrial/Automotive Equipment $231,924 $226,114 $224,776 3 1
Contractor Equipment 156,535 142,400 124,392 10 15
Lubrication Equipment 43,726 45,383 42,588 (4) 7
-------- -------- -------- ------ -------
Consolidated $432,185 $413,897 $391,756 4 6
======== ======== ======== ====== =======
Geographic Sales:
Americas $299,799 $276,410 $252,615 8 9
Europe 93,114 82,028 78,666 14 4
Asia Pacific 39,272 55,459 60,475 (29) (8)
-------- -------- -------- ------ -------
Consolidated $432,185 $413,897 $391,756 4 6
======== ======== ======== ====== =======
GROSS MARGINS
Gross margins, expressed as a percentage of sales, were 51 percent in 1998,
compared with 49 percent in 1997. The mix of products sold, pricing, improved
manufacturing efficiencies and higher sales all contributed to the enhanced
gross margin. 1997 gross margins of 49 percent were down from 1996 gross margins
of 50 percent. This was a result of several factors, including the mix of
products sold, material cost increases and exchange rates, partially offset by
improved manufacturing efficiencies.
OPERATING EXPENSES
In 1998, product development expenses increased, versus 1997, to $18.2 million.
In 1997, product development costs of $17.8 million were virtually unchanged
from 1996. Graco is committed to expanding its sales by making significant
investments in product development.
Selling, marketing, distribution and general and administrative expenses,
expressed as a percentage of sales, were 29 percent in 1998 and 1997. In 1998,
overall selling expenses were lower than in 1997 due to the results of corporate
restructuring initiatives. Administrative expenses were higher than 1997 levels
due to significant investments in information systems and restructuring charges.
In 1998, operating expenses increased by 7 percent in the Contractor segment and
decreased by 16 percent in the Lubrication segment. In all segments, operating
expenses decreased as a percentage of net sales. In 1997, selling, marketing,
distribution and general and administrative expenses, expressed as a percentage
of sales, were 29 percent, versus 32 percent in 1996. The lower expense levels
in 1997 were the result of the ongoing benefits of restructuring, exchange
rates, higher investment returns on employee retirement plan assets and
elimination of discretionary charitable contributions. In 1997, operating
expenses increased by 4 percent and 3 percent in the Lubrication and Contractor
segments, respectively, and decreased 3 percent in the Industrial/Automotive
segment.
FOREIGN CURRENCY EFFECTS
Foreign currency translations negatively impacted 1998 earnings before income
taxes by $4.5 million when compared to 1997, and decreased 1997 earnings before
income taxes by $6.2 million when compared to 1996. The reduced profits in both
years were due to a strong U.S. dollar, versus other foreign currencies. Since
approximately 26 percent of the Company's sales and 10 percent of its product
costs are in currencies other than the U.S. dollar, a strong U.S. dollar reduces
the Company's profits. Gains and losses attributable to translating the
financial statements of all non-U.S. subsidiaries and the gains and losses on
the forward and option contracts used to hedge these exposures, which are
non-speculative, are reported in Other expense (income).
OTHER EXPENSE (INCOME)
In 1998, interest expense, net of interest income, increased to $5.4 million due
to the borrowing incurred to fund the repurchase of 5.8 million shares of Graco
Inc. common stock from the Trust under the Will of Clarissa L. Gray.
Other expense, net of other income, was $0.2 million in 1998 compared to other
expense in 1997 of $1.1 million and other income in 1996 of $0.5 million. Other
expense (income) includes, among other things, the foreign currency translation
gains and losses discussed above, a $1.2 million gain from the sale of real
estate in 1997, a $0.8 million favorable settlement of a legal dispute in 1997
and a $1.5 million favorable settlement of a lawsuit in 1996.
INCOME TAXES
The Company's net effective tax rate of 34 percent in 1998 is one percentage
point lower than the 1998 U.S. federal tax rate of 35 percent. The increase from
the 30 percent rate in 1997 is due primarily to foreign earnings being taxed at
higher effective rates and the full utilization in 1997 of tax benefits
associated with previously reserved foreign subsidiary net operating losses. The
effective tax rate of 30 percent in 1997 was lower than the 1996 rate of 31
percent principally due to foreign earnings being taxed at lower effective rates
than the U.S. rate as foreign subsidiary earnings permitted the recognition of
previously reserved deferred tax benefits and previous tax filings were
validated. Reconciliations of the U.S. federal tax rate to the effective rates
for 1998, 1997 and 1996 are included in Note D to the Consolidated Financial
Statements.
ACCOUNTING CHANGES
The one-month reporting lag of the Company's European subsidiaries was
eliminated in 1998 and resulted in Europe's December 1997 net earnings being
recorded as an adjustment to equity.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As discussed under Foreign Currency Effects, Graco sells and purchases products
and services in currencies other than the U.S. dollar. Consequently, the Company
is subject to profitability risk arising from exchange rate movements.
Graco uses foreign exchange contracts to reduce risks associated with foreign
currency net balance sheet positions. These contracts typically have maturities
of 90 days or less, and gains or losses from changes in market value of these
contracts offset foreign exchange gains and losses on the underlying balance
sheet items. At December 25, 1998, the foreign currencies to which the Company
had the most significant balance sheet exchange rate exposure were the Canadian
dollar, Spanish peseta, Japanese yen, Italian lira, British pound, German mark,
Korean won, Belgian franc and French franc. The Company does not use derivative
financial instruments for trading purposes.
To evaluate its currency exchange rate risks on its foreign exchange contracts,
the Company uses sensitivity analysis, which measures the impact on earnings of
hypothetical changes in the value of foreign currencies to which it has
exposure. At December 25, 1998, due to the short-term nature of the Company's
hedging instruments, reasonably likely fluctuations in foreign currency exchange
rates in the near term would not materially affect Graco's consolidated
operating results, financial position or cash flows.
The Company utilizes interest rate swaps to manage its exposure to fluctuations
in earnings due to changes in interest rates on its variable rate debt. At
December 25, 1998, a 50 basis point increase or decrease in the market interest
rates, principally LIBOR, would not materially increase or decrease interest
expense or cash flows.
For further discussion of the Company's foreign currency and interest rate
hedging strategy and position, see Note A to the Consolidated Financial
Statements.
YEAR 2000
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year, which could cause
potential failure or miscalculation in date-sensitive software that recognizes
"00" as 1900 rather than 2000.
The Company is continuing its program, begun in 1996, to ensure that all
information technology systems and non-information technology (non-IT) systems
will be Year 2000-compliant. The assessment phase of the Year 2000 Project has
been completed. It was determined that the Company needed to modify or upgrade
most of its mainframe applications, operating systems, network hardware and
software and desktop hardware and software. In addition, many non-IT systems
required upgrading or replacement in order to ensure proper functioning beyond
the year 1999.
The mainframe modification phase involving the conversion of core business
applications was completed in July 1998 and the operating systems' upgrades were
completed in November 1998. The network and desktop upgrades involving the
replacement of certain hardware and software is scheduled to be completed by
July 1999. Further testing of all mainframe applications and databases is
scheduled to continue through July 1999.
Approximately 220 non-IT applications were identified at the Company with
approximately 55 percent being Year 2000-compliant as of December 1998. Non-IT
applications are primarily microprocessors and other electronic controls
embedded in non-computer equipment used by the Company. Teams have been
assembled to ensure the successful conversion of the remaining systems. These
conversions will continue into 1999.
The Company has incurred costs totaling $4.5 million, including $3.2 million in
1998, and estimates a total of an additional $2.0 million to be spent in 1999 to
resolve Year 2000 issues. These costs are charged to expense as incurred and
include software license fees and cost of persons assigned to the project.
Incremental costs associated with Year 2000 compliance are not anticipated to
result in significant increases in future operating expenses and are not
expected to have a material adverse effect on the results of operations,
liquidity and capital resources. Existing resources are being redeployed and
other projects are being delayed to accommodate Year 2000 related projects.
These delays are not expected to have a material adverse impact on future
results of operations or financial condition.
Business continuation plans for critical business processes and applications are
being developed. These plans include adequate staffing on-site during the Year
2000 date change to quickly repair any errant applications. In addition, in the
event of any problems the Company will follow its current computer outage
business continuation plans until such problems are corrected.
The Company is having discussions with, and has sent questionnaires to, its
suppliers to assess their Year 2000 readiness. Information will continue to be
gathered from key suppliers throughout 1999. The Company will identify
alternative suppliers for those suppliers unable to supply materials due to Year
2000 issues. The Company has very few customers whose loss of business would be
material to the Company. It is not aware of any Year 2000 issues with these
customers that would have a material adverse impact on the Company's results.
Management believes that sufficient resources have been allocated and project
plans are in place to avoid any adverse material impact on operations or
operating results. However, there can be no guarantee that the Company's systems
will be converted in a timely fashion and Year 2000 problems will not have an
adverse effect on the Company. The Year 2000 efforts of third parties are not
within the Company's control and their failure to respond to Year 2000 issues
successfully could result in business disruption and increased operating costs
to the Company. At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential impact they may
have on the Company's future results of operations and financial condition.
Readers are cautioned that forward-looking statements contained in the Year 2000
discussion should be read in conjunction with the Company's disclosures under
the heading Safe Harbor Cautionary Statement on the next page.
EURO CURRENCY
On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the euro as their common legal currency and established fixed conversion rates
between their existing sovereign currencies and the euro.
The Company has harmonized its price lists in the affected countries and has
updated its system to allow for invoicing in the euro. Although difficult to
predict, any competitive implications on the Company's pricing and marketing
strategies and any impact on existing financial instruments resulting from the
euro implementation are not expected to be material to the Company's financial
position, liquidity or results of operations.
OUTLOOK
Overall, we expect that 1999 will be a difficult year. We anticipate that poor
economic conditions will continue in the Asia Pacific Region and Latin America.
In addition, we believe that the economic growth in Europe and North America
will be slower than what we have experienced the last two years. Despite these
conditions, we are determined to improve our earnings per share in 1999.
Graco has changed a number of business processes in recent years that have
improved its effectiveness in the markets it serves, and have increased the
Company's operating margins and net profits. These efforts will continue to
favorably impact margins and profits in 1999. In 1998, we restructured our
automotive operations, and anticipate some short-term volatility in these sales,
but improved profitability as we transition to serving the automotive industry
in a new and improved manner.
We anticipate that the weakness of the U.S. dollar relative to other major
currencies will have a slightly positive impact on operating margins in 1999.
SAFE HARBOR CAUTIONARY STATEMENT
The information in this Annual Report on Form 10-K contains "forward-looking
statements" about the Company's expectations of the future, which are subject to
certain risk factors that could cause actual results to differ materially from
those expectations. These factors include economic conditions in the United
States and other major world economies, currency exchange fluctuations, the
results of the efforts of the Company, its suppliers and customers to avoid any
adverse effect as a result of the Year 2000 issue, and additional factors
identified in Exhibit 99 to the Company's Annual Report on Form 10-K for fiscal
year 1998.
SHAREHOLDER ACTIONS
Periodically, the Company initiates measures aimed at enhancing shareholder
value, broadening common stock ownership, improving the liquidity of its common
shares and effectively managing its cash balances. A summary of recent actions
follows:
o repurchase of 5.8 million shares in 1998 from Graco's largest shareholder,
the Trust under the Will of Clarissa L. Gray;
o three-for-two stock splits paid in 1998 and in 1996;
o an 18 percent increase in the regular dividend in 1997; and
o a 17 percent increase in the regular dividend in 1996.
LIQUIDITY AND SOURCES OF CAPITAL
The following table highlights several key measures of asset performance.
(In thousands) 1998 1997
- ------------------------------------ ------- -------
Cash and cash equivalents $ 3,555 $13,523
Working capital $48,354 $87,312
Current ratio 1.6 2.3
Average days receivables outstanding 67 75
Inventory turnover 6.3 4.9
In 1998, working capital decreased $39.0 million to $48.4 million. During the
first half of 1998, Graco increased its cash balance by $20.7 million from the
end of 1997. In July, the Company borrowed $158 million under a newly
established $190 million five-year reducing revolving credit facility (the
"Revolver") and combined the proceeds of the Revolver with available cash to
repurchase 5.8 million shares from the Company's largest shareholder, the Trust
under the Will of Clarissa L. Gray. As a result of strong cash flow, the amount
outstanding under the Revolver was reduced to $109.5 million by the end of 1998.
Receivables decreased $6 million as a result of lower sales in the fourth
quarter of 1998 compared with the same period in 1997. Inventories decreased
$9.9 million in 1998 as a result of several factors, including the restructuring
of the Company's automotive business and branch closings in Los Angeles,
California, and Toronto, Canada. Cash provided by operations was $77.1 million
in 1998, versus $36.3 million in 1997 and $48.6 million in 1996. In 1998,
additional cash needs were funded by bank borrowings. Significant uses of cash
included the repurchase of 5.8 million shares of Graco common stock for $191
million in 1998 and capital expenditures and dividends in 1997 and 1996.
The majority of 1998 capital expenditures were for manufacturing operations and
information systems.
At December 25, 1998, Graco had various lines of credit totaling $171.7 million,
of which $51.9 million was unused. The Company believes that the combination of
present capital resources, internally generated funds and unused financing
sources are more than adequate to meet cash requirements for 1999.
Item 8. Financial Statements and Supplementary Data
Page
o Responsibility for Financial Reporting 14
o Independent Auditors' Report 15
o Consolidated Statements of Earnings for fiscal years 1998,
1997 and 1996 16
o Consolidated Statements of Changes in Shareholders' Equity
Accounts (See Note F, Notes to Consolidated Financial Statements) 24
o Consolidated Balance Sheets for fiscal years 1998 and 1997 17
o Consolidated Statements of Cash Flows for fiscal years 1998,
1997 and 1996 18
o Notes to Consolidated Financial Statements 19
o Selected Quarterly Financial Data (See Part II, Item 5, Market
for the Company's Common Stock and Related Stockholder Matters) 8
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the accuracy, consistency, and integrity of the
information presented in this Annual Report on Form 10-K. The consolidated
financial statements and financial statement schedule have been prepared in
accordance with generally accepted accounting principles and, where necessary,
include estimates based upon management's informed judgment.
In meeting this responsibility, management believes that its comprehensive
systems of internal control provide reasonable assurance that the Company's
assets are safeguarded and transactions are executed and recorded by qualified
personnel in accordance with approved procedures. Internal auditors periodically
review these accounting and control systems. Deloitte & Touche LLP, independent
certified public accountants, are retained to audit the consolidated financial
statements, and express an opinion thereon. Their opinion is included below.
The Board of Directors pursues its oversight role through its Audit Committee.
The Audit Committee, composed of directors who are not employees, meets twice a
year with management, internal auditors, and Deloitte & Touche LLP to review the
systems of internal control, accounting practices, financial reporting and the
results of auditing activities.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors, Graco Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Graco Inc. and
Subsidiaries (the "Company") as of December 25, 1998, and December 26, 1997, and
the related statements of earnings and cash flows for each of the three years in
the period ended December 25, 1998. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graco Inc. and Subsidiaries as of
December 25, 1998, and December 26, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
25, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
January 18, 1999
Consolidated Statements of Earnings GRACO Inc. & Subsidiaries
Years Ended
------------------------------------------
December 25, December 26, December 27,
(In thousands, except per share amounts) 1998 1997 1996
- ---------------------------------------- ------------ ------------ ------------
Net Sales $432,185 $413,897 $391,756
Cost of products sold 212,784 210,909 195,775
------------ ------------ ------------
Gross Profit 219,401 202,988 195,981
Product development 18,213 17,817 17,909
Selling, marketing and distribution 83,169 87,479 85,281
General and administrative 41,146 32,219 39,734
------------ ------------ ------------
Operating Profit 76,873 65,473 53,057
Interest expense 5,319 866 831
Other expense (income), net 191 1,091 (543)
------------ ------------ ------------
Earnings before Income Taxes 71,363 63,516 52,769
Income taxes 24,100 18,800 16,600
------------ ------------ ------------
Net Earnings $ 47,263 $ 44,716 $ 36,169
============ ============ ============
Basic Net Earnings per Common Share $ 2.06 $ 1.75 $ 1.40
============ ============ ============
Diluted Net Earnings per Common Share $ 2.01 $ 1.71 $ 1.38
============ ============ ============
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets GRACO Inc. & Subsidiaries
December 25, December 26,
(In thousands, except share amounts) 1998 1997
- ---------------------------------------------------------------------------- ------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 3,555 $ 13,523
Accounts receivable, less allowances of $4,400 in 1998 and $4,100 in 1997 80,146 86,148
Inventories 34,018 43,942
Deferred income taxes, net 12,384 11,140
Other current assets 1,217 1,539
------------ ------------
Total current assets 131,320 156,292
Property, Plant and Equipment, at Cost:
Land 5,343 5,083
Buildings and improvements 61,712 63,981
Manufacturing equipment 98,723 91,161
Office, warehouse and automotive equipment 31,010 30,497
Construction in progress 2,334 6,218
------------ ------------
Total property, plant and equipment, at cost 199,122 196,940
Accumulated depreciation (102,756) (96,760)
------------ ------------
Net property, plant and equipment 96,366 100,180
Other Assets 6,016 8,060
------------ ------------
Total Assets $ 233,702 $ 264,532
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable to banks $ 14,560 $ 2,911
Current portion of long-term debt 3,157 1,796
Trade accounts payable 11,965 12,542
Salaries, wages and commissions 14,025 14,903
Accrued insurance liabilities 10,809 10,227
Income taxes payable 5,134 5,546
Other current liabilities 23,316 21,055
------------ ------------
Total current liabilities 82,966 68,980
Long-Term Debt, Less Current Portion 112,582 6,163
Retirement Benefits and Deferred Compensation 28,841 31,880
Commitments and Contingencies
Shareholders' Equity
Common stock, $1 par value; 33,750,000 shares authorized;
shares outstanding, 20,096,814 and 25,552,694 in 1998
and 1997, respectively 20,097 25,553
Additional paid-in capital 23,892 26,085
Retained earnings (deficit) (35,878) 105,030
Other, net 1,202 841
------------ ------------
Total shareholders' equity 9,313 157,509
------------ ------------
Total liabilities and shareholders' equity $ 233,702 $ 264,532
============ ============
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows GRACO Inc. & Subsidiaries
Years Ended
-------------------------------------------
December 25, December 26, December 27,
(In thousands) 1998 1997 1996
- ----------------------------------------------------- ------------ ------------ ------------
Cash Flows from Operating Activities:
Net earnings $ 47,263 $ 44,716 $ 36,169
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 13,736 13,494 12,658
Deferred income taxes (593) (358) 781
Change in:
Accounts receivable 6,293 (7,804) (10,192)
Inventories 10,547 (3,860) (394)
Trade accounts payable (761) (839) 459
Salaries, wages and commissions (934) 437 1,081
Retirement benefits and deferred compensation (3,255) (626) 928
Other accrued liabilities 2,695 (8,549) 6,963
Other 2,118 (330) 148
------------ ------------ ------------
Net cash provided by operating activities 77,109 36,281 48,601
------------ ------------ ------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (11,962) (20,109) (30,038)
Proceeds from sale of property, plant and equipment 2,201 1,990 1,058
------------ ------------ ------------
Net cash used in investing activities (9,761) (18,119) (28,980)
------------ ------------ ------------
Cash Flows from (for) Financing Activities:
Borrowing on notes payable and lines of credit 65,869 44,033 15,890
Payments on notes payable and lines of credit (54,376) (44,460) (16,657)
Borrowings on long-term debt 180,985 -- --
Payments on long-term debt (73,273) (1,455) (1,652)
Common stock issued 4,876 3,260 2,525
Retirement of common stock (190,899) (6,971) (8,115)
Cash dividends paid (10,701) (9,608) (8,344)
------------ ------------ ------------
Net cash used in financing activities (77,519) (15,201) (16,353)
------------ ------------ ------------
Effect of exchange rate changes on cash 203 4,027 1,624
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (9,968) 6,988 4,892
Cash and cash equivalents
Beginning of year 13,523 6,535 1,643
------------ ------------ ------------
End of year $ 3,555 $ 13,523 $ 6,535
============ ============ ============
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRACO Inc. & Subsidiaries
Years Ended December 25, 1998, December 26, 1997 and December 27, 1996
A. Summary of Significant Accounting Policies
Fiscal Year. The Company's fiscal year is 52 or 53 weeks, ending on the last
Friday in December.
Basis of Statement Presentation. The Consolidated Financial Statements include
the accounts of the parent company and its subsidiaries after elimination of all
significant intercompany balances and transactions. As of December 25, 1998, all
subsidiaries are 100 percent owned. The Company's European subsidiaries' fiscal
years ended December 25, 1998, and November 30, 1997 and 1996. 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. All other
subsidiaries outside North America have been included principally on the basis
of fiscal years ended November 30 to effect more timely consolidated financial
reporting. The U.S. dollar is the functional currency for all foreign
subsidiaries.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents. All highly liquid investments with a maturity of three months
or less at the date of purchase are considered to be cash equivalents.
Inventory Valuation. Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) cost method is used for valuing all U.S. inventories.
Inventories of foreign subsidiaries are valued using the first-in, first-out
(FIFO) cost method.
Currency Hedges. The Company periodically evaluates its monetary asset and
liability positions denominated in foreign currencies. The Company enters into
forward contracts, borrowings in various currencies or options, in order to
hedge its net monetary positions. Consistent with financial reporting
requirements, these hedges and net monetary positions are recorded at current
market values and the gains and losses are included in Other expense (income).
The Company believes it uses strong financial counterparts in these transactions
and that the resulting credit risk under these hedging strategies is not
significant. The notional amounts (which may not be indicative of credit or
market risk) of such contracts were (in U.S. dollars) $18,717,000 and
$28,271,000, and their fair value was not materially different than the notional
value at December 25, 1998, and December 26, 1997, respectively.
Interest Rate Hedges. The Company utilizes interest rate swaps to convert all or
a portion of its underlying debt from a variable rate to a fixed rate.
Consistent with financial reporting requirements, the gains and losses on these
agreements are included in interest expense. The notional amounts of such
contracts were $78 million and $3.5 million at December 25, 1998, and December
26, 1997, respectively.
Property, Plant and Equipment. For financial reporting purposes, plant and
equipment are depreciated over their estimated useful lives, primarily by using
the straight-line method as follows:
Buildings and improvements 10 to 30 years
Leasehold improvements 3 to 10 years
Manufacturing equipment and tooling 3 to 10 years
Office, warehouse and automotive equipment 4 to 10 years
Revenue Recognition. Revenue is recognized on large contracted systems using the
percentage-of-completion method of accounting. The Company recognizes revenue on
other products when title passes, which is usually upon shipment.
Earnings Per Common Share. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," in February 1997, which
requires the presentation of earnings per share on a basic and diluted basis.
Basic earnings per share is computed by dividing earnings available to common
shareholders by the weighted average number of shares outstanding during the
year. Diluted earnings per share is computed after giving effect to the exercise
of all dilutive outstanding option grants.
Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires companies to measure employee stock compensation plans
based on the fair value method of accounting. However, the statement allows the
alternative of continued use of Accounting Principles Board Opinion ("APBO") No.
25, "Accounting for Stock Issued to Employees," with pro forma disclosure of net
income and earnings per share determined as if the fair value method had been
applied in measuring compensation cost. The Company elected the continued use of
APBO No. 25.
Comprehensive Earnings. Comprehensive earnings is a measure of all nonowner
changes in shareholders' equity and includes such items as net earnings, certain
foreign currency translation items, minimum pension liability adjustments and
changes in the value of available-for-sale securities. In 1998, 1997 and 1996,
comprehensive earnings for the Company was equivalent to net earnings as
reported.
Derivative Instruments and Hedging Activities. SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments. The
statement requires recognition of all derivatives as either assets or
liabilities in the statement of financial position measured at fair value and
will be effective in fiscal Year 2000. The Company has not yet completed its
analysis of the impact SFAS No. 133 will have on its consolidated financial
statements.
B. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in 1998, which changes the way the Company reports
information about its operating segments. The information for 1997 and 1996 has
been restated to conform to the 1998 presentation.
The Company has three reportable segments: Industrial/Automotive, Contractor and
Lubrication. The Industrial/Automotive segment markets fluid application systems
and equipment for paints, coatings, sealants and adhesives for automotive and
truck assembly and feeder plants as well as the wood products, rail, marine,
aerospace, farm, construction, bus and recreational vehicles, and various other
industries. The Contractor segment markets sprayers for architectural coatings
for painting, roofing, texture, corrosion control and line striping and also
high-pressure washers. The Lubrication segment markets products to move and
dispense lubricants for fast oil change facilities, fleet service centers,
automobile dealerships and mining. All segments market parts and accessories for
their products.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The cost of manufacturing for each
segment is based on product cost, and expenses are based on actual costs
incurred along with cost allocations of shared and centralized functions.
Certain products are sold across segments, in which case the segment marketing
the product is credited with the sale. Assets of the Company are not tracked
along reportable segment lines.
Reportable segments are defined by product and type of customer. Segments are
responsible for the sales, marketing and development of their products and
market channel. This allows for focused marketing and efficient product
development. The segments share common purchasing, manufacturing and
distribution.
(In thousands) Industrial/
Reportable Segments Automotive Contractor Lubrication Total
- ----------------------------------- ----------- ---------- ----------- -----
1998
Net sales to unaffiliated customers $231,924 $156,535 $43,726 $432,185
Segment operating profit 42,973 35,836 8,829 87,638
1997
Net sales to unaffiliated customers 226,114 142,400 45,383 413,897
Segment operating profit 36,146 27,947 5,603 69,696
1996
Net sales to unaffiliated customers 224,776 124,392 42,588 391,756
Segment operating profit 35,436 22,356 5,034 62,826
Profit Reconciliation 1998 1997 1996
- ------------------------------------ --------- --------- ---------
Total profit for reportable segments $ 87,638 $ 69,696 $ 62,826
Unallocated corporate expenses (10,765) (4,223) (9,769)
--------- --------- ---------
Total operating profit $ 76,873 $ 65,473 $ 53,057
========= ========= =========
Geographic Information 1998 1997 1996
- ------------------------------------ --------- --------- ---------
Sales
United States $264,326 $243,197 $222,639
Other countries 167,859 170,700 169,117
--------- --------- ---------
Total $432,185 $413,897 $391,756
========= ========= =========
Long-lived assets
United States $ 91,068 $ 94,599 $ 89,092
Other countries 10,123 11,709 12,820
--------- --------- ---------
Total $101,191 $106,308 $101,912
========= ========= =========
Sales to Major Customers
No customer represented 10 percent or more of consolidated sales in the years
reported.
C. Inventories
Major components of inventories for the last two years were as follows:
(In thousands) 1998 1997
- ------------------------------------------------------- ------- --------
Finished products and components $27,764 $38,290
Products and components in various stages of completion 23,024 25,320
Raw materials 18,970 16,715
------- --------
69,758 80,325
Reduction to LIFO cost (35,740) (36,383)
------- --------
Total $34,018 $43,942
======== ========
Inventories valued under the LIFO method were $22,874,000 and $26,593,000 for
1998 and 1997, respectively. All other inventory was valued on the FIFO method.
In 1998 and 1997, certain inventory quantities were reduced, resulting in
liquidation of LIFO inventory quantities carried at lower costs from prior
years. The effect on net earnings was not significant.
D. Income Taxes
Earnings before income tax expense consist of:
(In thousands) 1998 1997 1996
- -------------- ------- ------- -------
Domestic $61,709 $53,139 $33,844
Foreign 9,654 10,377 18,925
------- ------- -------
Total $71,363 $63,516 $52,769
======= ======= =======
Income tax expense consists of:
(In thousands) 1998 1997 1996
- --------------------- ------- ------- -------
Current:
Domestic:
Federal $17,374 $11,729 $10,518
State and local 1,600 1,709 1,201
Foreign 5,628 5,281 4,638
------- ------- -------
24,602 18,719 16,357
======= ======= =======
Deferred:
Domestic (423) 1,994 (227)
Foreign (79) (1,913) 47
------- ------- --------
(502) 81 243
------- ------- --------
Total $24,100 $18,800 $16,600
======= ======= =======
Income taxes paid were $22,922,000, $17,148,000 and $14,967,000 in 1998, 1997
and 1996, respectively.
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate is as follows:
1998 1997 1996
---- ---- ----
Statutory tax rate 35% 35% 35%
Foreign earnings with (lower) higher tax rates (1) (3) 2
Reduction of valuation allowance -- (3) (6)
State taxes, net of federal effect 2 2 2
U.S. general business tax credits (1) (1) (1)
Other (1) -- (1)
---- ---- ----
Effective tax rate 34% 30% 31%
==== ==== ====
Deferred income taxes are provided for all temporary differences between the
financial reporting and the tax basis of assets and liabilities. The deferred
tax assets (liabilities) resulting from these differences are as follows:
(In thousands) 1998 1997
- -------------------------------------------------------- -------- -------
Inventory valuations $ 3,463 $ 3,299
Insurance accruals 3,349 3,445
Vacation accruals 1,258 1,343
Bad debt reserves 1,243 1,109
Net operating loss carryforward 606 --
-------- -------
Other 2,465 1,944
-------- -------
Current 12,384 11,140
-------- -------
Unremitted earnings of consolidated foreign subsidiaries<F1> (2,827) (3,500)
Excess of tax over book depreciation (6,237) (5,594)
Postretirement benefits 5,230 5,149
Pension and deferred compensation 4,428 5,397
Other 597 480
-------- -------
Non-current 1,191 1,932
-------- -------
Net deferred tax assets $ 13,575 $13,072
======== =======
<FN>
<F1>
1 Payable at the time these earnings are distributed to the parent, however, tax
planning strategies may mitigate this liability.
</FN>
Net non-current deferred tax assets above are included in Other Assets. Total
deferred tax assets were $22,993,000 and $22,522,000, and total deferred tax
liabilities were $9,418,000 and $9,450,000 on December 25, 1998, and December
26, 1997, respectively.
E. Debt
(In thousands) 1998 1997
- -------------------------------------------------------------- -------- -------
Reducing revolving credit facility, 6.28% at December 25, 1998 $109,509 $ --
Industrial development refunding revenue
bonds, 4.15% at December 25, 1998,
payable through 2002 (property carried at
$2,681 pledged as collateral) 3,000 3,500
Other 3,230 4,459
-------- -------
Total long-term debt 115,739 7,959
Less current portion 3,157 1,796
-------- -------
Long-term portion $112,582 $ 6,163
======== =======
Aggregate annual scheduled maturities of long-term debt for the next five years
are as follows: 1999-$3,157,000; 2000-$1,215,000; 2001-$1,310,000;
2002-$2,550,000; 2003-$107,507,000. Interest paid on debt during 1998, 1997, and
1996 amounted to $4,742,000, $856,000 and $841,000, respectively. The fair value
of the Company's long-term debt at December 25, 1998, and December 26, 1997, is
not materially different than its recorded value.
In July 1998, the Company entered into a five-year $190 million reducing
revolving credit facility (the "Revolver") with a syndicate of ten banks
including the lead bank, U.S. Bank National Association. The Revolver was
subsequently reduced to $147 million by December 25, 1998. The Company's initial
borrowing of $158 million financed a portion of the stock repurchase discussed
in Note F. The $109,509,000 outstanding balance bears underlying interest at the
London Interbank Offered Rate plus a spread of 0.625 percent. This spread
reduces as the ratio of total debt to earnings before interest, taxes and
depreciation and amortization declines. The Revolver specifies quarterly
reductions of the maximum amount of the credit line, and requires the Company to
maintain certain financial ratios as to net worth, cash flow leverage and fixed
charge coverage. The Revolver effectively restricts dividend payments that would
cause a violation of the tangible net worth ratio covenant. The amount of the
restriction was $18 million at December 25, 1998.
The Company has an interest rate swap agreement in place whereby it fixed the
underlying interest rate on $75 million of the Revolver at 5.74 percent through
2000. At December 25, 1998, the contractual underlying variable interest rate
under the Revolver was 5.66 percent. The cash flows related to the swap
agreement are recorded as income when received and expense when paid. Market and
credit risk are not significant.
The Company also has an interest rate swap agreement in place whereby it fixed
the interest rate of the remaining principal amounts of the Company's previously
variable interest rate revenue bond debt at 4.38 percent through 2002. At
December 25, 1998, the contractual variable interest rate under the revenue
bonds was Bankers Trust reference rate plus 0.30 percent, or 4.15 percent.
On December 25, 1998, the Company had lines of credit with U.S. and foreign
banks of $171,655,000, including the $147,000,000 Revolver. The unused portion
of these credit lines was $51,889,000 at December 25, 1998. Borrowing rates
under these facilities vary with the prime rate, rates on domestic certificates
of deposit and the London interbank market. The weighted short-term borrowing
rates were 6.3 percent, 5.8 percent and 3.6 percent at December 25, 1998,
December 26, 1997, and December 27, 1996, respectively. The Company pays
commitment fees of up to 0.25 percent per annum on the daily average unused
amounts on certain of these lines. No compensating balances are required.
The Company is in compliance with the covenants of its debt agreements.
F. Shareholders' Equity
Changes in shareholders' equity accounts are as follows:
(In thousands) 1998 1997 1996
- -------------------------- -------- -------- -------
Common Stock
Balance, beginning of year $ 25,553 $ 17,047 $ 17,265
Stock split -- 8,516 --
Shares issued 344 250 188
Shares repurchased (5,800) (260) (406)
-------- -------- --------
Balance, end of year 20,097 25,553 17,047
-------- -------- --------
Additional Paid-In Capital
Balance, beginning of year 26,085 22,254 20,397
Shares issued 4,535 4,171 2,337
Shares repurchased (6,728) (340) (480)
-------- -------- --------
Balance, end of year 23,892 26,085 22,254
-------- -------- --------
Retained Earnings (deficit)
Balance, beginning of year 105,030 85,232 64,949
Net income 47,263 44,716 36,169
Dividends declared (10,102) (10,033) (8,657)
Change in accounting period 300 -- --
Stock split -- (8,516) --
Shares repurchased (178,369) (6,369) (7,229)
-------- -------- --------
Balance, end of year (35,878) 105,030 85,232
-------- -------- --------
Other, Net
Balance, end of year 1,202 841 1,517
-------- -------- --------
Total Shareholders' Equity $ 9,313 $157,509 $126,050
======== ======== ========
In July 1998 the Company repurchased 5.8 million shares of common stock for
$190,887,000 from its largest shareholder, the Trust under the Will of Clarissa
L. Gray. The stock repurchase was funded with cash of $32,887,000 and
$158,000,000 from the Revolver discussed in Note E.
The Board of Directors declared a three-for-two stock split on December 12,
1997, in the form of a 50 percent stock dividend payable February 4, 1998; the
dividend was payable to shareholders of record on January 7, 1998. Accordingly,
the December 26, 1997, balance reflects the split with an increase in common
stock and reduction in retained earnings of $8,516,000. All stock option, share
and per share data has been restated to reflect the split.
At December 25, 1998, the Company had 22,549 authorized, but not issued,
cumulative preferred shares. The Company also has authorized, but not issued, a
separate class of 3 million shares of preferred stock, $1 par value.
The Company maintains a plan in which one preferred share purchase right
("Right") exists for each common share of the Company. Each Right will entitle
its holder to purchase one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $80, subject to
adjustment. The Rights are exercisable only if a person or group acquires
beneficial ownership of 20 percent or more of the Company's outstanding common
stock. The Rights expire in March 2000 and may be redeemed earlier by the Board
of Directors for $.01 per Right.
G. Stock Option and Purchase Plans
Stock Option Plans. The Company has a Long-Term Stock Incentive Plan, under
which a total of 5,212,500 common shares have been reserved for issuance, with
2,830,527 shares remaining reserved at December 25, 1998. Grants under this Plan
are in the form of restrictive share awards and stock options. Restrictive share
awards of 963,914 common shares have been made to certain key employees under
the Plan, with 52,500 shares still restricted for disposition. Such restrictions
will lapse in 1999. Compensation cost charged to operations for the restricted
share awards was $362,000, $188,000 and $256,000 in 1998, 1997 and 1996,
respectively. In 1997, certain officers of the Company agreed to forfeit certain
stock appreciation rights under an agreement which had been granted in prior
years. The net impact on earnings before income taxes in 1997 was $898,000.
Unearned compensation expense relating to the remaining restricted shares is
$614,000 at December 25, 1998 and is included as a reduction of shareholders'
equity in the Other, net category.
Stock options for 2,686,155 common shares have also been granted under the Plan.
The option price is the market price at the date of grant. Options become
exercisable at such time and in such installments as set by the Company, and
expire ten years from the date of grant.
In 1996, the shareholders approved a Nonemployee Director Stock Option Plan,
under which the Company makes initial and annual grants to the nonemployee
directors of the Company. There are 300,000 common shares authorized for
issuance under the Plan, all of which remained reserved at the end of 1998.
Nonemployee directors receive an initial option grant of 3,000 shares upon first
appointment or election and an annual option grant of 2,250 shares. The exercise
price of each option is the fair market value at the date of grant. The options
have a ten-year duration and may be exercised in equal installments over four
years, beginning one year from the date of grant.
Options on common shares granted and outstanding, as well as the weighted
average exercise price, are shown below:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, December 29, 1995 1,055,795 $ 9.13
Granted 105,039 13.10
Exercised (43,680) 8.02
Canceled (54,362) 8.09
--------- ----------------
Outstanding, December 27, 1996 1,062,792 9.56
Granted 237,000 19.51
Exercised (80,961) 21.46
Canceled (115,113) 10.92
--------- ----------------
Outstanding, December 26, 1997 1,103,718 11.65
Granted 319,750 29.79
Exercised (142,055) 8.60
Canceled (99,625) 17.84
--------- ----------------
Outstanding, December 25, 1998 1,181,788 $16.29
========= ================
The number of stock options exercisable was 510,886, 460,146 and 349,094, at
December 25, 1998, December 26, 1997 and December 27, 1996, respectively. These
stock options had a weighted average exercise price per share of $9.88, $8.73
and $7.97 at December 25, 1998, December 26, 1997 and December 27, 1996,
respectively.
The outstanding options at December 25, 1998, expire from 2002 to 2008, with a
weighted average contractual life remaining of 7.0 years, at exercise prices
ranging from $6.89 to $34.81.
Stock Purchase Plans. Under the Company's Employee Stock Purchase Plan,
5,850,000 common shares have been reserved for sale to employees, 1,069,769 of
which remained unissued at the end of 1998. The purchase price of the shares
under the Plan is the lesser of 85 percent of the fair market value on the first
day or the last day of the Plan year.
In 1994, the shareholders approved a Nonemployee Director Stock Plan which
enables individual nonemployee directors of the Company to elect to receive or
defer all or part of a director's annual retainer in the form of shares of the
Company's common stock instead of cash. The Company issued 3,357, 2,725 and
2,282 shares under this plan during 1998, 1997 and 1996, respectively. The
expense related to this plan is not significant.
Stock-Based Compensation. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
and purchase plans. Accordingly, no compensation cost has been recognized for
the Employee Stock Purchase Plan and stock options granted under the Long-Term
Incentive Plan and the Nonemployee Director Stock Option Plan. Had compensation
cost for the stock option plans been determined based upon fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net earnings and earnings per share would have been reduced as
follows:
1998 1997 1996
------- ------- -------
Net earnings
As reported $47,263 $44,716 $36,169
Pro forma 45,144 43,358 35,276
Net earnings per common share
Basic as reported $ 2.06 $ 1.75 $ 1.40
Diluted as reported 2.01 1.71 1.38
Pro forma basic 1.97 1.70 1.36
Pro forma diluted 1.92 1.66 1.34
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively; dividend
yields of 1.5 percent, 2.0 percent and 2.9 percent; expected volatility of 40.2
percent, 32.0 percent and 25.1 percent; risk-free interest rates of 5.5 percent,
6.6 percent and 6.3 percent; and expected lives of an average of 8 years. Based
upon these assumptions, the weighted average fair value at grant date of options
granted during 1998, 1997 and 1996 was $12.37, $10.47 and $5.25, respectively.
The SFAS No. 123 weighted average fair value of the employees' purchase rights
under the Employee Stock Purchase Plan was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1998,
1997 and 1996, respectively; dividend yields of 1.5 percent, 1.7 percent and 2.4
percent; expected volatility of 40.2 percent, 31.7 percent and 25.1 percent;
risk-free interest rate of 5.5 percent, 6.5 percent and 6.1 percent; and
expected lives of 1 year. The benefit of the 15 percent discount from the lesser
of the fair market value per common share on the first day and the last day of
the Plan year was added to the fair value of the employees' purchase rights
determined using Black-Scholes. The weighted average fair value per common share
was $7.85, $8.05 and $4.67 in 1998, 1997 and 1996, respectively.
H. Commitments and Contingencies
Lease Commitments. Aggregate annual rental commitments at December 25, 1998,
under operating leases with noncancelable terms of more than one year, were
$6,266,000, payable as follows:
Vehicles &
(In thousands) Buildings Equipment Total
-------------- --------- --------- ------
1999 $1,808 $1,277 $3,085
2000 1,502 571 2,073
2001 725 180 905
2002 70 82 152
2003 25 26 51
Thereafter - - -
--------- --------- ------
Total $4,130 $2,136 $6,266
========= ========= ======
Total rental expense was $3,307,000 for 1998, $3,339,000 for 1997 and $3,815,000
for 1996.
Contingencies. The Company is party to various legal proceedings arising in the
normal course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's consolidated results
of operations or its financial position.
I. Retirement Benefits
The Company has a defined contribution plan, under Section 401(k) of the
Internal Revenue Code, which provides additional retirement benefits to all U.S.
employees who elect to participate. The Company matches employee contributions
at a 100 percent rate, up to 3 percent of the employee's compensation. Prior to
1998, the Company matched employee contributions at a 50 percent rate, up to 3
percent of the employee's compensation. Employer contributions were $1,989,000,
$941,000 and $841,000 in 1998, 1997 and 1996, respectively.
The Company's postretirement medical plan provides certain medical benefits for
retired employees. U.S employees are eligible for these benefits upon retirement
and fulfillment of other eligibility requirements as specified by the plan.
The Company has noncontributory defined benefit pension plans covering
substantially all U.S. employees and directors and most of the employees of the
Company's non-U.S. subsidiaries. For the U.S. plans, the benefits are based on
years of service and the highest five consecutive years' earnings in the ten
years preceding retirement. In 1998, the Company amended the plans to remove the
30-year limitation on benefit service. The Company funds these plans annually in
amounts consistent with minimum funding requirements and maximum tax deduction
limits and invests primarily in common stocks and bonds, including the Company's
common stock. The market value of the plan's investment in the common stock of
the Company was $19,995,000 and $16,860,000 at December 25, 1998, and December
26, 1997, respectively. The following tables provide a reconciliation of the
changes in the plans' benefit obligations and fair value of assets over the
periods ending December 25, 1998 and December 26, 1997, and a statement of the
funded status as of the same dates.
Pension Benefits Other Benefits
----------------------- ---------------------
(In thousands) 1998 1997 1998 1997
- ------------------------------------------- -------- -------- -------- --------
Reconciliation of benefit obligation
Obligation, beginning of year $ 79,049 $ 74,179 $ 15,065 $ 14,269
Service cost 2,959 2,366 442 484
Interest cost 5,595 5,031 954 979
Plan amendments 1,716 -- -- --
Actuarial (gain) loss 9,443 (321) 54 249
Benefit payments (3,621) (2,206) (892) (916)
-------- -------- -------- --------
Obligation, end of year $ 95,141 $ 79,049 $ 15,623 $ 15,065
-------- -------- -------- --------
Reconciliation of fair value of plan assets
Fair value, beginning of year $ 89,460 $ 76,894 $ -- $ --
Actual return on assets 15,855 14,557 -- --
Employer contribution 1,412 215 892 916
Benefit payments (3,621) (2,206) (892) (916)
-------- -------- -------- --------
Fair value, end of year $103,106 $ 89,460 $ -- $ --
-------- -------- -------- --------
Funded status
Funded status over (under), end of year $ 7,965 $ 10,411 $(15,623) $(15,065)
Unrecognized transition (asset) obligation (74) (60) -- --
Unrecognized prior service cost 2,184 698 -- --
Unrecognized (gain) loss (20,036) (24,825) 680 353
-------- -------- -------- --------
Net $ (9,961) $(13,776) $(14,943) $(14,712)
======== ======== ======== ========
The following table provides the amounts included in the Statement of Financial
Position as of December 25, 1998, and December 26, 1997.
Pension Benefits Other Benefits
--------------------- ---------------------
(In thousands) 1998 1997 1998 1997
- ------------------------- --------- -------- --------- ---------
Accrued benefit liability $ (10,272) $(14,087) $ (14,943) $ (14,712)
Intangible asset 311 311 -- --
--------- -------- --------- ---------
Net $ (9,961) $(13,776) $ (14,943) $ (14,712)
========= ======== ========= =========
The components of net periodic benefit cost for the plans for 1998, 1997 and
1996 were as follows:
Pension Benefits Other Benefits
---------------------------- ---------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------ -------- ------- ------- ------- -------- --------
Service cost - benefits earned during the period $ 2,959 $ 2,366 $ 2,366 $ 442 $ 484 $ 457
Interest cost on projected benefit obligation 5,595 5,031 4,699 954 979 924
Expected return on assets (9,711) (8,342) (5,699) -- -- --
Amortization of transition (asset) obligation (3) 68 72 -- -- --
Amortization of prior service cost 230 95 95 -- -- --
Amortization of net (gain) loss (1,067) (944) (442) -- -- --
Cost of pension plans which are not significant
and have not adopted SFAS No. 87 371 233 171 N/A N/A N/A
-------- ------- ------- -------- -------- --------
Net periodic benefit (credit) cost (1,626) (1,493) 1,262 1,396 1,463 1,381
-------- ------- ------- -------- -------- --------
Curtailment gain (239) -- -- -- -- --
Settlement gain (271) -- -- -- -- --
-------- ------- ------- -------- -------- --------
Net periodic benefit (credit) cost after
curtailments and settlements $ (2,136) $(1,493) $ 1,262 $1,396 $1,463 $1,381
======== ======= ======= ======== ======== ========
The Company's retirement medical plan limits the annual cost increase that will
be paid by the Company. In measuring the Accumulated Postretirement Benefit
Obligation (APBO), a 6 percent maximum annual trend rate for healthcare costs
was assumed for the year ending December 25, 1998. This rate is assumed to
remain constant through the year 2001, decline to 5.5 percent in 2002 and 4.5
percent 2003, and remain at that level thereafter. The other assumptions used in
the measurement of the Company's benefit obligation are shown below:
Pension Benefits Other Benefits
------------------------ ------------------------
Weighted average assumptions 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Discount rate 6.5% 7.0% 7.0% 7.0% 7.0% 7.0%
Expected return on assets 11.0% 11.0% 9.0% N/A N/A N/A
Rate of compensation increase 3.3% 3.3% 3.3% N/A N/A N/A
==== ==== ==== ==== ==== ====
At December 25, 1998, a 1 percent change in assumed healthcare cost trend rates
would have the following effects:
1% Increase % Decrease
----------- ----------
Effect on total of service and interest cost
components of net periodic postretirement
healthcare benefit cost $ 235 $ (189)
Effect on the healthcare component of the
accumulated postretirement benefit obligation $2,343 $(1,918)
----------- ----------
J. Earnings per Share
Earnings per share for all years presented has been calculated to reflect the
three-for-two stock split declared on December 12, 1997. The following table
sets forth the computation of basic and diluted earnings per share:
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------- ------- ------- -------
Numerator:
Net earnings available to common shareholders $47,263 $44,716 $36,169
------- ------- -------
Denominators:
Denominator for basic earnings per share - weighted average shares 22,941 25,575 25,908
Dilutive effect of stock options computed based on the treasury
stock method using the average market price 606 591 394
------- ------- -------
Denominator for diluted earnings per share 23,547 26,166 26,302
======= ======= =======
Basic earnings per share $ 2.06 $ 1.75 $ 1.40
======= ======= =======
Diluted earnings per share $ 2.01 $ 1.71 $ 1.38
======= ======= =======
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the heading "Executive Officers of the Company" in Part I
of this 1998 Annual Report on Form 10-K and the information under the headings
"Election of Directors, Nominees and Other Directors" on pages 2 through 4 and
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" on
page 13, of the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders, to be held on May 4, 1999 (the "Proxy Statement"), is incorporated
herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" on pages 5
through 11 of the Proxy Statement is incorporated herein by reference, other
than the subsection thereunder entitled "Report of the Management Organization
and Compensation Committee" and "Comparative Stock Performance Graph".
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of Shares" on
pages 11 through 13 of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Business Relationships" on page 11 of
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders, to be
held on May 4, 1999 (the "Proxy Statement"), is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
See Part II
(2) Financial Statement Schedule Page
----
o Schedule II - Valuation and Qualifying Accounts..............30
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or Notes thereto.
(3) Management Contract, Compensatory Plan or Arrangement. (See
Exhibit Index) ...................................................32
Those entries marked by an asterisk are Management Contracts,
Compensatory Plans or Arrangements.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the thirteen weeks ended
December 25, 1998.
(c) Exhibit Index ....................................................32
Schedule II - Valuation and Qualifying Accounts
GRACO Inc. & Subsidiaries
(In thousands)
- --------------
Additions
Balance at charged to Deductions
beginning costs and from Balance at
Description of year expenses reserves end of year
- -------------------------------------------------- ---------- ---------- ---------- -----------
Year ended December 25, 1998:
Allowance for doubtful accounts $ 2,200 $ 900 $ 500<F1> $ 2,600
Allowance for obsolete and overstock inventory 4,700 2,900 3,300<F2> 4,300
Allowance for returns and credits 1,900 3,400 3,500<F3> 1,800
---------- ---------- ---------- -----------
$ 8,800 $7,200 $ 7,300 $ 8,700
========== ========== ========== ===========
Year ended December 26, 1997:
Allowance for doubtful accounts $ 2,400 $ 500 $ 700<F1> $ 2,200
Allowance for obsolete and overstock inventory 5,100 1,500 1,900<F2> 4,700
Allowance for returns and credits 2,300 3,700 4,100<F3> 1,900
Valuation allowance for tax benefits 1,995 -- 1,995 --
---------- ---------- ---------- -----------
$11,795 $5,700 $ 8,695 $ 8,800
========== ========== ========== ===========
Year ended December 27, 1996:
Allowance for doubtful accounts $ 2,800 $ 900 $ 1,300<F1> $ 2,400
Allowance for obsolete and overstock inventory 5,900 2,500 3,300<F2> 5,100
Allowance for returns and credits 2,000 4,100 3,800<F3> 2,300
Valuation allowance for tax benefits 5,020 -- 3,025 1,995
---------- ---------- ---------- -----------
$15,720 $7,500 $11,425 $11,795
========== ========== ========== ===========
<FN>
<F1>
1 Accounts determined to be uncollectible and charged against reserve, net of
collections on accounts previously charged against reserves.
<F2>
2 Items scrapped or otherwise disposed of during the year.
<F3>
3 Credits issued and returns processed.
</FN>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Graco Inc.
/s/James A. Earnshaw March 18, 1999
-------------------- --------------
James A. Earnshaw
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/James A. Earnshaw March 18, 1999
-------------------- --------------
James A. Earnshaw
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/Mark W. Sheahan March 18, 1999
------------------ --------------
Mark W. Sheahan
Vice President and Treasurer
(Principal Financial Officer)
/s/James A. Graner March 18, 1999
------------------ --------------
James A. Graner
Vice President and Controller
(Principal Accounting Officer)
D. A. Koch Director, Chairman of the Board
G. Aristides Director, and Vice Chairman
R. O. Baukol Director
R. D. McFarland Director
L. R. Mitau Director
M. A. M. Morfitt Director
D. R. Olseth Director
J. L. Scott Director
W. G. Van Dyke Director
George Aristides, by signing his name hereto, does hereby sign this document on
behalf of himself and each of the above named directors of the Registrant
pursuant to powers of attorney duly executed by such persons.
/s/George Aristides March 18, 1999
------------------- --------------
George Aristides
(For himself and as attorney-in-fact)
Exhibit Index
Exhibit
Number Description
------- -----------
3.1 Restated Articles of Incorporation as amended December 12, 1997.
See also Exhibit 4.3. (Incorporated by reference to Exhibit 3.1
to the Compan's 1997 Annual Report on Form 10-K.)
3.2 Restated Bylaws. (Incorporated by reference to Exhibit 3 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
4.1 Credit Agreement dated October 1, 1990, between the Company and
First Bank National Association. (Incorporated by reference to
Exhibit 5 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 28, 1990.)
4.2 Amendment 1 dated June 12, 1992, to Credit Agreement dated
October 1, 1990, between the Company and First Bank National
Association; and Amendment 2 dated December 31, 1992, to the same
Agreement. (Incorporated by reference to Exhibit 1 to the
Company's Report on Form 8-K dated March 11, 1993.) Amendment 3
dated November 8, 1993, and Amendment 4, dated February 8, 1994.
(Incorporated by reference to Exhibit 4.2 to the Company's 1993
Annual Report on Form 10-K.) Amendment 5, dated April 10, 1995.
(Incorporated by reference to Exhibit 4.2 to the Company's 1995
Annual Report on Form 10-K.) Amendment 6, dated September 27,
1996. (Incorporated by reference to Exhibit 4 to the Company's
Report on Form 10-Q for the thirty-nine weeks ended September 27,
1996.) Amendment 7 dated May 27, 1997. (Incorporated by reference
to Exhibit 4 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.) Amendment 8, dated May 28,
1998. (Incorporated by reference to Exhibit 4 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 26,
1998.)
4.3 Rights Agreement dated as of March 9, 1990, between the Company
and Norwest Bank Minnesota, National Association, as Rights
Agent, including as Exhibit A the form of the Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Shares. (Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated March 19,
1990.)
4.4 Credit Agreement dated July 2, 1998, between the Company and U.S.
Bank National Association. (Incorporated by reference to Exhibit
4 to the Company's Report on Form 10-Q for the thirty-nine weeks
ended September 25, 1998.)
*10.1 1998 Corporate and Business Unit Annual Bonus Plan.
(Incorporated by reference to Exhibit 10 to the Company's Report
on Form 10-Q for the thirteen weeks ended March 27, 1998.)
*10.2 Deferred Compensation Plan Restated, effective December 1, 1992.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 11, 1993.) Amendment 1 dated September 1,
1996. (Incorporated by reference to the Company's Report on Form
10-Q for the twenty-six weeks ended June 27, 1997.)
*10.3 Executive Deferred Compensation Agreement. Form of supplementary
agreement entered into by the Company which provides a retirement
benefit to selected executive officers, as amended by Amendment
1, effective September 1, 1990. (Incorporated by reference to
Exhibit 3 to the Company's Report on Form 8-K dated March 11,
1993.)
*10.4 Chairman's Award Plan. (Incorporated by reference to Exhibit 3
to the Company's Report on Form 8-K dated March 7, 1988.)
*10.5 Long Term Stock Incentive Plan, as amended December 12, 1997.
(Incorporated by reference to Exhibit 10.5 to the Company's 1997
Annual Report on Form 10-K.)
*10.6 Retirement Plan for Non-Employee Directors. (Incorporated by
reference to Attachment C to Item 5 to the Company's Report on
Form 10-Q for the thirteen weeks ended March 29, 1991.)
*10.7 Deferred Compensation Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 2 to the Company's Report
on Form 8-K dated March 7, 1988.)
*10.8 Restoration Plan 1998 restatement. (Incorporated by reference to
Exhibit 10.8 to the Company's 1997 Annual Report on Form 10-K.)
*10.9 Nonemployee Director Stock Plan, as amended November 6, 1997.
(Incorporated by reference to Exhibit 10.11 to the Company's 1997
Annual Report on Form 10-K.)
*10.10 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated May 2,
1994. (Incorporated by reference to Exhibit 10.3 to the Company's
Report on Form 10-Q for the twenty-six weeks ended July 1, 1994.)
*10.11 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to selected officers, dated December
15, 1994, December 27, 1994 and February 23, 1995. (Incorporated
by reference to Exhibit 10.16 to the Company's 1994 Annual Report
on Form 10-K.)
*10.12 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated March 1,
1995. (Incorporated by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the thirteen weeks ended March 31, 1995.)
*10.13 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to one executive officer, dated
December 15, 1995. (Incorporated by reference to Exhibit 10.18 to
the Company's 1995 Annual Report on Form 10-K.)
*10.14 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated March 1,
1996. (Incorporated by reference to Exhibit 10.19 to the
Company's 1995 Annual Report on Form 10-K.)
*10.15 Form of salary protection arrangement between the Company and
executive officers. (Incorporated by reference to Exhibit 10.21
to the Company's 1995 Annual Report on Form 10-K.)
*10.16 Nonemployee Director Stock Option Plan, as amended November 6,
1997. (Incorporated by reference to Exhibit 10.18 to the
Company's 1997 Annual Report on Form 10-K.)
*10.17 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 7,
1996. (Incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 28,
1996.)
*10.18 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated February
28, 1997. (Incorporated by reference to Exhibit 10.24 to the
Company's 1996 Annual Report on Form 10-K.)
*10.19 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from incentive stock option agreement dated February 25,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.25 to the Company's 1996 Annual Report on Form 10-K.)
*10.20 Stock Option Agreement Amendment. Form of amendment, dated
March 8, 1997, used to remove alternative stock appreciation
right from non-incentive stock option agreement dated May 4,
1993, for selected officers. (Incorporated by reference to
Exhibit 10.26 to the Company's 1996 Annual Report on Form 10-K.)
*10.21 Key Employee Agreement. Form of agreement with officers and
other key employees relating to change of control, dated April 2,
1997. (Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the twenty-six weeks ended June 27,
1997.)
*10.22 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to executive officer dated May 2,
1994, March 1, 1995 and March 1, 1996. (Incorporated by reference
to Exhibit 10.6 to the Company's Report on Form 10-Q for the
twenty-six weeks ended June 27, 1997.)
*10.23 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to selected officers dated December
15, 1994. (Incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.24 Stock Option Agreement Amendment. Form of amendment, dated
April 14, 1997, used to add change of control provision to
non-incentive stock options to one executive officer dated
December 15, 1995. (Incorporated by reference to Exhibit 10.8 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.25 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to one executive officer, dated April
23, 1997. (Incorporated by reference to Exhibit 10.9 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.26 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee directors, dated May 6,
1997. (Incorporated by reference to Exhibit 10.10 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.27 Executive Long Term Incentive Agreement. Form of restricted
stock award agreement used for award to one executive officer,
dated May 6, 1997. (Incorporated by reference to Exhibit 10.11 to
the Company's Report on Form 10-Q for the twenty-six weeks ended
June 27, 1997.)
*10.28 Stock Option Agreement. Form of agreement used for award of
non-incentive stock option to two executive officers, dated May
6, 1997. (Incorporated by reference to Exhibit 10.12 to the
Company's Report on Form 10-Q for the twenty-six weeks ended June
27, 1997.)
*10.29 Stock Option Agreement. Form of agreement used for award of
nonstatutory stock options to nonemployee director, dated
September 5, 1997. (Incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the thirty-nine weeks ended
September 26, 1997.)
*10.30 Trust Agreement dated September 30, 1997, between the Company
and Norwest Bank Minnesota, N.A. (Incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the
thirty-nine weeks ended September 26, 1997.)
*10.31 Key Employee Agreement Amendment. Form of amendment dated
January 9, 1998, revising payment reduction provisions.
(Incorporated by reference to Exhibit 10.33 to the Company's 1997
Annual Report on Form 10-K.)
*10.32 Stock Option Agreement. Form of agreement used for award of
non-incentive stock options to executive officers, dated February
28, 1998. (Incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the thirteen weeks ended March
27, 1998.)
*10.33 Separation and Release Agreement between Charles M. Osborne and
the Company, dated May 29, 1998.
*10.34 Employment Agreement between the Company and executive officer
dated December 22, 1998.
11 Statement of Computation of Earnings per share included in Note J
on page 28.
21 Subsidiaries of the Registrant included herein on page 36.
23 Independent Auditors' Consent included herein on page 36.
24 Power of Attorney included herein on page 37.
27 Financial Data Schedule (EDGAR filing only.)
99 Cautionary Statement Regarding Forward-Looking Statements.
*Management Contracts, Compensatory Plans or Arrangements.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain long-term debt of the
Company and its subsidiaries are not filed as exhibits because the amount
of debt authorized under any such instrument does not exceed 10 percent of
the total assets of the Company and its subsidiaries. The Company agrees to
furnish copies thereof to the Securities and Exchange Commission upon
request.
Exhibit 21
Subsidiaries of Graco Inc.
The following are subsidiaries of the Company:
Jurisdiction Percentage of Voting
of Securities Owned by
Subsidiary Organization the Company
----------------------------- ------------ --------------------
Equipos Graco Argentina S.A. Argentina 100%*
Graco Barbados FSC Limited Barbados 100%
Graco Canada Incorporated Canada 100%
Graco Chile Limitada Chile 100%*
Graco do Brasil Limitada Brazil 100%*
Graco Europe N.V. Belgium 100%*
Graco GmbH Germany 100%
Graco Hong Kong Limited Hong Kong 100%*
Graco K.K. Japan 100%
Graco Korea Inc. Korea 100%
Graco Limited England 100%*
Graco N.V. Belgium 100%*
Graco S.A. France 100%*
Graco S.r.l. Italy 100%*
* Includes shares held by selected directors and/or executive officers of the
Company or the relevant subsidiary to satisfy the requirements of local law.
Exhibit 23
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement No.
333-17691 on Form S-8 (the Company's Long- Term Stock Incentive Plan), in
Registration Statement No. 333-17787 on Form S-8 (the Company's Employee Stock
Purchase Plan), in Registration Statement No. 33-54205 on Form S-8 (the
Company's Nonemployee Director Stock Plan) and in Registration Statement No.
333-03459 on Form S-8 (the Company's Nonemployee Director Stock Option Plan) of
our report dated January 18, 1999, appearing in this Annual Report on Form 10-K
of Graco Inc. for the year ended December 25, 1998.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
March 23, 1999
Exhibit 24
Power of Attorney
Know all by these presents, that each person whose signature appears below
hereby constitutes and appoints George Aristides or Mark W. Sheahan, that
person's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for that person and in that person's name, place
and stead, in any and all capacities, to sign the Report on Form 10-K for the
year ended December 25, 1998, of Graco Inc. (and any and all amendments thereto)
and to file the same with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as that person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In witness whereof, this Power of Attorney has been signed by the following
persons on the date indicated.
Date
/s/G. Aristides February 19, 1999
--------------- -----------------
G. Aristides
/s/R. O. Baukol February 19, 1999
--------------- -----------------
R. O. Baukol
/s/D. A. Koch February 19, 1999
------------- -----------------
D. A. Koch
/s/R. D. McFarland February 19, 1999
------------------ -----------------
R. D. McFarland
/s/L. R. Mitau February 19, 1999
-------------- -----------------
L. R. Mitau
/s/M. A.M. Morfitt February 19, 1999
------------------ -----------------
M. A.M. Morfitt
/s/D. R. Olseth February 19, 1999
--------------- -----------------
D. R. Olseth
/s/J. L. Scott February 19, 1999
-------------- -----------------
J. L. Scott
/s/W. G. Van Dyke February 19, 1999
----------------- -----------------
W. G. Van Dyke