STOCK OPTION AGREEMENT
(NON-ISO)
THIS AGREEMENT, made this day of , 1999, by and between
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Graco Inc., a Minnesota corporation (the "Company") and James A. Earnshaw (the
"Employee").
WITNESSETH THAT:
WHEREAS, the Company pursuant to it's Long Term Incentive Stock Plan
wishes to grant this stock option to Employee;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto hereby agree as follows:
1. Grant of Option
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The Company hereby grants to Employee, the right and option
(hereinafter called the "option") to purchase all or any part of an
aggregate of 50,000 Common Shares, par value $1.00 per share, at the
price of $ per share on the terms and conditions set forth herein.
2. Duration and Exercisability
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A. Except as otherwise set forth herein, this option may not be
exercised by Employee until the expiration of two (2) years from
the date of grant, and this option shall in all events terminate
ten (10) years after the date of grant. During the first two years
from the date of grant of this option, no portion of this option
may be exercised. Thereafter this option shall become exercisable
in four cumulative installments of 25% as follows:
Total Portion of Option
Date Which is Exercisable
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Two Years after Date of Grant 25%
Three Years after Date of Grant 50%
Four Years after Date of Grant 75%
Five Years after Date of Grant 100%
In the event that Employee does not purchase in any one year the
full number of shares of Common Stock of the Company to which
he/she is entitled under this option, he/she may, subject to the
terms and conditions of Section 3 hereof, purchase such shares of
Common Stock in any subsequent year during the term of this
option.
B. During the lifetime of the Employee, the option shall be
exercisable only by him/her and shall not be assignable or
transferable by him/her otherwise than by will or the laws of
descent and distribution.
3. Effect of Termination of Employment
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A. In the event that Employee shall cease to be employed by the
Company or its subsidiaries for any reason other than his/her
gross and willful misconduct (as set forth on subparagraph B
below), death, retirement (as defined in Section 3(d) below), or
disability (as defined in Section 3(d) below): (i) If such
termination is voluntary, or involuntary and occurs after the
second anniversary of the first day of employment of the Employee
by the Company, the Employee shall have the right to exercise the
option at any time within one month after such termination of
employment to the extent of the full number of shares he/she was
entitled to purchase under the option on the date of termination,
subject to the condition that no option shall be exercisable
after the expiration of the term of the option; (ii) If such
termination is involuntary and occurs before the second
anniversary of the first day of employment of the Employee by the
Company, notwithstanding Section 2(A) hereof, the entire option
granted hereunder shall become immediately and fully exercisable
for a period of six (6) months after the date of such
termination.
B. In the event that Employee shall cease to be employed by the
Company or its subsidiaries by reason of his/her gross and
willful misconduct during the course of his/her employment,
including but not limited to wrongful appropriation of Company
funds, violation of Company policy or the commission of a felony,
the option shall be terminated as of the date of the misconduct.
C. If the Employee shall die while in the employ of the Company or a
subsidiary or within one month after termination of employment
for any reason other than gross and willful misconduct and shall
not have fully exercised the option, all remaining shares shall
become immediately exercisable and such option may be exercised
at any time within twelve months after his/her death by the
executors or administrators of the Employee or by any person or
persons to whom the option is transferred by will or the
applicable laws of descent and distribution, and subject to the
condition that no option shall be exercisable after the
expiration of the term of the option.
D. If the Employee's termination of employment is due to retirement
(either after attaining age 55 with 10 years of service, or
attaining age 65, or due to disability within the meaning of the
provisions of the Graco Long Term Disability Plan), all remaining
shares shall become immediately exercisable and the option may be
exercised by the Employee at any time within three years of the
employee's retirement, or in the event of the death of the
Employee within the three-year period after retirement, the
option may be exercised at any time within twelve months after
his/her death by the executors or administrators of the Employee
or by any person or persons to whom the option is transferred by
will or the applicable laws of descent and distribution, to the
extent of the full number of shares he/she was entitled to
purchase under the option on the date of death, and subject to
the condition that no option shall be exercisable after the
expiration of the term of the option.
4. Manner of Exercise
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A. The option can be exercised only by Employee or other proper
party within the option period delivering written notice to the
Company at its principal office in Minneapolis, Minnesota,
stating the number of shares as to which the option is being
exercised and, except as provided in Section 4(c), accompanied by
payment-in-full of the option price for all shares designated in
the notice.
B. The Employee may, at Employee's election, pay the option price
either by check (bank check, certified check, or personal check)
or by delivering to the Company for cancellation Common Shares of
the Company with a fair market value equal to the option price.
For these purposes, the fair market value of the Company's Common
Shares shall be the closing price of the Common Shares on the
date of exercise on the New York Stock Exchange (the "NYSE") or
on the principal national securities exchange on which the shares
are traded if the shares are not then traded on the NYSE. If
there is not a quotation available for such day, then the closing
price on the next preceding day for which such a quotation exists
shall be determinative of fair market value. If the shares are
not then traded on an exchange, the fair market value shall be
the average of the closing bid and asked prices of the Common
Shares as reported by the National Association of Securities
Dealers Automated Quotation System. If the Common Shares are not
then traded on NASDAQ or on an exchange, then the fair market
value shall be determined in such manner as the Company shall
deem reasonable.
C. The Employee may, with the consent of the Company, pay the option
price by arranging for the immediate sale of some or all of the
shares issued upon exercise of the option by a securities dealer
and the payment to the Company by the securities dealer of the
option exercise price.
5. Payment of Withholding Taxes
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Upon exercise of any portion of this option, Employee shall pay to the
Company an amount sufficient to satisfy any federal, state, or local
withholding tax requirements which arise as a result of the exercise
of the option or provide the Company with satisfactory indemnification
for such payment.
6. Change of Control
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A. Notwithstanding Section 2(a) hereof, the entire option shall
become immediately and fully exercisable on the day following a
"Change of Control" and shall remain fully exercisable until
either exercised or expiring by its terms. A "Change of Control"
means:
(1) acquisition by any individual, entity, or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act
of 1934),
(a "Person"), of beneficial ownership (within the meaning of
Rule 13d-3 under the 1934 Act) which results in the
beneficial ownership by such Person of 25% or more of either
(a) the then outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or
(b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company
Voting Securities");
provided, however, that the following acquisitions will not
result in a Change of Control:
(i) an acquisition directly from the Company,
(ii) an acquisition by the Company,
(iii) an acquisition by an employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company,
(iv) an acquisition by any Person who is deemed to have
beneficial ownership of the Company common stock
or other Company voting securities owned by the
Trust Under the Will of Clarissa L. Gray ("Trust
Person"), provided that such acquisition does not
result in the beneficial ownership by such Person
of 32% or more of either the Outstanding Company
Common Stock or the Outstanding Company Voting
Securities, and provided further that for purposes
of this Section 6, a Trust Person shall not be
deemed to have beneficial ownership of the Company
common stock or other Company voting securities
owned by The Graco Foundation or any employee
benefit plan of the Company, including, without
limitations, the Graco Employee Retirement Plan
and the Graco Employee Stock Ownership Plan,
(v) an acquisition by the Employee or any group that
includes the Employee, or
(vi) an acquisition by any corporation pursuant to a
transaction that complies with clauses (a), (b),
and (c) of subsection (4) below; and
provided, further, that if any Person's beneficial ownership
of the Outstanding Company Common Stock or Outstanding
Company Voting Securities is 25% or more as a result of a
transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of
additional Outstanding Company Common Stock or Outstanding
Company Voting Securities as a result of a transaction other
than that described in clause (i) or (ii) above, such
subsequent acquisition will be treated as an acquisition that
causes such Person to own 25% or more of the Outstanding
Company Common Stock or
Outstanding Company Voting Securities and be deemed a Change
of Control; and provided further, that in the event any
acquisition or other transaction occurs which results in the
beneficial ownership of 32% or more of either the Outstanding
Company Common Stock or the Outstanding Company Voting
Securities by any Trust Person, the Incumbent Board may by
majority vote increase the threshold beneficial ownership
percentage to a percentage above 32% for any Trust Person; or
(2) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of said Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board will be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial membership on the Board occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(3) The commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a Person of 25%
or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities; or
(4) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, or statutory exchange
of Outstanding Company Common Stock or Outstanding Company
Voting Securities or sale or other disposition of all or
substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either
explicitly or implicitly by consummation) excluding, however,
such a Business combination pursuant to which
(a) all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding Company
Common Stock or Outstanding Company Voting Securities
immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 80%
of, respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities entitled to vote generally
in the election of directors, as the case may be, of the
corporation
resulting from such Business Combination (including,
without limitation, a corporation that as a result of
such transaction owns the Company or all or substantially
all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common
Stock or Outstanding Company Voting Securities,
(b) no Person [excluding any employee benefit plan (or
related trust) of the Company or such corporation
resulting from such Business Combination] beneficially
owns, directly or indirectly, 25% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership
existed prior to the Business Combination, and
(c) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the
action of the Board, providing for such Business
Combination; or
(5) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
B. A Change of Control shall not be deemed to have occurred with
respect to an Employee if:
(1) the acquisition of the 25% or greater interest referred to in
subparagraph A.(1) of this Section 6 is by a group, acting in
concert, that includes the Employee or
(2) if at least 25% of the then outstanding common stock or
combined voting power of the then outstanding company voting
securities (or voting equity interests) of the surviving
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company shall
be beneficially owned, directly or indirectly, immediately
after a reorganization, merger, consolidation, statutory
share exchange, disposition of assets, liquidation or
dissolution referred to in subparagraph (4) and (5) of this
section by a group, acting in concert, that includes that
Employee.
7. Adjustments
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If Employee exercises all or any portion of the option subsequent to
any change in the number or character of the Common Shares of the
Company (through merger, consolidation, reorganization,
recapitalization, stock dividend, or otherwise), Employee shall then
receive for the aggregate price paid by him/her on such exercise of
the option, the number and type of securities or other consideration
which he/she would have received if such option had been exercised
prior to the event changing the number or character of outstanding
shares.
8. Miscellaneous
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A. This option is issued pursuant to the Company's Long-Term
Incentive Stock Plan and is subject to its terms. A copy of the
Plan has been given to the Employee. The terms of the Plan are
also available for inspection during business hours at the
principal offices of the company.
B. This Agreement shall not confer on Employee any right with respect
to continuance of employment by the Company or any of its
subsidiaries, nor will it interfere in any way with the right of
the Company to terminate such employment at any time. Employee
shall have none of the rights of a shareholder with respect to
shares subject to this option until such shares shall have been
issued to him upon exercise of this option.
C. The Company shall at all times during the term of the option
reserve and keep available such number of shares as will be
sufficient to satisfy the requirements of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the day and year first above written.
Employee Graco Inc.
By
Name Name and title