DONALDSON COMPANY, INC.
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
<TABLE>
<CAPTION>
<S> <C>
TIME: 10:00 a.m., central time, Friday, November 18, 1994
PLACE: Lutheran Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis, Minnesota.
ITEMS OF
BUSINESS: (1) Election of directors;
(2) Approval of Annual Cash Bonus Plan;
(3) Ratification of Ernst & Young as independent public accountants of the Company;
and any other business that properly comes before the meeting.
RECORD DATE: Shareholders of record at the close of business on September 27, 1994 are entitled
to notice of and to vote at the meeting or any adjournment. A list of such shareholders
will be available prior to the meeting at the office of the Company, 1400 West 94th
Street, Minneapolis, Minnesota for examination by any such shareholder for any purpose
germane to the meeting.
By Order of the Board of Directors
Raymond F. Vodovnik
Secretary
Dated: October 14, 1994
</TABLE>
IMPORTANT
YOU CAN HELP US PREPARE FOR THE MEETING AND ELIMINATE EXTRA EXPENSE - WHETHER
YOU HAVE A FEW SHARES OR MANY - IF YOU WILL COMPLETE AND RETURN THE ENCLOSED
PROXY PROMPTLY. YOUR PROMPT REPLY WILL ELIMINATE EXTRA EXPENSE IN SOLICITING
YOUR PROXY.
<PAGE>
DONALDSON COMPANY, INC.
1400 West 94th Street
Minneapolis, Minnesota 55431
PROXY STATEMENT
Mailing Date October 14, 1994
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors of
Donaldson Company, Inc. (the "Company") for use at the Annual Meeting of
Shareholders to be held on November 18, 1994. The person signing a proxy may
revoke it any time before it is exercised. Each valid proxy received prior to
the meeting will be voted according to the shareholder's directions.
The cost of this solicitation of proxies will be borne by the Company. In
addition to solicitation of proxies by the use of the mails, there may be
incidental personal solicitations by officers, directors and regular
employees of the Company who will not receive additional compensation
therefor. The Company will also request brokerage houses, nominees,
custodians and fiduciaries to forward soliciting material to the beneficial
owners of stock and will reimburse such persons for their expenses so
incurred.
VOTING SECURITIES
Shareholders of record as of the close of business on September 27, 1994 will
be entitled to vote at the meeting. The Company then had 26,510,661 shares of
Common Stock outstanding, each of which entitles its holder to one vote.
Representation at the meeting of a majority of the outstanding shares is
required for a quorum. Votes that are withheld and broker non-votes will be
counted as represented at the meeting for purposes of determining whether a
quorum exists. However, such votes will be treated as shares not voted for
purposes of determining the number of shares voted for or against any nominee
for director or any proposal. The affirmative vote of a majority of the
shares represented at the meeting and voting on the issue will be necessary
for election of the directors and approval of the Annual Cash Bonus Plan.
Shares of Common Stock credited to the accounts of participants in the
Automatic Dividend Reinvestment Program of the Company have been added to the
participants' other holdings and included in the enclosed proxy. Participants
in the Company's employee benefit plans are entitled to instruct the plan
trustee on how to vote all shares of Donaldson Common Stock allocated to
their accounts under the plans and will receive a separate voting instruction
card for voting such shares. Shares for which the trustee receives no voting
instructions from participants, including unallocated shares held in the
employee stock ownership plan ("ESOP"), will be voted by the trustee in the
same proportion as shares for which instructions are received.
SECURITY OWNERSHIP
Set forth below is information regarding persons known by the Company to own
beneficially (as defined by the SEC for proxy statement purposes) more than
5% of the outstanding Common Stock of the Company:
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
<S> <C> <C>
Donaldson Company, Inc.
Employee Stock Ownership Plan 3,356,964(1) 12.7%
c/o Harris Trust & Savings Bank
111 West Monroe Street
Chicago, IL 60690
<PAGE> 1
Mario J. Gabelli 1,806,000(2) 6.8%
655 Third Avenue
New York, NY 11017
Prudential Insurance Company of America 1,403,800 5.3%
751 Broad Street
Newark, NJ 07102
</TABLE>
(1) These shares are held in trust for the benefit of participants in the
Company's ESOP for which Harris Trust & Savings Bank is the trustee and
claims no voting or investment power over the indicated shares. (See also
discussion above on voting rights under employee benefit plans.)
(2) Mario J. Gabelli directly or indirectly controls various entities which
are primarily investment advisors and which generally have sole investment
and voting power as to the shares owned by the individual entity.
The following table sets forth information regarding the beneficial ownership
of the Company's Common Stock by each director, each of the Named Officers
and all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Total Percent Exercisable
Name of Individual or Group Shares (1) of Class Options
<S> <C> <C> <C>
William A. Hodder 1,155,842 4.1 399,000
Robert L. Findorff 474,879 1.7 169,876
William G. Van Dyke 402,926 1.4 212,004
John C. Read 238,949 * 228,676
Richard M. Negri 194,076 * 75,512
C. Angus Wurtele 11,692 * 4,000
Kendrick B. Melrose 11,644 * 4,000
S. Walter Richey 10,794 * 4,000
Stephen W. Sanger 6,860 * 4,000
Michael R. Bonsignore 4,844 * 4,000
Jack W. Eugster 4,726 * 2,000
A. Gary Ames 3,268 * 2,000
Directors and Officers as a
Group 3,012,662 10.8 1,353,494
</TABLE>
*Less than 1%
(1) Includes restricted shares, shares owned by related household members or
held in trust (including the ESOP allocation for years prior to F'94) and
shares which the directors and officers have a present right to acquire
pursuant to the Company's stock option plans as listed under the Exercisable
Options column.
ELECTION OF DIRECTORS
The Board of Directors is composed of ten members. Directors are elected for
a term of three years with positions staggered so that approximately
one-third of the directors are elected at each annual meeting of the
shareholders. It is intended that proxies received will be voted, unless
authority is withheld, for the election of the nominees presented on Page 3,
namely Messrs. Bonsignore, Eugster, Van Dyke and Wurtele.
Preston Townley, a director of the Company for more than 13 years, died on
September 30, 1994, creating a vacancy among the class of directors with
terms expiring in 1996. The vacancy created by Mr. Townley's death will be
filled by the remaining directors in accordance with the Bylaws of the
Company. Since the death was sudden and unexpected, a replacement has not
been selected as of the date of the Proxy Statement.
The Board of Directors meets on a regularly scheduled basis. During the past
fiscal year the Board held six meetings. Each director attended at least 75%
of the aggregate of the Board meetings and meetings of Board committees on
which each served.
<PAGE> 2
The Board of Directors has assigned certain responsibilities to committees.
The Audit Committee composed of directors A.Gary Ames, Jack W. Eugster,
Kendrick B. Melrose, S. Walter Richey and Stephen W. Sanger, all non-employee
directors, held two meetings during the past fiscal year. Briefly stated,
functions of the Audit Committee include: recommending to the Board of
Directors independent public auditors for the Company, reviewing the scope
and results of the auditors' examination, and reviewing the internal audit
program, adequacy of internal controls, and adherence to applicable legal,
ethical and regulatory requirements.
The Human Resources Committee, composed of directors Michael R. Bonsignore,
Jack W. Eugster, Kendrick B. Melrose, Stephen W. Sanger, and C. Angus
Wurtele, held four meetings during the past fiscal year. The functions of
this Committee include review of management development, approval of
compensation arrangements for senior management and administration of the
Company's stock compensation plans.
The Committee on Directors' Affairs, composed of directors A. Gary Ames,
Michael R. Bonsignore, S. Walter Richey and C. Angus Wurtele, held one
meeting during the past fiscal year. The committee's duties are to review the
organization of the Board and its committees, remuneration arrangements for
the directors, propose to the Board a slate of directors for election by the
shareholders at each Annual Meeting and propose candidates to fill vacancies
on the Board. The Committee will consider nominees for director recommended
by shareholders. Recommendations should be addressed to the Secretary,
Donaldson Company, Inc., P.O. Box 1299, Minneapolis, MN 55440.
The Board of Directors has no reason to believe that any nominees will be
unavailable or unable to serve, but in the event any nominee is not a
candidate at the meeting, the persons named in the enclosed proxy intend to
vote in favor of the remaining nominees and of such other person, if any, as
they may determine.
The table below and on the following page sets forth additional information
with respect to each nominee for election as a director and each other person
whose term of office as a director will continue after the meeting.
NOMINEES FOR ELECTION
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
<S> <C>
FOR A TERM EXPIRING IN 1997:
Michael R. Bonsignore Chief Executive Officer and Chairman of Honeywell Inc. (1993) (manufacturer of electronic
Age - 53 controls). Previously Executive Vice President and Chief Operating Officer (1990)
Director since 1988 and President, International of Honeywell Inc. Also a director of Honeywell Inc. and
The St. Paul Companies, Inc.
Jack W. Eugster Chairman, President and Chief Executive Officer of Musicland Stores Corp. (retail
Age - 49 consumer products). Also a director of Musicland Stores Corp., Damark, Inc., Midwest
Director since 1993 Resources Company, and Shopko Stores, Inc.
William G. Van Dyke President and Chief Operating Officer of the Company. (1994) Previously Executive
Age - 49 Vice President (1992) and Vice President - Industrial Group of the Company.
Elected a Director
effective August 1, 1994
C. Angus Wurtele Chairman of the Board and Chief Executive Officer of The Valspar Corporation (paint
Age - 60 products). Also a director of The Valspar Corporation, Bemis Co. Inc., and General
Director since 1981 Mills, Inc.
</TABLE>
<PAGE> 3
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
<S> <C>
TERMS EXPIRING IN 1995:
William A. Hodder Chairman and Chief Executive Officer of the Company. Also a director of Norwest
Age - 63 Corporation, Tennant Company, The NWNL Companies, Inc. and Supervalu Inc.
Director since 1969
Kendrick B. Melrose Chairman and Chief Executive Officer of The Toro Company (manufacturer of outdoor
Age - 54 maintenance products). Also a director of The Toro Company and The Valspar Corporation.
Director since 1991
Stephen W. Sanger President of General Mills, Inc. (1994) (consumer products and services). Previously
Age - 48 an executive officer of various groups and divisions of General Mills, Inc. Also
Director since 1992 a director of General Mills, Inc.
TERMS EXPIRING IN 1996:
A. Gary Ames President and Chief Executive Officer of U S WEST Communications (1990). Previously
Age - 50 President - Operations of U S WEST Communications. Also a director of Albertson's,
Director since 1993 Inc.
S. Walter Richey President and Chief Executive Officer of Space Center Company (owns and manages
Age - 58 business properties and distribution centers). Also a director of Space Center
Director since 1991 Company, First Bank Systems, Inc. and BMC Industries, Inc.
</TABLE>
DIRECTOR COMPENSATION
Directors who are not employees receive a retainer fee of $15,000 annually
and are paid $1,000 for each Board or Committee meeting attended. Pursuant to
the Company's Compensation Plan for Non-Employee Directors, any non-employee
director may elect, prior to each year of his term, to defer all or part of
his director compensation received during the year. Each participating
director is entitled to a company credit on the balance in his deferral
account at the same rate as the company credit under the Fixed Income Fund of
the Salaried Employees' Retirement Savings Plan. The deferral election must
also specify the manner for distribution of the deferral balance.
The 1991 Master Compensation Plan provides for the issuance of restricted
shares in lieu of 15% of the annual retainer for services as a Director to be
rendered in the following service year and allows an election to receive
restricted shares in lieu of all or part of the remaining retainer and
meeting fees. Transfer of the shares is restricted until the earliest of
retirement, disability, termination of service (with consent of the Board),
death or a change in control of the Company.
The Company also has a nonqualified pension plan for non-employee directors
which provides for an annual retirement benefit for directors, who have
served at least five years, in an amount equal to the final annual retainer
fee received for services as a director. Such annual benefit is payable over
a maximum fifteen year period or such shorter period as is equal to the
number of years of service on the Board.
The Company's Non-Qualified Stock Option Program for Non-employee Directors
provides for the automatic grant of a non-qualified stock option for 2,000
shares of Common Stock to each non-employee Director of the Company who is a
member of the Board between the dates of December 1 and December 22 each
year. The exercise price of such options is the closing price of Common Stock
in consolidated trading on the first business day of December in the
respective year. The options are exercisable on and after December 22 of the
respective year and have a term of ten years.
<PAGE> 4
EXECUTIVE COMPENSATION
The following table sets forth as to each person who was at the end of fiscal
1994, the Chief Executive Officer and the other four most-highly compensated
executive officers of the Company information concerning compensation for
services rendered to the Company for each of the last three fiscal years (the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
RESTRICTED STOCK ALL OTHER
FISCAL STOCK AWARD OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (2) (SHARES) (3} ($) (4) (5)
<S> <C> <C> <C> <C> <C> <C>
WILLIAM A. HODDER (6) 1994 464.423 488,205 0 88,608 116,022
Chairman and Chief 1993 428,846 216,270 0 299,092 64,412
Executive Officer 1992 391,347 199,440 0 151,500
WILLIAM G. VAN DYKE (6) 1994 275,000 232,690 0 48,058 61,828
President and Chief 1993 251,154 134,940 0 152,046 38,538
Operating Officer 1992 216,539 121,330 203,175 97,500
JOHN C. READ (7) 1994 288,077 242,374 0 34,148 64,601
Executive Vice President 1993 277,115 143,976 0 27,600 42,034
1992 258,209 56,575 203,175 60,000
ROBERT L. FINDORFF (8) 1994 246,169 189,287 0 36,794 53,030
Senior Vice President 1993 205,769 84,105 0 110,682 28,927
1992 196,537 83,100 0 78,000
RICHARD M. NEGRI 1994 143,461 89,878 0 21,772 28,474
Vice President, 1993 137,038 46,592 0 33,840 18,333
Manufacturing 1992 131,303 40,645 0 46,500
</TABLE>
(1) Includes any portion deferred according to the terms and conditions of
the Management Compensation Plan.
(2) As of July 31, 1994 Messrs. Van Dyke and Read each held an aggregate of
16,200 shares of restricted stock valued at $396,900. Dividends are paid on
all of the reported restricted stock at the same rate as paid on the
Company's Common Stock. Restricted shares held by Mr. Read were forfeited to
the Company effective August 8, 1994.
(3) Shares adjusted for stock splits.
(4) In accordance with the transition provisions of Securities Exchange
Commission rules only information with respect to fiscal 1993 and 1994 is
included.
(5) Amounts in this column represent the dollar value of share allocations
under the Company's ESOP and benefits in excess of the limits established by
Section 415 of the Internal Revenue Code ("IRC") contributed by the Company
to an unqualified suppmental plan. The amounts for fiscal 1994 are
approximately:
<TABLE>
<CAPTION>
Name ESOP ESOP (Supl.)
<S> <C> <C>
William A. Hodder $28,717 $87,305
William G. Van Dyke 28,717 33,111
John C. Read 28,717 35,884
Robert L. Findorff 28,717 24,313
Richard M. Negri 28,474 -0-
</TABLE>
(6) Effective August 1, 1994, Mr. Van Dyke was elected President and Chief
Operating Officer and Mr. Hodder, Chairman and Chief Executive Officer.
(7) Mr. Read resigned from employment with the Company effective August 8,
1994. See "Resignation Agreement" at page 11.
(8) Mr. Findorff retired from the Company on July 31, 1994.
<PAGE> 5
OPTIONS GRANTED IN FISCAL 1994
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE GAIN AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS (1) PRICE APPRECIATION (3)
% OF TOTAL
OPTIONS OPTIONS EXERCISE
GRANTED GRANTED TO OR BASE EXPIRATION
NAME (SHARES) (2) EMPLOYEES PRICE ($) DATE 0% ($) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C> <C>
WILLIAM A. HODDER 41,408 (4) 12.5 23.563 12/21/02 0 529,816 1,300,923
47,200 (5) 14.3 20.688 12/14/03 0 614,860 1,558,625
WILLIAM G. VAN DYKE 22,458 (4) 6.8 23.563 12/21/02 0 287,351 705,567
25,600 (5) 7.8 20.688 12/14/03 0 333,484 845,356
JOHN C. READ 622 (4) 0.2 18.875 08/08/95 0 1,178 2,411
5,926 (4) 1.8 23.50 08/08/95 0 10,209 20,639
27,600 (5) 8.4 20.688 08/08/95 0 47,867 97,238
ROBERT L. FINDORFF 17,194 (4) 5.2 23.563 07/31/99 0 124,700 279,185
19,600 (5) 5.9 20.688 07/31/99 0 128,179 287,959
RICHARD M. NEGRI 10,172 (4) 3.1 23.375 12/21/02 0 129,294 317,562
11,600 (5) 3.5 20.688 12/14/03 0 151,110 388,052
ALL SHAREHOLDERS (6) N/A N/A 24.50 03/29/02 0 323,990,358 782,378,506
STOCK PRICE (6) N/A N/A N/A N/A N/A 36.721 54.012
</TABLE>
(1) No stock appreciation rights ("SARs") have been granted.
(2) All grants during the period were non-qualified stock options granted at
the market value on date of grant, exercisable within 30 days of the date of
grant, and were granted with the right to use shares in lieu of the exercise
price and to satisfy any tax withholding obligations.
(3) These amounts represent certain assumed rates of appreciation over the
full term of the option. The value ultimately realized, if any, will depend
on the amount that the market price of the Company's stock exceeds the
exercise price on date of sale.
(4) These grants were made to individuals who exercised an option during
fiscal 1994 and made payment of the purchase price using shares of previously
owned Company stock. This restoration or "reload" grant is for the number of
shares equal to the shares used in payment of the purchase price or withheld
for tax withholding. The option price is equal to the market value of the
Company's stock on the date of exercise and will expire on the same date as
the original option which was exercised. These options, which are the result
of such a restoration, do not contain the reload feature.
(5) Annual grant of a non-qualified stock option. These options include a
reload feature in the event they are exercised while the executive is an
employee and the market price exceeds the exercise price by 25%.
(6) This value was calculated using the market price of Donaldson stock on,
and outstanding shares as of, July 31, 1994 and applying the assumed
appreciation over the weighted average option term of 8.3 years for all
options granted in fiscal 1994. In total, 31 key employees were granted
options for 330,330 shares at a weighted average exercise price of $21.69.
<PAGE> 6
AGGREGATED OPTION EXERCISES IN FISCAL 1994 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 7/31/94 7/31/94 (2)
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE (1) ($) (SHARES) (SHARES) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
WILLIAM A. HODDER 66,700 404,631 399,000 0 2,382,141 0
WILLIAM G. VAN DYKE 25,600 140,800 212,004 0 1,287,411 0
JOHN C. READ 13,072 184,116 228,676 0 2,466,637 0
ROBERT L. FINDORFF 19,600 107,800 169,876 0 1,080,970 0
RICHARD M. NEGRI 11,600 61,625 75,512 0 513,797 0
</TABLE>
(1) The number of shares shown in this column is larger than the number of
shares actually acquired on exercise. The actual number of shares received
are reduced by the number of shares delivered in payment of the exercise
price and shares withheld to cover withholding taxes. Share ownership
objectives for executive officers encourages retention of shares acquired
through option exercise.
(2) This value is based on the difference between the exercise price of such
options and the closing price of Donaldson Stock as of July 31, 1994.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors, consisting of six
independent outside directors, ("the Committee") is responsible for
establishing the compensation programs for the Company's, executive officers.
The objectives of the Company's executive compensation program are to:
* attract and retain the best executives available in our industry;
* motivate and reward executives responsible for attaining the financial and
strategic objectives essential to the Company's long-term success and
continued growth in shareholder value;
* promote a pay-for-performance philosophy by placing significant portions of
pay at risk and requiring outstanding results for payment at the threshold
level;
* obtain an appropriate balance between short-term and long-term results
based on the executive's influence and impact;
* align the interests of executives with those of the Company's shareholders
by providing a significant portion of compensation in the form of Company
common stock. Common stock ownership objectives have been established for all
executive officers ranging from six to ten times base salary.
BASE SALARIES.
Base salaries for all executives are reviewed annually based on
performance and market conditions. A performance appraisal is required for
all executives of the Company. The Committee approves and/or determines
the annual base salary increases for all senior executives based on
performance of the executive and external market data. Our objective is
that base salaries should approximate the mid-point (average) of senior
executives of manufacturing companies of similar size in the United
States. The Company uses nationally known consultant surveys for external
market data.
ANNUAL CASH INCENTIVE.
Executive officers are eligible for target awards under the annual
incentive program ranging from 30% to 60% of base salary. The size of the
target award is determined by the executive officer's position and
competitive data for similar positions at the peer and cross-industry
companies as presented in the same nationally recognized surveys as are
used for the base salary. The Company sets aggressive performance goals
and, in keeping with the strong performance-based philosophy, the
resulting awards decrease or increase substantially if actual Company
performance fails to meet or exceed targeted levels. Payments can range
from 0% to 200% of the target awards. Executive officers have from 50% to
100% of their annual cash incentive opportunity linked to Company
performance as measured by Earnings Per Share (EPS) and Return on Equity
after tax (ROE). In conducting its review for fiscal 1994, the Committee
<PAGE> 7
considered comparative data prepared by Frederic W. Cook & Co., Inc. and
decided to increase emphasis on EPS and eliminated mandatory ROE goals
from future performance awards.
Consequently, executive officers must obtain record EPS, thereby
increasing shareholder value, to receive a competitive annual cash
incentive.
LONG-TERM INCENTIVE COMPENSATION.
The Long-Term Performance Award program is based on three-year compounded
growth in sales at an after tax Return on Investment that exceeds the
Company's weighted cost of capital. Under this program, the Committee
selected eligible executives and established an incentive opportunity as a
percentage of base salary. In order for a participant to receive a payout,
minimum performance must be attained. There was no payout for the
1992-1994 cycle because the minimum sales growth objective of 10% per year
was not attained. The Committee occasionally grants restricted stock with
a fixed restriction period usually five years, to insure retention of key
executives. The Committee also believes that significant stock option
grants encourage the executive officers to own and hold Donaldson stock
and tie their long-term economic interests directly to those of the
shareholders. Stock options are typically granted annually. In determining
the number of shares covered by such options, the Committee takes into
account position levels, base salary, and other factors relevant to
individual performance but does not consider the amount and terms of
options and restricted stock already held by the executive.
STOCK OWNERSHIP.
Ownership of Donaldson stock is expected of Donaldson executives. The
Committee believes that linking a significant portion of the executive's
current and potential net worth to the Company's success, as reflected in
the stock price, gives the executive a stake similar to the shareholders.
The Committee has established stock ownership guidelines for the Named
Officers and certain other executive officers, which encourage retention
of shares obtained through the exercise of options. The guidelines range
from six to ten times base salary. The goal of the Chief Executive Officer
is ten times annual base salary. Mr. Hodder currently exceeds this
ownership goal. Shares of stock received on exercise of all options during
the fiscal year by the Named Officers of the Company were retained and
therefore are subject to market risk.
To encourage early exercise of options and thus facilitate timely
attainment of ownership goals, and to maintain executives' "carried
interest" in Company stock, the Company implemented in 1992, following
stockholder approval, a restoration stock option program (commonly
referred to as a reload option program) which provides that stock
surrendered to exercise an option would be replaced with a new option
grant for the remainder of the option term. The large number of option
grants in fiscal 1993 reflect the grant of reloads attributable to the
ownership goals and the restoration incentive.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER.
Mr. Hodder's fiscal 1994 base salary and incentive award were determined
by the Committee in accordance with the methodology described above.
BASE SALARY. Mr. Hodder's base salary for fiscal 1994 was $464,423
which approximates the market mid-point for manufacturing companies of
similar size.
ANNUAL BONUS. Mr. Hodder's cash incentive award for fiscal 1994 was
$488,205. This amount was based on EPS growth of 15.8% over the previous
record of $1.01 earned in fiscal 1993 and an after tax return on equity of
17.7%.
STOCK OPTIONS. Mr. Hodder received one normal grant during fiscal 1994
which approximated two times his base salary. In addition he received one
restoration option.
ACTION IN RESPONSE TO OMNIBUS BUDGET RECONCILIATION ACT OF 1993.
The Company's policy is to preserve the tax deduction for compensation
paid to its Chief Executive Officer and other senior executive officers.
In accordance with this policy, the shareholders will be asked to approve
the material terms of the performance goals of the Chief Executive Officer
and three other most highly compensated executive officers for payment of
the cash bonus under the Company's Annual Incentive program. (See proposal
for approval of Annual Cash Bonus Plan for Designated Executives.)
CONCLUSION.
The executive officer compensation program administered by the Committee
provides incentive to attain strong financial performance and an alignment
with shareholder interests. The Committee believes that the Company's
compensation program focuses the efforts of Company executive officers on
the continued achievement of growth and profitability for the benefit of
the Company's shareholders. The total compensation of the Named Officers
is consistent with five years of record profit growth and a 350% increase
in shareholder value over that period of time.
<PAGE> 8
C. Angus Wurtele, Chairman
Michael R. Bonsignore Kendrick B. Melrose
Jack W. Eugster Stephen W. Sanger
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's stock for the last five fiscal years with the cumulative total
return of the Standard & Poor's 500 Stock Index and the Standard & Poor's
Index of Manufacturing Companies. The graph assumes the investment of $100 in
the Company's common stock and each of the indexes at the market close on
July 31, 1989 and the reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
FISCAL YEARS ENDED JULY 31
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Donaldson $100 $181 $210 $275 $342 $456
S&P500 100 106 120 135 147 154
S&P
Manufacturing 100 109 115 121 137 159
</TABLE>
<PAGE> 9
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL BENEFITS FOR YEARS OF SERVICE SHOWN
FINAL AVERAGE COMPENSATION 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
<S> <C> <C> <C> <C> <C> <C>
$ 200,000 $ 30,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $ 95,000
400,000 60,000 90,000 120,000 150,000 180,000 190,000
600,000 90,000 135,000 180,000 225,000 270,000 285,000
800,000 120,000 180,000 240,000 300,000 360,000 380,000
1,000,000 150,000 225,000 300,000 375,000 450,000 475,000
1,200,000 180,000 270,000 360,000 450,000 540,000 570,000
</TABLE>
The executive officers are eligible for the Company's non-contributory
Salaried Employees' Pension Plan which provides benefits based on length of
service and final average compensation, defined as the five highest
consecutive years of the last ten years of service. The amounts shown are for
retirement at age 65 and are reduced by varying amounts (not exceeding
one-half) of the annual social security benefit. Covered compensation for the
named executive officers consists of the amounts shown under "Annual
Compensation" in the Summary Compensation Table. As of July 31, 1994 Messrs.
Hodder, Van Dyke, Read, Findorff and Negri had benefit service of 19, 20, 3,
27 and 32 years respectively. The table does not reflect the limitations
imposed by the Internal Revenue Code (the "Code"). The Board of Directors
established an Excess Benefit Plan which provides for supplemental payments
to be made to certain executives on retirement so that they will receive, in
the aggregate, the benefits they would be entitled to receive if such Code
limitations did not apply.
At July 31, 1994 the Company had a supplementary retirement benefit agreement
with Mr. Hodder providing for fifteen annual payments, after retirement at
age 65, to him or his beneficiaries. The size of the annual payment is based
on his termination or retirement date and upon the highest annual
compensation earned by him from the Company prior to such date if the Company
has not previously set a maximum level. The agreement provides for benefits
in the event of death prior to retirement and there is progressive vesting of
other benefits. Assuming the agreement is unchanged and employment until
normal retirement age, based on current compensation, annual payments under
the agreement would be $121,022.
The Company has a supplementary retirement benefit plan which is intended to
assure that Messrs. Hodder, and Van Dyke will receive at least 60% of their
average (five highest years) compensation upon retirement at age 65 with 2%
reduction for each year in the event of early retirement after age 55. In
determining whether the plan must supplement other retirement benefits to
reach such level, the Company will consider the benefits described in the
previous paragraph, the Pension Plan Table and footnote (5) to the Summary
Compensation Table as well as 50% of primary Social Security and vested
pension benefits from prior employers, if any. Assuming the plan is unchanged
and employment until age 65, based on current compensation and payment levels
from other plans, no payments would be made under this plan.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file initial reports of ownership and
reports of changes in ownership with the SEC and the New York Stock Exchange.
Based on a review of copies of such forms and written representations from
the directors and executive officers, the Company notes that Erland D.
Anderson, a Company officer, inadvertently failed to report the change in his
401(k) balance on account of withholding and stock price changes during the
third quarter of fiscal 1993. This information was reported on Form 5 for
fiscal 1994 following discovery of the error.
<PAGE> 10
RESIGNATION AGREEMENT
In connection with Mr. Read's resignation from employment with the Company
effective August 8, 1994, the Company and Mr. Read entered into a Resignation
Agreement replacing any and all other agreements existing between the Company
and Mr. Read. Pursuant to the material terms of such Resignation Agreement,
the Company is to pay Mr. Reed $470,400, less legally required withholdings
and deductions in 24 consecutive equal monthly payments. The Company also
agreed to forgive the outstanding loan plus accrued and accruing interest
which, at August 1, 1994, was approximately $292,000 in 24 consecutive equal
increments and agreed to continue Mr. Read's group medical and life insurance
at pre-resignation levels. The Company's obligation for such payments are
conditioned on Mr. Read complying with nondisclosure and noncompete
provisions of the Resignation Agreement.
CHANGE-IN-CONTROL ARRANGEMENTS
Each of the Named Officers has a severance agreement with the Company
designed to retain the executive and provide for continuity of management in
the event of an actual or threatened change of control in the Company (as
defined in the agreements). The agreements provide that in the event of a
change of control, each key employee would have specific rights and receive
certain benefits if, within three years after a change in control, the
employee is terminated without cause or the employee terminates voluntarily
under "constructive involuntary" circumstances as defined in the agreement.
In such circumstance the employee will receive a severance payment equal to
three times the employee's annual average compensation calculated over the
five pears preceding such termination as well as continued health, disability
and life insurance for three years after termination. The 1980 and 1991
Master Stock Compensation Plans, the supplementary retirement agreements and
deferred income arrangements also provide for immediate vesting or payment in
the event of termination under circumstances of a change in control.
APPROVAL OF THE ANNUAL CASH BONUS PLAN FOR DESIGNATED EXECUTIVES
Approval of the Annual Cash Bonus Plan for Designated Executives (the "Plan")
brings to the Shareholders what has been the Company's basic
performance-based cash compensation program for more than 30 years. This Plan
is being submitted for approval in order to maximize deductibility of
compensation paid thereunder, pursuant to Section 162(m) of the Internal
Revenue Code (the "Code").
The Plan provides that eligible participants may share in an annual cash
bonus pool. Eligibility under this Plan will be limited to the Chief
Executive Officer plus any three other key employees designated by the
Committee. This bonus pool is the mechanism for funding the Company's annual
cash bonuses for such executives. The Chief Executive Officer may receive no
more than 38% of the bonus pool, and the Second, Third and Fourth
Participants no more than 26%, 20% and 16% of the bonus pool respectively.
Before any payments can be made under the Plan, the Company must achieve at
least a 9% return on investment ("ROI") for the fiscal year for which bonuses
are being paid. ROI is defined as earnings after income taxes relative to the
Company's long-term debt and shareholders' equity, all as computed in
accordance with generally accepted accounting principles and reported by the
Company in its annual report. If the ROI threshold is met, the Plan's cash
bonus pool will be funded with an amount equal to 2.9% of the Company's
earnings before income taxes and extraordinary items for that fiscal year.
For purposes of the foregoing computation, changes in generally accepted
accounting principles, which occur during the fiscal year; and discontinued
operation and restructuring costs, as computed in accordance with generally
accepted accounting principles; shall not be taken into account. The bonus
pool will be the maximum amount available to the Committee in determining
participant cash bonuses.
The Committee will have the authority to reduce the share of any or all
participants below the maximum amount available. In the event that the
Committee elects to reduce the bonuses payable under the Plan to an amount
less than 2.9% of the Company pre-tax earnings for any fiscal year, the
amount by which the bonuses are reduced will be added to the bonus pool that
is available for any subsequent year or years to the extent permitted under
the Code.
In determining whether the share of any participant in the bonus pool will be
reduced, the Committee will consider those financial and individual
performance factors that it determines to be appropriate. While the nature of
<PAGE> 11
these factors and the size of the bonus pool in the future cannot be
predicted, the Committee has determined that if the Plan had been in effect
for fiscal year 1994, the Committee would have named Messrs. Van Dyke, Read
and Findorff as the Second, Third and Fourth Participants, respectively, in
addition to Mr. Hodder and would have awarded to the designated individuals
those bonus amounts set forth opposite their names in the Summary
Compensation Table on page 5. Therefore the total bonuses paid under the Plan
to all participating executives as a group would have been $1,152,556 if the
Plan had been in effect during fiscal 1994.
The Plan may be amended prospectively or terminated at any time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOREGOING PROPOSAL.
INDEPENDENT PUBLIC ACCOUNTANTS
Upon recommendation of its Audit Committee, the Board of Directors has appointed
Ernst & Young as independent public accountants to audit the books and accounts
of the Company for the fiscal year ending July 31, 1995, such appointment to
continue at the pleasure of the Board of Directors and subject to ratification
by the shareholders. Ernst & Young has audited the books and accounts of the
Company since 1951. Representatives of Ernst & Young are expected to be present
at the meeting with the opportunity to make a statement and to respond to
appropriate questions. In the event this appointment is not ratified, the Board
will appoint other independent accountants for the subsequent fiscal year.
The Board of Directors recommends that shareholders vote for ratification of
the appointment of Ernst & Young as independent public accountants for the
fiscal year ending July 31, 1995.
SHAREHOLDER PROPOSALS
The last day the Company will receive for its consideration any proposals
from shareholders for the 1995 Annual Meeting of Shareholders is June 16,
1995. Proposals should be sent to the attention of the Secretary.
OTHER MATTERS
The Company is not aware of any matter, other than as stated above, which
will or may properly be presented for action at the meeting. If any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed form of proxy to vote the shares represented by such
proxies in accordance with their best judgment.
By Order of the Board of Directors
Raymond F. Vodovnik
Secretary
October 14, 1994
<PAGE> 12
DONALDSON COMPANY, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William A. Hodder and Raymond F. Vodovnik,
and each of them, as proxies, with full power to appoint a substitute, to vote
all shares the undersigned is entitled to vote at the Annual Meeting of
Shareholders of Donaldson Company, Inc. to be held on November 18, 1994, and all
adjournments thereof, to vote as designated on the matters referred to on the
reverse side hereof and, in their discretion, on any other matters properly
coming before said meeting.
Dated: , 1994 Signatures
(Please sign as name(s) appear on this proxy. If joint account, each joint
owner should sign. When signing as attorney, executor, administrator, trustee,
guardian or corporate official, give your full title as such.)
(Continued from and to be signed on the reverse side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BELOW.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
1. ELECTION OF DIRECTORS.
Nominees: M.R. Bonsignore, J.W. Eugster, W.G. Van Dyke, C.A. Wurtele
[ ] VOTE FOR all nominees listed above; except vote withheld from following
nominees (if any):
[ ] WITHHOLD VOTE from all nominees.
2. APPROVE ANNUAL CASH BONUS PLAN:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFY APPOINTMENT OF PUBLIC ACCOUNTANTS:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. IN THEIR DISCRETION upon other matters as may come before the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS
CARD PROMPTLY USING THE ENCLOSED ENVELOPE
