SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended July 31, 1997 or
/ / Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required) for the transition period from _______ to ________
Commission File Number 1-7891
DONALDSON COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-0222640
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 West 94th Street, Minneapolis, Minnesota 55431
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 887-3131
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $5 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 ____
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 26, 1997 was $1,162,500,967.50.
The shares of common stock outstanding as of September 26, 1997 were 24,732,385.
Documents Incorporated by Reference
-----------------------------------
Portions of the 1997 Annual Report to Shareholders of the registrant are
incorporated by reference in Parts I and II, as specifically set forth in Parts
I and II.
Portions of the Proxy Statement for the 1997 annual shareholders meeting are
incorporated by reference in Part III, as specifically set forth in Part III.
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./ /
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
Donaldson Company, Inc. ("Donaldson" or the "Company") was founded in
1915 and organized in its present corporate form under the laws of the State of
Delaware in 1936.
The Company is a worldwide manufacturer of air cleaners, liquid filters
and exhaust products and accessories for heavy duty mobile equipment; in-plant
air cleaning systems; air intake systems and exhaust products for industrial gas
turbines; and specialized filters for diverse applications. The Company has one
industry segment which consists of the design, manufacture and sale of products
to filter air, sound and liquid. Its principal products are distributed through
multiple channels. The Company has customer relationships with original
equipment manufacturers (OEMs) worldwide for selling first-fit air intake,
exhaust and liquid filtration systems. Sale of aftermarket replacement products
are through OEM dealers and independent wholesalers/distributors. In-plant air
cleaning systems include dust, fume and mist collectors typically found in
manufacturing, production and assembly plants and are sold to end-users
worldwide. Gas turbine products include static and pulse-clean air filter
systems, replacement filters, inlet-exhaust silencers, evaporative coolers,
chiller coils, inlet heating and anti-icing systems. Sales are made through
customer relationships with gas turbine manufacturers and direct sales of
replacement parts to end-users. Specialized filter products for computer disk
drives, aircraft and automotive cabins, industrial and hospital clean rooms,
business machines, room air cleaners and air emission control are sold through
customer relationships with OEMs and end-users for specific applications and/or
markets.
The table below shows the percentage of total net sales contributed by
the principal classes of similar products for each of the last three fiscal
years:
Year Ended July 31
1997 1996 1995
---- ---- ----
Air cleaners, filtration
devices and accessories 66% 67% 67%
Acoustical products 11% 11% 11%
Other 23% 22% 22%
COMPETITION
The Company's business is not considered to be seasonal. Principal
methods of competition are price, geographic coverage, service and product
performance. The Company operates in a highly competitive environment. The
Company estimates it has more than 20 competitors in the sale of filtration
products worldwide and less than 10 competitors in the sale of acoustical
products worldwide.
RAW MATERIALS
The Company experienced no significant or unusual problems in the
purchase of raw materials or commodities. Donaldson has more than one source of
raw materials essential to its business. The Company is not required to carry
significant amounts of inventory to meet rapid delivery demands or secure
supplier allotments.
<PAGE>
PATENTS AND TRADEMARKS
The Company owns various patents and trademarks which it considers in
the aggregate to constitute a valuable asset. However, it does not regard the
validity of any one patent or trademark as being of material importance.
MAJOR CUSTOMER
Sales to Caterpillar, Inc. and subsidiaries ("Caterpillar") accounted
for 11 percent, 12 percent and 13 percent of net sales in 1997, 1996 and 1995,
respectively. Caterpillar has been a customer of the Company for many years and
it purchases several models and types of products for a variety of applications.
Sales to the U.S. Government do not constitute a material portion of the
Company's business.
BACKLOG
At August 31, 1997, the backlog of orders expected to be delivered
within 90 days was $163,682,000. The 90 day backlog at August 31, 1996 was
$128,624,000.
RESEARCH AND DEVELOPMENT
During 1997 the Company spent $17,288,000 on research and development
activities relating to the development of new products or improvements of
existing products or manufacturing processes. The Company spent $15,906,000 in
1996 and $14,487,000 in 1995 on research and development activities. Essentially
all commercial research and development is Company-sponsored.
ENVIRONMENTAL MATTERS
The Company does not anticipate any material effect on its capital
expenditures, earnings or competitive position due to compliance with government
regulations involving environmental matters.
EMPLOYEES
The Company employed 6,230 persons in worldwide operations as of July
31, 1997.
GEOGRAPHIC AREAS
Note H of the Notes to Consolidated Financial Statements on page 31 in
the 1997 Annual Report to Shareholders contains information regarding the
Company's geographic areas and is incorporated herein by reference.
Item 2. PROPERTIES
The Company's principal office and research facilities are located in
Bloomington, a suburb of Minneapolis, Minnesota. European administrative and
engineering offices are located in Leuven, Belgium.
<PAGE>
Manufacturing activities are carried on in thirteen plants in the
United States, two in Japan and Mexico and one each in Australia, France, United
Kingdom, Hong Kong, South Africa, Italy, Belgium, India, China and Germany. Page
36 of the 1997 Annual Report to Shareholders lists U.S. plant locations and is
incorporated herein by reference. Note H on page 31 of the 1997 Annual Report to
Shareholders presents identifiable assets by geographic area and is incorporated
herein by reference.
The Company is a lessee under several long-term leases. These leases
provide for options to purchase the facilities at the end of the lease term and
have been capitalized.
The Company's properties are considered to be suitable for their
present purposes, well maintained and in good operating condition.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Current information regarding executive officers is presented below.
All terms of office are for one year. There are no arrangements or
understandings between individual officers and any other person pursuant to
which he was selected as an officer.
First Year
Elected or
Appointed
as an
Name Age Positions and Offices Held Officer
- ---- --- -------------------------- -------
William G. Van Dyke 52 Chairman, Chief Executive 1979
Officer and President
William M. Cook 44 Senior Vice President, 1994
Commercial and Industrial
James R. Giertz 40 Senior Vice President and 1994
Chief Financial Officer
Norman C. Linnell 38 General Counsel and Secretary 1996
Nickolas Priadka 51 Senior Vice President, 1989
OE Engine
Lowell F. Schwab 49 Senior Vice President, 1994
Operations
Thomas A. Windfeldt 48 V.P., Controller and Treasurer 1985
All of the above-named executive officers have held executive or
management positions with Registrant for more than the past five years
except Mr. Giertz who was previously Assistant Treasurer Corporate
Finance for General Motors Corporation (1995) and Treasurer of various
subsidiaries of General Motors Corporation, Mr. Linnell who was
previously a partner in the law firm of Dorsey & Whitney LLP and Mr.
Schwab who was previously Vice President and General Manager of the
Machinery Division of Washington Scientific, Inc.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information in the sections "Quarterly Financial Information
(Unaudited)" and "NYSE Listing," on pages 32 and 33, and restrictions on payment
of dividends in Note D, page 27 of the 1997 Annual Report to Shareholders is
incorporated herein by reference. As of September 26, 1997, there were
approximately 1,500 shareholders of record of Common Stock.
The high and low sales prices for registrant's common stock for each
full quarterly period during 1997 and 1996 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996 $23 7/8-26 3/8 $24 1/8-26 1/8 $25 5/8-27 7/8 $24 - 28
1997 $25 3/8-29 1/4 $28 5/8-34 $30 3/4-36 5/8 $35 1/2-40 3/4
Item 6. SELECTED FINANCIAL DATA
The information for the years 1993 through 1997 on pages 34 and 35 of
the 1997 Annual Report to Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in the section "Management's Discussion and
Analysis" on pages 17 through 20 of the 1997 Annual Report to Shareholders is
incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements on pages 21 through 32, and the Quarterly Financial
Information (Unaudited) on page 32 of the 1997 Annual Report to Shareholders is
incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Nominees For Election" and
"Directors Continuing In Office" on pages 4 and 5 and under the heading
"Compliance With Section 16 (a) of the Securities Exchange Act of 1934" on page
15 of the Company's definitive proxy statement dated October 14, 1997 is
incorporated herein by reference. Information about the executive officers of
the Company is set forth in Part I of this report.
Item 11. EXECUTIVE COMPENSATION
The information under "Director Compensation" on page 5 and in the
section "Executive Compensation" on pages 8 through 10, the "Pension Plan Table"
on page 14 and under the caption "Change-in-Control Arrangements" on page 15 of
the Company's definitive proxy statement dated October 14, 1997, is incorporated
herein by reference.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section "Security Ownership" on pages 2 and 3 of
the Company's definitive proxy statement dated October 14, 1997, is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Not applicable.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
(1) Financial Statements -
Consolidated Balance Sheets--July 31, 1997 and 1996
(incorporated by reference from page 22 of the 1997 Annual
Report to Shareholders)
Consolidated Statements of Earnings--years ended July 31,
1997, 1996 and 1995 (incorporated by reference from page 21 of
the 1997 Annual Report to Shareholders)
Consolidated Statements of Cash Flows--years ended July 31,
1997, 1996 and 1995 (incorporated by reference from page 23 of
the 1997 Annual Report to Shareholders)
Consolidated Statements of Changes in Shareholders'
Equity--years ended July 31, 1997, 1996 and 1995 (incorporated
by reference from page 24 of the 1997 Annual Report to
Shareholders)
Notes to Consolidated Financial Statements (incorporated by
reference from pages 25 through 32 of the 1997 Annual Report
to Shareholders)
Report of Independent Auditors (incorporated by reference from
page 32 of the 1997 Annual Report to Shareholders).
(2) Financial Statement Schedules -
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instruction, or are inapplicable, and therefore have been
omitted.
(3) Exhibits
The exhibits listed in the accompanying index are filed as
part of this report or incorporated by reference as indicated
therein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
July 31, 1997.
<PAGE>
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DONALDSON COMPANY, INC.
-------------------------------------
(Registrant)
Date: October 29, 1997 By /s/ Norman C. Linnell
---------------------------------
Norman C. Linnell
General Counsel and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ William G. Van Dyke Chairman, Chief Executive
- ----------------------------- Officer and President
William G. Van Dyke
/s/ James R. Giertz Senior Vice President and
- ----------------------------- Chief Financial Officer
James R. Giertz
/s/ Thomas A. Windfeldt Vice President, Controller
- ----------------------------- and Treasurer
Thomas A. Windfeldt
*F. Guillaume Bastiaens Director
- -----------------------------
F. Guillaume Bastiaens
*Michael R. Bonsignore Director
- -----------------------------
Michael R. Bonsignore
*Paul B. Burke Director
- -----------------------------
Paul B. Burke
*Janet M. Dolan Director
- -----------------------------
Janet M. Dolan
*Jack W. Eugster Director
- -----------------------------
Jack W. Eugster
*Kendrick B. Melrose Director
- -----------------------------
Kendrick B. Melrose
*S. Walter Richey Director
- -----------------------------
S. Walter Richey
*Stephen W. Sanger Director
- -----------------------------
Stephen W. Sanger
*G. Angus Wurtele Director
- -----------------------------
G. Angus Wurtele
*By /s/ Norman C. Linnell Date: October 29, 1997
- -----------------------------
Norman C. Linnell
* As attorney-in-fact
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Thousands of Dollars)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged to Balance at
Beginning Costs and Charged to End of
Description of Period Expenses Other Accounts(A) Deductions(B) Period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1997:
Allowance for doubtful
accounts deducted from
accounts receivable $3,695 $ 894 $(161) $ (334) $4,094
====== ====== ====== ======== ======
Warranty and customer support $9,760 $6,901 $ (159) $16,502
====== ====== ======== =======
Year ended July 31, 1996:
Allowance for doubtful
accounts deducted from
accounts receivable $3,957 $ 511 $(246) $ (527) $3,695
====== ====== ====== ======== ======
Warranty and customer support $3,893 $7,779 $(1,912) $9,760
====== ====== ======== ======
Year ended July 31, 1995:
Allowance for doubtful
accounts deducted from
accounts receivable $3,443 $ 940 $ 111 $ (537) $3,957
====== ====== ======== ======
Warranty and customer support $8,232 $ 648 $(4,987) $3,893
====== ====== ======== ======
</TABLE>
Note A--Foreign currency translation losses (gains) recorded directly to
equity.
Note B--Bad debts charged to allowance, net of recoveries.
<PAGE>
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
* 3-A - Certificate of Incorporation of Registrant as
currently in effect (Filed as Exhibit 3-A to 1993
Form 10-K Report)
* 3-B - By-laws of Registrant as currently in effect (Filed as
Exhibit 3-B to 1996 Form 10-K Report)
* 4 - **
* 4-A - Preferred Stock Amended and Restated Rights
Agreement (Filed as Exhibit 4.1 to Form 8-K Report
Dated January 12, 1996)
* 4-B - Credit Agreement among Donaldson Company, Inc.
and certain listed banks dated as of October 8, 1987
(Filed as Exhibit 4-B to 1987 Form 10-K Report)
* 10-A - Annual Cash Bonus Plan (Filed as Exhibit 10-A to 1995
Form 10-K Report)
* 10-B - Supplementary Retirement Agreement with William A. Hodder
(Filed as Exhibit 10-B to 1993 Form 10-K Report)
* 10-C - 1980 Master Stock Compensation Plan as Amended (Filed
as Exhibit 10-C to 1993 Form 10-K Report)
* 10-D - Form of Performance Award Agreement under 1991 Master
Stock Compensation Plan (Filed as Exhibit 10-D to 1995
Form 10-K Report)
* 10-E - Copy of Phantom Stock Plan (Filed as Exhibit 10-E to 1991
Form 10-K Report)
* 10-F - Deferred Compensation Plan for Non-employee Directors as
amended (Filed as Exhibit 10-F to 1990 Form 10-K Report)
* 10-G - Form of "Change in Control" Agreement with key employees
as amended (Filed as Exhibit 10-G to 1990 Form 10-K Report)
* 10-H - Independent Director Retirement and Benefit Plan as
amended (Filed as Exhibit 10-H to 1995 Form 10-K Report)
* 10-I - Excess Benefit Plan (Filed as Exhibit 10-I to 1989
Form 10-K Report)
* 10-J - Copy of Supplementary Executive Retirement Plan (Filed as
Exhibit 10-J to 1991 Form 10-K Report)
* 10-K - 1991 Master Stock Compensation Plan as amended (Filed as
Exhibit 10-K to 1995 Form 10-K Report)
* 10-L - Form of Restricted Stock Award under 1991 Master Stock
Compensation Plan. (Filed as Exhibit 10-L to 1992 Form
10-K Report)
<PAGE>
* 10-M - Form of Agreement to Defer Compensation for certain
Executive Officers (Filed as Exhibit 10-M to 1993 Form
10-K Report)
* 10-N - Stock Option Program for Nonemployee Directors as amended
(Filed as Exhibit 10-N to 1995 10-K Report)
10-O - Salaried Employees' Pension Plan (1997 Restatement)
10-P - Eighth Amendment of Employee Stock Ownership Plan Trust
Agreement (1987 Restatement)
11 - Computation of net earnings per share
13 - Portions of Registrant's Annual Report to Shareholders
for the year ended July 31, 1997
21 - Subsidiaries ("Wholly Owned Subsidiaries" and "Joint
Ventures" on page 36 of the 1997 Annual Report to Shareholders
is incorporated by reference)
23 - Consent of Independent Auditors
24 - Powers of Attorney
27 - Financial Data Schedule
* Exhibit has heretofore been filed with the Securities and
Exchange Commission and is incorporated herein by
reference as an exhibit.
** Pursuant to the provisions of Regulation S-K Item
601(b)(4)(iii)(A) copies of instruments defining the rights of
holders of certain long-term debts of Registrant and its
subsidiaries are not filed and in lieu thereof Registrant
agrees to furnish a copy thereof to the Securities and
Exchange Commission upon request.
Note: Exhibits have been furnished only to the Securities and Exchange
Commission. Copies will be furnished to individuals upon request and
payment of $20 representing Registrant's reasonable expense in
furnishing such exhibits.
DONALDSON COMPANY, INC.
SALARIED EMPLOYEES' PENSION PLAN
(1997 RESTATEMENT)
First Effective October 1, 1955
As Amended and Restated Effective August 31, 1997
<PAGE>
DONALDSON COMPANY, INC.
SALARIED EMPLOYEES' PENSION PLAN
(1997 RESTATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. INTRODUCTION .................................................... 1
1.1. Amendment and Restatement
1.2. Definitions
1.2.1. Account Balance
1.2.2. Accrued Benefit
1.2.3. Accrued Points
1.2.4. Actuarial Equivalent
1.2.5. Actuary
1.2.6. Affiliate
1.2.7. Beneficiary
1.2.8. Benefit Service
1.2.9. Code
1.2.10. Committee or Retirement Committee
1.2.11. Compensation
1.2.12. Disability, Disabled
1.2.13. Earliest Retirement Age
1.2.14. Effective Date
1.2.15. Eligibility Service
1.2.16. Employer
1.2.17. ERISA
1.2.18. Fund
1.2.19. Hours of Service
1.2.20. Interest Credit
1.2.21. Interest Crediting Rate
1.2.22. Normal Retirement Age
1.2.23. One-Year Break in Service
1.2.24. Participant
1.2.25. Pay Credit
1.2.26. Plan
1.2.27. Plan Statement
1.2.28. Plan Year
1.2.29. Prior Plan Statement
1.2.30. Recognized Employment
<PAGE>
1.2.31. Social Security Taxable Wage Base
1.2.32. Termination of Employment
1.2.33. Trust Agreement
1.2.34. Trustee
1.2.35. Vested
1.2.36. Vesting Service
1.3. Participant's Account Balance
1.3.1. Initial Account Balance
1.3.2. Pay Credits
1.3.3. Interest Credits
1.3.4. Special Career Accruals
1.4. Grandfathered Benefits
1.4.1. Select Participants
1.4.2. Protected Benefits
1.5. Rules of Interpretation
SECTION 2. COVERAGE UNDER PLAN ............................................. 21
2.1. General Eligibility Rule
2.2. Special Rule for Former Participants
2.3. Participants Must Furnish Data
2.4. Effect of Misstatements by Participant
SECTION 3. RETIREMENT INCOME BENEFITS ...................................... 22
3.1. Normal Retirement Pension
3.1.1. When Available
3.1.2. Amount
3.1.3. Form of Pension
3.2. Early Retirement Pension
3.2.1. When Available
3.2.2. Amount
3.2.3. Form of Pension
3.3. Vested Benefit
3.3.1. When Available
3.3.2. Amount
3.3.3. Form of Benefit
3.4. Disability Rules
3.4.1. Continuing Pay Credits
3.4.2. Continuing Interest Credits
<PAGE>
3.5. General Benefits Rules
3.5.1. Nonduplication of Benefits
3.5.2. Effect of Termination Before Vesting --
Forfeiture and Restoration
3.6. Payments of Small Amounts
3.6.1. Lump Sum
3.6.2. Effect on Account Balance
3.7. Facility of Payment
3.8. Limitation on Benefits
3.9. Suspension of Benefits
3.9.1. Reemployment Before Normal Retirement Age
3.9.2. Reemployment After Normal Retirement Age
3.9.3. Reemployment Before Benefits Commence
3.9.4. Continued Employment After Normal Retirement
Age
3.9.5. Procedural Requirements
3.9.6. Offsets of Suspendible Amounts
SECTION 4. OPTIONAL FORMS OF PENSION ....................................... 29
4.1. Optional Forms Available
4.2. Presumptive Forms
4.3. Participant's Election Rights
4.4. Special Election for Retirees on or after July 1, 1997
but prior to August 31, 1997
4.5. Notices
4.6. Direct Rollover
SECTION 5. DEATH BENEFITS .................................................. 35
5.1. Death After Benefit Commencement
5.2. Death Before Benefit Commencement
5.2.1. When Available
5.2.2. Surviving Spouse Beneficiary
5.2.3. Nonspouse Beneficiaries
5.3. Designation of Beneficiaries
5.3.1. Right To Designate
5.3.2. Failure of Designation
5.3.3. Disclaimers by Beneficiaries
5.3.4. Definitions
5.3.5. Special Rules
<PAGE>
SECTION 6. FUNDING OF PLAN ................................................. 39
6.1. Creation of Trust
6.2. Cost of Plan
6.3. Contributions Not To Be Diverted
6.4. Spendthrift Provisions
SECTION 7. AMENDMENT AND TERMINATION ....................................... 41
7.1. Amendment
7.2. Termination of Plan
7.3. Merger or Spinoff of Plans
7.3.1. In General
7.3.2. Limitations
7.4. Adoption by Affiliates
7.4.1. Adoption by Consent
7.4.2. Procedure for Adoption
7.4.3. Effect of Adoption
7.5. Change in Control
7.5.1. Vesting
7.5.2. Termination
7.5.3. Amendment
7.5.4. Merger
7.5.5. Special Definitions
7.5.6. Not Amendable
SECTION 8. DETERMINATIONS-- RULES AND REGULATIONS .......................... 45
8.1. Determinations
8.2. Rules and Regulations
8.3. Method of Executing Instruments
8.4. Claims Procedure
8.4.1. Original Claim
8.4.2. Claims Review Procedure
8.4.3. General Rules
8.5. Information Furnished by Participants
SECTION 9. PLAN ADMINISTRATION ............................................. 48
9.1. Employer
9.1.1. Officers
9.1.2. Chief Executive Officer
9.1.3. Board of Directors
<PAGE>
9.2. Committee
9.2.1. Appointment and Removal
9.2.2. Automatic Removal
9.2.3. Authority
9.2.4. Majority Decisions
9.3. Limitation on Authority
9.4. Conflict of Interest
9.5. Dual Capacity
9.6. Administrator
9.7. Named Fiduciaries
9.8. Service of Process
9.9. Administrative Expenses
9.10. IRS Qualification
SECTION 10. MISCELLANEOUS RULES ............................................. 52
10.1. Disclaimers
10.2. Reversion of Fund Prohibited
10.3. Contingent Top Heavy Plan Rules
10.4. Continuity
APPENDIX A -- LIMITATION ON ANNUAL ADDITIONS
AND ANNUAL BENEFITS .......................................... A-1
APPENDIX B -- CONTINGENT TOP HEAVY PLAN RULES .............................. B-1
APPENDIX C -- DETERMINATION OF ACTUARIAL EQUIVALENT TO
SINGLE LIFE ANNUITY .......................................... C-1
APPENDIX D -- QUALIFIED DOMESTIC RELATIONS ORDERS .......................... D-1
<PAGE>
DONALDSON COMPANY, INC.
SALARIED EMPLOYEES' PENSION PLAN
(1997 RESTATEMENT)
SECTION 1
INTRODUCTION
1.1. AMENDMENT AND RESTATEMENT. Effective October 1, 1955, DONALDSON COMPANY,
INC., a Delaware corporation, adopted a defined benefit pension plan for the
benefit of its eligible salaried employees, which plan was set forth in a
document entitled "Donaldson Company, Inc. Salaried Employees' Amended Pension
Plan." Effective October 1, 1956, that Plan document was amended and restated in
a document entitled "Donaldson Company, Inc. 1956 Salaried Employees' Revised
Pension Plan." Effective August 1, 1962, that Plan document, as amended, was
further amended and restated in a document entitled "Donaldson Company, Inc.
1962 Salaried Employees' Revised Pension Plan." Effective July 31, 1976, that
Plan document, as amended, was further amended and restated in a document
entitled "Donaldson Company, Inc. 1976 Revised Salaried Employees' Pension
Plan." Effective August 1, 1985, that Plan document, as amended, was further
amended and restated in a document entitled "Donaldson Company, Inc. Salaried
Employees' Pension Plan (1985 Restatement)." That Plan document was thereafter
amended from time to time by the adoption of eight amendments.
In exercise of its reserved power of amendment (but not in exhaustion thereof),
the Employer hereby further amends those Plan documents by restating them in
their entirety. This amended and restated Plan document does not terminate the
Plan heretofore created but, on the contrary, continues and restates it
effective as of August 31, 1997. Except as may be hereinafter specifically
provided, this amended and restated Plan document shall not affect the rights
of, or benefits payable to or with respect to, any Participant who died, retired
or otherwise terminated employment prior to August 31, 1997. Except as
hereinafter specifically provided, the rights of, and benefits payable to or
with respect to, all such persons shall be governed under the Plan documents as
in effect at the time of such death, retirement or other termination of
employment.
1.2. DEFINITIONS. When used herein with initial capital letters, the following
words have the following meanings:
1.2.1. ACCOUNT BALANCE -- a single lump sum dollar amount determined
and redetermined for each Participant from time to time as provided in Section
1.3.
1.2.2. ACCRUED BENEFIT -- the monthly amount of retirement income
determined for a Participant as of a specified date (and normally payable
monthly to the Participant in the Single Life Annuity form, beginning on the
first day of the calendar month next following the Participant's
<PAGE>
Normal Retirement Age) which shall be the Actuarial Equivalent of that
Participant's Account Balance also determined as of that specified date. Neither
this Plan (as an amendment of the Prior Plan) nor any amendment of this Plan
shall have the effect of reducing the Accrued Benefit of any Participant. If any
such amendment would appear to have the effect of reducing an Accrued Benefit,
such amendment shall not be given effect to reduce the Accrued Benefit below the
level determined as of one day prior to the effective date of the Amendment (but
such amendment may have the effect of temporarily or indefinitely curtailing the
accrual of additional benefits).
1.2.3. ACCRUED POINTS -- a Participant's age attained as of the
birthday coincident with or immediately preceding the last day of the Plan Year
for which the Participant's Accrued Points are being calculated (expressed in
whole years) plus such Participant's completed years of Benefit Service
(expressed in whole years) completed as of the last day of such Plan Year.
1.2.4. ACTUARIAL EQUIVALENT -- a benefit of equivalent value computed
on the basis of actuarial tables, factors and assumptions set forth in the
Appendix C to this Plan Statement.
1.2.5. ACTUARY -- a corporation, firm or individual selected by the
Committee which has on its staff one or more Actuaries who are enrolled with the
Joint Board for the Enrollment of Actuaries. The Committee reserves the right to
retain the Actuary and to change the Actuary at any time and from time to time.
1.2.6. AFFILIATE -- a business entity which is under "common control"
with the Employer or which is a member of an "affiliated service group" that
includes the Employer, as those terms are defined in section 414(b), (c) and (m)
of the Code. A business entity which is a predecessor to the Employer shall be
treated as an Affiliate if the Employer maintains a plan of such predecessor
business entity or if, and to the extent that, such treatment is otherwise
required by regulations under section 414(a) of the Code. A business entity
shall also be treated as an Affiliate if, and to the extent that, such treatment
is required by regulations under section 414(o) of the Code. In addition to said
required treatment, the Committee may, in its discretion, designate as an
Affiliate any business entity which is not such a "common control," "affiliated
service group" or "predecessor" business entity but which is otherwise
affiliated with the Employer, subject to such limitations as the Committee may
impose.
1.2.7. BENEFICIARY -- a person designated by the Participant in
accordance with Section 5.3 (or automatically by operation of this Plan
Statement) to receive a death benefit payable under the terms of this Plan other
than the survivor benefit payable to a surviving spouse under a Qualified Joint
and Survivor Annuity). A person so designated shall not be considered a
Beneficiary until the death of the Participant.
1.2.8. BENEFIT SERVICE -- a measure of a Participant's service with the
Employer in Recognized Employment (stated as a number of years) which is equal
to the total years of the Participant's employment in Recognized Employment
determined as follows:
<PAGE>
(a) INCLUDED SERVICE.
(i) One (1) year of Benefit Service shall be credited for
each Plan Year in which the Participant has one
thousand (1,000) or more Hours of Service in
Recognized Employment during the Plan Year. If the
Participant has less than one thousand (1,000) Hours
of Service in Recognized Employment in the Plan Year,
no Benefit Service shall be credited for that Plan
Year.
(ii) Benefit Service shall not be credited for employment
if the Participant is accruing benefits on account of
that employment under any other pension plan to which
the Employer contributes.
(iii) Benefit Service shall not be credited for any
employment that is not Recognized Employment.
(iv) Benefit Service shall not be credited for employment
during any Plan Year prior to the Plan Year in which
the Participant attains age twenty-one (21) years.
(v) Notwithstanding anything herein to the contrary, one
(1) year of Benefit Service shall be credited for
each Plan Year in which the Participant has a
Disability as defined in Section 1.2.10.
(b) COMPUTATION PERIODS. The computation periods for determining
Benefit Service shall be the Plan Years.
(c) COMPLETION. A year of Benefit Service shall be deemed
completed as of the date in the computation period that the
employee completes one thousand (1,000) Hours of Service.
(Fractional years of Benefit Service for employment on or
after August 31, 1997, shall not be credited. Any fractional
years of Benefit Service earned prior to August 31, 1997,
shall be counted under this Plan Statement as follows:
one-half or more fractional years shall be counted as one (1)
year of Benefit Service, and less than one-half fractional
years of Benefit Service shall be disregarded).
(d) BREAK IN SERVICE. Benefit Service canceled before August 31,
1997 by operation of the Plan's break in service rules as they
existed prior to August 31, 1997 shall continue to be canceled
on and after August 31, 1997.
(e) BENEFIT RULE OF PARITY. If the Participant does not have a
Vested right to any portion of an Accrued Benefit, Benefit
Service completed before any One-Year Break in Service shall
be disregarded in determining his Benefit
<PAGE>
Service (upon a subsequent return to employment) if the number
of his consecutive One-Year Breaks in Service equals or
exceeds the greater of five (5) or the aggregate number of his
years (and fractions of years) of Benefit Service (whether or
not consecutive) completed before such One-Year Breaks in
Service. Such aggregate number of his years of Benefit Service
completed before such One-Year Breaks in Service shall not
include any years of Benefit Service which have been
disregarded under this paragraph by reason of any prior
One-Year Breaks in Service.
1.2.9. CODE -- the Internal Revenue Code of 1986, including applicable
regulations for the specified section of the Code. Any reference in this Plan
Statement to a section of the Code, including the applicable regulation, shall
be considered also to mean and refer to any subsequent amendment or replacement
of that section or regulation.
1.2.10. COMMITTEE OR RETIREMENT COMMITTEE -- the committee appointed
pursuant to Section 9.2.
1.2.11. COMPENSATION -- a Participant's Compensation will be determined
under the following rules:
(a) GENERAL RULE. Compensation is the total remuneration paid to
the Participant by the Employer for services rendered to the
Employer which would have been reported on Treasury Form W-2
Box 10 (or any comparable successor form) if reported on a
Plan Year basis; subject, however, to the following:
(i) EXCLUDED ITEMS. In determining a Participant's
Compensation there shall be excluded (A) all expense
reimbursements, moving expense payments and other
similar payments, and (B) all noncash remuneration,
and (C) third-party sick pay (including short and
long term disability insurance benefits), and (D)
income imputed from insurance coverages and premiums
or employee discounts and other similar amounts, and
(E) the value of stock options and stock appreciation
rights (whether or not exercised), Long Term
Compensation Plan payments and other similar amounts,
and (F) all foreign service allowances,
cost-of-living allowances, station allowances,
foreign tax equalization payments and other similar
payments, and (G) payments for vacation or sick
leaves accrued but not taken, and (H) any lump sum
payment of severance pay.
(ii) INCLUDED ITEMS. Compensation shall be determined
before any reductions authorized by the Participant
under a qualified cash or deferred arrangement under
section 401(k) of the Internal Revenue
<PAGE>
Code or under a cafeteria plan under section 125 of
the Internal Revenue Code.
(iii) PRE-PARTICIPATION EMPLOYMENT. Remuneration paid by
the employer attributable to periods prior to the
date the Participant becomes a Participant in the
Plan shall be taken into account in determining the
Participant's Compensation.
(iv) NON-RECOGNIZED EMPLOYMENT. Remuneration paid by the
Employer for employment that is not Recognized
Employment shall not be taken into account in
determining a Participant's Compensation.
(v) ATTRIBUTABLE TO PERIODS. A Participant's Compensation
shall be considered attributable to the Plan Year in
which it is actually paid and not when earned or
accrued.
(vi) MULTIPLE EMPLOYERS. If a Participant is employed by
more than one Employer in a Plan Year, a separate
amount of Compensation shall not be determined for
each Employer.
(vii) ANNUAL MAXIMUM. A Participant's Compensation for a
Plan Year shall not exceed the annual compensation
limit under section 401(a)(17) of the Internal
Revenue Code. For purposes of the foregoing, the
annual compensation limit under section 401(a)(17) of
the Internal Revenue Code shall be One Hundred and
Fifty Thousand Dollars ($150,000) (as adjusted under
the Internal Revenue Code for cost of living
increases) for Plan Years beginning on or after
January 1, 1994.
(b) MERGER OF DIXON HOURLY EMPLOYEES' PENSION PLAN. In the case of
a Participant who prior to April 1, 1987, was a Participant
under the "Donaldson Company, Inc. Dixon Hourly Employees'
Pension Plan," Compensation for Plan Years beginning prior to
April 1, 1987, shall be the hourly pay rate for him on the
June 30 preceding the Plan Year for which it is determined
multiplied by two thousand eighty (2,080).
(c) MERGER OF BALDWIN PENSION PLAN. In the case of a Participant
who prior to February 1, 1988, was a Participant under the
"Donaldson Company, Inc. Industrial Group Baldwin Hourly
Employees' Pension Plan," Compensation for Plan Years
beginning prior to February 1, 1988, shall be the hourly pay
rate for him on the June 30 preceding the Plan Year for which
it is determined multiplied by two thousand eighty (2,080).
<PAGE>
1.2.12. DISABILITY, DISABLED -- a physical or mental impairment which
constitutes total and permanent disability and during which the Participant is
not receiving any payments of an Early Retirement Pension or a Vested Benefit,
and either:
(a) is eligible to receive long-term disability benefits under the
Employer's separate long-term disability insurance plan (which
program shall be administered on a uniform and
nondiscriminatory basis); if such separate long-term
disability coverage is elected by the Participant, or
(b) is eligible to receive and is actually receiving (after the
applicable waiting period) benefits under the federal Social
Security Act as in effect at the time of the Disability.
1.2.13. EARLIEST RETIREMENT AGE -- the last day of the first calendar
month in which the Participant has both attained at least age fifty-five (55)
years and completed at least five (5) years of Vesting Service or, if earlier,
the date upon which the Participant attains age sixty-five (65) years (without
regard to the number of his years of Vesting Service).
1.2.14. EFFECTIVE DATE -- August 31, 1997. (Except as specifically
provided, this Plan Statement shall not affect the rights of or the benefits
payable to, or with respect to, any employee who died, retired or otherwise had
a Termination of Employment prior to the Effective Date.)
1.2.15. ELIGIBILITY SERVICE -- a measure of an employee's service with
the Employer and all Affiliates (stated as a number of years) which is equal to
the number of computation periods for which the employee is credited with one
thousand (1,000) or more Hours of Service; subject, however, to the following
rules:
(a) COMPUTATION PERIODS. The computation periods for determining
Eligibility Service shall be the twelve (12) consecutive month
period beginning with the date the employee first performs an
Hour of Service and all Plan Years beginning after such date
(irrespective of any termination of employment and subsequent
reemployment). Notwithstanding the foregoing, if the employee
performs the employee's first Hour of Service on the first
regularly scheduled workday of the calendar month, and if
treating that employee to have worked the employee's first
Hour of Service on the first day of the calendar month results
in the employee completing the employee's year of Eligibility
Service earlier, then the employee shall be deemed to have the
computation period beginning on the first day of the calendar
month in which the employee first performs an Hour of Service.
(b) COMPLETION. A year of Eligibility Service shall be deemed
completed only as of the last day of the computation period
(irrespective of the date during such
<PAGE>
period that the employee completed one thousand Hours of
Service). (Fractional years of Eligibility Service shall not
be credited.)
(c) BREAK IN SERVICE. Eligibility Service canceled before August
31, 1997, by operation of the Plan's break in service rules as
they existed prior to August 31, 1997, shall continue to be
canceled in and after August 31, 1997.
(d) ELIGIBILITY RULE OF PARITY. If the employee does not have a
Vested right to any portion of an Accrued Benefit, Eligibility
Service completed before any One-Year Break in Service shall
be disregarded in determining his Eligibility Service (upon a
subsequent return to employment) if the number of his
consecutive One-Year Breaks in Service equals or exceeds the
greater of five (5) or the aggregate number of his years of
Eligibility Service (whether or not consecutive) completed
before such One-Year Breaks in Service. Such aggregate number
of his years of Eligibility Service completed before such
One-Year Breaks in Service shall not include any years of
Eligibility Service which have been disregarded under this
paragraph by reason of any prior One-Year Breaks in Service.
1.2.16. EMPLOYER -- DONALDSON COMPANY, INC., a Delaware corporation
(the "principal sponsor"), and any business entity affiliated with the principal
sponsor that adopts the Plan with the consent of the principal sponsor and
subject to such limitations (not inconsistent with federal law) as the principal
sponsor may impose with respect to the extent that service with such business
entity prior to such adoption will be recognized hereunder, and any successor
thereof that adopts the Plan.
1.2.17. ERISA -- the Employee Retirement Income Security Act of 1974,
including applicable regulations for the specified section of ERISA. Any
reference in this Plan Statement to a section of ERISA, including the applicable
regulation, shall be considered also to mean and refer to any subsequent
amendment or replacement of that section or regulation.
1.2.18. FUND -- the assets of the Plan held by the Trustee from time to
time, including all contributions of the Employer and the investments and
reinvestments, earnings and profits thereon.
1.2.19. HOURS OF SERVICE -- a measure of an employee's service with the
Employer and all Affiliates, determined for a particular computation period and
equal to the number of hours credited to the employee under the following rules:
(a) PAID DUTY. An Hour of Service shall be credited for each hour
for which the employee is paid, or entitled to payment, for
the performance of duties for an Employer or an Affiliate.
These Hours of Service shall be credited to the employee for
the computation period or periods in which the duties are
performed.
<PAGE>
(b) PAID NONDUTY. An Hour of Service shall be credited for each
hour for which the employee is paid, or entitled to payment,
by an Employer or an Affiliate on account of a period of time
during which no duties are performed (irrespective of whether
the employment relationship has terminated) due to vacation,
holiday, illness, incapacity (including disability), layoff,
jury duty, military duty or leave of absence; provided,
however, that:
(i) no more than one thousand forty (1,040) Hours of
Service shall be credited on account of a single
continuous period during which the employee performs
no duties (whether or not such period occurs in a
single computation period);
(ii) no Hours of Service shall be credited on account of
payments made under a plan maintained solely for the
purpose of complying with applicable workers'
compensation, unemployment compensation or disability
insurance laws;
(iii) no Hours of Service shall be credited on account of
payments which solely reimburse the employee for
medical or medically related expenses incurred by the
employee;
(iv) payments shall be deemed made by or due from an
Employer whether made directly or indirectly from a
trust fund or an insurer to which the Employer
contributes or pays premiums.
These Hours of Service shall be credited to the
employee in accordance with applicable regulations then in
force and for the computation period for which payment is made
or, if the payment is not computed by reference to units of
time, the Hours of Service shall be credited to the first
computation period in which the event for which any part of
the payment is made occurred.
(c) BACK PAY. An Hour of Service shall be credited for each hour
for which back pay, irrespective of mitigation of damages, has
been either awarded or agreed to by an Employer or an
Affiliate. The same Hours of Service credited under paragraph
(a) and (b) shall not be credited under this paragraph (c).
The crediting of Hours of Service under this paragraph (c) for
periods and payments described in paragraph (b) shall be
subject to all the limitations of that paragraph. These Hours
of Service shall be credited to the employee for the
computation period or periods to which the award or agreement
pertains rather than the computation period in which the
award, agreement or payment is made.
<PAGE>
(d) UNPAID ABSENCES.
(i) MILITARY LEAVES. During service in the Armed Forces
of the United States if the employee both entered
such service and returned to employment with an
Employer or an Affiliate from such service under
circumstances entitling him to reemployment rights
granted veterans under federal law, the employee
shall be credited with the number of Hours of Service
which otherwise would normally have been credited but
for such absence; provided, however, that if the
employee does not return to employment for any reason
other than his death, Disability or attainment of
Normal Retirement Age within the time prescribed by
law for the retention of veteran's reemployment
rights, such Hours of Service shall not be credited.
(ii) PARENTING LEAVES. To the extent not otherwise
credited and solely for the purpose of determining
whether a One-Year Break in Service has occurred,
Hours of Service shall be credited to an employee for
any period of absence from work beginning after
December 31, 1984 due to pregnancy of the employee,
the birth of a child of the employee, the placement
of a child with the employee in connection with the
adoption of such child by the employee, or for the
purpose of caring for such child for a period
beginning immediately following such birth or
placement. The employee shall be credited with the
number of Hours of Service which otherwise would
normally have been credited to such employee but for
such absence. If it is impossible to determine the
number of Hours of Service which would otherwise
normally have been so credited, the employee shall be
credited with eight (8) Hours of Service for each day
of such absence. In no event, however, shall the
number of Hours of Service credited for any such
absence exceed five hundred one (501) Hours of
Service. Such Hours of Service shall be credited to
the computation period in which such absence from
work begins if crediting all or any portion of such
Hours is necessary to prevent the employee from
incurring a One-Year Break in Service in such
computation period. If the crediting of such Hours of
Service is not necessary to prevent the occurrence of
a One-Year Break in Service in that computation
period, such Hours of Service shall be credited in
the immediately following computation period (even
though no part of such absence may have occurred in
such subsequent computation period). These Hours of
Service shall not be credited until the employee
furnishes timely information which may be reasonably
required by the Employer to establish that the
absence from work is for a reason for which these
Hours of Service may be credited.
<PAGE>
(iii) LEAVES OF ABSENCE. Solely for the purpose of
determining whether a One-Year Break in Service has
occurred, during each unpaid leave of absence
authorized by the Employer or an Affiliate under
uniform rules of nondiscriminatory application that
does not exceed twelve (12) months duration, the
employee shall be credited with the number of Hours
of Service which otherwise would normally have been
credited to such employee but for such absence;
provided, however, that if the employee does not
return to employment for any reason other than his
death, Disability or attainment of Normal Retirement
Age at the expiration of the leave of absence, such
Hours of Service shall not be credited.
(iv) LAYOFFS. Solely for the purpose of determining
whether a One-Year Break in Service has occurred,
during each unpaid layoff from Recognized Employment
that does not exceed twelve (12) months duration, the
employee shall be credited with the number of Hours
of Service which otherwise would normally have been
credited to such employee but for such absence;
provided, however, that if the employee does not
return to employment for any reason other than his
death, Disability or attainment of Normal Retirement
Age at the expiration of the layoff, such Hours of
Service shall not be credited.
(e) SPECIAL RULES. For periods prior to the effective date, Hours
of Service shall be determined using whatever records are
reasonably accessible and in accordance with whatever
calculations are necessary to determine the approximate number
of Hours of Service completed during such prior period. To the
extent not inconsistent with other provisions hereof,
Department of Labor Regulations 29 C.F.R. ss. 2530.200b-2(b)
and (c) are hereby incorporated by reference herein. To the
extent required under section 414 of the Code, services of
leased employees, leased owners, leased managers, shared
employees, shared leased employees and other similar
classifications by the Employer or an Affiliate shall be taken
into account as if such services were performed as a common
law employee of the Employer for the purposes of determining
Eligibility Service, Vesting Service and One-Year Breaks in
Service as applied to Eligibility Service and Vesting Service.
Application of the leased employee rules under section 414(n)
of the Code shall be subject to the following: (i) "contingent
services" shall mean services performed by a person for the
Employer or an Affiliate during the period the person has not
performed the services on a substantially full time basis for
a period of at least twelve (12) consecutive months, (ii)
except as provided in (iii), contingent services shall not be
taken into account for purposes of determining Eligibility
Service, Vesting Service and One-Year Breaks in Service as
applied to Eligibility Service and Vesting Service, (iii)
contingent services performed by
<PAGE>
a person who has become a Leased Employee shall be taken into
account for purposes of determining Eligibility Service,
Vesting Service and One-Year Breaks in Service as applied to
Eligibility Service and Vesting Service, and (iv) all service
performed as a Leased Employee (I.E., all service following
the date an individual has satisfied all three requirements
for becoming a Leased Employee) shall be taken into account
for purposes of determining Eligibility Service, Vesting
Service and one-Year Breaks in Service as applied to
Eligibility Service and Vesting Service.
(f) ACQUISITION OF DAY DIVISION OF CARTER-DAY COMPANY. A former
employee of the Day Division of Carter-Day Company, a
Minnesota corporation, who transfers to Recognized Employment
from employment with the Day Division of Carter-Day Company in
connection with the Employer's acquisition of the Day Division
of Carter-Day Company which occurred on October 31, 1986,
within the thirty (30) day period beginning on October 31,
1986, shall be considered to have been employed by the
Employer for employment with Carter-Day Company up to October
31, 1986, for the purpose of determining a Participant's Hours
of Service, Eligibility Service and Vesting Service under the
Plan, but not for determining a Participant's Benefit Service
under the Plan.
(g) ACQUISITION OF INTEGRATED AIR SYSTEMS, INC. A former employee
of Integrated Air Systems, Inc. (IAS), a Delaware corporation,
who transfers to Recognized Employment from employment with
IAS in connection with the Employer's acquisition of IAS which
occurred on January 1, 1987, within the thirty (30) day period
beginning on January 1, 1987, shall be considered to have been
employed by the Employer for employment with IAS up to January
1, 1987, for the purpose of determining a Participant's Hours
of Service, Eligibility Service and Vesting Service under the
Plan, but not for determining a Participant's Benefit Service
under the Plan.
(h) ACQUISITION OF MINE SAFETY APPLICATIONS. A former employee of
Mine Safety Applications product division from Pittsburgh,
Pennsylvania, who transfers to Recognized Employment from
employment with Mine Safety Applications in connection with
the Employer's acquisition of Mine Safety Applications which
occurred on April 27, 1987, within the thirty (30) day period
beginning on April 27, 1987, shall be considered to have been
employed by the Employer for employment with Mine Safety
Applications up to April 27, 1987, for the purpose of
determining a Participant's Hours of Service, Eligibility
Service and Vesting Service under the Plan, but not for
determining a Participant's Benefit Service under the Plan.
<PAGE>
1.2.20. INTEREST CREDIT -- interest amounts credited to the Account
Balance as specified in Section 1.3.
1.2.21. INTEREST CREDITING RATE -- a percentage determined once for
each Plan Year which shall be equal to the average interest rate on one-year
Treasury bills auctioned in the month of June preceding such Plan Year plus one
percent (1%).
1.2.22. NORMAL RETIREMENT AGE-- the last day of the calendar month in
which a Participant attains age sixty-five (65) years.
1.2.23. ONE-YEAR BREAK IN SERVICE -- a Plan Year during which an
employee is not credited with any Hours of Service. (A One-Year Break in Service
shall be deemed to occur only on the last day of such a Plan Year.)
1.2.24. PARTICIPANT -- an employee of an Employer who becomes a
Participant in the Plan in accordance with the provisions of Section 2 hereof.
An employee who has become a Participant shall be considered to continue as a
Participant in the Plan until the date of his death or, if earlier, the date
when he is no longer employed in Recognized Employment and upon which the
Participant no longer has any Vested Accrued Benefit under the Plan (that is, he
has received a distribution of all of his Vested Accrued Benefit or his Accrued
Benefit that is not Vested has been cancelled by the occurrence of one or more
One-Year Breaks in Service).
1.2.25. PAY CREDIT -- pay-related amounts credited to the Account
Balance as specified in Section 1.3.
1.2.26. PLAN -- the tax-qualified defined benefit pension plan of the
Employer established for the benefit of employees eligible to participate
therein, as first set forth in the Prior Plan Statement and as amended in this
Plan Statement. (As used herein, "Plan" refers to the legal entity established
by the Employer and not to the documents pursuant to which the Plan is
maintained. Those documents are referred to herein as the "Prior Plan
Statement," the "Plan Statement" and the "Trust Agreement.") The Plan shall be
referred to as the "DONALDSON COMPANY, INC. SALARIED EMPLOYEES' PENSION PLAN."
1.2.27. PLAN STATEMENT -- this written instrument entitled "DONALDSON
COMPANY, INC. SALARIED EMPLOYEES' PENSION PLAN (1997 Restatement)" as adopted by
DONALDSON COMPANY, INC. effective as of August 31, 1997, as the same may be
amended from time to time thereafter.
1.2.28. PLAN YEAR -- the twelve (12) consecutive month period ending on
any July 31.
1.2.29. PRIOR PLAN STATEMENT -- the written instruments pursuant to
which the Plan was established and operated until August 31, 1997.
<PAGE>
1.2.30. RECOGNIZED EMPLOYMENT -- all employment with the Employer which
the Employer classifies as salaried employment, excluding, however, employment
which the Employer classifies as:
(a) employment as a salaried production employee eligible for
participation in another tax-qualified defined benefit pension
plan to which the Employer contributes;
(b) employment in a unit of employees whose terms and conditions
of employment are subject to a collective bargaining agreement
between the Employer and a union representing that unit of
employees, unless such collective bargaining agreement
provides for the inclusion of those employees in the Plan;
(c) employment as a nonresident alien who is not receiving any
earned income from the Employer which constitutes income from
sources within the United States;
(d) employment in a division or facility of the Employer which is
not in existence on August 1, 1985 (that is, was acquired,
established, founded or produced by the liquidation or similar
discontinuation of a separate subsidiary after August 1, 1985)
unless and until the Committee shall declare such employment
to be Recognized Employment; and
(e) employment by a United States citizen outside the United
States unless such citizen is formally designated by the
Committee as eligible for participation in the Plan,
(f) employment as a warehouse, salaried employee in the Employer's
distribution center facility unless and until the Committee
shall declare such employment to be Recognized Employment;
(g) services of a person not a common law employee of the Employer
including, without limiting the generality of the foregoing,
services of a leased employee, leased owner, leased manager,
shared employee, shared leased employee or other similar
classification; and
(h) employment of a highly compensated employee (as defined in
section 414 of the Internal Revenue Code) to the extent agreed
in writing by the employee.
1.2.31. SOCIAL SECURITY TAXABLE WAGE BASE -- the amount of wages on
which payroll taxes attributable to the funding of old-age and survivor's
disability insurance under Title II of the Social Security Act are assessed on
the first day of the Plan Year.
<PAGE>
1.2.32. TERMINATION OF EMPLOYMENT -- a complete severance of an
employee's employment relationship with the Employer and all Affiliates, if any,
for any reason. A transfer from employment with the Employer to employment with
an Affiliate of the Employer shall not constitute a Termination of Employment.
Notwithstanding that a Participant actually continues as an employee of the
Employer or an Affiliate, each Participant shall be deemed for the purpose of
commencing the payment of benefits under this Plan to have had a Termination of
Employment upon the earlier of:
(a) the last day of the calendar year in which the Participant
attains age seventy and one-half (70-1/2) years (or, if later,
the day the Participant first becomes Vested in any Accrued
Benefit); provided, however, that this paragraph (a) shall not
apply to any such Participant who elects not to commence
payment of benefits until after an actual termination of
employment; or
(b) the first day of any calendar month that begins after the
Participant's Normal Retirement Age and during which the
Participant has less than forty (40) Hours of Service.
1.2.33. TRUST AGREEMENT -- the separate written instrument entitled
"DONALDSON COMPANY, INC. MASTER INVESTMENT TRUST AGREEMENT" entered into by and
between the Trustee and the Employer effective as of May 25, 1988, as the same
may be amended from time to time thereafter.
1.2.34. TRUSTEE -- the Trustee originally named in the Trust Agreement
and its successor or successors in trust. Where the context requires, Trustee
shall also mean and refer to any one or more co-trustees serving hereunder.
1.2.35. VESTED -- nonforfeitable, i.e., a claim obtained by a
Participant or his Beneficiary to that part of an immediate or deferred benefit
hereunder which arises from the Participant's service, which is unconditional
and which is legally enforceable against the Plan.
1.2.36. VESTING SERVICE -- a measure of an employee's service with the
Employer and all Affiliates (stated as a number of years) which is equal to the
number of computation periods for which the employee is credited with one
thousand (1,000) or more Hours of Service; subject, however, to the following
rules:
(a) COMPUTATION PERIODS. The computation periods for determining
Vesting Service shall be the Plan Years.
(b) COMPLETION. A year of Vesting Service shall be deemed
completed as of the date in the computation period that the
employee completes one thousand (1,000) Hours of Service.
(Fractional years of Vesting Service shall not be credited.)
<PAGE>
(c) PRE-AUGUST 1, 1976 SERVICE. Years of Vesting Service shall be
credited for years prior to August 1, 1976 as if this Plan
Statement were then in effect; provided, however, that Plan
Years completed before August 1, 1976 that would have been
disregarded under the break in service rules in effect under
this Plan prior to August 1, 1976 shall be disregarded under
this Plan Statement.
(d) BREAK IN SERVICE. Vesting Service canceled before August 31,
1997, by operation of the Plan's break in service rules as
they existed prior to August 31, 1997, shall continue to be
canceled on and after August 31, 1997.
(e) VESTING RULE OF PARITY. Except as provided in the following
sentences, an employee's service both before and after a
One-Year Break in Service shall be taken into account in
computing his Vesting Service for the purpose of determining
the Vested percentage of his Accrued Benefit after such
One-Year Break in Service. If the employee does not have any
Vested right to any portion of an Accrued Benefit when he
incurs a One-Year Break in Service, however, Vesting Service
completed before any One-Year Break in Service shall be
disregarded in determining his Vesting Service (upon a
subsequent return to employment) if the number of his
consecutive One-Year Breaks in Service equals or exceeds the
greater of five (5) or the aggregate number of his years of
Vesting Service (whether or not consecutive) completed before
such One-Year Breaks in Service. Such aggregate number of his
years of Vesting Service completed before such One-Year Breaks
in Service shall not include any years of Vesting Service
which have been disregarded under the preceding sentence by
reason of any prior One-Year Breaks in Service.
1.3. PARTICIPANT'S ACCOUNT BALANCE. There shall be maintained for each
Participant an Account Balance which shall be adjusted annually with the
accruals hereinafter described, the value of which shall be determined without
regard to any contributions to the Fund or the income, expenses, gains and
losses of the Fund or any forfeitures under the Plan.
1.3.1. INITIAL ACCOUNT BALANCE.
(a) NEW PARTICIPANTS. An employee who becomes a Participant in the
Plan on or after August 31, 1997, shall have an initial
Account Balance of $0.
(b) TRANSITIONED PARTICIPANTS. As of August 31, 1997, the initial
Account Balance for each Participant who was a Participant in
Recognized Employment on or after August 1, 1997, shall be
established as follows:
<PAGE>
(i) Determine each Participant's monthly Accrued Benefit
under the Prior Plan Statement as of August 1, 1997
(expressed in a Single Life Annuity form commencing
on the first day of the calendar month following the
month in which the Participant attains the later of
Normal Retirement Age or the Participant's current
age and determined as if the Participant had
terminated on August 1, 1997);
(ii) Multiply the amount established in (i) by one hundred
twenty (120);
(iii) Determine the present value of the amount established
in (ii) as of August 1, 1997, by discounting the
amount established in (ii) from each Participant's
Normal Retirement Age to August 1, 1997, in years and
full calendar months (using a six percent (6%)
compounded interest rate assumption).
(c) REHIRED PARTICIPANTS. The initial Account Balance for each
Participant who was not in active employment on July 31, 1997,
and who is rehired on or after August 1, 1997, shall be
established as of the August 1 coincident with or immediately
preceding the Participant's rehire date as follows:
(i) Determine each Participant's monthly Accrued Benefit
under the Prior Plan Statement as of the August 1
coincident with or immediately preceding the
Participant's rehire date (expressed in a Single Life
Annuity form commencing on the first day of the
calendar month following the month in which the
Participant attains the later of Normal Retirement
Age or the Participant's current age);
(ii) Multiply the amount established in (i) by one hundred
twenty (120);
(iii) Determine the present value of the amount established
in (ii) as of the August 1 coincident with or
immediately preceding the Participant's rehire date,
by discounting the amount established in (ii) from
each Participant's Normal Retirement Age to the
August 1 coincident with or immediately preceding the
Participant's rehire date, in years and full calendar
months (using a six percent (6%) compounded interest
rate assumption).
The calculation of the Accrued Benefit under the Prior Plan
Statement is determined in part by reference to the estimated
Social Security benefit. Each Participant shall be notified of
the opportunity to provide the Employer with his or her actual
Social Security earnings history from the Social Security
Administration to be used in determining the Accrued Benefit
as of August 31, 1997, and Initial Account Balance. If such
actual Social Security
<PAGE>
earnings history is not filed with the Employer prior to March
30, 1998, the Social Security Benefit of such Participant
shall be determined by utilizing the alternative methods
specified in the Prior Plan Statement and the calculation of
the Accrued Benefit and Initial Account Balance will be final.
Notwithstanding anything in this Section 1.3.1(c) to the
contrary, a Participant who is rehired after benefit payments
have commenced under the Prior Plan Statement shall have an
initial Account Balance of $0, and the Accrued Benefit under
the Prior Plan Statement shall continue to be paid under the
Prior Plan Statement.
1.3.2. PAY CREDITS. As of each July 31 (beginning July 31, 1998, for
pay periods with a pay date after August 1, 1997), each eligible Participant's
Account Balance shall receive a Pay Credit equal to the applicable percentage of
that Participant's Compensation for the Plan Year ending on that date shown in
the following table:
Participant's Percentage of
Accrued Points Compensation
-------------- ------------
0-39 3%
40-49 4%
50-59 5%
60-69 6.5%
70 and over 8.5%
In addition, the Account Balance of each Participant whose Compensation for the
Plan Year exceeds the Social Security Taxable Wage Base shall receive a Pay
Credit equal to the applicable percentage of that portion of the Participant's
Compensation for the Plan Year that exceeds the Social Security Taxable Wage
Base at the beginning of the Plan Year shown in the following table:
Participant's Percentage of Compensation in Excess of
Accrued Points Social Security Taxable Wage Base
-------------- ---------------------------------
0-39 3%
40-49 4%
50 and over 5%
<PAGE>
For purposes of this Section 1.3.2,
(a) A Participant shall be eligible to receive a Pay Credit for a
Plan Year only if the Participant has completed one (1) year
of Benefit Service for that Plan Year.
(b) Any Participant who leaves Recognized Employment on a date
other than July 31 and who has completed one (1) year of
Benefit Service during that Plan Year, may receive a Pay
Credit for that Plan Year prior to July 31 if such Participant
requests a distribution of the Participant's Account Balance
prior to July 31.
(c) A Participant shall receive Pay Credits during a period of
Disability to the extent provided in Section 3.4.
(d) An employee who becomes a Participant in the Plan on or after
August 31, 1997, and who completes one (1) year of Benefit
Service during the Plan Year in which the employee becomes a
Participant under Section 2.1 of this Plan Statement shall
receive additional Pay Credits, as of the July 31 of the Plan
Year in which the employee becomes a Participant, based on the
Participant's Accrued Points and Compensation earned during
the Plan Year immediately preceding the Plan Year in which the
employee became a Participant, if the employee was in
Recognized Employment during such Plan Year.
1.3.3. INTEREST CREDITS. As of the last day of each Plan Year
(beginning July 31, 1998), there shall be credited to each eligible
Participant's or Beneficiary's Account Balance an Interest Credit, determined
under the following rules:
(a) The amount of each annual Interest Credit shall be equal to
the Interest Crediting Rate for the current Plan Year
multiplied by the Account Balance determined as of the first
day of the current Plan Year.
(b) Interest Credits to the Account Balance of a Participant whose
termination of employment during the current Plan Year is due
to retirement at or after Early Retirement Age, retirement at
or after Normal Retirement Age, or death and who commences
payment of benefits prior to or on July 31 of the current Plan
Year will be credited on a prorated basis up to and including
the last day of the month prior to the date as of which
payments first commence (on or after August 1, 1997) with
respect to such Account Balance (but not thereafter). Such
prorated Interest Credits shall be based on the Account
Balance determined as of the first day of the current Plan
Year (which Account Balance shall not include any prorated Pay
Credits made for the current Plan Year).
<PAGE>
(c) A Participant whose termination of employment during the
current Plan Year is not due to retirement at or after Early
Retirement Age, retirement at or after Normal Retirement Age
or death, or whose termination of employment occurred during
any prior Plan Year, will receive an Interest Credit for the
current Plan Year only if he or she has not commenced payment
of benefits prior to or on July 31 of the current Plan Year.
(d) A Participant who receives Pay Credits under Section 1.3.2(d)
shall receive Interest Credits on such Pay Credits as if such
Pay Credits had been credited to the Participant's account as
of the July 31 of the prior Plan Year.
1.3.4. SPECIAL CAREER ACCRUALS. Annually on each July 31 beginning July
31, 1998, there shall be credited (but only for each Participant who is an
active employee both on August 1, 1997, and on the last day of the applicable
Plan Year, who had attained at least forty (40) years of age as of August 1,
1997, and who has been an active employee in substantially continuous employment
since on or before July 31, 1992), a Pay Credit equal to three percent (3%) of
that Participant's Compensation attributable to such Plan Year. Such Pay Credits
shall be given to each such Participant for no longer than the lesser of (i) ten
(10) years, or (ii) the number of years determined by subtracting the total
number of completed years of Benefit Service earned by the Participant as of
August 1, 1997, from thirty-five (35).
1.4. GRANDFATHERED BENEFITS.
1.4.1. SELECT PARTICIPANTS. Notwithstanding anything in this Plan
Statement to the contrary, all benefits paid or payable with respect to a
Participant who did not perform an Hour of Service in Recognized Employment on
or after August 1, 1997, shall be paid under the terms of the Prior Plan
Document, except that Participants who retire at or after Early Retirement Age
or retire at or after Normal Retirement Age at anytime during the months of July
or August 1997 and who elect to commence benefit payments after August 1, 1997,
may elect to receive a lump sum optional form of distribution under this Plan
Statement.
1.4.2. PROTECTED BENEFITS. Notwithstanding anything in this Plan
Statement to the contrary, nothing in this Plan Statement or any amendment
thereto shall have the effect of decreasing the Accrued Benefit of any
Participant earned under the Prior Plan Statement, eliminating or reducing an
early retirement benefit or a retirement-type subsidy or eliminating an optional
form of benefit offered under the Prior Plan Statement. No Participant, except
those Participants described in Section 3.4 of the Prior Plan Statement, shall
accrue any additional benefit under the Prior Plan Statement after August 1,
1997. No Participant shall accrue any additional benefit under the Prior Plan
Statement on or after the date he or she becomes a Participant under this Plan
Statement.
1.5. RULES OF INTERPRETATION. An individual shall be considered to have attained
a given age on the individual's birthday for that age (and not on the day
before). The birthday of any individual born on a February 29 shall be deemed to
be February 28 in any year that is not a leap year.
<PAGE>
Notwithstanding any other provision of this Plan Statement or any election or
designation made under the Plan, any individual who feloniously and
intentionally kills a Participant, Joint Annuitant or Beneficiary shall be
deemed for all purposes of this Plan and all elections and designations made
under this Plan to have died before such Participant, Joint Annuitant or
Beneficiary. A final judgment of conviction of felonious and intentional killing
is conclusive for the purposes of this section. In the absence of a conviction
of felonious and intentional killing, the Committee shall determine whether the
killing was felonious and intentional for the purposes of this section. Whenever
appropriate, words used herein in the singular may be read in the plural, or
words used herein in the plural may be read in the singular; the masculine may
include the feminine; and the words "hereof," "herein" or "hereunder" or other
similar compounds of the word "here" shall mean and refer to the entire Plan
Statement and not to any particular paragraph or section of this Plan Statement
unless the context clearly indicates to the contrary. The titles given to the
various sections of this Plan Statement are inserted for convenience of
reference only and are not part of this Plan Statement, and they shall not be
considered in determining the purpose, meaning or intent of any provision
hereof. This instrument has been executed and delivered in the State of
Minnesota and has been drawn in conformity to the laws of that State and shall,
except to the extent that federal law is controlling, be construed and enforced
in accordance with the laws of the State of Minnesota.
<PAGE>
SECTION 2
COVERAGE UNDER PLAN
2.1. GENERAL ELIGIBILITY RULE. Each employee shall become a Participant on the
first day of the first month or the first day of the seventh month of the Plan
Year, as the case may be, next following the date as of which the employee has
both:
(a) attained age twenty-one (21) years or over, and
(b) completed one (1) or more years of Eligibility Service,
if the employee is then in Recognized Employment. If the employee is not then in
Recognized Employment, the employee shall become a Participant on the first date
thereafter upon which he or she enters Recognized Employment.
2.2. SPECIAL RULE FOR FORMER PARTICIPANTS. A Participant whose employment with
the Employer terminates and who subsequently is reemployed by an Employer shall
immediately reenter the Plan as a Participant upon his return to Recognized
Employment.
2.3. PARTICIPANTS MUST FURNISH DATA. As a condition of participation in the
Plan, each employee shall furnish the Committee such data and information,
including, specifically, satisfactory proof of age, and complete such forms as
the Committee may consider desirable or necessary for the effective
administration of the Plan. Notwithstanding anything to the contrary provided
herein, no retirement income benefit shall be payable under the Plan unless the
employee has complied with the requirements of this section, but the right of a
Participant to a retirement income benefit shall be fully preserved upon
subsequent compliance with said requirements.
2.4. EFFECT OF MISSTATEMENTS BY PARTICIPANT. If any Participant in any written
statement required under Section 2.3 shall misstate his age or the age of any
person upon whose survival the payment of any benefit in respect of such
Participant is contingent or any other fact the misstatement of which would
affect the amount of a benefit payable hereunder, the accrual of benefits in
respect of such Participant shall not be invalidated, but the amount of the
benefit to be available with respect to such Participant will be adjusted
retroactively to the amount which would have been payable if such fact or facts
had not been misstated; provided, however, that in no event will the Plan be
liable to pay any greater benefit in respect of any Participant than that which
would have been payable on the basis of the true facts.
<PAGE>
SECTION 3
RETIREMENT INCOME BENEFITS
3.1. NORMAL RETIREMENT PENSION.
3.1.1. WHEN AVAILABLE. Upon the Termination of Employment of a
Participant at or after Normal Retirement Age and upon the filing of a proper
application with the Committee, the Participant shall receive a Normal
Retirement Pension.
3.1.2. AMOUNT. If the Termination of Employment occurs on the
Participant's Normal Retirement Age, the initial monthly amount of the
Participant's Normal Retirement Pension shall be the amount of the Participant's
Accrued Benefit determined as of the date the first payment of the Normal
Retirement Pension is made.
3.1.3. FORM OF PENSION. The form of the Normal Retirement Pension is a
Single Life Annuity, the first payment of which is due on the first day of the
calendar month next following the Participant's Termination of Employment or on
the first day of any later calendar month that is designated by the Participant,
in writing delivered to the Committee or its designee, as the commencement date
(but such date cannot be later than the first day of the calendar year following
the calendar year in which the Participant attains age seventy and one-half
(70-1/2) years unless such Participant is an active employee and elects not to
commence payment of benefits until the Participant ceases to be an active
employee or, if later, the day the Participant first becomes vested in any
Accrued Benefit unless such Participant is an active employee and elects not to
commence payment of benefits until the Participant ceases to be an active
employee). In lieu of the Single Life Annuity form of Normal Retirement Pension,
a Participant may receive an optional form of pension as provided in Section 4
and a married Participant who does not elect otherwise shall receive his Normal
Retirement Pension in the Qualified Joint and Survivor Annuity form as provided
in Section 4.
3.2. EARLY RETIREMENT PENSION.
3.2.1. WHEN AVAILABLE. Upon the Termination of Employment of a
Participant at or after his Earliest Retirement Age and upon the filing of a
proper application with the Committee, the Participant shall receive an Early
Retirement Pension.
3.2.2. AMOUNT. The initial monthly amount of the Participant's Early
Retirement Pension shall be the amount of the Participant's Accrued Benefit
determined as of the date the first payment of the Early Retirement Pension is
made.
3.2.3. FORM OF PENSION. The form of the Early Retirement Pension is a
Single Life Annuity, the first payment of which is due on the first day of any
calendar month which follows the Participant's Earliest Retirement Age and
Termination of Employment and which is designated by the Participant, in writing
delivered to the Committee or its designee, as the commencement date (but
<PAGE>
such date cannot be later than the first day of the calendar year following the
calendar year in which the Participant attains age seventy and one-half (70-1/2)
years unless such Participant is an active employee and elects not to commence
payment of benefits until the Participant ceases to be an active employee). In
lieu of the Single Life Annuity form of Early Retirement Pension, a Participant
may receive an optional form of pension as provided in Section 4. and a married
Participant who does not elect otherwise shall receive his Early Retirement
Pension in the Qualified Joint & Survivor Annuity form as provided in Section 4.
3.3. VESTED BENEFIT.
3.3.1. WHEN AVAILABLE. A Participant shall be fully Vested in his or
her Accrued Benefit hereunder upon the occurrence of the first of the following
while still an employee of the Employer or an Affiliate:
(a) upon completing five (5) or more years of Vesting Service;
(b) upon attainment of age sixty-five (65) years;
(c) upon the occurrence of a "change in control" (as such term is
defined in Section 7.5 hereof); or
(d) upon a complete termination of the Plan (but only to the
extent the Participant's Accrued Benefit is then funded) or
upon a partial termination of the Plan affecting the
Participant (but only to the extent the Participant's Accrued
Benefit would then be funded if the Plan were then completely
terminated).
The Participant shall receive this Vested Benefit after the Participant's
Termination of Employment and upon the filing of a proper application with the
Committee. If no application is filed, payment of the Vested Benefit shall
commence on the first day of the calendar year after the Participant attains
seventy and one-half (70-1/2) years (or, if later, the day the Participant first
becomes Vested in any Accrued Benefit) unless such Participant is an active
employee and elects not to commence payment of benefits until the Participant
ceases to be an active employee.
3.3.2. AMOUNT. The initial monthly amount of the Participant's Vested
Benefit shall be the amount of the Participant's Accrued Benefit determined as
of the date the first payment of the Vested Benefit is made. If a Participant in
receipt of a Vested Benefit continues in employment with the Employer beyond the
January 1 following the calendar year in which such Participant attains age
seventy and one-half (70-1/2) years and the Participant has commenced payment of
benefits, the amount of such Participant's Vested Benefit shall be redetermined
as of Termination of Employment and as of each August 1 upon which such
Participant continues to be employed by the Employer as if that date were the
date of Termination of Employment. The amount of increased benefit, if any,
shall be paid to the Participant in the form originally determined for the
Participant (without any
<PAGE>
requirement for further notice to the Participant or the Participant's spouse,
Joint Annuitant or Beneficiary and without any requirement for further
Participant elections or spousal consent).
3.3.3. FORM OF BENEFIT. The form of the Vested Benefit is a Single Life
Annuity, the first payment of which is due on the first day of the calendar
month which follows Termination of Employment and which is designated by the
Participant, in writing delivered to the Committee, as the commencement date
(but such date cannot be later than the first day of the calendar year following
the calendar year in which the Participant attains age seventy and one-half
(70-1/2) years unless such Participant is an active employee and elects not to
commence payment of benefits until the Participant ceases to be an active
employee). In lieu of the Single Life Annuity form of Vested Benefit, a
Participant who commences payment of the Vested Benefit prior to his or her
attainment of fifty-five (55) years of age may receive a single lump sum payment
as provided in Section 4.1(e), a Participant who commences payment of the Vested
Benefit on or after attainment of fifty-five (55) years of age may receive an
optional form of pension as provided in Section 4 and a married Participant who
does not elect otherwise shall receive his Vested Benefit in the Qualified Joint
and Survivor Annuity form as provided in Section 4.
3.4. DISABILITY RULES.
3.4.1. CONTINUING PAY CREDITS. Pay Credits under Section 1.3.2 shall
continue to be made to a Participant's Account Balance during such Participant's
Disability until the earlier of (i) the Participant's attainment of Normal
Retirement Age, (ii) the Participant's death, or (iii) commencement of payments
to the Participant. Such Pay Credits will be based on such Participant's
Compensation earned in the last full Plan Year during which the Participant was
an active employee or, if greater, the Participant's Compensation earned in the
Plan Year during which the Participant's Disability commenced. Such Participant
shall also receive Pay Credits for any Compensation actually received by such
Participant after such full day that otherwise qualifies for Pay Credits.
3.4.2. CONTINUING INTEREST CREDITS. Interest Credits under Section
1.3.3 shall continue to be made to such Participant's Account Balance until the
commencement of payments, subject to Section 1.3.3(c).
3.5. GENERAL BENEFITS RULES.
3.5.1. NONDUPLICATION OF BENEFITS. There shall be no duplication of
retirement income benefits under the Plan. If a Participant is eligible for more
than one (1) of the retirement income benefits provided under Section 3, such
Participant shall elect only one (1) such benefit.
3.5.2. EFFECT OF TERMINATION BEFORE VESTING -- FORFEITURE AND
RESTORATION. No retirement income benefits are available upon the Termination of
Employment of a Participant before such Participant is entitled to those
retirement income benefits specifically enumerated herein. If a Participant has
a Termination of Employment prior to the date upon which retirement benefits are
Vested, such employee's Account Balance, if any, shall be forfeited and reduced
to zero as of the July
<PAGE>
31 coincident with or next following the Termination of Employment (after any
Pay Credits or Interest Credits are made as of such day). If such Participant
returns to employment with the Employer or an Affiliate before the occurrence of
five (5) One-Year Breaks in Service, however, the Account Balance of such
Participant shall be restored in the amount so forfeited (without interest or
other increase). Actuarial gains resulting from the Termination of Employment of
a Participant prior to the date on which retirement income benefits are Vested
shall be taken into account in determining the succeeding contributions of the
Employer and shall not be used to increase the retirement income benefits of
other Participants. A Participant who has a Termination of Employment when not
Vested shall be considered to have received full distribution.
3.6. PAYMENTS OF SMALL AMOUNTS.
3.6.1. LUMP SUM. Notwithstanding anything to the contrary herein
provided, if the Participant's Vested Account Balance at Termination of
Employment is not more than Three Thousand Five Hundred Dollars ($3,500), that
Account Balance shall be paid in a single lump sum as soon as administratively
practicable after the last day of the Plan Year in which occurs Termination of
Employment. For the purposes of this Section 3.6, if the present value of the
Participant's Vested Accrued Benefit is zero (0), the Participant shall be
deemed to have received a distribution of that present value at Termination of
Employment.
3.6.2. EFFECT ON ACCOUNT BALANCE. If a Participant receives a lump sum
distribution of the Vested Account Balance, the Account Balance shall be zero
(0) and the Plan shall thereafter disregard the Participant's Benefit Service
and Compensation before the date the Participant received such distribution.
3.7. FACILITY OF PAYMENT. In case of the legal disability, including minority,
of a Participant, Joint Annuitant or Beneficiary entitled to receive any
distribution under the Plan, payment shall be made, if the Committee shall be
advised of the existence of such condition:
(a) to the duly appointed guardian, conservator or other legal
representative of such Participant, Joint Annuitant or
Beneficiary, or
(b) to a person or institution entrusted with the care or
maintenance of the incompetent or disabled Participant, Joint
Annuitant or Beneficiary, provided such person or institution
has satisfied the Committee that the payment will be used for
the best interest and assist in the care of such Participant,
Joint Annuitant or Beneficiary, and provided further, that no
prior claim for said payment has been made by a duly appointed
guardian, conservator or other legal representative of such
Participant, Joint Annuitant or Beneficiary.
Any payment made in accordance with the foregoing provisions of this section
shall constitute a complete discharge of any liability or obligation of the
Employer, the Committee, the Trustee and the Fund therefor.
<PAGE>
3.8. LIMITATION ON BENEFITS. In no event shall any benefit be payable to any
Participant if, or to the extent that, it would exceed the limitations set forth
in the Appendix A to this Plan Statement.
3.9. SUSPENSION OF BENEFITS.
3.9.1. REEMPLOYMENT BEFORE NORMAL RETIREMENT AGE. If a Participant who
is receiving retirement income from the Plan for a previous period of employment
is reemployed by the Employer before his Normal Retirement Age, payment of such
retirement income shall be suspended for a period of calendar months equal to
the number of calendar months (beginning with the month of reemployment) during
which the Participant has eighty (80) or more Hours of Service. The payments of
retirement income shall resume no later than the first day of the third calendar
month following the first calendar month during which the Participant has fewer
than eighty (80) Hours of Service. Upon proper application at his subsequent
Termination of Employment, the Participant shall be entitled to the retirement
income which is accrued to him under the Plan on account of his total
employment, adjusted, however, for the payments previously received by him. In
no event shall the Participant receive, in the aggregate, a greater retirement
income than he would have received if his entire period of employment had been
continuous.
3.9.2. REEMPLOYMENT AFTER NORMAL RETIREMENT AGE. If a Participant who
is receiving retirement income from the Plan for a previous period of employment
is reemployed by the Employer after his Normal Retirement Age, payment of such
retirement income shall be suspended for a period of calendar months equal to
the number of calendar months (beginning with the month of reemployment) during
which the Participant has eighty (80) or more Hours of Service. The payments of
retirement income shall resume no later than the first day of the third calendar
month following the first calendar month during which the Participant has fewer
than eighty (80) Hours of Service. The payments of retirement income shall
resume in the same amount as was in effect immediately prior to the suspension,
but the initial payment upon resumption shall include the amount due for the
month of resumption plus the amount due for any prior month during which the
Participant had fewer than eighty (80) Hours of Service. If the Participant
should die during the period of suspension, then such survivor's benefits (if
any) as may be provided for under the form of annuity in effect prior to the
suspension shall be paid commencing with the first day of the month following
the month in which the Participant's death occurs.
3.9.3. REEMPLOYMENT BEFORE BENEFITS COMMENCE. If a Participant is
reemployed by the Employer after Termination of Employment but before any
retirement income payments have commenced under the Plan (without regard to
whether such reemployment occurs before or after Normal Retirement Age), such
retirement income payments shall not thereafter commence until the Participant's
subsequent Termination of Employment.
3.9.4. CONTINUED EMPLOYMENT AFTER NORMAL RETIREMENT AGE. If a
Participant continues in employment with the Employer after his Normal
Retirement Age, benefits will continue to accrue under the provisions of Section
1.3. Upon the subsequent Termination of Employment of
<PAGE>
the Participant, such Normal Retirement Pension benefit shall be paid to the
Participant under the provisions of Section 3.1.
3.9.5. PROCEDURAL REQUIREMENTS. Notwithstanding the foregoing, no
retirement income benefit shall be suspended under this Section 3.9 unless the
Participant is furnished a written notice during the first month in which a
payment is withheld that includes the following:
(a) a statement that payment of the Participant's retirement
income benefits is being suspended;
(b) a description of the specific reasons why payment is being
suspended;
(c) a general description of the Plan provisions relating to the
suspension of payments;
(d) a copy of this Section 3.9;
(e) a statement to the effect that the Department of Labor
regulations pertaining to suspension of benefits may be found
in section 2530.203-3 of Title 29, Code of Federal
Regulations;
(f) a description of the Plan's procedures for affording a review
of the suspension of payments (which shall be the Plan's
general claims procedure); and
(g) a description of how any suspendible amount actually (but
improperly) paid will be offset from future payments;
provided, however, that if some or all of that information is set forth in the
Plan's summary plan description and if the notice also includes information
concerning how the employee may obtain a copy of the summary plan description or
relevant portions thereof, then the notice may merely refer the Participant to
the relevant pages of the summary plan description.
3.9.6. OFFSETS OF SUSPENDIBLE AMOUNTS. If any retirement income payment
that should have been suspended under this Section 3.9 is paid to a Participant,
then the suspendible amount shall be offset (without any adjustment for
interest) from future payments as follows:
(a) from the first payment due the Participant after a suspension
of retirement income benefits, an amount not in excess of one
hundred percent (100%) of the payment may be offset; and
(b) from subsequent payments to the Participant, an amount not in
excess of twenty-five percent (25%) of each such payment may
be offset; and
<PAGE>
(c) from subsequent payments to Joint Annuitants or Beneficiaries,
an amount not in excess of twenty-five percent (25%) of each
such payment may be offset.
<PAGE>
SECTION 4
OPTIONAL FORMS OF PENSION
4.1. OPTIONAL FORMS AVAILABLE. To the extent authorized in Section 3, the forms
of pension which shall be available to a Participant under the Plan shall be:
(a) SINGLE LIFE ANNUITY - a form of annuity that is payable
monthly to and for the lifetime of the Participant. The first
payment shall be due on the date specified in Section 3 and
the last payment shall be due on the first day of the calendar
month in which the Participant's death occurs.
(b) QUALIFIED JOINT AND SURVIVOR ANNUITY - a form of annuity
payable monthly to and for the lifetime of the Participant
with a survivor annuity payable monthly after the death of the
Participant to and for the lifetime of the spouse of the
Participant (to whom the Participant was married on the date
the Participant received his first payment of benefits in the
Qualified Joint and Survivor Annuity form and to whom the
Participant was married for twelve continuous months at some
time) in an amount equal to fifty percent (50%) of the amount
payable during the joint lives of the Participant and his
spouse. The first payment shall be due on the date specified
in Section 3. The last payment to a Participant shall be due
on the first day of the calendar month in which the
Participant's death occurs. The last payment to a spouse who
survives the Participant shall be due on the first day of the
calendar month in which such spouse dies.
(c) SURVIVOR ANNUITY - a form of annuity payable monthly to and
for the lifetime of the Participant with a survivor annuity
payable monthly after the death of the Participant to and for
the lifetime of a designated joint annuitant (who had been
designated by the Participant prior to the date when the
Participant received his first payment of benefits in the
Survivor Annuity form) in an amount equal to fifty percent
(50%) or one hundred percent (100%), as elected by the
Participant, of the amount payable during the joint lives of
the Participant and the designated joint annuitant. The
designated joint annuitant need not be the Participants's
spouse. The first payment shall be due on the date specified
in Section 3. The last payment to the Participant shall be due
on the first day of the calendar month in which the
Participant's death occurs. The last payment to a designated
joint annuitant who survives the Participant shall be due on
the first day of the calendar month in which such designated
joint annuitant dies. The value of the amounts payable to the
Participant and joint annuitant in the Survivor Annuity form
shall be the Actuarial Equivalent of the amounts payable to
the Participant in the Single Life Annuity form.
<PAGE>
(d) TERM CERTAIN AND LIFE ANNUITY - a form of annuity payable
monthly to and for the lifetime of the Participant or for one
hundred twenty (120) months, if longer. The first payment
shall be due on the date specified in Section 3 hereof and the
last payment shall be due on the first day of the calendar
month in which the Participant's death occurs or, if later,
the day on which the one hundred twentieth (120th) monthly
payment is paid. If the Participant dies before receiving the
last of such payments, the remaining payments shall be made to
the Participant's Beneficiary. The value of the amounts
payable to the Participant and all Beneficiaries in the Term
Certain and Life Annuity form shall be the Actuarial
Equivalent of the amounts payable to the Participant in the
Single Life Annuity form.
(e) SINGLE LUMP SUM PAYMENT - a single lump sum payment in cash
equal to the Account Balance, determined on the last day of
the month preceding the day payment is made and payable as
soon as administratively feasible after the date specified in
Section 3. However, a single lump sum payment shall not be
made to a Participant who is a highly compensated employee or
a highly compensated former employee (as defined in section
414(q) of the Internal Revenue Code) unless: (i) after payment
of the single lump sum to such Participant, the value of plan
assets equals or exceeds one hundred ten percent (110%) of the
value of current liabilities (as defined in section 412(l)(7)
of the Internal Revenue Code) or, (ii) the value of the single
lump sum payable to such Participant is less than one percent
(1%) of the value of current liabilities before the payment.
In any Plan Year, the total number of Participants whose
benefits are subject to this restriction can be limited to a
group of not less than twenty-five (25) highly compensated
employees and highly compensated former employees. If the
group of affected Participants is so limited, the group must
consist of those highly compensated employees and highly
compensated former employees with the greatest compensation in
the current or any prior Plan Year. For purposes of this
restriction, the value of Plan assets and the value of current
liabilities must be determined as of the same date.
(f) LIMITATION ON 100% SURVIVOR ANNUITY. A Participant shall not
be permitted to elect a 100% Survivor Annuity that provides
for payments to a joint annuitant or Beneficiary who is not
the Participant's spouse unless the age of the Participant is
no more than ten (10) years greater than the age of such joint
annuitant or Beneficiary. The ages of the Participant and the
joint annuitant or Beneficiary will be measured for purposes
of this paragraph using their attained ages as of their
birthdays in the first calendar year in which the Participant
receives a distribution from the Plan.
<PAGE>
4.2. PRESUMPTIVE FORMS. In the absence of an affirmative written election to the
contrary made and filed with the Committee during the ninety (90) day period
before the first pension payment is made:
(a) each Participant who is not married when the first payment is
due shall receive his Vested Benefit payments in the Single
Life Annuity form, and
(b) each Participant who is married when the first payment is due
shall receive his Vested Benefit payments in the Qualified
Joint and Survivor Annuity form.
4.3. PARTICIPANT'S ELECTION RIGHTS. Subject to all other rules of this Plan
(which may place limitations upon the forms of pension available or the
conditions under which they may be effectively elected) a Participant shall be
permitted to elect not to receive the pension in the form otherwise specified
and to elect to receive it in another available form and to rescind any such
prior elections.
The Committee shall notify each Participant in writing a reasonable time before
his Earliest Retirement Age of his option to begin immediately (or at a deferred
date) to receive benefits in the form of an Single Life Annuity, Qualified Joint
and Survivor Annuity or other optional form, if any, made available under
Section 4. This written notice shall include an explanation of the following
rules:
(a) A Participant who is unmarried when his payments begin will
receive his benefit in the form of an Single Life Annuity
unless an optional form is made available under Section 4 and
is elected before the first pension payment is made.
(b) A Participant who is married when his payments begin will
receive his benefit in the form of a Qualified Joint and
Survivor Annuity unless he elects not to receive such form
before the first pension payment is made.
(c) A Participant who is married when his payments begin and who
elects not to receive his benefit as a Qualified Joint and
Survivor Annuity will receive his benefit in the form of an
Single Life Annuity unless, before the first pension payment
is made, the Participant:
(i) is eligible for and makes an election of an optional
form made available under Section 4, or
(ii) rescinds his prior election not to receive his
benefit in the form of a Qualified Joint and Survivor
Annuity.
(d) A Participant who is married when his payments begin and who
elects not to receive his benefit in the form of a Qualified
Joint and Survivor Annuity and
<PAGE>
later rescinds that election may thereafter again make and
rescind such election any number of times provided that, to be
effective, such elections and rescissions must be made before
the first payment is made.
(e) Of the Single Life Annuity and of the Qualified Joint and
Survivor Annuity and of the other optional forms of pension,
if any, made available to the Participant under Section 4 and
the relative financial effect on the Participant's annuity if
the Participant makes any of the elections described in
Section 4.
(f) An election not to receive the Vested Benefit in the form of
an Single Life Annuity shall not be effective unless
accompanied by an affirmative election of some other optional
form.
(g) An election of a form of pension (other than an Single Life
Annuity or Single Life Annuity) shall be automatically
rescinded by the death of the Participant or of a designated
Joint Annuitant prior to the Termination of Employment of the
Participant.
(h) Except for a distribution made in the Qualified Joint and
Survivor Annuity form or a lump sum distribution of the
Actuarial Equivalent present value of the Participant's Vested
Accrued Benefits of not more than Three Thousand Five Hundred
Dollars, no distribution will be commenced to a married
Participant in any form or at any time or under any
circumstances unless such Participant has made a written
application for such distribution which specifies the time and
form of the distribution and Participant's spouse consents to
such distribution. This consent of the Participant's spouse
must be given not more than ninety (90) days before the first
payment of benefits is made in writing, must be witnessed by a
notary public or a Plan representative designated by the
Committee and must acknowledge the effect of the Participant's
application (and the terms and conditions of the requested
distribution) to which it relates. The consent of the spouse
must be to a specific alternate form of distribution which may
not be changed without further spousal consent, or
alternatively, the consent of the spouse must expressly permit
the Participant to elect and to change an alternative form of
distribution without any requirement of further spousal
consent. If the form of the distribution provides for or may
provide for payments to a Joint Annuitant or Beneficiary, the
consent of the spouse must be for a specific named Joint
Annuitant or Beneficiary which may not be changed without
further spousal consent, or alternatively, the consent of the
spouse must expressly permit the Participant to make and to
change the designation of named Joint Annuitants or
Beneficiaries without any requirement of further spousal
consent. The consent of a spouse is effective only for that
spouse and is irrevocable once it is given.
<PAGE>
(i) Under no circumstances shall any election change the form of
pension benefit after the first payment of a pension has been
made.
(j) All elections and rescissions of elections and requests for
information must be made in writing, must be signed by the
Participant and will be deemed made only when delivered in
fact to the Committee.
(k) If a Participant makes a written request and furnishes all
necessary information within sixty (60) days after receiving
the notice described in this Section 4.3, the Committee will
furnish (within thirty days of the receipt of the
participant's request) a single written explanation in
nontechnical language of the terms and conditions of the
Qualified Joint and Survivor Annuity, the Single Life Annuity
and all other optional forms of pension made available under
Section 4 and the financial effect (in dollars per annuity
payment) upon a particular Participant's pension benefit if
the Participant makes an election not to receive pension
benefits in the form of a Qualified Joint and Survivor Annuity
or any other election described in this Section 4.
4.4. SPECIAL ELECTION FOR RETIREES ON OR AFTER JULY 1, 1997 BUT PRIOR TO AUGUST
31, 1997. Any Participant who has had a Termination of Employment on or after
July 1, 1997, but prior to August 31, 1997, and is entitled to a Normal
Retirement Pension or an Early Retirement Pension under the Prior Plan Statement
may elect at any time a lump sum payment of the Actuarial Equivalent of the
Accrued Benefit as a settlement of rights under the Plan. The amount of the lump
sum will be determined as described in Section 1.3.1. Any other form of benefit
paid to or elected by such Participant shall be calculated under the Prior Plan
Statement.
4.5. NOTICES. The Committee will issue such notices as may be required under
sections 402(f) and other sections of the Internal Revenue Code in connection
with distributions from the Plan. No distribution will be made unless it is
consistent with such notice requirements.
4.6. DIRECT ROLLOVER. A Distributee who is eligible to elect a direct rollover
may elect, at the time and in the manner prescribed by the Committee, to have
all or any portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the Distributee in a direct rollover. A
Distributee who is eligible to elect a direct rollover includes only a
Participant, a Beneficiary who is the surviving spouse of a Participant and a
Participant's spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Appendix D.
(a) ELIGIBLE ROLLOVER DISTRIBUTION means any distribution of all
or any portion of an Accrued Benefit to a Distributee who is
eligible to elect a direct rollover except (i) any
distribution that is one of a series of substantially equal
installments payable not less frequently than annually over
the life expectancy of such Distributee or the joint and last
survivor life expectancy of such Distributee and such
Distributee's designated Beneficiary, and (ii) any
<PAGE>
distribution that is one of a series of substantially equal
installments payable not less frequently than annually over a
specified period of ten (10) years or more, and (iii) any
distribution to the extent such distribution is required under
section 401(a)(9) of the Internal Revenue Code, and (iv) the
portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(b) ELIGIBLE RETIREMENT PLAN means (i) an individual retirement
account described in section 408(a) of the Internal Revenue
Code, or (ii) an individual retirement annuity described in
section 408(b) of the Internal Revenue Code, or (iii) an
annuity plan described in section 403(a) of the Internal
Revenue Code, or (iv) a qualified trust described in section
401(a) of the Internal Revenue Code that accepts the eligible
rollover distribution. However, in the case of an eligible
rollover distribution to a Beneficiary who is the surviving
spouse of a Participant, an eligible retirement plan is only
an individual retirement account or individual retirement
annuity as described in section 408 of the Internal Revenue
Code.
(c) DIRECT ROLLOVER means the payment of an eligible rollover
distribution by the Plan to the eligible retirement plan
specified by the Distributee who is eligible to elect a direct
rollover.
<PAGE>
SECTION 5
DEATH BENEFITS
5.1. DEATH AFTER BENEFIT COMMENCEMENT. The only death benefits which shall be
payable under the Plan upon the death of a Participant after his Termination of
Employment and after payment of retirement income benefits under the Plan has
commenced to the Participant shall be the unpaid installments of annuity, if
any, which are to be continued under the form of pension which the Participant
has elected under the provisions of Section 4 hereof or which are provided
automatically in the absence of the Participant's affirmative election.
5.2. DEATH BEFORE BENEFIT COMMENCEMENT.
5.2.1. WHEN AVAILABLE. Upon the death of a Participant who at his
death:
(a) had not yet begun to receive any payment of any retirement
income benefits under the Plan, and
(b) was either entitled to some Vested Account Balance or was
Disabled and receiving full Benefit Service during such
Disability,
the Account Balance attributable to the Participant shall be payable to the
Participant's Beneficiary. If, at the death of the Participant, payment of
benefits to the Participant was due or otherwise pending but not yet actually
commenced, such payment shall not be made and the Participant shall be deemed to
have not yet begun to receive any payment of any retirement income benefit under
the Plan at death.
5.2.2. SURVIVING SPOUSE BENEFICIARY. If the payment of the Account
Balance is to be made to the surviving spouse of a deceased Participant,
distribution shall be effected for the surviving spouse by converting the
Participant's Account Balance to an Actuarial Equivalent amount of monthly
income payable for the lifetime of the surviving spouse beginning on the date
designated by the surviving spouse which date may not be earlier than the first
day of the month following the date the Participant would have attained age
fifty-five (55) years and may not be later than the first day of the calendar
year following the date the Participant would have attained age seventy and
one-half (70-1/2) years (or if later, the date of the Participant's death);
provided, however, that a surviving spouse may reject distribution in this form
of a lifetime annuity by filing with the Committee an affirmative written
rejection of distribution in that lifetime annuity form and an election of
distribution of the Account Balance in a single lump sum. This rejection and
election must be made and filed not more than ninety (90) days before the date
the lump sum distribution is to be made to the surviving spouse. The surviving
spouse may make any number of rejections and revocations of rejections and they
may be made at any time until the date distribution is actually made or
commenced to the surviving spouse. Within a reasonable period of time prior to
the date distribution is to be made or commenced to the surviving spouse, there
shall be furnished to the surviving spouse a
<PAGE>
written explanation of the terms and conditions of the lifetime annuity, the
surviving spouse's right to reject, and the effect of a rejection of
distribution in the form of a lifetime annuity.
5.2.3. NONSPOUSE BENEFICIARIES. If the Beneficiary is not the spouse of
the deceased Participant, distribution shall be made to the Beneficiary in a
single lump sum not more than five (5) years after the date of the death of the
Participant.
5.3. DESIGNATION OF BENEFICIARIES.
5.3.1. RIGHT TO DESIGNATE. Each Participant may designate, upon forms
to be furnished by and filed with the Committee, one or more primary
Beneficiaries or alternative Beneficiaries. The Participant may change or revoke
any such designation from time to time without notice to or consent from any
Beneficiary or spouse. No such designation, change or revocation shall be
effective unless executed by the Participant and received by the Committee
during the Participant's lifetime. If, however, such designation of a
Beneficiary is made before the first day of the Plan Year in which the
Participant attains age thirty-five (35) years and the Participant dies on or
after that date while married, the Beneficiary designation is void.
Notwithstanding the foregoing, a designation will not be valid for the
purpose of paying benefits from the Plan to anyone other than a surviving spouse
of the Participant (if there is a surviving spouse) unless that surviving spouse
consents in writing to the designation of another person as Beneficiary. To be
valid, the consent of such spouse must be in writing, must acknowledge the
effect of the designation of the Beneficiary and must be witnessed by a notary
public. The consent of the surviving spouse need not be given at the time the
designation is made. The consent of the surviving spouse need not be given
before the death of the Participant. The consent of the surviving spouse will be
required, however, before benefits can be paid to any person other than the
surviving spouse. The consent of a spouse shall be irrevocable and shall be
effective only with respect to that spouse.
5.3.2. FAILURE OF DESIGNATION. If a Participant:
(a) fails to designate a Beneficiary, or
(b) designates a Beneficiary and thereafter revokes such
designation without naming another Beneficiary, or
(c) designates one or more Beneficiaries and all such
Beneficiaries so designated fail to survive the Participant,
such Participant's said death benefit, or the part thereof as to which such
Participant's designation fails, as the case may be, shall be payable to the
first class of the following classes of automatic Beneficiaries with a member
surviving the Participant and (except in the case of his surviving issue) in
equal shares if there is more than one member in such class surviving the
Participant:
<PAGE>
Participant's surviving spouse
Participant's surviving issue per stirpes and not per capita
Participant's surviving parents
Participant's surviving brothers and sisters
Representative of Participant's estate.
5.3.3. DISCLAIMERS BY BENEFICIARIES. A Beneficiary entitled to a
distribution may disclaim his interest therein subject to the following
requirements. To be eligible to disclaim, a Beneficiary must be a natural
person, must not have received a distribution of all or any portion of said
death benefit at the time such disclaimer is executed and delivered, and must
have attained at least age twenty-one (21) years as of the date of the
Participant's death. Any disclaimer must be in writing and must be executed
personally by the Beneficiary before a notary public. A disclaimer shall state
that the Beneficiary's entire interest is disclaimed or shall specify what
portion thereof is disclaimed. To be effective, duplicate original executed
copies of the disclaimer must be both executed and actually delivered to both
the Committee and to the Trustee after the date of the Participant's death but
not later than one hundred eighty (180) days after the date of the Participant's
death. A disclaimer shall be irrevocable when delivered to both the Committee
and the Trustee and shall not be effective to disclaim any interest that has
been distributed prior to the date the disclaimer is delivered. A disclaimer
shall be considered to be delivered to the Committee or the Trustee only when
actually received by the Committee or the Trustee (and in the case of a
corporate Trustee, shall be considered to be delivered only when actually
received by a trust officer familiar with the affairs of the Plan). The
Committee (and not the Trustee) shall be the sole judge of the content,
interpretation and validity of a purported disclaimer. Upon the filing of a
valid disclaimer, the Beneficiary shall be considered not to have survived the
Participant as to the interest disclaimed. A disclaimer by a Beneficiary shall
not be considered to be a transfer of an interest in violation of the provisions
of Section 6 hereof and shall not be considered to be an assignment or
alienation of benefits in violation of federal law prohibiting the assignment or
alienation of benefits under the Plan. No other form of attempted disclaimer
shall be recognized by either the Committee or the Trustee.
5.3.4. DEFINITIONS. When used herein and, unless the Participant has
otherwise specified in the Participant's Beneficiary designation, when used in a
Beneficiary designation, "issue" means all persons who are lineal descendants of
the person whose issue are referred to, including legally adopted descendants
and their descendants but not including illegitimate descendants and their
descendants; "child" means an issue of the first generation; "per stirpes" means
in equal shares among living children of the person whose issue are referred to
and the issue (taken collectively) of each deceased child of such person, with
such issue taking by right of representation of such deceased child; and
"survive" and "surviving" mean living after the death of the Participant.
5.3.5. SPECIAL RULES. Unless the Participant has otherwise specified in
the Participant's Beneficiary designation, the following rules shall apply:
<PAGE>
(a) If there is not sufficient evidence that a Beneficiary was
living at the time of the death of the Participant, it shall
be deemed that the Beneficiary was not living at the time of
the death of the Participant.
(b) The automatic Beneficiaries specified in Section 5.3.2 and the
Beneficiaries designated by the Participant shall become fixed
at the time of the Participant's death so that, if a
Beneficiary survives the Participant but dies before the
receipt of all payments due such Beneficiary hereunder, such
remaining payments shall be payable to the representative of
such Beneficiary's estate.
(c) If the Participant designates as a Beneficiary the person who
is the Participant's spouse on the date of the designation,
either by name or by relationship, or both, the dissolution,
annulment or other legal termination of the marriage between
the Participant and such person shall automatically revoke
such designation. (The foregoing shall not prevent the
Participant from designating a former spouse as a Beneficiary
on a form executed by the Participant and received by the
Committee after the date of the legal termination of the
marriage between the Participant and such former spouse, and
during the Participant's lifetime.)
(d) Any designation of a nonspouse Beneficiary by name that is
accompanied by a description of relationship to the
Participant shall be given effect without regard to whether
the relationship to the Participant exists either then or at
the Participant's death.
(e) Any designation of a Beneficiary only by statement of
relationship to the Participant shall be effective only to
designate the person or persons standing in such relationship
to the Participant at the Participant's death.
A Beneficiary designation is permanently void if it either is executed or is
filed by a Participant who, at the time of such execution or filing, is then a
minor under the law of the state of the Participant's legal residence. The
Committee (and not the Trustee) shall be the sole judge of the content,
interpretation and validity of a purported Beneficiary designation.
<PAGE>
SECTION 6
FUNDING OF PLAN
6.1. CREATION OF TRUST. Donaldson Company, Inc. has heretofore entered into and
shall continue in force a Trust Agreement with a Trustee establishing a Fund for
the purpose of receiving contributions made in support of the Plan, managing the
assets of the Plan, paying the reasonable expenses of the Plan and disbursing
benefits determined by the Committee to be due under the Plan. Donaldson
Company, Inc. reserves the right to select the Trustee, remove a Trustee and
amend the Trust Agreement from time to time and at any time.
The Trustee shall have the exclusive authority to manage and control the assets
of the Plan held in trust and their custody and shall not be subject to the
direction of any person in the discharge of its duties hereunder (except to the
directions of the Committee to pay benefits) nor shall its authority be subject
to delegation or modification except as provided in the Trust Agreement entered
into between the Employer and the Trustee.
At the Effective Date of this Plan Statement, the Trust Agreement in effect is
entitled "Donaldson Company, Inc. Master Investment Trust Agreement," is dated
as of May 25, 1988, and designates First Bank National Association as Trustee.
The rights and obligations of the Trustee shall be determined solely under the
terms of the Trust Agreement. The Trustee is not a party to this Plan Statement
and the terms of this Plan Statement shall not be binding on the Trustee except
to the extent that they are expressly incorporated by reference into the Trust
Agreement or are made binding upon the Trustee as a matter of law.
6.2. COST OF PLAN. During the continuation of the Plan and after consultation
with the Actuary, the Employer will determine and contribute annually or more
frequently to the Trustee such amounts which, together with the principal and
accumulated earnings, will comply with the provisions of the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974. Participants will
neither be required nor permitted to make contributions to the Fund in support
of the Plan. Each contribution to the Plan is conditioned upon its deductibility
for federal income tax purposes.
6.3. CONTRIBUTIONS NOT TO BE DIVERTED. Except as hereinafter provided, no part
of the contributions that the Employer makes under the Plan shall be available
to the Employer for any purpose except for providing benefits under the Plan to
Participants, Joint Annuitants and Beneficiaries under the Plan until all such
liabilities which have in fact accrued have been satisfied in full. If the
deduction for federal income tax purposes under section 404 of the Internal
Revenue Code should be disallowed, in whole or in part, for any Employer
contribution to the Plan for any year, or if any Employer contribution to the
Plan is made by reason of a mistake of fact, then there shall be calculated the
excess of the amount contributed over the amount that would have been
contributed had there not occurred a mistake in determining the deduction or a
mistake of fact. The Committee, at its election, may direct the Trustee to
return such excess, adjusted for its pro rata share of any net
<PAGE>
loss (but not any net gain) in the value of the Fund which accrued while such
excess was held therein, to the Employer within one (1) year of the disallowance
of the deduction or the mistaken payment of the contribution, as the case may
be.
6.4. SPENDTHRIFT PROVISIONS. Except as hereinbefore provided, no Participant
shall have any transmissible interest in his pension benefit and shall have no
power to alienate, dispose of, pledge or encumber the same except when, and only
as to, the portion or portions thereof received by him, nor shall the Employer,
the Committee or the Trustee recognize any assignment thereof, either in whole
or in part, nor shall the interest of any Participant or Beneficiary hereunder
be subject to attachment, garnishment, execution following judgment or other
legal process.
No Participant, Joint Annuitant or Beneficiary shall have any transmissible
interest in any benefit nor shall any Participant, Joint Annuitant or
Beneficiary have any power to anticipate, alienate, dispose of, pledge or
encumber the same while in the possession or control of the Trustee, nor shall
the Employer, the Committee or the Trustee recognize any assignment thereof,
either in whole or in part, nor shall it be subject to attachment, garnishment,
execution following judgment or other legal process while in the possession or
control of the Trustee.
The power to designate Joint Annuitants or Beneficiaries shall not permit or be
construed to permit such power or right to be exercised by the Participant so as
thereby to anticipate, pledge, mortgage or encumber his Accrued Benefit or any
part thereof, and any attempt of a Participant so to exercise said power in
violation of this provision shall be of no force and effect and shall be
disregarded by the Employer, the Committee and the Trustee.
This section does not preclude the Employer and the Trustee from complying with
a qualified domestic relations order as provided in the Appendix D to this Plan
Statement.
<PAGE>
SECTION 7
AMENDMENT AND TERMINATION
7.1. AMENDMENT. The Employer hereby reserves the power to amend this Plan
Statement:
(i) in any respect by resolution of the Board of
Directors of Donaldson Company, Inc., and
(ii) in any respect that does not materially increase the
cost of the Plan to the Employer by action of the
Committee (with the written concurrence of the Chief
Executive Officer of Donaldson Company, Inc.),
and may amend this Plan Statement either prospectively or retroactively or both;
provided that no amendment shall be effective to reduce or divest the Accrued
Benefit of any Participant unless the same shall have been adopted with the
consent of the Secretary of Labor pursuant to the provisions of the Employee
Retirement Income Security Act of 1974, or in order to comply with the
provisions of the Internal Revenue Code and the regulations and rulings
thereunder affecting the tax-qualified status of the Plan and the deductibility
of Employer contributions thereto.
7.2. TERMINATION OF PLAN. The Employer shall have the right at any time to
totally or partially terminate the Plan. Upon termination of the Plan, each
Participant, Beneficiary and Joint Annuitant shall look solely to the assets of
the Fund created for the purposes of the Plan and shall have no claim against
the Employer on account of the inadequacy of the assets of the Fund to
adequately provide the benefits otherwise apparently promised in this Plan
Statement, subject to the requirements of section 4041 of ERISA. The rights of
Participants who shall then retire or who have theretofore retired from the
employment of the Employer and who or whose designated Joint Annuitants or
Beneficiaries are then entitled to receive a pension or who are then in receipt
of a pension hereunder the rights of Participants who, on the date of such
termination, are then employed by the Employer shall be determined in accordance
with section 4044 of ERISA. Notwithstanding the foregoing, the benefits of any
highly compensated employee and any highly compensated former employee (as
defined in section 414(q) of the Code) is limited to a benefit that is
nondiscriminatory under section 401(a)(4) of the Code. Any funds held by the
Trustee after making the allocations described in said section 4044 shall revert
to and be paid to the Employer.
7.3. MERGER OR SPINOFF OF PLANS.
7.3.1. IN GENERAL. The Committee may cause all or a part of this Plan
to be merged with all or a part of any other plan and may cause all or a part of
the assets or liabilities to be transferred from this Plan to another plan. In
the case of merger or consolidation of this Plan with, or transfer of assets or
liabilities of this Plan to, any other plan, each Participant shall (if such
other plan were then terminated) receive a benefit immediately after the merger,
consolidation or transfer
<PAGE>
which is not less than the benefit the Participant would have been entitled to
receive immediately before the merger, consolidation or transfer (if this Plan
had then terminated).
7.3.2. LIMITATIONS. In no event shall liabilities be transferred from
any other plan to this Plan unless this Plan complies (or has been amended to
comply) with the optional form of benefit requirements of section
411(d)(6)(B)(ii) of the Code with respect to such transferred liabilities. In no
event shall liabilities be transferred from this Plan to any other plan unless
such other plan complies (or has been amended to comply) with the optional form
of benefit requirements of section 411(d)(6)(B)(ii) of the Code with respect to
such transferred assets.
7.4. ADOPTION BY AFFILIATES.
7.4.1. ADOPTION BY CONSENT. Donaldson Company, Inc. may consent to the
adoption of the Plan by any business entity affiliated in ownership with
Donaldson Company, Inc. subject to such conditions as Donaldson Company, Inc.
may impose.
7.4.2. PROCEDURE FOR ADOPTION. Any such adopting business entity shall
initiate its adoption of the Plan by delivery of a certified copy of the
resolutions of its board of directors adopting this Plan Statement to Donaldson
Company, Inc. Upon the consent by Donaldson Company, Inc. to the adoption by the
adopting business entity, and the delivery to the Trustee of written evidence of
Donaldson Company, Inc.'s consent, the adoption of the Plan by the adopting
business entity shall be effective as of the date specified by Donaldson
Company, Inc. If such adopting business entity is not a corporation, all
references in the Plan Statement to "board of directors" shall be deemed to
refer to such entity's governing body or other authorized individual.
7.4.3. EFFECT OF ADOPTION. Upon the adoption of the Plan by an adopting
business entity as heretofore provided, the adopting business entity shall be an
Employer hereunder in all respects. Each corporation and each other adopting
business entity, as a condition of continued participation in the Plan,
delegates to Donaldson Company, Inc. the sole power and authority over all Plan
matters except that the board of directors of each adopting business entity
shall have the power to amend this Plan Statement as applied to it by
establishing a successor plan to which assets and liabilities may be transferred
as provided in Section 7.3 and to terminate the Plan as applied to it.
The Plan will be maintained as a single plan with all Plan assets being
available to pay benefits to any Participant, Joint Annuitant, or Beneficiary
who is covered by the Plan and is entitled to payment under the terms of the
Plan Statement. The costs of maintaining the Plan will be allocated among the
Employers in the manner specified by Donaldson Company, Inc. Upon termination of
the Plan, any assets payable to the Employer under Section 7.2 shall be
allocated among the Employers then sponsoring the Plan in the manner specified
by Donaldson Company, Inc. Each reference to the Employer shall include
Donaldson Company, Inc. and all adopting business entities unless the context
clearly requires otherwise. Employment with Donaldson Company, Inc. or any
adopting corporation
<PAGE>
(subsequent to its adoption of the Plan) shall be credited with the Employer for
the purposes of determining Benefit Service, Eligibility Service, Vesting
Service and One-Year Breaks in Service.
7.5. CHANGE IN CONTROL.
7.5.1. VESTING. Notwithstanding any other provision of the Plan or the
Trust Agreement, in the event of a "change in control", all benefits accrued by
each Participant in accordance with Section 3 of the Plan shall become fully
Vested on the date of such "change in control."
7.5.2. TERMINATION. Notwithstanding any other provision of the Plan or
the Trust Agreement, in the event the Plan is terminated within three (3) years
following a "change in control," the Fund shall be applied in accordance with
the provisions of Section 7 to satisfy all liabilities to Participants, Joint
Annuitants, Beneficiaries and any other person entitled to payment under the
Plan. If, after satisfaction of all liabilities to Participants, Joint
Annuitants, Beneficiaries and any other person entitled to payment under the
Plan, there are assets remaining in the fund following such a termination after
a "change in control," such remaining assets shall be applied to the extent
permissible under law to the payment of retiree medical benefits payable or
provided by the Company to such Participants, their spouses and dependents. If,
after providing such retiree benefits, there are assets remaining in the Fund,
such assets shall be applied to increase the benefits of Participants actively
employed by the Employer on the date of the "change in control," and shall not
revert to or be paid to the Employer. Such an increase shall be made for such
Participants pro rata to the then present value of their Accrued Benefits.
7.5.3. AMENDMENT. Notwithstanding any other provision of the Plan or
the Trust Agreement, for a period of three (3) years following a "change in
control," the provisions of the Plan or Trust Agreement may not be amended if
any amendment would adversely affect the rights, expectancies or benefits,
provided by the Plan as in effect immediately prior to the "change in control"
or as increased by a termination described in Section 7.5.1, of any Participant,
Joint Annuitant, Beneficiary or other person entitled to payments under the
Plan.
7.5.4. MERGER. Notwithstanding any other provision of the Plan or the
Trust Agreement, in the event of any merger, consolidation, or transfer of
assets or liabilities which is effected within three (3) years following a
"change in control," the Accrued Benefit of each Participant actively employed
on the date of the "change in control," other than any such person who is a
"Disqualified Individual," as such term is defined in section 280G(c) of the
Internal Revenue Code, shall be increased in accordance with Section 7.5.1 such
that any excess, as of the date of any such transaction, of the fair market
value of the Fund over the present value of all Accrued Benefits (determined as
if such Plan had terminated immediately prior to such merger, consolidation or
transfer) is exhausted.
7.5.5. SPECIAL DEFINITIONS. For purposes of this Section 7.5, a "change
in control" shall occur if (i) any "person" or "group" (within the meaning of
sections 13(d) and 14(d)(2) of the
<PAGE>
Securities Exchange Act of 1934, as amended (the "Act")) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act) of more than fifty percent (50%)
of the then outstanding voting stock of the Employer, otherwise than through a
transaction arranged by, or consummated with the prior approval of, the Board of
Directors of Donaldson Company, Inc., or (ii) during any period of two (2)
consecutive years individuals who at the beginning of such period constitute the
Board of Directors of Donaldson Company, Inc. (and any new director whose
election by the Board of Directors of Donaldson Company, Inc. or whose
nomination for election by the Employer's stockholders was approved by a vote of
at least two-thirds of the directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority thereof.
7.5.6. NOT AMENDABLE. Notwithstanding any other provisions of the Plan
or the Trust Agreement, this Section 7.5 may not be amended for three (3) years
following a "change in control" without the written consent of a majority in
both number and interest of the Participants actively employed on the date of
the "change in control."
<PAGE>
SECTION 8
DETERMINATIONS -- RULES AND REGULATIONS
8.1. DETERMINATIONS. The Committee shall make such determinations as may be
required from time to time in the administration of the Plan. The Committee
shall have the sole discretion, authority and responsibility to interpret and
construe the Plan Statement and to determine all factual and legal questions
under the Plan, including but not limited to the entitlement of employees,
Participants, Joint Annuitants and Beneficiaries and the amounts of their
respective interests. The Actuary, the Trustee and other interested parties may
act and rely upon all information reported to them hereunder and need not
inquire into the accuracy thereof nor be charged with any notice to the
contrary.
8.2. RULES AND REGULATIONS. Any rule not in conflict or at variance with the
provisions hereof may be adopted by the Committee.
8.3. METHOD OF EXECUTING INSTRUMENTS.
(a) Information to be supplied or written notices to be made or
consents to be given by an Employer or the Committee pursuant
to any provision of this Plan Statement may be signed in the
name of the Employer by any officer thereof who has been
authorized to make such certification or to give such notices
or consents or by any Committee member.
(b) Any instrument or written notice required, necessary or
advisable to be made or given by the Trustee may be signed by
any Trustee, if all Trustees serving hereunder are
individuals, or by any authorized officer or employee of the
Trustee, if a corporate Trustee shall be acting hereunder as
sole Trustee, or by any such officer or employee of the
corporate Trustee or by an individual Trustee acting
hereunder, if corporate and individual Trustees shall be
serving as co-trustees hereunder.
8.4. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set
forth in this Section 8.4 shall be the claims procedure for the resolution of
disputes and disposition of claims arising under the Plan. An application for
benefits under Section 3 or Section 5 shall be considered as a claim for the
purposes of this Section 8.4.
8.4.1. ORIGINAL CLAIM. Any employee, former employee or Beneficiary of
such employee or former employee may, if he so desires, file with the Committee
a written claim for benefits under the Plan. Within ninety (90) days after the
filing of such a claim, the Committee shall notify the claimant in writing
whether his claim is upheld or denied in whole or in part or shall furnish the
claimant a written notice describing specific special circumstances requiring a
specified amount of additional time (but not more than one hundred eighty days
from the date the claim was filed) to
<PAGE>
reach a decision on the claim. If the claim is denied in whole or in part, the
Committee shall state in writing:
(a) the specific reasons for the denial;
(b) the specific references to the pertinent provisions of this
Plan Statement on which the denial is based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary;
and
(d) an explanation of the claims review procedure set forth in
this section.
8.4.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of
notice that his claim has been denied in whole or in part, the claimant may file
with the Committee a written request for a review and may, in conjunction
therewith, submit written issues and comments. Within sixty (60) days after the
filing of such a request for review, the Committee shall notify the claimant in
writing whether, upon review, the claim was upheld or denied in whole or in part
or shall furnish the claimant a written notice describing specific special
circumstances requiring a specified amount of additional time (but not more than
one hundred twenty days from the date the request for review was filed) to reach
a decision on the request for review.
8.4.3. GENERAL RULES.
(a) No inquiry or question shall be deemed to be a claim or a
request for a review of a denied claim unless made in
accordance with the claims procedure. The Committee may
require that any claim for benefits and any request for a
review of a denied claim be filed on forms to be furnished by
the Committee upon request.
(b) All decision on claims and on requests for a review of denied
claims shall be made by the Committee.
(c) The Committee may, in its discretion, hold one or more
hearings on a claim or a request for a review of a denied
claim.
(d) Claimants may be represented by a lawyer or other
representative (at their own expense), but the Committee
reserves the right to require the claimant to furnish written
authorization. A claimant's representative shall be entitled
to receive copies of notices sent to the claimant.
<PAGE>
(e) The decision of the Committee on a claim and on a request for
a review of a denied claim shall be served on the claimant in
writing. If a decision or notice is not received by a claimant
within the time specified, the claim or request for a review
of a denied claim shall be deemed to have been denied.
(f) Prior to filing a claim or a request for a review of a denied
claim, the claimant or his representative shall have a
reasonable opportunity to review a copy of this Plan Statement
and all other pertinent documents in the possession of the
Employer, the Committee and the Trustee.
8.5. INFORMATION FURNISHED BY PARTICIPANTS. Neither any Employer nor the
Committee nor the Trustee shall be liable or responsible for any error in the
computation of the benefits of a Participant resulting from any misstatement of
fact made by the Participant, directly or indirectly, to an Employer, the
Committee or the Trustee and used by them in determining his benefits. Neither
any Employer nor the Committee nor the Trustee shall be obligated or required to
increase the benefits of such Participant which, on discovery of the
misstatement, are found to be understated as a result of such misstatement of
the Participant. However, the benefits of any Participant which are overstated
by reason of any such misstatement shall be reduced to the amount appropriate
for him in view of the truth.
<PAGE>
SECTION 9
PLAN ADMINISTRATION
9.1. EMPLOYER.
9.1.1. OFFICERS. Except as hereinafter provided, functions generally
assigned to the Employer shall be discharged by the officers of Donaldson
Company, Inc. or delegated and allocated as provided herein.
9.1.2. CHIEF EXECUTIVE OFFICER. Notwithstanding the foregoing, the
Chief Executive Officer of Donaldson Company, Inc. may delegate or redelegate
and allocate and reallocate to one or more persons or to a committee of persons
jointly or severally, and whether or not such persons are directors, officers or
employees, such functions assigned to the Employer hereunder as he may from time
to time deem advisable.
9.1.3. BOARD OF DIRECTORS. Notwithstanding the foregoing, the Board of
Directors of Donaldson Company, Inc. shall have the exclusive authority to act
for the Employer to terminate the Plan.
9.2. COMMITTEE.
9.2.1. APPOINTMENT AND REMOVAL. The Committee shall consist of such
members as may be determined and appointed from time to time by the Chief
Executive Officer of Donaldson Company, Inc. and shall serve at the pleasure of
such Chief Executive Officer. Members of the Committee shall serve without
compensation, but their reasonable expenses shall be an expense of the
administration of the Fund and shall be paid by the Trustee from and out of the
Fund except to the extent that Donaldson Company, Inc., in its discretion,
directly pays such expenses.
9.2.2. AUTOMATIC REMOVAL. If any individual who is a member of the
Committee is a director, officer or employee when appointed as a member of the
Committee, then such individual shall be automatically removed as a member of
the Committee at the earliest time such individual ceases to be a director,
officer or employee. This removal shall occur automatically and without any
requirement for action by the Chief Executive Officer or any notice to the
individual so removed.
9.2.3. AUTHORITY. The Committee may elect such officers as the
Committee may decide upon. The Committee shall:
(a) establish rules for the functioning of the Committee,
including the times and places for holding meetings, the
notices to be given in respect of such meetings and the number
of members who shall constitute a quorum for the transaction
of business;
<PAGE>
(b) organize and delegate to such of its members as it shall
select authority to execute or authenticate rules, advisory
opinions or instructions, and other instruments adopted or
authorized by the Committee; adopt such bylaws or regulations
as it deems desirable for the conduct of its affairs; appoint
a secretary, who need not be a member of the Committee, to
keep its records and otherwise assist the Committee in the
performance of its duties; keep a record of all its
proceedings and acts and keep all books of account, records
and other data as may be necessary for the proper
administration of the Plan; notify the Employer and the
Trustee of any action taken by the Committee and, when
required, notify any other interested person or persons;
(c) determine from the records of the Employer the compensation,
service records, status and other facts regarding Participants
and other employees;
(d) cause to be compiled at least annually, from the records of
the Committee and the reports and accountings of the Trustee,
a report and accounting of the status of the Plan and the
benefits of the Participants and make it available to each
Participant who shall have the right to examine that part or
portion of such report and accounting (or a true and correct
copy of such part) which sets forth his benefits;
(e) prescribe forms to be used for applications for participation,
benefits, notifications, etc., as may be required in the
administration of the Plan;
(f) set up such rules, applicable to all Participants similarly
situated, as are deemed necessary to carry out the terms of
this Plan Statement;
(g) perform all other acts reasonably necessary for administering
the Plan and carrying out the provisions of this Plan
Statement and performing the duties imposed on it;
(h) resolve all questions of administration of the Plan not
specifically referred to in this section;
(i) in accordance with regulations of the Secretary of Labor:
(i) provide adequate notice in writing to any Participant
or Beneficiary whose claim for benefits under the
Plan has been denied, setting forth the specific
reasons for such denial, written in a manner
calculated to be understood by the Participant, and
<PAGE>
(ii) afford a reasonable opportunity to any Participant
whose claim for benefits has been denied for a full
and fair review by the Committee of the decision
denying the claim; and
(j) delegate or redelegate to one or more persons, jointly or
severally, and whether or not such persons are members of the
Committee or employees of the Employer, such functions
assigned to the Committee hereunder as it may from time to
time deem advisable.
9.2.4. MAJORITY DECISIONS. If there shall at any time be three (3) or
more members of the Committee serving hereunder who are qualified to perform a
particular act, the same may be performed, on behalf of all, by a majority of
those qualified, with or without the concurrence of the minority. No person who
failed to join or concur in such act shall be held liable for the consequences
thereof except to the extent that liability is imposed under the Employee
Retirement Income Security Act of 1974.
9.3. LIMITATION ON AUTHORITY. No action taken by any fiduciary, if authority to
take such action has been delegated or redelegated to it hereunder, shall be the
responsibility of any other fiduciary except as may be required by the
provisions of the Employee Retirement Income Security Act of 1974. Except to the
extent imposed by said Act, no fiduciary shall have the duty to question whether
any other fiduciary is fulfilling all of the responsibility imposed upon such
other fiduciary by this Plan Statement or by said Act or by any regulations or
rulings issued thereunder. The Trustee shall have no authority or duty to
determine or enforce payment of any Employer contribution under the Plan or to
determine the existence, nature or extent of any individual's rights under the
Plan or question any determination made by the Committee regarding the same.
9.4. CONFLICT OF INTEREST. If any officer or employee of any Employer, any
member of the Board of Directors of Donaldson Company, Inc., any member of the
Committee or any Trustee to whom authority has been delegated or redelegated
hereunder shall also be a Participant in the Plan, he shall have no authority as
such officer, employee, member or Trustee with respect to any matter specially
affecting his individual interest hereunder (as distinguished from the interests
of all Participants, Joint Annuitants and Beneficiaries or a broad class of
Participants, Joint Annuitants and Beneficiaries), all such authority being
reserved exclusively to the other officers, employees, member or Trustees, as
the case may be, to the exclusion of such Participant, and such Participant
shall act only in his individual capacity in connection with any such matter.
9.5. DUAL CAPACITY. Individuals, firms, corporations or partnerships identified
herein or delegated or allocated authority or responsibility hereunder may serve
in more than one fiduciary capacity.
9.6. ADMINISTRATOR. Donaldson Company, Inc. shall be the administrator for
purposes of section 3(16)(A) of the Employee Retirement Income Security Act of
1974.
<PAGE>
9.7. NAMED FIDUCIARIES. Donaldson Company, Inc., the Board of Directors of
Donaldson Company, Inc., the Committee and the Trustee shall be named
fiduciaries for the purpose of section 402(a) of the Employee Retirement Income
Security Act of 1974.
9.8. SERVICE OF PROCESS. In the absence of any designation to the contrary by
Committee, the Secretary of Donaldson Company, Inc. is designated as the
appropriate and exclusive agent for the receipt of service of process directed
to the Plan in any legal proceeding, including arbitration, involving the Plan.
9.9. ADMINISTRATIVE EXPENSES. The reasonable expenses of administering the Plan
shall be payable out of the Fund except to the extent that the Employer, in its
discretion, directly pays the expenses.
9.10. IRS QUALIFICATION. This Plan is intended to qualify under section 401(a)
of the Code as a defined benefit pension plan (and not as a defined contribution
profit sharing plan, stock bonus plan or money purchase pension plan).
<PAGE>
SECTION 10
MISCELLANEOUS RULES
10.1. DISCLAIMERS.
(a) Neither the terms of this Plan Statement nor the benefits
hereunder nor the continuance thereof shall be a term of the
employment of any employee, and the Employer shall not be
obliged to continue the Plan.
(b) The terms of this Plan Statement shall not give any employee
the right to be retained in the employment of any Employer.
(c) Neither the Employer or any of their officers nor any member
of their Boards of Directors nor any member of the Committee
nor the Trustee in any way guarantee the Fund against loss or
depreciation, nor do they guarantee the payment of any benefit
or amount which may become due and payable hereunder to any
Participant, Beneficiary or Joint Annuitant. Each Participant,
Joint Annuitant, Beneficiary or other person entitled at any
time to payments hereunder shall look solely to the assets of
the Fund for such payments.
(d) Neither the Employer or any of their officers nor any member
of their Boards of Directors nor any member of the Committee
shall in any manner be liable to any Participant, Beneficiary,
Joint Annuitant or other person for any act or omission of the
Trustee (except to the extent that liability is imposed under
the Employee Retirement Income Security Act of 1974).
(e) Neither the Employer or any of their officers nor any member
of their Boards of Directors nor any member of the Committee
nor the Trustee shall be under any liability or responsibility
(except to the extent that liability is imposed under the
Employee Retirement Income Security Act of 1974) for failure
to effect any of the objectives or purposes of the Plan by
reason of loss or fluctuation in the value of Fund or for the
form, genuineness, validity, sufficiency or effect of any Fund
asset at any time held hereunder, or for the failure of any
person, firm or corporation indebted to the Fund to pay such
indebtedness as and when the same shall become due or for any
delay occasioned by reason of any applicable law, order or
regulation or by reason of any restriction or provision
contained in any security or other asset held by the Fund.
(f) Except as is otherwise provided in the Employee Retirement
Income Security Act of 1974, the Employer and their officers,
the members of their Boards
<PAGE>
of Directors, the members of the Committee, the Trustee and
other fiduciaries shall not be liable for an act or omission
of another person with regard to a fiduciary responsibility
that has been allocated to or delegated to such other person
pursuant to the terms of this Plan Statement or pursuant to
procedures set forth in this Plan Statement.
(g) Neither the Employer nor the Committee nor the Trustee
guarantees that the benefits to be developed hereunder for
each Participant shall equal those which are assumed for the
purpose of determining and measuring the contributions of the
Employer.
10.2. REVERSION OF FUND PROHIBITED. The Fund from time to time hereunder shall
at all times be a trust fund separate and apart from the assets of the Employer,
and no part thereof shall be or become available to the Employer or to creditors
of the Employer under any circumstances other than those specified in, Section
6.3 and Section 7.2 hereof. It shall be impossible for any part of the corpus or
income of the Fund to be used for, or diverted to, purposes other than for the
exclusive benefit of Participants, Joint Annuitants and Beneficiaries (except as
hereinbefore provided).
10.3. CONTINGENT TOP HEAVY PLAN RULES. The rules of the Appendix B to this Plan
Statement (concerning additional provisions that apply if the Plan becomes top
heavy) are incorporated herein.
10.4. CONTINUITY. The tenure and membership of the Committee previously
appointed, the rules of administration adopted and the Beneficiary designations
or elections in effect under the Prior Plan Statement immediately before the
Effective Date shall, to the extent not inconsistent with this Plan Statement,
continue in full force and effect until altered as provided herein.
<PAGE>
APPENDIX A
LIMITATION ON ANNUAL ADDITIONS
AND ANNUAL BENEFITS
SECTION 1
INTRODUCTION
Terms defined in the Plan Statement shall have the same meanings when used in
this Appendix. In addition, when used in this Appendix, the following terms
shall have the following meanings:
1.1. ANNUAL ADDITION. Annual addition means, with respect to any Participant for
a limitation year, the sum of:
(i) all employer contributions (including employer
contributions of the Participant's earnings
reductions under section 401(k), section 403(b) and
section 408(k) of the Code) allocable as of a date
during such limitation year to the Participant under
all defined contribution plans;
(ii) all forfeitures allocable as of a date during such
limitation year to the Participant under all defined
contribution plans; and
(iii) all Participant contributions made as of a date
during such limitation year to all defined
contribution plans.
1.1.1. SPECIFIC INCLUSIONS. With regard to a plan which contains a
qualified cash or deferred arrangement or matching contributions or employee
contributions, excess contributions and excess aggregate contributions (whether
or not distributed during or after the limitation year) shall be considered
annual additions in the year contributed. Excess deferrals that are not
distributed in accordance with the regulations under section 402(g) of the Code
are annual additions.
1.1.2. SPECIFIC EXCLUSIONS. The annual addition shall not, however,
include any portion of a Participant's rollover contributions or any additions
to accounts attributable to a plan merger or a transfer of plan assets or
liabilities or any other amounts excludable under law. Excess deferrals that are
distributed in accordance with the regulations under section 402(g) of the Code
are not annual additions.
1.1.3. ESOP RULES. In the case of an employee stock ownership plan
within the meaning of section 4975(e)(7) of the Code, annual additions shall not
include any dividends or gains on sale of employer securities held by the
employee stock ownership plan (regardless of whether such
<PAGE>
dividends or gains are (i) on securities which are allocated to Participants'
accounts or (ii) on securities which are not allocated to Participants' accounts
which, in the case of dividends used to pay principal on an employee stock
ownership plan loan, result in employer securities being allocated to
Participants' accounts or, in the case of a sale, result in sale proceeds being
allocated to Participants' accounts). In the case of an employee stock ownership
plan within the meaning of section 4975(e)(7) of the Code under which no more
than one-third (1/3rd) of the employer contributions for a limitation year which
are deductible under section 404(a)(9) of the Code are allocated to highly
compensated employees (as defined in section 414(q) of the Code), annual
additions shall not include forfeitures of employer securities under the
employee stock ownership plan if such securities were acquired with the proceeds
of an exempt loan or employer contributions to the employee stock ownership plan
which are deductible by the employer under section 404(a)(9)(B) of the Code and
charged against the Participant's account (I.E., interest payments).
1.2. ANNUAL BENEFIT. Annual benefit means a retirement benefit under a defined
benefit plan which is payable annually in the form of a straight life annuity.
1.2.1. STRAIGHT LIFE ANNUITY. Except as provided below, a benefit
payable in a form other than a straight life annuity will be adjusted to the
actuarial equivalent straight life annuity before applying the limitations of
this Appendix. To determine this actuarial equivalent, the interest rate
assumption shall be the greater of the interest rate specified in the defined
benefit plan's plan document or five percent (5%) and the mortality assumption
shall be that specified in the defined benefit plan's plan document.
1.2.2. EXCLUDED CONTRIBUTIONS. The annual benefit does not include any
benefits attributable to employee contributions, rollover contributions or the
assets transferred from a qualified plan that was not maintained by a controlled
group member.
1.2.3. ANCILLARY BENEFITS. No actuarial adjustment to the annual
benefit is required for: (i) the value of a qualified joint and survivor annuity
(to the extent such value exceeds the sum of the value of a straight life
annuity beginning on the same date and the value of post-retirement death
benefits that would be paid even if the annuity were not in the form of a joint
and survivor annuity), or (ii) the value of benefits that are not directly
related to retirement benefits (such as a pre-retirement disability benefit, a
pre-retirement death benefit or a post-retirement medical benefit), or (iii) the
value of post-retirement cost of living increases made in accordance with
regulations under the Code.
1.3. CONTROLLED GROUP MEMBER. Controlled group member means the Employer and
each member of a controlled group of corporations (as defined in section 414(b)
of the Code and as modified by section 415(h) of the Code), all commonly
controlled trades or businesses (as defined in section 414(c) of the Code and as
modified by section 415(h) of the Code), affiliated service groups (as defined
in section 414(m) of the Code) of which the Employer is a part and other
organizations required to be aggregated for this purpose under section 414(o) of
the Code.
<PAGE>
1.4. DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS. Defined benefit plan and
defined contribution plan have the meanings assigned to those terms by section
415(k)(1) of the Code. Whenever reference is made to defined benefit plans and
defined contribution plans in this Appendix, it shall include all such plans
maintained by the Employer and all controlled group members.
1.5. DEFINED BENEFIT FRACTION.
1.5.1. GENERAL RULE. Defined benefit fraction means a fraction the
numerator of which is the sum of the Participant's projected annual benefits
under all defined benefit plans determined as of the close of the limitation
year, and the denominator of which is the lesser of:
(i) one hundred twenty-five percent (125%) of the dollar
limitation in effect under section 415(b)(l)(A) of
the Code as of the close of such limitation year
(I.E., 125% of $90,000 as adjusted for cost of
living, commencement dates, length of service and
other factors), or
(ii) one hundred forty percent (140%) of the dollar amount
which may be taken into account under section
415(b)(l)(B) of the Code with respect to such
Participant as of the close of such limitation year
(I.E., 140% of the Participant's highest average
compensation as adjusted for cost of living, length
of service and other factors).
1.5.2. TRANSITION RULE. Notwithstanding the above, if the Participant
was a participant as of the first day of the first limitation year beginning
after December 31, 1986, in one or more defined benefit plans which were in
existence on May 6, 1986, the denominator of this fraction will not be less than
one hundred twenty-five percent (125%) of the sum of the annual benefits under
such plans which the Participant had accrued as of the close of the last
limitation year beginning before January 1, 1987, disregarding any changes in
the terms and conditions of the defined benefit plans after May 5, 1986. The
preceding sentence applies only if the defined benefit plans individually and in
the aggregate satisfied the requirements of section 415 of the Code for all
limitation years beginning before January 1, 1987.
1.6. DEFINED CONTRIBUTION FRACTION.
1.6.1. GENERAL RULE. Defined contribution fraction means a fraction the
numerator of which is the sum of the Participant's annual additions (including
Employer contributions which are allocated to a separate account established for
the purpose of providing medical benefits or life insurance benefits with
respect to a key employee as defined in section 416 of the Code under a welfare
benefit fund or individual medical account) as of the close of the limitation
year and for all prior limitation years, and the denominator of which is the sum
of the amounts determined under paragraph (i) or (ii) below, whichever is the
lesser, for such limitation year and for each prior limitation year in which the
Participant had any service with the employer (regardless of whether that or any
other defined contribution plan was in existence during those years or continues
in existence):
<PAGE>
(i) one hundred twenty-five percent (125%) of the dollar
limitation in effect under section 415(c)(l)(A) of
the Code for such limitation year determined without
regard to section 415(c)(6) of the Code (I.E., 125%
of $30,000 as adjusted for cost of living), or
(ii) one hundred forty percent (140%) of the dollar amount
which may be taken into account under section
415(c)(l)(B) of the Code with respect to such
individual under the defined contribution plan for
such limitation year (I.E., 140% of 25% of the
Participant's ss.415 compensation for such limitation
year).
1.6.2. TEFRA TRANSITION RULE. The Employer may elect that the amount
taken into account for each Participant for all limitation years ending before
January 1, 1983, under Section 1.6.1(i) and Section 1.6.1(ii) shall be
determined pursuant to the special transition rule provided in section 415(e)(6)
of the Code.
1.6.3. EMPLOYEE CONTRIBUTIONS. Notwithstanding the definition of
"annual additions," for the purpose of determining the defined contribution
fraction in limitation years beginning before January 1, 1987, employee
contributions shall not be taken into account to the extent that they were not
required to be taken into account under section 415 of the Code prior to the Tax
Reform Act of 1986.
1.6.4. ANNUAL DENOMINATOR. The amounts to be determined under Section
1.6.1(i) and Section 1.6.1(ii) for the limitation year and for all prior
limitation years in which the Participant had any service with the employer
shall be determined separately for each such limitation year on the basis of
which amount is the lesser for each such limitation year.
1.6.5. RELEVANT LAW. For all limitation years ending before January 1,
1976, the dollar limitation under section 415(c)(1)(A) of the Code is
Twenty-five Thousand Dollars ($25,000). For limitation years ending after
December 31, 1975, and before January 1, 1997, the amount shall be:
<PAGE>
For limitation years The ss.415(c)(1)(A)
ending during: dollar amount is:
-------------- -----------------
1976 $ 26,825
1977 $ 28,175
1978 $ 30,050
1979 $ 32,700
1980 $ 36,875
1981 $ 41,500
1982 $ 45,475
1983 -- 1996 $ 30,000
1.6.6. RELIEF RULE. If the Participant was a participant as of the
end of the first day of the first limitation year beginning after December 31,
1986, in one or more defined contribution plans which were in existence on May
6, 1986, the numerator of this fraction will be adjusted if the sum of this
fraction and the defined benefit fraction would otherwise exceed one (1.0).
Under the adjustment, an amount equal to the product of the excess of the sum of
the fractions over one (1.0), times the denominator of this fraction, will be
permanently subtracted from the numerator of this fraction. The adjustment is
calculated using the fractions as they would be computed as of the end of the
last limitation year beginning before January 1, 1987, and disregarding any
changes in the terms and conditions of the plan made after May 6, 1986, but
using the section 415 limitations applicable to the first limitation year
beginning on or after January 1, 1987.
1.7. HIGHEST AVERAGE COMPENSATION. Highest average compensation means the
average ss.415 compensation for the three (3) consecutive calendar years during
which the Participant was both an active participant in the defined benefit plan
and had the greatest aggregate compensation from the Employer.
1.8. INDIVIDUAL MEDICAL ACCOUNT. Individual medical account means an account, as
defined in section 415(1)(2) of the Code maintained by the Employer or a
controlled group member which provides an annual addition.
1.9. LIMITATION YEAR. Limitation year means the calendar year.
1.10. MAXIMUM PERMISSIBLE ADDITION.
1.10.1. GENERAL RULE. Maximum permissible addition (a term that is
relevant only with respect to defined contribution plans) means, for any one (1)
limitation year, the lesser of:
(i) Thirty Thousand Dollars ($30,000), or if greater,
one-fourth (1/4) of the defined benefit limitation
set forth in section 415(b)(1) of the Code as in
effect for the limitation year, or
<PAGE>
(ii) twenty-five percent (25%) of the Participant's ss.415
compensation for such limitation year.
1.10.2. MEDICAL BENEFITS. The dollar limitation in Section 1.10.1(i),
but not the amount determined in Section 1.10.1(ii), shall be reduced by the
amount of employer contributions which are allocated to a separate account
established for the purpose of providing medical benefits or life insurance
benefits with respect to a key employee (as defined in section 416 of the Code)
under a welfare benefit fund or an individual medical account.
1.11. MAXIMUM PERMISSIBLE BENEFIT. Maximum permissible benefit (a term that is
relevant only with respect to defined benefit plans) means, for any one (1)
limitation year, an amount determined as follows:
1.11.1. SSRA COMMENCEMENT. If the annual benefit commences at the
social security retirement age, the maximum permissible benefit is the lesser
of:
(i) Ninety Thousand Dollars ($90,000), or
(ii) the Participant's highest average compensation.
1.11.2. EARLY COMMENCEMENT. If the annual benefit commences before the
social security retirement age, the maximum permissible benefit may not exceed
the lesser of the actuarial equivalent of a Ninety Thousand Dollar ($90,000)
annual benefit beginning at the social security retirement age or the
Participant's highest average compensation. If the annual benefit commences
before the social security retirement age but after age sixty-two (62) years,
this actuarial equivalent shall be the Ninety Thousand Dollar ($90,000) annual
benefit reduced in accordance with reductions in social security benefits (I.E.,
5/9% for each of the first 36 months and 5/12% for each additional month by
which the commencement date precedes the social security retirement age). If the
annual benefit commences before age sixty-two (62) years, this actuarial
equivalent shall be the actuarial equivalent of the maximum permissible benefit
as reduced under the prior sentence to age sixty-two (62) years. To determine
this actuarial equivalent (I.E., the pre-age 62 years actuarial equivalent), the
interest rate assumption shall be the greater of five percent (5%) or the rate
(if there is such a rate) specified in the defined benefit plan's plan document
for the purpose of determining actuarial equivalence for early retirement and
the mortality assumption shall be that specified in the defined benefit plan's
plan document.
1.11.3. LATE COMMENCEMENT. If the annual benefit commences after the
social security retirement age, the benefit may not exceed the lesser of the
actuarial equivalent of a Ninety Thousand Dollar ($90,000) annual benefit
beginning at the social security retirement age or the Participant's highest
average compensation. To determine this actuarial equivalent, the interest rate
assumption shall be the lesser of the rate specified in the defined benefit
plan's plan document or five percent (5%) and the mortality assumption shall be
that specified in the defined benefit plan's plan document.
<PAGE>
1.11.4. COST OF LIVING ADJUSTMENTS. Effective on January 1, 1988 and
each January 1 thereafter, the Ninety Thousand Dollar ($90,000) limit and the
highest average compensation limit (for Participants who have separated from
service) shall be adjusted automatically for increases in the cost of living by
the Secretary of the Treasury. The new amounts will apply to limitation years
ending within such calendar year.
1.11.5. PARTICIPATION REDUCTION. If a Participant has less than ten
(10) years of participation in the plan, the Ninety Thousand Dollar ($90,000)
limit otherwise defined and adjusted above (but not the highest average
compensation limit) shall be reduced to an amount equal to ninety thousand
dollars ($90,000) as otherwise defined and adjusted above multiplied by a
fraction:
(i) the numerator of which is the number of years (and
part thereof) of participation, and
(ii) the denominator of which is ten (10).
1.11.6. SERVICE REDUCTION. If a Participant has less than ten (10)
years of service with the controlled group members, the highest average
compensation limit otherwise defined and adjusted above (but not the Ninety
Thousand Dollar limit) shall be reduced to an amount equal to the highest
average compensation limit as otherwise defined and adjusted above multiplied by
a fraction:
(i) the numerator of which is the number of years (and
part thereof) of service, and
(ii) the denominator of which is ten (10).
1.12. PROJECTED ANNUAL BENEFIT. Projected annual benefit means the annual
benefit payable to the Participant at his or her normal retirement age (as
defined in the defined benefit plan) adjusted to an actuarially equivalent
straight life annuity form (or, if it would be a lesser amount, to any
actuarially equivalent qualified joint and survivor annuity form that is
available under the defined benefit plan) assuming that:
(i) the Participant continues employment and
participation under the defined benefit plan until
his or her normal retirement age (as defined in the
defined benefit plan) or, if later, until his or her
current age, and
(ii) the Participant's ss.415 compensation and all other
factors used to determine annual benefits under the
defined benefit plan remain unchanged for all future
limitation years.
1.13. SECTION 415 COMPENSATION. Section 415 compensation (sometimes, "ss.415
compensation") shall mean, with respect to any limitation year, the wages, tips
and other compensation paid to the Participant by the Employer and all
controlled group members and
<PAGE>
reportable in the box designated "wages, tips, other compensation" on Treasury
Form W-2 (or any comparable successor box or form) for the limitation year but
determined without regard to any rules that limit the remuneration included in
wages based on the nature or location of the employment or the services
performed (such as the exception for agricultural labor in section 3401(a)(2) of
the Code). For limitation years beginning after December 31, 1991, ss.415
compensation shall be determined on a cash basis. For limitation years beginning
after December 31, 1997, ss.415 compensation shall also include any elective
deferral as defined in section 402(g)(3) of the Code and any amount which is
contributed or deferred by an employer at the election of the employee and which
is not includable in the gross income of the employee by reason of section 125
or section 457 of the Code.
1.14. SOCIAL SECURITY RETIREMENT AGE. Social security retirement age means the
age used as retirement age under section 216(l) of the Social Security Act
except that such section shall be applied (i) without regard to the age increase
factor, and (ii) as if the early retirement age under section 216(1)(2) of the
Social Security Act were age sixty-two (62) years.
1.15. WELFARE BENEFIT FUND. Welfare benefit fund means a fund as defined in
section 419(e) of the Code which provides post-retirement medical benefits
allocated to separate accounts for key employees as defined in section
419A(d)(3).
SECTION 2
DEFINED CONTRIBUTION LIMITATION
Notwithstanding anything to the contrary contained in the Plan Statement, there
shall not be allocated to the account of any Participant under a defined
contribution plan for any limitation year an amount which would cause the annual
addition for such Participant to exceed the maximum permissible addition.
SECTION 3
DEFINED BENEFIT LIMITATION
Notwithstanding anything to the contrary contained in the Plan Statement, there
shall not be accrued for the benefit of any Participant under a defined benefit
plan an amount which would cause the annual benefit for any limitation year for
such Participant to exceed the maximum permissible benefit.
<PAGE>
SECTION 4
COMBINED PLANS LIMITATION
Notwithstanding anything to the contrary contained in the Plan Statement during
limitation years beginning before January 1, 2000, there shall not be allocated
to the account of any Participant under a defined contribution plan or accrued
for the benefit of any Participant under a defined benefit plan any amount which
would cause the sum of such Participant's defined benefit fraction and defined
contribution fraction to exceed one (1.0) at the close of any limitation year.
SECTION 5
REMEDIAL ACTION
5.1. DEFINED CONTRIBUTION PLANS ONLY. If a Participant's annual additions for a
limitation year would exceed the maximum permissible addition, to the extent
necessary to eliminate the excess the following shall occur in the following
sequence.
5.1.1. EMPLOYEE AFTER TAX CONTRIBUTIONS AND ELECTIVE DEFERRALS. The
defined contribution plan shall:
(i) return any unmatched employee contributions made by
the Participant for the limitation year to the
Participant (adjusted for their proportionate share
of gains but not losses while held in the defined
contribution plan), and
(ii) distribute unmatched elective deferrals (within the
meaning of section 402(g)(3) of the Code) made for
the limitation year to the Participant (adjusted for
their proportionate share of gains but not losses
while held in the defined contribution plan), and
(iii) return any matched employee contributions made by the
Participant for the limitation year to the
Participant (adjusted for their proportionate share
of gains but not losses while held in the defined
contribution plan), and
(iv) distribute matched elective deferrals (within the
meaning of section 402(g)(3) of the Code) made for
the limitation year to the Participant (adjusted for
their proportionate share of gains but not losses
while held in the defined contribution plan).
<PAGE>
To the extent matched employee contributions are returned or any matched
elective deferrals are distributed, any matching contribution made with respect
thereto shall be forfeited and reallocated to Participants as provided in the
defined contribution plan.
5.1.2. EMPLOYER CONTRIBUTIONS. If, after taking all the actions
contemplated by Section 5.1.1, an excess still exists, the defined contribution
plan shall dispose of the excess as follows.
(a) COVERED. If that Participant is covered by the defined
contribution plan at the end of the limitation year, the
Employer shall cause such excess to be used to reduce employer
contributions for the next limitation year ("second limitation
year") and succeeding limitation years, as necessary, for that
Participant.
(b) NOT COVERED. If the Participant is not covered by the defined
contribution plan at the end of the limitation year, however,
then the excess amounts must be held unallocated in an "excess
account" for the second limitation year (or succeeding
limitation years) and allocated and reallocated in the second
limitation year (or succeeding limitation year) to all the
remaining Participants in the defined contribution plan as if
an employer contribution for the second limitation year (or
succeeding limitation year). However, if the allocation or
reallocation of the excess amounts pursuant to the provisions
of the defined contribution plan causes the limitations of
this Appendix to be exceeded with respect to each Participant
for the second limitation year (or succeeding limitation
years), then these amounts must be held unallocated in an
excess account. If an excess account is in existence at any
time during the second limitation year (or any succeeding
limitation year), all amounts in the excess account must be
allocated and reallocated to Participants' accounts (subject
to the limitations of this Appendix) as if they were
additional employer contributions before any employer
contribution and any Participant contributions which would
constitute annual additions may be made to the defined
contribution plan for that limitation year. Furthermore, the
excess amounts must be used to reduce employer contributions
for the second limitation year (and succeeding limitation
years, as necessary) for all of the remaining Participants.
(c) NO DISTRIBUTIONS. Excess amounts may not be distributed from
the defined contribution plan to Participants or former
Participants.
If an excess account is in existence at any time during a limitation
year, the gains and losses and other income attributable to the excess account
shall be allocated to such excess account. To the extent that investment gains
or other income or investment losses are allocated to the excess account, the
entire amount allocated to Participants from the excess account, including any
such gains or other income or less any losses, shall be considered as an annual
addition. If the defined contribution plan
<PAGE>
should be terminated prior to the date any such temporarily held, unallocated
excess can be allocated to the Accounts of Participants, the date of termination
shall be deemed to be an Annual Valuation Date for the purpose of allocating
such excess and, if any portion of such excess cannot be allocated as of such
deemed Annual Valuation Date by reason of the limitations of this Appendix, such
remaining excess shall be returned to the Employer.
5.1.3. SEQUENCE OF PLANS. Each step of remedial action under Section
5.1.1 and Section 5.1.2 as may be necessary to correct an excess allocation
shall be made in all defined contribution plans before the next step of remedial
action is made. Each such step shall be made in the defined contribution plans
in the following sequence:
(i) all profit sharing and stock bonus plans containing
cash or deferred arrangements,
(ii) all money purchase pension plans other than money
purchase pension plans that are part of employee
stock ownership plans,
(iii) all profit sharing and stock bonus plans other than
profit sharing and stock bonus plans containing cash
or deferred arrangements and employee stock ownership
plans,
(iv) all employee stock ownership plans.
If an excess allocation occurs in two (2) or more plans in the same category,
correction of the excess allocation shall be made in chronological order as
determined by the effective date of each plan (using the original effective date
of the plan) beginning with the most recently established plan.
5.2. DEFINED BENEFIT PLANS ONLY.
5.2.1. GENERAL RULE. If a Participant's annual benefit for any
limitation year would exceed the maximum permissible benefit, to the extent
necessary to eliminate the excess the defined benefit plan shall cease the
accrual of benefits or reduce benefits previously accrued.
5.2.2. SEQUENCE OF PLANS. Such remedial action as may be necessary to
prevent an annual benefit from exceeding the maximum permissible benefit in a
limitation year shall be made in defined benefit plans as follows.
(a) SINGLE PLAN. If the Participant is accruing benefits in only
one defined benefit plan during such limitation year, all such
cessations and reductions shall be made in that plan; and
(b) OTHER PLANS IN EARLIER YEARS. To the extent that such
cessations and reductions are not adequate and the Participant
has accrued benefits in one or
<PAGE>
more other defined benefit plans in earlier limitation years,
such cessations and reduction of accrued benefits under other
plans shall be made in chronological order as determined by
the effective date of each plan (using the original effective
date of the plan) beginning with the most recently established
plan; and
(c) MULTIPLE PLANS. If the Participant is concurrently accruing
benefits in more than one defined benefit plan during such
limitation year, such cessations and reductions of accrued
benefits under such defined benefit plans shall be made in
chronological order as determined by the effective date of
each plan (using the original effective date of the plan)
beginning with the most recently established plan.
5.3. COMBINED DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS. If the sum of a
Participant's defined benefit fraction and the defined contribution fraction
would exceed one (1.0) at the end of any limitation year beginning before
January 1, 2000, to the extent necessary to eliminate the excess the following
shall occur in the following sequence.
(a) DEFINED BENEFIT. The cessation and reduction of accruals
described in Section 5.2 shall be made.
(b) DEFINED CONTRIBUTION. The actions described in Section 5.1
shall be taken.
<PAGE>
APPENDIX B
CONTINGENT TOP HEAVY PLAN RULES
Notwithstanding any of the foregoing provisions of the Plan Statement,
if, after applying the special definitions set forth in Section 1 of this
Appendix, this Plan is determined under Section 2 of this Appendix to be a top
heavy plan for a Plan Year, then the special rules set forth in Section 3 of
this Appendix shall apply. For so long as this Plan is not determined to be a
top heavy plan, the special rules in Section 3 of this Appendix shall be
inapplicable to this Plan.
SECTION 1
SPECIAL DEFINITIONS
Terms defined in the Plan Statement shall have the same meanings when used in
this Appendix. In addition, when used in this Appendix, the following terms
shall have the following meanings:
1.1. AGGREGATED EMPLOYERS. Aggregated employers means the Employer and each
other corporation, partnership or proprietorship which is a "predecessor" to the
Employer, or is under "common control" with the Employer, or is a member of an
"affiliated service group" that includes the Employer, as those terms are
defined in section 414(b), (c), (m) or (o) of the Code.
1.2. AGGREGATION GROUP. Aggregation group means a grouping of this Plan and:
(a) if any Participant in the Plan is a key employee, each other
qualified pension, profit sharing or stock bonus plan of the
aggregated employers in which a key employee is a Participant
(and for this purpose, a key employee shall be considered a
Participant only during periods when he is actually accruing
benefits and not during periods when he has preserved accrued
benefits attributable to periods of participation when he was
not a key employee), and
(b) each other qualified pension, profit sharing or stock bonus
plan of the aggregated employers which is required to be taken
into account for this Plan or any plan described in paragraph
(a) above to satisfy the qualification requirements under
section 410 or section 401(a)(4) of the Code, and
(c) each other qualified pension, profit sharing or stock bonus
plan of the aggregated employers which is not included in
paragraph (a) or (b) above, but which the Employer elects to
include in the aggregation group and which,
<PAGE>
when included, would not cause the aggregation group to fail
to satisfy the qualification requirements under section 410 or
section 401(a)(4) of the Code.
1.3. COMPENSATION. Unless the context clearly requires otherwise, compensation
means the wages, tips and other compensation paid to the Participant by the
Employer and reportable in the box designated "wages, tips, other compensation"
on Treasury Form W-2 (or any comparable successor box or form) for the
applicable period but determined without regard to any rules that limit the
remuneration included in wages based on the nature or location of the employment
or the services performed (such as the exception for agricultural labor in
section 3401(a)(2) of the Code). In determining compensation there shall be
included elective contributions made by the Employer on behalf of the
Participant that are not includible in gross income under sections 125,
402(e)(3), 402(h), 403(b), 414(h)(2) and 457 of the Code including elective
contributions authorized by the Participant under a cafeteria plan or any
qualified cash or deferred arrangement under section 401(k) of the Code. For the
purposes of this Appendix (excluding Section 1.6 of this Appendix), compensation
shall be limited to Two Hundred Thousand Dollars ($200,000) (as adjusted under
the Code for cost of living increases) for Plan Years beginning before January
1, 1994, and One Hundred and Fifty Thousand Dollars ($150,000) (as so adjusted)
for Plan Years beginning after December 31, 1993.
1.4. DETERMINATION DATE. Determination date means, for the first (1st) Plan Year
of a plan, the last day of such first (1st) Plan Year, and for each subsequent
Plan Year, the last day of the immediately preceding Plan Year.
1.5. FIVE PERCENT OWNER. Five percent owner means for each aggregated employer
that is a corporation, any person who owns (or is considered to own within the
meaning of the shareholder attribution rules) more than five percent (5%) of the
value of the outstanding stock of the corporation or stock possessing more than
five percent (5%) of the total combined voting power of the corporation, and,
for each aggregated employer that is not a corporation, any person who owns more
than five percent (5%) of the capital interest or the profits interest in such
aggregated employer. For the purposes of determining ownership percentages, each
corporation, partnership and proprietorship otherwise required to be aggregated
shall be viewed as a separate entity.
1.6. KEY EMPLOYEE. Key employee means each Participant (whether or not then an
employee) who at any time during a Plan Year (or any of the four preceding Plan
Years) is:
(a) an officer of any aggregated employer (excluding persons who
have the title of an officer but not the authority and
including persons who have the authority of an officer but not
the title) having an annual compensation from all aggregated
employers for any such Plan Year in excess of fifty percent
(50%) of the amount in effect under section 415(b)(1)(A) of
the Code for any such Plan Year, or
<PAGE>
(b) one (1) of the ten (10) employees (not necessarily
Participants) owning (or considered to own within the meaning
of the shareholder attribution rules) both more than one-half
of one percent (1/2%) ownership interest in value and the
largest percentage ownership interests in value of any of the
aggregated employers (which are owned by employees) and who
has an annual compensation from all the aggregated employers
in excess of the limitation in effect under section
415(c)(1)(A) of the Code for any such Plan Year, or
(c) a five percent owner, or
(d) a one percent owner having an annual compensation from the
aggregated employers of more than One Hundred Fifty Thousand
Dollars ($150,000);
provided, however, that no more than fifty (50) employees (or, if lesser, the
greater of three of all the aggregated employers' employees or ten percent of
all the aggregated employers' employees) shall be treated as officers. For the
purposes of determining ownership percentages, each corporation, partnership and
proprietorship otherwise required to be aggregated shall be viewed as a separate
entity. For purposes of paragraph (b) above, if two (2) employees have the same
interest in any of the aggregated employers, the employee having the greatest
annual compensation from that aggregated employer shall be treated as having a
larger interest. For the purpose of determining compensation, however, all
compensation received from all aggregated employers shall be taken into account.
The term "key employee" shall include the beneficiaries of a deceased key
employee.
1.7. ONE PERCENT OWNER. One percent owner means, for each aggregated employer
that is a corporation, any person who owns (or is considered to own within the
meaning of the shareholder attribution rules) more than one percent (1%) of the
value of the outstanding stock of the corporation or stock possessing more than
one percent (1%) of the total combined voting power of the corporation, and, for
each aggregated employer that is not a corporation, any person who owns more
than one percent (1%) of the capital or the profits interest in such aggregated
employer. For the purposes of determining ownership percentages, each
corporation, partnership and proprietorship otherwise required to be aggregated
shall be viewed as a separate entity.
1.8. SHAREHOLDER ATTRIBUTION RULES. Shareholder attribution rules means the
rules of section 318 of the Code, (except that subparagraph (C) of section
318(a)(2) of the Code shall be applied by substituting "5 percent" for "50
percent") or, if the Employer is not a corporation, the rules determining
ownership in such Employer which shall be set forth in regulations prescribed by
the Secretary of the Treasury.
1.9. TOP HEAVY AGGREGATION GROUP. Top heavy aggregation group means any
aggregation group for which, as of the determination date, the sum of:
<PAGE>
(i) the present value of the cumulative accrued benefits
for key employees under all defined benefit plans
included in such aggregation group, and
(ii) the aggregate of the accounts of key employees under
all defined contribution plans included in such
aggregation group,
exceed sixty percent (60%) of a similar sum determined for all employees. In
applying the foregoing, the following rules shall be observed:
(a) For the purpose of determining the present value of the
cumulative accrued benefit for any employee under a defined
benefit plan, or the amount of the account of any employee
under a defined contribution plan, such present value or
amount shall be increased by the aggregate distributions made
with respect to such employee under the plan during the five
(5) year period ending on the determination date.
(b) Any rollover contribution (or similar transfer) initiated by
the employee, made from a plan maintained by one employer to a
plan maintained by another employer and made after December
31, 1983, to a plan shall not be taken into account with
respect to the transferee plan for the purpose of determining
whether such transferee plan is a top heavy plan (or whether
any aggregation group which includes such plan is a top heavy
aggregation group). Any rollover contribution (or similar
transfer) not described in the preceding sentence shall be
taken into account with respect to the transferee plan for the
purpose of determining whether such transferee plan is a top
heavy plan (or whether any aggregation group which includes
such plan is a top heavy aggregation group).
(c) If any individual is not a key employee with respect to a plan
for any Plan Year, but such individual was a key employee with
respect to a plan for any prior Plan Year, the cumulative
accrued benefit of such employee and the account of such
employee shall not be taken into account.
(d) The determination of whether a plan is a top heavy plan shall
be made once for each Plan Year of the plan as of the
determination date for that Plan Year.
(e) In determining the present value of the cumulative accrued
benefits of employees under a defined benefit plan, the
determination shall be made as of the actuarial valuation date
last occurring during the twelve (12) months preceding the
determination date and shall be determined on the assumption
that the employees terminated employment on the valuation date
except as
<PAGE>
provided in section 416 of the Code and the regulations
thereunder for the first and second Plan Years of a defined
benefit plan. The accrued benefit of any employee (other than
a key employee) shall be determined under the method which is
used for accrual purposes for all plans of the employer or if
there is no method which is used for accrual purposes under
all plans of the employer, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under section
411(b)(1)(C) of the Code. In determining this present value,
the mortality and interest assumptions shall be those which
would be used by the Pension Benefit Guaranty Corporation in
valuing the defined benefit plan if it terminated on such
valuation date. The accrued benefit to be valued shall be the
benefit expressed as a single life annuity.
(f) In determining the accounts of employees under a defined
contribution plan, the account values determined as of the
most recent asset valuation occurring within the twelve (12)
month period ending on the determination date shall be used.
In addition, amounts required to be contributed under either
the minimum funding standards or the plan's contribution
formula shall be included in determining the account. In the
first year of the plan, contributions made or to be made as of
the determination date shall be included even if such
contributions are not required.
(g) If any individual has not performed any services for any
employer maintaining the plan at any time during the five (5)
year period ending on the determination date, any accrued
benefit of the individual under a defined benefit plan and the
account of the individual under a defined contribution plan
shall not be taken into account.
(h) For this purpose, a terminated plan shall be treated like any
other plan and must be aggregated with other plans of the
employer if it was maintained within the last five (5) years
ending on the determination date for the Plan Year in question
and would, but for the fact that it terminated, be part of the
aggregation group for such Plan Year.
1.10. TOP HEAVY PLAN. Top heavy plan means a qualified plan under which (as of
the determination date):
(i) if the plan is a defined benefit plan, the present
value of the cumulative accrued benefits for key
employees exceeds sixty percent (60%) of the present
value of the cumulative accrued benefits for all
employees, and
<PAGE>
(ii) if the plan is a defined contribution plan, the
aggregate of the accounts of key employees exceeds
sixty percent (60%) of the aggregate of all of the
accounts of all employees.
In applying the foregoing, the following rules shall be observed:
(a) Each plan of an Employer required to be included in an
aggregation group shall be a top heavy plan if such
aggregation group is a top heavy aggregation group.
(b) For the purpose of determining the present value of the
cumulative accrued benefit for any employee under a defined
benefit plan, or the amount of the account of any employee
under a defined contribution plan, such present value or
amount shall be increased by the aggregate distributions made
with respect to such employee under the plan during the five
(5) year period ending on the determination date.
(c) Any rollover contribution (or similar transfer) initiated by
the employee, made from a plan maintained by one employer to a
plan maintained by another employer and made after December
31, 1983, to a plan shall not be taken into account with
respect to the transferee plan for the purpose of determining
whether such transferee plan is a top heavy plan (or whether
any aggregation group which includes such plan is a top heavy
aggregation group). Any rollover contribution (or similar
transfer) not described in the preceding sentence shall be
taken into account with respect to the transferee plan for the
purpose of determining whether such transferee plan is a top
heavy plan (or whether any aggregation group which includes
such plan is a top heavy aggregation group).
(d) If any individual is not a key employee with respect to a plan
for any Plan Year, but such individual was a key employee with
respect to the plan for any prior Plan Year, the cumulative
accrued benefit of such employee and the account of such
employee shall not be taken into account.
(e) The determination of whether a plan is a top heavy plan shall
be made once for each Plan Year of the plan as of the
determination date for that Plan Year.
(f) In determining the present value of the cumulative accrued
benefits of employees under a defined benefit plan, the
determination shall be made as of the actuarial valuation date
last occurring during the twelve (12) months preceding the
determination date and shall be determined on the assumption
that the employees terminated employment on the valuation date
except as
<PAGE>
provided in section 416 of the Code and the regulations
thereunder for the first and second Plan Years of a defined
benefit plan. The accrued benefit of any employee (other than
a key employee) shall be determined under the method which is
used for accrual purposes for all plans of the employer or if
there is no method which is used for accrual purposes under
all plans of the employer, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under section
411(b)(1)(C) of the Code. In determining this present value,
the mortality and interest assumptions shall be those which
would be used by the Pension Benefit Guaranty Corporation in
valuing the defined benefit plan if it terminated on such
valuation date. The accrued benefit to be valued shall be the
benefit expressed as a single life annuity.
(g) In determining the accounts of employees under a defined
contribution plan, the account values determined as of the
most recent asset valuation occurring within the twelve (12)
month period ending on the determination date shall be used.
In addition, amounts required to be contributed under either
the minimum funding standards or the plan's contribution
formula shall be included in determining the account. In the
first year of the plan, contributions made or to be made as of
the determination date shall be included even if such
contributions are not required.
(h) If any individual has not performed any services for any
employer maintaining the plan at any time during the five (5)
year period ending on the determination date, any accrued
benefit of the individual under a defined benefit plan and the
account of the individual under a defined contribution plan
shall not be taken into account.
(i) For this purpose, a terminated plan shall be treated like any
other plan and must be aggregated with other plans of the
employer if it was maintained within the last five (5) years
ending on the determination date for the Plan Year in question
and would, but for the fact that it terminated, be part of the
aggregation group for such Plan Year.
SECTION 2
DETERMINATION OF TOP HEAVINESS
Once each Plan Year, as of the determination date for that Plan Year, the
administrator of this Plan shall determine if this Plan is a top heavy plan.
<PAGE>
SECTION 3
CONTINGENT PROVISIONS
3.1. WHEN APPLICABLE. If this Plan is determined to be a top heavy plan for any
Plan Year, the following provisions shall apply for that Plan Year (and, to the
extent hereinafter specified, for subsequent Plan Years), notwithstanding any
provisions to the contrary in the Plan.
3.2. VESTING REQUIREMENT.
3.2.1. GENERAL RULE. During any Plan Year that the Plan is determined
to be a Top Heavy Plan, then all accounts of all Participants in a defined
contribution plan that is a top heavy plan and the accrued benefits of all
Participants in a defined benefit plan that is a top heavy plan shall be vested
and nonforfeitable in accordance with the following schedule if, and to the
extent, that it is more favorable than other provisions of the Plan:
If the Participant Has His Vested
Completed the Following Percentage
Years of Vesting Service: Shall Be:
------------------------- ---------
Less than 2 years 0%
2 years but less than 3 years 20%
3 years but less than 4 years 40%
4 years but less than 5 years 60%
5 years but less than 6 years 80%
6 years or more 100%
3.2.2. SUBSEQUENT YEAR. In each subsequent Plan Year that the Plan is
determined not to be a top heavy plan, the other nonforfeitability provisions of
the Plan Statement (and not this section) shall apply in determining the vested
and nonforfeitable rights of Participants who do not have five (5) or more years
of Vesting Service (three or more years of Vesting Service for Participants who
have one or more Hours of Service in any Plan Year beginning after December 31,
1988) as of the beginning of such subsequent Plan Year; provided, however, that
they shall not be applied in a manner which would reduce the vested and
nonforfeitable percentage of any Participant.
3.2.3. CANCELLATION OF BENEFIT SERVICE. If this Plan is a defined
benefit plan and if the Participant's vested percentage is determined under this
Appendix and if a Participant receives a lump sum distribution of the present
value of the vested portion of his accrued benefit, the Plan shall:
(a) thereafter disregard the Participant's service with respect to
which he received such distribution in determining his accrued
benefit, and
<PAGE>
(b) permit the Participant who receives a distribution of less
than the present value of his entire accrued benefit to
restore this service by repaying (after returning to
employment covered under the Plan) to the trustee the amount
of such distribution together with interest at the interest
rate of five percent (5%) per annum compounded annually (or
such other interest rate as is provided by law for such
repayment). If the distribution was on account of separation
from service such repayment must be made before the earlier
of,
(i) five (5) years after the first date on which the
Participant is subsequently reemployed by the
employer, or
(ii) the close of the first period of five (5) consecutive
one-year breaks in service commencing after the
distribution.
If the distribution was on account of any other reason, such repayment must be
made within five (5) years after the date of the distribution.
3.3. DEFINED CONTRIBUTION PLAN MINIMUM BENEFIT REQUIREMENT.
3.3.1. GENERAL RULE. If this Plan is a defined contribution plan, then
for any Plan Year that this Plan is determined to be a top heavy plan, the
Employer shall make a contribution for allocation to the account of each
employee who is a Participant for that Plan Year and who is not a key employee
in an amount (when combined with other Employer contributions and forfeited
accounts allocated to his account) which is at least equal to three percent (3%)
of such Participant's compensation. (This minimum contribution amount shall be
further reduced by all other Employer contributions to this Plan or any other
defined contribution plans.) This contribution shall be made for each
Participant who has not separated from service with the Employer at the end of
the Plan Year (including for this purpose any Participant who is then on
temporary layoff or authorized leave of absence or who, during such Plan Year,
was inducted into the Armed Forces of the United States from employment with the
Employer) including, for this purpose, each employee of the Employer who would
have been a Participant if he had: (i) completed one thousand (1,000) Hours of
Service (or the equivalent) during the Plan Year, and (ii) made any mandatory
contributions to the Plan, and (iii) earned compensation in excess of the stated
amount required for participation in the Plan.
3.3.2. SPECIAL RULE. Subject to the following rules, the percentage
referred to in Section 3.3.1 of this Appendix shall not exceed the percentage at
which contributions are made (or required to be made) under this Plan for the
Plan Year for that key employee for whom that percentage is the highest for the
Plan Year.
(a) The percentage referred to above shall be determined by
dividing the Employer contributions for such key employee for
such Plan Year by his compensation for such Plan Year.
<PAGE>
(b) For the purposes of this Section 3.3, all defined contribution
plans required to be included in an aggregation group shall be
treated as one (l) plan.
(c) The exception contained in this Section 3.3.2 shall not apply
to (be available to) this Plan if this Plan is required to be
included in an aggregation group if including this Plan in an
aggregation group enables a defined benefit plan to satisfy
the qualification requirements of section 410 or section
401(a)(4) of the Code.
3.3.3. SALARY REDUCTION AND MATCHING CONTRIBUTIONS. For the purpose of
this Section 3.3, all Employer contributions attributable to a salary reduction
or similar arrangement shall be taken into account for the purpose of
determining the minimum percentage contribution required to be made for a
particular Plan Year for a Participant who is not a key employee but not for the
purpose of determining whether that minimum contribution requirement has been
satisfied. For the purpose of this Section 3.3 during all Plan Years beginning
after December 31, 1988, all Employer matching contributions shall be taken into
account for the purposes of determining the minimum percentage contribution
required to be made for a particular Plan Year for a Participant who was not a
key employee but not for the purpose of determining whether that minimum
contribution requirement has been satisfied.
3.4. DEFINED BENEFIT PLAN MINIMUM BENEFIT REQUIREMENT.
3.4.1. GENERAL RULE. If this Plan is a defined benefit plan, then for
any Plan Year that the Plan is determined to be a top heavy plan, the accrued
benefit for each Participant who is not a key employee shall not be less than
one-twelfth (l/12th) of the applicable percentage of the Participant's average
compensation for years in the testing period.
3.4.2. SPECIAL RULES AND DEFINITIONS. In applying the general rule of
Section 3.4.1 of this Appendix, the following special rules and definitions
shall apply:
(a) The term "applicable percentage" means the lesser of:
(i) two percent (2%) multiplied by the number of years of
service with the Employer, or
(ii) twenty percent (20%).
(b) For the purpose of this Section 3.4, a Participant's years of
service with the Employer shall be equal to the Participant's
Vesting Service except that a year of Vesting Service shall
not be taken into account if:
<PAGE>
(i) the Plan was not a top heavy plan for any Plan Year
ending during such year of Vesting Service, or
(ii) such year of Vesting Service was completed in a Plan
Year beginning before January l, 1984.
(c) A Participant's "testing period" shall be the period of five
(5) consecutive years during which the Participant had the
greatest compensation from the Employer; provided, however,
that:
(i) the years taken into account shall be properly
adjusted for years not included in a year of service,
and
(ii) a year shall not be taken into account if such year
ends in a Plan Year beginning before January l, 1984,
or such year begins after the close of the last year
in which the Plan was a top heavy plan.
(d) An individual shall be considered a Participant for the
purpose of accruing the minimum benefit only if such
individual has at least one thousand (1,000) Hours of Service
during a benefit accrual computation period (or equivalent
service determined under Department of Labor regulations).
Furthermore, such individual shall accrue a minimum benefit
only for a benefit accrual computation period in which such
individual has one thousand (1,000) Hours of Service (or
equivalent service). An individual shall not fail to accrue
the minimum benefit merely because the individual: (i) was not
employed on a specified date, or (ii) was excluded from
participation (or otherwise failed to accrue a benefit)
because the individual's compensation was less than a stated
amount, or (iii) because the individual failed to make any
mandatory contributions.
3.4.3. ACCRUALS PRESERVED. In years subsequent to the last Plan Year in
which this Plan is a top heavy plan, the other benefit accrual rules of the Plan
Statement shall be applied to determine the accrued benefit of each Participant,
except that the application of such other rules shall not serve to reduce a
Participant's accrued benefit as determined under this Section 3.4.
3.5. PRIORITIES AMONG PLANS. In applying the minimum benefit provisions of this
Appendix in any Plan Year that this Plan is determined to be a top heavy plan,
the following rules shall apply:
(a) If an employee participates only in this Plan, the employee
shall receive the minimum benefit applicable to this Plan.
<PAGE>
(b) If an employee participates in both a defined benefit plan and
a defined contribution plan and only one (1) of such plans is
a top heavy plan for the Plan Year, the employee shall receive
the minimum benefit applicable to the plan which is a top
heavy plan.
(c) If an employee participates in both a defined contribution
plan and a defined benefit plan and both are top heavy plans,
then the employee, for that Plan Year, shall receive the
defined benefit plan minimum benefit unless for that Plan Year
the employee has received employer contributions and
forfeitures allocated to his account in the defined
contribution plan in an amount which is at least equal to five
percent (5%) of his compensation.
(d) If an employee participates in two (2) or more defined
contribution plans which are top heavy plans, then the
employee, for that Plan Year, shall receive the defined
contribution plan minimum benefit in that defined contribution
plan which has the earliest original effective date.
3.6. ANNUAL CONTRIBUTION LIMITS.
3.6.1. GENERAL RULE. Notwithstanding anything apparently to the
contrary in the Appendix A to the Plan Statement, for any Plan Year that this
Plan is a top heavy plan, the defined benefit fraction and defined contribution
fraction of the Appendix to the Plan Statement pertaining to limits under
section 415 of the Code shall be one hundred percent (100%) and not one hundred
twenty-five percent (125%).
3.6.2. SPECIAL RULE. Section 3.6.1 of this Appendix shall not apply to
any top heavy plan if such top heavy plan satisfies the following requirements:
(a) MINIMUM BENEFIT REQUIREMENT. The top heavy plan (and any plan
required to be included in an aggregation group with such
plan) satisfies the requirements of Section 3.4 of this
Appendix when Section 3.4.2(a)(1) of this Appendix is applied
by substituting three percent (3%) for two percent (2%) and by
increasing (but by no more than ten percentage points) twenty
percent (20%) by one percentage point for each year for which
the plan was taken into account under this Section 3.7.
Section 3.3.1 of this Appendix shall be applied by
substituting "four percent (4%)" for "three percent (3%)."
Section 3.5(c) of this Appendix shall be applied by
substituting "seven and one-half percent (7-1/2%)" for "five
percent (5%)."
(b) NINETY PERCENT RULE. A top heavy plan would not be a top heavy
plan if "ninety percent (90%)" were substituted for "sixty
percent (60%)" each place
<PAGE>
that it appears in the definitions of top heavy plan and top
heavy aggregation group.
3.6.3. TRANSITION RULE. If, but for this Section 3.6.3, Section 3.6.1
of this Appendix would begin to apply with respect to this Plan because it is a
top heavy plan, the application of Section 3.6.l of this Appendix shall be
suspended with respect to any individual so long as there are no:
(a) employer contributions, forfeitures or voluntary nondeductible
contributions allocated to such individual (if this Plan is a
defined contribution plan), or
(b) accruals for such individual (if this Plan is a defined
benefit plan).
3.6.4. COORDINATING CHANGE. If this Plan is a top heavy plan for any
Plan Year, then for purposes of the Appendix A to the Plan Statement, section
415(e)(6)(i) of the Code shall be applied by substituting "Forty-one Thousand
Five Hundred Dollars ($41,500)" for "Fifty-one Thousand Eight Hundred
Seventy-five Dollars ($51,875)."
3.7. BARGAINING UNITS. The requirements of Section 3.2 through Section 3.6 of
this Appendix shall not apply with respect to any employee included in a unit of
employees covered by an agreement which the Secretary of Labor finds to be a
collective bargaining agreement between employee representatives and one (1) or
more employers if there is evidence that retirement benefits are the subject of
good faith bargaining between such employee representatives and such employer or
employers.
<PAGE>
APPENDIX C
DETERMINATION OF ACTUARIAL EQUIVALENT
TO SINGLE LIFE ANNUITY
Section 1. GENERAL RULES. The point of reference for determining the
Actuarial Equivalent amount of all forms of benefit is the monthly benefit
amount expressed in the Single Life Annuity form. When, under the terms of the
Plan Statement, the monthly amount of the Normal Retirement Pension, Early
Retirement Pension, Vested Benefit or other benefit has been determined in the
Single Life Annuity form, reference to the following factors and tables will
determine the Actuarial Equivalent dollar amount of benefit in other available
optional forms of pension; provided, however, that:
(a) The right to elect an optional form of pension shall not be
construed to permit a Participant to elect a commencement date
for that pension form which is other than the first date that
the pension benefit could have been paid in the Single Life
Annuity form.
(b) The following factors and tables assume that the first payment
of the Actuarial Equivalent form is made on the same day as
the first payment of the Single Life Annuity form to which it
is being compared.
(c) Nothing in this Appendix shall be interpreted as providing for
pension benefits under the Plan in excess of the limitations
prescribed in the Appendix A to the Plan Statement.
(d) Nothing in this Appendix shall be construed to provide for an
optional form of pension that is not made available under
Section 3 of the Plan Statement.
Section 2. GRANDFATHERED FACTORS. Except to the extent specified in the
Prior Plan Statement or this Plan Statement, the following interest and
mortality factors shall be used in determining the Actuarial Equivalent amount
of any benefit earned under the Prior Plan Statement.
Interest Assumption: Six percent (6%)
Mortality Assumption: 1971 Group Annuity Mortality Table (male
rates) with a one-year age setback for all
Participants and a five-year age setback for
all Joint Annuitants
Section 3. ACCOUNT BALANCE CONVERSIONS. When converting benefits from
the Participant's Account Balance to another form of benefit available under
Section 4 (or when converting benefits under the Prior Plan Statement to a
single lump sum for payment to a Participant),
<PAGE>
the benefit to be converted is the Account Balance (or the Single Life Annuity
form payable at Normal Retirement Age or the date as of which it is determined,
if later--when converting benefits to a single lump sum for payment to any other
person, the benefit to be converted shall be the benefit payable to such other
person at the latest date such benefit may commence). The factors to be used to
convert the Account Balance to another form of benefit (or the Single Life
Annuity form to a lump sum benefit) shall be:
Interest Assumption: During each stability period, the annual
rate of interest on 30-year Treasury
securities for the lookback month. The
stability period shall be the Plan Year. The
lookback month shall be the fifth calendar
month preceding the commencement of the
stability period.
Mortality Assumption: The mortality rate determined from the table
prescribed by the Secretary of the Treasury
under section 417(e)(3)(A)(ii)(I) of the
Code based on the prevailing commissioners'
standard table used to determine reserves
for group annuity contracts.
<PAGE>
APPENDIX D
QUALIFIED DOMESTIC RELATIONS ORDERS
SECTION 1
GENERAL MATTERS
Terms defined in the Plan Statement shall have the same meanings when used in
this Appendix.
1.1. GENERAL RULE. The Plan shall not honor the creation, assignment or
recognition of any right to any benefit payable with respect to a Participant
pursuant to a domestic relations order unless that domestic relations order is a
qualified domestic relations order.
1.2. ALTERNATE PAYEE DEFINED. The only persons eligible to be considered
alternate payees with respect to a Participant shall be that Participant's
spouse, former spouse, child or other dependent.
1.3. DRO DEFINED. A domestic relations order is any judgment, decree or order
(including an approval of a property settlement agreement) which relates to the
provision of child support, alimony payments, or marital property rights to a
spouse, former spouse, child or other dependent of a Participant and which is
made pursuant to a state domestic relations law (including a community property
law).
1.4. QDRO DEFINED. A qualified domestic relations order is a domestic relations
order which creates or recognizes the existence of an alternate payee's right to
(or assigns to an alternate payee the right to) receive all or a portion of the
Accrued Benefit of a Participant under the Plan and which satisfies all of the
following requirements.
1.4.1. NAMES AND ADDRESSES. The order must clearly specify the name and
the last known mailing address, if any, of the Participant and the name and
mailing address of each alternate payee covered by the order.
1.4.2. AMOUNT. The order must clearly specify the amount or percentage
of the Participant's Accrued Benefit to be paid by the Plan to each such
alternate payee or the manner in which such amount or percentage is to be
determined.
1.4.3. PAYMENT METHOD. The order must clearly specify the number of
payments or period to which the order applies.
1.4.4. PLAN IDENTITY. The order must clearly specify that it applies to
this Plan.
<PAGE>
1.4.5. SETTLEMENT OPTIONS. Except as provided in Section 1.4.8 of this
Appendix, the order may not require the Plan to provide any type or form of
benefits or any option not otherwise provided under the Plan.
1.4.6. INCREASED BENEFITS. The order may not require the Plan to
provide increased benefits (determined on the basis of actuarial value).
1.4.7. PRIOR AWARDS. The order may not require the payment of benefits
to an alternate payee which are required to be paid to another alternate payee
under another order previously determined to be a qualified domestic relations
order.
1.4.8. EXCEPTIONS. The order will not fail to meet the requirements of
Section 1.4.5 of this Appendix if:
(a) The order requires payment of benefits be made to an alternate
payee before the Participant has separated from service but as
of a date that is on or after the date on which the
Participant attains (or would have attained) the earliest
payment date described in Section 1.4.10 of this Appendix; and
(b) The order requires that payment of benefits be made to an
alternate payee as if the Participant had retired on the date
on which payment is to begin under such order (but taking into
account only the present value of benefits actually accrued
and not taking into account the present value of any Employer
subsidy for early retirement); and
(c) The order requires payment of benefits to be made to an
alternate payee in any form in which benefits may be paid
under the Plan to the Participant (other than in the form of a
joint and survivor annuity with respect to the alternate payee
and his or her subsequent spouse).
In lieu of the foregoing, the order will not fail to meet the requirements of
Section 1.4.5 of this Appendix if the order: (1) requires that payment of
benefits be made to an alternate payee in a single lump sum as soon as is
administratively feasible after the order is determined to be a qualified
domestic relations order, and (2) does not contain any of the provisions
described in Section 1.4.9 of this Appendix, and (3) provides that the payment
of such single lump sum fully and permanently discharges all obligations of the
Plan to the alternate payee.
1.4.9. DEEMED SPOUSE. Notwithstanding the foregoing:
(a) The order may provide that the former spouse of a Participant
shall be treated as a surviving spouse of such Participant for
the purposes of Section 4 and Section 5 or both Section 4 and
Section 5 of the Plan Statement (and that any
<PAGE>
subsequent or prior spouse of the Participant shall not be
treated as a spouse of the Participant for such purposes), and
(b) The order may provide that, if the former spouse has been
married to the Participant for at least one (1) year at any
time, the surviving former spouse shall be deemed to have been
married to the Participant for the one (1) year period ending
on the date of the Participant's death.
1.4.10. PAYMENT DATE DEFINED. For the purpose of Section 1.4.8 of this
Appendix, the earliest payment date means the earlier of:
(a) The date on which the Participant is entitled to a
distribution under the Plan; or
(b) The later of (i) the date the Participant attains age fifty
(50) years, or (ii) the earliest date on which the Participant
could begin receiving benefits under the Plan if the
Participant separated from service.
SECTION 2
PROCEDURES
2.1. ACTIONS PENDING REVIEW. During any period when the issue of whether a
domestic relations order is a qualified domestic relations order is being
determined by the Committee, the Committee shall cause the Plan to separately
account for the amounts which would be payable to the alternate payee during
such period if the order were determined to be a qualified domestic relations
order.
2.2. REVIEWING DROS. Upon the receipt of a domestic relations order, the
Committee shall determine whether such order is a qualified domestic relations
order.
2.2.1. RECEIPT. A domestic relations order shall be considered to have
been received only when the Committee shall have received a copy of a domestic
relations order which is complete in all respects and is originally signed or
certified or otherwise officially authenticated.
2.2.2. NOTICE TO PARTIES. Upon receipt of a domestic relations order,
the Committee shall notify the Participant and all persons claiming to be
alternate payees and all prior alternate payees with respect to the Participant
that such domestic relations order has been received. The Committee shall
include with such notice a copy of this Appendix.
<PAGE>
2.2.3. COMMENT PERIOD. The Participant and all persons claiming to be
alternate payees and all prior alternate payees with respect to the Participant
shall be afforded a comment period of thirty (30) days from the date such notice
is mailed by the Committee in which to make comments or objections to the
Committee concerning whether the domestic relations order is a qualified
domestic relations order. By the unanimous written consent of the Participant
and all persons claiming to be alternate payees and all prior alternate payees
with respect to the Participant, the thirty (30) day comment period may be
shortened.
2.2.4. INITIAL DETERMINATION. Within a reasonable period of time after
the termination of the comment period, the Committee shall give written notice
to the Participant and all persons claiming to be alternate payees and all prior
alternate payees with respect to the Participant of its decision that the
domestic relations order is or is not a qualified domestic relations order. If
the Committee determines that the order is not a qualified domestic relations
order or if the Committee determines that the written objections of any party to
the order being found a qualified domestic relations order are not valid, the
Committee shall include in its written notice:
(i) the specific reasons for its decision;
(ii) the specific reference to the pertinent provisions of
this Plan Statement upon which its decision is based;
(iii) a description of additional material or information,
if any, which would cause the Committee to reach a
different conclusion; and
(iv) an explanation of the procedures for reviewing the
initial determination of the Committee.
2.2.5. APPEAL PERIOD. The Participant and all persons claiming to be
alternate payees and all prior alternate payees with respect to the Participant
shall be afforded an appeal period of sixty (60) days from the date such an
initial determination and explanation is mailed in which to make comments or
objections concerning whether the original determination of the Committee is
correct. By the unanimous written consent of the Participant and all persons
claiming to be alternate payees and all prior alternate payees with respect to
the Participant, the sixty (60) day appeal period may be shortened.
2.2.6. FINAL DETERMINATION. In all events, the final determination of
the Committee shall be made not later than eighteen (18) months after the date
on which first payment would be required to be made under the domestic relations
order if it were a qualified domestic relations order. The final determination
shall be communicated in writing to the Participant and all persons claiming to
be alternate payees and all prior alternate payees with respect to the
Participant.
<PAGE>
2.3. FINAL DISPOSITION. If the domestic relations order is finally determined to
be a qualified domestic relations order and all comment and appeal periods have
expired, the Plan shall pay all amounts required to be paid pursuant to the
domestic relations order to the alternate payee entitled thereto. If the
domestic relations order is finally determined not to be a qualified domestic
relations order and all comment and appeal periods have expired, benefits under
the Plan shall be paid to the person or persons who would have been entitled to
such amounts if there had been no domestic relations order.
2.4. ORDERS BEING SOUGHT. If the Committee has notice that a domestic relations
order is being or may be sought but has not received the order, the Committee
shall not (in the absence of a written request from the Participant) delay
payment of benefits to a Participant, Joint Annuitant or Beneficiary which
otherwise would be due. If the Committee has determined that a domestic
relations order is not a qualified domestic relations order and all comment and
appeal periods have expired, the Committee shall not (in the absence of a
written request from the Participant) delay payment of benefits to a
Participant, Joint Annuitant or Beneficiary which otherwise would be due even if
the Committee has notice that the party claiming to be an alternate payee or the
Participant or both are attempting to rectify any deficiencies in the domestic
relations order. Notwithstanding the above, after the commencement of a divorce
action, the Committee shall comply with a restraining order, duly issued by the
court handling the divorce, reasonably prohibiting the disposition of a
Participant's benefits pending the submission to the Committee of a domestic
relations order or prohibiting the disposition of a Participant's benefits
pending resolution of a dispute with respect to a domestic relations order.
SECTION 3
PROCESSING OF AWARD
3.1. GENERAL RULES. If a benefit is awarded to an alternate payee pursuant to a
domestic relations order which has been finally determined to be a qualified
domestic relations order, the following rules shall apply.
3.1.1. EFFECT ON ACCRUED BENEFIT. For all purposes of the Plan, the
Participant's Accrued Benefit (and all other benefits payable under the Plan
which are derived in whole or in part by reference to the Participant's Accrued
Benefit) shall be permanently diminished by the portion of the Participant's
Accrued Benefit which is awarded to the alternate payee.
3.1.2. AFTER DEATH. After the death of an alternate payee, all amounts
awarded to the alternate payee which have not been distributed to the alternate
payee and which continue to be payable shall be paid in a single lump sum
distribution to the personal representative of the alternate payee's estate as
soon as administratively feasible, unless the qualified domestic relations order
clearly provides otherwise. The Participant's Beneficiary designation or other
elections under the
<PAGE>
Plan shall not be effective to dispose of any portion of the benefit awarded to
an alternate payee, unless the qualified domestic relations order clearly
provides otherwise.
3.2. FORMER ALTERNATE PAYEES. If an alternate payee has received all benefits to
which the alternate payee is entitled under a qualified domestic relations
order, the alternate payee will not at any time thereafter be deemed to be an
alternate payee or prior alternate payee for any substantive or procedural
purpose of this Plan.
EIGHTH AMENDMENT
OF
DONALDSON COMPANY, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST AGREEMENT
(1987 RESTATEMENT)
The "DONALDSON COMPANY, INC. EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AGREEMENT (1987 Restatement)" adopted by DONALDSON COMPANY, INC., a Delaware
corporation, first effective August 1, 1983, thereafter amended and restated
effective August 1, 1987 and thereafter amended on July 7, 1988 by a First
Amendment effective as of August 1, 1987, on July 29, 1988 by a Second Amendment
effective as of July 29, 1988, on November 22, 1988 by a Third Amendment
effective as of August 1, 1987, on March 16, 1989 by a Fourth Amendment
effective as of August 23, 1988, on June 3, 1989 by a Fifth Amendment effective
as of June 23, 1989, on June 8, 1994 by a Sixth Amendment effective as of August
1, 1987, August 1, 1988, August 1, 1989 and August 1, 1990, on July 26, 1995 by
a Seventh Amendment effective as of August 1, 1987, August 1, 1989 and August 1,
1995 (which Plan, as so amended, is hereinafter referred to as the "Plan
Statement"), is hereby further amended in the following respects:
1. ACCOUNT. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1, 1997,
SECTION 1.1.1 OF THE PLAN STATEMENT SHALL BE AMENDED TO READ IN FULL AS FOLLOWS:
1.1.1. ACCOUNTS -- the following Accounts will be maintained under this
Plan for Participants:
(a) TOTAL ACCOUNT -- a Participant's entire beneficial interest in
the Plan consisting of the sum of all of the Participant's
PAYSOP Account, ESOP Account and Employer Stock Contribution
Account.
(b) PAYSOP ACCOUNT -- the sum of all of the Participant's interest
in his PAYSOP Share Account and his PAYSOP Cash Account.
(c) PAYSOP SHARE ACCOUNT -- the separate Account maintained for a
Participant to which is credited:
(i) the number of shares of Qualifying Employer
Securities contributed to the Plan by the Employer
and allocated to the Participant under the PAYSOP as
of a date on or before December 31, 1986; and
(ii) the number of shares of Qualifying Employer
Securities representing dividends received with
respect to the Participant's PAYSOP Share Account
which are received in the form of Qualifying Employer
Securities; and
<PAGE>
(iii) the number of shares of Qualifying Employer
Securities acquired by the Plan for the benefit of
the Participant from the investment of all or a part
of the Participant's PAYSOP Cash Account.
(d) PAYSOP CASH ACCOUNT -- the separate Account maintained for a
Participant to which is credited:
(i) all property (other than Qualifying Employer
Securities) contributed to the Plan by the Employer
and allocated to the Participant, pending its
investment in Qualifying Employer Securities under
the PAYSOP as of a date on or before December 31,
1986; and
(ii) all increases received with respect to the
Participant's PAYSOP Share Account or PAYSOP Cash
Account (excluding dividends received in the form of
Qualifying Employer Securities) pending their
investment in Qualifying Employer Securities.
(e) EMPLOYER STOCK CONTRIBUTION ACCOUNT -- the Account maintained
for each Participant to which is credited the number of shares
of Qualifying Employer Securities contributed to the Plan by
the Employer pursuant to Sections 3.2 and 3.3, or made
pursuant to Section 3.4.2, together with any increase or
decrease thereon. The Employer Stock Contribution Account
shall also include a Participant's "ESOP Account" under the
Plan Statement prior to August 1, 1997, if any, together with
any increase or decrease thereon.
2. ACCOUNTS. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1, 1997, THE
"ESOP ACCOUNT" SHALL BE RENAMED THE "EMPLOYER STOCK CONTRIBUTION ACCOUNT" AND
ALL REFERENCES IN THE PLAN STATEMENT TO "ESOP ACCOUNT" SHALL BE CHANGED TO
"EMPLOYER STOCK CONTRIBUTION ACCOUNT."
3. HIGHLY COMPENSATED EMPLOYEE. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER
AUGUST 1, 1997, SECTION 1.1 OF THE PLAN STATEMENT SHALL BE AMENDED BY
RENUMBERING SECTIONS 1.1.13 THROUGH 1.1.27 OF THE PLAN STATEMENT (AND ALL CROSS
REFERENCED THERETO) AS SECTIONS 1.1.14 THROUGH 1.1.28 OF THE PLAN STATEMENT AND
BY ADDING THERETO A NEW SECTION 1.1.13 OF THE PLAN STATEMENT WHICH SHALL READ IN
FULL AS FOLLOWS:
1.1.13. HIGHLY COMPENSATED EMPLOYEE -- any employee who (a) is a five
percent (5%) owner (as defined in Appendix B) at any time during the current
Plan Year or the preceding Plan Year; or (b) receives compensation from the
Employer during the preceding Plan Year in excess of Eighty Thousand Dollars
($80,000) (as adjusted under the Code for cost of living increases); provided,
however, the Committee may elect to limit the number of Highly Compensated
Employees to the top 20% of employees ranked on the basis of compensation in the
preceding Plan Year, excluding those employees described in section 414(q)(5) of
the Code. For this purpose,
<PAGE>
"compensation" means compensation within the meaning of section 415(c)(3) of the
Code, but including amounts contributed by the Employer pursuant to a salary
reduction agreement which are excludable from the employee's gross income under
sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. Compensation for
any employee who performed services for only part of a year is not annualized
for this purpose.
4. ANNUAL MAXIMUM. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1,
1997, SECTION 1.1.22(g) (FORMERLY SECTION 1.1.21(g)) OF THE PLAN STATEMENT SHALL
BE AMENDED TO READ IN FULL AS FOLLOWS:
(g) ANNUAL MAXIMUM. A Participant's Recognized Compensation for a
Plan Year shall not exceed the annual compensation limit under
section 401(a)(17) of the Code, which is One Hundred Fifty
Thousand Dollars ($150,000) (as adjusted under the Code for
cost of living increases).
5. CLARIFICATION. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1, 1997,
SECTION 1.1.23(h) (FORMERLY SECTION 1.1.22(h)) OF THE PLAN STATEMENT SHALL BE
AMENDED TO READ IN FULL AS FOLLOWS:
(h) employment of a Highly Compensated Employee to the extent
agreed to in writing by the employee.
6. CLARIFICATION IN RECOGNIZED EMPLOYMENT. THE FOLLOWING PARAGRAPH SHALL BE
ADDED AT THE END OF THE DEFINITION OF RECOGNIZED EMPLOYMENT IN SECTION 1.1.23
(FORMERLY SECTION 1.1.22) OF THE PLAN STATEMENT TO CLARIFY THAT IT IS THE
EMPLOYER'S INTENT THAT ONLY THOSE PERSONS WHO ARE CLASSIFIED BY THE COMMITTEE AS
BEING EMPLOYED IN RECOGNIZED EMPLOYMENT SHALL BE ELIGIBLE TO PARTICIPATE IN THE
PLAN:
The Employer's classification of a person at the time of inclusion or exclusion
in Recognized Employment shall be conclusive for the purpose of the foregoing
rules. No reclassification of a person's status with the Employer, for any
reason, without regard to whether it is initiated by a court, governmental
agency or otherwise and without regard to whether or not the Employer agrees to
such reclassification, shall result in the person being included in Recognized
Employment, either retroactively or prospectively. Notwithstanding anything to
the contrary in this provision, however, the Committee may declare that a
reclassified person will be included in Recognized Employment, either
retroactively or prospectively. Any uncertainty concerning a person's
classification shall be resolved by excluding the person from Recognized
Employment.
7. USERRA. EFFECTIVE DECEMBER 12, 1994, SECTION 3 OF THE PLAN STATEMENT SHALL BE
AMENDED BY THE ADDING THERETO A NEW SECTION 3.7 WHICH SHALL READ IN FULL AS
FOLLOWS:
3.7. COMPLIANCE WITH UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT
OF 1994. Effective for veterans rehired on or after December 12, 1994, and
notwithstanding any
<PAGE>
provision of the Plan Statement to the contrary, any contributions, benefits or
service credits will be provided in accordance with ss.414(u) of the Code.
8. MATCHING CONTRIBUTIONS. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST
1, 1997, SECTION 3 OF THE PLAN STATEMENT SHALL BE AMENDED TO READ IN FULL AS
FOLLOWS:
SECTION 3
CONTRIBUTIONS AND ALLOCATION THEREOF
3.1. EMPLOYER CONTRIBUTIONS -- GENERAL RULES.
3.1.1. SOURCE OF EMPLOYER CONTRIBUTIONS. All Employer contributions to
this Plan shall be made without regard to current or accumulated profits.
3.1.2. LIMITATION. The contribution of the Employer to the Plan for any
year, when considered in light of its contribution for that year to any
tax-qualified profit sharing plan and tax-qualified pension plan it maintains,
shall, in no event, exceed the maximum amount deductible by it for federal
income tax purposes as a contribution to a tax-qualified stock bonus plan (and,
when applicable, to a leveraged employee stock ownership plan) under section 404
of the Internal Revenue Code. Each such contribution to this Plan is conditioned
upon its deductibility for such purpose.
3.1.3. FORM OF PAYMENT. The appropriate contribution of the Employer to
this Plan, determined as herein provided, shall be paid to the Trustee and may
be paid in cash, in Qualifying Employer Securities or in other assets of any
character of a value equal to the amount of the contribution or in any
combination of the foregoing ways.
3.2. FIXED MATCHING CONTRIBUTIONS.
3.2.1. AMOUNT AND ELIGIBILITY. The Employer shall contribute to the
Trustee for deposit in the Fund and for crediting to the eligible Participant's
Employer Stock Contribution Account an amount which will equal one hundred
percent (100%) of the first three percent (3%) of reduction in recognized
compensation under the Donaldson Company, Inc. Retirement Savings Plan for the
Plan Year which was agreed to by the eligible Participant pursuant to a
retirement savings agreement. Such Employer fixed matching contributions shall
be delivered to the Trustee for deposit in the Fund not later than the time
prescribed by federal law (including extensions) for filing the federal income
tax return of the Employer for the taxable year in which the Plan Year ends.
3.2.2. ALLOCATION. The Employer fixed matching contribution which is
made with respect to an eligible Participant shall be allocated to that
Participant's Employer Stock Contribution Account for the Plan Year with respect
to which it is made and, for the purposes of Section 4, shall be credited as
soon as practicable after it is received by the Trustee.
<PAGE>
3.2.3. ELIGIBLE PARTICIPANT. For purposes of this Section 3.2, a
Participant shall be an eligible Participant for a Plan year only if such
Participant had a retirement savings agreement in effect for the Donaldson
Company, Inc. Retirement Savings Plan at some time during such Plan year and the
Participant's employment is not in a unit of employees whose terms and
conditions of employment are subject to a collective bargaining agreement
between the Employer and a union representing that unit of employees, unless
such collective bargaining agreement provides for the inclusion of those
employees under this Section 3.2.
3.3. VARIABLE MATCHING CONTRIBUTIONS.
3.3.1. AMOUNT. The Employer may (but shall not be required to) make
variable matching contributions from year to year during the continuance of the
Plan in such amounts as the Employer shall from time to time determine. Such
Employer variable matching contributions shall be delivered to the Trustee for
deposit in the Fund not later than the time prescribed by federal law (including
extensions) for filing the federal income tax return of the Employer for the
taxable year in which the Plan Year ends.
3.3.2. ALLOCATION. The Employer variable matching contribution, if any,
shall be allocated to the Employer Stock Contribution Account of each eligible
Participant as defined in Section 3.3.3. The Employer variable matching
contribution shall be allocated to the Employer Stock Contribution Account of
each such eligible Participant in the ratio which the Recognized Compensation of
each such eligible Participant for that Plan Year bears to the Recognized
Compensation of all eligible Participants for that Plan Year. The amount so
allocated to an eligible Participant shall be allocated to such Participant's
Employer Stock Contribution Account for the Plan Year with respect to which it
is made and, for the purposes of Section 4, shall be credited as soon as
practicable after it is received by the Trustee.
3.3.3. ELIGIBLE PARTICIPANT. For purposes of this Section 3.3, a
Participant shall be an eligible Participant for a Plan Year only if such
Participant had a retirement savings agreement in effect for the Donaldson
Company, Inc. Retirement Savings Plan during such Plan Year, if such
Participant's retirement savings agreement resulted in a reduction in recognized
compensation under the Donaldson Company, Inc. Retirement Savings Plan of at
least one percent (1%) for the Plan Year, if such Participant meets the
requirements of Section 3.5(b) of the Plan Statement, and the Participant's
employment is not in a unit of employees whose terms and conditions of
employment are subject to a collective bargaining agreement between the Employer
and a union representing that unit of employees, unless such collective
bargaining agreement provides for the inclusion of those employees under this
Section 3.3.
3.4. EMPLOYER DISCRETIONARY CONTRIBUTIONS.
3.4.1. GENERAL. The Employer may (but shall not be required to) make
discretionary contributions from year to year during the continuance of the Plan
in such amounts as the Employer shall from time to time determine. Such
discretionary contributions shall be delivered to the Trustee
<PAGE>
for deposit in the Fund not later than the time prescribed by federal law
(including extensions) for filing the federal income tax return of the Employer
for the taxable year in which the Plan Year ends.
The Employer discretionary contribution for a Plan Year shall be
allocated as follows.
3.4.2. SECTION 401(m) CURATIVE ALLOCATION. If neither of the section
401(m) tests set forth in Section 3 has been satisfied and a distribution of
"excess aggregate contributions" has not been made pursuant to Section 7, then
any remaining portion of the Employer discretionary contribution for that Plan
Year shall be allocated to meet one of such tests. Only those Participants who
were not "eligible Highly Compensated Employees" (as defined in Section 3) for
that Plan Year and who were entitled to receive an Employer fix matching
contribution or an Employer variable matching contribution shall share in such
allocation. This allocation shall be made to the Participant with the least
amount of compensation (as defined in Section 3) and then, in ascending order of
compensation (as defined in Section 3), to other Participants. The amount of the
Employer discretionary contribution to be so allocated shall be that amount
required to cause the Plan to satisfy either of the section 401(m) tests set
forth in Section 3 for the Plan Year. The Employer discretionary contribution
which is so allocated to a Participant shall be allocated to that Participant's
Employer Stock Contribution Account for the Plan Year with respect to which it
is made and, for the purposes of Section 4, shall be credited as soon as
practicable after it is received by the Trustee.
3.4.3. DISCRETIONARY PRO RATA ALLOCATION. Any remaining portion of
the Employer's discretionary contribution (or shares of Qualifying Employer
Securities released from Unallocated Inventory under Section 1.1.11(v) hereof)
for a Plan Year shall be allocated to the Employer Stock Contribution Accounts
of eligible Participants under Section 3.5. The contribution shall be allocated
to the Employer Stock Contribution Accounts of each such eligible Participant in
the same ratio in which the Recognized Compensation of each such eligible
Participant for that Plan Year bears to the Recognized Compensation of all such
eligible Participants for that Plan Year. The amount so allocated to an eligible
Participant shall be allocated to such Participant's Employer Stock Contribution
Account for the Plan Year with respect to which it is made and, for the purposes
of Section 4, shall be credited as soon as practicable after it is received by
the Trustee.
3.5. ELIGIBLE PARTICIPANTS. For purposes of Section 3.4.3, a Participant shall
be an eligible Participant for a Plan Year only if such Participant satisfies
the following requirements in both (a) and (b) below:
(a) are credited with at least one thousand (1,000) Hours of
Service for such Plan Year, and
(b) are, on the last day of such Plan Year, in Recognized
Employment, including for this purpose any Participants who
then are on vacation or who are absent from Recognized
Employment on the last day of the Plan Year due to an absence
which began after January 31 of such Plan Year on account of:
<PAGE>
(i) an authorized leave of absence,
(ii) service with the armed forces of the United States,
(iii) a temporary layoff for lack of work or for the
convenience of the Employer,
(iv) a transfer to the employment of an Affiliate, or
(v) the Participant's termination of employment on the
last regularly scheduled workday of the Plan Year.
No other Participants shall be eligible to share in the allocation of the
Employer discretionary contribution pursuant to Section 3.4.3.
3.6. LEVERAGED ACQUISITIONS.
3.6.1. AUTHORITY TO BORROW. The Trustee, acting pursuant to the
instructions of the Committee, shall enter into an Exempt Guaranteed Loan and
shall invest the proceeds of the Exempt Guaranteed Loan as provided in Section
1.1.11(i). All Qualifying Employer Securities acquired with the proceeds of an
Exempt Guaranteed Loan and held to secure repayment of an Exempt Guaranteed Loan
shall be credited to the Unallocated Inventory until such time as they are
released from such encumbrance and allocated to the Accounts of Participants.
3.6.2. APPLICATION OF CONTRIBUTION TO DEBT. If at the time of any
Employer discretionary contribution, principal or interest is unpaid on an
Exempt Guaranteed Loan and is then due, so much of the Employer contribution
(which is made in any form other than Qualifying Employer Securities) as is
required shall be applied to the payment of interest or principal on the Exempt
Guaranteed Loan which is then due. The Qualifying Employer Securities that are
released from encumbrance on account of a payment of principal shall be
allocated as of the Annual Valuation Date of the Plan Year for which the
Employer contribution was made to the Employer Stock Contribution Accounts of
Participants entitled to share therein on the basis of the value at which they
are released from encumbrance (and not their then fair market value) in the
manner set forth in Section 3.4.3 hereof.
If there is no Exempt Guaranteed Loan (or to the extent the amount of
the Employer contribution required or designated to pay the interest and
principal on the Exempt Guaranteed Loan is less than the total amount of the
Employer discretionary contribution), then the Employer discretionary
contribution (or the portion thereof not required or designated to pay such
principal and interest) shall be allocated as of the Annual Valuation Date of
the Plan Year for which the Employer contribution was made to the Accounts of
Participants entitled to share therein in the manner set forth in Section 3.4.3
hereof.
<PAGE>
3.6.3. APPLICATION OF UNALLOCATED INVENTORY DIVIDENDS TO DEBT. If at
the time dividends are received on Qualifying Employer Securities held in
Unallocated Inventory, principal or interest is unpaid on an Exempt Guaranteed
Loan and is then due, so much of the dividend as is required shall be applied to
the payment of interest or principal on the Exempt Guaranteed Loan which is then
due. The Qualifying Employer Securities that are released from encumbrance on
account of a payment of principal shall be allocated as of the Annual Valuation
Date of the Plan Year in which the dividend is received to the Accounts of
Participants entitled to share therein as if such dividend were an Employer
discretionary contribution in the manner set forth in Section 3.4.3 thereof.
To the extent that the amount of the dividend required to pay the
interest and principal on the Exempt Guaranteed Loan is less than the total
amount of the dividend received, then the dividend (or the portion thereof not
required or designated to pay such principal and interest) shall be allocated as
of the Annual Valuation Date of the Plan Year in which the dividend is received
to the Accounts of Participants entitled to share therein as if such dividend
were an Employer discretionary contribution in the manner set forth in Section
3.4.3 hereof.
3.6.4. PAYMENT OF DIVIDENDS AND PAYMENT OF PRINCIPAL WITH ALLOCATED
PLAN ASSETS. The Trustee shall distribute dividends on Qualifying Employer
Securities allocated to Employer Stock Contribution Accounts to Participants and
Beneficiaries in cash not later than ninety (90) days after the close of the
Plan Year in which the dividends are paid on such Qualifying Employer
Securities. The Trustee shall use other assets of Employer Stock Contribution
Accounts to pay principal (but not interest) on an Exempt Guaranteed Loan if,
but only if, the value of shares released from encumbrance and allocated as a
result of such payment exceeds the value of the shares which could be purchased
on the market by the Trustee. Upon the payment of principal, the shares released
from encumbrance shall be allocated to the Employer Stock Contribution Accounts.
The Trustee shall not use dividends on Qualifying Employer Securities allocated
to PAYSOP Share Accounts and other assets of PAYSOP Cash Accounts to pay
principal or interest on an Exempt Guaranteed Loan.
3.6.5. DISPOSITION OF SHARES. If shares of Qualifying Employer
Securities which are acquired with the proceeds of an Exempt Guaranteed Loan are
sold before being released from the Unallocated Inventory, the proceeds of the
sale shall be applied to the payment of all principal and interest on such loan
and any remaining sale proceeds shall be treated as a general investment gain of
the Fund and allocated to the Accounts of Participants as provided in Section 4
hereof as soon as administratively feasible. The sale proceeds so allocated
shall not be considered an addition to the Accounts of Participants for the
purposes of Appendix A of this Plan Statement.
3.6.6. ADVANCE CONTRIBUTIONS. Notwithstanding the foregoing, if the
Employer shall make a contribution as of an Annual Valuation Date which is
subsequent to the actual date of contribution and designate such contribution
for allocation as of such subsequent Annual Valuation Date, then:
<PAGE>
(i) such contribution (or the Qualifying Employer
Securities released from Unallocated Inventory upon
the payment of principal with such contribution)
shall be segregated for investment purposes by the
Trustee from other assets of the Fund until such
subsequent Annual Valuation Date, and
(ii) the amount of such segregated contribution (adjusted
for gains or losses) shall be allocated as of such
Annual Valuation Date as if it were an Employer
contribution made in fact on that Annual Valuation
Date.
3.7. ADJUSTMENTS.
3.7.1. MAKE-UP CONTRIBUTIONS FOR OMITTED PARTICIPANTS. If, after the
Employer's contributions for a Plan Year have been made and allocated, it should
appear that, through oversight or a mistake of fact or law, a Participant (or an
employee who should have been considered a Participant) who should have been
entitled to share in such contribution received no allocation or received an
allocation which was less than he should have received, the Employer may, at its
election, and in lieu of reallocating such contribution, make a special make-up
contribution for the Account of such Participant in an amount adequate to
provide the same addition to the Participant's Account for such Plan Year as the
Participant should have received.
3.7.2. MISTAKEN CONTRIBUTIONS. If, after the Employer's contributions
for a Plan Year has been made and allocated, it should appear that, through
oversight or a mistake of fact or law, a Participant (or an individual who was
not a Participant) received an allocation which was more than the Participant
should have received, the Employer may direct that the mistaken contribution,
adjusted for its pro rata share of any net loss or net gain in the value of the
Fund which accrued while such mistaken contribution was held therein, shall be
withdrawn from the Account of such individual and retained in the Fund and used
to reduce the amount of the next succeeding contribution of the Employer to the
Fund due after the determination that such mistaken contribution had occurred.
3.8. SECTION 401(m) COMPLIANCE.
3.8.1. SPECIAL DEFINITIONS. For purposes of this Section 3.8, the
following special definitions shall apply:
(a) ELIGIBLE EMPLOYEE means an individual who is entitled to
receive an Employer matching contribution for any portion of
the Plan Year (whether or not the individual does so).
(b) ELIGIBLE HIGHLY COMPENSATED EMPLOYEE means an eligible
employee who is a Highly Compensated Employee.
<PAGE>
(c) CONTRIBUTION PERCENTAGE means the ratio (calculated separately
for each eligible employee) of:
(i) the total amount, for the Plan Year, of Employer
contributions credited to the eligible employee's
Employer Stock Contribution Account,
(ii) the eligible employee's compensation, as defined
below for the portion of such Plan Year that the
employee is an eligible employee for such Plan Year.
For this purpose, Employer contributions will be considered
made in the Plan Year if they are allocated as of a date
during such Plan Year and are delivered to the Trustee within
twelve (12) months after the end of such Plan Year.
(d) COMPENSATION means compensation for services performed for the
Employer defined as "ss.415 compensation" in Appendix A to
this Plan Statement. The Committee may elect to include as
compensation any elective contributions made by the Employer
on behalf of the eligible employee that are not includible in
gross income under sections 125, 402(a)(3), 402(h), 403(b),
414(h)(2) and 457 of the Code. Notwithstanding the definition
of "ss.415 compensation" in Appendix A to this Plan Statement,
compensation shall always be determined on a cash (and not on
an accrual) basis and compensation shall be determined on a
Plan Year basis (which is not necessarily the same as the
limitation year). An eligible employee's compensation for a
Plan Year shall not exceed the limit on annual compensation
under section 401(a)(17) of the Code which is One Hundred
Fifty Thousand Dollars ($150,000) (as adjusted under the Code
for cost of living increases).
(e) AVERAGE CONTRIBUTION PERCENTAGE means, for a specified group
of eligible employees for the Plan Year, the average of the
contribution percentages for all eligible employees in such
group.
3.8.2. SPECIAL RULES. For purposes of this Section 3.8, the following
special rules apply:
(a) ROUNDING. The contribution percentage of each eligible
employee and the average contribution percentage for each
group of eligible employees shall be calculated to the nearest
one-hundredth of one percent.
(b) HIGHLY COMPENSATED EMPLOYEES. In the case of an eligible
Highly Compensated Employee who participates in any other plan
of the Employer
<PAGE>
and Affiliates (other than an employee stock ownership plan
described in sections 409(a) and 4975(e)(7) of the Code) to
which Employer matching contributions are made on behalf of
the eligible Highly Compensated Employee, all such Employer
matching contributions shall be aggregated for purposes of
determining the eligible Highly Compensated Employee's
contribution percentage; provided, however, that such Employer
contributions made under an employee stock ownership plan
shall not be aggregated.
(c) PERMISSIVE AGGREGATION. To the extent permitted under the
Code, the Committee may elect to aggregate the Plan with any
other plan of the Employer and Affiliates for purposes of
determining whether the tests set forth in this Section are
satisfied for a Plan Year.
3.8.3. THE 401(m) TESTS. Notwithstanding the foregoing provisions, at
least one of the following two (2) tests is satisfied for that Plan Year:
TEST 1: The average contribution percentage for the group of eligible
Highly Compensated Employees for the current Plan Year is not
more than the average contribution percentage of all other
eligible employees for the preceding Plan Year multiplied by
one and twenty-five hundredths (1.25).
TEST 2: The excess of the average contribution percentage for the
group of eligible Highly Compensated Employees for the current
Plan Year over the average contribution percentage of all
other eligible employees for the preceding Plan Year is not
more than two (2) percentage points, and the average
contribution percentage for the group of eligible Highly
Compensated Employees for the current Plan Year is not more
than the average contribution percentage of all other eligible
employees for the preceding Plan Year multiplied by two (2).
The Committee may, however, elect in accordance with further guidance issued by
the Secretary of the Treasury to substitute the average contribution percentage
of all other eligible employees for the current Plan Year for the average
contribution percentage of all other eligible employees for the preceding Plan
Year in Tests 1 and 2 above. Any election made by the Committee to use the
average contribution percentage of all other eligible employees for the current
Plan Year in Tests 1 and 2 above may only be changed in the manner prescribed by
the Secretary of the Treasury.
3.8.4. PREVENTATIVE ACTION PRIOR TO PLAN YEAR END. If the Committee
determines that neither of the tests described in Section 3.8.3 will be
satisfied (or may not be satisfied) for a Plan Year, then during such Plan Year,
the Committee may from time to time establish (and modify) maximums for Employer
matching contributions of eligible Highly Compensated Employees that are less
than the contributions which would otherwise be permitted or provided. No
Employer matching contributions shall be made in excess of such maximums after
the date such maximums
<PAGE>
are effective. The Committee shall prescribe rules concerning such
modifications, including the frequency of applying the tests described in
Section 3.8.3 and the commencement and termination dates for any modifications.
3.9. LIMITATION ON ALLOCATIONS. In no event shall amounts be allocated to the
Account of any Participant if, or to the extent, such amounts would exceed the
limitations set forth in the Appendix A of this Plan Statement.
3.10. EFFECT OF DISALLOWANCE OF DEDUCTION OR MISTAKE OF FACT. All Employer
contributions to the Plan are conditioned on their qualification for deduction
for federal income tax purposes under section 404 of the Internal Revenue Code.
If any such deduction should be disallowed, in whole or in part, for any
Employer contribution to the Plan for any year, or if any Employer contribution
to the Plan is made by reason of a mistake of fact, then there shall be
calculated the excess of the amount contributed over the amount that would have
been contributed had there not occurred a mistake in determining the deduction
or a mistake of fact. The Employer will direct the Trustee to return such
excess, adjusted for its pro rata share of any net loss (but not any net gain)
in the value of the Fund which accrued while such excess was held therein, to
the Employer within one (1) year of the disallowance of the deduction or the
mistaken payment of the contribution, as the case may be. If the return of such
amount would cause the balance of any Account of any Participant to be reduced
to less than the balance which would have been in such Account had the mistaken
amount not been contributed, however, the amount to be returned to the Employer
shall be limited so as to avoid such reduction.
3.11. COMPLIANCE WITH UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT
OF 1994. Effective for veterans rehired on or after December 12, 1994, and
notwithstanding any provision of the Plan Statement to the contrary, any
contributions, benefits or service credits will be provided in accordance with
ss.414(u) of the Code.
9. DISTRIBUTIONS IN KIND. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST
1, 1997, SECTION 7.3 OF THE PLAN STATEMENT SHALL BE AMENDED TO READ IN FULL AS
FOLLOWS:
7.3. DISTRIBUTION IN KIND. Unless the distributee requests a distribution in
cash, the Trustee shall cause distribution of a Participant's PAYSOP Account,
Employer Stock Contribution Account and Employer Stock Contribution Account to
be made only in Qualifying Employer Securities and such cash as may be necessary
to represent fractional shares allocated to such Accounts. To the extent such
Accounts are not invested in shares of Qualifying Employer Securities, if
distribution is to be made in shares of Qualifying Employer Securities the
Trustee shall purchase such shares for the purpose of distribution and shall not
use shares allocated to other Participants to make such distribution.
10. DIVERSIFICATION. EFFECTIVE FOR DIVERSIFICATION ELECTIONS MADE ON OR AFTER
AUGUST 1, 1997, SECTION 7.9 OF THE PLAN STATEMENT SHALL BE AMENDED TO READ IN
FULL AS FOLLOWS:
<PAGE>
7.9. DIVERSIFICATION DISTRIBUTION.
7.9.1. ELECTION. Each "qualified Participant" (as defined below) in the
Plan may elect once, at any time during each calendar year in the "qualified
election period" (as defined below), to direct the Plan to distribute to the
Participant up to twenty-five percent (25%) of the Participant's Accounts in the
Plan (to the extent such portion exceeds the amount to which a prior
distribution election under this Section 7.9 applied). In the case of the
election year in which the Participant has attained at least age sixty (60), the
preceding sentence shall be applied by substituting fifty percent (50%) for
twenty-five percent (25%).
7.9.2. DEFINITIONS. When used in this Section 7.9, the following terms
have the following meaning:
(a) "qualified Participant" means any employee who has attained
age fifty-five (55) years;
(b) "qualified election period" means all calendar year periods
beginning with the calendar year in which the Participant
attains age fifty-five (55) years.
11. CORRECTIVE DISTRIBUTIONS. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER
AUGUST 1, 1997, SECTION 7 OF THE PLAN STATEMENT SHALL BE AMENDED BY THE ADDING
THERETO A NEW SECTION 7.10 WHICH SHALL READ IN FULL AS FOLLOWS:
7.10. EXCESS AGGREGATE CONTRIBUTIONS (SECTION 401(m) TEST).
7.10.1. IN GENERAL. Notwithstanding any other provision of the Plan
Statement, excess aggregate contributions, plus any income and minus any loss
allocable thereto, shall be distributed no later than the last day of the
following Plan Year to eligible Highly Compensated Employees as determined in
this Section.
7.10.2. EXCESS AGGREGATE CONTRIBUTIONS. For purposes of this Section,
"excess aggregate contributions" shall mean, with respect to any Plan Year, the
excess of:
(a) The Employer matching contributions for the eligible Highly
Compensated Employee who has the highest contribution
percentage shall be reduced by the amount required to cause
such eligible Highly Compensated Employee's contribution
percentage to equal the next highest contribution percentage
of an eligible Highly Compensated Employee.
(b) If neither of the tests is satisfied after such reduction, the
Employer matching contributions for eligible Highly
Compensated Employees who then have the highest contribution
percentage (including those reduced under (a) above) shall be
reduced by the amount required to cause such eligible Highly
<PAGE>
Compensated Employees' contribution percentage to equal the
next highest contribution percentage of an eligible Highly
Compensated Employee.
(c) If neither of the tests is satisfied after such reductions,
this method of reduction shall be repeated one or more
additional times until one of the tests is satisfied.
7.10.3. DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Excess
aggregate contributions, plus any income and minus any loss allocable thereto,
shall be distributed from the Participant's Employer Stock Contribution Account.
The amount of excess aggregate contributions to be distributed on behalf of each
eligible Highly Compensated Employee for the Plan Year shall be equal to the
amount of reduction determined as follows:
(a) The Employer matching contributions of the eligible Highly
Compensated Employee who has the highest dollar amount of such
contributions shall be reduced by the amount required to cause
such eligible Highly Compensated Employee's contributions to
equal the next highest dollar amount received by eligible
Highly Compensated Employees.
(b) If any excess aggregate contributions remain after performing
(a), then the eligible Highly Compensated Employees who have
the next highest dollar amount of Employer matching
contributions (including those reduced under (a) above) shall
be reduced by the amount required to cause such eligible
Highly Compensated Employees' contributions to equal the next
highest dollar amount received by eligible Highly Compensated
Employees.
(c) If any excess aggregate contributions remain after performing
(a) and (b), this method of reduction shall be repeated one or
more additional times until no excess aggregate contributions
remain.
Provided, however, if the total amount of reduction determined in (a) through
(c) would be greater than the amount of excess aggregate contributions, then the
final reduction amount shall be decreased so that the total amount of reductions
equals the amount of excess aggregate contributions.
7.10.4. DETERMINATION OF INCOME OR LOSS. The excess aggregate
contributions to be distributed to any eligible Highly Compensated Employee
shall be adjusted for income or loss. Unless the Committee and the Trustee agree
otherwise in writing, the income or loss allocable to excess aggregate
contributions to be distributed shall be determined by multiplying the income or
loss allocable to the eligible Highly Compensated Employee's Employer matching
contributions for the Plan Year by a fraction, the numerator of which is the
excess aggregate contributions to be distributed to the eligible Highly
Compensated Employee for the Plan Year and the denominator of which is the sum
of the eligible Highly Compensated Employees's account balances attributable to
<PAGE>
Employer matching contributions on the last day of the Plan Year, without regard
to any income or loss occurring during such Plan Year.
12. AMENDMENT. EFFECTIVE SEPTEMBER 19, 1997, SECTION 9.1 OF THE PLAN STATEMENT
SHALL BE AMENDED TO READ IN FULL AS FOLLOWS:
9.1. AMENDMENT. The Employer hereby reserves the power to amend this Plan
Statement and either prospectively or retroactively or both:
(a) in any respect by resolution of the Board of Directors; and
(b) in any respect that does not materially increase the cost of
the Plan by action of the Committee (with the written
concurrence of the Chief Executive Officer of the Principal
Sponsor);
provided however, that no amendment shall be effective to reduce or divest the
Account of any Participant unless the same shall have been adopted with the
Total consent of the Secretary of Labor pursuant to the provisions of the
Employee Retirement Income Security Act of 1974, or in order to comply with the
provisions of the Internal Revenue Code and the regulations and rulings
thereunder affecting the tax-qualified status of the Plan and the deductibility
of Employer contributions thereto.
13. VOTING RIGHTS. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1,
1997, THE REFERENCE TO "PAYSOP ACCOUNT AND EMPLOYER STOCK CONTRIBUTION ACCOUNT"
IN SECTION 10.1.1 OF THE PLAN STATEMENT SHALL BE CHANGED TO "PAYSOP ACCOUNT,
EMPLOYER STOCK CONTRIBUTION ACCOUNT AND EMPLOYER STOCK CONTRIBUTION ACCOUNT."
14. TENDER OFFERS. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1,
1997, SECTION 10.5 OF THE PLAN STATEMENT SHALL BE AMENDED TO READ IN FULL AS
FOLLOWS:
10.5. TENDER OFFER FOR QUALIFYING EMPLOYER SECURITIES.
10.5.1. PASS-THROUGH. Each Participant and Beneficiary shall have the
right to tender Qualifying Employer Securities held in such Participant's or
Beneficiary's Total Account as set forth in this Section 10.5.
10.5.2. PROCEDURES. Upon receipt of a tender or exchange offer filed
with the Securities and Exchange Commission, the Committee shall timely forward
or cause to be forwarded to each Participant and Beneficiary as of the Valuation
Date immediately prior to such receipt, no later than five business days after
such receipt, a copy of the offer accompanied by the procedures by which a
Participant or Beneficiary may elect to tender any amount up to the total amount
of shares held for such Participant or Beneficiary in such Total Account as of
the Valuation Date immediately prior to such receipt, which may contemplate that
any such election may be made at a later time. Not later than ten business days
prior to the date of expiration of the offer (the "Expiration Date"), the
<PAGE>
Committee shall timely furnish or cause to be furnished to each Participant and
Beneficiary a form providing binding instructions to the Trustee to tender such
number of shares and an envelope addressed to the Trustee to return such
instructions. All such instructions must be received by the Trustee no later
than five business days prior to the Expiration Date (unless a shorter time
period is acceptable to the Trustee). Any Participant or Beneficiary may revoke
such instructions by a writing addressed to the Trustee and timely received by
the Trustee prior to the Expiration Date. The Trustee shall timely tender that
number of shares for which it has received instructions that have not been
revoked and the Trustee shall have no discretion in such matter.
10.5.3. CONFIDENTIALITY. By virtue of the procedures set forth in this
Section 10.5, the Employer has determined that Participants and Beneficiaries
have the right to determine confidentially whether Qualifying Employer
Securities will be tendered in a tender or exchange offer within the meaning of
Section 203 of the Delaware General Corporation Law. The instructions received
by the Trustee from Participants and Beneficiaries shall be held by the Trustee
in confidence and shall not be divulged to any person including the officers or
employees of the Employer or any Affiliate.
10.5.4. PRORATION. If less than all shares tendered by the Trustee are
accepted, the shares sold for each Participant or Beneficiary shall be in the
same ratio to the number of shares in the Total Account as the total number of
shares accepted bears to the total number of shares tendered.
10.5.5. FUTURE INVESTMENTS. The proceeds from the sale of Qualifying
Employer Securities pursuant to this Section 10.5 shall be immediately
transferred to the PAYSOP Cash Account and Employer Stock Contribution Account
of a Participant or Beneficiary and (notwithstanding Section 4.2) shall be
invested in accordance with uniform rules of the Committee and shall not be
invested in Qualifying Employer Securities. All future contributions of the
Employer to the Participant's Employer Stock Contribution Account shall be
credited to his ESOP Cash Account and (notwithstanding Section 4.2) invested in
accordance with uniform rules of the Committee and shall not be invested in
Qualifying Employer Securities.
10.5.6. UNALLOCATED INVENTORY. The Trustee shall tender the same
proportion of Qualifying Employer Securities held in the Unallocated Inventory
as the number of shares tendered pursuant to Section 10.5.2 bears to the total
number of shares held in the Total Accounts of Participants and Beneficiaries.
10.5.7. NONRESPONSE. Shares of Qualifying Employer Securities allocated
to Participants' PAYSOP Share Accounts and Employee Stock Contribution Accounts,
for which no instructions are received by the Trustee, will not be tendered or
exchanged.
10.5.8. SPECIAL DEFINITION OF FIDUCIARY. For purposes of this Section
10.5, each Participant and Beneficiary of a deceased Participant is designated
as a "named fiduciary" within the meaning of section 403(a)(1) of the Employee
Retirement Income Security Act of 1974.
<PAGE>
15. LIMITATION YEAR. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1,
1997, SECTION 1.9 OF APPENDIX A TO THE PLAN STATEMENT SHALL BE AMENDED TO READ
IN FULL AS FOLLOWS:
1.9. LIMITATION YEAR. Limitation year means calendar year.
16. APPENDIX D. EFFECTIVE FOR PLAN YEARS BEGINNING ON OR AFTER AUGUST 1, 1997,
APPENDIX D TO THE PLAN STATEMENT SHALL BE DELETED IN ITS ENTIRETY WITHOUT
REPLACEMENT.
17. SAVINGS CLAUSE. SAVE AND EXCEPT AS HEREINABOVE EXPRESSLY AMENDED, THE PLAN
STATEMENT SHALL CONTINUE IN FULL FORCE AND EFFECT.
EXHIBIT 11
COMPUTATION OF NET EARNINGS PER SHARE
DONALDSON COMPANY, INC. AND SUBSIDIARIES
(Dollars in Thousands, Except Per Share Amounts)
Year Ended July 31
1997 1996 1995
---- ---- ----
Primary
- -------
Average shares outstanding 25,157,488 25,736,941 26,365,316
Effect of stock options based
on the treasury stock method
using average market price 450,895 276,483 301,204
----------- ----------- -----------
Total 25,608,383 26,013,424 26,666,520
=========== =========== ===========
Net Earnings $ 50,620 $ 43,436 $ 38,536
=========== =========== ===========
Earnings Per Share:
Net Earnings Per Share $ 1.98 $ 1.67 $ 1.45
=========== =========== ===========
Fully Diluted
- -------------
Average shares outstanding 25,157,488 25,736,941 26,365,316
Effect of stock options based
on the treasury stock method
using average market price
during the year or ending
market price, whichever is
higher 495,293 280,493 321,108
----------- ----------- -----------
Total 25,652,781 26,017,434 26,686,424
=========== =========== ===========
Net Earnings $ 50,620 $ 43,436 $ 38,536
=========== =========== ===========
Earnings Per Share:
Net Earnings Per Share $ 1.97 $ 1.67 $ 1.44
=========== =========== ===========
All share and per share amounts have been adjusted for all stock splits.
FINANCIAL TABLE OF CONTENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION
AND ANALYSIS.................................... 17
CONSOLIDATED STATEMENTS OF EARNINGS................ 21
CONSOLIDATED BALANCE SHEETS........................ 22
CONSOLIDATED STATEMENTS
OF CASH FLOWS................................... 23
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY............................ 24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS...................................... 25
REPORT OF INDEPENDENT AUDITORS..................... 32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following discussion of the company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other financial information included elsewhere
in this Report.
FISCAL 1997 COMPARED TO FISCAL 1996
The company reported record sales in 1997 of $833.3 million, up 9.8 percent from
prior-year sales of $758.6 million. Strong business conditions were evident
across all businesses. Sales for the core Engine Products businesses - first-fit
and replacement parts - were up 10.2 percent over last year. Industrial Products
businesses, including the Torit Products and Gas Turbine businesses, were up 9.1
percent from last year.
Domestic Engine Products sales were up 11.6 percent, primarily from
increased shipments to original equipment manufacturers (OEMs) and overall good
economic conditions in the United States. Weakness in the heavy-duty
transportation market was more than offset by business growth in the automotive
and defense markets. In addition, domestic aftermarket sales increased 11.0
percent year over year. Domestic Industrial Products sales increased 7.1
percent, led by strong sales in the Torit Products (dust collection) market
offset by lower sales in High Purity Products and Gas Turbine Products.
Overseas sales increased almost 7 percent - 15 percent in local currencies
- -- primarily due to increased net sales in Europe, Japan and Hong Kong. Overseas
Engine Products sales were up 7.7 percent compared to the prior year as
shipments increased in Europe. Overseas Industrial Products sales increased
approximately 12.9 percent due primarily to increased sales of High Purity
Products and Gas Turbine systems in Hong Kong.
The company reported record earnings for 1997 of $50.6 million compared to
$43.4 million in 1996, an increase of 16.5 percent. Earnings per share were
$1.98, up 18.6 percent from the prior year. Increased sales levels and
improvements in the gross margin and a reduction in the effective income tax
rate were the primary reasons for the higher earnings. Overseas operating income
totaled approximately 55 percent of consolidated operating income.
Gross margin for 1997 increased to 30.0 percent compared to 29.4 percent in
the prior year. Increased manufacturing efficiencies gained by higher operating
levels, product mix and lower raw material prices in 1997 contributed to this
improvement. Margins improved for Industrial Products and remained flat for
Engine Products.
Operating expenses as a percentage of sales for 1997 and 1996 were 20.1
percent and 19.4 percent, respectively. Operating expenses in 1997 totaled
$167.6 million compared to $147.2 million in 1996, which reflects an increase of
$20.3 million, or 13.8 percent. Selling expenses in 1997 increased $6.2 million
primarily due to the higher sales levels while general and administrative
expenses increased $12.7 million due to higher pension expenses, the write-down
of purchased intangibles of $5.0 million from a previous business acquisition,
increased warranty accruals on product lines and other accruals.
Interest expense declined $0.5 million, or 18.8 percent, primarily due to
the decline in total debt. Other expense totaled $1.3 million in 1997 compared
to $1.6 million in the prior year. The $0.3 million change is due to a $0.6
million decrease in foreign exchange loss, a $0.4 million decline in interest
income, an increase in charitable contributions of $1.2 million, an increase in
earnings from joint ventures, including AFSI, a joint venture with Caterpillar,
Inc., of $.06 million and a decrease in other miscellaneous items of $0.1
million.
The effective income tax rate of 36 percent in 1997 was lower compared to
38.9 percent in 1996 due to lower overseas tax rates.
Hard order backlogs, goods scheduled for delivery in 90 days, were $164.2
million and $121.9 million at July 31, 1997 and 1996, respectively. Worldwide
Engine Products backlog increased $24.5 million and Worldwide Industrial
Products backlog increased $17.9 million from 1996. Total backlogs of $257.1
million were up 26.4 percent from the prior year-end, primarily due to higher
overall orders and strong business conditions.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
During 1997, the company completed the acquisition of two overseas
operations in our Engine Products businesses. In South Africa, the company
purchased the exhaust products manufacturing assets of the Kilber Division of
N.E.I., which will allow the company to expand its exhaust products into that
market. In Mexico, the company purchased all of the outstanding shares of Diemo,
S.A. de D.V., a supplier of liquid filter components, in what was primarily a
vertical integration. The company also completed the acquisition of the assets
of the Armada Tube Group, including Armada Products Co., located in Armada,
Michigan, and Lakeside Tube Fabricators, Inc., located in Mooresville, North
Carolina. The Armada businesses generated annual sales of more than $15 million
in manufacturing and delivering bent and fabricated tubular assemblies for
exhaust and other engine related products. In addition, the company completed
the acquisition of the assets of Aercology Incorporated, located in Old
Saybrook, Connecticut. The Aercology business generated annual sales of more
than $10 million in the manufacturing of smaller sized industrial air filtration
products. All of the above acquisitions were treated as purchases. The results
of operations of these businesses were not material in relation to the company's
consolidated results of operations for 1997. See Note B in the footnotes to the
Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
Record 1996 net sales of $758.6 million were up 8 percent from prior-year sales
of $704.0 million. For the year, Engine Products sales were up 7 percent and
Industrial Products sales were up 9 percent.
Domestic Engine Products sales were up 12 percent, primarily from increased
shipments to original equipment manufacturers (OEMs). Weakness in the heavy-
duty transportation market was more than offset by new business in the
automotive and defense markets. In addition, domestic aftermarket sales
increased 7 percent year over year. Industrial Products sales increased 2
percent led by strong sales in the Torit Products (dust collection) market
offset by lower sales in High Purity Products.
Overseas sales increased almost 7 percent - 9 percent in local currencies,
primarily due to increased net sales in Europe and Hong Kong. Net sales in Japan
decreased 12 percent year over year. Overseas Industrial Products sales
increased 20 percent, primarily due to higher shipments of Torit Products and
Gas Turbine systems in Europe and increased sales of High Purity Products and
Gas Turbine systems in Hong Kong. High Purity Product sales in Hong Kong
benefited from the company's decision to consolidate all disk drive filter
production in Hong Kong in early 1996; clean room operations in the U.S. and
England were discontinued as part of this change. Overseas Engine Products sales
were flat compared to the prior year as increased shipments to European OEMs
were offset by lower OEM sales in Japan.
Record net earnings for 1996 of $43.4 million were up 13 percent from $38.5
million in the prior year. Increased net sales and improvements in the gross
margin were the primary reasons for the higher earnings. Overseas operating
income totaled approximately 53 percent of consolidated operating income
compared to 54 percent in 1995.
Gross margin for 1996 increased to 29.4 percent compared to 28.1 percent in
the prior year. Increased manufacturing efficiencies gained by higher operating
levels and lower raw material prices in 1996, were slightly offset by higher
obsolete inventory expense and a $2.0 million impaired asset write-down. Margins
improved in Japan's transportation and Industrial Products markets, Europe's
High Purity Products and Torit Products markets. In addition, margin
improvements were noted in all domestic markets. Offsetting these gains were
margin declines in Hong Kong's Industrial Products markets as well as Europe's
OEM and Gas Turbine systems markets.
Operating expenses as a percentage of sales for 1996 and 1995 were 19.4
percent and 18.8 percent, respectively. Operating expenses in 1996 totaled
$147.2 million compared to $132.4 million in 1995, which reflects an increase of
$14.8 million, or 11 percent. Selling expenses in 1996 increased $6.1 million
primarily due to the higher sales levels, while general and administrative
expenses increased $7.2 million due to higher medical expenses and increased
warranty accruals on new and existing product lines.
Interest expense declined $0.2 million, or 6 percent, primarily due to the
decline in total debt. Other expense totaled $1.6 million in 1996 compared to
other income of $0.7 million in the prior year. The $2.3 million change is
primarily due to a $1.1 million increase in foreign exchange loss, a $0.2
million decline in interest income, a $0.7 million increase in charitable
contributions, and a $0.3 million charge related to the sale of our Brazil
operation. Favorable earnings at AFSI, a joint venture with Caterpillar, Inc.,
offset $0.6 million of the unfavorable other expense variance.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
The effective income tax rate of 38.9 percent in 1996 was flat compared to
39.0 percent in 1995. For both years, the company's effective rate is higher
than the statutory federal rate due to higher effective overseas, state and
local taxes.
During the fourth quarter of 1996, the company sold the operations and
substantially all of the assets related to its Brazilian subsidiary. The sale
did not result in any material charge or credit to earnings. Net sales for this
operation total $3.0 million in 1996 compared to $6.3 million 1995. Operating
losses for 1996 and 1995 were $1.5 million and $0.3 million, respectively.
Hard order backlogs, goods scheduled for delivery in 90 days, were $121.9
million and $134.1 million at July 31, 1996 and 1995, respectively. A $2.2
million increase in worldwide Engine Products backlog was offset by a $13.5
million decline in worldwide Gas Turbine systems backlog. Backlogs, orders and
shipments in the Gas Turbine business segment typically fluctuate widely from
period to period; the most recent decline in backlogs is consistent with
historical observation and does not indicate any fundamental change in the
current market conditions. Total backlogs of $203.3 million were down 5 percent
from the prior year-end primarily due to lower Gas Turbine systems orders.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION
At July 31, 1997, the company's capital structure was comprised of $42.7 million
of current debt, $4.2 million of long-term debt and $243.9 million of
shareholders' equity. The ratio of long-term debt to total long-term capital was
1.7 percent, compared with 4.2 percent at July 31, 1996.
Total debt increased $23.7 million during 1997 to $46.9 million. The
increase resulted from the company's use of $25.0 million in short-term debt of
which $16.0 million was used for treasury stock repurchases at the end of fiscal
1997.
In December 1995, the company entered into a five-year multi-currency
revolving credit facility totaling $100.0 million with a group of international
banks, led by Citibank as the agent. There was $25.0 million outstanding under
this facility at July 31, 1997. 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 1998. The company
is in the process of amending some of the terms and conditions of the facility.
The amendments, if approved by the lending banks, will result in more favorable
terms for the company. The amendments are not expected to have a material effect
on the financial statements as presented.
At July 31, 1997, there was an additional $16 million available for use
under uncommitted facilities which provide unsecured borrowings for general
corporate purposes. There were no amounts outstanding under these facilities at
July 31, 1997.
Shareholders' equity increased $15.0 million in 1997 to $243.9 million. The
increase was primarily due to an increase in retained earnings of $50.6 million
from current year net earnings, issuance of stock awards of $3.2 million offset
by $24.9 million of treasury stock repurchases, a $5.1 million decrease in the
cumulative translation adjustment and $8.8 million of dividend payments.
CASH FLOWS
During 1997, $54.6 million of cash was generated from operating activities,
compared with $76.9 million in 1996 and $52.9 million in 1995. The decrease in
1997 was largely the result of the write-down of purchased intangibles, a
significant increase in accounts receivable and inventory, a significant
decrease in trade accounts payable, accruals and income taxes payable, all of
which more than offset the results of increased net earnings. Significant uses
for cash included $47.3 million for capital expenditures, $23.6 million for
business acquisitions, $24.9 million for stock repurchases, $5.3 million for
repayment of long-term debt and $8.8 million for dividend payments. Cash and
cash equivalents decreased $16.6 million during 1997.
Capital expenditures for property, plant and equipment totaled $47.3
million in 1997, compared to $39.3 million in 1996 and $25.3 million in 1995.
Significant additions in 1997 included a new lube and fuel product line in
Stevens Point, Wisconsin, and Mexico and a new plant in Port Huron, Michigan,
which was related to the Armada acquisition. In addition, the remaining capital
expenditures related to productivity enhancing improvements at various plants in
the United States and overseas and continuing upgrades to the U.S. information
systems.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
Capital spending in 1998 is planned to be $43.0 million. Significant
planned expenditures include the further upgrade of U.S. information systems and
the investment in operations and related projects. It is anticipated that 1998
capital expenditures will be financed primarily from funds from operations.
DIVIDENDS
The company's dividend policy is to maintain a payout ratio which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The company's dividend payout ratio target
is 20 percent to 25 percent of the average earnings per share of the last three
years. The current quarterly dividend of 9 cents per share equates to 21.1
percent of the 1995 through 1997 average net earnings per share.
SHARE REPURCHASE PLAN
In January 1996 the Board of Directors authorized the company to repurchase 2.0
million shares of common stock. At July 31, 1997, the company had approximately
906,000 remaining shares under the repurchase authorizations. Management and the
Board of Directors believe the share repurchase program is an excellent means of
returning value to the shareholders.
In 1997, the company repurchased 0.7 million shares of common stock on the
open market for $24.9 million, at an average price of $34.50 per share. The
company repurchased 0.9 million shares for $23.1 million in 1996 and 0.6 million
shares for $14.7 million in 1995.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 (FAS 123), "Accounting for Stock-Based Compensation." FAS 123 encourages
companies to adopt a fair value-based method of accounting for employee stock
options, but allows companies to continue to measure compensation cost for such
plans as it is measured currently. The company continues to use the current
method of accounting for stock compensation, but has adopted the disclosure
requirements of FAS 123, making pro forma disclosure in the notes to financial
statements of net earnings and earnings per share as if the fair value-based
method had been applied. FAS 123 has no impact on the company's financial
position or results of operations.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." The statement is required to be adopted in 1998. The
impact of (SFAS) No. 128 increases basic earnings per share by $.03 in 1997 and
$.02 in 1996. It has no impact on diluted earnings per share as reported.
FOREIGN CURRENCY EFFECTS
In 1997, the U.S. dollar was generally stronger relative to the currencies of
foreign countries where the company operates. A stronger dollar generally has a
negative impact on overseas results because foreign-exchange denominated
earnings translate into less U.S. dollars; a weaker dollar generally has a
positive translation effect.
It is not possible to determine the true impact of foreign currency
translation changes; however, the direct effect on net sales and net earnings
can be estimated. For 1997, the stronger U.S. dollar decreased net sales by
$20.2 million and decreased net earnings by $0.8 million. During 1996, the
generally stronger U.S. dollar decreased net sales by $7.4 million and decreased
net earnings by $0.6 million.
RISK FACTORS
Except for the historical information contained herein, certain of the matters
discussed in this annual report are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties, including, but not limited to changing economic and political
conditions in the United States and in other countries, changes in governmental
spending and budgetary policies, governmental laws and regulations surrounding
various matters such as environmental remediation, contract pricing, and
international trading restrictions, customer product acceptance, and continued
access to capital markets. All forecasts and projections in this report are
"forward-looking statements," and are based on management's current expectations
of the company's near term results, based on current information available
pertaining to the company, including the aforementioned risk factors. Actual
results could differ materially both due to the risk factors mentioned here, and
to other factors not so referenced.
20
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................................................ $ 833,348 $ 758,646 $ 703,959
Cost of sales ............................................................ 583,075 535,772 505,980
------------------------------------------
Gross Margin 250,273 222,874 197,979
Selling, general and administrative ...................................... 150,270 131,326 117,961
Research and development ................................................. 17,288 15,906 14,487
Interest expense ......................................................... 2,358 2,905 3,089
Other expense (income) ................................................... 1,263 1,617 (730)
------------------------------------------
Total Expenses 171,179 151,754 134,807
------------------------------------------
Earnings Before Income Taxes 79,094 71,120 63,172
Income taxes ............................................................. 28,474 27,684 24,636
------------------------------------------
Net Earnings $ 50,620 $ 43,436 $ 38,536
==========================================
Earnings per share ....................................................... $ 1.98 $ 1.67 $ 1.45
==========================================
Weighted average common equivalent shares outstanding .................... 25,608,383 26,013,424 26,666,520
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JULY 31
(THOUSANDS OF DOLLARS) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ..................................................... $ 14,278 $ 30,924
Accounts receivable, net ...................................................... 161,440 137,145
Inventories
Materials ................................................................ 36,178 31,427
Work in process .......................................................... 11,488 10,184
Finished products ........................................................ 38,253 30,359
-----------------------
Total Inventories 85,919 71,970
Prepaids and other current assets ............................................. 7,181 10,712
-----------------------
Total Current Assets 268,818 250,751
Property, Plant and Equipment, at cost
Land .......................................................................... 8,356 8,216
Buildings ..................................................................... 98,289 90,136
Machinery and equipment ....................................................... 236,038 202,807
Construction in progress ...................................................... 11,471 6,820
-----------------------
354,154 307,979
Less accumulated depreciation ................................................. (199,559) (183,066)
-----------------------
154,595 124,913
Other Assets ....................................................................... 30,981 27,186
-----------------------
Total $ 454,394 $ 402,850
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings ......................................................... $ 42,027 $ 8,916
Current maturities of long-term debt .......................................... 647 4,229
Trade accounts payable ........................................................ 68,317 62,020
Accrued employee compensation and related taxes ............................... 28,760 23,524
Income taxes payable .......................................................... 2,738 12,756
Warranty and customer support ................................................. 16,502 9,760
Other current liabilities ..................................................... 17,306 17,373
-----------------------
Total Current Liabilities 176,297 138,578
Long-term Debt ..................................................................... 4,201 10,041
Deferred Income Taxes .............................................................. 1,442 560
Other Long-term Liabilities ........................................................ 28,589 24,791
Shareholders' Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued .... - -
Common stock, $5.00 par value, 40,000,000 shares authorized,
27,063,407 issued in 1997 and 1996 ....................................... 135,317 135,317
Additional paid-in capital .................................................... 6,212 2,994
Retained earnings ............................................................. 167,444 128,795
Cumulative translation adjustment ............................................. 934 6,065
Treasury stock -- 2,337,379 and 1,738,793 shares in 1997 and 1996, at cost .... (63,312) (41,561)
Receivable from ESOP .......................................................... (2,730) (2,730)
-----------------------
Total Shareholders' Equity 243,865 228,880
-----------------------
Total $ 454,394 $ 402,850
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
(THOUSANDS OF DOLLARS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings ...................................................... $ 50,620 $ 43,436 $ 38,536
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and amortization ................................ 21,494 21,674 20,529
Write-down of impaired assets ................................ 5,029 2,009 1,427
Equity in earnings of affiliates ............................. (3,025) (2,445) (1,840)
Deferred income taxes ........................................ 950 (5,683) (153)
Other ........................................................ 6,125 6,177 5,682
Changes in operating assets and liabilities, net of
acquired businesses
Accounts receivable ..................................... (24,949) (7,150) (6,159)
Inventories ............................................. (14,498) (2,035) (9,823)
Prepaids and other current assets ....................... 3,574 (4,779) 7,093
Trade accounts payable and other accrued expenses ....... 9,246 25,720 (2,398)
----------------------------------
Net Cash Provided by Operating Activities 54,566 76,924 52,894
INVESTING ACTIVITIES
Net expenditures on property and equipment ........................ (47,327) (39,297) (25,334)
Acquisitions and investments in affiliates ........................ (23,606) (2,152) (3,911)
Dividends from affiliate .......................................... 3,749 616 -
----------------------------------
Net Cash Used in Investing Activities (67,184) (40,833) (29,245)
FINANCING ACTIVITIES
Repayment of long-term debt ....................................... (5,280) (361) (5,764)
Net change in short-term borrowings ............................... 28,976 (8,360) 1,715
Payment received from ESOP ........................................ - 2,520 2,415
Purchase of treasury stock ........................................ (24,904) (23,143) (14,692)
Dividends paid .................................................... (8,799) (7,725) (7,372)
Exercise of stock options ......................................... 1,788 129 3,201
----------------------------------
Net Cash Used in Financing Activities (8,219) (36,940) (20,497)
Effect of exchange rate changes on cash ........................... 4,191 3,208 2,468
----------------------------------
Increase (Decrease) in Cash and Cash Equivalents (16,646) 2,359 5,620
Cash and cash equivalents, beginning of year ...................... 30,924 28,565 22,945
----------------------------------
Cash and Cash Equivalents, End of Year $ 14,278 $ 30,924 $ 28,565
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DONALDSON COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
(THOUSANDS OF DOLLARS, COMMON PAID-IN RETAINED TRANSLATION TREASURY RECEIVABLE
EXCEPT PER SHARE AMOUNTS) STOCK CAPITAL EARNINGS ADJUSTMENTS STOCK FROM ESOP TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1994 $ 135,317 $ - $ 65,654 $ 8,244 $ (11,853) $ (7,665) $ 189,697
Treasury stock acquired (14,692) (14,692)
Stock options exercised (133) (3,073) 6,407 3,201
Payment received from ESOP 2,415 2,415
Performance awards 1,033 1 35 1,069
Tax reduction -- employee plans 1,739 1,739
Net earnings 38,536 38,536
Translation adjustments 6,580 6,580
Cash dividends ($.28 per share) (7,372) (7,372)
-----------------------------------------------------------------------------------------
BALANCE JULY 31, 1995 135,317 2,639 93,746 14,824 (20,103) (5,250) 221,173
Treasury stock acquired (23,143) (23,143)
Stock options exercised (140) (689) 958 129
Payment received from ESOP 2,520 2,520
Performance awards 114 27 727 868
Tax reduction -- employee plans 381 381
Net earnings 43,436 43,436
Translation adjustments (8,759) (8,759)
Cash dividends ($.30 per share) (7,725) (7,725)
-----------------------------------------------------------------------------------------
BALANCE JULY 31, 1996 135,317 2,994 128,795 6,065 (41,561) (2,730) 228,880
Treasury stock acquired (24,904) (24,904)
Stock options exercised 174 (3,266) 2,198 (894)
Performance awards 1,426 94 955 2,475
Tax reduction -- employee plans 1,618 1,618
Net earnings 50,620 50,620
Translation adjustments (5,131) (5,131)
Cash dividends ($.35 per share) (8,799) (8,799)
-----------------------------------------------------------------------------------------
BALANCE JULY 31, 1997 $ 135,317 $ 6,212 $ 167,444 $ 934 $ (63,312) $ (2,730) $ 243,865
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated finan-cial statements include the
accounts of Donaldson Company, Inc. and all majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
accounts of overseas subsidiaries are included for fiscal years ended June 30.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION: For substantially all foreign operations, local
currencies are considered the functional currency. Assets and liabilities are
translated using the year-end rates of exchange. Results of operations are
translated using the average exchange rates prevailing throughout the period.
Translation gains or losses, net of applicable deferred taxes, are accumulated
in the translation adjustments in shareholders' equity. Foreign currency
transaction (losses)/gains of $(.5 million), $(1.1 million) and $47,000, in
1997, 1996 and 1995, respectively, are included in earnings before income taxes.
CASH EQUIVALENTS: The company considers all highly liquid investments with a
maturity of 90 days or less when purchased to be cash equivalents. Cash
equivalents are carried at cost which approximates market value.
INVENTORIES: Inventories are stated at the lower of cost or market. Domestic
inventories are valued using the last-in, first-out (LIFO) method, while the
overseas subsidiaries use the first-in, first-out (FIFO) method. Inventories
valued at LIFO were 57 percent and 55 percent of total inventories at July 31,
1997 and 1996, respectively.
The current cost of inventories valued under the LIFO method exceeded their
LIFO carrying values by $19.5 million and $19.9 million at July 31, 1997 and
1996, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost.
Depreciation is computed principally by use of declining balance methods on
facilities and equipment acquired on or prior to July 31, 1992. The company
adopted the straight-line depreciation method for all property acquired after
July 31, 1992. Depreciation expense includes the amortization of capital lease
assets. Accelerated depreciation methods are generally used for income tax
purposes.
The estimated useful lives of property, plant and equipment are as follows:
Buildings........................ 10 to 40 years
Machinery and Equipment.......... 3 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS: The company reviews the long-lived assets,
including identifiable intangibles and associated goodwill, for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An asset is deemed impaired and written down to its fair
value if expected associated future cash flows are less than its carrying
amount.
INTANGIBLE ASSETS: Intangible assets are recorded at their estimated fair values
at date of acquisition and are amortized on a straight-line basis over periods
ranging up to 15 years.
The carrying value of identifiable intangible assets is assessed when
factors indicating impairment are present. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to
the estimated fair value as measured by the discounted cash flows.
During 1997, the company reassessed the carrying value of certain amounts
of purchased intangibles related to a previous business acquisition. As a
result, a total non-cash charge of $5.0 million was recorded and is included in
selling, general and administrative expenses on the statement of earnings in
1997.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be reversed.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
EARNINGS PER SHARE: Earnings per common share is based on the weighted average
number of common shares and share equivalents outstanding during the year.
TREASURY STOCK: Repurchased Common Stock is stated at cost and is presented as a
separate reduction of shareholders' equity.
RESEARCH AND DEVELOPMENT: All expenditures for research and development are
charged against earnings in the year incurred.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. Compensation cost for performance equity units is
recorded based on the quoted market price of the company's stock at the end of
the period.
REVENUE RECOGNITION: Sales are recorded when product is shipped and invoiced or
performance of services is complete.
NEW ACCOUNTING STANDARDS: In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." This new standard requires dual presentation of basic and
diluted earnings per share (EPS) on the statement of earnings for all entities
with complex capital structures. Adoption of SFAS No. 128 is required in the
second quarter of 1998 and requires a restatement of prior period earnings per
share. Early adoption is not permitted. The impact of SFAS No. 128 increases
basic earnings per share by $.03 in 1997 and $.02 in 1996. There will be no
impact on diluted earnings per share as reported.
DERIVATIVES AND MARKET RISK: The Securities and Exchange Commission has adopted
rules requiring expanded disclosure of risks and policies concerning derivatives
and market risk. The company utilizes derivative financial instruments to manage
its exposure to foreign currency volatility at the transactional level. The
majority of these contracts relate to European country currencies. The market
risk exposure is essentially limited to currency rate movements. The gains or
losses arising from these financial instruments are applied to offset exchange
gains or losses on related hedged exposures. Realized gains or losses in 1997
and 1996 were not material to the company's results of operations and total
outstanding contracts at July 31, 1997 and 1996 were insignificant.
NOTE B: ACQUISITIONS AND DIVESTITURE
ACQUISITIONS
All acquisitions were accounted for as purchases. The purchase prices assigned
to the net assets acquired were based on the fair value of such assets and
liabilities at the respective acquisition dates. The operating results of these
acquired companies have been included in the consolidated statement of earnings
from the dates of acquisition. Consolidated pro forma earnings and earnings per
share would not be materially different from the reported amounts for all years
presented.
During 1997, the company acquired the remaining 50.1 percent of its
Australian Torit Products distributor; acquired the exhaust products
manufacturing assets of the Kilber Division of N.E.I. in South Africa; and
acquired the common stock of Diemo, S.A. de D.V., a supplier of liquid filter
components in Mexico. Aggregate consideration for these transactions was $3.7
million.
In April 1997, the company acquired the assets of the Armada Tube Group,
including Armada Products Co., located in Armada, Michigan, and Lakeside Tube
Fabricators, Inc., located in Mooresville, North Carolina, for $11.3 million in
cash. The Armada Tube Group manufactures exhaust products. The excess of
purchase price over the fair values of the net assets acquired was $5.3 million
and has been recorded as goodwill which is being amortized on a straight-line
basis over 15 years.
In July 1997, the company acquired the assets of Aercology Incorporated,
located in Old Saybrook, Connecticut, for $9.8 million in cash. Aercology
manufactures industrial air filtration products. The excess purchase price over
the fair value of the net assets acquired was $6.7 million and has been recorded
as goodwill which is being amortized on a straight-line basis over 15 years.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
During 1996, the company acquired all of the common stock of Tecnov S.A., a
French manufacturer of heavy duty exhaust mufflers and invested in a Torit
Products manufacturer in the People's Republic of China.
During 1995, the company acquired the remaining 50 percent of Donaldson
Micro Pore Mexico, S.A. de C.V., obtained a 20 percent interest in an Indonesian
filter manufacturer and purchased an additional 9.9 percent in its Australian
Torit Products distributor.
DIVESTITURE
During the fourth quarter of 1996, the company sold the operations and
substantially all the assets related to its Brazilian subsidiary, Donaldson do
Brasil, Ltda., (DBL). The sale did not result in any material charge or credit
to earnings. DBL's results of operations prior to the divestiture date have been
included in the company's consolidated results of operations.
NOTE C: CREDIT FACILITIES
In December 1995, the company entered into a credit agreement with a group of
participating banks under which it may borrow up to $100 million. The agreement
provides that loans may be made under a selection of rate formulas including
Base Rate Advance or Eurocurrency Rate Advance. The interest rate on each
advance is based on certain adjusted leverage and debt to capitalization ratios.
Facility fees and other fees on the entire loan commitment are payable for the
duration of this facility. Total amount outstanding under this credit facility
at July 31, 1997 was $25 million, leaving $75 million available for further
borrowing under such facility. There were no amounts outstanding on this
facility at July 31, 1996. The weighted average interest rate on short-term
borrowings outstanding at July 31, 1997 was 5.95 percent. The com-pany is in the
process of amending some of the terms and conditions of the above facility. The
amendments, if approved by the lending banks, will result in more favorable
terms for the company. The amendments are not expected to have a material effect
on the financial statements as presented.
At July 31, 1997, there was an additional $16 million available for use
under uncommitted facilities which provide unsecured borrowings for general
corporate purposes. There were no amounts outstanding under these facilities at
July 31, 1997.
Overseas subsidiaries may borrow under various uncommitted facilities. As
of July 31, 1997 and 1996, borrowings under these facilities were $17.0 million
and $8.9 million, respectively. The weighted average interest rate on short-term
borrowings outstanding at July 31, 1997 and 1996 was 7.4 percent and 5.6
percent, respectively.
NOTE D: LONG-TERM DEBT
Long-term debt consists of the following:
(THOUSANDS OF DOLLARS) 1997 1996
- -------------------------------------------------------------------
U.S.
ESOP promissory note due
in increasing annual installments
through 1997. Interest rate is
either 82 percent of prime or 91
percent of the adjusted CD rate ........... $ - $ 2,730
6 3/8 percent mortgage due 1997 ............. - 1,000
7 percent note due in 2008 .................. - 500
Capital leases .............................. 2,950 5,337
Overseas
Variable rate note due in 1999. Interest rate
is LIBOR plus .25 percent ................. - 3,805
Other subsidiaries .......................... 1,898 898
-----------------
Total 4,848 14,270
Less current maturities ..................... 647 4,229
-----------------
Total Long-Term Debt $4,201 $10,041
=================
Annual maturities of long-term debt and capitalized leases for the next
five years are $0.6 million in 1998, $0.7 million in 1999, $0.7 million in 2000,
$0.4 million in 2001, $0.3 million in 2002 and $2.1 million thereafter.
Total interest paid relating to all debt was $2.4 million, $2.8 million and
$2.8 million in 1997, 1996 and 1995, respectively. In addition, total interest
expense recorded in 1997, 1996 and 1995 was $2.4 million, $2.9 million and $3.1
million, respectively.
Certain note agreements contain debt covenants related to working capital
levels and limitations on indebtedness. Further, the company is restricted from
paying dividends or repurchasing Common Stock if its tangible net worth (as
defined) does not exceed certain minimum levels. At July 31, 1997, under the
most restrictive agreement, tangible net worth exceeded the minimum by $71.0
million.
NOTE E: EMPLOYEE BENEFIT PLANS
PENSION PLANS: Donaldson Company, Inc. and certain of its subsidiaries have
defined benefit pension plans for substantially all hourly and salaried
employees. The domestic plans provide benefits based on the employee's years of
service and compensation during the years immediately preceding retirement. The
overseas plans generally provide similar types of benefits.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
The company's general funding policy is to make contributions as required
by applicable regulations. The assets are primarily invested in diversified
equity and debt portfolios.
Cost for the company's pension plans includes the following components:
(THOUSANDS OF DOLLARS) 1997 1996 1995
- ---------------------------------------------------------------
Service cost ............. $ 6,184 $ 5,224 $ 5,024
Interest cost on projected
benefit obligation .... 8,189 7,029 6,167
Actual return on
plan assets ........... (26,078) (4,391) (12,238)
Net amortization
and deferral .......... 18,324 (3,221) 5,265
---------------------------------
Net Periodic
Pension Expense $ 6,619 $ 4,641 $ 4,218
=================================
The funded status of the company's pension plans as of July 31, 1997 and
1996, is as follows:
(THOUSANDS OF DOLLARS) 1997 1996
- -------------------------------------------------------------------
Plan assets at fair value ............... $ 112,161 $ 85,172
Accumulated benefit obligation:
Vested ............................... (85,393) (71,887)
Nonvested ............................ (4,015) (3,019)
Provision for future salary increases ... (28,266) (20,250)
----------------------
Plan assets less than
projected benefit obligation ......... (5,513) (9,984)
Unrecognized net loss ................... 2,547 9,040
Unrecognized prior service cost ......... 4,987 4,611
Unrecognized net transition asset ....... (7,059) (8,156)
Additional minimum liability ............ (628) (970)
----------------------
Accrued Pension Liability $ (5,666) $ (5,459)
======================
The principal actuarial assumptions:
1997 1996 1995
- ---------------------------------------------------
Discount rate ............. 7.5% 8.0% 8.0%
Rate of future compensation
increases .............. 6.0% 5.5% 5.5%
Expected long-term
rate of return ......... 9.0% 9.0% 9.0%
EMPLOYEE STOCK OWNERSHIP PLAN: In 1987, the company established an Employee
Stock Ownership Plan (ESOP) for eligible U.S. employees. The ESOP borrowed $21.0
million from the company to purchase 3,600,000 newly issued shares of Common
Stock. These shares are held in trust and are issued to employees' accounts in
the ESOP as the loan is repaid over 10 years. At July 31, 1997 and 1996,
3,600,000 and 3,237,021 shares have been allocated to employees. The loan
obligation of the ESOP is considered unearned employee benefit expense and, as
such, is recorded as a reduction of the company's shareholders' equity. The
company's contributions to the ESOP, plus dividends paid on unallocated shares
held by the ESOP, are used to repay the loan principal and interest. Both the
loan obligation and the unearned benefit expense are reduced by the amount of
loan principal repayments made by the ESOP. The ESOP contribution expense
totaled $2.6 million, $2.5 million and $2.1 million in 1997, 1996 and 1995,
respectively. The ESOP's 10-year term was completed at July 31, 1997; therefore,
no further shares will be allocated in the future.
401(k) SAVINGS PLAN: The company provides a non- contributory employee savings
plan which permits participants to make contributions by salary reduction
pursuant to section 401(k) of the Internal Revenue Code.
Subsequent to year end, the company amended certain of its employee benefit
plans. The amendments are effective for years ending in 1998. The defined
benefit pension plan was amended to provide defined benefits pursuant to a cash
balance feature whereby a participant accumulates a benefit based upon a
percentage of current salary which varies with age, and interest credits. The
401(k) savings plan was amended to include a company contribution.
NOTE F: SHAREHOLDERS' EQUITY
On January 12, 1996, the Board of Directors of the company approved the
extension of the benefits afforded by the company's existing rights plan by
adopting a new shareholder rights plan. Pursuant to the new Rights Agreement,
dated as of January 12, 1996, by and between the company and Norwest Bank
Minnesota, National Association, as Rights Agent, one Right was issued on March
4, 1996 for each outstanding share of Common Stock, par value $5.00 per share,
of the company upon the expiration of the company's existing rights. Each of the
new Rights will entitle the registered holder to purchase from the company one
one-thousandth of a share of Series A Junior Participating Preferred Stock,
without par value, at a price of $130.00 per one one-thousandth of a share. The
Rights, however, will not become exercisable unless and until, among other
things, any person acquires 15 percent or more of the outstanding Common Stock
of the company. If a person acquires 15 percent or more of the outstanding
Common Stock of the company (subject to certain conditions and exceptions more
fully described in the Rights Agreement), each Right will entitle the holder
(other than the person who acquired 15 percent or more of the outstanding Common
Stock) to purchase Common Stock of the company having a market value equal to
twice the exercise price of a Right. The new Rights are redeemable under certain
circumstances at $.01 per Right and will expire, unless earlier redeemed, on
March 3, 2006.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
EMPLOYEE INCENTIVE PLANS: In November 1991, shareholders approved
the 1991 Master Stock Compensation Plan. The Plan extends through December 2001
and allows for the granting of nonqualified stock options, incentive stock
options, restricted stock, stock appreciation rights (SARs), dividend
equivalents, dollar-denominated awards and other stock-based awards.
The 1980 Master Stock Compensation Plan allows for the granting of
nonqualified stock options and incentive stock options. Both plans allow for the
granting of performance awards to a limited number of key executives. The awards
are payable in Common Stock and are based on a formula which measures
performance of the company over a three-year period. Performance award expense
totaled $3.5 million, $2.1 million and $2.1 million in 1997, 1996 and 1995,
respectively. Options under both Plans are granted to key employees at or above
100 percent of the market price at the date of grant. Options are exercisable
for up to 10 years from the date of grant.
STOCK OPTIONS: Stock options issued during fiscal 1997 become exercisable in
each of the following three years, in an equal number of shares each year, for
both executives and non-executives. Stock options issued prior to fiscal 1997
for non-executives and during fiscal 1997 for executives become exercisable in a
four-year period. Prior to fiscal 1996 stock options vested immediately for
executives. At July 31, 1997, options to purchase 1,658,654 shares are
outstanding under these plans.
In fiscal 1997, the company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 encourages entities to adopt a fair
value-based method of accounting for employee stock compensation plans, but
allows companies to continue to account for those plans using the accounting
prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees." The
company has elected to continue to account for stock based compensation using
APB 25, making pro forma disclosures of net earnings and earnings per share as
if the fair value-based method had been applied. Accordingly, no compensation
expense has been recorded for the stock option plans. Had compensation expense
for the stock option plans been determined under SFAS No. 123 in fiscal 1997 and
1996, the company's net income and earnings per share would have been
approximately $49.0 million and $1.94, and $42.8 million and $1.65,
respectively. The pro forma effect on net income and earnings per share is not
representative of the pro forma net earnings in future years because it does not
take into consideration pro forma compensation expense related to grants made
prior to 1996.
For purposes of computing compensation cost of stock options granted, the
fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: 6.13 percent risk free interest rate in 1997 and 1996, five or
seven year lives in 1997 and 1996, 19.4 percent expected volatility in 1997 and
1996, and 1 percent expected dividend yield in 1997 and 1996. Black-Scholes is a
widely accepted stock option pricing model; however, the ultimate value of stock
options granted will be determined by the actual lives of options granted and
future price levels of the company's Common Stock.
The weighted average fair value for options granted during fiscal 1997 and
1996 is $15.52 and $12.37 per share, respectively.
The number and option price of options granted under these plans were as
follows:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
- ------------------------------------------------------------------
Outstanding at July 31, 1994 ... 1,604,846 $16.62
Granted ..................... 321,799 23.69
Exercised ................... (378,657) 14.85
Canceled .................... (5,497) 14.39
-----------------------------
Outstanding at July 31, 1995 ... 1,542,491 18.54
Granted ..................... 201,291 25.15
Exercised ................... (95,899) 18.24
Canceled .................... (17,000) 15.36
-----------------------------
Outstanding at July 31, 1996 ... 1,630,883 19.40
Granted ..................... 313,889 31.87
Exercised ................... (283,868) 18.28
Canceled .................... (2,250) 24.75
-----------------------------
Outstanding at July 31, 1997 1,658,654 $21.95
=============================
At July 31, 1997 and 1996 there were 1,324,129 and 1,445,932 options
exercisable, respectively. Shares reserved at July 31, 1997 for outstanding
options and future grants were 3,624,729.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
The following table summarizes information concerning currently outstanding
and exercisable options:
WEIGHTED AVG. WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE AVERAGE
EXERCISE OUT- CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES STANDING LIFE(YEARS) PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------
$0 to $10 52,950 1.52 $ 6.13 52,950 $ 6.13
$10 to $20 733,506 3.47 17.21 733,506 17.21
$20 to $30 619,400 6.95 24.53 492,375 24.57
$30 to $40 252,798 9.13 32.68 45,298 33.48
- -----------------------------------------------------------------------------
$0 to $40 1,658,654 5.57 $21.95 1,324,129 $20.06
NOTE G: INCOME TAXES
The components of earnings before income taxes are as follows:
(THOUSANDS OF DOLLARS) 1997 1996 1995
- ------------------------------------------------------------
Earnings Before
Income Taxes:
United States ....... $50,259 $47,589 $42,355
Overseas ............ 28,835 23,531 20,817
---------------------------------
Total $79,094 $71,120 $63,172
=================================
The components of the provision for income taxes are as follows:
(THOUSANDS OF DOLLARS) 1997 1996 1995
- ----------------------------------------------------------------
Income Taxes:
Current:
Federal ......... $ 18,527 $ 21,796 $ 12,425
State ........... 2,092 2,047 1,810
Overseas ........ 8,805 9,524 10,554
--------------------------------------
29,424 33,367 24,789
--------------------------------------
Deferred:
Federal ......... (525) (5,424) 716
State ........... (30) (470) 49
Overseas ........ (395) 211 (918)
--------------------------------------
(950) (5,683) (153)
--------------------------------------
Total $ 28,474 $ 27,684 $ 24,636
======================================
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
(THOUSANDS OF DOLLARS) 1997 1996 1995
- --------------------------------------------------------------------------
Deferred Tax Assets:
Compensation and
retirement plans ........ $ 6,979 $ 10,587 $ 8,514
Accrued expenses .......... 9,758 7,155 4,572
Brazilian asset write-down 498 571 1,040
NOL carryforwards ......... 2,115 1,553 1,263
Inventories ............... 1,074 1,861 1,260
Investment in joint venture 1,306 957 1,606
Other ..................... 3,650 4,689 3,210
--------------------------------------
Gross Deferred
Tax Assets 25,380 27,373 21,465
Valuation Allowance ....... (1,316) (1,615) (1,426)
--------------------------------------
Net Deferred Tax Assets 24,064 25,758 20,039
Deferred Tax Liabilities:
Depreciation and
amortization ............ (6,756) (5,397) (1,844)
Cumulative translation
adjustment .............. (502) (3,264) (7,980)
Other ..................... (1,987) (1,445) (2,192)
--------------------------------------
Gross Deferred
Tax Liabilities (9,245) (10,106) (12,016)
--------------------------------------
Net Deferred Taxes $ 14,819 $ 15,652 $ 8,023
======================================
The following table reconciles the U.S. statutory income tax rate with the
effective income tax rate:
1997 1996 1995
- ------------------------------------------------------------------------
Statutory U.S.
federal rate .............. 35.0% 35.0% 35.0%
State income taxes ........... 1.7 1.5 1.9
Overseas taxes at
higher rates .............. (2.1) 2.1 1.9
Other ........................ 1.4 0.3 0.2
-----------------------------------
36.0% 38.9% 39.0%
===================================
At July 31, 1997, certain overseas subsidiaries had available net operating
loss carryforwards of approximately $6.0 million to offset future taxable
income. The majority of such carryforwards expire after 2001. Unremitted
earnings of overseas subsidiaries amounted to approximately $72.5 million at
July 31, 1997. Those earnings are intended to be indefinitely reinvested and,
accordingly, no income taxes have been provided. If a portion were to be
remitted, foreign tax credits would substantially offset any resulting tax
liability. It is not practicable to estimate the amount of unrecognized taxes on
these undistributed earnings due to the complexity of the computation.
The company made cash payments for income taxes of $41.5 million, $20.5
million and $21.8 million in 1997, 1996 and 1995, respectively.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTE H: SEGMENT INFORMATION
The company operates on a worldwide basis in a single business segment which
consists of the design, manufacture and sale of filtration products. The
company's key markets for filters are heavy-duty truck and equipment, light-duty
truck, in-plant air cleaning systems, industrial gas turbines and computer disk
drives.
The table below sets forth information about operations in different
geographic areas:
<TABLE>
<CAPTION>
UNITED OTHER
(THOUSANDS OF DOLLARS) STATES EUROPE JAPAN COUNTRIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Sales to customers ...................... $522,289 $141,358 $78,704 $90,997 $ - $833,348
Sales between geographic areas .......... 46,414 1,930 2,006 2,452 (52,802) -
-----------------------------------------------------------------------------
Net Sales $568,703 $143,288 $80,710 $93,449 $(52,802) $833,348
=============================================================================
Operating Income $ 37,397 $ 17,739 $ 9,331 $18,435 $ (187) $ 82,715
=============================================================================
Identifiable Assets:
Accounts receivable, net ................ $ 77,201 $ 38,766 $22,635 $22,838 $ - $161,440
Other ................................... 157,235 104,445 23,788 49,815 (56,096) 279,187
-----------------------------------------------------------------------------
Total identifiable assets ............... $234,436 $143,211 $46,423 $72,653 $(56,096) $440,627
General corporate assets ................ 13,767
--------
Total Assets $454,394
========
1996
Sales to customers ...................... $474,831 $129,765 $80,734 $73,316 $ - $758,646
Sales between geographic areas .......... 36,566 1,137 1,910 2,184 (41,797) -
-----------------------------------------------------------------------------
Net Sales $511,397 $130,902 $82,644 $75,500 $(41,797) $758,646
=============================================================================
Operating Income $ 35,535 $ 17,713 $10,955 $11,639 $ (200) $ 75,642
=============================================================================
Identifiable Assets:
Accounts receivable, net ................ $ 58,591 $ 37,403 $24,515 $16,598 $ 38 $137,145
Other ................................... 143,975 59,616 24,169 25,875 (29,216) 224,419
-----------------------------------------------------------------------------
Total identifiable assets ............... $202,566 $ 97,019 $48,684 $42,473 $(29,178) $361,564
General corporate assets ................ 41,286
--------
Total Assets $402,850
========
1995
Sales to customers ...................... $437,463 $114,731 $91,248 $60,517 $ - $703,959
Sales between geographic areas .......... 28,416 1,163 2,254 2,424 (34,257) -
-----------------------------------------------------------------------------
Net Sales $465,879 $115,894 $93,502 $62,941 $(34,257) $703,959
=============================================================================
Operating Income $ 29,968 $ 15,384 $10,741 $10,148 $ (710) $ 65,531
=============================================================================
Identifiable Assets:
Accounts receivable, net ................ $ 58,146 $ 31,705 $33,740 $13,548 $ 16 $137,155
Other ................................... 117,249 61,753 35,324 28,511 (29,650) 213,187
-----------------------------------------------------------------------------
Total identifiable assets ............... $175,395 $ 93,458 $69,064 $42,059 $(29,634) $350,342
General corporate assets ................ 30,700
--------
Total Assets $381,042
========
</TABLE>
Sales between geographic areas are made at cost plus a proportionate share
of operating profit. Net income of foreign operations includes royalty income
and reflects the gain or loss in foreign currency exchange. General corporate
assets include corporate cash and cash equivalents and buildings and equipment
used for corporate purposes. Sales to Caterpillar, Inc. accounted for 11
percent, 12 percent and 13 percent of net sales in 1997, 1996 and 1995,
respectively.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
NOTE I: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET GROSS NET EARNINGS DIVIDENDS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) SALES MARGIN EARNINGS PER SHARE PER SHARE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
First Quarter .............................. $ 187,176 $ 56,132 $ 11,590 $ .45 $ .09
Second Quarter ............................. 196,849 58,195 10,976 .43 .09
Third Quarter ............................. 213,876 66,204 14,200 .56 .09
Fourth Quarter ............................. 235,447 69,742 13,854 .54 .09
1996
First Quarter .............................. $ 188,867 $ 53,899 $ 10,131 $ .39 $ .07
Second Quarter ............................. 182,165 52,439 9,247 .35 .07
Third Quarter .............................. 185,225 55,372 12,625 .49 .08
Fourth Quarter ............................. 202,389 61,164 11,433 .44 .08
</TABLE>
NOTE J: CONTINGENCIES
The company is involved on an ongoing basis in litigation arising in the
ordinary course of business. In the opinion of management, the outcome of
litigation currently pending will not materially affect the company's results of
operations, financial condition or liquidity.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Donaldson Company, Inc.
We have audited the accompanying consolidated balance sheets of Donaldson
Company, Inc. and subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of earnings, changes in shareholders' equity and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Donaldson
Company, Inc. and subsidiaries at July 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 12, 1997
32
<PAGE>
SHAREHOLDER INFORMATION
DONALDSON COMPANY, INC. AND SUBSIDIARIES
CORPORATE AND SHAREHOLDER INFORMATION
NYSE LISTING: The common shares of Donaldson Company, Inc. are traded on the New
York Stock Exchange, under the symbol DCI.
SHAREHOLDER INFORMATION: For any concerns relating to your current or
prospective shareholdings, please contact Shareholder Services at (800)468-9716
or (612)450-4064.
DIVIDEND REINVESTMENT PLAN: As of September 26, 1997, more than 850 of Donaldson
Company's approximately 1,500 shareholders of record were participating in the
Dividend Reinvestment Plan. Under the plan, shareholders can invest Donaldson
Company dividends in additional shares of company stock. They may also make
periodic voluntary cash investments for the purchase of company stock.
Both alternatives are provided without service charges or brokerage
commissions. Shareholders may obtain a brochure giving further details by
writing Shareholder Services, Donaldson Company, Inc., M.S. 101, P.O. Box 1299,
Minneapolis, Minnesota 55440.
ANNUAL MEETING: The annual meeting of shareholders will be held at 10 a.m. on
Friday, November 21, 1997, at The Conference Center at Atrium Center, 3105 E.
80th Street, Bloomington, Minnesota.
10-K REPORTS: Copies of the Report 10-k, filed with the Securities and Exchange
Commission, are available on request from Shareholder Services, Donaldson
Company, Inc., M.S. 101, P.O. Box 1299, Minneapolis, Minnesota 55440.
AUDITORS: Ernst & Young LLP, Minneapolis, Minnesota
GENERAL COUNSEL: Dorsey & Whitney LLP,
Minneapolis, Minnesota
PATENT COUNSEL: Merchant, Gould, Smith, Edell, Welter & Schmidt, Minneapolis,
Minnesota
PUBLIC RELATIONS COUNSEL: Padilla Speer Beardsley Inc., Minneapolis, Minnesota
TRANSFER AGENT AND REGISTRAR: Norwest Bank Minnesota, N.A., South St. Paul,
Minnesota
SIX YEAR QUARTERLY HIGH-LOW STOCK PRICES
[PLOT POINTS CHART OMITTED]
33
<PAGE>
ELEVEN-YEAR COMPARISON OF RESULTS
DONALDSON COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales ............................ $833,348 $758,646 $703,959 $593,503
Gross margin ......................... $250,273 222,874 197,979 166,599
Gross margin percentage .............. 30.0% 29.4% 28.1% 28.1%
Operating income ..................... $ 82,715 75,642 65,531 52,079
Operating income percentage .......... 9.9% 10.0% 9.3% 8.8%
Interest expense ..................... $ 2,358 2,905 3,089 3,362
Earnings before income taxes ......... $ 79,094 71,120 63,172 50,193
Income taxes ......................... $ 28,474 27,684 24,636 18,244
Effective income tax rate ............ 36.0% 38.9% 39.0% 36.3%
Net earnings ......................... $ 50,620 43,436 38,536 31,949(1)
Return on sales ...................... 6.1% 5.7% 5.5% 5.4%
Return on average shareholders' equity 21.4% 19.3% 18.8% 17.6%
Return on investment ................. 18.2% 18.5% 17.6% 16.0%
---------------------------------------------------------
FINANCIAL POSITION
Total assets ......................... $454,394 402,850 381,042 337,360
Current assets ....................... $268,818 250,751 247,904 220,308
Current liabilities .................. $176,297 138,578 123,747 115,757
Working capital ...................... $ 92,521 112,173 124,157 104,551
Current ratio ........................ 1.5 1.8 2.0 1.9
Current debt ......................... $ 42,674 13,145 20,800 16,956
Long-term debt ....................... $ 4,201 10,041 10,167 16,028
Total debt ........................... $ 46,875 23,186 30,967 32,984
Shareholders' equity ................. $243,865 228,880 221,173 189,697
Long-term capitalization ratio ....... 1.7% 4.2% 4.4% 7.8%
Property, plant and equipment, net ... $154,595 124,913 110,640 99,559
Net expenditures on
property, plant and equipment ... $ 47,327 39,297 25,334 24,642
Depreciation and amortization ........ $ 21,494 21,674 20,529 16,365
---------------------------------------------------------
SHAREHOLDER INFORMATION
Net earnings per share ............... $ 1.98 1.67 1.45 1.17(1)
Dividends paid per share ............. $ .35 .30 .28 .25
Shareholders' equity per share ....... $ 9.86 9.04 8.45 7.16
Shares outstanding (000s) ............ 24,726 25,325 26,185 26,510
Common stock price range, per share
High ............................ $ 40 3/4 28 28 26 1/8
Low ............................. $ 25 1/4 23 7/8 20 7/8 18 1/4
---------------------------------------------------------
</TABLE>
Amounts are adjusted for all stock splits.
Operating income is gross margin less selling, general and administrative, and
research and development expense.
Return on investment is net earnings divided by average long-term debt plus
average shareholders' equity.
Long-term capitalization ratio is long-term debt divided by long-term debt plus
shareholders' equity.
(I) Excludes the cumulative effect of an accounting change of $2,206, or $.08
per share, in 1994 and extraordinary credits of $1,384, or $.05 per share, in
1988 and $1,375, or $.04 per share, in 1987.
34
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$533,327 $482,104 $457,692 $422,885 $397,535 $362,862 $294,993
152,236 133,574 129,858 121,454 105,275 104,828 83,336
28.5% 27.7% 28.4% 28.7% 26.5% 28.9% 28.3%
45,246 41,249 41,304 44,354 37,851 36,047 24,648
8.5% 8.6% 9.0% 10.5% 9.5% 9.9% 8.4%
2,723 2,681 3,526 3,731 3,555 3,229 2,359
44,682 41,721 39,385 34,875 27,664 29,868 21,748
16,468 15,952 15,337 13,849 12,230 13,630 10,782
36.9% 38.2% 38.9% 39.7% 44.2% 45.6% 49.6%
28,214 25,769 24,048 21,026 15,434 16,238(1) 10,966(1)
5.3% 5.3% 5.3% 5.0% 3.9% 4.5% 3.7%
16.9% 17.2% 18.0% 17.8% 15.1% 15.6% 9.8%
15.0% 14.8% 14.9% 14.2% 11.5% 11.7% 7.9%
- ------------------------------------------------------------------------------------------------------------------
300,217 286,348 253,194 245,947 204,813 193,548 200,827
196,014 187,360 169,398 168,522 130,848 122,602 128,370
93,666 89,956 77,537 79,917 58,009 52,126 44,609
102,348 97,404 91,861 88,605 72,839 70,476 83,761
2.1 2.1 2.2 2.1 2.3 2.4 2.9
7,595 11,425 6,380 11,384 8,602 3,875 4,302
18,920 23,482 25,673 28,320 30,750 33,784 35,353
26,515 34,907 32,053 39,704 39,352 37,659 39,655
174,008 160,303 138,947 128,787 107,516 97,254 110,517
9.8% 12.8% 15.6% 18.0% 22.2% 25.8% 24.2%
90,515 84,899 72,863 68,290 61,914 62,160 62,575
15,005 15,538 16,208 16,055 11,567 9,954 15,460
14,752 14,047 12,187 10,857 10,583 10,351 8,857
- ------------------------------------------------------------------------------------------------------------------
1.01 .92 .84 .73 .54 .55(1) .36(1)
.20 .19 .14 .13 .12 .11 .11
6.38 5.81 5.01 4.46 3.75 3.40 3.34
27,282 27,569 27,739 28,864 28,693 28,597 33,131
20 1/8 15 7/8 13 3/8 11 5/8 5 7/8 8 5/8 6 3/4
14 11 5/8 8 1/8 5 5/8 5 1/2 3 5/8 5 3/8
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
DONALDSON WORLDWIDE OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
WORLD HEADQUARTERS DISTRIBUTION CENTERS Donaldson Torit, B.V.,
HAARLEM, NETHERLANDS
Donaldson Company, Inc. RENSSELAER, INDIANA
MINNEAPOLIS, MINNESOTA ONTARIO, CALIFORNIA Donaldson France, S.A.,
ANTWERP, BELGIUM BRON, FRANCE
U.S. PLANTS Tecnov-Donaldson, S.A.,
JOINT VENTURES DOMJEAN, FRANCE
OLD SAYBROOK, CONNECTICUT
DIXON, ILLINOIS Advanced Filtration Systems Inc., Donaldson Italia s.r.l.,
FRANKFORT, INDIANA CHAMPAIGN, ILLINOIS OSTIGLIA, ITALY
CRESCO, IOWA
GRINNELL, IOWA MSCA, LLC, Nippon Donaldson, Ltd.,
OELWEIN, IOWA MONTICELLO, INDIANA TOKYO, JAPAN
NICHOLASVILLE, KENTUCKY
PORT HURON, MICHIGAN D.I. Filter Systems Pvt. Ltd., Donaldson Korea Co., Ltd.,
CHILLICOTHE, MISSOURI NEW DELHI, INDIA SEOUL, SOUTH KOREA
MOORESVILLE, NORTH CAROLINA
PHILADELPHIA, PENNSYLVANIA Guilin Air King Enterprise Ltd., Donaldson Far East Ltd.,
BALDWIN, WISCONSIN GUILIN, PEOPLE'S REPUBLIC OF CHINA HONG KONG, S.A.R., PEOPLE'S REPUBLIC
STEVENS POINT, WISCONSIN OF CHINA
PT Panata Jaya Mandiri,
JAKARTA, INDONESIA Donaldson (Wuxi) Filters Co., Ltd.,
WUXI, PEOPLE'S REPUBLIC OF CHINA
SUBSIDIARIES Donaldson Australasia (Pty.) Ltd.,
WYONG, AUSTRALIA
ENV Services, Inc.,
MINNEAPOLIS, MINNESOTA Donaldson Filtration
Systems (Pty.) Ltd.,
Donaldson Europe, N.V., CAPE TOWN, SOUTH AFRICA
LEUVEN, BELGIUM
Donaldson, S.A. de C.V.,
Donaldson Coordination AGUASCALIENTES, MEXICO
Center, N.V.,
LEUVEN, BELGIUM
LICENSEE
Donaldson Gesellschaft m.b.H.,
DULMEN, GERMANY Parker Hannifin Ind. Com. Ltda.,
SAO PAULO, BRAZIL
Donaldson Filter
Components, Ltd.,
HULL, ENGLAND
</TABLE>
36
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Donaldson Company, Inc. of our report dated September 12, 1997, included in
the 1997 Annual Report to Shareholders of Donaldson Company, Inc.
Our audit also included the financial statement schedule of Donaldson Company,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
Number 33-27086 on Form S-8 dated February 17, 1989, Registration Statement
Number 2-90488 on Form S-8 dated May 2, 1984 as amended through Post Effective
Amendment No. 1 dated January 7, 1988, and Registration Statement Number
33-44624 dated December 20, 1991 of our report dated September 12, 1997, with
respect to the consolidated financial statements incorporated herein by
reference and our report included in the preceding paragraph with respect to the
financial statement schedule of Donaldson Company, Inc. included in this Annual
Report on Form 10-K of Donaldson Company, Inc.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 29, 1997
Exhibit 24
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ F. Guillaume Bastiaens
------------------------------------
F. Guillaume Bastiaens
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Michael R. Bonsignore
------------------------------------
Michael R. Bonsignore
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Paul B. Burke
------------------------------------
Paul B. Burke
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Janet M. Dolan
------------------------------------
Janet M. Dolan
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Jack W. Eugster
------------------------------------
Jack W. Eugster
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Kendrick B. Melrose
------------------------------------
Kendrick B. Melrose
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ S. Walter Richey
------------------------------------
S. Walter Richey
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ Stephen W. Sanger
------------------------------------
Stephen W. Sanger
<PAGE>
POWER OF ATTORNEY
The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 1997, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf and report so
signed for filing with the Securities and Exchange Commission.
Dated as of October 29, 1997.
/s/ C. Angus Wurtele
------------------------------------
C. Angus Wurtele
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