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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, 1999 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 ON WHICH REGISTERED
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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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 24, 1999 was $949,089,253.
The shares of common stock outstanding as of September 24, 1999 were
46,032,230.
Documents Incorporated by Reference
-----------------------------------
Portions of the 1999 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 1999 annual shareholders meeting
are incorporated by reference in Part III, as specifically set forth in Part
III.
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<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 leading worldwide manufacturer of filtration systems and
replacement parts. The Company's product mix includes air and liquid filters and
exhaust and emission control products for mobile equipment; in-plant air
cleaning systems; air intake systems and exhaust products for industrial gas
turbines; and specialized filters for such diverse applications as computer disk
drives, aircraft passenger cabins and semiconductor processing. Products are
manufactured at more than two dozen plants around the world and through four
joint ventures. The Company has two reporting segments engaged in the design,
manufacture and sale of systems to filter air and liquid and other complementary
products. The two segments are Engine Products and Industrial Products. Products
in the Engine Products segment consist of air intake systems, exhaust systems,
liquid filtration systems and replacement parts. The Engine Products segment
sells to original equipment manufacturers (OEMs) in the construction,
industrial, mining, agriculture and transportation markets and to independent
distributors, OEM dealer networks, private label accounts and large private
fleets. Products in the Industrial Products segment consist of dust, fume and
mist collectors, static and pulse-clean air filter systems for industrial gas
turbines, computer disk drive filter products and other specialized air
filtration systems. The Industrial Products segment sells to various industrial
end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly
purified air.
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
1999 1998 1997
---- ---- ----
Engine Products Segment
Off-Road Equipment Products
(Including Defense Products) 19% 20% 21%
Truck and Automotive Products 17% 16% 16%
Aftermarket Products 29% 30% 30%
Industrial Products Segment
Dust Collection Products 16% 16% 15%
Gas Turbine Systems Products 9% 9% 9%
Special Applications Products 10% 9% 9%
The segment detail information in Note H in the Notes to Consolidated Financial
Statements on page 31 of the 1999 Annual Report to Shareholders is incorporated
herein by reference.
COMPETITION
The Company's business is not considered to be seasonal. Principal methods
of competition in both the Engine Products and Industrial Products segments 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 Industrial Products segment worldwide and less than
15 competitors in the Engine Products segment 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
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Company is not required to carry significant amounts of inventory to meet rapid
delivery demands or secure supplier allotments.
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 of net sales in 1999, 1998 and 1997. 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, 1999, the backlog of orders expected to be delivered within
90 days was $161,509,000. The 90 day backlog at August 31, 1998 was
$139,749,000.
RESEARCH AND DEVELOPMENT
During 1999 the Company spent $23,603,000 on research and development
activities relating to the development of new products or improvements of
existing products or manufacturing processes. The Company spent $23,509,000 in
1998 and $17,288,000 in 1997 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 7,056 persons in worldwide operations as of July 31,
1999.
GEOGRAPHIC AREAS
Note H of the Notes to Consolidated Financial Statements on page 31 in the
1999 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.
Manufacturing activities are carried on in fourteen 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. The
back cover of the 1999 Annual Report to Shareholders lists the principal plant
locations and is incorporated herein by reference. Note H on page 31 of the 1999
Annual Report to Shareholders presents identifiable assets by geographic area
and is incorporated herein by reference.
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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 54 Chairman, Chief Executive 1979
Officer and President
William M. Cook 46 Senior Vice President, 1994
Commercial and Industrial
James R. Giertz 42 Senior Vice President and 1994
Chief Financial Officer
Norman C. Linnell 40 General Counsel and Secretary 1996
Nickolas Priadka 53 Senior Vice President, OE Engine 1989
Lowell F. Schwab 51 Senior Vice President, Operations 1994
Thomas A. Windfeldt 50 Vice President, Controller 1985
and Treasurer
All of the above-named executive officers have held executive or management
positions with Registrant for more than the past five years except Mr. Linnell,
who was previously a partner in the law firm of Dorsey & Whitney LLP.
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 34 and 36, and restrictions on payment
of dividends in Note D, page 25 of the 1999 Annual Report to Shareholders is
incorporated herein by reference. As of September 24, 1999, there were
approximately 1,984 shareholders of record of Common Stock.
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The high and low sales prices for registrant's common stock for each full
quarterly period during 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1998 $20 5/16 - 27 3/16 $22 1/4 - 25 11/16 $22 5/8 - 26 3/16 $18 9/16 - 25 1/8
1999 $14 7/16 - 21 15/16 $17 11/16 - 21 $17 1/4 - 23 1/2 $21 15/16 - 25 7/8
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information for the years 1995 through 1999 on pages 10 and 11 of the
1999 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 12 through 17 of the 1999 Annual Report to Shareholders is
incorporated herein by reference.
A. MARKET RISK
Market Risk disclosure as discussed under "Market Risk" and "Foreign
Currency" on pages 15 and 16 of the 1999 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 18 through 34, and the Quarterly Financial Information
(Unaudited) on page 34 of the 1999 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 page 4 under the heading "Compliance With Section 16(a)
of the Securities Exchange Act of 1934" on page 13 of the Company's definitive
proxy statement dated October 13, 1999 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 6 through 8, the "Pension Plan Table" on page
12 and under the caption "Change-in-Control Arrangements" on page 13 of the
Company's definitive proxy statement dated October 13, 1999, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section "Security Ownership" on page 2 of the
Company's definitive proxy statement dated October 13, 1999, is incorporated
herein by reference.
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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, 1999 and 1998
(incorporated by reference from page 19 of the 1999 Annual Report
to Shareholders)
Consolidated Statements of Earnings -- years ended July 31, 1999,
1998 and 1997 (incorporated by reference from page 18 of the 1999
Annual Report to Shareholders)
Consolidated Statements of Cash Flows -- years ended July 31,
1999, 1998 and 1997 (incorporated by reference from page 20 of
the 1999 Annual Report to Shareholders)
Consolidated Statements of Changes in Shareholders' Equity --
years ended July 31, 1999, 1998 and 1997 (incorporated by
reference from page 21 of the 1999 Annual Report to Shareholders)
Notes to Consolidated Financial Statements (incorporated by
reference from pages 22 through 34 of the 1999 Annual Report to
Shareholders)
Report of Independent Auditors (incorporated by reference from
page 35 of the 1999 Annual Report to Shareholders).
(2) Financial Statement Schedules -
Schedule II Valuation and qualifying accounts
All other schedules (Schedules I, III, IV and V) 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,
1999.
6
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DONALDSON COMPANY, INC.
(Registrant)
Date: October 29, 1999 By: /s/ Norman C. Linnell
---------------- -------------------------------------
Norman C. Linnell
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. Guillaum Bastiaens Director
- ------------------------------------
F. Guillaume Bastiaens
*Paul B. Burke Director
- ------------------------------------
Paul B. Burke
*Janet M. Dolan Director
- ------------------------------------
Janet M. Dolan
*Jack W. Eugster Director
- ------------------------------------
Jack W. Eugster
*John F. Grundhofer Director
- ------------------------------------
John F. Grundhofer
*Kendrick B. Melrose Director
- ------------------------------------
Kendrick B. Melrose
*S. Walter Richey Director
- ------------------------------------
S. Walter Richey
*Stephen W. Sanger Director
- ------------------------------------
Stephen W. Sanger
*By /s/ Norman C. Linnell Date: October 29, 1999
- ------------------------------------
Norman C. Linnell
*As attorney-in-fact
7
<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 CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (A) DEDUCTIONS (B) PERIOD
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1999:
Allowance for doubtful accounts
deducted from accounts receivable $ 3,696 $ 959 $ (43) $ (271) $ 4,341
======= ======= ===== ========= =======
Warranty Reserves $15,599 $ 2,174 $ (6,765) $11,008
======= ======= ========= =======
Year ended July 31, 1998:
Allowance for doubtful accounts
deducted from accounts receivable $ 4,094 $ 413 $(136) $ (675) $ 3,696
======= ======= ===== ========= =======
Warranty Reserves $18,772 $ 6,685 $ (9,858) $15,599
======= ======= ========= =======
Year ended July 31, 1997:
Allowance for doubtful accounts
deducted from accounts receivable $ 3,695 $ 894 $(161) $ (334) $ 4,094
======= ======= ===== ========= =======
Warranty Reserves $12,593 $11,644 $ (5,465) $18,772
======= ======= ========= =======
</TABLE>
- ------------------
Note A -- Foreign currency translation losses (gains) recorded directly to
equity.
Note B -- Bad debts charged to allowance, net of recoveries.
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<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 Form 10-Q for the Second Quarter ended
January 31, 1998)
* 3-B -- By-laws of Registrant as currently in effect (Filed as Exhibit 3-B to
Form 10-Q for the Second Quarter ended January 31, 1999)
* 4 -- **
* 4-A -- Preferred Stock Amended and Restated Rights Agreement (Filed as
Exhibit 4.1 to Form 8-K Report Dated January 12, 1996)
*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 ESOP Restoration Plan as Amended and Restated (Filed as
Exhibit 10-E to Form 10-Q for the Second Quarter ended January 31,
1998)***
*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 Form 10-Q for the Second Quarter ended
January 31, 1999)***
*10-H -- Independent Director Retirement and Benefit Plan as amended (Filed as
Exhibit 10-H to 1995 Form 10-K Report)***
10-I -- Excess Pension Plan (1999 Restatement)***
10-J -- Supplementary Executive Retirement Plan (1999 Restatement)***
*10-K -- 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-K
to 1998 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)***
*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 (Filed as Exhibit 10-N
to 1998 Form 10-K Report)***
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*10-O -- Salaried Employees' Pension Plan -- 1997 Restatement (Filed as
Exhibit l0-0 to 1997 10-K Report)***
*10-P -- Eighth Amendment of Employee Stock Ownership Plan Trust Agreement
1987 Restatement (Filed as Exhibit 10-P to 1997 10-K Report)***
10-Q -- Deferred Compensation and 401(K) Excess Plan (1999 Restatement)***
*10-R -- Note Purchase Agreement among Donaldson Company, Inc. and certain
listed Insurance Companies dated as of July 15, 1998 (Filed as
Exhibit 10-R to 1998 Form 10-K Report)
*10-S -- First Supplement to Note Purchase Agreement among Donaldson Company,
Inc. and certain listed Insurance Companies dated as of August 1,
1998 (Filed as Exhibit 10-S to 1998 Form 10-K Report)
10-T -- Deferred Stock Option Gain Plan (1999 Restatement)***
11 -- Computation of net earnings per share ("Earnings Per Share" in
"Summary of Significant Accounting Policies" in Note A, page 23 of
the 1999 Annual Report to Shareholders is incorporated herein by
reference)
13 -- Portions of Registrant's Annual Report to Shareholders for the year
ended July 31, 1999
21 -- Subsidiaries ("Wholly Owned Subsidiaries" and "Joint Ventures" on the
back cover of the 1999 Annual Report to Shareholders is incorporated
herein by reference)
23 -- Consent of Independent Auditors
24 -- Powers of Attorney
27 -- Financial Data Schedule
99 -- Factors affecting future operating results
* 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.
*** Denotes compensatory plan or management contract.
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.
10
EXHIBIT 10.I
DONALDSON COMPANY, INC.
EXCESS PENSION PLAN
(1999 RESTATEMENT)
As Amended and Restated Effective as of July 30, 1999
<PAGE>
DONALDSON COMPANY, INC.
EXCESS PENSION PLAN
(1999 RESTATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. ESTABLISHMENT AND PURPOSE.........................................1
1.1. Establishment
1.2. Purpose
SECTION 2. DEFINITIONS.......................................................2
2.1. Account
2.2. Affiliate
2.3. Beneficiary
2.4. Board
2.5. Change of Control
2.5.1. Affiliate
2.5.2. Beneficial Owner
2.5.3. Exchange Act
2.5.4 Person
2.6. Code
2.7. Committee
2.8. Company
2.9. Compensation
2.10. Compensation Credit
2.11. Deferral Credit
2.12. Deferred Compensation Plan
2.13. Disability, Disabled
2.14. Effective Date
2.15. Eligible Employee
2.16. ERISA
2.17. Participant
2.18. Pay Credit
2.19. Pension Account Balance
2.20. Pension Plan
2.21. Plan
2.22. Plan Year
2.23. Termination of Employment
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2.24. Vested
SECTION 3. ELIGIBILITY AND PARTICIPATION.....................................6
3.1. Eligibility
3.2. Commencement of Participation
3.3. Termination of Participation
3.4. Overriding Exclusion
SECTION 4. CREDITED AMOUNTS..................................................7
4.1. Initial Credit
4.2. Compensation
4.3. 415 Credit
4.4. Vesting
SECTION 5. TIME AND MANNER OF PAYMENTS.......................................8
5.1. Time of Payment
5.2. Manner of Payment
5.3. Changes in Time and Manner of Payment
5.4. Change in Control Distributions
5.5. Acceleration of Payments
5.5.1. When Available
5.5.2. Forfeiture
5.6. Death Benefit
5.7. Beneficiary Designation
SECTION 6. ACCOUNT..........................................................10
6.1. Participant Accounts
6.2. Investment of Accounts
6.3. Charges Against Accounts
SECTION 7. FUNDING..........................................................11
7.1. Funding
7.2. Corporate Obligation
SECTION 8. FORFEITURE OF BENEFITS...........................................12
SECTION 9. ADMINISTRATION...................................................13
-ii-
<PAGE>
9.1. Authority
9.2. Liability
9.3. Procedures
9.4. Claim for Benefits
9.5. Claims Procedure
9.5.1. Original Claim
9.5.2. Claims Review Procedure
9.5.3. General Rules
9.6. Payments upon Imposition of Federal or State Taxes
9.7. Legal Fees
9.8. Errors in Computations
SECTION 10. MISCELLANEOUS....................................................16
10.1. Not an Employment Contract
10.2. Nontransferability
10.3. Tax Withholding
10.4. Expenses
10.5. Governing Law
10.6. Amendment and Termination
10.7. Rules of Interpretation
-iii-
<PAGE>
DONALDSON COMPANY, INC.
EXCESS PENSION PLAN
(1999 RESTATEMENT)
SECTION 1
ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. Effective as of July 30, 1999, Donaldson Company, Inc.
hereby amends and restates its unfunded, nonqualified deferred compensation plan
for a select group of highly compensated employees known as the "DONALDSON
COMPANY, INC. EXCESS PENSION PLAN".
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 July 30, 1999. 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. PURPOSE. The purpose of this Plan is to enable the Company to replace
benefits that will not be paid to a select group of management or highly
compensated employees under the Donaldson Company, Inc. Salaried Employees'
Pension Plan because of: (i) the limitation on benefits under section 415 of the
Code, (ii) the compensation limitation under section 401(a)(17) of the Code, and
(iii) the voluntary deferral of compensation under the nonqualified deferred
compensation plan maintained by Donaldson Company, Inc. known as the Donaldson
Company, Inc. Deferred Compensation and 401(k) Excess Plan and prior
nonqualified deferred compensation arrangements.
<PAGE>
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings, unless a
different meaning is plainly required by the context. Any masculine terminology
used in the Plan shall also include the feminine gender and the definition of
any terms in the singular shall also include the plural.
2.1. ACCOUNT -- the account established under this Plan for a Participant
pursuant to Section 6.1.
2.2. AFFILIATE -- a business entity which is under "common control" with the
Company or which is a member of an "affiliated service group" that includes the
Company, as those terms are defined in section 414(b), (c) and (m) 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" or "affiliated service group" business entity but which is
otherwise affiliated with the Company, subject to such limitations as the
Committee may impose.
2.3. BENEFICIARY -- any person or entity validly designated by the Participant
in accordance with Section 5 to receive the benefits, if any, payable from the
Participant's Account after the Participant's death. Designated persons or
entities shall not be considered Beneficiaries until the death of the
Participant.
2.4. BOARD -- the Board of Directors of the Company.
2.5. CHANGE OF CONTROL -- a "Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such
a Beneficial Owner in connection with a transaction described
in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for
election by the Company's stockholders was
-2-
<PAGE>
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or
(c) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions. Solely for
purposes of this Section 2.5, the following words and phrases shall have the
following meanings:
2.5.1. AFFILIATE -- an "affiliate" within the meaning of Rule 12b-2
promulgated under Section 12 of the Exchange Act.
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2.5.2. BENEFICIAL OWNER -- a "beneficial owner" within the meaning of
Rule 13d-3 under the Exchange Act.
2.5.3. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended
from time to time.
2.5.4 PERSON -- a "person" within the meaning of Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
2.6. 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.
2.7. COMMITTEE -- the Human Resources Committee of the Board of Directors of the
Company.
2.8. COMPANY -- Donaldson Company, Inc. and, except in determining under Section
2.5 hereof whether or not any Change in Control has occurred, shall include any
successor by merger, purchase or otherwise.
2.9. COMPENSATION -- the amount of remuneration paid to an Eligible Employee
that was treated as "Compensation" for the purpose of calculating Pay Credits.
2.10. COMPENSATION CREDIT -- any amount credited to an Eligible Employee in
accordance with Section 4.1.
2.11. DEFERRAL CREDIT -- any amount credited to an Eligible Employee under
Section 4.1, 4.2 or 4.3 of the Deferred Compensation Plan.
2.12. DEFERRED COMPENSATION PLAN -- the nonqualified deferred compensation plan
known as the "Donaldson Company, Inc. Deferred Compensation and 401(k) Excess
Plan," as amended from time to time.
2.13. DISABILITY, DISABLED -- a physical or mental impairment which constitutes
total and permanent disability and during which the Eligible Employee is not
receiving any payments of an Early Retirement Pension or a Vested Benefit under
the Pension Plan, and the Eligible Employee either:
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(a) is eligible to receive long-term disability benefits under the
Company'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 Eligible Employee, 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.
2.14. EFFECTIVE DATE -- August 31, 1997. The amended and restated Plan document
as set forth herein is effective as of July 30, 1999.
2.15. ELIGIBLE EMPLOYEE -- any executive employee of the Company or its
Affiliates who, for the Plan Year at issue, meets all of the requirements of
Section 3.1.
2.16. ERISA -- the Employee Retirement Income Security Act of 1974, including
applicable regulations for the specified section of ERISA. Any reference in this
Plan 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.
2.17. PARTICIPANT -- an Eligible Employee or a former Eligible Employee of the
Company or its Affiliates who has any amount credited to his or her Account in
this Plan.
2.18. PAY CREDIT -- a pay-related amount credited to the Pension Account Balance
of a Participant under the Pension Plan.
2.19. PENSION ACCOUNT BALANCE -- the Participant's "Account Balance" in the
Pension Plan, as defined under by Pension Plan.
2.20. PENSION PLAN -- the tax-qualified pension plan known as the "Donaldson
Company, Inc. Salaried Employees' Pension Plan (1997 Restatement)," as amended
from time to time.
2.21. PLAN -- the Donaldson Company, Inc. Excess Pension Plan as set forth
herein, and as the same may be amended from time to time.
2.22. PLAN YEAR -- the period commencing on August 31, 1997 and ending July 31,
1998, and thereafter, the twelve (12) consecutive month period ending on any
July 31.
2.23. TERMINATION OF EMPLOYMENT -- the complete severance of an employee's
employment relationship with the Company and all Affiliates, if any, for any
reason other than the employee's death or Disability.
2.24. VESTED -- nonforfeitable.
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SECTION 3
ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBILITY. An executive employee of the Company or its Affiliates shall
be an Eligible Employee for a Plan Year if the executive employee is
affirmatively selected by the Committee, and:
(a) the employee is entitled to a Pay Credit for the Plan Year and
(i) the employee's rate of Compensation for the Plan Year
exceeds the annual compensation limit then in effect
under Code section 401(a)(17), or
(ii) the employee elects to have a portion of his or her
Compensation credited as a "Deferral Credit" under
the Deferred Compensation Plan, or
(b) the employee has a Termination of Employment during the Plan
Year, and the Pension Plan benefit payable to the employee at
the earliest opportunity following such Termination of
Employment is limited by reason of the limitation on benefits
under Code section 415.
Committee selections shall continue in effect until rescinded by the Committee.
The Committee may rescind its selection of an Eligible Employee and discontinue
an employee's active participation in the Plan at any time.
3.2. COMMENCEMENT OF PARTICIPATION. An Eligible Employee shall become a
Participant in the Plan when the Eligible Employee is first credited with any
amount pursuant to Section 4.
3.3. TERMINATION OF PARTICIPATION. A person shall cease to be a Participant as
soon as all amounts credited to the Participant's Account have been paid in
full.
3.4. OVERRIDING EXCLUSION. Notwithstanding anything apparently to the contrary
in this Plan or in any written communication, summary, resolution or document or
oral communication, no individual shall be a Participant in this Plan, develop
benefits under this Plan or be entitled to receive benefits under this Plan
(either for the employee or his or her survivors) unless such individual is a
member of a select group of management or highly compensated employees (as that
expression is used in ERISA). If a court of competent jurisdiction, any
representative of the U.S. Department of Labor or any other governmental,
regulatory or similar body makes any direct or indirect, formal or informal,
determination that an individual is not a member of a select group of management
or highly compensated employees (as that expression is used in ERISA), such
individual shall not be (and shall not have ever been) a Participant in this
Plan at any time. If any person not so defined has been erroneously treated as a
Participant in this Plan, upon discovery of such error such person's erroneous
participation shall immediately terminate AB INITIO and upon demand such person
shall be obligated to reimburse the Company for all amounts erroneously paid to
him or her.
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SECTION 4
CREDITED AMOUNTS
4.1. INITIAL CREDIT. The Account of each person who is an Eligible Employee on
the Effective Date shall be credited as of the Effective Date with an
additional, one-time Compensation Credit equal to the difference between the
initial amount actually credited to the Eligible Employee's Pension Account
Balance as of August 31, 1997 pursuant to Section 1.3.1(b) of the Pension Plan,
and the amount that would have been so credited if the Eligible Employee's
accrued benefit under the Pension Plan as of August 1, 1997 had been determined
without regard to the compensation limit under section 401(a)(17) of the Code
and without excluding any compensation deferred under a nonqualified deferred
compensation plan maintained by the Company.
4.2. COMPENSATION. The Account of each employee who is an Eligible Employee for
a Plan Year shall be credited with a Compensation Credit for that Plan Year
equal to the amount, if any, of the Pay Credits the Eligible Employee did not
receive under the Pension Plan, but would have been entitled to receive under
the Pension Plan for that Plan Year if:
(a) the Eligible Employee had not elected to have Deferral Credits
credited to his or her account under the Deferred Compensation
Plan; and
(b) the Eligible Employee's Compensation for purposes of the
Pension Plan was not limited by the annual compensation limit
under section 401(a)(17) of the Code.
4.3. 415 CREDIT. The Eligible Employee's Account, for the Plan Year in which an
Eligible Employee's Termination of Employment occurs, also shall be credited
with a one-time Compensation Credit equal to the difference, if any, between the
amount that would be payable to the Eligible Employee under the Pension Plan if
the Eligible Employee received his or her entire benefit under the Pension Plan
in the form of a single lump sum distribution at the earliest opportunity
following such Termination of Employment, and the amount that would have been so
payable if the limitation on benefits under Code section 415 did not apply. In
the event a former Participant is rehired after receiving a payment under this
Plan and the individual later becomes entitled to another payment from this
Plan, the amount credited pursuant to this Section 4.3 shall be reduced (but not
to less than zero) by any amounts previously credited under this Section.
4.4. VESTING. Subject to the forfeiture provisions of Section 8, the Account of
a Participant shall be 100% Vested at all times after the Participant becomes
Vested in his or her benefits under the Pension Plan.
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SECTION 5
TIME AND MANNER OF PAYMENTS
5.1. TIME OF PAYMENT. Payment of a Participant's Account under the Plan will
commence as soon as administratively feasible following the occurrence of the
earliest of the following events:
(a) death,
(b) Disability, or
(c) the date of distribution selected by the Participant in
writing at a time and on a form prescribed by the Committee.
5.2. MANNER OF PAYMENT. A Participant's Account will be paid in cash to the
Participant in either a single lump sum payment or in annual installments of not
more than fifteen (15) years. The Participant must elect a manner of payment at
the time the Participant elects his or her date of distribution pursuant to
Section 5.1(c). In the event no election was made by the Participant, payment
shall be in a single lump sum.
5.3. CHANGES IN TIME AND MANNER OF PAYMENT. Notwithstanding the foregoing, a
Participant may make a new election concerning selection of the time and form of
payment authorized pursuant to this Section 5.3 (the "New Election") in
accordance with the following terms and conditions, unless waived or modified by
the Committee:
(a) A New Election shall only be permitted once and must be made
and become effective as hereinafter provided, if at all, prior
to the Participant's Termination of Employment, death or
Disability, whichever happens first;
(b) A New Election shall become effective twelve months after it
is received by the Company; and
(c) If any of the events set forth in Section 5.1 of the Plan
occur prior to the effective date of a New Election with
respect to previously credited deferrals, then payments shall
be paid hereunder to or with respect to the Participant
according to the elections in effect at the time of the event.
5.4. CHANGE IN CONTROL DISTRIBUTIONS. Notwithstanding any other provision of
this Section 5, a Participant or Beneficiary will receive a distribution of his
or her entire Account if a Change in Control occurs. Distribution of the entire
Account shall be made on the date of the Change in Control. Such distribution
shall be made in a lump sum cash payment.
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<PAGE>
5.5. ACCELERATION OF PAYMENTS.
5.5.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving
installments may receive an accelerated payment of his or her entire Account
(after reduction for the forfeiture described in Section 5.6.2). To receive such
an accelerated payment, the Participant or Beneficiary must file a written
payment application with the Committee. Payment of the accelerated payment
(after reduction for the forfeiture described in Section 5.6.2) shall be made as
soon as administratively feasible following the approval of a completed
application by the Committee. Such accelerated payment shall be made in a lump
sum cash payment. The amount of the accelerated payment shall be equal to the
value of the Account as of such distribution date (after reduction for the
forfeiture described below).
5.5.2. FORFEITURE. Upon the approval of an accelerated payment, there
shall be irrevocably forfeited from the Account of the Participant or
Beneficiary an amount equal to six percent (6%) of the Account. In addition, if
the Participant is an active employee at the time of the accelerated payment,
the Participant will not be an Eligible Employee under this Plan for two (2)
years following such accelerated payment.
5.6. DEATH BENEFIT. In the event of a Participant's death, the Company shall pay
the amount of the Participant's Account as of the date of death (as adjusted
from time to time pursuant to Section 6.2) in a lump sum or in installments, as
previously elected by the Participant, to the Participant's designated
Beneficiary as soon as administratively feasible. In the event no election was
made by the Participant, payment shall be in a single lump sum.
5.7. BENEFICIARY DESIGNATION. A Participant shall submit to the Company upon
initial designation as an Eligible Employee in the Plan, and at such other times
as the Participant desires, on a form provided by the Committee, a written
designation of the beneficiary or beneficiaries to whom payment of the
Participant's Account under the Plan shall be made in the event of the
Participant's death. Beneficiary designations shall become effective only when
received by the Company. Beneficiary designations first received by the Company
after the Participant's death, and any designations in effect at the time a
valid subsequent designation is received by the Company, shall be invalid and
have no effect.
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SECTION 6
ACCOUNT
6.1. PARTICIPANT ACCOUNTS. The Committee shall cause a bookkeeping account to be
kept in the name of each Participant which shall reflect the value of the
Compensation Credits and any Initial Credits, and any earnings thereon, credited
to a Participant. Compensation Credits other than the initial credit described
in Section 4.1 shall be credited to a Participant's Account as of the last day
of the Plan Year to which they relate, or, if the Participant dies or elects to
commence distribution of his or her Account prior to such last day, at such time
as the Committee shall direct.
6.2. INVESTMENT OF ACCOUNTS. Amounts credited to a Participant's Account will be
adjusted as of the last day of each Plan Year (beginning July 31, 1998) to the
same extent that an equal amount would be adjusted if it was part of the
Participant's Pension Account Balance for the Plan Year.
6.3. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's
bookkeeping account any payments made to the Participant or the Participant's
Beneficiary in accordance with Section 5.
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SECTION 7
FUNDING
7.1. FUNDING. The Company and its Affiliates shall be responsible for paying all
benefits due hereunder. For the purpose of facilitating the payment of benefits
due hereunder, the Company may (but shall not be required to) establish and
maintain a grantor trust pursuant to an Agreement between the Company and a
trustee selected by the Company; provided, however, that any such grantor trust
must be structured so that it does not result in any federal income tax
consequences to any Participant until distributions under Section 5 are actually
received. The Company may contribute to a grantor trust thereby created such
amounts as it may from time to time determine.
7.2. CORPORATE OBLIGATION. Neither the officers nor any member of the Board of
Directors of the Company or any of its Affiliates in any way secures or
guarantees the payment of any benefit or amount which may become due and payable
hereunder to or with respect to any Participant. Each Participant and other
person entitled at anytime to payments hereunder shall look solely to the assets
of the Company and its Affiliates for such payments as an unsecured, general
creditor. Nothing herein shall be construed to give a Participant, Beneficiary
or any other person or persons any right, title, interest or claim in or to any
specific asset, fund, reserve, account or property of any kind whatsoever owned
by the Company or in which it may have any right, title or interest now or in
the future. After benefits shall have been paid to or with respect to a
Participant and such payment purports to cover in full the benefit hereunder,
such former Participant or other person or persons, as the case may be, shall
have no further right or interest in the other assets of the Company and its
Affiliates in connection with this Plan.
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<PAGE>
SECTION 8
FORFEITURE OF BENEFITS
All unpaid benefits under this Plan shall be permanently forfeited if the
Committee determines that the Participant, either before or after the
Participant's Termination of Employment or Disability, or before the
Participant's death:
(a) engaged in criminal or fraudulent conduct resulting in a
hardship to the Company or an Affiliate; or
(b) breached the Participant's written employment agreement with
the Company or an Affiliate.
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SECTION 9
ADMINISTRATION
9.1. AUTHORITY. The Plan shall be administered by the Committee, which shall
have full discretionary power and authority to administer and interpret the Plan
and to determine all factual and legal questions under the Plan, including but
not limited to the entitlement of Participants and Beneficiaries, and the amount
of their respective interests. The Committee may 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 Company, such functions assigned to
the Committee hereunder as it may from time to time deem advisable. Until
withdrawn or redelegated by the Committee, all of the Committee's power and
authority under this Section 9.1 shall be deemed delegated to the Company's Vice
President in charge of executive compensation, excluding only the power and
authority to act in such a way as would materially increase the cost of the
Plan.
9.2. LIABILITY. No member of the Committee and no director or member of the
management of the Company or its Affiliates shall be liable to any persons for
any actions taken under the Plan, or for any failure to effect any of the
objective or purposes of the Plan, by reason of insolvency or otherwise.
9.3. PROCEDURES. The Committee may from time to time adopt such rules and
procedures as it deems appropriate to assist in the administration of the Plan.
9.4. CLAIM FOR BENEFITS. No employee or other person shall have any claim or
right to payment of any amount hereunder until payment has been authorized and
directed by the Committee.
9.5. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set
forth in this Section 9.5 shall be the claims procedure for the resolution of
disputes and disposition of claims arising under the Plan.
9.5.1. ORIGINAL CLAIM. Any employee, former employee, or Beneficiary of
such employee or former employee may, if the employee, former employee or
Beneficiary 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 the 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 (180) days from the date
the claim was filed) to 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 on which the denial is based,
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(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.
9.5.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of
notice that the 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 (120) from the date the request for review was filed) to
reach a decision on the request for review.
9.5.3. 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 decisions on original claims shall be made by the
Committee and 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 copies of all notices given to the claimant.
(e) The decision of the Committee on an original claim or 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 the claimant's representative shall
have a reasonable opportunity to review a copy of this Plan
Statement and all other pertinent documents in the possession
of the Company and its Affiliates.
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<PAGE>
9.6. PAYMENTS UPON IMPOSITION OF FEDERAL OR STATE TAXES. If any Participant is
determined to be subject to federal or state income tax on any amount accrued on
his or her behalf under this Plan prior to the time of payment hereunder,
federal or state taxes attributable to the amount determined to be so taxable
shall be distributed by the Plan to such Participant. An amount accrued on his
or her behalf under this Plan shall be determined to be subject to federal
income tax upon the earliest of:
(i) a final determination by the United States Internal
Revenue Service addressed to the Participant which is
not appealed to the courts;
(ii) a final determination by the United States Tax Court
or any other Federal Court affirming any such
determination by the Internal Revenue Service; or
(iii) an opinion by the Tax Counsel of the Company,
addressed to the Company that, by reason of Treasury
Regulations, amendments to the Internal Revenue Code,
published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts
accrued on a Participant's behalf hereunder are
subject to federal or state income tax prior to
payment.
The Company shall undertake at its sole expense to defend any tax claims
described herein which are asserted by the Internal Revenue Service or by any
state revenue authority against any Participant, including attorney fees and
costs of appeal, and shall have the sole authority to determine whether or not
to appeal any determination made by the Internal Revenue Service, by any state
revenue authority or by a lower court. The Company also agrees to reimburse any
Participant for any interest or penalties in respect of federal or state tax
claims hereunder upon receipt of documentation of same.
9.7. LEGAL FEES. If the Company does not pay the benefits required under the
terms of the Plan for reasons other than the insolvency of the Company, the
Company agrees to reimburse any Participant for all legal fees incurred in
enforcing his or her claim to benefits under the Plan.
9.8. ERRORS IN COMPUTATIONS. The Committee shall not be liable or responsible
for any error in the computation of any benefit payable to or with respect to
any Participant resulting from any misstatement of fact made by the Participant
or by or on behalf of any Beneficiary to whom such benefit shall be payable,
directly or indirectly, to the Committee, and used by the Committee in
determining the benefit. The Committee shall not be obligated or required to
increase the benefit payable to or with respect to such Participant which, on
discovery of the misstatement, is found to be understated as a result of such
misstatement of the participant. However, the benefit of any Participant which
is overstated by reason of any such misstatement or any other reason shall be
reduced to the amount appropriate in view of the truth (and to recover any prior
overpayment).
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<PAGE>
SECTION 10
MISCELLANEOUS
10.1. NOT AN EMPLOYMENT CONTRACT. This Plan is not and shall not be deemed to
constitute a contract of employment between the Company and any employee or
other person, nor shall anything herein contained be deemed to give any employee
or other person any right to be retained in the Company's employ or in any way
limit or restrict the Company's right or power to discharge any employee or
other person at any time and to treat him without regard to the effect which
such treatment might have upon the employee as a Participant in the Plan.
10.2. NONTRANSFERABILITY. A Participant's rights and interest under the Plan,
including amounts payable, may not be assigned, alienated, pledged or
transferred except, in the event of a Participant's death to his Beneficiary. No
benefit payable under this Plan shall be subject to attachment, garnishment,
execution following judgment or other legal process before actual payment to the
Participant or Beneficiary.
10.3. TAX WITHHOLDING. The Company shall withhold the amount of any federal,
state or local income tax or other tax required to be withheld by the Company
under applicable law with respect to any amount payable under the Plan. The
Participant shall not be liable for any tax withholding.
10.4. EXPENSES. All expenses of administering the Plan shall be borne by the
Company.
10.5. GOVERNING LAW. Except to the extent that federal law is controlling, the
Plan shall be construed and enforced in accordance with and governed by the laws
of the State of Minnesota.
10.6. AMENDMENT AND TERMINATION. The Company reserves the power to unilaterally
amend this Plan at any time, either prospectively or retroactively or both:
(a) in any respect by resolution of its 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 Company).
The Committee may likewise terminate or curtail the benefits of this Plan both
with regard to persons expecting to receive benefits in the future and persons
already receiving benefits at the time of such action; provided, however, that
the Committee may not amend or terminate the Plan with respect to benefits that
have accrued and are vested pursuant to Section 4 in any manner that reduces the
amount of such benefits or alters the effect of any Participant election
previously filed with the Company. No modification of the terms of this Plan
shall be effective unless it is in writing and signed on behalf of the Company
by a person authorized to execute such writing. No oral representation
concerning the interpretation or effect of this Plan shall be effective to amend
the Plan.
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<PAGE>
10.7. RULES OF INTERPRETATION. The titles given to the various sections of this
Plan are inserted for convenience of reference only and are not part of this
Plan, and they shall not be considered in determining the purpose, meaning or
intent of any provision hereof. This Plan shall be construed and this Plan shall
be administered to create an unfunded plan providing deferred compensation to a
select group of management or highly compensated employees so that it is exempt
from the requirements of Parts 2, 3 and 4 of Title I of ERISA and qualifies for
a form of simplified, alternative compliance with the reporting and disclosure
requirements of Part 1 of Title I of ERISA.
Date: DONALDSON COMPANY, INC.
--------------------
By
--------------------------------------
Chief Executive Officer
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EXHIBIT 10.J
DONALDSON COMPANY, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1999 RESTATEMENT)
As Amended and Restated Effective July 30, 1999
<PAGE>
DONALDSON COMPANY, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1999 RESTATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. ESTABLISHMENT AND PURPOSE.........................................1
1.1. Establishment
1.2. Purpose
SECTION 2. DEFINITIONS.......................................................2
2.1. Account
2.2. Actuarial Equivalent
2.3. Affiliate
2.4. Basic Retirement Plan Benefits
2.5. Beneficiary
2.6. Board
2.7. Change of Control
2.7.1. Affiliate
2.7.2. Beneficial Owner
2.7.3. Exchange Act
2.7.4. Person
2.8. Code
2.9. Committee
2.10. Company
2.11. Compensation
2.12. Deferral Credit
2.13. Deferred Compensation Plan
2.14. Disability, Disabled
2.15. Early Retirement Factor
2.16. Effective Date
2.17. Eligible Employee
2.18. ERISA
2.19. Final Average Compensation
2.20. Participant
2.21. Pension Plan
2.22. Pension Service
2.23. Plan
2.24. Plan Year
2.25. Termination of Employment
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2.26. Vested
SECTION 3. ELIGIBILITY AND PARTICIPATION.....................................8
3.1. Eligibility
3.2. Commencement of Participation
3.3. Termination of Participation
3.4. Overriding Exclusion
SECTION 4. CREDITED AMOUNTS..................................................9
4.1. Normal Retirement Benefit
4.2. Early Retirement Benefit
4.3. Disability or Death Benefit
4.4. Vesting
SECTION 5. TIME AND MANNER OF PAYMENTS......................................10
5.1. Time of Payment
5.2. Manner of Payment
5.3. Changes in Time and Manner of Payment
5.4. Change in Control Distributions
5.5. Acceleration of Payments
5.5.1. When Available
5.5.2. Forfeiture
5.6. Death Benefit
5.7. Beneficiary Designation
SECTION 6. ACCOUNT..........................................................12
6.1. Participant Accounts
6.2. Investment of Accounts
6.3. Charges Against Accounts
SECTION 7. FUNDING..........................................................13
7.1. Funding
7.2. Corporate Obligation
SECTION 8. FORFEITURE OF BENEFITS...........................................14
SECTION 9. ADMINISTRATION...................................................15
9.1. Authority
9.2. Liability
9.3. Procedures
9.4. Claim for Benefits
9.5. Claims Procedure
9.5.1. Original Claim
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9.5.2. Claims Review Procedure
9.5.3. General Rules
9.6. Payments upon Imposition of Federal or State Taxes
9.7. Legal Fees
9.8. Errors in Computations
SECTION 10. MISCELLANEOUS....................................................18
10.1. Not an Employment Contract
10.2. Nontransferability
10.3. Tax Withholding
10.4. Expenses
10.5. Governing Law
10.6. Amendment and Termination
10.7. Rules of Interpretation
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DONALDSON COMPANY, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(1999 RESTATEMENT)
SECTION 1
ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. Effective as of July 30, 1999, Donaldson Company, Inc.
hereby amends and restates its nonqualified compensation plan for a select group
of highly compensated employees known as the "DONALDSON COMPANY, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN".
1.2. PURPOSE. The purpose of this Plan is to enable the Company to provide
supplemental retirement benefits to a select group of management or highly
compensated employees such that the sum of the supplemental benefits, certain
other retirement benefits provided by Company, and benefits provided by prior
employers, will not be less than a predetermined portion of the employee's final
average compensation.
<PAGE>
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings, unless a
different meaning is plainly required by the context. Any masculine terminology
used in the Plan shall also include the feminine gender and the definition of
any terms in the singular shall also include the plural.
2.1. ACCOUNT -- the compensation account established under this Plan for a
Participant pursuant to Section 6.1.
2.2. ACTUARIAL EQUIVALENT -- a benefit of equivalent value computed on the basis
of actuarial tables, factors and assumptions set forth in Appendix C to the
Donaldson Company, Inc. Salaried Employees' Pension Plan.
2.3. AFFILIATE -- a business entity which is under "common control" with the
Company or which is a member of an "affiliated service group" that includes the
Company, as those terms are defined in section 414(b), (c) and (m) 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" or "affiliated service group" business entity but which is
otherwise affiliated with the Company, subject to such limitations as the
Committee may impose.
2.4. BASIC RETIREMENT PLAN BENEFITS -- the single lump sum value of the benefits
payable under all of the following plans, determined as of the date of the
Eligible Employee's Termination of Employment, death or Disability, whichever
happens first (or if the value of a plan cannot be determined as of that date,
as of the valuation date for such plan that immediately precedes or follows such
Termination of Employment, death or Disability, whichever happens first, as
determined by the Committee), and subject to the limitations, if any, set forth
below:
(a) Donaldson Company, Inc. Employee Stock Ownership Plan
(including PAYSOP);
(b) Donaldson Company, Inc. Salaried Employees' Pension Plan;
(c) Donaldson Company, Inc. Excess Pension Plan;
(d) Donaldson Company, Inc. Retirement Savings Plan (including
profit sharing plan), taking into account only benefits
attributable to vested employer matching contributions;
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(e) Donaldson Company, Inc. Deferred Compensation and 401(k)
Excess Plan, taking into account only benefits attributable to
Company Credits;
(f) Donaldson Company, Inc. ESOP Restoration Plan;
(g) Any qualified or non-qualified retirement plan, program or
arrangement provided by the Company or an Affiliate and not
listed above, taking into account only vested benefits
attributable to employer contributions;
(h) Any qualified or non-qualified retirement plan, program or
arrangement provided by a prior employer, taking into account
only vested benefits attributable to employer contributions.
For purposes of paragraphs (g) and (h) above, "employer contributions" does not
include pre-tax contributions to a tax-qualified retirement plan elected by an
Eligible Employee in lieu of current compensation under a 401(k) arrangement, or
any other amount contributed due to an Eligible Employee's election to defer
compensation. If prior to the earliest of the Eligible Employee's Termination of
Employment, death or Disability the Eligible Employee received a distribution of
any benefits that, but for the distribution, would have been included in the
Eligible Employee's Basic Retirement Plan Benefits, such Basic Retirement Plan
Benefits shall be increased by the amount of such distribution, plus interest
thereon at a rate to be determined by the Committee. In the event any of the
foregoing plans do not provide for payment in a single lump sum, the benefit
taken into account for purposes of this Section 2.4 shall be the single lump sum
Actuarial Equivalent of the benefit payable under such plan.
2.5. BENEFICIARY -- any person or entity validly designated by the Participant
in accordance with Section 5 to receive the benefits, if any, payable under the
Plan with respect to the Participant after the Participant's death. Designated
persons or entities shall not be considered Beneficiaries until the death of the
Participant.
2.6. BOARD -- the Board of Directors of the Company.
2.7. CHANGE OF CONTROL -- a "Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such
a Beneficial Owner in connection with a transaction described
in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the date hereof,
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constitute the Board and any new director (other than a
director whose initial assumption of office is in connection
with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or
election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote
of at least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or whose
appointment, election or nomination for election was
previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions. Solely for
purposes of this Section 2.7, the following words and phrases shall have the
following meanings:
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2.7.1. AFFILIATE -- an "affiliate" within the meaning of Rule 12b-2
promulgated under Section 12 of the Exchange Act.
2.7.2. BENEFICIAL OWNER -- a "beneficial owner" within the meaning of
Rule 13d-3 under the Exchange Act.
2.7.3. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended
from time to time.
2.7.4. PERSON -- a "person" within the meaning of Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
2.8. 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.
2.9. COMMITTEE -- the Human Resources Committee of the Board of Directors of the
Company.
2.10. COMPANY -- Donaldson Company, Inc. and, except in determining under
Section 2.7 hereof whether or not any Change in Control has occurred, shall
include any successor by merger, purchase or otherwise.
2.11. COMPENSATION -- the amount of remuneration paid to an Eligible Employee
that was treated as "Compensation" within the meaning of the Donaldson Company,
Inc. Excess Pension Plan (modified as described in subsections (a) and (b) of
Section 4.2 of such plan), subject, however to the following:
(a) annual bonuses shall be included in the year they are earned,
not the year they are paid;
(b) amounts paid under a non-qualified plan of deferred
compensation shall not be included (e.g., payments of deferred
salary or bonus).
2.12. DEFERRAL CREDIT -- any amount credited to an Eligible Employee under
Section 4.1, 4.2 or 4.3 of the Deferred Compensation Plan.
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2.13. DEFERRED COMPENSATION PLAN -- the nonqualified deferred compensation plan
known as the "Donaldson Company, Inc. Deferred Compensation and 401(k) Excess
Plan," as amended from time to time.
2.14. DISABILITY, DISABLED -- a physical or mental impairment which constitutes
total and permanent disability and during which the Eligible Employee is not
receiving any payments of an Early Retirement Pension or a Vested Benefit under
the Pension Plan, and the Eligible Employee either:
(a) is eligible to receive long-term disability benefits under the
Company'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 Eligible Employee, 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.
2.15. EARLY RETIREMENT FACTOR -- a one-sixth of one percent reduction for each
month, or portion thereof, that the Participant's Termination of Employment
precedes the Participant's attainment of age 62.
2.16. EFFECTIVE DATE -- July 30, 1999.
2.17. ELIGIBLE EMPLOYEE -- any senior officer of the Company who meets all of
the requirements of Section 3.1.
2.18. ERISA -- the Employee Retirement Income Security Act of 1974, including
applicable regulations for the specified section of ERISA. Any reference in this
Plan 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.
2.19. FINAL AVERAGE COMPENSATION -- the Participant's average annual
Compensation for the highest three consecutive Plan Years out of the most recent
ten Plan Years, ending with the Plan Year in which the earliest of the
Participant's Termination of Employment, death or Disability, occurs.
2.20. PARTICIPANT -- an Eligible Employee or a former Eligible Employee who has
not received all of the benefits to which he or she is entitled under this Plan.
2.21. PENSION PLAN -- the tax-qualified pension plan known as the "Donaldson
Company, Inc. Salaried Employees' Pension Plan (1997 Restatement)," as amended
from time to time.
2.22. PENSION SERVICE -- the Participant's "Benefit Service" as defined in the
Pension Plan.
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2.23. PLAN -- the Donaldson Company, Inc. Supplemental Executive Retirement Plan
as set forth herein, and as the same may be amended from time to time.
2.24. PLAN YEAR -- the twelve (12) consecutive month period ending on any July
31.
2.25. TERMINATION OF EMPLOYMENT -- the complete severance of an employee's
employment relationship with the Company and all Affiliates, if any, for any
reason other than the employee's death or Disability.
2.26. VESTED -- nonforfeitable.
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SECTION 3
ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBILITY. A senior officer of the Company who is affirmatively selected
by the Committee shall be an Eligible Employee and shall participate in the
Plan. Committee selections shall continue in effect until rescinded by the
Committee. The Committee may rescind its selection and thereby discontinue a
senior officer's active participation in the Plan at any time. If any amendment
or restatement of the Plan increases the cost of the benefits payable to a
senior officer, the senior officer's selection will be deemed rescinded
immediately prior to the effective date of the amendment or restatement, unless
reauthorized by the Committee or its delegate. If a senior officer's selection
is rescinded (or deemed rescinded), the benefit, if any, provided by this Plan
shall be calculated pursuant to the terms of the Plan in effect when the
rescission (or deemed rescission) took effect, using only the Participant's
compensation through that time, but calculating any offset for other benefits
using the amount of such other benefits at the time of the person's actual
Termination of Employment.
3.2. COMMENCEMENT OF PARTICIPATION. An Eligible Employee shall become a
Participant in the Plan when the Eligible Employee is first affirmatively
selected as required by Section 3.1.
3.3. TERMINATION OF PARTICIPATION. A person shall cease to be a Participant as
soon as all amounts payable to the Participant have been paid in full.
3.4. OVERRIDING EXCLUSION. Notwithstanding anything apparently to the contrary
in this Plan or in any written communication, summary, resolution or document or
oral communication, no individual shall be a Participant in this Plan, develop
benefits under this Plan or be entitled to receive benefits under this Plan
(either for the employee or his or her survivors) unless such individual is a
member of a select group of management or highly compensated employees (as that
expression is used in ERISA). If a court of competent jurisdiction, any
representative of the U.S. Department of Labor or any other governmental,
regulatory or similar body makes any direct or indirect, formal or informal,
determination that an individual is not a member of a select group of management
or highly compensated employees (as that expression is used in ERISA), such
individual shall not be (and shall not have ever been) a Participant in this
Plan at any time. If any person not so defined has been erroneously treated as a
Participant in this Plan, upon discovery of such error such person's erroneous
participation shall immediately terminate AB INITIO and upon demand such person
shall be obligated to reimburse the Company for all amounts erroneously paid to
him or her.
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SECTION 4
CREDITED AMOUNTS
4.1. NORMAL RETIREMENT BENEFIT. A Participant whose Termination of Employment
occurs on or after the date the Participant attains age 62 and completes at
least ten (10) years of Pension Service shall be credited with a Normal
Retirement Benefit equal to (a) minus (b):
(a) the product of (i), (ii) and (iii):
(i) 30%
(ii) Years of Pension Service, limited to twenty (20)
(iii) Final Average Compensation
(b) the lump sum value of the Participant's Basic Retirement Plan
Benefits.
4.2. EARLY RETIREMENT BENEFIT. A Participant whose Termination of Employment
occurs after the Participant has completed at least fifteen (15) years of
Pension Service and attained age 55, but before the date the Participant attains
age 62 shall, in lieu of any other benefit under this Plan, be credited with an
Early Retirement Benefit equal to the amount determined in the same manner as
provided in Section 4.1 above, except that the product in Section 4.1(a) will
include a fourth factor:
(iv) Early Retirement Factor
(Example: If a Participant retires early at age 60, the product in Section
4.1(a) would be further multiplied by .96.)
4.3. DISABILITY OR DEATH BENEFIT. A Participant who becomes Disabled prior to
his or her Termination of Employment and after completing at least fifteen (15)
years of Pension Service and before the date he or she attains age 62, or who
dies prior to both the Participant's Termination of Employment and Disability,
shall, in lieu of any other benefit under this Plan, be credited with a
Disability or Death Benefit equal to the amount determined in the same manner as
provided in Section 4.2, taking into account only Pension Service through the
date of Disability or death, and determining the Early Retirement Factor based
on the amount, if any, by which the Participant's Disability or death precedes
the Participant's attainment of age 62.
4.4. VESTING. The applicable amount determined in accordance with this Section 4
shall be credited to the Participant's Account at the time of the Participant's
Termination of Employment, death or Disability, as applicable. Subject to the
forfeiture provisions of Section 8, any Account established for a Participant
under this Plan shall be 100% Vested at all times.
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SECTION 5
TIME AND MANNER OF PAYMENTS
5.1. TIME OF PAYMENT. Payment of a Participant's Account under the Plan will
commence as soon as administratively feasible following the occurrence of the
earliest of the following events:
(a) death,
(b) Disability, or
(c) the date of distribution selected by the Participant in
writing at a time and on a form prescribed by the Committee.
5.2. MANNER OF PAYMENT. A Participant's Account shall be paid in cash to the
Participant in either a single lump sum payment or in annual installments of not
more than fifteen (15) years. The Participant must elect a manner of payment at
the time the Participant elects his or her date of distribution pursuant to
Section 5.1(c). In the event no election was made by the Participant, payment
shall be in a single lump sum.
5.3. CHANGES IN TIME AND MANNER OF PAYMENT. Notwithstanding the foregoing, a
Participant may make a new election concerning selection of the time and form of
payment authorized pursuant to this Section 5 (the "New Election") in accordance
with the following terms and conditions, unless waived or modified by the
Committee:
(a) A New Election shall only be permitted once and must be made
and become effective as hereinafter provided, if at all, prior
to the Participant's Termination of Employment, death or
Disability, whichever happens first;
(b) A New Election shall become effective twelve months after it
is received by the Company; and
(c) If any of the events set forth in Section 5.1 of the Plan
occur prior to the effective date of a New Election, then
payments shall be paid hereunder to or with respect to the
Participant according to the elections in effect at the time
of the event.
5.4. CHANGE IN CONTROL DISTRIBUTIONS. In the event of a Change in Control, a
Participant whose Termination of Employment, death or Disability has not
occurred nevertheless shall be credited with the benefit, if any, that would
have been credited to the Participant's Account if the Participant's Termination
of Employment had occurred on the date of the Change in Control. Distribution of
the entire Account payable to a Participant, or to the Beneficiary of a deceased
Participant, shall be made on the day the Change in Control occurs
notwithstanding any other provisions of this Section 5. Such distribution shall
be made in a lump sum cash payment.
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5.5. ACCELERATION OF PAYMENTS.
5.5.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving
installments may receive an accelerated payment of his or her entire Account
(after reduction for the forfeiture described in Section 5.6.2). To receive such
an accelerated payment, the Participant or Beneficiary must file a written
payment application with the Committee. Payment of the accelerated payment
(after reduction for the forfeiture described in Section 5.6.2) shall be made as
soon as administratively feasible following the approval of a completed
application by the Committee. Such accelerated payment shall be made in a lump
sum cash payment. The amount of the accelerated payment shall be equal to the
value of the Account as of such distribution date (after reduction for the
forfeiture described below).
5.5.2. FORFEITURE. Upon the approval of an accelerated payment, there
shall be irrevocably forfeited from the Account of the Participant or
Beneficiary an amount equal to six percent (6%) of the Account. In addition, if
the Participant is an active employee at the time of the accelerated payment,
the Participant will not be an Eligible Employee under this Plan for two (2)
years following such accelerated payment.
5.6. DEATH BENEFIT. In the event of a Participant's death, the Company shall pay
the amount of the Participant's Account as of the date of death (as adjusted
from time to time pursuant to Section 6.2) in a lump sum or in installments, as
previously elected by the Participant, to the Participant's designated
Beneficiary as soon as administratively feasible. In the event no election was
made by the Participant, payment shall be in a single lump sum.
5.7. BENEFICIARY DESIGNATION. A Participant shall submit to the Company upon
initial designation as an Eligible Employee in the Plan, and at such other times
as the Participant desires, on a form provided by the Committee, a written
designation of the beneficiary or beneficiaries to whom payment of the
Participant's Account under the Plan shall be made in the event of the
Participant's death. Beneficiary designations shall become effective only when
received by the Company. Beneficiary designations first received by the Company
after the Participant's death, and any designations in effect at the time a
valid subsequent designation is received by the Company, shall be invalid and
have no effect.
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SECTION 6
ACCOUNT
6.1. PARTICIPANT ACCOUNTS. The Committee shall cause a bookkeeping account to be
kept in the name of each Participant which shall reflect the value of the Normal
Retirement Benefit, Early Retirement Benefit, Disability or Death Benefit
credited to the Participant at the time of the Participant's Termination of
Employment, death or Disability, whichever applies.
6.2. INVESTMENT OF ACCOUNTS. When the manner of payment is annual installments,
the Participant's Account will be adjusted as of the last day of each Plan Year
to the same extent that an equal amount would be adjusted if it had been
credited to the subfund under the Deferred Compensation Plan that provides a
fixed rate of return.
6.3. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's
bookkeeping account any payments made to the Participant or the Participant's
Beneficiary in accordance with Section 5.
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SECTION 7
FUNDING
7.1. FUNDING. The Company and its Affiliates shall be responsible for paying all
benefits due hereunder. For the purpose of facilitating the payment of benefits
due hereunder, the Company may (but shall not be required to) establish and
maintain a grantor trust pursuant to an Agreement between the Company and a
trustee selected by the Company; provided, however, that any such grantor trust
must be structured so that it does not result in any federal income tax
consequences to any Participant until distributions under Section 5 are actually
received. The Company may contribute to a grantor trust thereby created such
amounts as it may from time to time determine.
7.2. CORPORATE OBLIGATION. Neither the officers nor any member of the Board of
Directors of the Company or any of its Affiliates in any way secures or
guarantees the payment of any benefit or amount which may become due and payable
hereunder to or with respect to any Participant. Each Participant and other
person entitled at anytime to payments hereunder shall look solely to the assets
of the Company and its Affiliates for such payments as an unsecured, general
creditor. Nothing herein shall be construed to give a Participant, Beneficiary
or any other person or persons any right, title, interest or claim in or to any
specific asset, fund, reserve, account or property of any kind whatsoever owned
by the Company or in which it may have any right, title or interest now or in
the future. After benefits shall have been paid to or with respect to a
Participant and such payment purports to cover in full the benefit hereunder,
such former Participant or other person or persons, as the case may be, shall
have no further right or interest in the other assets of the Company and its
Affiliates in connection with this Plan.
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SECTION 8
FORFEITURE OF BENEFITS
All unpaid benefits under this Plan shall be permanently forfeited if the
Committee determines that the Participant, either before or after the
Participant's Termination of Employment or Disability, or before the
Participant's death:
(a) engaged in criminal or fraudulent conduct resulting in a
hardship to the Company or an Affiliate; or
(b) breached the Participant's written employment agreement with
the Company or an Affiliate.
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SECTION 9
ADMINISTRATION
9.1. AUTHORITY. The Plan shall be administered by the Committee, which shall
have full discretionary power and authority to administer and interpret the Plan
and to determine all factual and legal questions under the Plan, including but
not limited to the entitlement of Participants and Beneficiaries, and the amount
of their respective interests. The Committee may 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 Company, such functions assigned to
the Committee hereunder as it may from time to time deem advisable. Until
withdrawn or redelegated by the Committee, all of the Committee's power and
authority under this Section 9.1, and all of the Committee's power and authority
to reauthorize continued participation following an amendment or restatement
described in Section 3.1, shall be deemed delegated to the Company's Vice
President in charge of executive compensation, excluding only the power and
authority to act in such a way as would materially increase the cost of the
Plan.
9.2. LIABILITY. No member of the Committee and no director or member of the
management of the Company or its Affiliates shall be liable to any persons for
any actions taken under the Plan, or for any failure to effect any of the
objective or purposes of the Plan, by reason of insolvency or otherwise.
9.3. PROCEDURES. The Committee may from time to time adopt such rules and
procedures as it deems appropriate to assist in the administration of the Plan.
9.4. CLAIM FOR BENEFITS. No employee or other person shall have any claim or
right to payment of any amount hereunder until payment has been authorized and
directed by the Committee.
9.5. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set
forth in this Section 9.5 shall be the claims procedure for the resolution of
disputes and disposition of claims arising under the Plan.
9.5.1. ORIGINAL CLAIM. Any employee, former employee, or Beneficiary of
such employee or former employee may, if the employee, former employee or
Beneficiary 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 the 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 (180) days from the date
the claim was filed) to 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,
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(b) the specific references to the pertinent provisions of this
Plan 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.
9.5.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of
notice that the 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 (120) from the date the request for review was filed) to
reach a decision on the request for review.
9.5.3. 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 decisions on original claims shall be made by the
Committee and 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 copies of all notices given to the claimant.
(e) The decision of the Committee on an original claim or 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 the claimant's representative shall
have a reasonable opportunity to review a copy of this
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<PAGE>
Plan Statement and all other pertinent documents in the
possession of the Company and its Affiliates.
9.6. PAYMENTS UPON IMPOSITION OF FEDERAL OR STATE TAXES. If any Participant is
determined to be subject to federal or state income tax on any amount accrued on
his or her behalf under this Plan prior to the time of payment hereunder,
federal or state taxes attributable to the amount determined to be so taxable
shall be distributed by the Plan to such Participant. An amount accrued on his
or her behalf under this Plan shall be determined to be subject to federal
income tax upon the earliest of:
(i) a final determination by the United States Internal
Revenue Service addressed to the Participant which is
not appealed to the courts;
(ii) a final determination by the United States Tax Court
or any other Federal Court affirming any such
determination by the Internal Revenue Service; or
(iii) an opinion by the Tax Counsel of the Company,
addressed to the Company that, by reason of Treasury
Regulations, amendments to the Internal Revenue Code,
published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts
accrued on a Participant's behalf hereunder are
subject to federal or state income tax prior to
payment.
The Company shall undertake at its sole expense to defend any tax claims
described herein which are asserted by the Internal Revenue Service or by any
state revenue authority against any Participant, including attorney fees and
costs of appeal, and shall have the sole authority to determine whether or not
to appeal any determination made by the Internal Revenue Service, by any state
revenue authority or by a lower court. The Company also agrees to reimburse any
Participant for any interest or penalties in respect of federal or state tax
claims hereunder upon receipt of documentation of same.
9.7. LEGAL FEES. If the Company does not pay the benefits required under the
terms of the Plan for reasons other than the insolvency of the Company, the
Company agrees to reimburse any Participant for all legal fees incurred in
enforcing his or her claim to benefits under the Plan.
9.8. ERRORS IN COMPUTATIONS. The Committee shall not be liable or responsible
for any error in the computation of any benefit payable to or with respect to
any Participant resulting from any misstatement of fact made by the Participant
or by or on behalf of any Beneficiary to whom such benefit shall be payable,
directly or indirectly, to the Committee, and used by the Committee in
determining the benefit. The Committee shall not be obligated or required to
increase the benefit payable to or with respect to such Participant which, on
discovery of the misstatement, is found to be understated as a result of such
misstatement of the participant. However, the benefit of any Participant which
is overstated by reason of any such misstatement or any other reason shall be
reduced to the amount appropriate in view of the truth (and to recover any prior
overpayment).
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<PAGE>
SECTION 10
MISCELLANEOUS
10.1. NOT AN EMPLOYMENT CONTRACT. This Plan is not and shall not be deemed to
constitute a contract of employment between the Company and any employee or
other person, nor shall anything herein contained be deemed to give any employee
or other person any right to be retained in the Company's employ or in any way
limit or restrict the Company's right or power to discharge any employee or
other person at any time and to treat him without regard to the effect which
such treatment might have upon the employee as a Participant in the Plan.
10.2. NONTRANSFERABILITY. A Participant's rights and interest under the Plan,
including amounts payable, may not be assigned, alienated, pledged or
transferred except, in the event of a Participant's death to his Beneficiary. No
benefit payable under this Plan shall be subject to attachment, garnishment,
execution following judgment or other legal process before actual payment to the
Participant or Beneficiary.
10.3. TAX WITHHOLDING. The Company shall withhold the amount of any federal,
state or local income tax or other tax required to be withheld by the Company
under applicable law with respect to any amount payable under the Plan. The
Participant shall not be liable for any tax withholding.
10.4. EXPENSES. All expenses of administering the Plan shall be borne by the
Company.
10.5. GOVERNING LAW. Except to the extent that federal law is controlling, the
Plan shall be construed and enforced in accordance with and governed by the laws
of the State of Minnesota.
10.6. AMENDMENT AND TERMINATION. The Company reserves the power to unilaterally
amend this Plan at any time, either prospectively or retroactively or both:
(a) in any respect by resolution of its 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 Company).
The Committee may likewise terminate or curtail the benefits of this Plan both
with regard to persons expecting to receive benefits in the future and persons
already receiving benefits at the time of such action; provided, however, that
the Committee may not amend or terminate the Plan with respect to benefits that
have accrued and are vested pursuant to Section 4 in any manner that reduces the
amount of such benefits or alters the effect of any Participant election
previously filed with the Company. No modification of the terms of this Plan
shall be effective unless it is in writing and signed on behalf of the Company
by a person authorized to execute such writing. No oral
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<PAGE>
representation concerning the interpretation or effect of this Plan shall be
effective to amend the Plan.
10.7. RULES OF INTERPRETATION. The titles given to the various sections of this
Plan are inserted for convenience of reference only and are not part of this
Plan, and they shall not be considered in determining the purpose, meaning or
intent of any provision hereof. This Plan shall be construed and this Plan shall
be administered to create an unfunded plan providing benefits to a select group
of management or highly compensated employees so that it is exempt from the
requirements of Parts 2, 3 and 4 of Title I of ERISA and qualifies for a form of
simplified, alternative compliance with the reporting and disclosure
requirements of Part 1 of Title I of ERISA.
Date: DONALDSON COMPANY, INC.
--------------------
By
--------------------------------------
Chief Executive Officer
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EXHIBIT 10.Q
DONALDSON COMPANY, INC.
DEFERRED COMPENSATION AND 401(k) EXCESS PLAN
(1999 RESTATEMENT)
As Amended and Restated Effective as of July 30, 1999
<PAGE>
DONALDSON COMPANY, INC.
DEFERRED COMPENSATION AND 401(k) EXCESS PLAN
(1999 RESTATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. ESTABLISHMENT AND PURPOSE.........................................1
1.1. Establishment
1.2. Purpose
SECTION 2. DEFINITIONS.......................................................2
2.1. Account
2.2. Affiliate
2.3. Beneficiary
2.4. Board
2.5. Change of Control
2.5.1. Affiliate
2.5.2. Beneficial Owner
2.5.3. Exchange Act
2.5.4 Person
2.6. Code
2.7. Committee
2.8. Company
2.9. Company Credit
2.10. Deferral Credit
2.11. Disability, Disabled
2.12. Effective Date
2.13. Eligible Employee
2.14. ERISA
2.15. ESOP
2.16. Fixed Matching Credit
2.17. 401(k) Plan
2.19. Participant
2.20. Plan
2.21. Plan Year
2.22. Profit Sharing Credit
2.23. Recognized Compensation
2.24. Termination of Employment
2.25. Valuation Date
2.26. Variable Credit
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<PAGE>
2.27. Vested
2.28. Year of Service
SECTION 3. ELIGIBILITY AND PARTICIPATION.....................................8
3.1. Eligibility
3.2. Commencement of Participation
3.3. Termination of Participation
3.4. Overriding Exclusion
SECTION 4. DEFERRED COMPENSATION AMOUNTS.....................................9
4.1. Salary Deferral Credits
4.2. Bonus Deferral Credits
4.3. Excess Deferral Credits
4.4. Long Term Incentive Deferral Credits.
4.5. Company Credits
4.6. Vesting
SECTION 5. TIME AND MANNER OF PAYMENTS......................................11
5.1. Time of Payment
5.2. Manner of Payment
5.3. Changes in Time and Manner of Payment
5.4. Hardship Distributions
5.4.1. When Available
5.4.2. Purposes
5.4.3. Limitations
5.5. Change in Control Distributions
5.6. Acceleration of Payments
5.6.1. When Available
5.6.2. Forfeiture
5.7. Death Benefit
5.8. Beneficiary Designation
SECTION 6. DEFERRED COMPENSATION ACCOUNT....................................14
6.1. Participant Accounts
6.2. Investment of Accounts
6.3. Assumption of Risk
6.4. Charges Against Accounts
SECTION 7. FUNDING..........................................................15
7.1. Funding
7.2. Corporate Obligation
SECTION 8. FORFEITURE OF BENEFITS...........................................16
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SECTION 9. ADMINISTRATION...................................................17
9.1. Authority
9.2. Liability
9.3. Procedures
9.4. Claim for Benefits
9.5. Claims Procedure
9.5.1. Original Claim
9.5.2. Claims Review Procedure
9.5.3. General Rules
9.6. Payments upon Imposition of Federal or State Taxes
9.7. Legal Fees
9.8. Errors in Computations
SECTION 10. MISCELLANEOUS....................................................20
10.1. Not an Employment Contract
10.2. Nontransferability
10.3. Tax Withholding
10.4. Expenses
10.5. Governing Law
10.6. Amendment and Termination
10.7. Rules of Interpretation
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<PAGE>
DONALDSON COMPANY, INC.
DEFERRED COMPENSATION AND 401(k) EXCESS PLAN
(1999 RESTATEMENT)
SECTION 1
ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. Effective as of December 21, 1997, Donaldson Company, Inc.
established a nonqualified, unfunded supplemental deferred compensation plan for
a select group of highly compensated employees known as the "DONALDSON COMPANY,
INC. DEFERRED COMPENSATION AND 401(k) EXCESS PLAN." Effective as of July 30,
1999, the Plan document is amended and restated to be as set forth herein.
1.2. PURPOSE. The purposes of this Plan are to enable the Company to supplement
the benefits for a select group of management or highly compensated employees
under the Donaldson Company, Inc. Retirement Savings Plan which will be reduced
because of the compensation limitation under section 401(a)(17) of the Code; to
provide a means whereby certain amounts payable by the Company to a select group
of management or highly compensated employees may be deferred to some future
period; and to attract and retain certain executive employees of outstanding
competence.
<PAGE>
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings, unless a
different meaning is plainly required by the context. Any masculine terminology
used in the Plan shall also include the feminine gender and the definition of
any terms in the singular shall also include the plural.
2.1. ACCOUNT -- the deferred compensation account established under this Plan
for a Participant pursuant to Section 6.1.
2.2. AFFILIATE -- a business entity which is under "common control" with the
Company or which is a member of an "affiliated service group" that includes the
Company, as those terms are defined in section 414(b), (c) and (m) 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" or "affiliated service group" business entity but which is
otherwise affiliated with the Company, subject to such limitations as the
Committee may impose.
2.3. BENEFICIARY -- any person or entity validly designated by the Participant
in accordance with Section 5 to receive the benefits, if any, payable from the
Participant's Account after the Participant's death. Designated persons or
entities shall not be considered Beneficiaries until the death of the
Participant.
2.4. BOARD -- the Board of Directors of the Company.
2.5. CHANGE OF CONTROL -- a "Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such
a Beneficial Owner in connection with a transaction described
in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for
election by the Company's stockholders was
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<PAGE>
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or
(c) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions. Solely for
purposes of this Section 2.5, the following words and phrases shall have the
following meanings:
2.5.1. AFFILIATE -- an "affiliate" within the meaning of Rule 12b-2
promulgated under Section 12 of the Exchange Act.
2.5.2. BENEFICIAL OWNER -- a "beneficial owner" within the meaning of
Rule 13d-3 under the Exchange Act.
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<PAGE>
2.5.3. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended
from time to time.
2.5.4 PERSON -- a "person" within the meaning of Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
2.6. 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.
2.7. COMMITTEE -- the Human Resources Committee of the Board of Directors of the
Company.
2.8. COMPANY -- Donaldson Company, Inc. and, except in determining under Section
2.5 hereof whether or not any Change in Control has occurred, shall include any
successor by merger, purchase or otherwise.
2.9. COMPANY CREDIT -- any amount credited to an Eligible Employee in accordance
with Section 4.5. Company Credits include Fixed Matching Credits, Variable
Credits and Profit Sharing Credits.
2.10. DEFERRAL CREDIT -- any amount credited to an Eligible Employee in
accordance with Sections 4.1, 4.2, 4.3 or 4.4.
2.11. DISABILITY, DISABLED -- a physical or mental impairment which constitutes
total and permanent disability and during which the Eligible Employee is not
receiving any payments of an Early Retirement Pension or a Vested Benefit under
the Pension Plan, and the Eligible Employee either:
(a) is eligible to receive long-term disability benefits under the
Company'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 Eligible Employee, 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.
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<PAGE>
2.12. EFFECTIVE DATE -- December 21, 1997. The amended Plan document as set
forth herein is effective as of July 30, 1999.
2.13. ELIGIBLE EMPLOYEE -- for purposes of Sections 4.1, 4.2, 4.3 and 4.4, the
officers of the Company who are selected by the Committee as provided in Section
3; for purposes of Section 4.3 only, any executive employee of the Company or
its Affiliates who, for the Plan Year at issue, meets all of the requirements of
Section 3.1.
2.14. ERISA -- the Employee Retirement Income Security Act of 1974, including
applicable regulations for the specified section of ERISA. Any reference in this
Plan 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.
2.15. ESOP -- the tax-qualified, stock bonus plan known as the "Donaldson
Company, Inc. Employee Stock Ownership Plan (1987 Restatement)."
2.16. FIXED MATCHING CREDIT -- any amount credited to an Eligible Employee in
accordance with Section 4.5(a).
2.17. 401(k) PLAN -- the tax-qualified, profit sharing plan known as the
"Donaldson Company, Inc. Retirement Savings Plan (1987 Restatement)."
2.18. LONG TERM INCENTIVE DEFERRAL CREDIT -- any amount credited to an Eligible
Employee in accordance with Section 4.4.
2.19. PARTICIPANT -- an Eligible Employee or a former Eligible Employee of the
Company or its Affiliates who has any amount credited to his or her Account in
this Plan.
2.20. PLAN -- the Donaldson Company, Inc. Deferred Compensation and 401(k)
Excess Plan as set forth herein, and as the same may be amended from time to
time.
2.21. PLAN YEAR -- the twelve (12) consecutive month period ending on any July
31.
2.22. PROFIT SHARING CREDIT -- any amount credited to an Eligible Employee in
accordance with Section 4.5(c).
2.23. RECOGNIZED COMPENSATION -- for purposes of Section 4.3 of the Plan, 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) and further determined without regard to any amounts paid or
reimbursed by the Employer for moving expenses incurred by the Participant (but
only to the extent that at the time of the payment it is reasonable to believe
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<PAGE>
that these amounts are deductible by the Participant under section 217 of the
Code); subject, however, to the following:
(a) INCLUDED ITEMS. In determining a Participant's Recognized
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
Retirement Savings Agreement, a cafeteria plan or any other
qualified cash or deferred arrangement under section 401(k) of
the Code.
(b) EXCLUDED ITEMS. In determining a Participant's Recognized
Compensation there shall be excluded all of the following: (i)
reimbursements or other expense allowances including foreign
service allowances, station allowances, foreign tax
equalization payment and other similar payments, (ii) welfare
and fringe benefits (both cash and noncash) including
third-party sick pay (i.e., short-term and long-term
disability insurance benefits), income imputed from insurance
coverages and premiums, employee discounts and other similar
amounts, payments for vacation or sick leave accrued but not
taken, final payments on account of Termination of Employment,
death or Disability (e.g., severance payments) and settlement
for accrued but unused vacation and sick leave, (iii) moving
expenses, and (iv) deferred compensation (both when deferred
and when received).
(c) ATTRIBUTION TO PERIODS. A Participant's Recognized
Compensation shall be considered attributable to the period in
which it is actually paid and not when earned or accrued;
provided, however, amounts earned but not paid in a Plan Year
because of the timing of pay periods and pay days may be
included in the Plan Year when earned if these amounts are
paid during the first few weeks of the next Plan Year, the
amounts are included on a uniform and consistent basis with
respect to all similarly situated Participants and no amount
is included in more than one Plan Year.
(d) EXCLUDED PERIODS. Amounts received after the Participant's
Termination of Employment, death or Disability shall not be
taken into account in determining a Participant's Recognized
Compensation.
(e) MULTIPLE EMPLOYERS. If a Participant is employed by more than
one Employer in a Plan Year, a separate amount of Recognized
Compensation shall be determined for each Employer.
2.24. TERMINATION OF EMPLOYMENT -- the complete severance of an employee's
employment relationship with the Company and all Affiliates, if any, for any
reason other than the employee's death or Disability.
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<PAGE>
2.25. VALUATION DATE -- each July 31 and each other day that the New York Stock
Exchange is open and conducting business, or such other date or dates as the
Committee may establish.
2.26. VARIABLE CREDIT -- any amount credited to an Eligible Employee in
accordance with Section 4.5(b).
2.27. VESTED -- nonforfeitable.
2.28. YEAR OF SERVICE -- a one year period of employment with the Company in
which the Participant completes at least 1,000 hours of service.
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<PAGE>
SECTION 3
ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBILITY. Any officer of the Company who is affirmatively selected by
the Committee shall be an Eligible Employee and may participate under the Plan
for purposes of Sections 4.1, 4.2, 4.3 and 4.4 until the earlier of the
officer's Termination of Employment, transfer to a non-officer position with the
Company or its Affiliates, death or Disability. Any executive employee of the
Company or its Affiliates whose rate of Recognized Compensation for the Plan
Year exceeds the annual compensation limit then in effect under Code section
401(a)(17), and who is affirmatively selected by the Committee, shall be an
Eligible Employee for that Plan Year and may participate under the Plan for
purposes of Section 4.3. The Committee may rescind its selection of an Eligible
Employee and discontinue an employee's or officer's active participation in the
Plan at any time.
3.2. COMMENCEMENT OF PARTICIPATION. An Eligible Employee shall become a
Participant in the Plan when the Eligible Employee is first credited with any
amount pursuant to Section 4.
3.3. TERMINATION OF PARTICIPATION. A person shall cease to be a Participant as
soon as all amounts credited to the Participant's Account have been paid in
full.
3.4. OVERRIDING EXCLUSION. Notwithstanding anything apparently to the contrary
in this Plan or in any written communication, summary, resolution or document or
oral communication, no individual shall be a Participant in this Plan, develop
benefits under this Plan or be entitled to receive benefits under this Plan
(either for the employee or his or her survivors) unless such individual is a
member of a select group of management or highly compensated employees (as that
expression is used in ERISA). If a court of competent jurisdiction, any
representative of the U.S. Department of Labor or any other governmental,
regulatory or similar body makes any direct or indirect, formal or informal,
determination that an individual is not a member of a select group of management
or highly compensated employees (as that expression is used in ERISA), such
individual shall not be (and shall not have ever been) a Participant in this
Plan at any time. If any person not so defined has been erroneously treated as a
Participant in this Plan, upon discovery of such error such person's erroneous
participation shall immediately terminate AB INITIO and upon demand such person
shall be obligated to reimburse the Company for all amounts erroneously paid to
him or her.
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<PAGE>
SECTION 4
DEFERRED COMPENSATION AMOUNTS
4.1. SALARY DEFERRAL CREDITS. An Eligible Employee may elect to have all or a
portion of the salary which the Eligible Employee would otherwise have received
and included in gross income credited to his or her Account. Such election must
comply with the rules and limits established by the Committee and must be made
by giving advance written notice to the Company on an election form approved by
the Committee. Elections with respect to salary earned during a pay period must
be received by the Company prior to the beginning of the pay period to which the
election applies. Participant elections will remain effective until the earlier
of: (i) the time a revised election is received and becomes effective, or (ii)
the following January 1. Revised elections will take effect on the first day of
the first pay period commencing after the pay period in which the election is
received by the Company.
4.2. BONUS DEFERRAL CREDITS. An Eligible Employee may elect to have all or a
portion of the annual bonus which the Eligible Employee would otherwise have
received and included in gross income credited to his or her Account. Such
election must comply with the rules and limits established by the Committee and
must be made by giving advance written notice to the Company on an election form
approved by the Committee. For the Plan Year beginning August 1, 1997 and all
subsequent Plan Years, elections with respect to bonus earned during a Plan Year
must be received by the Company prior to the April 1 of the Plan Year in which
the bonus was earned; provided, however, that the Committee may permit an
employee who becomes an Eligible Employee after April 1 of the Plan Year to make
an election for the remainder of that Plan Year effective with respect to
bonuses earned on or after the date the election is received.
4.3. EXCESS DEFERRAL CREDITS. An Eligible Employee may elect to have up to six
percent (6%) of Recognized Compensation which the Eligible Employee would
otherwise have received and included in gross income credited to his or her
Account. Elections under this Section 4.3 shall apply only to Recognized
Compensation earned after the Eligible Employee's Recognized Compensation for
the Plan Year has exceeded the annual compensation limit then in effect under
Code section 401(a)(17). Such election must be made by giving advance written
notice to the Company on an election form approved by the Committee. Elections
with respect to Recognized Compensation earned during a pay period must be
received by the Company prior to the beginning of the pay period to which the
election applies. Participant elections made by officers will remain effective
until a revised election is received and becomes effective.
4.4. LONG TERM INCENTIVE DEFERRAL CREDITS. An Eligible Employee may elect to
have all or a portion of the long term performance share award under the
Donaldson Company, Inc. 1991 Master Stock Compensation Plan (the "LTCP Plan")
which the Eligible Employee would otherwise have received and included in gross
income credited to his or her Account. Such election must comply with the rules
and limits established by the Committee and must be made by giving advance
written notice to the Company on an election form approved by the Committee.
Elections with respect to such long term performance share awards must be
received by the Company not less than one year
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<PAGE>
prior to the end of the "Incentive Cycle" (as defined in the LTCP Plan) with
respect to which the award was earned; provided, however, that the Committee may
permit an employee who becomes an Eligible Employee after the commencement of an
"Incentive Cycle" to submit an election with respect to the award for such
"Incentive Cycle" no later than 30 days after such employee becomes an Eligible
Employee.
4.5. COMPANY CREDITS.
(a) FIXED MATCHING CREDITS. Any Eligible Employee who elects
Deferral Credits in lieu of receiving Recognized Compensation
shall be credited with a Fixed Matching Credit to the Eligible
Employee's Account. The amount of an Eligible Employee's Fixed
Matching Credit shall equal the amount the Eligible Employee
would have received on the deferrals made under Sections 4.1,
4.2 and 4.3, as set forth in Section 3.2 of the ESOP, if such
deferrals had been made to the 401(k) Plan, without regard to
the annual compensation limit then in effect under Code
section 401(a)(17). Notwithstanding the foregoing, any
Eligible Employee who retires either during a Plan Year or
after the end of a Plan Year in which such Eligible Employee
is a Participant in this Plan and who receives a bonus after
the end of the Plan Year that was earned in the Plan Year in
which such Eligible Employee retired shall receive a Fixed
Matching Credit of three percent (3%) of the bonus amount in
such Eligible Employee's Account.
(b) VARIABLE CREDITS. Any Eligible Employee who elects Deferral
Credits in lieu of receiving Recognized Compensation may be
credited with a Variable Credit to the Eligible Employee's
Account. The amount of an Eligible Employee's Variable Credit
shall equal the amount the Eligible Employee would have
received on the deferrals made under Sections 4.1, 4.2 and
4.3, as set forth in Section 3.3 of the ESOP, if such
deferrals had been made to the 401(k) Plan, without regard to
the annual compensation limit then in effect under Code
section 401(a)(17).
(c) PROFIT SHARING CREDITS. The Board may, in its sole discretion,
cause the Account of an Eligible Employee to be credited with
Profit Sharing Credits for a Plan Year. Such Profit Sharing
Credits shall equal the amount the Eligible Employee would
have received if the profit sharing contribution to the 401(k)
Plan for that Eligible Employee had been made without regard
to the annual compensation limit then in effect under Code
section 401(a)(17), minus the amount of profit sharing
contributions actually made to the Eligible Employee's account
in the 401(k) Plan.
4.6. VESTING. Subject to the forfeiture provisions of Section 8, the Accounts of
all Participants shall be 100% Vested at all times.
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SECTION 5
TIME AND MANNER OF PAYMENTS
5.1. TIME OF PAYMENT. Payment of a Participant's Account under the Plan will
commence as soon as administratively feasible following the occurrence of the
earliest of the following events:
(a) death,
(b) Disability, or
(c) the date of distribution selected by the Participant in
writing at a time and on a form prescribed by the Committee.
Distribution of a Participant's Account attributable to Deferral Credits under
Sections 4.1, 4.2 and 4.4, and no other portion, may begin prior to the
Participant's Termination of Employment. In no event may payment of the portion
of a Participant's Account attributable to a Deferral Credit begin less than one
year after the date the Deferral Credit was first elected.
5.2. MANNER OF PAYMENT. A Participant's Account will be paid to the Participant
in either a single lump sum payment or in annual installments of not more than
fifteen (15) years. The Participant must elect a manner of payment at the time
the Participant elects his or her date of distribution pursuant to Section
5.1(c). In the event no election was made by the Participant, payment shall be
in a single lump sum. Payment of the portion of a Participant's Account
attributable to Deferral Credits other than Long Term Incentive Deferral Credits
shall be in cash. Payment of the portion of a Participant's Account attributable
to Long Term Incentive Deferral Credits shall be exclusively in shares of Common
Stock and cash for any fractional shares. Payment on or after the date certified
in writing by the Committee or its delegate as the date on which distributions
in stock of the portion of a Participant's Account attributable to Company
Credits are administratively feasible shall be exclusively in shares of Common
Stock and cash for any fractional shares. Payment prior to that certified date
of such portion of a Participant's Account shall be in cash.
5.3. CHANGES IN TIME AND MANNER OF PAYMENT. Notwithstanding the foregoing, a
Participant may make a new election concerning selection of the time and form of
payment authorized pursuant to this Section 5 (the "New Election") in accordance
with the following terms and conditions, unless waived or modified by the
Committee:
(a) A New Election shall only be permitted once and must be made
and become effective as hereinafter provided, if at all, prior
to the Participant's Termination of Employment, death or
Disability, whichever happens first;
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(b) A New Election shall become effective twelve months after it
is received by the Company; and
(c) If any of the events set forth in Section 5.1 of the Plan
occur prior to the effective date of a New Election with
respect to previously credited deferrals, then payments shall
be paid hereunder to or with respect to the Participant
according to the elections in effect at the time of the event.
5.4. HARDSHIP DISTRIBUTIONS.
5.4.1. WHEN AVAILABLE. A Participant may receive a hardship
distribution from the Deferral Credits in his or her Account if the Committee
determines that such hardship distribution is for a purpose described in Section
5.4.2 and the conditions in Section 5.4.3 have been fulfilled. To receive such a
distribution, the Participant must file a written hardship distribution
application with the Committee and furnish such documentation as the Committee
may require. In the application, the Participant shall specify the basis for the
distribution and the dollar amount to be distributed. If such hardship
distribution is approved by the Committee, distribution shall be made as soon as
administratively feasible following the approval of a completed application by
the Committee and such hardship distribution shall be made in a lump sum cash
payment. The amount of each hardship distribution shall be taken from the
portion of the Account attributable to the earliest enrollment (including
related earnings) first.
5.4.2. PURPOSES. Hardship distributions shall be allowed under Section
5.4.1 only if the Participant establishes that the hardship distribution is to
be made on account of an immediate and heavy financial need of the Participant
for which the Participant does not have other available resources.
5.4.3. LIMITATIONS. The amount of the hardship distribution shall not
exceed the amount of the Participant's proven immediate and heavy financial
need. A hardship distribution shall not be made after the death of the
Participant. The amount of approved hardship distribution shall not exceed the
value of the Account.
5.5. CHANGE IN CONTROL DISTRIBUTIONS. Notwithstanding any other provision of
this Section 5, a Participant or Beneficiary will receive a distribution of his
or her entire Account if a Change in Control occurs. Distribution of the entire
Account shall be made on the date of the Change in Control. Such distribution
shall be made in a single lump sum cash payment.
5.6. ACCELERATION OF PAYMENTS.
5.6.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving
installments may receive an accelerated payment of his or her entire Account
(after reduction for the forfeiture described in Section 5.6.2). To receive such
an accelerated payment, the Participant or Beneficiary must file a written
payment application with the Committee. Payment of the accelerated payment
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<PAGE>
(after reduction for the forfeiture described in Section 5.6.2) shall be made as
soon as administratively feasible following the approval of a completed
application by the Committee. Such accelerated payment shall be made in a lump
sum cash payment. The amount of the accelerated payment shall be equal to the
value of the Account as of such distribution date (after reduction for the
forfeiture described below).
5.6.2. FORFEITURE. Upon the approval of an accelerated payment, there
shall be irrevocably forfeited from the Account of the Participant or
Beneficiary an amount equal to six percent (6%) of the Account. In addition, if
the Participant is an active employee at the time of the accelerated payment,
the Participant will not be an Eligible Employee under this Plan for two (2)
years following such accelerated payment.
5.7. DEATH BENEFIT. In the event of a Participant's death, the Company shall pay
the amount of the Participant's Account as of the date of death (as adjusted
from time to time pursuant to Section 6.2) in a lump sum or in installments, as
previously elected by the Participant, to the Participant's designated
Beneficiary as soon as administratively feasible. In the event no election was
made by the Participant, payment shall be in a single lump sum.
5.8. BENEFICIARY DESIGNATION. A Participant shall submit to the Company upon
initial designation as an Eligible Employee in the Plan, and at such other times
as the Participant desires, on a form provided by the Committee, a written
designation of the beneficiary or beneficiaries to whom payment of the
Participant's Account under the Plan shall be made in the event of the
Participant's death. Beneficiary designations shall become effective only when
received by the Company. Beneficiary designations first received by the Company
after the Participant's death, and any designations in effect at the time a
valid subsequent designation is received by the Company, shall be invalid and
have no effect.
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<PAGE>
SECTION 6
DEFERRED COMPENSATION ACCOUNT
6.1. PARTICIPANT ACCOUNTS. The Committee shall cause a bookkeeping account to be
kept in the name of each Participant which shall reflect the value of the
Deferral Credits and Company Credits, and any earnings thereon, credited to a
Participant. Deferral Credits shall be credited to a Participant's Account as of
the date the amounts deferred otherwise would have become due or payable.
Company Credits shall be credited at such times as the Committee shall direct.
6.2. INVESTMENT OF ACCOUNTS. Amounts credited to a Participant's Account will be
adjusted for gains and losses to the same extent that an equal amount would be
adjusted if it had been invested as directed by the Participant in the subfund
or subfunds designated by the Committee.
6.3. ASSUMPTION OF RISK. The Participant, by electing to make deferrals under
this Plan, assumes all risk in connection with any decrease in value of the
Participant's Account.
6.4. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's
bookkeeping account any payments made to the Participant or the Participant's
Beneficiary in accordance with Section 5.
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<PAGE>
SECTION 7
FUNDING
7.1. FUNDING. The Company and its Affiliates shall be responsible for paying all
benefits due hereunder. For the purpose of facilitating the payment of benefits
due hereunder, the Company may (but shall not be required to) establish and
maintain a grantor trust pursuant to an Agreement between the Company and a
trustee selected by the Company; provided, however, that any such grantor trust
must be structured so that it does not result in any federal income tax
consequences to any Participant until distributions under Section 5 are actually
received. The Company may contribute to a grantor trust thereby created such
amounts as it may from time to time determine.
7.2. CORPORATE OBLIGATION. Neither the officers nor any member of the Board of
Directors of the Company or any of its Affiliates in any way secures or
guarantees the payment of any benefit or amount which may become due and payable
hereunder to or with respect to any Participant. Each Participant and other
person entitled at anytime to payments hereunder shall look solely to the assets
of the Company and its Affiliates for such payments as an unsecured, general
creditor. Nothing herein shall be construed to give a Participant, Beneficiary
or any other person or persons any right, title, interest or claim in or to any
specific asset, fund, reserve, account or property of any kind whatsoever owned
by the Company or in which it may have any right, title or interest now or in
the future. After benefits shall have been paid to or with respect to a
Participant and such payment purports to cover in full the benefit hereunder,
such former Participant or other person or persons, as the case may be, shall
have no further right or interest in the other assets of the Company and its
Affiliates in connection with this Plan.
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<PAGE>
SECTION 8
FORFEITURE OF BENEFITS
All unpaid benefits under this Plan accrued under Section 4.5 shall be
permanently forfeited if the Committee determines that the Participant, either
before or after the Participant's Termination of Employment or Disability, or
before the Participant's death:
(a) engaged in criminal or fraudulent conduct resulting in a
hardship to the Company or an Affiliate; or
(b) breached the Participant's written employment agreement with
the Company or an Affiliate.
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<PAGE>
SECTION 9
ADMINISTRATION
9.1. AUTHORITY. The Plan shall be administered by the Committee, which shall
have full discretionary power and authority to administer and interpret the Plan
and to determine all factual and legal questions under the Plan, including but
not limited to the entitlement of Participants and Beneficiaries, and the amount
of their respective interests. The Committee may 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 Company, such functions assigned to
the Committee hereunder as it may from time to time deem advisable. Until
withdrawn or redelegated by the Committee, all of the Committee's power and
authority under this Section 9.1 shall be deemed delegated to the Company's Vice
President in charge of executive compensation, excluding only the power and
authority to act in such a way as would materially increase the cost of the
Plan.
9.2. LIABILITY. No member of the Committee and no director or member of the
management of the Company or its Affiliates shall be liable to any persons for
any actions taken under the Plan, or for any failure to effect any of the
objective or purposes of the Plan, by reason of insolvency or otherwise.
9.3. PROCEDURES. The Committee may from time to time adopt such rules and
procedures as it deems appropriate to assist in the administration of the Plan.
9.4. CLAIM FOR BENEFITS. No employee or other person shall have any claim or
right to payment of any amount hereunder until payment has been authorized and
directed by the Committee.
9.5. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set
forth in this Section 9.5 shall be the claims procedure for the resolution of
disputes and disposition of claims arising under the Plan.
9.5.1. ORIGINAL CLAIM. Any employee, former employee, or Beneficiary of
such employee or former employee may, if the employee, former employee or
Beneficiary 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 the 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 (180) days from the date
the claim was filed) to 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 on which the denial is based,
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<PAGE>
(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.
9.5.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of
notice that the 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 (120) from the date the request for review was filed) to
reach a decision on the request for review.
9.5.3. 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 decisions on original claims shall be made by the
Committee and 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 copies of all notices given to the claimant.
(e) The decision of the Committee on an original claim or 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 the claimant's representative shall
have a reasonable opportunity to review
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<PAGE>
a copy of this Plan Statement and all other pertinent
documents in the possession of the Company and its Affiliates.
9.6. PAYMENTS UPON IMPOSITION OF FEDERAL OR STATE TAXES. If any Participant is
determined to be subject to federal or state income tax on any amount accrued on
his or her behalf under this Plan prior to the time of payment hereunder,
federal or state taxes attributable to the amount determined to be so taxable
shall be distributed by the Plan to such Participant. An amount accrued on his
or her behalf under this Plan shall be determined to be subject to federal
income tax upon the earliest of:
(i) a final determination by the United States Internal
Revenue Service addressed to the Participant which is
not appealed to the courts;
(ii) a final determination by the United States Tax Court
or any other Federal Court affirming any such
determination by the Internal Revenue Service; or
(iii) an opinion by the Tax Counsel of the Company,
addressed to the Company that, by reason of Treasury
Regulations, amendments to the Internal Revenue Code,
published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts
accrued on a Participant's behalf hereunder are
subject to federal or state income tax prior to
payment.
The Company shall undertake at its sole expense to defend any tax claims
described herein which are asserted by the Internal Revenue Service or by any
state revenue authority against any Participant, including attorney fees and
costs of appeal, and shall have the sole authority to determine whether or not
to appeal any determination made by the Internal Revenue Service, by any state
revenue authority or by a lower court. The Company also agrees to reimburse any
Participant for any interest or penalties in respect of federal or state tax
claims hereunder upon receipt of documentation of same.
9.7. LEGAL FEES. If the Company does not pay the benefits required under the
terms of the Plan for reasons other than the insolvency of the Company, the
Company agrees to reimburse any Participant for all legal fees incurred in
enforcing his or her claim to benefits under the Plan.
9.8. ERRORS IN COMPUTATIONS. The Committee shall not be liable or responsible
for any error in the computation of any benefit payable to or with respect to
any Participant resulting from any misstatement of fact made by the Participant
or by or on behalf of any Beneficiary to whom such benefit shall be payable,
directly or indirectly, to the Committee, and used by the Committee in
determining the benefit. The Committee shall not be obligated or required to
increase the benefit payable to or with respect to such Participant which, on
discovery of the misstatement, is found to be understated as a result of such
misstatement of the participant. However, the benefit of any Participant which
is overstated by reason of any such misstatement or any other reason shall be
reduced to the amount appropriate in view of the truth (and to recover any prior
overpayment).
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<PAGE>
SECTION 10
MISCELLANEOUS
10.1. NOT AN EMPLOYMENT CONTRACT. This Plan is not and shall not be deemed to
constitute a contract of employment between the Company and any employee or
other person, nor shall anything herein contained be deemed to give any employee
or other person any right to be retained in the Company's employ or in any way
limit or restrict the Company's right or power to discharge any employee or
other person at any time and to treat him without regard to the effect which
such treatment might have upon the employee as a Participant in the Plan.
10.2. NONTRANSFERABILITY. A Participant's rights and interest under the Plan,
including amounts payable, may not be assigned, alienated, pledged or
transferred except, in the event of a Participant's death to his Beneficiary. No
benefit payable under this Plan shall be subject to attachment, garnishment,
execution following judgment or other legal process before actual payment to the
Participant or Beneficiary.
10.3. TAX WITHHOLDING. The Company shall withhold the amount of any federal,
state or local income tax or other tax required to be withheld by the Company
under applicable law with respect to any amount payable under the Plan. The
Participant shall not be liable for any tax withholding.
10.4. EXPENSES. All expenses of administering the Plan shall be borne by the
Company.
10.5. GOVERNING LAW. Except to the extent that federal law is controlling, the
Plan shall be construed and enforced in accordance with and governed by the laws
of the State of Minnesota.
10.6. AMENDMENT AND TERMINATION. The Company reserves the power to unilaterally
amend this Plan at any time, either prospectively or retroactively or both:
(a) in any respect by resolution of its 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 Company).
The Committee may likewise terminate or curtail the benefits of this Plan both
with regard to persons expecting to receive benefits in the future and persons
already receiving benefits at the time of such action; provided, however, that
the Committee may not amend or terminate the Plan with respect to benefits that
have accrued and are vested pursuant to Section 4 in any manner that reduces the
amount of such benefits or alters the effect of any participant election
previously filed with the Company. No modification of the terms of this Plan
shall be effective unless it is in writing and signed on behalf of the Company
by a person authorized to execute such writing. No oral
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<PAGE>
representation concerning the interpretation or effect of this Plan shall be
effective to amend the Plan.
10.7. RULES OF INTERPRETATION. The titles given to the various sections of this
Plan are inserted for convenience of reference only and are not part of this
Plan, and they shall not be considered in determining the purpose, meaning or
intent of any provision hereof. This Plan shall be construed and this Plan shall
be administered to create an unfunded plan providing deferred compensation to a
select group of management or highly compensated employees so that it is exempt
from the requirements of Parts 2, 3 and 4 of Title I of ERISA and qualifies for
a form of simplified, alternative compliance with the reporting and disclosure
requirements of Part 1 of Title I of ERISA.
Date: DONALDSON COMPANY, INC.
-------------------
By
--------------------------------------
Chief Executive Officer
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EXHIBIT 10.T
DONALDSON COMPANY, INC.
DEFERRED STOCK OPTION GAIN PLAN
(1999 RESTATEMENT)
As Amended and Restated Effective as of July 30, 1999
<PAGE>
DONALDSON COMPANY, INC.
DEFERRED STOCK OPTION GAIN PLAN
(1999 RESTATEMENT)
TABLE OF CONTENTS
PAGE
SECTION 1. ESTABLISHMENT AND PURPOSE.........................................1
1.1. Establishment
1.2. Purpose
SECTION 2. DEFINITIONS.......................................................2
2.1. Account
2.2. Affiliate
2.3. Beneficiary
2.4. Board
2.5. Change of Control
2.5.1. Affiliate
2.5.2. Beneficial Owner
2.5.3. Exchange Act
2.5.4 Person
2.6. Committee
2.7. Common Stock
2.8. Company
2.9. Deferral Election
2.10. Deferred Stock Units
2.11. Disability, Disabled
2.12. Effective Date
2.13. Eligible Employee
2.14. Exercise Date
2.15. Participant
2.16. Plan
2.17. Plan Year
2.18. Termination of Employment
2.19. Vested
SECTION 3. ELIGIBILITY AND PARTICIPATION.....................................6
3.1. Eligibility
3.2. Commencement of Participation
3.3. Termination of Participation
3.4. Overriding Exclusion
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<PAGE>
SECTION 4. DEFERRED STOCK UNIT AMOUNTS.......................................7
4.1. Deferral Elections
4.2. Deferred Stock Units
4.3. Discretionary Credits
4.4. Dividend Credits
4.5. Vesting
SECTION 5. TIME AND MANNER OF PAYMENTS.......................................9
5.1. Time of Payment
5.2. Manner of Payment
5.3. Changes in Time and Manner of Payment
5.4. Change in Control Distributions
5.5. Acceleration of Payments
5.5.1. When Available
5.5.2. Forfeiture
5.6. Death Benefit
5.7. Beneficiary Designation
SECTION 6. DEFERRED STOCK UNIT ACCOUNTS.....................................11
6.1. Participant Accounts
6.2. Charges Against Accounts
SECTION 7. FUNDING..........................................................12
7.1. Funding
7.2. Corporate Obligation
SECTION 8. ADMINISTRATION...................................................13
8.1. Authority
8.2. Liability
8.3. Procedures
8.4. Claim for Benefits
8.5. Claims Procedure
8.5.1. Original Claim
8.5.2. Claims Review Procedure
8.5.3. General Rules
8.6. Payments upon Imposition of Federal or State Taxes
8.7. Legal Fees
8.8. Errors in Computations
SECTION 9. MISCELLANEOUS....................................................16
9.1. Not an Employment Contract
9.2. Nontransferability
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<PAGE>
9.3. Tax Withholding
9.4. Expenses
9.5. Governing Law
9.6. Amendment and Termination
9.7. Rules of Interpretation
-iii-
<PAGE>
DONALDSON COMPANY, INC.
DEFERRED STOCK OPTION GAIN PLAN
(1999 RESTATEMENT)
SECTION 1
ESTABLISHMENT AND PURPOSE
1.1. ESTABLISHMENT. Effective as of July 30, 1999, Donaldson Company, Inc.
hereby amends and restates its nonqualified elective deferral plan for a select
group of highly compensated employees known as the "DONALDSON COMPANY, INC.
DEFERRED STOCK OPTION GAIN PLAN."
1.2. PURPOSE. The purposes of this Plan are to allow a select group of
management and highly compensated employees of the Company to defer the receipt
of income that would otherwise be subject to income tax upon exercise of stock
options granted by the Company and to attract and retain certain executive
employees of outstanding competence.
<PAGE>
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings, unless a
different meaning is plainly required by the context. Any masculine terminology
used in the Plan shall also include the feminine gender and the definition of
any terms in the singular shall also include the plural.
2.1. ACCOUNT -- the deferred compensation account established under this Plan
for a Participant pursuant to Section 6.1.
2.2. AFFILIATE -- a business entity which is under "common control" with the
Company or which is a member of an "affiliated service group" that includes the
Company, as those terms are defined in section 414(b), (c) and (m) 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" or "affiliated service group" business entity but which is
otherwise affiliated with the Company, subject to such limitations as the
Committee may impose.
2.3. BENEFICIARY -- any person or entity validly designated by the Participant
in accordance with Section 5 to receive the benefits, if any, payable from the
Participant's Account after the Participant's death. Designated persons or
entities shall not be considered Beneficiaries until the death of the
Participant.
2.4. BOARD -- the Board of Directors of the Company.
2.5. CHANGE OF CONTROL -- a "Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(a) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such
a Beneficial Owner in connection with a transaction described
in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for
election by the Company's stockholders was
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approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or
(c) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity
or any parent thereof), in combination with the ownership of
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the
Company, at least 60% of the combined voting power of the
securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions. Solely for
purposes of this Section 2.5, the following words and phrases shall have the
following meanings:
2.5.1. AFFILIATE -- an "affiliate" within the meaning of Rule 12b-2
promulgated under Section 12 of the Exchange Act.
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2.5.2. BENEFICIAL OWNER -- a "beneficial owner" within the meaning of
Rule 13d-3 under the Exchange Act.
2.5.3. EXCHANGE ACT -- the Securities Exchange Act of 1934, as amended
from time to time.
2.5.4 PERSON -- a "person" within the meaning of Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
2.6. COMMITTEE -- the Human Resources Committee of the Board of Directors of the
Company.
2.7. COMMON STOCK -- the common stock of the Company.
2.8. COMPANY -- Donaldson Company, Inc. and, except in determining under Section
2.5 hereof whether or not any Change in Control has occurred, shall include any
successor by merger, purchase or otherwise.
2.9. DEFERRAL ELECTION -- an election to defer the receipt of gain on an option
to buy Common Stock made by an Eligible Employee in accordance with Section 4.1.
2.10. DEFERRED STOCK UNITS -- the units credited to a Participant's Account
pursuant to Section 4.2.
2.11. DISABILITY, DISABLED -- a physical or mental impairment which constitutes
total and permanent disability and during which the Eligible Employee is not
receiving any payments of an Early Retirement Pension or a Vested Benefit under
the Pension Plan, and the Eligible Employee either:
(a) is eligible to receive long-term disability benefits under the
Company'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 Eligible Employee, 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.
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<PAGE>
2.12. EFFECTIVE DATE -- July 25, 1997. The amended and restated Plan document as
set forth herein is effective as of July 30, 1999.
2.13. ELIGIBLE EMPLOYEE -- an officer of the Company who is selected by the
Committee as provided in Section 3.
2.14. EXERCISE DATE -- the date on which an Eligible Employee exercises an
option to purchase Common Stock that is subject to a Deferral Election; provided
however, that such date shall not be deemed to occur prior to the date on which
the Participant tenders mature shares of Common Stock in payment of the option
exercise price, by attestation to the ownership of shares. For the purpose of
this Plan, shares of Common Stock shall be considered mature if they have been
held by the Participant for at least six months and have not been used to pay
the exercise price for another stock option exercise during the six months prior
to their tender.
2.15. PARTICIPANT -- an Eligible Employee or a former Eligible Employee of the
Company or its Affiliates who has any amount credited to his Account in this
Plan.
2.16. PLAN -- the Donaldson Company, Inc. Stock Option Gain Deferral Plan as set
forth herein, and as the same may be amended from time to time.
2.17. PLAN YEAR -- the twelve (12) consecutive month period ending on any July
31.
2.18. TERMINATION OF EMPLOYMENT -- the complete severance of an employee's
employment relationship with the Company and all Affiliates, if any, for any
reason other than the employee's death or Disability.
2.19. VESTED -- nonforfeitable.
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<PAGE>
SECTION 3
ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBILITY. Any officer of the Company who is affirmatively selected by
the Committee shall be an Eligible Employee and may actively participate under
the Plan until the earlier of the officer's Termination of Employment or
transfer to a non-officer position with the Company or its Affiliates. The
Committee may rescind an officer's selection as an Eligible Employee and
discontinue an officer's active participation in the Plan at any time.
3.2. COMMENCEMENT OF PARTICIPATION. An Eligible Employee shall become a
Participant in the Plan when the Eligible Employee is first credited with any
amount pursuant to Section 4.
3.3. TERMINATION OF PARTICIPATION. A person shall cease to be a Participant as
soon as all amounts credited to the Participant's Account have been paid in
full.
3.4. OVERRIDING EXCLUSION. Notwithstanding anything apparently to the contrary
in this Plan Statement or in any written communication, summary, resolution or
document or oral communication, no individual shall be a Participant in this
Plan, develop benefits under this Plan or be entitled to receive benefits under
this Plan (either for himself or herself or his or her survivors) unless such
individual is a member of a select group of management or highly compensated
employees (as that expression is used in ERISA). If a court of competent
jurisdiction, any representative of the U.S. Department of Labor or any other
governmental, regulatory or similar body makes any direct or indirect, formal or
informal, determination that an individual is not a member of a select group of
management or highly compensated employees (as that expression is used in
ERISA), such individual shall not be (and shall not have ever been) a
Participant in this Plan at any time. If any person not so defined has been
erroneously treated as a Participant in this Plan, upon discovery of such error
such person's erroneous participation shall immediately terminate AB INITIO and
upon demand such person shall be obligated to reimburse the Company for all
amounts erroneously paid to him or her.
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<PAGE>
SECTION 4
DEFERRED STOCK UNIT AMOUNTS
4.1. DEFERRAL ELECTIONS. An Eligible Employee may file with the Committee a
Deferral Election as to any option to buy Common Stock granted to such Eligible
Employee by the Company, subject to the following:
(a) Except as provided in subsection (f) below and subject to the
modifications described in Sections 5.3 and 5.5, a Deferral
Election shall be irrevocable once it has been filed with the
Committee.
(b) Deferral Elections may only be made with respect to options
whose exercise price may be paid in shares of Common Stock,
and shall obligate the Eligible Employee making the Deferral
Election to pay the exercise price and any tax withholding
required at the time of exercise by attestation to the
ownership of shares of Common Stock that the Eligible Employee
has owned for at least six months and that have not been used
to exercise another option for at least six months.
(c) Each Deferral Election shall specify the time and manner in
which distribution of the portion of the Participant's Account
attributable to that Deferral Election shall be made;
provided, however, that distribution may not commence prior to
the first anniversary of the Exercise Date of the option that
is subject to the Deferral Election.
(d) Nothing in this Plan shall be deemed to extend the period
during which stock options may be exercised, or to otherwise
alter the terms of any stock option.
(e) Deferral Elections must be made on forms approved by the
Committee, must be made at such time as the Committee shall
determine but not less than twelve months prior to the
Exercise Date with respect to those options, and shall conform
to such other procedural and substantive rules as the
Committee shall make.
(f) Any Deferral Elections with respect to options that have not
been exercised shall become null and void upon an Eligible
Employee's Termination of Employment.
4.2. DEFERRED STOCK UNITS. As of each Exercise Date, a Participant's Account
shall be credited with the number of Deferred Stock Units equal to the
difference between (a) and (b):
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(a) The number of shares of Common Stock obtained by exercise of
the option being exercised; and
(b) The number of shares of Common Stock required to pay both the
exercise price of the option being exercised and any required
tax withholding.
4.3. DISCRETIONARY CREDITS. In the event of any change in the outstanding shares
of common stock of the Company by reason of any stock split or stock dividend in
the form of a split, the Committee shall adjust the number of Deferred Stock
Units in a Participant's Account so that such number equals the number of
Deferred Stock Units in the Account prior to the event, multiplied by a
fraction, the denominator of which is the number of Deferred Stock Units in the
Account prior to the event, and the numerator of which is the number of shares
of Common Stock the Participant would have had after the event if the
Participant had shares of Common Stock immediately prior to the event equal in
number to the number of Deferred Stock Units in the Participant's Account
immediately prior to the event. In the event of any dividend (other than a stock
dividend in the form of a split), recapitalization, merger, consolidation,
spinoff, reorganization, combination or exchange of shares or other similar
corporate change, then if the Committee, or the board of directors of a
successor corporation, shall determine, in its sole discretion, that such change
equitably requires an adjustment in the number of Deferred Stock Units then held
in the Participant's Account, such adjustment shall be made by the Committee or
said board and shall be conclusive and binding for all purposes of the Plan.
4.4. DIVIDEND CREDITS. The number of Deferred Stock Units in a Participant's
Account shall be automatically increased as of each Common Stock dividend
payment date in an amount equal to the number of shares of Common Stock that
could be purchased on such dividend payment date with the cash dividends that
would be paid on a number of shares of Common Stock equal to the number of
Deferred Stock Units in the Participant's Account on the record date for such
dividend.
4.5. VESTING. The Accounts of all Participants shall be 100% Vested at all
times.
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<PAGE>
SECTION 5
TIME AND MANNER OF PAYMENTS
5.1. TIME OF PAYMENT. Payment of a Participant's Account under the Plan will
commence as soon as administratively feasible following the occurrence of the
earliest of the following events:
(a) death
(b) Disability, or
(c) the date of distribution selected by the Participant in
writing at a time and on a form prescribed by the Committee
(i.e., in the Participant's Deferral Election).
In no event, however, may payment of the portion of a Participant's Account
attributable to a particular option exercise begin less than one year after the
Exercise Date with respect to that option exercise.
5.2. MANNER OF PAYMENT. A Participant's Account will be paid to the Participant
in either a single lump sum payment or in annual installments of not more than
fifteen (15) years. The Participant must elect a manner of payment at the time
the Participant elects his or her date of distribution pursuant to Section
5.1(c). In the event no election was made by a Participant, payment shall be
made in a single lump sum. Payment shall be made exclusively in the form of
shares of Common Stock and cash for any fractional shares. For purposes of
determining any cash payment and any tax withholding on a payment, the value of
Common Stock will be the market price of such Common Stock as of the close of
business on the day prior to the date as of which the payment is made.
5.3. CHANGES IN TIME AND MANNER OF PAYMENT. Notwithstanding the foregoing, a
Participant may make a new election concerning selection of the time and form of
payment authorized pursuant to this Section 5.3 (the "New Election") in
accordance with the following terms and conditions, unless waived or modified by
the Committee:
(a) A New Election shall only be permitted once and must be made
and become effective as hereinafter provided, if at all, prior
to the Participant's Termination of Employment, death or
Disability, whichever happens first;
(b) A New Election shall become effective twelve months after it
is received by the Company;
(c) A New Election shall be subject to the limitations described
in Section 4.1(a) through (f); and
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<PAGE>
(d) If any of the events set forth in Section 5.1 of the Plan
occur prior to the effective date of a New Election with
respect to previously credited deferrals, then payments shall
be paid hereunder to or with respect to the Participant
according to the elections in effect at the time of the event.
5.4. CHANGE IN CONTROL DISTRIBUTIONS. Notwithstanding any other provision of
this Section 5, a Participant or Beneficiary will receive a distribution of his
or her entire Account if a Change in Control occurs. Distribution of the entire
Account shall be made on the date of the Change in Control. Such distribution
shall be made in a single lump sum stock distribution.
5.5. ACCELERATION OF PAYMENTS.
5.5.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving
installments may receive an accelerated payment of his or her entire Account
(after reduction for the forfeiture described in Section 5.5.2). To receive such
an accelerated payment, the Participant or Beneficiary must file a written
payment application with the Committee. Payment of the accelerated payment
(after reduction for the forfeiture described in Section 5.5.2) shall be made as
soon as administratively feasible following the approval of a completed
application by the Committee. Such accelerated payment shall be made in a lump
sum cash payment. The amount of the accelerated payment shall be equal to the
value of the Account as of such distribution date (after reduction for the
forfeiture described below).
5.5.2. FORFEITURE. Upon the approval of an accelerated payment, there
shall be irrevocably forfeited from the Account of the Participant or
Beneficiary an amount equal to six percent (6%) of the Account. In addition, if
the Participant is an active employee at the time of the accelerated payment,
the Participant will not be an Eligible Employee under this Plan for two (2)
years following such accelerated payment.
5.6. DEATH BENEFIT. In the event of a Participant's death, the Company shall pay
the amount of the Participant's Account as of the date of death (as adjusted
from time to time pursuant to Section 4.4) in a lump sum or in installments, as
previously elected by the Participant, to the Participant's designated
Beneficiary as soon as administratively feasible. In the event no election was
made by the Participant, payment shall be in a single lump sum.
5.7. BENEFICIARY DESIGNATION. A Participant shall submit to the Company upon
initial designation as an Eligible Employee in the Plan, and at such other times
as the Participant desires, on a form provided by the Committee, a written
designation of the beneficiary or beneficiaries to whom payment of the
Participant's Account under the Plan shall be made in the event of the
Participant's death. Beneficiary designations shall become effective only when
received by the Company. Beneficiary designations first received by the Company
after the Participant's death, and any designations in effect at the time a
valid subsequent designation is received by the Company, shall be invalid and
have no effect.
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<PAGE>
SECTION 6
DEFERRED STOCK UNIT ACCOUNTS
6.1. PARTICIPANT ACCOUNTS. The Committee shall cause a bookkeeping account to be
kept in the name of each Participant which shall reflect the Deferred Stock
Units credited to a Participant.
6.2. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's
bookkeeping account any payments made to the Participant or the Participant's
Beneficiary in accordance with Section 5.
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<PAGE>
SECTION 7
FUNDING
7.1. FUNDING. The Company and its Affiliates shall be responsible for paying all
benefits due hereunder. For the purpose of facilitating the payment of benefits
due hereunder, the Company may (but shall not be required to) establish and
maintain a grantor trust pursuant to an Agreement between the Company and a
trustee selected by the Company; provided, however, that any such grantor trust
must be structured so that it does not result in any federal income tax
consequences to any Participant until distributions under Section 5 are actually
received. The Company may contribute to a grantor trust thereby created such
amounts as it may from time to time determine.
7.2. CORPORATE OBLIGATION. Neither the officers nor any member of the Board of
Directors of the Company or any of its Affiliates in any way secures or
guarantees the payment of any benefit or amount which may become due and payable
hereunder to or with respect to any Participant. Each Participant and other
person entitled at anytime to payments hereunder shall look solely to the assets
of the Company and its Affiliates for such payments as an unsecured, general
creditor. Nothing herein shall be construed to give a Participant, Beneficiary
or any other person or persons any right, title, interest or claim in or to any
specific asset, fund, reserve, account or property of any kind whatsoever owned
by the Company or in which it may have any right, title or interest now or in
the future. After benefits shall have been paid to or with respect to a
Participant and such payment purports to cover in full the benefit hereunder,
such former Participant or other person or persons, as the case may be, shall
have no further right or interest in the other assets of the Company and its
Affiliates in connection with this Plan.
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<PAGE>
SECTION 8
ADMINISTRATION
8.1. AUTHORITY. The Plan shall be administered by the Committee, which shall
have full discretionary power and authority to administer and interpret the Plan
and to determine all factual and legal questions under the Plan, including but
not limited to the entitlement of Participants and Beneficiaries, and the amount
of their respective interests. The Committee may 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 Company, such functions assigned to
the Committee hereunder as it may from time to time deem advisable. Until
withdrawn or redelegated by the Committee, all of the Committee's power and
authority under this Section 8.1 shall be deemed delegated to the Company's Vice
President in charge of executive compensation, excluding only the power and
authority to act in such a way as would materially increase the cost of the
Plan.
8.2. LIABILITY. No member of the Committee and no director or member of the
management of the Company or its Affiliates shall be liable to any persons for
any actions taken under the Plan, or for any failure to effect any of the
objective or purposes of the Plan, by reason of insolvency or otherwise.
8.3. PROCEDURES. The Committee may from time to time adopt such rules and
procedures as it deems appropriate to assist in the administration of the Plan.
8.4. CLAIM FOR BENEFITS. No employee or other person shall have any claim or
right to payment of any amount hereunder until payment has been authorized and
directed by the Committee.
8.5. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set
forth in this Section 8.5 shall be the claims procedure for the resolution of
disputes and disposition of claims arising under the Plan.
8.5.1. ORIGINAL CLAIM. Any employee, former employee, or Beneficiary of
such employee or former employee may, if the employee, former employee or
Beneficiary 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 the 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 (180) days from the date
the claim was filed) to 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 on which the denial is based,
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<PAGE>
(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.
8.5.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of
notice that the 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 (120) from the date the request for review was filed) to
reach a decision on the request for review.
8.5.3. 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 decisions on original claims shall be made by the
Committee and 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 copies of all notices given to the claimant.
(e) The decision of the Committee on an original claim or 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 the claimant's representative shall
have a reasonable opportunity to review
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<PAGE>
a copy of this Plan Statement and all other pertinent
documents in the possession of the Company and its Affiliates.
8.6. PAYMENTS UPON IMPOSITION OF FEDERAL OR STATE TAXES. If any Participant is
determined to be subject to federal or state income tax on any amount accrued on
his or her behalf under this Plan prior to the time of payment hereunder,
federal or state taxes attributable to the amount determined to be so taxable
shall be distributed by the Plan to such Participant. An amount accrued on his
or her behalf under this Plan shall be determined to be subject to federal
income tax upon the earliest of:
(i) a final determination by the United States Internal
Revenue Service addressed to the Participant which is
not appealed to the courts;
(ii) a final determination by the United States Tax Court
or any other Federal Court affirming any such
determination by the Internal Revenue Service; or
(iii) an opinion by the Tax Counsel of the Company,
addressed to the Company that, by reason of Treasury
Regulations, amendments to the Internal Revenue Code,
published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts
accrued on a Participant's behalf hereunder are
subject to federal or state income tax prior to
payment.
The Company shall undertake at its sole expense to defend any tax claims
described herein which are asserted by the Internal Revenue Service or by any
state revenue authority against any Participant, including attorney fees and
costs of appeal, and shall have the sole authority to determine whether or not
to appeal any determination made by the Internal Revenue Service, by any state
revenue authority or by a lower court. The Company also agrees to reimburse any
Participant for any interest or penalties in respect of federal or state tax
claims hereunder upon receipt of documentation of same. The Participant agrees
to cooperate with the Company in connection with any tax audit.
8.7. LEGAL FEES. If the Company does not pay the benefits required under the
terms of the Plan for reasons other than the insolvency of the Company, the
Company agrees to reimburse any Participant for all legal fees incurred in
enforcing his or her claim to benefits under the Plan.
8.8. ERRORS IN COMPUTATIONS. The Committee shall not be liable or responsible
for any error in the computation of any benefit payable to or with respect to
any Participant resulting from any misstatement of fact made by the Participant
or by or on behalf of any Beneficiary to whom such benefit shall be payable,
directly or indirectly, to the Committee, and used by the Committee in
determining the benefit. The Committee shall not be obligated or required to
increase the benefit payable to or with respect to such Participant which, on
discovery of the misstatement, is found to be understated as a result of such
misstatement of the participant. However, the benefit of any Participant which
is overstated by reason of any such misstatement or any other reason shall be
reduced to the amount appropriate in view of the truth (and to recover any prior
overpayment).
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<PAGE>
SECTION 9
MISCELLANEOUS
9.1. NOT AN EMPLOYMENT CONTRACT. This Plan is not and shall not be deemed to
constitute a contract of employment between the Company and any employee or
other person, nor shall anything herein contained be deemed to give any employee
or other person any right to be retained in the Company's employ or in any way
limit or restrict the Company's right or power to discharge any employee or
other person at any time and to treat him without regard to the effect which
such treatment might have upon the employee as a Participant in the Plan.
9.2. NONTRANSFERABILITY. A Participant's rights and interest under the Plan,
including amounts payable, may not be assigned, alienated, pledged or
transferred except, in the event of a Participant's death to his Beneficiary. No
benefit payable under this Plan shall be subject to attachment, garnishment,
execution following judgment or other legal process before actual payment to the
Participant or Beneficiary.
9.3. TAX WITHHOLDING. The Company shall withhold the amount of any federal,
state or local income tax or other tax required to be withheld by the Company
under applicable law with respect to any amount payable under the Plan. The
Participant shall not be liable for any tax withholding.
9.4. EXPENSES. All expenses of administering the Plan shall be borne by the
Company.
9.5. GOVERNING LAW. Except to the extent that federal law is controlling, the
Plan shall be construed and enforced in accordance with and governed by the laws
of the State of Minnesota.
9.6. AMENDMENT AND TERMINATION. The Company reserves the power to unilaterally
amend this Plan at any time, either prospectively or retroactively or both:
(a) in any respect by resolution of its 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 Company).
The Committee may likewise terminate or curtail the benefits of this Plan both
with regard to persons expecting to receive benefits in the future and persons
already receiving benefits at the time of such action; provided, however, that
the Committee may not amend or terminate the Plan with respect to benefits that
have accrued and are vested pursuant to Section 4 in any manner that reduces the
amount of such benefits or alters the effect of any Participant election
previously filed with the Company. No modification of the terms of this Plan
shall be effective unless it is in writing and signed on behalf of the Company
by a person authorized to execute such writing. No oral
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<PAGE>
representation concerning the interpretation or effect of this Plan shall be
effective to amend the Plan.
9.7. RULES OF INTERPRETATION. The titles given to the various sections of this
Plan are inserted for convenience of reference only and are not part of this
Plan, and they shall not be considered in determining the purpose, meaning or
intent of any provision hereof. This Plan shall be construed and this Plan shall
be administered to create an unfunded plan providing deferred compensation to a
select group of management or highly compensated employees so that it is exempt
from the requirements of Parts 2, 3 and 4 of Title I of ERISA and qualifies for
a form of simplified, alternative compliance with the reporting and disclosure
requirements of Part 1 of Title I of ERISA.
Date: DONALDSON COMPANY, INC.
------------------
By
--------------------------------------
Chief Executive Officer
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EXHIBIT 13
ELEVEN-YEAR COMPARISON OF RESULTS
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS
Net sales $944,139 $940,351 $833,348
Gross margin $275,681 263,262 250,273
Gross margin percentage 29.2% 28.0% 30.0%
Operating income $ 88,390 86,799 82,715
Operating income percentage 9.4% 9.2% 9.9%
Interest expense $ 6,993 4,671 2,358
Earnings before income taxes $ 89,210 86,441 79,094
Income taxes $ 26,763 29,390 28,474
Effective income tax rate 30.0% 34.0% 36.0%
Net earnings $ 62,447 57,051 50,620
Return on sales 6.6% 6.1% 6.1%
Return on average shareholders' equity 24.1% 22.8% 21.4%
Return on investment 19.0% 20.5% 20.8%
FINANCIAL POSITION
Total assets $528,358 500,525 454,394
Current assets $311,477 287,341 268,818
Current liabilities $151,144 167,492 176,297
Working capital $160,333 119,849 92,521
Current ratio 2.1 1.7 1.5
Current debt $ 20,696 45,896 42,674
Long-term debt $ 86,691 51,553 4,201
Total debt $107,387 97,449 46,875
Shareholders' equity $262,763 255,671 243,865
Long-term capitalization ratio 24.8% 16.8% 1.7%
Property, plant and equipment, net $182,180 178,867 154,595
Net expenditures on property, plant
and equipment $ 29,539 54,705 47,327
Depreciation and amortization $ 27,686 25,272 21,494
SHAREHOLDER INFORMATION
Net earnings per share - Diluted $ 1.31 1.14 .99
Dividends paid per share $ .23 .19 .17
Shareholders' equity per share $ 5.69 5.28 4.93
Shares outstanding (000s) $ 46,197 48,382 49,452
Common stock price range, per share
High $ 25 7/8 27 3/16 20 3/8
Low $ 14 7/16 18 9/16 12 5/8
===============================================================================================
</TABLE>
AMOUNTS ARE ADJUSTED FOR ALL STOCK SPLITS AND REFLECT ADOPTION OF SFAS 128.
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.
(1) EXCLUDES THE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE OF $2,206, OR $.08
PER SHARE, IN 1994.
10
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$758,646 $703,959 $593,503 $533,327 $482,104 $457,692 $422,885 $397,535
222,874 197,979 166,599 152,236 133,574 129,858 121,454 105,275
29.4% 28.1% 28.1% 28.5% 27.7% 28.4% 28.7% 26.5%
75,642 65,531 52,079 45,246 41,249 41,304 44,354 37,851
10.0% 9.3% 8.8% 8.5% 8.6% 9.0% 10.5% 9.5%
2,905 3,089 3,362 2,723 2,681 3,526 3,731 3,555
71,120 63,172 50,193 44,682 41,721 39,385 34,875 27,664
27,684 24,636 18,244 16,468 15,952 15,337 13,849 12,230
38.9% 39.0% 36.3% 36.9% 38.2% 38.9% 39.7% 44.2%
43,436 38,536 31,949(1) 28,214 25,769 24,048 21,026 15,434
5.7% 5.5% 5.4% 5.3% 5.3% 5.3% 5.0% 3.9%
19.3% 18.8% 17.6% 16.9% 17.2% 18.0% 17.8% 15.1%
18.5% 17.6% 16.0% 15.0% 14.8% 14.9% 14.2% 11.5%
402,850 381,042 337,360 300,217 286,348 253,194 245,947 204,813
250,751 247,904 220,308 196,014 187,360 169,398 168,522 130,848
138,578 123,747 115,757 93,666 89,956 77,537 79,917 58,009
112,173 124,157 104,551 102,348 97,404 91,861 88,605 72,839
1.8 2.0 1.9 2.1 2.1 2.2 2.1 2.3
13,145 20,800 16,956 7,595 11,425 6,380 11,384 8,602
10,041 10,167 16,028 18,920 23,482 25,673 28,320 30,750
23,186 30,967 32,984 26,515 34,907 32,053 39,704 39,352
228,880 221,173 189,697 174,008 160,303 138,947 128,787 107,516
4.2% 4.4% 7.8% 9.8% 12.8% 15.6% 18.0% 22.2%
124,913 110,640 99,559 90,515 84,899 72,863 68,290 61,914
39,297 25,334 24,642 15,005 15,538 16,208 16,055 11,567
21,674 20,529 16,365 14,752 14,047 12,187 10,857 10,583
.84 .73 .59(1) .51 .46 .42 .37 .27
.15 .14 .12 .10 .09 .07 .06 .06
4.52 4.23 3.58 3.19 2.91 2.51 2.23 1.88
50,650 52,370 53,020 54,564 55,138 55,478 57,728 57,386
14 14 13 1/16 10 1/16 7 15/16 6 9/16 5 13/16 2 15/16
11 15/16 10 15/16 9 1/8 7 5 3/16 4 1/16 2 13/16 2 3/4
==================================================================================================================
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 (including Note H, Segment
Reporting) and other financial information included elsewhere in this Report.
FISCAL 1999 COMPARED TO FISCAL 1998 The company reported record sales in 1999 of
$944.1 million, a slight increase over prior-year sales of $940.4 million. Sales
for the Engine Products segment of $611.0 million were down 1.7 percent over the
prior year. Sales for the Industrial Products segment of $333.0 million were up
4.6 percent from the prior year. Overall, end-market conditions varied widely
for the various products and geographic locations. Demand in some markets, such
as agricultural equipment, was down sharply, while other markets, such as gas
turbine systems, experienced rapid growth. Most of the markets served by the
company experienced sluggish growth or modest contractions in demand.
Domestic Engine Products sales were down 3.0 percent from the prior year.
This decrease is primarily due to an ongoing weakness in the agricultural
equipment markets and, to a lesser extent, lower production of mining and large
equipment resulting in a decrease in sales of off-road equipment products of 9.5
percent. This decrease was offset by an increase in sales of truck products of
13.6 percent from the prior year. Domestic Industrial Products sales increased
6.7 percent. This increase was led by strong sales of gas turbine systems
products (38.5 percent increase from the prior year) as well as modest sales
growth in dust collection products. This increase was partially offset by lower
sales in special applications products.
In U.S. dollars, total overseas sales increased 1.0 percent from the prior
year. Excluding the negative impact of foreign currency translation of $1.2
million, sales increased 1.4 percent over the prior year. Total overseas Engine
Products sales were up 0.9 percent compared to the prior year despite lower
overall sales of off-road and truck products. Aftermarket product sales showed
an increase of 8.2 percent over the prior year largely due to increased activity
in Mexico. Total overseas Industrial Products sales increased 1.2 percent from
the prior year. This increase was primarily a result of an increase in sales of
filters for computer disk drives partially offset by a decrease in sales of gas
turbine systems products of 24.0 percent.
The company reported record net earnings for 1999 of $62.4 million compared
to $57.1 million in 1998, an increase of 9.5 percent. Net earnings per share -
diluted were $1.31, up 14.9 percent from the prior year and reflects the impact
of the company's stock repurchase program. The increase in net earnings, with
only a slight increase in net sales, was primarily due to cost reduction and
productivity initiatives, an increase in other income as discussed below and a
reduction in the effective income tax rate. Overseas operating income totaled
approximately 57.6 percent and 50.3 percent of consolidated operating income in
1999 and 1998, respectively.
Gross margin for 1999 increased to 29.2 percent compared to 28.0 percent in
the prior year. Gross margin improved over the course of the year; gross margin
in the second half of 1999 was 30.3 percent. The improvement in gross margin
reflects the positive impact of cost reduction and productivity initiatives
partially offset by the negative impact of lower production volumes in some
facilities.
Operating expenses as a percentage of sales for 1999 and 1998 were 19.8
percent and 18.8 percent, respectively. Operating expenses in 1999 totaled
$187.3 million compared to $176.5 million in 1998, an increase of $10.8 million,
or 6.1 percent. Selling expenses in 1999 decreased $2.1 million reflecting the
positive impact of cost reduction and productivity initiatives while general and
administrative expenses increased $12.8 million consisting primarily of
increases in product liability expense, legal expense, system and programming
costs and employee compensation. In addition, there were $2.8 million of costs
related to the closing of the Oelwein plant.
Interest expense increased $2.3 million, or 49.7 percent, primarily due to
the increase in long-term debt for the full year. Other income totaled $7.8
million in 1999 compared to other income of $4.3 million in the prior year. The
major components of other income in 1999 were: interest income of $1.4 million,
earnings from non-consolidated joint ventures of $3.6 million, gain on sale of
assets and product lines of $0.9 million, and other miscellaneous items of $1.9
million.
12
<PAGE>
The effective income tax rate of 30 percent in 1999 was lower compared to
34 percent in 1998 primarily due to lower overseas taxes and foreign tax credits
from foreign dividends. The company anticipates that its effective income tax
rate will remain at 30 percent in 2000.
Total backlogs of $283.7 million were up 16.6 percent from the prior
year-end. Hard order backlogs, goods scheduled for delivery in 90 days, were
$157.1 million and $138.8 million at July 31, 1999 and 1998, respectively. Hard
order backlog for worldwide Engine Products increased $7.7 million from 1998.
This increase was due primarily to an increase in backlog for truck and
automotive products of 25.5 percent offset by a decrease in off-road equipment
products backlog of 8.2 percent. Hard order backlog for worldwide Industrial
Products increased $10.7 million from 1998. This increase was due to significant
increases in backlog for both gas turbine and special applications products of
53.0 percent and 58.6 percent, respectively, offset by a decrease in dust
collection products backlog of 19.1 percent.
FISCAL 1998 COMPARED TO FISCAL 1997 The company reported record sales in 1998 of
$940.4 million, up 12.8 percent from prior-year sales of $833.3 million. Strong
business conditions were evident across all businesses. Sales for the core
Engine Products - first-fit and replacement parts - were up 12.4 percent over
last year. Sales of Industrial Products, including the dust collection and gas
turbine system products, were up 13.6 percent from last year.
Domestic Engine Products sales were up 19.0 percent, primarily from
increased shipments to original equipment manufacturers (OEMs) and overall good
economic conditions in the United States. In addition, domestic sales of
aftermarket products increased 13.2 percent year over year. Domestic Industrial
Products sales increased 18.9 percent, led by strong sales in the dust
collection products and gas turbine system products offset by lower sales of
special applications products.
In U.S. dollars overseas Engine Products sales were up 3.3 percent compared
to the prior year, mostly attributable to increased shipments in Europe.
Overseas Industrial Products sales increased approximately 6.2 percent due
primarily to increased sales of special applications products and gas turbine
systems products in Hong Kong. Overseas sales in local currencies were down
approximately 3.5 percent in Japan and Australia and were up 23.0 percent in
Europe.
The company reported record net earnings for 1998 of $57.1 million compared
to $50.6 million in 1997, an increase of 12.7 percent. Net earnings per share -
diluted were $1.14, up 15.2 percent from the prior year and reflects the impact
of the company's stock repurchase program. Increased sales levels and a
reduction in the effective income tax rate were the primary reasons for the
higher earnings. Overseas operating income totaled approximately 50.3 percent
and 54.7 percent of consolidated operating income in 1998 and 1997.
Gross margin for 1998 decreased to 28.0 percent compared to 30.0 percent in
the prior year. The primary factors leading to this decline in margins include:
integration and process problems at Armada Tube facilities; lower gross margins
on automotive product lines; product cost increases in Engine Products, not
immediately recoverable in price; pricing pressures in certain special
applications products within the Industrial Products segment.
Operating expenses as a percentage of sales for 1998 and 1997 were 18.8
percent and 20.1 percent, respectively. Operating expenses in 1998 totaled
$176.5 million compared to $167.6 million in 1997, which reflects an increase of
$8.9 million, or 5.3 percent. Selling expenses in 1998 increased $5.2 million,
primarily due to the higher sales levels, while general and administrative
expenses decreased $2.5 million due to lower pension expenses, the write-down in
1997 of purchased intangibles of $5.0 million on a previous business acquisition
in 1997, decreased warranty accruals on product lines and other accruals.
Interest expense increased $2.3 million, or 98 percent, primarily due to
the increase in total debt. Other (income)/ expense totaled $(4.3) million in
1998 compared to other (income)/expense of $1.3 million in the prior year. The
significant items leading to this change in other (income)/expense were a
decrease in charitable contributions of $2.3 million and a decrease in other
miscellaneous items such as legal
13
<PAGE>
accruals and non-compete payments related to a previous business acquisition
which were included in 1997 other (income)/expense totals.
The effective income tax rate of 34 percent in 1998 was lower compared to
36 percent in 1997 due to lower overseas tax rates.
Total backlogs of $243.3 million were down 5.2 percent from the prior
year-end. Hard order backlogs, goods scheduled for delivery in 90 days, were
$138.8 million and $164.2 million at July 31, 1998 and 1997, respectively.
Worldwide Engine Products backlog decreased $16.5 million and worldwide
Industrial Products backlog decreased $8.9 million from 1997. After adjusting
for discontinued product lines and other special factors, hard backlogs were
essentially unchanged from last year. Backlog for gas turbine systems products
was down about $4.6 million after an exceptionally strong period of shipments in
the third quarter of 1998. About $14.5 million of the hard order backlog decline
was associated with discontinued product lines - automotive system for GM light
trucks, catalytic converter mufflers for medium and heavy duty truck OEMs and
certain disk drive filter units. Finally, about $4.5 million of the hard backlog
decline related to the timing of orders in our engine aftermarket and high
purity product lines and does not reflect an overall change in the level of
sales activity.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION At July 31, 1999, the company's capital structure was
comprised of $20.7 million of current debt, $86.7 million of long-term debt and
$262.8 million of shareholders' equity. The ratio of long-term debt to total
long-term capital was 24.8 percent, compared with 16.8 percent at July 31, 1998.
Total debt increased $9.9 million during 1999 to $107.4 million. The
increase resulted from the issuance of $25.0 million of senior notes in August
1998 and an increase of other long-term debt of $10.2 million overseas during
the year offset by a decrease in short-term debt of $25.3 million for operating
purposes.
The company has a multi-currency revolving credit facility totaling $100.0
million with a group of banks and an additional $35.0 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, 1999. 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 2000.
Shareholders' equity increased $7.1 million in 1999 to $262.8 million. The
increase was primarily due to current year earnings of $62.4 million offset
primarily by $44.5 million of treasury stock repurchases and $10.8 million of
dividend payments.
CASH FLOWS During 1999, $100.4 million of cash was generated from operating
activities, compared with $37.9 million in 1998 and $58.3 million in 1997. The
increase in 1999 was primarily due to a decrease in inventory of $21.4 million
during the year in contrast to the prior year when inventory increased. In
addition, increased earnings and changes in other working capital items resulted
in increased operating cash flow in 1999.
In addition to cash generated from operating activities, the company
obtained an additional $34.4 million in long-term debt. These cash flows were
used primarily to support $29.5 million for capital expenditures, $44.5 million
for stock repurchases, $24.3 million for repayment of short-term borrowings and
$10.8 million for dividend payments. Cash and cash equivalents increased $25.9
million during 1999.
Capital expenditures for property, plant and equipment totaled $29.5
million in 1999, compared to $54.7 million in 1998 and $47.3 million in 1997.
Capital expenditures primarily related to productivity enhancing investments at
various plants in the United States and overseas and continuing upgrades to the
U.S. information systems.
Capital spending in 2000 is planned to be $42.0 million. Significant
planned expenditures include the further upgrade of U.S. information systems and
investment in manufacturing equipment and tooling. It is anticipated that 2000
capital expenditures will be financed primarily from funds from operations.
14
<PAGE>
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 6 cents per share equates to 20.9
percent of the 1997 through 1999 average net earnings per share.
SHARE REPURCHASE PLAN In November 1998, the Board of Directors authorized the
company to repurchase 5.0 million shares of common stock. At July 31, 1999, the
company had approximately 3.6 million 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 1999, the company repurchased 2.4 million shares of common stock on the
open market for $44.5 million, at an average price of $18.80 per share. The
company repurchased 1.3 million shares for $33.3 million in 1998 and 1.4 million
shares for $24.9 million in 1997.
ENVIRONMENTAL MATTERS The company has established reserves for potential
environmental liabilities and plans to continue to accrue reserves in
appropriate amounts. While uncertainties exist with respect to the amounts and
timing of the company's ultimate environmental liabilities, management believes
that such liabilities, individually and in the aggregate, will not have a
material adverse effect on the company's financial condition or results of
operations.
NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activi ties" is effective
for fiscal years beginning after June 15, 2000. SFAS 133 requires a company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the hedged assets, liabilities, or firm commitments are recognized through
earnings or in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The company has not yet determined what the
effect of SFAS 133 will be on earnings and the financial position of the
company.
MARKET RISK The company's market risk includes the potential loss arising from
adverse changes in foreign currency exchange rates and interest rates. The
company manages foreign currency market risk, from time to time, through the use
of a variety of financial and derivative instruments. The company does not enter
into any of these instruments for trading purposes to generate revenue. Rather,
the company's objective in managing these risks is to reduce fluctuations in
earnings and cash flows associated with changes in foreign currency exchange
rates. The company uses forward exchange contracts and other hedging activities
to hedge the U.S. dollar value resulting from anticipated foreign currency
transactions. The company's market risk on interest rates is the potential
increase in fair value of long-term debt resulting from a potential decrease in
interest rates. See further discussion of these market risks below.
FOREIGN CURRENCY In 1999, the U.S. dollar was mixed relative to the currencies
of foreign countries where the company operates. A stronger dollar generally has
a negative impact on overseas results because foreign-currency 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 1999, the impact of foreign currency translation resulted in a
decrease in net sales by $1.2 million and increase in net earnings by $0.8
million. During 1998, the generally stronger U.S. dollar decreased net sales by
$24.5 million and decreased net earnings by $1.9 million.
The company maintains significant assets and operations in Europe,
countries of the Asia-Pacific Rim, South Africa and Mexico. As a result,
exposure to foreign currency gains and
15
<PAGE>
losses exists. A portion of foreign currency exposure is hedged by incurring
liabilities, including bank debt, denominated in the local currency where
subsidiaries are located.
The subsidiaries of the company purchase products and parts in various
currencies. As a result, the company may be exposed to cost increases relative
to local currencies in the markets to which it sells. To mitigate such adverse
trends, the company, from time to time, enters into forward exchange contracts
and other hedging activities. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure.
Some products made in the United States are sold abroad, primarily in
Canada. As a result, sales of such products are affected by the value of the
U.S. dollar relative to other currencies. Any long-term strengthening of the
U.S. dollar could depress these sales. Also, competitive conditions in the
company's markets may limit its ability to increase product pricing in the face
of adverse currency movements.
INTEREST At July 31, 1999, the fair value of the company's long-term debt
approximates market. Market risk is estimated as the potential increase in fair
value resulting from a hypothetical one-half percent decrease in interest rates
and amounts to approximately $2.1 million.
YEAR 2000 The company initiated its planning and implementation to address the
Year 2000 problem several years ago. The company has surveyed and assessed all
critical business systems and processes as part of its implementation of the
Year 2000 plan described below and based on those activities believes that all
critical systems and processes are now Year 2000 ready. All non-critical systems
are expected to be Year 2000 ready by the end of October 1999. Contingency plans
have been outlined and will be put in place over the remaining months before
January 1, 2000. Based on our efforts to address this problem, the company
believes it has relatively low risk of experiencing Year 2000 operational
problems. A summary of the company's Year 2000 readiness follows.
Only a small percentage of our products contain microprocessors, and we
have assessed and identified all of our products as Year 2000 compliant.
Our business information systems (financial, purchasing, manufacturing,
planning, etc.) have been inventoried and assessed. The plan to achieve Year
2000 readiness included the installation of new applications in some areas and
the remediation of legacy systems as appropriate. Our new applications
installation is approximately 95 percent complete, and is scheduled to be
finalized on or before October 31, 1999. Legacy system modifications are
approximately 95 percent complete, and are scheduled to be finalized on or
before October 31, 1999.
We have surveyed and evaluated our infrastructure that supports all
information technology and communication systems for the company worldwide. All
critical computer hardware, databases, operating systems, network equipment and
communication gear have been assessed and identified as Year 2000 ready for all
our global facilities. Personal computers and workstations have been inventoried
and evaluated; all non-compliant hardware and software has been or will be
replaced. Approximately 90 percent of the personal computer and workstation
upgrade is complete, and the balance is scheduled to be completed on or before
October 31, 1999.
We surveyed our significant suppliers to assess the potential impact on
operations if key third parties are not successful in converting their systems
in a timely manner. Responses received to date indicate that our suppliers are
aware of the Year 2000 issue and are implementing all necessary changes. Vendors
who have not responded to our surveys are being evaluated in more detail, and
contingency plans are being developed as appropriate. We have initiated on-site
Year 2000 assessments of certain key suppliers.
We surveyed and assessed our manufacturing and significant administrative
facilities globally, and based on this evaluation believe that all critical
systems that support the building operations are Year 2000 ready. We surveyed
and
16
<PAGE>
assessed our engineering systems and based on this evaluation believe these
systems are Year 2000 ready. We have surveyed the machine and process control
equipment in our manufacturing plants and believe that all significant
remediation work is now complete.
All Year 2000 issues are managed through a task force led by the Chief
Financial Officer. Regular updates are provided to senior management. The Chief
Financial Officer reports progress to the Audit Committee of the Board of
Directors on a regular basis.
Incremental costs (including contractor expenses and the cost of internal
resources dedicated to achieving Year 2000 compliance) are charged to expense as
incurred. Total costs for all relevant Year 2000 specific activity is estimated
to be $8.0 million, of which approximately 90 percent has been spent to date.
The source of funds for these costs is operating cash flow. These costs do not
include overall costs of new system applications that have been implemented in
the normal business cycle and not specifically for Year 2000 remediation.
The most reasonably likely negative scenario is that modification work will
not proceed on schedule, causing some increase to the total cost of achieving
Year 2000 compliance. The impact on the company's results of operations if the
company, its suppliers, customers or other critical public or private entities
are not fully Year 2000 compliant, and the scope of resulting difficulties and
related costs are not reasonably determinable.
FORWARD-LOOKING STATEMENTS The company desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is making this cautionary statement in connection with such safe harbor
legislation. This Annual Report to Shareholders, any Form 10-K, Form 10-Q or
Form 8-K of the company or any other written or oral statements made by or on
behalf of the company may include forward-looking statements which reflect the
company's current views with respect to future events and financial performance.
The words "believe," "expect," "anticipate," "intends," "estimate," "forecast,"
"project," "should" and similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All forecasts and projections in this Annual
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 risk factors noted below.
The company wishes to caution investors that any forward-looking statements
made by or on behalf of the company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other risk factors include, but are 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, continued access to capital markets,
issues related to the company's Year 2000 compliance program, and foreign
currency risks. For a more detailed explanation of the foregoing and other
risks, see exhibit 99 which is filed with the Securities and Exchange
Commission. The company wishes to caution investors that other factors may in
the future prove to be important in affecting the company's results of
operations. New factors emerge from time to time and it is not possible for
management to predict all such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or a combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only to the company's views as of the
date the statement is made. The company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
17
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 944,139 $ 940,351 $ 833,348
Cost of sales 668,458 677,089 583,075
- --------------------------------------------------------------------------------------------------------------
Gross Margin 275,681 263,262 250,273
Selling, general and administrative 163,688 152,954 150,270
Research and development 23,603 23,509 17,288
Interest expense 6,993 4,671 2,358
Other (income) expense (7,813) (4,313) 1,263
- --------------------------------------------------------------------------------------------------------------
Total Expenses 186,471 176,821 171,179
- --------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 89,210 86,441 79,094
Income taxes 26,763 29,390 28,474
- --------------------------------------------------------------------------------------------------------------
Net Earnings $ 62,447 $ 57,051 $ 50,620
==============================================================================================================
Weighted Average Shares - Basic 46,899,127 49,332,266 50,314,976
==============================================================================================================
Weighted Average Shares - Diluted 47,793,180 50,229,005 51,216,766
==============================================================================================================
Net Earnings Per Share - Basic $ 1.33 $ 1.16 $ 1.01
==============================================================================================================
Net Earnings Per Share - Diluted $ 1.31 $ 1.14 $ .99
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT JULY 31,
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 41,944 $ 16,069
Accounts receivable, net 178,419 161,914
Inventories
Raw materials 32,722 38,346
Work in process 13,758 14,557
Finished products 35,618 49,114
- ---------------------------------------------------------------------------------------------------------
Total Inventories 82,098 102,017
Prepaids and other current assets 9,016 7,341
- ---------------------------------------------------------------------------------------------------------
Total Current Assets 311,477 287,341
Property, Plant and Equipment, at cost
Land 7,166 7,726
Buildings 105,913 102,371
Machinery and equipment 296,038 256,698
Construction in progress 12,308 24,586
- ---------------------------------------------------------------------------------------------------------
421,425 391,381
Less accumulated depreciation (239,245) (212,514)
- ---------------------------------------------------------------------------------------------------------
182,180 178,867
Other Assets 34,701 34,317
- ---------------------------------------------------------------------------------------------------------
$ 528,358 $ 500,525
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 20,287 $ 45,491
Current maturities of long-term debt 409 405
Trade accounts payable 63,361 59,368
Accrued employee compensation and related taxes 24,720 26,837
Income taxes payable 13,537 6,565
Warranty and accrued liabilities 22,680 22,691
Other current liabilities 6,150 6,135
- ---------------------------------------------------------------------------------------------------------
Total Current Liabilities 151,144 167,492
Long-term Debt 86,691 51,553
Deferred Income Taxes 1,155 1,604
Other Long-term Liabilities 26,605 24,205
Shareholders' Equity
Preferred stock, $1.00 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $5.00 par value, 80,000,000 shares
authorized, 49,655,954 shares issued in 1999 and 1998 248,280 248,280
Additional paid-in capital 1,611 1,199
Retained earnings 87,909 39,965
Accumulated other comprehensive income (5,670) (5,135)
Treasury stock - 3,458,670 and 1,274,251 shares in 1999
and 1998, at cost (69,367) (28,638)
- ---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 262,763 255,671
- ---------------------------------------------------------------------------------------------------------
$ 528,358 $ 500,525
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
(THOUSANDS OF DOLLARS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 62,447 $ 57,051 $ 50,620
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization 27,686 25,272 21,494
Write-down of impaired assets -- 1,000 5,029
Equity in earnings of unconsolidated affiliates (2,187) (1,944) 724
Deferred income taxes 489 4,226 (950)
Other 2,859 (7,972) 6,125
Changes in operating assets and liabilities, net of acquired businesses
Accounts receivable (13,244) (6,780) (24,949)
Inventories 21,382 (20,037) (14,498)
Prepaids and other current assets (1,660) (656) 3,574
Trade accounts payable and other accrued expenses 2,608 (12,305) 11,146
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 100,380 37,855 58,315
INVESTING ACTIVITIES
Expenditures on property and equipment (29,539) (54,705) (47,327)
Acquisitions and investments in unconsolidated affiliates (230) (920) (23,606)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (29,769) (55,625) (70,933)
FINANCING ACTIVITIES
Change in long-term debt 34,359 46,307 (5,280)
Change in short-term borrowings (24,263) 4,568 28,976
Payment received from ESOP -- 2,730 --
Purchase of treasury stock (44,535) (33,250) (24,904)
Dividends paid (10,830) (9,630) (8,799)
Exercise of stock options 1,617 2,619 1,788
- -----------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (43,652) 13,344 (8,219)
Effect of exchange rate changes on cash (1,084) 6,217 4,191
- -----------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 25,875 1,791 (16,646)
Cash and Cash Equivalents, Beginning of Year 16,069 14,278 30,924
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 41,944 $ 16,069 $ 14,278
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
(THOUSANDS OF DOLLARS, COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY RECEIVABLE
EXCEPT PER SHARE AMOUNTS) STOCK CAPITAL EARNINGS INCOME STOCK FROM ESOP TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1996 $ 135,317 $ 2,994 $ 128,795 $ 6,065 $ (41,561) $ (2,730) $ 228,880
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net earnings 50,620 50,620
Foreign currency translation (5,131) (5,131)
----------
Comprehensive income 45,489
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
Cash dividends ($.17 per share) (8,799) (8,799)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1997 135,317 6,212 167,444 934 (63,312) (2,730) 243,865
Comprehensive income
Net earnings 57,051 57,051
Foreign currency translation (6,069) (6,069)
----------
Comprehensive income 50,982
Treasury stock acquired (33,250) (33,250)
Stock options exercised 143 (5,145) 3,135 (1,867)
Performance awards (1,546) 594 1,349 397
Payment received from ESOP 2,730 2,730
Tax reduction - employee plans 2,444 2,444
Two-for-one stock split 112,963 (6,054) (170,349) 63,440 --
Cash dividends ($.19 per share) (9,630) (9,630)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1998 248,280 1,199 39,965 (5,135) (28,638) -- 255,671
Comprehensive income
Net earnings 62,447 62,447
Foreign currency translation (535) (535)
----------
Comprehensive income 61,912
Treasury stock acquired (44,535) (44,535)
Stock options exercised 149 (3,499) 3,004 (346)
Performance awards (1,071) (174) 802 (443)
Tax reduction - employee plans 1,334 1,334
Cash dividends ($.23 per share) (10,830) (10,830)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1999 $ 248,280 $ 1,611 $ 87,909 $ (5,670) $ (69,367) $ -- $ 262,763
=================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Donaldson Company, Inc. and all majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
amounts in prior periods have been reclassified to conform to the current
presentation. The reclassifications had no impact on the net earnings as
previously reported.
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 most foreign operations, local currencies are
considered the functional currency. Assets and liabilities are translated using
the exchange rates in effect at the balance sheet date. 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 foreign currency adjustment in accumulated other
comprehensive income in shareholders' equity. Foreign currency transaction gains
of $0.2 million in 1999 and losses of $1.4 million and $0.5 million in 1998 and
1997, respectively, are included in earnings before income taxes.
CASH EQUIVALENTS The company considers all highly liquid temporary investments
with a maturity of three months 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 approximately 53 percent of total inventories at July 31,
1999 and 1998.
The FIFO cost of inventories valued under the LIFO method exceeded the LIFO
carrying values by $19.7 million and $19.9 million at July 31, 1999 and 1998,
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. 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
================================================================================
INTANGIBLE ASSETS Intangible assets, primarily consisting of goodwill, are
amortized on a straight-line basis over periods ranging up to 15 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. 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 1998 and 1997, the company reassessed the carrying value of certain
amounts of purchased intangibles related to previous business acquisitions. As a
result, a total non-cash charge of $1.0 million and $5.0 million was recorded
and is included in selling, general and administrative expenses on the
consolidated statement of earnings in 1998 and 1997, respectively.
22
<PAGE>
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.
COMPREHENSIVE INCOME The company adopted Statement of Finan cial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, in the first quarter
of fiscal 1999. Comprehensive Income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statements of
Changes in Shareholders' Equity. Accumulated other comprehensive income consists
only of accumulated foreign currency translation adjustment. The adoption of
SFAS 130 has no impact on the company's net earnings or shareholders' equity.
EARNINGS PER SHARE The company follows SFAS 128 "Earnings per Share" to present
earnings per share calculations.
The company's basic net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares. The
company's diluted net earnings per share is computed by dividing net earnings by
the weighted average number of outstanding common shares and dilutive shares
relating to stock options.
The following table presents information necessary to calculate basic and
diluted earnings per share:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- --------------------------------------------------------------------------------
Weighted average shares - basic 46,899 49,332 50,315
Dilutive shares 894 897 902
- --------------------------------------------------------------------------------
Weighted average shares - diluted 47,793 50,229 51,217
================================================================================
Net earnings for basic and diluted
earnings per share computation $62,447 $57,051 $50,620
================================================================================
Net earnings per share - basic $ 1.33 $ 1.16 $ 1.01
================================================================================
Net earnings per share - diluted $ 1.31 $ 1.14 $ .99
================================================================================
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 SFAS123, "Accounting for Stock-Based Compensa tion"
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 (APB) 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 Revenue is recognized when product is shipped and invoiced
or performance of services is complete.
PRODUCT WARRANTIES The company provides for estimated warranty costs and accrues
for specific items at the time their existence is known and the amounts are
determinable.
NEW ACCOUNTING STANDARDS SFAS 133 "Accounting for Deriv ative Instru ments and
Hedging Activities" is effective for fiscal years beginning after June 15, 2000.
SFAS 133 requires a company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the hedged assets, liabilities, or firm
commitments are recognized through earnings or in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The company has not yet determined what the effect of SFAS 133 will be on
earnings and the financial position of the company.
23
<PAGE>
NOTE B ACQUISITIONS AND PLANT CLOSURE
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 1999, the company acquired the remaining 49 percent of D.I. Filter
Systems Pvt. Ltd., in New Delhi, India for $0.1 million.
During 1998, the company acquired an additional 10 percent of PT Panata
Jaya Mandiri in Jakarta, Indonesia for $0.7 million. This additional investment
brought the total ownership in this joint venture to 30 percent.
During 1998 the company also invested approximately $1.6 million for a 50
percent ownership in MSCA, LLC in Monticello, Indiana.
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.
During 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 1998, the company reassessed the goodwill related to
this acquisition and recorded a non-cash charge of $1.0 million included in
selling, general and administrative expenses.
During 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.
PLANT CLOSURE
During the fourth quarter 1999, the company adopted a plan to close one of its
manufacturing facilities. The closure of the facility is expected to be
completed by the end of the calendar year. A pretax charge of $2.8 million was
recorded in the fourth quarter and is included in general and administrative
expense in the company's consolidated statement of earnings. The charge was
primarily related to severance and other employee related costs associated with
the elimination of approximately 125 positions.
24
<PAGE>
NOTE C CREDIT FACILITIES
In December 1997, the company amended and renewed a five-year multi-currency
revolving facility 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 currencies and 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. There were no amounts outstanding under this credit facility at July
31, 1999 and $22.0 million outstanding at July 31, 1998, leaving $100.0 million
and $78.0 million available for further borrowing under such facility at July
31, 1999 and 1998, respectively. The weighted average interest rate on
short-term borrowings outstanding at July 31, 1998 was 5.29 percent.
At July 31, 1999, there was an additional $35.0 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, 1999. There was $1.0 million outstanding under these facilities at July
31, 1998.
Overseas subsidiaries may borrow under various credit facilities. As of
July 31, 1999 and 1998, borrowings under these facilities were $20.3 million and
$22.5 million, respectively. The weighted average interest rate on these
overseas borrowings outstanding at July 31, 1999 and 1998 was 3.04 percent and
5.47 percent, respectively.
NOTE D LONG-TERM DEBT
Long-term debt consists of the following:
(THOUSANDS OF DOLLARS) 1999 1998
- --------------------------------------------------------------------------------
6.20% Unsecured senior notes due July 15, 2005,
interest payable semi-annually, principal
payment of $23.0 million is due
July 15, 2005 $23,000 $23,000
6.31% Unsecured senior notes due July 15, 2008,
interest payable semi-annually, principal
payment of $27.0 million is due
July 15, 2008 27,000 27,000
6.39% Unsecured senior note due
August 15, 2010, interest payable
semi-annually, principal payments of
$5.0 million, to be paid annually
commencing August 16, 2006 25,000 0
1.9475% Guaranteed senior note due
January 29, 2005, interest payable
semi-annually, principal payment of
$1.2 billion Yen is due January 31, 2005 10,358 0
Other 1,742 1,958
- --------------------------------------------------------------------------------
Total 87,100 51,958
Less current maturities 409 405
- --------------------------------------------------------------------------------
Total long-term debt $86,691 $51,553
================================================================================
Annual maturities of long-term debt for the next five years are $0.4
million in 2000, $0.2 million in 2001 and $0.1 million in 2002. Annual
maturities in 2003 and 2004 are not significant. The company estimates that the
carrying value of long-term debt approximates its fair market value.
Total interest paid relating to all debt was $6.0 million, $4.6 million and
$2.4 million in 1999, 1998 and 1997, respectively. In addition, total interest
expense recorded in 1999, 1998 and 1997 was $7.0 million, $4.7 million and $2.4
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
25
<PAGE>
worth (as defined) does not exceed certain minimum levels. At July 31, 1999,
under the most restrictive agreement, tangible net worth exceeded the minimum by
$93.0 million.
Subsequent to year end, the company has obtained $8.0 million in Industrial
Development Revenue Bond Financing. This financing will cover the expenses to be
incurred in the construction of the company's new manufacturing facility in
Auburn, Alabama. The bonds are variable rate, tax exempt investments with a
maturity of September 2, 2024. The initial coupon rate was set at 3.35 percent,
on September 2, 1999.
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 plan provides defined benefits pursuant to a cash
balance feature whereby a participant accumulates a benefit comprised of a
percentage of current salary which varies with years of service, interest
credits and transition credits. The overseas plans generally provide pension
benefits based on years of service and compensation level. 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 domestic pension plans includes the following
components:
(THOUSANDS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------
Net periodic cost:
Service cost $ 5,609 $ 4,833 $ 4,495
Interest cost 9,188 8,465 8,190
Expected return on assets (10,006) (8,838) (7,641)
Transition amount amortization (1,097) (1,097) (1,097)
Prior service cost amortization 30 (18) 338
Actuarial loss amortization 1,094 259 645
Curtailment loss 684 0 0
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 5,502 $ 3,604 $ 4,930
================================================================================
The funded status of the company's domestic pension plans as of July 31,
1999 and 1998, is as follows:
(THOUSANDS OF DOLLARS) 1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $121,213 $117,674
Service cost 5,609 4,833
Interest cost 9,188 8,465
Plan amendments 1,338 232
Actuarial (gain)/loss 1,392 (5,162)
Benefits paid (6,744) (4,829)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $131,996 $121,213
================================================================================
Change in plan assets:
Fair value of plan assets at
beginning of year $123,956 $112,161
Actual return on plan assets 9,282 8,955
Company contributions 3,893 7,669
Benefits paid (6,744) (4,829)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $130,387 $123,956
================================================================================
Reconciliation of funded status:
Funded (unfunded) status $ (1,609) $ 2,743
Unrecognized actuarial loss 1,885 863
Unrecognized prior service cost 1,968 1,344
Unrecognized net transition obligation (4,866) (5,963)
- --------------------------------------------------------------------------------
Net amount recognized in consolidated
balance sheet $ (2,622) $ (1,013)
================================================================================
Amounts recognized in consolidated
balance sheet consist of:
Prepaid benefit cost $ 3,500 $ 4,057
Accrued benefit liability (6,122) (5,070)
Additional minimum liability (653) (2,442)
Intangible asset 653 2,442
- --------------------------------------------------------------------------------
Net amount recognized in
consolidated balance sheet $ (2,622) $ (1,013)
================================================================================
26
<PAGE>
The projected benefit obligation and accumulated benefit obligation for
domestic pension plans with accumulated benefit obligations in excess of plan
assets were $7.9 million and $4.4 million, respectively, as of July 31,1999 and
$18.2 million and $17.0 million, respectively, as of July 31, 1998. There was no
fair value of plan assets and $13.3 million fair value of plan assets for
domestic pension plans with accumulated benefit obligations in excess of plan
assets as of July 31, 1999 and July 31, 1998, respectively.
WEIGHTED-AVERAGE ACTUARIAL
ASSUMPTIONS AS OF JULY 31 1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.50% 7.25% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 6.00% 6.00% 6.00%
================================================================================
Expenses related to overseas plans were $2.5 million, $1.7 million and $1.7
million for 1999, 1998 and 1997, respectively. Any actuarially calculated assets
or liabilities related to these plans are not significant.
Beginning with fiscal year 2000, the company expects to change its
measurement date from the last day of the fiscal year to three months prior. The
weighted average discount rate, expected return on plan assets and rate of
compensation increase assumptions as of April 30, 1999 is 7.00 percent, 9.00
percent and 6.00 percent, respectively. Management of the company believes the
impact on the fiscal year 2000 pension expense, as well as the cumulative effect
of this change will be immaterial.
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 were held in trust and were issued to employees' accounts in
the ESOP as the loan was repaid over 10 years. All shares have been allocated as
of July 31, 1999. The loan obligation of the ESOP was considered unearned
employee benefit expense and, as such, was 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, were used to repay the
loan principal and interest. Both the loan obligation and the unearned benefit
expense were reduced by the amount of loan principal repayments made by the
ESOP. The ESOP contribution expense totaled $2.6 million in 1997. The ESOP's 10
year term was completed at July 31, 1997.
401(k) SAVINGS PLAN The company provides a contributory employee savings plan
which permits participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. The company's contributions under
this plan are based on the level of employee contributions including a variable
contribution based on performance of the company. Total contribution expense was
$4.9 million and $2.9 million for the years ended July 31, 1999 and July 31,
1998, respectively. There was no contribution for the year ended July 31, 1997.
NOTE F SHAREHOLDERS' EQUITY
STOCK RIGHTS 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 entitles 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),
27
<PAGE>
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.
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. There was no performance award expense in 1999. Performance
award expense totaled $0.7 million and $3.5 million in 1998 and 1997,
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 1999 become exercisable for
non-executives in each of the following three years, in an equal number of
shares each year and become exercisable for executives immediately upon the date
of grant. Stock options issued during fiscal 1997 and 1998 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 1996 for executives become exercisable in a
four year period in equal number of shares each year. Prior to fiscal 1996,
stock options vested immediately for executives. At July 31, 1999, options to
purchase 3,382,322 shares are outstanding under these plans.
In fiscal 1997, the company adopted the disclosure-only provisions of SFAS
123 "Accounting for Stock-Based Compen sation." 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 123 in fiscal 1999, 1998 and 1997, the company's net income and earnings
per share would have been approximately $61.1 million and $1.28, $55.7 million
and $1.11, and $49.4 million and $.97, 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: risk free interest rate of 5.50 percent, 5.63 percent and 6.13
percent in 1999, 1998 and 1997, respectively; two, three or seven year lives in
1999, three, six, seven or nine year lives in 1998 and five or seven year lives
in 1997; expected volatility of 26.3 percent, 22.5 percent and 19.4 percent in
1999, 1998 and 1997, respectively; and 1 percent expected dividend yield in
1999, 1998 and 1997. 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 the actual future price levels of the
company's common stock.
The weighted average fair value for options granted during fiscal 1999,
1998 and 1997 is $5.62, $6.35 and $7.76 per share, respectively.
28
<PAGE>
The number and option price of options granted under these plans were as
follows:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
- --------------------------------------------------------------------------------
Outstanding at July 31, 1996 3,261,766 $ 9.70
Granted 627,778 15.94
Exercised (567,736) 9.14
Canceled (4,500) 12.38
- --------------------------------------------------------------------------------
Outstanding at July 31, 1997 3,317,308 10.98
Granted 472,595 22.83
Exercised (419,728) 8.40
Canceled (21,999) 14.98
- --------------------------------------------------------------------------------
Outstanding at July 31, 1998 3,348,176 12.95
Granted 495,149 20.10
Exercised (432,505) 8.65
Canceled (28,498) 18.35
- --------------------------------------------------------------------------------
OUTSTANDING AT JULY 31, 1999 3,382,322 $14.50
================================================================================
At July 31, 1999 and 1998 there were 2,451,657 and 2,536,342 options
exercisable, respectively. Shares reserved at July 31, 1999 for outstanding
options and future grants were 8,576,98l.
The following table summarizes information concerning currently outstanding
and exercisable options:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$0 to $5 15,600 .38 $ 3.42 15,600 $ 3.42
$5 to $10 833,684 1.90 8.81 833,684 8.81
$10 to $15 1,135,940 4.94 12.29 1,064,340 12.27
$15 and above 1,397,098 8.22 19.81 538,033 19.04
- --------------------------------------------------------------------------------
3,382,322 5.53 $ 14.50 2,451,657 $ 12.52
================================================================================
NOTE G INCOME TAXES
The components of earnings before income taxes are as follows:
(THOUSANDS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------
Earnings before income taxes:
United States $ 55,811 $ 60,673 $ 50,259
Overseas 33,399 25,768 28,835
- --------------------------------------------------------------------------------
Total $ 89,210 $ 86,441 $ 79,094
================================================================================
The components of the provision for income taxes are as follows:
(THOUSANDS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------
INCOME TAXES:
Current:
Federal $ 16,717 $ 15,931 $ 18,527
State 2,471 1,837 2,092
Overseas 7,086 7,396 8,805
- --------------------------------------------------------------------------------
26,274 25,164 29,424
- --------------------------------------------------------------------------------
Deferred:
Federal 426 3,410 (525)
State 24 195 (30)
Overseas 39 621 (395)
- --------------------------------------------------------------------------------
489 4,226 (950)
- --------------------------------------------------------------------------------
Total $ 26,763 $ 29,390 $ 28,474
================================================================================
29
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
(THOUSANDS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Compensation and retirement plans $ 8,950 $ 5,705 $ 6,979
Accrued expenses 9,617 8,365 9,758
Brazilian asset write-down 0 720 498
NOL carryforwards 3,560 2,070 2,115
Inventories 1,595 1,095 1,074
Investment in joint venture 588 1,195 1,306
Cumulative translation adjustment 2,494 2,646 --
Other 3,267 3,630 3,650
- --------------------------------------------------------------------------------
Gross deferred tax assets 30,071 25,426 25,380
Valuation allowance (2,432) (1,172) (1,316)
- --------------------------------------------------------------------------------
Net deferred tax assets 27,639 24,254 24,064
Deferred tax liabilities:
Depreciation and amortization (11,235) (8,573) (6,756)
Cumulative translation adjustment -- -- (502)
Other (1,626) (2,224) (1,987)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (12,861) (10,797) (9,245)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 14,778 $ 13,457 $ 14,819
================================================================================
The following table reconciles the U.S. statutory income tax rate with the
effective income tax rate:
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes 1.8 1.4 1.7
Overseas taxes at lower rates (5.5) (1.3) (2.1)
Other (1.3) (1.1) 1.4
- --------------------------------------------------------------------------------
30.0% 34.0% 36.0%
================================================================================
At July 31, 1999, certain overseas subsidiaries had available net operating
loss carryforwards of approximately $10.0 million to offset future taxable
income. The majority of such carryforwards expire after 2002. Unremitted
earnings of overseas subsidiaries amounted to approximately $86.9 million at
July 31, 1999. The majority of those earnings are intended to be indefinitely
reinvested and, accordingly, no deferred U.S. income taxes have been provided.
If a portion were to be remitted, foreign tax credits would substantially offset
any resulting incremental U.S. income 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 lower overseas taxes in 1999 reflect the
benefit of foreign tax credits from foreign dividends and lower overseas taxes.
30
<PAGE>
The company made cash payments for income taxes of $20.8 million, $22.5
million and $30.7 million in 1999, 1998 and 1997, respectively.
NOTE H SEGMENT REPORTING
The company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective with fiscal year-end 1999. This standard
requires companies to disclose selected financial data by operating segment. A
segment is defined as a component with business activity resulting in revenue
and expense that has separate financial information evaluated regularly by the
company's chief operating decision maker in determining resource allocation and
assessing performance. The company has identified two reportable segments:
Engine Products and Industrial Products. Segment selection was based on the
internal organizational structure, management of operations and performance
evaluation by management and the company's Board of Directors.
The Engine Products segment sells to original equipment manufacturers
(OEMs) in the construction, industrial, mining, agriculture and transportation
markets and to independent distributors, OEM dealer networks, private label
accounts and large private fleets. Products include air intake systems, exhaust
systems, liquid filtration systems and replacement filters.
The Industrial Products segment sells to various industrial end-users, OEMs
of gas-fired turbines, OEMs and end users requiring highly purified air.
Products include dust, fume and mist collectors, static and pulse-clean air
filter systems and specialized air filtration systems.
Corporate and Unallocated amounts include corporate expenses determined to
be non-allocable to the segments, interest income and expense, non-operating
income and expense and expenses not allocated to the business segments in the
same period. Assets included in Corporate and Unallocated principally are cash
and cash equivalents, inventory reserves, certain prepaids, certain investments,
other assets and assets allocated to intercompany transactions.
The company has developed an internal measurement system to evaluate
performance and allocate resources based on profit or loss from operations
before income taxes. The company's manufacturing facilities serve both reporting
segments. Therefore, the company uses an allocation methodology to assign costs
and assets to the segments. A certain amount of costs and assets are assigned to
intercompany activity and are not assigned to either segment. Certain accounting
policies applied to the reportable segments differ from those described in the
summary of significant accounting policies. The reportable segments account for
receivables on a gross basis, account for inventory on a standard cost basis and
account for income taxes on a flat rate.
Segment allocated assets are primarily accounts receivable, inventories and
property, plant and equipment. Reconciling items included in Corporate and
Unallocated are created based on accounting differences between segment
reporting and the consolidated, external reporting as well as internal
allocation methodologies.
31
<PAGE>
Segment detail is summarized as follows (in thousands):
<TABLE>
<CAPTION>
ENGINE INDUSTRIAL CORPORATE & TOTAL
PRODUCTS PRODUCTS UNALLOCATED COMPANY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $611,378 $332,761 $ -- $944,139
Depreciation and amortization 18,486 7,506 1,694 27,686
Equity in earnings of unconsolidated affiliates 3,202 -- 408 3,610
Earnings before income taxes 61,896 36,373 (9,059) 89,210
Assets 327,035 160,201 41,122 528,358
Equity investments in unconsolidated affiliates 10,581 -- 2,972 13,553
Capital expenditures 19,723 8,008 1,808 29,539
===============================================================================================================
1998
Net sales $622,096 $318,255 $ -- $940,351
Depreciation and amortization 16,551 6,437 2,284 25,272
Equity in earnings of unconsolidated affiliates 3,506 -- -- 3,506
Earnings before income taxes 62,987 29,057 (5,603) 86,441
Assets 321,872 151,221 27,432 500,525
Equity investments in unconsolidated affiliates 8,803 -- -- 8,803
Capital expenditures 35,826 13,934 4,945 54,705
===============================================================================================================
1997
Net sales $556,730 $276,618 $ -- $833,348
Depreciation and amortization 13,967 5,760 1,767 21,494
Equity in earnings of unconsolidated affiliates 2,791 -- -- 2,791
Earnings before income taxes 76,137 21,382 (18,425) 79,094
Assets 277,379 152,162 24,853 454,394
Equity investments in unconsolidated affiliates 6,854 -- -- 6,854
Capital expenditures 30,753 12,684 3,890 47,327
===============================================================================================================
</TABLE>
32
<PAGE>
Geographic sales by origination and property, plant and equipment (in
thousands):
<TABLE>
<CAPTION>
PROPERTY, PLANT &
NET SALES EQUIPMENT - NET
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999
United States $616,254 $122,513
Europe 166,431 28,616
Asia Pacific 138,453 21,911
Other 23,001 9,140
- ---------------------------------------------------------------------------------------------------------------
Total $944,139 $182,180
===============================================================================================================
1998
United States $615,770 $119,623
Europe 160,211 29,620
Asia Pacific 139,606 18,848
Other 24,764 10,776
- ---------------------------------------------------------------------------------------------------------------
Total $940,351 $178,867
===============================================================================================================
1997
United States $522,289 $ 98,066
Europe 141,358 28,193
Asia Pacific 148,683 17,477
Other 21,018 10,859
- ---------------------------------------------------------------------------------------------------------------
Total $833,348 $154,595
===============================================================================================================
</TABLE>
Sales to one customer accounted for 11 percent of net sales in 1999, 1998
and 1997.
33
<PAGE>
NOTE I QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(THOUSAND OF DOLLARS, FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net Sales $225,431 $220,249 $244,219 $254,240
Gross Margin 62,329 62,262 74,212 76,878
Net Earnings 13,369 13,172 17,418 18,488
Diluted Earnings Per Share .28 .27 .37 .39
Dividends Declared Per Share .06 .06 .06 .06
===============================================================================================================
1998
Net Sales $234,067 $232,974 $233,840 $239,470
Gross Margin 68,390 64,940 62,744 67,188
Net Earnings 14,018 12,509 15,924 14,600
Diluted Earnings Per Share .27 .25 .32 .30
Dividends Declared Per Share .05 .05 .05 .05
===============================================================================================================
</TABLE>
NOTE J CONTINGENCIES
The company is involved 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.
34
<PAGE>
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 8, 1999
35
<PAGE>
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 Shareowner Services at (800)468-9716 or (651)450-4064.
DIVIDEND REINVESTMENT PLAN
As of September 9, 1999, 1,246 of Donaldson Company's approximately 1,984
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 Norwest Bank Minnesota, N.A., Shareowner Services, P.O. Box 64854, St.
Paul, MN 55164-0854.
ANNUAL MEETING
The annual meeting of shareholders will be held at 10 a.m. on Friday, November
19, 1999, at The Conference Center at Atrium Center, 3105 E. 80th Street,
Bloomington, Minnesota. You are welcome to attend.
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, MN 55440.
AUDITORS
Ernst & Young LLP, 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
[BAR CHART]
HIGH LOW
---- ---
1994
1ST QUARTER 10 13/16 9 1/8
2ND QUARTER 11 7/8 10
3RD QUARTER 12 5/8 10 15/16
4TH QUARTER 13 1/16 10
1995
1ST QUARTER 13 10 7/16
2ND QUARTER 12 1/8 10 7/16
3RD QUARTER 12 7/8 11 1/4
4TH QUARTER 14 12 1/16
1996
1ST QUARTER 13 3/16 11 15/16
2ND QUARTER 13 1/16 12 1/16
3RD QUARTER 13 15/16 12 13/16
4TH QUARTER 14 12
1997
1ST QUARTER 14 5/8 12 11/16
2ND QUARTER 17 14 5/16
3RD QUARTER 18 5/16 15 3/8
4TH QUARTER 20 3/8 17 3/4
1998
1ST QUARTER 27 3/16 20 5/16
2ND QUARTER 25 11/16 22 1/4
3RD QUARTER 26 3/16 22 5/8
4TH QUARTER 25 1/8 18 9/16
1999
1ST QUARTER 21 15/16 14 7/16
2ND QUARTER 21 17 11/16
3RD QUARTER 23 1/2 17 1/4
4TH QUARTER 25 7/8 21 15/16
36
<PAGE>
BOARD OF DIRECTORS AND CORPORATE OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS
<S> <C> <C>
F. Guillaume Bastiaens, 56, S. Walter Richey, 63, William G. Van Dyke, 54,
VICE CHAIRMAN, RETIRED CHAIRMAN, PRESIDENT CHAIRMAN, PRESIDENT AND
CARGILL INC., MINNEAPOLIS (AGRIBUSINESS). AND CHIEF EXECUTIVE OFFICER, CHIEF EXECUTIVE OFFICER.
DIRECTOR SINCE 1995.(2),(3) MERITEX, INC., MINNEAPOLIS, 27 YEARS SERVICE.
(DISTRIBUTION SERVICES).
Paul B. Burke, 43, DIRECTOR SINCE 1991.(2),(3) William M. Cook, 46,
CHAIRMAN, PRESIDENT AND SENIOR VICE PRESIDENT,
CHIEF EXECUTIVE OFFICER, Stephen W. Sanger, 53, COMMERCIAL AND INDUSTRIAL.
BMC INDUSTRIES, INC., MINNEAPOLIS CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 19 YEARS SERVICE.
(MANUFACTURING). GENERAL MILLS, INC., MINNEAPOLIS
DIRECTOR SINCE 1996.(1),(3) (CONSUMER PRODUCTS). James R. Giertz, 42,
DIRECTOR SINCE 1992.(1),(2) SENIOR VICE PRESIDENT AND
Janet M. Dolan, 50, CHIEF FINANCIAL OFFICER.
PRESIDENT AND CHIEF EXECUTIVE OFFICER, William G. Van Dyke, 54, 6 YEARS SERVICE.
TENNANT COMPANY, MINNEAPOLIS CHAIRMAN, PRESIDENT AND
(MANUFACTURING). CHIEF EXECUTIVE OFFICER, Nickolas Priadka, 53,
DIRECTOR SINCE 1996.(2),(3) DONALDSON COMPANY, INC. SENIOR VICE PRESIDENT, OEM ENGINE
DIRECTOR SINCE 1994. SYSTEMS AND PARTS.
Jack W. Eugster, 54, 30 YEARS SERVICE.
CHAIRMAN, PRESIDENT AND (1) HUMAN RESOURCES COMMITTEE
CHIEF EXECUTIVE OFFICER, (2) AUDIT COMMITTEE Lowell F. Schwab, 51,
THE MUSICLAND GROUP, INC., (3) DIRECTORS AFFAIRS COMMITTEE SENIOR VICE PRESIDENT, OPERATIONS.
MINNEAPOLIS (CONSUMER PRODUCTS). 20 YEARS SERVICE.
DIRECTOR SINCE 1993.(1),(3)
Edmund C. Craft, 59,
John F. Grundhofer, 60, VICE PRESIDENT, ENGINE AFTERMARKET.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 20 YEARS SERVICE.
U.S. BANCORP, MINNEAPOLIS
(FINANCIAL SERVICES). Norman C. Linnell, 40,
DIRECTOR SINCE 1997(1),(3) GENERAL COUNSEL AND SECRETARY.
4 YEARS SERVICE.
Kendrick B. Melrose, 59,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, John E. Thames, 49,
THE TORO COMPANY, MINNEAPOLIS VICE PRESIDENT, HUMAN RESOURCES
(MANUFACTURING). AND COMMUNICATIONS.
DIRECTOR SINCE 1991.(1),(2) 11 YEARS SERVICE.
Thomas A. Windfeldt, 50,
VICE PRESIDENT, CONTROLLER AND TREASURER.
19 YEARS SERVICE.
</TABLE>
<PAGE>
WORLDWIDE OPERATIONS
<TABLE>
<S> <C> <C>
WORLD HEADQUARTERS JOINT VENTURES Donaldson Italia s.r.l.,
OSTIGLIA, ITALY
Donaldson Company, Inc. Advanced Filtration Systems Inc.,
MINNEAPOLIS, MINNESOTA CHAMPAIGN, ILLINOIS Nippon Donaldson, Ltd.,
TOKYO, JAPAN
U.S. PLANTS MSCA, LLC,
MONTICELLO, INDIANA Donaldson Korea Co., Ltd.,
AUBURN, ALABAMA SEOUL, SOUTH KOREA
OLD SAYBROOK, CONNECTICUT Guilin Air King Enterprises Ltd.,
DIXON, ILLINOIS GUILIN, PEOPLE'S REPUBLIC OF CHINA Donaldson Far East Ltd.,
FRANKFORT, INDIANA HONG KONG, S.A.R.,
CRESCO, IOWA PT Panata Jaya Mandiri, PEOPLE'S REPUBLIC OF CHINA
GRINNELL, IOWA JAKARTA, INDONESIA
OELWEIN, IOWA Donaldson (Wuxi) Filters Co., Ltd.,
NICHOLASVILLE, KENTUCKY SUBSIDIARIES WUXI, PEOPLE'S REPUBLIC OF CHINA
PORT HURON, MICHIGAN
CHILLICOTHE, MISSOURI Donaldson Europe, N.V., PT Donaldson Systems Indonesia
MOORESVILLE, NORTH CAROLINA LEUVEN, BELGIUM JAKARTA, INDONESIA
PHILADELPHIA, PENNSYLVANIA
BALDWIN, WISCONSIN Donaldson Coordination Center, N.V., D.I. Filter Systems Pvt. Ltd.,
STEVENS POINT, WISCONSIN LEUVEN, BELGIUM NEW DELHI, INDIA
DISTRIBUTION CENTERS Donaldson Gesellschaft m.b.H., Donaldson Australasia (Pty.) Ltd.,
DULMEN, GERMANY WYONG, AUSTRALIA
RENSSELAER, INDIANA
ONTARIO, CALIFORNIA Donaldson Filter Components, Ltd., Donaldson Filtration Systems (Pty.) Ltd.,
ANTWERP, BELGIUM HULL, ENGLAND CAPE TOWN, SOUTH AFRICA
SINGAPORE
Donaldson Torit, B.V., Donaldson, S.A. de C.V.,
HAARLEM, NETHERLANDS AGUASCALIENTES, MEXICO
Donaldson France, S.A., Diemo S.A. de C.V.,
BRON, FRANCE GUADALAJARA, MEXICO
Tecnov-Donaldson, S.A., LICENSEE
DOMJEAN, FRANCE
Parker Hannifin Ind. Com. Ltda.,
Donaldson Filtros Iberica S.L., SAO PAULO, BRAZIL
MADRID, SPAIN
</TABLE>
[LOGO]
DONALDSON(R)
FILTRATION SOLUTIONS
DONALDSON COMPANY, INC. MAILING ADDRESS:
1400 WEST 94TH STREET P.O. BOX 1299
MINNEAPOLIS, MINNESOTA MINNEAPOLIS, MINNESOTA
U.S.A. 55440 U.S.A
612-887-3131
www.donaldson.com
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 8, 1999, included
in the 1999 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 333-56027 on Form S-8 dated June 4, 1998, 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 8, 1999,
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 27, 1999
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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/s/ John F. Grundhofer
----------------------------------------
John F. Grundhofer
<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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/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 1999, 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 said report so
signed for filing with the Securities and Exchange Commission.
Dated: October 8, 1999
/s/ F. Guillaume Bastiaens
---------------------------------------
F. Guillaume Bastiaens
EXHIBIT 99
FACTORS AFFECTING FUTURE OPERATING RESULTS
From time to time, the Company, through its management, may make forward-looking
statements reflecting the Company's current views with respect to future events
and financial performance. These forward-looking statements, which may be in
reports filed under the Securities Exchange Act of 1934, as amended ( The
"Exchange Act"), in press releases and in other documents and materials as well
as in written or oral statements made by or on behalf of the company, are
subject to certain risks and uncertainties, including those discussed below
which could cause actual results to differ materially from historical results or
those anticipated. The words or phrases " will likely result," "are expected
to," "will continue," "estimate," "project," "believe," "expect," "anticipate,"
"forecast" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 21e of the Exchange Act and Section 27A
of the Securities Act of 1933, as amended, as enacted by the Private Securities
Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date such statements are made. In
addition, the company wishes to advise readers that the factors listed below, as
well as other factors could affect the company's financial or other performance
and could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods or events in any current statement. This discussion of factors is not
intended to be exhaustive, but rather to highlight important risk factors that
impact results. General economic conditions and many other contingencies that
may cause the Company's actual results to differ from those currently
anticipated are not separately discussed. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS
The Company maintains international subsidiaries and operations in many
countries, and the results of operations and the financial position of each of
the company's subsidiaries is reported in the relevant foreign currency and then
translated into United States ("U.S.") dollars at the applicable foreign
currency exchange rate for inclusion in the Company's consolidated financial
statements. As exchange rates between these foreign currencies and the U.S.
dollar fluctuate, the translation effect of such fluctuations may have an
adverse effect on the Company's results of operations or financial position as
reported in U.S. dollars.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company does business in numerous countries, including markets in Asia,
Mexico and Europe. Maintenance and continued growth of this portion of the
company's business may be affected by changes in trade, monetary and fiscal
policies and the laws and regulations of the United States and other trading
nations. In addition, the Company's international operations are subject to the
risk of new and different legal and regulatory requirements in local
jurisdictions, tariffs and trade barriers, potential difficulties in staffing
and managing local operations, credit risk of local customers and distributors,
potential difficulties in protecting intellectual property,
<PAGE>
risk of nationalization of private enterprises, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions,
including the possibility of hyper-inflationary conditions, in certain
countries. Net sales in the Asia Pacific region have fallen slightly in the past
two years and the Company anticipates this trend of flat or slow sales growth to
continue for the near term. If for whatever reason, the U.S. were to enter a
recession, then demand for Company products would be negatively impacted in
North America and throughout the rest of the world.
COMPETITION AND TECHNOLOGY ISSUES
The markets in which the Company operates are highly competitive and fragmented
both geographically and by application. As a result, the Company competes with
numerous regional or specialized competitors, many of which are well established
in their respective markets. The Company has, from time to time, experienced
price pressures from competitors in certain product lines and geographic
markets. The Company's competitors and new entrants into the Company's lines of
business can be expected to continue to improve the design and performance of
their products and to introduce new products with competitive price and
performance characteristics. Competition in the Company's lines of business may
limit its ability to recover future increases in labor and raw material
expenses. Although the Company believes that it has certain technological and
other advantages over its competitors, realizing and maintaining these
advantages will require continued productive investment by the Company in
research and development, sales and marketing and customer service and support.
There can be no assurance that the Company will be successful in maintaining
such advantages. Successful product innovation by competitors that reach the
market prior to comparable innovation by the Company or that are amenable to
patent protection may adversely affect the Company's financial performance.
A number of the Company's major OEM customers manufacture products for their own
use that compete with the Company's products. Although these OEM customers have
indicated that they will continue to rely on outside suppliers, the OEMs could
elect to manufacture products for their own use and in place of the products now
supplied by the Company. In addition, customers of the Company's engine
filtration and exhaust products business line could decide to meet their
filtration requirements through alternative methods, such as engine design
modifications, rather than rely on the Company's products.
RISKS RELATING TO FUTURE ACQUISITIONS
The Company has in the past and may in the future pursue acquisitions of
complementary product lines, technologies or businesses. Future acquisitions by
the Company may result in potentially dilutive issuance's of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, which could adversely affect
the Company's profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, corporate culture conflicts, the diversion
of management's attention from other business concerns, assumption of
unanticipated legal liabilities and the potential loss of key employees of the
acquired company. There can be no assurance that the Company will be able to
identify and successfully complete and integrate potential acquisitions in the
future. In the event that any such acquisition does occur, however, there can be
no assurance as to the effect thereof on the Company's business or operating
results.
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations in the
jurisdictions in which it operates, including those relating to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes
and the remediation of contamination associated with the use and disposal of
hazardous substances. The Company, like many of its competitors, has incurred
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations in both the United States and
abroad.
PRODUCT DEMAND CONSIDERATIONS
Demand for certain of the Company's products tends to be cyclical, responding
historically to varying levels of construction, agricultural, heavy equipment
manufacturing, mining and industrial activity in the United States and in other
industrialized nations. Other factors affecting demand include the availability
and cost of financing for equipment purchases and the market availability of
used equipment.
Sales to Caterpillar, Inc. and its subsidiaries have accounted for greater than
10 percent of the Company's net sales in each of the last three fiscal years. An
adverse change in Caterpillar's financial performance, condition or results of
operations or a material reduction in sales to this customer for any other
reason could negatively impact the Company's operating results.
AVAILABILITY OF PRODUCT COMPONENTS
The Company obtains raw material and certain manufactured components from
third-party suppliers. The Company maintains limited raw material inventories,
even brief unanticipated delays in delivery by suppliers, including those due to
capacity constraints, labor disputes, impaired financial condition of suppliers,
weather emergencies or other natural disasters, may adversely affect the
Company's ability to satisfy its customers on a timely basis and thereby affect
the Company's financial performance.
CHANGES IN THE MIX OF PRODUCTS COMPRISING REVENUE
The Company's products constitute various product lines, which have varying
profit margins. A change in the mix of products sold by the Company from that
currently experienced could adversely affect the Company's financial
performance.
RESEARCH AND DEVELOPMENT
The Company makes significant annual investment in research and development
activities to develop new and improved products and manufacturing processes.
There can be no assurance that research and development activities will yield
new or improved products or products which will be purchased by the Company's
customers, or new and improved manufacturing processes.
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