SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
DONALDSON COMPANY, INC.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X][ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
[LOGO](TM)
DONALDSON(R)[DONALDSON LOGO]
DONALDSON COMPANY, INC.
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
TIME: 10:00 a.m., central time, Friday, November 20, 199819, 1999
PLACE: The Conference Center at Atrium Center, 3105 E. 80th Street,
Bloomington, Minnesota.
ITEMS OF (1) Election of three directors;
BUSINESS:
(2) ApprovalRatification of appointment of Ernst & Young LLP as
independent auditors of the Company;
(3) Amendment of the Company's 1991 Master Stock Compensation
Plan; and
any other business that properly comes before the meeting.
RECORD DATE: Stockholders of record at the close of business on September
25,
199824, 1999 are entitled to notice of and to vote at the meeting
or any adjournment. A list of such stockholders will be
available prior to the meeting at the office of the Company,
1400 West 94th Street, Minneapolis, Minnesota for examination
by any such stockholder for any purpose germane to the meeting.
By Order of the Board of Directors
Norman C. Linnell
SECRETARY
Dated: October 14, 199813, 1999
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IMPORTANT
STOCKHOLDERS ARE ENCOURAGED TO VOTE THEIR PROXY BY TELEPHONE AS DESCRIBED IN
THE ENCLOSED TELEPHONE VOTING INSTRUCTIONS OR DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, TO WHICH NO POSTAGE NEED BE AFFIXED
IF MAILED IN THE UNITED STATES.
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DONALDSON COMPANY, INC.
1400 WEST 94TH STREET
MINNEAPOLIS, MINNESOTA 55431
-----------------------------
PROXY STATEMENT
MAILING DATE OCTOBER 14, 199813, 1999
-----------------------------
SOLICITATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of Donaldson Company, Inc. (the "Company") for use at the Annual Meeting of
Stockholders to be held on November 20, 1998,19, 1999, and at any adjournments thereof.
The person signing a proxy may revoke it any time before it is exercised. Each
valid proxy received prior to the meeting will be voted according to the
stockholder's directions. If no direction is given, such proxies will be voted
in favor of (1) the nominees for directors identified herein, and (2) approvingratifying
the auditors named herein, and (3) approving the amendment to the 1991 Master Stock
Compensation Plan described herein.
The cost of this solicitation of proxies will be borne by the Company. In
addition to solicitation of proxies by the use of the mails, there may be
incidental personal solicitations by telephone, special communications or in
person, by officers, directors and regular employees of the Company who will not
receive additional compensation therefor. The Company will reimburse banks,
brokerage firms and other nominees, custodians and fiduciaries for reasonable
expenses incurred by them in sending proxy materials and annual reports to the
beneficial owners of stock. The Company has engaged Morrow & Co., Inc. to assist
in proxy solicitation for an estimated fee of $5,000 plus out-of-pocket
expenses. This proxy statement and the accompanying proxy are first being mailed
to stockholders on or about October 14, 1998.13, 1999.
VOTING SECURITIES
Stockholders of record as of the close of business on September 25, 199824, 1999
will be entitled to vote at the meeting. The Company then had approximately
47,587,17446,032,230 shares of Common Stock outstanding, each of which entitles its holder
to one vote. Representation at the meeting of a majority of the outstanding
shares is required for a quorum.
If an executed proxy card is returned or a proxy is voted by telephone, and
the stockholder has abstained from voting on any matter or, in the case of the
election of directors has withheld authority to vote with respect to any or all
of the nominees, the shares represented by such proxy will be considered present
at the meeting for purposes of determining a quorum and for purposes of
calculating the vote, but will not be considered to have been voted in favor of
such matter or, in the case of the election of directors, in favor of such
nominee or nominees. If an executed proxy is returned by a broker holding shares
in street name which indicates that the broker does not have discretionary
authority as to certain shares to vote on one or more matters, such shares will
be considered present at the meeting for purposes of determining a quorum, but
will not be considered to be represented at the meeting for purposes of
calculating the vote with respect to such matter.
Shares of Common Stock credited to the accounts of participants in the
Automatic Dividend Reinvestment Program of the Company have been added to the
participants' other holdings and included in the enclosed proxy. Participants in
the Company's employee benefit plans are entitled to instruct the plan trustee
as to how to vote all shares of Donaldson Common Stock allocated to their
accounts under the plans as of the record date, and will receive a separate
voting instruction card for directing the plan trustee to vote such shares.
1
SECURITY OWNERSHIP
Set forth below is information regarding persons known by the Company to
own beneficially more than 5% of the outstanding Common Stock of the Company
based on the number of shares of Common Stock outstanding on September 25, 1998:
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
Donaldson Company, Inc.
Employee Stock Ownership Plan ........... 5,831,138(1) 12.3%
c/o Fidelity Management Trust Company
82 Devonshire Street
Boston, MA 02109
Pioneering Management Corporation ....... 4,942,200(2) 10.4%24, 1999:
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
Donaldson Company, Inc.
Employee Stock Ownership Plan ............ 5,391,741(1) 11.7%
c/o Fidelity Management Trust Company
82 Devonshire Street
Boston, MA 02109
Pioneering Management Corporation ........ 4,890,000(2) 10.6%
60 State Street
Boston, MA 02109
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(1) These shares are held in trust for the benefit of participants in the
Company's ESOP for which Fidelity Management Trust Company is the trustee
and claims no voting or investment power over the indicated shares.
(2) Pioneering Management Corporation is a registered investment adviser with
sole voting power with respect to all 4,942,2004,890,000 shares and shared investment
power with respect to all 4,942,2004,890,000 shares. Information is based solely on a
Schedule 13G filed with the Securities and Exchange Commission by Pioneering
Management Corporation with respect to shares held as of December 31, 1997.1998.
The following table sets forth information as of July 31, 1998,1999, regarding the
beneficial ownership of the Company's Common Stock by each director, each of the
Named Officers (as hereinafter defined) and all executive officers and directors
of the Company as a group. Except as otherwise indicated, the named beneficial
owner has sole voting and investment power with respect to the shares held by
such beneficial owner.
TOTAL PERCENT EXERCISABLE
NAME OF INDIVIDUAL OR GROUP SHARES(1) OF CLASS OPTIONS(1)
--------------------------- --------- -------- -----------
William G. Van Dyke ................... 821,062 1.7 454,736
Nickolas Priadka ...................... 244,077 * 119,011
William M. Cook ....................... 99,937 * 50,017
James R. Giertz ....................... 138,463 * 61,324
Lowell F. Schwab ...................... 76,454 * 36,808
Kendrick B. Melrose ................... 43,128 * 20,000
S. Walter Richey ...................... 44,233 * 20,000
Stephen W. Sanger ..................... 36,379 * 20,000
Jack W. Eugster ....................... 31,209 * 16,000
F. Guillaume Bastiaens ................ 13,572 * 8,000
Paul B. Burke ......................... 8,843 * 4,000
Janet M. Dolan ........................ 7,608 * 4,000
John Grundhofer ....................... 3,228 * 0
Directors and Officers as a Group ..... 1,744,646 3.7 914,584
TOTAL PERCENT EXERCISABLE
NAME OF INDIVIDUAL OR GROUP SHARES (1) OF CLASS OPTIONS (1)
--------------------------- ---------- -------- ------------
William G. Van Dyke ................... 959,789(2) 2.1 550,406
Nickolas Priadka ...................... 254,732(3) * 124,881
James R. Giertz ....................... 210,178 * 125,628
William M. Cook ....................... 159,230 * 104,615
Lowell F. Schwab ...................... 134,878 * 88,458
S. Walter Richey ...................... 51,057 * 25,200
Kendrick B. Melrose ................... 49,539 * 25,200
Stephen W. Sanger ..................... 43,282 * 25,200
Jack W. Eugster ....................... 37,535 * 21,200
F. Guillaume Bastiaens ................ 19,330 * 13,200
Paul B. Burke ......................... 15,408 * 9,200
Janet M. Dolan ........................ 14,182 * 9,200
John Grundhofer ....................... 9,648 * 5,200
Directors and Officers as a Group ..... 2,495,402 5.4 1,257,945
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* Less than 1%
(1) Includes restricted shares, shares held in trust and the shares underlying
options exercisable within 60 days, as listed under the Exercisable Options
column.
The total shares for Mr. Van Dyke includes 8,256(2) Includes 65,936 shares held by his
spouse.immediate family members.
(3) Includes 24,358 shares held in a trust of which, Mr. Priadka is a trustee
and has shared voting and investment power.
2
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall consist
of not less than three nor more than 15 directors and that the number of
directors may be fixed from time to time by the affirmative vote of a majority
of the directors. At its meeting of November 21, 1997, theThe Board of Directors has fixed the number of directors
constituting the entire Board at nine. Vacancies and newly created directorships
resulting from an increase in the number of directors may be filled by a
majority of the directors then in office and the directors so chosen will hold
office until the next election of the class for which such directors shall have
been chosen and until their successors are elected and qualified. Directors are
elected for a term of three years with positions staggered so that approximately
one-third of the directors are elected at each annual meeting of the
stockholders. The terms of Paul B. Burke, Kendrick
B. MelroseF. Guillaume Bastiaens, Janet M. Dolan and Stephen W. SangerS. Walter
Richey expire at the annual meeting. Mr. BurkeBastiaens was elected by the Board in
1996, Mr. Melrose1995, Ms. Dolan in 19911996 and Mr. SangerRichey in 1992.1991. It is intended that proxies
received will be voted, unless authority is withheld, FOR the election of the
nominees presented on Page 4, namely Paul B. Burke, Kendrick
B. MelroseF. Guillaume Bastiaens, Janet M. Dolan and
Stephen W. Sanger.S. Walter Richey. The electiondirector nominees receiving the highest number of each nominee requiresvotes
will be elected to fill the affirmative vote ofseats on the holders of a plurality of the shares cast in the
election of directors.Board.
The Board of Directors meets on a regularly scheduled basis. During the
past fiscal year, the Board held six meetings. Each director attended at least
75% of the aggregate of the Board meetings and meetings of Board committees on
which each served, with the exception of Mr. Burke who attended 67%.served.
The Board of Directors has assigned certain responsibilities to standing
committees. The Audit Committee is composed of directors F. Guillaume Bastiaens,
Janet M. Dolan, Kendrick B. Melrose, S. Walter Richey (Chairperson)(Chair) and Stephen W.
Sanger, all of whom are non-employee directors. The Audit Committee held three
meetings during the past fiscal year. Functions of the Audit Committee include: recommending toare
described in the Audit Committee Charter adopted by the Board of Directors independent public auditors foron
September 24, 1999 and set forth in Exhibit A. The Audit Committee satisfied its
obligations under this charter in the Company, reviewing the scope and results of the auditors' examination, and
reviewing the internal audit program, adequacy of internal controls, and
adherence to applicable legal, ethical and regulatory requirements.past year.
The Human Resources Committee is composed of directors Paul B. Burke, Jack
W. Eugster, John F. Grundhofer, Kendrick B. Melrose and Stephen W. Sanger
(Chairperson)(Chair), all of whom are non-employee directors. This Committee held two
meetings during the past fiscal year. The functions of this committee include
review of management development, approval of compensation arrangements for
senior management and the directors and administration of the Company's stock compensation plans.
The Committee on Directors' Affairs is composed of directors Paul B. Burke,
Janet M. Dolan, Jack W. Eugster (Chairperson)(Chair), John F. Grundhofer and S. Walter
Richey, all of whom are non-employee directors. This Committee held one meetingdid not meet
formally during the past fiscal year. The Committee's duties are to review the
organization of the Board and its committees, propose to the Board a slate of
directors for election by the stockholders at each Annual Meeting, and propose
candidates to fill vacancies on the Board.Board and approval of director compensation.
The Committee will consider nominees for director recommended by stockholders.
Recommendations should be addressed to the Secretary, Donaldson Company, Inc.,
P.O. Box 1299, Minneapolis, MN 55440. Any proposal by a stockholder for the
nomination of a candidate for director at the annual meeting for the election of
directors is required by the Company's Bylaws to be submitted in writing to the
Secretary and received at the principal executive offices of the Company not
less than 6090 days nor more than 90120 days prior to the anniversary date of the
immediately preceding annual meeting.
The Board of Directors has no reason to believe that any nominees will be
unavailable or unable to serve, but in the event any nominee is not a candidate
at the meeting, the persons named in the enclosed proxy intend to vote in favor
of the remaining nominees and of such other person, if any, as they may
determine.
3
The table below and on the following page sets forth additional information
with respect to each nominee for election as a director and each other person
whose term of office as a director will continue after the meeting.
NOMINEES FOR ELECTION
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ---- ------------------------------------------------------------------------------------------------------------------------------------------------------------
FOR A TERM EXPIRING IN 2001:
Paul B. Burke Chairman (1995), President and Chief Executive Officer of BMC Industries,
Age - 42 Inc. (manufacturer of precision imaged and optical products).
Director Since 1996
Kendrick B. Melrose Chairman and Chief Executive Officer of The Toro Company (manufacturer
Age - 58 of outdoor maintenance products). Also, a director of Jostens, Inc., SurModics,
Director since 1991 Inc. and The Valspar Corporation.
Stephen W. Sanger Chairman and Chief Executive Officer of General Mills, Inc. (1995) (consumer
Age - 52 products and services). Previously, an executive officer of various groups
Director since 1992 and divisions of General Mills, Inc. Also, a director of The Dayton Hudson
Corporation.
DIRECTORS CONTINUING IN OFFICE
FOR A TERM EXPIRING IN 2000:
Jack W. Eugster Chairman, President and Chief Executive Officer of The Musicland Group,
Age - 53 Inc. (retail consumer products). Also, a director of Damark, Inc., Jostens,
Director since 1993 Inc., MidAmerican Energy Company and Shopko Stores, Inc.
William G. Van Dyke Chairman and Chief Executive Officer (1996) and President (1994) of the
Age - 53 Company. Previously, Executive Vice President. Also, a director of Graco
Director since 1994 Inc.
John F. Grundhofer Chief Executive Officer and President of U.S. Bancorp (financial services).
Age - 59 Also, a director of U.S. Bancorp, a trustee of Minnesota Mutual Life
Director since 1997 Insurance Company and a trustee of Irvine Apartment Communities, Inc.
DIRECTORS CONTINUING IN OFFICE
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ---- -------------------------------------------------------------------------------
TERMS EXPIRING IN 1999:2002:
F. Guillaume Bastiaens Vice Chairman of Cargill, Inc. (1997) and President, Food Sector of Cargill,
Inc.
Age - 5556 Inc. (Agribusiness). Previously, Executive Vice President of Cargill, Inc.
Director Since 1995
Janet M. Dolan Chief Executive Officer (1999) and President and(1998). Previously Chief
Age - 50 Operating Officer (1998) and Executive Vice President of Tennant Company
Age - 49Director Since 1996 (manufacturer of floor maintenance equipment and coating products). Director Since 1996 Previously, Executive Vice President of Tennant Company. Also,
a director of William Mitchell College of Law.
S.WalterS. Walter Richey Retired Chairman, President and Chief Executive Officer of Meritex, Inc.
Age - 6263 and its predecessor corporation Space Center Company (owns and manages
Director Since 1991 business properties and distribution centers). Also, a director of U.S.
Bancorp and a member of the Board of Overseers of the Curtis L. Carlson
School of Management at the University of Minnesota.
DIRECTORS CONTINUING IN OFFICE
FOR A TERM EXPIRING IN 2001:
Paul B. Burke Chairman (1995), President and Chief Executive Officer of BMC Industries,
Age - 43 Inc. (manufacturer of precision imaged and optical products).
Director Since 1996
Kendrick B. Melrose Chairman and Chief Executive Officer of The Toro Company (manufacturer
Age - 59 of outdoor maintenance products). Also, a director of Jostens, Inc., SurModics,
Director since 1991 Inc. and The Valspar Corporation.
Stephen W. Sanger Chairman and Chief Executive Officer of General Mills, Inc. (1995) (consumer
Age - 53 products and services). Previously, an executive officer of various groups
Director since 1992 and divisions of General Mills, Inc. Also, a director of The Dayton Hudson
Corporation.
FOR A TERM EXPIRING IN 2000:
Jack W. Eugster Chairman, President and Chief Executive Officer of The Musicland Group,
Age - 54 Inc. (retail consumer products). Also, a director of Damark International,
Director since 1993 Inc., Jostens, Inc., MidAmerican Energy Company and Shopko Stores, Inc.
William G. Van Dyke Chairman and Chief Executive Officer (1996) and President (1994) of the
Age - 54 Company. Previously, Executive Vice President. Also, a director of Graco
Director since 1994 Inc.
John F. Grundhofer Chairman, and Chief Executive Officer of U.S. Bancorp (financial services).
Age - 60 Also, a director of Minnesota Mutual Life Insurance Company and Irvine
Director since 1997 Apartment Communities, Inc.
4
DIRECTOR COMPENSATION
Directors who are not employees receive a retainer fee of $20,000 annually
and are paid $1,000 for each Board or Committee meeting attended. Committee
Chairs receive an additional annual retainer of $2,500. Pursuant to the
Company's Compensation Plan for Non-Employee Directors, any non-employee
director may elect, prior to each year of their term, to defer all or part of
his or her director compensation received during the upcoming year. Each
participating director is entitled to a Company credit on the balance in his or
her deferral account at the ten-year Treasury Bond rate plus 2%. The deferral
election must also specify the manner for distribution of the deferral balance.
The 1991 Master Stock Compensation Plan, as amended (the "Plan"), provides
for non-employee directors to be credited with shares to a deferred stock
account in lieu of 30% of the annual retainer for services as a Director to be
rendered in the following service year. The Plan also allows a director to elect
to receive a credit of shares to a deferred stock account in lieu of all or part
of the remaining retainer and meeting fees. The directors also receive a credit
for dividend reinvestment shares. The Company contributes an amount equal to the
deferred stock accounts to a trust and the trust purchases shares of Donaldson
Common Stock. Each director is entitled to direct the trustee to vote all shares
allocated to the director's account in the trust. The Common Stock will be
distributed to each director following the director's retirement from the Board
pursuant to the director's deferral payment election. The trust assets remain
subject to the claims of the Company's creditors. The trust becomes irrevocable
in the event of a "Change in Control" as defined under the Plan.
The Company's Non-Qualified Stock Option Program for Non-employee Directors
provides for the automatic grant of a non-qualified stock option for 3,600
shares of Common Stock to each non-employee Director of the Company who is a
member of the Board on December 1 each year. The exercise price of such options
is the closing price of Common Stock in consolidated trading on the first
business day of December in the respective year. The options awarded prior to
December 1, 1998 are fully vested and have a term of ten years. The options
awarded on December 1, 1998 vest annually beginning on the first anniversary in
three equal installments and have a term of ten years. The option also includesaward was
modified beginning in 1998 to include a "reload option" granted at the time of
exercise of the original option for the number of shares equal to the shares
used in payment of the purchase price. The one-time reload option feature is
similar to that included in the option grants to officers.
Donaldson's non-qualified pension plan for non-employee director's was
eliminated effective May 21, 1998. When the plan was eliminated, each director
continuing in office received a credit of shares to a deferred stock account
under the 1991 Master Stock Compensation Plan equal to 115% of the dollar value
of the amount accrued by the Company for each director's pension benefit. The
Board of Directors considered the value of the annual benefits eliminated
through the termination of the pension plan in its approval of an increase in
the annual retainer from $18,000 to $20,000, the increase in the annual stock
option grant from 2,000 shares to 3,600 shares together with the addition of the
one time "reload option" feature, as described above.
Restricted stock awards and sharesShares credited to deferred stock accounts to non-employee directors under
the 1991 Master Stock Compensation Plan in fiscal 1998, including the one-time grant for the termination of the pension plan,1999, were as follows:
Bastiaens, 2,052556 shares, Burke, 1,4891,410 shares, Dolan, 1,9781,372 shares, Eugster, 3,8531,119
shares, Grundhofer, 1,2281,219 shares, Melrose, 4,5341,201 shares, Richey, 4,7811,611 shares,
and Sanger, 4,2031,696 shares.
5
INDEPENDENT AUDITORS
Upon recommendation of its Audit Committee, the Board of Directors has
appointed Ernst & Young LLP as independent public accountants to audit the books
and accounts of the Company for the fiscal year ending July 31, 1999,2000, such
appointment to continue at the pleasure of the Board of Directors and subject to
ratification by the stockholders. Ernst & Young LLP has audited the books and
accounts of the Company since 1951. Representatives of Ernst & Young LLP are
expected to be present at the meeting with the opportunity to make a statement
and to respond to appropriate questions. In the event this appointment is not
ratified, the Board will appoint other independent auditors for the subsequent
fiscal year.
The Board of Directors recommends that stockholders vote FOR ratification
of the appointment of Ernst & Young LLP as independent auditors for the fiscal
year ending July 31, 1999.
PROPOSAL TO AMEND THE 1991 MASTER STOCK COMPENSATION PLAN
The Board of Directors recommends stockholder approval of the proposed
amendment to the Donaldson Company, Inc. Master Stock Compensation Plan (the
"Plan") under which the Company offers shares of its Common Stock and options to
purchase shares of its Common Stock to key employees of the Company.
PROPOSAL
In July of 1998, the Board of Directors approved an amendment to the Plan,
subject to shareholder approval, relating to Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). Section 162(m) of the Code
generally disallows a tax deduction to publicly held companies for compensation
exceeding $1 million paid to a corporation's Chief Executive Officer and four
other most highly compensated executive officers. Qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. A large part of the Company's executive officers' compensation which
could exceed the $1 million limitation is associated with stock options. The
Company proposes to amend the Plan by adding a new Section 2.10 as follows:
SECTION 2.10 OPTION AND AWARD LIMITATIONS UNDER THE PLAN. No
Participant under this Plan may be granted an option or
Award (or options or Awards), the value of which is based
solely on an increase in the value of the Common Stock after
the date or dates of grant of such option or Award (or
options or Awards), for more than 500,000 shares of Common
Stock (subject to adjustment as provided in Section 1.05),
in the aggregate, in any single calendar year. The foregoing
annual limitation specifically includes the grant of any
options or Awards representing qualified performance-based
compensation within the meaning of Section 162(m) of the
Internal Revenue Code.
If certain other requirements are satisfied, limiting the number of options
and awards that may be granted in any calendar year will allow the Company to
continue to deduct the compensation attributable to options granted under the
Plan in calculating its tax liability.
The amendment to limit the number of options and certain other awards under
the Plan that may be made to any employee in any calendar year is necessary in
order to allow the Company to deduct fully certain compensation to executive
officers attributable to such options or awards. Under Section 162(m) of the
Code, one of the requirements for certain executive compensation related to
options or certain other awards under the Plan to be "qualified
performance-based compensation" not subject to the $1,000,000 cap, is that the
Company must place a shareholder approved limit on the number of shares subject
to awards that may be granted to an employee during any calendar year under the
Plan. The Board of Directors believes that it is important for the Company to
take all steps reasonably necessary to ensure that the Company will be able to
take all available tax deductions with respect to compensation resulting from
stock options and certain other awards made under the Plan.
The full text of the Plan appears as Exhibit A to this Proxy Statement. The
summary of the principal features which follows is qualified entirely by
reference to the full text.
GENERAL
The Plan permits the granting of a variety of stock based awards to
facilitate formulation of effective incentive arrangements. The Plan became
effective on November 15, 1991 and will remain in full force and
6
effect until December 31, 2001, unless earlier terminated. The Plan is not
subject to the provisions of the Employee Retirement Income Security Act of
1974.
The Plan contemplates granting awards under two separate parts to separate
groups of participants. Employee Awards are limited to employees of the Company
or its majority owned subsidiaries (including officers and employee directors).
Nonemployee Director Awards are limited to members of the Board of Directors of
the Company who are not full time employees. The selection of participants is
solely within the discretion of a subcommittee of the Human Resources Committee
of the Board of Directors (the "Committee").
Subject to adjustment as described below, the number of shares of the
Company's Common Stock available for granting awards under the Plan in any
calendar year shall not exceed 1.5 percent (the "Limitation Amount") of the
outstanding shares of the Company's Common Stock, Common Stock equivalents and
treasury shares as of the end of the fiscal year ending in such calendar year.
If certain events occur, the Committee may adjust awards to prevent the
dilution or enlargement of the benefits available under the Plan. These events
include, but are not limited to the following: dividend or other distribution;
recapitalization; stock split or reverse stock split; reorganization; merger;
consolidation; spin-off; repurchase or exchange of shares or other securities of
the Company; the exercisability of stock purchase rights issued under the Rights
Plan; the issuance of warrants or other rights to purchase shares or other
securities of the Company and other similar events.
EMPLOYEE AWARDS
Employee Awards are in the form of grants of options to purchase Common
Stock, SARs, restricted stock, other stock-based awards and dollar-denominated
awards. In addition, dividend equivalents may be awarded in respect of all
employee awards.
The exercise price per share of Common Stock purchasable under any stock
option, the exercise price of any SAR, and the purchase price of any other stock
based award shall not be less than 100% of the fair market value (the "Market
Value") of the shares on the date of the grant of such option, SAR or other
stock based award, or, if the Committee so determines, in the case of certain
awards retroactively granted in tandem with or in substitution for other awards
under the Plan or for any outstanding awards granted under any other plan of the
Company, on the date of grant of such other awards. Options and other purchase
rights shall be exercised by payment in full of the purchase price, at the
discretion of the Committee, by any one or a combination of the following
methods: (a) in cash or (b) by the tendering of shares with a fair market value
equal to all or a portion of the option price for the total number of options
being exercised. In the discretion of the Committee any option may be
accompanied by a "reload option" representing an additional option to acquire
the same number of shares as are tendered in payment of the purchase price. Fair
market value under the Plan shall be the closing sales price of the shares as
reported on the New York Stock Exchange or otherwise in accordance with methods
and procedures established by the Committee. The term of a stock option, SAR or
other stock-based award shall be established by the Committee and set forth in a
written award agreement at time of the award except that all rights to exercise
an Incentive Stock Option ("ISO") shall expire not more than ten years after the
date of grant.
Restricted stock may be granted either at no cost to the grantee or for
such cost as specified by the award agreement. Restricted stock may not be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of during the
period of restrictions determined by the Committee. Restrictions, as determined
by the Committee, may be based on a period of continuous employment, on
obtaining specific business objective or on other quantitative or qualitative
criteria. The Committee may also, in its sole discretion, shorten or terminate
the period for the lapsing of restrictions or waive any conditions for the
lapsing or termination of restrictions as regards all or any portion of the
restricted stock. Regardless of the manner in which the restricted stock may be
evidenced, the grantee shall generally have the rights and privileges of a
shareholder as to the restricted shares including the right to vote, the right
to receive cash or stock dividends, unless otherwise specified in the award
agreement.
The Committee is also authorized to establish the terms and conditions of
other stock-based awards, subject to the terms of the Plan and the requirements
of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b-3"). The
Committee may grant other stock-based awards that do not require the payment of
7
consideration (other than services previously rendered, or as may be permitted
by applicable law, services to be rendered). If a purchase is required, the
purchase price must be at least equal to the Market Value on date of grant.
No employee award granted under the Plan may be assigned or transferred
except by will or the laws of descent and distribution, provided, however, that
transferability of stock option grants is permitted with the approval of the
Committee.
NEW PLAN BENEFITS
Regulations of the Securities and Exchange Commission call for a table
setting forth the amounts that will be received by (i) the CEO and four other
executive officers named in this proxy statement, (ii) the Company's executive
officers as a group, (iii) directors who are not executive officers as a group,
and (iv) all employees, including officers who are not executive officers, as a
group, under the Plan being submitted to the stockholders for approval, if such
amounts are determinable. If such amounts are not determinable, which is the
case for the Plan, the Company is required to set out the amounts which would
have been received for the last fiscal year if the Plan had been in effect, as
amended.
The amounts which would have been received for fiscal 1998 in the case of
the Plan are the amounts actually granted in fiscal year 1998 under the same
plan. These amounts are reflected (i) under the tables and footnotes in the
Executive Compensation Section for the CEO and four other executive officers
named in the proxy statement, and those tables and footnotes have been extended
to provide the required information for the Company's executive officers as a
group and for all employees, including officers who are not executive officers,
as a group; and (ii) under the "DIRECTOR COMPENSATION" section. On September 30,
1998, the closing sale price of a share of Common Stock of the Company on the
New York Stock Exchange was $16.00.
NONEMPLOYEE DIRECTOR AWARDS
Each member of the Board of Directors who is not a full time employee of
the Company shall have, in lieu of cash payment, 30% of the annual retainer
payable for services to be rendered on the Board during the following service
year (for convenience determined as December 1 through November 30) credited to
a deferred stock account. The number of shares to be credited shall be
determined by dividing such installments by the Market Value of Common Stock on
the first business day of December. The participant may also elect to defer up
to 100% of his or her annual retainer and meeting fees into the deferred stock
account.
CHANGE IN CONTROL
The Plan provides that upon a Change in Control all stock options and SARs
shall immediately become exercisable in full. In addition, all forfeitable
awards and a pro rata portion of all performance-based awards will immediately
become non-forfeitable. Furthermore, on or after a Change in Control, the
Committee may not under any circumstances change any determination of the basis
on which any previously granted award shall be measured or paid or change any
other terms, conditions or provisions affecting any previously granted awards,
if the change would adversely affect any such award or the participant's rights
thereto.
AMENDMENT OR TERMINATION
The Board may terminate, amend or revise the Plan at any time provided that
the Board may not amend the Plan in any manner or by any procedure that would
result in noncompliance with Rule 16b-3 or any applicable law.
FEDERAL INCOME TAX CONSEQUENCES
The principal Federal income tax consequences of awards under the Plan,
based on the current provisions of the Internal Revenue Code and the regulations
thereunder, are as follows.
Generally, the grant of an option or SAR to an employee is not expected to
result in income to the employee or in a deduction for the Company.
In general, upon the exercise of an ISO, the employee will not recognize
income, and the Company will not be entitled to a tax deduction. (However, the
excess of the acquired shares' fair market value on the exercise date over the
option price is included in the employee's income for purposes of the
alternative minimum tax.) When an employee disposes of ISO shares, the
difference between the option price and the
8
amount realized by the employee will, in general, constitute a long-term capital
gain or loss, as the case may be. However, if the employee fails to hold the ISO
shares for more than one year after exercising the ISO and for more than two
years after the grant of the ISO, the portion of any gain realized by the
employee upon the disposition of the shares that does not exceed the excess of
the fair market value of the shares on the exercise date over the option price
generally will be treated as ordinary income, the balance of any gain or any
loss will be treated as a capital gain or loss (long-term or short-term,
depending on whether the shares have been held for more than one year), and the
Company will be entitled to a tax deduction equal to the amount of ordinary
income recognized by the employee.
In general, upon the exercise of an option other than an ISO (a
"nonqualified option"), the employee will recognize ordinary income equal to the
excess of the acquired shares' fair market value on the exercise date over the
option price, and, assuming that the grants qualify under Section 162(m) of the
Code, the Company will be entitled to a tax deduction in the same amount. Upon
the exercise of a SAR, the employee will recognize as ordinary income any cash
received and the fair market value on the exercise date of any shares received,
and the Company will be entitled to a tax deduction in the same amount.
With respect to other awards granted under the Plan (including Nonemployee
Director Awards) that are settled either in cash or in shares that are
transferable or are not subject to a substantial risk of forfeiture, the grantee
will recognize ordinary income equal to the excess of (a) the cash or the fair
market value of any shares received (determined as of the date of settlement)
over (b) the amount, if any, paid for the shares by the grantee, and the Company
will be entitled to a tax deduction in the same amount. In the case of an award
that is settled in shares that are nontransferable and subject to a substantial
risk of forfeiture, the grantee will generally recognize ordinary income equal
to the excess of (a) the fair market value of the shares received (determined as
of the date on which the shares become transferable or not subject to a
substantial risk of forfeiture, whichever occurs first) over (b) the amount, if
any, paid for the shares, and the Company will be entitled to a tax deduction in
the same amount. A grantee may elect to recognize income when the shares are
received, rather than upon the expiration of the transfer restriction or risk of
forfeiture and the amount of ordinary income will be determined as of the date
of receipt rather than upon expiration of the applicable restriction and the
Company's tax deduction will be determined at the same time.
The affirmative vote of a majority of the shares represented at the meeting
will be required to approve the amendment to the Plan. In the event this
Proposal 3 does not receive the required affirmative vote, the amendment will
not be put into effect.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOREGOING PROPOSAL.
9
2000.
EXECUTIVE COMPENSATION
The following table sets forth as to each person who was at the end of
fiscal 1998,1999, the Chief Executive Officer and the other four most-highly
compensated executive officers of the Company information concerning the cash
and noncash compensation for services rendered to the Company for each of the
last three fiscal years (the "Named Officers").
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------------------------------------------------------------
ANNUAL COMPENSATION(1)COMPENSATION (1) AWARDS PAYOUTS
---------------------- ------------------------ --------------------------------------- --------------
SECURITIES
UNDERLYING
RESTRICTED STOCK
STOCK OPTIONS/SARsSARS ALL OTHER
FISCAL AWARD(S) (SHARES) LTIP PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($SALARY ($) BONUS($BONUS ($) ($)(5) (2) ($)(3) ($)(4)
- --------------------------- ------ -------------------------------------- -------- ---------- ------------ ----------- ------------ -------------------------- -------------- -------------
WILLIAM G. VAN DYKE ......... 1999 539,615 678,000 0 78,000 0 29,208
Chairman, Chief 1998 483,846 606,000 0 78,000 322,734301,219 27,373
Chairman, ChiefExecutive Officer and 1997 450,000 540,000 0 131,704 525,586586,253 173,520
Executive OfficerPresident
WILLIAM M. COOK ............. 1999 213,654 203,379 0 26,000 0 6,947
Senior Vice President, 1998 196,539 172,126 0 26,000 55,377 3,796
Commercial and 1996 385,000 462,000Industrial 1997 178,154 85,260 0 108,724 190,125 121,960
President43,484 101,772 46,214
JAMES R. GIERTZ ............. 1998 219,769 133,8961999 239,962 158,621 0 57,964 147,133 6,67235,304 0 6,219
Senior Vice President and 1998 219,769 134,451 0 57,964 137,324 6,672
Chief Financial Officer 1997 199,808 151,639 0 61,360 766,480854,911 61,582
Chief Financial Officer 1996 220,000 181,229 315,625 30,600 0 50,434
NICKOLAS PRIADKA ............ 1998 207,154 140,7131999 224,654 121,795 0 42,631 117,990 5,80327,000 0 5,985
Senior Vice President, 1998 207,154 140,697 0 42,631 110,124 5,803
OEM Engine Systems and 1997 187,808 133,739 0 61,400 186,462207,984 56,340
OE Engine 1996 169,117 108,165 0 20,600 129,050 37,174Parts
LOWELL F. SCHWAB ............ 1998 183,462 151,0691999 200,962 129,204 0 24,000 99,664 5,4770 5,782
Senior Vice President, 1998 183,462 151,782 0 24,000 93,020 5,477
Operations 1997 168,450 152,491 0 26,474 481,787537,361 56,243
Operations 1996 148,808 88,911 0 16,296 0 32,546
WILLIAM M. COOK ............. 1998 196,539 164,441 0 26,000 59,333 3,796
Senior Vice President, 1997 178,154 85,260 0 43,484 91,248 46,214
Commercial and Industrial 1996 160,425 72,883 0 25,666 39,715 29,190
- ------------------
(1) Includes any portion deferred under the Management Compensation Plan.
(2) Shares adjusted for stock splits.
(3) Earned under the Company's 1991 Master Stock Compensation Plan during the
three-year period ending in the fiscal year in which the payout is listed.
Payout is made in the form of the Company's common stock and delivered
during the following fiscal year.
(4) Amounts in this column for 1999 and 1998 represent the dollar value of share
allocations (i) under the Company's match for bonus and salary under the
Company's ESOP and 401k benefit plans; and
6
(ii) under the Company's match for deferred bonus and salary and salary in
excess of the limits established by Section 415 of the Internal Revenue
Code contributed by the Company to an unqualified supplemental plan. The
amounts for fiscal 19981999 are:
SALARY DEFERRED SALARY
NAME AND BONUS MATCH AND BONUS MATCH EXCESS MATCH
---- --------------- --------------- ----------------------------------------- ----------------- ----------------- -------------
William G. Van Dyke ........ $5,383 $15,994 $11,379......... $4,217 $ 0 $29,208
William M. Cook ............. 4,568 984 5,963
James R. Giertz ............ 5,541............. 4,536 0 6,6726,219
Nickolas Priadka ........... 5,039 408 5,395............ 4,601 1,513 4,472
Lowell F. Schwab ........... 5,019............ 4,581 0 5,477
William M. Cook ............ 5,301 1,559 2,2375,782
1997 and 1996 amounts represent the dollar value of share allocations under the
Company's ESOP and benefits in excess of the limits established by Section
415 of the Internal Revenue Code contributed by the Company to an
unqualified supplemental plan.
10
(5) Amounts in the Restricted Stock Award column represent the dollar value of
grants of restricted stock under the Company's 1991 Master Stock
Compensation Plan. Regular dividends are paid on the restricted shares. At
the end of fiscal 1998,1999, the number and value of the aggregate restricted
stockholdings for the Named Officers were: William G. Van Dyke, 0, $0; James
R. Giertz, 25,000, $464,063;$620,313; Nickolas Priadka, 8,400, $155,925;$208,425; Lowell F.
Schwab, 8,400, $155,925;$208,425; and William M. Cook, 0, $0. No restricted stock
awards were made to Executive Officers as a group and grants of 1,000 shares ($17,000) of restricted stock were made to all
Non-Executive Officer
Employees as a Group.
OPTION/SARsSARS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
-----------------------------------------GRANTS (1)
--------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE ATANNUAL RAT
SECURITIES OPTIONS/SARsSARS ASSUMED ANNUAL RATESPRECIATIONES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATIONAP TERM (3) FOR OPTION
TERM(3)
OPTIONS/SARsSARS EMPLOYEES OR BASE EXPIRATION -------------------------------------------------------------------
NAME GRANTED(2)GRANTED (2) IN FISCAL YEAR PRICE/sh($SH ($) DATE 0% ($) 5% ($) 10% ($)
- ---- -------------------------------------- -------------- --------------- -------------- ----------- ------------------ --------- ----------- ----------
WILLIAM G. VAN DYKE 78,000 17.7 22.68873,400 15.7 20.00 12/19/0703/08 0 1,114,314 2,824,703924,384 2,343,245
4,600 1.0 20.75 12/31/08 0 60,104 152,359
WILLIAM M. COOK 26,000 5.6 20.00 12/03/08 0 327,439 830,032
JAMES R. GIERTZ 29,000 6.6 22.6886.2 20.00 12/19/0703/08 0 414,296 1,050,210
14,749(4) 3.3 23.250 09/08/04 0 132,126 305,255
5,845(4) 1.3 23.250365,220 925,805
6,304(4) 1.4 19.00 12/21/05 0 64,493 154,301
4,176(4) .9 23.250 12/05/06 0 52,943 130,107
4,194(4) 1.0 21.063 12/05/06 0 44,879 108,75448,186 112,081
NICKOLAS PRIADKA 27,000 6.1 22.68825,500 5.5 20.00 12/19/0703/08 0 385,724 977,782
7,931(4) 1.8 22.688321,142 814,070
1,500 .3 20.75 12/21/0531/08 0 85,134 203,572
7,700(4) 1.7 22.688 12/05/06 0 94,863 232,92919,599 49,682
LOWELL F. SCHWAB 24,000 5.4 22.6885.1 20.00 12/19/0703/08 0 342,866 869,139
WILLIAM M. COOK 26,000 5.9 22.688 12/19/07 0 371,438 941,568302,251 766,184
ALL EXECUTIVE OFFICERS
AS A GROUP 250,595 56.9221,349 47.5
ALL NON-EXECUTIVE OFFICER
EMPLOYEES AS A GROUP 190,000 43.1245,000 52.5
- ------------------
(1) No stock appreciation rights ("SARs") have been granted.
(2) All grants (other than as noted in footnote(4)) during the period were
non-qualified stock options granted at the market value on date of grant for
a term of ten years, vesting in three equal annual installments
beginning 12/19/98,immediately and were granted with the right to
use shares in lieu of the exercise price and to satisfy any tax withholding
obligations.
(3) These amounts represent certain assumed rates of appreciation over the full
term of the option. The value ultimately realized, if any, will depend on
the amount by which the market price of the Company's stock exceeds the
exercise price on date of sale.
7
(4) These grants were made to individuals who exercised an option during fiscal
19981999 and made payment of the purchase price using shares of previously owned
Company stock. This restoration or "reload" grant is for the number of
shares equal to the shares used in payment of the purchase price or withheld
for tax withholding. The option price is equal to the market value of the
Company's stock on the date of exercise and will expire on the same date as
the original option which was exercised. These options, which are the result
of such a restoration, do not contain the reload feature.
11
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
UNDERLYING UNEXERCISEDOPTIONS/SARS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS/SARs
OPTIONS/SARsSARS
(2) AT FISCAL YEAR-END(2) AT FISCAL YEAR-END(2)YEAR-END (2)(3)
---------------------------------- -----------------------------
SHARES VALUE ------------------------------- ------------------------------
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE(1)EXERCISE (1) ($) (SHARES) (SHARES) ($) ($)
- ---- -------------- ----------- --------- --------------------------- --------------- ------------- ---------------------------
WILLIAM G. VAN DYKE 60,000 1,020,000 454,736 161,500 3,439,033 315,15676,080(4) 1,001,490 550,406 67,750 6,155,944 306,391
WILLIAM M. COOK 2,402(4) 14,862 104,615 22,333 839,865 99,020
JAMES R. GIERTZ 36,287 334,935 61,324 63,633 36,680 139,3767,650 50,681 125,628 26,983 647,751 136,230
NICKOLAS PRIADKA 19,300 164,166 119,011 55,300 726,806 105,35651,780(4) 794,872 124,881 23,150 959,224 102,303
LOWELL F. SCHWAB 0 0 36,808 47,300 210,273 82,169
WILLIAM M. COOK 1,156 10,838 50,017 53,333 202,690 101,95888,458 19,650 755,220 79,397
- ------------------
(1) The number of shares shown in this column is larger than the number of
shares actually acquired on exercise. The actual number of shares received
is reduced by the number of shares delivered in payment of the exercise
price and shares withheld to cover withholding taxes.
(2) No SARs were exercised in fiscal 1998.1999.
(3) This value is based on the difference between the exercise price of such
options and the closing price of Company Common Stock as of fiscal year-end
1998.1999.
(4) The officers elected under the Deferred Stock Option Gain Plan to defer
receipt of the shares to be acquired upon exercise. The officers receive a
credit of shares to a deferred stock account and also receive a credit for
dividend reinvestment shares.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS
NUMBER OF PERFORMANCE UNDER NON-STOCK
SHARES, UNITS OR OTHER PERIOD PRICE-BASED PLAN
OR OTHER UNTIL MATURATION ------------------------------------------------------------------
NAME RIGHTS(1)RIGHTS (1) OR PAYOUT THRESHOLD TARGET MAXIMUM
- ---- ------------- ---------------- --------- ------ ---------------------- ------------------ ----------- -------- --------
WILLIAM G. VAN DYKE 14,20014,400 8/1/9798 - 7/31/00 7,100 14,200 39,05001 7,200 14,400 39,600
WILLIAM M. COOK 4,900 8/1/98 - 7/31/01 2,450 4,900 13,475
JAMES R. GIERTZ 5,400 8/1/9798 - 7/31/0001 2,700 5,400 14,850
NICKOLAS PRIADKA 5,100 8/1/9798 - 7/31/0001 2,550 5,100 14,025
LOWELL F. SCHWAB 4,6004,500 8/1/9798 - 7/31/00 2,300 4,600 12,650
WILLIAM M. COOK 4,800 8/1/97 - 7/31/00 2,400 4,800 13,20001 2,250 4,500 12,375
- ------------------
(1) Awards are of Performance Units, each of which represents the right to
receive one share of the Company's common stock. Awards are earned only if
the Company achieves the minimum Performance Objectives and the Award Value
will be based on a weighting of compound corporate net sales growth and
after-tax return on investment over the three year period. The amounts shown
in the table under the headings "Threshold", "Target" and "Maximum" are
amounts awarded at 50%, 100% and 275% of the targeted award. The award may
also be adjusted upward by 25% for consistency if earnings per share
increase in each of the three years in the period by at least 5%.
128
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors, consisting of five
independent, non-employee directors ("the Committee"), is responsible for
establishing the compensation programs for the Company's executive officers. The
objectives of the Company's executive compensation program are to:
*o emphasize a pay-for-performance philosophy by placing significant portions
of pay at risk and requiring outstanding results for payment at the
threshold level;
*o attract and retain the best executives available in our industry and have
their compensation levels keyed to a peer group of companies;
*o motivate and reward executives responsible for attaining the financial and
strategic objectives essential to the Company's long-term success focusing
on earnings per share growth and continued growth in stockholder value; and
*o align the interests of executives with those of the Company's stockholders
by providing a significant portion of compensation in the form of Company
common stock. Common stock ownership objectives have been established for
all executive officers ranging from five to ten times base salary.
BASE SALARIES. Base salaries for all executives are reviewed annually based
on performance and market conditions. A performance appraisal is required for
all executives of the Company. The Committee approves and/or determines the
annual base salary increases for all senior executives based on performance of
the executive and external market data. Our objective is that base salaries
should approximate the mid-point (average) of senior executives of manufacturing
companies of similar size in the United States. The Company uses nationally
known consultant surveys for external market data.
ANNUAL CASH INCENTIVE. Executive officers are eligible for target awards
under the annual incentive program that range up to 60% of base salary. The size
of the target award is determined by the executive officer's position and
competitive data for similar positions at the peer and cross-industry companies
as presented in the same nationally recognized surveys as are used for the base
salary. The Company sets aggressive performance goals and, in keeping with the
strong performance-based philosophy, the resulting awards decrease or increase
substantially if actual Company performance fails to meet or exceeds targeted
levels. Payments can range from 0% to 200% of the target awards. Executive
officers have up to 100% of their annual cash incentive opportunity linked to
achieving record Earnings Per Share (EPS).
Consequently, executive officers must obtain record EPS, thereby increasing
stockholder value, to receive a competitive annual cash incentive.
LONG-TERM INCENTIVE COMPENSATION. There was no payout under the long-term
incentive plan in 1999 based on the Company's failure to achieve the minimum
performance objectives for net sales growth. The volatility in the long-term
incentive plan payouts for the three years shown in the summary compensation
table is consistent with the at risk nature of the payouts and the pay for
performance philosophy. The Long-Term Performance Award program is based on
three-year compounded growth in net sales and an after-tax Return on Investment
that exceeds the Company's weighted average cost of capital. Under this program,
the Committee selected eligible executives and established an incentive
opportunity as a percentage of base salary. In order for a participant to
receive a payout, minimum performance must be attained. Payout for the
1996-1998 cycle is listed in the Compensation Table. The Committee
occasionally grants restricted stock with a fixed restriction period, usually
five years, to insure retention of key executives. The Committee also believes
that significant stock option grants encourage the executive officers to own and
hold Donaldson stock and tie their long-term economic interests directly to
those of the stockholders. Stock options are typically granted annually. In
determining the number of shares covered by such options, the Committee takes
into account position levels, base salary, and other factors relevant to
individual performance but does not consider the amount and terms of options and
restricted stock already held by the executive.
Targets for the incentive portion of compensation are tied to financial
performance in the sixty-fifth percentile of the peer group.
STOCK OWNERSHIP. Ownership of Donaldson stock is expected of Donaldson
executives. The Committee believes that linking a significant portion of the
executive's current and potential net worth to the Company's success, as
reflected in the stock price, gives the executive a stake similar to the
stockholders. The Committee
9
has established stock ownership guidelines for the Named Officers and certain
other executive officers, which encourage retention of shares obtained through
the exercise of options. The guidelines range from five to ten
13
times base
salary. The goal of the Chief Executive Officer is ten times annual base salary.
Mr. Van Dyke currently exceeds this ownership goal.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. Mr. Van Dyke's fiscal 19981999
base salary and incentive award were determined by the Committee in accordance
with the methodology described above.
BASE SALARY. Mr. Van Dyke's base salary for calendar 19981999 was $505,000,$565,000,
which is below the market mid-point for manufacturing companies of similar
size.
ANNUAL BONUS. Mr. Van Dyke's bonus award for fiscal 19981999 was $606,000.$678,000.
This annual bonus was earned under the annual incentive program based on
EPSearning per share growth of $1.14;$1.31, up 15% over the previous record earned
in fiscal 1997.1998.
STOCK OPTIONS. Mr. Van Dyke received an annual grantoption grants in December
19971998 of options to purchase 39,00078,000 shares of stock.
LONG-TERM INCENTIVE PLAN PAYOUT. Mr. Van Dyke received no payout under the
Long-Term Incentive Plan in 1999 based on the Company's failure to achieve
the minimum performance objectives for net sales growth.
POLICY ON QUALIFYING COMPENSATION. The Company's policy is to preserve the
tax deduction for compensation paid to its Chief Executive Officer and other
senior executive officers. In accordance with this policy, in November 1994 the
stockholders approved the material terms of the performance goals for payment of
the cash bonus under the Company's Annual Cash Bonus Plan for Designated
Executives. The 1991 Master Stock Compensation Plan has been amended subject to
stockholder approval, to limit
the number of shares that can be granted in any one year to any one individual
to further the policy of preserving the tax deduction for compensation paid to
executives.
CONCLUSION. The executive officer compensation program administered by the
Committee provides incentive to attain strong financial performance and an
alignment with stockholder interests. The Committee believes that the Company's
compensation program focuses the efforts of Company executive officers on the
continued achievement of growth and profitability for the benefit of the
Company's stockholders.
SUBMITTED BY THE HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS
Stephen W. Sanger, ChairpersonChair
Paul B. Burke
Jack W. Eugster
John F. Grundhofer
Kendrick B. Melrose
PERFORMANCE GRAPHS
The following graphs compare the cumulative total stockholder return on the
Company's Common Stock for the last five fiscal years and nine fiscal years with
the cumulative total return of the Standard & Poor's 500 Stock Index and the
Standard & Poor's Index of Manufacturing Companies. The first graph assumes the
investment of $100 in the Company's Common Stock and each of the indexes at the
market close on fiscal year-end 19921994 and the reinvestment of all dividends. The
second graph assumes the investment of $100 in the Company's Common Stock and
each of the indexes at the market close on fiscal year-end 1989 and the
reinvestment of all dividends. The Company believes the second graph is useful
in showing the cumulative total stockholder return over the nine-yearten-year period of
consecutive double-digit increases in earnings per share.
1410
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
[PLOT POINTS GRAPH]CHART]
FISCAL YEARS ENDED JULY 31
1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- --------1999
------------ ------------ ------------ ------------ ------------ ------------
Donaldson ............................... $ 100.00 $ 133.54110.45 $ 147.49102.86 $ 137.36172.07 $ 229.78158.09 $ 211.12213.75
S&P 500 ................................... 100.00 105.16 132.62 154.59 235.19 280.54126.11 147.00 223.65 266.78 320.68
S&P Manufacturing ............... 100.00 116.33 159.39 188.60 294.92 290.24137.02 162.12 253.52 249.49 348.68
COMPARISON OF NINETEN YEAR CUMULATIVE TOTAL RETURN
[PLOT POINTS GRAPH]CHART]
FISCAL YEARS ENDED JULY 31
1989 1990 1991 1992 1993
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------------- ------------ ------------ ------------ ------------
Donaldson ......................... $ 100.00 $ 181.27 $ 209.85 $ 274.83 $ 341.32
$ 455.80 $ 503.43 $ 468.85 $ 784.29 $ 720.60
S&P 500 ............................. 100.00 106.50 158.44 178.70 194.30 204.33 257.68 300.37 456.99 545.09120.09 135.45 147.27
S&P Manufacturing ......... 100.00 109.34 115.50 120.57 139.40 162.16 222.19 262.92 411.13 404.60
15[WIDE TABLE CONTINUED]
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
Donaldson ............ $ 455.79 $ 503.42 $ 468.79 $ 784.24 $ 720.48 $ 974.16
S&P 500 .............. 154.87 195.31 227.67 346.38 413.16 496.62
S&P Manufacturing .... 162.16 222.19 262.92 411.13 404.60 565.45
11
PENSION BENEFITS
The Company maintains the Donaldson Company, Inc. Salaried Employees'
Pension Plan (the "Retirement Plan"), whicha defined benefit pension plan that
provides retirement benefits forto eligible employees. Through July 31, 1997employees through a cash balance
benefit structure. Participants in the Retirement Plan was structured asaccumulate benefits in a
traditional, defined benefit plan. Effective August 1, 1997, the Retirement Plan
was amended to provide defined benefits pursuant to a cashhypothetical account balance feature
whereby a participant accumulates a benefit based upon a percentage of current
salary which variesthrough annual interest credits, and pay credits
that vary with age, service and interest credits, andpay. At retirement or termination of employment,
the present
valuevested account balance is payable to the participant in the form of accrued benefits under the Retirement Plan was converted to an
initial
cash balance.immediate or deferred lump sum or actuarially equivalent annuity.
Under the cash balance formula, each participant hasbenefit structure, account balances receive an
Interest Credit annually. The Interest Credit is defined as the current plan
year's Interest Crediting Rate times the account for record
keeping purposes only, to which credits are allocated each payroll period based
upon the following two percentages: The "Applicable Base Percentage"balance as of the participant's total compensation in the current pay period ("Pensionable
Earnings") and the "Applicable Excess Percentage" of Pensionable Earnings in
excessbeginning of
the Social Security taxable wage base.plan year. The applicable percentagesInterest Crediting Rate for a particular plan year is equal
to the average auctioned yield of one-year U.S. Treasury Bills during the month
of June preceding the plan year, plus one percent. The Interest Crediting Rate
is 5.89% for the 1999 plan year.
Additionally, Pay Credits are credited to the account balance at the end of
each plan year. The participant's Pay Credit Percentages are determined by the
participant's years of age and years of service of the participant with the Company and its affiliates as of
the end of each plan year. The participant's Base Pay Credit is equal to the
Base Pay Credit Percentage times total covered compensation during the plan year
("Pensionable Earnings"). The participant's Excess Pay Credit is equal to the
Excess Pay Credit Percentage times Pensionable Earnings in excess of the Social
Security taxable wage base. The following table showsdisplays the Applicable Base and ExcessPay Credit
Percentages used to determined credits atfor the sum of years of age and years of service indicated.
APPLICABLE PERCENTAGE
---------------------
SUM OF AGE PLUS YEARS OF SERVICE BASE EXCESS
-------------------------------- -------- --------shown:
PAY CREDIT PERCENTAGES
----------------------
SUM OF YEARS OF AGE PLUS SERVICE BASE EXCESS
---------------------------------- --------- ---------
Less than 40 3.0% 3.0%
40 -- 49 4.0 4.0
50 -- 59 5.0 5.0
60 -- 69 6.5 5.0
70 or more 8.5 5.0
As of August 1, 19981999, the sum of years of age plus years of service for Messrs. Van
Dyke, Giertz, Priadka, Schwab and Cook were 78, 45, 80, 6747, 82, 69 and 62,64, respectively.
In addition, all balances in the accounts of participants earn a fixed rate
of interest which is credited annually. The interest rate for a particular plan
year is based on the average of the daily one-year U.S. Treasury Note yields for
the previous June plus one percent. For the 1998 fiscal/plan year, the interest
rate is 6.13%.
At retirement or other termination of employment, an amount equal to the
vested balance then credited to the account is payable to the participant in the
form of an immediate or deferred, lump sum or annuity for the entire benefit
under the Plan.
The individuals named in the Summary Compensation Table are also are eligible
for retirement benefits under the Donaldson Company, Inc. Excess Retirement Plan
(the "Excess Retirement Plan"). The Excess Retirement Plan is an unfunded,
non-qualified deferred compensation arrangement that primarily provides
retirement benefits that cannot be payable under a qualified plan like the Retirement Plan because of
the maximum limitations imposed on suchqualified plans by the Code. The projections
below set forth the estimated annual benefit payable to each of the individuals
named in the Summary Compensation Table as a single life annuity at age 65 under
the Retirement Plan and the Excess Retirement Plan. ThePlans: Mr. Van Dyke, $532,397; Mr. Giertz,
$229,047; Mr. Priadka, $180,098; Mr. Schwab, $151,815; and Mr. Cook, $255,075.
These projections are based on the following assumptions: (1) employment until
age 65 assuming65; (2) no increase in pensionable earnings after July 31, 1997; (2)the 1998 plan year; (3)
interest credits at the actual rate of 6.35% for 1998,5.89% during the 1999 plan year, and
an assumed rate of 7% for years6.00% thereafter; and (3)
the(4) conversion to a straightsingle life annuity at normal
retirement age is based on an interest rate of 7%6.00% and the Unisex 1983 Group
Annuity Mortality table: Mr.
Van Dyke, $621,918; Mr. Giertz, $267,815; Mr. Priadka, $229,276; Mr. Schwab,
$181,919; and Mr. Cook, $228,193.table.
The individuals named in the Summary Compensation Table are also eligible
for retirement benefits under the Donaldson Company, Inc. Supplemental Executive
Retirement Plan (the "SERP"). The SERP has been designed to assure participants
a supplementarylump sum retirement benefit plan which is intendedfrom all company funded retirement programs equal
to assure that Messrs. Van Dyke, Giertz, Priadka, Schwab and Cook will receive
at least 60% ofsix times their average (fivecompensation (three highest consecutive years) compensation upon
reaching age 62 with 20 years of service. However, this retirement at age 65benefit is
prorated for retirements with less than 20 years of service and further reduced
by 2% reduction for each year in the event of early retirement afterprecedes age 55.62. In determining whether the planSERP
must supplement the other retirement benefitsprograms to reach such level,this benefit target, the
Company will consider the lump sum value of the benefits described in the
previous paragraph the Pension Plan Table and footnote(5)footnote (5) to the Summary Compensation Table, as well
as 50% of primary Social Security andany vested pension benefits payable from prior employers, if any. Assuming
the plan isSERP remains unchanged and employment untilcontinues to age 65 based onat current
compensation and payment levels, no benefits are expected to be required from other plans, no payments would be made under the plan toSERP for
any of the five
participants.
1612
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section
16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to file initial reports of ownership
and reports of changes in ownership with the SEC and the New York Stock
Exchange. To the Company's knowledge, based on a review of copies of such forms
and written representations furnished to the Company during fiscal 1998,1999, all
Section 16(a) filing requirements applicable to the Company's directors and
executive officers were satisfied except as follows: a late filing made on behalf of William Cook
of an exempt transaction reporting the vesting of restricted shares in May 1998;
and a late filing made on behalf of Kendrick Melrose reporting an exempt gift of
600 shares in April 1998.satisfied.
CHANGE-IN-CONTROL ARRANGEMENTS
Each of the Named Officers has a severance agreement with the Company
designed to retain the executive and provide for continuity of management in the
event of an actual or threatened change of control in the Company (as defined in
the agreements). The agreements provide that in the event of a change of
control, each key employee would have specific rights and receive certain
benefits if, within three years after a change in control, the employee is
terminated without cause or the employee terminates voluntarily under
"constructive involuntary" circumstances as defined in the agreement. In such
circumstance the employee will receive a severance payment equal to three times
the employee's annual average compensation calculated over the five years
preceding such termination as well as continued health, disability and life
insurance for three years after termination. The 1980 and 1991 Master Stock
Compensation Plans, the supplementary retirement agreementsbenefit plan and deferred
incomecompensation arrangements also provide for immediate vesting or payment in the
event of termination under circumstances of a change in control.
19992000 STOCKHOLDER PROPOSALS
Any stockholder wishing to include a proposal in the Company's Proxy
Statement for its 19992000 annual meeting of stockholders must submit such proposal
for consideration in writing to the Secretary of the Company at the address
indicated on the first page of this Proxy Statement no later than June 16, 1999.2000.
Under the Company's Bylaws, a shareholder proposal not included in the Company's
Proxy Statement for its 19992000 annual meeting of stockholders is untimely and may
not be presented in any manner at the 19992000 annual meeting of stockholders unless
the stockholder wishing to make such proposal follows certain specified notice
procedures set forth in the Company's Bylaws, including delivering notice of
such proposal in writing to the Secretary of the Company at the address
indicated on the first page of this Proxy Statement no earlier than AugustJuly 21,
19992000 and no later than SeptemberAugust 20, 1999.2000.
OTHER MATTERS
The Company is not aware of any matter, other than as stated above, which
will or may properly be presented for action at the meeting. If any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed form of proxy to vote the shares represented by such
proxies in accordance with their best judgment.
By Order of the Board of Directors
/s/ NormanNormac C. Linnell
Norman C. Linnell
SECRETARY
October 14, 1998
1713, 1999
13
EXHIBIT A
DONALDSON COMPANY, INC.
1991 MASTER STOCK COMPENSATION PLAN
I. GENERAL
SECTION 1.01 PURPOSEAUDIT COMMITTEE CHARTER
MISSION STATEMENT
The audit committee will assist the board of directors in fulfilling its
oversight responsibilities. The audit committee will review the financial
reporting process, the system of internal control, the audit process and the
company's process for monitoring compliance with laws, regulations and the
company's code of conduct. In performing its duties, the committee will maintain
effective working relationships with the board of directors, management, and the
internal and external auditors.
ORGANIZATION
The audit committee will be organized consistent with the following
significant parameters:
SIZE OF THE PLAN.COMMITTEE: The purposeaudit committee will have no less than three
and no more than six members.
QUALIFICATIONS: Committee members must be "Independent Directors" of the
1991 Master Stock Compensation Plan is to enhancecompany. (Members of the long-term profitability of Donaldson and shareholder value by offering stock
based incentives in addition to current compensation to those individuals who
are keyaudit committee will be considered independent if they
have no relationship to the growthcorporation that may interfere with the exercise of
their independence from management and successthe corporation.) In addition, each
committee member must be "Financially Literate" or must achieve this status
through training within six months of Donaldson.
SECTION 1.02 DEFINITIONS.
For all purposes of the Plan, the following terms shall have the meanings
assigned to them, unless the context otherwise requires:
(a) "Award" means any award described in Parts II and III.
(b) "Award Agreement" means an agreement entered into between Donaldson and
a Participant setting forth the terms and conditions applicablebeing appointed to the Award
grantedcommittee (for
these purposes, "Financial Literacy" is the ability to read and understand
fundamental financial statements, including the Participant.
(c) "Changebalance sheet, income statement
and cash flow statement).
FREQUENCY OF MEETINGS: The committee will have three regularly scheduled
meetings each fiscal year, in Control". A "ChangeSeptember, November and May. In addition, the
committee will meet at other times if deemed necessary to completely discharge
its duties and responsibilities as outlined in Control" of Donaldson shall have
occurred if (i) any "person", as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than Donaldson, any trustee or other fiduciary holding securities under an
employee benefit plan of Donaldson or any corporation owned, directly or
indirectly,this charter.
APPOINTMENT OF MEMBERS AND CHAIRPERSON: Each committee member will be
selected by the shareholders of Donaldson in substantially the same
proportions as their ownership of stock of Donaldson), either is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of Donaldson representing 30% or more of the
combined voting power of Donaldson's then outstanding securities, (ii) during
any period of two consecutive years (not including any period prior to the
effective date of this Plan), individuals who at the beginning of such period
constitute the Board of Directors of Donaldson (the "Board" ), and any new
director (other than a director designated by a person who has entered into an
agreement with Donaldson to effect a transaction described in clause (i), (iii)
or (iv) of this subparagraph) whose election by the Board or nomination for
election by Donaldson's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
thereof, unless the approval of the election or nomination for election of such
new directors was in connection with an actual or threatened election or proxy
contest, (iii) the shareholders of Donaldson approve a merger or consolidation
of Donaldson with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of Donaldson
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of Donaldson or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of Donaldson (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the combined voting
power of Donaldson's then outstanding securities or (iv) the shareholders of
Donaldson approve a plan of complete liquidation of Donaldson or an agreement
for the sale or disposition by Donaldson of all or substantially all of
Donaldson's assets or any transaction having a similar effect (the date upon
which an event described in clause (i), (ii), (iii) or (iv) of this paragraph
(c) occurs shall be referred to herein as an "Acceleration Date").
(d) "Committee" means the subcommittee (or subcommittees as may be
necessary) of the Human Resources CommitteeChairman of the Board of Directors (the
"Board") appointed to administer the Plan and constituted so as to satisfy the
legal requirements, including any such requirements for disinterested
administration, imposed by Rule 16b-3will serve a term of one
year. Committee members can serve successive one-year terms without limitation.
The Chairperson of the Exchange Act ("Rule 16b-3").
(e) "Common Stock" means the Common Stock of Donaldson, par value $5.00 per
share, including treasury Shares and authorized but unissued Shares or any
security of Donaldson issued in substitution, exchange or in lieu thereof.
A-1
(f) "Donaldson" means Donaldson Company, Inc. and its Subsidiaries.
(g) "Limitation Amount" means with respect to any Plan Year, one and one
half (11/2) percent of the Outstanding Shares.
(h) "Market Value" of Common Stock as of any date means the closing sales
price on such date on the New York Stock Exchange, or if there was no sale on
that date, then, unless otherwise specifically set forth hereinafter, on the
preceding date on which a sale occurred.
(i) "Outstanding Shares" means, with respect to any Plan Year, the
outstanding Shares of Common Stock, outstanding Common Stock equivalents (as
determined by Donaldson in the calculation of earnings per share on a fully
diluted basis) and Treasury Shares as reported in the Annual Report on Form 10-K
of Donaldson for the most recent fiscal year that ends during the Plan Year.
(j) "Participant" means an individual who has been granted an Award
pursuant to the Plan.
(k) "Plan" means this 1991 Master Stock Compensation Plan.
(l) "Plan Year" means the calendar year.
(m) "Shares" means shares of Common Stock.
(n) "Subsidiary" means any corporation or other entity of which a majority
of the voting power is owned, directly or indirectly, by Donaldson, or which is
otherwise controlled by Donaldson.
SECTION 1.03 SHARES SUBJECT TO THE PLAN.
(a) Subject to adjustments authorized by Section 1.05 and the provisions of
the remaining subsections of this Section 1.03, the number of Shares with
respect to which Awards mayAudit Committee will be issued under the Plan in any Plan Year shall not
exceed the Limitation Amount; provided that any Shares with respect to which
Awards may be issued, but are not issued, under the Plan in any Plan Year shall
be carried forward and shall be available to be covered by Awards issued in any
subsequent Plan Year in which Awards may be issued under the Plan.
(b) In the event any options granted under the Plan shall terminate or
expire for any reason without having been exercised in full, the Shares not
purchased under such options shall again be available under the Plan.
(c) In the event Shares that are the subject of Awards under the Plan are
subsequently forfeited to Donaldson pursuant to the applicable restrictions or
Award Agreement, such Shares shall again be available under the Plan.
(d) If a Participant exercises a stock appreciation right, any Shares
coveredselected by the stock appreciation right in excess of the number of Shares issued
(or, in the case of a settlement in cash or any other form of property, in
excess of the number of Shares equal in value to the amount of such settlement,
based on the Market Value of such Shares on the date of such exercise) shall
again be available under the Plan.
(e) If pursuant to the terms of the Plan a Participant uses Shares to (i)
pay a purchase or exercise price, including an option exercise price, or (ii)
satisfy tax withholding or payment requirements, such Shares shall become
available for grant under the Plan; provided, however, that such Shares shall
not become available for grant under the Plan unless the Committee determines
that this provision would be in compliance with the applicable requirements of
Rule 16b-3 and other applicable law.
(f) The Shares that again become available under the Plan pursuant to
Subsections (b), (c), and (d) above, and the Shares that become available under
the Plan pursuant to Subsection (e) above, shall be in addition to the number of
Shares authorized by Subsection (a) above.
(g) Subject to the foregoing provisions of this Section 1.03, the grant of
an Award, the payment or settlement of which may be made in Shares, shall be
deemed to be a grant of Shares equal to the greater of the number of Shares that
may be issued under the Award or the number of Shares on the basis of which the
Award is calculated. The grant of an Award that is convertible into, or
exercisable for, Shares shall be deemed to be a grant of Shares equal to the
number of Shares into which the Award is convertible or exercisable on the date
of grant. Where the value of an Award is variable on the date it is granted, the
value of the Award
A-2
shall be deemed to be equal to the maximum limitation on the number of Shares
that may be granted or purchased under the Award. Where two or more Awards are
granted with respect to the same Shares, such Shares shall be taken into account
only once for purposes of this Section 1.03.
(h) Shares authorized or issued under any other plan or which are not
specifically issued pursuant to this Plan, shall not reduce the number of Shares
with respect to which Awards may be issued under this Plan.
SECTION 1.04 ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee which shall in its sole
discretion determine:
(a) the individuals to participate in the Plan;
(b) the number of Shares to be covered by Awards granted under the Plan and
the price to be paid, if any, for such Shares;
(c) the size and terms of the Awards, any performance periods and
objectives, and range of achievement percentages;
(d) the provisions governing the disposition of an Award in the event of
retirement, disability, death or other termination of a Participant's employment
or relationship to Donaldson; and
(e) the interpretation, construction and implementation of the Plan.
All determinations of the Committee shall be by a majority of its members.
Decisions and determinations by the Committee shall be final.
SECTION 1.05 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Shares, other securities, or
other property), extraordinary cash dividend, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up,
combination, repurchase, or exchange of Shares or other securities,
exercisability of stock purchase rights received under the rights plan, issuance
of warrants or other rights to purchase Shares or other securities, or other
similar corporate transaction or event affects the Shares with respect to which
Awards have been or may be issued under the Plan, such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee, in such manner as the Committee may deem
equitable, may adjust any or all of (i) the number and type of Shares that
thereafter may be made the subject of Awards, (ii) the number and type of Shares
(or other securities or property) subject to outstanding Awards, and (iii) the
grant, purchase, or exercise price with respect to any Award, or, if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
Award; provided, in each case, that with respect to incentive stock options, no
such adjustment shall be authorized to the extent that such adjustment would
cause such options to violate Section 422 of the Internal Revenue Code of 1988
as amended (the "Code") or any successor provision; and provided further, that
the number of Shares subject to any Award denominated in Shares shall always be
a whole number.
(b) In the event of a corporate merger, consolidation, acquisition of
property or stock, reorganization or liquidation, the Committee shall be
authorized to cause the Corporation to issue or to assume stock options or stock
appreciation rights, whether or not in a transaction to which Section 424(a) of
the Code applies, by means of substitution of new options or rights for
previously issued options or rights or an assumption or previously issued
options or rights, but only if and to the extent that such substitution or
assumption is consistent with the other provisions of the Plan, with the
applicable requirements of Rule 16b-3, and with any other applicable law.
SECTION 1.06 EFFECTIVE DATE.
The effective date of the Plan shall be the date upon which the Plan shall
be approved by the shareholders of Donaldson. Unless the Plan is terminated
earlier in accordance with Section 1.07 hereof, the Plan shall remain in full
force and effect until the close of business on December 31, 2001, at which time
the right to grant Awards under the Plan shall terminate automatically unless
the Shareholders of Donaldson approve an extension or renewal. Any Awards
granted under the Plan before such termination date shall continue to be
governed, thereafter, by the terms of the Plan and of the Awards.
A-3
SECTION 1.07 AMENDMENT OR TERMINATION OF PLAN.
The Board may at any time terminate the Plan or from time to time amend or
revise the terms of the Plan or any part thereof without further action of the
shareholders; provided, however, that the Board may not amend the Plan in any
manner or by any procedure that would result in noncompliance with Rule 16b-3 or
any applicable law.
Notwithstanding any of the above, on or after the occurrence of a Change in
Control, no direct or indirect alteration, amendment, suspension, termination or
discontinuance of the Plan, no establishment or modification of rules,
regulations or procedures under the Plan, no interpretation of the Plan or
determination under the Plan, and no exercise of authority or discretion vested
in the Committee under any provision of the Plan (collectively or individually,
a "Change") shall be made if such Change (1) is not required by applicable law,
necessary to meet the requirements of Rule 16b-3, or required to preserve the
qualification of incentive stock options under the Code, and (2) would have the
effect of:
(i) eliminating, reducing or otherwise adversely affecting a Participant's,
former Participant's or beneficiary's right with respect to any Award (including
without limitation any Award previously deferred and unpaid (including any
appreciation, dividend equivalents, interest, or other earnings thereon) in
accordance with a deferral election made prior to such Change and in accordance
with any investment or payment option permitted (irrespective of any requirement
for approval) pursuant to rules, regulations or procedures in effect on the date
immediately preceding the date on which the Change in Control occurs),
(ii) altering the meaning or operation of the definition of "Change in
Control" in Section 1.02 hereof (and of the definition of all the defined terms
that appear in the definition of "Change in Control"), the provisions of this
Section 1.07 or Section 1.13 or any rule, regulation, procedure, provision or
determination made or adopted prior to the Change in Control pursuant to this
Section 1.07 or any provision in any rule, regulation, procedure, provision or
determination made or adopted pursuant to the Plan that becomes effective upon
the occurrence of a Change in Control (collectively, the "Change in Control
Provisions"), or
(iii) undermining or frustrating the intent of the Change in Control
Provisions to secure for Participants, former Participants and beneficiaries the
maximum rights and benefits that can be provided under the Plan.
Upon and after the occurrence of a Change in Control, all rights of all
Participants, former Participants and beneficiaries under the Plan (including
without limitation any rules, regulations or procedures promulgated under the
Plan) shall be contractual rights enforceable against Donaldson and any
successor to all or substantially all of the Donaldson's business or assets.
SECTION 1.08 WITHHOLDING OF TAX.
Each participant, as a condition precedent to the issuance of Shares
hereunder, shall make arrangements with Donaldson for payment or withholding of
the amount of any tax required by any government authority to be withheld and
paid by Donaldson to such government authority for the account of the
participant.
SECTION 1.09 EMPLOYMENT.
Nothing in the Plan and no grant of an Award shall be deemed to grant any
right of continued employment to a participating employee or to limit or waive
any rights of Donaldson to terminate such employment at any time, with or
without cause.
SECTION 1.10 RIGHTS AS SHAREHOLDERS.
A participating employee shall have no rights whatsoever as a shareholder
of Donaldson with respect to any Shares covered by an Award until the date of
issuance of a stock certificate pursuant to the terms of such Award.
SECTION 1.11 UNFUNDED PLAN.
The Plan shall be unfunded. Donaldson shall not be required to segregate
any assets that may at any time be represented by Awards made pursuant to the
Plan. Neither Donaldson nor the Board shall be deemed to be a trustee of any
amounts to be paid under the Plan. Any liability of Donaldson to any
Participant, former Participant or beneficiary with respect to an Award shall be
based solely upon contractual obligations created by the Plan and the Award
Agreement. No such obligation shall be deemed to be secured by any pledge of or
any encumbrance on any property of Donaldson.
A-4
SECTION 1.12 NO FRACTIONAL SHARES.
No fractional Shares shall be issued pursuant to the Plan or any Award. The
Committee shall determine whether cash, other securities, or other property
shall be paid or transferred in lieu of fractional Shares, or whether fractional
Shares or any rights thereto shall be canceled, terminated or otherwise
eliminated.
SECTION 1.13 CHANGE IN CONTROL. IN THE EVENT OF A CHANGE IN CONTROL OF
DONALDSON:
(a) any outstanding options and stock appreciation rights granted under the
Plan not previously vested and exercisable shall become fully vested and
exercisable and shall remain exercisable thereafter until they are either
exercised or expire by their terms;
(b) performance objectives applicable to Awards granted under the Plan
shall be deemed to have been met at 100% of target then prorated on the basis of
the portion of the performance period that has expired; and
(c) the restrictions applicable to any restricted Shares awarded under the
Plan shall lapse and such Shares shall become fully vested.
II. EMPLOYEE AWARDS
SECTION 2.01
The following types of Awards may be granted under this Part II, singly or
in combination or in tandem with other Awards (or with awards under other plans
of Donaldson) as the Committee may determine. All such Awards shall be in a form
determined by the Committee provided that no Award may be inconsistent with the
terms of the Plan and must be set forth in an Award Agreement.
SECTION 2.02 GRANT OF STOCK OPTIONS.
Any employee (including officers and employee directors) regularly employed
by Donaldson shall be eligible to receive options hereunder. No option may be
granted to any employee who owns more than 5% of the Common Stock.
Options shall be evidenced by written Award Agreements. The Award
Agreements, in such form as the Committee shall from time to time approve, shall
contain the terms and conditions of such option including the following:
(a) TIME OF EXERCISE. An employee may exercise an option at such time or
times as determined by the Committee at the time of the grant; provided,
however, that all rights to exercise an incentive stock option shall expire not
more than ten years after the date such option is granted.
(b) EXERCISE PRICE. The exercise price per share of Common Stock
deliverable upon the exercise of an option shall be determined by the Committee
at the time of grant and clearly set forth in the Award Agreement; but shall not
be less than the Market Value of the Shares on the date the option is granted.
(c) EXERCISE OF OPTIONS. To exercise an option in whole or in part, the
Participant employee shall give written notice to Donaldson's Treasurer at the
principal offices of Donaldson of the exercise of the option, stating the number
of Shares with respect to which the Participant is so exercising and
accompanying such notice with full payment of the exercise price for such number
of Shares. Payment of the exercise price may be made in cash or, with the
consent of the Committee, in whole or in part through the delivery or
attestation to the ownership of Common Stock valued at the Market Value on the
day preceding the date of exercise provided that in the case of attestation, the
Shares transferred upon exercise of the option shall be net of the number of
Shares attested to. Subject to rules established by the Committee, the amount of
any tax required to be paid or withheld pursuant to Section 1.08 may be
satisfied by Donaldson withholding Shares issued on exercise having a Market
Value on the day preceding the date of exercise equal to such taxes; provided,
that the number of Shares so withheld shall be rounded up to avoid the necessity
of issuing fractional Shares.
(d) The Committee may grant "reload" options pursuant to which, subject to
the terms and conditions established by the Committee and any applicable
requirements of Rule 16b-3 or any other applicable law, the Participant would be
granted a new option when the payment of the exercise price of a previously
granted
A-5
option is made by the delivery or attestation to ownership of Common Stock owned
by the Participant, as described in Section 2.02(c) hereof, which new option (i)
would be an option to purchase the number of Shares provided as consideration
upon the exercise of the previously granted option and (ii) would have a per
share exercise price equal to the Market Value as of the date of grant of the
new option.
SECTION 2.03 STOCK APPRECIATION RIGHTS.
The Committee may grant stock appreciation rights under the Plan. A Stock
Appreciation Right (SAR) is a right, denominated in Shares, to receive, upon
surrender of the right (or of both the right and a related option in the case of
a tandem right) in whole or in part, but without payment, an amount (payable in
Shares, in cash, or a combination thereof as the Committee shall determine) that
does not exceed the excess of the Market Value on the exercise date of the
number of Shares for which the SAR is exercised over the exercise price of such
right, which exercise price shall not be less than the Market Value for such
Shares on the date the right was granted (or, in the case of an option with
tandem SAR not less than the option price that the optionee otherwise would have
been required to pay for such Shares); provided that, in the case of any SAR
granted retroactively in tandem with or in substitution for another Award (or
any outstanding award granted under any other plan of Donaldson), the exercise
price shall not be less than the Market Value for the number of Shares for which
the SAR is exercised on the date of grant of the other Award (or award). The
exercise of SARs for cash by a Participant who is an officer or a director for
purposes of Sections 16(a) and 16(b) of the Exchange Act or any successor
thereto, shall be subject to the requirements of Rule 16b-3. Upon exercise of a
tandem SAR as to some or all of the Shares covered by the grant, the related
stock option shall be canceled automatically to the extent of the number of
Shares covered by such exercise. If a related stock option is exercised as to
some or all of the Shares covered by the grant, the tandem SAR, if any, shall be
canceled automatically to the extent of the number of Shares covered by the
stock option exercise.
SECTION 2.04 INCENTIVE STOCK OPTIONS.
At the discretion of the Committee, options granted under Section 2.02
above may be designated incentive stock options in compliance with Section 422
of the Code or any successor section, as it may be amended from time to time,
and the regulations thereunder.
Incentive stock options shall be evidenced by written Award Agreements and
may be granted only with respect to Shares of Common Stock. The aggregate number
of Shares for which incentive stock options may be granted under the Plan shall
not exceed 1,000,000 Shares of Common Stock, subject in any Plan Year to the
limitations imposed and adjustments required by Section 1.03 hereof and subject
to the adjustment provisions set forth in Section 1.05 hereof. Incentive stock
options may not be granted under the Plan after November 15, 2001.
SECTION 2.05 RESTRICTED STOCK.
The Committee may grant to any employee restricted stock, for no cash
consideration, if permitted by applicable law, or for such other consideration
as may be determined by the Committee and specified in the Award Agreement which
sets forth the Award. The terms and conditions of Awards of restricted stock
shall be determined by the Committee. Unless otherwise specified in the Award
Agreement, holders of restricted stock shall have the right to vote such Shares
and receive cash and stock dividends on such shares.
Any restricted stock issued hereunder may be evidenced in such manner as
the Committee in its sole discretion shall deem appropriate, including, without
limitation, bookentry registration or issuance of a stock certificate or
certificates, and may be held in escrow by such party as the Committee in its
sole discretion shall designate. In the event any stock certificate is issued in
respect of restricted stock granted hereunder and not held in escrow, such
certificate shall bear an appropriate legend with respect to the restrictions
applicable to such Award.
SECTION 2.06 OTHER STOCK-BASED AWARDS.
The Committee may grant Awards (other than the Awards described above)
under the Plan that consist of or are denominated in or payable in, valued in
whole or in part by reference to, or otherwise based on or related to, Shares,
provided that such grants must comply with Rule 16b-3 and other applicable law.
The Committee may subject such Awards to such restrictions on transfer and/or
such other restrictions on incidents of ownership as the Committee may
determine, provided that such restrictions must be consistent
A-6
with the terms of the Plan. The Committee may grant Awards under this Section
2.06 that require no payment of consideration by the Participant (other than
services previously rendered or, as may be permitted by applicable law, services
to be rendered), either on the date of grant or the date any restriction(s)
thereon are removed. In addition, the Committee may grant Awards under this
Section 2.06 that provide to the Participant the right to purchase Shares,
provided that the purchase price or exercise price, if any, shall in no event be
less than the Market Value for such Shares on the date of grant; provided that,
in the case of any Award granted retroactively in tandem with or in substitution
for another Award (or any outstanding award granted under any other plan of
Donaldson) the purchase price or exercise price, if any, shall not be less than
the Market Value on the date of grant of the other Award (or award).
SECTION 2.07 DOLLAR-DENOMINATED AWARDS.
The Committee may grant cash Awards under the Plan that are denominated in,
valued by reference to, or otherwise based on or related to, a designated dollar
amount or amounts (including dollar amounts that are determined pursuant to a
formula), as determined by the Committee, and that are determined in accordance
with the achievement of long-term performance criteria applicable to Donaldson,
a Subsidiary, division, operating unit or individual Participant, as determined
by the Committee. Awards granted pursuant to this Section 2.07 shall be payable
only in cash.
SECTION 2.08 DIVIDEND EQUIVALENTS
The Committee may grant dividend equivalents in respect of Awards. In
respect of any such Award that is outstanding on a dividend record date for the
Shares covered by the Award, the Participant may be credited with an amount
equal to the amount of cash or stock dividends that would have been paid on the
Shares covered by the Award if the covered Shares had been issued and
outstanding on the dividend record date. Subject to the terms of the Plan and
any applicable Award Agreements, the Committee shall establish such rules and
procedures governing the crediting of dividend equivalents, including the timing
and payment contingencies that apply to the dividend equivalents, as the
Committee deems necessary or appropriate and which rules and procedures shall
comply with Rule 16b-3 and other applicable law. Dividend equivalents shall be
paid only in cash.
SECTION 2.09 NON-TRANSFERABILITY OF AWARDS.
Awards (other than Restricted Shares, the restrictions upon which have
lapsed) are not transferable by an employee other than by will or the laws of
descent and distribution. During the employee's lifetime, stock options and
stock appreciation rights may be exercised only by such employee.
Notwithstanding the above, transferability of stock option grants is permitted
with the approval of the Committee.
III. NONEMPLOYEE DIRECTOR AWARDS
SECTION 3.01 ELIGIBLE PARTICIPANTS.
Each member of the Board from time to time who is not a full time employee
of Donaldson shall be an eligible participant ("Part III Participant") for an
Award under this Part III.
SECTION 3.02 DEFERRED SHARES IN LIEU OF RETAINER OR MEETING FEES.
(a) AUTOMATIC RECEIPT OF RESTRICTED SHARES. Thirty percent (30%) of the
annual retainer payable to a Part III Participant for service on the Board shall
be payable solely by crediting to such Part III Participant's deferred stock
account (a "Deferred Stock Account") a number of Shares having a Fair Market
Value equal to 30% of such annual retainer. Such Part III Participant shall
receive the Shares held in his or her Deferred Share Account in accordance with
the terms of Section 3.09 below. The Shares shall be issued to a Part III
Participant in accordance with the election made by such Part III Participant
prior to the commencement of the service year for which services will be
rendered to the Board; provided that, if no such election is made, all such
Deferred Shares shall be deferred until such Part III Participant's retirement
from service on the Board.
(b) ELECTION TO RECEIVE ADDITIONAL RESTRICTED SHARES. Each Part III
Participant shall have the right to elect to receive up to 100% of his or her
annual retainer for services on the Board which would otherwise be payable in
cash (other than fees which have been deferred under the Company's Compensation
Plan for
A-7
Nonemployee Directors), in the form of Shares. Any part of the annual retainer
elected to be so deferred shall be payable in Shares held in his or her Deferred
Share Account in accordance with the terms of Section 3.09 below. The number of
Shares to be credited to a Part III Participant's Deferred Stock Account
hereunder shall be determined in accordance with Section 3.02(d) of this Plan.
Such election must be made prior to the service year for which the annual
retainer is to be so deferred. Elections under this Subsection 3.02(b) shall
remain in effect from year to year until changed by the Part III Participant. No
change shall be effective until the next service year.
(c) ELECTION TO RECEIVE DEFERRED SHARES IN LIEU OF MEETING FEES. Each Part
III Participant may also elect to be credited with Shares in lieu of all or any
portion of the meeting fees otherwise payable to such Part III Participant. The
number of Shares to be credited to a Part III Participant's Deferred Stock
Account hereunder shall be determined in accordance with Section 3.02(d) of this
Plan. Such election must be made prior to the service year for which the annual
retainer is to be so deferred. Elections under this Subsection 3.02(c) shall
remain in effect from year to year until changed by the Part III Participant. No
change shall be effective until the next service year.
(d) CREDITS TO DEFERRED STOCK ACCOUNT FOR ELECTIVE DEFERRALS. On December 1
and on June 1 of each service year (each a "Credit Date"), a Part III
Participant shall receive a credit to his or her Deferred Stock Account. The
amount of the credit on December 1 shall be the number of Shares (rounded to the
nearest one-hundredth of a share) determined by dividing (i) an amount equal to
the portion of the annual retainer fees for the upcoming service year specified
for deferral pursuant to Section 3.04 and the meeting fees payable to such Part
III Participant on such Credit Date for meetings attended since the preceding
Credit Date and specified for deferral pursuant to Section 3.04, by (ii) the
Fair Market Value of one Share on such Credit Date. The amount of the credit on
June 1 shall be the number of Shares (rounded to the nearest one-hundredth of a
share) determined by dividing (i) an amount equal to the meeting fees payable to
such Part III Participant on such Credit Date for meetings attended since the
preceding Credit Date and specified for deferral pursuant to Section 3.04, by
(ii) the Fair Market Value of one Share on such Credit Date.
SECTION 3.03 ISSUANCE OF STOCK IN LIEU OF CASH.
The Company shall not issue fractional shares; however, fractional shares
will be credited to the Deferred Stock Accounts (rounded to the nearest
one-hundredth share). Whenever, under the terms of this Plan, a fractional share
would be required to be issued, an amount in lieu thereof shall be paid in cash
for such fractional share based upon the same Fair Market Value as was utilized
to determine the number of Shares to be issued on the relevant issue date.
SECTION 3.04 MANNER OF MAKING DEFERRAL ELECTION.
A Part III Participant may elect to defer payment of a portion of the
annual retainer or meeting fees pursuant to Sections 3.02(b) or (c) of this Plan
by filing, no later than November 15 of each year (or by such other date as the
Administrator shall determine), an irrevocable election with the Administrator
on a form provided for that purpose ("Deferral Election"). The Deferral Election
shall be effective with respect to the annual retainer and meeting fees payable
on or after December 1 of the following service year unless the Part III
Participant shall revoke or change the election in accordance with the procedure
set forth in Section 3.07. The Deferral Election form shall specify an amount to
be deferred expressed as a dollar amount or as a percentage of the Part III
Participant's annual retainer and/or meeting fees payment.
SECTION 3.05 DIVIDEND CREDIT.
Each time a dividend is paid on the Common Stock, a Part III Participant
shall receive a credit to his or her Deferred Stock Account equal to that number
of shares of Common Stock (rounded to the nearest one-hundredth of a share)
having a Fair Market Value on the dividend payment date equal to the amount of
the dividend payable on the number of Shares credited to the Part III
Participant's Deferred Stock Account on the dividend record date.
SECTION 3.06 FAIR MARKET VALUE.
For purposes of converting dollar amounts into shares of Common Stock, the
Fair Market Value of each share of Common Stock shall be equal to the closing
price of one share of the Company's Common Stock on
A-8
the New York Stock Exchange-Composite Transactions on the last business day as
of which Deferred Shares are credited to the Part III Participant's Deferred
Stock Account or the date of issuance of Shares, as the case may be.
SECTION 3.07 CHANGE IN ELECTION.
Each Part III Participant may irrevocably elect in writing to change an
earlier Deferral Election, either to change the percentage of his or her annual
retainer or meeting fees to be credited in Shares to such Part III Participant's
Deferred Share Account or to receive the entire amount in cash (an "Amended
Election"). Such Amended Election shall not become effective until the December
1 following the date of receipt of such Amended Election by the Company.
SECTION 3.09 DEFERRAL PAYMENT.
(a) DEFERRAL PAYMENT ELECTION. At the time of making the Deferral Election,
each Part III Participant shall also complete a deferral payment election
specifying one of the payment options described in Sections 3.09(b) and (c), and
the year in which amounts credited to the Part III Participant's Deferred Stock
Account shall be paid in a lump sum pursuant to Section 3.09(b), or in which
installment payments shall commence pursuant to Section 3.09(c). The deferral
payment election shall be irrevocable as to all amounts credited to the Part III
Participant's Deferred Stock Account. The Part III Participant may change the
deferral payment election by means of a subsequent deferral payment election in
writing that will take effect for deferrals credited after the date the Company
receives such subsequent deferral payment election.
(b) PAYMENT OF DEFERRED STOCK ACCOUNTS IN A LUMP SUM. Unless a Part III
Participant elects to receive payment of his or her Deferred Stock Account in
installments as described in Section 3.09(c), credits to a Part III
Participant's Deferred Stock Account shall be payable in full on December 1 of
the year following the Part III Participant's termination of service on the
Board (or the first business day thereafter) or such other date as elected by
the Part III Participant pursuant to Section 3.09(a). All payments shall be made
in shares of Common Stock plus cash in lieu of any fractional share.
Notwithstanding the foregoing, in the event of a Change in Control, credits to a
Part III Participant's Deferred Stock Account as of the business day immediately
prior to the effective date of the transaction constituting the Change in
Control shall be paid in full to the Part III Participant or the Part III
Participant's beneficiary or estate, as the case may be, in whole shares of
Common Stock (together with cash in lieu of a fractional share) on such date.
(c) PAYMENT OF DEFERRED STOCK ACCOUNTS IN INSTALLMENTS. A Part III
Participant may elect to have his or her Deferred Stock Account paid in annual
installments following termination of service as a director or at such other
time as elected by the Part III Participant pursuant to Section 3.09(a). All
payments shall be made in shares of Common Stock plus cash in lieu of any
fractional share. All installment payments shall be made annually on December 1
of each year (or the first business day thereafter). The amount of each
installment payment shall be computed as the number of Shares credited to the
Part III Participant's Deferred Stock Account on the relevant installment
payment date, multiplied by a fraction, the numerator of which is one and the
denominator of which is the total number of installments elected (not to exceed
ten) minus the number of installments previously paid. Amounts paid prior to the
final installment payment shall be rounded to the nearest whole number of
Shares; the final installment payment shall be for the whole number of Shares
then credited to the Part III Participant's Deferred Stock Account, together
with cash in lieu of any fractional shares. Notwithstanding the foregoing, in
the event of a Change of Control, credits to a Part III Participant's Deferred
Stock Account as of the business day immediately prior to the effective date of
the transaction constituting the Change of Control shall be paid in full to the
Part III Participant or the Part III Participant's beneficiary or estate, as the
case may be, in whole Shares (together with cash in lieu of a fractional share)
on such date.
SECTION 3.10 LIMITATION ON RIGHTS OF PART III PARTICIPANTS.
(a) SERVICE AS A DIRECTOR. Nothing in this Plan will interfere with or
limit in any way the right of the Company's Board or its stockholders to remove
a Part III Participant from the Board. Neither this Plan nor any action taken
pursuant to it will constitute or be evidence of any agreement or understanding,
express or implied, that the Company's Board or its stockholders have retained
or will retain a Part III Participant as a director for any period of time or at
any particular rate of compensation.
A-9
(b) NONEXCLUSIVITY OF THE PLAN. Nothing contained in this Plan is intended
to effect, modify or rescind any of the Company's existing compensation plans or
programs or to create any limitations on the Board's power or authority to
modify or adopt compensation arrangements as the Board may from time to time
deem necessary or desirable.
(c) PARTICIPANTS ARE GENERAL CREDITORS OF THE COMPANY. The Part III
Participants and beneficiaries thereof shall be general, unsecured creditors of
the Company with respect to any payments to be made pursuant to this Plan and
shall not have any preferred interest by way of trust, escrow, lien or otherwise
in any specific assets of the Company. If the Company shall, in fact, elect to
set aside monies or other assets to meet its obligations hereunder (there being
no obligation to do so), whether in a grantor's trust or otherwise, the same
shall, nevertheless, be regarded as a part of the general assets of the Company
subject to the claims of its general creditors, and neither any Part III
Participant nor any beneficiary thereof shall have a legal, beneficial or
security interest therein.
SECTION 3.11 SPECIAL ONE-TIME AWARD OF DEFERRED SHARES.
The following Award is being paid in conjunction with the termination,
effective as of May 21, 1998, of the Company's Independent Director Retirement
and Death Benefit Plan (the "Director Retirement Plan") with respect to all
directors who are membersChairman of the
Board of Directors on May 21, 1998:
Each Part III Participant who isand will serve in that capacity for one year. The Chairperson
must have academic training in accounting or current or past experience in
positions of senior financial management (for example, currently or previously
held the position of Chief Financial Officer, Chief Executive Officer or
Chairman of a director on May 21, 1998, shall be
awarded a one-time grant, effective on such date, of Shares to his or her
Deferred Stock Accountcorporation). The Chairperson can serve successive terms in an amount equal to 115%this
capacity without limitation.
ROLES AND RESPONSIBILITIES
A broad outline of the benefits accruedroles and responsibilities of the audit committee is
presented below.
INTERNAL CONTROL:
1. Evaluate whether senior management has established and appropriately
reinforced the importance of internal control within the organization,
2. Evaluate the scope, effectiveness and significant findings of the
self-audit process for North American operations,
3. Review the internal auditor's report on the results of the annual self
audit survey,
4. Review the internal auditor's report and significant findings for the
company's international operations,
5. Evaluate whether recommendations for improved internal control are
effectively implemented by management.
FINANCIAL REPORTING:
1. Annually review the significant risks the company is exposed to and
evaluate management's plan to manage these uncertainties,
2. Review and evaluate management's interpretation and implementation of
mandated changes to accounting and reporting requirements,
A-1
3. Review the annual financial statements for accuracy and completeness,
4. Evaluate the accounting treatment of unusual or non-recurring
transactions such Part III Participantas restructuring charges and acquisitions,
5. Evaluate significant income statement and balance sheet items which
require management judgement,
6. Review and approve the 10K, including the Management Discussion and
Analysis (MD&A), before public release,
7. Review and approve the process for preparing interim, unaudited
(quarterly) financial statements.
COMPLIANCE WITH LAWS, REGULATIONS AND COMPANY POLICIES:
1. Review the effectiveness of the system for monitoring compliance with
laws and regulations,
2. Review the significant findings from the annual self audit survey of
compliance matters,
3. Ensure that the company's compliance manual, code of conduct and corporate
policy statements are kept up to date and are accessible to and usable by
the entire organization.
RELATIONSHIP WITH EXTERNAL AUDITOR:
1. Recommend the external auditor appointment to the Board of Directors,
2. Review and approve the scope of the external audit to be performed each
fiscal year,
3. Confirm the independence of the external auditor,
4. Meet with the external auditors to review the accuracy, completeness and
overall quality of the annual financial statements.
REPORTING REQUIREMENTS
The audit committee Chairperson will update the full Board of Directors
regarding the significant items of discussion at each committee meeting.
Additional reports on matters of special interest will be submitted to the Board
of Directors as appropriate. In addition to Board of Director communication, the
following information will be reported to the shareholders in the Director Retirement Plan asannual proxy
statement: (1) confirmation that the company has a formal, documented audit
committee charter, (2) confirmation that the audit committee satisfied its
obligations under the charter in the prior year, (3) the full text of such date
dividedthe audit
committee charter at least once every three years and after any significant
modification is approved by the Fair Market ValueBoard of one Share as of such date. All of such
Shares credited to a Part III Participant's Deferred Stock Account shall be paid
out in three, equal, annual installments, commencing on December 1 of the first
service year in which such Part III Participant is no longer serving as a
director.
SECTION 3.12 RESTRICTED STOCK AWARDS.
If such grant does not affect the "disinterested administrator" status of
the Committee under Rule 16b-3, the Committee may grant to any Part III
Participant Shares of restricted stock, for no cash consideration, if permitted
by applicable law, or for such other consideration as may be determined by the
Committee and specified in the Award.
A-10Directors.
A-2
[LOGO](TM)
DONALDSON(R)
DONALDSON COMPANY, INC.
ANNUAL MEETING --OF STOCKHOLDERS
NOVEMBER 20, 199819, 1999
10:00 A.M., CENTRAL TIME
THE CONFERENCE CENTER AT ATRIUM CENTER
3105 E. 80TH STREET
BLOOMINGTON, MINNESOTA
- --------------------------------------------------------------------------------
[DONALDSON LOGO] DONALDSON COMPANY, INC. PROXY
- --------------------------------------------------------------------------------
The undersigned appoints WILLIAM G. VAN DYKE and NORMAN C. LINNELL, and each of
them, as Proxies, each with the power to appoint his substitute, to represent
and vote, as designated below, all shares of the undersigned at the 19981999 Annual
Meeting of Stockholders of Donaldson Company, Inc. at The Conference Center at
Atrium Center, 3105 E. 80th Street, Bloomington, Minnesota, at 10:00 a.m.,
Central Time, on Friday, November 20, 1998,19, 1999, and at any adjournment thereof.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS, DONALDSON COMPANY, INC.
(CONTINUED, AND TO BE SIGNED AND DATED ON OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS VOTES FOR:
1. ELECTION OF DIRECTORS.
Nominees: (01)PAUL B. BURKE, (02)KENDRICK B. MELROSE, (03)STEPHEN W. SANGER
[ ] VOTE FOR all nominees [ ] WITHHOLD VOTE from all nominees
To withhold authority to vote for any nominee(s), write the number(s) of
the nominee(s) in the box to the right. [_____________________________]
2. Approve appointment of Ernst & Young LLP as independent auditors.
[ ] For [ ] Against [ ] Abstain
3. Approve Amendment of 1991 Master Stock Compensation Plan.
[ ] For [ ] Against [ ] Abstain
Date _____________________________, 1998
________________________________________
PLEASE DATE AND SIGN ABOVE exactly as
name appears, indicating, if
appropriate, official position or
representative capacity. If stock is
held in joint tenancy, each joint owner
should sign.
[LOGO](TM)
DONALDSON(R)
DONALDSON----------------------------
COMPANY INC.
ANNUAL MEETING -- NOVEMBER 20, 1998
The undersigned appoints WILLIAM G. VAN DYKE and NORMAN C. LINNELL, and each of
them, as Proxies, each with the power to appoint his substitute, to represent
and vote, as designated below, all shares of the undersigned at the 1998 Annual
Meeting of Stockholders of Donaldson Company, Inc. at The Conference Center at
Atrium Center, 3105 E. 80th Street, Bloomington, Minnesota, at 10:00 a.m.,
Central Time, on Friday, November 20, 1998, and at any adjournment thereof.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS, DONALDSON COMPANY, INC.
(CONTINUED, AND TO BE SIGNED AND DATED ON OTHER SIDE)
#
CONTROL #
----------------------------
VOTE BY TELEPHONE
QUICK ***--- EASY ***--- IMMEDIATE
CALL TOLL FREE ***--- ON A TOUCH TONE TELEPHONE
1-800-240-6326 ----- ANYTIME
[LOGO](TM) -------------------
DONALDSON(R) COMPANY #
FILTRATION SOLUTIONS CONTROL #
-------------------
- --------------------------------------------------------------------------------
Your telephone vote authorizes the named proxies to vote your shares in the
same manner as if you marked, dated, signed and returned your proxy card. The
deadline for telephone voting is noon (ET), November 19, 1998.18, 1999.
AUTOMATED TELEPHONE VOTING INSTRUCTIONS
1. Using a TOUCH-TONE telephone, dial 1-800-240-6326. Please make sure you stay
on the line until you receive a confirmation of your vote.
2. When prompted, enter the 3-digit Company Number located in the box on the
upper right hand corner of the proxy card.
3. When prompted, enter your 7-digit numeric Control Number that follows the
Company Number.
OPTION #1: To vote as the Board of Directors recommends on ALL proposals:
Press "1" When asked, please confirm your vote by pressing 1 --
THANK YOU FOR VOTING.
OPTION #2: If you choose to vote on each proposal separately: Press "0" You
will hear these instructions:
Proposal 1: To vote FOR ALL nominees, press "1"; to WITHHOLD FOR
ALL nominees, press "9"; to WITHHOLD FOR AN
INDIVIDUAL nominee, press "0" and listen to the
instructions.
Proposal 2: To vote FOR, press "1"; AGAINST, press "9"; ABSTAIN,
press "0"
Proposal 3: To vote FOR, press "1"; AGAINST, press "9"; ABSTAIN,
press "0"
When asked, please confirm your vote by pressing
"1" -- THANK YOU FOR VOTING.
IF YOU VOTE BY TELEPHONE, DO NOT MAIL BACK YOUR PROXY
PLEASE DETACH HERE
- --------------------------------------------------------------------------------
- ------- -------
THE BOARD OF DIRECTORS RECOMMENDS VOTES FOR:
1. Election of directors: 01 F. GUILLAUME BASTIAENS 03 S. WALTER RICHEY [ ] Vote FOR [ ] Vote WITHHELD
02 JANET M. DOLAN all nominees from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), ----------------------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX TO THE RIGHT.
----------------------------------------------------
2. Ratify appointment of Ernst & Young LLP as independent auditors. [ ]For [ ] Against [ ] Abstain
Address Change? Mark Box [ ]
Indicate changes below:
Date
----------------------------------
----------------------------------------------------
----------------------------------------------------
PLEASE DATE AND SIGN ABOVE exactly as name appears,
indicating, if appropriate, official position or
representative capacity. If stock is held in joint
tenancy, each joint owner should sign.
- ------- -------
[LOGO] DONALDSON(R)
DONALDSON COMPANY, INC.
ANNUAL MEETING -- NOVEMBER 19, 1999
The undersigned appoints WILLIAM G. VAN DYKE and NORMAN C. LINNELL, and each of
them, as Proxies, each with the power to appoint his substitute, to represent
and vote, as designated below, all shares of the undersigned at the 1999 Annual
Meeting of Stockholders of Donaldson Company, Inc. at The Conference Center at
Atrium Center, 3105 E. 80th Street, Bloomington, Minnesota, NOVEMBER 20, 1998at 10:00 a.m.,
CENTRAL TIME
PLEASE DETACH HERE
- --------------------------------------------------------------------------------Central Time, on Friday, November 19, 1999, and at any adjournment thereof.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS, DONALDSON COMPANY, INC.
(CONTINUED, AND TO BE SIGNED AND DATED ON OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS VOTES FOR:
1. ELECTION OF DIRECTORS.
Nominees: (01)PAUL B. BURKE, F. GUILLAUME BASTIAENS, (02)KENDRICK B. MELROSE, JANET M. DOLAN,
(03)STEPHEN W. SANGER S. WALTER RICHEY
[ ] VOTE FOR all nominees [ ] WITHHOLD VOTE from all nominees
To withhold authority to vote for any __________________________________
nominee(s), write the number(s) of the | |
nominee(s) in the box to the right. [_____________________________]|__________________________________|
2. ApproveRatify appointment of Ernst & Young LLP
as independent auditors. [ ] For [ ] Against [ ] Abstain
3. Approve Amendment of 1991 Master Stock Compensation Plan.
[ ] For [ ] Against [ ] Abstain
[ ] Mark here for address change and note below.
Date _____________________________, 1998
_________________________________________________________________, 1999
__________________________________
| |
| |
|__________________________________|
PLEASE DATE AND SIGN ABOVE exactly
as name appears, indicating, if
appropriate, official position or
representative capacity. If stock is
held in joint tenancy, each joint
owner should sign.