-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M5ReY4LiuW2flFwZkKTCSVzg1d/PhVptmTkbPY1RGvyLBJG6yrYANTBMPimaoQni Dztr2I+eb1I1dnq63XqbAg== 0000897101-98-000280.txt : 19980317 0000897101-98-000280.hdr.sgml : 19980317 ACCESSION NUMBER: 0000897101-98-000280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONALDSON CO INC CENTRAL INDEX KEY: 0000029644 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 410222640 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07891 FILM NUMBER: 98565582 BUSINESS ADDRESS: STREET 1: 1400 W. 94TH ST. CITY: MINNEAPOLIS STATE: MN ZIP: 55431 BUSINESS PHONE: 6128873131 MAIL ADDRESS: STREET 1: 1400 W 94TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55431 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _______________. Commission File Number 1-7891 DONALDSON COMPANY, INC. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 41-0222640 ------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1400 West 94th Street Minneapolis, Minnesota 55431 --------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 887-3131 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $5 Par Value -- 49,571,511 shares as of February 27, 1998 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CONDENSED STATEMENTS OF CONSOLIDATED EARNINGS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended January 31 January 31 --------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net Sales $ 232,974 $ 196,849 $ 467,041 $ 384,025 Cost of Sales 168,034 138,654 333,711 269,698 ------------ ------------ ------------ ------------ Gross Margin 64,940 58,195 133,330 114,327 Operating Expenses 44,979 40,218 91,347 77,389 Other (Income) Expense 17 364 (185) 606 Interest Expense 991 464 1,976 1,073 ------------ ------------ ------------ ------------ Earnings Before Income Taxes 18,953 17,149 40,192 35,259 Income Taxes 6,444 6,173 13,665 12,693 ------------ ------------ ------------ ------------ Net Earnings $ 12,509 $ 10,976 $ 26,527 $ 22,566 ============ ============ ============ ============ Net Earnings Per Share: Weighted Average Shares Outstanding During Period 49,593,217 50,183,698 49,528,532 50,312,988 ============ ============ ============ ============ Diluted Shares Outstanding 50,697,926 50,917,647 50,594,132 51,047,211 ============ ============ ============ ============ Net Earnings Per Share - Basic $ .25 $ .22 $ .54 $ .45 ============ ============ ============ ============ Net Earnings Per Share Assuming Dilution $ .25 $ .22 $ .52 $ .44 ============ ============ ============ ============ Dividends Paid Per Share $ .05 $ .04 $ .09 $ .08 ============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements. CONDENSED CONSOLIDATED BALANCE SHEETS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
January 31, July 31, 1998 1997 ---------- ---------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 6,291 $ 14,278 Accounts Receivable, Net 157,716 161,440 Inventories Materials 42,177 36,178 Work in Process 13,055 11,488 Finished Products 45,190 38,253 ---------- ---------- Total Inventories 100,422 85,919 Prepaids and Other Current Assets 10,183 7,181 ---------- ---------- TOTAL CURRENT ASSETS 274,612 268,818 Property, Plant and Equipment, at Cost 374,538 354,154 Less Accumulated Depreciation (204,902) (199,559) ---------- ---------- Property, Plant and Equipment, Net 169,636 154,595 Other Assets 29,386 30,981 ---------- ---------- TOTAL ASSETS $ 473,634 $ 454,394 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Debt $ 52,091 $ 42,027 Current Maturities of Long-Term Debt 105 647 Trade Accounts Payable 69,053 68,317 Accrued Employee Compensation & Related Taxes 23,616 28,760 Warranty and Customer Support 17,507 16,502 Other Current Liabilities 23,107 20,044 ---------- ---------- TOTAL CURRENT LIABILITIES 185,479 176,297 Long-Term Debt 4,108 4,201 Deferred Income Taxes 986 1,442 Other Long-Term Liabilities 27,714 28,589 SHAREHOLDERS' EQUITY Preferred Stock, $1 par value, 1,000,000 shares authorized, no shares issued -- -- Common Stock, $5 par value, 80,000,000 shares authorized, 49,655,954 and 54,126,814 issued January 31, 1998 and July 31, 1997, respectively 248,280 135,317 Additional Paid-In Capital 823 6,212 Retained Earnings 12,990 167,444 Cumulative Translation Adjustment (4,853) 934 Treasury Stock - 91,561 and 4,674,758 shares, at cost (1,893) (63,312) Receivable from ESOP -- (2,730) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 255,347 243,865 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 473,634 $ 454,394 ========== ==========
See Notes to Condensed Consolidated Financial Statements. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
Six Months Ended January 31 ------------------------ 1998 1997 --------- --------- OPERATING ACTIVITIES Net Earnings $ 26,527 $ 22,566 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 12,001 10,828 Changes in Operating Assets and Liabilities (14,332) (2,680) Other (2,972) (89) --------- --------- Net Cash Provided by Operating Activities 21,224 30,625 INVESTING ACTIVITIES Net Expenditures on PP&E (31,274) (20,603) Dividends & Distributions from Affiliates 1,500 3,037 --------- --------- Net Cash Used in Investing Activities (29,774) (17,566) FINANCING ACTIVITIES Purchase of Treasury Stock (6,149) (8,904) Net Change in Debt 10,049 (2,262) Dividends Paid (4,707) (4,281) Payment Received from ESOP 2,730 -- Other 157 554 --------- --------- Net Cash Provided by (Used In) Financing Activities 2,080 (14,893) Effect of Exchange Rate Changes on Cash (1,517) (2,726) --------- --------- (Decrease) in Cash and Cash Equivalents (7,987) (4,560) Cash and Cash Equivalents-Beginning of Year 14,278 30,924 --------- --------- Cash and Cash Equivalents-End of Period $ 6,291 $ 26,364 ========= =========
See Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended January 31, 1998 are not necessarily indicative of the results that may be expected for the year ended July 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in Donaldson Company, Inc. and subsidiaries' annual report on Form 10-K for the year ended July 31, 1997. Note B - New Accounting Standards In February, 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which was adopted by the Company in the second quarter of fiscal 1998. Upon adoption of SFAS No. 128, the Company is presenting basic earnings per share and diluted earnings per share. Basic earnings per share is computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options using the treasury stock method, and shares issuable under its Performance and Incentive Plans. The following table presents information necessary to calculate basic and diluted earnings per common and common equivalent share:
Three Months Ended Six Months Ended January 31, January 31, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Weighted average shares outstanding-Basic 49,593,217 50,183,698 49,528,532 50,312,988 Dilutive share equivalents 1,104,709 733,949 1,065,600 734,223 ----------- ----------- ----------- ----------- Weighted average shares - Diluted 50,697,926 50,917,647 50,594,132 51,047,211 =========== =========== =========== =========== Net earnings for basic and diluted earnings per share computation $ 12,509 $ 10,976 $ 26,527 $ 22,566 ----------- ----------- ----------- ----------- Basic earnings per share $ .25 $ .22 $ .54 $ .45 =========== =========== =========== =========== Diluted earnings per share $ .25 $ .22 $ .52 $ .44 =========== =========== =========== ===========
Earnings per share amounts and share amounts have been restated to reflect the Company's 2-for-1 stock split on January 13, 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. A. Financial Condition The Company generated $21.2 million of cash and cash equivalents from operations during the first six months of fiscal 1998. Operating cash flows decreased 30.7% from the prior year period primarily due to higher inventory requirements to support higher sales levels. In addition to the operating cash flow, $1.5 million was received as a return-of-capital from an unconsolidated affiliate. These cash flows were used primarily to support $31.3 million in capital additions (a 51.8% increase from the prior year), repurchase $6.1 million of treasury stock, and pay $4.7 million in dividends during the first six months of fiscal 1998. Increase in capital expenditures is due to productivity enhancing projects at various plants in the United States and overseas, capacity expansion and continuing upgrades to information systems. Expenditures for domestic plants and distribution centers totaled $17.7 million for the first six months of fiscal 1998. Expenditures for overseas operations totaled $9.5 million for the same period. At the end of the second quarter, the Company held $6.3 million in cash and cash equivalents. Short-term debt totaled $52.1 million, up from $42.0 million at July 31, 1997. Long-term debt of $4.1 million at January 31, 1998, represented 1.6% of total long-term capital, down from 1.7% at July 31, 1997. The Board of Directors on November 21, 1997 declared a 2-for-1 stock split of its common stock, effected in the form of a 100 percent stock dividend. The stock split was distributed January 13, 1998, to shareholders of record as of December 19, 1997. B. Results of Operations The Company reported record net earnings for the second quarter ended January 31, 1998 of $12.5 million, up 14.0% from the $11.0 million recorded in the second quarter last year. Diluted earnings per share were 25 cents, up 13.6% from prior-year diluted earnings per share of 22 cents as the average number of shares outstanding decreased 0.4%. Increase in net earnings was primarily due to higher sales and a reduction in the effective income tax rate offset by slightly lower margins. Total net sales for the three months ended January 31, 1998 of $233.0 million were up 18.4% from the same period last year of $196.8 million. For the six months, net earnings were a record $26.5 million, up 17.6% from fiscal 1997. Diluted earnings per share were 52 cents, up 18.2% from last year's diluted earnings per share of 44 cents. Year-to-date sales are up 21.6% to $467.0 million. In general, business conditions remain strong in North America and Europe; Japan and certain surrounding markets are flat. Specifically, in the first six months of the year, revenue in local currency terms is up 31.2% in North America and 30.6% in Europe relative to last year; revenue from our Japanese subsidiary was unchanged relative to last year. Engine products revenues were $155.2 million, a 20.1% increase over second quarter last year and $316.4 million for the six month period, an increase of 20.3% over prior year. Significant factors supporting the growth in engine products include growth in replacement part sales and the addition of $5.0 million in revenue from the Armada Tube Group acquired in the third quarter of fiscal 1997. Industrial products revenues were $77.8 million, a 15.0% increase over second quarter last year and $150.7 million for the six month period, a 24.4% increase over prior year. Significant contributors to revenue growth in industrial products include an increase in Torit dust collection sales due to strong market conditions in the United States and Europe, strong gas turbine growth, and the acquisition of the assets of the Aercology business in the fourth quarter of fiscal 1997. The gross margins for the second quarter of fiscal 1998 decreased to 27.9% from 29.6% in the same period last year. The six months figures are 28.5% and 29.8%, respectively. The decrease was due to product mix changes resulting in lower profitability in the automotive business and integration cost related to the Armada Tube acquisition, but was partially offset by higher margins in industrial products. Operating expenses during the second quarter of fiscal 1998 were $45.0 million, 19.3% of sales, compared to $40.2 million, 20.4% of sales in the same quarter of 1997. Year-to-date operating expenses as a percentage of sales have decreased from 20.2% to 19.6%, primarily due to lower reserves for warranty expense and pension obligations. Hard order backlogs -- goods scheduled for delivery in 90 days -- of $154.6 million at January 31, 1998, increased 7.8% from the same period last year and are down slightly in the quarter. Only the gas turbine and high purity markets have softened against the prior year. All other significant business markets have increased relative to one year ago and indicate continued revenue growth in the near term. The U. S. dollar continues to be strong relative to the currencies of foreign countries where the Company operates. The strong dollar continues to have a negative impact on overseas results because foreign exchange denominated earnings translate into less U. S. dollars. The impact of foreign exchange translation on net sales was a negative $6.6 million and $12.9 million for the three and six months ended January 31, 1998. C. Year 2000 Issues A task force was formed approximately one year ago to assess the Company's exposure to the "year 2000" issue -- all computer hardware and software systems have been evaluated to determine whether date-dependent functions will remain operable through the year 2000. In summary, the Company has implemented measures to have all critical business systems year-2000-ready by December 31, 1998. Several auxiliary or non-critical systems will be modified in 1999. Costs incurred and expected to be incurred related exclusively to addressing year-2000 issues at the Company total approximately $5.0 million. Based on the Company's analysis of the year 2000 issues, it appears that the amount spent to remediate its year 2000 issues will not have a material effect on the operations or financial results of the Company. D. Risk Factors Except for the historical information contained herein, certain of the matters discussed in this Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties, including, but not limited to changing economic and political conditions in the U.S. and in other countries, changes in governmental spending and budgetary policies, governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing, and international trading restrictions, customer product acceptance, and continued access to capital markets. All forecasts and projections in this Form 10-Q are "forward-looking statements," and are based on management's current expectations of the Company's near-term results, based on current information available pertaining to the Company, including the aforementioned risk factors. Actual results could differ materially both due to the risk factors mentioned here and to other factors not so referenced. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security holders (a) The Annual meeting of shareholders of Registrant was held on Novemnger 21, 1997. A total of 24,732,385 shares were outstanding and entitled to vote at the meeting. (b) Not Applicable. (c) Matters Submitted and Voting Results: (i) Election of Directors: Name of Nominee Vote Tabulation For Withheld --- -------- Jack W. Eugster 21,366,251 230,442 William G. Van Dyke 21,346,464 250,229 (ii) Approved the adoption of the amendment of the Company's Certificate of Incorporation to increase the number of authorized shares of Company Common Stock from 40,000,000 to 80,000,000 with the following vote: For - 20,043,851; Against - 1,457,677; Abstaining - 95,165. (iii) Ratified selection of Ernst & Young LLP as Registrant's independent public auditors for the fiscal year ending July 31, 1998 with the following vote: For - 21,380,591; Against - 49,384; Abstaining - 166,718. (d) Not Applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index 3-A Certificate of Incorporation of Registrant as currently in effect 10-E ESOP Restoration Plan (Amended and Restated) 10-Q Deferred Compensation and 401(K) Excess Plan Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $20 representing Registrant's reasonable expense in furnishing such exhibits. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended January 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DONALDSON COMPANY, INC. (Registrant) Date 3/13/98 By /s/James R. Giertz ------------------ James R. Giertz Vice President - Chief Financial Officer Date 3/13/98 By /s/Norman C. Linnell -------------------- Norman C. Linnell General Counsel and Secretary EX-3.A 2 CERTIFICATE OF INCORPORATION EXHIBIT 3.A CERTIFICATE OF INCORPORATION OF DONALDSON COMPANY, INC. (AS AMENDED) --------------------------------------- FIRST. The name of this corporation is "DONALDSON COMPANY, INC." SECOND. The registered office of the corporation in the State of Delaware is 4305 Lancaster Pike, City of Wilmington, County of New Castle; and the name of its registered agent at such address is Corporation Service Company. (B/D:2/18/83). THIRD. The nature of the business and the objects and purposes proposed to be transacted, promoted and carried on are to do any and all of the things herein mentioned as fully and to the same extent as natural persons might or could do, viz.: To manufacture, buy, sell, distribute, market and in any manner deal in and with, as manufacturer, jobber, distributor, agent, or otherwise, air cleaners for gas engines, spark-arresting mufflers, breathers, crank-case ventilating systems, all kinds of automotive and mechanical devices, accessories, appliances, parts, tools, products and supplies, and all kinds of products, articles, and things used or useful in connection with automobiles, tractors, trucks, buses, motorcycles, motor vehicles of any kind, boats, airplanes, or airships. To carry on a general manufacturing and jobbing business and any business incidental thereto or useful in connection therewith. To purchase, lease, hire or otherwise acquire real and personal property, improved and unimproved, of every kind and description and to sell, dispose of, lease, convey and mortgage said property, or any part thereof; to acquire, hold, lease, manage, operate, develop, control, build, erect, maintain for the purpose of said corporation, construct, reconstruct or purchase, either directly or through ownership of stock in any corporation, any lands, buildings, offices, stores, warehouses, mills, shops, factories, plants, machinery, rights, easements, permits, privileges, franchises and licenses, and all other things which may at any time be necessary or convenient for the purposes of the corporation; to sell, lease, hire or otherwise dispose of the lands, buildings or other property of the corporation, or any part thereof. To purchase or otherwise acquire, hold, use, sell, or in any manner dispose of and to grant licenses or other rights therein and in any manner deal with patents, inventions, improvements, processes, formulas, trade-marks, trade-names, rights and licenses secured under letters patent, copyrights or otherwise; to enter into any and all license agreements and to pay royalties thereunder. To subscribe or cause to be subscribed for, and to purchase and otherwise acquire, hold, sell, assign, transfer, mortgage, pledge, exchange, distribute and otherwise dispose of the whole or any part of the shares of the capital stock, bonds, coupons, mortgages, deeds of trust, debentures, securities, obligations, evidences of indebtedness, notes, good will, rights, assets and property of any and every kind or any part thereof of any other corporation or corporations, association or associations, now or hereafter existing and whether created by the laws of the State of Delaware, or of any other State, Territory or Country, and to operate, manage and control such properties, or any of them, either in the name of such other corporation or corporations or in the name of this corporation, and while owners of any of said shares of capital stock to exercise all the rights, powers and privileges of ownership of every kind and description including the right to vote thereon, with power to designate some person for that purpose from time to time to the same extent as natural persons might or could do. To manufacture, purchase, lease or otherwise acquire, hold, own, repair, mortgage, pledge or otherwise hypothecate, sell, assign and transfer, or otherwise dispose of, to invest, trade, deal in and deal with goods, wares and merchandise, and real, personal and mixed property of every class and description, wherever situate; and in particular lands, buildings, business concerns and undertakings, book debts and claims, and any interest in real or personal property, and any claims against such property, or against any person or company, and to carry on any business, concern or undertaking so acquired. To acquire the good will, rights and property and to undertake the whole or any part of the assets and liabilities, of any person, firm, association or corporation; to pay for the same in cash, the stock of this company, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired and to exercise all the powers necessary or convenient in and about the conduct and management of such business. To borrow money from and to lend money to any other corporation, or any firm, association, or individual, including corporations in which this corporation is interested as a stockholder or otherwise. To enter into, make and perform contracts of every kind for any lawful purpose, without limit as to amount, with any person, firm, association or corporation, town, city, county, state, territory or government. To draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, debentures and other negotiable or transferable instruments. To issue bonds, debentures or obligations and to secure the same by mortgage, pledge, deed of trust or otherwise. To purchase, hold and reissue the shares of its capital stock. To carry on any or all of its operations and business and to promote its objects within the State of Delaware or elsewhere, without restriction as to place or amount. To carry on any other business in connection therewith. To do all and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes, or the attainment of any one or more of the objects herein enumerated or incidental to the powers herein named, or which shall at any time appear conducive or expedient for the protection or benefit of the corporation. To do any or all of the things herein set forth to the same extent as natural persons might or could do and in any part of the world, as principals, agents, contractors, trustees or otherwise, alone or in company with others. The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation, and are in furtherance of, and in addition to, and not in limitation of the general powers conferred by the laws of the State of Delaware. It is the intention that the purposes, objects and powers specified in this Article Third and all sub-divisions thereof shall, except as otherwise expressly provided, in nowise be limited or restricted by reference to or inference from the terms of any other clause or paragraph of this article, and that each of the purposes, objects and powers specified in this Article Third shall be regarded as independent purposes, objects and powers. FOURTH. The total number of shares of stock of all classes which the Corporation shall have authority to issue is 81,000,000 divided into 1,000,000 shares of Preferred Stock of the par value of $1.00 each and 80,000,000 shares of Common Stock of the par value of $5.00 each. (11-18-76; 11-16-78; 11-21-86; 11-20-92; 11-21-97). The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock are as follows: The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, subject to the limitations prescribed by law and in accordance with the provisions hereof, including (but without limiting the generality thereof) the following: (a) The designation of the series and the number of shares to constitute the series. (b) The dividend rate of the series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or non-cumulative. (c) Whether the shares of the series shall be subject to redemption by the corporation and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption. (d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of the series. (e) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange. (f) The extent, if any, to which the holders of the shares of the series shall be entitled to vote with respect to the election of directors or otherwise. (g) The restrictions, if any, on the issue or reissue of any additional Preferred Stock. (h) The rights of the holders of the shares of the series upon the dissolution, liquidation, or winding up of the corporation. Subject to the prior or equal rights, if any, of the Preferred Stock of any and all series stated and expressed by the Board of Directors in the resolution or resolutions providing for the issuance of such Preferred Stock, the holders of Common Stock shall be entitled (i) to receive dividends when and as declared by the Board of Directors out of any funds legally available therefor, (ii) in the event of any dissolution, liquidation or winding up of the corporation, to receive the remaining assets of the corporation, ratably according to the number of shares of Common Stock held, and (iii) to one vote for each share of Common Stock held. No holder of Common Stock shall have any pre-emptive right to purchase or subscribe for any part of any issue of stock or of securities of the corporation convertible into stock of any class whatsoever, whether now or hereafter authorized. (AMENDED 11-13-69) FIFTH. The minimum amount of capital with which it will commence business is One Thousand Dollars ($1,000.00). SIXTH. The name and place of residence of each of the incorporators are as follows: NAME RESIDENCE S. L. MACKEY WILMINGTON, DELAWARE J. SKRIVAN WILMINGTON, DELAWARE M. C. PALMATARY WILMINGTON, DELAWARE SEVENTH. The existence of this corporation is to be perpetual. EIGHTH. The private property of the stockholders of this corporation shall not be subject to the payment of corporate debts to any extent whatever. NINTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the board of directors is expressly authorized: To make, alter, amend and repeal the by-laws; To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to alter or abolish any such reserve; to authorize and cause to be executed mortgages and liens upon the property and franchises of this corporation. To designate, by resolution passed by a majority of the whole board, one or more committees, each to consist of two or more directors, which committees, to the extent provided in such resolution or in the by-laws of the corporation, shall have and may exercise any or all of the powers of the board of directors in the management of the business and affairs of this corporation and have power to authorize the seal of this corporation to be affixed to all papers which may require it. From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of this corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by law or authorized by resolution of the directors or of the stockholders. To sell, lease or exchange all of its property and assets, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other corporation or corporations, when and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called for that purpose. (Amended 11-15-85) Directors need not be elected by ballot. TENTH. In the absence of fraud, no contract or transaction between this corporation and any other association or corporation shall be affected by the fact that any of the directors or officers of this corporation are interested in or are directors or officers of such other association or corporation, and any director or officer of this corporation individually may be a party to, or may be interested in, any such contract or transaction of this corporation; and no such contract or transaction of this corporation with any person or persons, firm, association or corporation shall be affected by the fact that any director or officer of this corporation is a party to, or interested in, such contract or transaction, or in any way connected with such person or persons, firm, association or corporation; and each and every person who may become a director or officer of this corporation is hereby relieved from any liability that might otherwise exist from thus contracting with this corporation for the benefit of himself or any person, firm, association or corporation in which he may be in any way interested; provided, however, that in any such case the fact of such interests shall be disclosed to the other directors or stockholders acting upon or in reference to such contract or transaction. ELEVENTH. This corporation may in its By-Laws make any other provision or requirements for the management or conduct of the business of this corporation, provided the same be not inconsistent with the provisions of this certificate or contrary to the laws of the State of Delaware, or of the United States. TWELFTH. This corporation reserves the right to amend, alter, change, add to or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon officers, directors, and stockholders herein are granted subject to this reservation. Any action required or permitted to be taken by the stockholders of this corporation must be effected at an annual or special meeting of stockholders and may not be effected by any consent in writing by such stockholders. (Amended 11-15-85) MINIMUM PRICE REQUIREMENTS (Approved 11-15-85) THIRTEENTH. 1. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in paragraph 2 of this Article Thirteenth: (a) any merger, consolidation or share exchange of the corporation or any Subsidiary (as hereinafter defined) with any Interested Stockholder (as hereinafter defined) or any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger, consolidation or share exchange would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $10,000,000 or more; or (c) the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 75% of the then outstanding shares of capital stock of the corporation entitled to vote in the election of directors (the "Voting Stock"), voting together as a single class (each share of Voting Stock having the number of votes granted to it pursuant to Article Fourth of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. The term "Business Combination" as used in this Article Thirteenth shall mean any transaction which is referred to in any one or more of sub-paragraphs (a) through (e) of this paragraph 1. 2. The provisions of paragraph 1 of this Article Thirteenth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of the following sub-paragraphs (a) or (b) are met: (a) The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). (b) All of the following conditions shall have been met: (i) The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any share of Common Stock acquired by it within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in the transaction in which it became an Interested Stockholder, whichever is higher, after giving effect to any appropriate adjustment for stock dividends, stock splits and similar recapitalizations. (ii) The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Preferred Stock (as hereinafter defined) shall be at least equal to the higher of (A) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Preferred Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; or (B) the highest preferential amount per share to which the holders of shares of such class of Preferred Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of this sub-paragraph (b)(ii) shall be required to be met with respect to every class of outstanding Preferred Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Preferred Stock. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (iv) A Proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed by the Company to public stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 3. For the purposes of this Article Thirteenth. (a) "Person" shall mean any individual, firm, corporation or other entity. (b) "Interested Stockholder" shall mean any person (other than the corporation or any Subsidiary) who: (i) is the beneficial owner (as hereinafter defined) of more than 10% of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of 10% or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (c) A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (d) For the purposes of determining whether a person is an Interested Stockholder pursuant to sub-paragraph (b) of this paragraph 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of sub-paragraph (c) of this paragraph 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (e) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on August 13, 1985. (f) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in sub-paragraph (b) of this paragraph 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the corporation. (g) The term "Disinterested Director" means any member of the Board of Directors of the corporation (the "Board") who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. (h) The term "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in questions of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of Disinterested Directors. (j) The term "Preferred Stock' shall mean the Preferred Stock, Preference Stock and Cumulative Preferred Stock and any other class of preferred stock which may from time to time be authorized in or by the Certificate of Incorporation of the Corporation and which by the terms of its issuance is specifically designated "Preferred Stock" for purposes of this Article Thirteenth. (k) In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash" as used in sub-paragraphs (b)(i) and (ii) of paragraph 2 of this Article Thirteenth shall include the shares of Common Stock and/or the shares of any other class of Voting Stock retained by the holders of such shares. 4. Nothing contained in this Article Thirteenth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. 5. A majority of the Disinterested Directors shall have the power to interpret all of the terms and provisions of this Article Thirteenth and to make any other factual determination as is necessary. 6. Notwithstanding any other provisions of this Certificate of Incorporation, the By-Laws of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the corporation), the affirmative vote of the holders of 75% or more of the shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article Thirteenth; provided, however, that this paragraph 6 shall not apply to, and such 75% vote shall not be required for, any amendment, repeal or adoption unanimously recommended by the Board of Directors if all such directors are persons who would be eligible to serve as Disinterested Directors within the meaning of this Article Thirteenth. FOURTEENTH. No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damage for breach of fiduciary duty as a director, except for liability (I) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. (Filed 12-29-86) WE, THE UNDERSIGNED, being all of the incorporators, for the purpose of forming a corporation, in pursuance of an Act of the Legislature of the State of Delaware, entitled "AN ACT PROVIDING A GENERAL CORPORATION LAW," (approved March 10, 1899), and the acts amendatory thereof and supplemental thereto, do make and file this Certificate of Incorporation, hereby declaring and certifying that the facts herein stated are true and accordingly hereunto have set our respective hands and seals this twenty-fourth day of December, A. D. 1936. In the presence of S. L. MACKEY (SEAL) JOHN W. GAILEY J. SKRIVAN (SEAL) M. C. PALMATARY (SEAL) STATE OF DELAWARE ) ) SS. COUNTY OF NEW CASTLE ) BE IT REMEMBERED, that on this twenty-fourth day of December, A. D. 1936, personally appeared before me, the subscriber, a notary public for the State and County aforesaid, S. L. Mackey, J. Skrivan and M. C. Palmatary, all the parties to the foregoing certificate of incorporation, known to me personally to be such, and severally acknowledged the said certificate to be their act and deed respectively, and that the facts therein stated were truly set forth. GIVEN under my hand and seal of office the day and year aforesaid. JOHN W. GAILEY Notary Public. - -------------------------------------------------------------------------------- John W. Gailey Notary Public State of Delaware Appointed Jan. 17, 1935 Term of office 2 years - -------------------------------------------------------------------------------- STATE OF DELAWARE ---------------------------------- OFFICE OF SECRETARY OF STATE ----------------------------------- I, WALTER DENT SMITH, Secretary of State of the State of Delaware, DO HEREBY CERTIFY that the above and foregoing is a true and correct copy of Certificate of Incorporation of the "DONALDSON COMPANY, INC.", as received and filed in this office the twenty-fourth day of December, A. D. 1936, at 1 o'clock P. M. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal, at Dover, this twenty-fourth day of December, in the year of our Lord one thousand nine hundred and thirty-six. WALTER DENT SMITH, Secretary of State ******************************* Secretary's Office 1855 Delaware 1793 ******************************* RECEIVED FOR RECORD this 24th day of December, A. D. 1936. ALBERT STETSER, RECORDER. EX-10.E 3 AMENDED AND RESTATED ESOP RESTORATION PLAN EXHIBIT 10.E AMENDED AND RESTATED ESOP RESTORATION PLAN 1. PURPOSE The purpose of the Donaldson Company, Inc. ESOP Restoration Plan is to permit certain key employees of Donaldson Company, Inc., who participate in the Employee Stock Ownership Plan to receive contributions equal to amounts in excess of the limitations on contributions imposed by the Internal Revenue Code of 1986, as amended, on defined contribution plans. Such contributions shall be based upon the award of Performance Units, the value of which is related to the appreciation in the value of the common stock of the Company. Accordingly, the Company hereby adopts the Plan pursuant to the terms and provisions set forth below. 2. DEFINITIONS Wherever used herein the following terms shall have the meaning herein after set forth: 2.1. "Account" means the account maintained by the Company under the Plan for a Participant that is credited with amounts contributed under Section 4 of the Plan. 2.2. "Board" means the Board of Directors of the Company. 2.3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations thereunder. 2.4. "Committee" means the Human Resource Committee of the Board. 2.5. "Company" means Donaldson Company, Inc., a Delaware corporation (the principal sponsor). 2.6. Dividend Equivalents shall have the meaning given to them in Section 13 herein. 2.7. "ESOP" means the Employee Stock Ownership Plan established effective June 29, 1987. 2.8. "ESOP Account" means the account established for the Participant under the ESOP. 2.9. "ESOP Contributions" means the contribution made by the Company for the benefit of the Participant under and in accordance with the terms of the ESOP in any Plan Year. 2.10. "Participant" means a key employee of the Company who is a participant in the ESOP and to whom or with respect to whom contributions may be made under the plan, which may be limited due to compensation in excess of $200,000 and future limits indexed for inflation by the IRS. 2.11. "Plan" means the ESOP Restoration Plan of the Company. 2.12. "Plan Year" means the twelve consecutive month period ending on any July 31. 2.13. "Stock" means common stock of the Company. 2.14. "Performance Unit" means a bookkeeping unit used for purposes of crediting amounts to the Account of a Participant, each such Performance Unit being equivalent to the fair market value of a share of Stock. 3. ADMINISTRATION The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have exclusive power to select the key employees to be granted Performance Units, to determine the number of Performance Units to be granted to each key employee selected and to determine the time or times when Performance Units will be granted. The authority granted to the Committee by the preceding sentence will be exercised based upon recommendations received from the management of the Company. The Committee shall have authority to interpret the Plan, to adopt and revise rules and regulations relating to the Plan, to determine the conditions subject to which any awards may be made or payable, and to make any other determinations which it believes necessary or advisable for the administration of the Plan. Determinations by the Committee shall be made by majority vote and shall be final and binding on all parties with respect to all matters relating to the Plan. 4. GRANTS Performance Units shall be granted to such Participants as the Committee shall determine. (See Appendix A for a list of current Participants.) If any Performance Units awarded under the Plan shall be forfeited or canceled such Performance Units may again be awarded under the Plan. Performance Units and fractional Performance Units, as necessary, shall be granted annually in an amount equal to the difference between (a) and (b) below: (a) The ESOP Contribution, inclusive of Dividend Equivalents, which would have been allocated to the ESOP Account of the Participant for the Plan Year, without giving effect to the $200,000 limitation (or subsequently indexed amount) on compensation imposed by the Code on the ESOP; LESS (b) The amount of the ESOP Contribution actually allocated to the ESOP Account of the Participant for the Plan Year; and based on the Performance Unit valuation set forth in Section 8 of the Plan. These grants shall be subject to such terms and conditions, in addition to the terms and conditions set forth in the Plan, as the Committee shall determine. 5. PERFORMANCE UNITS Performance Units granted to a Participant shall be earned and credited annually to the Account of the Participant in accordance with completion of each full Fiscal Year. Dividend Equivalents will be credited quarterly. The Account of a Participant shall be the record of Performance Units granted to him under the Plan, is solely for accounting purposes and shall not require a segregation of any Company assets. Each Performance Unit shall be valued by the Committee, in the manner provided in Section 8, as of the date of grant thereof. Each annual grant of Performance Units under the Plan to a Participant and the value of such Performance Units as of the date of grant shall be communicated by the Committee in writing to the Participant within thirty (30) days after the date of grant. 6. MATURITY OF PERFORMANCE UNITS 6.1. Performance Units granted to a Participant shall mature immediately upon award, but shall be subject to forfeiture pursuant to the provisions of Section 7.4. 7. PAYMENT FOR PERFORMANCE UNITS 7.1. Upon termination of employment of a Participant with the Company for any reason (other than as set forth in Section 7.4), the Participant shall be entitled to receive from the Company an amount equal to the value (as determined by the Committee pursuant to Section 8) of each Performance Unit in the Participant's Account as of the date of termination of his employment with the Company. 7.2. Payment to a Participant of the amount set forth in paragraph 7.1 above for Performance Units shall be made in Stock, and, either in a lump sum or in annual installments over a period of not more than fifteen years beginning up to two years after departure from the Company. The Participant must elect a manner of payment no later than January 31, 1998. If the election is not received by the Company on or before such time, the election will not be effective until the first day of the following calendar year. Notwithstanding the foregoing, a Participant may make a new election concerning selection of the time and form of payment authorized pursuant to this Section 7.2 (the "New Election") in accordance with the following terms and conditions, unless waived or modified by the Committee: (a) A New Election shall only be permitted twice and must be made and become effective as hereinafter provided, if at all, prior to a Participant's termination of employment with the Company for any reason whatsoever; (b) A New Election shall be effective at the beginning of the calendar year following the date of the New Election; and (c) If any of the events set forth in Section 7.1 of the Plan occur prior to the effective date of a New Election with respect to previously credited allocations, then payments shall be paid hereunder to or with respect to the Participant according to the terms of any old or prior elections that were effective or, if no effective prior election exists, shall be made in annual installments over a period of fifteen years beginning up to two years after departure from the Company. 7.3. Hardship Distributions. 7.3.1. A Participant may receive a hardship distribution from his or her Account if the Committee determines that such hardship distribution is for a purpose described in Section 7.3.2 and the conditions in Section 7.3.3 have been fulfilled. To receive such a distribution, the Participant must file a written hardship distribution application with the Committee and furnish such documentation as the Committee may require. In the application, the Participant shall specify the basis for the distribution and the dollar amount to be distributed. If such hardship distribution is approved by the Committee, distribution shall be made as soon as administratively feasible following the approval of a completed application by the Committee and such hardship distribution shall be made in a lump sum payment. The amount of each hardship distribution shall be taken from the portion of the Account attributable to the earliest enrollment (including related earnings) first. 7.3.2. Hardship distributions shall be allowed under Section 7.3.1 only if the Participant establishes that the hardship distribution is to be made on account of an immediate and heavy financial need of the Participant for which the Participant does not have other available resources. 7.3.3. The amount of the hardship distribution shall not exceed the amount of the Participant's proven immediate and heavy financial need. A hardship distribution shall not be made after the death of the Participant. The amount of approved hardship distribution shall not exceed the value of the Account. 7.4. A Participant or Beneficiary will receive a distribution of his or her Account if a Change of Control has occurred. Distribution of the entire Account shall be made within 30 days of the Change of Control. Such distribution shall be made in a lump sum cash payment. 7.5. Acceleration of Payments. 7.5.1. A Participant or Beneficiary who is receiving installments may receive an accelerated payment of his or her entire Account (after reduction for the forfeiture described in Section 7.4.2). To receive such an accelerated payment, the Participant or Beneficiary must file a written payment application with the Committee. Payment of the accelerated payment (after reduction for the forfeiture described in Section 7.4.2) shall be made as soon as administratively feasible following the approval of a completed application by the Committee. Such accelerated payment shall be made in a lump sum payment. The amount of the accelerated payment shall be equal to the value of the Account as of such distribution date (after reduction for the forfeiture described below). 7.5.2. Upon the approval of an accelerated payment, there shall be irrevocably forfeited from the Account of the Participant or Beneficiary an amount equal to six percent (6%) of the Account. 7.6. If a Participant should die before distribution of the full amount of his Account has been made to him, any remaining amounts shall be distributed to the beneficiary and in the method designated by the Participant in writing delivered to the Committee prior to his death. If a Participant has not designated a beneficiary, or method of distribution, or if no designated beneficiary is living on the date of distribution, such amounts shall be distributed to those persons entitled to receive distributions of the Participant's accounts under the ESOP and in the same method as distribution is made under the ESOP. 7.7. Notwithstanding any other provision of the Plan, all rights to any payments hereunder to a Participant will be discontinued and forfeited, and the Company will have no further obligation hereunder to such Participant, if any of the following circumstances occur: (a) The Participant is discharged from employment with the Company for cause; (b) The Participant engages in competition with the Company during, or within two years following his termination of employment with the Company, or (c) The Participant performs acts of willful malfeasance or gross negligence in a matter of material importance to the Company. 7.8. The Committee shall have sole discretion with respect to the application of the provisions of this Section 7 and such exercise of discretion shall be conclusive and binding upon the Participant, and all other persons. 7.9. All payments of Stock under this Plan shall be made using either shares held in the Treasury of the Company or shares purchased in the open market by the Company. 8. VALUATION OF PERFORMANCE UNITS 8.1. For all purposes of the Plan, the value of a Performance Unit on a date of grant pursuant to Section 5 will be an amount equal to $17.50 per unit (subject to stock splits), until such time as the Plan changes or is terminated. Any fractional Performance Units granted shall be valued at a prorated amount equal to $17.50 multiplied by the fraction of a Performance Unit represented thereby, until such time as the Plan changes or is terminated. 8.2. For all purposes of the Plan, the value of Performance Unit upon termination of employment pursuant to Section 7 will be an amount equal to the average market value of Company stock as of the close of business for the ten business days coincident with and immediately preceding the participant's termination date (including any allocation to the participant's account made after termination for services rendered before termination). Any fractional Performance Units shall be accounted for by multiplying the portion of a Performance Unit which they represent by the fair market value noted above. 9. (INTENTIONALLY OMITTED) 10. CHANGES IN CAPITAL AND CORPORATE STRUCTURE In the event of any change in the outstanding shares of common stock of the Company by reason of an issuance of additional shares, recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the Committee shall proportionately adjust, in an equitable manner, the number of Performance Units held by Participants under the Plan. The foregoing adjustment shall be made in a manner that will cause the relationship between the aggregate appreciation in outstanding common stock and earnings per share of the Company and the increase in value of each Performance Unit granted hereunder to remain unchanged as a result of the applicable transaction. 11. NONTRANSFERABILITY Performance Units granted under the Plan, and any rights and privileges thereto, may not be transferred, assigned, pledged or hypothecated in any manner, by operation of law or otherwise, other than by will or by the laws of descent and distribution, and shall not be subject to execution, attachment or similar process. 12. WITHHOLDING The Company shall have the right to deduct from all amounts paid pursuant to the Plan any taxes required by law to be withheld with respect to such awards. 13. VOTING AND DIVIDEND RIGHTS No Participant shall be entitled to any voting rights with respect to the Performance Units of the Company. Each Participant shall be entitled to have his Account credited or increased as a result of any dividends or other distribution with respect to the Stock of the Company (each such credit being referred to herein as a "Dividend Equivalent"). Dividend Equivalents shall be equal to a) the value of the dividends which would have been awarded to a participant had such participant been the owner of record on the dividend payment dates with respect thereto of the number of shares of Stock equal to the number of Performance Units then credited to his Account, divided by b) the fair market value of the Stock on the actual record date. 14. REORGANIZATION In the event of a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation or in the event a change in management shall have, in the sole opinion of the Committee, occurred, any Plan Year in progress shall be declared complete and the Performance Units for such year granted. The balance in each Participant's Account following this award shall then be paid within 30 days of the Committee's declaration. 15. MISCELLANEOUS PROVISIONS 15.1. No employee or other person shall have any claim or right to be granted an award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company. 15.2. No Participant or other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. The Company shall be entitled, at the discretion of the Committee, to establish a "rabbi trust" to hold assets of the Company payable to Participants hereunder for the benefit of such participants. 15.3. The Plan shall be construed and administered under the laws of the State of Minnesota. 15.4. If any person entitled to a distribution under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. 15.5. Each Participant shall keep the Company informed of his current address and the current address of his designated beneficiary. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Account may first be made, payment may be made as though the Participant had died at the end of the three-year period had elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any designated beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or designated beneficiary and such benefit shall be irrevocably forfeited. 15.6. Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as employee or agent of the Company shall be liable to any Participant, former Participant or other person for any claim, loss, liability or expense incurred in connection with the Plan. 15.7. Except when otherwise required by the context, any masculine terminology in this document shall include the feminine, and any singular terminology shall include the plural. 16. AMENDMENT OF THE PLAN The Board may alter or amend the Plan from time to time without obtaining the approval of the stockholders of the Company. No amendment to the Plan may alter, impair or reduce the number of Performance Units granted under the Plan prior to the effective date of such amendment without the written consent of any affected Participant. 17. EFFECTIVENESS AND TERMS OF PLAN The effective date of the Plan shall be August 1, 1990. The Committee may at any time terminate the Plan. No Performance Units shall be granted pursuant to the Plan after the date of termination of the Plan, although after such date payments shall be made with respect to Performance Units granted prior to the date of termination. EX-10.Q 4 DEFERRED COMPENSATION AND 401(K) EXCESS PLAN EXHIBIT 10.Q DONALDSON COMPANY, INC. DEFERRED COMPENSATION AND 401(k) EXCESS PLAN First Effective December 21, 1997 DONALDSON COMPANY, INC. DEFERRED COMPENSATION AND 401(k) EXCESS PLAN TABLE OF CONTENTS PAGE SECTION 1. ESTABLISHMENT AND PURPOSE.......................................1 1.1. Establishment 1.2. Purpose SECTION 2. DEFINITIONS.....................................................2 2.1. Account 2.2. Affiliate 2.3. Beneficiary 2.4. Board 2.5. Change of Control 2.6. Code 2.7. Committee 2.8. Company 2.9. Company Credit 2.10. Deferral Credit 2.11. Disability 2.12. Effective Date 2.13. Eligible Employee 2.14. ERISA 2.15. ESOP 2.16. Fixed Matching Credit 2.17. 401(k) Plan 2.18. Participant 2.19. Plan 2.20. Plan Year 2.21. Profit Sharing Credit 2.22. Recognized Compensation 2.23. Valuation Date 2.24. Variable Credit 2.25. Vested 2.26. Year of Service -i- SECTION 3. ELIGIBILITY AND PARTICIPATION...................................7 3.1. Eligibility 3.2. Commencement of Participation 3.3. Termination of Participation 3.4. Overriding Exclusion SECTION 4. DEFERRED COMPENSATION AMOUNTS...................................8 4.1. Salary Deferral Credits 4.2. Bonus Deferral Credits 4.3. Excess Deferral Credits 4.4. Company Credits 4.5. Vesting SECTION 5. TIME AND MANNER OF PAYMENTS....................................10 5.1. Time of Payment 5.2. Manner of Payment 5.3. Changes in Time and Manner of Payment 5.4. Hardship Distributions 5.4.1. When Available 5.4.2. Purposes 5.4.3. Limitations 5.5. Change in Control Distributions 5.6. Acceleration of Payments 5.6.1. When Available 5.6.2. Forfeiture 5.7. Death Benefit 5.8. Beneficiary Designation SECTION 6. DEFERRED COMPENSATION ACCOUNT..................................13 6.1. Participant Accounts 6.2. Investment of Accounts 6.3. Assumption of Risk 6.4. Charges Against Accounts SECTION 7. FUNDING........................................................14 7.1. Funding 7.2. Corporate Obligation SECTION 8. FORFEITURE OF BENEFITS.........................................15 -ii- SECTION 9. ADMINISTRATION.................................................16 9.1. Authority 9.2. Liability 9.3. Procedures 9.4. Claim for Benefits 9.5. Claims Procedure 9.5.1. Original Claim 9.5.2. Claims Review Procedure 9.5.3. General Rules 9.6. Payments upon Imposition of Federal or State Taxes 9.7. Legal Fees 9.8. Errors in Computations SECTION 10. MISCELLANEOUS..................................................19 10.1. Not an Employment Contract 10.2. Nontransferability 10.3. Tax Withholding 10.4. Expenses 10.5. Governing Law 10.6. Amendment and Termination -iii- DONALDSON COMPANY, INC. DEFERRED COMPENSATION AND 401(K) EXCESS PLAN SECTION 1 ESTABLISHMENT AND PURPOSE 1.1. ESTABLISHMENT. Effective as of December 21, 1997, Donaldson Company, Inc. hereby establishes an unfunded supplemental deferred compensation plan for a select group of highly compensated employees known as the "DONALDSON COMPANY, INC. DEFERRED COMPENSATION AND 401(k) EXCESS PLAN." 1.2. PURPOSE. The purposes of this Plan are to enable the Company to supplement the benefits for a select group of management or highly compensated employees under the Donaldson Company, Inc. Retirement Savings Plan which will be reduced because of the compensation limitation under section 401(a)(17) of the Code; to provide a means whereby certain amounts payable by the Company to a select group of management or highly compensated employees may be deferred to some future period; and to attract and retain certain executive employees of outstanding competence. -1- SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings, unless a different meaning is plainly required by the context. Any masculine terminology used in the Plan shall also include the feminine gender and the definition of any terms in the singular shall also include the plural. 2.1. ACCOUNT -- the deferred compensation account established under this Plan for a Participant pursuant to Section 6.1. 2.2. AFFILIATE -- a business entity which is under "common control" with the Company or which is a member of an "affiliated service group" that includes the Company, as those terms are defined in section 414(b), (c) and (m) of the Code. A business entity shall also be treated as an Affiliate if, and to the extent that, such treatment is required by regulations under section 414(o) of the Code. In addition to said required treatment, the Committee may, in its discretion, designate as an Affiliate any business entity which is not such a "common control" or "affiliated service group" business entity but which is otherwise affiliated with the Company, subject to such limitations as the Committee may impose. 2.3. BENEFICIARY -- any person or entity validly designated by the Participant in accordance with Section 3 to receive the benefits, if any, payable from the Participant's Account after the Participant's death. Designated persons or entities shall not be considered Beneficiaries until the death of the Participant. 2.4. BOARD -- the Board of Directors of the Company. 2.5. CHANGE OF CONTROL -- a "Change in Control" 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, 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 -2- 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 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 occurs shall be referred to herein as an "Acceleration Date"). 2.6. CODE -- the Internal Revenue Code of 1986, including applicable regulations for the specified section of the Code. Any reference in this Plan Statement to a section of the Code, including the applicable regulation, shall be considered also to mean and refer to any subsequent amendment or replacement of that section or regulation. 2.7. COMMITTEE -- the Human Resources Committee of the Board of Directors of the Company. 2.8. COMPANY -- Donaldson Company, Inc., or any successor by merger, purchase or otherwise. 2.9. COMPANY CREDIT -- any amount credited to an Eligible Employee in accordance with Section 4.4. Company Credits include Fixed Matching Credits, Variable Credits and Profit Sharing Credits. 2.10. DEFERRAL CREDIT -- any amount credited to an Eligible Employee in accordance with Sections 4.1, 4.2 or 4.3. 2.11. DISABILITY -- a medically determinable physical or mental impairment which: (i) renders the individual incapable of performing any substantial gainful employment, (ii) can be expected to be of long-continued and indefinite duration or result in death, and (iii) is evidenced by a certification to this effect by a doctor of medicine approved by the Committee. In lieu of such a certification, the Committee may accept, as proof of Disability, the official written determination that the individual will be eligible for disability benefits under the federal Social Security Act as now enacted or hereinafter amended (when any waiting period expires). The Committee shall determine the date on which the Disability shall have occurred if such determination is necessary. 2.12. EFFECTIVE DATE -- December 21, 1997. -3- 2.13. ELIGIBLE EMPLOYEE -- for purposes of Sections 4.1, 4.2 and 4.3, the officers of the Company who are selected by the Committee as provided in Section 3; for purposes of Section 4.3 only, any executive employee of the Company or its Affiliates whose rate of Recognized Compensation for the Plan Year exceeds the annual compensation limit then in effect under Code section 401(a)(17), and who is selected by the Committee as provided in Section 3. 2.14. ERISA -- the Employee Retirement Income Security Act of 1974, including applicable regulations for the specified section of ERISA. Any reference in this Plan to a section of ERISA, including the applicable regulation, shall be considered also to mean and refer to any subsequent amendment or replacement of that section or regulation. 2.15. ESOP -- the tax-qualified, stock bonus plan known as the "Donaldson Company, Inc. Employee Stock Ownership Plan (1987 Restatement)." 2.16. FIXED MATCHING CREDIT -- any amount credited to an Eligible Employee in accordance with Section 4.4(a). 2.17. 401(k) PLAN -- the tax-qualified, profit sharing plan known as the "Donaldson Company, Inc. Retirement Savings Plan (1987 Restatement)." 2.18. PARTICIPANT -- an Eligible Employee or a former Eligible Employee of the Company or its Affiliates who has any amount credited to his or her Account in this Plan. 2.19. PLAN -- the Donaldson Company, Inc. Deferred Compensation and 401(k) Excess Plan as set forth herein, and as the same may be amended from time to time. 2.20. PLAN YEAR -- the twelve (12) consecutive month period ending on any July 31. 2.21. PROFIT SHARING CREDIT -- any amount credited to an Eligible Employee in accordance with Section 4.4(c). 2.22. RECOGNIZED COMPENSATION -- for purposes of section 4.3 of the Plan, wages, tips and other compensation paid to the Participant by the Employer and reportable in the box designated "wages, tips, other compensation" on Treasury Form W-2 (or any comparable successor box or form) for the applicable period but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code) and further determined without regard to any amounts paid or reimbursed by the Employer for moving expenses incurred by the Participant (but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Participant under section 217 of the Code); subject, however, to the following: (a) INCLUDED ITEMS. In determining a Participant's Recognized Compensation there shall be included elective contributions made by the Employer on behalf -4- of the Participant that are not includible in gross income under sections 125, 402(e)(3), 402(h), 403(b), 414(h)(2) and 457 of the Code including elective contributions authorized by the Participant under a Retirement Savings Agreement, a cafeteria plan or any other qualified cash or deferred arrangement under section 401(k) of the Code. (b) EXCLUDED ITEMS. In determining a Participant's Recognized Compensation there shall be excluded all of the following: (i) reimbursements or other expense allowances including foreign service allowances, station allowances, foreign tax equalization payment and other similar payments, (ii) welfare and fringe benefits (both cash and noncash) including third-party sick pay (i.e., short-term and long-term disability insurance benefits), income imputed from insurance coverages and premiums, employee discounts and other similar amounts, payments for vacation or sick leave accrued but not taken, final payments on account of termination of employment (i.e., severance payments) and settlement for accrued but unused vacation and sick leave, (iii) moving expenses, and (iv) deferred compensation (both when deferred and when received). (c) ATTRIBUTION TO PERIODS. A Participant's Recognized Compensation shall be considered attributable to the period in which it is actually paid and not when earned or accrued; provided, however, amounts earned but not paid in a Plan Year because of the timing of pay periods and pay days may be included in the Plan Year when earned if these amounts are paid during the first few weeks of the next Plan Year, the amounts are included on a uniform and consistent basis with respect to all similarly situated Participants and no amount is included in more than one Plan Year. (d) EXCLUDED PERIODS. Amounts received after the Participant's termination of employment shall not be taken into account in determining a Participant's Recognized Compensation. (e) MULTIPLE EMPLOYERS. If a Participant is employed by more than one Employer in a Plan Year, a separate amount of Recognized Compensation shall be determined for each Employer. 2.23. VALUATION DATE -- each July 31 and each other day that the New York Stock Exchange is open and conducting business, or such other date or dates as the Committee may establish. 2.24. VARIABLE CREDIT -- any amount credited to an Eligible Employee in accordance with Section 4.4(b). 2.25. VESTED -- nonforfeitable. -5- 2.26. YEAR OF SERVICE -- a one year period of employment with the Company in which the Participant completes at least 1,000 hours of service. -6- SECTION 3 ELIGIBILITY AND PARTICIPATION 3.1. ELIGIBILITY. Any officer of the Company who is affirmatively selected by the Committee shall be an Eligible Employee and may participate under the Plan for purposes of Sections 4.1, 4.2 and 4.3 until the earlier of: (1) termination from employment with the Company, or (2) transfer to a non-officer position with the Company or its Affiliates. Any executive employee of the Company or its Affiliates whose rate of Recognized Compensation for the Plan Year exceeds the annual compensation limit then in effect under Code section 401(a)(17), and who is affirmatively selected by the Committee, shall be an Eligible Employee for that Plan Year and may participate under the Plan for purposes of Section 4.3. The Committee may rescind its selection and discontinue an employee's or officer's active participation in the Plan at any time. 3.2. COMMENCEMENT OF PARTICIPATION. An Eligible Employee shall become a Participant in the Plan when the Eligible Employee is first credited with any amount pursuant to Section 4. 3.3. TERMINATION OF PARTICIPATION. A person shall cease to be a Participant as soon as all amounts credited to the Participant's Account have been paid in full. 3.4. OVERRIDING EXCLUSION. Notwithstanding anything apparently to the contrary in this Plan or in any written communication, summary, resolution or document or oral communication, no individual shall be a Participant in this Plan, develop benefits under this Plan or be entitled to receive benefits under this Plan (either for the employee or his or her survivors) unless such individual is a member of a select group of management or highly compensated employees (as that expression is used in ERISA). If a court of competent jurisdiction, any representative of the U.S. Department of Labor or any other governmental, regulatory or similar body makes any direct or indirect, formal or informal, determination that an individual is not a member of a select group of management or highly compensated employees (as that expression is used in ERISA), such individual shall not be (and shall not have ever been) a Participant in this Plan at any time. If any person not so defined has been erroneously treated as a Participant in this Plan, upon discovery of such error such person's erroneous participation shall immediately terminate AB INITIO and upon demand such person shall be obligated to reimburse the Company for all amounts erroneously paid to him or her. -7- SECTION 4 DEFERRED COMPENSATION AMOUNTS 4.1. SALARY DEFERRAL CREDITS. An Eligible Employee may elect to have salary which the Eligible Employee would otherwise have received and included in gross income credited to his or her Account. Such election must comply with the rules and limits established by the Committee and must be made by giving advance written notice to the Company on an election form approved by the Committee. Elections with respect to salary earned during a pay period must be received by the Company prior to the beginning of the pay period to which the election applies. Participant elections will remain effective until the earlier of: (i) the time a revised election is received and becomes effective, or (ii) the following January 1. Revised elections will take effect on the first day of the first pay period commencing after the pay period in which the election is received by the Company. 4.2. BONUS DEFERRAL CREDITS. An Eligible Employee may elect to have a portion of the annual bonus which the Eligible Employee would otherwise have received and included in gross income credited to his or her Account. Such election must comply with the rules and limits established by the Committee and must be made by giving advance written notice to the Company on an election form approved by the Committee. For the Plan Year beginning August 1, 1997 and all subsequent Plan Years, elections with respect to bonus earned during a Plan Year must be received by the Company prior to the April 1 of the end of the Plan Year in which the bonus was earned; provided, however, that the Committee may permit an employee who becomes an Eligible Employee after April 1 of the Plan Year to make an election for the remainder of that Plan Year effective with respect to bonuses earned on or after the date the election is received. 4.3. EXCESS DEFERRAL CREDITS. An Eligible Employee may elect to have up to six percent (6%) of Recognized Compensation which the Eligible Employee would otherwise have received and included in gross income credited to his or her Account. Elections under this Section 4.3 shall apply only to Recognized Compensation earned after the Eligible Employee's Recognized Compensation for the Plan Year has exceeded the annual compensation limit then in effect under Code section 401(a)(17). Such election must be made by giving advance written notice to the Company on an election form approved by the Committee. Elections with respect to Recognized Compensation earned during a pay period must be received by the Company prior to the beginning of the pay period to which the election applies. Participant elections made by officers will remain effective until a revised election is received and becomes effective. Notwithstanding anything herein to the contrary, a Participant electing to make deferrals under this Section 4.3 with respect to Recognized Compensation earned during the period beginning December 21, 1997 and ending July 31, 1998 may elect to defer up to 10.2% of Recognized Compensation earned during the period ending July 31, 1998. -8- 4.4. COMPANY CREDITS. (a) FIXED MATCHING CREDITS. Any Eligible Employee who elects Deferral Credits in lieu of receiving Recognized Compensation shall be credited with a Fixed Matching Credit to the Eligible Employee's Account. The amount of an Eligible Employee's Fixed Matching Credit shall equal the amount the Eligible Employee would have received on the deferrals made under Sections 4.1, 4.2 and 4.3, as set forth in Section 3.2 of the ESOP, if such deferrals had been made to the 401(k) Plan, without regard to the annual compensation limit then in effect under Code section 401(a)(17). Notwithstanding the foregoing, any Eligible Employee who retires either during a Plan Year or after the end of a Plan Year in which such Eligible Employee is a Participant in this Plan and who receives a bonus after the end of the Plan Year that was earned in the Plan Year in which such Eligible Employee retired shall receive a Fixed Matching Credit of three percent (3%) of the bonus amount in such Eligible Employee's Account. Notwithstanding the foregoing, Fixed Matching Credits to officers who are Eligible Employees during the Plan Year ending July 31, 1998, shall be made at a rate determined by the Company to equal 3% of such Eligible Employee's compensation as of July 31, 1998; provided, however, that Fixed Matching Credits shall not be made in an amount greater than the deferral amount elected by such Eligible Employee. (b) VARIABLE CREDITS. Any Eligible Employee who elects Deferral Credits in lieu of receiving Recognized Compensation may be credited with a Variable Credit to the Eligible Employee's Account. The amount of an Eligible Employee's Variable Credit shall equal the amount the Eligible Employee would have received on the deferrals made under Sections 4.1, 4.2 and 4.3, as set forth in Section 3.3 of the ESOP, if such deferrals had been made to the 401(k) Plan, without regard to the annual compensation limit then in effect under Code section 401(a)(17). (c) PROFIT SHARING CREDITS. The Board may, in its sole discretion, cause the Account of an Eligible Employee to be credited with Profit Sharing Credits for a Plan Year. Such Profit Sharing Credits shall equal the amount the Eligible Employee would have received if the profit sharing contribution to the 401(k) Plan for that Eligible Employee had been made without regard to the annual compensation limit then in effect under Code section 401(a)(17), minus the amount of profit sharing contributions actually made to the Eligible Employee's account in the 401(k) Plan. 4.5. VESTING. The Accounts of all Participants shall be 100% vested at all times. -9- SECTION 5 TIME AND MANNER OF PAYMENTS 5.1. TIME OF PAYMENT. Payment of all or, under Section 5.1(b), a portion of the Participant's Account under the Plan will be made as soon as administratively feasible following the occurrence of the earliest of the following events: (a) death, or (b) the date of distribution selected by the Participant upon electing to make Deferral Credits under Sections 4.1, 4.2 or 4.3. 5.2. MANNER OF PAYMENT. The portion of the Participant's Account attributable to deferrals under Sections 4.1 or 4.2 will be paid to the Participant in either a single lump sum payment or installments. The portion of the Participant's Account attributable to deferrals under Section 4.3 will be paid to a Participant in either a single lump sum payment or in installments of not more than fifteen (15) years beginning up to two (2) years after departure from the Company. The Participant must elect a manner of payment at the time the Participant elects to make Deferral Credits under Sections 4.1, 4.2 or 4.3. 5.3. CHANGES IN TIME AND MANNER OF PAYMENT. Notwithstanding the foregoing, a Participant may make a new election concerning selection of the time and form of payment authorized pursuant to this Section 5.3 (the "New Election") in accordance with the following terms and conditions, unless waived or modified by the Committee: (a) A New Election shall only be permitted twice and must be made and become effective as hereinafter provided, if at all, prior to a Participant's termination of employment with the Company for any reason whatsoever; (b) A New Election shall be effective (i) immediately upon receipt with respect to deferrals first credited after the date the Company receives the New Election and (ii) at the beginning of the calendar year following the date of the New Election for any and all deferrals previously credited to or for the benefit of the Participant pursuant to the Plan; and (c) If any of the events set forth in Section 5.1 of the Plan occur prior to the effective date of a New Election with respect to previously credited deferrals, then payments shall be paid hereunder to or with respect to the Participant according to the terms of any old or prior elections pursuant to Sections 5.1 and 5.2. -10- 5.4. HARDSHIP DISTRIBUTIONS. 5.4.1. WHEN AVAILABLE. A Participant may receive a hardship distribution from his or her Account if the Committee determines that such hardship distribution is for a purpose described in Section 5.4.2 and the conditions in Section 5.4.3 have been fulfilled. To receive such a distribution, the Participant must file a written hardship distribution application with the Committee and furnish such documentation as the Committee may require. In the application, the Participant shall specify the basis for the distribution and the dollar amount to be distributed. If such hardship distribution is approved by the Committee, distribution shall be made as soon as administratively feasible following the approval of a completed application by the Committee and such hardship distribution shall be made in a lump sum cash payment. The amount of each hardship distribution shall be taken from the portion of the Account attributable to the earliest enrollment (including related earnings) first. 5.4.2. PURPOSES. Hardship distributions shall be allowed under Section 5.4.1 only if the Participant establishes that the hardship distribution is to be made on account of an immediate and heavy financial need of the Participant for which the Participant does not have other available resources. 5.4.3. LIMITATIONS. The amount of the hardship distribution shall not exceed the amount of the Participant's proven immediate and heavy financial need. A hardship distribution shall not be made after the death of the Participant. The amount of approved hardship distribution shall not exceed the value of the Account. 5.5. CHANGE IN CONTROL DISTRIBUTIONS. A Participant or Beneficiary will receive a distribution of his or her entire Account if a Change in Control has occurred. Distribution of the entire Account shall be made within 30 days of the Change in Control. Such distribution shall be made in a lump sum cash payment. 5.6. ACCELERATION OF PAYMENTS. 5.6.1. WHEN AVAILABLE. A Participant or Beneficiary who is receiving installments may receive an accelerated payment of his or her entire Account (after reduction for the forfeiture described in Section 5.6.2). To receive such an accelerated payment, the Participant or Beneficiary must file a written payment application with the Committee. Payment of the accelerated payment (after reduction for the forfeiture described in Section 5.6.2) shall be made as soon as administratively feasible following the approval of a completed application by the Committee. Such accelerated payment shall be made in a lump sum cash payment. The amount of the accelerated payment shall be equal to the value of the Account as of such distribution date (after reduction for the forfeiture described below). 5.6.2. FORFEITURE. Upon the approval of an accelerated payment, there shall be irrevocably forfeited from the Account of the Participant or Beneficiary an amount equal to six percent (6%) of the Account. In addition, if the Participant is an active employee at the time of the -11- accelerated payment, the Participant will not be an Eligible Employee under this Plan for two (2) years following such accelerated payment. 5.7. DEATH BENEFIT. In the event of a Participant's death prior to the date on which distribution of the Participant's Account is made, the Company shall pay the amount of the Participant's Account as of the date of death in a lump sum or in installments, as previously elected by the Participant, to the Participant's designated Beneficiary as soon as administratively feasible. 5.8. BENEFICIARY DESIGNATION. A Participant shall submit to the Company before enrollment into the Plan, and at such other times as the Participant desires, on a form provided by the Committee, a written designation of the beneficiary or beneficiaries to whom payment of the Participant's Account under the Plan shall be made in the event of the Participant's death. Beneficiary designations shall become effective only when received by the Company. Beneficiary designations first received by the Company after the Participant's death, and any designations in effect at the time a valid subsequent designation is received by the Company, shall be invalid and have no effect. -12- SECTION 6 DEFERRED COMPENSATION ACCOUNT 6.1. PARTICIPANT ACCOUNTS. The Committee shall cause a bookkeeping account to be kept in the name of each Participant which shall reflect the value of the Deferral Credits and Company Credits, and any earnings thereon, credited to a Participant. Deferral Credits shall be credited to a Participant's Account as of the date the amounts deferred otherwise would have become due or payable. Company Credits shall be credited at such times as the Committee shall direct. 6.2. INVESTMENT OF ACCOUNTS. Amounts credited to a Participant's Account will be adjusted for gains and losses to the same extent that an equal amount would be adjusted if it had been invested as directed by the Participant in the subfund or subfunds designated by the Committee. 6.3. ASSUMPTION OF RISK. The Participant, by electing to make deferrals under this Plan, assumes all risk in connection with any decrease in value of the Participant's Account. 6.4. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's bookkeeping account any payments made to the Participant or the Participant's Beneficiary in accordance with Section 5. -13- SECTION 7 FUNDING 7.1. FUNDING. The Company and its Affiliates shall be responsible for paying all benefits due hereunder. For the purpose of facilitating the payment of benefits due hereunder, the Company may (but shall not be required to) establish and maintain a grantor trust pursuant to an Agreement between the Company and a trustee selected by the Company; provided, however, that any such grantor trust must be structured so that it does not result in any federal income tax consequences to any Participant until distributions under Section 5 are actually received. The Company may contribute to a grantor trust thereby created such amounts as it may from time to time determine. 7.2. CORPORATE OBLIGATION. Neither the officers nor any member of the Board of Directors of the Company or any of its Affiliates in any way secures or guarantees the payment of any benefit or amount which may become due and payable hereunder to or with respect to any Participant. Each Participant and other person entitled at anytime to payments hereunder shall look solely to the assets of the Company and its Affiliates for such payments as an unsecured, general creditor. Nothing herein shall be construed to give a Participant, Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Company or in which it may have any right, title or interest now or in the future. After benefits shall have been paid to or with respect to a Participant and such payment purports to cover in full the benefit hereunder, such former Participant or other person or persons, as the case may be, shall have no further right or interest in the other assets of the Company and its Affiliates in connection with this Plan. -14- SECTION 8 FORFEITURE OF BENEFITS All unpaid benefits under this Plan accrued under Section 4.4 shall be permanently forfeited upon the determination by the Committee that the Participant, either before or after termination of employment: (a) engaged in criminal or fraudulent conduct resulting in a hardship to the Company or an Affiliate; or (b) breached the Participant's employment agreement with the Company or an Affiliate. -15- SECTION 9 ADMINISTRATION 9.1. AUTHORITY. The Plan shall be administered by the Committee, which shall have full discretionary power and authority to administer and interpret the Plan and to determine all factual and legal questions under the Plan, including but not limited to the entitlement of Participants and Beneficiaries, and the amount of their respective interests. 9.2. LIABILITY. No member of the Committee and no director or member of the management of the Company or its Affiliates shall be liable to any persons for any actions taken under the Plan, or for any failure to effect any of the objective or purposes of the Plan, by reason of insolvency or otherwise. 9.3. PROCEDURES. The Committee may from time to time adopt such rules and procedures as it deems appropriate to assist in the administration of the Plan. 9.4. CLAIM FOR BENEFITS. No employee or other person shall have any claim or right to payment of any amount hereunder until payment has been authorized and directed by the Committee. 9.5. CLAIMS PROCEDURE. Until modified by the Committee, the claims procedure set forth in this Section 9.5 shall be the claims procedure for the resolution of disputes and disposition of claims arising under the Plan. 9.5.1. ORIGINAL CLAIM. Any employee, former employee, or Beneficiary of such employee or former employee may, if the employee, former employee or Beneficiary so desires, file with the Committee a written claim for benefits under the Plan. Within ninety (90) days after the filing of such a claim, the Committee shall notify the claimant in writing whether the claim is upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred eighty (180) days from the date the claim was filed) to reach a decision on the claim. If the claim is denied in whole or in part, the Committee shall state in writing: (a) the specific reasons for the denial, (b) the specific references to the pertinent provisions of this Plan on which the denial is based, (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and (d) an explanation of the claims review procedure set forth in this Section. -16- 9.5.2. CLAIMS REVIEW PROCEDURE. Within sixty (60) days after receipt of notice that the claim has been denied in whole or in part, the claimant may file with the Committee a written request for a review and may, in conjunction therewith, submit written issues and comments. Within sixty (60) days after the filing of such a request for review, the Committee shall notify the claimant in writing whether, upon review, the claim was upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred twenty days (120) from the date the request for review was filed) to reach a decision on the request for review. 9.5.3. GENERAL RULES. (a) No inquiry or question shall be deemed to be a claim or a request for a review of a denied claim unless made in accordance with the claims procedure. The Committee may require that any claim for benefits and any request for a review of a denied claim be filed on forms to be furnished by the Committee upon request. (b) All decisions on original claims shall be made by the Committee and requests for a review of denied claims shall be made by the Committee. (c) The Committee may, in its discretion, hold one or more hearings on a claim or a request for a review of a denied claim. (d) Claimants may be represented by a lawyer or other representative at their own expense, but the Committee reserves the right to require the claimant to furnish written authorization. A claimant's representative shall be entitled to copies of all notices given to the claimant. (e) The decision of the Committee on an original claim or on a request for a review of a denied claim shall be served on the claimant in writing. If a decision or notice is not received by a claimant within the time specified, the claim or request for a review of a denied claim shall be deemed to have been denied. (f) Prior to filing a claim or a request for a review of a denied claim, the claimant or the claimant's representative shall have a reasonable opportunity to review a copy of this Plan Statement and all other pertinent documents in the possession of the Company and its Affiliates. 9.6. PAYMENTS UPON IMPOSITION OF FEDERAL OR STATE TAXES. If any Participant is determined to be subject to federal or state income tax on any amount accrued on his or her behalf under this Plan prior to the time of payment hereunder, federal or state taxes attributable to the amount determined to be so taxable shall be distributed by the Plan to such Participant. An amount accrued -17- on his or her behalf under this Plan shall be determined to be subject to federal income tax upon the earliest of: (i) a final determination by the United States Internal Revenue Service addressed to the Participant which is not appealed to the courts; (ii) a final determination by the United States Tax Court or any other Federal Court affirming any such determination by the Internal Revenue Service; or (iii) an opinion by the Tax Counsel of the Company, addressed to the Company that, by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts accrued on a Participant's behalf hereunder are subject to federal or state income tax prior to payment. The Company shall undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service or by any state revenue authority against any Participant, including attorney fees and costs of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Internal Revenue Service, by any state revenue authority or by a lower court. The Company also agrees to reimburse any Participant for any interest or penalties in respect of federal or state tax claims hereunder upon receipt of documentation of same. 9.7. LEGAL FEES. If the Company does not pay the benefits required under the terms of the Plan for reasons other than the insolvency of the Company, the Company agrees to reimburse any Participant for all legal fees incurred in enforcing his or her claim to benefits under the Plan. 9.8. ERRORS IN COMPUTATIONS. The Committee shall not be liable or responsible for any error in the computation of any benefit payable to or with respect to any Participant resulting from any misstatement of fact made by the Participant or by or on behalf of any Beneficiary to whom such benefit shall be payable, directly or indirectly, to the Committee, and used by the Committee in determining the benefit. The Committee shall not be obligated or required to increase the benefit payable to or with respect to such Participant which, on discovery of the misstatement, is found to be understated as a result of such misstatement of the participant. However, the benefit of any Participant which is overstated by reason of any such misstatement or any other reason shall be reduced to the amount appropriate in view of the truth (and to recover any prior overpayment). -18- SECTION 10 MISCELLANEOUS 10.1. NOT AN EMPLOYMENT CONTRACT. This Plan is not and shall not be deemed to constitute a contract of employment between the Company and any employee or other person, nor shall anything herein contained be deemed to give any employee or other person any right to be retained in the Company's employ or in any way limit or restrict the Company's right or power to discharge any employee or other person at any time and to treat him without regard to the effect which such treatment might have upon the employee as a Participant in the Plan. 10.2. NONTRANSFERABILITY. A Participant's rights and interest under the Plan, including amounts payable, may not be assigned, alienated, pledged or transferred except, in the event of a Participant's death to his Beneficiary. No benefit payable under this Plan shall be subject to attachment, garnishment, execution following judgment or other legal process before actual payment to the Participant or Beneficiary. 10.3. TAX WITHHOLDING. The Company shall withhold the amount of any federal, state or local income tax or other tax required to be withheld by the Company under applicable law with respect to any amount payable under the Plan. The Participant shall not be liable for any tax withholding. 10.4. EXPENSES. All expenses of administering the Plan shall be borne by the Company. 10.5. GOVERNING LAW. Except to the extent that federal law is controlling, the Plan shall be construed and enforced in accordance with and governed by the laws of the State of Minnesota. 10.6. AMENDMENT AND TERMINATION. The Company reserves the power to unilaterally amend this Plan at any time, either prospectively or retroactively or both: (a) in any respect by resolution of its Board of Directors; and (b) in any respect that does not materially increase the cost of the Plan by action of the Committee (with the written concurrence of the Chief Executive Officer of the Company). The Committee may likewise terminate or curtail the benefits of this Plan both with regard to persons expecting to receive benefits in the future and persons already receiving benefits at the time of such action; provided, however, that the Committee may not amend or terminate the Plan with respect to benefits that have accrued and are vested pursuant to Section 4. No modification of the -19- terms of this Plan shall be effective unless it is in writing and signed on behalf of the Company by a person authorized to execute such writing. No oral representation concerning the interpretation or effect of this Plan shall be effective to amend the Plan. Date: 12-19-97 DONALDSON COMPANY, INC. By /s/ William Van Dyke ----------------------------------- Chief Executive Officer -20- EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUL-31-1998 NOV-01-1997 JAN-31-1998 6,291 0 161,822 4,106 100,422 274,612 374,538 204,902 473,634 185,479 4,108 0 0 248,280 7,067 473,634 467,041 0 333,711 91,347 (185) 12 1,976 40,192 13,665 26,527 0 0 0 26,527 .52 .52
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