-----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, WmiWVA61OD56tjPNuyRIqjDoHiMjPodECEFrBxQ+9Z40mzySVbyzrfdhd7DFjhag CPnCHJeDxg7uJuFT19o6uw== 0000897101-99-000231.txt : 19990318 0000897101-99-000231.hdr.sgml : 19990318 ACCESSION NUMBER: 0000897101-99-000231 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 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: 99567279 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, 1999 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 -- 46,675,059 shares as of February 28, 1999 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended January 31 January 31 ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $ 220,249 $ 232,974 $ 445,680 $ 467,041 Cost of sales 157,987 167,971 321,035 333,637 ------------ ------------ ------------ ------------ Gross margin 62,262 65,003 124,645 133,404 Operating expenses 43,484 44,971 85,736 91,334 Other (income) expense (2,353) 88 (3,714) (98) Interest expense 1,761 991 3,592 1,976 ------------ ------------ ------------ ------------ Earnings before income taxes 19,370 18,953 39,031 40,192 Income taxes 6,198 6,444 12,490 13,665 ------------ ------------ ------------ ------------ Net earnings $ 13,172 $ 12,509 $ 26,541 $ 26,527 ============ ============ ============ ============ Weighted average shares outstanding - basic 47,125,314 49,593,217 47,481,330 49,528,532 Weighted average shares outstanding - diluted 47,896,535 50,697,926 48,223,003 50,594,132 Net earnings per share-basic $ .28 $ .25 $ .56 $ .54 Net earnings per share-diluted $ .27 $ .25 $ .55 $ .52 Dividends paid per share $ .06 $ .05 $ .11 $ .09
2 CONDENSED CONSOLIDATED BALANCE SHEETS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
January 31 July 31 1999 1998 ---------- ---------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 19,818 $ 16,069 Accounts Receivable 162,713 161,914 Inventories Materials 35,277 38,346 Work in Process 12,997 14,557 Finished Products 44,560 49,114 ---------- ---------- Total Inventories 92,834 102,017 Prepaid and Other Current Assets 10,465 7,341 ---------- ---------- TOTAL CURRENT ASSETS 285,830 287,341 Property, Plant and Equipment, at Cost 418,489 391,381 Less Accumulated Depreciation (232,167) (212,514) ---------- ---------- Property, Plant and Equipment, Net 186,322 178,867 Other Assets 35,652 33,113 ---------- ---------- TOTAL ASSETS $ 507,804 $ 499,321 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-Term Debt $ 33,734 $ 45,491 Current Maturities of Long-Term Debt 460 405 Trade Accounts Payable 55,699 59,368 Accrued Employee Compensation & Related Taxes 21,494 26,837 Warranty and Customer Support 16,268 16,096 Other Current Liabilities 27,433 19,295 ---------- ---------- TOTAL CURRENT LIABILITIES 155,088 167,492 Long-Term Debt 75,270 50,349 Deferred Income Taxes 1,680 1,604 Other Long-Term Liabilities 24,988 24,205 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 issued at both dates 248,280 248,280 Additional Paid-in Capital 1,364 1,199 Retained Earnings 59,952 39,965 Accumulated Other Comprehensive Income 1,409 (5,135) Treasury Stock - 2,955,528 and 1,274,251 shares at January 31, 1999 and July 31, 1998, respectively (60,227) (28,638) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 250,778 255,671 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 507,804 $ 499,321 ========== ==========
See Notes to Condensed Consolidated Financial Statements 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) (Unaudited)
Six Months Ended January 31 1999 1998 ---------- ---------- OPERATING ACTIVITIES Net Earnings $ 26,541 $ 26,527 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 14,045 12,001 Changes in Operating Assets and Liabilities 10,811 (14,332) Other (1,785) (2,972) ---------- ---------- Net Cash Provided by Operating Activities 49,612 21,224 INVESTING ACTIVITIES Net Expenditures on Property and Equipment (17,070) (31,274) Business Acquisitions, Net of Cash Acquired (200) -- Return of Investment in Affiliate -- 1,500 Dividends From Affiliate 47 -- ---------- ---------- Net Cash Used in Investing Activities (17,223) (29,774) FINANCING ACTIVITIES Purchase of Treasury Stock (33,586) (6,149) Net Change in Debt 11,279 10,049 Dividends Paid (5,250) (4,707) Payment Received from ESOP -- 2,730 Other 1,154 157 ---------- ---------- Net Cash (Used In) Provided by Financing Activities (26,403) 2,080 Effect of Exchange Rate Changes on Cash (2,237) (1,517) ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents 3,749 (7,987) Cash and Cash Equivalents-Beginning of Year 16,069 14,278 ---------- ---------- Cash and Cash Equivalents-End of Period $ 19,818 $ 6,291 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and 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, 1999 are not necessarily indicative of the results that may be expected for the year ended July 31, 1999. 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, 1998. Note B - Net Earnings Per Share The Company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. The following table presents information necessary to calculate basic and diluted net earnings per common share:
Three Months Ended Six Months Ended January 31 January 31 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Weighted average shares outstanding-Basic 47,125,314 49,593,217 47,481,330 49,528,532 Dilutive share equivalents 771,221 1,104,709 741,673 1,065,600 ----------- ----------- ----------- ----------- Weighted average shares outstanding- Diluted 47,896,535 50,697,926 48,223,003 50,594,132 =========== =========== =========== =========== Net earnings for basic and diluted earnings per share computation $13,172,000 $12,509,000 $26,541,000 $26,527,000 ----------- ----------- ----------- ----------- Net earnings per share - Basic $ .28 $ .25 $ .56 $ .54 =========== =========== =========== =========== Net earnings per share - Diluted $ .27 $ .25 $ .55 $ .52 =========== =========== =========== ===========
5 Note C - Comprehensive Income The Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which was adopted by the Company in the first quarter of fiscal 1999. Upon adoption of SFAS No. 130, the Company is reporting Accumulated Other Comprehensive Income as a separate item in the shareholders' equity section of the balance sheet and disclosing components of other comprehensive income. The adoption of this Statement has no impact on the Company's net earnings or shareholders' equity. Other comprehensive income consists solely of foreign currency translation adjustments. Prior financial statements have been restated to conform to the provisions of SFAS 130. Total comprehensive income and its components are as follows (in thousands):
Three Months Ended Six Months Ended January 31 January 31 ------------------- ------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net earnings $13,172 $12,509 $26,541 $26,527 Foreign currency translation adjustment 4,013 (3,000) 6,544 (5,787) Total other comprehensive income $17,185 $ 9,509 $33,085 $20,740
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. A. Financial Condition The Company generated $49.6 million of cash and cash equivalents from operations during the first six months of fiscal 1999. Operating cash flows more than doubled from the prior year period primarily due to a decrease in inventory levels compared to an increase for the same period in the prior year, as well as a decrease in accounts receivable factoring in the effects of foreign exchange translation. These cash flows plus borrowings from the Company's credit facility were used primarily to support $17.1 million in capital additions (a 45.4% decrease from prior year), repurchase $33.6 million of treasury stock, and the payment of $5.3 million in dividends during the first six months of fiscal 1999. At the end of the second quarter, the Company held $19.8 million in cash and cash equivalents. Short-term debt totaled $33.7 million, down from $45.5 million at July 31, 1998. Long-term debt of $75.3 million at January 31, 1999, represented 23.1% of total long-term capital, up from 16.5% at July 31, 1998. The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for 1999. 6 B. Results of Operations The Company reported net earnings for the second quarter ended January 31, 1999 of $13.2 million, up 5.3% from the $12.5 million recorded in the second quarter last year. Total net sales for the three months ended January 31, 1999 of $220.2 million were down 5.5% from prior year sales of $233.0 million. The lower sales volume is primarily due to depressed demand in the agricultural, mining and other off-road end-user markets and generally unfavorable economic conditions in those markets. Diluted net earnings per share were 27 cents, up 8.0% from prior year diluted net earnings per share of 25 cents as the average number of shares outstanding decreased 5.5% compared to the prior year period. The increase in net earnings, despite the decrease in net sales, was primarily due to a reduction in the effective income tax rate, cost reduction measures taken in general operating expenses and the favorable impact from various other income/expense items described below. For the six months ended January 31, 1999, net earnings were $26.5 million, unchanged from the six months ended in the prior year. Diluted net earnings per share were 55 cents, up 5.8% from prior year's diluted net earnings per share of 52 cents. The net earnings remained unchanged from prior year as lower gross margin was offset by a reduction in operating expenses, a reduction in the effective income tax rate and the favorable impact of various other income/expense items. Total net sales for the six months ended January 31, 1999 of $445.7 million were down 4.6% from the prior years sales of $467.0 million. Excluding the negative impact of foreign currency translation of $2.6 million, sales were down 4.0% from last year. For the quarter Engine products showed an 8.1% decrease in net sales from the same period in the prior year. The most significant factors contributing to this decrease were lower demand in the agricultural and other off-road markets and lower sales to automotive customers. Net sales for the Industrial products were essentially unchanged for the quarter from the same period in the prior year. Within the Industrial products area, the dust collection and disk drive product lines showed revenue growth, but gas turbine and other high purity product lines posted lower sales than the prior year. Disk drive gains reflect a strong disk drive market resulting in an increase in sales of disk drive products. Although gas turbine sales are lower, backlogs are significantly higher for this product line and the Company expects that net sales for gas turbine for the full year will be essentially unchanged from the prior full year. Geographically, domestic sales were down 7.0% in the second quarter, primarily attributed to weakness in end markets for Engine products. Europe posted a sales increase of about 10.0% from the prior year while our sales in Japan were about 10.0% below last year. The strength in the European market is primarily attributed to Engine products, both first-fit and aftermarket. Overall, activity in the off-road end-user markets has slowed and we anticipate revenue for the fiscal year 1999 will be at or slightly below the level of 1998. The gross margins for the second quarter of fiscal 1999 were 28.3%--about one half of one percentage points above the same quarter last year. The improvement in gross margin for the quarter reflects the positive impact of cost reduction and product improvement initiatives, 7 partially offset by the negative impact of lower production volumes. The six months figures are 28.0% and 28.6% respectively. Operating expenses during the second quarter of fiscal 1999 were $43.5 million, 19.7% of sales, compared to $45.0 million, 19.3% of sales in the same quarter of fiscal 1998. Year-to-date operating expense as a percentage of sales have decreased from 19.6% to 19.2% from the prior year period. This reduction in operating expense was due primarily to lower levels of warranty expense and lower salary compensation expense. Other income has increased $2.4 million and $3.6 million from the prior years three and six month periods ending January 31. These increases are due to lower charitable contributions, the gain on sale of surplus land in Minnesota, the sale of a product line in Hong Kong, an increase in income from the Company's joint venture activities and a general weakening of the dollar primarily in Japan in fiscal 1999. The effective income tax rate for the six month period ending January 31, 1999 was 32% compared to 34% for the same period last year due to taxes on overseas earnings. Hard order backlogs -- goods scheduled for delivery in 90 days -- of $149.1 million for the second quarter of fiscal 1999 are down 3.5% from the same period last year and up 2.5% from the prior quarter end. Relative to last year, the majority of the decline in backlog is attributed to the automotive, defense and heavy duty truck market product lines in North America. Excluding the impact of discontinued product lines and other special factors in these three businesses, backlogs are essentially unchanged from prior year. The US dollar has weakened relative to the currencies of foreign countries where the Company operates. The weakening of the dollar, primarily in Japan, has had positive effects on net income for the three and six month periods ending January 31, 1999. The impact of foreign exchange rates on net income was an increase of approximately $800,000 over the prior year six month period. Year 2000 The Company has developed plans to address the potential for business interruption related to the impact of Year 2000 on computer systems. Financial, information and operating systems (including any equipment with embedded microprocessors) have been surveyed and assessed. In most cases, identified problems have already been rectified. In the remaining cases identified problems will be addressed with repair projects with target completion dates of no later than October 1999. Progress against these plans is monitored and reported to senior management and to the Audit Committee of the Board of Directors on a regular basis. Implementation of required changes to, and testing of, critical business systems was substantially completed at the end of 1998. Changes to all other systems are expected to be complete by no later than October 1999. The Company has also surveyed its significant suppliers to assess the potential impact on operations if key third parties are not successful in converting their systems in a timely manner. A survey of all significant suppliers has been completed. Responses received to date indicate 8 that our suppliers are aware of the Year 2000 issue and are implementing all necessary changes, mostly scheduled for completion by mid-1999. A contingency plan for potentially non-compliant suppliers is now being implemented. Incremental costs (including contractor expenses and the cost of internal resources dedicated to achieving Year 2000 compliance) are charged to expense as incurred. Total costs for all relevant Year 2000 specific activity is estimated to be $5 million, of which approximately 80 percent has been spent to date. The source of funds for these costs is operating cash flow. In general, only a small percentage of our products contain microprocessors and all of our product range is now Year 2000 compliant. Our information systems (financial, purchasing, manufacturing planning, etc.) have been inventoried and detailed modification plans exist and are being executed. Our manufacturing systems are, in general, standard pieces of equipment with relatively few proprietary or unique operating systems or controls. The Company is in the process of developing and implementing a comprehensive, global contingency plan relative to potential Year 2000 disruptions. Each significant system either has been repaired and tested, or is being repaired. For systems currently being reworked, contingency plans exist to address the most reasonably likely negative scenarios. The most reasonably likely negative scenario is that modification work will not proceed on schedule, causing some increase to the total cost of achieving Year 2000 compliance although modification work will be completed for year 2000 compliance purposes. The impact on the Company's results of operations if the Company or its suppliers or customers are not fully Year 2000 compliant and the scope of resulting difficulties and related costs are not reasonably determinable. Our dependence on the performance of our employees, contractors, vendors and customers, as it relates to the Year 2000 issue, can be compared to our dependence on these groups relative to a wide range of other expectations (e.g., product quality, dependable delivery, technical support, timely payment, etc.) Euro Currency The Company has a significant number of customers located in the European Union countries participating in the conversion to a new European Currency (the "Euro Conversion"). The Company does not expect the costs of any modifications to its internal systems to have a material effect on the Company's results of operations or financial condition. The Euro Conversion may also have competitive implications for the sale of the Company's products, which could be material in nature, however, any such impact is not known at this time. There can be no assurance that unforeseen difficulties will not arise for the Company or its customers and that related costs will not thereby be incurred. Market Risk The Company's market risk includes the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. The Company manages foreign currency market risk through the use of a variety of financial and derivative instruments. The Company's objective in 9 managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The Company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value resulting from anticipated foreign currency transactions. The Company's market risk on interest rates is the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. There have been no material changes in the reported market risks of the Company since July 31, 1998. See further discussion of these market risks in the Donaldson Company, Inc. annual report on Form 10-K for the year ended July 31, 1998. Private Securities Litigation Reform Act of 1995 "Safe Harbor" The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is making this cautionary statement in connection with such safe harbor legislation. This Form 10-Q, the Company's Annual Report to Shareholders, any Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project," "should" and similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this 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 risk factors noted below. The Company wishes to caution investors that any forward-looking statements made by or on behalf of the Company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to: changing economic and political conditions in the 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, continued access to capital markets, issues related to the Company's Year 2000 compliance program, and foreign currency risks (including risks associated with the introduction of the Euro currency). For a more detailed explanation of the foregoing and other risks see exhibit 99 attached hereto. The Company wishes to caution investors that other factors may in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Investors are further cautioned not to place undue reliance on such forward-looking statements as they speak only to the Company's views as of the date the statement is made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk See discussion of quantitative and qualitative disclosure about market risk in "Market Risk" section of Management's Discussion and Analysis. 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 November 20, 1998. A total of 47,587,174 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 --- -------- Paul B. Burke 43,411,205 1,094,625 Kendrick B. Melrose 43,921,108 584,722 Stephen W. Sanger 43,950,942 554,888 (ii) Ratified selection of Ernst & Young LLP as Registrant's independent public auditors for the fiscal year ending July 31, 1999 with the following vote: For - 44,010,960: Against - 316,312; Abstaining - 178,558. (iii) Approved the adoption of the amendment of the Company's 1991 Master Stock Compensation Plan with the following vote: For - 41,757,594; Against - 2,082,745; Abstaining - 665,491. (d) Not Applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index 3-B Bylaws of Registrant as currently in effect 10-G Form of "Change in Control" Agreement with key employees 99 Factors Affecting Future Operating Results 11 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, 1999. 12 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 March 17, 1999 By /s/ James R. Giertz ---------------------- ------------------- James R. Giertz Senior Vice President and Chief Financial Officer 13 EX-3.B 2 AMENDED AND RESTATED BYLAWS EXHIBIT 3.B AMENDED AND RESTATED BYLAWS OF DONALDSON COMPANY, INC. Offices 1. The principal office of the Company shall be in Wilmington, Delaware, and the resident agent in charge thereof shall be Corporation Service Company. The Company may also have an office or offices at such place or places, within or without the State of Delaware as the Board of Directors may from time to time designate or the business of the Company may require. Corporate Seal 2. The corporate seal shall have inscribed thereon the name of the Company, the year of its incorporation, and the words "Incorporated Delaware." Meetings of Stockholders 3. The Annual Meeting of Stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the third Friday in November of each year or on such other date as may be fixed by resolution of the Board of Directors. Special meetings of the stockholders may only be called at any time by (i) the chairman of the board or the president or (ii) by vote of a majority of the directors. All meetings of the stockholders, including meetings for the election of directors, shall be held at such place or places within or without the State of Delaware as may from time to time be fixed by the Board of Directors or shall be specified and fixed in the respective notices or waivers of notices thereof. No business may be transacted at an annual meeting or special meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the meeting by any stockholder of record on the date of the giving of the notice provided for in this Bylaw 3 and on the record date for the determination of stockholders entitled to vote at such meeting. In addition to any other applicable requirements, for business to be properly brought before an annual meeting or special meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the secretary of the Company. For notice to be timely for an annual meeting, a stockholder's notice to the secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than ninety days nor more than one-hundred twenty days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event the annual meeting is called for a date that is not within thirty days before or after such anniversary date, notice by the stockholder in order to be timely must be received no later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. In no event shall the public disclosure of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described in these Bylaws. To be in proper written form, a stockholder's notice to the secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting or special meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of such stockholder, (c) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by such stockholder, (d) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the meeting to bring such business before the meeting. In the case of a proposed nomination for election or re-election as a director, a stockholder's notice shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder 2 (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected). Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Company's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Company who is a stockholder of record at the time of giving of notice provided for in this Bylaw 3, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw 3. In the event the Company calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Company's notice of meeting, if the stockholder's notice required by this Bylaw 3 shall be delivered to the secretary at the principle executive offices of the Company not earlier than one-hundred twenty days prior to such special meeting and not later than the later of ninety days prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described in this Bylaw 3. A complete list of stockholders entitled to vote, arranged in alphabetical order, shall be prepared by the secretary and shall be open to the examination of any stockholder at the place of election, for ten days prior thereto, and during the whole time of the election. No business shall be conducted at an annual meeting or special meeting of stockholders except business brought before the meeting in accordance with the procedures set forth in this Bylaw 3; provided, however, that, once business has been properly brought before such meeting in accordance with such procedures, nothing in this Bylaw 3 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting or special meeting determines that business was not properly brought before such meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. Except as otherwise provided by statute or by the Certificate of Incorporation, at each meeting of the stockholders each stockholder having the right to vote thereat shall be entitled to (i) one vote, in person or by proxy signed by such stock- 3 holder, for each share of common stock of the Company standing in his name, and (ii) such voting rights, if any, as are provided in the applicable Certificate of Designation, Preferences and Rights with respect to any series of preferred stock of the Company standing in his name, which voting rights may be exercised in person or by proxy signed by such stockholder, and in all such instances on the date fixed by the Board of Directors as the record date for the determination of the stockholders who shall be entitled to notice of and vote at such meeting; or if no record date shall have been fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given. Such right to vote shall be subject to the right of the Board of Directors to close the transfer books or to fix a record date for voting stockholders as hereinafter provided and if the directors shall not have exercised such right, no share of stock shall be voted on at any election for directors which shall have been transferred on the books of the Company within twenty days next preceding such election. Written notice of all meetings shall be given by the secretary not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. The holders of a majority of the Common Stock outstanding present in person or represented by proxy shall be requisite to and shall constitute a quorum for the transaction of business except as otherwise provided by law or by the Certificate of Incorporation as amended or by these Bylaws. However, the holders of the majority of the Common Stock who are present in person or represented by proxy shall have power to adjourn such meeting from time to time without notice other than announcement at the meeting until a quorum is secured. Directors 4. The property and business of the Company shall be managed and controlled by its Board of Directors. The number of directors which shall constitute the whole board shall be such number, not less than three nor more than fifteen, as may be determined from time to time (i) by the stockholders by the affirmative vote of the holders of two-thirds of the outstanding shares of all classes of stock of the Company entitled to vote for the election of directors (considered for this purpose as one class) or (ii) by the Board of Directors by a vote of not less than a majority of all of the directors then in office. All directors to be elected shall be elected for three-year terms (except as hereinafter provided with respect to directors to fill certain vacancies) so that approximately one-third of the directors will be elected to each annual meeting of the stockholders. Each director shall continue in office until the annual meeting in the year in which his term expires and until his successor shall have been elected and qualified, 4 or until his death, or until he shall resign or have been removed by the vote of the holders of a majority of the outstanding shares of capital stock of all classes of the Company entitled to vote in the election of directors at a special meeting of the stockholders called for that purpose. Any vacancies in the Board of Directors from any cause, including vacancies created by increase in the number of directors, may be filled by a majority of the then qualified directors, even though less than a quorum. Each director so chosen shall hold office for the unexpired term of the director whose place shall be vacant, providing that each director so chosen to fill a vacancy created by increase in the number of directors shall be elected for an appropriate term so that approximately one-third of the directors will be elected at each annual meeting of the stockholders thereafter. Directors shall be bona fide owners of at least one hundred (100) shares of this Company's stock, shall not stand for election or reelection after attaining the age of sixty-eight and shall offer their resignation from the Board at such time as they may change their basic business or professional activity or affiliation; provided, however, that nonemployee directors need not offer such resignation in the event of normal retirement. Nonemployee directors' continuous membership on the Board of Directors shall be limited to five consecutive three-year terms. Powers of Directors 5. The business and affairs of the Company shall be managed under the direction of the Board of Directors. In addition to the powers and authorities expressly conferred upon them by these Bylaws, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders. Meetings of Directors 6. Immediately after each annual election of directors, the directors shall meet for the purpose of organization, the election of officers and the transaction of other business at such place as shall be specified in the notice of such meeting provided as hereinafter established for either regular or special meetings. 5 The Board of Directors may provide by resolution, the time and place, either at the general office of the Company or elsewhere, for the holding of regular meetings without other notice than such resolution. Special meetings of the directors may be called at any time by the chairman of the board or the president and shall be called on the written request of any two directors. Notice of special meeting of the directors shall be given to each director at his residence or usual place of business in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twelve hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purposes of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws in accordance with Bylaw 25. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with Bylaw 24. Special meetings of the directors may be held within or without the State of Delaware at such place as is indicated in the notice or waiver of notice thereof. A majority of the directors shall constitute a quorum, but a smaller number may adjourn from time to time, without further notice, until a quorum is secured. Executive and Other Committees 7. The Board of Directors may by resolution or resolutions passed by a majority of the whole board designate one or more committees, each committee to consist of one or more of the directors of the Company. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at 6 the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company, and may authorize the seal of the Company to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law (the "DGCL") to be submitted to stockholders for approval or (ii) adopting, amending or releasing these Bylaws. Compensation of Directors and Members of Committees 8. Directors and members of standing committees shall receive such compensation for attendance at each regular or special meeting as the board shall from time to time prescribe. Officers of the Company 9. The officers of the Company shall be the chairman of the Board of Directors (if one is elected by the Board of Directors), the president, one or more vice presidents, a secretary, a treasurer and such other officers as may from time to time be elected by the Board of Directors. The officers of the Company shall hold office until their successors are elected and qualify. An officer elected by the Board of Directors may be removed either with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors. Such removal, however, shall be without prejudice of the contract rights of the person so removed. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the affirmative vote of a majority of the whole Board of Directors. Duties of the Chairman of the Board and the President 10. The chairman of the Board of Directors, if one is elected, shall preside at all meetings of the stockholders and directors and shall have such other duties as may be prescribed from time to time by the Board of Directors. In the absence of the chairman of the Board of Directors, the president shall preside at all meetings of the stockholders and directors and shall have such other duties as may be prescribed from time to time by the Board of Directors. 7 If the chairman of the Board of Directors is not the president, the Board of Directors shall designate which of the chairman of the Board of Directors or the president is the chief executive officer of the Company, and shall provide for the division of executive duties and responsibilities between those two officers. If the chairman of the Board of Directors is also president, the chairman shall be the chief executive officer of the Company and shall have general and active management of the business of the Company. Vice President 11. The vice president or vice presidents, in the order designated by the Board of Directors, shall be vested with all the powers and required to perform all the duties of the president in his absence or disability and shall perform such other duties as may be prescribed by the Board of Directors. President Pro Tem 12. In the absence or disability of the chairman of the board, the president and the vice presidents, the board may appoint from their own number a president pro tem. Secretary 13. The secretary shall attend all meetings of the Company, the Board of Directors, the executive committee and standing committees. He shall act as clerk thereof and shall record all of the proceedings of such meetings in a book kept for that purpose. He shall give proper notice of meetings of stockholders and directors and shall perform such other duties as shall be assigned to him by the chief executive officer or the Board of Directors. Financial Officers 14. The Vice President-Chief Financial Officer shall have such authority and responsibility as specified herein for both the Treasurer and the Controller. The treasurer, vice president-finance or such other similar title shall be the financial officer, shall have custody of, and be responsible for, all funds of the Company; shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors; shall render to the chief executive officer and directors, whenever they may 8 require it, an account of all transactions as treasurer and of the financial condition of the Company; shall keep an account of stock registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe; and shall perform all of the duties incident to the office of the treasurer and such other duties as from time to time may be assigned by the chief financial officer, chief executive officer of Board of Directors. The controller shall be the chief accounting officer, shall keep full and accurate accounts of all assets, liabilities, receipts, disbursements and other financial transactions in books belonging to the Company; shall cause regular audits of such books and records to be made; shall see that all expenditures are made in accordance with procedures duly established by the Company; shall render to the chief executive officer and Board of Directors, whenever requested, financial statements of the Company; and shall perform all the duties incident to the office of controller and such other duties as, from time to time, may be assigned by the chief financial officer, chief executive officer or Board of Directors. Financial officers may be required to furnish bond in such amount as shall be determined by the Board of Directors. Duties of Officers May Be Delegated 15. In case of the absence or disability of any officer of the Company or for any other reason deemed sufficient by a majority of the board, the Board of Directors may delegate his powers or duties to any other officer or to any director for the time being. Certificates of Stock 16. Certificates of stock shall be signed by the President or a Vice President and the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary. Any or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon any such certificate shall thereafter have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Company with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. If a certificate of stock be lost, mutilated or destroyed, another may be issued in its stead upon proof of such loss, mutilation or destruction, and the giving of a bond of indemnity in form, substance and amount 9 satisfactory to the Company and to the Transfer Agent and Registrar, if any, of such stock, provided that, if there be no Transfer Agent or Registrar for the class of stock of which the certificate be lost, mutilated or destroyed, the Board of Directors may waive the requirement of a bond indemnity if in its judgment such waiver is warranted by the circumstances. Transfer of Stock 17. All transfers of stock of the Company shall be made upon its books by the holder of the shares in person or by his lawfully constituted representative, upon surrender of certificates of stock for cancellation. Provided, however, that, with respect to stock which has been presumed abandoned under an applicable state law, appropriate officers of the Company may effect cancellation of the certificate representing the abandoned shares and cause transfer thereof to such state by means of delivery of a new certificate in the name of such state. Record Date 18. The Board of Directors shall fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of any meeting of stockholders, nor more than sixty days prior to any other action, for the determination of stockholders entitled to notice of, and to vote, at any such meeting or any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of stock or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Company after such record date fixed as aforesaid. Stockholders of Record 19. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. 10 Fiscal Year 20. The fiscal year of the Company shall begin on the first day of August in each year. Dividends 21. Dividends upon the capital stock may be declared by the Board of Directors at any regular or special meeting and may be paid in cash or in property or in shares of the capital stock. Before paying any dividend or making any distribution of profits, the directors may set apart out of any of the funds of the Company available for dividends a reserve or reserves for any proper purpose and may alter or abolish any such reserve or reserves. Checks for Money 22. All checks, drafts or orders for the payment of money shall be signed by the treasurer or by such other officer or officers as the Board of Directors may from time to time designate. No check shall be signed in blank. Books and Records 23. The books, accounts and records of the Company, except as otherwise required by the laws of the State of Delaware, may be kept within or without the State of Delaware, at such place or places as may from time to time be designated by the Bylaws or by resolution of the directors. Notices 24. Except as specifically set forth herein, notice required to be given under the provisions of these Bylaws to any director, officer or stockholder shall not be construed to mean personal notice, but may be given in writing by depositing the same in a post office or letter-box, in a post-paid sealed wrapper, addressed to such stockholder, officer or director at such address as appears on the books of the Company, and such notice shall be deemed to be given at the time when the same shall be thus mailed. Any stockholder, officer or director may waive, in writing, any notice required to be given under these Bylaws, whether before or after the time stated therein. 11 Amendments of Bylaws 25. Except as hereinafter stated, these Bylaws may be amended, altered, repealed or added to by the stockholders by the affirmative vote of a majority of the outstanding shares entitled to vote on the matter, or by the Board of Directors by a majority of the directors then in office, at any regular meeting or at any special meeting called for that purpose. Provided that any amendment, alteration or repeal of, or addition to, the first paragraph of Bylaw 4 or this sentence of Bylaw 25 by stockholders shall require the affirmative vote of 66 2/3% of the outstanding shares of capital stock of all classes of the Company entitled to vote generally for the election of directors, considered for this purpose as one class. Indemnification of Directors and Officers 26. Each person who was or is made a party or is threatened to be made a party to or is involved in or called as a witness in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and any appeal therefrom (hereinafter, collectively a "proceeding"), by reason of the fact that he or she is, was or had agreed to become a director of the Company or is, was or had agreed to become an officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Company to the fullest extent permitted under the DGCL as the same now exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than the DGCL permitted the Company to provide prior to such amendment), against all expenses, liabilities and losses (including attorneys' fees, judgments, fines, excise taxes or penalties pursuant to the Employee Retirement Income Security Act of 1974, as amended, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, that except as explicitly provided herein, prior to a Change in Control of the Company, as defined herein, a person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person against the Company or any director, officer, employee or agent of the Company shall not be entitled thereto unless the Company has joined in or consented to such proceeding (or part thereof). For purposes of this Bylaw 26, a "Change in Control of the Company" shall be deemed to have occurred if (i) any "Person" (as used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes (except in a transaction approved in advance by the Board of Directors of the Company) the beneficial owner (as defined in Rule 13d-3 the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power 12 of the Company's then outstanding securities or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election of each director who was not a director at the beginning of the period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. Any indemnification under this Bylaw 26 (unless ordered by a court) shall be paid by the Company unless within sixty days of such request for indemnification a determination is made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such proceeding, (ii) if such quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel (who may be the regular counsel of the Company) in a written opinion or (iii) by the stockholders, that indemnification of such person is not proper under the circumstances because such person has not met the necessary standard of conduct under the DGCL, provided, however, that following a Change of Control of the Company, with respect to all matters thereafter arising out of acts, omissions or events prior to the Change of Control of the Company concerning the rights of any person seeking indemnification under this Bylaw 26, such determination shall be made by special independent counsel selected by such person and approved by the Company (which approval shall not be unreasonably withheld), which counsel has not otherwise performed services (other than in connection with similar matters) within the five years preceding its engagement to render such opinion for such person or for the Company or any affiliates (as such term is defined in Rule 405 under the Securities Act of 1933, as amended) of the Company (whether or not they were affiliates when services were so performed) ("Independent Counsel"). Unless such person has theretofore selected Independent Counsel pursuant to this Bylaw 26 and such Independent Counsel has been approved by the Company, legal counsel approved by a resolution or resolutions of the Board of Directors prior to a Change in Control of the Company shall be deemed to have been approved by the Company as required. Such Independent Counsel shall determine as promptly as practicable whether and to what extent such person would be permitted to be indemnified under applicable law and shall render its written opinion to the Company and such person to such effect. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such Independent Counsel against any and all expenses, claims, liabilities and damages arising out of or relating to this Bylaw 26 or its engagement pursuant hereto. Expenses, including attorneys' fees, incurred by a person referred to in this Bylaw 26 in defending or otherwise being involved in a proceeding shall be paid by the Company in advance of the final disposition of such proceeding, including any appeal 13 therefrom, upon receipt of an undertaking (the "Undertaking") by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company. If a claim under this Bylaw 26 hereof is not paid in full by the Company within sixty days after a written claim has been received by the Company or if expenses pursuant to this Bylaw 26 have not been advanced within ten days after a written request for such advancement accompanied by the Undertaking has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or the advancement or expenses. (If the claimant is successful, in whole or in part, in such suit or any other suit to enforce a right for expenses for indemnification against the Company or any other party under any other agreement, such claimant shall also be entitled to be paid the reasonable expense of prosecuting such claim.) It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required Undertaking has been tendered to the Company) that the claimant has not met the standards to conduct which make it permissible under the DGCL for the Company to indemnify the claimant for the amount claimed. After a Change in Control, the burden of proving such defense shall be on the Company, and any determination by the Company (including its Board of Directors, independent legal counsel to its stockholders) that the claimant had not met the applicable standard of conduct required under the DGCL shall not be a defense to the action nor create a presumption that claimant had not met such applicable standard of conduct. The rights conferred on any person by this Bylaw 26 shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. The Board of Directors shall have the authority, by resolution, to provide for such other indemnification of directors, officers, employees or agents as it shall deem appropriate. The Company may purchase and maintain insurance to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expenses, liabilities or losses, whether or not the Company would have the power to indemnify such expenses, liabilities or losses under the DGCL. The provisions of this Bylaw 26 shall be applicable to all proceedings commenced after its adoption, whether such arise out of events, acts, omissions or 14 circumstances which occurred or existed prior or subsequent to such adoption, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. This Bylaw 26 shall be deemed to grant each person who, at any time that this Bylaw 26 is in effect, serves or agrees to serve in any capacity which entitles him to indemnification hereunder rights against the Company to enforce the provisions of this Bylaw 26, and any repeal or other modification of this Bylaw 26 or any repeal or modification of the DGCL or any other applicable law shall not limit any rights of indemnification then existing or arising out of events, acts, omissions, circumstances occurring or arising out of events, acts, omissions, circumstances occurring out or existing prior to such repeal or modification, including, without limitation, the right to indemnification for proceedings commenced after such repeal or modification to enforce this Bylaw 26 with regard to acts, omissions, events or circumstances occurring or existing prior to such repeal or modification. If this Bylaw 26 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify such director and officer of the Company as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Company, to the full extent permitted by any applicable portion of this Bylaw 26 that shall not have been invalidated and to the full extent permitted by applicable law. 15 EX-10.G 3 MANAGEMENT SEVERANCE AGREEMENT EXHIBIT 10.G MANAGEMENT SEVERANCE AGREEMENT THIS AGREEMENT, dated as of July 24, 1998, is made by and between Donaldson Company, Inc., a Delaware corporation (the "Company"), and (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect through July 31, 2000; provided, however, that commencing on August 1, 1999 and each August 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than April 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 2 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than the Com pany's short- or long-term disability plan, as applicable), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 3 6. Severance Payments. 6.1 If (i) the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, or (ii) the Executive voluntarily terminates his employment for any reason during the one-month period commencing on the first anniversary of the Change in Control, then, in either such case, the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subse- 4 quent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Execu tive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the Executive's "target bonus" (i.e., the Executive's "opportunity incentive target" bonus multiplied by the "target" factor, which for 1998 is 1.4) pursuant to the Company's Management Compensation Plan or any successor thereto in respect of the fiscal year in which occurs the Date of Termination or, if higher, the fiscal year in which occurs the first event or circumstance constituting Good Reason. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1 (B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or 5 made available to the Executive shall be re ported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited under each Pension Plan during such period with compensation equal to the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding Date of Termination or, if higher, during the twelve months immediately prior to the first occurrence of an event or circumstance constituting Good Reason, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial 6 equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(C), "actuarial equivalent" shall be determined using the same assumptions utilized under the Company's Salaried Employees' Pension Plan immediately prior to the Date of Termination. or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason." (D) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which 7 was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, 8 plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsections (A) and (C) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in 9 which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good 10 faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in 11 Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the 12 same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Donaldson Company, Inc. P.O. Box 1299 Minneapolis Minnesota 55440-1299 Attention: General Counsel 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged 13 unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party, including the Management Agreement entered into between the Company and the Executive, effective as of [, as amended as of ]; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which 14 shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Minneapolis, Minnesota in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. 15 (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the 16 Company representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an 17 employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Com- 18 pany immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean Donaldson Company, Inc. and, except in determining under Section 15(E) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all refer- 19 ences in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including without limitation (if the Executive is an executive officer of the Company immediately prior to the Change in Control) ceasing to be an executive officer of a public company; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 25 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all se- 20 nior executives of the Company and all senior executives of any Person in control of the Company, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's equity compensation plans, annual incentive bonus plan, long-term compensation plan, 401(k) excess plan, excess pension plan, supplemental executive pension plan, and deferred stock option gain plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all 21 senior executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (P) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (Q) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (R) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension 22 plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired di rectly from the Company or its affiliates); or 23 (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (U) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (V) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (W) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (X) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Y) "Total Payments" shall mean those payments so described in Section 6.2 hereof. DONALDSON COMPANY, INC. By: -------------------------------------- Name: William G. Van Dyke Title: Chairman, Chief Executive Officer and President --------------------------------------- [name and address of Executive] 24 EX-99 4 FACTORS AFFECTING FUTURE OPERATING RESULTS EXHIBIT 99 FACTORS AFFECTING FUTURE OPERATING RESULTS From time to time, the Company, through its management, may make forward-looking statements reflecting the Company's current views with respect to future events and financial performance. These forward-looking statements, which may be in reports filed under the Securities Exchange Act of 1934, as amended ( The "Exchange Act"), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the company, are subject to certain risks and uncertainties, including those discussed below which could cause actual results to differ materially from historical results or those anticipated. The words or phrases " will likely result," "are expected to," "will continue," "estimate," "project," "believe," "expect," "anticipate," "forecast" and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the company wishes to advise readers that the factors listed below, as well as other factors could affect the company's financial or other performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods or events in any current statement. This discussion of factors is not intended to be exhaustive, but rather to highlight important risk factors that impact results. General economic conditions and many other contingencies that may cause the Company's actual results to differ from those currently anticipated are not separately discussed. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS The Company maintains international subsidiaries and operations in many countries, and the results of operations and the financial position of each of the company's subsidiaries is reported in the relevant foreign currency and then translated into United States ("U.S.") dollars at the applicable foreign currency exchange rate for inclusion in the Company's consolidated financial statements. As exchange rates between these foreign currencies and the U.S. dollar fluctuate, the translation effect of such fluctuations may have an adverse effect on the Company's results of operations or financial position as reported in U.S. dollars. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company does business in numerous countries, including markets in Asia, Mexico and Europe. Maintenance and continued growth of this portion of the company's business may be affected by changes in trade, monetary and fiscal policies and the laws and regulations of the United States and other trading nations. In addition, the Company's international operations are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, tariffs and trade barriers, potential difficulties in staffing and managing local operations, credit risk of local customers and distributors, potential difficulties in protecting intellectual property, risk of nationalization of private enterprises, potential imposition of restrictions on investments, potentially adverse tax consequences, including imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries, and local economic, political and social conditions, including the possibility of hyper-inflationary conditions, in certain countries. Recently, growth in net sales in Asia has slowed and the Company anticipates this trend to continue for the near term. COMPETITION AND TECHNOLOGY ISSUES The markets in which the Company operates are highly competitive and fragmented both geographically and by application. As a result, the Company competes with numerous regional or specialized competitors, many of which are well established in their respective markets. The Company has, from time to time, experienced price pressures from competitors in certain product lines and geographic markets. The Company's competitors and new entrants into the Company's lines of business can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Competition in the Company's lines of business may limit its ability to recover future increases in labor and raw material expenses. Although the Company believes that it has certain technological and other advantages over its competitors, realizing and maintaining these advantages will require continued productive investment by the Company in research and development, sales and marketing and customer service and support. There can be no assurance that the Company will be successful in maintaining such advantages. Successful product innovation by competitors that reach the market prior to comparable innovation by the Company or that are amenable to patent protection may adversely affect the Company's financial performance. A number of the Company's major OEM customers manufacture products for their own use that compete with the Company's products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to manufacture products for their own use and in place of the products now supplied by the Company. In addition, customers of the Company's engine filtration and exhaust products business line could decide to meet their filtration requirements through alternative methods, such as engine design modifications, rather than rely on the Company's products. RISKS RELATING TO FUTURE ACQUISITIONS The Company has in the past and may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions by the Company may results in potentially dilutive issuance's of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could adversely affect the Company's profitability. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, corporate culture conflicts, the diversion of management's attention from other business concerns, assumption of unanticipated legal liabilities and the potential loss of key employees of the acquired company. There can be no assurance that the Company will be able to identify and successfully complete and integrate potential acquisitions in the future. In the event that any such acquisition does occur, however, there can be no assurance as to the effect thereof on the Company's business or operating results. ENVIRONMENTAL MATTERS The Company is subject to various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. The Company, like many of its competitors, has incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations in both the United States and abroad. PRODUCT DEMAND CONSIDERATIONS Demand for certain of the Company's products tends to be cyclical, responding historically to varying levels of construction, agricultural, heavy equipment manufacturing and industrial activity, principally in the United States and, to a lesser extend, in other industrialized nations. Other factors affecting demand include the availability and cost of financing for equipment purchases and the market availability of used equipment. Sale to one customer and its subsidiaries have accounted for greater than 10 percent of the Company's net sales in each of the last three fiscal years. An adverse change in the customer's financial performance, condition or results of operations or a material reduction in sales to this customer for any other reason could result in a material adverse change in the Company's operating results. AVAILABILITY OF PRODUCT COMPONENTS The Company obtains raw material and certain manufactured components from third-party suppliers. The Company maintains limited raw material inventories, even brief unanticipated delays in delivery by suppliers, including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies or other natural disasters, may adversely affect the Company's ability to satisfy its customers on a timely basis and thereby affect the Company's financial performance. CHANGES IN THE MIX OF PRODUCTS COMPRISING REVENUE The Company's products constitute various product lines, which have varying profit margins. A change in the mix of products sold by the Company from that currently experienced could adversely affect the Company's financial performance. RESEARCH AND DEVELOPMENT The Company makes significant annual investment in research and development activities to develop new and improved products and manufacturing processes. There can be no assurance that research and development activities will yield new or improved products or products which will be purchased by the Company's customers, or new and improved manufacturing processes. EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUL-31-1999 AUG-01-1998 JAN-31-1999 19,818 0 167,894 5,181 92,834 285,830 418,489 232,167 507,804 155,088 0 0 0 248,280 2,498 507,804 445,680 0 321,035 85,736 (3,714) 1,485 3,592 39,031 12,490 26,541 0 0 0 26,541 .56 .55
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