UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
DONALDSON COMPANY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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[LOGO]TM
Donaldson(R)
DONALDSON COMPANY, INC.
1400 WEST 94TH STREET
MINNEAPOLIS, MINNESOTA 55431-2370
www.Donaldson.com
NOTICE OF 2002 ANNUAL MEETING OF STOCKHOLDERS
TIME: 10:00 a.m. (CST) on Friday, November 15, 2002
PLACE: Donaldson Company, Inc. Corporate Offices, 1400 West 94th
Street, Minneapolis, Minnesota.
ITEMS OF BUSINESS: (1) To elect three directors;
(2) To ratify appointment of PricewaterhouseCoopers LLP
as Donaldson Company's independent auditors; and
(3) To act on any other business that properly comes
before the meeting.
RECORD DATE: You may vote if you are a stockholder of record at the
close of business on September 20, 2002.
PROXY VOTING: It is important that your shares be represented
and voted at the Annual Meeting. Please follow the
instructions provided with your proxy card and promptly
vote your proxy by telephone, internet or by signing and
returning the enclosed proxy card. Your support is
appreciated and you are cordially invited to attend the
Annual Meeting.
PLEASE PROMPTLY VOTE YOUR PROXY TO SAVE THE
COMPANY THE EXPENSE OF ADDITIONAL SOLICITATION
By Order of the Board of
Directors
/s/ Norman C. Linnell
Norman C. Linnell
SECRETARY
Dated: October 8, 2002
TABLE OF CONTENTS
PAGE
-----
Proxy Statement ........................................................ 1
Proposals You are Asked to Vote on .................................... 1
General Information about the Annual Meeting and Voting ............... 2
Security Ownership ..................................................... 4
Election of Directors .................................................. 6
Nominees for Election ................................................. 7
Directors Continuing in Office ........................................ 7
Director Compensation ................................................. 8
Audit Committee Report and Ratification of Auditors .................... 9
Total Return to Shareholders ........................................... 11
Executive Compensation ................................................. 12
Human Resources Committee Report on Executive Compensation ............. 15
Pension Benefits ....................................................... 17
Compliance with Section 16(a) of the Securities Exchange Act of 1934 ... 18
Change-in-Control Arrangements ......................................... 18
Appendix A Audit Committee Charter ..................................... A-1
i
DONALDSON COMPANY, INC.
1400 WEST 94TH STREET
MINNEAPOLIS, MINNESOTA 55431
------------------------
PROXY STATEMENT
MAILING DATE: OCTOBER 8, 2002
------------------------
PROPOSALS YOU ARE ASKED TO VOTE ON
ITEM NO. 1
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ELECTION OF DIRECTORS
Three current directors, F. Guillaume Bastiaens, Janet Dolan and Jeffrey
Noddle, are recommended for election to the Board of Directors at the annual
meeting. Detailed information on the nominees is provided on page 7. Directors
are elected for a three-year term so that approximately one-third are elected at
each annual meeting of stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH DIRECTOR
NOMINEE.
ITEM NO. 2
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RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee and the Board of Directors have selected
PricewaterhouseCoopers LLP ("PWC") to audit the Company's consolidated financial
statements for fiscal year 2003, subject to ratification by the stockholders.
INDEPENDENT AUDITORS FEES
The aggregate fees billed to the Company for fiscal year 2002 by PWC, the
Company's independent public accountants, are as follows:
* Audit Fees (includes statutory audits) ................. $ 533,000
* Financial Information Systems Design and
Implementation Fees ................................... $ 0
* All Other Fees (relating primarily to tax planning)..... $1,015,686
The Audit Committee has considered whether performance of services other
than audit services is compatible with maintaining the independence of PWC.
Representatives of PWC will attend the annual meeting, where they will have the
opportunity to make a statement and to answer questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT AUDITORS FOR
FISCAL YEAR 2003.
1
GENERAL INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
Q: WHY DID I RECEIVE THIS PROXY STATEMENT?
A: Because you are a Donaldson stockholder as of the close of business on the
record date of September 20, 2002. Only stockholders of record are entitled
to vote at the annual meeting and the Board of Directors is soliciting your
proxy to vote at the meeting. The Company had 43,897,537 shares of common
stock outstanding as of close of business on the record date. Each share
entitles its holder to one vote.
This Proxy Statement summarizes the information you need to know to vote.
We first mailed the Proxy Statement and proxy card to stockholders on or
about October 8, 2002.
Q: WHAT AM I VOTING ON AND WHAT DOES THE BOARD RECOMMEND?
A: 1. The election of directors; and
2. The ratification of the appointment of our independent auditors for
fiscal year 2003.
THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES TO THE BOARD OF
DIRECTORS AND FOR THE RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS
INDEPENDENT AUDITORS FOR FISCAL YEAR 2003.
Q: HOW DO I VOTE IF I AM A STOCKHOLDER OF RECORD?
A: If you are a stockholder of record you may vote using any ONE of the
methods set forth on your enclosed proxy card:
1. VOTE BY PHONE TOLL FREE 1-800-240-6326 QUICK *** EASY *** IMMEDIATE
2. VOTE BY INTERNET -- http://www.eproxy.com/dci/
3. VOTE BY PROMPTLY MAILING YOUR PROXY CARD -- COMPLETE AND SIGN
4. VOTE BY CASTING YOUR VOTE IN PERSON AT THE MEETING
If you participate in the Donaldson Dividend Reinvestment Program open to
all stockholders and administered by the transfer agent, your shares in
that program have been added to your other holdings and included on your
proxy card.
If you participate in the Donaldson Employee Stock Purchase Program
administered by the transfer agent, your shares in that program have been
added to your other holdings and included on your proxy card.
Q: HOW DO I VOTE IF I HOLD STOCK THROUGH A DONALDSON EMPLOYEE BENEFIT PLAN?
A: We have added the shares of common stock held by participants in
Donaldson's employee benefit plans to the participants other holdings shown
on their proxy cards. Donaldson's employee benefit plans are the Employee
Stock Ownership Plan, the PAYSOP, and the Donaldson Company, Inc.
Retirement Savings Plan (the 401(k) plan).
If you hold stock through Donaldson's employee benefit plans, voting your
proxy using one of methods 1-3 above also serves as voting instructions to
the plan trustee, Fidelity Management Trust Company ("Fidelity"). Fidelity
will vote your employee benefit plan shares as directed by you provided
that your proxy vote is RECEIVED BY NOVEMBER 13, 2002.
Fidelity also will vote the shares allocated to individual participant
accounts, for which it has not received instructions, as well as shares not
so allocated in the same proportion as the directed shares are voted.
Q: HOW DO I VOTE IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT IN MY BROKER'S
NAME (I.E., STREET NAME)?
A: If your shares are held in a brokerage account in your broker's name
(street name), you should follow the voting directions provided by your
broker or nominee. If you do so, your broker or nominee will vote your
shares as you have directed.
2
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It means that you have multiple accounts with banks or stockbrokers or with
the transfer agent. PLEASE VOTE ALL OF YOUR SHARES.
Q: WHAT IF I CHANGE MY MIND AFTER I VOTE MY SHARES?
A: You can revoke your proxy at any time before it is voted at the meeting by:
1. Sending written notice of revocation to the Company Secretary
2. Submitting a properly signed proxy card with a later date
3. Voting by telephone or internet at a time following your prior
telephone or internet vote; or
4. Voting in person at the annual meeting.
Q: HOW ARE THE VOTES COUNTED?
A: For the election of directors, you may 1) vote for all of the nominees, 2)
withhold your vote from all of the nominees or 3) withhold your vote from a
specifically designated nominee. For the ratification of the appointment of
the independent auditors, you may vote (or abstain) by choosing For,
Against or Abstain.
If you abstain from the ratification of the auditors, your shares will be
counted as present at the meeting for the purposes of determining a quorum,
and they will be treated as shares not voted on the specific proposal.
If you hold shares in street name and do not provide voting instructions to
your broker, your broker will not vote your shares on any proposal where
the broker does not have discretionary authority to vote. In such a
situation, the shares will be considered present at the meeting for
purposes of determining a quorum, but will not be considered to be
represented at the meeting for purposes of calculating the vote with
respect to the matter requiring discretionary authority. New York Stock
Exchange Rules permit brokers discretionary authority to vote on both items
1 and 2, if they do not receive instructions from the street name holder of
the shares. As a result, if you do not vote your street name shares, your
broker has authority to vote on your behalf.
The Company uses an independent inspector of elections, Wells Fargo Bank
Minnesota, which tabulates the votes received.
Q: WHAT IF I DO NOT SPECIFY HOW I WANT MY SHARES VOTED?
A. If you do not specify on your returned proxy card or through the telephone
or internet prompts how you want to vote your shares, they will be voted
FOR the election of all director nominees and FOR the ratification of the
appointment of the independent auditors.
Q: HOW MANY SHARES MUST BE PRESENT TO HOLD THE MEETING?
A: A quorum must be present for the meeting to be valid. This means that at
least a majority of the shares outstanding as of the record date must be
present. We will count you as present if you:
1. Have properly voted your proxy by telephone, internet or mailing of
the proxy card; or
2. Are present and vote in person at the meeting.
Q: HOW MANY VOTES ARE NEEDED TO APPROVE EACH ITEM?
A: The vote of a plurality of the shares of common stock present or
represented and entitled to vote at the meeting is required for election as
a director. This means that, since shareholders will be electing 3
directors, the 3 nominees receiving the most votes will be elected.
Ratification of the appointment of the independent auditors requires the
affirmative vote of a majority of shares entitled to vote and represented
at the meeting in person or by proxy.
Q: HOW WILL VOTING ON ANY OTHER BUSINESS BE CONDUCTED?
A: We do not know of any business to be considered at the 2002 Annual Meeting
of Stockholders other than the proposals described in this Proxy Statement.
If any other business is presented at the annual meeting, the persons named
in the form of proxy intend to vote the shares represented by such proxies
in accordance with their best judgment.
3
Q: WHO MAY ATTEND THE MEETING?
A: All Donaldson stockholders of record as of the close of business on
September 20, 2002 may attend.
Q: WHERE DO I FIND THE VOTING RESULTS OF THE MEETING?
A: We will publish the voting results in our Form 10-Q for the second quarter
of fiscal 2003, which we will file with the Securities and Exchange
Commission.
Q: HOW DO I SUBMIT A STOCKHOLDER PROPOSAL?
A: If you wish to include a proposal in the Company's Proxy Statement for its
2003 annual meeting of stockholders, you must submit the proposal in
writing so that it is received no later than June 10, 2003. Please send
your proposal to the Company Secretary, Donaldson Company, Inc., P.O. Box
1299, Minneapolis, MN 55440-1299.
Under our bylaws, if you wish to nominate a director or bring other
business before the stockholders at our 2003 annual meeting without having
your proposal included in our Proxy Statement:
> You must notify the Company Secretary of Donaldson Company, Inc. in
writing between July 18, 2003 and August 17, 2003.
> Your notice must contain the specific information required in our
bylaws. If you would like a copy of our bylaws, we will send you one
without charge. Please write to the Company Secretary at the address
shown above.
Q: WHO PAYS FOR THE COST OF PROXY PREPARATION AND SOLICITATION?
A: Donaldson pays for the cost of proxy preparation and solicitation,
including the reasonable charges and expenses of brokerage firms, banks or
other nominees for forwarding proxy materials to street name holders. We
have retained Morrow & Co., to assist in the solicitation of proxies for
the annual meeting for a fee of approximately $5,000, plus associated costs
and expenses. We are soliciting proxies primarily by mail. In addition, our
directors, officers and regular employees may solicit proxies by telephone
or facsimile or personally. These individuals will receive no additional
compensation for their services other than their regular salaries.
SECURITY OWNERSHIP
Set forth below is information regarding persons known by the Company to
own beneficially more than 5% of the outstanding Common Stock of the Company
based on the number of shares of Common Stock outstanding on September 20, 2002:
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP OF CLASS
---------------------- ----------------------- --------
None. See footnote (1)
- ------------------
(1) Fidelity Management Trust Company, as the trustee of the Company's
Retirement Savings Plan -- 401(k) Profit Sharing and ESOP/PAYSOP Plan, held
5,331,880 shares, or 12.1%, of the Company's common stock as of September
20, 2002. Fidelity disclaims beneficial ownership of the shares claiming
that it holds the shares solely for the benefit of the employee
participants, and that it does not have the power to vote or dispose of
those shares except as directed by the employee participants.
The table on page 5 shows information regarding the beneficial ownership of
the Company's common stock and information concerning deferred restricted stock
units, deferred share units under stock option exercises and phantom stock
units, as of September 30, 2002, by each director, each of the Named Officers
(as identified on page 12) and all executive officers and directors of the
Company as a group. The definition of beneficial ownership includes shares over
which a person has sole or shared voting power, or sole or shared power to
invest or dispose of the shares, whether or not a person has any economic
interest in the shares, and also includes shares subject to options exercisable
within 60 days of September 30, 2002. Except as otherwise indicated, the named
beneficial owner has sole voting and investment power with respect to the shares
held by such beneficial owner.
4
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP PERCENT OF DEFERRED
OF COMMON COMMON STOCK EXERCISABLE
NAME OF BENEFICIAL OWNER SHARES (1)(2)(3) SHARES(3) UNITS(3) OPTIONS
------------------------ ---------------- ---------- -------- -----------
William G. Van Dyke ................. 830,124(4) 1.9 406,128 470,596
James R. Giertz ..................... 283,254 * 29,170 211,043
William M. Cook ..................... 266,854 * 19,301 187,097
Nickolas Priadka .................... 233,103(5) * 88,445 104,975
Lowell F. Schwab .................... 222,416 * 10,841 148,392
Kendrick B. Melrose ................. 66,792(6) * 38,400
S. Walter Richey .................... 60,679(6)(7) * -- 31,256
Stephen W. Sanger ................... 55,657(6) * -- 30,400
Jack W. Eugster ..................... 49,778(6) * -- 30,400
F. Guillaume Bastiaens .............. 33,398(6) * -- 26,400
Paul B. Burke ....................... 32,239(6) * -- 22,400
Janet M. Dolan ...................... 31,148(6) * -- 22,400
John F. Grundhofer .................. 24,419(6)(8) * -- 16,730
Jeffrey Noddle ...................... 10,405(6) * -- 7,200
Paul D. Miller ...................... 4,594(6) -- 3,600
Directors and Officers as a Group ... 2,473,958 5.6 605,286 1,535,082
- ------------------
* Less than 1%
(1) Includes restricted shares, shares for non-employee directors held in trust
and the shares underlying options exercisable within 60 days, as listed
under the Exercisable Options column.
(2) Includes the following shares held in the ESOP trust: Mr. Van Dyke, 27,929
shares; Mr. Priadka, 21,459 shares; Mr. Giertz, 4,193 shares; Mr. Cook,
17,921 shares; Mr. Schwab, 12,651 shares. Voting of shares held in the ESOP
Trust is passed through to the participants. Also includes the following
shares held in the 401K Plan trust: Mr. Van Dyke, 0 shares; Mr. Priadka, 0
shares; Mr. Giertz, 4,230 shares; Mr. Cook, 2,594 shares; Mr. Schwab, 6,525
shares. Voting of shares held in the 401K Plan Trust is passed through to
the participants. Also includes the following shares held in the Deferred
Compensation and 401K Excess Plan trust: Mr. Van Dyke, 8,939 shares; Mr.
Priadka, 1,631 shares; Mr. Giertz, 2,177 shares; Mr. Cook, 2,009 shares;
Mr. Schwab, 1,773 shares. Voting of shares held in the Deferred
Compensation and 401K Excess Plan trust is passed through to the
participants.
(3) The deferred stock units listed under the third column "Deferred Stock
Units" are not included in the beneficial ownership totals or in the
percent of ownership (columns 1 and 2) because there are not yet any issued
shares and there is no voting or investment power. The column "Deferred
Stock Units" includes phantom stock units allocated to employees earning in
excess of the limits established by the Internal Revenue Code for the
qualified Employee Stock Ownership Plan that distributed shares in trust
for employees during the period from 1987 to 1996. ESOP phantom stock units
are held by the named executive officers in the following amounts: Van
Dyke, 31,202; Cook, 2,560; Schwab, 3,078; Priadka, 3,873; and Giertz,
4,257, all directors and officers as a group, 48,116.
The Deferred Stock Units column also includes deferred restricted stock
units under the Deferred Compensation and 401(k) plan. Deferred restricted
stock units are held by the named executive officers in the following
amounts: Giertz, 24,913; all directors and officers as a group, 24,913.
The Deferred Stock Units column also includes deferred stock units under
the Deferred Compensation and 401(k) plan for exercises of stock options
where the executive has previously elected to defer the receipt of the
underlying shares. Deferred stock option gain units are held by the named
executive officers in the following amounts: Van Dyke, 327,136; Cook,
2,551; Priadka, 74,013; all directors and officers as a group, 441,513.
The Deferred Stock Units column also includes deferred stock units under
the Deferred Compensation and 401(k) plan for deferral of shares awarded
under the long-term compensation plan under the 1991 Master Stock
Compensation Plan, where the executive has previously elected to defer the
receipt of the
5
underlying shares. Deferred stock units are held by the named executive
officers in the following amounts: Van Dyke, 47,790; Cook, 14,190; Priadka,
10,559; Schwab, 7,763; and all directors and officers as a group, 90,744.
(4) Includes 250,146 shares held in a family trust of which Mr. Van Dyke is a
trustee and a beneficiary, as to which he shares voting and investment
power, and 61,636 shares held in a family trust of which Mr. Van Dyke is a
trustee, as to which he shares voting and investment power; and 16,200
shares underlying options gifted to immediate family members.
(5) Includes 24,358 shares held in a trust of which Mr. Priadka is a trustee
and has shared voting and investment power.
(6) Includes the following shares held in the non-employee director's deferred
stock account trust: Mr. Richey, 9,320 shares; Mr. Melrose, 9,063 shares;
Mr. Sanger, 8,962 shares; Mr. Eugster, 6,953 shares; Mr. Bastiaens, 2,343
shares; Mr. Burke 5,537 shares; Ms. Dolan, 5,989 shares; Mr. Grundhofer,
5,099 shares; Mr. Noddle, 2,205 shares; and Mr. Miller, 794 shares. Voting
of shares held in the deferred stock account trust is passed through to the
participants.
(7) Includes 6,579 shares held by spouse.
(8) Includes 2,000 shares held in a trust of which Mr. Grundhofer is a trustee
and has shared voting and investment power.
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors shall consist
of not less than three nor more than 15 directors and that the number of
directors may be fixed from time to time by the affirmative vote of a majority
of the directors. The Board of Directors has fixed the number of directors
constituting the entire Board at 11. Vacancies and newly created directorships
resulting from an increase in the number of directors may be filled by a
majority of the directors then in office and the directors so chosen will hold
office until the next election of the class for which such directors shall have
been chosen and until their successors are elected and qualified. Directors are
elected for a term of three years with positions staggered so that approximately
one-third of the directors are elected at each annual meeting of the
stockholders. The terms of F. Guillaume Bastiaens, Janet M. Dolan and Jeffrey
Noddle expire at the annual meeting. Mr. Bastiaens was elected to the Board in
1995, Ms. Dolan in 1996 and Mr. Noddle in 2000. It is intended that proxies
received will be voted, unless authority is withheld, FOR the election of the
nominees, namely F. Guillaume Bastiaens, Janet M. Dolan and Jeffrey Noddle. The
three director nominees receiving the highest number of votes will be elected to
fill the seats on the Board. The term of S. Walter Richey also expires at the
2002 annual meeting. Mr. Richey has advised the Board of his intention to retire
and not to serve another term. The Board, upon the recommendation of the
Corporate Governance Committee, has approved reducing the number of directors
from 11 to 10 and eliminating the director position held by Mr. Richey effective
upon his retirement.
The Board of Directors meets on a regularly scheduled basis. During the
past fiscal year, the Board held six meetings. Each director attended at least
75% of the aggregate of the Board meetings and meetings of Board committees on
which each served, with the exception of Admiral Miller. Admiral Miller missed
only one meeting date, on which there was held both a Board and a Corporate
Governance Committee meeting.
The Board of Directors has assigned certain responsibilities to standing
committees. The Audit Committee is composed of directors F. Guillaume Bastiaens,
Janet M. Dolan, Kendrick B. Melrose, Jeffrey Noddle, S. Walter Richey (Chair)
and Stephen W. Sanger, all of whom are independent non-employee directors. The
Audit Committee held four meetings during the past fiscal year. The
responsibilities of the Audit Committee are described in the Audit Committee
Report to this Proxy Statement and are set forth in its Charter, which is
reviewed and amended periodically, as appropriate. A copy of the revised Audit
Committee Charter may be found in Appendix A to this Proxy Statement.
The Human Resources Committee is composed of directors Paul B. Burke, Jack
W. Eugster, John F. Grundhofer, Kendrick B. Melrose, Jeffrey Noddle, and
Stephen W. Sanger (Chair), all of whom are independent non-employee directors.
This Committee held two meetings during the past fiscal year. The functions of
this committee include review and approval of compensation arrangements for the
chief executive officer and senior management and administration of the
Company's stock compensation plans. The Report of the Human Resources Committee
on Executive Compensation follows in this Proxy Statement.
6
The Corporate Governance Committee is composed of directors F. Guillaume
Bastiaens, Paul B. Burke, Janet M. Dolan, Jack W. Eugster (Chair), John F.
Grundhofer, Paul D. Miller and S. Walter Richey, all of whom are independent
non-employee directors. This Committee held one meeting during the past fiscal
year. The Committee's duties include oversight of the organization and
evaluation of the Board and its committees, to propose to the Board a slate of
directors for election by the stockholders at each Annual Meeting, to propose
candidates to fill vacancies on the Board, to review and recommend director
compensation, and recommending to the Board a set of corporate governance
principles. The Committee will consider nominees for director recommended by
stockholders. Recommendations should be addressed to the Secretary, Donaldson
Company, Inc., P.O. Box 1299, Minneapolis, MN 55440. Any proposal by a
stockholder for the nomination of a candidate for director at the annual meeting
for the election of directors is required by the Company's Bylaws to be
submitted in writing to the Secretary and received at the principal executive
offices of the Company not less than 90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting.
The Board of Directors has no reason to believe that any nominees will be
unavailable or unable to serve, but in the event any nominee is not a candidate
at the meeting, the persons named in the enclosed proxy intend to vote in favor
of the remaining nominees and such other person, if any, as they may determine.
The table below and on the following page sets forth additional information
with respect to each nominee for election as a director and each other person
whose term of office as a director will continue after the meeting. S. Walter
Richey, who has served as a director since 1991, is retiring and will not serve
another term.
NOMINEES FOR ELECTION
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ---- ---------------------------------------------------------------------------
TERMS EXPIRING IN 2002:
F. Guillaume Bastiaens Vice Chairman (1998) of Cargill, Inc. Previously, Executive Vice President
Age - 59 and President, Food Sector of Cargill, Inc. (Agribusiness).
Director since 1995
Janet M. Dolan Chief Executive Officer (1999) and President (1998) of Tennant Company.
Age - 52 Previously, Chief Operating Officer (1998) and Executive Vice President
Director since 1996 (1996) of Tennant Company (manufacturer of floor maintenance equipment
and coating products). Also, a director of The St. Paul Companies, Inc. and
a member of the NYSE Listed Company Advisory Committee.
Jeffrey Noddle Chief Executive Officer (2001) and President (2000) of SUPERVALU INC.
Age - 56 Previously, Chief Operating Officer (2000) and Corporate Executive Vice
Director since 2000 President; President and Chief Operating Officer -- Wholesale Food
Companies (1995) of SUPERVALU INC. (food retailer and distributor).
Also, a director of SUPERVALU INC. and General Cable Corporation.
DIRECTORS CONTINUING IN OFFICE
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ---- ---------------------------------------------------------------------------
TERMS EXPIRING IN 2003:
Jack W. Eugster Non-Executive Chairman (2001) of ShopKo Stores, Inc. (specialty discount
Age - 57 retailer). Previously, Chairman, Chief Executive Officer and President of
Director since 1993 The Musicland Group, Inc. from 1986 until his retirement in 2001. Also, a
director of Best Buy Co., Inc.
John F. Grundhofer Chairman (1999) of U.S. Bancorp (financial services); Previously, Chief
Age - 63 Executive Officer (1990-2001) and Chairman (1990-1997) of U.S. Bancorp.
Director since 1997 Also, a director of Minnesota Life Insurance Company.
7
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ---- ---------------------------------------------------------------------------
Admiral Paul David Miller Chairman and Chief Executive Officer (1999) of ATK (Alliant Techsystems
Age 60 Inc.), (aerospace and defense company). Previously, President (1994-1999)
Director since 2001 of Sperry Marine, Inc. and Vice President (1997-1999) of Litton Marine
Systems. Prior to his retirement from the U.S. Navy following a 30-year
career, Admiral Miller served as Commander-in-Chief, U.S. Atlantic
Command and NATO Supreme Allied Commander-Atlantic. Also, a director
of SunTrust Bank (mid-Atlantic) and Teledyne Technologies, Inc.
William G. Van Dyke Chairman, Chief Executive Officer and President of the Company since
Age - 57 1996. Also, a director of Graco, Inc.
Director since 1994
TERMS EXPIRING IN 2004:
Paul B. Burke Retired Chairman and Chief Executive Officer of BMC Industries, Inc.
Age - 46 (manufacturer of precision imaged and optical products). Mr. Burke was
Director since 1996 with BMC from 1983 until 2002.
Kendrick B. Melrose Chairman and Chief Executive Officer of The Toro Company (manufacturer
Age - 62 of outdoor maintenance products) since 1987. Also, a director of SurModics,
Director since 1991 Inc.
Stephen W. Sanger Chairman and Chief Executive Officer of General Mills, Inc. (consumer
Age - 56 products and services) since 1995. Also, a director of Target Corporation.
Director since 1992
DIRECTOR COMPENSATION
Directors who are not employees receive a retainer fee of $26,000 annually
and are paid $1,000 for each Board or Committee meeting attended. Committee
Chairs receive an additional annual retainer of $2,500. Pursuant to the
Company's Compensation Plan for Non-Employee Directors, any non-employee
director may elect, prior to each year of their term, to defer all or part of
his or her director compensation received during the upcoming year. Each
participating director is entitled to a Company credit on the balance in his or
her deferral account at the ten-year Treasury Bond rate plus 2%. The deferral
election must also specify the manner for distribution of the deferral balance.
Non-employee directors are credited with shares to a deferred stock account
in lieu of 30% of the annual retainer for services as a Director to be rendered
in the following service year. Directors are allowed to elect to receive a
credit of shares to a deferred stock account in lieu of all or part of the
remaining retainer and meeting fees. The directors also receive a credit for
dividend reinvestment shares. The Company contributes an amount equal to the
deferred stock accounts to a trust and the trust purchases shares of Donaldson
Common Stock. Each director is entitled to direct the trustee to vote all shares
allocated to the director's account in the trust. The Common Stock will be
distributed to each director following the director's retirement from the Board
pursuant to the director's deferral payment election. The trust assets remain
subject to the claims of the Company's creditors. The trust becomes irrevocable
in the event of a "Change in Control" as defined under the 1991 Master Stock
Compensation Plan.
The Company's Non-Qualified Stock Option Program for Non-employee Directors
provides for the automatic grant of a non-qualified stock option for 3,600
shares of Common Stock to each non-employee Director of the Company who is a
member of the Board on December 1 each year. The exercise price of such options
is the closing price of Common Stock in consolidated trading on the first
business day of December in the respective year. The options awarded in the
years prior to and after December 1, 1998 are fully vested and have a term of
ten years. The options awarded on December 1, 1998 vest annually beginning on
the first anniversary in three equal installments and have a term of ten years.
The option award was modified beginning in 1998 to include a "reload option"
granted at the time of exercise of the original option for the number of shares
equal to the shares used in payment of the purchase price. The one-time reload
option feature is similar to that included in the option grants to officers.
Shares credited to deferred stock accounts to non-employee directors in
fiscal 2002, were as follows: Bastiaens, 234 shares, Burke, 970 shares, Dolan,
1,055 shares, Eugster, 802 shares, Grundhofer, 963 shares, Melrose, 1,078
shares, Miller, 792 shares, Noddle, 966 shares, Richey, 1,150 shares, and
Sanger, 1,142 shares.
8
AUDIT COMMITTEE REPORT AND APPOINTMENT OF AUDITORS
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, consisting of six,
independent, non-employee directors, assists the board in carrying out its
oversight responsibilities for the Company's financial reporting process, audit
process and internal controls. The Audit Committee formally met four times
during the past fiscal year. The Audit Committee reviewed and recommended to the
Board of Directors (i) that the audited financial statements be included in the
Company's Annual Report on Form 10-K; and (ii) the selection of the independent
public accountants to audit the books and records of the Company.
The Audit Committee has also discussed with PricewaterhouseCoopers LLP, the
Company's independent auditors, matters relating to the auditors' judgments
about the quality, as well as the acceptability, of the Company's accounting
principles, as applied in its financial reporting as required by Statement of
Auditing Standards No. 61, Communications with Audit Committees. In addition,
the Audit Committee has discussed with PWC their independence from management
and the Company, as well as the matters in the written disclosures received from
PWC and required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees. The Committee also reviewed and considered
the compatibility of PWC's performance of non-audit services with the
maintenance of PWC's independence as the Company's independent auditor.
Based on the review and discussions with management and the independent
auditors, the Audit Committee recommended to the Board of Directors that the
audited financial statements be included in the Company's Annual Report on Form
10-K for the fiscal year ending July 31, 2002 for filing with the Securities and
Exchange Commission. The Audit Committee also approved and recommended to the
Board of Directors that PricewaterhouseCoopers LLP be appointed as the Company's
independent auditors for the fiscal year ending July 31, 2003.
Audit Committee
S. Walter Richey, Chair Kendrick B. Melrose
F. Guillaume Bastiaens Jeffrey Noddle
Janet M. Dolan Stephen W. Sanger
RATIFICATION OF APPOINTMENT OF AUDITORS
On April 18, 2002, the board of directors (the "Board") of the Company, at
the recommendation of its audit committee, dismissed Arthur Andersen LLP
("Andersen") as the Company's independent public accountants and engaged
PricewaterhouseCoopers LLP ("PWC") to serve as the Company's independent public
accountants for fiscal year 2002.
Andersen's reports on the Company's consolidated financial statements for
each of the years ended July 31, 2001 and 2000 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the years ended July 31, 2001 and 2000 and through April 18, 2002,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to Andersen's satisfaction, would have caused them to
make reference to the subject matter of the disagreements in connection with
their report on the Company's consolidated financial statements for such years;
and there were no "reportable events," as such term is defined in Item
304(a)(1)(v) of Regulation S-K.
The Company reported the dismissal and change in independent auditor on
Form 8-K on April 24, 2002. The Form 8-K contained a letter from Andersen dated
April 18, 2002 and addressed to the Securities and Exchange Commission, stating
its agreement with the statements contained in such disclosures.
During the years ended July 31, 2001 and 2000 and through the date of the
Board's decision to engage PWC, the Company did not consult PWC with respect to
the application of accounting principles to a
9
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
Upon recommendation of its Audit Committee, the Board of Directors has
appointed PricewaterhouseCoopers LLP as independent public accountants to audit
the books and accounts of the Company for the fiscal year ending July 31, 2003,
such appointment to continue at the pleasure of the Board of Directors and
subject to ratification by the stockholders. PWC has audited the books and
accounts of the Company since 2002. Representatives of PWC are expected to be
present at the meeting with the opportunity to make a statement and to respond
to appropriate questions. In the event this appointment is not ratified, the
Board of Directors will reconsider its selection. Ratification of the selection
will require the affirmative vote of a majority of the shares of Common Stock of
the Company entitled to vote and represented at the meeting in person or by
proxy.
The Board of Directors recommends that stockholders vote FOR ratification
of the appointment of PricewaterhouseCoopers LLP as independent auditors for the
fiscal year ending July 31, 2003.
AUDIT COMMITTEE CHARTER
On September 20, 2002, the Audit Committee adopted a new Audit Committee
Charter, a copy of which is included as Appendix A.
10
TOTAL RETURN TO SHAREHOLDERS
The following graphs compare the cumulative total stockholder return on the
Company's Common Stock for the last five fiscal years and thirteen fiscal years
with the cumulative total return of the Standard & Poor's 500 Stock Index and
the Standard & Poor's Index of Industrial Machinery Companies. The graph and
table assume the investment of $100 in each of Donaldson's common stock and the
specified indexes at the beginning of the applicable period, and assume the
reinvestment of all dividends. The second graph shows the total return over the
Company's thirteen-year period of consecutive double-digit increases in earnings
per share.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
[PLOT POINTS GRAPH]
1997 1998 1999 2000 2001 2002
------------ ----------- ------------ ----------- ------------ ------------
Donaldson Co., Inc. ........... $ 100.00 $ 91.88 $ 124.23 $ 97.23 $ 157.92 $ 173.38
S&P 500 ....................... 100.00 119.28 143.38 156.25 133.86 102.23
Industrial Machinery .......... 100.00 98.41 137.54 132.62 149.46 148.04
COMPARISON OF THIRTEEN YEAR CUMULATIVE TOTAL RETURN
[PLOT POINTS GRAPH]
FISCAL YEARS ENDED JULY 31
1989 1990 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
Donaldson ......... $ 100.00 $ 181.27 $ 209.84 $ 274.83 $ 341.31 $ 455.78 $ 503.41
S&P 500 ........... 100.00 106.50 120.09 135.45 147.27 154.87 195.31
Industrial
Machinery ........ 100.00 109.34 115.50 120.57 139.40 162.16 222.19
1996 1997 1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------ -------------- --------------
Donaldson ......... $ 468.77 $ 784.18 $ 720.48 $ 974.17 $ 762.48 $ 1,238.30 $ 1,359.60
S&P 500 ........... 227.67 346.38 413.18 496.65 541.25 463.69 354.12
Industrial
Machinery ........ 262.92 411.14 404.61 565.47 545.25 614.48 608.64
11
EXECUTIVE COMPENSATION
The following table includes information for each person who was, at the
end of fiscal 2002, the Chief Executive Officer or one of the other four most
highly compensated executive officers of the Company (the "Named Officers") on
the basis of total annual salary and bonus for the last completed fiscal year.
The table includes compensation information for each of the last three fiscal
years.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------ --------------------------- --------------
SECURITIES
RESTRICTED UNDERLYING
STOCK STOCK ALL OTHER
FISCAL AWARD(S) OPTIONS/SARS LTIP PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(2) (SHARES)(3) ($)(4) ($)(5)
- -------------------------------- -------- ------------ ----------- ------------ -------------- -------------- -------------
WILLIAM G. VAN DYKE ............ 2002 656,962 581,875 0 85,000 487,867 38,811
Chairman, Chief 2001 632,885 452,200 0 159,096 385,368 52,292
Executive Officer and 2000 593,846 738,000 0 70,500 394,060 49,800
President
WILLIAM M. COOK ................ 2002 284,616 175,680 0 25,603 346,809 16,527
Senior Vice President, 2001 250,885 154,444 0 21,500 292,380 18,627
International and Chief 2000 228,077 227,095 249,219 21,500 155,320 14,943
Financial Officer
LOWELL F. SCHWAB ............... 2002 269,615 166,530 0 38,040 176,744 14,664
Senior Vice President, 2001 246,462 113,649 0 43,377 123,206 18,364
Operations 2000 222,846 188,474 179,438 21,000 119,300 12,606
NICKOLAS PRIADKA ............... 2002 264,538 169,915 0 60,347 82,875 10,582
Senior Vice President, 2001 249,616 63,250 0 89,812 68,241 15,218
OEM Engine Systems 2000 239,077 142,070 0 22,500 113,500 12,448
and Parts
JAMES R. GIERTZ ................ 2002 277,615 139,910 0 24,500 178,259 19,266
Senior Vice President, 2001 270,881 204,034 0 97,041 144,506 18,660
Commercial and Industrial 2000 259,539 208,075 0 46,374 131,100 15,156
- ------------------
(1) Includes any portion of salary and bonus deferred under the Deferred
Compensation and 401(K) Excess Plan. In fiscal 2001, Mr. Cook and Mr.
Priadka elected to participate in the stock option bonus replacement
program and received option grants in fiscal 2002 in lieu of all or a
portion of their fiscal 2001 cash bonus. Mr. Cook received an option grant
for 4,103 shares with an exercise price of $30.11 in lieu of receiving 20%
of his bonus and Mr. Priadka received an option grant for 8,403 shares with
an exercise price of $30.11 in lieu of receiving 100% of his bonus.
(2) Amounts in the Restricted Stock Award column represent the dollar value of
grants of restricted stock under the Company's 1991 Master Stock
Compensation Plan. Regular dividends are paid on the restricted shares. At
the end of fiscal 2002, the number and value of the aggregate restricted
stockholdings for the Named Officers were: William G. Van Dyke, 0, $0;
James R. Giertz, 0, $0; William M. Cook, 12,500, $398,750; Lowell F.
Schwab, 9,000, $287,100; and Nickolas Priadka, 0, $0. Mr. Giertz
surrendered 25,000 shares of restricted stock in 2001 and received 24,637.5
deferred restricted share units. The balance of Mr. Giertz's deferred
restricted share units at the end of fiscal 2002, including dividend
equivalent rights earned, was 24,856 shares valued at $792,908. No
restricted stock awards were made to the Executive Officer Employees in
fiscal 2002.
(3) The stock option grants include both new fiscal 2002 annual grants and
previously awarded reload grants resulting from the exercise of option
awards granted in prior years.
(4) Earned under the Company's 1991 Master Stock Compensation Plan during the
three-year period ending in the fiscal year in which the payout is listed.
Payout is made in the form of the Company's common stock and delivered or
deferred into the deferred compensation plan during the following fiscal
year.
12
(5) Amounts in this column represent the dollar value of share allocations (i)
under the Company's match for bonus and salary under the Company's ESOP and
401k benefit plans; and (ii) under the Company's match for deferred bonus
and salary and salary in excess of the limits established by Section 415 of
the Internal Revenue Code contributed by the Company to an unqualified
supplemental plan. The amounts for fiscal 2001 are:
SALARY DEFERRED SALARY
NAME AND BONUS MATCH AND BONUS MATCH EXCESS MATCH
----------------------------------- ----------------- ----------------- -------------
William G. Van Dyke ......... $2,444 $18,088 $18,279
William M. Cook ............. 9,010 4,511 3,006
Lowell F. Schwab ............ 7,333 0 7,331
Nickolas Priadka ............ 7,223 1,046 2,313
James R. Giertz ............. 6,985 0 12,281
OPTION/SARS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
---------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM(3)
OPTIONS/SARS EMPLOYEES OR BASE EXPIRATION ----------------------------------
NAME GRANTED(2) IN FISCAL YEAR PRICE/SH ($) DATE 0% ($) 5% ($) 10% ($)
- -------------------------- -------------- --------------- -------------- ----------- -------- ----------- ------------
WILLIAM G. VAN DYKE 85,000 14.3 36.38 12/03/11 0 1,944,731 4,928,330
WILLIAM M. COOK 21,500 3.6 36.38 12/03/11 0 491,903 1,246,578
4,103 0.7 30.11 08/06/11 0 77,694 196,893
LOWELL F. SCHWAB 21,000 3.5 36.38 12/03/11 0 480,463 1,217,587
17,040(4) 2.9 37.10 12/05/06 0 174,769 386,221
NICHOLAS PRIADKA 22,500 3.8 36.38 12/03/11 0 514,782 1,304,558
15,191(4) 2.5 39.30 12/12/10 0 319,050 780,882
14,253(4) 2.4 38.84 12/06/09 0 261,584 625,354
8,403 1.4 30.11 08/06/11 0 159,119 403,240
JAMES R. GIERTZ 24,500 4.1 36.38 12/03/11 0 560,540 1,420,519
ALL EXECUTIVE OFFICERS AS
A GROUP 289,293 49.0
ALL NON-EXECUTIVE OFFICER
EMPLOYEES AS A GROUP 306,745 51.0
- ------------------
(1) No stock appreciation rights ("SARs") have been granted. Total shares used
to calculate the total options percentages do not include options granted
to the Board of Directors of 37,930.
(2) All officer grants (other than as noted in footnote (4)) during the period
were non-qualified stock options granted at the market value on date of
grant for a term of ten years, vesting immediately and were granted with
the right to use shares in lieu of the exercise price and to satisfy any
tax withholding obligations.
(3) These amounts represent certain assumed rates of appreciation over the full
term of the option. The value ultimately realized, if any, will depend on
the amount by which the market price of the Company's stock exceeds the
exercise price on date of sale.
(4) These grants were made to officers who exercised an option during fiscal
2002 and made payment of the purchase price using shares of previously
owned Company stock. This restoration or "reload" grant is for the number
of shares equal to the shares used in payment of the purchase price or
withheld for tax withholding. The option price is equal to the market value
of the Company's stock on the date of exercise and will expire on the same
date as the original option which was exercised. These options, which are
the result of such a restoration, do not contain the reload feature.
13
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FISCAL YEAR-END(2) AT FISCAL YEAR-END(2)(3)
------------------------------- ------------------------------
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE (1) ($) (SHARES) (SHARES) ($) ($)
- --------------------- -------------- ----------- ------------- --------------- ------------- --------------
WILLIAM G. VAN DYKE 144,344 4,173,139 470,596 0 3,077,187 0
WILLIAM M. COOK 4,666 136,606 187,097 0 2,009,225 0
LOWELL F. SCHWAB 30,195 643,887 148,392 0 894,563 0
NICKOLAS PRIADKA 74,915 1,234,177 104,975 0 93,079 0
JAMES R. GIERTZ 0 0 211,043 0 1,356,786 0
- ------------------
(1) The number of shares shown in this column is larger than the number of
shares actually acquired on exercise. The actual number of shares received
is reduced by the number of shares delivered in payment of the exercise
price and shares withheld to cover withholding taxes.
(2) No SARs were exercised in fiscal 2002.
(3) This value is based on the difference between the exercise price of such
options and the closing price of Company Common Stock as of fiscal year-end
2002.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS
NUMBER OF PERFORMANCE UNDER NON-STOCK
SHARES, UNITS OR OTHER PERIOD PRICE-BASED PLAN
OR OTHER UNTIL MATURATION ------------------------------------
NAME RIGHTS(1) OR PAYOUT THRESHOLD TARGET MAXIMUM
- --------------------- --------------- ------------------ ----------- -------- --------
WILLIAM G. VAN DYKE 17,700 8/1/01 - 7/31/04 4,425 17,700 48,675
WILLIAM M. COOK 5,500 8/1/01 - 7/31/04 1,375 5,500 15,125
LOWELL F. SCHWAB 5,200 8/1/01 - 7/31/04 1,300 5,200 14,300
NICKOLAS PRIADKA 5,000 8/1/01 - 7/31/04 1,250 5,000 13,750
JAMES R. GIERTZ 5,400 8/1/01 - 7/31/04 1,350 5,400 14,850
- ------------------
(1) Awards are of Performance Shares of the Company's common stock. Awards are
earned only if the Company achieves the minimum Performance Objectives and
the Award Value will be based on a weighting of compound corporate net
sales growth and after-tax return on investment over the three year period.
The amounts shown in the table under the headings "Threshold", "Target" and
"Maximum" are amounts awarded at 25%, 100% and 275% of the targeted award.
The award may also be adjusted upward by 25% if earnings per share increase
in each of the three years in the period by at least 5%.
14
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors, consisting of six
independent, non-employee directors ("the Committee"), is responsible for
establishing the compensation programs for the Company's key executives. The
Company's executive compensation program comprises base salary, annual incentive
and long-term incentive compensation. The objectives of the Company's executive
compensation program are to:
* emphasize a pay-for-performance philosophy by placing significant
portions of pay at risk and requiring outstanding results for payment
at the threshold level;
* attract and retain the best executives available in our industry and
have their compensation levels keyed to a peer group of companies;
* motivate and reward executives responsible for attaining the financial
and strategic objectives essential to the Company's long-term success
focusing on earnings per share growth and continued growth in
shareholder value; and
* align the interests of executives with those of the Company's
stockholders by providing a significant portion of compensation in the
form of Company common stock. Common stock ownership objectives have
been established for all executive officers ranging from five to ten
times base salary.
BASE SALARIES. Base salaries for all executives are reviewed annually based
on performance and market conditions. A performance appraisal is required for
all executives of the Company. The Committee approves and/or determines the
annual base salary increases for all senior executive officers based on
performance of the executive and external market data. The Company's objective
is that base salaries should approximate the mid-point (average) of senior
executives of manufacturing companies of similar size in the United States. The
Company uses surveys by national consultants for external market data.
ANNUAL CASH INCENTIVE. Executive officers are eligible for target awards
under the annual incentive program that range up to 70% of base salary. The size
of the target award is determined by the executive officer's position and
competitive data for similar positions at the peer and cross-industry companies
as presented in the same nationally recognized surveys as are used for the base
salary. The Company sets aggressive performance goals and, in keeping with the
strong performance-based philosophy, the resulting awards decrease or increase
substantially if actual Company performance fails to meet or exceeds targeted
levels. Payments can range from 0% to 200% of the target awards. The CEO has
100% of his annual cash incentive opportunity linked to achieving record
earnings per share (EPS). The remaining Named Officers have 50% of their
opportunity linked to achieving record EPS and 50% linked to achieving sales,
net operating profit and return on investment targets for their respective
business unit responsibilities.
Consequently, executive officers must obtain record EPS, thereby increasing
shareholder value, to receive a competitive annual cash incentive.
LONG-TERM INCENTIVE STOCK COMPENSATION AWARDS AND STOCK OPTION GRANTS.
There was a payout under the Long Term Compensation Plan in 2002 as shown in the
summary compensation table on page 12. The Long Term Compensation Plan and its
targets and award payouts are consistent with the at risk and pay for
performance compensation philosophy. The Long Term Compensation Plan Award is
based on three-year compounded growth in net sales and an after-tax return on
investment that exceeds the Company's weighted average cost of capital. Under
this program, the Committee selected eligible executives and established an
incentive opportunity as a percentage of base salary. In order for a participant
to receive a payout, minimum performance must be attained. The Committee
occasionally grants restricted stock with a fixed restriction period, usually
five years, to ensure retention of key executives. The Committee also believes
that significant stock option grants encourage the key executives to own and
hold Donaldson stock and tie their long-term economic interests directly to
those of the stockholders. Stock options are typically granted annually. In
determining the number of shares covered by such options, the Committee takes
into account position levels, base salary, and other factors relevant to
individual performance but does not consider the amount and terms of options and
restricted stock already held by the executive.
Targets for the incentive portion of compensation are tied to financial
performance in the sixtieth to sixty-fifth percentile of the peer group.
15
STOCK OPTION BONUS REPLACEMENT PROGRAM. To encourage stock ownership by
executives, the Company adopted in fiscal 2000 a program that allows executives
to elect to receive stock options under the 1991 Master Stock Compensation Plan
and going forward under the 2001 Master Stock Incentive Plan in lieu of some or
all of the cash compensation earned under the annual cash bonus incentive
program. Currently under the program, participants receive an option to acquire
$4 of stock at market value for every $1 of compensation exchanged. In fiscal
2002, no executives participated in the program.
STOCK OWNERSHIP. Ownership of Donaldson stock is expected of Donaldson
executives. The Committee believes that linking a significant portion of the
executive's current and potential net worth to the Company's success, as
reflected in the stock price, gives the executive a stake similar to the
stockholders. The Committee has established stock ownership guidelines for the
Named Officers and certain other executive officers, which encourage retention
of shares. The guidelines range from five to ten times base salary and, in
addition, require officers to retain one-half of the difference between their
initial target ownership and their potential ownership. The goal of the Chief
Executive Officer is ten times annual base salary. Mr. Van Dyke currently
exceeds this ownership goal.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. Mr. Van Dyke's fiscal 2002
base salary and incentive award opportunity were determined by the Committee in
accordance with the methodology described above. The Committee considered Mr.
Van Dyke's performance against pre-established objectives and met both in
private and with Mr. Van Dyke in completing his performance appraisal.
BASE SALARY. Mr. Van Dyke's base salary for fiscal 2002 was $656,962,
which is approximately at the market mid-point for manufacturing companies
of similar size.
ANNUAL BONUS. Mr. Van Dyke's bonus award for fiscal 2002 was $581,875.
This annual bonus was earned under the annual incentive program based on
earning per share growth from $1.66 to $1.90, up more than 10% over the
previous record earned in fiscal 2001.
STOCK OPTIONS. Mr. Van Dyke received annual option grants in December
2001 of options to purchase 85,000 shares of stock.
LONG-TERM INCENTIVE PLAN PAYOUT. Mr. Van Dyke received a payout of
13,975 shares of stock under the Long-Term Incentive Plan in 2002 based on
the Company's achieving the performance objectives for three year
compounded growth in net sales and after-tax return on investment.
POLICY ON QUALIFYING COMPENSATION. The Company's policy is to preserve the
tax deduction for compensation paid to its Chief Executive Officer and other
senior executive officers. In accordance with this policy, in November 1994, the
stockholders approved the material terms of the performance goals for payment of
the cash bonus under the Company's Annual Cash Bonus Plan for Designated
Executives. The 1991 Master Stock Compensation Plan and the 2001 Master Stock
Incentive Plan were approved by shareholders in 1991 and 2001 respectively and
limit the number of shares that can be granted in any one year to any one
individual to further the policy of preserving the tax deduction for
compensation paid to executives.
CONCLUSION. The executive officer compensation program administered by the
Committee provides incentives to attain strong financial performance and an
alignment with stockholder interests. The Committee believes that the Company's
compensation program focuses the efforts of Company executives on the continued
achievement of growth and profitability for the benefit of the Company's
stockholders.
Human Resources Committee
Stephen W. Sanger, Chair
Paul B. Burke
Jack W. Eugster
John F. Grundhofer
Kendrick B. Melrose
Jeffrey Noddle
16
PENSION BENEFITS
The Company maintains the Donaldson Company, Inc. Salaried Employees'
Pension Plan (the "Retirement Plan"), a defined benefit pension plan that
provides retirement benefits to eligible employees through a cash balance plan
structure. The Company also maintains the Donaldson Company, Inc. Excess
Retirement Plan (the "Excess Retirement Plan"). The Excess Retirement Plan is an
unfunded, non-qualified deferred compensation arrangement that primarily
provides retirement benefits that cannot be paid under the Retirement Plan
because of the limitations imposed by the Code on qualified plans in regards to
compensation and benefits.
Participants in the Retirement and Excess Retirement Plans accumulate
benefits in a hypothetical account balance through interest credits, and company
credits that vary with age, service and pay. At retirement or termination of
employment, the vested account balance is payable to the participant in the form
of an immediate or deferred lump sum, or an actuarially equivalent annuity.
Under the cash balance benefit structure, account balances receive an
Interest Credit annually. The Interest Credit is defined as the current plan
year's Interest Crediting Rate times the account balance as of the beginning of
the plan year. The Interest Crediting Rate for a particular plan year is the
greater of the yield on one-year U.S. Treasury Constant Maturities during the
month of June preceding the plan year, plus one percent, and 4.83%. The Interest
Crediting Rate is 4.83% for the 2002 plan year.
Company Credits are credited to the account balances at the end of each
plan year. The participant's Company Credit Percentages are based on the
participant's years of age and service with the Company and its affiliates as of
the end of each plan year. As of August 1, 2002, the sum of years of age plus
service for Messrs. Van Dyke, Cook, Schwab, Priadka and Giertz were 86, 53, 70,
75 and 88, respectively. The participant's Base Company Credit is equal to the
Base Company Credit Percentage times total covered compensation during the plan
year ("Pensionable Earnings"). The participant's Excess Company Credit is equal
to the Excess Company Credit Percentage times Pensionable Earnings in excess of
the Social Security taxable wage base. The following table displays the Company
Credit Percentages for the sum of years of age and service shown:
COMPANY CREDIT
PERCENTAGES
----------------
SUM OF YEARS OF AGE PLUS SERVICE BASE EXCESS
-------------------------------- ------ ---------
Less than 40 3.0% 3.0%
40 - 49 4.0 4.0
50 - 59 5.0 5.0
60 - 69 6.5 5.0
70 or more 8.5 5.0
Special Career Credits are credited at the end of the plan year to the
account balances of participants who were born prior to August 1, 1957 and
continuously employed since August 1, 1992. The Special Career Credits are equal
to 3.0% of the participant's Pensionable Earnings and will continue through the
end of the 2006 plan year, or if earlier, through the plan year in which the
participant attains 35 years of benefit service. Messrs. Van Dyke, Cook, Schwab
and Priadka are all currently eligible to receive Special Career Credits.
The individuals named in the Summary Compensation Table are also eligible
for retirement benefits under the Donaldson Company, Inc. Supplemental Executive
Retirement Plan (the "SERP"). The SERP assures participants a lump sum
retirement benefit from all company funded retirement programs equal to six
times their average compensation (three highest consecutive years) upon reaching
age 62 with 20 years of service. This target benefit is reduced by 2% for each
year the participant's retirement precedes age 62, and it is also reduced on a
prorated basis for less than 20 years of service. In determining whether the
SERP must supplement the other company funded retirement programs, the Company
will consider the lump sum benefits described in the previous paragraph and
footnote (X) to the Summary Compensation Table, as well as, any vested pension
benefits available from prior employers, if any.
The projections below set forth the estimated annual benefit payable to
each of the individuals named in the Summary Compensation Table as a single
life annuity, beginning at age 65, under the Retirement and Excess Retirement
Plans: Mr. Van Dyke, $502,955; Mr. Cook, $248,621; Mr. Schwab, $162,811; Mr.
Priadka, $173,533; and Mr. Giertz, $208,837. No additional benefits are
expected to be required from the SERP for any of these participants. These
projections are based on the following assumptions: (1) employment until age
65;
17
(2) no future increase in pensionable earnings; (3) interest credits at the
actual rate of 4.83% during the 2002 plan year, and thereafter; and (4)
conversion to a single life annuity at normal retirement age based on a discount
rate of 6.00% and the Unisex 1983 Group Annuity Mortality Table.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file initial reports of ownership and
reports of changes in ownership with the SEC and the New York Stock Exchange. To
the Company's knowledge, based on a review of copies of such forms and
representations furnished to the Company during fiscal 2002, all Section 16(a)
filing requirements applicable to the Company's directors and executive officers
were satisfied.
CHANGE-IN-CONTROL ARRANGEMENTS
Each of the Named Officers has a severance agreement with the Company
designed to retain the executive and provide for continuity of management in the
event of an actual or threatened change of control in the Company (as defined in
the agreements). The agreements provide that in the event of a change of
control, each key employee would have specific rights and receive certain
benefits if, within three years after a change in control, the employee is
terminated without cause or the employee terminates voluntarily under
"constructive involuntary" circumstances as defined in the agreement. In such
circumstance the employee will receive a severance payment equal to three times
the employee's annual average compensation calculated over the five years
preceding such termination as well as continued health, disability and life
insurance for three years after termination. The awards issued under the stock
compensation plans, the supplementary retirement benefit plan and the deferred
compensation arrangements also provide for immediate vesting or payment in the
event of termination under circumstances of a change in control.
STOCKHOLDERS WHO WISH TO OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, FOR THE FISCAL
YEAR ENDED JULY 31, 2002, MAY DO SO WITHOUT CHARGE BY WRITING TO COMPANY
SECRETARY, DONALDSON COMPANY, INC., MS 101, P.O. BOX 1299, MINNEAPOLIS, MN
55440-1299.
By Order of the Board of Directors
/s/ Norman C. Linnell
Norman C. Linnell
SECRETARY
October 8, 2002
18
APPENDIX A
DONALDSON COMPANY, INC.
AUDIT COMMITTEE CHARTER
MISSION STATEMENT
The Audit Committee will assist the Board of Directors in fulfilling its
oversight of (1) the integrity of the Company's financial statements, (2) the
Company's compliance with legal and regulatory requirements, (3) the independent
auditor's qualifications and independence, and (4) the performance of the
Company's internal audit function and independent auditors; and will prepare the
report that SEC rules require be included in the Company's annual proxy
statement. The Committee also will carry out its duties and responsibilities to
retain and terminate the Company's independent auditors and to conduct an annual
performance evaluation of the Audit Committee.
While the Audit Committee has the oversight responsibilities and powers set
forth in this charter, the Committee does not itself prepare financial
statements or perform audits, and its members are not auditors or certifiers of
the Company's financial statements. This is the responsibility of management and
the Company's independent auditor.
ORGANIZATION
The Committee will be organized consistent with the following significant
parameters:
SIZE OF THE COMMITTEE: The Committee will have no less than three
members.
QUALIFICATIONS: Committee members must be non-employee directors who meet
the independence and experience requirements of the Securities and Exchange
Commission, the New York Stock Exchange and applicable law.
FREQUENCY OF MEETINGS: The Committee will have no less than four regularly
scheduled meetings each fiscal year. In addition, the Committee will meet at
other times if deemed necessary to discharge completely its duties and
responsibilities as outlined in this charter.
APPOINTMENT OF MEMBERS AND CHAIRPERSON: Each Committee member and the
Chairperson will be recommended by the Corporate Governance Committee and shall
be elected by vote of the Board of Directors to serve a term of one year.
Committee members and the Chairperson may serve successive one-year terms
without limitation.
OVERSIGHT
INTERNAL CONTROLS AND DISCLOSURE CONTROLS:
1. Review the appointment, performance and replacement of the senior
internal audit executive.
2. Review the internal auditor's reports and findings on internal audit
activities and the major issues as to the adequacy of the Company's
internal controls.
3. Review the Company's disclosure controls and procedures for its
filings with the Securities and Exchange Commission.
FINANCIAL REPORTING:
1. Review the Company's policies with respect to risk assessment and risk
management.
2. Review major issues regarding accounting principles and financial
statement presentations, including any significant change in the
Company's selection or application of accounting principles.
3. Review analyses prepared by management and/or the independent auditor
setting forth the Company's critical accounting policies and
estimates, and significant financial reporting issues and judgments
made in connection with the preparation of the financial statements,
including analyses of the effects of alternative GAAP methods on the
financial statements.
4. Review the effect on the financial statements of regulatory and
accounting initiatives and off-balance sheet structures.
A-1
5. Review the annual financial statements, including the Company's
disclosures under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," with management and the
independent auditors prior to the filing or release of such financial
statements, including confirmation that the Committee (i) discussed
with the external auditors the matters requiring discussion by
Statement on Auditing Standards No. 61, and (ii) received the written
report from the external auditors required by Independence Standards
Board Statement No. 1. Based on these reviews and discussions,
recommend to the Board of Directors that the audited financial
statements be included in the Annual Report on Form 10-K filed with
the SEC.
6. Review and approve the process for reviewing and discussing with
management and the independent auditors the quarterly financial
statements, including the Company's disclosures under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," either through the Committee as a whole or through the
Chairperson.
COMPLIANCE WITH LAWS, REGULATIONS AND COMPANY POLICIES:
1. Review the Company's compliance system (including, but not limited to,
a code of ethics for senior financial officers).
2. Review the Committee's charter on an annual basis and recommend any
proposed changes to the Board of Directors for approval.
3. Affirmatively determine that the Committee members are independent as
required by the "Qualifications" section of this charter.
RELATIONSHIP WITH INDEPENDENT AUDITOR:
1. The Committee has the ultimate authority and responsibility to select
and evaluate the independent auditor, approve all audit engagement
terms and fees to be paid to such firm, and terminate such firm when
circumstances warrant, and the independent auditor shall be
accountable to and report to the Committee.
2. Evaluate the independent auditor's qualifications, performance and
independence on an ongoing basis, but no less frequently than once per
year.
3. Review and approve the scope of the external audit to be performed
each fiscal year.
4. Set policies and procedures for, and, as appropriate, approve the
engagement of, the independent auditor for any non-audit service (to
the extent such service is not prohibited) and the fee for such
service, and consider whether the independent auditor's performance of
any non-audit services is compatible with its independence.
5. Review with the independent auditor any audit problems or difficulties
the independent auditor may have encountered in the course of the
audit work and any management letter provided by the independent
auditor, and management's response (including any restrictions on the
scope of the independent auditor's activities or on access to
requested information and any significant disagreements with
management).
6. At least annually, obtain and review a report by the independent
auditor describing:
* the independent auditor's internal quality-control procedures;
* any material issues raised by the most recent internal
quality-control review, or peer review, of the independent
auditor's firm, or by any inquiry or investigation by
governmental or professional authorities, within the preceding
five years, respecting one or more independent audits carried out
by the firm, and any steps taken to deal with such issues; and
(to assess the auditor's independence)
* all relationships between the independent auditor and the
Company.
A-2
OTHER RESPONSIBILITIES:
1. Set clear hiring policies for employees or former employees of the
independent auditor.
2. Review procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
controls or auditing matters, and the confidential, anonymous
submissions by employees of concerns regarding questionable accounting
or auditing matters.
3. Meet separately, periodically, with management, with internal auditors
and with the independent auditor in executive sessions.
4. Discuss generally with management earnings press releases and
financial information and earnings guidance provided through public
disclosures under the New York Stock Exchange requirements and
applicable law.
5. Prepare the Committee report for inclusion in the Company's annual
proxy statement.
6. Conduct an annual performance evaluation of the Committee.
7. As appropriate, obtain advice and assistance from outside legal,
accounting or other advisors. In this regard, the Committee will have
authority to:
* conduct or authorize investigations into any matters within its
scope of responsibilities;
* engage outside auditors for special audits, reviews and other
procedures;
* retain special counsel and other experts and consultants to
advise the Committee and meet with any representative of the
Company; and
* approve the fees and other retention terms for such parties.
8. Report regularly to the full Board of Directors regarding the
significant items of discussion at each Committee meeting.
A-3
Donaldson Company, Inc. Annual Meeting of Stockholders
Friday, November 15, 2002, at 10:00 a.m.
Held at the Corporate Offices of
Donaldson Company, Inc.
1400 West 94th Street
Minneapolis, Minnesota
[LOGO]TM
Donaldson(R)
DONALDSON COMPANY, INC.
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 15, 2002
10:00 A.M., CENTRAL TIME
DONALDSON COMPANY, INC.
1400 WEST 94TH STREET
MINNEAPOLIS, MINNESOTA
- --------------------------------------------------------------------------------
[LOGO]TM
Donaldson(R) DONALDSON COMPANY, INC. PROXY
- --------------------------------------------------------------------------------
The undersigned appoints WILLIAM G. VAN DYKE, WILLIAM M. COOK and NORMAN C.
LINNELL, and each of them, as Proxies, each with the power to appoint his
substitute, to represent and vote, as designated on the reverse side, all
shares of the undersigned at the 2002 Annual Meeting of Stockholders of
Donaldson Company, Inc. at Donaldson Company, Inc., 1400 West 94th Street,
Minneapolis, Minnesota, at 10:00 a.m., Central Time, on Friday, November 15,
2002, and at any adjournment thereof.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS, DONALDSON COMPANY, INC.
(CONTINUED, AND TO BE SIGNED AND DATED ON OTHER SIDE)
____________________
| COMPANY # |
| CONTROL # |
|____________________|
THERE ARE THREE WAYS TO VOTE YOUR PROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK --- EASY --- IMMEDIATE
* Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 11:00 a.m. (CT) on November 14, 2002.
* You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above.
* Follow the simple instructions the voice provides you.
VOTE BY INTERNET -- http://www.eproxy.com/dci/ -- QUICK --- EASY --- IMMEDIATE
* Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on November 14, 2002.
* You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above to obtain your records and create an
electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Donaldson Company, Inc., c/o Shareowner
Services(SM), P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
PLEASE DETACH HERE
THE BOARD OF DIRECTORS RECOMMENDS VOTES FOR:
1. Election of directors: 01 F. GUILLAUME BASTIAENS 03 JEFFREY NODDLE [ ] Vote FOR [ ] Vote WITHHELD
02 JANET M. DOLAN all nominees from all nominees
____________________________________________
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), | |
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX TO THE RIGHT. |____________________________________________|
2. Ratify appointment of PricewaterhouseCoopers LLP as
independent auditors. [ ] For [ ] Against [ ] Abstain
Address Change? Mark Box [ ]
Indicate changes below:
Date _______________________________
___________________________________________
| |
| |
|___________________________________________|
PLEASE DATE AND SIGN ABOVE exactly as name
appears, indicating, if appropriate, official
position or representative capacity. If stock
is held in joint tenancy, each joint owner
should sign.