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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1997
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 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-0380010
(State of Incorporation) (I.R.S. Employer Identification No.)
5757 N. Green Bay Avenue
P.O. Box 591
Milwaukee, Wisconsin 53201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 228-1200
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------------------- ------------------------
Common Stock, $.16-2/3 par value New York Stock Exchange
Rights to Purchase Common Stock New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
<TABLE>
<CAPTION>
Aggregate Market Value Number of Shares
of Nonaffiliates' Shares Outstanding at
Title of Each Class as of November 20, 1997 November 20, 1997
- ------------------------------------- ------------------------ -----------------
<S> <C> <C>
Common Stock, $.16-2/3 par value $3,842,382,850 84,101,403
Series D Convertible Preferred Stock,
$1.00 par value, $512,000
liquidation value $255,529,274 279.649
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV incorporate by reference portions of the Annual Report to
Shareholders for the year ended September 30, 1997.
Part III incorporates by reference portions of the Proxy Statement dated
December 5, 1997.
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JOHNSON CONTROLS, INC.
Index to Annual Report on Form 10-K
Year Ended September 30, 1997
<TABLE>
<CAPTION>
Page
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING
INFORMATION 3
PART I.
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 15
EXECUTIVE OFFICERS OF THE REGISTRANT 15
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 18
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 18
ITEM 11. EXECUTIVE COMPENSATION 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 19
INDEX TO EXHIBITS 27-31
</TABLE>
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Johnson Controls, Inc. (the company) has made forward-looking statements in
this document that are subject to risks and uncertainties. Forward-looking
statements include information concerning possible or assumed future risks
preceded by, following or that include the words "believes," "expects,"
"anticipates" or similar expressions. For those statements, the company
cautions that the numerous important factors discussed elsewhere in this
document and in the company's Form 8-K filing (dated October 30, 1997), could
affect the company's actual results and could cause its actual consolidated
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company.
PART I
ITEM 1 BUSINESS
General Development of Business
Johnson Controls, Inc. is a Wisconsin corporation organized in 1885. Its
principal office is located at 5757 N. Green Bay Avenue, Milwaukee, Wisconsin
53201-0591 (Telephone: 414-228-1200). From 1885 through 1978 the company's
operations were predominantly in the controls business (see "Products and
Services" discussion that follows). Through subsequent business acquisitions
the company's operations have been expanded to include an additional business
segment, the automotive segment.
In 1978 the company acquired Globe-Union, Inc. and thereby became a leading
domestic manufacturer of automotive batteries for the United States replacement
and original equipment markets.
In 1985 the company acquired Hoover Universal, Inc., a manufacturer of
automotive seating and seating components, plastic containers and plastics
blowmolding machinery. As a result of the acquisition, the company became the
leading independent producer of automotive seating systems and plastic beverage
bottles.
In 1989 the company acquired Pan Am World Services, Inc. (name subsequently
changed to Johnson Controls World Services Inc., "World Services"), a leading
provider of integrated facilities management for military bases, space centers
and other government facilities worldwide. This acquisition served as the
foundation for the controls segment's entry into the integrated facilities
management business which has subsequently been extended to provide integrated
facilities management to the non-residential buildings market worldwide.
The company completed two significant transactions during fiscal 1997.
First, effective October 1, 1996, the company acquired Prince Holding
Corporation (Prince), a major supplier of automotive interior systems and
components including overhead systems and consoles, door panels and floor
consoles. The acquisition of Prince serves as a conduit for the company's
growth beyond seating in the automotive industry and positions the company as a
worldwide interior systems integrator and supplier. Second, on February 28,
1997, the company completed
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the sale of its Plastic Container division to Schmalbach-Lubeca AG/Continental
Can Europe (a member of the VIAG Group), thereby exiting the plastic beverage
bottle business.
Financial Information About Business Segments
Business segment financial information can be found within the 1997 Annual
Report to Shareholders, which is incorporated herein by reference, on page 20
("Business Segments" table) and on page 38 (Note 14 "Segment Information" of
Notes to Consolidated Financial Statements).
Products and Services
Automotive Segment
The automotive segment's primary operations consist of its seating and
interior systems business, which designs and manufactures complete
automotive seating and interior systems; and its batteries business,
which produces automotive batteries for the replacement and original
equipment markets.
The automotive seating and interior systems business designs and
manufactures complete seating systems, including seating foam pads,
mechanisms, metal frames and trim covers, and interior systems, including
overhead, door and instrument panel systems for manufacturers of cars and
light trucks (including vans and sport utility vehicles). Worldwide, the
business is among the top 20 automotive suppliers, with sales to all of
the top 10 automobile companies in the world.
In addition to its U.S. operations, the automotive seating and interiors
business has operations in the Asia/Pacific region, Canada, Europe,
Mexico, South America, South Africa and Australia through wholly-owned,
majority-owned and partially-owned businesses. The business operates 81
wholly-owned and 30 majority-owned manufacturing or assembly facilities.
The business is the world's largest supplier of automotive seating
systems and the largest independent North American supplier of automotive
interior systems, subsystems and components.
The automotive seating and interior systems business operates 51 wholly
or majority-owned assembly plants that supply automotive manufacturers
with complete seats on a "just-in-time/in-sequence" basis. All foam and
metal seating components, covers and seat mechanisms are shipped to these
plants from the business' production facilities or outside suppliers.
The seats are then assembled to specific order and delivered on a
predetermined schedule directly to an automotive assembly line.
The seating and interior systems business has increased significantly
during the last several years. Seating systems operations have expanded
principally through internal growth, while interior systems operations
have been bolstered by several strategic acquisitions. In 1996, the
company acquired a majority interest in Roth Freres S.A., which supplies
seats, headliners and other interior components, and in 1997 acquired
Prince, a major supplier of automotive interior systems. Seating and
interior systems business sales represent approximately 85% of total
segment sales.
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The segment's batteries business sales represent approximately 10% of
total segment sales. The business is a leading manufacturer of lead-acid
automotive batteries for the North American replacement and original
equipment markets. Automotive batteries, which account for over 90% of
the business' sales, are sold primarily under private label to automotive
replacement battery retailers and distributors and to automobile
manufacturers as original equipment. The business is developing several
new battery technologies to alter the way lead-acid batteries are
designed and used, including its Thin Metal Film technology, which is
expected to significantly decrease battery size and weight.
Manufacturing of batteries and plastic battery containers is conducted at
11 plants in the United States, one plant in Mexico and, via
partially-owned affiliates, at plants in Brazil and China.
The batteries business also produces and markets lead-acid batteries for
use in a variety of industrial and consumer applications. The most
important are those based on gelled electrolyte technology and absorbent
glass mat (AGM) technology. The gelled electrolyte batteries are
portable, maintenance-free, rechargeable units used in various
applications including cable/telecommunication and deep cycling
applications. The AGM batteries are sealed, maintenance free,
rechargeable units used mainly in uninterruptible power supply (UPS)
systems for computers, telecommunications, cable television and other
applications where a UPS system is required.
Controls Segment
Overall, approximately 40% of the controls segment's sales are derived
from the installation and service of control systems to the existing
worldwide commercial building market, 20% from new construction, while
the remaining 40% originates from integrated facilities management.
The controls segment is a major worldwide supplier of control systems,
services and products providing energy management, temperature and
ventilation control, security and fire safety for non-residential
buildings. Building control systems are sold, installed and serviced,
and mechanical equipment is serviced, primarily by employee sales
engineers, application engineers and mechanics working out of branch
offices located in approximately 260 principal cities throughout the
world. The segment manufactures a broad line of electric and electronic
products for sale to its own sales force and to original equipment
manufacturers, wholesalers and distributors of air-conditioning,
refrigeration, commercial and residential heating, water-pumping and
gas-burning equipment. Control system products are manufactured in six
domestic and five foreign facilities.
The segment is also a leading supplier of integrated facilities
management for commercial buildings worldwide and government facilities.
Commercial facilities management ensures the reliability of a building's
mechanical systems and energy supply, as well as provides a wide range of
on-site building support such as maintenance, security, food services,
etc. Government facilities management services are provided for military
bases, space centers and other government facilities.
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Major Customers and Competition
The company has sales to the automotive industry. Ford Motor Company accounted
for 17% of the company's net sales in fiscal 1997, 14% in 1996 and 8% in 1995.
General Motors Corporation accounted for 11%, 8% and 11% in 1997, 1996 and
1995, respectively. Chrysler Corporation accounted for 11%, 10% and 12% in
1997, 1996 and 1995, respectively.
Automotive Segment
The segment's seating and interior systems business supplies the
automotive original equipment market and faces competition from other
automotive parts suppliers and, with respect to certain products, from
the automobile manufacturers which themselves produce or have the
capability to produce many of the products supplied by the business.
Competition is based on technology, quality and price. Design,
engineering and product planning are increasingly important factors.
The business' seating systems operations principally compete in North
America with Lear Corporation and Magna International, Inc. In Europe,
the seating systems operations primarily compete with Lear Corporation,
Bertrand Faure, Magna International, Inc. and automotive manufacturers.
The market for interior systems is highly fragmented in both North
America and Europe. In North America, the business' interior systems
operations compete with Lear Corporation; Davidson Interior Trim, a
division of Textron, Inc.; UT Automotive, a subsidiary of United
Technologies, Inc. and The Becker Group. In Europe, the primary
competitors are Lear Corporation, Sommer Allibert, The Becker Group and
Magna International, Inc.
Approximately 60% of the seating and interior systems business' sales
over the last three years were to four major automobile manufacturers.
Because of the importance of new vehicle sales of major automotive
manufacturers to its operations (see pages 18 through 19 of the company's
1997 Annual Report to Shareholders), the business is affected by general
business conditions in this industry.
Approximately 80% of the automotive segment's batteries business sales
are to the automotive replacement market, with the remaining 20% to the
original equipment market. The business is the principal supplier of
automotive batteries to Interstate Battery System of America
("Interstate") and AutoZone, and is a major supplier of automotive
batteries to Wal-Mart and Sears' Western Auto Parts America. The
business has also won a new three-year contract to manufacture Sears
DieHard Gold batteries, beginning in October 1997. Each of these
customers sell replacement batteries under their own brand labels.
Original equipment and replacement batteries are sold to a number of
large manufacturers of motor vehicles and heavy construction equipment.
Replacement batteries are also sold to battery distributors for resale to
retail outlets.
Sales of the batteries business depend primarily on quality, price,
delivery and service, including marketing support and technical advice.
The business primarily competes in North America with Exide Corporation;
Delphi Automotive Systems, a division of General Motors Corporation; and
GNB Batteries, a subsidiary of Pacific Dunlop Limited.
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Controls Segment
The controls segment conducts much of its systems installation business
and its integrated facilities management business through thousands of
individual contracts that are either negotiated or awarded on a
competitive basis. Key factors in awarding contracts include product and
service quality, price, reputation with respect to customer service,
design, application engineering capability and construction management
expertise. Although differences in corporate organization and product
mix make comparisons difficult, management believes that the controls
segment's domestic installed systems sales are approximately equal to
those of its next largest competitor, Honeywell, Inc. The integrated
facilities management services market is highly fragmented, with no one
company being dominant.
Sales of the segment's integrated facilities management business are
largely dependent upon numerous individual contracts with commercial
businesses worldwide and various departments and agencies of the U.S.
Federal Government. The loss of any individual contract would not have a
materially adverse effect on the company.
Backlog
The company's backlog relates to the controls segment's systems installation
and services business, which derives a significant portion of its revenues from
long-term contracts which are accounted for on the percentage-of-completion
method. In accordance with customary industry practice, the controls segment
progress bills customers on an estimated basis as work proceeds.
Information concerning contracts in progress for the controls segment is as
follows:
<TABLE>
<CAPTION>
September 30,
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(in millions) 1997 1996
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<S> <C> <C>
Backlog of uncompleted building systems and services contracts $2,102 $1,970
Earned revenues on uncompleted building systems and services contracts 1,342 1,224
------ ------
Unearned backlog of building systems and services contracts $ 760 $ 746
====== ======
</TABLE>
The data above does not include amounts associated with unearned contracts of
the controls segment's integrated facilities management business because such
contracts are typically multi-year service awards, the amount of which are
outstanding at any given period is not necessarily indicative of the amount of
revenue to be earned in the coming fiscal period. In addition, certain of the
company's manufacturing businesses accumulate backlog data, but the amounts,
when considered in the aggregate, are not significant to an understanding of
these businesses.
Raw Materials
Raw materials used by the automotive segment's seating and interiors business,
such as steel, urethane chemicals and chromium, were readily available during
the year and such availability is expected to continue. Principal raw
materials used in the manufacture of the automotive segment's batteries are
lead, antimony, calcium, sulfuric acid and polypropylene, all of which are
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generally available in the open market. The controls segment is not dependent
upon any single source of supply for essential materials, parts or components.
Intellectual Property
Generally, statutory protection is sought for most intellectual property
embodied in patents, trademarks and copyrights. Some intellectual property,
where appropriate or possible, is protected by contract, license, agreement or
hold-in-confidence undertaking.
The company owns numerous U.S. and counterpart foreign patents, the more
important of which cover those technologies and inventions embodied in current
products, or which are used in the manufacture of those products. While the
company believes patents are important to its business operations and in the
aggregate constitute a valuable asset, no single patent, or group of patents,
is critical to the success of the business. The company, from time to time,
grants licenses under its patents and technology and receives licenses under
patents and technology of others.
The company has numerous registered trademarks in the United States and in many
foreign countries. The most important of these marks are "JOHNSON CONTROLS"
(including a stylized version thereof) and "JOHNSON." These marks are
universally used in connection with certain of its product lines and services.
The trademarks and servicemarks "ALLIANCE," "PENN," "BASO," "UNI-TRIM,"
"COUNTERLINE," "UNILOY-SPRINGFIELD," "METASYS," "UNILOY," "HOMELINK," and
"AUTOLINK" are used in connection with certain company product lines and
services. Original equipment and replacement automotive batteries are sold
carrying customer-owned private labels and trademarks. The company also
markets automotive batteries under the licensed trademarks "EVEREADY" and
"ENERGIZER." Industrial batteries for original equipment and/or replacement
usage are sold carrying either company or customer-owned trademarks, including
the company mark "DYNASTY."
Most works of authorship produced for the company, such as computer programs,
catalogs and sales literature, carry appropriate notices indicating the
company's claim to copyright protection under U.S. law and appropriate
international treaties.
Environmental and Health and Safety Matters
The company's domestic operations are governed by a variety of laws intended to
protect the environment, principally the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Water Act, the Clean Air Act and the state counterparts
of these laws (collectively, "Environmental Laws"), and by laws addressing
workers' safety administered by both the Occupational Safety and Health
Administration and similar state agencies and federal and state laws regulating
health (collectively "Worker Safety Laws"). The Environmental Laws implemented
by the United States Environmental Protection Agency and state agencies govern
the generation and management of hazardous and toxic materials, the discharge
of pollutants into the air and into surface and underground waters, the
construction of new discharge sources, and environmental reporting and record
keeping, among other things. These laws govern ongoing operations, require
remediation of sites associated with past operations, and provide for civil and
criminal penalties and fines, as well as injunctive and remedial relief, for
noncompliance or cleanup.
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The company's policy is to comply with applicable Environmental Laws and Worker
Safety Laws, and the company maintains procedures designed to foster and ensure
compliance. The company has expended substantial resources, both financial and
managerial, to ensure compliance with Environmental Laws and Worker Safety
Laws. Certain of the company's businesses are and have been engaged in the
handling or use of substances or compounds that may be considered toxic or
hazardous within the meaning of the Environmental Laws and Worker Safety Laws.
While this creates the risk of environmental liability rising out of the
company's operations and products, the company is committed to protect the
environment and comply with all such applicable laws utilizing available
technology.
The company's operations and facilities have been, and in the future may
become, the subject of formal or informal enforcement actions or proceedings
for noncompliance with such laws. Resolution of such matters typically has
been achieved by negotiation with the regulatory authorities resulting in
commitments to compliance or abatement programs and payment of penalties.
Historically, neither such commitments nor such penalties have been material.
(See Item 3 "Legal Proceedings" of this report for a discussion of the
company's potential environmental liabilities.) Although the company believes
that its operations are in substantial compliance with such laws, there are no
assurances that substantial additional costs for compliance will not be
incurred in the future.
Environmental Capital Expenditures
The company's ongoing environmental compliance program often results in capital
expenditures. Environmental considerations are a part of all significant
capital expenditures; however, expenditures in 1997 related solely to
environmental compliance were not material. It is management's opinion that
the amount of any future capital expenditures related solely to environmental
compliance will not have a material adverse effect on the company's financial
results or competitive position in any one year.
Employees
As of September 30, 1997, the company employed approximately 72,300 employees,
of whom 50,400 were hourly and 21,900 were salaried.
Seasonal Factors
Sales of seating and interior systems and batteries to automobile manufacturers
for use as original equipment are dependent upon the demand for new
automobiles. Management believes that demand for new automobiles generally
reflects sensitivity to overall economic conditions with no material seasonal
effect. The automotive replacement battery market is affected by weather
patterns because batteries are more likely to fail when extremely low
temperatures place substantial additional power requirements upon a vehicle's
electrical system. Also, battery life is shortened by extremely high
temperatures which accelerate corrosion rates. Therefore, either mild winter
or moderate summer temperatures may adversely affect automotive replacement
battery sales.
The business of the controls segment is executed on a relatively continuous
basis, with no significant fluctuation in revenues during the year.
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International Operations
The automotive segment has manufacturing facilities worldwide. The automotive
seating and interior systems business has wholly-owned and majority-owned
manufacturing facilities located outside the United States, including plants in
Argentina, Australia, Austria, Belgium, Brazil, Canada, the Czech Republic,
France, Germany, Mexico, the Netherlands, Portugal, South Africa, Spain and the
United Kingdom. These facilities produce, depending on the location, complete
seats, interior systems and related components. The business also has
partially-owned operations in the Asia/Pacific region, Europe and Mexico that
manufacture complete seats, headliners and/or seating components. The
segment's batteries business has a manufacturing operation in Mexico and
partially-owned affiliates in Brazil and China that produce batteries.
Licensing and joint venture arrangements are also in effect with certain
foreign manufacturers of batteries and automotive parts.
Through a number of foreign subsidiaries and branches, the controls segment
operates fully-staffed sales offices, offering engineering, installation and
service capabilities (the counterpart to the domestic controls operations),
and, in many cases, integrated facilities management services. Offices are
located in Australia, Austria, Belgium, Canada, China, CIS (Russia), the Czech
Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India,
Israel, Italy, Korea, Malaysia, Mexico, the Netherlands, Norway, the
Philippines, Poland, Portugal, Republic of Kazakhstan, Saudi Arabia, Singapore,
Slovak Republic, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey,
United Arab Emirates and the United Kingdom. In addition, controls segment
products are marketed through distributors represented in approximately 40
countries. Products are manufactured in plants located in China, Germany,
Italy, Mexico and the Netherlands, with the remainder of the product line
supplied from the United States. The controls segment also has joint venture
operations in the United States, Brazil, China, Italy, Japan, Kuwait, Malaysia,
Singapore, Switzerland and Thailand.
The financial results of all foreign operations are subject to currency
exchange rate fluctuations. The company selectively uses financial instruments
to minimize its risk of loss from fluctuations in exchange rates. The company
primarily enters into forward exchange contracts to reduce the earnings and
cash flow impact of non-functional currency denominated receivables and
payables, predominately intercompany transactions. Gains and losses from
hedging instruments offset the gains or losses on the underlying assets,
liabilities and investments being hedged. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
Financial Information About Geographic Areas
Note 14 of Notes to Consolidated Financial Statements, "Segment Information,"
on page 38 of the 1997 Annual Report to Shareholders is incorporated herein by
reference.
Research and Development Expenditures
Expenditures for research activities relating to product development and
improvement are charged against income as incurred. Such expenditures amounted
to $232 million in 1997, $156 million in 1996 and $127 million in 1995. The
acquisition of Prince, and its related research and development activities,
accounted for the majority of the current year's increase in expenditures
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for research and development. In addition, the company expended $119 million
in 1997, $108 million in 1996 and $76 million in 1995 for research activities
sponsored by customers.
ITEM 2 PROPERTIES
The company has numerous wholly-owned and majority-owned manufacturing
facilities located throughout the world. The company considers its facilities
to be suitable and adequate. The majority of all of the company's facilities
are operating at normal levels based on capacity.
The principal manufacturing, administrative, and research and development
facilities listed on the following pages by segment and location aggregate
approximately 23 million square feet of floor space and are owned by the
company except as noted. In addition, approximately 260 controls segment
branch offices in major cities throughout the world are either owned or leased.
These offices vary in size in proportion to the volume of business in the
particular locality.
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AUTOMOTIVE SYSTEMS GROUP
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<S> <C> <C> <C>
Alabama Cottondale (1) Argentina Escobar
California City of Industry Rosario
Fullerton Australia Adelaide
Livermore Melbourne
Modesto Thomastown
Stockton (1) Austria Graz
Delaware Middletown Mandling
Florida Tampa Belgium Anderlecht (1)
Georgia Atlanta Geel
John's Creek (1) Brazil Pouso Alegre
Illinois Geneva Santo Andre
Lawrenceville Sao Bernardo (1)
Sycamore Sao Jose
Indiana Ossian Canada Milton
Kentucky Bardstown Orangeville
Cadiz Saint Mary's
Florence (1) Stratford
Georgetown (1) Tillsonburg
Glasgow Czech Republic Ceska Lipa
Harrodsburg Mlada Boleslav
Leitchfield Policka Boriny (1)
Maysville Roudnice (1)
Nicholasville Straz Pod Ralskem
Shelbyville (1) France Schweighouse-sur-Moder
Winchester (1) Strasbourg (2)
Louisiana Shreveport (1) Rosny (1)
Maryland Belcamp (2) Germany Berlin (1)
Michigan Holland Betriebsgelande
Lapeer Bochum (1)
Lincoln Park (1) Burscheid
Livonia (1) Epselkamp
Manchester (2) Lahnwerk
Mt. Clemens (1) Mallersdorf
Plymouth (2) Radesomweld (1)
Southfield (1) Rastatt (1)
Sterling Heights (1) Schwalbach (1)
Taylor (1) Waghausel
Williamston (1) Zwickau
Missouri Jefferson City Italy Florence
Kansas City (1) Milan
St. Joseph (1) Mexico Juarez (2)
New Jersey Dayton (1) Mexico City (1)
Edison (1) Torreon
North Carolina Winston-Salem The Netherlands Sittard
Ohio Greenfield Portugal Nelas
Oberlin (1) Portalegre
Strongsville (1) South Africa Port Elizabeth (1)
Toledo Pretoria (1)
Oregon Canby (Portland) Uitenhaige (1)
South Carolina Oconee Spain Alagon
Tennessee Athens Barcelona
Lewisburg (2) Valencia
Lexington (2) United Kingdom Birmingham (1)
Linden Chelmsford (1)
Murfreesboro (2) Dagenham (1)
Pulaski Mansfield
Texas El Paso (1) Silloth
Virginia Chesapeake Speke (2)
Wisconsin Hudson Staffordshire
Milwaukee (2) Telford
Warwickshire (1)
Wednesbury
</TABLE>
(1) Leased
(2) Both owned and leased facilities
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CONTROLS GROUP CORPORATE
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<TABLE>
<S> <C> <C> <C>
Florida Cape Canaveral (2) Wisconsin Milwaukee
Georgia Atlanta
Indiana Goshen
Oklahoma Poteau
Wisconsin Milwaukee
Watertown
Germany Essen (1)
Italy Lomagna
Mexico Juarez
Reynosa
The Netherlands Leeuwarden
United Kingdom Bournemouth (1) (1) Leased
Waterlooville (1) (2) Both owned and leased facilities
</TABLE>
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ITEM 3 LEGAL PROCEEDINGS
Environmental Litigation and Proceedings. As noted previously, the activities
of the company are subject to various environmental laws and worker safety
laws. Liabilities potentially arise under these laws for any activities which
are not in compliance with such laws and for the cleanup of sites where
hazardous or toxic materials are present.
With respect to the cleanup of hazardous or toxic materials, the company's
activities have led to allegations that the company is responsible for
performing cleanups, or for the repayment of costs spent by governmental
entities or others performing cleanups at approximately 60 sites. Many of
these sites are landfills used by the company in the past for the disposal of
waste materials; others are secondary lead smelters and lead recycling sites
where the company returned lead-containing materials for recycling; a few
involve the cleanup of company manufacturing facilities; and the remaining fall
into miscellaneous categories. Furthermore, the company may face similar
claims of liability at additional sites in the future as a result of the
company's past or future operations.
Liability for investigation and remediation costs exists regardless of fault or
legality at the time of disposal, and it is joint and several, meaning that any
one of the companies responsible for disposing materials at the site may be
responsible for all of the cleanup expenses. Nevertheless, any responsible
party that has paid more than its fair share of site costs may recover fair
shares of its expenditures from other responsible parties. Thus, with respect
to many of the sites for which the company has potential liabilities, there are
other parties who the company believes will be required and have the ability to
bear a significant share of site cleanup costs. At any given site, the
liability and costs to be allocated among the parties depend on such factors as
the number of parties, the willingness of governmental agencies to contribute
public funds to the cleanup, the volume of material delivered to the site by
each party, the nature of each party's materials, the costs of the site cleanup
and the financial strength of the parties. Where the company is alleged to be
responsible for performing cleanup or for costs, it pursues a course of action
intended to mitigate its potential liabilities.
The company's policy is to accrue for potential environmental losses for
cleanup consistent with generally accepted accounting principles. In that
regard, the company accrues for potential environmental losses when it is
probable a loss has been incurred and the amount of the loss is reasonably
estimable. Its reserves for environmental related costs at the end of fiscal
year 1997 totalled $36 million. The company reviews the status of the sites on
a quarterly basis and adjusts its reserves accordingly. Such potential
liabilities accrued by the company are undiscounted and do not take into
consideration possible recoveries of future insurance proceeds. They do,
however, take into account the likely share other parties will bear at the
site. It is difficult to estimate the company's ultimate level of liability
for the sites due to the large number of other parties that may be involved,
the complexity of determining the relative liability among those parties, the
uncertainty as to the nature and scope of the investigations and remediation to
be conducted, uncertainty in the application of law and risk assessment, the
various choices and costs associated with diverse technologies that may be used
in corrective actions at the sites, and the often quite lengthy periods over
which eventual remediation may occur. Nevertheless, the company has no reason
to believe at the present time that any claims, penalties or costs in
connection with known environmental remediation matters will have a material
adverse effect on the company's financial position, results of operations or
cash flows.
14
<PAGE> 15
Typically, site remediation matters are addressed at the administrative agency
level of the government. Occasionally, however, litigation is involved. The
most significant of such matters where litigation has been commenced by the
government or by private parties and remain pending against the company is as
follows:
United States v. NL Industries, Inc., Case No. 91-CV-00578-WDS (United
States District Court for the Southern District of Illinois), filed July
31, 1991. The EPA seeks to enforce an administrative order issued on
November 27, 1990 against Johnson Controls and other defendants requiring
performance of a cleanup at a secondary smelter facility in Granite City,
Illinois. The company, the other defendants and the other parties to the
1990 order have chosen not to perform on the basis that the administrative
record of decision underlying that order does not support the remedy the
agency is requiring. The complaint alleges that the defendants should pay
penalties (up to $25,000 per day and three times the cost of work the
government performs) for failing to comply with the order. It also
alleges the company should be responsible for past government
expenditures. According to the agency, the total cost, both past and
future, will probably exceed $64 million. The company is vigorously
defending this action.
The company is also currently involved in litigation against its insurers to
recover cleanup costs and other damages for which it may be adjudged
responsible at many of the sites. The suit, Johnson Controls, Inc. v.
Employers Insurance of Wausau (Case No. 89-CV-016174), was filed in 1989 in
Milwaukee County Circuit Court. The suit seeks costs of defense and indemnity
payments under the policies and also declaratory judgments for future costs.
In 1994, the Wisconsin Supreme Court ruled that many types of cleanup costs are
not recoverable under common comprehensive general liability insurance
policies, such as those at issue in the company's cases. In 1995, the
Milwaukee County Circuit Court decided that the Wisconsin Supreme Court's
ruling applies to the company's case against its insurers and found for the
insurers. The company has appealed the decision. In Spring 1997, the
Wisconsin Supreme Court narrowed its 1994 decision in a manner advantageous to
Johnson Controls' claims, and additional briefs have been submitted to the
Wisconsin Court of Appeals, where the case is pending.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction of G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this report in lieu of being
included in the company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
James H. Keyes, 57, was elected Chairman of the Board in January, 1993,
and Chief Executive Officer in 1988. He has served as President
since 1986. Mr. Keyes joined the company in 1966.
15
<PAGE> 16
John M. Barth, 51, was elected a member of the Board of Directors in
November, 1997. He has served as an Executive Vice President with
responsibility for the Automotive Systems Group since 1992. Previously,
he served as Vice President, Automotive Systems Group, since 1990.
Mr. Barth joined the company in 1969.
Joseph W. Lewis, 62, was elected an Executive Vice President in 1992 and
has served as Vice President, Controls Group, since 1986. Mr. Lewis
joined the company in 1958. He has announced his retirement, effective
January, 1998.
Dr. Steven J. Bomba, 60, was elected Vice President, Corporate Technology
in 1990. From 1987 to 1990 he was Vice President, Advanced Manufacturing
Technologies, for Rockwell International.
Susan F. Davis, 44, was elected Vice President, Human Resources, in April
1994. From August 1993, she served as Vice President of Organizational
Development for the Automotive Systems Group, and the former Plastics
Technology Group and the Battery Group. Ms. Davis joined the company in
1983.
Giovanni (John) Fiori, 53, was elected a Corporate Vice President in 1992
and serves as Vice President and General Manager of automotive operations
in Europe and emerging markets. Previously, he served as Vice President
of automotive seating operations in Europe. Mr. Fiori joined the company
in 1987.
Michael F. Johnston, 50, was elected a Corporate Vice President in July
1993, and was named Vice President and General Manager of the Automotive
Systems Group's North American operations in November 1997. Previously,
he served as Vice President and General Manager of the company's Interior
Systems and Batteries businesses. Mr. Johnston joined the company in
1989.
John P. Kennedy, 54, was elected a Corporate Vice President in 1989 and
has been Secretary since 1987 and General Counsel since 1984 when he
joined the company.
William P. Killian, 63, was elected Vice President, Corporate Development
and Strategy in 1988, and served as Vice President, Corporate Development,
from 1985 to 1988. Mr. Killian joined the company in 1977.
Robert Netolicka, 50, was elected Vice President and General Manager of
the Controls Group's Integrated Facilities Management business in
1997. Previously, he served as Vice President and General Manager of the
Controls Group's Systems Products business, since 1993, and has held
Controls Group management positions in Australia, Europe, Hong Kong and
America since joining the company in 1974.
Stephen A. Roell, 47, was elected Vice President and Chief Financial
Officer in 1991. Since 1990 he served as Corporate Controller and
Assistant Secretary. He served as Treasurer from 1987 to 1991. Mr. Roell
joined the company in 1982.
16
<PAGE> 17
Brian J. Stark, 48, was elected Vice President and General Manager of the
Controls Group's Systems and Services business in September 1995. Since
joining the company in 1971, Mr. Stark has served as a Branch and Regional
Manager within the Systems and Services field organization.
Keith E. Wandell, 47, was elected Vice President and General Manager of
the Automotive Systems Group's Batteries business in 1997. Previously, he
served in a number of management positions, most recently as Vice
President and General Manager of the Batteries business' Starting,
Lighting and Ignition Division. Mr. Wandell joined the company in
1988.
Denise M. Zutz, 46, was elected Vice President, Communication in 1991.
She previously served as Director of Corporate Communication and had
served in other communication positions since joining the company in 1973.
Ben C.M. Bastianen, 53, was named Treasurer in 1991, when he joined the
company. Between 1984 and 1990 he served as Assistant Treasurer, and then
Treasurer, of Borg-Warner Corporation.
Patrick J. Dennis, 46, was named Controller, with responsibility for the
Automotive Systems Group, effective January, 1996. He has held controller
responsibilities for the Automotive Systems Group since joining the
company in 1983.
Stacy L. Fox, 44, was elected Assistant Secretary in November, 1996. She
joined the company in 1989 and serves as Vice President and Division
General Counsel of the Automotive Systems Group.
Jerome D. Okarma, 45, was elected Assistant Secretary in 1990. He has
served as Assistant General Counsel since joining the company in 1989 and
as Vice President and Division General Counsel of the Controls Group since
1993.
Franklin H. Smith, Jr., 46, was named Controller, with responsibility for
the Controls Group, effective October, 1995. Between 1991 and 1995, he
served as Corporate Controller, and from 1987 to 1991 he served as
Director, Corporate Taxes for the company. Mr. Smith joined the company
in 1987.
Subhash (Sam) Valanju, 55, joined the company in 1996 and is presently
the Chief Information Officer. Prior to that time, Mr. Valanju was
Director of Information Systems for Rockwell Automotive.
There are no family relationships, as defined by the instructions to this item,
between the above executive officers.
All officers are elected for terms which expire on the date of the meeting of
the Board of Directors following the Annual Meeting of Shareholders or until
their successors are elected and qualified.
17
<PAGE> 18
PART II
The information required by Part II, Items 5, 6, 7, 7A and 8, are incorporated
herein by reference to the company's 1997 Annual Report to Shareholders as
follows:
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS - See price range and dividend information on page 18, and
Note 9 "Shareholders' Equity" on page 34 of Notes to Consolidated
Financial Statements of the 1997 Annual Report to Shareholders.
Number of Record Holders
Title of Class as of November 20, 1997
-------------- ------------------------
Common Stock, $.16-2/3 par value 56,989
ITEM 6 SELECTED FINANCIAL DATA - See "Five Year Summary" on page 40 of the
1997 Annual Report to Shareholders.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - See pages 18 through 25 of the 1997 Annual
Report to Shareholders.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - See
"Risk Management" on pages 23 through 24 of Management's Discussion
and Analysis section of the 1997 Annual Report to Shareholders.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - See pages 26 through 38
of the 1997 Annual Report to Shareholders.
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
All information required by Items 10 through 13 of Part III, with the exception
of information on the Executive Officers which appears on pages 15-17 of Part I
of this report, is incorporated by reference to pages 1-11 of the company's
Proxy Statement for its 1998 Annual Meeting of Shareholders.
18
<PAGE> 19
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page in
Annual Report*
-------------
<S> <C>
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Statement of Income for the years ended
September 30, 1997, 1996 and 1995 .......................... 26
Consolidated Statement of Financial Position at
September 30, 1997 and 1996 ................................ 27
Consolidated Statement of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 28
Consolidated Statement of Shareholders' Equity for
the years ended September 30, 1997, 1996 and 1995 29
Notes to Consolidated Financial Statements 30-38
Report of Independent Accountants 39
</TABLE>
*Incorporated by reference from the indicated pages of the 1997 Annual Report
to Shareholders.
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
(2) Financial Statement Schedule
Report of Independent Accountants on Financial
Statement Schedule 24
For the years ended September 30, 1997, 1996 and 1995:
II. Valuation and Qualifying Accounts 26
</TABLE>
All other schedules are omitted because they are not applicable, or the
required information is shown in the financial statements or notes thereto.
19
<PAGE> 20
Financial statements of 50% or less-owned companies have been omitted because
the proportionate share of their profit before income taxes and total assets
are less than 20% of the respective consolidated amounts, and investments in
such companies are less than 20% of consolidated total assets.
(3) EXHIBITS
3.(i) Restated Articles of Incorporation of Johnson Controls,
Inc., as amended January 22, 1997, filed herewith.
3.(ii) By-laws of Johnson Controls, Inc., as amended March 27, 1996
(incorporated by reference to Exhibit 3.(ii) to Johnson
Controls, Inc. Annual Report on Form 10-K for the year ended
September 30, 1996).
4.A Miscellaneous long-term debt agreements and financing leases
with banks and other creditors and debenture indentures.*
4.B Miscellaneous industrial development bond long-term debt
issues and related loan agreements and leases.*
4.C Rights Agreement between Johnson Controls, Inc. and Firstar
Trust Company (Rights Agent) as amended November 16, 1994
(incorporated by reference to Exhibit 4.C to Johnson Controls,
Inc. Annual Report on Form 10-K for the year ended
September 30, 1994)
4.D Certificate of the Relative Rights and Preferences of the
Series D Convertible Preferred Stock of Johnson Controls, Inc.
(incorporated by reference to an exhibit to the Form 8-K dated
May 26, 1989).
4.E Note and Guaranty Agreement dated June 19, 1989 between
Johnson Controls, Inc., as Guarantor, and Johnson Controls, Inc.
Employee Stock Ownership Trust, acting by and through LaSalle
National Bank, as trustee, as issuer (incorporated by reference
to Exhibit 4.E to Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1990).
4.F Letter of agreement dated December 6, 1990 between Johnson
Controls, Inc., LaSalle National Trust, N.A. and Fidelity
Management Trust Company which replaces LaSalle National
Trust, N.A. as Trustee of the Johnson Controls, Inc. Employee
Stock Ownership Plan Trust with Fidelity Management Trust
Company as Successor Trustee, effective January 1, 1991
(incorporated by reference to Exhibit 4.F to Johnson Controls,
Inc. Annual Report on Form 10-K for the year ended September
30, 1991).
4.G Indenture for debt securities dated February 22, 1995 between
Johnson Controls, Inc. and Chemical Bank Delaware, trustee
(Incorporated by reference to the Form S-3 filed February 13,
1995, which became effective February 17, 1995).
20
<PAGE> 21
(3) EXHIBITS (Continued)
10.A Johnson Controls, Inc., 1992 Stock Option Plan as amended
through January 24, 1996 (incorporated by reference to Exhibit
10.A to Johnson Controls, Inc. Annual Report on Form 10-K for
the year ended September 30, 1996).
10.B Johnson Controls, Inc., 1984 Stock Option Plan as amended
through September 22, 1993 (Incorporated by reference to Exhibit
10.B to Johnson Controls, Inc. Annual Report on Form 10-K for
the year ended September 30, 1993).
10.C Johnson Controls, Inc., 1992 Stock Plan for Outside
Directors, (incorporated by reference to Exhibit 10.D to Johnson
Controls, Inc. Annual Report on Form 10-K for the year ended
September 30, 1992).
10.D Johnson Controls, Inc., Common Stock Purchase Plan for
Executives approved January 24, 1996 (incorporated by reference
to Exhibit 10.D to Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1996).
10.E Johnson Controls, Inc., Deferred Compensation Plan for
Certain Directors as amended through September 25, 1991
(incorporated by reference to Exhibit 10.C to Johnson Controls,
Inc. Annual Report on Form 10-K for the year ended
September 30, 1991).
10.F Johnson Controls, Inc., Directors Retirement Plan as amended
through July 26, 1989 (incorporated by reference to Exhibit
10.D to Johnson Controls, Inc. Annual Report on Form 10-K for
the year ended September 30, 1989).
10.G Johnson Controls, Inc., Executive Incentive Compensation Plan
Deferred Option as amended March 21, 1995 (incorporated by
reference to Exhibit 10.F to Johnson Controls, Inc.
Annual Report on Form 10-K for the year ended September 30,
1995).
10.H Johnson Controls, Inc., Executive Incentive Compensation Plan
as amended through September 22, 1993, (incorporated by
reference to Exhibit 10.H to Johnson Controls, Inc. Annual
Report on Form 10-K for the year ended September 30, 1993).
10.I Johnson Controls, Inc., Executive Incentive Compensation
Plan, Deferred Option, Qualified Plan effective September 28,
1994, (incorporated by reference to Exhibit 10.I to Johnson
Controls, Inc. Annual Report on Form 10-K for the year ended
September 30, 1994).
10.J Johnson Controls, Inc., Long-Term Performance Plan, as
amended through September 28, 1994, (incorporated by reference
to Exhibit 10.J to Johnson Controls, Inc. Annual Report on
Form 10-K for the year ended September 30, 1994).
21
<PAGE> 22
(3) EXHIBITS (Continued)
10.K Johnson Controls, Inc., Executive Survivor Benefits Plan, as
amended through January 1, 1989, (incorporated by reference to
Exhibit 10.K to Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1994).
10.L Johnson Controls, Inc., Equalization Benefit Plan as amended
through May 24, 1989 (incorporated by reference to Exhibit 10.L
to Johnson Controls, Inc. Annual Report on Form 10-K for
the year ended September 30, 1996).
10.M Form of employment agreement as amended through October 1,
1991 between Johnson Controls, Inc. and Messrs. Barth, Kennedy,
Keyes, Lewis and Roell, (incorporated by reference to Exhibit
10.K to Johnson Controls, Inc. Annual Report on Form 10-K for
the year ended September 30,1992).
10.N Form of indemnity agreement, as amended, between Johnson
Controls, Inc. and Messrs. Barth, Kennedy, Keyes, Lewis and
Roell, (incorporated by reference to Exhibit 10.K to Johnson
Controls, Inc. Annual Report on Form 10-K for the year ended
September 30, 1991).
11 Statement regarding computation of earnings per share for the
years ended September 30, 1997, 1996 and 1995, filed herewith.
12 Statement regarding computation of ratio of earnings to fixed
charges for the year ended September 30, 1997, filed herewith.
13 1997 Annual Report to Shareholders (incorporated sections
only in electronic filing), filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Consent of Independent Accountants dated December 18, 1997,
filed herewith.
27 Financial Data Schedule (electronic filing only).
99 Proxy Statement for Annual Meeting of Shareholders of Johnson
Controls, Inc., to be held January 28, 1998, filed herewith.
*These instruments are not being filed as exhibits herewith
because none of the long-term debt instruments authorizes the
issuance of debt in excess of ten percent of the total assets
of Johnson Controls, Inc., and its subsidiaries on a
consolidated basis. Johnson Controls, Inc. agrees to furnish a
copy of each such agreement to the Securities and Exchange
Commission upon request.
22
<PAGE> 23
(b) The following Form 8-K was filed during the fourth quarter of the
company's 1997 fiscal year or thereafter through the date of this Form
10-K:
(1) On October 30, 1997, the company filed a Form 8-K in order to
take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and to provide updated
disclosure of the factors that could affect any forward-looking
statements made by, or on behalf of, the company.
Other Matters
For the purposes of complying with the amendments to the rules governing Form
S-8 under the Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference
into registrant's Registration Statements on Form S-8 Nos. 33-30309, 33-31271,
33-58092, 33-58094, 33-49862, 333-10707 and 333-36311.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
23
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Johnson Controls, Inc.
Our audits of the consolidated financial statements referred to in our report
dated October 20, 1997 appearing on page 39 of the 1997 Annual Report to
Shareholders of Johnson Controls, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
October 20, 1997
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JOHNSON CONTROLS, INC.
BY Stephen A. Roell
Vice President and Chief
Financial Officer
Date: December 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of December 18, 1997, by the following persons
on behalf of the registrant and in the capacities indicated:
James H. Keyes Stephen A. Roell
Chairman and Vice President and Chief
Chief Executive Officer Financial Officer
Robert W. Smith
Assistant Corporate Controller
Martha R. Seger Gilbert R. Whitaker, Jr.
Director Director
Fred L. Brengel Robert A. Cornog
Director Director
Richard F. Teerlink William F. Andrews
Director Director
25
<PAGE> 26
JOHNSON CONTROLS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997 1996 1995
---------------------------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of period $20.9 $18.6 $19.9
Accounts charged off (6.9) (4.7) (5.8)
Provision charged to costs and expenses 5.2 6.8 4.5
Acquisition of businesses 2.6 1.0 -
Currency translation (0.9) (0.1) 0.4
Recoveries on accounts previously charged off - (1.0) 0.2
Other (0.1) 0.3 (0.6)
---------------------------------
Balance at end of period $20.8 $20.9 $18.6
=================================
DEFERRED TAX ASSETS - VALUATION ALLOWANCE
Balance at beginning of period $56.6 $30.9 $23.8
Allowance established for new
loss carryforwards and tax credits 38.9 30.6 8.5
Allowance reversed for loss carryforwards utilized (14.2) (4.9) (1.4)
---------------------------------
Balance at end of period $81.3 $56.6 $30.9
=================================
</TABLE>
26
<PAGE> 27
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
<TABLE>
EXHIBITS TITLE PAGE
<S> <C> <C>
3.(i) Restated Articles of Incorporation of Johnson
Controls, Inc., as amended January 22, 1997,
filed herewith. 32-49
3.(ii) By-laws of Johnson Controls, Inc., as amended
March 27, 1996 (incorporated by reference to
Exhibit 3.(ii) to Johnson Controls, Inc. Annual
Report on Form 10-K for the year ended
September 30, 1996).
4.A Miscellaneous long-term debt agreements and
financing leases with banks and other creditors
and debenture indentures.*
4.B Miscellaneous industrial development bond
long-term debt issues and related loan
agreements and leases.*
4.C Rights Agreement between Johnson Controls,
Inc. and Firstar Trust Company (Rights Agent),
as amended November 16, 1994, (incorporated by
reference to Exhibit 4.C to Johnson Controls,
Inc. Annual Report on Form 10-K for the year
ended September 30, 1994).
4.D Certificate of the Relative Rights and
Preferences of the Series D Convertible
Preferred Stock of Johnson Controls, Inc.
(incorporated by reference to an exhibit to the
Form 8-K dated May 26, 1989).
4.E Note and Guaranty Agreement dated June 19,
1989 between Johnson Controls, Inc., as
Guarantor, and Johnson Controls, Inc. Employee
Stock Ownership Trust, acting by and through
Lasalle National Bank, as trustee, as issuer,
(Incorporated by reference to Exhibit 4.E to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1990).
</TABLE>
27
<PAGE> 28
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS TITLE PAGE
<S> <C> <C>
4.F Letter of agreement dated December 6, 1990
between Johnson Controls, Inc., LaSalle
National Trust, N.A. and Fidelity
Management Trust Company which replaces
LaSalle National Trust, N.A. as Trustee
of the Johnson Controls, Inc. Employee Stock
Ownership Plan Trust with Fidelity Management
Trust Company as Successor Trustee, effective
January 1, 1991 (incorporated by reference to
Exhibit 4.F to Johnson Controls, Inc. Annual
Report on Form 10-K for the year ended
September 30, 1991).
4.G Indenture for debt securities dated
September 1, 1989 between Johnson Controls,
Inc. and Chemical Bank Delaware, trustee
(incorporated by reference to the Form S-3
dated September 20, 1989).
10.A Johnson Controls, Inc., 1992 Stock Option
Plan as amended through January 24, 1996
(incorporated by reference to Exhibit 10.A to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1996).
10.B Johnson Controls, Inc., 1984 Stock Option
Plan as amended through September 22, 1993
(incorporated by reference to Exhibit 10.B to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1993).
10.C Johnson Controls, Inc., 1992 Stock Plan for
Outside Directors, (incorporated by reference
to Exhibit 10.D to Johnson Controls, Inc.
Annual Report on Form 10-K for the year ended
September 30, 1992).
10.D Johnson Controls, Inc., Common Stock
Purchase Plan for Executives, approved January
24, 1996 (incorporated by reference to Exhibit
10.D to Johnson Controls, Inc. Annual Report on
Form 10-K for the year ended September 30,
1996).
</TABLE>
28
<PAGE> 29
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS TITLE PAGE
<S> <C> <C>
10.E Johnson Controls, Inc., Deferred
Compensation Plan for Certain Directors as
amended through September 25, 1991
(incorporated by reference to Exhibit 10.C to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1991).
10.F Johnson Controls, Inc., Directors Retirement
Plan as amended through July 26, 1989
(incorporated by reference to Exhibit 10.D to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1989).
10.G Johnson Controls, Inc., Executive Incentive
Compensation Plan Deferred Option as amended
March 21, 1995 (incorporated by reference to
Exhibit 10.F to Johnson Controls, Inc. Annual
Report on Form 10-K for the year ended
September 30, 1995).
10.H Johnson Controls, Inc., Executive Incentive
Compensation Plan as amended through September
22, 1993 (incorporated by reference to Exhibit
10.H to Johnson Controls, Inc. Annual Report on
Form 10-K for the year ended September 30,
1993).
10.I Johnson Controls, Inc., Executive Incentive
Compensation Plan, Deferred Option, Qualified
Plan effective September 28, 1994,
(incorporated by reference to Exhibit 10.I to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1994).
10.J Johnson Controls, Inc., Long-Term
Performance Plan as amended through September
28, 1994, (incorporated by reference to Exhibit
10.J to Johnson Controls, Inc. Annual Report on
Form 10-K for the year ended September 30,
1994).
</TABLE>
29
<PAGE> 30
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS TITLE PAGE
<S> <C> <C>
10.K Johnson Controls, Inc., Executive Survivor
Benefits Plan amended through January 1, 1989,
(incorporated by reference to Exhibit 10.K to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1994).
10.L Johnson Controls, Inc., Equalization Benefit
Plan dated May 24, 1989 (incorporated by
reference to Exhibit 10.L to Johnson Controls,
Inc. Annual Report on Form 10-K for the year
ended September 30, 1996).
10.M Form of employment agreement, as amended
through October 1, 1991, between Johnson
Controls, Inc. and Messrs. Barth, Kennedy,
Keyes, Lewis and Roell, (incorporated by
reference to Exhibit 10.K to Johnson Controls,
Inc. Annual Report on Form 10-K for the year
ended September 30, 1992).
10.N Form of indemnity agreement, as amended,
between Johnson Controls, Inc. and Messrs.
Barth, Kennedy, Keyes, Lewis and Roell,
(incorporated by reference to Exhibit 10.K to
Johnson Controls, Inc. Annual Report on Form
10-K for the year ended September 30, 1991).
11 Statement regarding computation of
earnings per share for the years ended
September 30, 1997, 1996 and 1995, filed
herewith. 50
12 Statement regarding computation of ratio
of earnings to fixed charges for the year
ended September 30, 1997, filed herewith. 51
13 1997 Annual Report to Shareholders
(incorporated sections only in electronic
filing), filed herewith. 52-94
</TABLE>
30
<PAGE> 31
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS TITLE PAGE
<S> <C> <C>
21 Subsidiaries of the Registrant, filed herewith. 95-105
23 Consent of Independent Accountants
dated December 18, 1997, filed herewith. 106
27 Financial Data Schedule, (electronic filing only.)
99 Proxy Statement for Annual Meeting of
Shareholders of Johnson Controls, Inc., to be held
January 28, 1998, filed herewith. 107-125
</TABLE>
*These instruments are not being filed as exhibits herewith because
none of the long-term debt instruments authorizes the issuance of
debt in excess of ten percent of the total assets of Johnson
Controls, Inc., and its subsidiaries on a consolidated basis.
Johnson Controls, Inc. agrees to furnish a copy of each such
agreement to the Securities and Exchange Commission upon request.
31
<PAGE> 1
EXHIBIT 3 (i)
RESTATED ARTICLES OF INCORPORATION
OF
JOHNSON CONTROLS, INC.
Pursuant to the authority and provisions of Chapter 180 of the Wisconsin
Statutes, the existing Articles of Incorporation are hereby amended, superseded
and restated to read as follows:
ARTICLE I
Name
The name of the corporation is Johnson Controls, Inc.
ARTICLE II
Purpose
The corporation is organized for the purpose of any lawful activity within the
purposes for which corporations may be organized under the Wisconsin Business
Corporation Law, Chapter 180 of the Wisconsin Statues, including (without in
any manner limiting by the following enumeration the generality of the
foregoing) the manufacture, sale and installation of, and dealing in, automatic
temperature and humidity controls for heating, cooling, ventilating,
air-conditioning and industrial processing.
ARTICLE III
Authorized Shares
The aggregate number of shares which this Corporation has authority to issue is
302,000,000* shares, consisting of 300,000,000* shares of class of designated
"Common Stock" of the par value of $0.16-2/3* per share and 2,000,000 shares of
class designated "Preferred Stock" of the par value of $1.00 per share. Any
and all such shares of Common Stock and Preferred Stock may be issued for such
consideration, not less than the par value thereof, as shall be fixed from time
to time by the Board of Directors. Any and all such shares so issued, the full
consideration for which has been paid or delivered, shall be deemed fully paid
stock and shall not be liable to any further call or assessment thereon, and
the holders of such share shall not be liable for any further payments except
as otherwise provided by applicable Wisconsin Statutes. Notwithstanding any
other provision hereof, the Board of Directors shall have no authority to cause
any shares of Preferred Stock to be issued if, as a result of such issuance,
the aggregate amount payable in the event of voluntary or involuntary
liquidation on all shares of Preferred
32
<PAGE> 2
Stock outstanding would exceed $100,000,000. The preferences, limitations and
relative rights of each class shall be as follows:
*(As Amended January 22, 1997)
(A) Preferred Stock
(1) Series of Preferred Stock
The Board of Directors shall (have) authority to divide the Preferred
Stock into series, and shall determine and fix the relative rights and
preferences of the shares of any series so established prior to the
issuance thereof, but only with respect to:
(a) The rate of dividend and the date from which such dividends shall be
cumulative;
(b) The price at and the terms and conditions on which shares may be
redeemed;
(c) The amount payable upon shares in the event of voluntary or
involuntary liquidation;
(d) Sinking fund provisions for the redemption or purchase of share;
(e) The terms and conditions on which shares may be converted into
shares of Common Stock, if the shares or any series are issued with
the privilege of conversion.
(f) Voting rights, if any.
Except as to the matters expressly set forth above in this Paragraph (1), all
series of the Preferred Stock of the corporation, whenever designated and
issued, shall have the same preferences, limitations and relative rights and
shall rank equally, share ratably and be identical in all respects as to all
matters.
All shares of any one series of Preferred Stock hereinabove authorized shall be
alike in every particular, and each series thereof shall be distinctively
designated by letter or descriptive words or figures.
(2) Dividends
The holders of Preferred Stock shall be entitled to receive dividends
at the rate per annum specified as to each series pursuant to
Paragraph (1), and no more, payable quarterly on the last day of
March, June, September, and December in each year for the respective
calendar quarter ending on such dates ("Dividend Periods") out of the
unreserved earned surplus of the corporation or out of any capital
surplus legally available for the payment of such dividends, when and
as declared by the Board of Directors. Such dividends shall accrue on
each share of Preferred Stock from the first day of the Dividend
Period in which such share is issued or from such other date as the
Board of Directors may fix for this purpose pursuant to Paragraph (1).
All dividends on Preferred Stock shall be cumulative so that if the
corporation shall not pay or set apart for payment the dividend, or
any part thereof, for any Dividend Period, on the Preferred Stock then
issued and outstanding, such deficiency in the dividend on the
Preferred Stock shall thereafter be fully paid or declared and set
apart for payment, but without interest before any dividend shall be
paid or declared and set apart for payment on the Common Stock. The
holders of Preferred Stock shall not be entitled to participate in
33
<PAGE> 3
any other or additional earnings or profits of the corporation, except
for such premiums, if any, as may be payable in case of redemption,
liquidation, dissolution or winding up.
Any dividend paid upon the Preferred Stock at a time when any accrued
dividends for any prior Dividend Period are delinquent shall be
expressly declared to be in whole or partial payment of the accrued
dividends to the extent thereof, beginning with the earliest Dividend
Period for which dividends are then wholly or partly delinquent, and
shall be so designated to each shareholder to whom payment is made.
No dividends shall be paid upon any shares of any series of Preferred
Stock of the corporation for a current Dividend Period unless there
shall have been paid or declared and set apart for payment dividends
required to be paid to the holders of each other series of Preferred
Stock for all past Dividend Periods of such other series. If any
dividends are paid on any of the Preferred Stock with respect
to any past Dividend Period at any time when less than the total
dividends then accumulated and payable for all past Dividend Periods
on all of the Preferred Stock then outstanding are to be paid or
declared and set apart for payment, then the dividends being paid
shall be paid on each series of Preferred Stock in proportions that
the dividends than accumulated and payable on each series for all past
Dividend Periods bear to the total dividends then accumulated and
payable for all such past Dividend Periods on all outstanding
Preferred Stock.
(3) Liquidation, Dissolution or Winding Up
In case of voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the holders of each series of Preferred
Stock shall be entitled to receive out of the assets of the
corporation in money or money's worth the amount specified pursuant to
Paragraph (1) with respect to that series of Preferred Stock, together
with all accrued but unpaid dividends thereon (whether or not earned
or declared), before any of such assets shall be paid or distributed
to holders of Common Stock. In case of voluntary or involuntary
liquidation, dissolution or winding up of the corporation, if the
assets shall be insufficient to pay the holders of all of the series
of Preferred stock then outstanding the full amounts to which they may
be entitled, the holders of each outstanding series shall share
ratably in such assets in proportion to the amounts which would be
payable with respect to such series if all amounts payable thereon
were paid in full. The consolidation or merger of the corporation
with or into any restoration, or a sale of all or any part of its
assets, shall not be deemed a liquidation, dissolution or winding up
of the corporation within the meaning of this paragraph.
(4) Redemption
Except as otherwise provided with respect to a particular series
pursuant to Paragraph (1), the following general redemption provisions
shall apply to each series of Preferred stock (hereinafter in this
paragraph referred to as "Series"):
34
<PAGE> 4
On or prior to the date fixed for redemption of a particular Series or
any part thereof as specified in the notice of redemption for
said Series, the corporation shall deposit adequate funds for such
redemption, in trust for the account of holders of the Series to be
redeemed, with a bank having trust company in good standing organized
under the laws of the United States of America or the State of
Wisconsin doing business in the State of Wisconsin and having capital,
surplus and undivided profits aggregating at least One Million Dollars
($1,000,000), and if the name and address of such bank or trust
company and the deposit of or intent to deposit the redemption funds
in such trust account shall have been stated in such notice of
redemption, them from and after the mailing of such notice and the
making of such deposit the shares of the Series called for redemption
no longer be deemed to be outstanding for any purpose whatsoever, and
all rights of the holders of such share in or with respect to the
corporation shall forthwith cease and terminate except only the right
of the holders of such shares (2) to transfer such shares prior to the
date fixed for redemption, (b) to receive out of said deposit the
redemption price of such shares, which shall nevertheless include
accrued but unpaid dividends to the date fixed for redemption, without
interest, upon surrender of the certificate or certificates
representing the shares to be redeemed, and (c) to exercise on or
before the close of business on the fifth day preceding the date fixed
for redemption privileges of conversion, if any, not theretofore
expired.
In case of redemption of only a part of a Series, the corporation shall
designate by lot, in such manner as the Board of Directors may
determine, the share to be redeemed, or shall effect such redemption
pro rata.
Any moneys so deposited by the corporation which shall remain
unclaimed by the holders of the shares called for redemption and not
converted shall, at the end of six years after the date fixed for
redemption, be paid to the corporation upon its request, after which
repayment the holders of the shares so called for redemption shall no
longer look to the said bank or trust company for the payment of the
redemption price but shall look only to the corporation or to others,
as the case may be, for the payment of any lawful claim for such
moneys which holders of said shares may still have. After said
six-year period, the right of any shareholder other person to receive
such payment may be forfeited in the manner and with the effect
provided under Wisconsin Law. Any portion of the moneys so deposited
by the corporation, in respect of shares of the Series converted into
Common Stock, shall be repaid to the corporation upon its request.
(5) Conversion Rights
Except as otherwise provided with respect to a particular series
pursuant to Paragraph (1), the following general conversion provisions
shall apply to each series of Preferred Stock which is convertible
into Common Stock (hereinafter, in this paragraph, referred to as
"Series"):
35
<PAGE> 5
(a) All shares of Common Stock issued upon conversion shall be fully
paid and nonassessable, and shall be free of all taxes, liens and
charges with respect to the issue thereof except taxes, if any,
payable by reason of issuance in a name other than that of the holder
of the share or shares converted and except as otherwise provided by
applicable Wisconsin Statutes.
(b) The number of shares of Common Stock issuable upon conversion of
a particular Series at any time shall be the quotient obtained by
dividing the aggregate conversion value, as herein provided, of the
shares of that Series surrendered for conversion, by the price per
share of Common Stock then in effect for that Series as herein
provided. The corporation shall not be required, however, upon any
such conversion, to issue any fractional share of Common Stock, but in
lieu thereof the corporation shall pay to the shareholder who would
otherwise be entitled to receive such fractional share if issued, a
sum in case equal to the value of such fractional share at the rate of
the then market value per share of Common Stock which for purposes
hereof shall mean the last reported sale price of Common Stock on the
New York Stock Exchange. Share of Preferred Stock shall be deemed to
have been converted as of the close of business on the date of receipt
at the office of the Transfer Agent of the certificates therefor, duly
endorsed, together with written notice by the holder of his election
to convert the same.
(c) The basic conversion price per share of Common Stock for a
particular Series, as provided for under the detailed description of
the individual Series, shall be subject to adjustment from time to
time as follows:
(i) In Case the corporation shall (A) pay a dividend or make
a distribution of all holders of outstanding shares of its Common
Stock as a class in shares of its Common Stock, (B) subdivide or
split the outstanding shares of its Common Stock into a larger
number of shares, or (C) combine the outstanding shares of its
Common Stock into a smaller number of shares, the base conversion
price per share of Common Stock in effect immediately prior
thereto shall be adjusted retroactively so that the holder of each
outstanding share of each Series of Preferred Stock which by its
terms is convertible into Common Stock shall thereafter be
entitled to receive upon the conversion of such share the number
of shares of Common Stock of the corporation which he would have
owned and been entitled to receive after the happening of any of
the events described above had such share of such Series been
converted immediately prior to the happening of such event. An
adjustment made pursuant to this clause (c) (i) shall become
effective retroactively immediately after such record date in the
case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split or combination.
Such adjustments shall be made successively whenever any event
described above shall occur.
(ii) In case the corporation shall issue to all holders of its
Common Stock as a class any rights or warrants enabling them to
subscribe for or purchase shares of Common Stock at a price per
share less than the current market price per share of
36
<PAGE> 6
Common Stock (as hereinafter defined) at the record date for
determination of shareholders entitled to receive such rights or
warrants, the basic conversion price per share of Common Stock in
effect immediately prior thereto for each Series of Preferred
Stock which by its terms is convertible into Common Stock shall
be adjusted retroactively by multiplying such basic conversion
price by a fraction, of which the numerator shall be the sum of
the number of shares of Common Stock outstanding at such record
date and the number of share of Common Stock which the aggregate
exercise price (before deduction of underwriting discounts or
commissions and other expenses of the corporation in connection
with the issue) of the total number of shares so offered for
subscription or purchase would purchase at such current market
price per share of which the denominator shall be the sum of the
number of shares of Common Stock outstanding at such record date
and the number of additional shares of Common Stock so offered
for subscription or purchase. An adjustment made pursuant to
this clause (c) (ii) shall become effective retroactively
immediately after the record date for determination of
shareholders entitled to receive such rights or warrants. Such
adjustments shall be made successively whenever any event
described above shall occur.
(iii) In case the corporation shall distribute to all holders
of its Common Stock as a class evidences of its indebtedness or
assets (other than cash dividends), the basic conversion price per
share of Common Stock in effect immediately prior thereto for each
Series of Preferred Stock which by its terms is convertible into
Common Stock shall be adjusted retroactively by multiplying such
basis conversion price by a fraction, of which the numerator shall
be the difference between the current market price per share per
share of Common Stock at the record date for determination of
shareholders entitled to receive such distribution and the fair
value (as determined by the Board of Directors) of the portion of
the evidences of indebtedness or assets (other than cash
dividends) so distributed applicable to one share of Common Stock,
and of which the denominator shall be the current market price per
share of Common Stock. An adjustment made pursuant to this clause
(c) (iii) shall become effective retroactively immediately after
such record date. Such adjustments shall be made successively
whenever any event described above shall occur.
(d) For the purpose of any computation under clause (c) (iii) above,
the current market price per share of Common Stock on any date shall
be deemed to be the average of the high and low sale prices of the
Common Stock of the corporation, as reported in the New York Stock
Exchange - Composite Transactions (or such other principal market
quotation as may then be applicable to such Common Stock) for each of
the 30 consecutive trading days commencing 45 trading days before such
date.
(e) For the purpose of making the computations prescribed in clause
(c) of this Paragraph (5), no adjustment shall be made in the basic
conversion price for any Series of Preferred Stock in effect
immediately prior to such computation if the amount of such adjustment
would be less than fifty cents; provided however, that any adjustments
which by reason
37
<PAGE> 7
of this clause (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment; and
provided further that anything to the contrary in the foregoing
notwithstanding any adjustment required for purposes of making the
computations in said clause (c) shall be made not later than the
earlier of (x) 3 years after the effective date provided for under
said clause (c) for such adjustment or (y) the date as of which such
adjustment would require an increase or decrease of at least 3% in the
aggregate number of shares of Common Stock issued and outstanding on
the first date on which an event occurred which required the making of
a computation prescribed in said clause (c). All calculations under
this Paragraph (5) shall be made to the nearest cent or to the nearest
1/100th of a share, as the case may be."
(f) In the case of any capital reorganization or reclassification of
Common Stock, or if the corporation shall be consolidated with or
merged into, or sell or dispose of all substantially all of its
property and assets, to any other corporation, proper provisions shall
be made as part of the terms of such capital reorganization,
reclassification, consolidation, merger or sale that any shares of a
particular Series at the time outstanding shall thereafter be
convertible into the number of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock
deliverable upon conversion of such shares of a particular Series
would have been entitled upon such capital reorganization,
reclassification, consolidation or merger.
(g) No adjustment with respect to dividends upon any Series or with
respect to dividends upon Common Stock shall be made in connection
with any conversion.
(h) Whenever there is an issue of additional shares Common Stock of
the corporation requiring a change in the conversion price as provided
above, and whenever there occurs any other event which results in a
change in the existing conversion rights of the holders of shares of a
series, the corporation shall file and its transfer agent or agents
and at its principal office in Milwaukee, Wisconsin, a statement
signed by the President or a Vice President and by the Treasurer or
Assistant Treasurer of the corporation, describing specifically such
issue of additional shares of Common Stock or such other event (and,
in the case of a capital reorganization, reclassification,
consolidation or merger, the terms thereof) and the actual conversion
prices or basis of conversion as changed by such issue or event and
the change, if any, in the securities issuable upon conversion.
Whenever there are issued by the corporation to all holders of its
Common Stock as a class any rights or warrants enabling them to
subscribe for or purchase shares of Common Stock, the corporation
shall also file in like manner a statement describing the same and the
consideration receivable by the corporation therefrom. The statement
so filed shall be open to inspection by any holder of record of shares
of any Series.
(i) The corporation shall at all times have authorized and shall at
all times reserve and set aside a sufficient number of duly authorized
shares of Common Stock for the conversion of all stock of all then
outstanding Series which are convertible into Common Stock.
38
<PAGE> 8
(6) Reissuance of Shares
Any shares of Preferred Stock retired by purchase, redemption,
through conversion or through the operation of any sinking fund or
redemption or purchase account, shall thereafter have the status of
authorized but unissued shares of Preferred Stock of the corporation,
and may thereafter be reissued as part of the same series or may be
reclassified and reissued by the Board of Directors in the same manner
as any other authorized and unissued shares of Preferred Stock.
(7) Voting Rights of Preferred Stock
(a) Ordinary Voting Rights. Holders of Preferred Stock shall be
entitled to one vote for each share of such class held on all
questions on which shareholders of the corporation are entitled to
vote and shall vote together share for share with the holders of
Common Stock as one class, except as otherwise provided by law or
as hereinafter otherwise provided or as otherwise determined by
the Board of Directors at the time of the establishment of such
Series of Preferred Stock pursuant to clause (f) of Paragraph (1)
of this Section (A).
(b) Special Voting Rights. Holders of Preferred Stock shall have
voting rights as provided in the preceding clause (a) and, in
addition, the following special voting rights:
(i) Election of Directors. Whenever dividends payable on any
series of the Preferred Stock shall be in arrears in an aggregate
amount equivalent to six full quarterly dividends on the shares of
all of the Preferred Stock of that series then outstanding, the
holders of Preferred Stock of that series shall have the exclusive
and special right voting separately as a class, to elect two
directors of the corporation, and the number of directors
constituting the Board of Directors shall be increased to the
extent necessary to effectuate such right. Whenever such
right of the Board of Directors shall be increased to the extent
necessary to effectuate such right. Whenever such right of the
holders of any series of the Preferred Stock shall have vested,
such right may be exercised initially either at a special meeting
of the holders of such series of the Preferred Stock called as
hereinafter provided in clause (b) (ii), or at any annual meeting
of shareholders, and thereafter at annual meetings of
shareholders. The right of the holders of any series of the
Preferred Stock voting separately as a class to elect members of
the Board of Directors of the corporation as aforesaid shall
continue until such time as all dividends accumulated on such
series of the Preferred Stock shall have been paid in full, at
which time the special right of the holders of such series of the
Preferred Stock so to vote separately as a class for the election
of directors shall terminate, subject to revesting in the event
of each and every subsequent default in an aggregate amount
equivalent to six full quarterly dividends.
39
<PAGE> 9
(ii) Special Meetings of Holders of Preferred Stock. At any time when
such special voting power shall have vested in the holders of
any series of the Preferred Stock as hereinbefore provided in
clause (b) (i), a proper officer of the corporation shall, upon
the written request of the holders of record of at least 10% of
such series of the Preferred Stock then outstanding addressed to
the Secretary of the corporation, call a special meeting of the
holders of such series of the Preferred Stock for the purpose of
electing directors pursuant to clause (b) (i). Such meeting
shall be held at the earliest practicable date in such place as
may be designated pursuant to the By-laws (or if there be no
designation, at the principal offices of the corporation in
Milwaukee, Wisconsin). If such meeting shall not be called by
the proper officers of the corporation within 20 days after
personal service of the said written request upon the Secretary
of the corporation, or within 30 days after mailing the same
within the United States of America by registered or certified
mail addressed to the Secretary of the corporation at its
principal office, then the holders of record of at least 10% of
such series of the Preferred Stock then outstanding may designate
in writing one of their numbers to call such meeting at the
expense of the corporation, and such meeting may be called by
such person so designated upon the notice required for annual
meetings of shareholders and shall be held in Milwaukee,
Wisconsin. Any holder of such series of Preferred Stock so
designated shall have access to the stock books of the
corporation for the purpose of causing meeting of shareholders to
be called pursuant to these provisions. Notwithstanding the
provisions of this clause (b) (ii), no such special meeting shall
be called during the period within 90 days immediately preceding
the date fixed for the next annual meeting of shareholders.
(iii)Special Rules Applicable While Any Series of Preferred Stock
Has Special Voting Rights. At any annual or special meeting at
which the holders of any series of the Preferred Stock shall have
the special right, voting separately as a class, to elect
directors as provided in clause (b) (i), the presence, in person
or by proxy, of the holders of 33-1/3% of such series of the
Preferred Stock shall be required to constitute a quorum of such
series for the election of any director by the holders of such
series as a class. At any such meeting or adjournment thereof,
(A) the absence of a quorum of such series of the Preferred Stock
shall not prevent the election of directors other than those to
be elected by such series of the Preferred Stock voting as a
class, and the absence of a quorum for the election of such other
directors shall not prevent the election of the directors to be
elected by such series of the Preferred Stock voting as a class
and (B) in the absence of either or both such quorums, a majority
of the holders present in person or by proxy of the stock or
stocks which lack a quorum shall have power to adjourn the
meeting for the election of directors which they are entitled to
elect from time to time until a quorum shall be present, without
notice other than announcement at the meeting.
40
<PAGE> 10
During any period in which the holders of any series of the
Preferred Stock have the right to vote as a class for directors
as provided in clause (b) (i), any vacancies in the Board of
Directors shall be filled only be vote of a majority (even if
that be only a single director) of the remaining directors
theretofore elected by the holders of the series or class of
stock which elected the directors whose office shall have become
vacant. During such period the directors so elected by the
holders of any series of the Preferred Stock shall continue in
office (A) until the next succeeding annual meeting or until
their successors, if any are elected by such holders and qualify,
or (B) unless required by applicable law to continue in office
for longer period, until termination of the right of the holders
of such series of the Preferred Stock to vote as a class for
directors, if earlier. If and to the extent permitted by
applicable law, immediately upon any termination of the right of
the holders of any series of the Preferred Stock to vote as a
class for directors as provided in clause (b) (i), the term of
office of the directors then in office so elected by the holders
of such series shall terminate.
(iv) Action Requiring Approval of Two-Thirds of Outstanding Shares
of Each Series of Preferred Stock. The affirmative vote or
written consent of the holders of record of at least tow-thirds
of the outstanding shares of a series of the Preferred Stock
shall be a prerequisite of the right of the corporation.
(A) To create any shares of any securities convertible into
or evidencing the right to purchase shares ranking prior to such
series of the Preferred Stock with respect to the payment of
dividends or of assets upon liquidation, dissolution or winding
up; or
(B) To change the designations, preferences, limitations, or
relative rights of the outstanding shares or such series of
Preferred Stock in any manner prejudicial to the holders thereof.
(v) Action Requiring Approval of a Majority of Outstanding
Shares of Each Series of Preferred Stock. The affirmative vote or
written consent of the holders of a majority of the outstanding
shares of each series of Preferred Stock shall be a prerequisite
to the right of the corporation to authorize any shares of
Preferred Stock in excess of 2,000,000 shares or any other shares
ranking on a parity with Preferred Stock with respect to the
payment of dividends or of assets upon liquidation, dissolution or
winding up.
(8) Restrictions in Event of Default in Dividends on Preferred Stock
If at any time the corporation shall have failed to pay dividends in
full on the Preferred Stock, thereafter and until dividends in full,
including all accrued and unpaid dividends for all past quarterly
dividend periods on the Preferred Stock outstanding, shall have been
declared and set apart in trust for payment or paid, or if at any time
the corporation shall have failed to pay in full amounts payable with
respect to any obligations to retire shares of the Preferred Stock,
thereafter and until such amount shall have been paid in
41
<PAGE> 11
full or set apart in trust for payment (a) the corporation, without the
affirmative vote or consent of the holders of at least 66-2/3% of the
Preferred Stock at the time outstanding given in person or by proxy,
either in writing or by resolution adopted at a special meeting called
for the purpose, at which the holders of the Preferred Stock shall vote
separately as a class, regardless of series, shall not redeem less than
all of the Preferred Stock at such time outstanding; (b) the
corporation shall not purchase any Preferred Stock except in accordance
with a purchase offer made in writing to all holders of Preferred Stock
of all series upon such terms as the Board of Directors in its sole
discretion after consideration of the respective annual dividend rate
and other relative rights and preferences of the respective series,
shall determine (which determination shall be final and conclusive)
will result in fair and equitable treatment among the respective
series; provided that (i) the corporation, to meet the requirements of
any purchase retirement or sinking fund provisions with respect to any
series, may use shares of such series acquired by it prior to such
failure and then held by it as treasury stock and (ii) nothing shall
prevent the corporation from completing the purchase or redemption of
shares of Preferred Stock for which a purchase contract was entered
into for any purchase, retirement or sinking fund purposes, or
the notice of redemption of which was initially mailed, prior to such
failure; and (c) the corporation shall not redeem, purchase or
otherwise acquire, or permit any subsidiary to purchase or acquire any
shares of any other stock of the corporation ranking junior to the
Preferred Stock as to dividends and upon liquidation.
(9) Series B, $2.00 Cumulative Convertible Preferred Stock.
(a) Designation - Series B. There shall be a series of the
Preferred Stock of this corporation hereby designated as Series B,
$2.00 Cumulative Convertible Preferred Stock (hereinafter in this
Paragraph (9) referred to as "Series B Stock") consisting of
1,000,000 shares. The shares of Series B Stock shall have the
rights and preferences hereinafter set forth, in addition to those
otherwise provided with respect to all shares of Preferred Stock.
(b) Dividends - Series B. The rate of dividends on the
Series B Stock shall be $2.00 pre annum, payable quarterly on the
last days of March, June, September and December of each year for
the respective Dividend Periods ending on such dates. Dividends
on shares of Series B Stock shall accrue from and after October 1,
1978 and shall be cumulative from and after such date whether or
not on nay quarterly dividend date there shall be funds legally
available for the payment of dividends.
(c) Liquidation, Dissolution or Winding Up - Series B. In
case of voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the holders of Series B Stock shall
be entitled to receive out of the assets of the corporation in
money's worth an amount equal to $40.00 for each share of the
Series B Stock, plus all accrued but unpaid dividends thereon, and
no more, before any of such assets shall be paid or distributed to
holders of Common Stock. The consolidation or merger of the
corporation with or into any other corporation, or a sale of all
or any part of its assets, shall not be deemed a liquidation,
dissolution or winding up of the corporation within the meaning of
this paragraph.
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<PAGE> 12
(d) Redemption - Series B.
(1) The shares of Series B Stock shall not be
redeemable on or before October 9, 1983 and thereafter will be
redeemable at any time at the option of the corporation,
exercised by resolution of the Board of Directors, either in
whole or in part, at (x) a redemption price per share equal to
the lesser of (i) $40.00 per share, or (ii) 110% of the less
of (A) the average of the high and low sales prices of the
shares of Common Stock, par value $5 per share, of Globe-Union
Inc. as reported in the New York Stock Exchange - Composite
Transactions (or by any such other national securities
exchange on which such shares shall be listed) on the trading
day immediately preceding the date on which the shareholders
of Globe-Union Inc. approve the Plan and Agreement of
Reorganization dated June 27, 1978 between Globe-Union Inc.
and the corporation, or (B) the average "when issued" price of
the Series B Stock as quoted in the customary "when issued"
market on such trading day immediately preceding the date of
such approval by the shareholders of Globe-Union Inc., except
that in the event that there is not in the opinion of Goldman
Sachs & Co. a readily ascertainable "when issued" market for
the Series B Stock on such trading day, then such average
"when issued" price shall, for purposes of this clause (II)
(B), be the average of the high and low sales prices of the
Series B Stock as reported in the New York Stock Exchange -
Composite Transactions (or by any such other national
securities exchange on which such shares shall be listed) on
the first trading day on which such shares are traded after
October 10, 1978 (or if such Series B Stock is not listed on
the New York Stock Exchange (or any such other national
securities exchange) on such first trading date after October
10, 1978 then the average of the bid and asked prices of the
Series B Stock on such first trading date as quoted by the
National Association of Securities Dealers through its
automated quotation system), plus (y) in each case a sum equal
to all accrued but unpaid dividends of such Series B Stock;
provided, however, that the corporation shall have no such
right to redeem shares of Series B Stock unless the product of
(A) the quotient of the conversion value (as defined in clause
(e) below) divided by the basic conversion price (as adjusted
from time to time), times (B) the average of the high and low
sales prices of the Common Stock of the corporation, as
reported in the New York Stock Exchange - Composite
Transactions (or such other principal market quotation as may
then be applicable to such Common Stock) for ten consecutive
trading days ending with the tenth trading day prior to the
date of the corporation's notice of redemption under clause
(d) (2) below, is at least $42.00 for each such trading day.
(2) Notice of any redemption of Series B Stock,
specifying the time and place of redemption, shall be mailed
to each holder of record of the shares to be redeemed, at his
address of record, not more than all the shares owned by such
shareholder are then to be redeemed, the notice shall also
specify the number of shares thereof which are to be redeemed
and the number of the certificates representing such shares.
43
<PAGE> 13
(e) Conversion Right - Series B. Any holder of Series B Stock
may convert the same, at any time, into shares of Common Stock on the
basis herein provided, at a basic conversion price of $32.40 per
share, subject to adjustment from time to time as hereinbefore
provided in Paragraph (5), provided that the conversion right of any
shares of Series B Stock which shall have been called for redemption
shall terminate at the close of business on the fifth day preceding
the date fixed for the redemption of such shares. For the purpose of
such conversion, shares of Series B Stock shall at all times be taken
to have a conversion value of 440.00 per share.
(f) Notice to Holders of Series B Stock. Immediately after
the initial issuance of the Series B Stock the corporation shall file
with its transfer agent or agents a statement specifying the
redemption price provided in clause (d) (1) (x) and the basic
conversion price provided in clause (e) (including, in reasonable
detail, the manner in which such redemption price and basic conversion
price were calculated), and cause a notice, setting forth such
redemption price and basic conversion price, to be mailed to holders
of record of shares of Series B Stock at their addresses as shown on
the books of the corporation."
(B) Common Stock
(1) Dividends
After all dividends on all series of Preferred Stock entitled to
dividends which shall have accrued through the ends of the last
preceding Dividend Periods set for all such series shall have been
paid or declared and set apart for payment at the rates at which such
series of Preferred Stock are entitled for the last preceding
Dividend Periods set for such series, the holders of the Common Stock
shall be entitled to receive such dividends as may be declared
thereon from time to time by the Board of Directors, at its
discretion, out of any assets of the corporation at the time legally
available for payment of dividends of Common Stock.
(2) Dissolution
In the event of the dissolution of the corporation, whether voluntary
or involuntary, after distribution to the holders of all shares of
Preferred Stock which shall be entitled to a preference over the
holders of Common Stock of the full preferential amounts to which
they are entitled, the holders of Common Stock shall be entitled to
share ratably in the distribution of the remaining assets of the
corporation.
(3) Voting Rights of Common Stock
Holders of Common Stock shall be entitled to one vote for each share
of such class held on all questions on which shareholders of the
corporation as entitled to vote and shall vote together share for
share with the holders of Preferred Stock as one class, except as
otherwise provided by law or as herein otherwise provided.
44
<PAGE> 14
(C) General
(1) Pre-emptive Rights
No holder of any class of stock of the corporation shall have any
pre-emptive or preferential right to subscribe for or purchase any of
the unissued shares of stock the corporation, whether now or
hereafter authorized, or any stock of this corporation purchased by
this corporation or by its nominee or nominees, or any bonds,
certificates of indebtedness, debentures or other securities
convertible into stock of this corporation, or any right of
subscription to any thereof other than such, if any, as the Board of
Directors in its discretion may from time to time determine.
(2) Holders of Record
The corporation shall be entitled to treat the holder of record of
any share or shares or stock as the owner thereof for all purposes,
and shall not be bound to recognize any equitable or other claim to
or interest in any such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof.
(3) Increases Shareholder Voting Requirement in Connection with Certain
Merger and Other Transactions
(a) Except as set forth in clause (d) of this Paragraph (3),
the affirmative vote or consent of the holders of four-fifths of
all classes of stock of this corporation entitled to vote in
elections of directors, considered for the purposes of this
Paragraph (3) as one class, shall be required (i) for the adoption
of any agreement for the merger or consolidation of this
corporation with or into any other corporation, or (ii) to
authorize any sale, lease, exchange, mortgage, pledge or other
disposition of all or any substantial part of the assets of this
corporation to, or any sale, lease, exchange, mortgage, pledge or
other disposition to this corporation or any subsidiary thereof in
exchange for securities of this corporation of any assets of, any
other corporation, person or other entity, if, in either case, as
of the record date for the determination of shareholders entitled
to notice thereof and to vote thereon or consent thereto such
other corporation, person or entity is the beneficial owner,
directly or indirectly, of more than 10% of the outstanding shares
of stock of this corporation entitled to vote in elections of
directors considered for the purposes of this Paragraph (3) as one
class. Such affirmative vote or consent shall be in addition to
the vote or consent of the holders of the stock of this
corporation otherwise required by law, these Articles of
Incorporation or any agreement between this corporation and any
national securities exchange.
45
<PAGE> 15
(b) For the purposes of this paragraph (3), (i) any
corporation, person or other entity shall be deemed to be the
beneficial owner of any shares of stock of this corporation (A)
which it has the right to acquire pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or
otherwise or (B) which are beneficially owned, directly or
indirectly (including shares deemed owned through application of
subclause (A), above), by any other corporation, person or entity
with which it or its "affiliate" or "associate" (as defined below)
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposition of stock of this
corporation, or which is its "affiliate" or "associate" as those
terms are defined in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934 as in effect
on January 1, 1969, and (ii) the outstanding shares of any class
of stock of this corporation shall include shares deemed owned
through application of subclauses (A) and (B) above but shall not
include any other shares which may be issuable pursuant to any
agreement, or upon exercise of conversion rights, warrants or
options, or otherwise.
(c) The Board of Directors shall have the power and duty to
determine for the purposes of this Paragraph (3), on the basis of
information known to such Board, whether (i) such other
corporation, person or other entity beneficially owns more than
10% of the outstanding shares of stock of this corporation
entitled to vote in elections of directors, (ii) a corporation,
person, or entity is an "affiliate" or associate (as defined
above) of another, and (iii) the memorandum of understanding
referred to below is substantially consistent with the transaction
covered thereby. Any such determination shall be conclusive and
binding for all purposes of this Paragraph (3).
(d) The provisions of this Paragraph (3) shall not be
applicable to (i) any merger or consolidation of this corporation
with or into any other corporation, or any sale, lease, exchange,
mortgage, pledge or other disposition of all or any substantial
part of the assets of this corporation to, or any sale, lease
mortgage, pledge or other disposition to this corporation or any
subsidiary thereof in exchange for securities of this corporation
of any assets of, any other corporation, person or other entity,
if the Board of Directors of this corporation shall by resolution
have approved a memorandum of understanding with such other
corporation, person or other entity, with respect to and
substantially consistent with such transaction prior to the time
such other corporation, person or other entity shall have become a
beneficial owner of more than 10% of the shares of stock of this
corporation entitled to vote in elections of directors; or (ii)
any merger or consolidation of this corporation with, or any sale,
lease, exchange, mortgage, pledge or other disposition to this
corporation or any subsidiary thereof of any assets of any
corporation of which a majority of the outstanding shares of all
classes of stock entitled to vote in elections of directors is
owned of record or beneficially by this corporation and its
subsidiaries.
46
<PAGE> 16
(e) No amendment to these Articles of Incorporation shall
amend, alter, change or repeal any of the provisions of this
Paragraph (3), unless the amendment effecting such amendment,
alteration, change or repeal shall receive the affirmative vote or
consent of the holders of four-fifths of all classes of stock of
this corporation entitled to vote in elections of directors,
considered for the purposes of this Paragraph (3) as one class.
ARTICLE IV
Board of Directors
The Board of Directors shall consist of such number of directors (not less than
three) as in fixed from time to time by the By-laws. The By-laws may provide,
to the extent permitted by law, that the directors be divided into classes and
that the terms of office or directors of each class may be more than one year.
A director may be removed from office during the term for which he has been
elected only by affirmative vote to two-thirds of the outstanding shares
entitled to vote for the election of such director.
ARTICLE V
Registered Office and Agent
The address of the registered office is 5757 North Green Bay Avenue, Glendale,
Wisconsin 53209, and the name of the registered agent at such address is John
P. Kennedy.
ARTICLE VI
Indemnification
(A) The corporation shall indemnify any person who was or is a party
or threatened to be made a party to any threatened, pending or
completed action, suite or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a
director officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses, including attorney's
fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connect with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to he best interests of the
corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did
47
<PAGE> 17
not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(B) The corporation shall indemnify any person who was or is a party
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses, including attorney's fees,
actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless
and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the
case, such person is fairly and reasonably entitled to indemnity for
such expenses which such court shall deem proper.
(C) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in the preceding
Sections (A) and (B) of this Article VI, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection therewith.
(D) Any indemnification under Sections (A) or (B) of this Article VI,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in such Sections. Such determination shall be made:
(1) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding.
(2) If such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) By the shareholders.
(E) Expenses, including attorney's fees, incurred in defending a
civil or criminal action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit
or proceeding as authorized in the manner provided in Section (D) upon
receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this Article VI.
48
<PAGE> 18
(F) The right to indemnification provided by this Article VI shall
not be deemed exclusive of any other rights to which those indemnified
may be entitled under any by-law, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(G) The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such
liability under the provisions of this Article VI.
* * * * * * *
These Restated Articles of Incorporation supersede and take the place of the
existing Articles of Incorporation and all amendments to the Articles of
Incorporation.
This document was drafted by John P. Kennedy, Esq.
49
<PAGE> 1
EXHIBIT 11
JOHNSON CONTROLS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(in millions, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net Income $288.5 $234.7 $195.8
Preferred dividends, net of tax
benefit (9.5) (9.5) (9.4)
------ ------ ------
Earnings available for common
shareholders $279.0 $225.2 $186.4
------ ------ ------
Average common shares outstanding
Common stock 83.5 82.6 81.8
Common stock equivalents -
Assumed exercise of stock options 1.3 1.0 0.5
------ ------ ------
84.8 83.6 82.3
------ ------ ------
Primary earnings per share $3.29 $2.69 $2.26
====== ====== ======
FULLY DILUTED EARNINGS PER SHARE
Net Income $288.5 $234.7 $195.8
After tax compensation expense
which would arise from the assumed
conversion of the Series D
Convertible Preferred Stock (5.5) (5.6) (5.8)
------ ------ ------
Fully diluted earnings $283.0 $229.1 $190.0
------ ------ ------
Average common shares outstanding
Common stock 83.5 82.6 81.8
Conversion of Series D Convertible
Preferred Stock 5.6 6.0 6.2
Common stock equivalents -
Assumed exercise of stock options 1.8 1.3 1.1
------ ------ ------
90.9 89.9 89.1
------ ------ ------
Fully diluted earnings per share $3.12 $2.55 $2.13
====== ====== ======
</TABLE>
50
<PAGE> 1
EXHIBIT 12
JOHNSON CONTROLS, INC.
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
For the Year Ended
September 30, 1997
------------------
<S> <C>
Income from continuing operations $220.6
Provision for income taxes 180.9
Undistributed earnings of partially-owned affiliates (9.1)
Minority interest in earnings of consolidated subsidiaries 24.1
Amortization of previously capitalized interest 4.0
------
420.5
Fixed charges:
Interest incurred and amortization of debt expense 136.8
Estimated portion of rent expense 32.3
------
Fixed charges 169.1
Less: Interest capitalized during period (7.9)
------
161.2
------
Earnings $581.7
======
Ratio of earnings to fixed charges 3.4
======
</TABLE>
For the purpose of computing this ratio, "earnings" consist of (a) income from
continuing operations before income taxes (adjusted for undistributed earnings
or recognized losses of partially-owned affiliates, minority interest in
earnings or losses of consolidated subsidiaries, and amortization of previously
capitalized interest), plus (b) fixed charges, minus (c) interest capitalized
during the period. "Fixed charges" consist of (a) interest incurred and
amortization of debt expense plus (b) the portion of rent expense
representative of the interest factor.
51
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
DISCONTINUED OPERATIONS
On February 28, 1997, the Company completed the sale of its Plastic
Container division (PCD) to Schmalbach-Lubeca AG/Continental Can Europe (a
member of the VIAG Group) for approximately $650 million, with a portion of the
proceeds deferred. The Company recorded a gain on the sale of $135 million ($69
million or $.76 per fully diluted share, after-tax).
Operating results, net assets and cash flows of PCD have been
segregated as discontinued operations in the accompanying consolidated
financial statements. Net (loss) earnings of PCD were $(1.1) million ($(.01)
per fully diluted share) on sales of $242 million for the five months ended
February 28, 1997 and $12.0 million ($.13 per fully diluted share) on sales of
$799 million for the year ended September 30, 1996.
<TABLE>
<CAPTION>
Common Stock Price Range Dividends
- ------------------------------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C>
First Quarter $35-3/4 - 42-11/16 $28-7/8 - 34-7/8 $0.215 $0.205
Second Quarter 39-3/8 - 45-11/16 32-5/16 - 37-13/16 0.215 0.205
Third Quarter 35-3/8 - 43-7/8 33-1/2 - 37-9/16 0.215 0.205
Fourth Quarter 41 - 49-13/16 31-1/4 - 38-1/4 0.215 0.205
- ------------------------------------------------------------------------------------
Year $35-3/8 - 49-13/16 $28-7/8 - 38-1/4 $0.86 $0.82
====================================================================================
</TABLE>
Prior year results of operations, financial position and cash flows
noted in the following discussion have been restated to reflect the current
year's presentation of PCD as a discontinued operation.
CONTINUING OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
SALES
- -----
Consolidated net sales for 1997 reached a record $11,145 million,
representing a 21% increase over 1996 sales of $9,210 million. The Company's
automotive segment was the principal contributor to the year's increased sales.
Automotive segment sales for 1997 rose 28% to $8,022 million, up from
the prior year's $6,250 million. Approximately one-half of the increase is
attributable to the acquisition of Prince, the interior systems company acquired
in October 1996. North American seating sales were strong despite a slight
decline in industry vehicle production levels in 1997 compared with the prior
year. The sales growth reflects the Company's participation with new vehicle
models such as Ford's Expedition and F-150 light trucks and General Motors'
minivans. Seating sales in Europe were higher, despite the impact of lower
currency exchange rates, due to successful new programs with Ford, Chrysler and
Volkswagen.
<PAGE> 2
Sales of automotive batteries reached a record level due to higher unit
shipments to existing markets and the addition of a new customer, Sears' Western
Auto Parts America.
Controls segment sales increased 6% to $3,123 million from $2,960
million in 1996. Integrated facilities management activity in the commercial
market worldwide was the source of most of the segment's growth. Sales were also
higher in the non-residential building construction markets in the Asia/Pacific
region and the United States.
Looking to 1998, management expects consolidated net sales will exceed
the 1997 level. Automotive segment sales are expected to increase approximately
8% to 13%, reflecting the launch of new seating business in North America,
Europe, and South America; tempered by an expectation for slightly lower vehicle
production levels in North America. Sales of automotive batteries are also
expected to increase due to growth from existing customers and the Company's new
three-year contract to manufacture Sears DieHard Gold brand batteries.
Management expects controls segment sales to increase approximately 5%
to 10% in 1998. The expected increase is based on the continued expansion of
integrated facilities management activity in the commercial market and higher
systems retrofit activity, particularly for U.S. government facilities. At
September 30, 1997, the unearned backlog of commercial building systems and
services contracts (excluding integrated facilities management) to be executed
within the next fiscal year was $760 million. The increase from the prior year
amount of $746 million is primarily due to growth in orders in the
non-residential building construction market in the Asia/Pacific region.
OPERATING INCOME
- ----------------
Consolidated operating income for 1997 was $527 million, including a $70
million restructuring charge recorded in the second quarter (see discussion that
follows). Operating income before the restructuring charge was $597 million, a
25% increase over the prior year's $479 million.
The automotive segment's operating income, excluding the segment's
portion of the restructuring charge, rose to $478 million, a 32% increase from
the prior year's $361 million. The inclusion of earnings from Prince and higher
seating shipments in North America and Europe contributed to the segment's
increased operating income. Higher automotive battery volumes contributed to the
segment's operating income growth. Start-up and engineering investments related
to new seating programs worldwide, especially in Europe and South America, and
strikes at two of the Company's automotive facilities also affected segment
operating income.
Operating income for the controls segment, excluding the segment's
portion of the restructuring charge, increased 2% to $119 million. The
improvement was largely due to increased integrated facilities management
activity in the commercial market, both in North America and continental Europe.
This improvement was partially offset by lower operating margins in the North
American systems and services market as investments outpaced revenues.
<PAGE> 3
In the second quarter of 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70 million involving its
automotive and controls segments. The automotive initiatives primarily relate to
European operations where certain manufacturing capacity is being realigned with
anticipated future customer sourcing requirements, and product development
resources are being consolidated. The charge associated with the controls
business principally addresses the Company's decision to restructure certain
low-margin service activities which are outside its core controls and facilities
management businesses. At September 30, 1997, costs of $55 million had been
charged against the reserve, comprised of asset writedowns of $43 million,
employee severance and termination benefits of $6 million, and other costs
relating to the restructuring initiatives of $6 million. Restructuring actions
are expected to be completed during 1998.
Consolidated operating income is expected to increase in 1998, based
principally on higher sales projections and improved efficiencies. The
automotive segment's operating income is anticipated to grow as a result of new
seating business worldwide, continued involvement in successful vehicle
programs, and reduced start-up and engineering costs in Europe as new programs
move from start-up to production. The launch of new seating programs in South
America and the Asia/Pacific region, however, is expected to continue to reduce
operating income. The automotive segment has supply agreements with certain of
its customers that provide for annual productivity price reductions and, in some
instances, for the recovery of material and labor cost increases. The segment
has been, and anticipates it will continue to be, able to significantly offset
any sales price changes with cost reductions from design changes, productivity
improvements and similar programs with suppliers. Controls segment operating
income is expected to increase due to expansion of integrated facilities
management and systems retrofit activity in the commercial market. Performance
in the systems and services market is expected to improve as certain initiatives
started in 1997, including cost reduction and productivity improvement programs,
continue in 1998.
OTHER INCOME/EXPENSE
- --------------------
Net interest expense (interest expense net of interest income) in 1997
was $113 million, $47 million higher than the prior year. The increase was
primarily the result of the financing associated with the acquisition of Prince
for approximately $1.3 billion at the beginning of the Company's fiscal year.
Net interest expense in 1998 is expected to be slightly lower than in 1997.
Miscellaneous-net income of $11 million increased by $3 million over the
prior year. The improvement was primarily due to higher equity income, with
strong contributions from the automotive segment's partially-owned affiliates in
North America and Europe.
PROVISION FOR INCOME TAXES
- --------------------------
The effective income tax rate on continuing operations was 42.5% for
1997 compared with 40.8% for the prior year. The increase primarily reflects the
non-deductible goodwill amortization associated with the acquisition of Prince.
The effective rate for the fiscal year was higher than the combined federal and
state statutory rate of approximately 39%, due mostly to the non-deductible
goodwill amortization of Prince and higher foreign effective rates. No
significant change in the effective income tax rate is anticipated for 1998.
<PAGE> 4
INCOME FROM CONTINUING OPERATIONS
- ---------------------------------
The Company's income from continuing operations for 1997 was $221
million or $2.37 per fully diluted share. Before the restructuring charge ($40
million or $.44 per fully diluted share, after-tax), income from continuing
operations totaled $261 million, which represents a 17% increase from the prior
year's $223 million. The increase was attributable to improvements in operating
income, offset in part by higher net interest expense. Fully diluted earnings
per share from continuing operations (before the restructuring charge) were
$2.81, up from $2.42 in the prior year.
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
SALES
- -----
Consolidated net sales for 1996 were $9,210 million, representing a 24%
increase over 1995 sales of $7,401 million. Automotive segment sales rose 31% to
$6,250 million in 1996, principally due to the Company's participation in new
and successful vehicle seating programs worldwide and the acquisition of Roth
Freres (Roth) during the year. New seating programs launched in 1996 included
Ford's F-Series light truck in North America and Fiesta in Europe. Some of the
more successful vehicle programs in which the Company participates include
Ford's Explorer, Chrysler's Jeep Cherokee and General Motors' Jimmy/Blazer. In
December 1995, the Company completed the acquisition of approximately 75% of
Roth, a major supplier of seating and interior components to the European
automotive industry, which added approximately $500 million to 1996 sales. Sales
of automotive batteries increased as a result of the higher level of unit
shipments to both replacement and original equipment customers. Increased market
penetration by aftermarket battery customers and the colder winter weather were
key contributors to the increase in replacement battery demand. In addition,
higher lead costs, which are passed through to customers in pricing, increased
sales.
Controls segment sales for 1996 were $2,960 million, 13% greater than
1995. The increase was primarily generated by a higher level of activity in the
existing buildings market. Worldwide commercial integrated facilities
management sales improved substantially year-over-year. Sales of retrofit
control systems to the non-residential buildings market, primarily in the form
of performance contracts, also contributed to the increase. Construction sales
in Europe and the Asia/Pacific region were also higher than the year ago
period. Facilities management activity in the U.S. government market was lower
than the prior year.
OPERATING INCOME
- ----------------
Consolidated operating income for 1996 was $479 million, an increase of
21% over 1995. The automotive segment's operating income increased 24% to $361
million in 1996. The segment benefited from higher volumes in both North America
and Europe. Operating margin improvements in North America and Europe,
associated with established vehicle seating program efficiencies, were more than
offset by start-up costs in the segment's
<PAGE> 5
emerging South American and Asia/Pacific seating markets. Significant
reductions in battery operating costs benefited operating margins.
BUSINESS SEGMENTS(1)
<TABLE>
<CAPTION>
Operating Income
Prior to Charge Operating Assets Depreciation/ Capital
Net Sales for Restructuring(2) Income (Year End) Amortization Expenditures
Year ended September 30,
- --------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
1997
Automotive $ 8,022.1 $477.6 $440.6 $4,456.2 $295.6 $309.7
Controls 3,123.3 119.5 86.5 1,143.4 59.3 61.2
Unallocated - - - 449.0 - -
- --------------------------------------------------------------------------------------------------------
Consolidated $11,145.4 $597.1 $527.1 $6,048.6 $354.9 $370.9
========================================================================================================
1996
Automotive $ 6,250.2 $361.2 $361.2 $2,970.5 $209.1 $260.6
Controls 2,959.8 117.7 117.7 1,177.1 53.4 61.7
Unallocated - - - 402.9 - -
Net assets of
discontinued
operations - - - 440.7 - -
- --------------------------------------------------------------------------------------------------------
Consolidated $ 9,210.0 $478.9 $478.9 $4,991.2 $262.5 $322.3
========================================================================================================
1995
Automotive $ 4,770.4 $291.1 $291.1 $2,264.7 $172.2 $274.4
Controls 2,630.3 104.0 104.0 1,071.1 46.9 56.5
Unallocated - - - 345.2 - -
Net assets of
discontinued
operations - - - 466.6 - -
- --------------------------------------------------------------------------------------------------------
Consolidated $ 7,400.7 $395.1 $395.1 $4,147.6 $219.1 $330.9
========================================================================================================
</TABLE>
(1) Prior year segment information has been reclassified to conform to
the current year's presentation.
(2) Operating income for 1997 includes a restructuring charge (see Note 2)
of $70.0 million, with $37.0 million charged to the automotive segment and
$33.0 million charged to the controls segment.
Operating income of the controls segment was $118 million, an increase
of 13% over the prior year. Income grew in line with the higher sales and
primarily resulted from the increased activity in the worldwide existing
commercial buildings market.
OTHER INCOME/EXPENSE
- --------------------
Net interest expense (interest expense net of interest income) in 1996
was $66 million, $19 million higher than the prior year. The increase primarily
resulted from the financing associated with the Roth acquisition and the debt
assumed with the purchase.
Miscellaneous-net income of $8 million compares to an expense of $10
million in the prior year. The Company recorded $14 million more in equity
income in 1996 than in 1995. The majority of this improvement related to the
Company's Mexican affiliates, which benefited from both improved operating
results and the absence of prior year losses associated with
<PAGE> 6
the Mexican Peso devaluation. Other miscellaneous income items in 1996
included gains associated with the sale of certain assets and foreign currency
transactions.
PROVISION FOR INCOME TAXES
- --------------------------
The effective income tax rate on continuing operations for 1996 was
40.8%, lower than the 1995 rate of 42.3%. The effective rate declined due to
improved performance by certain of the Company's consolidated subsidiaries and
European operations, offset by start-up operations in emerging markets. The
effective rate for the fiscal year remained higher than the combined federal and
state statutory rate of approximately 39%, principally due to overall higher
foreign effective rates.
INCOME FROM CONTINUING OPERATIONS
- ---------------------------------
Income from continuing operations rose 33% in 1996 to $223 million as a
result of the improvements in operating and equity income, offset by the
increase in interest expense. Fully diluted earnings per share from continuing
operations were $2.42 for 1996, up from $1.82 in 1995.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Capital expenditures associated with continuing operations were $371
million, $322 million and $331 million in 1997, 1996 and 1995, respectively.
Capital expenditures for the automotive segment accounted for approximately 80%
of the 1997 spending, and were related to the expansion of automotive seating
and interior facilities and product lines worldwide and cost reduction projects.
Controls segment spending was primarily for information technology and cost
reduction projects. Capital expenditures for 1998 are expected to approximate
$350-$375 million, with the majority anticipated to again focus on automotive
seating and interior systems expansion, with spending by the controls segment on
information technology and automated business systems. Cost reduction programs
related to both segments are expected to account for the majority of the
remainder of the expenditures.
Goodwill increased $1,012 million to $1,560 million at September 30,
1997. The increase is attributable to businesses acquired during 1997, most
notably the acquisition of Prince at the beginning of the Company's fiscal year.
All acquisitions were accounted for as purchases and, as such, operating results
are included from the respective acquisition dates.
Investments in partially-owned affiliates of $145 million were
approximately $16 million higher than the prior year. A notable increase during
1997 resulted from the formation of an automotive battery joint venture in
Brazil. Additionally, the Company earned approximately $20 million of equity
income for the year. The increases were partially offset by the impact of
currency translation and dividend distributions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
<PAGE> 7
CASH FLOW
- ---------
Cash of $617 million was provided by operating activities of continuing
operations during 1997 compared with $403 million in 1996. This increase was
generated by a favorable change in the level of working capital. Total working
capital (excluding "Net assets of discontinued operations") decreased to a
negative $443 million at September 30, 1997 compared to $226 million at
September 30, 1996. The significant decrease in working capital relates to the
increase in short-term debt which was used to finance the acquisition of Prince.
Working capital, excluding debt and cash, was lower than the prior year largely
due to higher accounts payable and accrued liabilities.
CAPITALIZATION
- --------------
The Company's capitalization of $3,151 million at September 30, 1997
included short-term debt of $538 million; long-term debt, including the current
portion, of $925 million; and shareholders' equity of $1,688 million. Total debt
as a percentage of total capitalization increased to 46% from 41% at September
30, 1996. The increase is attributable to the issuance of short-term debt to
finance the acquisition of Prince. However, this represents a significant
decline from the 60% level that existed in the first quarter of fiscal 1997,
after Prince was acquired. The reduction is due to the Company's use of the
after-tax proceeds from the sale of PCD and strong operating cash flows during
the second half of 1997 to reduce short-term debt.
In September 1996, the Company entered into two revolving credit
facilities, one for $1.1 billion maturing in September 1997 and the other for
$500 million maturing in May 2001. In May 1997, the $500 million credit facility
was increased to $600 million, with an option to increase it to $1 billion, and
a maturity of May 2002. The Company's other credit facility was renegotiated in
September 1997, decreasing the facility to $250 million, with a maturity of
September 1998. The credit facilities support the issuance of commercial paper.
At September 30, 1997, $538 million of short-term borrowings were outstanding
compared with $248 million at 1996 fiscal year-end.
<PAGE> 8
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter(1) Quarter Quarter Year(1)
Year ended September 30,
- -----------------------------------------------------------------------------------------------
(in millions, except per share data; unaudited)
<S> <C> <C> <C> <C> <C>
1997
Net sales $2,761.3 $2,743.6 $2,879.3 $2,761.2 $11,145.4
Gross profit $ 406.7 $ 375.3 $ 433.4 $ 444.4 $ 1,659.8
Income (loss)
from continuing
operations $ 54.9 $ (1.6) $ 74.4 $ 92.9 $ 220.6
Discontinued
operations,
net of tax $ (1.8) $ 69.7 - - $ 67.9
Net income $ 53.1 $ 68.1 $ 74.4 $ 92.9 $ 288.5
Earnings (loss)
per share from
continuing
operations
Primary $ 0.63 $ (0.06) $ 0.85 $ 1.06 $ 2.48
Fully diluted $ 0.59 $ (0.03) $ 0.81 $ 1.00 $ 2.37
Earnings per share
Primary $ 0.61 $ 0.77 $ 0.85 $ 1.06 $ 3.29
Fully diluted $ 0.57 $ 0.74 $ 0.81 $ 1.00 $ 3.12
- -----------------------------------------------------------------------------------------------
1996
Net sales $1,997.0 $2,245.5 $2,482.0 $2,485.5 $ 9,210.0
Gross profit $ 303.2 $ 299.3 $ 349.5 $ 379.7 $ 1,331.7
Income from
continuing
operations $ 45.3 $ 36.3 $ 63.5 $ 77.6 $ 222.7
Discontinued
operations,
net of tax $ 1.7 $ 0.1 $ 5.8 $ 4.4 $ 12.0
Net income $ 47.0 $ 36.4 $ 69.3 $ 82.0 $ 234.7
Earnings per
share from
continuing
operations
Primary $ 0.52 $ 0.40 $ 0.73 $ 0.90 $ 2.55
Fully diluted $ 0.49 $ 0.39 $ 0.69 $ 0.85 $ 2.42
Earnings per share
Primary $ 0.54 $ 0.40 $ 0.80 $ 0.95 $ 2.69
Fully diluted $ 0.51 $ 0.39 $ 0.76 $ 0.89 $ 2.55
- -----------------------------------------------------------------------------------------------
</TABLE>
(1)Second quarter earnings include (per fully diluted share) the effects
of a restructuring charge equal to $(.44), earnings from discontinued operations
of $.01 and a gain on the sale of discontinued operations of $.76; full year
earnings include a loss from discontinued operations of $(.01). Excluding these
items would result in earnings per fully diluted share of $.41 for the second
quarter and $2.81 for the year.
In May 1997, the Company's $1.5 billion universal shelf registration
statement, under which the Company can issue a variety of debt and equity
instruments, was made effective by the Securities and Exchange Commission. In
July 1997, the Company refinanced a portion of its commercial paper borrowings
associated with the Prince acquisition by issuing $150 million of 7.125% notes
due in 2017. In November 1997, the shelf registration statement was amended to
provide the ability to offer a maximum of $500 million of medium term notes.
<PAGE> 9
High credit ratings from Moody's (A2), Fitch (A), and Standard & Poor's
(A) have been maintained on the Company's long-term debt.
The Company's capital resources and liquidity position are considered
sufficient to meet projected needs. Requirements for working capital, capital
expenditures, dividends and debt maturities in fiscal 1998 are expected to be
funded from operations, supplemented by short-term or long-term borrowings, if
required.
RISK MANAGEMENT
The Company is exposed to market risk from changes in foreign exchange
and interest rates and, to a lesser extent, commodities. To reduce such risks,
the Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
Analytical techniques used to manage and monitor foreign exchange and interest
rate risk include market valuation and sensitivity analysis.
A discussion of the Company's accounting policies for derivative
financial instruments is included in the Summary of Significant Accounting
Policies in the Notes to the Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note 8 - Financial
Instruments.
FOREIGN EXCHANGE
- ----------------
The Company has manufacturing, sales and distribution facilities around
the world and thus makes investments and enters into transactions denominated in
various foreign currencies. In order to maintain strict control and achieve the
benefits of the Company's global diversification, foreign exchange exposures are
first centralized and then netted internally so that only the Company's net
foreign exchange exposures are hedged with financial instruments. The Company
primarily enters into forward exchange contracts to reduce the earnings and cash
flow impact of non-functional currency denominated receivables and payables,
predominately intercompany transactions. Gains and losses resulting from hedging
instruments offset the gains or losses on the underlying assets, liabilities and
investments being hedged. The Company's forward exchange contracts generally
have maturities which do not exceed 12 months, and the maturities coincide with
the settlement dates of the related transactions. Realized and unrealized gains
and losses on these contracts are recognized in the same period as gains and
losses on the hedged items. The Company has entered into two cross-currency
interest rate swaps to hedge portions of its net investments in Germany and
France. The currency effects of these swaps are reflected in the cumulative
translation adjustments account within shareholders' equity where they offset
gains and losses on the net investments in Germany and France. The currencies
that the Company was primarily exposed to on September 30, 1997 were the British
Pound, French Franc, German Mark, Italian Lira, Hong Kong Dollar, Spanish
Peseta, Portuguese Escudo and Australian Dollar.
SENSITIVITY ANALYSIS: The following table indicates the U.S. dollar
equivalents of the net foreign exchange contracts and non-functional currency
denominated debt (instruments) outstanding by currency and the corresponding
impact on the value of these instruments
<PAGE> 10
assuming both a 10% appreciation and depreciation of the respective
currencies. The resulting functional currency gains and losses are translated at
the U.S. dollar spot rate on September 30, 1997. As noted above, the Company's
policy prohibits the trading of financial instruments for profit. It is
important to note that gains and losses indicated in the sensitivity analysis
would be offset by gains and losses on underlying payables, receivables and net
investments in foreign subsidiaries.
<TABLE>
<CAPTION>
Foreign Exchange Gain/(Loss) from:
-------------------------------------
Net Amount of 10% Appreciation 10% Depreciation
Instruments of the Functional of the Functional
Currency Long/(Short) Currency Currency
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in millions)
British Pounds $(146) $15 $(15)
French Francs (33) 3 (3)
German Marks (28) 3 (3)
Italian Lira 24 (2) 2
Hong Kong Dollars (21) 2 (2)
Spanish Pesetas (20) 2 (2)
Portuguese Escudos 15 (2) 2
Australian Dollars (9) 1 (1)
Other 37 (4) 4
- -----------------------------------------------------------------------------------------
Total $(181) $18 $(18)
=========================================================================================
</TABLE>
INTEREST RATES
- --------------
The Company uses interest rate swaps to modify the Company's exposure to
interest rate movements. Certain cross-currency interest rate swaps are
designated as hedges of the Company's related foreign net investment exposures.
Net interest payments or receipts from interest rate swaps are recorded as
adjustments to interest expense in the consolidated statement of income on a
current basis. The Company's earnings exposure related to adverse movements in
interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to U.S. short-term money market rates. A 10%
increase/ decrease in the average cost of the Company's short-term debt would
result in an increase/decrease in pre-tax interest expense of approximately $3
million.
COMMODITIES
- -----------
The Company's exposure to commodity price changes relates to certain
manufacturing operations that utilize raw commodities. The Company manages its
exposure to changes in those prices primarily through its procurement and sales
practices. This exposure is not material to the Company.
FUTURE ACCOUNTING CHANGES
<PAGE> 11
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share." This
statement establishes revised standards for computing and presenting earnings
per share. The statement is effective for the Company's fiscal 1998 first
quarter. All prior periods are required to be restated. The adoption of this
standard will not have a material impact on the Company's reported earnings per
share.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company's U.S. operations are governed by federal environmental
laws, principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air
Act, and the Clean Water Act, as well as state counterparts ("Environmental
Laws"), and by federal and state laws addressing worker safety and health
("Worker Safety Laws"). These laws govern ongoing operations and the remediation
of sites associated with past operations. Under certain circumstances these laws
provide for civil and criminal penalties and fines, as well as injunctive and
remedial relief.
The Company's policy is to comply with applicable Environmental Laws and
Worker Safety Laws, and it has expended substantial resources, both financial
and managerial, to comply with such laws and for measures designed to protect
the environment and maximize worker protection and safety.
The Company believes it is in substantial compliance with such laws, and
maintains procedures designed to ensure compliance. However, the Company has
been, and in the future may become, the subject of formal or informal
enforcement actions or proceedings. Such matters typically are resolved by
negotiation with regulatory authorities resulting in commitments to compliance
or abatement programs and payment of penalties. Historically, neither such
commitments nor penalties imposed on the Company have been material.
Environmental Laws require that certain parties fund remedial actions
regardless of fault, legality of original disposal or ownership of the site. The
Company is currently participating in environmental assessment and remediation
at a number of sites under these laws, and it is likely that in the future the
Company will be involved in additional environmental assessments and
remediations. Such sites include facilities that had been engaged in the
recycling of lead batteries.
Future remediation expenses at these and other sites are subject to a
number of uncertainties, including the method and extent of remediation
(dependent, in part, on existing laws and technology), the percentage and type
of material attributable to the Company, the financial viability of site owners
and the other parties, and the availability of insurance coverage. A charge to
earnings is recorded for sites when it is probable that a liability has been
incurred and the cost can be reasonably estimated.
Environmental considerations are a part of all significant capital
expenditure decisions; however, expenditures in 1997 related solely to
environmental compliance were not material. Environmental remediation,
compliance and management expenses incurred by
<PAGE> 12
the Company in 1997 were approximately $9 million. At September 30,
1997, an accrued liability of approximately $36 million was maintained relating
to environmental matters. The Company's environmental liabilities are
undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds. Because of the uncertainties associated with
environmental assessment and remediation activities, future expenses to
remediate the currently identified sites could be considerably higher than the
accrued liability. However, while neither the timing nor the amount of ultimate
costs associated with known environmental assessment and remediation matters can
be determined at this time, the Company does not expect that these matters will
have a material adverse effect on its financial position, results of operations
or cash flows.
On June 30, 1995, the Company appealed to the Wisconsin Court of Appeals
a Milwaukee County Circuit Court order granting summary judgment dismissing
Johnson Controls' complaint against Employers Insurance of Wausau and other
insurance companies seeking to recover environmental response costs at 21 sites.
The Circuit Court based its decision on a 1994 Wisconsin Supreme Court case that
held response costs incurred to remedy contamination were not "damages" as that
term was used in comprehensive general liability policies. On April 22, 1997,
the Wisconsin Supreme Court handed down decisions in two cases that held that
certain types of environmental payments may be "damages." Based on these cases,
the Company believes that the Court of Appeals will reverse the Circuit Court's
decision, at least in part. If so, the Company believes that at least certain of
its environmental costs should be reimbursed by the defendant insurance
companies. The Company further believes that the insurers will claim that the
costs are not recoverable on the theory that the damage was expected and
intended. The Company has not recorded any anticipated recoveries of future
insurance proceeds, and therefore, the outcome of this case should have no
significant adverse impact on the Company's consolidated financial statements.
If future Environmental and Worker Safety Laws contain more stringent
requirements than currently anticipated, expenditures could be expected to have
a more significant effect on the Company's financial position, results of
operations or cash flows. In general, the Company's competitors face the same
laws, and, accordingly, the Company should not be placed at a competitive
disadvantage.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this document that
are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks in the "Risk Management"
section of this document and those preceded by, following or that include the
words "believes," "expects," "anticipates" or similar expressions. For those
statements, the Company cautions that the numerous important factors discussed
elsewhere in this document and in the Company's Form 8-K filing (dated October
30, 1997), could affect the Company's actual results and could cause its actual
consolidated results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
<PAGE> 13
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended September 30,
- -------------------------------------------------------------------------------------------
(in millions, except per share data) 1997 1996 1995
<S> <C> <C> <C>
Net sales $11,145.4 $9,210.0 $7,400.7
Cost of sales 9,485.6 7,878.3 6,236.0
- -------------------------------------------------------------------------------------------
Gross profit 1,659.8 1,331.7 1,164.7
- -------------------------------------------------------------------------------------------
Selling, general and administrative expenses 1,062.7 852.8 769.6
Restructuring charge 70.0 - -
- -------------------------------------------------------------------------------------------
Operating income 527.1 478.9 395.1
- -------------------------------------------------------------------------------------------
Interest income 9.9 7.9 7.1
Interest expense (122.7) (73.4) (53.7)
Miscellaneous - net 11.3 8.1 (10.2)
- -------------------------------------------------------------------------------------------
Other income (expense) (101.5) (57.4) (56.8)
- -------------------------------------------------------------------------------------------
Income before income taxes and minority
interests 425.6 421.5 338.3
Provision for income taxes 180.9 171.8 143.0
Minority interests in net earnings of
subsidiaries 24.1 27.0 27.3
- -------------------------------------------------------------------------------------------
Income from continuing operations 220.6 222.7 168.0
- -------------------------------------------------------------------------------------------
Discontinued operations
(Loss) income from discontinued
operations, adjusted for applicable
(benefit) provision for income taxes
of $(1.0), $9.8 and $19.9,
respectively, and minority interests (1.1) 12.0 27.8
Gain on sale of discontinued
operations, net of $66.0 of income
taxes 69.0 - -
- -------------------------------------------------------------------------------------------
Net income $ 288.5 $ 234.7 $ 195.8
- -------------------------------------------------------------------------------------------
Earnings available for common shareholders $ 279.0 $ 225.2 $ 186.4
- -------------------------------------------------------------------------------------------
Earnings per share from continuing operations
Primary $ 2.48 $ 2.55 $ 1.93
Fully diluted $ 2.37 $ 2.42 $ 1.82
- -------------------------------------------------------------------------------------------
(Loss) earnings per share from discontinued
operations
Primary $ (0.01) $ 0.14 $ 0.33
Fully diluted $ (0.01) $ 0.13 $ 0.31
- -------------------------------------------------------------------------------------------
Earnings per share from gain on sale of
discontinued operations
Primary $ 0.82 $ - $ -
Fully diluted $ 0.76 $ - $ -
- -------------------------------------------------------------------------------------------
Earnings per share
Primary $ 3.29 $ 2.69 $ 2.26
Fully diluted $ 3.12 $ 2.55 $ 2.13
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 14
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 111.8 $ 165.2
Accounts receivable, less allowance for doubtful
accounts of $20.8 and $20.9, respectively 1,467.4 1,376.7
Costs and earnings in excess of billings on
uncompleted contracts 217.2 212.3
Inventories 373.4 344.7
Net assets of discontinued operations - 440.7
Other current assets 359.5 309.5
- ----------------------------------------------------------------------------------------
Current assets 2,529.3 2,849.1
Property, plant and equipment - net 1,533.0 1,320.2
Goodwill, less accumulated amortization of $173.7
and $127.2, respectively 1,560.3 548.2
Investments in partially-owned affiliates 144.6 128.4
Other noncurrent assets 281.4 145.3
- ----------------------------------------------------------------------------------------
Total assets $6,048.6 $4,991.2
- ----------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Short-term debt $ 537.8 $248.1
Current portion of long-term debt 118.4 33.2
Accounts payable 1,341.9 1,178.2
Accrued compensation and benefits 303.3 238.4
Accrued income taxes 78.8 44.0
Billings in excess of costs and earnings on uncompleted
contracts 107.6 83.6
Other current liabilities 484.9 357.1
- ----------------------------------------------------------------------------------------
Current liabilities 2,972.7 2,182.6
- ----------------------------------------------------------------------------------------
Long-term debt 806.4 752.2
Postretirement health and other benefits 167.2 167.9
Other noncurrent liabilities 414.4 380.7
Shareholders' equity 1,687.9 1,507.8
- ----------------------------------------------------------------------------------------
Total liabilities and equity $6,048.6 $4,991.2
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 15
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
- ------------------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 220.6 $ 222.7 $ 168.0
Adjustments to reconcile income from continuing
operations to cash provided by operating
activities of continuing operations
Depreciation 283.6 226.6 191.7
Amortization of intangibles 71.3 35.9 27.4
Equity in earnings of partially-owned
affiliates (20.4) (15.9) (1.6)
Deferred income taxes (45.4) 34.3 1.7
Restructuring charge 70.0 - -
Other 29.4 11.1 (1.3)
Changes in working capital, excluding
acquisition and divestiture of businesses
Receivables (70.8) (202.4) (217.2)
Inventories (41.7) (43.1) (19.3)
Other current assets (15.5) (9.3) (37.2)
Accounts payable and accrued
liabilities 181.1 160.6 185.7
Accrued income taxes (70.7) (14.5) (11.7)
Billings in excess of costs and
earnings on uncompleted contracts 25.8 (3.5) 10.8
Cash provided by operating
activities of continuing
operations 617.3 402.5 297.0
Cash (used) provided by
operating activities of
discontinued operations (8.4) 65.1 73.2
- ------------------------------------------------------------------------------------------------
Cash provided by
operating activities 608.9 467.6 370.2
- ------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (370.9) (322.3) (330.9)
Sale of property, plant and equipment - net 14.5 12.3 8.9
Acquisition of businesses, net of cash acquired (1,264.5) (148.3) (30.6)
Divestiture of businesses 650.7 - -
Additions of long-term investments (39.6) (12.5) (5.5)
Proceeds from long-term investments 15.7 11.9 15.2
Investing activities of discontinued operations (19.5) (49.1) (109.4)
Other - 0.7 0.3
- ------------------------------------------------------------------------------------------------
Cash used by investing activities (1,013.6) (507.3) (452.0)
- ------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 330.8 101.1 107.1
Issuance of long-term debt 164.8 155.4 218.8
Repayment of long-term debt (56.7) (83.7) (206.8)
Payment of cash dividends (83.4) (80.0) (76.3)
Net financing activities of discontinued operations 16.5 24.4 (12.6)
Other (13.4) 6.9 9.7
- ------------------------------------------------------------------------------------------------
Cash provided by financing activities 358.6 124.1 39.9
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (7.3) 0.3 0.5
- ------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents $ (53.4) $ 84.7 $ (41.4)
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 16
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Capital in Treasury Cumulative
Preferred Compensation Common Excess of Retained Stock, Translation
(in millions) Total Stock - ESOP Stock Par Value Earnings at Cost Adjustments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT SEPTEMBER 30, 1994 $ 1,202.8 $ 164.1 $ (146.6) $ 7.1 $ 509.9 $ 730.7 $ (54.9) $ (7.5)
Net income 195.8 - - - - 195.8 - -
Reduction of guaranteed
ESOP debt 7.9 - 7.9 - - - - -
Cash dividends
Series D preferred ($3.97
per one ten-thousandth
of a share), net of $3.1
million tax benefit (9.4) - - - - (9.4) - -
Common ($.78 per share) (63.8) - - - - (63.8) - -
Translation adjustments 0.3 - - - - - - 0.3
Other, including options
exercised 6.6 (4.0) - - 10.6 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1995 1,340.2 160.1 (138.7) 7.1 520.5 853.3 (54.9) (7.2)
Net income 234.7 - - - - 234.7 - -
Reduction of guaranteed
ESOP debt 9.0 - 9.0 - - - - -
Cash dividends
Series D preferred ($3.97
per one ten-thousandth
of a share), net of $2.7
million tax benefit (9.5) - - - - (9.5) - -
Common ($.82 per share) (67.8) - - - - (67.8) - -
Translation adjustments (13.8) - - - - - - (13.8)
Other, including options
exercised 15.0 (5.5) - 0.1 14.5 - 5.9 -
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996 1,507.8 154.6 (129.7) 7.2 535.0 1,010.7 (49.0) (21.0)
Net income 288.5 - - - - 288.5 - -
Reduction of guaranteed
ESOP debt 10.3 - 10.3 - - - - -
Cash dividends
Series D preferred ($3.97
per one ten-thousandth
of a share), net of $2.1
million tax benefit (9.6) - - - - (9.6) - -
Common ($.86 per share) (71.7) - - - - (71.7) - -
Translation adjustments (58.2) - - - - - - (58.2)
Two-for-one split of
common stock - - - 7.2 (7.2) - - -
Other, including options
exercised 20.8 (11.2) - - 24.8 - 7.2 -
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997 $ 1,687.9 $ 143.4 $ (119.4) $ 14.4 $ 552.6 $1,217.9 $ (41.8) $ (79.2)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Johnson
Controls, Inc. and its majority-owned domestic and foreign subsidiaries. All
significant intercompany transactions have been eliminated. Investments in
partially-owned affiliates are accounted for by the equity method when the
Company's interest exceeds 20%. Gains and losses from the translation of most
foreign currency financial statements are accumulated as a separate component of
shareholders' equity.
RECLASSIFICATION
- ----------------
The accompanying consolidated financial statements for 1997, 1996 and
1995 have been reclassified to identify separately the results of operations,
financial position and cash flows of the Company's discontinued Plastic
Container division, which was sold in February 1997 (see Note 1).
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
INVENTORIES
- -----------
Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for most inventories at
domestic locations. Cost of other inventories is determined on the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
The Company uses the straight-line method of depreciation for financial
reporting purposes and accelerated methods for income tax purposes. The general
range of useful lives for financial reporting is 10 to 50 years for buildings
and improvements and 3 to 20 years for machinery and equipment.
INTANGIBLES
- -----------
Goodwill arising from business acquisitions is amortized using the
straight-line method over periods of 15 to 40 years. Patents and other
intangibles are amortized over their estimated lives. The Company reviews the
carrying value of goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Measurement of any impairment would include a comparison of estimated
<PAGE> 18
future operating cash flows anticipated to be generated during the remaining
life of the goodwill to the net carrying value of goodwill.
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
The Company has written policies and procedures that place all financial
instruments under the direction of corporate treasury and restrict all
derivative transactions to those intended for hedging purposes. The use of
financial instruments for trading purposes is strictly prohibited. The Company
uses financial instruments to manage the market risk from changes in foreign
exchange rates and interest rates. The Company has global operations and enters
into forward exchange contracts to hedge certain of its foreign currency
commitments. Forward points on forward exchange contracts are amortized to
income over the life of the contracts. Gains and losses derived from the change
in the spot rate on these contracts that hedge assets and liabilities are
deferred and recognized when the hedged transaction is settled. Gains and losses
on forward contracts that hedge net foreign investments are deferred in the
cumulative translation adjustments (CTA) account within shareholders' equity.
The Company uses interest rate swap agreements to modify its exposure to
interest rate movements and reduce borrowing costs. Cross-currency interest rate
swap agreements are also used to hedge a portion of the Company's net
investments in foreign subsidiaries. Related foreign exchange gains and losses
on the notional principal values of cross-currency swaps are deferred in CTA.
Net interest payments or receipts from interest rate swaps and the interest
component of cross-currency interest rate swaps are recorded as adjustments to
interest expense in the Consolidated Statement of Income on a current basis.
REVENUE RECOGNITION
- -------------------
The Company recognizes revenue from long-term contracts of the controls
segment over the contractual period under the percentage-of-completion method of
accounting (see "Long-Term Contracts"). In all other cases, the Company
recognizes revenue at the time products are shipped or as services are
performed.
LONG-TERM CONTRACTS
- -------------------
Under the percentage-of-completion method of accounting used for
long-term contracts, sales and gross profit are recognized as work is performed
based on the relationship between actual costs incurred and total estimated
costs at completion. Sales and gross profit are adjusted prospectively for
revisions in estimated total contract costs and contract values. Estimated
losses are recorded when identified. Claims against customers are recognized as
revenue upon settlement. The amount of accounts receivable due after one year is
not significant.
EARNINGS PER SHARE
- ------------------
Primary earnings per share are computed by dividing net income, after
deducting dividend requirements on the Series D Convertible Preferred Stock, by
the weighted average number of common shares and common stock equivalents which
would arise from the exercise of stock options. Fully diluted earnings are
computed by deducting from net income the after-tax compensation expense which
would arise from the assumed
<PAGE> 19
conversion of the Series D Convertible Preferred Stock, which was $5.5
million, $5.6 million and $5.8 million in 1997, 1996 and 1995, respectively.
Fully diluted weighted average shares assume the conversion of the Series D
Convertible Preferred Stock, if dilutive, plus the dilutive effect of the stock
options.
The weighted average number of shares used in the primary and fully
diluted earnings per share computations were as follows:
<TABLE>
<CAPTION>
Year ended September 30,
- ----------------------------------------------------------------------------
(in millions of shares) 1997 1996 1995
<S> <C> <C> <C>
Primary 84.8 83.6 82.3
Fully diluted 90.9 89.9 89.1
- ----------------------------------------------------------------------------
</TABLE>
Cash Flow
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
FUTURE ACCOUNTING CHANGES
- -------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share."
This statement establishes revised standards for computing and presenting
earnings per share. The statement is effective for the Company's fiscal 1998
first quarter. All prior periods will be required to be restated. The adoption
of this standard will not have a material impact on the Company's reported
earnings per share.
NOTE 1 - ACQUISITION AND DIVESTITURE
ACQUISITION OF PRINCE
- ---------------------
Effective October 1, 1996, the Company completed the acquisition of
Prince Holding Corporation (Prince) for approximately $1.3 billion. Prince,
based in Holland, Michigan, supplies automotive interior systems and components
including overhead systems and consoles, door panels and floor consoles.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair value of the acquired net assets, which
approximated $1.1 billion, was recorded as goodwill. The Company used the
after-tax proceeds from the sale of its Plastic Container division (see below)
and debt securities to finance the purchase.
DIVESTITURE OF PLASTIC CONTAINER DIVISION
- -----------------------------------------
On February 28, 1997, the Company completed the sale of its Plastic
Container division (PCD) to Schmalbach-Lubeca AG/Continental Can Europe (a
member of the VIAG Group) for approximately $650 million, with a portion of the
proceeds deferred. The Company recorded a gain on the sale of $135 million ($69
million or $.82 per primary share and $.76 per fully diluted share, after-tax).
<PAGE> 20
The results of PCD have been reported separately as discontinued operations in
the Consolidated Statement of Income. The results of the discontinued
operations do not reflect any interest expense or management fees allocated by
the Company. Prior year consolidated financial statements have been restated to
present PCD as a discontinued operation. Revenues of PCD were $242 million for
the five months ended February 28, 1997 and $799 million for the year ended
September 30, 1996. These amounts are not included in sales as reported in the
Consolidated Statement of Income.
PRO FORMA FINANCIAL INFORMATION
- -------------------------------
The following pro forma results of operations of the Company give effect to the
acquisition of Prince, the divestiture of PCD, and the application of the
after-tax proceeds from the PCD sale as though these transactions had occurred
on October 1, 1995.
<TABLE>
<CAPTION>
Year ended September 30,
- ---------------------------------------------------------------------------------
(in millions, except per share data; unaudited) 1997(1) 1996
<S> <C> <C>
Net sales $11,145.4 $10,076.7
Income from continuing operations $ 226.6 $ 232.9
- ---------------------------------------------------------------------------------
Earnings per share from continuing operations
Primary $ 2.56 $ 2.67
Fully diluted $ 2.43 $ 2.53
- ---------------------------------------------------------------------------------
Weighted average shares
Primary 84.8 83.6
Fully diluted 90.9 89.9
- ---------------------------------------------------------------------------------
</TABLE>
(1) Amounts include a restructuring charge (see Note 2) of $70.0 million
($40.3 million or $.48 per primary share and $.44 per fully diluted share,
after-tax).
The unaudited pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had
these transactions taken place on October 1, 1995 or the future results of
operations.
NOTE 2 - RESTRUCTURING CHARGE
In the second quarter of 1997, the Company recorded a restructuring charge,
including related asset writedowns, of $70.0 million ($40.3 million or $.48 per
primary share and $.44 per fully diluted share, after-tax). The restructuring
initiatives involve the Company's automotive and controls segments and include
four plant closings and the elimination of certain underperforming business
lines resulting in workforce reductions of approximately 650 employees and the
writedown of certain long-lived assets, including goodwill. These actions,
taking place in both the United States and Europe, resulted in restructuring
charges of $37.0 million and $33.0 million for the automotive and controls
segments, respectively. The automotive segment charges primarily relate to its
European business where certain manufacturing capacity is being eliminated or
realigned with future customer sourcing requirements, and product development
resources are being consolidated. Most significantly, the Company has decided to
close a complete seat manufacturing facility located in Belgium due to the
announcement by Renault of the closure of their automobile manufacturing
operations in that country. In addition, the Company is converting a seat
cushion facility in Portugal from a specialized rubberized hair to a new foam
operation as a
<PAGE> 21
result of the loss of certain General Motors business in Spain.
Within the controls segment, the Company is restructuring a business which
provides low-end maintenance services as it no longer provides a means of
penetrating more lucrative markets. In addition, the Company has exited the
domestic cable installation business.
The cash and noncash elements of the restructuring charge approximate $15.6
million and $54.4 million, respectively. Details of the restructuring charge are
as follows:
<TABLE>
<CAPTION>
Balance at
Original Utilized September 30,
(in millions) Reserve Cash Noncash 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Writedown of long-lived assets $43.6 $ - $43.6 $ -
Employee severance and
termination benefits 10.7 5.6 - 5.1
Other 15.7 3.8 2.2 9.7
- -------------------------------------------------------------------------------------------
$70.0 $9.4 $45.8 $14.8
===========================================================================================
</TABLE>
For plants to be closed and business lines eliminated, the tangible
assets to be disposed of have been written down to their estimated fair value,
less cost of disposal. All intangible asset carrying values associated with the
plant closings and elimination of business lines have been eliminated. The
write-down of long-lived assets of $43.6 million approximates the carrying value
of those assets as fair value of the tangible assets less costs to sell is
negligible. Considerable management judgment is necessary to estimate fair
value, accordingly, actual results could vary significantly from such estimates.
As part of the restructuring initiative, approximately 300 employees have
separated from the Company as of September 30, 1997. It is expected that the
restructuring actions will be substantially completed by approximately mid-year
of fiscal 1998.
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
Raw materials and supplies $196.8 $155.8
Work in process 79.0 94.7
Finished goods 137.3 136.3
- -------------------------------------------------------------------------------------------
FIFO inventories 413.1 386.8
LIFO reserve (39.7) (42.1)
- -------------------------------------------------------------------------------------------
LIFO inventories $373.4 $344.7
- -------------------------------------------------------------------------------------------
</TABLE>
Inventories valued by the LIFO method of accounting were approximately
53% and 47% of total inventories at September 30, 1997 and 1996, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
Buildings and improvements $ 811.6 $ 669.9
Machinery and equipment 2,049.5 1,743.4
Construction in progress 152.6 141.7
- -------------------------------------------------------------------------------------------
3,013.7 2,555.0
Land 86.4 63.5
- -------------------------------------------------------------------------------------------
3,100.1 2,618.5
Less accumulated depreciation (1,567.1) (1,298.3)
- -------------------------------------------------------------------------------------------
Property, plant and equipment - net $1,533.0 $1,320.2
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
Interest costs capitalized during 1997, 1996, and 1995 were $7.5
million, $5.3 million and $7.9 million, respectively.
NOTE 5 - LEASES
Certain administrative and production facilities and equipment are
leased under long-term agreements. Most leases contain renewal options for
varying periods, and certain leases include options to purchase the leased
property during or at the end of the lease term. Leases generally require the
Company to pay for insurance, taxes and maintenance of the property. Leased
capital assets included in net property, plant and equipment, primarily
buildings and improvements, were $23 million and $26 million at September 30,
1997 and 1996, respectively.
Other facilities and equipment are leased under arrangements which are
accounted for as operating leases. Total rental expense was $97 million in 1997,
$83 million in 1996 and $71 million in 1995.
Future minimum capital and operating lease payments and the related
present value of capital lease payments at September 30, 1997 were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- --------------------------------------------------------------------------
(in millions)
<S> <C> <C>
1998 $3.9 $ 76.2
1999 3.7 59.0
2000 3.7 42.1
2001 3.7 32.0
2002 3.7 22.2
After 2002 15.1 69.8
- --------------------------------------------------------------------------
Total minimum lease payments 33.8 $301.3
- --------------------------------------------------------------------------
Interest 10.3
- --------------------------------------------------------------------------
Present value of net minimum lease payments $23.5
- --------------------------------------------------------------------------
</TABLE>
NOTE 6 - SHORT-TERM DEBT AND CREDIT AGREEMENTS
Short-term debt at September 30, 1997 and 1996 consisted entirely of
bank borrowings. At September 30, 1997, the Company had unsecured lines of
credit available from banks totalling $1,218 million. The lines of credit are
subject to the usual terms and conditions applied by banks. Domestic lines of
credit available for support of outstanding commercial paper averaged $1,214
million during the year and were $850 million at September 30, 1997. The average
short-term debt outstanding during 1997 and 1996 was $1,164 million and $339
million, respectively. The weighted average interest rate on short-term debt
outstanding at September 30, 1997 and 1996 was 6.71% and 5.30%, respectively.
Total interest paid on both long-term and short-term debt was $130 million, $76
million and $63 million in 1997, 1996 and 1995, respectively.
<PAGE> 23
NOTE 7 - LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30,
(in millions) 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured notes
6.92% due in 1998 $ 30.0 $ 30.0
6.06% due in 2002 34.3 -
7.7% due in 2015 124.8 124.8
7.125% due in 2017 149.1 -
8.2% due in 2024 125.0 125.0
6.95% due in 2045 125.0 125.0
Industrial revenue bonds due through 2006,
net of unamortized discount of $2.3 million
in 1997 and $2.6 million in 1996 46.2 51.0
Medium-term notes due in 1997 and 1999
at an average interest rate of 7.4% 103.0 103.0
Guaranteed ESOP debt due in increasing
annual installments through 2004 at
an average interest rate of 7.35%
(tied in part to LIBOR) 119.4 129.7
Capital lease obligations 23.5 27.1
Other 44.5 69.8
- -------------------------------------------------------------------------------------
Gross long-term debt 924.8 785.4
- -------------------------------------------------------------------------------------
Less current portion 118.4 33.2
- -------------------------------------------------------------------------------------
Net long-term debt $806.4 $752.2
- -------------------------------------------------------------------------------------
</TABLE>
In July 1997, the Company issued $150 million of 7.125% notes due in
2017. The proceeds were used to refinance commercial paper borrowings associated
with the Prince acquisition.
Industrial revenue bond financed facilities have been accounted for as plant and
equipment. The related bonds issued by the government units are recorded as
long-term debt. Fixed rate industrial revenue bonds of $23 million at September
30, 1997 and $27 million at September 30, 1996 had weighted average interest
rates of 6.0% and 6.3%, respectively. Variable rate bonds of $25 million at
September 30, 1997 and $27 million at September 30, 1996 had weighted average
interest rates of 4.2% and 4.1%, respectively.
In 1989 the Company established an employee stock ownership plan (ESOP). The
ESOP was financed with $175 million of debt issued by the ESOP. The ESOP debt is
guaranteed by the Company as to payment of principal and interest and,
therefore, the unpaid balance has been recorded as long-term debt. The dividends
on the Series D Preferred Stock held by the ESOP plus Company contributions to
the ESOP are used by the ESOP to service the debt. Therefore, interest incurred
on the ESOP debt of $9 million in 1997 and $10 million in both 1996 and 1995 has
not been reflected as interest expense in the Company's Consolidated Statement
of Income.
The installments of long-term debt maturing in each of the next five years
(including the guaranteed ESOP debt) are: 1998 - $118 million, 1999 - $31
million, 2000 - $92 million, 2001 - $26 million and 2002 - $37 million.
The indentures for the unsecured notes and the guaranteed ESOP debt include
various financial covenants, none of which are expected to restrict future
operations.
<PAGE> 24
NOTE 8 - FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents and short-term debt approximate
their carrying values. The fair value of net long-term debt which was $840
million and $757 million at September 30, 1997 and 1996, respectively, was
determined using market interest rates and discounted future cash flows. The
fair values of hedging instruments, discussed below, were obtained from dealer
quotes and published foreign currency exchange rates.
HEDGING TRANSACTIONS
The Company has global operations and participates in the foreign exchange
markets to minimize its risk of loss from fluctuations in exchange rates. The
Company enters into forward exchange contracts to hedge certain of its foreign
currency commitments. Realized and unrealized gains and losses on these
contracts are recognized in the same period as the hedged commitments. The
Company's forward exchange contracts generally have maturities which do not
exceed 12 months, and are designed to coincide with settlement dates of the
related transactions.
During the year, the Company entered into two $150 million interest rate
swap agreements, one for 5 years at 6.87% and the other for 10 years at 6.59%.
The ten-year swap agreement is fixed at 6.59% unless the LIBOR rate reaches
9.00%, at which point the interest rate would convert to a floating rate. These
interest rate swaps establish fixed interest rates on a total of $300 million of
outstanding commercial paper. The fair value of the interest rate swaps is the
amount the Company would receive or pay to terminate the outstanding contracts
at the reporting date. The Company would have paid approximately $12 million to
terminate the contracts at September 30, 1997.
In March 1997, the Company settled its 50 million Deutschemark (DM)
forward contract by paying 50 million DM in exchange for $30 million. The
Company also renewed its three-year 50 million DM cross-currency interest rate
swap agreement in March 1997, which is used to hedge a portion of its net
investments in its German subsidiaries. Under the swap, the Company receives
interest based on a floating three-month U.S. dollar LIBOR rate on $30 million
and pays interest based on a three-month floating DM LIBOR rate plus seven basis
points on 50 million DM through March 2000, at which time the Company will
receive $30 million in exchange for paying 50 million DM.
In December 1995, the Company entered into a seven-year amortizing
French Franc (FRF) cross-currency interest rate swap to hedge a portion of its
net investments in its French subsidiaries. Under the swap, the Company receives
interest based on a fixed U.S. dollar interest rate of 6.95% and pays a floating
rate, indexed to the level of the six-month DM LIBOR rate plus 223 basis points,
on the outstanding notional principal amounts in dollars and francs,
respectively. The initial notional principal amounts of $80 million and FRF 400
million will remain outstanding until December 1, 1999. Under the terms of the
contract, the Company will pay 100 million FRF in exchange for $20 million on
the first business day in December 1999 and in each of the subsequent three
years through December 2, 2002. On December 2, 2002 the swap will terminate with
a final principal settlement of 100 million FRF paid by the Company in exchange
for $20 million.
<PAGE> 25
Related foreign exchange gains and losses on the notional principal
values of the cross-currency swaps are deferred in the cumulative translation
adjustments account (CTA) within shareholders' equity. The net pretax exchange
gain deferred in CTA of approximately $10 million at September 30, 1997 was
offset by translation gains and losses on the underlying net investments. Net
interest payments or receipts from the interest rate swaps and the interest
component of the cross-currency swaps are recorded as adjustments to interest
expense in the Consolidated Statement of Income on a current basis. The fair
value of the cross-currency swaps approximate their carrying value at September
30, 1997 and 1996.
All contracts are executed with major international financial
institutions and, as such, the Company does not anticipate that these
institutions will fail to perform.
The following additional forward contracts, by which the Company sold or
purchased currencies, were outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Currency Sold Currency Purchased Contract Amount
- ------------------------------------------------------------------
(in millions)
<S> <C> <C>
British Pounds U.S. Dollars $163
British Pounds German DM 95
German DM British Pounds 86
U.S. Dollars German DM 64
U.S. Dollars French Francs 63
German DM Belgian Francs 30
French Francs U.S. Dollars 28
U.S. Dollars British Pounds 26
German DM Italian Lira 23
Hong Kong Dollars U.S. Dollars 21
Belgian Francs German DM 18
Spanish Pesetas Portuguese Escudos 12
Others 72
- ------------------------------------------------------------------
$701
- ------------------------------------------------------------------
</TABLE>
The fair value of these forward contracts approximate their carrying value at
September 30, 1997 and 1996.
NOTE 9 - SHAREHOLDERS' EQUITY
On January 22, 1997, the Company's Board of Directors authorized a
two-for-one stock split to be distributed on March 31, 1997 to shareholders of
record on March 7, 1997. Shareholders' equity reflects the stock split by
reclassifying from Capital in Excess of Par Value to Common Stock the par value
of the additional shares arising from the split. In addition, all share and per
share information in the financial statements and notes thereto have been
restated.
<PAGE> 26
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------
(in millions of shares) 1997 1996
<S> <C> <C>
Preferred Stock, $1.00 par value
Authorized 2.0 2.0
Issued and outstanding Series D Convertible * *
- -------------------------------------------------------------------------------------
Common Stock, $.16-2/3 par value
Authorized 300.0 300.0
Issued and outstanding 84.1 82.9
- -------------------------------------------------------------------------------------
</TABLE>
*280.2403 and 302.0084 shares of Series D Convertible Preferred Stock were
outstanding at September 30, 1997 and 1996, respectively.
In 1989 the Company issued 341.7969 shares of 7.75% Series D Convertible
Preferred Stock to its newly established ESOP for $175 million. The Preferred
Stock was issued in fractional amounts representing one ten-thousandth of a
share each or 3.4 million Preferred Stock units in total. Each Preferred Stock
unit has a liquidation value of $51.20.
The ESOP financed its purchase of the Preferred Stock units by issuing debt in
the amount of $175 million. The ESOP debt is guaranteed by the Company and is
therefore recorded as long-term debt of the Company. An amount representing
unearned employee compensation, equivalent in value to the unpaid balance of the
ESOP debt, has been recorded as a deduction from shareholders' equity. The net
increase in shareholders' equity at September 30, 1997 and 1996 resulting from
the above transactions was $24 million and $25 million, respectively.
Preferred Stock units are allocated to participating employees based on the
annual ESOP debt service payments and are held in trust for the employees until
their retirement, death, or vested termination. Each allocated unit may be
converted into two shares of common stock or redeemed for $51.20 in cash, at the
election of the employee or beneficiary, upon retirement, death or vested
termination. The Company, at its option, may issue shares of its common stock or
distribute cash to the ESOP to redeem the Preferred Stock units. As of September
30, 1997, 5.6 million shares of common stock were reserved for the conversion of
the Preferred Stock units. Employees may vote allocated units, and the plan
trustee is to vote unallocated units in the same proportion as the allocated
units are voted.
Dividends on the Preferred Stock are deductible for income tax purposes and
enter into the determination of earnings available for common shareholders net
of their tax benefit.
The Company held 2.6 million shares of its common stock in treasury at September
30, 1997. These shares may be used for a variety of purposes, including employee
benefit and stock option plans.
Options to purchase common stock of the Company, at prices equal to or higher
than market values on dates of grant, are granted to key employees under stock
option plans. Stock appreciation rights (SARs) may be granted in conjunction
with the stock option grants under one plan. Options or SARs are exercisable
between one and ten years after date of grant. Shares available for future grant
under stock option plans were 4.0 million at September 30, 1997.
<PAGE> 27
Following is a summary of activity in the stock option plans for 1997,
1996, and 1995:
<TABLE>
<CAPTION>
Weighted Shares
Average Subject to
Option Price Option SARs
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Outstanding,
September 30, 1994 $21.35 3,265,080 681,646
Granted 24.66 1,387,400 420,116
Exercised 16.91 836,110 154,236
Cancelled 22.86 661,086 155,920
- ------------------------------------------------------------------------------------------
Outstanding,
September 30, 1995 23.66 3,155,284 791,606
Granted 31.85 1,477,630 349,130
Exercised 21.40 452,656 82,224
Cancelled 26.14 206,184 7,988
- ------------------------------------------------------------------------------------------
Outstanding,
September 30, 1996 26.83 3,974,074 1,050,524
Granted 36.94 1,558,420 475,350
Exercised 26.20 779,891 204,875
Cancelled 29.69 451,981 30,770
- ------------------------------------------------------------------------------------------
Outstanding,
September 30, 1997 $30.31 4,300,622 1,290,229
- ------------------------------------------------------------------------------------------
</TABLE>
Options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Outstanding at Remaining Exercise
September 30, Contractual Price
Range of Exercise Prices 1997 Life (years) per Share
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$16.00 - $25.99 1,227,274 6.12 $22.56
$26.00 - $36.99 3,073,348 8.20 $33.39
- ------------------------------------------------------------------------------------------
</TABLE>
Options exercisable:
<TABLE>
<CAPTION>
Exercisable Weighted Average Exercise
Range of Exercise Prices Shares Price per Share
- ------------------------------------------------------------------------------------------
At September 30, 1997
<S> <C> <C>
$16.00 - $25.99 732,000 $21.14
$26.00 - $26.99 470,338 $26.91
- ------------------------------------------------------------------------------------------
At September 30, 1996 951,698 $22.05
- ------------------------------------------------------------------------------------------
At September 30, 1995 952,984 $18.95
- ------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for employee stock options. Accordingly,
no compensation expense has been recognized for stock option plans.
Pro forma net income and earnings per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined as
if the Company had accounted for employee stock options under the fair value
method described by SFAS No. 123. The fair value of these options was estimated
at grant date using the Black-Scholes option pricing model with the following
weighted average assumptions for both 1997 and 1996: dividend yield of 3.15%, an
expected option life of 6 years and the 7-year U.S. Treasury interest rate on
the grant dates. The volatility factors of the expected market prices
<PAGE> 28
of the Company's common stock were 19.69% and 20.70%, for 1997 and 1996,
respectively. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the three-year vesting period of the
options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
Year ended September 30,
- --------------------------------------------------------------------------------
(in millions, except per share data) 1997(1) 1996
<S> <C> <C>
Net income $285.8 $233.6
- --------------------------------------------------------------------------------
Earnings per share
Primary $ 3.26 $ 2.68
Fully diluted $ 3.08 $ 2.54
- --------------------------------------------------------------------------------
</TABLE>
(1) Amounts include a restructuring charge (see Note 2) of $70.0 million ($40.3
million or $.48 per primary share and $.44 per fully diluted share, after-tax).
The weighted average fair value of options granted using the Black-Scholes
pricing method described above was $8 and $7 for 1997 and 1996, respectively.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts because transition rules require pro
forma disclosures only for awards granted after fiscal 1995.
Under the terms of a Rights Agreement, as amended effective November 16, 1994,
each share of the Company's common stock entitles its holder to one Right. The
Rights Agreement provides that if 20% or more of the Company's common stock is
acquired, the Rights become exercisable. Further, upon the occurrence of certain
defined events, the Rights entitle the holder to purchase common stock of the
Company or common stock of an "acquiring company" having a market value
equivalent to two times the Right's exercise price of $87.50. In addition, the
Rights Agreement permits the Company's Board of Directors, in certain
circumstances, to exchange the Rights for shares of common stock and permits a
bidder to call for a shareholders' vote to redeem the Rights. The Rights are
subject to redemption by the Board of Directors for $.005 per Right. The Rights
have no voting power and expire November 30, 2004.
Approximately $61 million of consolidated retained earnings at September 30,
1997 represents undistributed earnings of the Company's partially-owned
affiliates accounted for by the equity method.
NOTE 10 - RETIREMENT PLANS
PENSION BENEFITS
The Company has noncontributory defined benefit pension plans covering most
domestic and certain foreign employees. The benefits provided are based
primarily on years of service and average compensation or a monthly retirement
benefit amount. Funding for domestic pension plans equals or exceeds the minimum
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Also, the Company makes contributions to union-trusteed pension funds for
construction and service personnel and to defined contribution plans for the
majority of Johnson Controls World Services Inc.
<PAGE> 29
employees. Net pension expense for defined benefit plans included the
following components:
<TABLE>
<CAPTION>
Year ended September 30,
- ---------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
Service cost $32.2 $31.6 $28.0
Interest cost on projected benefit obligation 54.2 51.7 46.5
Actual return on plan assets (133.5) (105.9) (75.6)
Net amortization and deferral 68.0 47.6 21.6
- ---------------------------------------------------------------------------------------
Net pension expense $20.9 $25.0 $20.5
- ---------------------------------------------------------------------------------------
</TABLE>
The following schedule details the funded status of the Company's defined
benefit pension plans. Plans with assets exceeding the accumulated benefit
obligation (ABO) are segregated by column from plans with the ABO exceeding
assets. The plans with the ABO exceeding assets were primarily foreign plans
which are not subject to ERISA. The projected benefit obligation was determined
using an assumed discount rate of 7.75% at September 30, 1997 and 1996. Pension
expense was determined using assumed discount rates of 7.75% in 1997 and 1996,
and 8.00% in 1995. The assumed long-term rate of return on plan assets was 9.75%
in 1997, 1996 and 1995. The average rate of compensation increase assumed was
6.0% in 1997, 1996 and 1995.
<TABLE>
<CAPTION>
September 30,
- -----------------------------------------------------------------------------------------------
1997 1996
Assets ABO Assets ABO
Exceed Exceeds Exceed Exceeds
(in millions) ABO Assets ABO Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations
Vested $510.8 $ 84.3 $455.6 $ 87.0
Nonvested 29.8 2.8 28.1 3.8
- -----------------------------------------------------------------------------------------------
Accumulated benefit obligation 540.6 87.1 483.7 90.8
Effect of projected
salary increases 119.9 11.8 118.8 15.0
- -----------------------------------------------------------------------------------------------
Total projected benefit obligation 660.5 98.9 602.5 105.8
Plan assets at fair value 784.1 40.3 664.0 40.7
- -----------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over
projected benefit obligation 123.6 (58.6) 61.5 (65.1)
Unrecognized transitional asset (20.7) (3.0) (22.9) (2.7)
Unrecognized net (gain) loss (81.2) 5.2 (11.3) 6.7
- -----------------------------------------------------------------------------------------------
Prepaid (accrued) pension expense $ 21.7 $(56.4) $ 27.3 $(61.1)
- -----------------------------------------------------------------------------------------------
</TABLE>
At the measurement dates of June 30, 1997 and 1996, plan assets included
approximately 843,000 and 824,000 shares, respectively, of Johnson Controls,
Inc. common stock with total market values of $34.6 million and $28.7 million at
the respective dates.
During 1989, the Company established an ESOP as part of its existing savings and
investment (401K) plan, which is available to eligible domestic employees. The
ESOP issued debt to finance its purchase of 3.4 million units (341.7969 shares)
of the Company's Series D Convertible Preferred Stock for $175 million. The
Preferred Stock units are being allocated to participating employees over the
15-year term of the ESOP debt and held in trust until the employees' retirement,
death, or vested termination. As of September 30, 1997, approximately 1,679,000
Preferred Stock units had been allocated to employees.
<PAGE> 30
The Company's annual contributions to the ESOP, when combined with the Preferred
Stock dividends, are of an amount which will allow the ESOP to meet its debt
service requirements. This contribution amount was $11 million in 1997, $8
million in 1996, and $6 million in 1995. Total compensation expense recorded by
the Company was $18 million in 1997 and $17 million in 1996 and 1995.
POSTRETIREMENT HEALTH AND OTHER BENEFITS
The Company provides certain healthcare and life insurance benefits for eligible
retirees and their dependents. These benefits are not funded, but are paid as
incurred. Eligibility for coverage is based on meeting certain years of service
and retirement age qualifications. These benefits may be subject to deductibles,
copayment provisions and other limitations, and the Company has reserved the
right to modify these benefits. Effective January 31, 1994, the Company modified
certain salaried plans to place a limit on the Company's cost of future annual
retiree medical benefits at no more than 150% of the 1993 cost. Most
international employees are covered by government sponsored programs, and the
cost to the Company is not significant.
Net postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
Year ended September 30,
- -------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
Service cost $3.7 $3.7 $4.3
Interest cost on accumulated
benefit obligation 11.4 10.8 11.2
Net amortization and deferral (1.9) (2.1) (1.9)
- -------------------------------------------------------------------------------------
Net postretirement benefit expense $13.2 $12.4 $13.6
- -------------------------------------------------------------------------------------
</TABLE>
The status of the Company's postretirement benefit plans is as follows:
<TABLE>
<CAPTION>
September 30,
- -------------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation
Retirees $ 96.5 $ 96.0
Vested active plan participants 12.9 12.4
Other plan participants 41.1 41.1
- -------------------------------------------------------------------------------------
150.5 149.5
- -------------------------------------------------------------------------------------
Unrecognized prior service cost 24.8 28.2
Unrecognized net gain 6.8 3.7
- -------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $182.1 $181.4
</TABLE>
The accumulated postretirement benefit obligation was determined using
an assumed discount rate of 7.75% at September 30, 1997 and 1996. Assumed
discount rates of 7.75% in 1997 and 1996, and 8.00% in 1995 were used to
determine postretirement benefit expense. The September 30, 1997 accumulated
postretirement benefit obligation was determined using assumed healthcare cost
trend rates of 10% and 7% for pre-65 and post-65 years of age employees,
respectively. The September 30, 1996 accumulated postretirement benefit
obligation was determined using assumed healthcare cost trend rates of 11% and
8% for pre-65 and post-65 years of age employees, respectively. These rates
decrease 1% per year to an ultimate rate of 6%. The healthcare cost trend rate
assumption has a significant effect on the amounts reported. To illustrate, a
one percentage point increase in the assumed healthcare cost trend rate would
have increased the accumulated
<PAGE> 31
benefit obligation by $9 million at September 30, 1997, and the sum of the
service and interest costs in 1997 by $1 million.
No change in the Company's practice of funding these benefits on a pay-as-you-go
basis is anticipated.
NOTE 11 - RESEARCH AND DEVELOPMENT
Expenditures for research activities relating to product development and
improvement are charged against income as incurred. Such expenditures amounted
to $232 million in 1997, $156 million in 1996 and $127 million in 1995.
NOTE 12 - INCOME TAXES
Components of income from continuing operations before income taxes and minority
interests included the following:
<TABLE>
<CAPTION>
Year ended September 30,
- ---------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
Domestic $386.8 $353.7 $273.0
Foreign 38.8 67.8 65.3
- ---------------------------------------------------------------------------------------
Income before income taxes $425.6 $421.5 $338.3
- ---------------------------------------------------------------------------------------
</TABLE>
Components of the provision for income taxes on continuing operations were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
- ---------------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
Current
Federal $162.8 $ 92.7 $ 98.7
State 32.2 19.0 21.1
Foreign 31.3 25.8 21.5
- ---------------------------------------------------------------------------------------
226.3 137.5 141.3
- ---------------------------------------------------------------------------------------
Deferred
Federal (41.1) 27.3 (2.7)
State (5.3) 3.5 (0.8)
Foreign 1.0 3.5 5.2
- ---------------------------------------------------------------------------------------
(45.4) 34.3 1.7
- ---------------------------------------------------------------------------------------
Provision for income taxes $180.9 $171.8 $143.0
- ---------------------------------------------------------------------------------------
</TABLE>
An analysis of effective income tax rates for continuing operations is shown
below:
<TABLE>
<CAPTION>
Year Ended September 30,
- ---------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.9 4.1 4.2
Federal tax expense at different rates
and foreign losses without tax benefits 4.4 1.3 1.1
Goodwill 2.8 0.6 0.7
Other (3.6) (0.2) 1.3
- ---------------------------------------------------------------------------------------
42.5% 40.8% 42.3%
- ---------------------------------------------------------------------------------------
</TABLE>
The effective income tax rate for discontinued operations was 49% for 1997, 46%
for 1996, and 40% for 1995.
<PAGE> 32
Deferred taxes for continuing operations were classified in the Consolidated
Statement of Financial Position as follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
Other current assets $108.5 $ 61.1
Other noncurrent assets 22.3 40.9
Accrued income taxes (2.1) -
Other noncurrent liabilities (34.5) -
- --------------------------------------------------------------------------------
Net deferred tax asset $ 94.2 102.0
- --------------------------------------------------------------------------------
</TABLE>
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities for continuing operations included:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------
(in millions) 1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued expenses and reserves $182.2 $121.0
Postretirement and postemployment benefits 79.7 79.3
Operating loss and foreign tax credit carryforwards 93.1 63.5
Other 2.2 25.5
- --------------------------------------------------------------------------------
357.2 289.3
Valuation allowance (81.3) (56.6)
- --------------------------------------------------------------------------------
275.9 232.7
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property, plant and equipment 70.6 50.8
Employee benefits 9.0 13.1
Inventories 7.0 5.9
Long-term contracts 25.1 29.7
Joint ventures 9.7 9.3
Intangible assets 51.2 17.2
Other 9.1 4.7
- --------------------------------------------------------------------------------
181.7 130.7
- --------------------------------------------------------------------------------
Net deferred tax asset $ 94.2 $102.0
</TABLE>
The valuation allowance primarily represents foreign loss carryforwards
and foreign tax credit carryforwards for which utilization is uncertain. These
tax benefits expire at various dates from 1998 to 2006.
Income taxes paid during 1997, 1996 and 1995 were $291 million, $116
million and $164 million, respectively.
Domestic income taxes have not been provided on undistributed earnings
of foreign subsidiaries of $269 million which are considered to be permanently
invested. If undistributed earnings were remitted, foreign tax credits would
substantially offset any resulting domestic tax liability.
NOTE 13 - CONTINGENCIES
The Company is involved in a number of proceedings and potential
proceedings relating to environmental matters. At September 30, 1997, the
Company had an accrued liability of approximately $36 million relating to
environmental matters. The Company's environmental liabilities are undiscounted
and do not take into consideration any possible recoveries of future insurance
proceeds. Because of the uncertainties associated with environmental assessment
and remediation activities, the Company's future expenses to
<PAGE> 33
remediate the currently identified sites could be considerably higher
than the accrued liability. Although it is difficult to estimate the liability
of the Company related to these environmental matters, the Company believes that
these matters will not have a materially adverse effect upon its capital
expenditures, earnings or competitive position.
Additionally, the Company is involved in a number of product liability and
various other suits incident to the operation of its businesses. Insurance
coverages are maintained and estimated costs are recorded for claims and suits
of this nature. It is management's opinion that none of these will have a
materially adverse effect on the Company's financial position, results of
operations or cash flows.
NOTE 14 - SEGMENT INFORMATION
The Company operates in two business segments, automotive and controls. The
automotive segment is primarily engaged in the design and manufacture of
complete seat systems, seating components and interior systems for cars, light
trucks and vans and the manufacture of automotive batteries for the replacement
and original equipment markets. The controls segment is primarily engaged in the
installation and service of control systems, the service of mechanical equipment
and other systems in non-residential buildings, and for on-site integrated
facilities management services. Reference is made to page 20 for business
segment financial data.
All operating revenues and expenses are allocated to business segments and
geographical areas in determining their operating incomes. Other income
(expense), excluded from the determination of segment operating income, includes
interest income and expense, equity in earnings of partially-owned affiliates,
gains and losses from sales of long-term assets, foreign currency gains and
losses and other miscellaneous expenses. Unallocated assets are corporate cash
and cash equivalents, investments in partially-owned affiliates and other
non-operating assets.
The Company has sales to the automotive industry. Ford Motor Company accounted
for 17% of the Company's net sales in 1997, 14% in 1996 and 8% in 1995. General
Motors Corporation accounted for 11%, 8%, and 11% in 1997, 1996 and 1995,
respectively. Chrysler Corporation accounted for 11%, 10% and 12% in 1997, 1996
and 1995, respectively. As of September 30, 1997, the Company had accounts
receivable totalling $502 million from these manufacturers.
Product transfers from domestic to foreign locations amounted to $94 million in
1997, $72 million in 1996 and $48 million in 1995. Product transfers from
foreign to domestic locations were $103 million in 1997, $71 million in 1996 and
$107 million in 1995. Interarea transfers of manufactured products are at prices
in excess of cost. The resultant income is assigned to the geographic area of
manufacture.
<PAGE> 34
<TABLE>
<CAPTION>
Geographic Areas Year ended September 30,
- --------------------------------------------------------------------------------
(in millions) 1997 1996 1995
<S> <C> <C> <C>
NET SALES
Domestic $ 7,330.7 $5,967.0 $5,246.9
European 3,024.7 2,709.0 1,667.1
Other foreign 790.0 534.0 486.7
- --------------------------------------------------------------------------------
Consolidated $11,145.4 $9,210.0 $7,400.7
- --------------------------------------------------------------------------------
OPERATING INCOME(1)
Domestic $ 496.9 $ 409.0 $ 325.7
European 1.8 49.7 31.4
Other foreign 29.2 20.9 39.3
Eliminations (0.8) (0.7) (1.3)
- --------------------------------------------------------------------------------
Consolidated 527.1 478.9 395.1
Other income (expense) (101.5) (57.4) (56.8)
- --------------------------------------------------------------------------------
Income before income taxes
and minority interests $ 425.6 $ 421.5 $ 338.3
- --------------------------------------------------------------------------------
ASSETS (YEAR END)
Domestic $ 3,922.4 $2,268.4 $2,037.9
European 1,236.7 1,550.2 1,081.5
Other foreign 440.5 329.0 216.4
Unallocated 449.0 402.9 345.2
- --------------------------------------------------------------------------------
6,048.6 4,550.5 3,681.0
Net assets of discontinued operations - 440.7 466.6
- --------------------------------------------------------------------------------
Consolidated $ 6,048.6 $4,991.2 $4,147.6
- --------------------------------------------------------------------------------
</TABLE>
(1)1997 operating income includes a restructuring charge (see Note 2) of $70.0
million, with $25.0 million of the charge associated with domestic operations
and $45.0 million associated with European operations.
<PAGE> 35
REPORT OF MANAGEMENT
Johnson Controls management has primary responsibility for the consolidated
financial statements and other information included in this annual report and
for ascertaining that the data fairly reflect the Company's financial position
and results of operations. The Company prepared the consolidated financial
statements in accordance with generally accepted accounting principles
appropriate in the circumstances, and such statements necessarily include
amounts that are based on best estimates and judgements with appropriate
consideration given to materiality.
The Company's system of internal control is designed to provide
reasonable assurance that Company assets are safeguarded from loss or
unauthorized use or disposition and that transactions are executed in accordance
with management's authorization and are properly recorded to permit the
preparation of financial statements in accordance with generally accepted
accounting principles. This system is augmented by a careful selection and
training of qualified personnel, a proper division of responsibilities, and
dissemination of written policies and procedures. An internal audit program
monitors the effectiveness of this control system.
The Audit Committee of the Board of Directors consists entirely of directors who
are not employees of the Company. The Audit Committee reviews audit plans,
internal controls, financial reports and related matters and meets regularly
with the internal auditors and independent accountants, both of whom have open
access to the Committee.
Price Waterhouse LLP, independent accountants, audited the Company's
consolidated financial statements and issued the opinion below.
James H. Keyes
Chairman and Chief Executive Officer
Stephen A. Roell
Vice President and Chief Financial Officer
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Johnson Controls, Inc.
In our opinion, the statements appearing on pages 26 through 38 of this
report present fairly, in all material respects, the financial position of
Johnson Controls, Inc. and its subsidiaries at September 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Milwaukee, Wisconsin
October 20, 1997
<PAGE> 37
Five Year Summary
<TABLE>
<CAPTION>
Year ended September 30,(1, 2)
- ------------------------------------------------------------------------------------------------------------
(dollars in millions,
except per share data) 1997(3) 1996 1995 1994 1993(4)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $11,145.4 $9,210.0 $ 7,400.7 $6,111.7 $5,496.6
Operating income $ 527.1 $ 478.9 $ 395.1 $ 311.4 $ 268.5
Income from continuing
operations before
cumulative effect
of accounting changes
Before 1997
restructuring charge $ 260.9 $ 222.7 $ 168.0 $ 134.8 $ 113.6
After 1997
restructuring charge $ 220.6 $ 222.7 $ 168.0 $ 134.8 $ 113.6
Net income $ 288.5 $ 234.7 $ 195.8 $ 165.2 $ 15.9
Earnings per share from
continuing operations
before cumulative effect
of accounting changes
Before 1997 restructuring
charge
Primary $ 2.96 $ 2.55 $ 1.93 $ 1.53 $ 1.28
Fully diluted $ 2.81 $ 2.42 $ 1.82 $ 1.46 $ 1.21
After 1997 restructuring
charge
Primary $ 2.48 $ 2.55 $ 1.93 $ 1.53 $ 1.28
Fully diluted $ 2.37 $ 2.42 $ 1.82 $ 1.46 $ 1.21
Earnings per share
Primary $ 3.29 $ 2.69 $ 2.26 $ 1.90 $ 0.08
Fully diluted $ 3.12 $ 2.55 $ 2.13 $ 1.80 $ 0.08(6)
Return on average
shareholders' equity(5) 16% 16% 13% 12% 11%
Capital expenditures $ 370.9 $ 322.3 $ 330.9 $ 261.7 $ 239.4
Depreciation $ 283.6 $ 226.6 $ 191.7 $ 169.3 $ 161.5
Number of employees 72,300 65,800 59,200 54,800 50,100
FINANCIAL POSITION
Working capital (excluding
"Net assets of
discontinued operations") $ (443.4) $ 225.8 $ 81.1 $ 226.9 $ 213.8
Total assets $ 6,048.6 $4,991.2 $ 4,147.6 $3,633.9 $3,062.7
Long-term debt $ 806.4 $ 752.2 $ 619.3 $ 661.6 $ 487.7
Total debt $ 1,462.6 $1,033.5 $ 814.8 $ 702.3 $ 527.6
Shareholders' equity $ 1,687.9 $1,507.8 $ 1,340.2 $1,202.8 $1,079.0
Total debt to total
capitalization 46% 41% 38% 37% 33%
Book value per share $ 19.80 $ 17.88 $ 16.05 $ 14.55 $ 13.15
COMMON SHARE INFORMATION
Dividends per share $ 0.86 $ 0.82 $ 0.78 $ 0.72 $ 0.68
Market prices
High $49-13/16 $ 38-1/4 $ 33 $ 30-5/8 $ 29-9/16
Low $ 35-3/8 $ 28-7/8 $ 22-7/8 $22-7/16 $ 19-5/16
Number of shareholders 57,824 44,636 37,971 33,227 30,483
Weighted average shares
(in millions)
Primary 84.8 83.6 82.3 82.1 81.5
Fully diluted 90.9 89.9 89.1 88.5 88.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Share and per share information has been restated to reflect a
two-for-one split of the Company's common stock effective March 7, 1997.
(2) Historical amounts have been restated to reflect the
reclassification of the Plastic Container division as a discontinued operation.
<PAGE> 38
(3) Results include a restructuring charge of $70.0 million ($40.3
million or $.48 per primary share and $.44 per fully diluted share, after-tax).
(4) Results include the adoption of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," No. 109, "Accounting for Income Taxes," and No. 112, "Employers'
Accounting for Postemployment Benefits." The combined cumulative effect of the
accounting changes was a one-time charge of $122 million or $1.50 per share on a
primary basis and $1.41 per share fully diluted, after taxes.
(5) Return on average shareholders' equity represents income from
continuing operations before the cumulative effect of accounting changes divided
by average equity. Income from continuing operations for 1997 excludes the
restructuring charge. Average equity for 1993 includes the cumulative effect of
accounting changes.
(6) Calculation is anti-dilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Below is a list of all direct and indirect subsidiaries of the company,
including all wholly-owned and partially-owned subsidiaries, in alphabetical
order.
<TABLE>
<CAPTION>
JURISDICTION
WHERE
SUBSIDIARY IS
NAME INCORPORATED
- ----------------------------------------------------------------------------------------------------
<S> <C>
3-A Johnson Controls Andina, C. A. Venezuela
ABC Plastic Containers Limited Cayman Islands
Academy Mechanical Services Ltd. Canada
Acropol-Johnson Controls (S) Pte. Ltd. Singapore
AJC Johnson Controls, Ltd. U.K.
Apple Container Corp. Delaware
B+W Kunststoffmaschinenbau Handelsgesellschaft Germany
Beijing Johnson Controls Automotive Trim Co., Ltd. China
Beijing Johnson Controls Co., Ltd China
Canadian Fabricated Products Ltd. Canada
CEMIS S.A. France
CESA S.A. France
Controles de Presion de Ciudad Juarez Mexico
Controles Reynosa SA de CV Mexico
Desarrollo y Pl. SA Mexico
Ensamble de Interiores Automotrices, S.A. de C.V. Mexico
</TABLE>
95
<PAGE> 2
<TABLE>
<S> <C>
Eurosit SA Spain
Factory for Thread and Synthetic Manufacturing Slovakia
Johnson Controls - NTU GmbH
G-U Export, Inc. Wisconsin
Gaz Grunder u. Anwendungszentrum f.F.&A. GmbH Germany
Global Energy Systems, S.A. de C.V. Mexico
Globe International Delaware, Inc. Delaware
Globe-Union, Inc. (DE) Delaware
Haydon & Company Limited U.K.
Haydon Distribution Limited U.K.
Haydon Group Limited U.K.
Haydon Management Services Limited U.K.
Hoover Universal, Inc. Michigan
Hyperion Corp. Michigan
Ikeda-Hoover Co. Ltd. U.K.
IKIN L.L.C. Pennsylvania
INDU TECNO spol s.r.o. Czech Republic
Industrialesud SpA Italy
Industrias IAMSA SA de CV Mexico
Interior Product Services, Inc. Delaware
Interiores Prince SA de CV Mexico
Interstate Battery System International, Inc. Delaware
Intertec Systems L.L.C. Michigan
</TABLE>
96
<PAGE> 3
<TABLE>
<S> <C>
J.C. Capital Corporation Minnesota
J.R.I. Technologies Ltd. U.K.
JC Beteiligungs GmbH Germany
JC Export Inc. Barbados
JC S.A.R.L. Luxembourg Luxembourg
JCI Beteiligungs GmbH Germany
JCI Canfab Ltd. Canada
JCI Regelungstechnik GmbH (A) Austria
JCI Regelungstechnik GmbH (G) Germany
JKL Plastic Corp. Delaware
Johnson Control International Sp. z.o.o. Poland
Johnson Control Products, Ltd. Nevada
Johnson Control SpA Italy
Johnson Control Systems Ltd. U.K.
Johnson Control Systems Pensions Ltd. U.K.
Johnson Controles de Engenharia Ltda. Brazil
Johnson Controles Ltda. Brazil
Johnson Controls (Barbados) Inc. Barbados
Johnson Controls (India) Pvt. Ltd. India
Johnson Controls (M) SDN BHD Malaysia
Johnson Controls (Mauritius) Private Limited Mauritius
Johnson Controls (Portugal) Componentes de Automoveis Lda. Portugal
</TABLE>
97
<PAGE> 4
<TABLE>
<S> <C>
Johnson Controls (Proprietary) Limited South Africa
Johnson Controls (s) Pte. Ltd. Singapore
Johnson Controls (Suisse) S.A. Delaware
Johnson Controls (Thailand) Co., Ltd. Thailand
Johnson Controls (UK) Ltd. U.K.
Johnson Controls - Roth S.A. France
Johnson Controls / ACCS Illinois
Johnson Controls Alagon, S.A. Spain
Johnson Controls Australia Pty. Ltd. Australia
Johnson Controls Austria Gesellschaft m.b.H Austria
Johnson Controls Automation Systems BV Netherlands
Johnson Controls Automobilovy Soucastky s.r.o. Czech Republic
Johnson Controls Automotive (PTY) Ltd. South Africa
Johnson Controls Automotive (UK) Ltd. U.K.
Johnson Controls Automotive Assemblies Pty. Ltd. South Africa
Johnson Controls Automotive Components Group Ltd. U.K.
Johnson Controls Automotive Components Ltd U.K.
Johnson Controls Automotive Foam Ltd. U.K.
Johnson Controls Automotive France S.A. France
Johnson Controls Automotive Mexico SA de CV Mexico
Johnson Controls Automotive NV Belgium
Johnson Controls Automotive South Africa (Pty) Ltd. South Africa
</TABLE>
98
<PAGE> 5
<TABLE>
<S> <C>
Johnson Controls Automotive Spain S.A. Spain
Johnson Controls Automotive Systems S.A. Argentina
Johnson Controls Automotive Trim (Pty) Ltd. South Africa
Johnson Controls Battery (U.K.) Ltd. U.K.
Johnson Controls Battery de Mexico, SA de CV Mexico
Johnson Controls Battery Group, Inc. Wisconsin
Johnson Controls Capital (U.K.) Ltd. U.K.
Johnson Controls de Mexico SA de CV Mexico
Johnson Controls DISC, Inc. Delaware
Johnson Controls do Brasil Automotive Ltda. Brazil
Johnson Controls Engineering, Inc. Wisconsin
Johnson Controls Espana Spain
Johnson Controls Facilities, Inc. Wisconsin
Johnson Controls France S.A. France
Johnson Controls GmbH Germany
Johnson Controls GmbH & Co. KG Germany
Johnson Controls Holding Company de Mexico, S.A. de C.V Mexico
Johnson Controls Holding Company, Inc. Delaware
Johnson Controls Holding Limited Canada
Johnson Controls Hong Kong Ltd. Hong Kong
Johnson Controls I.F.M. GmbH & Co. KG Germany
Johnson Controls Integrated Facility Management, S.A. Spain
Johnson Controls Integrated Facility Management
</TABLE>
99
<PAGE> 6
<TABLE>
<S> <C>
Catering GmbH Germany
Johnson Controls Integrated Facility Management Nordic AB Sweden
Johnson Controls Integrated Facility Management
Reinigung GmbH Germany
Johnson Controls Integrated Facility Management
Sicherheit GmbH Germany
Johnson Controls Integrated Facilty Management
Verwaltungs GmbH Germany
Johnson Controls II Assentos de Espuma Lda. Portugal
Johnson Controls Integrated Facility Management, B.V. Netherlands
Johnson Controls International B.V. Netherlands
Johnson Controls International Kft Hungary
Johnson Controls International NV/SA Belgium
Johnson Controls International, Inc. Delaware
Johnson Controls International spol s.r.o. Czech Republic
Johnson Controls International spol s.r.o. Slovakia
Johnson Controls Investment Company, Inc. Delaware
Johnson Controls Jersey Limited Jersey, Channel Islands
Johnson Controls Lahnwerk Beteiligungs GmbH Germany
Johnson Controls Lahnwerk GmbH & Co. KG Germany
Johnson Controls Limited U.K.
Johnson Controls Ltd. Canada
Johnson Controls Management Company Minnesota
Johnson Controls Managment Systems, Inc. Florida
</TABLE>
100
<PAGE> 7
<TABLE>
<S> <C>
Johnson Controls Martorell, S.A. Spain
Johnson Controls Nederland BV Netherlands
Johnson Controls Nederland Holding BV Netherlands
Johnson Controls Network Integration Services, Inc Delaware
Johnson Controls Nevada, Inc. Nevada
Johnson Controls Norden A/S Norway
Johnson Controls Northern New Mexico L.L.C. New Mexico
Johnson Controls Novel SL Spain
Johnson Controls Objekt Bochum GmbH & Co. KG Germany
Johnson Controls Objekt Bochum Verwaltungs GmbH Germany
Johnson Controls Objekt Zwickau GmbH & Co. KG Germany
Johnson Controls Objekt Zwickau Verwaltungs GmbH Germany
Johnson Controls Plastics-Holding NV/SA Belgium
Johnson Controls Richland, Inc. Washington
Johnson Controls Roth Freres Insitu-Technologie GmbH Germany
Johnson Controls SA/NV Belgium
Johnson Controls Schwalbach GmbH Germany
Johnson Controls Services Company Minnesota
Johnson Controls Services Ltd. Cayman Islands
Johnson Controls Services Mexico S.A. de C.V. Mexico
Johnson Controls Software (Asia) Pvt. Ltd. India
Johnson Controls SpA Italy
</TABLE>
101
<PAGE> 8
<TABLE>
<S> <C>
Johnson Controls Systems A.G. Switzerland
Johnson Controls Technology Company Michigan
Johnson Controls Uniloy Machinery - Mexico SA de CV Mexico
Johnson Controls V.I., Inc. Virgin Islands
Johnson Controls World Services Inc. Florida
Johnson Controls World Services Ltd. Canada
Johnson Controls World Services (Thailand) Co., Ltd. Thailand
Johnson Controls, SA de CV Mexico
Johnson Controls - RMS, Inc. Florida
Johnson Controls/ Naue Engineering GmbH & Co. KG Germany
Johnson Controls/Naue Engineering Verwaltungs GmbH Germany
Johnson International Trade Co. Michigan
Johnson Service Co. (DE) Delaware
Johnson Service Co. (NV) Nevada
JOROCA, NV Belgium
Joventa AG Switzerland
Joventa USA Inc. Nevada
Kentair (Wholesale) Limited U.K.
Komplettsitzwerk Schwalbach GmbH Germany
Maintenance Automation Corporation Florida
MAJOR, SA France
Major SKT A.S. Turkey
</TABLE>
102
<PAGE> 9
<TABLE>
<S> <C>
Naue de Mexico SA de CV Mexico
Naue - JCA Marketing GmbH & Co. KG Germany
NAV L.L.C. Pennsylvania
Nicco Corporation Ltd. India
NYLLE L.L.C. Pennsylvania
P & ET Container, Inc. Delaware
Paul Carter (Environmental) Services Limited U.K.
Perfekta Algemeine Industrie - und Handels GmbH Germany
Plastics USA Corporation Michigan
Price Johnson Controls (Hong Kong) Limited Hong Kong
Price Johnson Controls (M) Sdn Bhd Malaysia
Price Johnson Controls Pte. Ltd. Singapore
Prince APG GmbH Germany
Prince APG Ltd. U.K.
Prince APG, Inc. Michigan
Prince Corporation Michigan
Prince Holding Corporation Delaware
Prince Transportation, Inc. Michigan
Procord Limited U.K.
Propel-Johnson Controls (M) Sdn. Bhd. Malaysia
PT Johnson Columbus Mabua Indonesia
Readiness Management Support L.C. Florida
</TABLE>
103
<PAGE> 10
<TABLE>
<S> <C>
Recticel JCI Formschaum GmbH Germany
Roth Johnson Technologie France
Royal LePage Facility Management Services Ltd Canada
SAVID L.L.C. Pennsylvania
SECH L.L.C. Pennsylvania
Semco-Johnson Controls Gerenciamento de Ativos Ltda. Brazil
Setex, Inc. Ohio
Shanghai Johnson Battery Company Limited China
Shanghai Johnson Controls Co. Ltd. China
Shanghai Johnson Controls Factory Ltd. China
Sicar B.V. Netherlands
Sistemas Automotrice Summa SA de CV ("SAS") Mexico
St. Thomas Energy Exports, Inc. Virgin Islands
Syncro Partners N.V. Belgium
Tata Johnson Controls Automotive Pvt. Ltd. India
Techmix, S. de R.L. de C.V. Mexico
TechnoTrim de Mexico, S. de R.L. de C.V. Mexico
TechnoTrim, Inc. Michigan
Tecnoconfort S.A. Spain
Tolena S.A. Spain
Trim Masters Inc. Kentucky
Trimco spol s.r.o. Czech Republic
</TABLE>
104
<PAGE> 11
<TABLE>
<S> <C>
Uniloy S.r.L. Italy
Uniloy (U.K.) Ltd. U.K.
Uniloy France S.A. France
Vanpro Assentos Lda. Portugal
Vanpro GmbH Entwicklungsges.f.Autositze Germany
Vintec Co. Michigan
XYZ Container Corporation Delaware
YJC Engineering Chiba Company Japan
Yokogawa Johnson Controls Corporation Japan
</TABLE>
105
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 and in the
Registration Statements on Form S-8 listed below of Johnson Controls, Inc. of
our report dated October 20, 1997 appearing on page 39 of the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 24 of this Form 10-K.
1. Post-Effective Amendment No. 6 to Form S-16 on Form S-3
(Registration No. 2-64288)
2. Registration Statement on Form S-8 (Registration No. 33-30309)
3. Registration Statement on Form S-8 (Registration No. 33-31271)
4. Registration Statement on Form S-3 (Registration No. 33-50110)
5. Registration Statement on Form S-8 (Registration No. 33-58092)
6. Registration Statement on Form S-8 (Registration No. 33-58094)
7. Registration Statement on Form S-8 (Registration No. 33-49862)
8. Registration Statement on Form S-3 (Registration No. 33-57685)
9. Registration Statement on Form S-3 (Registration No. 33-64703)
10. Registration Statement on Form S-8 (Registration No. 333-10707)
11. Registration Statement on Form S-3 (Registration No. 333-13525)
12. Registration Statement on Form S-8 (Registration No. 333-36311)
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
December 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 111,800
<SECURITIES> 0
<RECEIVABLES> 1,705,400
<ALLOWANCES> 20,800
<INVENTORY> 373,400
<CURRENT-ASSETS> 2,529,300
<PP&E> 3,100,100
<DEPRECIATION> 1,567,100
<TOTAL-ASSETS> 6,048,600
<CURRENT-LIABILITIES> 2,972,700
<BONDS> 806,400
0
143,400
<COMMON> 14,400
<OTHER-SE> 1,530,100
<TOTAL-LIABILITY-AND-EQUITY> 6,048,600
<SALES> 11,145,400
<TOTAL-REVENUES> 11,145,400
<CGS> 9,485,600
<TOTAL-COSTS> 9,485,600
<OTHER-EXPENSES> 1,106,300
<LOSS-PROVISION> 5,200
<INTEREST-EXPENSE> 122,700
<INCOME-PRETAX> 425,600
<INCOME-TAX> 180,900
<INCOME-CONTINUING> 220,600
<DISCONTINUED> 67,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 288,500
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.12
</TABLE>
<PAGE> 1
Johnson Controls, Inc. LOGO
JOHNSON CONTROLS, INC.
POST OFFICE BOX 591
MILWAUKEE, WISCONSIN 53201
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, JANUARY 28, 1998
To the Shareholders of Johnson Controls, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of Johnson
Controls, Inc., a Wisconsin corporation, will be held in the Superior Room,
Milwaukee Athletic Club, 758 North Broadway Street, Milwaukee, Wisconsin, on
Wednesday, January 28, 1998, at 2:00 o'clock P.M. (Central Standard Time), for
the following purposes:
(1) To elect four directors of the class to serve for a term of three years
expiring at the annual meeting to be held in 2001 or until the
director's earlier retirement;
(2) To consider and act upon a proposal to ratify the appointment of Price
Waterhouse as auditors for 1998; and
(3) To consider and act upon any other matters which may properly come
before the meeting or any adjournments thereof.
Holders of Common Stock and Preferred Stock units of record at the close of
business on November 20, 1997, will be entitled to vote at the meeting and any
adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS,
John P. Kennedy
John P. Kennedy, Secretary
Milwaukee, Wisconsin
December 5, 1997
A PROXY FOR THE MEETING AND A PROXY STATEMENT ARE ENCLOSED HEREWITH. YOU ARE
REQUESTED TO FILL IN AND SIGN THE ENCLOSED FORM OF PROXY, WHICH IS SOLICITED BY
THE COMPANY'S BOARD OF DIRECTORS, AND TO MAIL IT PROMPTLY. SHAREHOLDERS WHO
EXECUTE PROXIES RETAIN THE RIGHT TO REVOKE THEM AT ANY TIME BEFORE THEY ARE
VOTED.
<PAGE> 2
JOHNSON CONTROLS, INC.
5757 NORTH GREEN BAY AVENUE
P.O. BOX 591
MILWAUKEE, WISCONSIN 53201
DECEMBER 5, 1997
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 28, 1998
This proxy statement is furnished to the shareholders of Johnson Controls, Inc.
(the Company), in connection with the solicitation by the Board of Directors of
the Company of proxies for use at the annual meeting of shareholders to be held
at the Milwaukee Athletic Club at 758 North Broadway Street, Milwaukee,
Wisconsin, on January 28, 1998, at 2:00 o'clock P.M., Central Standard Time, and
any adjournments of such meeting.
Execution of a proxy given in response to this solicitation will not affect a
shareholder's right to attend the meeting and to vote in person. Presence at the
meeting of a shareholder who has signed a proxy does not alone revoke a proxy.
Any shareholder giving a proxy may revoke it at any time before it is exercised
by giving notice thereof to the Company in writing. Unless so revoked, the
shares represented by proxies will be voted at the meeting and at any
adjournments thereof. Where a shareholder specifies a choice by means of a
ballot provided in the proxy, the shares will be voted in accordance with such
specification.
Only owners of the Company's Common Stock and Preferred Stock units of record on
November 20, 1997, will be entitled to vote at the meeting. As of November 20,
1997, there were 84,101,403 shares of the Company's Common Stock outstanding,
each share having one vote. As of November 20, 1997, there were also 279.649
shares of the Company's Preferred Stock outstanding. Each share of Preferred
Stock consists of 10,000 units, each unit having two votes. On October 31, 1997,
the directors, nominees for directors, and officers of the Company as a group
were beneficial owners of 1,601,334 shares of the Company's Common Stock
(including 963,860 shares subject to options exercisable within 60 days)
constituting approximately 1.9% of the outstanding shares of Common Stock, and
11,097 units of the Company's Preferred Stock, constituting less than 1% of the
outstanding units.
Set forth below is a tabulation indicating those persons whom the management of
the Company believes to be beneficial owners of more than 5% of any class of the
Company's securities. The following information is based on reports on Schedules
13G filed with the Securities and Exchange Commission or other information
believed to be reliable.
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of Percent
Title of Class Beneficial Owner Ownership of Class
-------------------- --------------------------------- ---------- --------
<S> <C> <C> <C>
Common Stock FMR Corporation 4,575,704(1) 5.5%
$0.16 2/3 Par Value 82 Devonshire Street
Boston, MA 02109
Common Stock J.P. Morgan & Co. Incorporated 5,595,080(2) 6.7%
$0.16 2/3 Par Value 60 Wall Street
New York, N.Y. 10260
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of Percent
Title of Class Beneficial Owner Ownership of Class
-------------------- --------------------------------- ---------- --------
<S> <C> <C> <C>
Series D Convertible Fidelity Management Trust Company 279.970(3) 100%
Preferred Stock 82 Devonshire Street
$1.00 Par Value Boston, MA 02109
</TABLE>
----------------------------
(1) FMR Corporation's most recent report as of October 31, 1997 showed sole
voting power with respect to 270,464 shares, and sole dispositive power with
respect to 4,575,704 shares. The report includes shares beneficially owned
by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp.
(2) J. P. Morgan & Co. Incorporated's most recent report as of October 31, 1997
showed sole voting power with respect to 3,612,240 shares, sole dispositive
power with respect to 5,340,580 shares, shared voting power with respect to
120,500 shares and shared power to dispose with respect to 174,900 shares.
(These numbers reflect the post March 31, 1997 stock split equivalents of
the Schedule 13G report.) The report includes shares beneficially owned by
Morgan Guaranty Trust Company of New York, J.P. Morgan Investment
Management, Inc. and J.P. Morgan Florida Federal Savings Bank.
(3) Fidelity Management Trust Company reported that as of October 31, 1997 it
held shared voting power and sole dispositive power with respect to the
shares indicated above in its capacity as trustee of the Johnson Controls,
Inc. Employee Stock Ownership Trust.
ELECTION OF DIRECTORS
The Board of Directors consists of 12 members of whom approximately one-third
are elected each year to serve for terms of three years or until the director's
earlier retirement pursuant to the Board of Directors Retirement Policy(1). It
is intended that the enclosed form of proxy will be voted for the election of
Messrs. William F. Andrews, Robert L. Barnett, Willie D. Davis and Richard F.
Teerlink, all of whom are now members of the Board, for three year terms or
until the director's earlier retirement.
Directors are elected by a plurality of the votes cast by the holders of the
Company's Common Stock and Preferred Stock units at a meeting at which a quorum
is present. "Plurality" means that the individuals who receive the largest
number of votes cast are elected as directors up to the maximum number of
directors to be chosen at the meeting. Consequently, any shares not voted
(whether by abstention, broker nonvote or otherwise) have no impact in the
election of directors except to the extent the failure to vote for an individual
results in another individual receiving a larger number of votes.
- -------------------------
(1) The Board of Directors has adopted a Retirement Policy that requires a
director to retire as of the last regular Board of Directors' meeting held
in the year of his or her 70th birthday or, in the event a shareholders'
meeting is held on that date, then such retirement shall be effective the
next day. The Retirement Policy does not apply to Mr. Brengel.
2
<PAGE> 4
The Directors Committee of the Board of Directors has no reason to believe that
any of such nominees will be unable or unwilling to serve as a director if
elected, but if any nominee should be unable or for good cause unwilling to
serve, the shares represented by proxies solicited by the Board of Directors
will be voted for the election of such other person for the office of director
as the Board of Directors may recommend in place of such nominee. Set forth
below is information with respect to the nominees and the other directors on the
Board.
<TABLE>
<S> <C>
CLASS OF 2001 (ALL OF WHOM ARE NOMINEES)
- ------------------ WILLIAM F. ANDREWS Director
since 1991
Age 66
Chairman of Schrader-Bridgeport International, Inc. and
Chairman of Scovill Fasteners Inc., since 1995. Chairman,
President and Chief Executive Officer, Amdura Corporation
from 1993-1995. President and Chief Executive Officer, UNR
Industries, Inc., Chicago, Illinois (diversified
manufacturer) from 1991 to 1993, President of Massey
Investment Company, Nashville, Tennessee (private investment
company) from 1989 to 1990, and Chairman, CEO and President
of Singer Sewing Machine Company (SSMC) Inc., Shelton,
Connecticut (diversified manufacturer) from 1986 to 1989.
Mr. Andrews is a director of Black Box Corp., Corrections
Corporation of America, Katy Industries, Navistar
International Corporation, Northwestern Steel & Wire Co.,
and Southern New England Telecommunications Corporation.
Member of Compensation and Directors Committees.
- ------------------ ROBERT L. BARNETT Director
since 1986
Age 57
Executive Vice President, Motorola Inc. and President, Land
Mobile Products Sector since April 1997. Corporate Vice
President, iDen Group, Motorola Inc., Schaumburg, Illinois,
1995 to 1997. Consultant in the field of international
communications from 1992 to 1995. Vice-Chairman, Ameritech
and President, Ameritech Bell Group, American Information
Technologies Corporation, Chicago, Illinois
(telecommunications) from 1989 to 1993 and President,
Ameritech Enterprise Group, from 1987 to 1989. Mr. Barnett
is a director of USG Corp. Member of Executive Committee and
Chairman of Directors Committee.
- ------------------ WILLIE D. DAVIS Director
since 1991
Age 63
President of All Pro Broadcasting Incorporated, Los Angeles,
California (radio broadcasting) since 1977. Mr. Davis is a
director of Alliance Bank Co., Dow Chemical Company, Kmart
Corporation, MGM Grand, Inc., Sara Lee Corporation, and
WICOR, Inc. Mr. Davis is also a director of 42 funds for
which Strong Capital Management, Inc. is the investment
adviser. Member of Audit Committee.
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------ RICHARD F. TEERLINK Director
since 1994
Age 61
Chairman of the Board of Harley-Davidson, Inc., Milwaukee,
Wisconsin, since May 1997, President and Chief Executive
Officer of Harley from May 1989 to June 1997, and Chairman
since May, 1996. Mr. Teerlink is a director of Firstar Bank
Milwaukee, and Snap On Inc.. Member of Audit Committee and
member of Executive Committee.
CLASS OF 2000
- ------------------ JOHN M. BARTH Director
since 1997
Age 51
Executive Vice President, Johnson Controls, Inc., Milwaukee,
Wisconsin since 1991. In 1987, Mr. Barth was named Vice
President and General Manager of the Plastics Technology
Group. In 1990, he became Vice President and General Manager
of the Plastics Technology Group and the Automotive Systems
Group. Mr. Barth is a director of Handleman Company and
Edwards Brothers.
- ------------------ PAUL A. BRUNNER Director
since 1983
Age 62
President and Chief Executive Officer, Spring Capital, Inc.,
Stamford, Connecticut (international investment management)
since 1985. President and Chief Executive Officer, ASEA,
Inc., 1982-1984. President and Chief Executive Officer,
Crouse Hinds Co., 1967-1982. Chairman of Audit Committee and
member of Compensation Committee.
- ------------------ SOUTHWOOD J. MORCOTT Director
since 1993
Age 59
Chairman since 1990, President since 1986 to 1996, and Chief
Executive Officer since 1989 of Dana Corporation, Toledo,
Ohio (vehicular and industrial component manufacturer). Mr.
Morcott is a director of CSX Corporation, Dana Corporation,
and Phelps-Dodge Corporation. Chairman of Compensation
Committee and member of Directors Committee.
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------ GILBERT R. WHITAKER, JR. Director
since 1986
Age 66
Dean and H. J. Nelson Professor of Business Economics, Jesse
Jones Graduate School of Administration, Rice University
since July of 1997. Professor of Business Economics,
University of Michigan, 1979 through June 1997. Provost and
Executive Vice-President for Academic Affairs, University of
Michigan, 1990-1995. Mr. Whitaker served as Dean, School of
Business Administration, University of Michigan, from 1979
to 1990. Mr. Whitaker is a director of Handleman Company,
Lincoln National Corporation, and Structural Dynamics
Research Corp. Chairman of Pension and Benefits Committee.
CLASS OF 1999
- ------------------ FRED L. BRENGEL Director
since 1964
Age 74
Chairman of the Board, Johnson Controls, Inc., Milwaukee,
Wisconsin, from 1985 to 1993. Mr. Brengel served as the
Chief Executive Officer of Johnson Controls, Inc., from 1967
to 1988. Mr. Brengel is a director of Rexworks, Inc. Member
of Executive Committee.
- ------------------ ROBERT A. CORNOG Director
since 1992
Age 57
President, Chief Executive Officer and Chairman of the Board
of Directors of Snap-on Incorporated (tool manufacturer)
since 1991. Mr. Cornog is a director of Snap-on
Incorporated, Wisconsin Electric Power Company, and
Wisconsin Energy Corporation. Member of Audit Committee and
Executive Committee.
- ------------------ JAMES H. KEYES Director
since 1985
Age 57
Chairman and Chief Executive Officer, Johnson Controls,
Inc., Milwaukee, Wisconsin. In 1985 Mr. Keyes was named
Executive Vice President and subsequently became Chief
Operating Officer and a member of the Board of Directors. He
became President of Johnson Controls, Inc., in 1986, its
Chief Executive Officer in 1988, and Chairman in 1993. Mr.
Keyes is a director of Firstar Corp., LSI Logic Corporation,
and Universal Foods Corporation. Chairman of Executive
Committee.
- ------------------ WILLIAM H. LACY Director
since 1997
Age 52
Chairman and Chief Executive Officer of Mortgage Guaranty
Insurance Corporation (MGIC), and President and Chief
Executive Officer of its parent company, MGIC Investment
Corporation, since 1987. Mr. Lacy is a Director of Firstar
Bank Milwaukee, Columbia Health System, Inc. and MGIC
Investment Corporation.
</TABLE>
5
<PAGE> 7
Each of the directors or nominees for director has had the principal occupation
indicated or in certain instances has served in another executive position with
the employer indicated or an affiliate thereof during the last five years.
The Audit Committee of the Board of Directors met three times during fiscal
1997. Its functions include, but are not necessarily limited to, the following:
(1) to review the adequacy of internal controls established by management; (2)
to assess the adequacy of the financial reporting process and selection of
accounting policies; (3) to review management's evaluation and proposed
selection of independent accountants, including the appropriateness of fees, and
to recommend to the Board of Directors the appointment of independent
accountants subject to the ratification by the shareholders; (4) to review the
adequacy of audit plans prepared by internal audit and independent accountants;
(5) to review periodically the status of significant issues and internal control
recommendations; (6) to meet and to consult with the Company's internal auditors
and accounting and financial personnel and with independent public accountants
concerning the foregoing matters; (7) to report on the results of these
activities periodically to the Board of Directors; (8) to review significant
issues concerning litigation, contingent liabilities, and tax and insurance; (9)
to review management information systems of the Company; and (10) to monitor
compliance procedures of the Company and their implementation.
The Compensation Committee of the Board of Directors met five times during
fiscal 1997. Its functions include, but are not necessarily limited to, the
following: (1) to consider and make recommendations to the Board of Directors
regarding the selection and retention of elected officers and certain other
principal officers and key employees of the Company and its subsidiaries; (2) to
consider and make recommendations regarding salary structure, officer gradings,
and salaries for elected officers; (3) to administer, make grants and awards,
make rules, and recommend amendments to the Company's executive compensation
plans; (4) to consider and make recommendations to the Board concerning bonus
awards, perquisites, and other remuneration to executive officers; (5) to
consider and make recommendations concerning the total compensation package for
all elected officers and to approve the disclosure of such information in the
Company's proxy statement; (6) to oversee the selection of, and to meet with,
outside consultants to review the Company's executive compensation programs as
appropriate; (7) to review and make recommendations concerning management
succession; (8) to recommend to the Board of Directors the selection of the
Chief Executive Officer of the Company; and (9) in the case of the Chairman of
the Board of Directors being precluded from fulfilling his/her duties by death,
disability or other debilitating circumstances, the Chair of the Committee is to
call a Special Board Meeting, as provided in the By-Laws, and chair the Board
Meeting until the Board elects a new Chairman of the Board.
The Directors Committee of the Board of Directors met three times during fiscal
1997. Its function includes, but is not necessarily limited to, the following:
(1) to review the qualifications of, and to make recommendations to the Board of
Directors concerning, nominees for directors; (2) to review and consider
candidates for election as directors submitted by the shareholders; (3) to
consider and make recommendations concerning the size and composition of the
Board of Directors; (4) to develop and recommend guidelines and criteria to
determine the qualifications of directors; (5) to recommend an overall
compensation program for directors; (6) to review and recommend committees and
committee structure for the Board; (7) to recommend performance criteria for the
Board of Directors and to review its performance; and (8) to review conflicts of
interest that may affect directors. Shareholders wishing to propose director
candidates for consideration by the Directors Committee may do so by writing to
the Secretary of the Company, giving the candidate's name, biographical data and
qualifications. Further, the Company's By-Laws set forth certain requirements
for shareholders wishing to nominate director candidates for consideration by
shareholders. With respect to elections of directors to be held at an annual
meeting, among other things, a shareholder must give written notice of an intent
to make such a nomination complying with the By-Laws to the
6
<PAGE> 8
Secretary of the Company not less than 60 days nor more than 90 days prior to
the fourth Tuesday in the month of January.
The Executive Committee of the Board of Directors did not meet during fiscal
1997. Its functions include the exercise of certain powers of the Board of
Directors in the general supervision and control of the business and affairs of
the Company during intervals between meetings of the Board of Directors.
The Pension and Benefits Committee of the Board of Directors met four times
during fiscal 1997. Its functions include, but are not necessarily limited to,
the following: (1) to review annually actuarial assumptions and actuarial
valuation of the pension plans of the Company; (2) to review investment policy
of the funds of the employee benefit plans of the Company; (3) to select and to
terminate investment managers as appropriate; (4) to review with investment
advisors past performance and current investment strategy; (5) to review and
approve the adoption of any new trust agreements or master trusts implementing
the plans; (6) to monitor and oversee Company policies affecting employee
benefit plans; and (7) to oversee administration of plans, to review annually
plan provisions, and to recommend amendments to the plans as appropriate.
During fiscal 1997, the Board of Directors met seven times. Each director
attended 80% or more of the total number of meetings held during fiscal 1997
while he or she was a member of the Board, including meetings of committees of
which the director is a member.
Directors who are not employees receive a $36,000 annual retainer, plus $1,200
for each Board meeting they attend, $1,200 for each meeting they attend of Board
committees of which they are members, $1,500 for each meeting they attend of
Board committees of which they are chairmen, plus expenses.
Directors, who are not covered by other insurance and who are under 65 years of
age, may purchase medical coverage on the same basis as Company employees. A
director who retires after attaining the age of 65 and 6 years of service as a
director will be paid the annual retainer in effect upon his or her retirement
for life. The value of this retirement plan per annum depends on life expectancy
at retirement, the retainer at retirement and the number of years of Board
Service. The annual value for current directors ranges from $8,549 to $24,808.
Under the Stock Plan for Outside Directors adopted on January 27, 1993, up to
50% of the retainer fee will be paid in Common Stock each year. The remainder
will be paid in cash at the same time. The stock will be priced as of the date
of the Annual Meeting. In addition, new directors receive an initial grant of
400 shares of Common Stock upon election or appointment. New directors also
receive a pro rata share of the annual retainer for the remainder of that year,
and the stock provided as part of the annual retainer will be priced as of the
date of the first meeting of the Board at which the new director participates.
7
<PAGE> 9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below shows the compensation for the past three
fiscal years of each of the Company's five most highly compensated executive
officers, including the Chief Executive Officer (the named executive officers).
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which options
to purchase Common Stock of the Company and stock appreciation rights (SARs),
which are rights, granted in tandem with an option, to receive cash payments
equal to any appreciation in value of the shares subject to option from the date
of the option grant to the date of exercise in lieu of exercise of the option,
are granted to officers and other key employees of the Company and its
subsidiaries. The table on page 9 shows Options/SAR grants in fiscal 1997 to the
named executive officers. Of the stock options shown in the Summary Compensation
Table below and the Option/SAR Grant Table on page 9, 50% of the options were
options with tandem SARs.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR AND OPTION/SAR VALUE TABLE
The table on page 9 shows information concerning the exercise of stock options
or tandem SARs during fiscal 1997 by each of the named executive officers and
the fiscal year-end value of unexercised options and SARs.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation --------------------
-------------------------------- Long-Term
Other Annual Options/ Incentive All Other
Fiscal Salary Bonus Compensation SARs Payout Compensation
Name and Principal Position Year ($) ($) ($)(1) (#)(2) ($) ($)(3)
- ----------------------------- ------ ------- ------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James H. Keyes 1997 875,001 689,000 -- 120,000 730,000 67,714
Chairman and Chief Executive 1996 787,503 575,000 -- 80,000 450,000 62,925
Officer 1995 731,250 599,400 -- 60,000 363,000 54,858
John M. Barth 1997 487,503 371,000 -- 48,000 277,000 34,966
Executive Vice-President 1996 441,249 260,000 -- 48,000 204,000 31,693
1995 407,496 264,649 -- 40,000 165,000 27,230
Joseph W. Lewis 1997 384,999 229,000 -- 34,000 239,000 26,643
Executive Vice-President 1996 365,247 171,000 -- 34,000 188,000 24,550
1995 346,000 175,463 -- 30,000 156,200 22,791
Stephen A. Roell 1997 348,747 246,000 -- 34,000 202,000 25,510
Vice-President and 1996 324,999 188,000 -- 34,000 101,000 23,789
Chief Financial Officer 1995 302,496 200,136 -- 30,000 79,200 19,123
John P. Kennedy 1997 304,998 194,000 -- 24,000 157,000 22,752
Vice-President, Secretary, 1996 280,503 172,000 -- 24,000 91,000 18,492
and General Counsel 1995 248,500 144,547 -- 14,000 78,100 15,241
</TABLE>
- -------------------------
(1) The aggregate amount of "Other Annual Compensation," which includes
perquisites and personal benefits was less than the required reporting
threshold (the lesser of $50,000 or 10% of the officer's annual salary and
bonus for the year).
(2) The Options/SAR's reflect the effects of the 2 for 1 stock split which took
place on March 31, 1997.
(3) "All Other Compensation" consists of contributions by the Company on behalf
of the named individuals to the Company's savings and investment plans.
8
<PAGE> 10
OPTIONS/SAR GRANTS IN FISCAL 1997(1)
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
- -------------------------------------------------------------------------------------- Value at Assumed
% of Total Annual Rates of Stock
Options/SARs Exercise Price Appreciation for
Granted to or Base Full Option Term
Options/SARs Employees in Price Expiration -----------------------
Name Granted(2) Fiscal 1997 ($/Share)(2) Date 5% 10%
- ----------------------------- ------------ ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS/SARs GRANTED November 20, 1996
James H. Keyes 120,000 7.75% $36.9375 11/20/06 $2,787,575 $7,064,263
John M. Barth 48,000 3.10% $36.9375 11/20/06 $1,115,030 $2,825,705
Joseph W. Lewis 34,000 2.19% $36.9375 11/20/06 $ 789,813 $2,001,541
Stephen A. Roell 34,000 2.19% $36.9375 11/20/06 $ 789,813 $2,001,541
John P. Kennedy 24,000 1.55% $36.9375 11/20/06 $ 557,515 $1,412,853
</TABLE>
- -------------------------
(1) The Stock Option/SAR plans are administered by the Compensation Committee of
the Board of Directors, which has authority to determine the individuals to
whom and the terms at which option and SAR grants shall be made, certain
terms of the options, and the number of shares to be subject to each option.
The per share option/SAR prices are the fair market value of the Company's
Common Stock on the date of the grant, and the term of the options is 10
years. Fifty percent of each award is exercisable two years after the grant,
and the remainder is exercisable three years after the grant.
(2) Options/SAR's granted are stated to reflect the effects of the 2 for 1 stock
split that took place on March 31, 1997.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of Unexercised In-the-Money
Shares/SARs Options/SARs at FY-End Options/SARs at FY-End
Acquired on Value ---------------------------- -------------------------
Name Exercise(1) Realized Exercisable/Unexercisable(1) Exercisable/Unexercisable
- ---------------------------------- ----------- ---------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
James H. Keyes 0 0 274,000 / 230,000 $7,186,319 / $3,500,006
John M. Barth 68,000 $1,079,870 0 / 116,000 0 / $1,864,002
Joseph W. Lewis 0 0 110,200 / 83,000 $2,905,415 / $1,340,439
Stephen A. Roell 40,000 $ 691,247 15,000 / 83,000 $361,875 / $1,340,439
John P. Kennedy 0 0 54,400 / 55,000 $1,465,201 / $859,626
</TABLE>
- -------------------------
(1) These are stated to reflect the effects of the 2 for 1 stock split which
took place on March 31, 1997.
LONG-TERM INCENTIVE PLAN AWARDS
The following table shows each Contingent Performance Award made to any named
executive officer for the 1998 fiscal year under the Company's Long-Term
Performance Plan (LTPP). Payouts of awards are tied to the Company's weighted
average return on shareholder's equity for fiscal years 1998, 1999 and 2000
compared to the median return on shareholder's equity of the Standard & Poor's
Manufacturers (Diversified Industrial) Index (S&P index) during the same
three-year period. Performance in the third year of the award is multiplied by
3/6, performance in the second year is multiplied by 2/6, and performance in the
first year is multiplied by 1/6 to establish a weighted average. If the
Company's average level of return is: (1) Less than the 45th percentile of the
return for companies in the S&P index, no award is earned; (2) equal to or
greater than the 45th
9
<PAGE> 11
percentile, the threshold amount is earned; (3) equal to or greater than the
50th percentile, the target amount is earned; (4) equal to or greater than the
55th percentile, 110% of the target amount is earned; and (5) equal to or
greater than the 60th percentile, the maximum amount is earned.
In fiscal 1997, based upon the data available at the time of this proxy, LTPP
participants were paid 100% of the maximum amount available under the criteria
established by the Compensation Committee. When the remaining comparison
companies have reported, these awards could [increase, decrease or vary].
<TABLE>
<CAPTION>
Amount of Performance
Contingent Period Until
Performance Maturation or Threshold Target Maximum
Name Award($) Payout ($) ($) ($)
---- ----------- ------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
James H. Keyes................ 810,000 1998-2000 648,000 810,000 972,000
John M. Barth................. 350,000 Fiscal Years 280,000 350,000 420,000
Joseph W. Lewis............... 234,000 157,000 234,000 281,000
Stephen A. Roell.............. 213,000 170,000 213,000 256,000
John P. Kennedy............... 171,000 137,000 171,000 205,000
</TABLE>
EMPLOYMENT CONTRACTS
The Company has employment agreements with each of the executive officers of the
Company including the named executive officers. These agreements provide that
employment shall continue for continuous terms, unless terminated by either the
Company or the employee as provided therein; the term of the agreements,
however, does not extend automatically after the employee reaches age 65. These
agreements provide for termination by the Company for cause, for death or
disability and under certain circumstances without cause. In the event of
termination without cause the employees under any of the contracts will be
entitled to receive benefits in an amount equal to the greater of two times the
Company's termination allowance policy for administrative employees or an amount
equal to 52 weeks' earnings of the employee. In the event of termination by the
Company for cause, the employee's compensation is terminated immediately. Change
of control agreements have also been entered into by the Company with these
executives. In the event of a change of control, these agreements provide for a
severance payment equal to three times the executive's annual compensation at
the time plus a lump sum payment for the actuarial equivalent of lost benefits
under the applicable retirement plan if the executive is terminated other than
for cause or has good reason to terminate his or her employment. If the amount
to be paid upon termination exceeds certain amounts established under the
Internal Revenue Code, so as to require the payment of additional federal taxes,
the executive receives an additional payment such that, after payment by the
executive of all taxes payable in connection with the agreement, the executive
will retain the full amount of the payments to which he is entitled under the
agreement. The executive has a 30-day period at the end of the first year after
a change of control to terminate his or her employment for any reason and
receive this benefit.
The Company has in effect an Executive Survivor Benefits Plan for certain
executives. Coverage under this plan is in lieu of the Company's regular group
life insurance coverage. In the event of the death of a participating executive
while he is employed by the Company, his beneficiary is entitled to payments of
between 90% and 100% (depending on the executive's age) of the executive's final
base annual salary for a period of 10 years.
The Executive Incentive Compensation Plan (EICP) provides that, in the event of
a change of control of the Company, certain participants, including the named
executive officers, may re-elect to receive early payment of deferred amounts,
and a participant may direct the Company to cause a letter of credit be issued
in an amount sufficient to provide for all payments due to such participant
under the Plan. The Long-Term Performance Plan also provides that, in the event
of a change of
10
<PAGE> 12
control of the Company, certain participants, including the named executive
officers, shall be entitled to receive early payment of deferred amounts.
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is the tabulation indicating as of October 31, 1997, the shares
of the Company's Common Stock and equivalents beneficially owned by each
director and nominee, each of the named executive officers, and directors and
executive officers of the Company as a group. No executive officer or director
owns more than 1% of the outstanding shares of Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
Amount and Units Representing
Name of Nature(1) of Stock Deferred
Beneficial Owner Ownership Compensation(3)
- --------------------------------------------------- ------------------ ------------------
<S> <C> <C>
James H. Keyes 408,709(2) 97,968 units
John M. Barth 94,697(2) 16,726 units
Joseph W. Lewis 264,291(2) 52,540 units
Stephen A. Roell 78,641(2) 2,176 units
John P. Kennedy 79,620(2) 12,018 units
William F. Andrews 5,410 0 units
Robert Barnett 2,956 16,418 units
Fred L. Brengel 219,054 12,068 units
Paul A. Brunner 12,600 0 units
Robert A. Cornog 4,651 3,751 units
Willie D. Davis 3,000 0 units
Southwood J. Morcott 2,188 2,948 units
Martha R. Seger 2,678 1,541 units
Donald Taylor 6,614 2,113 units
Richard F. Teerlink 3,056 0 units
Gilbert R. Whitaker, Jr. 5,140 5,749 units
R. Douglas Ziegler 26,200 0 units
</TABLE>
All directors and executive officers as a group (not including deferred shares
referred to in footnote (3)) TOTAL 1,623,528(2)
TOTAL PERCENT OF CLASS OF COMMON STOCK AND EQUIVALENTS 1.91%
- -------------------------
(1) Includes all shares with respect to which each officer or director directly,
through any contract, arrangement, understanding, relationship or otherwise,
has or shares the power to vote or to direct voting of such shares or to
dispose or to direct the disposition of such shares.
(2) Includes shares of Common Stock which, as of October 31, 1997, were subject
to outstanding stock options exercisable within 60 days as follows: Mr.
Keyes, 344,000; Mr. Barth, 44,000; Mr. Lewis, 142,200; Mr. Roell, 47,000;
and Mr. Kennedy, 73,400. Also reflects common stock equivalents of preferred
units that are owned by these officers.
(3) Includes deferred shares under the EICP, LTPP, and Deferred Compensation
Plan for Certain Directors, or other deferred compensation plans. Units will
not be distributed in the form of Common Stock.
11
<PAGE> 13
COMPENSATION COMMITTEE REPORT
EXECUTIVE COMPENSATION PRINCIPLES
The Company's Executive Compensation Program is based on guiding principles
designed to align executive compensation with Company values and objectives,
business strategy, management initiatives, and business financial performance.
The Johnson Controls Vision, approved by the Board of Directors, identifies
customer satisfaction, technology, growth, market leadership, and shareholder
value as the Company's primary objectives. In applying these principles the
Compensation Committee (the Committee) has established a program to:
- - Attract and retain key executives critical to the long-term success of the
Company and each of its business groups.
- - Reward executives for long-term strategic management and the enhancement of
shareholder value.
- - Integrate compensation programs with both the Company's annual and long-term
strategic planning and measuring processes, which focus on after-tax return on
shareholder equity, return on investment, growth, market share, and cost
reduction.
- - Support a performance-oriented environment that rewards performance not only
with respect to Company goals but also Company performance as compared to that
of industry performance levels.
- - The Company's policy is generally to preserve the federal income tax
deductibility of compensation paid. Accordingly, the company has taken
appropriate actions, to the extent it believes feasible, to preserve the
deductibility of annual incentives, long-term performance plan payments, and
stock option awards. However, notwithstanding the Company's general policy,
the Committee may authorize payments that may not be deductible, if it
believes that this is in the best interests of the Company and its
shareholders.
EXECUTIVE COMPENSATION PROGRAM
The total compensation program involves a market comparison of total
compensation, based on surveys provided to the Company by an independent
compensation consultant. A survey of 22 companies with annual sales between $1
billion and $12.3 billion comparing all elements of executive officer
compensation was provided by an independent compensation consultant with respect
to compensation for officers and senior managers. Average sales of these 22
companies was $6.3 billion; adjustments were made to account for differences in
annual sales between the Company and those companies in the survey. The level of
comparison is the 50th percentile for total compensation.
The program consists of both cash and equity-based compensation. The annual
compensation consists of a base salary and an annual bonus under the Executive
Incentive Compensation Plan (EICP). The Committee determines the level of salary
for key executive officers and a salary range for other executive officers.
Factors considered in determining salary amounts or ranges include prior year
salary, changes in individual job responsibilities, past performance of
individuals, and, most importantly, achievement or trends toward achievement of
specified Company goals and the salary comparison survey results. Generally, all
executive officers participate in the EICP. For each fiscal year, the Committee
determines in advance and communicates to the executive the formula for the
award, which is based on specified benchmarks for return on shareholders'
equity, or return on group or division assets, increase in market share, or cost
reduction. These benchmarks are consistent with the Company's annual and
long-term strategic planning objectives based on achievement of business plans
approved by the Board of Directors that include goals of improved performance
over the previous year and take into account industry growth and cycles. At the
end of the fiscal year, the Committee applies the formula to objective
performance results to determine an
12
<PAGE> 14
executive's award for the year. Except under the EICP Qualified Plan, where
discretionary increases to the bonus amount may no longer be made, adjustments
may then be made by the Committee, within specified ranges, for the executive's
achievement of specified objectives and individual job performance.
Long-term incentives are provided through both the Long Term Performance Plan
(LTPP) and stock options. The Committee reviews and approves the participation
of executive officers of the Company and its subsidiaries under the LTPP.
Generally, all named executive officers participate in the LTPP, which is
intended to motivate executives to achieve longer-term objectives by providing
incentive compensation based on Company performance over a three-year period.
For each award under the LTPP, the Committee assigns an executive a contingent
performance award, which the executive has the opportunity to earn based upon
the Company's return on equity during the specified three-year period.
Currently, LTPP awards are based upon a specified level of return on
shareholders' equity relative to the Standard & Poor's Manufacturers
(Diversified Industrial) Index median return on shareholders' equity. The
specified level of return is consistent with the Company's strategic planning
objectives. At the end of the period, the Committee applies the specified goal
to objective performance results to determine the executive's LTPP award.
The Committee grants stock options and stock appreciation rights (SARs) under
the 1992 Stock Option Plan. The Committee has the authority to determine the
individuals to whom stock options and SARs are awarded, the terms at which
option grants shall be made, the terms of the options, and the number of shares
subject to each option. Compensation to executives through stock options and
SARs and the LTPP, taken together, is targeted at the 50th percentile of such
compensation granted by similar companies as identified in the survey. Current
stock ownership by executives, the number of unexercised options that may be
outstanding for an executive or executives as a whole, and other factors may be
considered only for new or promoted officers. Through the award of stock option
grants, the objective of aligning executive officers' long-range interests with
those of the shareholders is met by providing the executive officers with the
opportunity to build a meaningful stake in the Company.
Executive officers may also participate in the Company's Savings and Investment
Plan (401k Plan), which includes Company contributions to the Plan, an
Equalization Benefit Plan under which certain executives, including the named
executive officers, are entitled to additional benefits that cannot be paid
under qualified plans due to Internal Revenue Code limitations and in addition
other benefit plans generally available to all levels of salaried employees.
Also, certain executive officers may elect to defer certain awards or
compensation under plans. Deferred awards are accounted for as if invested in
various accounts.
The Board of Directors has adopted an Executive Stock Ownership Policy, which
requires that all officers and senior managers in each business group, within
five years of becoming subject to the Policy, hold common stock of the Company
in an amount, depending upon the officer or manager, of one to three times their
annual salary. Total compensation to be received by these individuals is not
affected by the policy. The 1995 Common Stock Purchase Plan for Executives
(CSPPE) facilitates the acquisition of common stock by executives subject to the
Executive Stock Ownership Policy. All officers and key executives may
participate in the CSPPE. Participants in the CSPPE may deduct from their pay up
to a maximum of $2,500 per month to purchase shares of the Company's common
stock. The price of each share of such stock will be 100% of the average price
of shares purchased by Firstar Trust Company as agent for the participants. No
brokerage fees or commissions will be charged, and the Company bears the
expenses of administering the CSPPE.
Approximately 75% of the total compensation paid to the executive officer group
is performance related, which is comparable to the average of the companies
identified in the executive compensation survey.
13
<PAGE> 15
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee relied on the same approach in determining the Chief Executive
Officer's compensation as it used for compensation of other executive officers.
The Chief Executive Officer of the Company received a base salary in fiscal 1997
of $900,000, which represented an increase of 12.5% over the previous year. The
Chief Executive Officer's base salary remained below the average base salary for
chief executive officers for the 22 companies reviewed. His fiscal 1997 EICP
award of $689,000 was based upon the return on shareholder's equity for the
Company for fiscal 1997 and represented 56% of the maximum amount available
under the criteria established by the Committee. In fiscal 1997, the Chief
Executive Officer received payments under the LTPP of $730,000, based upon the
Company's return on shareholder's equity over the past three fiscal years, and
it represented 100% of the maximum amount available under the criteria
established by the Committee based upon the data available on the date of this
proxy. When the remaining comparison companies have reported, this award could
subsequently increase to 100% of the maximum amount. Stock options were awarded
in November 1996, when the Chief Executive Officer received an option award of
60,000 shares (120,000 shares if restated to reflect the 3/31/97 stock split).
Approximately 65% of the total compensation paid to the Chief Executive Officer
is performance related, which is comparable to the historical average for the
companies identified in the survey.
COMPENSATION COMMITTEE
Southwood Morcott, Chairman
William F. Andrews
Paul A. Brunner
Donald Taylor
14
<PAGE> 16
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based on the market price of the Common
Stock and assuming reinvestment of dividends, with the cumulative total return
of companies on the Standard & Poor's 500 Stock Index and the S&P Manufacturers
(Diversified Industrial) Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG S&P 500 INDEX, S&P MANUFACTURERS (DIVERSIFIED
INDUSTRIAL) INDEX AND JOHNSON CONTROLS, INC.
<TABLE>
<CAPTION>
MANUFACTURERS
MEASUREMENT PERIOD (DIVERSIFIED
(FISCAL YEAR COVERED) S&P 500 INDUSTRIAL) JCI
<S> <C> <C> <C>
1992 100 100 100
1993 113.00 118.55 140.21
1994 117.17 131.73 131.84
1995 152.02 175.45 172.51
1996 182.93 226.03 209.31
1997 256.92 314.65 282.23
</TABLE>
ASSUMES $100 INVESTED ON SEPTEMBER 30, 1992, IN S&P 500 INDEX, S&P MANUFACTURERS
(DIVERSIFIED INDUSTRIAL) INDEX AND JOHNSON CONTROLS, INC., AND THAT DIVIDENDS
ARE REINVESTED AT THE END OF MONTH IN WHICH THEY ARE PAID.
15
<PAGE> 17
PENSION PLANS
PENSION PLAN TABLE
The following table shows the maximum annual retirement benefits payable in
dollars under the Company's plans (including amounts attributable to the
Company's Equalization Benefit Plan) at the normal retirement age for specified
remunerations and years of service under provisions in effect on September 30,
1997, and assuming retirement on that date. Compensation for purposes of the
plans for the named executive officers generally corresponds with the aggregate
of the earned salary, plus bonus or Executive Incentive Compensation Plan awards
for each such person.
<TABLE>
<CAPTION>
Maximum Annual Pension at Normal Retirement Age
Average Annual After Years of Participating Service
Compensation in (Prior to Adjustment for Social Security
Highest 5 Consecutive Years Covered Compensation)
of Last 10 Years --------------------------------------------------
Before Retirement 25 Years 30 Years 35 Years 40 Years
- --------------------------- ---------- ---------- ---------- -----------
<C> <C> <C> <C> <C>
100,000 42,500 51,000 56,750 62,500
200,000 85,000 102,000 113,500 125,000
250,000 106,250 127,500 141,875 156,250
300,000 127,500 153,000 170,250 187,500
400,000 170,000 204,000 227,000 250,000
500,000 212,500 255,000 283,750 312,500
600,000 255,000 306,000 340,500 375,000
700,000 297,500 357,000 397,250 437,500
800,000 340,000 408,000 454,000 500,000
900,000 382,500 459,000 510,750 562,500
1,000,000 425,000 510,000 567,500 625,000
1,100,000 467,500 561,000 624,250 687,500
1,200,000 510,000 612,000 681,000 750,000
1,300,000 552,500 663,000 737,750 812,500
1,400,000 595,000 714,000 794,500 875,000
1,500,000 637,500 765,000 851,250 937,500
1,600,000 680,000 816,000 908,000 1,000,000
</TABLE>
As of September 30, 1997, the persons named in the Summary Compensation Table
were credited with the following years of service under the Company's pension
plan: Mr. Keyes, 28 years; Mr. Barth, 27 years; Mr. Lewis, 36 years; Mr. Roell,
14 years; and Mr. Kennedy, 12 years.
Pension plans of the Company generally apply to all regular employees, including
officers of the Company. The Johnson Controls Pension Plan (the Plan), effective
January 1, 1989, generally covers all salaried and non-union hourly employees of
the Company. The Plan has been amended from time to time. Under the Plan,
benefits are accrued according to the following formula: 1.15% of Participant's
Average Monthly Compensation multiplied by the Participant's years of Benefit
Service plus 0.55% of Average Monthly Compensation in excess of the
Participant's Covered Compensation multiplied by the Participant's years of
Benefit Service. The amounts actually payable may be actuarially adjusted to
reflect the Participant's marital status, early retirement or termination, and,
in some circumstances, age. "Average Monthly Compensation" is defined as the
average monthly compensation for the highest five consecutive years in the last
10 years. "Benefit Service" generally means the number of years worked for the
Company. "Covered Compensation" means the average of compensation subject to
Social Security taxes for the 35-year period ending in the year the Participant
attains Social Security Retirement Age; i.e. the age at which the Participant
will be entitled to full Social Security payments.
Participants become entitled to benefits under the Plan after five years of
service with the Company or any of its subsidiaries, and the normal retirement
date is a Participant's 65th birthday.
16
<PAGE> 18
The Internal Revenue Code places maximum limitations on the amount of benefits
that may be paid under the Plan. The Company has adopted an Equalization Benefit
Plan under which certain executives, including the named executive officers, are
entitled to the additional pension benefits that cannot be paid under the
qualified plan due to these limitations and because they have elected to defer a
portion of their award under an incentive compensation plan.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, since October 1, 1996,
all filing requirements applicable to its officers, directors, and greater than
ten percent beneficial owners were complied with.
SELECTION OF AUDITORS
Management will propose the adoption of a resolution ratifying the Board of
Directors' decision to appoint Price Waterhouse as auditors. If the shareholders
fail to ratify such selection, the Board will reconsider it. Representatives of
Price Waterhouse are expected to be present at the shareholders' meeting with
the opportunity to make a statement if they desire to do so and to be available
to respond to appropriate questions.
SHAREHOLDERS' PROPOSALS
Proposals of shareholders which are intended to be presented at the 1999 annual
meeting must be received by the Company no later than August 6, 1998 to be
included in the Company's proxy materials for that meeting. Further, a
shareholder who otherwise intends to present business at the 1999 annual meeting
must comply with the requirements set forth in the Company's By-Laws. Among
other things, to bring business before an annual meeting, a shareholder must
give written notice thereof, complying with the By-Laws, to the Secretary of the
Company not less than 60 days and not more than 90 days prior to the fourth
Tuesday of the month of January. The 1999 annual meeting will be held on January
27, 1999, or on such other date designated by the Board of Directors.
17
<PAGE> 19
OTHER MATTERS
The matters referred to in the notice of meeting and in the proxy statement are,
as far as management now knows, the only matters which will be presented for
consideration at the meeting. If any other matters properly come before the
meeting, the persons named in the accompanying form of proxy will vote on them
in accordance with their best judgment.
The cost of soliciting proxies will be borne by the Company. The Company expects
to solicit proxies primarily by mail. Proxies also may be solicited personally
and by telephone by certain officers and regular employees of the Company. D.F.
King & Co., Inc., has been retained for solicitation of all brokers and nominees
at a cost of approximately $11,000 plus customary out-of-pocket expenses. The
Company may reimburse brokers and other nominees for their expenses in
communicating with the persons for whom they hold stock of the Company.
The Company's 1997 Annual Report is being mailed to the shareholders with this
proxy statement.
JOHNSON CONTROLS, INC.
JOHN P. KENNEDY
John P. Kennedy, Secretary
December 5, 1997
18
<PAGE> 20
JOHNSON CONTROLS, INC.
P.O. BOX 591
MILWAUKEE, WI 53201
SHAREHOLDER'S PROXY ANNUAL MEETING-JANUARY 28, 1998
The undersigned, having received the Notice of Meeting and Proxy Statement
dated December 5, 1997, and Annual Report for 1997, hereby appoints J.P.
Kennedy and J.H. Keyes, and each of them, proxies with power of substitution to
vote for the undersigned at the annual shareholders' meeting of Johnson
Controls, Inc., on January 28, 1998, and at any adjournments thereof.
This proxy when properly executed will be voted in the manner directed therein
by the undersigned. If no direction is made, this proxy will be voted for all
nominees listed and for Proposal 2.
-- DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED --
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<S><C>
JOHNSON CONTROLS, INC. 1998 ANNUAL MEETING
The Board of Directors recommends a vote FOR items 1 and 2. If no direction is made, this proxy will be voted FOR all
nominees listed and FOR item 2.
1. ELECTION OF DIRECTORS: 1 - William F. Andrews 2 - Robert L. Barnett / / FOR all nominees / / WITHHOLD AUTHORITY
3 - Willie D. Davis 4 - Richard F. Teerlink listed to the left to vote for all
(except as nominees listed
specified below). to the left.
________________________________________
(Instructions: To withhold authority to vote for any indicated nominee, write | |
number(s) of nominee(s) in the box provided to the right.) -------> |______________________________________|
2. Ratification of the appointment of Price Waterhouse as auditors. / / FOR / / AGAINST / / ABSTAIN
3. In their discretion, upon any other matters which may properly come before the
meeting or any adjournments thereof, hereby revoking any proxy heretofore given by
the undersigned for such meting.
Check appropriate box Date________________________
Indicate changes below:
Address Change? / / Name Change? / / ___________________________________________
| |
| |
|_________________________________________|
SIGNATURE(S) IN BOX
Please sign name exactly as it appears
hereon. When signed as attorney, executor,
trustee or guardian, please add title. For
joint accounts, each owner should sign.
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