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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 DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-5358
SUNDSTRAND CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 36-1840610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (815) 226-6000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH THE COMMON
TITLE OF EACH CLASS STOCK AND RIGHTS ARE REGISTERED
Common stock-$.50 par value New York Stock Exchange
Common stock purchase rights Chicago Stock Exchange
Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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
--- ---
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$2,634,858,191 as of February 18, 1997.*
*For purposes of this calculation, the Registrant has assumed that
its directors and executive officers are affiliates.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
60,083,206 shares of common stock outstanding at February 18, 1997.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
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DOCUMENT FORM 10-K REFERENCE
Portions of Registrant's Proxy Statement for Part III
Annual Meeting of Stockholders to be held
April 15, 1997
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SUNDSTRAND CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data for the Registrant for Each of the
Last Five Fiscal Years...................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Disagreements on Accounting and Financial Disclosure........ 37
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 38
Item 13. Certain Relationships and Related Transactions.............. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 38
Signatures.............................................................. 42
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CROSS-REFERENCE TABLE OF CONTENTS
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held April 15, 1997, including all information required in Part III of Form
10-K. The Cross-Reference Table of Contents set forth in Part III identifies the
source of incorporated material for each of the Form 10-K items included in Part
III. Only those sections of the Proxy Statement cited in the Cross-Reference
Table are part of this Form 10-K and filed with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS
Sundstrand Corporation (Sundstrand or the Registrant) is a multinational
organization comprised of an Aerospace and an Industrial business segment. These
segments are engaged in the design, manufacture, and sale of a variety of
proprietary, technology-based components and systems for diversified
international markets. During 1996, the Registrant purchased the electrical load
management technology and some related business from Leach International
Corporation. In December 1996, the Registrant acquired Labinal S.A.'s (Labinal)
interest in and related assets of Auxiliary Power International Corporation
(APIC), a joint venture formed in 1989 by Sundstrand and Labinal to market and
sell auxiliary power units (APUs) to the commercial transport airline market. As
it relates to APIC, the Registrant continues to project near and long-term
growth opportunities in the APU business, with lower investment required as the
family of existing APUs are applied to a limited number of new aircraft
platforms. Also in December 1996, the Registrant initiated the restructuring of
Sullair Europe S.A., as described in the restructuring footnote on pages 25 and
26, to configure this business in a more focused manner.
STRATEGY
The Registrant intends to grow its revenues and market share by introducing
new products, entering new markets, and by making small niche-type acquisitions.
Sundstrand believes that by decentralizing its operations into smaller and more
focused business units, which can better anticipate customer needs, it will
improve the timing and increase the volume of new product development. During
1996, the Registrant established Sundstrand Fluid Handling Corporation as a
wholly owned subsidiary to better position the Registrant for future expansion
and to meet growing worldwide market demands. For additional discussion of
strategy see Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 15 and 16.
DATE OF INCORPORATION
The Registrant was incorporated in Illinois in 1910 and became a Delaware
corporation in 1966.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The financial information on industry segments can be found on page 22.
AEROSPACE SEGMENT
The Aerospace segment consists of three product lines, electric power
systems, mechanical and fluid systems, and auxiliary power systems.
Sundstrand is the leading supplier of aircraft electric power systems. The
Registrant's systems are installed on every current aircraft platform offered by
Boeing and Airbus Industrie, most McDonnell Douglas transports, several of the
most popular smaller commercial aircraft, and many of the world's military
aircraft. This scope of coverage is important both for the significant
aftermarket business it generates and for the ongoing relationships it provides
with customers. With proven capabilities in hydromechanical, electrical
generation, electronics and power electronics, and hybrid technologies,
Sundstrand can design a system for each aircraft's power requirements and usage
patterns. The acquisition of Leach's electrical load management
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technology extends Sundstrand's current capabilities for generating and managing
aircraft electric power. The electric power systems product line accounted for
more than 50 percent of Aerospace segment sales in 1996, 1995, and 1994.
The mechanical and fluid systems product line includes aircraft actuation
systems, secondary/emergency power systems, and a range of pumps as well as
systems for missile and space applications and undersea propulsion. Actuation
systems incorporate mechanical, hydraulic, and electrical technologies for the
movement and positioning of aircraft control surfaces such as flaps, slats, and
horizontal stabilizers. Some of the Registrant's largest and most successful
actuation system programs have been for military applications. This experience
base has enabled Sundstrand to expand its product offerings into commercial
markets where opportunities for growth exist. Secondary and emergency power
systems include aircraft accessory drives and engine starting systems along with
ram air turbines and air-driven generators that provide emergency hydraulic or
electric power.
Sundstrand produces APUs for a wide variety of commercial and military
applications ranging from business jets to commercial transports. During
December 1996, the Registrant purchased Labinal's 50 percent interest in APIC, a
joint venture between Sundstrand and Labinal which markets larger APUs for
Airbus, Boeing, and McDonnell Douglas commercial transports. Sundstrand expects
this acquisition to improve the efficiency of APIC's operations and to allow
APIC to respond more rapidly to the international airlines market.
INDUSTRIAL SEGMENT
The Registrant's Industrial businesses serve a diverse group of basic
industries throughout the world with a wide variety of products ranging from
small metering pumps to some of the world's largest ring gears. The operating
levels of these industries, which are involved primarily in raw material
processing, bulk material handling, direct manufacturing, and construction, are
tied closely to the level of general economic activity.
The Falk Corporation serves a global customer base in industries such as
mining, metal processing, wood and paper processing, construction and cement,
chemical processing, utilities, transportation, food processing, and a variety
of smaller markets. Falk's products include a broad line of standard enclosed
gear drives and flexible shaft couplings sold through a worldwide distributor
network as well as custom-engineered enclosed gear drives, large open gear sets,
large alloy steel castings, and main propulsion marine drives sold directly to
end users. Typical customer applications involve bulk material handling and raw
material processing into finished goods. Falk's standard enclosed gear drives
and couplings are used in conveying and mixing applications, while the larger
custom drives are used for grinding and ship propulsion systems.
Sullair Corporation is a major multinational manufacturer of rotary screw
industrial and portable air compressors, rotary screw compressors for the
refrigeration market, rotary screw vacuum systems, and pneumatic construction
tools. Filters and dryers are also available for applications requiring
extremely clean, dry air. Sullair's industrial compressors range from
five-horsepower continuous-duty encapsulated models to 600-horsepower,
high-efficiency, two-stage tandem models. Sullair's portable compressors for the
construction market have capacities ranging from 70 cfm to 1,900 cfm. In
December 1996, Sundstrand recorded a $32 million charge primarily to restructure
the operations of its Sullair Europe S.A. subsidiary. For more information on
this restructuring, see the restructuring footnote on pages 25 and 26.
Sundstrand Fluid Handling Corporation manufactures engineered centrifugal
pumps, compressors, and blowers for the hydrocarbon and chemical processing,
pulp and paper, water treatment, electric power, and sanitary processing
industries worldwide. These pumps are tailored for specific customer
applications worldwide, and sold to end users and engineering contractors.
Milton Roy Company serves the worldwide market with high-quality metering
pumps and specialty pumps. Metering pumps typically are used in municipal and
industrial water conditioning, waste water treatment, chemical processing, and
pulp and paper applications. The larger motor-driven metering pumps are often
designed into systems and sold through engineering contractors. Smaller
electronic metering pumps,
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controllers, and pH monitoring systems are stock items sold through industrial
distribution channels for small industrial water treatment applications.
INTERNATIONAL
For information related to the Registrant's international activities see
the Foreign Operations and Activity discussion on page 13 in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See the Information by Business Segment on pages 22 and 23.
MATERIALS AND SUPPLIES
The Registrant uses many raw and finished materials of primary and
alloy-type metal in forms such as cast, forged, sheet, and bar, which are
generally available from multiple sources. In addition, mechanical and
electronic materials and supplies such as fasteners, bearings, gaskets, filters,
motors, resistors, transformers, and semiconductors are procured from various
sources. The Registrant deals with numerous suppliers and is not dependent upon
any one manufacturer or supplier of materials, supplies, or services. However,
from time to time, general shortages of particular raw materials and supplies
may have an adverse effect on the Registrant.
INTELLECTUAL PROPERTY RIGHTS
The Registrant owns a large number of pending and granted patents (expiring
through 2017) and other intellectual property rights and interests, e.g.,
trademarks, copyrights, trade secrets, and licenses, which are of importance in
the aggregate to the conduct of its business and are expected to be of value in
the future. In the judgment of the Registrant, its patents and other
intellectual property rights and interests are adequate for the conduct of its
business, and the loss or expiration of any single or group of patents or other
intellectual properties or interests would not materially affect the conduct of
its business as a whole. In the Registrant's opinion, its design, manufacturing
and marketing skills, experience, and reputation are as responsible for its
positions in the markets it serves as are its patents and other formal
intellectual property rights and interests.
MAJOR CUSTOMERS
Other than the U.S. government, no single customer qualifies as a major
customer, whereby sales to that customer represent more than 10 percent of the
Registrant's total revenues.
UNFILLED ORDERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 13.
GOVERNMENT CONTRACT MATTERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 15 and the Government Contract
Matters footnote on page 37.
COMPETITION
The Registrant has competitors or potential competitors in each of its
product lines. Some of these competitors or potential competitors may have
greater financial and personnel resources than the Registrant. The Registrant
believes that its research and development, proprietary technology, and product
and service reputations have been of particular significance in maintaining the
Registrant's competitive standing.
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RESEARCH AND DEVELOPMENT
See the Research and Development footnote on page 35.
ENVIRONMENTAL MATTERS
See the Environmental Matters footnote on pages 36 and 37.
ITEM 2. PROPERTIES
The Registrant occupies building space totaling approximately 6.0 million
square feet, which is divided by business segment as follows: Industrial, 3.0
million square feet; Aerospace, 2.8 million square feet; and corporate offices,
.2 million square feet. All building space is owned by the Registrant, except
approximately .8 million square feet of leased space, and is well maintained, in
good operating condition, and suitable for its operations. The Registrant owns
approximately 200 acres of vacant land for future expansion.
Aerospace domestic manufacturing facilities are located in Phoenix,
Arizona; San Diego, California; Denver and Grand Junction, Colorado; Rockford,
Illinois; York, Nebraska; and Santa Isabel, Puerto Rico.
An Aerospace manufacturing facility is located in the Republic of
Singapore.
Industrial domestic manufacturing facilities are located in Auburn,
Alabama; Arvada, Colorado; Michigan City, Indiana; Acton, Massachusetts;
Ivyland, Pennsylvania; and Milwaukee, Wisconsin.
Industrial foreign manufacturing facilities are located in Eastbourne,
England; Dijon, Montbrison, Pont-St.-Pierre, and St. Priest, France; and Madras,
India.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is party to litigation matters and claims incurred in the
course of its operations. While the results of litigation and claims cannot be
predicted with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the Registrant's consolidated
financial position, results of operations, or liquidity.
The Registrant is also involved in a number of matters involving
environmental claims. For information concerning these matters see the Note to
the Registrant's Consolidated Financial Statements captioned "Environmental
Matters" on pages 36 and 37.
In addition to the foregoing, see the last three paragraphs of the Note to
the Registrant's Consolidated Financial Statements captioned "Income Taxes" on
pages 31 and 32.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Registrant's security holders
during the fourth quarter of fiscal year 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following chart sets forth the executive officers of Registrant, their
ages, their offices with the Registrant, and the period during which they have
held such offices.
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AGE AS OF NUMBER OF
NAME 3/5/97 CURRENT OFFICE AND PRINCIPAL OCCUPATION YEARS AS OFFICER
---- --------- --------------------------------------- ----------------
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Robert H. Jenkins........ 53 President and Chief Executive Officer. Elected 1
President and Chief Executive Officer October 1,
1995.(1)
Don R. O'Hare............ 74 Chairman of the Board. Elected Chairman of the 18
Board September 26, 1994; also Chief Executive
Officer from September 26, 1994, to September
30, 1995; and consultant to the Registrant from
August 20, 1991, to September 25, 1994.
Patrick L. Thomas........ 51 Executive Vice President and Chief Operating 2
Officer, Industrial. Elected Executive Vice
President and Chief Operating Officer,
Industrial January 2, 1995.(2)
Ronald F. McKenna........ 56 Executive Vice President and Chief Operating 1
Officer, Aerospace. Elected Executive Vice
President and Chief Operating Officer, Aerospace
May 6, 1996.(3)
Paul Donovan............. 49 Executive Vice President and Chief Financial 9
Officer and Treasurer. Chief Financial Officer
since December 2, 1988; elected to additional
position of Executive Vice President August 7,
1990; reelected to position of Treasurer
September 9, 1996.
Richard M. Schilling..... 59 Vice President and General Counsel and 19
Secretary. Vice President since April 21, 1978;
elected to additional position of Secretary July
21, 1988.
DeWayne J. Fellows....... 52 Vice President and Controller. Controller since 8
February 16, 1989; elected to additional
position of Vice President August 7, 1990.
</TABLE>
(1) Mr. Jenkins was Executive Vice President of Illinois Tool Works, Inc. From
March 1, 1990, to September 30, 1995.
(2) Mr. Thomas was President of Milton Roy Company from April 1, 1991, to
January 1, 1995; and Vice President and General Manager of Sundstrand Fluid
Handling from October 12, 1989, to March 31, 1991.
(3) Mr. McKenna was Vice President of Business Development, Sundstrand Aerospace
from January 28, 1995, to May 6, 1996 and Vice President and General Manager
of the Sundstrand Electric Power Division from December 2, 1989, to January
27, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Sundstrand common stock is listed on the New York, Chicago, and Pacific
stock exchanges under the symbol SNS.
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DIVIDENDS AND STOCK PRICE RANGE
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PER SHARE OF COMMON STOCK
------------------------------------------------
PRICE RANGE
DIVIDENDS --------------------------------
PAID HIGH LOW
--------- ------------- ------------
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Quarter
1996
First......................................... $.17 $ 41 5/8 $ 33 1/2
Second........................................ .17 40 3/4 33 1/4
Third......................................... .17 40 1/2 32 1/2
Fourth........................................ .17 42 3/4 37 3/4
----
$.68
----
1995(a)
First......................................... $.15 $ 25 7/16 22 1/4
Second........................................ .15 30 3/4 25 1/8
Third......................................... .15 34 15/16 28 1/2
Fourth........................................ .15 35 3/8 29 9/16
----
$.60
----
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(a) Amounts adjusted or restated to reflect the effects of the Registrant's
two-for-one stock split payable in the form of a 100 percent stock dividend
effective March 19, 1996.
For information on the two-for-one stock split payable as a 100 percent
dividend see the Stock Split footnote on page 26. For information regarding
restrictions on dividend payments see the Notes Payable and Long-Term Debt
footnote on page 32. For information on the number of common stockholders and
further information regarding the Registrant's common stock price see the
Selected Financial Data for the Registrant for Each of the Last Five Fiscal
Years on pages 9 and 10.
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ITEM 6. SELECTED FINANCIAL DATA FOR THE REGISTRANT FOR EACH OF THE LAST FIVE
FISCAL YEARS
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996(a) 1995(b) 1994(c) 1993 1992(d)(e)(f)
------- ------- ------- ------ -------------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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Summary of Operations
Net Sales
Aerospace.................................... $ 785 $ 726 $ 710 $ 754 $ 840
Industrial................................... 736 747 663 629 639
------ ------ ------ ------ -------
Total................................... $1,521 $1,473 $1,373 $1,383 $ 1,479
====== ====== ====== ====== =======
Operating Profit
Aerospace.................................... $ 138 $ 54 $ 88 $ 106 $ 91
Industrial................................... 84 121 106 84 82
------ ------ ------ ------ -------
Total................................... $ 222 $ 175 $ 194 $ 190 $ 173
====== ====== ====== ====== =======
- -----------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes, extraordinary item, and
cumulative effect of accounting change....... $ 184 $ 135 $ 149 $ 133 $ 110
Net earnings from continuing operations before
extraordinary item and cumulative effect of
accounting change............................ $ 114 $ 79 $ 96 $ 91 $ 70
Net earnings (loss) available for common
shares....................................... $ 114 $ 79 $ 96 $ 141 $ (122)
Return on average equity, after tax............ 22.9% 16.2% 19.0% 27.0% (19.9)%
- -----------------------------------------------------------------------------------------------------
Per Share of Common Stock(g)
Earnings from continuing operations before
extraordinary item and cumulative effect of
accounting change............................ $ 1.87 $ 1.25 $ 1.46 $ 1.28 $ .97
Earnings (loss)................................ $ 1.87 $ 1.25 $ 1.46 $ 1.98 $ (1.68)
Cash dividends................................. $ .68 $ .60 $ .60 $ .60 $ .588
Market value -- high........................... $42.75 $35.38 $26.00 $22.38 $ 23.63
low.......................... $32.50 $22.25 $20.50 $17.50 $ 15.56
year-end..................... $42.50 $35.19 $22.75 $21.00 $ 20.13
Book value..................................... $ 8.49 $ 7.80 $ 7.80 $ 7.65 $ 7.33
- -----------------------------------------------------------------------------------------------------
Year-End Financial Position
Working capital................................ $ 375 $ 323 $ 303 $ 365 $ 490
Current ratio.................................. 1.9 1.7 1.7 2.1 2.2
Total assets................................... $1,595 $1,593 $1,587 $1,512 $ 1,780
Long-term debt................................. $ 226 $ 228 $ 247 $ 255 $ 420
Total debt..................................... $ 344 $ 396 $ 441 $ 282 $ 479
Shareholders' equity........................... $ 513 $ 481 $ 494 $ 512 $ 530
Ratio of total debt to total capital........... 40.1% 45.2% 47.1% 35.5% 47.5%
Shares outstanding at year end (in
millions)(g)................................. 60.4 61.7 63.3 66.9 72.3
- -----------------------------------------------------------------------------------------------------
Other Data
Orders received
Aerospace.................................... $ 822 $ 896 $ 736 $ 527 $ 886
Industrial................................... 735 761 701 625 641
------ ------ ------ ------ -------
Total................................... $1,557 $1,657 $1,437 $1,152 $ 1,527
====== ====== ====== ====== =======
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996(a) 1995(b) 1994(c) 1993 1992(d)(e)(f)
------- ------- ------- ------ -------------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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Unfilled orders
Aerospace.................................... $ 806 $ 769 $ 599 $ 572 $ 799
Industrial................................... 161 162 148 110 115
------ ------ ------ ------ -------
Total................................... $ 967 $ 931 $ 747 $ 682 $ 914
====== ====== ====== ====== =======
Property, plant, and equipment (excluding
leased equipment):
Additions, at cost........................... $ 63 $ 62 $ 54 $ 56 $ 75
Depreciation................................. $ 60 $ 61 $ 61 $ 69 $ 66
Approximate number of employees................ 9,400 9,200 9,200 9,300 10,800
Approximate number of shareholders of record... 3,500 3,700 4,000 4,100 4,300
</TABLE>
(a) 1996 includes a restructuring charge of $32 million before taxes ($23
million after taxes equivalent to $.38 per share) related to the operations
of Sullair Europe S.A. Also includes pension and postretirement benefit
curtailment gains of $8 million before taxes ($5 million after taxes
equivalent to $.08 per share) related to the shutdown of the Lima, Ohio,
facility.
(b) Includes a restructuring charge of $58 million before taxes ($40 million
after taxes equivalent to $.64 per share) related to the reduction of
manufacturing capacity and the divestiture of two non-core product lines.
(c) Includes a reduction of depreciation expense related to a change in
depreciable lives of $9 million before taxes ($6 million after taxes
equivalent to $.08 per share).
(d) Includes charges of $35 million before taxes ($22 million after taxes
equivalent to $.31 per share) for restructuring of, and reduction in
employment in the Aerospace segment. Also includes charges of $17 million
before taxes ($11 million after taxes equivalent to $.15 per share),
exclusive of the cumulative effect, associated with the adoption of SFAS No.
106 and a credit of $9 million before taxes ($6 million after taxes
equivalent to $.08 per share) resulting from a change in pension cost
assumptions.
(e) Includes provisions for interest charges for the anticipated resolution of
certain tax disputes of $2 million before taxes ($1 million after taxes
equivalent to $.02 per share).
(f) Amounts restated to reflect the Registrant's Sundstrand Data Control
division as a discontinued operation.
(g) Amounts adjusted or restated to reflect the effects of the Registrant's
two-for-one stock split payable in the form of a 100 percent stock dividend
effective March 19, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking information which should
be read in conjunction with the cautionary language set forth in the
Registrant's report on Form 8-K filed on February 13, 1997.
Total sales of the Registrant increased $48 million to $1,521 million in
1996, from $1,473 million in 1995. Net earnings in 1996 were $114 million, or
$1.87 per share, which included a pretax restructuring charge of $32 million,
one-time gains related to the 1995 restructuring totaling $8 million, and period
costs related to the 1995 restructuring of approximately $13 million. Net
earnings in 1995 were $79 million, or $1.25 per share, which included a pretax
restructuring charge of $58 million. Excluding the restructuring charges,
related one-time gains and related period costs, 1996 net earnings were $140
million, or $2.30 per share, compared with $123 million, or $1.96 per share, in
1995.
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SALES BY BUSINESS SEGMENT
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<CAPTION>
1996 1995 1994
SALES (AMOUNTS IN MILLIONS) AND ---------------- ---------------- ----------------
INCREASE (DECREASE) FROM PRIOR YEAR AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
- --------------------------------------- ------ ------ ------ ------ ------ ------
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Business segment
Aerospace -- Commercial.............. $ 550 12.9% $ 487 12.7% $ 432 (0.5)%
-- Military................ 235 (1.7)% 239 (14.0)% 278 (13.1)%
------ ----- ------ ----- ------ -----
-- Total................... 785 8.1% 726 2.3% 710 (5.9)%
Industrial............................. 736 (1.5)% 747 12.7% 663 5.4%
------ ----- ------ ----- ------ -----
Total............................. $1,521 3.3% $1,473 7.3% $1,373 (0.8)%
====== ===== ====== ===== ====== =====
</TABLE>
1996 Aerospace segment sales were $785 million, representing 51.6 percent
of total sales. The $59 million increase from 1995 sales was due primarily to
higher commercial original equipment manufacturer (OEM) and aftermarket sales
both of which increased by more than 10 percent from the prior year. The growth
reflects the increase in aircraft orders, continued airline traffic growth, and
improved profitability in the airline industry. Military sales were flat in 1996
compared with 1995.
Aerospace segment sales in 1995 were $726 million, which represents a $16
million increase over 1994 sales and 49.3 percent of total sales. Commercial
sales in 1995 increased by $55 million compared with 1994 due to a 25.1 percent
increase in aftermarket sales. The growth in commercial aftermarket sales
reflected the sustained growth in passenger traffic and previously depleted
spare parts inventories. Commercial OEM sales were flat in 1995 compared with
1994. As a result of a more than 15 percent decrease in military OEM sales and a
more than 5 percent decrease in military aftermarket sales, military sales in
1995 were $239 million, a $39 million decrease from 1994.
The Registrant's electric power systems product line (Electric Power) is
the largest product line within the Aerospace segment. This product line
accounted for more than 50 percent of Aerospace segment sales in 1996, 1995, and
1994.
Sales in the Industrial segment were $736 million in 1996, representing
48.4 percent of total sales, compared with sales of $747 million in 1995.
Excluding sales from Milton Roy's divested Spectronic Instruments (Spectronic)
business, 1996 sales increased by $5 million from 1995. Lower sales from
Sullair's industrial compressor business were more than offset by higher sales
of Falk's custom built products and higher domestic sales of Sundstrand Fluid
Handling's Sundyne(R) product. Excluding Spectronic, Milton Roy's sales were
flat.
Industrial segment sales were $747 million in 1995, representing 50.7
percent of total sales, compared with 1994 sales of $663 million. Excluding
sales from the Spectronic business, sales at all three Industrial businesses
increased by approximately 15 percent from 1994. The sales increases resulted
primarily from an upturn in the cyclical markets which the Industrial businesses
serve.
OPERATING PROFIT BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
1996 1995 1994
OPERATING PROFIT (AMOUNTS IN MILLIONS) AND -------------- -------------- --------------
OPERATING PROFIT AS A PERCENT OF NET SALES AMOUNT % AMOUNT % AMOUNT %
- -------------------------------------------------- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Business segment
Aerospace....................................... $138 17.6 $ 54 7.4 $ 88 12.4
Industrial...................................... 84 11.4 121 16.2 106 16.0
---- ---- ---- ---- ---- ----
Total........................................ $222 14.6 $175 11.9 $194 14.1
==== ==== ==== ==== ==== ====
</TABLE>
Operating profit in the Aerospace segment increased to $138 million in 1996
from $54 million in 1995. Excluding restructuring related period costs and
one-time gains, 1996 operating profit was $143 million, or 18.2 percent of
sales, compared with $108 million, or 14.9 percent of sales, in 1995 excluding
restructuring
11
<PAGE> 12
related items. The year-over-year increase was due primarily to the increase in
commercial OEM and aftermarket sales.
Aerospace segment operating profit decreased by $34 million to $54 million
in 1995 from $88 million in 1994. Excluding the 1995 restructuring charge of $48
million and the related period costs of $6 million, 1995 operating profit was
$108 million, or 14.9 percent of sales. The operating profit increase, excluding
the restructuring, was due primarily to the increase in high-margin commercial
aftermarket sales in 1995 and the effect of short-term manufacturing
inefficiencies in 1994. The short-term manufacturing inefficiencies, which
reduced operating profit substantially in 1994, were related primarily to the
transfer of production from the closed Brea and San Diego, California, plants to
other Aerospace facilities.
Operating profit in the Industrial segment in 1996 was $84 million, which
included a $32 million restructuring charge related to Sullair Europe S.A.
Excluding the restructuring charge, 1996 operating profit was $116 million, or
15.8 percent of sales, compared with $121 million, or 16.2 percent of sales, in
1995. The decrease was due primarily to increased operating losses at Sullair's
European subsidiary and lower profitability at Milton Roy's Flow Control
Division resulting from lower volume and higher manufacturing costs, partially
offset by the restructuring charge recorded to write down the assets of
Spectronic in 1995.
Industrial segment operating profit was $121 million in 1995 compared with
$106 million in 1994. The increase was due primarily to increased sales and
higher operating profit margins from all three Industrial businesses, partially
offset by the restructuring charge recorded to write down the assets of
Spectronic.
RESTRUCTURING
In December 1996, the Registrant initiated a restructuring plan related
primarily to the operations of Sullair Europe S.A. which resulted in a pretax
charge of $32 million. The charge is reflected in the restructuring charge line
on the income statement. The restructuring was undertaken as a result of
continuing losses at these operations, weakness in the European economy, and
significant competitive pressures in the European markets. The charge included
$11 million in termination benefits for approximately 140 employees, primarily
consisting of workers at Sullair Europe's St. Priest, France, facility. The
charge also included $14 million for the write-down of assets of Sullair Europe
and $7 million primarily for disposition of the St. Priest facility and
professional fees. Operations currently at the St. Priest facility will be
transferred to other plant sites in Europe and the United States. The shutdown
of the St. Priest facility and termination or transfer of the employees is
expected to be completed in late 1997 and it is anticipated that the sale of the
facility will be completed by the end of 1999. No material restructuring amounts
were paid in 1996. The net effect of cost savings and related expenses which
were not subject to accrual are projected to result in pretax savings of $4
million, $10 million, and $11 million in 1997, 1998, and 1999, respectively.
Additionally, the restructuring is expected to reduce cash flow by about $10
million in 1997 and provide cash flow benefits of approximately $9 million and
$11 million in 1998 and 1999, respectively.
During 1995, the Registrant recorded a $58 million restructuring charge
related to the reduction of manufacturing capacity in the Aerospace segment and
the divestiture of two non-core product lines. Since that time, $7 million has
been disbursed and charged against the liability, including costs to terminate
359 employees. The shutdown of the Lima, Ohio, facility was completed during
1996 and the disposition of that facility is expected to be completed in 1997.
The shutdown of the Lima facility triggered curtailment and settlement gains
during 1996, totaling $8 million, related to pension and other postretirement
benefits for the terminated employees. These gains are reflected in the
restructuring charge line in the income statement. Additionally during 1996,
approximately $13 million, related primarily to the movement of equipment from
the Lima facility to other manufacturing sites, was charged to costs of products
sold.
ACQUISITIONS AND DIVESTITURES
During 1996, the Registrant purchased the electrical load management
technology and some related business from Leach International Corporation. On
December 19, 1996, the Registrant purchased from Labinal S.A. (Labinal) its
interest in Auxiliary Power International Corporation (APIC) and related assets
for approximately $25 million.
12
<PAGE> 13
On July 12, 1995, the Registrant sold Spectronic for $19 million to Life
Sciences International Plc., London, England. On September 6, 1995, the
Registrant sold a majority interest in APT in a leveraged buy out by a
management-led group. The losses on both of these sales were recognized as part
of the asset write-down included in the 1995 restructuring charge discussed
earlier.
FOREIGN OPERATIONS AND ACTIVITY
The Registrant has been expanding its international activity over the past
several years, in part through joint-venture operations, acquisitions, and
development of foreign subsidiaries. Accordingly, the Registrant enters into
foreign currency forward contracts primarily to protect specific assets and
liabilities and certain cash flows from foreign currency exchange rate
fluctuations. As a result, foreign exchange rate fluctuations are not expected
to have a material impact on the Registrant's financial condition or results of
operations. For further information related to foreign currency forward
contracts see the Summary of Significant Accounting Policies note on pages 24
and 25 and the Financial Instruments With Off-Balance-Sheet Risk note on page
33.
The Registrant continues to explore a variety of strategies to expand its
international presence, including joint ventures and distribution arrangements.
Markets in high-growth areas, such as the Asia-Pacific region, continue to be a
focus of the Registrant's efforts. During 1996, the Registrant acquired
Labinal's 50 percent interest in APIC, a joint venture formed by the Registrant
and Labinal to provide auxiliary power units to the worldwide commercial
transport airline market. During 1995, Milton Roy increased its ownership in
Asia LMI Pte. Ltd., a pump manufacturer in India, to 70 percent. While there is
risk inherent in entering these markets, the Registrant expects its investments
to result in long-term benefits.
UNFILLED ORDERS
Unfilled orders increased by $36 million to $967 million at December 31,
1996, of which $361 million are not expected to be filled in 1997. Unfilled
orders at December 31, 1995 were $931 million. Unfilled orders in the Aerospace
segment increased by approximately five percent from 1995 while Industrial
segment unfilled orders remained flat. Aerospace unfilled orders at December 31,
1997 are expected to decline slightly from December 31, 1996 and Industrial
unfilled orders are expected to remain flat.
AUXILIARY POWER UNITS
The Registrant's Power Systems product line includes auxiliary power units
(APUs) developed and produced for both the military and commercial aerospace
markets. Since 1989, the Registrant has participated in the APIC joint venture
with Labinal to develop and market a family of APUs to serve the commercial
airline transport market. Initial entry into this market has required
substantial investments by the Registrant and APIC.
On December 19, 1996, the Registrant purchased Labinal's 50 percent share
of the joint venture giving the Registrant 100 percent ownership of APIC. This
action was taken to further strengthen the Registrant's APU product line and to
capitalize on the acceptance of these products in the growing aerospace market.
The Registrant continues to project near and long-term growth opportunities in
the APU business, with lower investment required as the family of existing APUs
are applied to a limited number of new aircraft platforms.
ENVIRONMENTAL MATTERS
For a detailed discussion, see the Environmental Matters note on pages 36
and 37.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $375 million at December 31, 1996, compared with $323
million at December 31, 1995. The $52 million increase was due primarily to
lower notes payable and higher inventories and accounts receivable, partially
offset by lower cash and cash equivalents. Notes payable decreased as available
cash was used to reduce short-term debt. Inventories increased in response to
higher sales and order activity in the
13
<PAGE> 14
Aerospace segment and as a result of the APIC acquisition. Accounts receivable
increased primarily as a result of higher sales and the APIC acquisition.
Net cash flow from operating activities decreased to $168 million in 1996
from $197 million in 1995. Excluding the restructuring charges and related
items, operating cash flow did not change materially year over year as the
unfavorable impact of fluctuations in accounts receivable and accounts payable
balances were substantially offset by higher net earnings and the effect of
increased accrued expenses. The increase in accrued expenses in 1996, excluding
fluctuations in restructuring reserves, was due primarily to increases in
advanced payments received from customers and other postretirement benefit
liabilities.
Net cash flow from operating activities in 1995 increased to $197 million
from $108 million in 1994. Excluding the restructuring, which reduced 1995 cash
flow by approximately $13 million, the increase was due primarily to improved
net earnings in 1995 and a $35 million tax payment related to the gain from the
sale of SDC which decreased the 1994 net operating cash flow.
During 1996, the Registrant used $86 million of cash for investing
activities, primarily for the purchase of fixed assets and for acquisitions. In
1996, the Registrant used $144 million of cash for financing activities,
primarily to repay short-term borrowings, repurchase common stock, and pay
dividends.
In 1995, the Registrant used $44 million of cash for investing activities,
primarily for the purchase of fixed assets, an investment in an industrial
revenue bond (IRB) trust, and the purchase of the ram air turbine product line
of Dowty Aerospace Hydraulics, Dowty Group Plc., Cheltenham, England, offset in
part by the proceeds from the sale of assets. The IRB trust was formed to fund
capital improvements at the Registrant's Auburn, Alabama, facility and proceeds
from the sale of assets included cash received in conjunction with the
dispositions of Spectronic and APT. During 1995, the Registrant used $136
million of cash for financing activities, primarily to repurchase common stock,
repay both short-term and long-term borrowings, and pay dividends.
In 1994, the Registrant used $77 million of cash for investing activities,
primarily for the purchase of fixed assets and the HMD-Kontro acquisition.
Financing activities provided $33 million of cash in 1994, primarily net
borrowings supported by lines of credit and borrowings for the HMD-Kontro
acquisition, partially offset by cash used to repurchase common stock and pay
dividends.
At December 31, 1996, a total of $335 million of unsecured revolving
domestic credit facilities, all of which was unused, was being provided to the
Registrant by seven banks. The Registrant also maintains foreign lines of credit
for use by foreign operations totaling the equivalent of approximately $14
million, of which only a minimal amount was outstanding at December 31, 1996.
The entire unused portion of these credit facilities was available under the
Registrant's most restrictive debt covenants at December 31, 1996. Cash flow
from operating activities and access to credit facilities and the commercial
paper market provide the Registrant with current and continuing sources of
liquidity.
The Registrant issues commercial paper in the United States, which is
supported by its domestic revolving credit facilities. At December 31, 1996 and
1995, the Registrant had $118 million and $167 million of commercial paper
outstanding, respectively.
On February 20, 1996, the Registrant's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend which was
distributed on March 19, 1996, to shareholders of record on March 5, 1996.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the split. In
addition, all references to the number of shares and per share amounts of the
Registrant's common stock have been restated to reflect the split.
On June 20, 1995, the Registrant was authorized by its Board of Directors
to issue up to an additional $150 million of long-term debt. During the fourth
quarter of 1995, the Registrant arranged a private shelf facility with the
Prudential Insurance Company of America which will allow it quick access to the
private debt market through November 1998. On February 8, 1996, the Registrant
filed a shelf registration statement on
14
<PAGE> 15
Form S-3 with the Securities and Exchange Commission which will facilitate quick
access to the public debt market.
The Registrant's Board of Directors has authorized the repurchase of 20
million shares of the Registrant's outstanding common stock. The Registrant had
purchased 13 million shares through December 31, 1996 at a total purchase price
of $321 million. Funds for the repurchases were provided by the Registrant's
4(2) commercial paper program and operating activities. The Registrant will
consider a variety of options for the repurchase of the shares, from time to
time, including open market, Dutch auction, and other purchases. The Registrant
currently intends to hold the repurchased shares as treasury stock.
The Registrant uses debt to the extent internally generated cash flow is
insufficient to meet its requirements. Accordingly, the ratio of its total debt
to total capital is important since it indicates the Registrant's capacity to
absorb additional debt. This ratio was 40.1 percent at the end of 1996, compared
with 45.2 percent at the end of 1995, and 47.1 percent at the end of 1994. The
decrease in 1996 was due primarily to the previously discussed decrease in notes
payable and the increase in retained earnings partially offset by the effects of
the share repurchase program. The Registrant expects that for 1997 its
total-debt-to-total-capital ratio will be in the 40 percent to 45 percent range.
Capital expenditures, cash dividend payments, and working capital
requirements will be financed from the Registrant's continuing sources of
liquidity.
The Registrant remains actively involved in evaluating potential
acquisitions, which may be financed with internal cash flow, debt, stock, or a
combination thereof.
Capital expenditures (excluding leased equipment) consisting primarily of
normal replacements of property, plant, and equipment were $63 million in 1996,
compared with $62 million in 1995. Capital expenditures are expected to increase
to approximately $125 million in 1997, due primarily to increased investment in
machinery and equipment related to increasing volume and new manufacturing
process strategies and an information systems project in the Aerospace segment.
Total research and development expenditures for the years 1996, 1995, and
1994 were $98 million, $113 million, and $109 million, respectively, of which
$43 million, $47 million, and $45 million, respectively, was funded by
customers. The Registrant expects 1997 research and development expenditures to
be approximately $110 million, including approximately $35 million of which will
be customer funded.
TAX ISSUES
For a detailed discussion, see the Income Taxes note on pages 30 through
32.
GOVERNMENT CONTRACT MATTERS
A portion of the Registrant's business results from contracts with or for
government agencies. Military sales in 1996 were $240 million, of which 48
percent and 52 percent were from prime contracts and subcontracts, respectively.
Military sales in 1995 were $243 million, of which 42 percent and 58 percent
were from prime contracts and subcontracts, respectively. Military sales in 1994
were $279 million, of which 31 percent and 69 percent were from prime contracts
and subcontracts, respectively. In addition, sales where the final customer was
the U.S. government represented 72 percent, 75 percent, and 87 percent of total
military sales in 1996, 1995, and 1994, respectively.
For additional discussions on government contract matters, see the
Government Contract Matters note on page 37.
STRATEGY
The Registrant is known internationally for the quality of its engineered
products. In the future, the Registrant intends to continue in this area of
excellence while focusing on new product and market opportunities. The emphasis
will be on sales growth through products of like technology and profit
potential.
15
<PAGE> 16
Additionally, the Registrant is focusing on improving its manufacturing
capabilities and processes so that its ability to manufacture and serve its
customers will be important competitive advantages.
The new business and manufacturing process strategies will be focused
through decentralized organizations. Discrete business units and enterprises
will be used to implement customized improvements in work flow, cycle time
reduction, and customer response.
OUTLOOK
Aerospace
Strong commercial aircraft order rates during 1996 will produce increased
shipments to OEM customers during 1997; while the ongoing growth of worldwide
airline travel will benefit aftermarket shipments though not to the same degree.
Aerospace military sales are expected to grow slightly in 1997 as a result of
increased shipments to foreign military customers.
Industrial
The outlook for the Registrant's Industrial businesses continues to be
favorable. For the near term, sustained demand in the U.S. industrial economy
and continued penetration of rapidly growing economies worldwide are expected.
European markets continue to show weakness. As described above, the Registrant
has commenced the restructuring of the air compressor business of Sullair Europe
which should begin to reduce the losses at that entity toward the end of 1997
and allow it to break-even during 1998.
Forecast
The following discussion contains forward-looking information which should
be read in conjunction with the cautionary language set forth in the
Registrant's report on Form 8-K filed on February 13, 1997.
The Registrant projects that 1997 sales will increase between 10 percent
and 15 percent. In addition to the previously discussed acquisition of the
remaining interest in APIC the Registrant purchased the electrical load
management technology and some related business from Leach International
Corporation. While both of these acquisitions are expected to be very good for
the Registrant, each will have a slightly dilutive impact in 1997. In addition
the Registrant will be investing in strategic initiatives, which are expected to
adversely affect profitability in 1997. These initiatives should begin to
provide benefits as early as 1998, with even greater benefits by the year 2000.
Considering all of these factors, the Registrant's forecast for 1997 is an
earnings per share range of $2.65 to $2.85 per share, excluding previously
announced restructuring charges and any future share repurchases. Additionally,
the Registrant expects to generate operating cash flow after capital
expenditures of between $100 million and $125 million in 1997.
Total Aerospace sales are projected to increase between 20 percent and 25
percent for 1997 with commercial OEM sales projected to increase by
approximately 50 percent. Commercial aftermarket sales should increase by about
10 percent, while military sales are expected to increase by approximately 10
percent to 15 percent. Because of the acquisition of the electrical load
management technology and related business from Leach and the acquisition of the
remaining interest in APIC, the Aerospace segment operating profit margin is
expected to be reduced by about one and one half percentage points in 1997. In
addition, strategic initiatives should reduce Aerospace operating profit margins
by up to an additional one percentage point. Despite these reductions, the
Aerospace segment is expected to generate an operating profit margin in the mid
17 percent to mid 18 percent range for 1997, which should result in Aerospace
operating profit growing by 18 percent to 25 percent.
The Registrant expects Industrial segment sales to grow by up to 5 percent
in 1997. The 1997 Industrial segment operating profit margin, excluding
previously announced restructuring charges, is expected to be in the 16 percent
to 17 percent range, which should result in Industrial segment operating profit
growing by 5 percent to 10 percent.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report
The management of Sundstrand is responsible for the preparation and
presentation of the consolidated financial statements and related financial
information included in this Annual Report on Form 10-K. These have been
prepared in conformity with generally accepted accounting principles
consistently applied and, as such, include amounts based on estimates by
management. The consolidated financial statements have been audited by Ernst &
Young LLP, the Registrant's independent auditors.
Management also is responsible for maintaining a system of internal
accounting controls which is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and are properly recorded. To assure the maintenance
of effective internal controls, management adopts and disseminates policies,
procedures and directives; selects and trains qualified personnel; establishes
organizational structures which permit the delegation of authority and
responsibility; and maintains an active program of internal audits and
appropriate follow-up by management.
The management of Sundstrand also recognizes its responsibility to promote
a strong ethical climate throughout the Registrant. Toward this end, the
Registrant provides training in ethical decision making to each employee. In
addition, each employee receives a copy of the Registrant's manual on Business
Conduct and Ethics.
The Board of Directors elects an Audit Committee from among its members who
are not employees of the Registrant. The Audit Committee meets periodically with
management, the internal auditors, and the independent auditors to review the
work of each and satisfy itself that they are properly discharging their
responsibilities. Both the independent auditors and internal auditors have free
access to the Audit Committee, without the presence of management, to discuss
internal accounting controls, auditing, and financial reporting matters.
/s/ Robert H. Jenkins /s/ Paul Donovan
Robert H. Jenkins Paul Donovan
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer and Treasurer
January 28, 1997
- --------------------------------------------------------------------------------
Independent Auditor's Report
To the Shareholders and Board of Directors, Sundstrand Corporation
We have audited the accompanying consolidated balance sheets of Sundstrand
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Registrant's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sundstrand
Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 28, 1997
17
<PAGE> 18
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------ ------ ------
(AMOUNTS IN MILLIONS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $1,521 $1,473 $1,373
Costs and expenses:
Costs of products sold.................................... 990 957 916
Marketing and administration.............................. 300 297 280
Restructuring charges, net................................ 24 58 -
------ ------ ------
1,314 1,312 1,196
------ ------ ------
Earnings before other income (deductions)................... 207 161 177
Other income (deductions):
Interest expense.......................................... (29) (33) (30)
Interest income........................................... 5 5 4
Other, net................................................ 1 2 (2)
------ ------ ------
(23) (26) (28)
------ ------ ------
Earnings before income taxes................................ 184 135 149
Less income taxes........................................... 70 56 53
------ ------ ------
Net earnings................................................ $ 114 $ 79 $ 96
====== ====== ======
Weighted-average number of common shares outstanding
(adjusted for the stock split)............................ 61.0 62.7 65.4
Net earnings per share (adjusted for the stock split)....... $ 1.87 $ 1.25 $ 1.46
====== ====== ======
Cash dividends per common share (adjusted for the stock
split).................................................... $ .68 $ .60 $ .60
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 19
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ------ -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings.............................................. $ 114 $ 79 $ 96
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 61 61 60
Amortization........................................... 12 16 18
Deferred income taxes.................................. 6 (14) (15)
Change in operating assets and liabilities excluding
the effects of acquisitions and divestitures:
Accounts receivable.................................. (18) 6 (2)
Inventories.......................................... (37) (32) 9
Other assets......................................... 5 8 2
Accounts payable..................................... (4) 9 12
Accrued expenses..................................... 20 58 (79)
Other.................................................. 9 6 7
----- ----- ----
Total adjustments...................................... 54 118 12
----- ----- ----
Net cash provided by operating activities................... 168 197 108
----- ----- ----
Cash flow from investing activities:
Cash paid for property, plant, and equipment.............. (64) (63) (52)
Proceeds from sale of assets.............................. 2 43 10
Cash paid for acquisitions, net of cash acquired.......... (29) (8) (25)
Investment in IRB trust................................... 5 (14) -
Investments in equity companies........................... - (2) (10)
----- ----- ----
Net cash used for investing activities...................... (86) (44) (77)
----- ----- ----
Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit.... (50) (26) 143
Principal payments on long-term debt...................... (7) (23) (9)
Issuance of long-term debt................................ - 8 -
Additional debt for HMD-Kontro acquisition................ - - 25
Purchase of treasury stock................................ (49) (60) (87)
Proceeds from stock options exercised..................... 3 3 -
Dividends paid............................................ (41) (38) (39)
----- ----- ----
Net cash provided by (used for) financing activities........ (144) (136) 33
----- ----- ----
Effect of exchange rate changes on cash..................... 5 (8) (13)
----- ----- ----
Increase (decrease) in cash and cash equivalents.......... (57) 9 51
Cash and cash equivalents at January 1.................... 75 66 15
----- ----- ----
Cash and cash equivalents at December 31.................... $ 18 $ 75 $ 66
===== ===== ====
Supplemental cash flow information:
Interest paid............................................. $ 31 $ 34 $ 32
Income taxes paid......................................... $ 55 $ 64 $ 98
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE> 20
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
------- -------
(AMOUNTS IN MILLIONS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 18 $ 75
Accounts receivable, net.................................. 313 281
Inventories, net of progress payments..................... 378 330
Deferred income taxes..................................... 53 55
Other current assets...................................... 10 20
------ ------
Total current assets................................... 772 761
Property, Plant, and Equipment, net......................... 427 449
Intangible Assets, net...................................... 273 266
Deferred Income Taxes....................................... 78 75
Other Assets................................................ 45 42
------ ------
$1,595 $1,593
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable............................................. $ 118 $ 168
Long-term debt due within one year........................ 4 7
Accounts payable.......................................... 104 102
Accrued salaries, wages, and commissions.................. 25 24
Accrued postretirement benefits other than pensions....... 18 17
Restructuring liability................................... 20 27
Other accrued liabilities................................. 108 93
------ ------
Total current liabilities.............................. 397 438
Long-Term Debt.............................................. 222 221
Accrued Postretirement Benefits Other Than Pensions......... 367 363
Other Liabilities........................................... 96 90
SHAREHOLDERS' EQUITY
Common stock, par value $.50 per share; authorized
150,000,000 shares; issued 1996 and 1995 -- 75,686,028
shares (including shares in treasury).................. 38 38
Additional contributed capital............................ 155 151
Retained earnings......................................... 677 604
Foreign currency translation adjustment................... (8) (11)
Common stock in treasury (at cost); 1996 -- 15,324,019
shares and 1995 -- 13,990,358 shares................... (337) (287)
Unamortized value of restricted stock issued.............. (12) (14)
------ ------
513 481
------ ------
$1,595 $1,593
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 21
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(AMOUNTS IN MILLIONS
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Common Stock
Balance at December 31.................................... $ 38 $ 38 $ 38
===== ===== =====
Additional Contributed Capital
Balance at January 1...................................... $ 151 $ 147 $ 147
Stock issued under employee stock plans................... 4 4 -
----- ----- -----
Balance at December 31.................................... $ 155 $ 151 $ 147
===== ===== =====
Retained Earnings
Balance at January 1...................................... $ 604 $ 563 $ 506
Net earnings.............................................. 114 79 96
Cash dividends paid....................................... (41) (38) (39)
----- ----- -----
Balance at December 31.................................... $ 677 $ 604 $ 563
===== ===== =====
Foreign Currency Translation Adjustment
Balance at January 1...................................... $ (11) $ (9) $ (11)
Adjustment for the year................................... 3 (2) 2
----- ----- -----
Balance at December 31.................................... $ (8) $ (11) $ (9)
===== ===== =====
Common Stock in Treasury
Balance at January 1...................................... $(287) $(234) $(154)
Purchase of 1,372,074, 1,920,400, and 3,536,300 shares for
treasury in 1996, 1995, and 1994, respectively......... (51) (60) (80)
Stock issued under employee stock plans................... 5 8 4
Purchase of shares previously issued under employee stock
plans.................................................. (4) (1) (4)
----- ----- -----
Balance at December 31.................................... $(337) $(287) $(234)
===== ===== =====
Unamortized Value of Restricted Stock Issued
Balance at January 1...................................... $ (14) $ (11) $ (14)
Stock issued under employee stock plans................... (2) (8) (4)
Purchase of shares previously issued under employee stock
plans.................................................. 2 1 4
Net amortization of deferred compensation under employee
stock plans............................................ 2 4 3
----- ----- -----
Balance at December 31.................................... $ (12) $ (14) $ (11)
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE> 22
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT
Financial data with respect to the various business segments in which the
Registrant operates are set forth below. Intersegment sales are immaterial.
Military sales occur primarily in the Aerospace segment.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Net sales
Aerospace................................................. $ 785 $ 726 $ 710
Industrial................................................ 736 747 663
------ ------ ------
$1,521 $1,473 $1,373
====== ====== ======
The above includes:
Military sales (final customer is primarily the U.S.
government)............................................ $ 240 $ 243 $ 279
Export sales of domestically manufactured products
Europe................................................. $ 166 $ 152 $ 137
Asia/Pacific Rim....................................... 143 134 111
North America.......................................... 105 83 70
Other.................................................. 57 48 49
------ ------ ------
$ 471 $ 417 $ 367
====== ====== ======
- ------------------------------------------------------------------------------------------
Operating profit
Aerospace................................................. $ 138 $ 54 $ 88
Industrial................................................ 84 121 106
------ ------ ------
Total operating profit................................. 222 175 194
Interest expense............................................ (29) (33) (30)
Interest income............................................. 5 5 4
General corporate expenses.................................. (14) (14) (14)
Other....................................................... - 2 (5)
------ ------ ------
Earnings before income taxes.............................. $ 184 $ 135 $ 149
====== ====== ======
- ------------------------------------------------------------------------------------------
Assets
Aerospace................................................. $ 846 $ 813 $ 832
Industrial................................................ 558 596 600
Corporate................................................. 191 184 155
------ ------ ------
$1,595 $1,593 $1,587
====== ====== ======
Capital expenditures (includes leased equipment)
Aerospace................................................. $ 35 $ 34 $ 28
Industrial................................................ 28 27 19
Corporate................................................. - 1 7
------ ------ ------
$ 63 $ 62 $ 54
====== ====== ======
Depreciation and amortization (includes leased equipment)
Aerospace................................................. $ 48 $ 53 $ 54
Industrial................................................ 23 22 22
Corporate................................................. 2 2 2
------ ------ ------
$ 73 $ 77 $ 78
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 23
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Geographic Areas
Net sales
Domestic............................................ $1,356 $1,301 $1,243
Foreign(a).......................................... 165 172 130
------ ------ ------
$1,521 $1,473 $1,373
====== ====== ======
Operating profit (loss)
Domestic............................................ $ 241 $ 158 $ 180
Foreign............................................. (19) 17 14
------ ------ ------
$ 222 $ 175 $ 194
====== ====== ======
Assets
Domestic............................................ $1,432 $1,405 $1,409
Foreign............................................. 163 188 178
------ ------ ------
$1,595 $1,593 $1,587
====== ====== ======
</TABLE>
(a) Amounts do not include export sales of domestically manufactured product.
- --------------------------------------------------------------------------------
Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31(c) JUNE 30(b) SEPTEMBER 30 DECEMBER 31(a)
----------- ---------- ------------ --------------
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Net sales.................................. $ 368 $371 $371 $ 411
Gross profit............................... $ 127 $128 $130 $ 146
Net earnings............................... $ 26 $ 34 $ 34 $ 20
Earnings per share(d)...................... $ .42 $.56 $.57 $ .32
1995
Net sales.................................. $ 346 $377 $355 $ 395
Gross profit............................... $ 120 $130 $129 $ 137
Net earnings (loss)........................ $ (18) $ 27 $ 34 $ 36
Earnings (loss) per share(d)............... $(.29) $.44 $.53 $ .57
</TABLE>
(a) 1996 includes a restructuring charge of $32 million before taxes ($23
million after taxes equivalent to $.38 per share) related to the operations
of Sullair Europe S.A.
(b) 1996 includes pension and postretirement benefit curtailment gains of $8
million before taxes ($5 million after taxes equivalent to $.08 per share)
related to the shutdown of the Lima, Ohio, facility.
(c) 1995 includes a restructuring charge of $58 million before taxes ($40
million after taxes equivalent to $.64 per share) related to the reduction
of manufacturing capacity and the divestiture of two non-core product lines.
(d) Amounts adjusted or restated to reflect the effects of the Registrant's
two-for-one stock split payable in the form of a 100 percent stock dividend
effective March 19, 1996.
See Notes to Consolidated Financial Statements
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
Sundstrand Corporation is a multinational organization engaged in the
design, manufacture, and sale of a variety of proprietary, technology-based
components and systems for diversified international aerospace and industrial
markets. The Industrial and Aerospace businesses are approximately equal in size
based on sales. The principal markets for the Aerospace business are airframe
manufacturers located primarily in the United States and Europe as well as world
airlines. The ultimate customer for a significant portion of the Aerospace
business is the United States government. The Industrial businesses serve a wide
range of markets, primarily in the United States and Europe, but with growing
activity in Asia and South America.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation provide for the inclusion of the accounts of
Sundstrand Corporation and all subsidiaries. All intercompany transactions are
eliminated in consolidation.
Estimates are used in the preparation of financial statements in conformity
with generally accepted accounting principles. These management estimates, which
include estimates of total contract costs used in determining sales to be
recorded under long-term contracts, affect the reported amounts included in the
financial statements and accompanying footnotes. Actual results could differ
from these estimates.
Cash Equivalents are considered by the Registrant to be all highly liquid
debt instruments purchased with original maturities of three months or less.
Sales Under Long-Term Contracts, a portion of which are with the U.S.
government, are accounted for under the percentage of completion method. The
Registrant enters into long-term contracts which require it to develop or
advance state-of-the-art technology products. Sales on developmental contracts
are recorded as the related costs are incurred and include estimated profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost method of percentage of completion). The
Registrant also enters into long-term contracts for the manufacture of products.
Sales on production-type contracts are recorded as deliveries are made
(units-of-delivery method of percentage of completion). Marketing and
administrative costs are expensed as incurred.
On a selective basis, the Registrant may enter into a contract to research
and develop or manufacture a product with a loss anticipated at the date the
contract is signed. These contracts are entered into in anticipation that
profits will be obtained from future contracts for the same or similar products.
These loss contracts often provide the Registrant with intellectual property
rights which, in effect, establish it as the sole producer of certain products.
Such losses are recognized at the date the Registrant becomes contractually
obligated, with revisions made as changes occur in the related estimates to
complete.
Certain contracts and subcontracts are subject to government audit and
review. Information related to government contract matters is presented on page
37.
Inventories are stated at the lower of cost (principally first-in,
first-out method) or market. Certain inventories are valued using the last-in,
first-out method. Inventoried costs relating to long-term contracts are
accounted for based on the percentage-of-completion methods described above.
Property, Plant, and Equipment is recorded at cost and depreciation is
generally provided on the straight-line basis by charges to expense at rates
based on the estimated useful lives of the assets. Estimated useful lives range
from 3 to 20 years for machinery and equipment and 10 to 40 years for buildings.
Expenditures for new facilities and expenditures that substantially increase the
useful lives of the property are capitalized. Maintenance and repairs are
expensed as incurred.
Intangible Assets of $273 million and $266 million at December 31, 1996 and
1995, respectively (net of accumulated amortization of $97 million and $87
million, respectively), consist primarily of goodwill associated with certain
acquisitions. Goodwill is amortized on a straight-line basis over a period not
to exceed 40 years.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Registrant annually evaluates whether a change in the estimated useful
life of goodwill is warranted or whether the remaining goodwill balance may be
impaired. The Registrant believes that no impairment of goodwill has occurred
related to the balance at December 31, 1996. However, if the estimated
cumulative undiscounted cash flow, before interest, over the remaining life of
the goodwill indicated an impairment, a reduction for impairment of goodwill
would be recorded in accordance with the Registrant's policy. As a result of the
Sullair Europe restructuring discussed below, a $7 million impairment charge was
taken as part of the 1996 restructuring charge.
Stock-Based Compensation is recorded based on the intrinsic value method in
accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees." The Stock-Based Compensation footnote contains a
summary of the pro forma effects to reported net income and earnings per share
for 1996 and 1995 as if the Registrant had elected to recognize compensation
cost based on the fair value of the options granted at the grant date as
prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
Derivative Financial Instruments in the form of foreign currency forward
contracts are entered into by the Registrant as a hedge against foreign currency
exposures. These contracts limit the Registrant's exposure to both favorable and
unfavorable currency fluctuations. On contracts which are designated as a hedge
of a firm commitment, a net investment in a foreign entity, or an intercompany
loan of a long-term nature, gains and losses are deferred and included in the
measurement of the hedged transaction upon settlement. Gains and losses on other
foreign currency forward contracts, including contracts which relate to
anticipated transactions, are reflected in the financial statements in the
period in which the currency fluctuation occurs.
The Registrant has strict controls regarding the use of derivative
financial instruments. The required level of authorization for the use of
derivative instruments increases based on their relative risk characteristics.
The use of leveraged derivatives is prohibited. In order to manage credit risk
related to foreign currency forward contracts, the Registrant utilizes only
highly rated commercial banks or financial institutions for such purposes.
Compliance with this policy is monitored on an ongoing basis, and is reviewed
and approved annually by the Finance Committee of the Registrant's Board of
Directors.
Information by Business Segment is presented on pages 22 and 23.
Quarterly Results are presented on page 23.
RESTRUCTURING
In December 1996, the Registrant initiated a restructuring plan related
primarily to the operations of Sullair Europe S.A. which resulted in a pretax
charge of $32 million. The charge is reflected in the restructuring charge line
on the income statement. The restructuring was undertaken as a result of
continuing losses at these operations, weakness in the European economy, and
significant competitive pressures in the European markets. The charge included
$11 million in termination benefits for approximately 140 employees, primarily
consisting of workers at Sullair Europe's St. Priest, France, facility. The
charge also included $14 million for the write-down of assets of Sullair Europe
and $7 million primarily for disposition of the St. Priest facility and
professional fees. Operations currently at the St. Priest facility will be
transferred to other plant sites in Europe and the United States. The shutdown
of the St. Priest facility and termination or transfer of the employees is
expected to be completed in late 1997 and it is anticipated that the sale of the
facility will be completed by the end of 1999. No material restructuring amounts
were paid in 1996.
During 1995, the Registrant's Board of Directors approved a restructuring
plan which resulted in a pretax charge of $58 million. The charge was taken to
reduce excess Aerospace manufacturing capacity caused by reductions in
manufacturing volume and increases in manufacturing productivity, and to write
down the assets of the Industrial segment's Spectronic Instruments business
(Spectronic) and the Aerospace segment's Advanced Power Technology, Inc. (APT)
in anticipation of their divestiture. The charge included $24 million in
termination benefits, including recognition of certain long-term retirement
benefits, for approximately 350
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees, primarily consisting of workers at the Registrant's Lima, Ohio,
facility. Also included in the charge was $29 million for the write-down of the
assets of the Lima facility, Spectronic, and APT, as well as $5 million for
disposition of the Lima facility. The shutdown of the Lima facility was
completed during 1996. The disposition of the Lima facility is expected to be
completed in 1997 and the sales of Spectronic and a majority interest in APT
were completed in the third quarter of 1995.
Since the 1995 restructuring charge was recorded, approximately $7 million
has been paid and charged against the restructuring liability, including costs
to terminate 359 employees. During 1996, as a result of the Lima plant shutdown,
future pension and other postretirement benefits for the terminated Lima
employees were fixed causing recognition of curtailment and settlement gains
totaling $8 million, which are reflected in the restructuring charge line on the
income statement. Additionally, during 1996 approximately $13 million was
charged to costs of products sold related primarily to the movement of equipment
from the Lima facility to other manufacturing sites.
ACQUISITIONS
During 1996, the Registrant purchased the electrical load management
technology and some related business from Leach International Corporation. On
December 19, 1996, the Registrant purchased from Labinal S.A. its interest in
Auxiliary Power International Corporation and related assets for approximately
$25 million.
STOCK SPLIT
On February 20, 1996, the Registrant's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend which was
distributed on March 19, 1996, to shareholders of record on March 5, 1996.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the split. In
addition, all references to the number of shares and per share amounts of the
Registrant's common stock have been restated to reflect the split.
ACCOUNTS RECEIVABLE, NET
The components of net accounts receivable at December 31, 1996 and 1995,
were:
<TABLE>
<CAPTION>
1996 1995
---- ----
(AMOUNTS IN
MILLIONS)
<S> <C> <C>
U.S. government
Amounts billed............................................ $ 30 $ 33
Unbilled costs and accrued profits........................ 16 25
---- ----
46 58
Commercial.................................................. 267 223
---- ----
$313 $281
==== ====
</TABLE>
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
The components of inventories at December 31, 1996 and 1995, were:
<TABLE>
<CAPTION>
1996 1995
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Raw materials............................................. $ 45 $ 51
Work in process........................................... 151 118
Finished goods and parts.................................. 199 179
---- ----
395 348
Less progress payments.................................... 17 18
---- ----
$378 $330
==== ====
</TABLE>
Prior to the application of progress payments, the inventories shown above
included costs of $65 million and $52 million at December 31, 1996 and 1995,
respectively, related to long-term contracts.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1996 and 1995, was
classified as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Land and improvements..................................... $ 39 $ 40
Buildings and improvements................................ 226 230
Machinery and equipment................................... 822 792
------ ------
1,087 1,062
Less accumulated depreciation............................. 660 613
------ ------
$ 427 $ 449
====== ======
</TABLE>
PENSION BENEFITS
The Registrant has defined benefit pension plans covering substantially all
U.S. employees. Pay-related plans generally provide pension benefits that are
based on the employee's highest compensation during a three-year period or the
employee's average career compensation, prior to retirement. Nonpay-related
plans provide benefits of stated amounts for each year of service. Pension plans
for U.S. employees have been funded at amounts equal to or greater than the
minimum required by ERISA.
Net periodic pension cost for 1996, 1995, and 1994 included:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Service cost of current period........................ $19 $ 16 $ 19
Interest cost on projected benefit obligation......... 47 47 44
Less recognized (loss) gain on plan assets............ 87 130 (4)
Net amortization and deferral......................... 35 79 (50)
--- ---- ----
Net periodic pension cost............................. $14 $ 12 $ 17
=== ==== ====
</TABLE>
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of the plans at December 31, 1996 and 1995, was:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
ASSETS IN ACCUMULATED ASSETS IN ACCUMULATED
EXCESS OF BENEFITS EXCESS OF BENEFITS
ACCUMULATED IN EXCESS ACCUMULATED IN EXCESS
BENEFITS OF ASSETS BENEFITS OF ASSETS
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Benefit obligation liability:
Vested benefits.............................. $ 448 $ 7 $484 $16
Nonvested benefits........................... 54 1 55 1
----- --- ---- ---
Accumulated benefit obligation............... 502 8 539 17
Effect of projected future compensation
levels.................................... 106 2 96 2
----- --- ---- ---
Projected benefit obligation................. 608 10 635 19
Less plan assets at market value............... 715 - 687 4
----- --- ---- ---
Projected benefit obligation in excess of (less
than) plan assets............................ (107) 10 (52) 15
Adjustments for deferrals of benefit obligation
liability not yet recognized in cost:
Net experience gain (loss)................... 127 (1) 79 (2)
Initial net obligation....................... (17) - (21) -
Prior service cost due to plan amendments.... (2) (2) (1) (1)
Adjustment required to recognize minimum
liability.................................... - 1 - 1
----- --- ---- ---
Accrued pension liability...................... $ 1 $ 8 $ 5 $13
===== === ==== ===
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.75 percent at December 31, 1996, and 7.25 percent at December 31,
1995. The assumed weighted-average long-term rate of compensation increase was
4.5 percent at December 31, 1996, and 4.0 percent at December 31, 1995. The
assumed long-term rate of return on plan assets was 9.0 percent at December 31,
1996 and 1995, and 8.75 percent at December 31, 1994. Plan assets consist
principally of common stocks and fixed income investments.
During 1996, the Registrant closed its Lima, Ohio, facility resulting in
the recognition of a $1 million curtailment gain and a $1 million settlement
gain, which have been reflected in the restructuring charge line.
The Registrant also sponsors three defined contribution retirement benefit
plans that cover substantially all U.S. and Puerto Rican employees. All of these
plans are subject to ERISA. Two of the plans are intended to be maintained under
the provisions of Section 401(k) of the Internal Revenue Code of 1986, as
amended, and one plan is intended to be maintained under the Puerto Rico Income
Tax Act of 1954, as amended. Two of these plans provide that the employer will
match certain portions of the employee-directed contributions. The Registrant
matching contributions to the above plans were $1 million in 1996 and less than
$1 million in 1995 and 1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Registrant provides health and life insurance benefits for retired
employees and certain dependents when employees become eligible for these
benefits by satisfying plan provisions, which include certain age and/or service
requirements. Health and life insurance benefits for retirees of domestic
operations are provided through insurance contracts, a group benefit trust or
general assets of the Registrant. Health and life insurance benefits for
retirees of foreign operations, where applicable, are provided through
government-sponsored plans to which contributions by the Registrant are
required. The health insurance plans covering substantially all U.S. employees
are contributory, with contributions adjusted annually, and these plans contain
other cost-sharing features such as deductibles and coinsurance. Currently, the
Registrant requires contributions, which are adjusted annually, primarily from
employees who retired subsequent to 1991. The
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Registrant does not prefund these plans and has the right to modify or terminate
any of these plans in the future.
The components of postretirement benefit cost for 1996, 1995, and 1994
were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 4 $ 3 $ 4
Interest cost 21 21 22
Net amortization and deferral............................. (4) (7) (3)
--- --- ---
Postretirement benefit cost............................... $21 $17 $23
=== === ===
</TABLE>
The funded status of the plans at December 31, 1996 and 1995, was:
<TABLE>
<CAPTION>
1996 1995
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $215 $193
Eligible active plan participants....................... 13 12
Other active plan participants.......................... 57 89
---- ----
285 294
Plan assets at market value............................... - -
---- ----
Accumulated postretirement benefit obligation in excess of
plan assets............................................. 285 294
Unrecognized prior period gain............................ 85 74
Unrecognized prior service gain........................... 19 22
---- ----
Postretirement benefit liability recognized in the balance
sheet................................................... $389 $390
==== ====
</TABLE>
The assumed weighted-average annual rate of increase in the per capita cost
of medical and prescription drug benefits (applicable only to employees who
retired prior to 1992) is 6.25 percent for 1997 and is assumed to decrease
gradually each year from 1997 to 2000 and remain level at 5 percent thereafter.
The assumed weighted-average annual rate of increase in the per capita cost of
dental benefits (applicable only to employees who retired prior to 1992) is 5
percent in 1997 and is expected to remain level at that rate thereafter. These
rates have no effect on the Registrant's costs for employees retiring after 1991
as the Registrant's policy is to increase retiree contributions so that the
Registrant's annual per capita cost increases at the general inflation rate. The
assumed annual rate of increase in the general inflation rate (applicable to
employees retiring after 1991) is 4 percent.
A 1 percent increase in the annual health care trend rates would have
increased the accumulated postretirement benefit obligation at December 31, 1996
and 1995, by $18 million and $19 million, respectively, and increased
postretirement benefit expense for 1996, 1995, and 1994 by $1 million in each
year. The weighted-average discount rate used to estimate the accumulated
postretirement benefit obligation was 8.0 percent at December 31, 1996, and 7.5
percent at December 31, 1995.
During 1996, the Registrant closed its Lima, Ohio, facility resulting in
the recognition of a $6 million curtailment gain. The decision to close this
facility was made in 1995 and resulted in the recognition of a $12 million
curtailment loss. Both amounts have been reflected in the restructuring charge
line in their respective years. For more information related to this charge see
the Restructuring note on pages 25 and 26.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income tax expense for the three years ended December 31, 1996, consisted
of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Current income tax expense.............................. $78 $ 69 $ 64
Deferred income tax benefit............................. (8) (13) (11)
--- ---- ----
Total income tax expense.............................. $70 $ 56 $ 53
=== ==== ====
Total income tax expense includes:
State tax............................................. $10 $ 7 $ 9
Foreign tax........................................... $ - $ 8 $ 7
</TABLE>
State income taxes for 1996, 1995, and 1994 were principally current.
Foreign income tax for 1996 included $9 million of current tax expense, offset
by $9 million of deferred tax benefit. Foreign income taxes for 1995 and 1994
were principally current.
Total income tax expense for each year varied from the amount computed by
applying the statutory U.S. federal income tax rate to earnings before income
taxes for the reasons set forth in the following reconciliation:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Income tax expense at the statutory rate................. $64 $47 $52
Increases (reductions) in taxes resulting from:
State taxes based on income, net of federal income
taxes............................................... 7 5 6
Adjustments to prior year accruals..................... - 3 4
Additional earnings of foreign subsidiaries now deemed
to be permanently invested.......................... - - (8)
Book/tax difference on sale of stock................... - 5 -
Nondeductible goodwill writeoff........................ 2 - -
FSC tax benefits....................................... (6) (5) (2)
Miscellaneous other items.............................. 3 1 1
---- ---- ----
Actual income tax expense......................... $70 $56 $53
==== ==== ====
"Effective" tax rate.............................. 38.0% 41.8% 36.0%
</TABLE>
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the net deferred tax assets at December 31, 1996
and 1995, were:
<TABLE>
<CAPTION>
1996 1995
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Deferred Tax Assets Arising From:
Retiree medical......................................... $151 $148
Restructuring........................................... 15 17
Employee benefit plans.................................. 10 14
Net operating losses.................................... 10 6
Environmental reserves.................................. 9 11
Warranty reserve........................................ 9 11
Recoverable taxes....................................... 6 7
Inventory............................................... 6 6
Other................................................... 30 25
---- ----
Total Deferred Tax Assets.......................... 246 245
---- ----
Deferred Tax Liabilities Arising From:
Property, plant, and equipment.......................... 37 43
Taxes provided on unremitted foreign earnings........... 24 25
Other................................................... 54 47
---- ----
Total Deferred Tax Liabilities..................... 115 115
---- ----
Net Deferred Tax Assets............................ $131 $130
==== ====
</TABLE>
Domestic and foreign earnings/(loss) from continuing operations before
income taxes for the three years ended December 31, 1996, as shown below,
exclude profits recorded on intercompany sales. Net interest expense is
allocated between geographic segments based on non-cash assets.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Domestic................................................ $206 $121 $139
Foreign................................................. (22) 14 10
---- ---- ----
Total earnings before income taxes............... $184 $135 $149
==== ==== ====
</TABLE>
Profits recorded on intercompany sales from foreign entities excluded above
were $19 million, $19 million, and $15 million, in 1996, 1995, and 1994,
respectively, and were earned primarily by the Registrant's Singapore
subsidiaries.
At December 31, 1996, total assets of operations outside the United States
were $163 million after deducting $37 million due from the Registrant's domestic
operations.
In 1995, recognizing the increase in business opportunities outside the
U.S., and in the Far East region in particular, the Registrant adjusted its
planning to recognize that foreign earnings previously earmarked for
repatriation would now be considered permanently invested and used for capital
investment. As of December 31, 1996 and 1995, the Registrant had not provided
federal income taxes on $55 million and $63 million, respectively, of
undistributed earnings recorded by certain subsidiaries outside the United
States, since these earnings were deemed permanently invested.
For the years 1984 and 1985, the IRS has proposed to increase the
Registrant's taxable income by approximately $225 million based upon the IRS'
assertion that certain intercompany loans between the Registrant and its Sunpac
subsidiary in Singapore should be taxed as if they were dividends to the
Registrant. On July 31, 1995, the Registrant filed a petition with the U.S. Tax
Court requesting a redetermination of the asserted deficiency related to this
issue. While the amount of the proposed adjustment is material, the Registrant
does not believe the IRS' position will be sustained.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1992, the U.S. Tax Court issued an opinion adverse to the
Registrant, for the years 1979 through 1982, related to the issue of whether the
payments made upon the resolution of previous government contracts disputes
could reduce taxable income in the years in which the revenues from the
contracts were reported. In October 1994, the Registrant ceased its efforts to
reverse this decision and made a payment of $18 million to the IRS which did not
have a material financial impact on the Registrant. Additionally, during 1994,
the IRS informed the Registrant that it was disallowing a deduction for the $115
million in payments pursuant to the agreement dated August 29, 1988, which
settled the government contracts disputes. While the potential impact of this
disallowance is material, the Registrant does not believe that the IRS' position
will be substantially sustained.
The Registrant believes that its recorded tax and interest provisions are
sufficient to cover the final resolution of any tax deficiencies.
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable, consisting of commercial paper and bank borrowings, were
$118 million and $168 million at an average interest rate of 6.2 percent and 6.1
percent at December 31, 1996 and 1995, respectively. At December 31, 1996, the
Registrant maintained committed domestic revolving credit facilities totaling
$335 million. Commitment fees incurred were not material. The Registrant also
maintained uncommitted foreign lines of credit for use by its foreign operations
totaling the equivalent of approximately $14 million at December 31, 1996.
Under a long-term debt agreement in place at December 31, 1996, payments of
dividends are limited by the requirement to maintain a minimum level of net
worth. At December 31, 1996, net worth exceeded the maintenance level by $296
million.
The composition of long-term debt at December 31, 1996 and 1995, was:
<TABLE>
<CAPTION>
1996 1995
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
9.48% notes due 2001........................................ $100 $100
9.15% notes due 2003........................................ 50 50
9.34% notes due 2006........................................ 50 50
Other, including $16 million of variable rate debt, weighted
average rate of 4.3% at December 31, 1996................. 26 28
---- ----
226 228
Less amount due within one year............................. 4 7
---- ----
Long-term debt (less current portion)....................... $222 $221
==== ====
</TABLE>
In November 1995, the Registrant arranged a private shelf facility with the
Prudential Insurance Company of America under which the Registrant may issue up
to $150 million of long-term debt in the private market through November 1998.
In February 1996, the Registrant filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission for the public issuance of up to $150
million of unsecured debt of the Registrant. As of December 31, 1996, no debt of
the Registrant has been issued under either facility.
Total principal payments required under long-term debt agreements for the
five years subsequent to December 31, 1996, are $4 million in 1997, $10 million
in 1998, $1 million in 1999, less than $1 million in 2000, and $100 million in
2001.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Registrant is party to financial
instruments with off-balance-sheet risk to meet financing needs and to reduce
its own exposure to fluctuations in exchange rates. These financial instruments
include financial guarantees and forward exchange contracts. These instruments
involve, to varying degrees, elements of credit and/or exchange rate risk in
excess of the amount recognized in the financial statements.
Financial guarantees are conditional commitments issued by the Registrant
to guarantee the payment of certain liabilities of unconsolidated affiliates and
unaffiliated entities to third parties. These guarantees are issued primarily to
support borrowing arrangements, and are scheduled to expire, subject to
extension, from 1997 to 2000. The Registrant's exposure for financial guarantees
is equal to the contractual amount of these guarantees. Both the contractual
amounts and the maximum credit loss in the event of non-performance were $7
million at December 31, 1996.
Forward exchange contracts are contracts for delivery or purchase of
foreign currencies at specified future dates. The contract amounts represent
currency exposure if the counter party fails to perform under the contract. At
December 31, 1996, the Registrant had forward exchange contracts maturing
primarily during 1997 to sell the equivalent of $94 million and to purchase the
equivalent of $66 million in foreign currencies. These included $129 million in
contracts which the Registrant used to limit its exposure to foreign currency
fluctuations related to specific assets and liabilities denominated in foreign
currencies, primarily the French franc and the British pound sterling. The
remaining $31 million in contracts was used to limit the effects of foreign
currency fluctuations on anticipated Singapore dollar cash requirements, based
on forecasted monthly expenditures. Had all of the forward exchange contracts
matured on December 31, 1996, the Registrant's cash gain would have been $2
million.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Registrant in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates their fair value.
Foreign currency exchange contracts: The fair value of the Registrant's
foreign exchange contracts is estimated based on quoted market prices of
comparable contracts.
Short- and long-term debt: The carrying amounts of the Registrant's
borrowings under its commercial paper programs, its short-term revolving credit
agreements, and variable rate long-term debt instruments approximate their fair
value. The fair value of the Registrant's other long-term debt is estimated
using discounted cash flow analyses, based on the Registrant's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Registrant's financial
instruments at December 31, 1996 and 1995, were:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 18 $ 18 $ 75 $ 75
Foreign exchange contracts...................... - - - 2
Short-term debt................................. 118 118 168 168
Long-term debt.................................. 226 257 228 267
</TABLE>
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASE ARRANGEMENTS AND RENT EXPENSE
Rent and lease expense for the years 1996, 1995, and 1994 was $13 million,
$15 million, and $15 million, respectively. The Registrant leases certain
facilities and equipment under operating leases, many of which contain renewal
options and escalation clauses. Minimum future rental commitments under
noncancelable operating leases which extend beyond one year are payable as
follows: 1997, $7 million; 1998, $6 million; 1999, $4 million; 2000, $4 million;
2001, $4 million; and after 2001, $4 million. Facilities and equipment under
capital leases, minimum future rentals receivable under subleases, and
contingent rental expenses were not significant for the years 1996, 1995, and
1994.
STOCK-BASED COMPENSATION
The Registrant maintains five plans for the administration of stock-based
compensation: the Stock Incentive Plan, the 1982 Restricted Stock Plan and the
1989 Restricted Stock Plan (referred to herein collectively as the Restricted
Stock Plan), the Management Stock Performance Plan, and the Nonemployee Director
Stock Option Plan.
The Stock Incentive Plan permits up to a maximum of 6.6 million shares of
common stock to be granted as nonqualified and incentive stock options and
restricted stock to managerial, supervisory, and professional employees. The
Management Stock Performance Plan is similar in nature and permits up to 3
million shares to be granted. In both plans, the options are granted at fair
market value for a term of 10 years and become exercisable in increments of 25
percent of an individual grant on each of the second through fifth anniversary
dates of the grant. During 1996, the Registrant issued managerial employees a
total of 51,600 shares of restricted stock for both plans combined. During 1995,
the Registrant sold managerial employees 119,500 shares of restricted stock at
par value for both plans combined. The restricted stock may not be sold by the
employee until the restrictions placed on these shares expire. The amount of
compensation represented by the sale or issuance of restricted stock is being
amortized over a nine-year vesting period. The Nonemployee Director Stock Option
Plan permits up to 264,000 stock options to be granted.
In accordance with the provisions of SFAS No. 123, the Registrant applies
APB Opinion 25 and related Interpretations in accounting for stock options
issued under these plans and accordingly, does not recognize compensation
expense related to these options. If the Registrant had elected to recognize
compensation expense based on the fair value of the options granted at the grant
date as prescribed by SFAS No. 123, pro forma net income and earnings per share
would have been:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net earnings -- as reported................................. $ 114 $ 79
Net earnings -- pro forma................................... 113 78
Earnings per share -- as reported........................... 1.87 1.25
Earnings per share -- pro forma............................. 1.84 1.25
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.05%
and 6.02%; dividend yields of 1.6% and 1.7%; stock price volatility factors of
20.0% and 21.1%; assumed forfeiture rate of 3.0%; and expected life of the
options of seven years. Because the SFAS No. 123 method of accounting has not
been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years. The weighted-average fair value of options granted in 1996 and
1995 were $10.75 and $8.97, respectively.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions involving stock options for the incentive stock plan are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
STOCK OPTIONS OPTIONS PRICE
- ---------------------------------------------------------- --------- --------
<S> <C> <C>
Outstanding December 31, 1993............................. 688,150 $19.32
Granted................................................. 647,900 22.46
Canceled................................................ (17,800) 19.32
Exercised............................................... (16,722) 19.32
--------- ------
Outstanding December 31, 1994............................. 1,301,528 20.88
--------- ------
Granted................................................. 236,400 32.30
Canceled................................................ (35,112) 20.96
Exercised............................................... (159,982) 19.36
--------- ------
Outstanding December 31, 1995............................. 1,342,834 23.07
--------- ------
Granted................................................. 698,350 38.87
Canceled................................................ (29,100) 21.91
Exercised............................................... (176,629) 19.85
--------- ------
Outstanding December 31, 1996............................. 1,835,455 29.41
--------- ------
Exercisable December 31, 1996............................. 435,134 20.79
========= ======
</TABLE>
902,105 of the 1,835,455 options outstanding at December 31, 1996 have
exercise prices between $15 and $25, with a weighted average exercise price of
$21.34 and a weighted average remaining contractual life of 7.2 years. 435,134
of these options are exercisable; their weighted average exercise price is
$20.79. 235,000 of the 1,835,455 options outstanding at December 31, 1996 have
exercise prices between $25 and $35, with a weighted average exercise price of
$32.29 and a weighted average remaining contractual life of 8.8 years. None of
these options are exercisable. The remaining 698,350 options have exercise
prices between $35 and $45, with a weighted average exercise price of $38.87 and
a weighted average remaining contractual life of 9.9 years. None of these
options are exercisable.
Under the Registrant's Restricted Stock Plan, no shares of restricted stock
were issued to employees in 1996 and 114,700 shares of common stock were sold to
key managerial employees at their par value during 1995. This common stock may
not be resold until the restrictions placed on these shares expire. The amount
of compensation represented by the sale or issuance of restricted stock is being
amortized over a nine-year vesting period. The Restricted Stock Plan permits up
to two million shares to be granted.
Total compensation expense recognized for restricted stock in 1996, 1995,
and 1994 was $2 million, $3 million, and $3 million, respectively.
RESEARCH AND DEVELOPMENT
The Registrant performs research and development under both Company-funded
programs and under contracts with others, principally the U.S. government.
Company-funded programs include bid and proposal work for both military and
commercial products and research and development. All Company-funded research
and development is expensed as incurred or expensed in accordance with the
Registrant's policy on contract accounting; customer-funded research and
development is accounted for under the Registrant's contract accounting policy.
Total research and development expenditures for the years 1996, 1995, and 1994
were $98 million, $113 million, and $109 million, respectively, of which $43
million, $47 million, and $45 million, respectively, was funded by customers.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL MATTERS
The Registrant is subject to numerous environmental laws and regulations
and is exposed to liabilities and compliance costs arising from its past and
current handling, processing, storing, and disposal of hazardous substances and
wastes. These liabilities and costs relate to present facilities, former
facilities which have been closed or sold, and to Superfund sites.
The Registrant continually monitors its operations with respect to
potential environmental issues and has established reserves for onsite and
offsite environmental investigation and remediation costs. The amount reserved
with respect to any site reflects the Registrant's estimate of its degree of
responsibility, the anticipated method and ultimate cost of remediation and,
when applicable, an assessment of the ability of other potentially responsible
parties (PRPs) to pay their share of such costs. Although the Registrant
believes its experience provides a reasonable basis for estimating its
liability, the ultimate outcome may differ from the Registrant's estimates. As
additional information becomes available, the reserves are reevaluated and
adjusted as necessary.
The Registrant's expenditures from its reserve for remediation and related
studies over the past three years are as follows: 1996 -- $5 million; 1995 -- $3
million; and 1994 -- $5 million. In addition to this spending, approximately $4
million was expensed and added to the reserve during this same time period.
It is anticipated that expenditures from the environmental reserve will be
$5 million in 1997 and $5 million in 1998. Although the Registrant believes that
its environmental reserve is adequate, due to changed circumstances or the
discovery of new sites at which the Registrant is liable, additional accruals
could be required in the future that could have a material effect on the results
of operations in a particular quarter or annual period. However, the Registrant
believes it is unlikely that there would be any material adverse effect on the
Registrant's overall financial position.
Environmental expenditures that relate to the day-to-day activities of
current operations are expensed or capitalized as appropriate. These
expenditures are in addition to the above reserve spending for remediation and
related studies. Such expenditures in 1996, 1995, and 1994 were not material and
are not expected to be material in 1997 or 1998.
At the present and former plant sites where the Registrant is presently
conducting remediations, such remediations are being conducted pursuant to plans
which have been submitted to the appropriate regulatory agencies. For each of
these plant sites, the established reserve is believed to be adequate to conduct
the required remediation. At certain present and former plant sites, the
Registrant is in the process of evaluating whether remediation will be required
or whether the existing contamination is attributable to the Registrant's
activities. The Registrant is presently unable to determine whether the
applicable reserve will need to be adjusted.
Under the Superfund laws, the Registrant participates as a PRP at 23 sites
where environmental remediation is being or will be conducted. At 19 of these
sites, the Registrant anticipates that it will be able to conclude its
participation by settling as a de minimis PRP. At two of the Superfund sites,
the Registrant, based upon the volume of waste being attributed to it, will not
be able to effect a de minimis resolution. The Registrant believes, based upon
its evaluation of its exposure and the information available from its activity
with PRP groups, that its reserve is adequate to satisfy its liability with
respect to these 21 sites.
The two remaining Superfund sites are located in Rockford, Illinois. At one
of the sites, the PRP group, in which the Registrant participates, has entered
into consent decrees with the Illinois Environmental Protection Agency relating
to certain investigations and interim remediations which are substantially
complete. The PRP group is currently finalizing the results of the
investigations to determine the scope of remediation. The Registrant has
established a reserve for this site which it believes, based upon its evaluation
of its exposure and information presently known, is adequate to resolve its
liability.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The second Superfund site relates to a regional area of groundwater
contamination, much of which is located in a highly industrialized area and
which involves multiple sources. The Registrant is alleged to be linked to the
site as one of the possible sources. The Department of Justice and the City of
Rockford have been seeking a global solution to the site. Both parties have
agreed to this proposed solution, subject to the City being able to create the
required special taxing district. Since this type of solution is likely, the
Registrant believes that its reserve, which is based upon such a solution, is
adequate.
GOVERNMENT CONTRACT MATTERS
U.S. Government contracts generally provide for the termination or the
adjustment of material terms of such contracts at the election of the
government, and the government may pursue contractual, administrative, civil,
and criminal remedies for improper or illegal activities associated with
obtaining and performing government contracts. Administrative remedies include
the suspension, debarment, or ineligibility of all or part of a company from
receiving government contracts and government-approved subcontracts. As is the
case with any company that performs material amounts of business with the
federal government, any such action by the government could have a material
impact upon the Registrant's business. Management is not currently aware of any
such situations.
During 1995, the Registrant collected approximately $8 million of the
previously disclosed $10 million settlement related to a contract for the supply
of jet aircraft start units which the U.S. Navy terminated for its convenience
in 1986. The remaining $2 million was collected in 1996.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None
37
<PAGE> 38
PART III
The information required by Items 10 through 13 of Part III of this report,
with the exception of the information on the Executive Officers which appears at
the end of Part I, is incorporated by reference from the Registrant's Proxy
Statement for its 1997 Annual Meeting of Stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Proxy Statement, information under the captions "Nominee for Election to
Board of Directors" and "Members of Board of Directors Continuing in Office" on
pages 2 and 3; and information under the caption "Section 16 Compliance" on
pages 17 and 18.
ITEM 11. EXECUTIVE COMPENSATION
Proxy Statement, information regarding director compensation on pages 5 and
6; information under the caption "Compensation Committee Interlocks and Insider
Participation" on page 6; and information under the captions "Compensation
Committee Report on Executive Compensation," "Summary Compensation Table,"
"Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values," "Retirement Plans," and "Employment
Agreements" on pages 7 through 16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Proxy Statement, information under the caption "Ownership of Sundstrand
Common Stock" on pages 4 and 5.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Proxy Statement, information under the caption "Transactions and Loans with
Management" on page 17.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE NO.
--------
(a) 1. Consolidated Financial Statements Included in Part II
Management's Report....................................... 17
Independent Auditor's Report.............................. 17
Consolidated Statement of Earnings, Years Ended December 18
31, 1996, 1995, and 1994...............................
Consolidated Statement of Cash Flows, Years Ended December 19
31, 1996, 1995, and 1994...............................
Consolidated Balance Sheets, December 31, 1996 and 1995... 20
Consolidated Statement of Shareholders' Equity, Years 21
Ended December 31, 1996, 1995, and 1994................
Information by Business Segment for the Years Ended 22
December 31, 1996, 1995, and 1994......................
Quarterly Results (Unaudited) for 1996 and 1995........... 23
Notes to Consolidated Financial Statements................ 24
38
<PAGE> 39
(a) 2. Financial Statement Schedules
The schedules have been omitted as the required information is not
applicable or not required.
(a) 3. Exhibits
(3) Articles of Incorporation and By-Laws
(a) Registrant's Restated Certificate of Incorporation as effective
December 19, 1991 (filed as Exhibit (3)(a) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991, File No. 1-5358, and incorporated herein by
reference).
(b) Registrant's By-Laws, including all amendments, as effective
September 9, 1996 (filed as Exhibit (3)(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, File No. 1-5358, and incorporated herein by
reference).
(c) Text of resolution adopted by Board of Directors of Registrant
on February 18, 1997, amending Registrant's By-Laws effective
April 15, 1997.
(4) Instruments Defining the Rights of Security Holders, including
Indentures
(a) Credit Agreement dated as of January 28, 1993, among Registrant
and seven banking institutions including Morgan Guaranty Trust
Company of New York, as Agent (filed as Exhibit (4)(a) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-5358, and incorporated
herein by reference); Amendment No. 1 dated October 15, 1993,
and Amendment No. 2 dated October 31, 1994, to the Credit
Agreement (filed as Exhibit (4)(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, File No. 1-5358, and incorporated herein by reference);
and Amendment No. 3 dated November 30, 1995, to the Credit
Agreement (filed as Exhibit (4)(c) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 1-5358, and incorporated herein by reference);
and Amended and Restated Credit Agreement dated December 16,
1996, to the Credit Agreement.
(b) Second Amended and Restated Rights Agreement between Registrant
and Harris Trust and Savings Bank, as Rights Agent, dated
November 21, 1995 (filed as Exhibit 1 to Registrant's Form
8-A/A (Amendment No. 2) dated November 27, 1995, File No.
1-5358, and incorporated herein by reference); and First
Amendment to Second Amended and Restated Rights Agreement,
dated February 20, 1996 (filed as Exhibit (4)(e) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-5358, and incorporated
herein by reference).
(c) Lease dated as of December 14, 1987, between Registrant and
Greyhound Real Estate Investment Six, Inc. (filed as Exhibit
(4)(f) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, File No. 1-5358, and
incorporated herein by reference).
(d) Note Agreement of Registrant dated May 15, 1991 (filed as
Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, File No. 1-5358, and
incorporated herein by reference); and Amendment effective
December 31, 1991, to the Note Agreement (filed as Exhibit
(19)(c) to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992, File No. 1-5358, and
incorporated herein by reference).
(e) Note Agreement of Registrant dated October 31, 1991 (filed as
Exhibit (4)(l) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 1-5358, and
incorporated herein by reference); and Amendment dated December
1, 1995, to the Note Agreement (filed as Exhibit (4)(l) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-5358, and incorporated
herein by reference).
(f) Note Agreement of Registrant dated December 2, 1991 (filed as
Exhibit (4)(m) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 1-5358, and
incorporated herein by reference).
(g) Amendment dated December 11, 1995, to Registrant's Note
Agreement dated May 15, 1991, as amended December 31, 1991, and
to Registrant's Note Agreement dated
39
<PAGE> 40
December 2, 1991 (filed as Exhibit (4)(n) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, File No. 1-5358, and incorporated herein by
reference).
(10) Material Contracts
(a) Employment Agreement dated September 19, 1995, between
Registrant and Robert H. Jenkins, Registrant's President and
Chief Executive Officer, effective October 1, 1995 (filed as
Exhibit (10)(a) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, File No. 1-5358, and
incorporated herein by reference).*
(b) Employment Agreement dated September 19, 1995, between
Registrant and Don R. O'Hare, Registrant's Chairman of the
Board, effective October 1, 1995 (filed as Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, File No. 1-5358, and incorporated
herein by reference).*
(c) Agreement dated June 19, 1988, between Registrant and Paul
Donovan, Registrant's Executive Vice President and Chief
Financial Officer and Treasurer, regarding Registrant's
repurchase of shares of restricted stock (filed as Exhibit
(10)(h) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, File No. 1-5358, and
incorporated herein by reference).*
(d) Form of Employment Agreement, including all amendments thereto,
between Registrant and each of Paul Donovan, Registrant's
Executive Vice President and Chief Financial Officer and
Treasurer; Patrick L. Thomas, Registrant's Executive Vice
President and Chief Operating Officer, Industrial; Ronald F.
McKenna, Registrant's Executive Vice President and Chief
Operating Officer, Aerospace; Richard M. Schilling,
Registrant's Vice President and General Counsel and Secretary;
and DeWayne J. Fellows, Registrant's Vice President and
Controller (filed as Exhibit (10)(g) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, File No. 1-5358, and incorporated herein by reference).*
(e) Employment Agreement dated April 18, 1995, between Registrant
and James F. Ricketts, Registrant's former Vice President and
Treasurer (filed as Exhibit (10)(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File
No. 1-5358, and incorporated herein by reference).*
(f) Termination agreement dated June 7, 1996, between Registrant
and Robert J. Smuland (filed as Exhibit (1) to Registrant's
Current Report on Form 8-K dated June 10, 1996, File No.
1-5358, and incorporated herein by reference).*
(g) Termination agreement dated August 7, 1996, between Registrant
and James F. Ricketts (filed as Exhibit (10)(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, File No. 1-5358, and incorporated herein by
reference).*
(h) Registrant's Stock Incentive Plan effective December 1, 1992
(filed as Exhibit (10)(l) to Registrant's Annual Report for the
fiscal year ended December 31, 1992, File No. 1-5358, and
incorporated herein by reference).*
(i) Text of resolution adopted by the Board of Directors of
Registrant on April 18, 1995, amending Registrant's Stock
Incentive Plan (filed as Exhibit (10)(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, File No. 1-5358, and incorporated herein by reference).*
(j) First Amendment to Registrant's Stock Incentive Plan effective
as of November 19, 1996.
(k) Registrant's Nonemployee Director Stock Option Plan effective
August 1, 1994 (filed as Exhibit A to Registrant's Proxy
Statement dated March 7, 1995, File No. 1-5358, and
incorporated herein by reference).*
(l) Registrant's Nonemployee Director Compensation Plan effective
August 1, 1994 (filed as Exhibit B to Registrant's Proxy
Statement dated March 7, 1995, File No. 1-5358, and
incorporated herein by reference).*
(m) Registrant's 1989 Restricted Stock Plan as adopted April 20,
1989, by the stockholders of Registrant (filed as Exhibit
(10)(v) to Registrant's Annual Report on Form 10-K for the
*Management contract or compensatory plan.
40
<PAGE> 41
fiscal year ended December 31, 1989, File No. 1-5358, and
incorporated herein by reference).*
(n) Registrant's 1982 Restricted Stock Plan as adopted on April 15,
1982, by the stockholders of Registrant, including all
amendments through April 16, 1986 (filed as Exhibit (10)(c) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1982, File No. 1-5358, and incorporated
herein by reference).*
(o) Text of resolution adopted by the Board of Directors of
Registrant on April 17, 1986, amending Registrant's 1982
Restricted Stock Plan (filed as Exhibit (10)(c) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1986, File No. 1-5358, and incorporated herein by
reference).*
(p) Text of resolution adopted by the Board of Directors of
Registrant on August 7, 1990, amending Registrant's 1982 and
1989 Restricted Stock Plans (filed as Exhibit (19)(f) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-5358, and incorporated
herein by reference).*
(q) Text of resolution adopted by the Board of Directors of
Registrant on July 16, 1989, adopting a Director Emeritus
Retirement Plan and copy of such plan as effective July 20,
1989 (filed as Exhibit (10)(dd) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989, File
No. 1-5358, and incorporated herein by reference).*
(r) Text of resolution adopted by the Board of Directors of
Registrant on October 17, 1984, establishing a 1984 Elected
Officers' Loan Program (filed as Exhibit (10)(i) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1984, File No. 1-5358, and incorporated
herein by reference).*
(s) Text of resolution adopted by the Board of Directors of
Registrant on October 15, 1991, amending the 1984 Elected
Officers' Loan Program (filed as Exhibit (10)(ff) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, File No. 1-5358, and incorporated
herein by reference).*
(t) Registrant's Management Stock Performance Plan effective as of
November 19, 1996.*
(u) Registrant's Supplemental Retirement plan effective as of
December 10, 1975, including all amendments.*
(v) Registrant's Officer Performance Compensation Plan effective as
of January 1, 1997 (filed as Exhibit A to Registrant's Proxy
Statement dated March 5, 1997, File No. 1-5358, and
incorporated herein by reference.)*
(w) Registrant's Deferred Compensation Plan effective as of January
1, 1995, including all amendments.*
(11) Computation of Fully Diluted Earnings Per Share (Unaudited) for
the quarters ended December 31, 1996 and 1995, and for the years
ended December 31, 1996 and 1995.
(21) Subsidiaries of Registrant
(23) Consents of Experts and Counsel
(a) Consent of Independent Auditors (Ernst & Young LLP).
(24) Powers of Attorney
(27) Financial Data Schedule
(99) Additional Exhibits
(a) Undertakings (filed as Exhibit (28)(a) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1982, File No. 1-5358, and incorporated herein by reference).
(b) Reports on Form 8-K
None
*Management contract or compensatory plan.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 5th day of
March, 1997.
SUNDSTRAND CORPORATION
(Registrant)
By: /s/ PAUL DONOVAN
------------------------------------
Paul Donovan
Executive Vice President
and Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Robert H. Jenkins )
President and )
Chief Executive Officer )
)
Paul Donovan )
Executive Vice President )
and Chief Financial Officer )
and Treasurer )
)
DeWayne J. Fellows )
Vice President and Controller )
)
Don R. O'Hare )
Chairman of the Board )
)
Richard A. Abdoo ) March 5, 1997
Director )
)
J. P. Bolduc )
Director )
)
Gerald Grinstein )
Director )
)
Charles Marshall )
Director )
)
Donald E. Nordlund )
Director )
)
Berger G. Wallin )
Director )
By: /s/ PAUL DONOVAN
----------------------------------
Paul Donovan, Attorney-in-Fact
42
<PAGE> 1
EXHIBIT (3)(c)
AMENDMENT OF BY-LAWS
RESOLVED, by the Board of Directors of Sundstrand Corporation, that the
first sentence of Section 3.1 of the By-Laws of the Corporation be, and it
hereby is, amended effective April 15, 1997, by changing the word "eleven" to
"eight" where it appears in such sentence.
<PAGE> 1
EXHIBIT (4)(a)
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 16, 1996 among
SUNDSTRAND CORPORATION, the BANKS listed on the signature pages hereof (the
"Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a Credit Agreement
dated as of January 28, 1993 (the "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as set forth
herein and to restate the Agreement in its entirety to read as set forth in the
Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically defined
herein, each capitalized term used herein which is defined in the Agreement
shall have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended and restated hereby.
SECTION 2. Amendment of Termination Date. The date "November 30, 1998" in
the definition of "Termination Date" in Section 1.01 of the Agreement is changed
to "November 30, 1999".
SECTION 3. Amendment of Company's 1991 Form 10-K. The definition of
"Company's 1991 Form 10-K" in Section 1.01 of the Agreement is amended to read
in its entirety as follows:
"Company's 1995 Form 10-K" means the Company's annual report on form 10-K
for the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934.
SECTION 4. Amendment of SEC Filings. The definition of "SEC Filings" in
Section 1.01 of the Agreement is amended to read in its entirety as follows:
"SEC Filings" means the Company's 1995 Form 10-K and the three quarterly
reports of the Company on Form 10-Q for the respective fiscal quarters ending
March 31, June 30 and September 30, 1996, as filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
SECTION 5. Amendment of Lending Margins. (a) The definition of "Leverage
Margin" in Section 1.01 of the Agreement is amended to read in its entirety as
follows:
"Leverage Margin" means a per annum amount determined based on the
Company's Leverage Ratio as of the last day of the fiscal quarter for which
financial statements have been delivered to the Banks pursuant to Section 4.05
or 5.01 of this Agreement next preceding the first day of the relevant Interest
Period, all in accordance with the following schedule:
<TABLE>
<CAPTION>
LEVERAGE RATIO LEVERAGE MARGIN
- ------------------------------------------------------------ ---------------
<S> <C>
0.375 or Less............................................... 0.0 %
More Than 0.375 but Less Than or Equal to 0.475............. 0.0350%
More Than 0.475 but Less Than or Equal to 0.525............. 0.1100%
More Than 0.525............................................. 0.3100%
</TABLE>
(b) The figure "0.35%" in the definition of "CD Margin" in Section 2.07(b)
of the Agreement is changed to "0.29%".
<PAGE> 2
(c) The figure "0.225%" in the definition of "Euro-Dollar Margin" in
Section 2.07(c) of the Agreement is changed to "0.165%".
SECTION 6. Amendment of Section 4.05. Each reference to "1991" and "1992"
in Section 4.05 of the Agreement is amended to read "1995" and "1996,"
respectively.
SECTION 7. Amendment of Facility Fee. Section 2.08(b) of the Agreement is
amended to read in its entirety as follows:
Facility Fee. For each day during any fiscal quarter of the Company, the
Company shall pay to the Agent for the Accounts of the Banks ratably in
proportion to their Commitments a facility fee accruing at the rate per annum
specified in the table below based on the Company's Leverage Ratio as of the
last day of the immediately preceding fiscal quarter.
<TABLE>
<CAPTION>
LEVERAGE RATIO FACILITY FEE RATE
- ------------------------------------------------------------ -----------------
<S> <C>
0.375 or Less............................................... 0.0850%
More Than 0.375 but Less Than or Equal to 0.475............. 0.1000%
More Than 0.475............................................. 0.1250%
</TABLE>
Such facility fee shall accrue (i) from and include the Effective Date and
continue to but exclude the Termination Date (or earlier date of termination of
the Commitments in their entirety), on the daily aggregate amount of the
Commitments (whether used or unused) and (ii) from and include the Termination
Date (or earlier date of termination of the Commitments in their entirety) and
continue to but exclude the date the Loans shall be repaid in their entirety, on
the daily aggregate outstanding principal amount of the Loans.
SECTION 8. Representations and Warranties. The Borrower hereby represents
and warrants that as of the date of this Amendment and Restatement and after
giving effect hereto:
(a) no Default has occurred and is continuing; and
(b) each representation and warranty of the Borrower set forth in the
Agreement is true and correct as though made on and as of the date of this
Amendment and Restatement.
SECTION 9. Governing Law. This Amendment and Restatement shall be governed
by and construed in accordance with the laws of the State of New York.
SECTION 10. Counterparts; Effectiveness. This Amendment and Restatement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment and Restatement shall become effective as of the date
hereof when (i) the Agent shall have received duly executed counterparts hereof
signed by each of the parties hereto (or, in the case of any party as to which
an executed counterpart shall not have been received, the Agent shall have
received telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such party); (ii) the Agent shall have
received an opinion of the General Counsel of the Borrower (or such other
counsel for the Borrower as may be acceptable to the Agent), substantially in
the form of Exhibit B to the Agreement with reference to this Amendment and
Restatement and the Agreement as amended and restated hereby; and (iii) the
Agent shall have received all documents it may reasonably request relating to
the existence of the Borrower, the corporate authority for and the validity of
the Agreement as amended and restated hereby and any other matters relevant
hereto, all in form and substance satisfactory to the Agent. Upon the
effectiveness of this Amendment and Restatement, the rights of the parties shall
be governed by the terms hereof; provided that, the rights of the parties prior
to amendment hereby shall be governed by the terms of the Agreement.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
SUNDSTRAND CORPORATION
By /s/ PAUL DONOVAN
------------------------------------
Title: Executive Vice President and
Chief Financial Officer
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ GEORGE J. STAPLETON
------------------------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ R. GUY STAPLETON
------------------------------------
Title: Managing Director
M&I MARSHALL & ILSLEY BANK
By /s/ G. DAVID GINN
------------------------------------
Title: Vice President
MELLON BANK, N.A.
By /s/ M. JAMES BARRY, III
------------------------------------
Title: Vice President
THE BANK OF NOVA SCOTIA
By /s/ M. D. SMITH
------------------------------------
Title: Agent
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ WILLIAM OLEFERCHIK
------------------------------------
Title: Authorized Agent
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By /s/ DIETER HOEPPLI
------------------------------------
Title: Assistant Vice President
By /s/ JAMES P. KELLEHER
------------------------------------
Title: Assistant Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By /s/ GEORGE J. STAPLETON
------------------------------------
Title: Vice President
<PAGE> 1
EXHIBIT (10)(j)
FIRST AMENDMENT TO THE
SUNDSTRAND CORPORATION STOCK INCENTIVE PLAN
The Sundstrand Corporation Stock Incentive Plan (the "Stock Plan") is
hereby amended to provide as follows:
PART A
The Stock Plan is amended as follows effective as of November 19, 1996,
subject to approval of the Corporation's stockholders at the Corporation's 1997
Annual Meeting.
1. The last sentence of Section 1.3 of the Stock Plan is deleted in its
entirety, and in the place thereof the following new sentence should be
inserted:
"However, in no event may an Award be granted under the Plan on or after
January 1, 2007."
2. Section 4.1 of the Stock Plan is amended by adding at the end thereof a
new paragraph which shall provide as follows:
"Effective as of January 1, 1997, the total number of Shares available for
grant under the Plan shall be increased by 3 million shares, such increased
Shares being subject to adjustment as provided in Section 4.2 of the Plan.
Such additional Shares may be either authorized but unissued, reacquired or
a combination thereof."
3. Section 4.2 of the Stock Plan is amended by inserting after the phrase
"such adjustment shall be made in the number of Shares which may be granted
under the Plan" the following phrases: "in the maximum number of Options and the
maximum number of Shares of Restricted Stock that the Committee can authorize
the CEO to grant in the aggregate or grant to any one Employee in any calendar
year, in the maximum number of Options or Shares of Restricted Stock which may
be granted to an elected officer in any calendar year,".
4. Section 6.1 of Article 6 of the Stock Plan is changed by adding a new
sentence at the end thereof which shall provide as follows:
"In no event may the number of Options granted to an elected officer of the
Company in any calendar year exceed 150,000 Options."
5. Section 7.1 of Article 7 of the Stock Plan is amended by adding after
subsection (b) a new subsection (c) which shall provide as follows:
"(c) Maximum Grant of Restricted Stock. In no event may the number of
Shares of Restricted Stock granted to an elected officer of the Company in
any calendar year exceed 50,000 Shares of Restricted Stock."
6. Article 7 of the Stock Plan is amended by adding after Section 7.9 a new
Section 7.10 which shall provide as follows:
"7.10 LIMITATION ON GRANTS TO ELECTED OFFICERS. Notwithstanding anything to
the contrary contained in the Plan, the Committee shall select, not later
than the 90th day after the commencement of each plan
<PAGE> 2
year, one or more of the following performance elements and the performance
level to be achieved as the threshold parameter:
<TABLE>
<S> <C>
a.) generation of free cash
b.) earnings per share
c.) revenues
d.) market share
e.) stock price
f.) cash flow
g.) retained earnings
h.) results of customer satisfaction surveys
i.) aggregate product price and other product price measures
j.) safety record
k.) acquisition activity
l.) management succession planning
m.) improved asset management
n.) improved gross margins
o.) increased inventory turns
p.) product development and liability
q.) research and development integration
r.) proprietary protections
s.) legal effectiveness
t.) handling of SEC and environmental matters
u.) manufacturing efficiencies
v.) system review and improvement
w.) service reliability and cost management
x.) operating expense ratios
y.) total stockholder return
z.) return on sales
aa.) return on equity
bb.) return on capital
cc.) return on assets
dd.) return on investments
ee.) net income
ff.) operating income
gg.) working capital
hh.) comparative performance of one or more of the above criteria
to the performance of other corporations."
</TABLE>
7. Article 7 of the Stock Plan is amended by adding after new Section 7.10
a new Section 7.11 which shall provide as follows:
"7.11 AWARDS OF RESTRICTED STOCK. No shares of Restricted Stock will be
awarded under the Plan to any elected officer of the Company unless the
threshold parameter as determined by the Committee is achieved. In
determining actual performance under any performance element selected,
adjustments will be made to exclude (i) all items determined in accordance
with standards published by opinion No. 30 of the Accounting Principles
Board ("APB Opinion No. 30") to be extraordinary or unusual in nature,
infrequent in occurrence, related to disposal of a segment of a business or
related to a change in accounting principles, and (ii) all items related to
discontinued operations that do not qualify as a segment of a business as
defined under APB Opinion No. 30, and (iii) all restructuring charges
recorded in accordance with Emergency Issues Task Force Issue No. 94-3.
Prior to the award of Restricted Stock under the Plan, the Committee shall
confirm that the threshold parameter has been satisfied.
2
<PAGE> 3
If the threshold parameter for a Plan year is achieved, the number of
Shares of Restricted Stock awarded to an elected officer with respect to
such Plan year shall not exceed 50,000 Shares; provided that the Committee,
in its sole discretion, may cancel or reduce the number of Shares of
Restricted Stock awarded based on such criteria as the Committee in its
sole discretion shall determine."
PART B
The Stock Plan is amended as follows effective as of November 19, 1996:
1. Section 6.1 of the Stock Plan is amended by changing the number
"300,000" where it appears in said Section to the number "600,000" and by
changing the number "5,000" where it appears in said Section to the number
"10,000".
2. Section 6.4 of the Stock Plan is amended by inserting the phrase ",
except as provided in subsections (a), (b) and (c) of Section 6.8," after the
words "provided, however, that".
3. Section 6.6 of the Stock Plan is amended by inserting at the beginning
of the first sentence of said Section the phrase "Subject to such other
method(s) as may have been established by the Company,".
4. Subsections (a) and (b) of Section 6.8 of the Stock Plan are amended in
their entirety to provide as follows:
"(a) TERMINATION BY NORMAL RETIREMENT OR EARLY RETIREMENT AT AGE 60. In the
event the employment of a Participant is terminated by reason of Normal
Retirement or Early Retirement at or after attaining age 60, all
outstanding Options granted to that Participant shall immediately become
exercisable, and shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date of such retirement,
whichever period is longer.
(b) TERMINATION BY EARLY RETIREMENT PRIOR TO AGE 60. In the event the
employment of a Participant is terminated by reason of Early Retirement
prior to attainment of age 60, the Committee, in its sole discretion, shall
have the right to cause all or any portion of such outstanding Options
granted to that Participant to immediately become exercisable, in which
event such options shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the date of such Early
Retirement, whichever period is longer."
5. Subsection (c) of Section 6.8 of the Stock Plan is amended by changing
the word "shorter" where it appears in such subsection to the word "longer".
6. Subsections (d) of Section 6.8 of the Stock Plan is amended by changing
the words "five (5) years" where they appear in such subsection to the words
"one (1) year" and by changing the word "shorter" where it appears in such
subsection to the word "longer".
7. Section 6.11 of the Stock Plan is amended to provide as follows:
"6.11 NONTRANSFERABILITY OF OPTIONS. Except as otherwise provided in this
Section 6.11, options granted under the Plan may only be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated in accordance
with the Participant's beneficiary designation, by will, or by the laws of
descent and distribution. The Committee, in its sole discretion, may
provide for the transferability of Options granted under the Plan, by a
Participant to persons or entities on terms and conditions as may be
determined by the Committee, in its sole discretion. The Committee, with
respect to an Option granted under the Plan which is not transferable, may,
in its sole discretion, provide for the transferability of such an Option
by the Participant to persons or entities on terms and conditions as may be
determined by the Committee, in its sole discretion. In addition, any
determination by the Committee to provide for the transferability of an
Option by any one Participant under the Plan shall not be deemed to provide
to any other Participant under the Plan a right of transferability with
respect to an Option granted under this Plan to such other Participant."
3
<PAGE> 4
8. Subsection (a) of Section 7.1 of the Stock Plan is amended by changing
the number "150,000" where it appears in said subsection to the number "300,000"
and by changing the number "2,000" where it appears in said subsection to the
number "4,000".
9. Section 7.3 of the Stock Plan is amended by changing the words "shall
not be less than" where they appear in such Section to the words "may be less
than".
10. Section 7.4 of the Stock Plan is amended by deleting therefrom the
second sentence thereof which begins "In no event may . . .".
PART C
Notwithstanding anything to the contrary contained in the Stock Plan, any
Restricted Stock Certificate or any Option Certificate, all Shares of Restricted
Stock and all Options granted to a Participant prior to November 19, 1996, under
the Stock Plan shall be covered by the changes made in Sections 2, 3, 4, 5, 6,
7, 9 and 10 of Part B above.
4
<PAGE> 1
Exhibit (10)(t)
SUNDSTRAND CORPORATION
MANAGEMENT STOCK PERFORMANCE PLAN
Effective November 19, 1996
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan. Sundstrand Corporation, a Delaware
corporation (the "Company), hereby establishes a stock performance
compensation plan to be known as the "Sundstrand Corporation Management Stock
Performance Plan" (the "Plan"), as set forth in this document. The Plan
permits the grant of Nonqualified Stock Options, Incentive Stock Options, and
Restricted Stock.
The Plan shall be effective as of November 19, 1996 (the "Effective
Date"), and shall remain in effect as provided in Section 1.3 herein.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the success
and enhance the value of the Company by linking the personal interests of
Participants to those of Company shareholders, and by providing Participants an
incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants upon
whose judgment, interest, and special effort the successful conduct of its
operations are largely dependent.
1.3 Duration of the Plan. Subject to the right of the Board of Directors
of the Company to terminate the Plan at any time pursuant to Article 11
herein, the Plan shall remain in effect until all Shares subject to the Plan
shall have been purchased or acquired according to the Plan's provisions.
However, in no event may an Award be granted under the Plan on or after
November 19, 2006.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meaning
set forth below:
(a) "Award" means, individually or collectively, a
grant under this Plan of Nonqualified Stock Options, Incentive
Stock Options or Restricted Stock.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" means any of the following events:
(i) The acquisition (other than from the
Company) by any person (as such term is defined in
Sections 13(d) or 14(d) of the Exchange Act) of
beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of
thirty-three percent (33%) or more of the combined
voting power of the Company's then outstanding voting
securities; or
(ii) The individuals who, as of the date
hereof, are members of the Board (the "Incumbent
Board"), cease for any reason to constitute a
majority of the Board, unless the election, or
nomination for election by the Company's
stockholders, of any new Director was approved by a
vote of a majority of the Incumbent Board, and such
new Director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board; or
(iii) Approval by stockholders of the Company
of (A) a merger or consolidation involving the
Company if the stockholders of the Company,
immediately before such merger or consolidation, do
not as a result of such merger or consolidation, own,
directly or indirectly, more than sixty-seven percent
(67%) of the combined voting power of the then
outstanding voting securities of the corporation
resulting from such merger or consolidation in
substantially the same proportion as their ownership
of the combined voting power of the voting securities
of the Company outstanding immediately before such
merger or consolidation or (B) a complete liquidation
or dissolution of the Company or an agreement for the
sale or other disposition of all or substantially all
of the assets of the Company.
Notwithstanding the foregoing, a Change
in Control shall not be deemed to occur pursuant to
subsection (i), solely because thirty-three percent
(33%) or more of the combined voting power of the
Company's then outstanding securities is acquired by
(A) a trustee or other fiduciary holding securities
under one or more employee benefit plans maintained
by the Company or any of its Subsidiaries or (B) any
corporation which, immediately prior to such
acquisition, is owned directly or indirectly by the
stockholders of the Company in the same proportion as
their ownership of stock in the Company immediately
prior to such acquisition.
(d) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
<PAGE> 2
(e) "Committee" means the committee specified in Article 3.
(f) "Disability" means a permanent and total
disability, within the meaning of Code Section 22(e)(3), as
determined by the Committee in good faith, upon receipt of
sufficient competent medical advice from one or more
individuals, selected by the Committee, who are qualified to
give professional medical advice.
(g) "Early Retirement" shall mean an Employee's
eligibility to receive an early retirement benefit from
any retirement plan maintained by the Company or any
Subsidiary.
(h) "Employee" means any full-time managerial,
supervisory or professional employee of the Company or of the
Company's Subsidiaries. "Employee" does not include any
director or elected officer of the Company.
(i) "Exchange Act" means the Securities Exchange Act
of 1934, as amended from time to time.
(j) "Fair Market Value" means the average of the
highest and lowest quoted selling prices for Shares on the
relevant date, or (if there were no sales on such date) the
weighted average of the means between the highest and lowest
quoted selling prices for Shares on the nearest day before and
the nearest day after the relevant date, as determined by the
CEO.
(k) "Incentive Stock Option" or "ISO" means an option
to purchase Shares granted under Article 6 herein, which is
designated as an Incentive Stock option and is intended to
meet the requirements of Section 422 of the Code.
(l) "Insider" shall mean an Employee who is, on the
relevant date, an elected officer of the Company.
(m) "Noninsider" means an Employee who is not, on the
relevant date, an Insider, as determined by the General
Counsel of the Company or his designee.
(n) "Nonqualified Stock Option" or "NQSO" means an
option to purchase Shares granted under Article 6 herein,
which is not intended to be an Incentive Stock Option.
(o) "Normal Retirement" shall mean an Employee's
eligibility to receive a normal retirement benefit from any
retirement plan maintained by the Company or any Subsidiary.
(p) "Option" means an Incentive Stock Option or a
Nonqualified Stock Option.
(q) "Option Certificate" means a certificate setting
forth the terms and provisions applicable to Options granted
to Participants.
(r) "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option.
(s) "Participant" means an Employee of the Company who
has outstanding an Award granted under the Plan.
(t) "Period of Restriction" means the period during
which the transfer of Shares of Restricted Stock is limited
in some way, as provided in this Plan.
(u) "Restricted Stock" means an Award granted under
Article 7 herein.
(v) "Restricted Stock Certificate" means a certificate
setting forth the terms and provisions applicable to
Restricted Stock granted to Participants.
(w) "Restricted Stock Price" means the price at which
a Share may be purchased by a Participant pursuant to a
Restricted Stock grant.
(x) "Shares" means shares of common stock of the Company.
(y) "Subsidiary" means any corporation in which the
Company owns directly, or indirectly through subsidiaries, at
least fifty percent (50%) of the total combined voting power
of all classes of stock, or any other entity (including, but
not limited to, partnerships and joint ventures) in which the
Company owns at least fifty percent (50%) of the combined
equity thereof.
ARTICLE 3. ADMINISTRATION
3.1 Authority of the CEO. The CEO shall have full power, except as limited
by law or by the Certificate of Incorporation or Bylaws of the Company, and
subject to the provisions herein, to determine the size and types of Awards; to
determine the terms and conditions of such Awards in a manner consistent with
the Plan, and subject to the provisions of Article 11 herein, to amend the
terms and conditions of any outstanding Award consistent with the Plan.
<PAGE> 3
3.2 The Committee. The Plan shall be administered by the Employee Benefit
Committee which is appointed by the Finance Committee of the Board or by any
other Committee appointed by the Board.
3.3 Authority of the Committee. The Committee shall have full power,
except as limited by law or by the Certificate of Incorporation or the
By-Laws of the Company, and subject to provisions herein, to construe and
interpret the Plan and any agreement or instrument entered into under the Plan;
and to establish, amend, or waive rules and regulations for the Plan's
administration. The Committee may make arrangements for the cashless exercise
of any Options issued hereunder. The Committee may delegate its authority as
permitted hereunder.
3.4 Decisions Binding. All determinations and decisions made by the CEO or
the Committee pursuant to the provisions of the Plan shall be final,
conclusive, and binding on all persons, including the Company and its
successors or assigns, and on its stockholders, Employees, Participants, and
their respective estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.2
herein, the total number of Shares available for grant under the Plan shall be
3 million Shares. These Shares may be either authorized but unissued,
reacquired or a combination thereof.
4.2 Adjustments in Available Shares, Options and Restricted Share Grants.
In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, Share
combination, or other change in the capital structure of the Company affecting
the Shares, such adjustment shall be made in the number of Shares which may be
granted under the Plan, in the maximum number of Options and the maximum number
of Shares of Restricted Stock that the CEO is authorized to grant in the
aggregate or grant to any one Employee in any calendar year, and in the number
of and/or price of Shares subject to outstanding Options and outstanding
Restricted Stock grants under the Plan, as may be determined to be appropriate
and equitable by the CEO, in his sole discretion, to prevent dilution or
enlargement of rights; provided that the number of Shares subject to any Award
shall always be a whole number.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Persons eligible to participate in this Plan are such
Employees as are determined by the CEO.
5.2 Actual Participation. Subject to the provisions of the Plan, the CEO
may, from time to time, select from all eligible Employees, those to whom
Awards shall be granted.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted only to Employees, who are Noninsiders, at any time and
from time to time as shall be determined by the CEO. The CEO shall have
discretion in determining the number and type of Options granted to each
Participant.
During any calendar year of the Company, the aggregate number of
Options available for grant by the CEO pursuant to this Section 6.1 is limited
to 600,000, with the number of Options which may be granted by the CEO to any
one Employee during any calendar year limited to 10,000.
6.2 Option Certificate. Each Option grant shall be evidenced by an Option
Certificate that shall specify the Option Price, the Option duration, the
number of Shares to which the Option pertains, whether the Option is intended
to be an ISO or a NQSO, and such other provisions as the CEO shall determine.
6.3 Option Price. The Option Price for each grant of an Option shall be
determined by the CEO; provided that the Option Price shall not be less than
one hundred percent (100%) of the Fair Market Value of a Share on the date the
Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as the CEO
shall determine at the time of grant; provided, however, that except as
provided in Sections 6.8(a), (b), (c) and (d), no Option shall be exercisable
later than the tenth (10th) anniversary date of its grant.
6.5 Exercise of Options. Subject to the provisions of Section 6.10, Options
granted under the Plan shall be exercisable at such times and be subject to
such restrictions and conditions as the CEO shall in each instance approve,
which need not be the same for each grant or for each Participant.
6.6 Payment. Subject to such other method(s) as may have been established by
the Committee, Options shall be exercised by the delivery of a written notice
of exercise to the Secretary of the Company, setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full
payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), or (c) by a combination of
(a) and (b).
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
name or names designated by the Participant, Share certificates in an
appropriate amount based upon the number of Shares purchased under the
Option(s).
<PAGE> 4
6.7 Special Restrictions on Shares Acquired Pursuant to the Exercise of an
Option. The CEO may impose such restrictions on Shares acquired pursuant to
the exercise of an Option under the Plan as he may deem advisable.
6.8 Termination of Employment.
(a) Termination by Normal Retirement or Early
Retirement at Age 60. In the event the employment of a
Participant is terminated by reason of Normal Retirement or
Early Retirement at or after attaining age 60, all outstanding
Options granted to that Participant shall immediately become
exercisable, and shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date of
such retirement, whichever period is longer.
(b) Termination by Early Retirement Prior to Age 60.
In the event the employment of a Participant is terminated by
reason of Early Retirement prior to attainment of age 60, the
CEO, in his sole discretion, shall have the right to cause all
or any portion of such outstanding Options granted to that
Participant to immediately become exercisable, in which event
such Options shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date of
such Early Retirement, whichever period is longer.
(c) Termination by Death. In the event the employment
of a Participant is terminated by reason of death, all
outstanding Options granted to that Participant shall
immediately become exercisable, and shall remain exercisable
at any time prior to their expiration date, or for one (1)
year after the date of death, whichever period is longer, by
such person or persons as shall have been named as the
Participant's beneficiary, or by such persons that have
acquired the Participant's rights under the Option by will or
by the laws of descent and distribution.
(d) Termination by Disability. In the event the
employment of a Participant is terminated by reason of
Disability, all outstanding Options granted to that
Participant shall immediately become exercisable as of the
date the CEO determines the definition of Disability to have
been satisfied, and shall remain exercisable at any time prior
to their expiration date, or for one (1) year after the date
that the CEO determines the definition of Disability to have
been satisfied, whichever period is longer.
(e) Employment Termination Followed by Death. In the
event that a Participant's employment terminates by reason of
Normal Retirement, Early Retirement or Disability and within
the exercise period following such termination the Participant
dies, then the remaining exercise period under outstanding
Options shall be any time prior to their expiration date, or
for one (1) year following death, whichever period is shorter.
Such Options shall be exercisable by such person or persons
who shall have been named as the Participant's beneficiary, or
by such persons who have acquired the Participant's rights
under the Option by will or by the laws of descent and
distribution.
(f) Termination of Employment for Other Reasons. If
the employment of a Participant shall terminate for any reason
other than the reasons set forth in subsections (a)-(d) of
this Section 6.8, the CEO, in his sole discretion, shall have
the right to cause all or any portion of such outstanding
Options granted to that Participant to immediately become
exercisable, subject to such terms as the CEO, in his sole
discretion, deems appropriate. Options which are or become
exercisable as of the effective date of employment termination
shall remain exercisable any time prior to their expiration
date, or for three (3) months after the date of employment
termination, whichever period is shorter.
6.9 Forfeiture of Options. Options held by a Participant which are not
exercisable as of the effective date of employment termination and which do not
become exercisable pursuant to the provisions of Section 6.8 immediately shall
be forfeited.
6.10 Alternate Exercisability Following Termination. With respect to
Options held by a Participant as of the date of any employment termination, the
provisions of Section 6.8 regarding the exercisability of Options as of the
date of employment termination and the provisions regarding the length of the
exercise period following employment termination notwithstanding, the CEO may,
in his sole discretion, provide for accelerated exercisability of all Options
and an extended period of exercisability following termination, upon such terms
and provisions as he deems appropriate; provided, however, that the period of
extended exercisability shall not extend beyond the period specified in Section
6.4 herein.
6.11 Transferability of Options. Except as otherwise provided in this
Section 6.11, options granted under the Plan may only be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated in accordance with
the Participant's beneficiary designation, by will, or by the laws of descent
and distribution. The CEO, in his sole discretion, may provide for the
transferability of Options granted under the Plan, by a Participant to persons
or entities on terms and conditions as may be determined by the CEO, in his
sole discretion. The CEO, with respect to an Option granted under the Plan
which is not transferable, may, in his sole discretion, provide for the
transferability of such an Option by the Participant to persons or entities on
terms and conditions as may be determined by the CEO, in his sole discretion.
Any determination by the CEO to provide for the transferability of an Option by
any one Participant under the Plan shall not be deemed to provide to any other
Participant under the Plan a right of transferability with respect to an Option
granted under the Plan to such other Participant.
ARTICLE 7. RESTRICTED STOCK
7.1 Discretionary Grants of Restricted Stock. The CEO, at any time and
from time to time, may grant Shares of Restricted Stock to eligible
Employees in such amounts as the CEO shall determine. During any calendar year
of the Company, the aggregate number of Shares of Restricted Stock which the
CEO may grant is limited to 300,000 with the number of Shares of Restricted
Stock which may be granted to any one Employee during any calendar year limited
to 4,000.
<PAGE> 5
7.2 Restricted Stock Certificate. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Certificate that shall specify the Period or
Periods of Restriction, the number of Shares of Restricted Stock granted, and
such other provisions as the CEO shall determine.
7.3 Restricted Stock Price. The Restricted Stock Price for each grant of
Restricted Stock shall be determined by the CEO, provided that the Restricted
Stock Price may be less than the par value of a Share on the date of the
Restricted Stock grant.
7.4 Restrictions on Transferability and Vesting. Except as otherwise
provided in this Article 7, the Shares of Restricted Stock granted herein may
not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated until the end of the applicable Period of Restriction established
by the CEO in his sole discretion and specified in the Restricted Stock
Certificate, or upon the earlier satisfaction of any other conditions as
specified by the CEO in his sole discretion and set forth in the Restricted
Stock Certificate. All rights with respect to the Restricted Stock granted to
a Participant under the Plan shall be available during his lifetime only to
such Participant.
7.5 Other Restrictions. The CEO shall impose such other restrictions on any
Shares of Restricted Stock granted pursuant to the Plan as he may deem
advisable.
7.6 Escrow or Legend. In order to enforce the restrictions imposed upon
Shares of Restricted Stock issued hereunder, the Committee may require any
Participant to enter into an escrow agreement providing that the
certificates representing Shares of Restricted Stock issued pursuant to this
Article 7 shall remain in the physical custody of an escrow holder until any or
all of the restrictions imposed pursuant to this Article 7 have terminated and
the Committee may cause a legend or legends to be placed on any certificates
representing shares issued pursuant to this Article 7, which legend or legends
shall make appropriate reference to the restrictions imposed hereunder.
7.7 Voting Rights. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.8 Dividends and Other Distributions. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares. If any such dividends or distributions are paid in Shares, the
Shares shall be subject to the same restrictions on transferability and
forfeitability as the Shares of Restricted Stock with respect to which they
were paid.
7.9 Termination of Employment.
(a) Termination by Reason of Normal Retirement, Death
or Disability. In the event the employment of a Participant
who has purchased Shares of Restricted Stock hereunder
terminates because of Normal Retirement, death or Disability,
then the Company shall not have the right to repurchase any of
such Shares of Restricted Stock purchased hereunder by such
Participant and all restrictions applicable to such Shares
shall immediately terminate.
(b) Termination by Reason Other than Normal
Retirement, Death or Disability. In the event the employment
of a Participant who has purchased Shares of Restricted Stock
hereunder terminates for any reason other than Normal
Retirement, death or Disability, the Company shall have the
option for ninety (90) days following such termination of
employment to buy at his cost for cash all or any part of the
terminating Participant's nonvested Shares of Restricted
Stock.
(c) Alternate Treatment of Restricted Stock. With
respect to Shares of Restricted Stock granted pursuant to
Section 7.1, regardless of the provisions regarding the
treatment of Shares of Restricted Stock specified in
subsections (a) and (b) of this Section 7.9, the CEO shall in
his sole discretion have the authority to modify the treatment
of those Shares of Restricted Stock held by Participants as of
the date of employment termination on which the restrictions
have not terminated, upon such terms as the CEO deems
appropriate.
ARTICLE 8. BENEFICIARY DESIGNATION
8.1 Beneficiary Designation. Each Participant under the Plan may, from
time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan shall accrue
in case of his death. Each such designation shall revoke all prior
designations by the same Participant, shall be in a form prescribed by the
Company, and will be effective only when filed by the Participant in writing
with the Secretary of the Company during the Participant's lifetime. In the
absence of any such designation, benefits remaining at the Participant's death
shall accrue to the Participant's estate.
ARTICLE 9. RIGHTS OF EMPLOYEES
9.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at
any time, or confer upon any Participant any right to continue in the employ of
the Company.
For purposes of the Plan, transfer of employment of a Participant
between the Company and any one of its Subsidiaries (or between Subsidiaries)
shall not be deemed a termination of employment.
9.2 Participation. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having once been selected, have a right
to again be selected to receive a future Award.
<PAGE> 6
ARTICLE 10. CHANGE IN CONTROL
10.1 Occurrence of a Change in Control. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited by the terms of applicable
law or regulation:
(a) Any and all Options granted hereunder shall become
immediately exercisable;
(b) Any Periods of Restriction and other restrictions
imposed on Shares of Restricted Stock shall immediately
terminate; and
(c) Subject to Article 11 herein, the CEO shall have
the authority to make any modifications to the Awards as
determined by the CEO to be appropriate before the effective
date of the Change in Control.
ARTICLE 11. AMENDMENT, MODIFICATION, AND TERMINATION
11.1 Amendment, Modification, and Termination. The Board at any time and
from time to time may terminate, amend or modify the Plan.
ARTICLE 12. WITHHOLDING
12.1 Tax Withholding. The Company shall have the power and the right as set
forth in this Article 12 to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy any and all Federal,
state, and local taxes (including the Participant's FICA obligation) required
by law to be withheld with respect to any taxable event arising out of or as a
result of this Plan.
12.2 Share Withholding. With respect to tax withholding required upon the
exercise of Options, upon the termination of restrictions on Restricted Stock,
or upon any other taxable event hereunder, a Participant may elect, subject to
the approval of the CEO, to satisfy the withholding requirement, in whole or in
part, by having the Company withhold a number of Shares, the Fair Market Value
of which, in itself or when added to a cash payment made by the Participant to
the Company, equals the minimum statutory total tax.
ARTICLE 13. SUCCESSORS
13.1 Successors. All obligations of the Company under the Plan, with respect
to Awards granted hereunder, shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or substantially all of
the business and/or assets of the Company.
ARTICLE 14. LEGAL CONSTRUCTION
14.1 Gender and Number. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
14.2 Requirements of Law. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
14.3 Foreign Employees. To the extent permissible under applicable law, the
CEO may grant Awards to eligible Employees who are employed in locations
outside of the United States. The CEO shall have the authority to modify the
terms of Awards granted to such Employees in order to ensure compliance with
applicable local and national law.
14.4 Governing Law. To the extent not preempted by Federal law (or foreign
law, in the case of grants to Employees who are not United States residents),
the Plan, and any agreement hereunder, shall be construed in accordance with
and governed by the laws of the State of Delaware.
14.5 Severability. In the event any provision of the Plan or any action
taken thereunto shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included, and the illegal or invalid action shall be deemed null
and void.
<PAGE> 1
EXHIBIT (10)(U)
MASTER THROUGH FOURTH AMENDMENT
ADOPTED 11/19/96
SUNDSTRAND CORPORATION
SUPPLEMENTAL RETIREMENT PLAN
WHEREAS, this Sundstrand Corporation Supplemental Retirement Plan (the
"Plan") was established by Sundstrand Corporation effective as of December 10,
1975; and
WHEREAS, said Plan has heretofore been amended and it is desirable to
further amend the Plan and in the interest of meeting certain legal,
administrative and other requirements, it is desirable to restate the Plan in
its entirety;
NOW, THEREFORE, effective as of January l, 1988, the Plan is hereby amended
and restated in its entirety to provide as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall have
the meanings indicated, unless a different meaning is clearly required by the
context:
1.1 "Board" means the Board of Directors of the Corporation.
1.2 "Code" means the Internal Revenue Code of 1986, as amended from
time to time. Reference to a section of the Code shall include such section
and any comparable section or sections of any future legislation that
amends, supplements, or supersedes such section.
1.3 "Committee" means the Compensation Committee of the Board.
1.4 "Corporation" means Sundstrand Corporation, a Delaware
corporation, its corporate successors, and the surviving corporation
resulting from any merger or consolidation of Sundstrand Corporation with
any other corporation or corporations.
1.5 "Employee" means a salaried employee of an Employer who is a
participant under the Qualified Plan (or any successor or replacement
salaried employees' retirement plan) and to whom or with respect to whom a
benefit is payable under the Plan.
1.6 An "Employer" means the Corporation and any Related Corporation
which adopts the Plan.
1.7 "Normal Retirement Date" means with respect to any Employee, the
last day of the month in which he attains age 65.
1.8 "Plan" means the Sundstrand Corporation Supplemental Retirement
Plan.
1.9 "Qualified Plan" means the Sundstrand Corporation Retirement Plan
effective October 1, 1971, and each predecessor, successor or replacement
salaried employees' retirement plan, and as of January 1, 1994, also means
the Sundstrand Corporation Retirement Plan-Industrial.
1.10 "Qualified Plan Retirement Benefit" means the aggregate benefit
payable to an Employee pursuant to the Qualified Plan and all annuities
purchased for an Employee under the Qualified Plan (whether or not
terminated) by reason of his termination of employment with the Employer
and all affiliates for any reason other than death.
1.11 "Qualified Plan Surviving Spouse Benefit" means the aggregate
benefit payable to the Surviving Spouse of an Employee pursuant to the
Qualified Plan and all annuities purchased for the
<PAGE> 2
Employee under the Qualified Plan (whether or not terminated) in the event
of the death of the Employee at any time prior to commencement of payment
of his Qualified Plan Retirement Benefit.
1.12 "Supplemental Retirement Benefit" means the benefit payable to an
Employee pursuant to the Plan by reason of his termination of employment
with an Employer and all affiliates for any reason other than death.
1.13 "Surviving Spouse" means a person who is married to an Employee
at the date of his death and for at least one year prior thereto.
1.14 "Supplemental Surviving Spouse Benefit" means the benefit payable
to a Surviving Spouse pursuant to the Plan.
1.15 Words in the masculine gender shall include the feminine and the
singular shall include the plural, and vice versa, unless qualified by the
context. Any headings used herein are included for ease of reference only,
and are not to be construed so as to alter the terms hereof.
ARTICLE II
ELIGIBILITY
An Employee shall be eligible to receive a Supplemental Retirement Benefit
under this Plan if
(a) the amount of his Qualified Plan Retirement Benefit is reduced by
(i) application of the limitation on benefits imposed by Section
415 of the Code, as in effect on the date of commencement of the
Qualified Plan Retirement Benefit, or as in effect at any time
thereafter, or
(ii) exclusion from the calculation of the Qualified Plan
Retirement Benefit of salary compensation which is deferred under a
non-qualified deferred compensation plan or arrangement with an
employer;
(b) his "Considered Compensation" (as that term is defined and used in
the Qualified Plan) exceeds $200,000 (or such amount as adjusted in
accordance with the provisions of Section 401(a)(17) of the Code) in any
plan year, or
(c) he is a participant in the Officer Performance Compensation Plan
adopted by the Board on December 1, 1989, to be effective January 1, 1990,
or
(d) he is a participant in the Management Performance Compensation
Plan (the "Performance Plan") and has been selected by the Corporation's
Chief Executive Officer with the approval of the Committee to have his
award under the Performance Plan included for purposes of calculating the
Supplemental Retirement Benefit,
whichever one or more of the foregoing are applicable. The Surviving Spouse of
an Employee described in the preceding sentence who dies prior to commencement
of payment of his Qualified Plan Retirement Benefit shall be eligible to receive
a Supplemental Surviving Spouse Benefit.
ARTICLE III
SUPPLEMENTAL RETIREMENT BENEFIT
3.1 Amount. The Supplemental Retirement Benefit payable to an eligible
Employee in the form of a straight life annuity over the lifetime of the
Employee only, commencing on his Normal Retirement Date, shall be a monthly
amount equal to the difference between (a) and (b) below:
(a) the monthly amount of the Qualified Plan Retirement Benefit to
which the Employee would have been entitled under the Qualified Plan if
such benefit were computed
2
<PAGE> 3
(i) without giving effect to the limitations on benefits imposed by
application of Section 415 of the Code,
(ii) as if the amount of any salary compensation which was deferred
under a non-qualified compensation plan or arrangement with the Employer
had not been deferred and had been included in such computation,
(iii) without excluding from the Employee's "Considered
Compensation" (as that term is defined and used in the Qualified Plan)
the amount in excess of $200,000 (or such amount as adjusted in
accordance with the provisions of Section 40l(a)(17) of the Code) for
any plan year,
(iv) including in the Employee's "Considered Compensation" (as that
term is defined and used in the Qualified Plan) for any plan year in
which he participates in the Officer Performance Compensation Plan or
for any plan year in which he participates in the Management Performance
Compensation Plan and has been selected to participate in this Plan
pursuant to subsection (d) of Article II, any amount received under the
said Officer Performance Compensation Plan or Management Performance
Compensation Plan, or
whichever one or more of the foregoing are applicable;
Less
(b) the monthly amount of the Qualified Plan Retirement Benefit
actually payable to the Employee under the Qualified Plan.
The amounts described in (a) and (b) shall be computed as of the date of
termination of employment of the Employee with the Employer and all affiliates
in the form of a straight life annuity payable over the lifetime of the Employee
only commencing on his Normal Retirement Date.
3.2 Form of Benefit. The Supplemental Retirement Benefit shall be paid in
whichever one or more of the following forms the Employee shall elect:
(a) the same payment form as the Employee shall have elected for
payment of his Qualified Plan Retirement Benefit (with the valid consent of
his Surviving Spouse where required under the Qualified Plan),
(b) a lump sum, actuarially adjusted pursuant to Section 3.5 to be the
equivalent of the Supplemental Retirement Benefit, or
(c) one or more payments deferred in accordance with a schedule that
the Employee shall elect, which payment or payments shall be actuarially
adjusted pursuant to Section 3.5 to be the equivalent of the Supplemental
Retirement Benefit.
3.3 Commencement of Benefit. Payment of the Supplemental Retirement Benefit
to an Employee shall commence on the same date as payment of the Qualified Plan
Retirement Benefit to the Employee commences. Any election under the Qualified
Plan made by the Employee with respect to the commencement of payment of his
Qualified Plan Retirement Benefit shall also be applicable with respect to the
commencement of payment of his Supplemental Retirement Benefit.
3.4 Approval of Employer. Notwithstanding the provisions of Sections 3.2
and 3.3 above, an election made by an Employee under the Qualified Plan with
respect to the form of payment of his Qualified Plan Retirement Benefit (with
the valid consent of his Surviving Spouse where required under the Qualified
Plan), or the date for commencement of payment thereof, shall not be effective
with respect to the form of payment or date for commencement of payment of his
Supplemental Retirement Benefit hereunder unless such election is expressly
approved in writing by the Corporation with respect to his Supplemental
Retirement Benefit. If the Corporation shall not approve such election in
writing, then the form of payment or date for commencement of payment of the
Employee's Supplemental Retirement Benefit shall be selected by the Corporation
in its sole discretion.
3
<PAGE> 4
3.5 Actuarial Adjustment. A Supplemental Retirement Benefit which is
payable in any form other than a straight life annuity over the lifetime of the
Employee, or which commences at any time prior to the Employee's Normal
Retirement Date, shall be the equivalent of the Supplemental Retirement Benefit
set forth in Section 3.1 above as determined by the same actuarial adjustments
as those specified in the Qualified Plan with respect to determination of the
amount of the Qualified Plan Retirement Benefit on the date for commencement of
payment hereunder.
ARTICLE IV
SUPPLEMENTAL SURVIVING SPOUSE BENEFIT
4.1 Amount. If an Employee dies prior to commencement of payment of his
Qualified Plan Retirement Benefit under circumstances in which a Qualified Plan
Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental
Surviving Spouse Benefit is payable to his Surviving Spouse as hereinafter
provided. The monthly amount of the Supplemental Surviving Spouse Benefit
payable to a Surviving Spouse shall be equal to the difference between (a) and
(b) below:
(a) the monthly amount of the Qualified Plan Surviving Spouse Benefit
to which the Surviving Spouse would have been entitled under the Qualified
Plan if such Benefit were computed
(i) without giving effect to the limitations on benefits imposed by
application of Section 415 of the Code,
(ii) as if the amount of any salary compensation of the deceased
Employee which was deferred under a non-qualified compensation plan or
arrangement with the Employer had not been deferred and had been
included in such computation,
(iii) without excluding from the deceased Employee's "Considered
Compensation" (as that term is defined and used in the Qualified Plan)
the amount in excess of $200,000 (or such amount as adjusted in
accordance with the provisions of Section 40l(a)(17) of the Code) for
any plan year, or
(iv) including in the deceased Employee's "Considered Compensation"
(as that term is defined and used in the Qualified Plan), for any plan
year in which the deceased Employee participated in the Officer
Performance Compensation Plan or for any plan year in which he
participates in the Management Performance Compensation Plan and has
been selected to participate in this Plan pursuant to subsection (d) of
Article II, any amount received under the said Officer Performance
Compensation Plan or Management Performance Compensation Plan,
whichever one or more of the foregoing are applicable;
Less
(b) the monthly amount of the Qualified Plan Surviving Spouse Benefit
actually payable to the Surviving Spouse under the Qualified Plan.
4.2 Form and Commencement of Benefit. A Supplemental Surviving Spouse
Benefit shall be payable over the lifetime of the Surviving Spouse only in
monthly installments commencing on the date for commencement of payment of the
Qualified Plan Surviving Spouse Benefit to the Surviving Spouse and terminating
on the date of the last payment of the Qualified Plan Surviving Spouse Benefit
made before the Surviving Spouse's death.
ARTICLE V
ADMINISTRATION OF THE PLAN
5.1 Administration by the Corporation. The Corporation shall be responsible
for the general operation and administration of the Plan and for carrying out
the provisions thereof.
4
<PAGE> 5
5.2 General Powers of Administration. All provisions set forth in the
Qualified Plan with respect to the administrative powers and duties of the
Corporation, expenses of administration, and procedures for filing claims shall
also be applicable with respect to the Plan. The Corporation shall be entitled
to rely conclusively upon all tables, valuations, certificates, opinions and
reports furnished by any actuary, accountant, counsel or other person employed
or engaged by the Corporation with respect to the Plan.
ARTICLE VI
AMENDMENT OF TERMINATION
6.1 Amendment or Termination. The Corporation intends the Plan to be
permanent but reserves the right to amend or terminate the Plan when, in the
sole opinion of the Corporation, such amendment or termination is advisable. Any
such amendment or termination shall be made pursuant to a resolution of the
Board and shall be effective as of the date set forth in such resolution or in
such amendment.
6.2 Effect of Amendment or Termination. No amendment or termination of the
Plan by the Corporation shall directly or indirectly deprive any current or
former Employee or Surviving Spouse of all or any portion of any Supplemental
Retirement Benefit or Supplemental Surviving Spouse Benefit payment of which has
commenced prior to the effective date of such amendment or termination or which
would be payable if the Employee terminated employment for any reason, including
death, on such effective date.
In addition, no such amendment or termination shall adversely affect or
impair the accrued Supplemental Retirement Benefit as defined in this Section of
any covered Employee then in the employ of the Corporation. For the purpose of
this Section 6.2, an accrued Supplemental Retirement Benefit will be determined
for each eligible Employee in accordance with the provisions of the Plan and the
accrued benefit provided by the Qualified Plan all determined as of the
effective date of the amendment or termination. Payment of benefits based on
such an accrued Supplemental Retirement Benefit will be made in accordance with
the terms of this Plan to the Employee if he retires under the Qualified Plan,
or to his surviving spouse if he dies while in the employ of the Corporation and
leaves a spouse eligible for a Qualified Plan Surviving Spouse Benefit under the
Qualified Plan.
ARTICLE VII
GENERAL PROVISIONS
7.1 Funding. The Plan shall be unfunded, and any Supplemental Retirement
Benefit or Supplemental Surviving Spouse Benefit shall be paid only from the
general assets of the Corporation. No Employee, Surviving Spouse or any other
person shall have any interest in any particular assets of the Corporation by
reason of the right to receive a benefit under the Plan and any such Employee,
Surviving Spouse or other person shall have only the rights of a general
unsecured creditor of the Corporation with respect to any rights under the Plan.
7.2 General Conditions. Except as otherwise expressly provided herein, all
terms and conditions of the Qualified Plan applicable to a Qualified Plan
Retirement Benefit or a Qualified Plan Surviving Spouse Benefit shall also be
applicable to a Supplemental Retirement Benefit or a Supplemental Surviving
Spouse Benefit payable hereunder. Any Qualified Plan Retirement Benefit or
Qualified Plan Surviving Spouse Benefit, or any other benefit payable under the
Qualified Plan, shall be paid solely in accordance with the terms and conditions
of the Qualified Plan and nothing in this Plan shall operate or be construed in
any way to modify, amend or affect the terms and provisions of the Qualified
Plan.
7.3 Plan Non-Contractual. Nothing herein contained shall be construed as a
commitment or agreement on the part of any person to continue his employment
with his Employer, and nothing herein contained shall be construed as a
commitment on the part of his Employer to continue the employment or the rate of
compensation of any such person for any period. All Employees shall remain
subject to discharge, layoff, or disciplinary action to the same extent as if
the Plan had never been put into effect.
5
<PAGE> 6
7.4 Restriction on Alienation of Benefits. No rights or interests of any
person under the Plan, including any right to receive a benefit, shall be
subject in any manner to sale, transfer, encumbrance, assignment, pledge or
alienation of any kind; nor may such rights or interest be resorted to, either
voluntarily or involuntarily, for the satisfaction of the debts of, or other
obligations or claims against, such person, including claims for alimony,
support, separate maintenance and claims in bankruptcy proceedings. No such
person shall have the power in any manner to sell, transfer, encumber, assign,
pledge or alienate any of his interest or rights under the Plan, including his
right to receive any benefit, and any attempt to do so shall be void.
7.5 Claims of Other Persons. The provisions of the Plan shall in no event
be construed as giving any Employee or any other person, firm or corporation,
any legal or equitable right as against an Employer, its officers, employees or
directors, or as against the Corporation, except any such rights as are
specifically provided for in the Plan or are hereafter created in accordance
with the terms and provisions of the Plan.
7.6 Governing Law. The Plan shall be construed and administered under the
laws of the State of Illinois.
7.7 Payment of Small Benefits. Notwithstanding anything to the contrary
contained in the Plan, if the actuarial value of any Supplemental Retirement
Benefit or Supplemental Surviving Spouse Benefit is less than $3,500, the
Corporation may pay the actuarial value of such Benefit to the Employee or
Surviving Spouse in a single lump sum in lieu of any further benefit payments
hereunder.
7.8 Facility of Payment. In the event that it shall be found that any
individual to whom an amount is payable under the Plan is incapable of attending
to his financial affairs because of any mental or physical condition, including
the infirmities of advanced age, such amount (unless prior claim therefor shall
have been made by a duly qualified guardian or other legal representative) may,
in the discretion of the Corporation, be paid to another person for the use or
benefit of the individual found incapable of attending to his financial affairs
or in satisfaction of legal obligations incurred by or on behalf of such
individual. Any such payment made in accordance with the provisions of this
Section 7.8 shall be a complete discharge of liability therefor under the Plan.
7.9 Corporate Successors. The Plan shall not be terminated by a transfer or
sale of assets of the Corporation or by the merger or consolidation of the
Corporation into or with any other corporation or other entity.
7.10 Duty to Furnish Information and Documents. Every person with an
interest in the Plan or claiming benefits under the Plan shall furnish the
Corporation with such documents, evidence, data, or information as the
Corporation considers necessary or desirable for the purpose of administering
the Plan, and the benefit provisions of the Plan shall be applicable to such
person upon the condition that such person will furnish promptly full, true and
complete documents, evidence, data and information requested by the Corporation.
The Corporation, in its sole discretion, may postpone payment of benefits until
such information and such documents have been furnished.
7.11 Reemployment. If a retired Employee who is receiving Supplemental
Retirement Benefit payments is reemployed by his Employer as an Employee, his
Supplemental Retirement Benefit payments shall cease and shall resume with the
month following his subsequent retirement. The monthly Supplemental Retirement
Benefit payable upon such subsequent retirement shall be determined as if he
were then first retired; provided, that such monthly Retirement Benefit shall be
reduced actuarially to reflect the value of any Supplemental Retirement Benefit
payments which he received under the Plan prior to his Normal Retirement Date.
7.12 Unclaimed Benefits. Each Employee shall keep the Corporation informed
of his current address and the current address of his spouse. The Corporation
shall not be obligated to search for the whereabouts of any person. If the
location of an Employee is not made known to the Corporation within three (3)
years after the date on which payment of the Employee's Supplemental Retirement
Benefit may first be made, payment may be made as though the Employee had died
at the end of the three-year period. If, within one additional year after such
three-year period has elapsed, or, within three years after the actual death of
an Employee, the Corporation is unable to locate any Surviving Spouse of the
Employee, then the Corporation shall have no
6
<PAGE> 7
further obligation to pay any benefit hereunder to such Employee or his
Surviving Spouse or any other person and such benefit shall be irrevocably
forfeited.
7.13 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, neither the Corporation nor any individual acting as an
employee or agent of the Corporation shall be liable to any Employee, former
Employee, Surviving Spouse or any other person for any claim, loss, liability or
expense incurred in connection with the Plan.
7.14 Titles. Titles are provided in the Plan for convenience of reference
only and are not to serve as a basis for interpretation or construction of the
Plan.
7.15 References. Unless the context clearly indicates to the contrary, a
reference to a Plan provision, statute, regulation or document shall be
construed as referring to any subsequently enacted, adopted or executed
counterpart.
7
<PAGE> 1
EXHIBIT (10)(W)
MASTER THROUGH SECOND AMENDMENT
ADOPTED 11/19/96
SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
Effective January 1, 1995, Sundstrand Corporation, a Delaware corporation
(the "Corporation"), by action of the Compensation Committee of the
Corporation's Board of Directors, hereby establishes this Deferred Compensation
Plan (the "Plan") by the adoption of this document.
ARTICLE I
NAME, PURPOSE, AND DEFINITIONS
Section 1.1. Name. This Plan shall be known as the "Sundstrand Corporation
Deferred Compensation Plan."
Section 1.2. Purpose.
(a) The Corporation believes that Executives may desire to defer a
portion of their compensation and/or part or all of a lump sum distribution
from the Sundstrand Corporation Supplemental Retirement Plan as provided in
this Plan, and the Corporation is willing to assist in administering such a
program and desires to specify the terms for such deferrals and the method
of payment of such amounts. The Corporation desires to retain and attract
to its employment and the employment of its subsidiaries executives of
outstanding competence.
(b) This Plan allows a temporary deferral of income as provided
herein. The benefits made available under this Plan are in addition to
other benefits provided under other plans sponsored by the Employer.
(c) The executives who participate in this Plan (collectively the
"Executives" and individually an "Executive") shall be members of a select
group of management or highly compensated employees of the Employer.
Section 1.3. Definitions. Whenever used herein, the following words and
phrases shall have the meanings ascribed to them in this Section, unless
otherwise specifically defined or unless the context clearly otherwise requires:
(a) "Beneficiary": The beneficiary or beneficiaries designated by the
Executive to receive the amount payable after the death of the Executive,
as provided in Section 4.3 hereof.
(b) "Board": The Board of Directors of Sundstrand Corporation.
(c) "Committee": The Compensation Committee of the Board.
(d) "Code": The Internal Revenue Code of 1986, as amended and now in
effect and as it may be amended from time to time. All citations to
sections of the Code are to such sections as they may from time to time be
amended or renumbered.
(e) "Deferral Election Form": A document whereby the Executive
designates the portion of his compensation and/or part or all of a lump sum
distribution from the Sundstrand Corporation Supplemental Retirement Plan
to be deferred, as described in Section 3.2 and attached as Exhibit A,
which Exhibit A may from time to time be amended.
(f) "Deferred Compensation Account": The account calculated for each
Executive pursuant to Section 4.1 of this Plan.
<PAGE> 2
(g) "Employer": The Corporation and any of its subsidiary
corporations.
(h) "Executive": An employee of the Employer who has been selected to
be eligible to participate in this Plan pursuant to Article III of this
Plan.
(i) "Unanticipated Emergency": Severe financial hardship to the
Executive resulting from a sudden and unexpected illness or accident of the
Executive or of a dependent of the Executive, loss of the Executive's
property due to casualty, or other similar extraordinary and unanticipated
circumstances due to events beyond the control of the Executive.
ARTICLE II
ADMINISTRATION AND INTERPRETATION OF THE PLAN
Section 2.1. Interpretation. The Committee shall have full power and
discretionary authority to interpret, apply, and administer the provisions of
this Plan, determine any questions of fact under this Plan, resolve any
ambiguities under this Plan, and make all decisions and determinations necessary
under this Plan or in connection with its administration, interpretation, and
application. Decisions by the Committee shall be final and binding upon all
parties.
Section 2.2. Contractual Nature of Plan. Executives are general unsecured
creditors of the Corporation and the Plan constitutes a promise by the
Corporation to make benefit payments in the future.
Section 2.3. Unfunded Status of the Plan. For the purposes of the Code and
the Employee Retirement Income Security Act of 1974, as amended, the Plan is
unfunded.
ARTICLE III
ELIGIBILITY AND DEFERRAL ELECTION
Section 3.1. Eligibility. Individual participation shall be limited to
those Executives who participate in the Corporation's Officer Incentive
Compensation Plan and Management Incentive Plan.
Section 3.2. Notification, Participation, and Election. Each Executive
eligible to participate in this Plan shall be notified by the Corporation. After
notification, an Executive who desires to participate in the Plan shall, prior
to January 1 of the Plan year, execute a Deferral Election Form, and such other
forms and documents as the Corporation may require from time to time, and he
shall be bound by all of the terms and provisions thereof.
ARTICLE IV
PAYMENT OF DEFERRED AMOUNTS
Section 4.1. Deferred Compensation Account. The Corporation shall compute a
Deferred Compensation Account for each Executive participating in this Plan,
which shall equal the amounts deferred pursuant to a Deferral Election Form
executed by the Executive, plus interest, compounded annually, on such deferred
amounts. For Plan years 1995 and 1996, interest will be calculated according to
the annual interest rate schedule published by the Company which is based upon
Sundstrand's equivalent corporate bond rate. For Plan years after 1996, each
participant's deferral account will have two interest components, as follows:
"Interest Component A" which will be calculated at 100% of the Moody Average (as
defined below), and "Interest Component B" which will be calculated at 30% of
the Moody Average. Distributions to participants who have reached age 55, become
disabled, or die shall include both Interest Components. Distributions to
participants who are actively employed and have not attained age 55 shall
include only Interest Component A, with the Interest Component B being paid to
such participants upon their attainment of age 55, disability or death while
employed by the Corporation, or forfeited if they do not attain age 55 while so
employed. For purposes of the Plan, the "Moody Average" means the average rate
under the Moody's Corporate Bond Index
2
<PAGE> 3
for the 12-month period ending on the last business day in September of the Plan
year preceding the Plan year in which such rate shall be used.
Section 4.2. Payment of Deferred Amounts. In the year prior to the elected
distribution date, the Executive must complete the Compensation Payment Election
Form to indicate the desired payment option or to elect to redefer payment. (The
redeferral option is available to active employees only.) Unless otherwise
provided by action authorized in Section 5.1 hereof, or as otherwise provided
pursuant to the terms of this Plan, the Employer shall pay an amount in
accordance with the payment option specified on the Executive's Compensation
Payment Election Form. Payments will be made in January of the specified
distribution year and will be in one or more annual payments over a period not
to exceed ten years. Payment may be made prior to the specified distribution
year in the event of an unanticipated emergency. Withdrawals of amounts because
of an unanticipated emergency must only be permitted to the extent reasonably
needed to satisfy the emergency need after cessation of deferrals under the
Plan. Payment may not be made to the extent that such hardship is or may be
relieved through reimbursement or compensation by insurance or liquidation of
the Executive's assets, to the extent liquidation of assets would not itself
cause severe financial hardship. After the Employer has paid an amount equal to
the Executive's Deferred Compensation Account, the Employer shall have no
further obligation under this Plan. In the event the Executive leaves the
company before the specified distribution year, payment will be made as
indicated on the appropriate Deferral Election Form. In all cases, appropriate
taxes on the deferral payments are the responsibility of the payee.
Section 4.3. Beneficiary. The Executive may designate a Beneficiary to
receive the amounts as provided herein after the Executive's death by delivering
in writing to the Employer in substantially the form of Exhibit B attached
hereto and hereby made a part of this Agreement. In the event of Executive's
death prior to his receipt of the payment provided in Section 4.2 hereof, the
Employer shall pay such amount to the Beneficiary or, absent such designation,
to the Executive's estate. Payment will be made in January in the year or years
following death according to the payment option selected by the Executive;
provided however that the Beneficiary may, prior to January 1 of the year in
which payment to such Beneficiary commences, make an alternative election on a
Compensation Payment Election Form.
Section 4.4. Amounts Payable Only From Corporate Assets.
(a) Nothing contained in this Plan, and no action taken pursuant to
its provisions by the Corporation or Employer or any other entity or
individual hereto shall create, or be construed to create, a trust of any
kind.
(b) The payment of any amount hereunder to the Executive or to any
Beneficiary shall be made from assets which shall continue, for all
purposes, to be a part of the general assets of the Employer; no person
shall have or acquire any interest in such assets by virtue of the
provisions of this Agreement. To the extent that the Executive or any
Beneficiary acquires a right to receive payments from the Employer under
the provisions hereof, such right shall be no greater than the right of any
unsecured general creditor of the Employer.
Section 4.5. No Assignment. Neither the Executive's nor the Beneficiary's
interest in this Plan or any rights related thereto shall be subject in any
manner to (a) any claims of any creditor of the Executive or Beneficiary, (b)
the debts, contracts, liabilities or torts of the Executive or Beneficiary, or
(c) voluntary or involuntary transfers to, on behalf of, or on account of, any
creditor of the Executive or Beneficiary. No right, expectancy, distribution or
payment pursuant to this Plan to the Executive or Beneficiary, shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, whether voluntary or involuntary, and any attempt to so
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the
same shall be void. If any person or entity attempts to take any action contrary
to this Section, such action will have no effect, and the Employer and the
Executive will disregard the action, will not in any manner be bound by it, and
will not incur any liability on account of it or the disregard of it.
Section 4.6. Merger or Consolidation. In the event of a takeover, the
Executives will receive a payout if termination of employment occurs within 12
months after takeover.
3
<PAGE> 4
Section 4.7. Early Payment. May be permitted under other circumstances as
determined by management.
ARTICLE V
AMENDMENT AND TERMINATION OF PLAN
Section 5.1. Amendment and Termination of the Plan. By action of the
Committee, the Corporation shall have the right to (a) amend this Plan in any
respect, in whole or in part, (b) replace this Plan with another deferred
compensation arrangement, or (c) terminate this Plan, at any time and from time
to time, in each such case subject to the Executive's rights, if any,
established at such time pursuant to the Deferral Election Form and this Plan.
ARTICLE VI
MISCELLANEOUS
Section 6.1. Additional Information and Cooperation. Each Executive shall
furnish to the Employer such documents or other information as is necessary or
desirable for the purpose of this Plan, and it shall be a condition of
participation in this Plan that each such Executive furnish such information
promptly and sign such documents as the Employer may require before any benefit
becomes payable under this Plan. The Executive and the Employer will take such
actions as are necessary and appropriate to carry out the provisions of this
Plan, with the intention of establishing a deferred compensation arrangement
between the Executive and the Employer. The Executive will sign such forms as
the Employer may require, from time to time.
Section 6.2. Notice. Any notice, consent or demand required or permitted to
be given under the provisions of this Plan shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or demand
is mailed, it shall be sent by United States certified or registered mail,
postage prepaid, addressed to such party's last known address as shown on the
records of the Employer. The date of such mailing shall be deemed the date of
notice, consent or demand.
Section 6.3. No Guarantee of Employment. Neither this Plan nor any action
taken hereunder shall be construed as a contract of employment between the
Employer and the Executive, to be a consideration for, or an inducement or
condition of, the employment of the Executive, or as giving any Executive any
rights to be retained in the employ of the Employer, or to interfere with the
right of the Employer to discharge any Executive at any time.
Section 6.4. Gender and Number. For purposes of this Plan document, the
masculine pronouns shall be construed to include the feminine, the feminine
shall be construed to include the masculine, the singular to include the plural,
and the plural to include the singular.
Section 6.5. Applicable Law. This Plan and all rights hereunder shall be
construed, regulated, and administered under the laws of the State of Illinois
(without regard to its conflict of law rules).
4
<PAGE> 1
EXHIBIT (11)
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
EARNINGS
Net earnings........................................... $ 20 $ 36 $ 114 $ 79
===== ===== ===== =====
SHARES
Weighted-average number of common shares outstanding... 61.0 62.7 61.0 62.7
Additional shares assuming conversion of stock
options............................................. .6 .5 .6 .5
----- ----- ----- -----
Fully diluted shares................................... 61.6 63.2 61.6 63.2
===== ===== ===== =====
FULLY DILUTED EARNINGS PER SHARE
Net earnings........................................... $ .32 $ .57 $1.85 $1.24
===== ===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
The following lists each of the Registrant's significant domestic and
foreign subsidiaries.
<TABLE>
<CAPTION>
PERCENT
JURISDICTION OF VOTING
IN WHICH SECURITIES
NAME OF CORPORATION INCORPORATED OWNED
- ------------------------------------------------------------ ------------ ----------
<S> <C> <C>
Milton Roy Company.......................................... Pennsylvania 100%
The Falk Corporation........................................ Delaware 100%
Sullair Corporation......................................... Indiana 100%
Sundstrand Fluid Handling Corporation....................... Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT (23)(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-29234) pertaining to the Sundstrand Corporation Employee
Savings Plan, the Registration Statement (Form S-8 No. 33-29235) pertaining to
the Sundstrand Corporation Rockford Factory Employee Savings Plan, the
Registration Statement (Form S-8 No. 33-61372) pertaining to the Sundstrand
Corporation Stock Incentive Plan, and the Registration Statement (Form S-8 No.
33-58689) pertaining to the Sundstrand Corporation Nonemployee Director Stock
Option Plan and the Sundstrand Corporation Nonemployee Director Compensation
Plan of our report dated January 28, 1997, with respect to the consolidated
financial statements of Sundstrand Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 4, 1997
<PAGE> 1
EXHIBIT (24)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, SUNDSTRAND
CORPORATION, a Delaware corporation, does hereby nominate, constitute and
appoint ROBERT H. JENKINS and PAUL DONOVAN, and either or both of them, as its
true and lawful attorneys-in-fact, in its name and on its behalf to file with
the Securities and Exchange Commission the Annual Report on Form 10-K of said
Corporation for the year ended December 31, 1996, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
That each of the undersigned directors and officers of said Corporation
does hereby nominate, constitute and appoint ROBERT H. JENKINS and PAUL DONOVAN,
and either or both of them, as his true and lawful attorneys-in-fact, in his
name and in the capacity indicated below, to execute the aforesaid Form 10-K.
And the undersigned do hereby authorize and direct the said
attorneys-in-fact, and either or both of them, to execute and deliver such other
documents to the Securities and Exchange Commission and to take all such other
action as they or either of them may consider necessary or advisable to the end
that said Form 10-K shall comply with the Securities Exchange Act of 1934 and
the applicable rules, rulings and regulations of the Securities and Exchange
Commission.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents
this 18th day of February, 1997.
SUNDSTRAND CORPORATION
By: /s/ ROBERT H. JENKINS
------------------------------------
Robert H. Jenkins
President and Chief Executive
Officer
(CORPORATE SEAL)
ATTEST:
/s/ RICHARD M. SCHILLING
- --------------------------------------
Richard M. Schilling
Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT H. JENKINS President and Chief Executive Officer and
- -------------------------------------------- Director
Robert H. Jenkins
/s/ PAUL DONOVAN Executive Vice President and Chief Financial
- -------------------------------------------- Officer and Treasurer
Paul Donovan
/s/ DEWAYNE J. FELLOWS Vice President and Controller
- --------------------------------------------
DeWayne J. Fellows
/s/ DON R. O'HARE Chairman of the Board
- --------------------------------------------
Don R. O'Hare
/s/ RICHARD A. ABDOO Director
- --------------------------------------------
Richard A. Abdoo
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ J. P. BOLDUC Director
- --------------------------------------------
J. P. Bolduc
/s/ GERALD GRINSTEIN Director
- --------------------------------------------
Gerald Grinstein
/s/ CHARLES MARSHALL Director
- --------------------------------------------
Charles Marshall
Director
- --------------------------------------------
Klaus H. Murmann
/s/ DONALD E. NORDLUND Director
- --------------------------------------------
Donald E. Nordlund
Director
- --------------------------------------------
John A. Puelicher
Director
- --------------------------------------------
Ward Smith
/s/ BERGER G. WALLIN Director
- --------------------------------------------
Berger G. Wallin
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 313
<ALLOWANCES> 0
<INVENTORY> 378
<CURRENT-ASSETS> 772
<PP&E> 1,087
<DEPRECIATION> 660
<TOTAL-ASSETS> 1,595
<CURRENT-LIABILITIES> 397
<BONDS> 222
0
0
<COMMON> 38
<OTHER-SE> 475
<TOTAL-LIABILITY-AND-EQUITY> 1,595
<SALES> 1,521
<TOTAL-REVENUES> 1,521
<CGS> 990
<TOTAL-COSTS> 1,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 184
<INCOME-TAX> 70
<INCOME-CONTINUING> 114
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 0
</TABLE>
