<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
SUNDSTRAND CORPORATION
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
SUNDSTRAND CORPORATION
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
6,806,819 shares of Common Stock (plus outstanding options to acquire
504,405 shares of Common Stock)
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
$18.85 per outstanding shares of Common Stock; $18.85 less applicable
exercise price for option shares
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
[Sundstrand Logo]
SUNDSTRAND CORPORATION
ROCKFORD, ILLINOIS
To the Stockholders of
SUNDSTRAND CORPORATION:
The 1997 Annual Meeting of Stockholders of Sundstrand Corporation is to be
held in the Auditorium at Northern Illinois University, Rockford Education
Center, 8500 East State Street, Rockford, Illinois, on Tuesday, April 15, 1997,
at 11:00 a.m., Central Time. Stockholders will be called upon to elect one
director for a term of three years; to approve a proposed Officer Performance
Compensation Plan under which bonuses paid to officers will be performance-based
and, therefore, excluded from the Internal Revenue Code $1 million cap on
deductible nonperformance-based compensation; to approve amendments to the
Sundstrand Corporation Stock Incentive Plan which are designed to make awards of
options and restricted stock performance based and, therefore, excluded from the
aforementioned $1 million cap on deductible nonperformance-based compensation;
and to vote upon such other matters as may properly come before the meeting. The
Board of Directors cordially invites you to attend the meeting.
A copy of the Company's Annual Report on Form 10-K for the year 1996 and
the Company's Summary Annual Report are enclosed.
At your earliest convenience, please date, sign and return the enclosed
proxy card so your shares will be represented at the meeting.
Very truly yours,
/s/Don R. O'Hare /s/Robert H. Jenkins
- ----------------------- ----------------------
Chairman of the Board President and
Chief Executive Officer
March 5, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE DATE, SIGN AND
MAIL PROMPTLY THE ENCLOSED PROXY CARD FOR WHICH A RETURN ENVELOPE IS PROVIDED.
<PAGE> 3
SUNDSTRAND CORPORATION
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
March 5, 1997
Notice is hereby given that the Annual Meeting of Stockholders of
Sundstrand Corporation, a Delaware corporation, will be held in the Auditorium
at Northern Illinois University, Rockford Education Center, 8500 East State
Street, Rockford, Illinois, on Tuesday, April 15, 1997, at 11:00 a.m., Central
Time, for the following purposes:
1. To elect one director for a term of three years;
2. To consider and vote upon the proposed Officer Performance Compensation
Plan, as set forth in the Proxy Statement;
3. To consider and vote upon the proposed amendment to the Sundstrand
Corporation Stock Incentive Plan, as set forth in the Proxy Statement;
and
4. To transact such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on February 18,
1997, as the time for taking a record of the stockholders entitled to notice of
and to vote at the meeting. A list of such stockholders will be available from
the Manager, Investor Relations at the offices of Sundstrand Corporation, 4949
Harrison Avenue, Rockford, Illinois 61125 on and after March 24, 1997.
By order of the Board of Directors,
RICHARD M. SCHILLING,
Secretary
<PAGE> 4
- --------------------------------------------------------------------------------
CONTENTS
Proxy Statement
<TABLE>
<S> <C> <C>
Voting Securities........................................... 1
[X] Election of Director........................................ 1
Nominee for Election to Board of Directors.................. 2
Members of Board of Directors Continuing in Office.......... 2
Ownership of Sundstrand Common Stock........................ 4
Board of Directors' Compensation, Meetings and Committees... 5
Compensation Committee Interlocks and Insider
Participation.......................................... 6
Compensation Committee Report on Executive Compensation..... 7
Summary Compensation Table.................................. 10
Option Grants in Last Fiscal Year........................... 11
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 12
Retirement Plans............................................ 12
Employment Agreements....................................... 13
Transactions and Loans with Management...................... 17
Performance Graph and Table................................. 17
Section 16 Compliance....................................... 17
[X] Adoption of the Officer Performance Compensation Plan....... 18
[X] Amendment of Stock Incentive Plan........................... 19
Other Business to be Transacted............................. 23
Independent Certified Public Accountants.................... 23
Stockholders' Proposals for 1998 Annual Meeting............. 23
Exhibit A -- Sundstrand Corporation Officer Performance
Compensation Plan
</TABLE>
[X] To be voted on at the meeting
---------------------------------
EVERY STOCKHOLDER'S VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN
YOUR PROXY CARD.
<PAGE> 5
SUNDSTRAND CORPORATION
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
MARCH 5, 1997
---------------
PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 15, 1997
The enclosed proxy is being solicited by the Board of Directors of
Sundstrand Corporation (the "Company") and may be revoked prior to the voting
thereof. The cost of soliciting proxies by mail, telephone, facsimile, or in
person, as needed, will be borne by the Company. The Company has retained
Georgeson & Company Inc. to assist in soliciting proxies from stockholders,
including brokers' accounts, at a fee of $6,500 plus out-of-pocket expenses, to
be paid by the Company. Also, officers or regular employees of the Company may
engage in the solicitation of proxies by telephone, facsimile or personal calls.
VOTING SECURITIES
The record date for determining the stockholders entitled to vote at the
meeting is February 18, 1997. On this date, the Company had 60,083,206 shares of
Common Stock outstanding which are entitled to vote at the meeting. Stockholders
are entitled to one vote for each share held. The holders of a majority of the
stock issued and outstanding and entitled to vote, present in person or
represented by proxy, as determined by election inspectors appointed for the
meeting, will constitute a quorum. The election inspectors will also tabulate
the votes that are received. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum and as a nonaffirmative vote for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a broker
or other nominee indicates on the proxy that it does not have discretionary
authority as to certain shares to vote on a particular matter, such shares will
be treated as present and entitled to vote for purposes of determining the
presence of a quorum but as nonvoted for purposes of determining the approval of
any matter submitted to the stockholders for a vote.
ELECTION OF DIRECTOR
Article Ninth of the Restated Certificate of Incorporation of the Company
provides that the number of directors from time to time shall be not less than
eight nor more than twelve as fixed by the Company's by-laws. The Company's
by-laws currently provide for eleven directors, but have been amended effective
April 15, 1997, to reduce the number of directors to eight. Article Ninth of the
Restated Certificate of Incorporation also requires that the Board of Directors
be classified into three classes as nearly equal in number as possible, each
director being elected for a term of three years.
One director is to be elected at the meeting for a term of three years or
thereafter until his successor is duly elected and qualified. The Board of
Directors has nominated Charles Marshall for a three-year term. Mr. Marshall is
presently serving as a director of the Company. Unless otherwise directed, the
proxy holders intend to vote the proxies received by them for the election of
the nominee. The election of Mr. Marshall will require the affirmative vote of
the holders of a majority of the shares of Common Stock present in person or
represented by proxy at the meeting. If, on account of death or unforeseen
contingencies, Mr. Marshall is unavailable for election, the proxies will be
voted for a substitute nominee designated by the Board of Directors.
1
<PAGE> 6
The nominee and the seven continuing Board members, the year each first
became a director, his age, description of his principal occupation for the past
five years, directorships held in publicly owned companies and certain other
directorships are set forth below.
NOMINEE FOR ELECTION TO BOARD OF DIRECTORS
FOR THREE-YEAR TERM EXPIRING 2000
CHARLES MARSHALL, 67, has served as a Director of the Company since 1989. Since
June 1989, the retired Vice Chairman of American Telephone and Telegraph
Company, New York, New York, a company involved in information movement,
management systems and communications. Mr. Marshall is a director of Hartmarx
Corporation, Chicago, Illinois, a company involved in the manufacture of
clothing; Ceridian Corporation, Minneapolis, Minnesota, a diversified company in
financial and educational services; GATX Corporation, Chicago, Illinois, a
company involved in the operation of rail cars and Great Lakes vessels, bulk
liquid terminals and financing for capital equipment and real estate; and Sonat,
Inc., Birmingham, Alabama, a holding company for energy and energy services.
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING 1998
WARD SMITH, 66, has served as a Director of the Company since 1983. Mr. Smith is
a director and since May 11, 1994, the retired Chairman of NACCO Industries,
Inc., Mayfield Heights, Ohio, a coal mining company and a manufacturer of small
home appliances and fork lift trucks. From May 8, 1991, through May 10, 1994,
Mr. Smith was Chairman of NACCO Industries, Inc. Mr. Smith is a director of
Gulftech International Company, Pueblo, Colorado, a manufacturer of produce
processing machinery; and is a trustee of various mutual funds managed by
Massachusetts Financial Services Company, Boston, Massachusetts, an investment
adviser.
J. P. BOLDUC, 57, has served as a Director of the Company since 1991. Mr. Bolduc
is a director and since March 1995, Chairman and Chief Executive Officer of JPB
Enterprises, Inc., Columbia, Maryland, a holding company with interests in the
food, beverage, real estate, retail and manufacturing industries. From January
1, 1993, to March 3, 1995, Mr. Bolduc was President and Chief Executive Officer
of W. R. Grace & Co., Boca Raton, Florida; and, from August 2, 1990, to January
1, 1993, he was its President and Chief Operating Officer. Mr. Bolduc is a
director of Marshall & Ilsley Corporation, Milwaukee, Wisconsin, a multi-bank
holding company; Unisys Corporation, Blue Bell, Pennsylvania, a computer
manufacturer and information technology company; Newmont Mining Corporation,
Denver, Colorado, a gold mining and producing company; Brothers Gourmet Coffees,
Inc., Boca Raton, Florida, a specialty coffee company; and Proudfoot PLC,
Richmond, England, an international management consultancy.
GERALD GRINSTEIN, 64, has served as a Director of the Company since 1991. Since
December 31, 1995, the retired Chairman of Burlington Northern Santa Fe
Corporation, Fort Worth, Texas, a diversified company in railroads and other
businesses. From September 1995 to December 30, 1995, Mr. Grinstein was the
Chairman of Burlington Northern Santa Fe Corporation; and, from October 1990 to
September 1995, Mr. Grinstein was Chairman and Chief Executive Officer of
Burlington Northern, Inc. Mr. Grinstein is a director of Browning-Ferris
Industries, Inc., Houston, Texas, a waste disposal company; Delta Air Lines,
Inc., Atlanta, Georgia, a commercial airline; and Imperial Holly Corporation,
Sugar Land, Texas, a producer/marketer of refined sugar.
ROBERT H. JENKINS, 54, has served as a Director of the Company since 1995.
President and Chief Executive Officer of Sundstrand Corporation since October 1,
1995. From March 1990 to September 1995, Mr. Jenkins was Executive Vice
President of Illinois Tool Works Inc., Glenview, Illinois, a company involved in
the manufacture of construction products, engineered polymers, automotive and
specialty components, packaging products/systems, and finishing systems. Mr.
Jenkins is a director of AK Steel Holding Corporation, Middletown, Ohio, a steel
manufacturer.
2
<PAGE> 7
MEMBERS OF BOARD OF DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING 1999
KLAUS H. MURMANN, 65, has served as a Director of the Company since 1981. Mr.
Murmann is a director and since April 16, 1989, Chairman and Chief Executive
Officer of Sauer Inc., Ames, Iowa, a holding company for businesses engaged in
the manufacture of hydrostatic transmissions for use in off-highway mobile
equipment. Mr. Murmann is a member of the supervisory boards of Fried. Krupp AG
Hoesch-Krupp, Essen, a German industrial company; Gildemeister AG, Bielefeld, a
German manufacturer of machine tools; and Preussen Elektra AG, Hannover, a
German utility concern. Mr. Murmann is vice-chairman of the board of Gothaer
Versicherungsbank, Gottingen/Cologne, a German insurance company; and is a
member of the board of BankgesellschaftBerlin AG, Berlin, a German bank.
BERGER G. WALLIN, 66, has served as a Director of the Company since 1995. Since
May 1, 1996, the retired Executive Vice President for Special Projects of
Sundstrand Corporation. From August 7, 1990, to January 1, 1995, Mr. Wallin was
Executive Vice President and Chief Operating Officer, Industrial of Sundstrand
Corporation.
RICHARD A. ABDOO, 53, has served as a Director of the Company since 1996. Mr.
Abdoo is a director and since May 1991, the Chairman, President and Chief
Executive Officer of Wisconsin Energy Corporation, Milwaukee, Wisconsin, a
public utility holding company. Since June 1990, Mr. Abdoo also was Chief
Executive Officer of Wisconsin Electric Power Company, Wisconsin Energy
Corporation's principal subsidiary. From June 1990 to December 1995, he was
Chairman and Chief Executive Officer of Wisconsin Natural Gas Company, a former
subsidiary of Wisconsin Energy Corporation. Mr. Abdoo is a director of United
Wisconsin Services, Inc., Milwaukee, Wisconsin, a managed care company; and
Marshall & Ilsley Corporation, Milwaukee, Wisconsin, a multi-bank holding
company.
3
<PAGE> 8
OWNERSHIP OF SUNDSTRAND COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock by (i) each person or group that is
known by the Company to be the beneficial owner of more than five percent (5%)
of the Company's outstanding Common Stock, (ii) each of the directors and the
nominee, (iii) each of the executive officers named in the Summary Compensation
Table on page 10 of this proxy statement, and (iv) by the nominee, directors and
current officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK PERCENT OF COMMON
NAME BENEFICIALLY OWNED STOCK OUTSTANDING
- ------------------------------------------------------- ---------------------- -----------------
<S> <C> <C>
RCM Capital Management, L.L.C., RCM Limited L.P and RCM
General Corporation 5,166,951(1) 8.5%(1)
Chancellor LGT Asset Management, Inc., Chancellor LGT
Trust Company and LGT Asset Management, Inc. 3,881,200(2) 6.35%(2)
The Capital Group Companies, Inc. and Capital Research
and Management Company 3,130,000(3) 5.2%(3)
Charles Marshall 11,014* **
Ward Smith 9,434* **
J. P. Bolduc 3,014* **
Gerald Grinstein 5,014* **
Robert H. Jenkins 77,280* **
Klaus H. Murmann 10,259* **
Berger G. Wallin 164,547*
Richard A. Abdoo 722*
Donald E. Nordlund 17,946* **
John A. Puelicher 8,298* **
Don R. O'Hare 200,738*(4) **
Patrick L. Thomas 47,358*(4) **
Ronald F. McKenna 49,486*(4) **
Paul Donovan 56,600* **
The Nominee, Directors and Current Officers as a Group
(16 persons, including those named above) 824,306*(4) 1.4%
</TABLE>
* Shares owned as of February 3, 1997.
** Less than one percent (1%).
(1) Based on Schedule 13G dated January 30, 1997, shares held of record by RCM
Capital Management, L.L.C., RCM Limited L.P. and RCM General Corporation,
Four Embarcadero Center, Suite 2900, San Francisco, California 94111. RCM
Capital Management, L.L.C. is an investment adviser registered under the
Investment Advisers Act of 1940. RCM Limited L.P. is the managing agent of
RCM Capital Management, L.L.C. and RCM General Corporation is the general
partner of RCM Limited L.P.
(2) Based on Schedule 13G dated February 7, 1997, shares held of record by
Chancellor LGT Asset Management, Inc. and Chancellor LGT Trust Company, both
located at 1166 Avenue of the Americas, New York, New York 10036, and LGT
Asset Management, Inc., 50 California Street, San Francisco, California
94111. Chancellor LGT Asset Management, Inc. is an investment advisor
registered under the Investment Advisors Act of 1940. Chancellor LGT Trust
Company is a New York State chartered trust company and a wholly owned
subsidiary of Chancellor LGT Asset Management, Inc. LGT Asset Management,
Inc. is the holding company for chancellor LGT Asset Management, Inc. and is
an indirect wholly owned subsidiary of Liechtenstein Global Trust, AG.
(3) Based on Schedule 13G dated February 12, 1997, shares held of record by The
Capital Group Companies, Inc., 333 South Hope Street, Los Angeles,
California 90071, as a parent holding company, and by Capital Research and
Management Company, an investment adviser registered under the Investment
Advisers Act of 1940 and a wholly owned subsidiary of The Capital Group
Companies, Inc.
4
<PAGE> 9
(4) The number of shares of Common Stock beneficially owned includes stock
options awarded under the Company's Stock Incentive Plan or under the
Company's Nonemployee Director Stock Option Plan that such persons have a
right to exercise within 60 days as follows: Mr. O'Hare -- 23,000; Mr.
Thomas -- 7,000; Mr. McKenna -- 9,000; and the nominee, directors and
current officers as a group -- 118,186.
BOARD OF DIRECTORS' COMPENSATION, MEETINGS AND COMMITTEES
During 1996, nonofficer directors were compensated by an annual retainer
fee equal to $26,000 paid pursuant to the Sundstrand Corporation Nonemployee
Director Compensation Plan (the "Compensation Plan") in Company Common Stock
based on the market price as of the April 16, 1996, Annual Meeting of
Stockholders. The Compensation Plan provides that the annual retainer fee be
paid to each nonemployee director in the form of the Company's Common Stock
rather than in cash. Accordingly, each nonofficer director received 722 shares
of Common Stock (Mr. Wallin received 681 shares of Common Stock since prior to
May 1, 1996, he was an officer of the Company). In addition, pursuant to the
Sundstrand Corporation Nonemployee Director Stock Option Plan (the "Stock Option
Plan"), each nonemployee director received 2,000 nonqualified stock options. The
Stock Option Plan provides for the award of 2,000 nonqualified stock options for
shares of the Company's Common Stock to each nonemployee director immediately
following each annual meeting. Nonofficer directors also received $1,200 for
each Board meeting attended and $1,000 for each meeting of a committee of the
Board attended and are reimbursed for expenses and costs in connection with
attendance at meetings. Under the policy of the Board of Directors, no fees are
paid to directors who are also officers of the Company. During 1996, the Company
provided the use of Company planes to Mr. Murmann which amounted to $10,631.
Under the Director Emeritus Retirement Plan, each director is eligible to
receive, upon ceasing to be a director, an annual retirement benefit equal to
the annualized rate of compensation being paid to directors (excluding Board and
committee meeting attendance fees) at the time such person ceases to be a
director. Payments are made quarterly until the earlier of the retired
director's death or the expiration of a period of time equal to the period of
such person's service as a director of the Company. In the event of the death of
a director prior to commencement of the retirement benefit or prior to the
receipt of payments for a period equal to the period of such person's service as
a director, the plan provides that payments will be made to the director's
surviving spouse or beneficiary, as designated by the director, or to such
person's estate in the absence of such designation, for such period or the
remainder of such period. The plan provides for the lump sum payment of the
entire retirement benefit in the event of a change of control (as defined in the
plan) of the Company.
There were seven meetings of the Board of Directors, including two
telephonic meetings, during 1996 and on one occasion action was taken through
consent resolutions signed by all directors, which reflected decisions reached
following discussion among the directors. Mr. Puelicher participated in fewer
than seventy-five percent (75%) of the aggregate of the Board of Directors
meetings and meetings of the Board Committees on which he served. Present
Board-appointed committees are the Audit, Compensation, Finance and Nominating
Committees.
The Audit Committee reviews the Company's audited financial statements, the
independent certified public accountant's annual report of audit and the
accompanying management letter. The Committee also reviews any significant
problems in completing the audit. In addition, the Audit Committee reviews the
adequacy of the Company's internal accounting controls, the internal audit
activities performed during the prior and current years and the internal audit
plan for the current year. The Committee also recommends to the Board of
Directors the engagement of independent certified public accountants and
approves the scope and estimated cost of the audit services to be performed by
such accountants. The Committee also receives various reports and reviews proxy
materials relating to director and executive officer compensation. The Audit
Committee met three times during 1996. The present members of the Audit
Committee are Ward Smith (Chairman), Charles Marshall, J. P. Bolduc, Gerald
Grinstein and Richard A. Abdoo.
The Compensation Committee reviews and fixes the salary and other forms of
compensation for the Company's elected officers and reviews their perquisites
and makes recommendations as to appropriateness. In
5
<PAGE> 10
addition, the Compensation Committee administers the Company's Restricted Stock
and Stock Incentive Plans in which the elected officers participate and
administers the Compensation Plan and Stock Option Plan in which nonemployee
directors participate. The Compensation Committee also decides upon the grant of
restricted shares of the Company's Common Stock and stock options to the elected
officers. The Compensation Committee met six times during 1996. The present
members of the Compensation Committee are Donald E. Nordlund (Chairman), Klaus
H. Murmann, John A. Puelicher, Ward Smith and Gerald Grinstein.
The Finance Committee reviews the Company's financial condition and
requirements for funds, reviews proposed financing activities of the Company,
and reviews and recommends to the Board of Directors proposals to change the
capital structure of the Company. The Finance Committee also reviews the
Company's risk management program and its adequacy, approves the Company's
investment and hedging policies and has certain responsibilities with respect to
those benefit plans of the Company which are subject to Title I of the Employee
Retirement Income Security Act of 1974 and the nonqualified supplemental
retirement plan of the Company. The Finance Committee met three times during
1996. The present members of the Finance Committee are Don R. O'Hare (Chairman),
John A. Puelicher, Donald E. Nordlund, Robert H. Jenkins, Berger G. Wallin and
Richard A. Abdoo.
The Nominating Committee reviews the size and composition of the Board and
recommends appropriate changes to the Board of Directors. It also recommends to
the Board of Directors candidates to fill vacancies which occur on the Board.
Generally, nonemployee directors are selected on the basis of recognized
achievements in business, education or other professional fields. The Nominating
Committee also recommends for approval of the Board of Directors the directors
to serve on the various committees of the Board. The Nominating Committee met
once during 1996. The present members of the Nominating Committee are Charles
Marshall (Chairman), Klaus H. Murmann, J. P. Bolduc, and Berger G. Wallin.
The Company's by-laws provide that any stockholder entitled to vote in the
election of directors generally may nominate one or more persons for election as
a director at a meeting only if such stockholder has given written notice of
such stockholder's intent to make such nomination or nominations, either by
personal delivery or by United States mail, postage prepaid, to the Secretary of
the Company not later than ninety days prior to the anniversary date of the
immediately preceding annual meeting (with respect to an election to be held at
an annual meeting of stockholders) or, with respect to an election to be held at
a special meeting of stockholders for the election of directors, the close of
business on the tenth day following the date on which notice of such meeting is
first given to stockholders. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission as then in effect; and (e) the consent of
each nominee to serve as a director of the Company if so elected. The presiding
officer of the annual or special meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The present members of the Compensation Committee are Donald E. Nordlund
(Chairman), Klaus H. Murmann, John A. Puelicher, Ward Smith and Gerald
Grinstein. During the last fiscal year and presently, Mr. Murmann, Chairman and
Chief Executive Officer and a director of Sauer Inc., Ames, Iowa, served on the
Company's Compensation Committee. During this period Mr. O'Hare and Richard M.
Schilling, Vice President and General Counsel and Secretary of the Company,
served as directors of Sauer Inc.
6
<PAGE> 11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
consists of five nonemployee directors. The Committee, with respect to the
executive officers, has overall responsibility to review and fix their salary
and other forms of compensation, including perquisites, and determines the
amount, if any, of restricted stock and options which will be granted under the
Company's stock programs. The Committee has furnished the following report on
executive compensation.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Committee's compensation program is designed to:
- maintain an appropriate balance between base salary and short-term and
long-term incentive opportunity, with more compensation at risk at higher
executive levels;
- provide executives with a total compensation opportunity that is
competitive, based on a comparison with compensation levels at a selected
peer group of companies, and which takes into account the individual
executive's experience, responsibility and performance;
- tie a portion of an executive's compensation to business results;
- foster the creation of shareholder value by aligning, through stock
ownership by executives, the financial interests of the executives with
those of the Company's stockholders; and
- attract, retain and motivate high-caliber executives on a long-term
basis.
The peer group of companies consist of 22 corporations, of which 3 are in
the Standard & Poor's Diversified Manufacturing Index and 2 are in the Standard
& Poor's Aerospace/Defense Index, which indices are incorporated into the
performance graph and table on page 17 of this proxy statement.
The Company's executive compensation program is composed of the following:
(1) an annual base salary; (2) an annual cash bonus; (3) the annual grant of
restricted stock and stock options; (4) a benefit package consisting of
retirement benefits and life, medical and disability insurance; and (5)
perquisites which include among other things physical exams, financial
counseling, tax preparation and the use of Company planes.
The Committee's objective is that the compensation of the Company's
executive officers, when compared with the compensation paid by the peer group
of companies, is for their base salary to be at the 60th percentile, total cash
compensation (salary plus bonus) to be at the 75th percentile, their long-term
incentive compensation (restricted stock and stock option grants) to be at the
50th percentile, and their net total compensation to be at the 60th percentile.
As in prior years, the Committee engaged an independent compensation
consultant to make a comparison between the Committee's objectives and the
compensation paid to the Company's executives and recommend any adjustments
which they determined to be appropriate in meeting the objectives. Based on the
consultant's report, the Committee, in November 1996, determined that the
composition of the Company's executive compensation program was adequate, but
that there were several individual deficiencies which needed to be addressed.
Additionally, the Committee recognized, with consultation from management, that
if the recommended adjustments were made the limitations under Section 162(m) of
the Internal Revenue Code on the deductibility of certain nonperformance-based
compensation, could become applicable. Accordingly, changes in the Company's
bonus and stock-based programs need to be made (see the Board's proposals set
forth on pages 18-22 of this proxy statement) to minimize the potential for lost
tax deductibility of compensation.
ANNUAL COMPONENT
BASE SALARY
The Committee annually reviews the salary of each of the Company's
executive officers. Based upon the consultant's report and recommendation, a
review with the Company's Chief Executive Officer ("CEO") as to each of the
officers' performance, the CEO's recommendation of salary changes, and the
responsibilities,
7
<PAGE> 12
expertise and experience of the relevant officer, the Committee at its November
1996 meeting increased the salaries of three executive officers while those of
three executive officers were not changed since they were at or above the 60th
percentile of the peer group of companies.
INCENTIVE COMPENSATION PLAN
The Company's Officer Incentive Compensation Plan (the "Bonus Plan")
provides executive officers with the opportunity to receive an annual cash bonus
based upon the achievement of Company financial performance goals set by the
Committee. The Committee determines the performance elements, their relative
weight, and the bonus value assigned for various levels of element achievement.
If the threshold level for any element is not achieved, no bonus can be earned
with respect to that element, and if in any year the Company fails to achieve at
least a twelve percent (12%) return on average total equity, no bonuses will be
awarded under the plan for that year. In addition to setting a threshold
achievement level for each element, the Committee also determines target and
maximum achievement levels. At target, one hundred percent (100%) of the target
bonus amount will be paid and if the maximum achievement level is reached, a
bonus equal to one hundred and sixty percent (160%) of the target amount will be
paid. The target bonus amount for each officer is a percentage of such officer's
base salary and varies based on his position. For 1996, Mr. Jenkins and Mr.
O'Hare had the highest target potential at fifty percent (50%) of base salary
with a maximum of eighty percent (80%) of base salary.
In late 1995, the Committee selected earnings per share, cash flow from
operations after capital expenditures and return on average equity as the
performance elements upon which the 1996 bonus compensation for each of the
officers would be based. Each of these elements was equally weighted and the
threshold, target and maximum achievement levels were set. During 1996, an
adjustment was made to the earnings per share and cash flow from operations
after capital expenditures achievement levels to take into account erroneous
assumptions which were made when the achievement levels were first set.
After the performance of the Company for 1996 was determined (and after
adjustment for unusual and nonrecurring accounting issues), a comparison was
made with the preestablished achievement levels and points were awarded as
applicable. Bonuses were then calculated based upon the points awarded (the
"Calculated Bonuses"). Although the Committee has authority under the plan to
adjust the Calculated Bonuses, it did not make any adjustments, awarding the
calculated amounts.
During the Committee's compensation review, it was determined that the
potential bonus achievement level of several of the executive officers was too
low if the objective of total cash compensation at the 75th percentile of that
of the peer group of companies was to be achieved in the future. Accordingly,
for 1997 the Committee adjusted the potential bonus amount which could be
awarded to these executive officers.
As previously mentioned, because the increased potential total compensation
of certain of the officers could exceed the limitations under Section 162(m) of
the Internal Revenue Code on the deductibility of certain nonperformance-based
compensation, the Committee has adopted, subject to stockholder approval, a new
Officer Performance Compensation Plan. It is the Committee's intention to
administer the new plan in the same manner as it administered the predecessor
plan with achievement elements being selected annually and with threshold,
target and maximum achievement levels being set for each element. The intent is
for the new plan to comply with the provisions of Section 162(m) and, therefore,
ensure the tax deductibility of compensation paid under the plan.
LONG-TERM COMPONENT
STOCK OPTIONS AND RESTRICTED STOCK
The Company maintains stock plans under which the Committee may grant stock
options and restricted stock to executive officers of the Company. The number of
options and restricted shares granted to an officer will vary based upon the
position the officer holds and the evaluation of his performance. In prior
years, the Committee has awarded options and restricted stock in alternate
years. Based upon the recommendation of the consultant, in 1996, the Committee
made awards of both stock options and restricted stock to the executive
officers.
8
<PAGE> 13
Stock options granted to an executive officer under the Company's Stock
Incentive Plan presently are granted at an exercise price equal to the fair
market value of a share of the Company's Common Stock on the date of grant,
become exercisable in increments of twenty-five percent (25%) on each of the
second through fifth anniversary dates of the grant, and generally remain
exercisable until the tenth anniversary date of the grant. Grants of restricted
stock are without cost to the executive officer and vest in increments of twenty
percent (20%) per year in each of the fifth through ninth anniversary dates of
the grant.
In November 1996, the Committee awarded both stock options and restricted
stock to the Company's executive officers. The size of the restricted stock
awards generally was consistent with the recommendation of the consultant, while
the size of the stock option awards generally was greater than that which was
recommended. The Committee was of the opinion, however, that the overall grant
was consistent with its objectives for long-term incentive compensation and took
into account the Company's high performance level for the year.
As indicated above, the Board has adopted, subject to stockholder approval,
certain amendments to the Company's Stock Incentive Plan to cause future grants
of stock options and restricted stock to be performance-based and, therefore,
not subject to the Section 162(m) limitation on deductible nonperformance-based
compensation. The Committee does not intend, nor does it anticipate, that the
plan changes will affect the manner in which grants are made nor the size of
grants which are made under the plan in the future.
BENEFIT AND PERQUISITE COMPONENT
The Committee annually reviews with the Chief Executive Officer the
perquisites and other benefits available to the executive officers and makes
recommendations as to the appropriateness of this compensation. This
compensation is also reviewed and reported on by the consultant. The Committee
has determined that the level of benefits and perquisites is consistent with the
Committee's objectives.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Jenkins was elected President and Chief Executive Officer of the
Company on October 1, 1995, and at that time, the Committee set his annual base
salary at $650,000. During the compensation review in November 1996, the
Committee decided not to change Mr. Jenkins' salary since it was determined to
be close to the Committee's objective of the 60th percentile for the peer group
of companies.
The cash bonus earned by Mr. Jenkins during 1996 was $452,075. This amount
was determined based upon the Company's financial performance as compared to the
pre-selected targets for 1996 as discussed under the heading "Incentive
Compensation Plan." Since the Company's performance in 1996 when compared to the
selected elements was favorable, Mr. Jenkins' bonus exceeded the targeted
amount. During the compensation review, the Committee determined that the cash
bonus opportunity for Mr. Jenkins was low and increased his opportunity level
for 1997 from a target level of 50% of base salary to 100% of base salary and to
one hundred and sixty percent (160%) of base salary at maximum. This increase
was determined by the Committee to be appropriate based upon Mr. Jenkins
favorable performance during the year.
The Committee, as part of its compensation review in November 1996, granted
to Mr. Jenkins 12,000 shares of restricted stock and 40,000 options which
options have a purchase price of $38.94 representing the fair market value at
the date of grant. In making these grants, the Committee considered the
compensation information provided by the consultant, the Company's favorable
performance in 1996, and Mr. Jenkins' leadership during the year. In addition,
the Committee determined that these grants were consistent with the Committee's
objective and the long-term incentives granted to chief executive officers of
the selected peer group of companies.
COMPENSATION COMMITTEE
Donald E. Nordlund, Chairman
Klaus H. Murmann
Ward Smith
John A. Puelicher
Gerald Grinstein
9
<PAGE> 14
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of the Company's President
and Chief Executive Officer and the Company's other four most highly compensated
executive officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
---------------------------------- --------------------
OTHER RESTRICTED
ANNUAL STOCK ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)(2)(3) (#) ($)
------------------ ---- -------- -------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert H. Jenkins 1996 $650,000 $452,075 $ -- $ 467,250 40,000 $ 83,062(4)(5)
President and Chief 1995 150,000 658,794(1) -- 2,078,876 90,000 8,861(5)
Executive Officer
Don R. O'Hare 1996 $650,000 $452,075 $ $ -- 30,000 $ 15,176(4)(6)
Chairman of the Board 1995 650,000 435,175 -- -- 90,000 9,750(6)
1994 162,500 100,000 -- -- 92,000 136,262(7)
Patrick L. Thomas 1996 $350,000 $194,740 $ -- $ 233,625 25,000 $ 8,194(4)
Executive Vice 1995 300,000 160,680 -- 383,813 -- 51,033(8)
President and Chief
Operating Officer,
Industrial
Ronald F. McKenna 1996 $263,087 $166,920 $ -- $ 233,625 25,000 $ 6,541(4)
Executive Vice
President and Chief
Operating Officer,
Aerospace
Paul Donovan 1996 $330,000 $183,612 $ -- $ 155,750 20,000 $ 8,003(4)
Executive Vice 1995 330,000 176,748 -- 191,906 -- 5,158(9)
President and Chief 1994 300,000 115,440 -- -- 20,000 4,140(6)
Financial Officer
</TABLE>
(1) The amount set forth represents a $550,000 signing bonus and a $108,794
bonus earned under the Company's Officer Incentive Compensation Plan.
(2) The amounts set forth represent the fair market value of the shares of
restricted stock awarded to the named executive officer for the year
indicated less the purchase price paid by the executive officer. Dividends
on restricted stock are paid at the same time and in the same amounts as
dividends paid on Common Stock, but such amounts are not included in this
column.
(3) On December 31, 1996, Mr. Jenkins held 76,000 shares of restricted stock
which had an aggregate market value of $3,218,750; Mr. Thomas held 31,600
shares of restricted stock which had an aggregate market value of
$1,338,575; Mr. McKenna held 28,000 shares of restricted stock which had an
aggregate market value of $1,186,250; and Mr. Donovan held 61,400 shares of
restricted stock which had an aggregate market value of $2,598,988.
(4) The amount reflects the portion allocable to 1996 of the projected cash
surrender value available to the executive officer at the maturity of his
split-dollar life insurance policy under the Executive Life Insurance
Program and the amount contributed by the Company on behalf of the executive
officer under the Company's Employee Savings Plan and the Supplemental
Savings Plan as further described in this proxy statement on page 13. The
portion allocated to 1996 of the projected cash surrender value available
10
<PAGE> 15
at maturity and the contribution amount under the Company's Employee Savings
Plans for each of the executive officers was as follows:
<TABLE>
<CAPTION>
1996 ALLOCATION SAVINGS
OF PROJECTED CASH PLANS
EXECUTIVE OFFICER SURRENDER VALUE CONTRIBUTION
----------------- ----------------- ------------
<S> <C> <C>
Robert H. Jenkins $10,131 $3,794
Don R. O'Hare 0 5,426
Patrick L. Thomas 5,641 2,553
Ronald F. McKenna 5,226 1,315
Paul Donovan 5,469 2,534
</TABLE>
(5) The amounts set forth include costs incurred by the Company in connection
with Mr. Jenkins' relocation which were $69,137 in 1996 and $8,861 in 1995.
(6) The amounts set forth represent the dollar value of term life insurance
premiums paid by the Company for the group term life insurance component of
the Executive Life Insurance Program, and an imputed value based upon the
equivalent of term life insurance premiums for the survivor income benefit
component of the Executive Life Insurance Program which were $9,750 in 1996
and 1995 for Mr. O'Hare and $4,140 in 1994 for Mr. Donovan.
(7) The amount set forth includes $91,352 earned pursuant to a consulting
agreement which terminated effective September 25, 1994, $6,000 in Board
meeting fees, $2,000 in committee meeting fees, $15,167 for the portion of
the annual Board of Directors retainer fee payable between January 1 and
August 1, 1994, and 409 shares of Common Stock valued at $19,453 and $47 in
cash for the portion of such annual retainer fee payable between August 1,
1994, and the 1995 Annual Meeting of Stockholders pursuant to the
Compensation Plan. The remaining $2,243 of the amount set forth represents
the dollar value of term life insurance premiums paid by the Company as
further described in footnote (6) above.
(8) The amount set forth represents costs incurred by the Company in 1995 in
connection with Mr. Thomas' relocation equaling $46,382 and $4,651
representing the portion allocable to 1995 of the projected cash surrender
value available to Mr. Thomas at the maturity of his split-dollar insurance
policy under the Executive Life Insurance Program.
(9) The amount represents the portion allocable to 1995 of the projected cash
surrender value available to Mr. Donovan at the maturity of his split-dollar
life insurance policy under the Executive Life Insurance Program.
OPTION GRANTS IN LAST FISCAL YEAR
During 1996, the only grants of nonqualified stock options under the Stock
Incentive Plan to named executive officers are as set forth below. The
hypothetical present values on date of grant shown for stock options granted in
1996 are presented pursuant to the rules of the Securities and Exchange
Commission and calculated under the Black-Scholes model for pricing options. The
actual value before tax will be the excess of
11
<PAGE> 16
the market price of Sundstrand Common Stock over the exercise price at the time
of execution. There is no assurance that the present value will be realized.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL OPTIONS EXERCISE OF
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(1) IN FISCAL YEAR ($/SHARE) DATE PRESENT VALUE(2)
- ----------------------------- ---------- -------------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Robert H. Jenkins 40,000 5.86% $38.9375 11/19/06 $430,092
Don R. O'Hare 30,000 4.40% $38.9375 11/19/06 $322,569
Patrick L. Thomas 25,000 3.66% $38.9375 11/19/06 $268,808
Ronald F. McKenna 25,000 3.66% $38.9375 11/19/06 $268,808
Paul Donovan 20,000 2.93% $38.9375 11/19/06 $215,046
</TABLE>
(1) Options become exercisable at a rate of twenty-five percent (25%) of each
grant on the second through fifth anniversary dates of the date of grant,
provided that in the event of a Change in Control as defined on page 16 of
this proxy statement, such options shall become immediately exercisable.
(2) These values are based upon the Black-Scholes option pricing model, which is
a mathematical formula used to value options traded on stock exchanges.
Factors used to value the options granted to each named executive officer on
November 19, 1996, included a capital expected volatility rate of 20.0
percent, a risk-free rate of return based upon a ten year zero-coupon
Treasury bond at 6.03 percent, a dividend yield of 1.6 percent, a projected
time of exercise of seven years and a forfeiture rate of 3 percent.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information on the exercise of stock options
in 1996 by named executive officers as well as the number of options which were
exercisable and the number of options which were not exercisable in 1996 and the
value of such options based upon the difference between the exercise price and
the market price of the underlying shares as of December 31, 1996. The actual
value before tax will be the excess of the market price of Sundstrand Common
Stock over the exercise price at the time of execution. There is no assurance
that the values shown in the table will be realized.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT FY-END OPTIONS AT FY-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------ ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert H. Jenkins -- -- 0/ 130,000 $ 0/ $1,074,529
Don R. O'Hare -- -- 23,000/ 189,000 $463,610/ $2,357,386
Patrick L. Thomas -- -- 7,000/ 34,750 $155,094/ $ 294,344
Ronald F. McKenna -- -- 9,000/ 32,000 $204,656/ $ 239,594
Paul Donovan 10,624 $199,006 10,312/ 40,314 $224,442/ $ 498,864
</TABLE>
RETIREMENT PLANS
Generally, the retirement benefit to which an executive officer will be
entitled upon retirement is provided under the tax-qualified Sundstrand
Corporation Retirement Plan-Aerospace (the "Retirement Plan") and the
non-tax-qualified supplemental retirement plan (the "Supplemental Retirement
Plan"). The eligibility for both plans is the same. The Supplemental Retirement
Plan provides a lump sum option for the total accrued benefit, while the
Retirement Plan provides a lump sum option for the portion of the benefit
accrued through December 31, 1991.
12
<PAGE> 17
The following table sets forth estimated annual retirement benefits for
representative years of service and three-year average annual earnings amounts.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFIT
FOR REPRESENTATIVE YEARS OF SERVICE
HIGHEST CONSECUTIVE ------------------------------------------------------
THREE-YEAR 30 OR
AVERAGE ANNUAL EARNINGS 10 YEARS 15 YEARS 20 YEARS 25 YEARS MORE YEARS
- ----------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$ 300,000 $ 66,670 $100,005 $133,340 $166,675 $200,010
450,000 100,005 150,008 200,010 250,013 300,015
600,000 133,340 200,010 266,680 333,350 400,020
950,000 211,122 316,683 422,243 527,804 633,365
1,150,000 255,568 383,353 511,137 638,921 766,705
1,300,000 288,903 433,355 577,807 722,258 866,710
</TABLE>
Generally, the combined amounts shown in the Salary and Bonus columns of
the Summary Compensation Table on page 10 of this proxy statement are expected
to approximate the three-year average annual earnings of an executive officer
which would be used to determine his total retirement benefit under the
Retirement Plan and the Supplemental Retirement Plan.
Messrs. Jenkins, Thomas, McKenna and Donovan upon attainment of age 65, the
normal retirement age under the plans, will have 12.5, 40.7, 35.9 and 24.0
actual years of service with the Company, respectively. Mr. O'Hare is accruing
no additional benefit under the Retirement Plan or the Supplemental Retirement
Plan.
Although the Retirement Plan benefit formula includes a reduction for fifty
percent (50%) of a participant's monthly primary Social Security benefit earned
at retirement, the amounts shown in the table do not reflect this reduction. The
benefit amounts shown in the table are calculated based upon the straight life
annuity form of payment.
In addition to the foregoing, the Company matches, at the rate of $0.50 for
each $1.00 of contribution, contributions made by an executive officer to the
Company's Employee Savings Plan with a current maximum match of one percent (1%)
of the executive officer's eligible compensation. Under the Company's
nonqualified Supplemental Savings Plan, benefits are provided which are not
available under the Employee Savings Plan because of Internal Revenue Code
limitations on the amount of annual compensation that may be considered for
determining contributions to the Employee Savings Plan.
At the time of his employment, Mr. Jenkins entered into an unfunded
retirement agreement with the Company which provides that he will receive a
nonqualified benefit which, when combined with his benefits under the Retirement
Plan and the Supplemental Retirement Plan, will equal the benefit that would be
payable from these plans if it is assumed at such time that he had twice his
actual years of service with the Company. The agreement also provides that Mr.
Jenkins shall be entitled to receive a nonqualified benefit without regard to
any service requirement for eligibility. The estimated annual pension benefit
payable under the agreement to Mr. Jenkins at his normal retirement age, which
benefit is in addition to the benefit payable under the Retirement Plan and
Supplemental Retirement Plan, is $315,503.
Messrs. Jenkins and O'Hare, as directors of the Company, also are accruing
a benefit under the Director Emeritus Retirement Plan, which plan is described
on page 5 of this proxy statement.
EMPLOYMENT AGREEMENTS
On September 19, 1995, the Company entered into an employment agreement
with Mr. Jenkins (the "Jenkins Agreement") that is designed to assure the
Company of the benefit of his services in an executive capacity. The "Employment
Period" under the Jenkins Agreement commenced on October 1, 1995, and, except as
otherwise provided, was to expire on September 30, 1998. Unless written notice
is given to the contrary, on each September 30 the Employment Period is
automatically extended for an additional year.
13
<PAGE> 18
The Jenkins Agreement provides that throughout the Employment Period, the
Company shall neither demote Mr. Jenkins nor assign to him any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities and status as President and Chief Executive Officer. Under the
agreement, Mr. Jenkins shall receive during the Employment Period a salary of
not less than $650,000 per year, paid vacations and holidays, fringe benefits
and perquisites, shall be eligible to participate in the Company's employee
benefit plans, practices and programs, and shall be eligible to participate in
such executive benefit or incentive plans as are in effect, including the
Company's Bonus Plan, Stock Incentive Plan, 1989 Restricted Stock Plan, the
Supplemental Retirement Plan and the Supplemental Savings Plan.
Under the agreement, Mr. Jenkins covenants not to compete with the Company
or to disclose confidential information concerning the Company during the
Employment Period. The Jenkins Agreement contains certain conditions of
employment such as the Company not assigning duties to Mr. Jenkins which would
require him to move the location of his principal business office or principal
place of residence outside of the Rockford, Illinois, area. In the event the
Company fails to perform any covenant or agreement set forth in the agreement,
Mr. Jenkins will be entitled to receive for the remainder of the Employment
Period the salary and benefits he would have otherwise received if his
employment had continued for such period. These benefits would not be payable,
however, in the event his employment is terminated by reason of (a) conviction
of a felony, (b) death, or (c) during the Employment Period breach of either his
covenant not to compete or his covenant not to disclose confidential information
and failure to cure such breach (the "Enumerated Reasons"). The Jenkins
Agreement also provides for the reimbursement of legal expenses incurred in
connection with certain claims or legal proceedings brought under or involving
the agreement.
The Jenkins Agreement also requires the Company to make an additional
"gross-up payment" to Mr. Jenkins to offset fully the effect of any excise tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), on any payment made to him in connection with his employment with the
Company (the "Gross-up Payment"). The amount of the Gross-up Payment to be paid,
if any, may be substantial and will depend upon numerous factors, including the
price per share of the Common Stock of the Company and the extent, if any, that
payments or benefits made to Mr. Jenkins constitute "excess parachute payments"
within the meaning of Section 280G of the Code.
The Jenkins Agreement provides that upon a Change in Control (as described
on page 16 of this proxy statement) during the Employment Period the following
will occur: (a) all restrictions on any stock purchased by or otherwise granted
to Mr. Jenkins pursuant to the Company's 1989 Restricted Stock Plan, the
Company's Stock Incentive Plan and any other restricted stock plan sponsored by
the Company shall lapse and all such stock shall immediately vest and be
delivered to Mr. Jenkins, and all outstanding stock options held by him shall
become fully vested and immediately exercisable; and (b) commencing at the time
of Mr. Jenkins' termination of employment or if later his attainment of age 65,
he shall be provided with the same health care coverage as provided to other
eligible retirees at that time and with a life insurance benefit of one time his
annual base salary at the higher of the annual rate in effect at the time of his
termination of employment or immediately prior to the Change in Control; and (c)
Mr. Jenkins will become fully vested in a retirement benefit determined pursuant
to the provisions of the Retirement Plan, with such benefit calculated as though
he had 20 years of participation under the Retirement Plan. The agreement also
provides that upon his termination of employment following a Change in Control
in addition to all other amounts payable under the agreement, he will within
five days of such termination be paid in a single lump sum all amounts accrued
but unpaid under the agreement, including salary, vacation pay, bonuses and
other incentive compensation plus, if his employment is terminated for any
reason other than the Enumerated Reasons, a bonus equal to the largest bonus
received during the three years preceding the termination of employment
multiplied by a fraction, which will not be less than 1, the numerator of which
is the number of months remaining in his Employment Period and the denominator
of which is 12, or, if his employment is terminated for one of the Enumerated
Reasons, a bonus equal to the incentive award that would have been paid if it
were assumed his employment had continued to the end of the year and it were
assumed all performance targets and goals were met multiplied by a fraction
which shall not be less than 0, the numerator of which is the number of months
remaining in the year through the date of termination and the denominator of
which is 12.
14
<PAGE> 19
Assuming a Change in Control occurred on March 1, 1997, and his employment
were terminated by the Company on that date for a reason other than an
Enumerated Reason, Mr. Jenkins would have been eligible to receive a bonus of
$1,679,167. In addition, he would have been entitled to receive 76,000 shares of
restricted stock and the 130,000 unexercisable stock options held by him would
have become fully exercisable. Mr. Jenkins also would have been entitled to have
his base salary continued for the Employment Period which would result in
payments during that time totaling $1,679,167 and he would have been entitled to
continue to receive incentive compensation and other personal benefits. He also
immediately would become fully vested in a benefit which, as stated above, would
be calculated as though he had accrued 20 years of participation in the
Retirement Plan, which benefit would be payable under the Retirement and
Supplemental Retirement Plans and under his retirement agreement, as discussed
on pages 12-13.
On September 19, 1995, the Company entered into an employment agreement
with Mr. O'Hare (the "O'Hare Agreement") that is designed to assure the Company
of the continued benefit of his services as Chairman of the Board. The
"Employment Period" under the O'Hare Agreement commenced on October 1, 1995, and
will expire at the close of business on the date of the 1997 Annual Meeting of
Stockholders. Under the agreement, Mr. O'Hare will receive an annual salary of
$650,000, paid vacations and holidays, certain fringe benefits and perquisites
and will be eligible to participate in certain employee benefit plans, policies,
practices and arrangements including the Company's Bonus Plan, Stock Incentive
Plan (with respect to stock options), disability plan, group life insurance and
Supplemental Savings Plan.
Under the agreement, Mr. O'Hare covenants not to compete with the Company
or to disclose confidential information concerning the Company during the
Employment Period and for two years thereafter. The O'Hare Agreement contains
certain conditions of employment such as the Company not assigning duties to Mr.
O'Hare which would require him to move the location of his principal business
office or principal place of residence outside of the Rockford, Illinois, area.
In the event the Company fails to perform any covenant or agreement set forth in
the agreement, including the Company's termination of Mr. O'Hare's employment
for a reason other than an Enumerated Reason (the same reasons as described
under the Jenkins Agreement on page 14 of this proxy statement), Mr. O'Hare
would be entitled to receive for the remainder of the Employment Period the
salary, incentive compensation and other benefits he would have otherwise
received if his employment continued for such period. The O'Hare Agreement also
provides for the reimbursement of legal expenses incurred in connection with
certain claims or legal proceedings brought under or involving the agreement. In
the event a Change in Control occurs, the 189,000 unexercisable stock options
held by Mr. O'Hare, pursuant to the terms of the Company's Stock Incentive Plan,
would become fully exercisable.
The O'Hare Agreement further provides that upon termination of the
Employment Period, Mr. O'Hare shall become a consultant to the Company for a
three-year period at an annual fee of $360,000.
On July 20, 1989, the Company entered into an employment agreement with Mr.
Donovan, which agreement was amended on August 7, 1990. On February 21, 1995 and
June 18, 1996, the Company entered into employment agreements with Messrs.
Thomas and McKenna, respectively, which are substantially identical to Mr.
Donovan's employment agreement, as amended. The three agreements are hereinafter
collectively referred to as the "Employment Agreement." The rights and
obligations set forth in the Employment Agreement arise for a period of up to
three years following a Change in Control (the "Term") provided the Change in
Control occurs during the "Protected Period" defined in the Employment
Agreement. The Employment Agreement sets forth the terms and conditions of the
executive's employment, annual base salary and participation by the executive in
the Company's benefit plans. If the executive's employment is terminated during
the Term (a) by the Company other than for "Cause" (as defined in the Employment
Agreement), (b) by the executive for "Good Reason" (as defined in the Employment
Agreement) or (c) by the executive for any reason or without reason during the
60-day period which commences on the date six months following a Change in
Control, he will be entitled to receive (w) a "Pro-Rata Bonus" (as defined in
the Employment Agreement), (x) a lump sum cash payment equal to three times the
sum of his base salary and bonus (the base salary at least equal to his base
salary in effect prior to a Change in Control and the bonus equal to the "Bonus
Amount" as defined in the Employment Agreement), subject to certain adjustments,
(y) continuation of life insurance, disability, medical, dental and
hospitalization benefits for a period of up to 36 months and (z) a lump sum cash
payment reflecting certain retirement benefits he would have been
15
<PAGE> 20
entitled to receive had he remained employed by the Company for an additional
three years, subject to certain adjustments. In addition, all restrictions on
any outstanding incentive awards will lapse and become fully vested, and all
outstanding stock options shall become fully vested and immediately exercisable.
The Employment Agreement also provides that the Company will pay all legal fees
and related expenses incurred by the executive arising out of his employment or
termination of employment if, in general, the circumstances for which he has
retained legal counsel occurred on or after a Change in Control. Under the
Employment Agreement, the Company also is required to make an additional
"gross-up payment" to the executive to offset fully the effect of any excise tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), on any payment made to him under the Employment Agreement, the 1982 and
1989 Restricted Stock Plans, the Stock Incentive Plan, or any other incentive
compensation or bonus plan (the "Gross-up Payment"). The amount of the Gross-up
Payment to be paid, if any, may be substantial and will depend upon numerous
factors, including the price per share of the Common Stock of the Company and
the extent, if any, that payments or benefits made to the executive constitute
"excess parachute payments" within the meaning of Section 280G of the Code.
Assuming a Change in Control occurred on March 1, 1997, and their
employment were terminated on that date, the approximate amount of cash payments
that would have been made pursuant to the Employment Agreement as described
above (other than the Gross-up Payment, if applicable) would have been
$1,698,658 for Mr. Thomas, $1,455,993 for Mr. McKenna and $1,592,913 for Mr.
Donovan. The number of shares of restricted stock they would have been entitled
to receive and the number of unexercisable stock options they would have which
become fully exercisable as a result of the Change in Control would have been
31,600 shares and 34,750 stock options for Mr. Thomas, 28,000 shares and 32,000
stock options for Mr. McKenna and 56,600 shares and 40,314 stock options for Mr.
Donovan. In addition, personal benefits would continue for the term of the
Employment Agreement, and as set forth above, each of the executives would also
have for a period of up to 36 months continued life insurance, disability,
medical, dental and hospitalization benefits. The retirement benefit to which
each of the executives would be entitled would be paid pursuant to the
Retirement and Supplemental Retirement Plans as discussed on pages 12-13 of this
proxy statement.
In general, for purposes of the Jenkins Agreement, the O'Hare Agreement,
each Employment Agreement and the Stock Incentive Plan, a Change in Control is
defined as any of the following events: (a) the acquisition (other than from the
Company) by any person (as such term is defined in Sections 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
thirty-three percent (33%) or more of the combined voting power of the Company's
then-outstanding voting securities; (b) the individuals who, as of the date the
agreements were executed, are members of the Company's Board of Directors (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 the Jenkins Agreement, each
Employment Agreement and the Stock Incentive Plan, be considered as a member of
the Incumbent Board; or (c) approval by stockholders of the Company of (i) 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 (ii) 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. A Change in Control shall not be
deemed to occur by reason of an acquisition referred to in clause (a) above
because thirty-three percent (33%) or more of the combined voting power of the
Company's then-outstanding securities is acquired by (x) a trustee or other
fiduciary holding securities under one or more employee benefit plans maintained
by the Company or any of its subsidiaries or (y) 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.
16
<PAGE> 21
TRANSACTIONS AND LOANS WITH MANAGEMENT
Since the beginning of 1996 through February 3, 1997, certain executive
officers sold to the Company shares of the Company's Common Stock which they
owned as follows: Mr. Donovan -- 23,512 shares ($1,006,945); Mr. McKenna --
1,600 shares ($65,400); Richard M. Schilling -- 5,000 shares ($228,750); and
DeWayne J. Fellows, Vice President and Controller -- 11,374 shares ($463,491).
On October 17, 1984, the Board of Directors adopted the 1984 Elected
Officers' Loan Program (the "Loan Program") pursuant to which elected officers
could borrow from the Company for a period of up to eight years. All loans
outstanding under the program are collateralized. As of February 3, 1997,
executive officers with loans in excess of $60,000 under the Loan Program were
as follows: Mr. Donovan -- $957,000; Mr. Schilling -- $870,000; and Mr. Fellows
- -- $215,000. The interest rate charged on the loans is 5.89 percent. The
indicated amounts were the largest aggregate amounts outstanding during 1996
with respect to each of the named executive officers except with respect to Mr.
Fellows for whom the largest aggregate amount outstanding during 1996 was
$425,000. Effective October 1, 1992, the Company discontinued making loans under
the Loan Program with existing loans being permitted to continue to maturity.
Each of the loans will mature on September 1, 2000.
PERFORMANCE GRAPH AND TABLE
The following performance graph and table compare the five-year cumulative
total stockholder return, assuming reinvestment of dividends, on $100 invested
on December 31, 1991, in each of Sundstrand Corporation Common Stock, Standard &
Poor's 500 Stock Index, Standard & Poor's Aerospace/Defense Index and Standard &
Poor's Diversified Manufacturing Index. The Standard & Poor's Aerospace/Defense
and Diversified Manufacturing Indices were selected as properly reflecting the
Company's involvement in the aerospace market and industrial market segments,
the sales of which segments were 49.3% and 50.7%, respectively, of the Company's
total sales in 1996.
<TABLE>
<CAPTION>
Measurement Period S&P Aero- S&P Diversi-
(Fiscal Year Covered) Sundstrand S&P 500 space/Defense fied Mfg.
<S> <C> <C> <C> <C>
1991 100 100 100 100
1992 112 108 105 108
1993 121 119 137 132
1994 134 120 146 135
1995 212 165 242 190
1996 261 203 312 254
</TABLE>
SECTION 16 COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers to file initial reports of beneficial
ownership of Common Stock and report changes in beneficial ownership of Common
Stock with the Securities and Exchange Commission and the New York Stock
Exchange.
17
<PAGE> 22
Based upon a review of forms which were received with respect to 1996, and
written representations from certain reporting persons, the Company believes
that all Section 16(a) filing requirements applicable to its directors and
officers have been met, except that Mr. Jenkins filed one late report on Form 4
covering shares purchased in his account in the Company's 401(k) plan, Mr.
Schilling filed one late report on Form 4 covering shares purchased in his
account in the Company's 401(k) plan, and Mr. McKenna filed one late report on
Form 4 covering shares sold to the Company.
ADOPTION OF THE OFFICER PERFORMANCE COMPENSATION PLAN
The Board of Directors recommends that the stockholders approve the
adoption of the proposed Sundstrand Corporation Officer Performance Compensation
Plan (the "Performance Plan"). The sole purpose for instituting the Performance
Plan is to assure the current federal income tax deductibility of annual
incentive compensation earned by the executive officers of the Company. It is
intended that the Performance Plan will be administered so that benefits under
the plan will be no greater than would otherwise be paid under the Company's
Officer Incentive Compensation Plan (after taking into account the adjustments
made by the Compensation Committee of the Board of Directors in the potential
bonus amounts that can be awarded to the executive officers as described in the
Compensation Committee Report on Executive Compensation on pages 8 and 9 of this
proxy statement) which plan has been terminated. The complete text of the
Performance Plan is set forth in Exhibit A to this proxy statement, and
stockholders are urged to review the plan together with the following
information, which is qualified in its entirety by referring to Exhibit A.
GENERAL
Section 162(m) of the Internal Revenue Code provides that, effective for
tax years beginning on or after January 1, 1994, a publicly owned corporation,
subject to certain exceptions, may not deduct compensation in excess of $1
million per year paid to such corporation's chief executive officer and its four
other most highly paid executive officers. One of the exceptions is for
performance-based compensation paid under a stockholder-approved plan that
satisfies certain conditions of Section 162(m). The Performance Plan will
provide incentive compensation awards to the Company's elected officers on the
basis of selected performance measures to qualify the awards as
performance-based and, therefore, tax deductible under Section 162(m).
DESCRIPTION OF THE OFFICER PERFORMANCE COMPENSATION PLAN
ELIGIBILITY
The persons eligible to participate in the plan are the officers of the
Company designated each year by the Compensation Committee of the Board of
Directors of the Company. The officer group currently consists of seven
officers, with one such officer retiring on April 15, 1997.
THRESHOLD PARAMETER
Each year the Compensation Committee will select a threshold parameter
which will consist of one or more performance elements and a performance level
for each element which is to be achieved. If the threshold parameter is not
achieved, no performance compensation award ("bonus") will be made that year. If
the threshold parameter is achieved, a bonus may be awarded to each
participating officer.
BONUS AMOUNT
The amount of bonus which is to be awarded to each participant if the
threshold parameter is achieved is $1.5 million, provided that the Compensation
Committee, in its sole discretion, may cancel or reduce the amount of any bonus.
The Compensation Committee intends to exercise its negative discretion by
establishing additional conditions and terms for determining the actual amount
of bonus to be awarded, including the achievement of other financial, strategic
or individual goals, which may be objective or subjective, as it deems
appropriate. The maximum bonus amount of $1.5 million has been set above the
Company's historical and presently anticipated bonus levels for executive
officers because the 162(m) regulations allow only "negative
18
<PAGE> 23
discretion" in respect of this type of plan and the Compensation Committee wants
flexibility to recognize exceptional performance when warranted.
ADMINISTRATION
The Performance Plan will be administered by the Compensation Committee,
which will have the sole authority to interpret any provision of the Performance
Plan.
NEW PLAN BENEFITS
The table below sets forth the benefit that would be received under the
Performance Plan for 1997 if the Company financial performance goals selected by
the Compensation Committee are achieved and bonuses are awarded at the target
bonus amount. In the event the financial performance goals are exceeded, it is
possible that the amount of bonuses paid could be up to one hundred and sixty
percent (160%) of the target bonus amount.
<TABLE>
<CAPTION>
PERFORMANCE PLAN
- -----------------------------------------------------------------------------------
NAME AND POSITION TARGET BONUS AMOUNT
- ------------------------------------------------------------ -------------------
<S> <C>
Robert H. Jenkins $ 650,000
President and Chief Executive Officer
Don R. O'Hare 189,600
Chairman of the Board
Patrick L. Thomas 262,500
Executive Vice President and Chief Operating Officer,
Industrial
Ronald F. McKenna 252,000
Executive Vice President and Chief Operating Officer,
Aerospace
Paul Donovan 216,000
Executive Vice President and Chief Financial Officer
Executive Officers as a Group $1,748,100
(Including those named above)
</TABLE>
AMENDMENT AND TERMINATION
The Board of Directors of the Company may amend or terminate the
Performance Plan at any time. In the event the stockholders fail to approve the
Performance Plan at the Annual Meeting, the Performance Plan will automatically
terminate.
DIRECTORS' RECOMMENDATION
The approval of the Performance Plan will require the affirmative vote of
the holders of a majority of the shares of the Company's Common Stock present in
person or represented by proxy at the meeting. If the proposed Performance Plan
is not approved, the Compensation Committee, since incentive compensation is
considered to be an integral part of the Company's executive compensation
program, may consider the implementation of some other incentive compensation
program irrespective of whether any amount paid under such program would be
deductible under Section 162(m). THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSED OFFICER PERFORMANCE COMPENSATION
PLAN.
AMENDMENT OF STOCK INCENTIVE PLAN
The Board of Directors recommends that the stockholders approve the
proposed amendment to the Sundstrand Corporation Stock Incentive Plan (the
"Stock Plan"). The Board of Directors believes that the
19
<PAGE> 24
proposed amendment to the Stock Plan is desirable and in the best interest of
the Company. A brief description of the Stock Plan and the proposed amendment
follow.
DESCRIPTION OF THE STOCK INCENTIVE PLAN AND PROPOSED AMENDMENT
GENERAL
The Stock Plan became effective as of December 1, 1992, and allows awards
of restricted stock and stock options to be made until December 1, 2002. The
Stock Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines the size and type of awards
participants in the plan will receive, provided that the Committee can delegate
the determination of awards for nonofficer employees to the Company's Chief
Executive Officer. The group of eligible employees is comprised of full-time,
managerial, supervisory or professional employees of the Company or its
subsidiaries, including the elected officers of the Company. In November 1996,
the Board of Directors adopted the Sundstrand Corporation Management Stock
Performance Plan under which restricted stock and stock options can be granted
to employees other than the elected officers and the directors of the Company.
Accordingly, it is intended that future grants under the Stock Plan will be
limited primarily to the elected officers. Presently, the elected officer group
consists of seven officers, with one of such officers retiring on April 15,
1997. Currently, there are 1,084,828 shares available for future grants under
the Stock Plan.
STOCK OPTION GRANTS
Under terms of the Stock Plan, the option price for each grant of an option
to purchase Common Stock is to be determined by the Compensation Committee
provided that the option price shall not be less than one hundred percent (100%)
of the fair market value of a share of Common Stock on the date the option is
granted. Each option is exercisable at such time and is subject to such rules as
the Compensation Committee may promulgate, but in no event is an option to be
exercisable prior to six months following the date of grant nor, with limited
exceptions, exercisable later than the tenth anniversary date of its grant.
Currently, options become exercisable in increments of twenty-five percent (25%)
of the amount granted commencing with the second and continuing through the
fifth anniversary date of the grant.
RESTRICTED STOCK GRANTS
The Stock Plan also provides that the price for each grant of restricted
stock shall be determined by the Compensation Committee and may be below the par
value per share on the date of grant. Shares of restricted stock may not be
sold, transferred, assigned or otherwise alienated or hypothecated until the end
of the period of restriction established by the Compensation Committee, which
period in no event may terminate prior to six months following the date of
grant. Currently, restricted stock vests in increments of twenty percent (20%)
commencing with the fifth and continuing through the ninth anniversary date of
the grant. During the period of restriction, participants holding shares of
restricted stock may exercise full voting rights and are entitled to receive all
dividends and other distributions paid with respect to those shares.
TERMINATION OF EMPLOYMENT
In connection with the awards under the Stock Plan, options become
exercisable and restrictions lapse in the event the employment of a participant
holding options or restricted shares terminates by reason of normal retirement,
death or disability. In the event the participant's employment terminates for
any other reason, the Compensation Committee has the discretion to cause all or
any portion of such outstanding options to become exercisable, or to repurchase
all or any portion of such shares of restricted stock at the employee's cost, if
any. Options which are not exercisable as of the date of employment termination
and which do not become exercisable as set forth above shall be forfeited.
Notwithstanding the foregoing, the Compensation Committee may modify the term
for exercisability of options and the treatment of shares of restricted stock
still under restriction.
20
<PAGE> 25
TAX WITHHOLDING
In connection with any taxable event arising from awards made under the
Stock Plan, the Company may deduct or withhold, or require the employee to remit
to it, an amount sufficient to satisfy any and all federal, state and local
taxes, including the employee's FICA obligation. Currently, the employee may
elect to satisfy the withholding requirement, in whole or in part, by having the
Company withhold shares, the fair market value of which exceeds the tax due.
CHANGE IN CONTROL
In the event of a Change in Control as defined on page 16 of this proxy
statement under the heading "Employment Agreements," unless otherwise
specifically prohibited by the terms of applicable law and regulation, any and
all outstanding stock options granted under the Stock Plan shall become
immediately exercisable, any restrictions imposed on shares of restricted stock
shall immediately lapse, and the Board or the Compensation Committee shall have
the authority to make any modifications to the outstanding awards before the
effective date of the "Change in Control."
PROPOSED CHANGES
The Board of Directors has approved and is proposing for stockholder
approval the following changes to the Stock Plan:
(i) In order to extend the life of the Stock Plan and avoid having to
request in the near future approval of a new stock plan in which the
elected officers would participate, it is proposed that an additional
3,000,000 shares be included under the plan and the expiration date of the
plan be extended until January 1, 2007.
(ii) In order to cause stock option and restricted stock to be
performance-based and, therefore, not included in the Section 162(m)
limitations on nondeductible compensation, provide that the maximum number
of options and the maximum number of shares of restricted stock that may be
granted in any year to an elected officer may not exceed 300,000 options or
100,000 shares of restricted stock. In addition, with respect to the grant
of restricted stock, condition any award on the achievement of a threshold
parameter selected by the Compensation Committee within ninety (90) days
after the commencement of each plan year. The threshold parameter may
consist of one or more performance elements with a performance level set
for each element. The elements from which the threshold parameter may be
selected are the same as those proposed for the Performance Plan (see
Section 3.2 of Exhibit A on page A-1 of this proxy statement). If the
threshold parameter is achieved (subject to certain adjustments) the number
of shares of restricted stock which shall be awarded to an elected officer
is set at 100,000, provided that the Compensation Committee has the
discretion to reduce the number of shares of restricted stock awarded based
on such criterion as the Committee determines. It is intended that the
Committee will exercise such discretion to reduce such awards utilizing the
same criteria as is presently utilized in making grants of restricted
stock. The 100,000 share number has purposefully been set above the
Company's historically and presently anticipated grant level for executive
officers because the 162(m) regulations allow only "negative discretion" in
respect of this type of plan and the Compensation Committee wants
flexibility to recognize exceptional performance when warranted.
(iii) To provide that in the event of a merger, reorganization, stock
dividend, stock split-up or other change in the capital structure of the
Company affecting the Company's Common Stock, a corresponding adjustment
shall be made not only in the number of shares covered by the plan but also
in the maximum number of options and restricted stock that may be awarded
each year by the Compensation Committee or by the Chief Executive Officer,
if he is delegated authority to make grants to nonofficer employees
participating in the plan.
21
<PAGE> 26
PLAN BENEFITS AFTER AMENDMENT
The table below sets forth the grants received under the Stock Plan on
November 19, 1996, which grants would not have been different if the amendment
had been in effect as of the date of the grants. On February 3, 1997, the
closing price of the Company's Common Stock on the New York Stock Exchanges was
$43.1250.
<TABLE>
<CAPTION>
STOCK OPTION PLAN
- -------------------------------------------------------------------------------------------------------------
GRANT SHARES OF NUMBER OF EXERCISE
NAME AND POSITION DATE RESTRICTED STOCK OPTIONS PRICE
- ---------------------------------------------------------- ------- ---------------- --------- --------
<S> <C> <C> <C> <C>
Robert H. Jenkins 11/19/96 12,000 40,000 $38.9375
President and Chief Executive Officer
Don R. O'Hare 11/19/96 0 30,000 $38.9375
Chairman of the Board
Patrick L. Thomas 11/19/96 6,000 25,000 $38.9375
Executive Vice President and Chief Operating Officer,
Industrial
Ronald F. McKenna 11/19/96 6,000 25,000 $38.9375
Executive Vice President and Chief Operating Officer,
Aerospace
Paul Donovan 11/19/96 4,000 20,000 $38.9375
Executive Vice President and Chief Financial Officer
Executive Officers as a Group (Including those named 11/19/96 31,000 156,000 $38.9375
above)
</TABLE>
FEDERAL TAX CONSIDERATIONS OF STOCK OPTIONS
Under federal income tax law as currently in effect, the grant of a
nonqualified stock option would not be a taxable event for the participant nor a
tax deductible event for the Company. However, in general, under current federal
income tax law, upon the exercise of a nonqualified stock option, the
participant would realize ordinary income measured by the excess of the fair
market value of the acquired shares of Common Stock at the time of exercise over
the option price paid, and the Company would be entitled to a deduction in a
corresponding amount. Upon subsequent sale or other disposition of the acquired
shares of Common Stock, the basis in the shares for determining gain or loss
would be the sum of the option price paid and the gain realized upon exercise,
and generally any such gain or loss upon sale or other disposition would be a
long-term or short-term capital gain or loss depending upon the holding period
preceding disposition. The above discussion does not purport to cover all tax
consequences related to the exercise of nonqualified stock options.
AMENDMENT AND TERMINATION
The Stock Plan may be amended, terminated or modified by the Board,
provided that stockholder approval will be sought to the extent such approval is
required by the federal securities laws, any material securities exchange or
system on which the shares are then listed or reported, or a regulatory body
having jurisdiction with respect thereto.
DIRECTORS' RECOMMENDATION
The approval of the amendment to the Stock Plan will require the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present in person or represented by proxy at the meeting. If the
proposed amendment to the Stock Plan is not approved by the stockholders, the
Compensation Committee will continue to make grants of restricted stock and
stock options under the plan until there are no further shares available for
grant. However, it is unlikely that the Corporation will be able to exclude the
compensation value of such grants from the $1 million limit on
nonperformance-based compensation which is deductible under Section 162(m). THE
BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF THE
PROPOSED AMENDMENT TO THE STOCK PLAN.
22
<PAGE> 27
OTHER BUSINESS TO BE TRANSACTED
At the date of this statement, the foregoing is the only business which
management intends to present or knows that others will present at the meeting.
In the event that any other matters shall properly come before the meeting, it
is the intention of the persons named in the enclosed proxy to vote such proxy
in accordance with their judgment on such matters.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Ernst & Young LLP were the Company's independent certified public
accountants for 1996 and have been selected by the Company as its independent
certified public accountants for 1997. Representatives of this accounting firm
will be present at the Annual Meeting of Stockholders and will be given an
opportunity to make any comments they wish and will be available to respond to
appropriate questions raised at the meeting.
STOCKHOLDERS' PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of stockholders intended to be presented at the Annual Meeting in
1998 and which are to be included in the Company's 1998 Proxy Statement and form
of proxy relating to that meeting must be received by the Company not later than
November 4, 1997.
If you will be unable to be present in person at the 1997 Annual Meeting,
you are urged to date, sign and return the enclosed proxy card in order that
your shares may be represented at the meeting.
By order of the Board of Directors,
RICHARD M. SCHILLING
Secretary
Rockford, Illinois
March 5, 1997
23
<PAGE> 28
EXHIBIT A
SUNDSTRAND CORPORATION
OFFICER PERFORMANCE COMPENSATION PLAN
Article I. Establishment and Duration
1.1 Sundstrand Corporation (the "Corporation") hereby
establishes a plan to be known as the "Sundstrand
Corporation Officer Performance Compensation Plan" (the
"Plan") as set forth in this document. The Plan is effective
as of January 1, 1997, and shall remain in effect until
terminated by the Board of Directors of Sundstrand
Corporation, provided, however, that in the event
stockholder approval of the Plan is not attained at the
Corporation's Annual Meeting of Stockholders in 1997, the
Plan shall automatically terminate.
Article II. Eligible Participants
2.1 Not later than the 90th day after the commencement of each
Plan year, the Compensation Committee (the "Committee") of
the Board of Directors of the Corporation shall identify, by
resolution, the officers of the Corporation who will
participate in the Plan for such year. The addition after
such 90th day of any other officer to participate in the
Plan during such Plan year shall be made only in the event
of an unusual circumstance, such as a new hire or promotion.
Article III. Threshold Parameter
3.1 With respect to each Plan year, the performance compensation
award of an officer participating in the Plan shall be
determined upon the basis of the achievement of the
threshold parameter (one or more of the performance elements
set forth in Section 3.2) selected by the Committee not
later than the 90th day after the commencement of each Plan
year.
3.2 The threshold parameter applicable to a participating
officer for any Plan year shall be determined by the
Committee and shall consist of one or more of the following
performance elements and the performance level to be
achieved: generation of free cash, earnings per share,
revenues, market share, stock price, cash flow, retained
earnings, results of customer satisfaction surveys,
aggregate product price and other product price measures,
safety record, acquisition activity, management succession
planning, improved asset management, improved gross margins,
increased inventory turns, product development and
liability, research and development integration, proprietary
protections, legal effectiveness, handling of SEC and
environmental matters, manufacturing efficiencies, system
review and improvement, service reliability and cost
management, operating expense ratios, total stockholder
return, return on sales, return on equity, return on
capital, return on assets, return on investments, net
income, operating income, working capital, and comparative
performance of one or more of the above criteria to the
performance of other corporations.
3.3 In determining actual performance under the threshold
parameter selected, adjustments will be made to exclude (i)
all items determined in accordance with standards
established 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
principle, (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.
Article IV. Compensation Awards
4.1 No compensation award will be made under the Plan unless the
threshold parameter as determined by the Committee is
achieved.
A-1
<PAGE> 29
Article V. Amount of Performance Compensation Award
5.1 If the threshold parameter for a Plan year is achieved, the
amount of the performance compensation award earned by each
participating officer with respect to such Plan year shall
be an amount not to exceed one and one-half million dollars
($1,500,000); provided that the Committee, in its sole
discretion, may cancel or reduce the amount of such award
based on such criteria as the Committee in its sole
discretion shall determine.
Article VI. Confirmation
6.1 Prior to the payment of any performance compensation award
with respect to any Plan year, the Committee shall confirm
that the threshold parameter has been satisfied.
Article VII. Vesting
7.1 With respect to any person who during a Plan year was a
participant in the Plan and who as of the end of the Plan
year is an officer of the Corporation, such person's
performance compensation award for such Plan year shall be
vested as of the end of such Plan year. With respect to any
person who during a Plan year was a participant in the Plan,
but who as of the end of such Plan year is no longer an
officer or employee of the Corporation, the determination as
to whether a performance compensation award will be paid to
such person for such Plan year shall be at the sole
discretion of the Committee.
Article VIII. Guidelines
8.1 The Committee may adopt guidelines to implement and
administer this Plan.
A-2
<PAGE> 30
- --------------------------------------------------------------------------------
PROXY/VOTING INSTRUCTION CARD
SUNDSTRAND CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING ON APRIL 15, 1997
The undersigned hereby appoints Robert H. Jenkins and Richard M. Schilling as
proxies, with powers to be exercised by both or either of them, and with full
power of substitution, to vote as designated on the reverse side all Common
Stock of SUNDSTRAND CORPORATION according to the number of shares the
undersigned is entitled to vote if personally present at the Annual Meeting of
Stockholders of Sundstrand Corporation to be held in the Auditorium at Northern
Illinois University, Rockford Education Center, 8500 East State Street,
Rockford, illinois, on April 15, 1997, at 11:00 a.m., Central Time or at any
adjournment thereof.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOX ON THE
REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
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<TABLE>
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SUNDSTRAND CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
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This Proxy will be voted in accordance with specifications made. The Board of Directors recommends a vote "FOR" Proposals 1, 2
and 3. If no choice is indicated, this Proxy will be voted "FOR" Proposals 1, 2 and 3.
1. ELECTION OF DIRECTOR -- FOR WITHHOLD 3. Proposal to adopt the amendment to the FOR AGAINST ABSTAIN
Nominee: Charles Marshall / / / / Sundstrand Corporation Stock Incentive / / / / / /
Plan.
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2 Proposal to adopt the Sundstrand FOR AGAINST ABSTAIN 4. In their discretion, the proxies are authorized to vote upon such
Corporation Officer Performance / / / / / / other business as may properly come before the meeting or any
Compensation Plan. adjournment thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT
OF THE 1997 NOTICE OF ANNUAL MEETING AND PROXY
STATEMENT.
Signature(s)
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(Please sign your name exactly as imprinted
hereon. In case of multiple or joint
ownership, all should sign. Persons signing
in a fiduciary capacity should indicate their
position.)
Dated: _______________________, 1997
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